Comments for Bill Mitchell - billy blog

Comment on When conservatives reinvent history to suit themselves by PZ

PZ — Sun, 20 May 2012 08:01:44 +0000

Money is an public institution, always have been, always will be. It is only in the mainstream economists mythology that all money comes to existence as a loans from private banks. For reasons that I have not never really crasped, Im sure they must be good, we call the stock of government-issued money as government debt.

And history, as well as contemporary examples like Japan proves this point: no private entitity can withstand debt to turnover ratio of 200 – 250%. Only the currency issuer can.

Comment on When conservatives reinvent history to suit themselves by bill

bill — Sun, 20 May 2012 04:22:01 +0000

Dear Art Vandalay (at 2012/05/20 at 13:29)

Thanks for your comment.

You asked:

What could possibly go wrong…

Perhaps rather than take a cynical, add-nothing to the discussion perspective you might like to enlighten us with what could go wrong and how – relative to the mess that the world is in because they have adopted your implicit viewpoint.

best wishes
bill

Comment on When conservatives reinvent history to suit themselves by Art Vandalay

Art Vandalay — Sun, 20 May 2012 03:29:54 +0000

Fair enough, you have found one journalist talking a lot of guff. Surely that shouldn’t be too hard?

What is it that is actually being advocated here? Some kind of Japanese model… Let’s all let our debt to GDP reach 200%? What could possibly go wrong…

Comment on When conservatives reinvent history to suit themselves by PZ

PZ — Sun, 20 May 2012 03:12:52 +0000

Someone should ask David Cameron why is he so worried over debt to GDP ratio of measly 80%, when britain had debt to GDP ratio of 250% after WW2 with no problem to fund it whatsoever. How can any austerian explain that history?

Media discussion over debt and deficits is so ridicilous! How come they are not asking any hard questions? Reporters are saving those for future HARDTALK sessions perhaps?

Comment on Saturday quiz – May 19, 2012 – answers and discussion by Thomas Bergbusch

Thomas Bergbusch — Sun, 20 May 2012 02:53:26 +0000

once again — very useful. The explanations are just at the right level — they require that I do a little work (given my mediocre algebra) to understand the answers, which means I retain them better.

Comment on When conservatives reinvent history to suit themselves by Matt

Matt — Sun, 20 May 2012 02:11:02 +0000

Bill,

This is kind of off topic, but what I think would be an excellent future blog is the budget process and how it relates to treasury spending and such. What I mean by this is not the usual central bank transactions with private and public accounts, but how the budget is made, the political allocations of spending (military, health care, welfare, social security, foreign aid, taxes, etc.) and the patterns we’ve seen with it in history and how it supports the MMT position.

