MMT is just plain good economics – Part 3

This is the third and final part of this series where I examine claims made by senior advisors to the British Labour Party that a fiscal policy that is designed using the insights provided by Modern Monetary Theory (MMT) would be “catastrophic” and render the British pound worthless. In Part 1, I examined the misunderstanding as to what MMT actually is. A senior Labour advisor had claimed, in fact, that any application of MMT would be “catastrophic” for Britain. He talked about MMT “policy prescriptions”, which disclosed an ignorance about the nature of MMT. In Part 2, I considered the British Labour Party’s Fiscal Credibility Rule and demonstrated that its roots were in core neoliberal ideology and any strict adherence to it would not be consistent with progressive outcomes. I noted that it was likely to promote a private ‘debt-bias’ that was unsustainable. In this final part, I explore some economic history over the last five decades to give some further force to the argument presented in Part 2. And I finish by arguing that a well governed, rule of law abiding Britain with a government building and maintaining first-class infrastructure, with excellent public services (energy, transport, health, education, training, environmental certainty, etc), with a highly skilled labour force, and regulative certainty, would be a magnet for profit-seeking private investment irrespective of whether it was running a continuous fiscal deficit or not. Yet, it is highly likely, given Britain’s history, that such a deficit (both on current and capital contexts) would be required.

The previous blog posts in the series:

1. MMT is just plain old bad economics – Part 1 (August 9, 2018).

2. MMT is just plain old bad economics – Part 2 (August 13, 2018).

Response to responses

At the outset, I see my blog as an extension of my role as an educator.

The point is that the matters I write about are not without controversy and very much not in the mainstream psyche. That means I have to explain and contexualise the argument in greater detail or put myself open to criticism that I have ignored this or that.

Education is more than a 280 character Tweet. One character overnight criticised the length of my blog posts – as a snide put down.

The same person then, in ‘smart-guy’ mode, claimed to summarise yesterday’s blog for everyone in a Tweet.

Sad to say, it seems that even though my blog post was long in his view, he still didn’t understand it.

For example, he accused me of claiming that public capital investment is a neoliberal policy.

Of course, regular readers will know I would never think that nor have I ever written or said that. Claiming otherwise is just attention-seeking lying.

What I said was that the Labour Party’s Fiscal Rule is framed within neoliberal concepts and language. That is entirely different matter.

Frame lies and you privilege them!

My points about the Golden Rule component of the Rule were fourfold: (a) there is a problem distinguishing capital from current expenditure; (b) in a deep recession, the Golden Rule may not be flexible enough to prevent significant output and employment losses; (c) in a recession, it would make it virtually impossible to meet the debt commitment within the Rule, and (d) it creates a private-debt bias.

He also said I failed understand the Labour Party’s fiscal rule.

Well I quoted the Rule from its source and here is the relevant section again:

Labour will close the deficit on day-to-day spending over five years … we would commit to always eliminating the deficit on current spending in five years, as part of a strategy to target balance on current spending after a rolling, five-year period.

This was written in a section where we were also told that “everybody knows that if you’re putting the rent on the credit card month after month, things needs to change.”

The household budget analogy no less. Neoliberal framing! Lies. And these characters are claiming the Labour Party is adopting a progressive macroeconomics!

Anyway, what this constraint in the Rule says is obvious. It allows ‘current’ spending (whatever that is) to exceed ‘current’ revenue (from taxes) in Year 1, Year 2, Year 3 and even Year 4, but after 5 years it has has to balance. And that rolling average then starts in Year 2 and ends in Year 6 (another balance), then Year 3 to Year 7 (another balance).

Yes, the Government can suspend the rule in “exceptional circumstances” but this (according to the Rule) would only follow when “the Monetary Policy Committee decides that monetary policy cannot operate”.

That is, the unelected and unaccountable Bank of England determines when the elected Government can step in and break the Fiscal Rule.

The rule clearly means that the Government cannot run continuous recurrent deficits by their own choice, which may be necessary to ensure schools are well provisioned, hospitals have enough resources, and all the rest of it.

Overall, education is a slow burn process. It needs in-depth analysis and discovery. My blog posts are long because I take the time to provide that analysis. I am an educator not a social media hero.

The social media world is perverting our sense of literature and debate.

For example, his attempt to summarise my blog post in a Tweet indicated that I had mentioned “Something about Friedman, Kyland and Prescott”. End of point.

