{"id":49327,"date":"2022-03-01T13:44:14","date_gmt":"2022-03-01T03:44:14","guid":{"rendered":"https:\/\/billmitchell.org\/blog\/?p=49327"},"modified":"2022-03-01T13:44:14","modified_gmt":"2022-03-01T03:44:14","slug":"the-imf-shows-us-that-the-central-bank-monetary-financing-taboo-has-no-substance","status":"publish","type":"post","link":"https:\/\/billmitchell.org\/blog\/?p=49327","title":{"rendered":"The IMF shows us that the central bank monetary financing taboo has no substance"},"content":{"rendered":"

\t\t\t\tRecently (February 22, 2022), I received the latest E-mail update from the IMF blog advertising their new post – Should Monetary Finance Remain Taboo?<\/a> – which obviously attracted my attention. One of the most deeply entrenched taboos in economics relates to central banks directly facilitating government spending without any other monetary operation. In an important sense, the characterisation of ‘monetary financing’ by the mainstream economists is erroneous and leads to all sorts of fictions that undermine sensible and responsible economic policy making. But, we can work through those fictions to discuss what the IMF is talking about. Importantly, they find that this taboo, which has been broken during the pandemic in many countries (although Japan has been leading the way for decades) does not lead to enduring inflation or a rise in inflationary expectations. Another major plank of mainstream macroeconomics gone. That is something to celebrate.
\n<\/p>\n

The opening lines in Chapter 17 of my 2015 book – Eurozone Dystopia: Groupthink and Denial on a Grand Scale<\/a> (published May 2015) – were:<\/p>\n

\nTaboo<\/strong><\/p>\n

noun<\/p>\n

… a social or religious custom prohibiting or forbidding discussion of a particular practice or forbidding association with a particular person, place or thing.<\/p>\n

adjective<\/p>\n

… prohibited or restricted by social custom.<\/p>\n

verb<\/p>\n

… place under prohibition.<\/p>\n

[Oxford Dictionary]<\/p>\n

Jens Weidmann, President of the Deutsche Bundesbank<\/p>\n

“we have to ensure that the prohibition of monetary financing is respected.”<\/p>\n

Interview with MNI, March 21, 2014.\n<\/p><\/blockquote>\n

The Chapter was about ‘overt monetary financing’ and I began by noting that while taboos in western society are ways to reinforce the status quo and resist change, they also, obviously function to allow dominant hegemonies to isolate options if they consider exercising them would undermine their capacity to maintain ideological control over public policy.<\/p>\n

I asked: How can a relatively simple monetary operation between a central bank and its corresponding treasury department (both part of what we call the ‘consolidated’ government sector) possibly be considered a taboo? <\/p>\n

‘Overt Monetary Financing’ (OMF) simply means that in some form or another, the treasury arm of government tells the central bank it wants to spend a particular amount and the latter then ensures those funds are available for use in the government’s bank account.<\/p>\n

Various accounting arrangements might accompany that action. For example, the treasury might sell some government bonds to the central bank to match the value of the funds that are placed in the treasury’s bank account. <\/p>\n

None of these accounting arrangements should cloud, in the words of former Bundesbank chief Jens Weidmann – during a Speech in Frankfurt – Money Creation and Responsibility<\/a> – on September 28, 2012, that:<\/p>\n

\n… the fact that central banks can create money out of thin air … many observers are likely to find surprising and strange, perhaps mystical and dreamlike, too – or even nightmarish.\n<\/p><\/blockquote>\n

That is, the currency-issuing government via its central bank can create as much of its currency as it likes but to do so has been considered taboo by economists.<\/p>\n

Why?<\/p>\n

Inflation anxiety is the stated reason.<\/p>\n

Actual reason?<\/p>\n

The elites want to reserve that capacity to advance their own interests and suppress the capacity when it might empower those below them in the pecking order.<\/p>\n

Well the events since the GFC, accelerated by the pandemic are exposing all sorts of truths that taboos require to remain suppressed.<\/p>\n

IMF talks about taboos<\/h2>\n

The IMF article define “monetary financing” as:<\/p>\n

\n… the financing of government via money creation.\n<\/p><\/blockquote>\n

They relate it to “Milton Friedman’s metaphor of a helicopter dropping money from the sky” – or cruder characterisations which still abound today = ‘printing money’.<\/p>\n

The term ‘printing money’ is not used in Modern Monetary Theory (MMT) because it is not descriptive of the actual process that underpins government spending.<\/p>\n

The term also invokes irrational emotional responses about hyperinflation with the Weimar Republic or Zimbabwe immediately entering the conversation and reasoned debate then becomes impossible.<\/p>\n

