Bonnie Scotland – ignorance or denial – either way it is fraught

There was an article in the UK Guardian (October 29, 2013) – Mainstream economics is in denial: the world has changed, which reported that the economics profession had been “stupidly cocky before the crash” and “had learned no lesson since”. It followed a – report – last week (October 25, 2013) that students at Manchester University had proposed an overhaul of orthodox teachings and economics. The latest Guardian article concludes that the economics profession is in “denial”, that is, “the high priests of economics refuse to recognise the world has changed”. I will come back to that in a moment, but evidence of this denial is swamping the debate about the upcoming Scottish decision on whether to break from Britain. So-called informed policy briefing papers have started to emerge, which will distort the choice available to the Scottish people by perpetuating basic myths about the way monetary systems operate and the choices particular currency arrangements provide government. As I’ve said before, if the medical profession offered the sort of analysis and professional opinion that my own profession offers, then they would be very few practising medics because they would have all been sent broke through malpractice lawsuits.

Before I head to Bonnie Scotland let me deal with the proposition that the “high priest of economic’s refuse to recognise the world has changed”. This, of-course, implies that before the change the mainstream economic theories were reliable basis on which to conduct analysis.

That is not correct. The mainstream macroeconomic approach was shown to be deeply flawed during the Great Depression by Keynes and others and has an improved since.

It is true that prior to 1971 advanced economies worked with a convertible, fixed exchange rate monetary system, which meant that currency-issuing government were financially constrained by dint of the need to manage the fixed parities through monetary policy interventions.

It is also true that after 1971, he same nations abandoned convertibility and operated with Fiat currencies, that is, the currency was empowered by legislative fiat such that the issuing government merely stated that all liabilities to the government (that is, tax etc) would only be resolvable using the currency in question.

After that point (noting that countries did not all immediately adopt the fiat currency, flexible exchange rate system after the Americans abandoned it in 1971 – that is, it took some time), none of the fiat currency-issuing governments faced any financial constraints on their spending.

Yes, they all introduced voluntary restrictions – accounting smokescreens – to make it look as though they had financial constraints. But in reality, at the intrinsic level of the monetary system, they do not have and can vary the legislative rules that they have in place almost whenever they choose.

While the Guardian article wants us to believe that the crisis is the turning point that my profession should recognise, the fundamental changes that most have missed occurred during the Great Depression and in 1971.

In other words, mainstream macroeconomics has never really been an accurate depiction of the way the capitalist monetary system operates and the global financial crisis is just another catastrophe along the way the many failures that the dominant paradigms has produced for us.

But I did love the anecdote from a US university classroom in 2009:

The world was apparently collapsing around them, and what better forum to discuss this in than a macroeconomics class. The response? “The students were curtly informed that it wasn’t on the syllabus, and there was nothing about it in the assigned textbook, and the instructor therefore did not wish to diverge from the set lesson plan. And he didn’t.”

That lesson plan would have been about the glorious advantages of the self-regulated market and how governments had no further macroeconomic roll to play because the business cycle was dead!

The Guardian article then asks – “How do elites remain in charge?”:

If the tale of the economists is any guide, by clearing out the opposition and then blocking their ears to reality. The result is the one we’re all paying for.

This is nothing new it starts on day one of an undergraduate economic’s programme, intensifies by fourth-year (the honours year in stride), dominates postgraduate studies, and mostly defines the appointments, promotion, publication, and research grant processes once the Ph.D. has been obtained.

The brainwashing is as intense as the arrogance of the positions held by the theoreticians. Some sneak through the system, somehow flourishing and reaching more coherent ways of understandings the world. But they are the exception to the rule.

I hope that, in time, Modern Monetary Theory (MMT) provides a basis for curious minds to conduct economic analysis and design policy interventions. But, at present, we are some way from that.

And now to Scotland.

I last wrote about the Scotland decision in this blog – Scotland should vote yes in 2014 but only if ….

The British National Institute of Economic and Social Research released a paper last month (September 17, 2013) – Scotland’s Currency Options. The paper was presented to an – International Conference on the Economics of Constitutional Change – in Edinburgh on September 19-20, 2013. You can find all the papers at the conference link.

All the papers I have read so far (most) reflect the denial that the Guardian article alludes to.

The NIESR paper is no exception. The Institute created a YouTube cartoon, which it thinks is neat. I wouldn’t waste my time watching it (I did and regret it).

Essentially, the paper considers:

… the three currency options for any independent Scotland: being part of a sterling currency union, adopting the euro, or having an independent currency. No currency option is the best when considered against all criteria, they find. Therefore, making the decision requires deciding which criteria are most important. The NIESR researchers puts their emphasis on fiscal solvency; whether a country can honour its debt obligations.

