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The Weekend Quiz – March 31-April 1, 2018 – answers and discussion

Here are the answers with discussion for this Weekend’s Quiz. The information provided should help you work out why you missed a question or three! If you haven’t already done the Quiz from yesterday then have a go at it before you read the answers. I hope this helps you develop an understanding of modern monetary theory (MMT) and its application to macroeconomic thinking. Comments as usual welcome, especially if I have made an error.

Question 1:

We are told that a country is running a small current account deficit and that the private domestic sector is saving overall. However, until we know the relative magnitudes of these balances, we are unable to conclude the state of the fiscal balance.

The answer is False.

This question requires an understanding of the sectoral balances that can be derived from the National Accounts. But it also requires some understanding of the behavioural relationships within and between these sectors which generate the outcomes that are captured in the National Accounts and summarised by the sectoral balances.

To refresh your memory the balances are derived as follows. The basic income-expenditure model in macroeconomics can be viewed in (at least) two ways: (a) from the perspective of the sources of spending; and (b) from the perspective of the uses of the income produced. Bringing these two perspectives (of the same thing) together generates the sectoral balances.

From the sources perspective we write:

(1) GDP = C + I + G + (X – M)

which says that total national income (GDP) is the sum of total final consumption spending (C), total private investment (I), total government spending (G) and net exports (X – M).

Expression (1) tells us that total income in the economy per period will be exactly equal to total spending from all sources of expenditure.

We also have to acknowledge that financial balances of the sectors are impacted by net government taxes (T) which includes all tax revenue minus total transfer and interest payments (the latter are not counted independently in the expenditure Expression (1)).

Further, as noted above the trade account is only one aspect of the financial flows between the domestic economy and the external sector. we have to include net external income flows (FNI).

Adding in the net external income flows (FNI) to Expression (2) for GDP we get the familiar gross national product or gross national income measure (GNP):

(2) GNP = C + I + G + (X – M) + FNI

To render this approach into the sectoral balances form, we subtract total net taxes (T) from both sides of Expression (3) to get:

(3) GNP – T = C + I + G + (X – M) + FNI – T

Now we can collect the terms by arranging them according to the three sectoral balances:

(4) (GNP – C – T) – I = (G – T) + (X – M + FNI)

The the terms in Expression (4) are relatively easy to understand now.

The term (GNP – C – T) represents total income less the amount consumed less the amount paid to government in taxes (taking into account transfers coming the other way). In other words, it represents private domestic saving.

The left-hand side of Equation (4), (GNP – C – T) – I, thus is the overall saving of the private domestic sector, which is distinct from total household saving denoted by the term (GNP – C – T).

In other words, the left-hand side of Equation (4) is the private domestic financial balance and if it is positive then the sector is spending less than its total income and if it is negative the sector is spending more than it total income.

The term (G – T) is the government financial balance and is in deficit if government spending (G) is greater than government tax revenue minus transfers (T), and in surplus if the balance is negative.

Finally, the other right-hand side term (X – M + FNI) is the external financial balance, commonly known as the current account balance (CAD). It is in surplus if positive and deficit if negative.

In English we could say that:

The private financial balance equals the sum of the government financial balance plus the current account balance.

We can re-write Expression (6) in this way to get the sectoral balances equation:

(5) (S – I) = (G – T) + CAD

which is interpreted as meaning that government sector deficits (G – T > 0) and current account surpluses (CAD > 0) generate national income and net financial assets for the private domestic sector.

Conversely, government surpluses (G – T < 0) and current account deficits (CAD < 0) reduce national income and undermine the capacity of the private domestic sector to add financial assets.

Expression (5) can also be written as:

(6) [(S – I) – CAD] = (G – T)

where the term on the left-hand side [(S – I) – CAD] is the non-government sector financial balance and is of equal and opposite sign to the government financial balance.

This is the familiar MMT statement that a government sector deficit (surplus) is equal dollar-for-dollar to the non-government sector surplus (deficit).

The sectoral balances equation says that total private savings (S) minus private investment (I) has to equal the public deficit (spending, G minus taxes, T) plus net exports (exports (X) minus imports (M)) plus net income transfers.

All these relationships (equations) hold as a matter of accounting and not matters of opinion.

So what economic behaviour might lead to the outcome specified in the question?

