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The moronic activity of the rating agencies

It is a public holiday in NSW today – Labour Day – to celebrate the 8-hour day although for many workers that victory is now a thing of the past as labour market deregulation bites harder on the hard-won conditions that workers enjoyed during the full employment period. I am also ailing (with “the bug” that is “going around”) and I have two major pieces of work to finish (one completed this morning). There is also a birthday in my immediate family and so I am partying tonight (in relative terms). So all that means a shortish blog. I was giving a talk in Perth last week about the absurdity of state (non-currency issuing) governments running down public infrastructure because they refuse to borrow all in the name of preserving their AAA credit rating from the corrupt ratings agencies. The obvious question seems to evade people – why have AAA credit rating if you refuse to borrow. The ridiculousness of the ratings game raised its head again last week when one of the ratings agencies threatened to downgrade the British Government’s rating. It is clear that the agency is probably needing a revenue boost so tried to attract some publicity. If I was the Chancellor I would have told them to buzz off and to stress how irrelevant they really are. But the reaction was typical – angst and worry. For what? Nothing. The only thing it demonstrated was how mislead the public are and how mindless this “dark age” that we are living through at present really is.

On September 28, 2012, Fitch Ratings issued its latest attempt to remain important – Fitch Affirms United Kingdom at ‘AAA’; Maintains Negative Outlook – which really says it all.

In their press release on Britain’s “sovereign ratings” they noted that the:

–Long-term foreign currency Issuer Default Rating (IDR) affirmed at ‘AAA’
–Long-term local currency IDR affirmed at ‘AAA’
–Country Ceiling affirmed at ‘AAA’
–Short-term foreign currency rating affirmed at ‘F1+’

They also added that:

The Outlooks on the Long-term IDRs have been maintained at Negative.

Which you will conclude are mindless statements given the nature of the monetary system. They are claiming that there is a scale of possible ratings other than zero risk, but it is difficult to find any coherent reason for them denying the obvious.

Which is – Britain issues its own currency and that means it holds all the cards if it should choose to do so.

What we have in relation to these ratings agencies is an elaborate charade – a game of bluff. The British government has all the policy tools necessary at its disposable to render anything that Fitch and its ilk might say, yet plays along as if the boot is on the other foot.

In case you are in doubt, please read my blog – Who is in charge? – for more discussion on this point.

I was talking to a person in London recently who was a very influential economic policy advisor to the previous Labour Government. He said that they knew that the government had a currency issuing monopoly but worried that the consequences of the ratings agencies turning on the government would be severe so they just didn’t want to take a chance.

This is nothing more than a game of bluff and the government has the power but pretends it doesn’t. Ridiculous.

You get some spiel about the methodology in this Fitch document (undated) – Sovereign Ratings – although the document seems to be a picture parade of all the self-important staff with fancy titles that spend their time engaged in the ultimate unproductive, “make work scheme” that one could ever imagine.

We read that:

Fitch’s sovereign rating methodology draws on modern instances of default and near-default to establish key indicators of debt capacity – both quantitative and qualitative – changes in which may presage growing debt distress. Sovereign ratings assess debt capacity over the medium term and endeavour to look beyond cyclical and other short-term fluctuations. A risk model assures comparable treatment of countries and serves as a starting point for the rating process. The methodology is continually updated to incorporate experience acquired from crises such as in Mexico, Asia, Russia and more recently in Argentina and Turkey. Particular weight is attached to the analysis of debt structure – by debtor, creditor and maturity – public and external accounts, as well as the health of the financial sector in order to provide a comprehensive assessment of country risk.

Let’s state some basic principles that apply to any fiat-currency issuing nation:

1. The national government can never reach a situation where, on financial grounds, it is unable to honour all of its obligations denominated in the currency it issues. Read: Never!.

2. Such a government exposes itself to default risk if it chooses to create liabilities (borrow funds) in a currency that it does not issue. Which means that to remain risk free a national government should never borrow in foreign currencies. There is no need to borrow at all much less in foreign currencies.

3. There may be times when the polity becomes so dysfunctional that certain elements determine that it is best – as a political stunt – to default on its obligations. Or during times of war governments might default on its debt obligations (for example, Japan in the 1940s). None of these circumstances are amenable to “risk models” or “key indicators” that are based or constructed using economic and/or financial data.