Which immediately alerts you to the fact that the paper is going to be grim reading. Only one of these currency options – having an independent currency – is necessary and sufficient for an independent Scotland.

Using a foreign currency, for example sterling or the euro creates a dependent Scotland and so the essential premise that the researchers begin with is flawed from the outset. It goes downhill from there.

They conclude that “no currency option is best when considered against all criteria”. They believe that the decision will have major ramifications for Scotland’s fiscal position.

We read that:

For an independent Scotland to prosper, it requires a ‘hard’ currency, one in which investors are willing to hold long-dated assets at a reasonable price. A necessary condition for a ‘hard’ currency is that government solvency must be beyond doubt. If this condition is met, then a long-term domestic debt market can develop which supports public finances and financial stability. If it is in doubt, then investors and citizens may choose to hold assets in another currency or simply no longer subscribe to government debt issues.

None of which is true. A truly independent Scotland, issuing its own currency doesn’t need any one to “hold it” other than the residents and others who are forced to pay taxes in that currency.

The link between the currency and other “long-dated assets” (that is, government debt) is erroneous. They make the link because they assume that the Scottish government should maintain the charade of issuing debt to feed the corporate welfare recipients as if, somehow, the Scottish government needs the private sector to give it its own currency before it can spend it.

Have you ever heard of such nonsense!

For a currency-issuing government the bond markets other subjugated ones. Please read my blog – Who is in charge? – for more discussion on this point.

The reality is that government debt-issuance supports the “long-term domestic debt market” not the other way around. That is one of the first myths that needs to be dispelled if the public is ever to understand what has been going on before their eyes for decades.

The NIESR paper then claims that:

Solvency is the ability to repay and service debts determined by the value of assets exceeding liabilities. The value of a nation’s assets is the marketable value of its physical assets and its expected future primary fiscal surpluses plus any seigniorage, while the value of liabilities is its current and likely future debts. Expectations play an important part in judging solvency. In the wake of the financial crisis, the debt burden of many countries has dramatically worsened, leading creditors to question the solvency of even advanced economies much more closely.

There is never a solvency issue for a currency-issuing government no matter how fancy you want to define the condition. Read: never. expectations of the private sector play no role in that condition.

A currency-issuing government can always meet its liabilities as long as they are in its own currency. Its central bank can continuously run with negative capital (in accounting terms) and what we think about the capacity of that type of government to pay up is irrelevant.

Note also the slippage in demarcation in the last sentence. Yes, the outstanding debt for many countries has increased, although it is not a burden for a currency-issuing government.

Using emotional terminology like “dramatically worsened” provides no informational content if we are considering a currency-issuing government.

But note the inexactness of the next statement about “even advanced economies”, which have apparently had their solvency scrutinised by leading creditors.

Which advanced economies are they referring to? And remember, this is in the context that the Scottish government could introduce its own currency and only issue liabilities within that currency.

Well it turns out, not that the NIESR authors care to specify this, that the only nations that have encountered any difficulty in terms of selling their government debt are those in the Eurozone, which do not issue their own currency.

The authors leave it to the reader (who may not have the capacity to differentiate here) to think of advanced nations in terms of the UK, the US, Japan, Australia and then infer somehow that the solvency of these nations has been in doubt and is also something that the bond markets determine.

It is highly likely that the authors do not even understand they are doing that. It is highly likely that it is not so much denial (as in the Guardian article) but just plain, bog ignorance brought on by years of brainwashing as a result of being part of the mainstream economics profession.

But no advanced nation, which issues its own currency, has had any problems issuing its debt in the last five years – and we know why. The bid-to-cover ratios have remained high because bond markets need the debt to feed their parasitic addiction to the corporate welfare that the debt provides.

Recall my example in Australia when the government was running surpluses and retiring debt. The financial markets demanded that the government issue a minimum amount of new debt even though in the mainstream logic there was no reason to. It blew their cover completely.

This loose reasoning is typical of the mainstream profession, which fails to understand the fiat monetary system.

The analysis presented also assumes that Scotland would “join the European Union at the earliest opportunity” and therefore be required to make a “commitment to join the euro, and that timing would be unspecified, but depend on meeting the Maastricht criteria”.

They then spend considerable time estimating that under these conditions, “Scotland would need to run primary surpluses of 3.1% annually order to achieve a Maastricht defined debt to GDP ratio of 60% after 10 years of independence”.

And then compared to its 2000-12 performance – an “average primary fiscal deficit of 2.3% (including taxes from oil and gas)”, the authors claim that this “would represent a fiscal tightening of 5.4%”.

