On June 26, 2016, the Bank of International Settlements (BIS) published its – 86th Annual Report, 2015/16 – claimed that “there is an urgent need to rebalance policy in order to shift to a more robust and sustainable global expansion and address accumulated vulnerabilities”. Yesterday (October 5, 2106), the IMF issued its latest – Fiscal Monitor – Debt: Use it Wisely – which as the title might suggest focuses on what it sees as a dangerous exposure to global debt, which it currently estimates to be “at 225 percent of world GDP … currently at an all-time high.” Needless to say, this latest offering from the IMF has attracted news headlines with dire warnings about impending catastrophes. Some of this emphasis is justified but overall the IMF is erring, once again, in the opposite direction to its pre-GFC prediction errors. The context is obvious – mass unemployment continues as economic growth is stalling (or modest at best) because of a combination of non-government sector spending caution and the government obsession with fiscal austerity. The latter obsession has been stoked for years by the likes of the BIS and the IMF and while they do not explicitly recognise that in these latest documents, their stilted support for more fiscal action now, amounts to an admission of prior failures driven by the neo-liberal Groupthink that pervades these institutions.
On September 18, 2016, the Reserve Bank of Australia ushered in a new governor, in the form of Philip Lowe. It been the deputy governor for several years and has worked at the RBA all his professional life except for a short stint with the Bank of International Settlements. He speaks Central Bank-speak. On September 22, 2016, he appeared for the first time as governor before the House of Representatives Standing Committee on Economics and delivered the RBA Annual Report 2015 to Parliament. His – Opening Statement – and the subsequent answers to questioning by the House Committee members were revealing because they indicated that the new governor clearly understood the vexed situation that the government had placed the central bank in over the last decade or so, but, at the same time, indicated he was also prepared to continue perpetuating neo-liberal myths that have created the vexed situation in the first place. Not a great start in my opinion. The full transcript of the hearing is available in the Parliamentary Transcript.
There was a Project Syndicate article (September 2, 2016) – The Unavoidable Costs of Helicopter Money – claiming that “In fact, there are major downsides to helicopter money”. Hmm. Should I read this article was my thought at the the time. Waste a few minutes of my life. I wondered if I could pen the article in advance and then check to see how close I was. The theme would be inflation. In that I was correct. But the author really innovated a bit and, in doing so, undermined his own argument. What we learn is fairly straightforward. If a government continues to increase nominal spending growth ahead of the growth in productive capacity then there will be inflation. The argument presented is, in fact, nothing to do with the monetary operations that accompany government spending – helicopter or otherwise. The inflation risk is in the spending. If private investment expenditure outstripped the capacity of the supply-side to produce the capital equipment demanded then the same outcome. Should we caution against such expenditure? Should be make it taboo? Obviously not.
In a paper – Fiscal Policy, Monetary Policy and Central Bank Independence – delivered to the Jackson Hole Economic Policy Symposium, hosted by the Federal Reserve Bank of Kansas City, last week (August 25-27, 2016), Princeton University academic Christopher Sims suggested that monetary policy effectiveness cannot be judged independent of the fiscal position taken by the government. He argued that the current reality has demonstrated that when central banks shift to very loose monetary policy settings these policy changes will be ineffective if the fiscal authorities are simultaneously pursuing austerity. Even conservatives like Christopher Sims are starting to understand that the dominant mantra that places all policy responsibility on central banks and, meanwhile, pursues fiscal austerity, represents a failed and deeply flawed overall strategy. That is, the core neo-liberal macroeconomics strategy is now being shown by conservatives to be ridiculous. Modern Monetary Theory has long argued that monetary policy has to work hand-in-glove with fiscal policy and if the central bank is cutting interest rates then the fiscal authority has to be increasing its fiscal deficit to make the policy changes stick. Some of the more enlightened conservative economists are now seeing this reality.
On the Wikipedia page for economist Ricardo Reis we learn he was “Influenced by: Greg Mankiw”, which basically should tell you everything. Everything that is that would lead to the conclusion that his macroeconomics is plain wrong. Yet his connections in the profession are strong and has prestigious academic appointments, is ensconced in senior editorial positions on influential economics journals, advises central banks in the US and has regular Op Ed space in a leading Portuguese newspaper (his homenation). These facts tell you what is wrong with my profession. That someone can write articles that are just so off the mark yet have significant influence in the profession and be held out in the public debate as to be someone who is worth listening to and being reported on. I have received many E-mails in the last few days about the proposal offered by Reis at Jackson Hole last week. Many readers are still confused and actually thought the proposal had credibility. Let me be clear – bank lending is not influenced by the reserve positions of the banks. Without credit-worthy borrowers lining up to access loans, the banks could have all the reserves in the world and the central bank could invoke any number of nifty ‘indexing’ or other support payment schemes on those reserves, and the banks would still not lend. And with those credit-worthy borrowers lining up to access loans, the banks will always lend irrespective of their current reserve position or the nifty support schemes the central bank might dream up. Core Modern Monetary Theory (MMT) 101!