Apart from his spelling problems (it is Kydland), how many of my readers would know what that one line summary of what were several paragraphs in my blog post meant?

Hardly any I would guess, particularly the reference to Finn Kydland and Edward Prescott.

The fact is that their work has been a major part of the shift to what we popularly think of as ‘free market’ macroeconomics.

Their contribution (if you can call it that) is used as an authority to justify the entire framework of macroeconomic policy setting in the modern era, including the ruse about central bank independence, which I demonstrate has damaged progressive outcomes.

How many of you understand their place in the history of economics? Not many I would think. Which is not a shortcoming, given the work is part of the academic literature in macroeconomics.

That is why I determined it was productive to spend a little time contexualising the roots of the Fiscal Rule. It hasn’t come out of a void. It is embedded in a copious literature that spans techniques and ideologies.

I see my blog as a conduit to translate as best I can this complex literature into meaningful prose that non-economists can understand and benefit from knowing.

My role as an educator is, thus, to educate – that is, to increase knowledge, which, in turn, empowers people to challenge the status quo if they feel it is not delivering on their aspirations.

A few smart-guy Tweets is not education. And that is why I never engage in these futile Twitter exchanges.

A little economic history

Now lets look at British economic history since 1975.

Here is a four-panel graph which covers the period between the March-quarter 1975 to the March-quarter 2018. The graphs are the Bank of England’s bank rate (its policy rate), the annual inflation rate, the quarterly real GDP growth rate and the official unemployment rate.

I was unsure of the best way to present the graph given that in its current form it is very long (in pixels) and you will have to go back and forth with the text. But I did it this way so you could better align the time axis and I have also added 3 blue vertical lines to mark certain periods.

The graph is useful in considering how Labour’s Fiscal Rule might operate.

The graph tells me (along with other rather more extensive knowledge of what was happening over this period) that:

1. Monetary policy changes (interest rate shifts) are not a very reliable way to discipline the inflation rate. In the first two periods marked by the vertical blue lines, inflation kept rising even when interest rates were pushed up to dramatic levels (related, in part, to the currency instability).

2. Every time, interest rates have been hiked for extended periods, a recession has followed. But as we will see presently, in the case of the 1980s and 1990s, those monetary policy shifts were accompanied by significant contractionary fiscal shifts. In other words, fiscal policy cuts were reinforcing the interest rate hikes.

3. Every time, a recession occurs, unemployment shoots up sharply and then takes a long time to fall again even after economic growth has returned.

4. The high inflation rates following the OPEC oil shocks (and the elevated expectations that accompanied the high rates) only really were expunged by the severe recessions of the 1980s and then early 1990s.

The sustained output gaps were crucial in moderating inflation rather than any move to make the Bank of England ‘independent’.

And they came at the cost of huge income losses and elevated unemployment levels.

In all this period (except the GFC) the MPC of the Bank of England would never tell the Government “that monetary policy cannot operate”, which is the condition within Labour’s Fiscal Rule that allows the Government to “suspend” its operation and use fiscal policy more broadly (over and above the Golden Rule) to stimulate the economy.

Yet, it is obvious that on several occasions during this period, the fiscal deficit would have had to be increased rather significantly to arrest the output and employment losses.

The next graph shows the fiscal and monetary policy shifts from 1970 to 2014 (using annual data which presents average positions over each year).

The fiscal policy shift is the annual change in the fiscal deficit as a per cent of GDP – so if it is positive it means policy overall is tightening and vice versa.

The monetary policy shift is the annual change in the Bank of England’s policy rate – so if it is positive (rising) then rates have risen over the year and vice versa.

So you can see in the late 1970s, monetary policy was tightened sharply as it was again in the late 1980s (leading into currency strife that came to a head with Black Wednesday – September 16, 1992).

In both periods, the interest rate levels were also very high (see previous graph).

The previous graph shows that deep recessions followed soon after.

But look at the fiscal policy shifts. There was a substantial contraction starting in 1979, which continued through to the late 1980s, with some cyclical pressure on the structural policy positions in 1983 and 1984. The discretionary policy stance in this period was very contractionary and reinforcing the monetary policy shifts.

Macroeconomic policy settings were thus significant contributory factors to the major recessions and elevated unemployment that marked (scarred) these periods.

The average fiscal deficit over this period, despite the periods of extreme austerity, was 3.42 per cent of GDP. During this time span, there were several periods when unemployment was to excessive and required higher fiscal deficits than the Government was willing to pursue.