We can conclude one thing from this – their Excel spreadsheet has the correct formulas! But not much else. Scotland would be mad to accept this future.

They do not have to join the Euro, nor join the EU if they choose not to and the conditions of membership mean they have to impose fiscal austerity which will damage the living standards of its people.

The fiscal position it would have to adopt depends on its external performance, the spending and saving decisions of its private domestic sector and the degree of real resource slack that it inherits.

Questions about its “per capita share of UK government debt and a geographic share of oil” that are central to the NIESR analysis are largely irrelevant if it issues its own currency.

First, as an independent nation it can renegotiate the prorated debt into its own currency. Second, the prosperity of the nation will hinge on the real resources it has access to – either within its borders or those it can import.

The government can motivate the maximisation of all real resources that are available for sale in the new currency. The nation as whole would, in the worst-case scenario, have to export to import foreign real resources.

We also read that:

If Scotland chose to issue its own currency … then it could, in theory, create an almost unlimited supply at virtually no cost.

Yes, that is true. So what is all the discussion about the need to pacify financial markets about?

They go on:

To assure citizens that it will not abuse this position and possibly cause inflation, states generally grant the central bank independence to deliver government targets.

No, that is not true. What is required is that the new Scottish government would have to assure its citizens that its fiscal policy aims were to achieve and sustain full employment and no more.

The arrangements regarding the central bank are irrelevant in that regard.

As long as the government spends within the real resource space provided by non-government overall saving (whether it be private domestic sector saving overall or external deficits) – relative to full capacity utilisation – then there is no fear of inflation – irrespective of whether it issues debt to the non-government sector or not.

The inflation risk comes with spending not the monetary arrangements that might accompany it.

You can appreciate how tortured this style of analysis is from the following reasoning:

In periods of financial distress when private agents want to hoard the safest asset, central banks supply of liquidity provides an important safety valve. In the fog of a crisis it is rarely straightforward to distinguish between illiquidity (a central bank responsibility) and insolvency (a fiscal issue). Central banks which provide liquidity can facilitate the transfer onto the fiscal accounts.

That is about as bad as it gets. What this means is that the currency-issuer can always provide the currency-issuer with as much “cash” as it likes to avoid both a banking meltdown and meet all spending ambitions.

Why not just say it – there is no liquidity or solvency risk facing a currency-issuing government (where the latter embraces the consolidated treasury and central bank)?

They later go on to recommend a pegged currency if the government issued its own currency. This is in the context of the fiscal austerity (they call it “fiscal rectitude”) they claim will be required.

The fiscal austerity is not required nor would pegging a currency allow the new nation to be independent. The Scottish government would be advised to float the currency and let it adjust accordingly so that its policy focus can be on maximising the potential of the domestic economy.

The authors fear “capital flight” – which would promote a depreciation in the exchange rate – but no real resources can fly anywhere other than airplanes and they have a habit of flying back again – full of tourists enjoying the increased competitiveness of the nation that would come with the lower exchange rate – enhancing the already beautiful countryside!

The following points are worth remembering.

A sovereign government in a fiat monetary system has specific capacities relating to the conduct of the sovereign currency. It is the only body that can issue this currency. It is a monopoly issuer, which means that the government can never be revenue-constrained in a technical sense (voluntary constraints ignored). This means exactly this – it can spend whenever it wants to and has no imperative to seeks funds to facilitate the spending.

This is in sharp contradistinction with a household (generalising to any non-government entity) which uses the currency of issue. Households have to fund every dollar they spend either by earning income, running down saving, and/or borrowing.

Clearly, a household cannot spend more than its revenue indefinitely because it would imply total asset liquidation then continuously increasing debt. A household cannot sustain permanently increasing debt. So the budget choices facing a household are limited and prevent permanent deficits.

These household dynamics and constraints can never apply intrinsically to a sovereign government in a fiat monetary system.

There is also a sharp distinction between a state within a federal system (which uses the federal currency and has no central banking capacity) and a truly sovereign national government.

A sovereign government does not need to save to spend – in fact, the concept of the currency issuer saving in the currency that it issues is nonsensical.

A sovereign government can sustain deficits indefinitely without destabilising itself or the economy and without establishing conditions which will ultimately undermine the aspiration to achieve public purpose.

Further, the sovereign government is the sole source of net financial assets (created by deficit spending) for the non-government sector. All transactions between agents in the non-government sector net to zero. For every asset created in the non-government sector there is a corresponding liability created $-for-$. No net wealth can be created. It is only through transactions between the government and the non-government sector create (destroy) net financial assets in the non-government sector.