Comment on Barnaby, better to walk before we run by Alex Seferian

Alex Seferian — Sat, 19 May 2012 20:11:18 +0000

Reviewing this model made me better understand MMT. Thank you. There are some additional conclusions that I think one can draw, in addition to the important ones outlined already, and I was hoping you could kindly confirm whether what follows is theoretically coherent.
First, a clarification: I noticed that in your model Private Sector Savings = GDP – Taxes. Starting with the formula GDP = C+S+T, this implies that GDP-T = C+S. But since the Private Sector Balance formula is (S – I) = (G – T) + (X – M), then one has to infer that S-I = C+S, or what is the same: C+I=0. In other words, in your simple model, the Kids are not consuming, nor investing… all they are doing is saving, which is fine because the exercise is not meant to produce a perfect model of the world. Rather, it is a simplification to help people reach useful conclusions, including regarding deficits and savings.
Now, I’d like to add a few layers of complexity to see if further conclusions can be drawn. Since the Kids just save, I’d like to assume for the time being that there are other people living in the house that consume and invest. Lets call these the “Others”. The “Others” own and manage the Garden that produces vegetables (this society is vegetarian and has zero additional needs). The “Others” depend on Father’s house not having leaks and being well maintained, but it turns out that this House has been in reasonable shape for the past years without any work being done on it, so the “Others” have generally forgotten about the need for regular maintenance (I’ll come back to this point later). Overall, the “Others” live in harmony, exchanging vegetables and related services amongst themselves, and are peaceful… they are content.
Father, or the Government, is not interfering with the “Others”. There is a link in that the “Others” use one of the rooms of the House. Father is OK with this because he is generous, and because it is his way of compensating the “Others” for the fact that they take care of the Garden. Another link is that the “Others” have some old business cards that they use to facilitate exchange amongst themselves, and given how relatively cumbersome bartering would be. To keep things simple, at least in this next step, it turns out that the “Others” are not being taxed (we can change this assumption later).
The Kids co-exist with the “Others”, and partly depend on them to supply a few vegetables from time to time. However, the Kids are so frugal that for all intents and purposes their consumption is negligible. I say this, for now, only to be coherent with the model that assumes that the Kids only save, and as per the formula C+I=0 above.
Now, we go to Month 1 of the model. Assume some G is deemed “necessary” to get the house in proper shape. In this case, the figure is 600 and the Kids do the work (they have “idle” time… some argue they are a bit lazy in fact… but they are Kids and they are young).
Because G=T, the Kids would NOT end up with extra business cards. This case is akin to them just doing the work because Father insists… Father is the boss. The tax is a coercive measure to ensure the actual activity gets done and to eradicate some of the laziness. After all, the Kids will in the end be better off because the house will not have leaks… Father knows best.
In this case too, the “Others” will be better off, because although they did not notice at first, the house was indeed beginning to show some wear and tear.
What if G were “useless” (e.g. instead of maintenance work, Father insisted that the Kids dig holes in the front lawn and refill them)? Then the entire Household (or Economy) would be neither better, nor worse off (as long as the Kids really did have “idle” time). Month 1 would be like a “zero sum game”.
What about if G were “destructive”? Unrealistic but for arguments sake lets assume that Father instructs the Kids to start changing the heating system, and because of his inexperience and hardheadedness, they end up installing a system that does not work and has to be totally replaced. Then, all would be worse off. Government intervention and taxes would have made the house a slightly less comfortable place to live in.
Conclusion #1: The nature of G is key. If G serves to advance the public purpose, then the society should be in favor of it. MMT helps focus the debate around the quality and quantity of G; it rightfully makes a case against imaginary or self-imposed constraints that only serve to fudge the real issues.
Now, lets move on to Month 2. Let’s assume that the correct amount that must be spent in order to keep the house in good shape is 800. People had forgotten about the need for regular maintenance, but now all are suddenly “wiser” and convinced, including the “Others”. If the correct amount of spending is 800 then everybody should be better off in a scenario where G=800, versus one where G=0, or even G=600.
Now we assume that in Month 2 Father is debating whether T=800, or 600. This is an important question. If T=800, then the Kids will not generate extra savings. Do the Kids need those extra savings? If one ignores the China family, and also ignores that in a future the Kids may become less frugal, then the answer should be no. Reminder that according to the model the Kids do not consume, nor invest; if T=800, therefore, the Kids should be indifferent, at least initially. The “Others”, on the other hand, would be really better off… they would be getting a free ride given the maintenance. Kids are indifferent, “Others” are really happy… Conclusion: the “system” is OK.
Now lets add some further complexity. It turns out that just as the “Others” have become wiser, so have the Kids, and they start thinking that their frugality is excessive. Why should their consumption be so low that it effectively does not leave a dent on the system? To consume more they need business cards. Under this scenario, if T=600 then the Kids would be better off; therefore, they campaign for Taxes to be 600, and not 800.
What about the “Others”? To the extent the Kids start holding business cards that can effectively be used to compete for the goods that the “Others” had been happily exchanging amongst themselves, then to a minimum the “Others” will have to get together and assess the negative impact that those extra business cards may have on their daily lives, and then see how that impact compares to the benefit they are getting by having the Kids maintain the house.
This is a complex analysis, because the impact of the extra business cards is not clear, so overall, the “Others” tend to gravitate towards a G=T stance; the “Others” will campaign for T = 800. In fact, they will be a bit coy and argue that the maintenance is not that useful, and they will bring into the debate arguments about tradition, and how for years they have co-existed amongst themselves peacefully, efficiently, and without interference from neither Father nor the Kids. Reminder: the “Others” do not pay taxes (not yet) and they only use the business cards because they choose to do so… they are not forced by taxes.
So what should Father do? Go for T=600, or T=800? Both sides are making what seem to be valid arguments. Father decides that it is important to first understand the impact of those extra business cards.