In other words, the average should have been much higher given the behaviour of the non-government sector had the Government privileged a full employment strategy.

We don’t have coherent government capital infrastructure spending for the entire period (the current national accounts series starts at the March-quarter 1997).

But the public investment to GDP ratio over that period averaged just 2.4 per cent.

For the period, 1970-71 to 2016-2017, the current fiscal balance in Britain averaged 1.3 per cent of GDP while the capital balance has averaged 2 per cent.

The following graph shows these two balances over that period.

This period, of course, includes the very damaging periods of fiscal austerity which sent unemployment skyrocketing.

If I set the current fiscal balance to zero over the periods of austerity, for example, which would have lessened the increase in unemployment, the average rises to 1.6 per cent of GDP.

The point is that during these periods, the Bank of England;s MPC would not have ceded control of macroeconomic policy to the Treasury in order to suspend the Fiscal Rule.

But it would be improbable that growth could continue unless the capital deficit rose dramatically and was well outside anything approaching historical averages.

This would be in the context of an already elevated capital effort given the laudable Labour Party Mandate to increase productivity and nationalise some major components of essential services, and, to pump money into the NHS, education, and the environment.

The government can clearly raise taxes to match any extra recurrent spending it deems necessary to fulfill its mandate, but that defeats the purpose that a recurrent deficit at several times during this period would have been required.

My conclusion is that the Government would not be able to keep within their debt targets during periods when the MPC had primary carriage under the Fiscal Rule.

The more obvious conclusion is why would they bother setting themselves up for failure in this way.

Answer: Ideology (or a surrender to an ideology for perceived short-run political purposes).

The many, though, do not benefit from this framing as history tells us.

MMT policies would render the currency worthless

This was the claim made by a senior advisor to the Shadow Chancellor in Britain, which motivated this exploration in the first place. I didn’t set out to attack the British Labour Party. I just wanted to correct lies being spread about MMT by those who had fallen prey to neoliberal framing.

To repeat, this is what was written in a social media exchange a week or so ago:

MMT is just plain old bad economics, unfortunately, and a regression of left economic thinking. An economy “with its own currency” may never “run out of money”: but that money can become entirely worthless … its prescriptions are close to catastrophic … Any country that isn’t the US trying to apply MMT’s prescriptions would find itself in the same position.

Ok.

As I noted in – MMT is just plain old bad economics – Part 1 – there are no non-MMT policy prescriptions.

Please read that again if you didn’t get the point being made.

In that sense, what we are arguing about is what might be the progressive policy options that flow from an understanding of MMT.

That is the only sensible way to frame this.

It is not sensible to attack MMT as a body of work because Bill Mitchell, as a left-leaning progressive, for example, wants legislative bans on the financial sector engaging in speculative activities that do not enhance the capacity of the real economy to deliver better outcomes to workers and their families.

Or wants banks to carry all their assets on their own balance sheets.

Or wants the government to outlaw trade with nations that abuse the rights of trade unions to form.

Or wants governments to introduce legislation that caps corporate salary payments and brings them into line with social standards.

Or wants governments to refrain from issuing debt of any kind to private markets, which just ends up as corporate welfare.

Or is happy for the government to run continuous fiscal deficits if by doing that it is providing income support to the non-government sector to allow it to reach its savings aspirations while still maintaining full employment.

All of those ‘policy prescriptions’ come from my understanding of MMT as one of its original architects but reflect my value-system (my ideological disposition).

I could have said I want governments to run surpluses and squeeze the hell out of the non-government sector in order to create an elevated pool of mass unemployment because I know that will suppress wage demands and allow capital to get a greater share of national income.

That would be a ‘policy prescription’ that might reflect a right-wing thinker. Both policy stances could be derived from a firm understanding of MMT.

I doubt from earlier statements and Tweets etc that have followed that this nuance has ever been understood by the defenders of Labour’s Fiscal Rule.

So what could the Shadow Chancellor’s advisor be thinking about?

First, take the Labour Party’s current policy – Our Manifesto – which outlines a range of policies that a new Labour government would pursue.

1. “Creating an economy that works for all” – this includes ensuring workers get better pay (including women), bringing the financial system to heel, increase public investment etc.

All of which a progressive person like me would support.