4. It is totally inappropriate to make historical comparisons between nations that have pegged currencies, or which use foreign currencies and nations that issue their own floating currency. It is also inappropriate to historically compare monetary systems that were based on fixed exchange rate systems (such as the Bretton Woods arrangement) and fiat monetary systems where there is strict non-covertability (that is, the unit of currency is only able to be converted into itself).

And if you understand the economics underlying these principles, you will quickly realise what a charade the Fitch Ratings excercise the other day was.

Here is what they said about the UK.

First, they wrote in their press release that:

Fitch judges the risk of a fiscal financing crisis to be negligible.

That is, zero! Britain will always have people queuing up to buy the debt that it voluntarily (and unnecessarily) issues.

So if that is the case, how can we have a negative outlook on the debt that the British government is issuing?

Well, apparently:

… weaker than expected growth and fiscal outturns in 2012 have increased pressure on the UK’s ‘AAA’ rating, which has been on Negative Outlook since March 2012. With a structural budget deficit second in size within the ‘AAA’ category only to the US (‘AAA’/Negative), and general government gross debt (GGGD) approaching 100% of GDP in 2015-16 under Fitch’s revised baseline estimates – the upper limit of the level consistent with the UK retaining its ‘AAA’ status – the likelihood of a downgrade has therefore increased.

Why, if there is no risk of any “fiscal financing crisis”? Answer: no reason given other than their “risk model” must have some constraint built into it that says when this reaches this point we downgrade. There is no economic reason for this.

As an aside, there was some reportage last week (September 28, 2012) in Le Parisien – L’incroyable histoire de la naissance des 3% de déficit (The incredible story of the birth of the 3% deficit)

An English language report – The secret of 3% finally revealed – says that a “former senior Budget Ministry official” in the Mitterrand government was asked to come up with the fiscal rules that would become the Stability and Growth Pact (SGP).

He was quoted as being the “the inventor of the concept, endlessly repeated by all governments whether of the right or the left, that the public deficit should not exceed 3% of the national wealth”, although if we asked whether that statement was true or false we would all conclude it was false.

Why? Because wealth is a stock and GDP is a flow and the SGP budget deficit rule is specified in terms of 3 per cent of GDP (the size of the flow of national output and income in any given period). Whether he was actually the “inventor” of the rule is another matter.

Anyway, the official had this to say when asked about the origins of the 3 per cent rule:

We came up with the 3% figure in less than an hour. It was a back of an envelope calculation, without any theoretical reflection. Mitterrand needed an easy rule that he could deploy in his discussions with ministers who kept coming into his office to demand money … We needed something simple. 3%? It was a good number that had stood the test of time, somewhat reminiscent of the Trinity.

Which is another example of how arbitrary the neo-liberal period has been. Yet these arbitrary rules and assessments – all part of an elaborate smokescreen or charade – cause real damage to the lives of working people and rarely undermine the capacities of the elites. There are countless high paid officials in Brussels strutting around making all sorts of statements about the need for nations to cut welfare, wages, jobs and the like based on a rule that was just made up on the spot without any economic justification or authority.

If only the general populace could become familiar with this chicanery. That was one of the message I tried to impart in my talk in Perth last week. That citizens have to arm themselves with knowledge to challenge these crazy arbitrary rules and statements that our politicians emit as if they are venerable truths that have to be obeyed.

Anyway, back to Fitch.

First, they claim the currency issuing government has to reduce its budget deficit (engage in fiscal consolidation) or else it will lose its AAA rating.

Second, they acknowledge that the “private sector deleveraging and fiscal consolidation as well as from depressed business and consumer confidence, weak investment, and constrained credit growth” are undermining growth in the UK.

Which means they demanded that the UK economy grow more slowly than otherwise to hold the AAA rating.

Third, then they note that the “weaker than anticipated economy” is undermining tax revenue collections which is pushing up “public sector net borrowing” and blowing out the fiscal projections that they had previously formulated.

Why they thought that there would not be a increased deficit once the fiscal consolidation undermined growth is another matter that bears on their basic macroeconomic understanding in the first place. Like the IMF and the OECD, these agencies demand fiscal cuts, yet pretend that they will be offset by private sector spending growth. Even the most basic understanding of psychology tells us that confidence does not increase when sales are falling, jobs are being cut and unemployment is rising.