The IMFs depiction of ‘monetary financing’ is drawn from the erroneous mainstream macroeconomic framework for analysing the so-called ‘financing’ choices faced by a government – taxation, debt-issuance, and money printing.<\/p>\n

This choice is analysed within the so-called ‘government budget constraint’, where the currency-issuer is reduced to a household facing the need to raise currency in order to spend.<\/p>\n

You can see even at the most elemental level, the framework quickly enters the world of fiction.<\/p>\n

Students in mainstream programs are told that in order to spend, the government has to raise funds from taxpayers (which allegedly undermines incentives to work and invest).<\/p>\n

If they want to spend more than the tax revenue they can raise, then they have two options.<\/p>\n

They can issue debt – which allegedly squeezes scarce savings in the loans markets, drives up the cost of borrowing (interest rates), which undermines (‘crowds out’) private investment spending. It also allegedly leaves a legacy of higher tax burdens for future generations. <\/p>\n

So debt-issuance is discouraged.<\/p>\n

Alternatively, the central bank can just ‘print money’ to cover the deficits. But this is taboo because allegedly too much money enters the system, which undermines its value (inflation).<\/p>\n

Taken these negatives together, the mainstream economist is thus persuaded to advocate for small fiscal footprints where low taxation generates just enough revenue to cover essential government functions such as law and order and defence of property rights (including external borders) and the government achieves fiscal balance or surplus.<\/p>\n

However, these depictions are fiction and designed to reinforce the ideological message – small government and (the unstated) fiscal handouts only to the elites.<\/p>\n

The reality is that every day, new currency enters the economy via government spending and currency leaves the system via taxation.<\/p>\n

The idea that the government spends out of different kitties (tax, debt, printing) is false and obfuscates the reality.<\/p>\n

In a sense, ‘monetary financing’ is happening all the time anyway.<\/p>\n

But we can advance the discussion by agreeing that what the IMF is referring to, while erroneously constructed by them, is the situation where the central bank arm of government credits bank accounts or sends out cheques on behalf of the treasury arm of government to match government expenditure, without there being any offsetting tax revenue raised or debt issued to the private bond markets.<\/p>\n

The IMF also thinks that the taboo against that practice began in the 1970s:<\/p>\n

\nThe 1970s struggle to contain inflation, and the many catastrophic episodes during which monetary policy became hostage to a country’s fiscal needs, however, made monetary finance taboo.\n<\/p><\/blockquote>\n

In fact, Abba Lerner in the 1940s was keenly aware that the conservative economists considered the ‘printing money’ option to be taboo.<\/p>\n

In his 1943 article – Functional Finance and the Federal Debt<\/em> (published in Social Research, Vol 10(1), 38-51), he referred to the:<\/p>\n

\n… almost instinctive revulsion that we have to the idea of printing money, and the tendency to identify it with inflation, can be overcome if we calm ourselves and take note that this printing does not affect the amount of money spent (p.41).\n<\/p><\/blockquote>\n

He had earlier said that common people are (p.38):<\/p>\n

\n… easily frightened by fairly tales of terrible consequences …\n<\/p><\/blockquote>\n

The money financing taboo was used to elevate the sense of fright in order to prevent otherwise sensible ideas becoming politically acceptable and benefiting the broader population.<\/p>\n

The IMF also claim that the taboo was useful because it allowed the central banks to operate independently from government and suppress inflation in the post-1970s period.<\/p>\n

That claim is also false.<\/p>\n

The OPEC-induced inflation was finally driven out of the system by the deep recession in 1991 rather than any specific conduct by the central banks.<\/p>\n

Around the globe, different central banks embraced the ‘inflation-first’ targetting approach in very different ways and experienced broadly similar inflation outcomes.<\/p>\n

Further, the so-called great moderation came after the 1991 recession and by then inflation was generally low and stable.<\/p>\n

And, whenever you hear a mainstream economist preach the virtues of ‘central bank independence’ ask them what happens each day of the working week where treasury and central bankers work closely together to ensure there is a correspondence between the impacts of fiscal policy on the ‘cash’ system and the implications for the monetary policy interest rate target.<\/p>\n

There can be no ‘independence’ between these institutions in a modern monetary economy.<\/p>\n

Please read my blog posts for more discussion on that topic:<\/p>\n

1. The central bank independence myth continues<\/a> (March 2, 2020).<\/p>\n

2. The sham of central bank independence<\/a> (December 23, 2014).<\/p>\n

3. Central bank independence – another faux agenda<\/a> (May 26, 2010).<\/p>\n

The IMF blog post asks the questions:<\/p>\n

\nShould monetary finance remain taboo? Or are there merits to recent calls for using this tool during times of severe crises?\n<\/p><\/blockquote>\n