Although I notice the Manifesto does not have a commitment to full employment which is disturbing, especially in the context that the Party announced it would consider introducing a UBI.

So perhaps the Shadow Chancellor’s advisor think a commitment to full employment is going to render the currency worthless. I wondered about that in Part 1.

2. “A fair taxation system” – clearly a progressive ambition.

Despite the nonsense I have read on Twitter in the last days (unfortunately because people keep copying me into their rants) that MMT proponents do not think taxes are important, the reality is that taxation plays a central role in the understanding MMT provides about the operations of the monetary system and the capacities of the currency-issuing government within it.

What we don’t say, however, is that the government has to ‘tax the rich’ (or anyone) to raise funds in order that it can spend.

That error (taxes fund spending) is inherent in the Labour Party’s fiscal rule and the many statements that the Shadow Chancellor and his staff have made over the last several years.

That factual error and associated framing is not a reflection of a progressive position in any shape or form.

Yes, I want to tax the rich. But not to get their money. Rather, to deprive them of that purchasing power. Two very different things.

I want them to have less resources as part of a process to limit their power in society.

But then on Twitter the idiots have been banging on about how MMT (and yours truly) have nothing to say about power in society. Good try!

3. “Infrastructure investment” – yes, I have consistently argued for more public investment in capital goods – better schools, hospitals, universities, public transport, parks, gardens, etc etc.

I have also consistently argued that nationalisation should be a central strategy for a progressive government to get essential services like transport, energy, telecommunications, etc back into public hands to deliver benefits for all and take private profit out of the equation.

4. “Transforming our financial system” – all of Labour’s policies here I would support. But then I would go further as above.

5. “A new deal for business” – including forcing companies to broaden their responsibilities (public, environment, etc) are all fine.

6. “Widening ownership of our economy” – including nationalisation of essential services, helping workers take over companies, etc – all fine.

7. “Sustainable energy” – excellent.

8. “Balancing the books” – I put this last for obvious reasons, even though the actual Manifesto places it earlier in the ordering of the policy areas.

Given that most of the policy options outlined in Areas 1 to 7 are unobjectionable it must be the statements that MMT proponents have made under “Area 8 Balancing the Books” that the Shadow Chancellor’s advisor thinks will send the currency worthless.

Which is why I have spent some time in Parts 1 and 2 of this series outlining what the Fiscal Rule means and its implications.

The Manifesto tell us that:

Our Fiscal Credibility Rule is based on the simple principle that government should not be borrowing for day-to-day spending.

What “simple principle” is that?

Answer: mainstream macroeconomics.

MMT response: why would a currency-issuing government be wanting to borrow at all?

So this is the nub.

The statement that MMT would drive the currency worthless must be predicated on the fact that we argue that:

1. There is no particular issue with a government running a continuous fiscal deficit as long as inflation is stable and the saving aspirations of the non-government sector are being met. In other words, as long as the economy is operating at full employment.

My value system would add the constraint as long as this level of economic activity was also environmentally sustainable.

2. There is no need for a currency issuing government to issue any debt to match its net spending – whether the net spending is composed of a recurrent spending deficit and/or a capital spending deficit.

Such debt-issuance amounts to corporate welfare because it provides a credit-risk free asset to the non-government speculators which they can use to price other assets or seek as a safe haven (and guaranteed annuity) when there is uncertainty.

A progressive government has no reason to continue practices that were relevant during the fixed exchange, convertible currency period following World War 2.

3. Having said that, there is no extra inflation risk involved from a government that runs a fiscal deficit and matches it with debt issuance compared to a government that runs the same fiscal deficit and just instructs the central bank to credit relevant bank accounts in the non-government sector.

The inflation risk is in the net spending not the monetary operation that might accompany it.

There is an inflation risk in all spending (government, private domestic – consumption and investment, external exports).

There is nothing particularly unique in this regard with respect to government spending.

4. Taxes are issued to create a demand for the currency rather than to fund government spending. There is no need to tax the rich to get funds that will allow the government to spend. We might want to tax the rich more to reduce their access to resources and their power.

5. The idea of central bank independence is false. Even at the operational level, the central bank and treasury functions of government have to work together closely on a daily basis to ensure the management of the cash system is effective (meaning: to ensure the central bank can meets its policy target).

This operational sense is quite apart from the fact that the central bank is always a creature of the government. Claiming it is independent is just a depoliticisation strategy.