Fourth, in light of the weakening economy and the fact that the Government will not meet its deficit and debt reduction targets within the time frame specified in recent budget statements, Fitch decided to shift the AAA rating “to Negative from Stable”. As they say, this is because “Fitch’s Sovereign Rating Methodology” has a mindless rule that says with “general government gross debt to GDP ratio forecast to approach 100%, the likelihood of a rating downgrade has increased”.

What is the difference between 100 per cent, 110 per cent, 0 per cent or any other percent? A mindless and arbitrary rule drawn from analyses that breach the fundamental principles I outlined above.

But it is also moronic in the extreme – the logic being: Cut deficits to keep the AAA rating – which undermines growth and pushes up the deficit and debt – which undermines the AAA rating.

And the politicians and everyone else goes along with this nonsense. We really are not a very bright race of people.

Apparently, the:

Negative Outlook on the UK rating reflects the very limited fiscal space, at the ‘AAA’ level, to absorb further adverse economic shocks in light of the UK’s elevated debt levels and uncertain growth outlook.

Which means nothing at all. What fiscal space are we talking about? Earlier they admitted that the “risk of a fiscal financing crisis to be negligible”. That is, there is as much financial space for deficit spending as is required in the UK – as there is for any currency-issuing government.

There is near infinite financial space, which is the concept of “fiscal space” that they are referring to. There isn’t infinite real space – that is, the availability of real goods and services that can be purchased at any time with government spending.

But whatever is available for sale in UK Pounds – including all the unemployed and underemployed workers – can be purchased at any time by the national government. There is never an intrinsic financial constraint on that capacity.

Once again, we encounter lots of arbitrary (voluntary) constraints. When people say to me that the government has run out of money I just look at them (quickly recall which currency is being discussed) and say: What the Australian Government has run out of dollars?

The fact is that the British government can absorb any “adverse economic shock” at any time without exception. It might choose, as it is now, not to do so. But then the public debate would turn to examining why it was deliberately allowing unemployment to increase when it has all the means at its disposal not to have that happen.

Fitch also give us a guide to what would trigger a downgrade in Britain:

— General government gross debt failing to stabilise below 100% of GDP and on a firm downward path towards 90% of GDP over the medium-term.

— Discretionary fiscal easing that resulted in government debt peaking later and higher than currently forecast.

— A material downward revision of the assessment of the UK’s medium-term growth potential.

Which confirms that their entire business is conducted at a level which is moronic in the extreme.

The logic being: Cut deficits to keep the AAA rating – which undermines growth and pushes up the deficit and debt – which undermines the AAA rating.

Please read my blogs – Time to outlaw the credit rating agencies and Ratings agencies and higher interest rates and – Moodys and Japan – rating agency declares itself irrelevant – again – for more discussion on why the ratings agencies should be ignored and … outlawed.

Conclusion

Given their propensity to corrupt behaviour (as evidenced in the various hearings that have been conducted in the fallout of the financial crisis) I would outlaw the ratings agencies immediately.

But if I was in government I would also be engaging in a large education campaign trying to inform people about how moronic the logic used by these agencies is.

But I am not in government, so I am doing it anyway, except my reach is significantly more limited than if I was the Prime Minister of Britain.

That is enough for today!

(c) Copyright 2012 Bill Mitchell. All Rights Reserved.

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    This Post Has 30 Comments
    1. “Which means they demanded that the UK economy grow more slowly than otherwise to hold the AAA rating.” Bill Mitchell

      Deflation increases the real returns on the debt of a monetary sovereign while doing nothing to increase the risk of default since there can be none. The US, for example, has a Constitutional Amendment (the 14th) that says (in part):

      “Section 4. The validity of the public debt of the United States, authorized by law, including debts incurred for payment of pensions and bounties for services in suppressing insurrection or rebellion, shall not be questioned.”

      So all the deficit hysteria appears to be for the benefit of the usury class.

    2. I’ve gotten some answers on this, but am still a bit unsure. Is there any level of debt to GDP that is too high? And, I don’t mean the government infinite capacity to service the dept. Just that if NFA in the private sector are so large, can that lead to inflation that is difficult to control (they spend the money). Or, is that not expected to ever be an issue?