This accounting reality means that if the non-government sector wants to net save overall in the currency of issue then the government has to be in deficit $-for-$. The accumulated wealth in the currency of issue is also the accounting record of the accumulated deficits $-for-$.

So when the government runs a surplus, the non-government sector has to be in deficit. There are distributional possibilities between the foreign and domestic components of the non-government sector but overall that sector’s outcome is the mirror image of the government balance.

If Scotland wants to be truly independent it has to have its own currency.

Then all the issues about what ratings the public debt would get from the bond markets and the rating agencies and all the rest of the nonsense would fade away into irrelevance.

Conclusion

Denial or ignorance – major changes are required within my profession before it starts to serve the people with sound advice that will advance their well-being.

That is enough for today!

(c) Copyright 2013 Bill Mitchell. All Rights Reserved.

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    32 Responses to Bonnie Scotland – ignorance or denial – either way it is fraught

    1. Bill,

      Warren Mosler claimed that the government / central bank machine should issue no interest yielding debt at all: i.e. the only liability it should issue is monetary base. See second last paragraph here:

      http://www.huffingtonpost.com/warren-mosler/proposals-for-the-banking_b_432105.html

      Can we have your views on that?

      Personally I think that interest on debt (if there is any) should always be below the rate of inflation. That means a negative REAL RATE of interest, which means government makes a profit out of its creditors. As for a permanent zero rate, which is what Warren is effectively saying, I’m not sure.

    2. Brian Stobie says:

      All painfully correct as usual, Bill.
      (Note – I am a Scot who will be voting YES in our up-coming referendum)
      I think the apparent economic choices are dominated by pragmatic politics.
      It’s a question of convincing the public that Independence isn’t a scary thing, so it’s no co-incidence that the preferred monetary solution is as near as possible to the status quo.
      The YES team has to convince a public who have been fed the household-budget TINA story all their lives, and for who the words neo-liberal, neo-classical, post-Keynesian, etc. are the most obscure wonkish boring crap they’ve never heard of, that actually all that stuff they yawned through on the news has been a big lie, but don’t worry, there’s this new untried thing called MMT, that will liberate them economically.
      All they have to do is throw away those pound notes and print some ‘tartan poonds’ instead.
      Though I wish they would, they’re not going to do it, Bill.
      The destruction of Sound Finance by Functional Finance is going to be a long, slow haul because of the deliberately produced economic ignorance of the public.

    3. larry says:

      The economic claptrap that is now pummeling the Scots will be supported by the present coalition and not just because they believe in it. Cameron has stated publicly that Westminster is neutral to the Scottish referendum on independence, as he must, but of course they don’t want it to take place, but since it will, they want the result to be negative. So, any contentions or “research” showing that independence will be bad for the Scots is music to the ears of the government. A number of supporters of the referendum want a negative result, too. But the main reason for this is that they hope that a close negative result will give the Scottish Parliament greater bargaining leverage in getting Westminster to give it more independence and more powers than it already has while still remaining within the womb of the UK.

    4. Neil Wilson says:

      “Personally I think that interest on debt (if there is any) should always be below the rate of inflation.”

      Why pay people to save, when they are going to do it anyway?

      The interest rate paid on savings is a matter for the commercial sector based upon loan demand. The state should inject liabilities via a different channel – tax cuts, spending increase, increased state pensions, etc.

    5. James Schipper says:

      Dear Bill

      First, I don’t have much respect for Scottish nationalism because I don’t believe that there is a Scottish nation. There is a British nation, of course, and the Scots are a regional variety of it. The Scots are a genealogical community, a clan, not a nation. A clan is a group of people who share common ancestry or who believe that they share common ancestry. People who proudly say that they are Scottish are not different from Canadians or Americans who proudly say that they are Polish, Italian, German, Swedish, etc, even though they speak only English and have negligible knowledge about the world outside of North America.

      Scottish nationalism is entirely backward-looking. Its emotional energy seems to come from a sense grievance about what the English did to Scots in a distant past. That’s why the referendum will be held on the same day in September as the day in September of 1314 when there was an important battle between the English and the Scots. That is seven!!! centuries ago. Every living Scotsman was born after 1900. Well, what have the English done to the Scots since 1900 that justifies righteous indignation among Scotsmen?

      If people feel victimized, not because they suffered an injustice, but because their ancestors suffered injustices, then they may end up behaving like Serbs, Croats and Muslim Bosniacs, people who speak the same language and are culturally very similar but who are capable of intense hatred toward each other simply because of the nasty things that their ancestors did to each other. As someone once said, the past is a foreign country. Quite right, and by the same token, our ancestors are foreigners. We are not our ancestors, and there is no such thing as hereditary victimhood or hereditary guilt.. Let bygones be bygones, certainly when the bygones are more than a century old.