If the nation is running an external deficit it means that the contribution to aggregate demand from the external sector is negative – that is net drain of spending – dragging output down. The reference to a “small” external deficit was to place doubt in your mind. In fact, it doesn’t matter how large the external deficit is for this question.

Assume, now that the private domestic sector (households and firms) seeks to increase its overall saving (that is, spend less than it earns) and is successful in doing so. Consistent with this aspiration, households may cut back on consumption spending and save more out of disposable income. The immediate impact is that aggregate demand will fall and inventories will start to increase beyond the desired level of the firms.

The firms will soon react to the increased inventory holding costs and will start to cut back production. How quickly this happens depends on a number of factors including the pace and magnitude of the initial demand contraction. But if the households persist in trying to save more and consumption continues to lag, then soon enough the economy starts to contract – output, employment and income all fall.

The initial contraction in consumption multiplies through the expenditure system as workers who are laid off also lose income and their spending declines. This leads to further contractions.

The declining income leads to a number of consequences. Net exports improve as imports fall (less income) but the question clearly assumes that the external sector remains in deficit. Total saving actually starts to decline as income falls as does induced consumption.

So the initial discretionary decline in consumption is supplemented by the induced consumption falls driven by the multiplier process.

The decline in income then stifles firms’ investment plans – they become pessimistic of the chances of realising the output derived from augmented capacity and so aggregate demand plunges further. Both these effects push the private domestic balance further towards and eventually into surplus

With the economy in decline, tax revenue falls and welfare payments rise which push the public fiscal balance towards and eventually into deficit via the automatic stabilisers.

If the private sector persists in trying to net save then the contracting income will clearly push the fiscal outcome into deficit.

So we would have an external deficit, a private domestic surplus and a fiscal deficit.

There will always be a fiscal deficit at any national income level, if the private domestic sector is successfully spending less than it earns and the external sector is in deficit.

The following blogs may be of further interest to you:

Question 2:

Current private sector wealth is invariant to the decision by government to issues bonds to match its deficit spending as against not issuing any bonds.

The answer is True.

This answer relies on an understanding the banking operations that occur when governments spend and issue debt within a fiat monetary system. That understanding allows us to appreciate what would happen if a sovereign, currency-issuing government (with a flexible exchange rate) ran a fiscal deficit without issuing debt?

In this situation, like all government spending, the Treasury would credit the reserve accounts held by the commercial bank at the central bank. The commercial bank in question would be where the target of the spending had an account. So the commercial bank’s assets rise and its liabilities also increase because a deposit would be made.

The transactions are clear: The commercial bank’s assets rise and its liabilities also increase because a new deposit has been made. Further, the target of the fiscal initiative enjoys increased assets (bank deposit) and net worth (a liability/equity entry on their balance sheet). Taxation does the opposite and so a deficit (spending greater than taxation) means that reserves increase and private net worth increases.

This means that there are likely to be excess reserves in the “cash system” which then raises issues for the central bank about its liquidity management. The aim of the central bank is to “hit” a target interest rate and so it has to ensure that competitive forces in the interbank market do not compromise that target.

When there are excess reserves there is downward pressure on the overnight interest rate (as banks scurry to seek interest-earning opportunities), the central bank then has to sell government bonds to the banks to soak the excess up and maintain liquidity at a level consistent with the target. Some central banks offer a return on overnight reserves which reduces the need to sell debt as a liquidity management operation.

What would happen if there were bond sales? All that happens is that the banks reserves are reduced by the bond sales but this does not reduce the deposits created by the net spending. So net worth is not altered. What is changed is the composition of the asset portfolio held in the non-government sector.

The only difference between the Treasury “borrowing from the central bank” and issuing debt to the private sector is that the central bank has to use different operations to pursue its policy interest rate target. If it debt is not issued to match the deficit then it has to either pay interest on excess reserves (which most central banks are doing now anyway) or let the target rate fall to zero (the Japan solution).

There is no difference to the impact of the deficits on net worth in the non-government sector.

Mainstream economists would say that by draining the reserves, the central bank has reduced the ability of banks to lend which then, via the money multiplier, expands the money supply.

However, the reality is that:

  • Building bank reserves does not increase the ability of the banks to lend.
  • The money multiplier process so loved by the mainstream does not describe the way in which banks make loans.
  • Inflation is caused by aggregate demand growing faster than real output capacity. The reserve position of the banks is not functionally related with that process.