The first thing that Father does is to analyze whether there is extra capacity in the Garden. He clearly realizes that the effect the Kids will have will depend on what impact the newly created currency will have on the prices of the goods that the “Others” produce and consume. Suppose there is no extra capacity, then as the Kids come into the market, prices will be driven up as there will be more competition for those same goods. The net effect is that, all other things equal, the “Others” will end up consuming less. How much less will depend on how much money the Kids have, but Father realizes that there has to be some point of equilibrium because the “Others” are indeed getting a free ride with the maintenance if T=800.
Fortunately, the debate is somewhat facilitated because it turns out that there is indeed extra capacity in the garden. Father concludes that prices will not rise given the extra demand from the Kids (Q will adjust but not P). So Father is inclined to swing the balance in favor of the Kids. What will happen when Father announces this suggestion in an “Open House” meeting? Father is not so much a dictator, as he is a democratic consensus builder.
The “Others” will take the news in and debate amongst themselves. OK they will conclude at first, lets allow the Kids to take in some extra veggies. Their reasoning: our loss in terms of quantity of will be zero, and yet we will benefit from the maintenance. However, suddenly one of the “Others” makes a persuasive point: with the Kids coming on board as consumers, the Garden will just reach full capacity, and whilst prices will not have increased, our ability to have a “buffer” of land to cultivate in case one area goes bad one day will be curtailed. Everybody agrees that this is an issue. Furthermore, another “Other” argues an additional point and asks: who is going to do all the extra gardening work? Not the Kids… they will be tied up with maintenance work. Now suddenly the workers amongst the “Others” realize that there will be an additional “cost” for them, even if consumer prices do not rise: this segment of the “Others” will have less vacation time.
Ultimately, the “Others” weigh the losses (less buffer land and less vacations) against the gains (less leaks in the house) and reach a compromise. They return to the meeting and try to strike a deal, overall arguing against “excessive” deficit spending, but agreeing to some. Throughout the negotiation, the “Others” are considering that the G is meaningful and helpful. Otherwise, they will argue (quite persuasively) that the new class of consumers (the Kids) will be getting “something from nothing”.
Father agrees that the difference between G and T cannot be too wide. His concern is that if the Kids generate too much savings over the coming months, there may come a point where the coercive nature of the taxes will not be enough, and the Kids will decide to pay their taxes through their savings, and not work and help maintain the house. At some point Father would catch on and simply raise taxes if this occurred, but he generally agrees with the notion of not letting the G and T gap become too high persistently.
Conclusion #2: T and G have ultimately a lot to do with how a society decides to allocate resources and “divide up the cake”. Technically speaking T does not fund G in terms of the money, but T is nonetheless an instrument to effectively re-allocate real resources away from the private sector and towards the public sector, and therefore T helps implement G programs. The more G exceeds T, the more publicly orchestrated re-allocation of resources will take place, or what is the same, the more savings one segment of the society will generate relative to another. Keeping a balance is key and is a political question.
Even if G helps advance the public purpose, the interests and philosophical beliefs of the different groups will always result in a debate in terms of who gets what, and what is appropriate for G. Those who believe that Father is “inefficient” and that the Kids are “lazy” will tend to favor low G levels. They will also want to minimize the gaps between G and T as a general rule. This is neo-liberalism in some respects. The neo-liberals will use arguments about running out of money, or about sovereign governments going bankrupt either out of “ignorance”, or “on purpose” and in order to generally keep “Father” and the “Kids” in check. For these people, whether there is or not excess capacity in the economy will be less relevant than it should be, because even if inflation is not generated as a result of G, they will find other costs that are generated if the G-T gap is high (e.g. less buffer land and less vacation time).
Is running a budget surplus a bad thing? This question again has everything to do with the allocation of resources and the debate as to how to divide up the cake. In one extreme Father could just tax the Kids, and not generate any G. This could work as long as the Kids had accumulated savings, ie. there was National Debt. Would reducing this Debt be good? No if you ask the Kids. Yes if you ask the “Others” (to the extent that debt reflects savings of the Kids that could be one day used to compete for vegetables). Arguing in favor of one position or the other is a political question.
What about the China Family? The simple model considers that G and the issuance of extra cards is a benefit for the Kids, and the system as a whole. The Kids get even more free time. The House gets maintained. Everybody is happy. However, there could be other repercussions from this policy of letting the China family do the maintenance work.
In the simple model, the Kids just save. However, in the more elaborate model the Kids want to increase their consumption. To the extent they earned less savings by letting the China family do some of the work, they would have less ability to buy vegetables in the future. Lets take the example to an extreme. The Kids just become very astute traders, and in month 5 when the neighbors arrive they just decide to channel all their wages to the China family, such that the Kids end up doing nothing (they just spend time with their Play Stations), and the house gets fully maintained. Who will have bargaining power vis-à-vis the “Others” and their vegetables in the future? … clearly, not the Kids.
Do the Kids care? Maybe not today because they just prefer to save, but to the extent they are kept idle for too long, they may loose their “edge”, or competitiveness. Then, in a future they may regret the decision of having allowed the China family to do all the work and become very efficient at it (I am thinking about Germany and the periphery).
Be that all as it may, in the short term, to the extent G did indeed help further the public purpose of the Household, then the China family will have increased the Households welfare, as they helped maintain it and all they received in exchange were some business cards. But to the extent these business cards can chase the goods that the “Others” produce then we come back to the “Open House” debate we had before. Instead of the Kids, it is now the China Family who competes for the goods that the “Others” produce, but insofar as the Others are concerned, this makes no difference. To the extent G was to fund “destructive” expenditures (the case where the heating system stopped working) then the debate will be even more heated. Again, this is a political question.
Is there anything above that is incorrect or does not make sense. Sorry for the long post but feedback would be much appreciated.

