The head of the Australian Prudential Regulation Authority (APRA), which was created in 1998 as part of the sham to separate regulation from policy and pretend the Reserve Bank of Australia was independent, gave a speech in Sydney yesterday (November 21, 2017) – Housing – The importance of solid foundations. The reason the speech is important is because it demonstrates the disconnect in policy making and the failure of key policy makers and regulators to connect macroeconomic dots. Australia – like the rest of the world – needs politicians and officials who understand how the macroeconomic aggregates are connected. One cannot have a conversation about household debt without recognising that it is, in part, directly related to the fiscal position of the government and the nation’s external position. While the APRA boss is correct to highlight the precarious nature of household balance sheets given the record and increasing debt levels being borne by households who are experiencing a wages squeeze and a government intent on austerity cuts, he should be educating the public on the broader context. Then there would be more acceptance of expanding discretionary fiscal deficits and a wages policy designed to bring real wages growth back into line with productivity growth. If that was the case, much of the idiotic conversations – some masquerading as ‘research’ results would disappear.
A cursory glance at the World’s leading tax havens illustrates the hypocrisy of politicians getting wound up about the revelations in the recently released Paradise Papers and the Panama Papers before them. Many of the havens are within the direct legislative jurisdiction of nations such as the US (which is itself a tax haven) and the UK, for example. And we should not forget that Luxembourg, Switzerland are key European homes of tax avoidance. Remember that the current President of the European Commission “spent years in his previous role as Luxembourg’s prime minister secretly blocking EU efforts to tackle tax avoidance by multinational corporations” (Source) ably supported by the Netherlands, another nation engaged in the practice. If the politicians were truly worried about this issue they could do something about it directly with the stroke of a legislative pen. Britain could, for example, eliminate Jersey, the Isle of Man, and its Overseas Territories from this corporate scam. The US could do similarly. The EU could bring in new rules to stop Luxembourg. But they don’t stop it, which tells you everything. But, the problem of tax avoidance and evasion is not fiscal. Progressives get stuck on that point. It is largely irrelevant. The real issues are inequality, power and macroeconomic stability. That is what this blog is about.
One wonders what goes on in the heads of politicians sometimes. Perhaps not much other than a warped sense of their purpose in life – which for some seems to be to advance themselves rather than advance societal well-being. In recent days, fiscal debates have raged on both sides of the Atlantic. In the US, there is the Trump tax cut debate. The correct progressive response would be to focus on why these cuts will not advance anybody but the rich and will do very little if anything to create new jobs. Unfortunately, prominent Democrats such as the awful Nancy Pelosi have been spouting stuff about the tax cuts increasing the federal deficit and federal debt. At a time, when the Republicans are abandoning the deficit terrorism to advance their own interests, the Democrats seems to be reinforcing the ‘deficits are bad’ narrative. Instead, they could have seized the opportunity to say to the American people – see deficits are fine but the real issue is what we do with them. Pelosi and her ilk seem incapable of adopting that quality of leadership. In the UK, the reality is dawning on the British government that the austerity harvest is anything but what they had hoped it would be. No surprises there. Austerity undermines growth which can easily increase the fiscal deficit when the goal is the opposite. But the way that reality is being handled in the progressive press is pathetic. The UK Guardian, for example, has headlines about ‘black holes’ and is giving oxygen to reports that talk about the deteriorating fiscal situation in the UK. Readers are left with nothing but neoliberalism reinforcement of the ‘deficits are bad’ myth. A shocking indictment of the progressive debate in the UK.
In our new book Reclaiming the State: A Progressive Vision of Sovereignty for a Post-Neoliberal World (Pluto Books, 2017) – Thomas Fazi and I argue that a new progressive agenda would see the abolition of the IMF and the World Bank and the creation of a new multilateral institution that is entrusted with ensuring poor nations can access necessary funds to prevent their societies collapsing. This organisation would not be a bulwark for inflicting neoliberal policies on the poorer nations, but rather, a body that assisted nations in developing first-class health, education and environmental care capacities and infrastructure in a fully employed environment. It would help insulate such nations from the vicissitudes of global finance by supporting capital controls and other anti-speculative policy tools. The current multilateral framework dominated by the likes of the IMF and the World Bank have failed categorically in this regard. Recent research, which, in part consolidates a rich body of research going back to 1987, has found that the so-called ‘structural adjustment policies’ that accompany assistance from these organisations have materially damaged child and maternal health in the nations where these conditionality programs have been imposed. The IMF likes to talk about intergenerational fairness, especially in relation to the alleged burdens that fiscal deficits leave for future generations, but then they support and implement policies that unambiguously damage the health and well-being of children in poorer nations, while allowing real resources to be sucked out of those nations to the benefit of the global rich. A criminal enterprise.
The ‘infinite-horizon fiscal gap’ is just an infinity of nonsense. That is, if such a level of ridiculousness can be measured, which it cannot. So suffice to say a pretty large dose of nonsense. Certainly nothing to take seriously. Anyone who sprouts this nonsense declares themselves unqualified to discuss notions of sovereignty and the capacities of a currency-issuing state. But while some mainstream economists are firmly stuck in their Groupthink-riddled stupors with their ‘infinite-horizon fiscal gap’ calculations producing ever increasing (scaremungous) $ sums that the US government is allegedly unable to ever pay, the movers and shakers of the political scene, such as the Koch Brothers in the US, feel no compunction to stick with a consistent line attacking fiscal deficits. A few years ago they were predicting mayhem and insolvency just like the stupified academics. How things change when some dollars are up for grabs even if the fiscal deficit has to rise to transfer that largesse to the non-government sector. Then it is look the other way on the deficit and send us the cash. Sickening.