So the banks are able to create as much credit as they can find credit-worthy customers to hold irrespective of the operations that accompany government net spending.

You might argue that once the interest payments flow on the debt held by the non-government sector this government spending will boost net financial assets. That is correct, which is why I used the qualifier ‘current’ in the question.

You may wish to read the following blogs for more information:

Question 3

When a government records a fiscal surplus which means it is withdrawing more purchasing power from the economy than it is adding, we know that it is seeking to attenuate the growth in aggregate demand.

The answer is that False.

The actual fiscal outcome that is reported in the press and by Treasury departments is not a pure measure of the fiscal policy stance adopted by the government at any point in time. As a result, a straightforward interpretation of

Economists conceptualise the actual fiscal outcome as being the sum of two components: (a) a discretionary component – that is, the actual fiscal stance intended by the government; and (b) a cyclical component reflecting the sensitivity of certain fiscal items (tax revenue based on activity and welfare payments to name the most sensitive) to changes in the level of activity.

The former component is now called the “structural deficit” and the latter component is sometimes referred to as the automatic stabilisers.

The structural deficit thus conceptually reflects the chosen (discretionary) fiscal stance of the government independent of cyclical factors.

The cyclical factors refer to the automatic stabilisers which operate in a counter-cyclical fashion. When economic growth is strong, tax revenue improves given it is typically tied to income generation in some way. Further, most governments provide transfer payment relief to workers (unemployment benefits) and this decreases during growth.

In times of economic decline, the automatic stabilisers work in the opposite direction and push the fiscal balance towards deficit, into deficit, or into a larger deficit. These automatic movements in aggregate demand play an important counter-cyclical attenuating role. So when GDP is declining due to falling aggregate demand, the automatic stabilisers work to add demand (falling taxes and rising welfare payments). When GDP growth is rising, the automatic stabilisers start to pull demand back as the economy adjusts (rising taxes and falling welfare payments).

The problem is then how to determine whether the chosen discretionary fiscal stance is adding to demand (expansionary) or reducing demand (contractionary). It is a problem because a government could be run a contractionary policy by choice but the automatic stabilisers are so strong that the fiscal outcome goes into deficit which might lead people to think the “government” is expanding the economy.

So just because the fiscal outcome goes into deficit doesn’t allow us to conclude that the Government has suddenly become of an expansionary mind. In other words, the presence of automatic stabilisers make it hard to discern whether the fiscal policy stance (chosen by the government) is contractionary or expansionary at any particular point in time.

To overcome this ambiguity, economists decided to measure the automatic stabiliser impact against some benchmark or “full capacity” or potential level of output, so that we can decompose the fiscal balance into that component which is due to specific discretionary fiscal policy choices made by the government and that which arises because the cycle takes the economy away from the potential level of output.

As a result, economists devised what used to be called the Full Employment or High Employment Budget. In more recent times, this concept is now called the Structural Balance. As I have noted in previous blogs, the change in nomenclature here is very telling because it occurred over the period that neo-liberal governments began to abandon their commitments to maintaining full employment and instead decided to use unemployment as a policy tool to discipline inflation.

The Full Employment Budget Balance was a hypothetical construction of the fiscal balance that would be realised if the economy was operating at potential or full employment. In other words, calibrating the fiscal position (and the underlying fiscal parameters) against some fixed point (full capacity) eliminated the cyclical component – the swings in activity around full employment.

This framework allowed economists to decompose the actual fiscal balance into (in modern terminology) the structural (discretionary) and cyclical fiscal balances with these unseen fiscal components being adjusted to what they would be at the potential or full capacity level of output.

The difference between the actual fiscal outcome and the structural component is then considered to be the cyclical fiscal outcome and it arises because the economy is deviating from its potential.

So if the economy is operating below capacity then tax revenue would be below its potential level and welfare spending would be above. In other words, the fiscal balance would be smaller at potential output relative to its current value if the economy was operating below full capacity. The adjustments would work in reverse should the economy be operating above full capacity.