      Back to economics. People often talk about the the impossible trinity, that is, the impossibility of having simultaneously free cross-border capital flows, sovereign monetary policy and fixed exchange rates. Shouldn’t we add free trade to that? Import tariffs or export subsidies are similar to exchange rates in that both affect the price of internationally traded goods. If a country has a fixed exchange rate, could it not use import tariffs or export subsidies to avoid balance-of-payment problems?

      For instance, if prices rise more rapidly in Ruritania than in Slobodia and if both countries have a fixed exchange rate, could Ruritania then not impose tariffs on imports from Slobodia and subsidize exports to Slobodia in order to nullify the effects of its higher inflation? France and Germany have the same exchange rate because they both have the euro. If abandoning the euro were impossible, couldn’t France restore trade balance with Germany through the imposition of tariffs on goods from Germany and the subsidization of French exports to Germany? I know that it is against EU rules, but it should be economically feasible.

      Regards. James

    6. Bob Travels says:

      Hi,

      Thank you for posting the daily blog. I have a couple of questions.

      1. The paragraph

      “Further, the sovereign government is the sole source of net financial assets (created by deficit spending) for the non-government sector. All transactions between agents in the non-government sector net to zero. For every asset created in the non-government sector there is a corresponding liability created $-for-$. No net wealth can be created. It is only through transactions between the government and the non-government sector create (destroy) net financial assets in the non-government sector.”

      Each sentence there contains a powerful assertion. Can you provide a a pointer to a simple explanation of, for example “For every asset created in the non-government sector there is a corresponding liability created $-for-$.”

      2. If a country is running a current account surplus through exporting something like oil, does it make sense for the government to take a cut of this national resource and build up a sovereign fund? (presumably investing in foreign assets?) Or should the profits remain in the private sector?

      3. How should the government treat large foreign companies that export profits or resources?

      I think I understand (maybe?) where your economic model works for a closed economy. But nowadays globalisation and the freedom of internetional trade blurs the issues. At least for me.

      Thanks for your time.

    7. antonio says:

      I broadly agree with BM.
      But What about the debts nominated in foreing currency-mainly I presum in British Pounds and Euros?

    8. Brian Stobie says:

      Bill, I hope you will allow me two words in response to Mr. Schippers non-economic comments on Scottish Independence, particularly the sentence “Well, what have the English done to the Scots since 1900 that justifies righteous indignation among Scotsmen?”.
      Maggie Thatcher?

    9. Tristan Lanfrey says:

      @James Schipper,

      Not sure where you get this impression, but most of my Scottish friends view on why Scotland would be better off as an independent nation (haven’t met one who says it wouldn’t, so maybe I’m biaised) are very much anchored in the present and not so distant past, rather than Bravehart as you seem to suggest.

      The major motivation I’ve been given was that they do not wish to be imposed London centric policies nor do they wish to be ruled by the Tories ever again (who’ve never won anything in Scotland anyway, so they tell me). Some of this has already been achieved as a lot of power has been devolved regionnally already, but it is obvious that as long as their national budget – the nominal figure on the yearly big check, not how the check is spent – is controlled by London, their parliament will never be able to fully implement the policies they are elected for (mostly antithetic with the Tories).

      Also, regarding your comparison about the North-Americans proudly claiming other origins while speaking English, the Scotts I know never really claimed to be speaking the Queen’s English, they have a profound knowledge of Scotland itself and its culture. A proper Burns night is brilliant, even though I sometimes have a hard time to understand the poems!.

    10. Tim Smith says:

      Brian,

      As an Englishman working in manufacturing both in England and Scotland can I say that Thatcher (and her ilk) have done and continue to “do” both the Scots and the English. Emotionally I would rather see “The City ” be given its independence and the rest of England and Scotland remain united. The City could then pay a fair price for food and water imported from that portion of the country currently considered by the Government to be little more than a liabilty to the profits of the square mile.

    11. Tristan Lanfrey says:

      @Bob Travels,

      For your first question, I suggest these blog posts in particular:

      bilbo.economicoutlook.net/blog/?p=332
      bilbo.economicoutlook.net/blog/?p=352
      bilbo.economicoutlook.net/blog/?p=381

      As for your other questions, for first hand material and Bill quality answers, you can search among the blog posts tagged as “Debriefing 101″, there’s a link on the right handside.