      In the US we supposedly have a one of these self-constraining rules that the government must issue debt to cover fiscal deficits (having a safe investment is probably a good idea anyway). However, we also have quantitive easing, which is the central bank purchasing government bonds (I believe), which seems to make a mockery of this rule. Is the rule still in place in the sense that the bonds must be sold to the private sector first?

      Sorry for the US-centric questions.

    3. “Is there any level of debt to GDP that is too high?” SteveK9

      How much “corporate welfare” is tolerable? How much confusion about government money creation is tolerable? How much support for what should be a purely private business (should it be able to survive as such), banking, is tolerable?

    4. Isn’t there some ‘optimum seignorage’ level beyond which debt-to-GDP or inflation become destructive for the currency issuer?

    5. “Isn’t there some ‘optimum seignorage’ level beyond which debt-to-GDP or inflation become destructive for the currency issuer?” Art Vandalay

      Why do you conflate seigniorage with debt? There is no necessary connection between the two unless you insist that fiat spent into the economy without borrowing and that is not necessarily doomed to be taxed out of the economy is “debt.”

      My, how the bankers and usury class have indoctrinated us with “money must be debt.”

    6. As far as I’m aware, note issues are backed by government securities in most central banks around the world. So to this extent, money is backed by debt, ergo money is debt.

      Also, I think the idea that government spending requires taxation is relatively uncontroversial.

      However, neither of these points actually address the quesntion I was asking:

      While a currency issuer, by definition, can’t run out of money, can it run out of people who are willing to use it (through excessive devaluation/inflation)?

    7. “So to this extent, money is backed by debt, ergo money is debt.” Art Vandalay

      But it need not and should not be.

      “Also, I think the idea that government spending requires taxation is relatively uncontroversial.” Art Vandalay

      That’s a convenient lie going back to the gold standard where governments were forced to buy or rent a shiny metal in order to create government money.

      “While a currency issuer, by definition, can’t run out of money, can it run out of people who are willing to use it (through excessive devaluation/inflation)?” Art Vandalay

      Even if genuine private currencies were allowed, like they should be, taxpayers would still need fiat in order to pay their taxes.

    8. “That’s a convenient lie going back to the gold standard where governments were forced to buy or rent a shiny metal in order to create government money”

      The standard Imperial currency of the day was forced to buy or rent a shiny metal.
      Other currencies were free to devalue against that unit.

      I am all in favour of Fiat currencies withen defined political borders Beard but what about real physical trade balances ?

      The UK ran up a truely massive £100 billion negative trade balance in real goods &oil last year and is set to shoot past that huge number this year by a very wide margin.
      Just how much goods are the Euro vassal states willing to export to London ?

      If you look at real goods trade the euro seems to be a London invention for sure……a free lunch for the elite withen that society.
      The IMF recently wrote a paper – “External Imbalances in the Euro Area”
      See the Irish economy blog.

      I know it was “in the Euro Area” but you would think they would somehow mention the UK since it was still part of Europe the last time I checked.
      They did not.
      The relative Success of sovergin countries may have much to do with the failure of non sov euro countries.
      You can certainly see this in areas such as vehicle sales and the like.
      Its a zero sum world now as 30+ years of entropy makes it impossible to create anything as people have forgotten far more then what has been learned over these very strange decades.

    9. @F Beard
      Is this a free ride ? ….it sure looks like it
      2011.
      Trade of goods balance : – 88,505m
      Trade of oil Balance : – 11,509m

      Is Europe a victim of unsustainable international trade /energy connections which reduces rational internal / national demand and rational investment ?

      If you compare this to the year 2000
      Trade of goods balance : -39,512 m

      Trade of oil balance :+6,536m (peak)

      And Y1991

      Trade of goods balance : -11,497m
      Trade of oil balance : + 1,274m

      Some records set during the UK Q2 period in its balance of trade and current account figures.

      Current account Net

      Trade in Goods : £ -28.1 Billion ( largest deficit ever recorded)
      Trade in Services : £+ 17.9
      Income : £ -5.2 Billion (largest deficit ever recorded)
      Transfers : £ -5.5 Billion

      Current balance £ -20.8 Billion (largest deficit ever recorded)

    10. This is what a free lunch looks like.

      2011.
      Trade of goods balance : – 88,505m
      Trade of oil Balance : – 11,509m

      Is Europe a victim of unsustainable international trade /energy connections which reduces rational internal / national demand and rational investment ?