If the fiscal outcome is in deficit when computed at the “full employment” or potential output level, then we call this a structural deficit and it means that the overall impact of discretionary fiscal policy is expansionary irrespective of what the actual fiscal outcome is presently. If it is in surplus, then we have a structural surplus and it means that the overall impact of discretionary fiscal policy is contractionary irrespective of what the actual fiscal outcome is presently.

So you could have a downturn which drives the fiscal outcome into a deficit but the underlying structural position could be contractionary (that is, a surplus). And vice versa.

The question then relates to how the “potential” or benchmark level of output is to be measured. The calculation of the structural deficit spawned a bit of an industry among the profession raising lots of complex issues relating to adjustments for inflation, terms of trade effects, changes in interest rates and more.

Much of the debate centred on how to compute the unobserved full employment point in the economy. There were a plethora of methods used in the period of true full employment in the 1960s.

As the neo-liberal resurgence gained traction in the 1970s and beyond and governments abandoned their commitment to full employment , the concept of the Non-Accelerating Inflation Rate of Unemployment (the NAIRU) entered the debate – see my blogs – The dreaded NAIRU is still about and Redefing full employment … again!.

The NAIRU became a central plank in the front-line attack on the use of discretionary fiscal policy by governments. It was argued, erroneously, that full employment did not mean the state where there were enough jobs to satisfy the preferences of the available workforce. Instead full employment occurred when the unemployment rate was at the level where inflation was stable.

The estimated NAIRU (it is not observed) became the standard measure of full capacity utilisation. If the economy is running an unemployment equal to the estimated NAIRU then mainstream economists concluded that the economy is at full capacity. Of-course, they kept changing their estimates of the NAIRU which were in turn accompanied by huge standard errors. These error bands in the estimates meant their calculated NAIRUs might vary between 3 and 13 per cent in some studies which made the concept useless for policy purposes.

Typically, the NAIRU estimates are much higher than any acceptable level of full employment and therefore full capacity. The change of the the name from Full Employment Budget Balance to Structural Balance was to avoid the connotations of the past where full capacity arose when there were enough jobs for all those who wanted to work at the current wage levels.

Now you will only read about structural balances which are benchmarked using the NAIRU or some derivation of it – which is, in turn, estimated using very spurious models. This allows them to compute the tax and spending that would occur at this so-called full employment point. But it severely underestimates the tax revenue and overestimates the spending because typically the estimated NAIRU always exceeds a reasonable (non-neo-liberal) definition of full employment.

So the estimates of structural deficits provided by all the international agencies and treasuries etc all conclude that the structural balance is more in deficit (less in surplus) than it actually is – that is, bias the representation of fiscal expansion upwards.

As a result, they systematically understate the degree of discretionary contraction coming from fiscal policy.

The only qualification is if the NAIRU measurement actually represented full employment. Then this source of bias would disappear.

So a government could still be adopting an expansionary discretionary stance yet record a fiscal surplus because the automatic stabilisers are so strong.

The following blogs may be of further interest to you:

Reclaiming the State – Big Discount over Easter 2018

Pluto Books has gone mad this Easter.

All their stock is being offered at a 50 per cent discount, which is better than the author’s discount I can get normally.

That means you can purchase our new book – Reclaiming the State: A Progressive Vision of Sovereignty for a Post-Neoliberal World – online, for half price (and the Paperback version comes with a free e-Book).

The offer ends on April 9, 2018.

That is enough for today!

(c) Copyright 2018 William Mitchell. All Rights Reserved.

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    This Post Has 18 Comments
    1. You might argue that once the interest payments flow on the debt held by the non-government sector this government spending will boost net financial assets. That is correct, which is why I used the qualifier ‘current’ in the question.

      And this is why all central banks have the theory completely wrong about interest rate hikes. They all ignore the interest income channels.

      It would be great if Bill did a post on this because all central banks think increasing interest rates makes

      a) Curreny stronger

      b) Fights inflation

      After 6 US rate hikes just pick a graph any graph youwant and it is quite clear the opposite is true.

      $ ⬇

      Tresuries ⬇

      Gold and other commodities ⬆

      Inflation ⬆

      Since they started hiking in Dec 2015.

      Interest on Treasury Securities, $127.1 bln, up $11.5 bln, growing at 10% y-o-y.

      This is the fastest growing spending item and one of the largest. It shows you how rate hikes equate to fiscal expansions.