Comment on Oh what a difference a President makes! by Andrei

Andrei — Sat, 19 May 2012 19:47:56 +0000

Vassilis:

The entities that owe money to British and other depositors are British-based subsidiaries of Icelandic, private banks. Isn’t this correct? The operation of foreign banks in a country’s soil is supposed to be regulated and monitored by said country’s authorities. Isn’t this, too, correct as far as Britain and Iceland are concerned?

No, that is not correct. Iceland is a member of the European Free Trade Association and the European Economic Area since 1970 and respectively 1994. These memberships allow Iceland to fully participate in the EU internal market, including of course the free trade zone. In return, Iceland have obliged themselves to implement all EU legislation relevant to the workings of the internal market. One of those regulations is the Directive 94/19/EC of the European Parliament on deposit guarantee schemes, which, as the description tells you, is a directive targetted at harmonizing regulation about minimum deposit guarantees across the EU internal market. This directive was duly adopted by Iceland as national law in 1999. This directive establishes, amongst other things, that branches of financial institutions operating abroad will still fall under the supervision of their home state relevant authorities and their solvency will be guaranteed by the home state's solvency guarantee scheme. How this scheme should function in detail is left at the discretion of each state, but it has to guarantee a uniform minimum amount for deposits. In the case of Icesave, neither the UK, nor the Netherland authorities had any insight into the workings of the Icelandic bank branches, because they both fell under the supervision of the Icelanding deposit guarantee scheme.

After the Icelandic banks collapsed, the Icelandic government decided, on its own free volition and without being obliged to do anything, to hand out to Icelandic depositors the money they lost. This, to me, is equivalent to the government handing out free money to the victims of a natural disaster.