      If you compare this to the year 2000 in the UK
      Trade of goods balance : -39,512 m

      Trade of oil balance :+6,536m (peak)

      And Y1991

      Trade of goods balance : -11,497m
      Trade of oil balance : + 1,274m

    11. And another record breaking year coming down the tracks…….
      UK Current account Net Q2

      Trade in Goods : £ -28.1 Billion ( largest deficit ever recorded)
      Trade in Services : £+ 17.9
      Income : £ -5.2 Billion (largest deficit ever recorded)
      Transfers : £ -5.5 Billion

      Current balance £ -20.8 Billion (largest deficit ever recorded)

      Meanwhile Ireland posted a record current account surplus of over 3 Billion Euros in Q2 and even Greece had a current account surplus in July.

      The shoppers of London seem quite happy with their lot although some of the deficit is probally pseudo monetary assets such as Works of Art ,silver and other Glam shiny stuff. (not Gold)

      Is this the true function of the Euro ?

      Who needs India when you have the eurozone Lutheran club at your door ?
      I mean when you have turned Southern Ireland & Italy Lutheran you know the game of real resourse transfer has been won.

    12. It is certainly true that Britain does not have to worry about pleasing credit agencies and do not have to borrow money at all. But if Britain decided to go the MMT route, wouldn’t the battle just switch to their exchange rate. If they stopped borrowing from the bond markets and decided to instead exercise their sovereign rights to issue their own currency wouldn’t there be a reaction from the Neo-liberal globalists? Now a totally self-sufficient economy has little reason to worry about its exchange rate but with the radical Neo-Liberal globalization that has occurred in the past 40 years there are very few nations that can even approach autarky. If British policy makers chose the MMT route, and the Neo-liberals decided in retaliation to attack Sterling, Britain would eventually have little choice but to pull the Pound from international exchanges and make it a non-convertible currency. This would free them from Neo-liberal constraints but the new problem would be a search for hard currency to import energy and consumer products; not to mention agricultural staples and basic raw materials.

      It seems to me that MMT was tried in Eastern Europe for around forty post war years. It resulted in forty years of hard austerity in the Eastern Bloc. In order to deal with international trade the various Communist nations founded the Council for Mutual Economic Assistance (Comecon). The whole structure was dependent on the Soviets being willing to subsidize their hegemony with supplies of oil at below-market price to their partners. As the demand for Western goods outstripped the Comecon nation’s ability to earn hard currency, these nations were forced to borrow from the Western capitalists. Eventually Eastern Germany, for example, had annual hard currency debt services at 1.5 their annual hard currency export earnings. In the end Comecon broke down because in order to both service this debt and to buy more goods from the West the various members stopped being willing to trade exportable goods among themselves and instead desired to trade with the West for hard currency. The Soviets realized the costs of hegemony were not worth the limited benefits.

      I wonder if MMT theorists have ever addressed the issue of exchange rate risk and the post-war experiment with MMT in the Eastern Bloc?

    13. ” But if Britain decided to go the MMT route, wouldn’t the battle just switch to their exchange rate.”

      MMT says that you take the excess savings of the non-government sector and accommodate them by extra government spending – preferably via a Job Guarantee.

      What that means is that there is extra spending power in the UK economy to buy stuff. And people buying stuff means more profits for businesses.

      So yes the financial investors will probably leave and find another economy to destroy – as the UK stops paying interest on bonds and lets the interest rate drop to zero.

      But real investors will see the extra spending and realise that the businesses in the UK are about to make lots of extra profit. So they will move in.

      So the expectation should be that we will lose the financial speculators looking for government corporate welfare and attract those who want to invest in productive businesses making money. Difficult to see how that is a bad thing.

      “Britain would eventually have little choice but to pull the Pound from international exchanges and make it a non-convertible currency.”

      The Pound is already non-convertible. It can only be exchanged. Which means you have to find somebody willing to go in the opposite direction *or you can’t exchange*.

      Also bear in mind that there is no solid economic theory of how exchange rates work.

    14. Dear Working Class Nero (at 2012/10/02 at 17:33)

      You asked:

      But if Britain decided to go the MMT route, wouldn’t the battle just switch to their exchange rate.