If you want a more detailed analysis of their answers, then consult the IMF Departmental Paper No. 2022\/001 – Monetary Finance: Do Not Touch, or Handle with Care?<\/a> – which was published on January 13, 2022.<\/p>\n

The blog post really is sufficient though to understand their argument.<\/p>\n

Their reasoning is totally mainstream and incorrect.<\/p>\n

They claim that:<\/p>\n

\nProponents of monetary finance argue that it has a stronger effect on aggregate demand than a debt-financed fiscal stimulus. Because there is no increase in public debt, monetary finance does not need to be paid for with future tax hikes, making consumers more likely to spend.\n<\/p><\/blockquote>\n

This claim rehearses the so-called Ricardian Equivalence theorem that says government spending in ineffective because consumers realise that the deficits will have to be paid back with higher taxes and so they save up to ensure they can pay the extra tax burden and as a consequence consumption spending falls to offset the new government net spending.<\/p>\n

It is a ridiculous notion that has never found any empirical resonance.<\/p>\n

You can find out more about that notion in this blog post – Ricardian agents (if there are any) steer clear of Australia<\/a> (June 9, 2014).<\/p>\n

I would guess that if we conducted a sample of households they would not reveal any knowledge of the relations between treasury and the central bank, and would not form any view of future tax hikes in this context.<\/p>\n

And every generation chooses its own tax structure when it reaches voting age.<\/p>\n

Next we are told by the IMF that:<\/p>\n

\nMonetary finance may also prevent self-fulfilling runs on government debt. If investors suddenly lose confidence in debt sustainability, the central bank may avert a default by partially monetizing debt. Importantly, if the central bank commits to this strategy-and does not abuse its power to monetize debt outside of self-fulfilling runs-investors are unlikely to lose confidence in the first place, without requiring the central bank to intervene.\n<\/p><\/blockquote>\n

As if the bond markets are in charge or something.<\/p>\n

What we have all learned (I hope) during the years of GFC then pandemic is that the currency-issuing government controls the yields on the debt it issues whenever it wants to.<\/p>\n

The bond markets only get latitude if the government gives it to them.<\/p>\n

The bond markets can never threaten the spending capacity of such a government.<\/p>\n

Investors are supplicants for the corporate welfare that the government debt offers them.<\/p>\n

They do not call the shots.<\/p>\n

Please read my blog post – Who is in charge?<\/a> (February 8, 2010) – for more discussion on this point.<\/p>\n

We are then appraised of the IMF concern that democracy might prevail:<\/p>\n

\nThe primary concern is that it may pave the way to fiscal dominance whereby monetary policy decisions are made subordinate to the fiscal needs of the government.\n<\/p><\/blockquote>\n

So our elected representatives, who are accountable to us via the ballot box, might actually represent our interests and make sure the unelected technocrats in the central bank, who play revolving doors with the private speculating institutions (hedge funds, etc) and who are not accountable to us, play ball.<\/p>\n

Worrisome in the extreme.<\/p>\n

Suppressing the quality of our democracies has been one of the primary purposes of this taboo, among others in the economic sphere of our lives.<\/p>\n

The IMF then offer some empirical research to see if “monetary expansion” is highly inflationary.<\/p>\n

I won’t go into their methods, which are flawed.<\/p>\n

But even with those flawed methods, the findings are that over time there is very little impact on inflation even when the initial inflation rate is high and the fiscal deficits are large.<\/p>\n

Further, the IMF differentiate between monetary financing (buying government debt in the primary issuing market) and quantitative easing (purchasing the same debt in secondary markets after it has been issued to private investors in the primary market).<\/p>\n

They claim the difference is that QE carries the expectation that the central bank will sell the debt back to the non-government investors, which is another imaginary piece of reasoning.<\/p>\n

Ask yourself, how much debt has the ECB, the Bank of Japan, the Federal Reserve, the Bank of England, etc sold back rather than allowed to mature while still on their books?<\/p>\n

The answer is not much!<\/p>\n

They find that during the pandemic, that neither central bank option that were used variously by nations had any:<\/p>\n

\n… systematic effects … on inflation expectations …\n<\/p><\/blockquote>\n

Which means that all the hype that surrounds the ‘taboo’ about the private sector fearing inflation if the government acts in this way is based on nothing substantive.<\/p>\n

But that doesn’t stop the IMF falling back into lockstep with the fiction when they conclude that “departures from central bank independence can be very dangerous … [and have] … devastating effects on economies and livelihoods”.<\/p>\n

Conclusion<\/h2>\n

Phew, for a moment I thought the IMF might be turning the corner<\/p>\n

That is enough for today!<\/p>\n

(c) Copyright 2022 William Mitchell. All Rights Reserved.\t\t<\/p>\n","protected":false},"excerpt":{"rendered":"

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