The Icelanding government was obliged to guarantee a minimum amount of those deposits to everybody, Icelanding depositors or British depositors - that is part of the legislation that they implemented as their national law in 1999. If the Icelanding government had refused to pay at least the minimum amount guaranteed, the Icelanders had the option of suing their government both in national courts and in european courts to get their money back. What the Icelanding government did actually do out of their own "free will" (more like to avoid being burned down or staked) was to not only repay the deposits to the minimum amount guaranteed (about 20k € at the time), but to repay them in full, for their own citiziens at least. The foreigners of course could go screw themselves. Or so the Icelanders thought.

If there’s an earthquake in Iceland and the government decides to compensate only Icelanders, that’s the government’s prerogative. Foreigners can complain about the unfairness of it but do they have a case in court? I think not.

Alas, you think wrong. The EU directive specifies that the minimum deposit guarantee goes for every client of the banks, no matter if they are domestic or foreigners, clients of the home bank or of a branch abroad. Not only that, but one of the fundamental parts of the EEA agreement that Iceland signed (specifically Article 4) specifically forbids governments to selectively apply their legislation in order to protect just their citizens and discriminate against foreigners - that's a basic rule within the common market, since free trade can only exist and function properly if there is a guarantee of uniform treatment. The Icelanders were of course aware of all this, so they used a legal trick to try and get around this rule: they didn't repay the deposits of the original Icelanding banks - no, they can say that nobody became a cent, neither the Icelanders nor the foreigners. What they instead did, was split their banks overnight into two entities, the "Old Bank" and the "New Bank" - in the new bank landed all the domestic deposits, which were then state guaranteed and repaid in full, and in the old bank landed all the foreign deposits, which haven't since a cent from Iceland since. Of course, even a child can see through such a transparent embezzlement scheme, which is why the complaint (see above to a link to the proceedings) against Iceland by the supervising comission before the EFTA Court concerns itself also with this clear case of discrimination against foreigners, which is clearly and obviously in contradiction with the legally binding agreements Iceland signed as part of the deal to gain access to the EU internal market. Hence, state brigandism.

Are you saying that if a Deutche Bank subsidiary in Somalia goes belly up, the German government will somehow owe money to Somali depositors?

I don't think Germany and Somalia are part of any free trade zone agreements with specific agreements on deposit guarantee schemes, so I am not exactly sure why you employ such faulty analogies?

Comment on When conservatives reinvent history to suit themselves by John Fremont

John Fremont — Sat, 19 May 2012 19:41:48 +0000

@ Dan Kervick A couple of years ago Eric Rauchway did a series about the New Deal including footnotes back to academic studies done on the subject. (Very) short reading list: unemployment in the 1930s. There she goes again.

Comment on When conservatives reinvent history to suit themselves by John Zelnicker

John Zelnicker — Sat, 19 May 2012 16:18:03 +0000

Ikonoclast — The answer has to do with how the conservative mind works as different from the progressive mind. There is a recently published book on this subject with associated articles and interviews on alternet.org. These are a couple of them by the book author:

http://www.alternet.org/story/154252/the_republican_brain:_why_even_educated_conservatives_deny_science_–_and_reality/?page=entire

http://www.alternet.org/teaparty/154607/how_the_right-wing_brain_works_and_what_that_means_for_progressives, page=entire

His basic thesis, as I understand it, is that the conservative mind is fearful of uncertainty, change, new ideas and the world in general. The progressive thinker, on the other hand, welcomes such things and is not as fearful, generally speaking, as the conservative seems to be. The right wing has continued to gain power by playing on these very fears. I find it amazing, for instance, that they have made many of those who are dependent on Medicare and Social Security more scared of what might happen in ten years rather than what is happening right now. (Or could happen if the right wingers get their way on “rescuing” those insurance programs.)
There are apparently some very important, very real differences in the way conservatives and progressives think, e.g., there is some evidence that conservatives with higher education are more likely to deny science and empirical fact.

I also think your thumbnail sketch has an important truth in it. The PTB have the the middle and lower classes running scared and they don’t have the time or the inclination to sit and think this stuff through.