      This is a common misconception. Britain as a fiat-currency issuing nation is already operating a MMT monetary system (excuse the phrase). MMT is not some new regime. It relates to all modern monetary systems. The particular government can place any number of constraints on its currency – including how it interchanges with other currencies; whether it issues debt to match deficit spending in that currency etc. MMT adds explanatory capacity to allow one to understand what are the implications of all these choices.

      But whatever it does it is operating as a MMT system.

      You then seem to get lost in your talk about Communism.

      best wishes
      bill

    15. Working Class Nero, I think it is unfair to associate MMT with the misery of Communism (some vanguard that turned out to be!).

      In practice, MMT shows some encouraging signs. In Japan, at least, whenever there has been fiscal stimulus (post 1991) there has been increased growth. Once stimulus is removed, so is the growth. If ever there was a classic example of a balance sheet recession, Japan is it. Closer to home, in Australia, fiscal stimulus limited negative growth to just one quarter during the GFC. I don’t know if that explains sub-par growth since this period but at least it prevented an unmitigated disaster. One thing is for sure though, get money into the hands of those with a high propensity to consume. The very poor have little deleveraging to do, because they would find it hard to get loans in the first place. And where they spend it is their business, not yours.

      Cheerio.

    16. “I am all in favour of Fiat currencies withen defined political borders Beard but what about real physical trade balances ?” The Dork of Cork

      What about them? If foreigners want to buy UK goods and services then they’ll need UK fiat at least for the tax part of their purchases.

    17. ” This would free them from Neo-liberal constraints but the new problem would be a search for hard currency to import energy and consumer products; not to mention agricultural staples and basic raw materials.”

      Working Class Nero

      Fiat could easily be a very sound currency if it were limited to its proper use as legal tender for government debts only*. Then if the monetary sovereign overspent relative to taxation only it and its payees would suffer loss of purchasing power. Fiat could also be made more sound by eliminating government privileges for the banks so as to reduce their ability to create endogenous money unethically.

      Not that I am against endogenous money creation but it must be done ethically. Our current money system with government privileges for the banks is fascist, not free market.

      *After a universal bailout with full legal tender fiat to reset and re-level the playing field.

    18. @F Beard
      This is not a linear system.
      Its a dynamic fluid system.
      You have a sov / financial centre in the middle of Euro Vassal states…..it can thus Game the surplus production very easily.

      A sov can give pirates a letter of Mark……..A skilled sailor can then go out into the deep blue sea and raid at will without resistance.

      Ireland was really always a non sov system.
      But especially since 1987 To maintain this non sov system it was forced to Game multinational and Finance flows.
      This caused a extinction of almost all rational domestic demand and investment (disguised by a credit hyperinflation)
      With any “real investment” geared towards for example roads which is very dependent on outside capital flows as it requires oil in large amounts and bank consumer credit for cars etc.

      Also The export industry then became huge relative to the domestic economy.

      Is this trade surplus healthy ? (go back to 1972)
      http://www.tradingeconomics.com/ireland/balance-of-trade
      There is almost no core internal capital in Ireland.
      It (Ireland) exists to farm outside capital flows because the Landlords agents (politicans) run away or in extremis denied the ability to farm its own internal capital flows.

      Any internal capital ireland produces is exported out , the troika now determine how much we get back……i.e. .its not a closed capital system and this open system now has no political inputs which is part of the design I suspect.

      These countries are not closed agricultural hinterlands trading with each other or trading food energy units with each other.
      External capital now has the legal basis to overpower all city or state borders under previous IMF or future ESM sanction.

      The real Goods balance of Euro countries is a reflection of where the true power resides
      Both the UK and to a lesser extent France is in real goods deficit which benefits the elite withen those countries.
      Both Germany and Ireland are extreme colonies.
      But in Germany the truth is heavily disguised…..in Ireland given that it is such a absurd little place the truth is very clear for all to see.
      Which is a good thing in some ways.
      I suspect our absurdity has become a embarrassment for these vampires although they are not delicate creatures.
      Still Bullshit can be important sometimes.
      Its a mistake to let the mask slip unless they feel the game is almost up.