      Interest on Treasury securities was the largest single line item of government expenditure during Reagan’s first term, which became known as the Reagan “boom.” Spending on interest even surpassed spending on the military. Rates were 20% back then so you can see why.

      Rate hikes also increase bank deposits.

      Bank deposits rose by $25.4 bln to $11.993 trillion.

      All else equal interest rate hikes are

      a) Price hikes right across the board as the new costs get passed on

      b) A fiscal stimulas via the interest income channels

      Both of which are inflationary.

      For me this a huge problem if all central banks think the oppsoite is true.

      QE was an asset swap from an interest bearing asset to a reserve blance.

      Balance sheet reduction is an asset swap of a reserve blance to an interest bearing asset.

      Yet, if you listen to any central banking chief they have this back to front and upside down.

      It’s akin to religious fundamentalism. If people believe and have faith that interest rate hikes make a currency stronger and fight inflation then when the FED starting hiking they would have…

      Shorted the £ @ 1.2

      Shorted the Euro @ 1.06

      Shorted Gold @ $1020

      Long the Yen @ 1.21

      Their economic religious beliefs would have put you in the poor house.

      Do a post on it Bill using real data and the US graphs after 6 rate hikes. It’s really important to destory these myths.

    2. The Sectoral Balances are related to deficit spending as well as tax and exports. But what about all the deficit spending done “under the counter”? Are they counted in the sectoral balance accounts? All our pensions are paid outside the budget, thanks to Costello. It begs the question as to just how valid are the government accounts. Does anyone know how big this anomaly is?
      Any comment?

    3. Bill, I love your work. But, it needs to attract attention from the Left. I think writing a piece for Jacobin magazine would be good.

    4. John Doyle 21:10

      Government pensions are paid in under the budget as well as for the private sector. Pensions are earned during service and invested in funds. Pensions are paid out later after service. That is the general scheme I presume.

    5. Derek Henry;

      In theory inflation, c.p. , makes a currency weaker yes, and stronger during deflation. But everything is connected and there are relative forces to acknowledge. Capital movements decides what will happen. And expectations. So in the short or medium range I expect both dollar, us interest-rates can move up in tandem if us economy improves more relative the EU for example. This can also be true if the ECB refuse to normalize it´s interest-rate from negative. Before making investment-decisions in a foreign country you have to look for the direction of the currency. Always! Never invest against the local currency! Right now the dollar(index) have not turned up yet but it is looking for a test right here. Weak financial markets always attracts dollar buying(safe-haven i.e).

      There are theory and there are reality.

    6. ThorLeif

      If the US keeps hiking the $ will continue to fall as they are price hikes all else equal. Currencies don’t get stronger if prices keep increasing.

      Then on top of that you have record government spending.

      Tax cuts

      Balance sheet reduction

      All of which are inflationary.

      Pick a graph any graph since 2015 when they started hiking.

    7. Dear Derek Henry,

      As far as I know there are many theories surrounding the processes of inflation and currency-valuations. I don´t know what you relate to when you claim that centralbanks(US FED) always have a belief that raising interest-rates(FED Funds rate) always make their currency(usd) stronger and always will fight inflation? Inflation have many faces and interest-differentials are only one of the sources from which capital moves. Normalization of interest-rates is about going to positive real interest-rates. If the dollar falls in the short perspective during this process is of no big concern for the FED I would think. The Adminstration(Trump) on the other hand would problably prefer a lower dollar for the export-sector(just like here in Sweden). Anyway, currency-strength and growth could go hand in hand as long as inflation is “kept under control”. Maybe you are worried that stagflation are the bigger risk here? Is that what you are saying? Or just that cb don´t have inflation-processes under control? Maybe they really want´s a lot more of inflation(+3%) but don´t want to alarm the markets?

    8. Derek Henry, MMT already says that the effects of monetary policy are ambiguous and have too broad an effect to be a good tool for economic policy. Bill Mitchell has mentioned the stimulatory income effects of higher interest rates many times. But I don’t remember him saying anything about higher interest rates being “Price hikes right across the board as the new costs get passed on”. (He may have, and I might have forgotten it). Anyways- that is an interesting idea and could you explain a little more about how that could happen?

    9. Jerry

      Everytime they hike rates the monopoly price setter hikes the cost of credit and this gets passed on.