      For a second (or rather third) rate answers from me, read on :)

      Regarding 2, redirecting a x% cut of the exports to a sovereign fund is pretty much the same as levying a x% tax, which is the same as saying the whole industry is x% owned by the state. A sovereign fund in itself is useless as the sovereign nation (if it issues its own currency and does not issue debt in a foreign currency) does not need to save. Saving something you can create an infinite quantity of at virtually no cost just does not make any sense.

      As for 3, from what I understand, the main idea regarding profits being exported is that in fact they aren’t really exported because FX conversions mean that somebody else has to buy the same amount of currency on the other end of the transaction. And if they don’t want to exchange the currency, then they would only be able to buy goods or services for sale in that currency.

    12. Neil,

      You ask “Why pay people to save”? Good question. Certainly I don’t think government should pay a POSITIVE real rate of interest to anyone to store up holdings of the national currency.

      I’m just torn between the sort of miserable rate that Japan pays (about 0.5% for short term debt) and the “absolutely nothing” rate advocated by Warren Mosler.

      I quite like the “Japan” rate in that it gives government more control of aggregate private spending. That is, you can spend $20,000 on a new car, but if the private sector as a whole cannot “spend” a significant proportion of its holdings of government debt in car showrooms: if it tried to, the price of government debt would decline.

    13. Andy says:

      I was chatting on the Guardian blog a while ago and pointing how vital the currency was and the fact that the SNP were discounting the idea made the whole point of Independence meaningless. Some canny Scot pointed out they have enough of a job on their hands at the moment getting a yes vote and introducing their own currency would be a lot easier after they achieve that.

      That may or may not be in the minds of the Scottish leaders but it shut me up anyway.
      Would announcing the intention to have their own currency now help or hinder the efforts to win the vote ?

    14. SpotTheLemon says:

      The currency position of the Yes campaign is dictated by the view that they need to portray independence as safe and there’s little doubt a separate currency would be perceived as scarier than a guiser at Halloween. Even if they were able to explain the advantages of an independent currency then the NO campaign would immediately claim that an SNP run independent Scotland would fund its programmes by “printing money” & as we all know “printing money” is perceived as way beyond scary, the mere mention of the phrase causing gasps of terror & looks of sheer horror.
      Scottish Separation has always been a process rather than a one off event, the referendum represents another step not the end point, just as devolution wasn’t the end though it was portrayed as such by many, Scotland has already gained additional powers since devolution, whether the referendum is successful or not it will gain more.
      In the , according to the polls, unlikely event of a Yes vote, I suspect the next major SNP campaign will end up being a campaign for an independent currency when the limitations of independence without one become apparent, it will be another step in the process.

    15. Mike Cowan says:

      Can someone please explain to me where the limitations of real resources fit into the MMT argument?

      I have recently been to Japan, and I note that it is culture that almost totally immune to foreign inflluence. Apart from McDonalds, they seem to consume resources that are entirley ‘home grown’. This allows them to be totally indifferent to their exchange rate.

      Likewise, Australia has the capacity (if not the willingness) to be self sustaining, there are more than sufficient real resources to sustain our own society.

      What happens in countries where there are insufficient real resources (Scotland possibly being one)? They ultimately rely on imports to sustain their society, and those imports rely on their currency being tenable in the global market. Also, are the real resources of Scotland sufficient to maintain full employment without a massive devaluation?

    16. Daniel D says:

      Great article Professor.

    17. Alan Dunn says:

      Mike
      The Japanese energy sector relies on imports of oil, natural gas, and uraniun. They also import around 20% of the worlds coal imports. So not entirely self suffcient.

    18. Neil Wilson says:

      “This allows them to be totally indifferent to their exchange rate.”

      That’s not the case. Japan is still a global exporter and is very sensitive to the Yen getting into ‘nosebleed’ territory.

      And when it does the Bank of Japan dutifully does some more ‘liquidity’ operations and buys up some foreign currency to get the level of the Yen back down.

      Which of course has the effect of holding *up* all the other currencies wrt. the Yen.

      And that is why as a big net importer you needn’t worry to much about consuming foreign goods. Because those foreigners rely on you consuming those foreign goods for their jobs – and will ensure that their political and monetary system supports them.

      It’s the old colliery again. If you owe the bank a thousand pounds they own you. If you owe them a few million pounds, then you own the bank.

      It’s the same with imports. If you take a few imports from a country then the balance of power is in their favour. If you take a lot, then the balance of power is in yours.

      What is missing from the neo-classical view is the mantra that is drilled into everybody who works at the coal face in a business.

      Businesses need sales. Sales are everything. Sales are all that matter (often to the exclusion of profit in many cases).