      To put it simply a huge amount of energy is lost in the ether to maintain these absurd long distance capital and trade flows.
      However it is of no consequence to the elite if they can continue to offload the externalties to the proles.

    19. Beard – finally we find something we can agree on ‘private currencies should be allowed’. You are a bit of a libertarian at heart, aren’t you!?

      Bill – I agree that to the extent that countries are using QE, they are adhering to MMT as I understand it. For example, the cumulative UK deficit between 2009 and now is pretty close to the figure of GBP375 billion that has been used for QE.

      In view of this, have you put in your application for the now available position of governor of the Bank of England?

    20. “finally we find something we can agree on ‘private currencies should be allowed’.” Art Vandalay

      Yes, but:

      1) A universal bailout, including non-debtors, of the population should be funded with FULL legal tender fiat so as to force the banks to accept it.

      2) Unlike Ron Paul, I would never attempt to define what private money is but only what government money is, leaving it always to the free market to define what private money is. As for government money, it should only be inexpensive fiat.

    21. Art Vandalay: I agree that to the extent that countries are using QE, they are adhering to MMT as I understand it.

      Art, QE is ZIRP. ZIRP (Zero Interest Rate Policy) is a recommendation of MMT, but one of secondary importance. Using QE or ZIRP is not adhering to MMT recommendations. It is doing something which MMT says is not all that important: Monetary policy. Contrary to the magical-thinking, central bank cult trend of the last few decades.

      MMT (and common sense) says fiscal policy is much more important. Full employment, the JG is adhering to MMT. High unemployment austerity with QE, as in the UK and to a lesser extent the USA, is anti-MMT.

    22. Yes, I understand that and I would go further and say it is NIRP – negative interest rate policy. My point is that fiscal policy is already being funded by newly created money, so in that sense governments are using MMT. If there was a commitment not to implement austerity then it would be pure MMT, as I understand it.

      However, may I suggest a more (and by more I mean, in a certain sense, less) radical alternative, that if existing government spending was redirected in a more redistributive fashion then perhaps there would be no need for greater deficits, just better and more fairly directed policy.

    23. Is there really anything preventing private currencies now?

      Seems to me that we are all “able” to issue our own currencies already,the trick is getting them accepted by enough sellers.

      I’ve come to the view that the whole idea that banks are being somehow forced to use the govts fiat is plain disingenuous. (Not that FBeard or Art V are explicitly saying that) Banks WANT to use the govts fiat. If they were on their own and had to do things to make their currency broadly accepted they would have to change their business model.

      Moslers statement that a state monetary system is created to move resources to the state is clearly true once you realize that ANYONE who creates money is trying to move resources to them selves. Why else create your own money except to buy stuff for yourself? It’s this simple dynamic which makes a stable economy almost impossible with only private bank currencies circulating. Banks have figured out its better for them to not be issuing competing currencies but simply competing for the extraction rights of the state currency. They are in the “Fiat mining” business!!!

    24. “Banks WANT to use the govts fiat. ”

      They go one step further than that. They peg their liabilities to the state liabilities guaranteeing a one-to-one conversion.

      The private to state system is just a big fixed-exchange-rate system.

    25. Greg – Right, there isn’t anything preventing private currencies – so there are plenty, though the non-banks’ usually die out quickly. Of course the most important private currencies are the banks’.
      Neil:They peg their liabilities to the state liabilities guaranteeing a one-to-one conversion.
      To clarify – They announce such guarantee, with limits, but only the state can actually make it. But in recent practice in the USA, the state always acts as a nice IMF for the banksters when their gambling goes bad.

    26. “Is there really anything preventing private currencies now?” Greg

      The capital gains tax on potential private money forms such as common stock is one hindrance. But like you imply, who can compete with a government enforced/backed counterfeiting cartel, the banking system?

      But if that cartel was abolished (and also the capital gains tax) it would be interesting to see what private money forms could survive in a true free market of private money creation. My bet would be on common stock.

    27. “To clarify – They announce such guarantee, with limits, but only the state can actually make it.” some guy

      Yep. And yet we supposedly have a “free market.”

    28. QE3 could be construed as quasi-fiscal policy, to the extent that it is an unequal asset swap – does anybody really believe that the toxic MBS bought from banks have been valued appropriately?

      The primary winners from QE3 are the banks, it seems to me. Same old story.

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