      They are price adjustments, pure and simple. Higher rates equate to higher prices and higher prices mean higher inflation. Inflation is not good for currency. Higher inflation is good for inflation-sensitive stuff like gold and commodities as well as some stocks.

      Currencies are a bit like bonds, the only difference being they have zero maturity. Everyone seems to understand that when rates go up bond prices go down. It’s an inverse relationship. The discount to par reflects the implied yield and that discount increases as rates go up.

      Same with currencies. The spot price of a currency can be considered par. In a rising-rate environment the forward prices of a currency are lower. The market is literally pricing in a lower exchange rate. The degree of discount to par reflects the implied yield. Buy a forward and hold it over time until it converges to spot and you will earn the implied yield.

      Gold and commodities exhibit the opposite behavior. They don’t earn. They cost you to hold. There are interest payments and storage costs so the natural “curve” of gold and commodity markets has a positive slope. (Deferred contracts are priced higher than spot.)

      In a rising-rate environment, forward contracts for gold are priced higher. That reflects the “cost” of holding, which equals the interest rate plus storage, etc. Prices rise in a rising-rate environment and they fall in a falling rate environment.

      Of course this does not reflect short-term portfolio shifts based on traders’ beliefs. Many believe that lower rates are bullish for gold or bearish for a currency and vice-versa. As a result, they act on those beliefs and buy and sell accordingly. However, that’s not the true fundamental effect. That’s why so many people lost money buying gold when they believed rate cuts would be inflationary. Similarly, they wrongly sold the dollar. These mistakes are being repeated now, only in reverse.

      The Fed thinks it is fighting inflation when actually it is feeding it via these rate hikes. Any commodity curve will show this in reaction to a rising-rate environment. The curve will instantly reflect higher future costs.

      In addition, their policy and statements seem to reflect a lack of understanding of the government being a net payer of interest. They talk about being on guard against further fiscal stimulus when it is the Fed itself that is doing the stimulating. It is paying. That is income added, not removed. While some may find it harder to borrow because of the higher cost of credit, that is offset by the additional income earned by creditors and savers. There is net income received by the economy and that is by no means a brake on economic activity.

    10. Thanks Derek. After reading your reply I think MMT has the correct position on the effects of interest rate policy for the entire economy – we just don’t know how it will pan out because it will affect different sectors of the economy in very different ways.

      Take the real-estate/housing industry for example. Interest rates affect this sector a lot and pretty much how the Fed thinks they will. I am pretty sure that, other things equal, far more houses get built when interest rates are low and a lot more people are able and willing to buy them. Not only that, people will be willing to buy ‘more house’ at lower interest rates- because for most people financing a house is necessary- hardly anyone can pay cash for the whole thing. So the loan payments become part of a monthly price paid for the house. At high interest rates most people will be able to buy a lot less house than at low rates. And whoever built the house, or owns the house if it isn’t new, is probably going to receive less income from the sale- it will be a tougher market. And the same is probably true for a lot of other high priced products that get purchased through credit- cars, trucks, appliances- things that are important to the real economy.

      But then, as you say, government is a payer of interest and that interest is a higher income for someone. And with higher income typically there is more consumption and investment. So cutting interest rates can lower that income and presumably lower the consumption of those receiving the interest payments. For the economy as a whole this income effect will depend on how likely the interest payments are going to be used for consumption or investment?

      Question about your statement that there is a cost to holding gold equal to the interest rate- that would be the ‘opportunity cost’ of buying a non-interest bearing commodity verses an interest paying bond? It is not a real cost though- it is just something that you are missing out on when you decide to buy gold.

    11. Derek;

      In an economy were interest-rates gone down to zero and stayed there for long debts have been growing. So if rates starts to go up businesses will realize, as consumers, that margins will shrink. I guess it is a nobrainer that prices can and will be raised in some areas. The main question is if price-increases will stay a the same level(inflation) even after FED reached it´s goal on returning to positive real rates?

      There are many periods when inflation and gold doesn´t correlate. Also remember 40% of UST are owned by foreigners. Interest can slip away meaning it will not be spent in the US!

      But I agree with you Jerry. If you want inflation, try raising rates but do that when the economy can sustain it. Maybe FED thinks now is the time? It´s another matter in the Euro-zone were the system with a “foreign currency” is used.