Today, I have translated two interviews I did while I was in Europe recently. The original interviews were in Spanish. The first interview was with Andrés Villena Oliver for CTXT and was published in the Spanish newspaper Público. It was conducted at Ecooo in Madrid on September 28, 2017. The the second interview was with journalist Marta Luengo Garcés from the progressive newspaper El Salto Diaro. It was conducted at the Principe Pio Hotel in Madrid on September 29, 2017. You can get a feel for the concerns of the progressive journalists in Spain by the type of questions they asked me. I have also included the video of an interview I did yesterday (October 16, 2017) with Steve Grumbine of the Real Progressives. That should keep readers more than busy until tomorrow.
On May 6, 1997, just 4 days after coming to office in what was to become Tony Blair’s retrogressive regime, the then British Labour Chancellor Gordon Brown announced that Labour would legislate the so-called independence of the Bank of England. The BBC claimed this was the “most radical shake-up in the bank’s 300-year history”, which gave “the bank freedom to control monetary policy”. Gordon Brown’s legacy to the British people, of course, is in his famous ‘light touch’ regulation, which he boasted about in the lead up to the GFC but went silent about soon after. But he has come out of the woodwork recently to reflect on his decision to set up the Monetary Policy Committee (MPC) within the Bank of England and abandon the practice where the Chancellor and the Governor of the Bank would meet on a monthly basis to determine interest rates. He claims that decision kept Britain out of the euro and was a great success. But then in the same speech he railed against the ‘political’ intrusion of the MPC into broader fiscal policy debates and its failure to conduct monetary policy correctly during the GFC. A very confused narrative. The point is that central banks can never be independent of treasury departments and the claims to the contrary were just part of the depoliticisation of policy that accompanied neoliberalism. Brown is also wrong that setting up a separate MPC kept the nation out of the euro. Britain realised the euro would be a disaster long before 1997.
I am writing this while waiting for a train at Victoria Station (London), which will take me to Brighton for tomorrow’s presentation at the British Labour Party Conference. The last several days I was in Kansas City for the inaugural International Modern Monetary Theory Conference, which attracted more than 200 participants and was going well when I left it on Saturday. A great step forward. I believe there will be video for all sessions available soon just in case you were unable to watch the live stream. Today’s blog completes my little history of the US Treasury Federal Reserve Accord, which really marked a turning point (for the worse) in the way macroeconomic policy was conducted in the US. In Part 1, I explained how from the inception (1913), the newly created Federal Reserve Bank, America’s central bank, was required by the US Treasury Department to purchase Treasury bonds in such volumes that would ensure the yields on long-term bonds were stable and low. There was growing unease with this arrangement among the conservative central bankers and, in 1935, the arrangement was altered somewhat to require the bank to only purchase debt in the secondary markets. But the change had little effective impact. The yields stayed low as was the intent. Further, all the prognistications that the conservatives raised about inflation and other maladies also did not emerge (which anyone who knew anything would have expected anyway). In Part 2, I traced the increased tensions between the central bank FOMC and the Treasury, which in part was exacerbated by the slight spike in inflation that accompanied the spending associated with the prosecution of the Korean War in the early 1950s. The tension manifested into open disagreement about the FOMC’s desire to raise interest rates and end the pegged yield arrangement with the Treasury. In Part 3, we discuss the culmination of that tension and disagreement and examine some of the less known and underlying forces that were fermenting the central bank desire for rebellion.
I have all that much time today to write this up and it is going to be one of those multi-part blogs given the depth of the historical literature I am digging into. So this is Part 1. The topic centres on an agreement between the US Federal Reserve System (the central bank federation in the US) and the US Treasury to peg the interest rate on government bonds in 1942. What the agreement demonstrated is that a central bank can always control yields on government bonds, which includes keeping them at zero (or even negative in the current case of Japan). What it demonstrates is that private bonds markets, no matter how much they might huff and puff about their own importance or at least the conservatives who are ‘fan boys’ of the bond markets), the government always rules because of its currency monopoly
In The role of literary fiction in perpetuating neo-liberal economic myths – Part 1, I noted introduced the idea that fictional literature plays a significant role in framing false economic concepts and, thus, can promotes neo-liberal biases among the readership, even when the plot of the narrative is ostensibly about something other than economics. In other words, what parades as fiction becomes a powerful tool for spreading ideological propaganda, often in a very subliminal or subtle way. In Part 2, I demonstrate that further and provide correct Modern Monetary Theory (MMT) interpretations of popularised economic statements that the characters in the book in focus (The Mandibles) weave into their conversation as if they are accepted facts. The lesson is clear. To further advance Modern Monetary Theory (MMT) ideas, novelists who are sympathetic to the cause should construct their narratives consistent with the MMT principles, where economic matters are touched upon in their work. This will help to counter the misconceptions that arise in literary fiction when authors engage with flawed neo-liberal arguments about the monetary system. It might also help educate book reviewers who often, knowingly or unknowingly, reinforce the myths in the main text.