      For exporters that translates into exporters need to export. If you have an export led economy, then you can guarantee that your central bank will be in on that policy and be working to support it.

    19. Neil Wilson says:

      “Some canny Scot pointed out they have enough of a job on their hands at the moment getting a yes vote and introducing their own currency would be a lot easier after they achieve that.”

      I’d consider it easier the other way around.

      Because then you really can show that everybody can have a job, that mortgages will be cleared down and pensions made secure.

      Which is what people will really vote for.

    20. Neil Wilson says:

      “if the private sector as a whole cannot “spend” a significant proportion of its holdings of government debt in car showrooms: if it tried to, the price of government debt would decline.”

      It can because of the discount window and liquidity operations at the central bank, and the dynamic nature of the auction and repayment functions within government bond issues.

      There is no ‘lock-away’ function in government bonds within modern finance. The dynamics stop that from happening.

      If you want a locking function then you need 90 day+ notice savings accounts at National Savings.

      (And that’s ignoring the effect of extra spending, which causes extra taxation, which reduces the issue quantity of government bonds).

    21. ChrisCairns says:

      Bill. All advanced countries are blindsided by accountants. Yes I am an economist who was taught rubbish in the 80s and have witnessed people in power my entire life accept advice from accountants, even when its wrong. It’s simple double entry, if you give out money via welfare for example, it must be offset by tax receipts or debt issuance. I don’t know how to counter this, the idea that governments must balance their budgets like everyone else is imprinted in people’s minds… Keep up the good work

    22. Brian Stobie says:

      Neil said,

      “I’d consider it easier the other way around.
      Because then you really can show that everybody can have a job, that mortgages will be cleared down and pensions made secure.
      Which is what people will really vote for.”

      This I think is a significant problem for MMT (or in general heterodox economics) – if one country would adopt its policies, the example would (hopefully) show that it was the way to go and they would quickly ditch the parties that promote sound finance – but no nation has the courage to to do it, particularly since all the existing political parties in power world-wide have been pushing the household budget analogy for a very long time, so nobody would vote for a party that was so obviously ‘wrong’ in its economic thinking.

    23. paul says:

      The Scottish Government has considered its own currency, the groat, but the chief ecenomists argued that it was too ‘dangerous’. From my understanding, there is very little knowledge and even a wilful incuriousity about MMT in government and the academy here (Though I nudge every economics professor I meet to this site).
      I think spot the lemon’s comment captures the SNP’s approach. Personally, I think its a mistake, a currency union with the Bank of England (London?) is a considerable hostage to fortune. However, one thing you can say about Alex Salmondm is that he can happily turn on a sixpence. He certainly doesn’t talk anout the euro anymore.
      People seem reluctant to choose change, but rarely begrudge having it imposed. Fearful thinking is an essential component of the current order.
      Despite receiving some doggerel from the labour wing of the tripartite conservative coalition I will still be voting YES.
      Its a start.

    24. Neil Wilson says:

      “so nobody would vote for a party that was so obviously ‘wrong’ in its economic thinking.”

      That’s Overton Window thinking.

      You have to move the Overton Window. And that requires you to sell the idea hard, with a lot of effort and Charisma.

      Eventually though it shifts.

      There was a time when full employment and balance of payments was top of the agenda and no party would get elected if they didn’t pay homage to those points.

    25. wee e says:

      Dear Bill
      Very interesting, if way over my head.
      What’s not over my head are James’ comments, though.

      “First, I don’t have much respect for Scottish nationalism because I don’t believe that there is a Scottish nation. ”
      Belief doesn’t affect the reality. There is a Scottish nation, just as there is an English nation. Each used to be a nation-state. The two nation-states combined by means of an international bilateral treaty into one State.

      James may not be aware, but Scotland has always had its own national (but not Established) church; its legal system (not based on common law as England’s is); its own policing; its own education system (with different examinations): and Scotland’s health system slightly predates the rUK’s and again has always been separate. Scotland also has its own constitutional make-up. For example, the Church of Scotland is headed by elected moderators — not monarchs — and has no governmental or parliamentary role. Another example: whereas in the rest of the UK the monarch-in-parliament is sovereign, in Scotland the people is sovereign. It’s sovereignty that makes a nation.

      This last dates from the 14th century– but it has been upheld by the highest judiciary in modern times. That is what gave the Scottish parliament and government the unassailable right to set up and run a referendum. And this is why David Cameron’s attempt to wrest control of the referendum to Westminster failed. The Edinburgh agreement was desirable: it was not necessary other than as a fig-leaf for Westminster’s limited authority, and a way for both sides to publicly state that in this third Scottish referendum, the voters’ wishes actually will be respected.