I noted in Monday’s blog – Modern Monetary Theory – what is new about it? – that I am working on a paper (with my colleague Martin Watts) that will form the basis of a a keynote talk I will give at the – International Post Keynesian Conference – which will be held at the University of Missouri – Kansas City between September 15-18, 2016. That talk will now be held at 15:30 on Saturday, September. 17, 2016. I also listed four areas where we would discuss the novel contribution that Modern Monetary Theory (MMT) has made to macroeconomics, despite the claims of both mainstream economists and some Post Keynesians that there is nothing new in MMT. The first two blogs on this topic covered the juxtaposition of employment versus unemployment buffer stocks and the implications of that for how we view the Phillips curve, a central framework in macroeconomics linking inflation to developments in the real sector (unemployment etc). Today’s blog considers another section of the paper – the dynamics of fiscal deficits and public debt. We consider the difference between deficit doves, who consider fiscal deficits are appropriate under some conditions but should be balanced over some definable economic cycle, which we argue has been the standard Post Keynesian position, and the MMT approach to deficits, which considers the desirable deficit outcome at any point in time to be a function of the state of non-government spending and the utilisation of the productive capacity of the economy. We argue that fiscal rules expressed in terms of some rigid balance to GDP target are not only meaningless but dangerous. Fiscal rules in MMT are only meaningful if related to the state of non-government spending and the utilisation of the productive capacity of the economy. This body of MMT work is clearly novel and improves on the extant Post Keynesian literature in the subject which was either silent or lame on these topics.
There was an article (May 24, 2016) – Helicopter money: The illusion of a free lunch – written by three institutional bank economists (two from the BIS, the other from the central bank of Thailand), which concluded that Overt Monetary Financing (OMF), where the bank provides the monetary capacity to support much larger fiscal deficits with no further debt being issued to the non-government sector, was “too good to be true”, in the sense that it “comes with a heavy price” – summarised as “giving up on monetary policy forever“. The argument they make is very consistent with the work that Modern Monetary Theory (MMT) proponents have published for more 20 years now, which is now starting to penetrate the mainstream banking analysis. However, the conclusion they draw is not supported by the original MMT proponents who would characterise OMF as a highly desirable policy development, more closely representative of the intrinsic monetary capacity of the government. The article also raises questions of what we mean by a “free lunch”, a term which was popularised (but not invented) by Monetarist Milton Friedman. Its use in economics is always loaded towards the mainstream view that government interventions are costly. But if we really appraise what the term “no such thing as a free lunch” really means then, once again, we are more closely operating in the MMT realm which stresses real resource constraints and exposes the fallacies of financial constraints that are meant to apply to currency-issuing governments.
Last week, I reported on some claims by Australian private sector economists that the Australian government was deplete of policy tools (“run out of ammunition” was the cute term used among these self-serving characters) and would not be able to handle the Brexit fallout – see When journalists allow dangerous economic myths to pervade. It was obvious that the statements were nonsensical and only reflected the dangerous neo-liberal ideology that discretionary fiscal policy should be constrained to the point of being not used! In the last week, some major central bankers around the world have given speeches which suggest they also understand that fiscal policy has come to the fore and provide some certainty to the world economy. The latest estimates from the ECB of the Eurozone output gap certainly provide the evidence base to justify a major expansion of fiscal deficits across the Eurozone. The research is suggesting that there is a significant output gap which is evidence of insufficient aggregate spending rather than any structural shifts in potential GDP. I guess they are warming the Member States for more expansionary action although the message is very clear – the European Commission has to abandon its austerity mindset and provide some old-fashioned deficit stimulus – quick smart!
This morning I was reading the – The euro area bank lending survey – for the first quarter of 2016, published by the European Central Bank (ECB). This is a quarterly survey that the ECB conducts which was first published in 2003. It seeks to assess the extent to which banks are lending and the factors that are influencing that behaviour. The results published in the April 2016 edition relate to the first three months of 2016 and “expectations of changes in the second quarter of 2016”. Of particular interest was the inclusion of several ‘ad hoc’ questions (outside the normal survey design) that were designed to gauge “the impact of the ECB’s expanded asset purchase programme” and the “impact of the ECB’s negative deposit facility rate”. The results are fairly clear if you delve into the detail. From the April 2016 bank lending survey (BLS) we can conclude that the massive asset purchasing program and the negative interest rates have not significantly increased bank lending. We know why. It is a pity that the majority of commentators have not yet worked out the answer!
As the years have passed, I have become inured to the depths of absurdity that the European Commission and the political elites its nurtures go to justify their existence. The Maastricht exercise in the late 1980s and early 1990s was comical. The convergence process towards Phase III of the Economic and Monetary Union in the 1990s was established a new norm for craziness. Who would believe the stuff that went on. Then the Goldman Sachs fiddle to allow Greece to enter the Eurozone two years later than the rest. What! Then the Stability and Growth Pact fudges in 2003 when Germany (and France) were clearly in violation of the rules they had bullied the other Member States into accepting. Look the other way and whistle! Then the GFC and the on-going mess. By now the Commission and the Council were outdoing themselves in pursuing absurdity. It was a pity that millions of innocent citizens have had their lives wrecked through unemployment and poverty as a result. And, now, perhaps, this lot have exceeded their own capacity for nonsense. I refer to the latest Convergence Reports published by the European Commission and the European Central Bank. Hypocrisy has no limit it seems. The Eurozone and EU is now firmly entrenched in austerity and deflation and the policy makers think that is the desirable benchmark for others to aspire to. Who could have invented this stuff! And, in relation to the upcoming vote in Britain – how the hell would any reasonable citizen want to be part of this sham outfit (EU) if they had a choice.