    12. Read your posts on Takahashi Korekiyo. I took a lot of economics in school, became a financial reporter a few decades back, and I never heard of him until a couple of years ago.

      Japan nearly sidestepped the Great Depression.

      You can read books and books on the US Great Depression, and scarcely see the name Takahashi Korekiyo. Oh, that.

      Thanks for your posts. Did you write a book on him?

    13. Jerry and Thorleif

      Look at the real data in the real world. We do know how it pans out all else equal and I’m a MMT’r.

      Pick a graph any graph the central banks are wrong. The data backs up our claims.

      How it will pan out and has panned out is $ will continue to fall and not strengthen like they claim. Gold will continue to raise and not weaken like they claim. Inflation will continue rise slowly and not fall like they claim. They are not fighting it they are fueling it.

      Show me a graph any graph that proves increasing interest rates makes a currency stronger and fights inflation ? Any data will do. You won’t find one.

      I’ve highlighted many that backs up what we say and also if you want to take a look at Russia who has been cutting interest rates pick a graph any graph from Russia they also back up our claims. Cutting interest rates strengthens a currency and fights inflation all else equal.

      The hard data backs up our theory in the real world.

    14. As Warren would say the actual proof is so much on our side on what happens when central banks raises interest rates.

      It’s now up to the central bankers to prove that increasing interest rates do what they say they do and makes a currency stronger and fights inflation. As Warren says they can’t as it is another innocent fraud.

      They still call QE a stimulas and money printing they call balance sheet reduction taking the punch bowl away. All you have to do is listen to Draghi when he speaks. They have no idea what they are doing.

      Or they have lied about it for so long now to keep inflation low in the Eurozone to appease the Germans and the Euro that they are caught up in their own double speak and can’t escape from it.

    15. Bank Of England raised interest rates at the back end of the last year.

      It was a move along now folks nothing more to see event. They even said that they would not be raising again until 2019.

      We laughed and said good luck with that and said they’ll be raising again long before 2019. Here they are maybe going to raise again next month. 8 months early.


      Because they think they are making the £ stronger by fighting inflation every time they hike. The reality is the are hiking prices and causing inflation slowly. They are stuck in their own groupthink.

      I bet if the BOE hike in May they’ll be hiking again before the years out. So last years hike was not a non event at all they’ll soon be trapped like the FED is now in an inflation cycle. Causing it when they think they are fighting it.

      You’ll see.

      Lets see where Gold is and the $ is and inflation is after the FED has hiked another 3 times this year and 2 times next year. Making it 11 rate hikes in total.


      Then we can put this to bed once and for all.

    16. Derek,

      I would like to agree with you but I am not sure about your point that cb now wants to “fight inflation” by appreciating the currency? Yes there is this theory about managing inflation-expectations but I generally see this policy-tool as to influence wage-negotiations(both parties) more than the capital markets directly giving cb the illusion they can control inflation(maybe Sweden more than the US). They can´t, they can only do the formal adjustments necessary to keep rates were they want them(positive real rates at least)in their theory. And of cource they can have a short influance on currency-markets too. Looking back since 1980(US) inflation has fallen to negative(disinflation/deflation). No one can really claim the FED RESERVE is responsible for this development. They did only adjust.

      When monetary policy really have a significance is when they speak and ant match their talk by unusal policies. Like the Greenspan Put, QE´s, Zirp or like when they are telling the market in advance that “rates will not be increased for a very long time” etc. Now were are speaking of unorthodoxy measures which have had big impacts on markets and spending behaviour since the 90´s.

      I now see cb´s as “spender of first resort”. They want the return of demand-inflation to take place. General overindebtness has to be deflated through income-inflation(hopefully in real terms). Will they succeed? Price-increases will start something. Stagflation risks! Personally I would hope Trump would dare to swap some Pentagon expenditures for public infrastructures. As FED always said since Bernanke; “FED can´t alone resolve long term economic weakness. It is up to Congress”

      In an overindebted society interest-rates do impact living costs. So in that sense cb(FED) policy now have influence on inflation in the short term. Of that we agree.

      It will be interesting to follow the dollar/inflation-theme in the forthcoming periods. According to theory currencies usually falls with inflation och increase with deflation. So looking to the US-EU relation the eur/usd should continue to appreciate giving the policies by ECB visavi FED and structures of EMU.

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