      As to the battle James refers to, he has his facts wrong. It’s the battle of Bannockburn he’s referring to: well, that was not in September, it was in June.

    26. paul says:

      Scottish nationalism is entirely backward-looking.
      Not at all. its the unionists who are appealing to tradition. However there is nothing wrong with looking if you can find something of worth, such as the Declaration of Arbroath.

      “As long as but a hundred of us remain alive, never will we on any condition be brought under English domination. It is in truth not for glory, nor for riches, nor for honour that we are fighting, but only and alone for freedom, which no good man surrenders but with his life.”

    27. James Schipper says:

      Dear Wee

      If sovereignty makes a nation, then in 1988 there was a Soviet nation but no Latvian or Estonian nation. In 1913 there was an Austrian-Hungarian nation but no Polish or Czech nation. Sovereignty is what defines a state, not a nation. Some nations don’t have a state of their own, such as the Poles and Czechs before WWI and the Kurds today. Many states have more than one nation within them, such as Nigeria and Belgium. A state is an entity that has ultimate authority within a certain territory. A nation is a people which speaks a common language and has a common culture. Well, how different are the Scots and the English from each other in terms of language and culture?

      I don’t deny that Scotland has always had a modest degree of independence, but Michigan and Texas also have some independence, but we don’t consider Michigans and Texans nations. Borders do not define nations, but they define states. Just the fact that people live on the same of the border doesn’t mean that belong to the same nation, nor does the fact that they live on different sides of the border mean that are members of different nations. 3 million Hungarians live outside the borders of Hungary. They don’t stop being Hungarian just because live outside the borders of Hungary.

      As to the battle of Bannockburn, it may have taken place in June, but it is commemorated in September.

      Regards. James

    28. Kevin Harding says:

      on the debate on what is the ideal interest rate to be offered on government bonds
      if the point is to pursue functional finance over balancing the books
      why offer bonds at all?
      the paradigm shift is to dispel the myth that government finance is like a households
      it seems to me the most effective way to accomplish that
      is to do away with issuing bonds to ” account for” a government deficit
      it might be a good idea for government to offer pension bonds with a tax free interest rate
      and a maximum allowance to help people save for retirement without being at the mercy of
      the financial casinos but such bonds could be independent of funding spending

    29. Neil Wilson says:

      “it might be a good idea for government to offer pension bonds with a tax free interest rate”

      It might be better for them simply to offer a decent state pension and do away with the need to hoard money – which has little economic effect other than to create a paradox of thrift that the government sector then has to offset.

      People should just spend their wages, safe in the knowledge that their retirement will be looked after.

      Social Security, properly implemented, increases the amount of current production and prevents the hysteresis effects of unemployment.

      And that’s because it eliminates risk and uncertainty about the future, and that loosens the purse strings.

    30. Anthony says:

      Bill, I think the Scots can kiss their independence good-bye. The leader of the Scottish Nats, Alec Salmond, is already saying they will keep the pound sterling and the Queen as head of state. Furthermore, a friend of mine in Britain, is telling me the Brits are going to close the centuries old shipyards in Portsmouth, England and concentrate in Glasgow, Scotland, i.e. the British nuke sub base in Scotland, won’t be shut down. Clearly the British military aren’t too worried about Scottish independence.

    31. Neil Wilson says:

      “Clearly the British military aren’t too worried about Scottish independence.”

      There are a few people in Portsmouth I reckon who think that is a political stitch up to keep the Union together.

    32. Michael says:

      @James Schipper. You misunderstand the nature of Britain which is a Union of nations. In sporting terms there’s often a reference to the “Home Nations”, ie Scotland, England, Wales and Northern Ireland, each of whom has its own football team (ie not a UK football team). The fact that Michigan and Texas aren’t considered nations is entirely irrelevant. Historically Scotland and England were separate states, and there have been attempts to create out of Britain simply a southern part and a northern part, not Scotland or England as distinct entities within the Union of nations. That has never been successful. The fact that Scots and English both speak English and share many similarities is something to be celebrated but has got diddly squat to do with the fact that the historic nations of Scotland and England to both their inhabitants and others are not simply the local regional branch of UK plc but distinct entities.

      Regarding the Battle of Bannockburn, it isn’t being celebrated in September. Events (including reenactments) are happening in June on the anniversary of the battle. Was the year 2014 considered for the referendum to use the 700th anniversary of the battle as an emotional pull? Perhaps, in a subliminal way. But listening to the debate going on, it’s about economics and governance and the future, not some emotive call to “remember Bannockburn”.

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