So trying to map those points into something we might call an “MMT policy prescription” is difficult.

But I suppose the Shadow Chancellor’s advisor thinks that running continuous deficits will be catastrophic.

Or reframing the relationship between the central bank and the treasury so the public understood clearly what the operational links that bind the two together are.

Or announcing that the Government is no longer issuing any debt to match its net spending.

Which if you think about it just means that we are really back to Britain circa 1976 with Denis Healey lying about the need for the British government to borrow from the IMF because it has run out of money.

That lie was driven by Healey’s growing acceptance of Milton Friedman’s Monetarism and the microeconomic analogue which demanded governments extensively deregulate the labour and financial markets and tilt the balance of power firmly into the hands of capital.

It was driven by the false belief that global financial capital was more powerful than the legislative capacity and sovereignty of the national government.

It was driven by the rejection of any use of capital controls or other legislative curbs on the unproductive currency speculation.

Healey could have easily trapped the speculative funds that were attacking the pound at the time. But he was ideologically against that and was lunching with IMF officials who were leading the charge in rejecting these sensible legislative imposts on out-of-control profit seekers who only wanted to benefit themselves without regard for the costs their actions might impose on anyone else.

Thomas Fazi and I deal with this period in detail in our latest book – Reclaiming the State: A Progressive Vision of Sovereignty for a Post-Neoliberal World (Pluto Books, 2017).

The following blog posts provide some further background and detailed analysis (among other blog posts I have written on this topic):

1. On the trail of inflation and the fears of the same … (December 3, 2015).

2. Globalisation and currency arrangements (January 11, 2016).

3. The capacity of the state and the open economy – Part 1 (February 8, 2016).

4. Is exchange rate depreciation inflationary? (February 9, 2016).

5. Balance of payments constraints (February 10, 2016).

6. Ultimately, real resource availability constrains prosperity (February 11, 2016).

7. The British Monetarist infestation (February 25, 2016).

8. The Monetarism Trap snares the second Wilson Labour Government (March 9, 2016).

9. The Heath government was not Monetarist – that was left to the Labour Party (March 15, 2016).

10. Britain and the 1970s oil shocks – the failure of Monetarism (March 16, 2016).

11. British trade unions in the early 1970s (March 31, 2016).

12. Distributional conflict and inflation – Britain in the early 1970s (April 7, 2016).

13. The British Labour Party path to Monetarism (April 13, 2016).

14. Britain approaches the 1976 currency crisis (April 21, 2016).

15. The 1976 currency crisis (April 26, 2106).

16. The Bacon-Eltis intervention – Britain 1976 (May 11, 2016).

17. British Left reject fiscal strategy – speculation mounts, March 1976 (May 18, 2016).

18. The US government view of the 1976 sterling crisis (May 25, 2016).

19. The British Cabinet divides over the IMF negotiations in 1976 (June 8, 2016).

20. The 1976 British austerity shift – a triumph of perception over reality (June 13, 2016).

21. The conspiracy to bring British Labour to heel 1976 (June 15, 2016).

22. The British Left is usurped and IMF austerity begins 1976 (June 29, 2016).

23. Why capital controls should be part of a progressive policy (July 6, 2016).

Quite a body of work in fact, which provides detailed responses to the questions about whether currencies can be made worthless, what governments can do when their floating currency is under attack from speculation, what ultimately drives material well-being.

The summary might be that:

MMT does not deny and has never denied that crises, particularly pertaining to currencies can occur.

These will be more likely to occur when the currency is pegged in some way and the central bank is committed to maintaining the parity.

These will be more likely to occur if the government borrows in a foreign currency.

These will be more likely to occur if non-government spending growth is driven by accessing foreign currency denominated credit and repayment is dependent on strong export markets.

These will be more likely to occur if the government fails to maintain full employment and a strong investment climate for firms.

These will be more likely to occur if there is a lack of governance capacity, unstable political processes prone to military takeovers, and endemic corruption among public officials, an inability or unwillingness to maintain the rule of law, with contractual certainties, and things of that ilk.

There is no reason why a currency crisis would follow if the government announced it was no longer issuing debt to match its net spending.

If you are statistically and econometrically competent then you will know that there is no robust statistical result linking fiscal deficits to currency crises.

We can find extreme cases in every dataset. But sound statistical practice does not take ‘outliers’ into account when trying to establish generalised behaviour about the data generating process that is disclosed by real world data.

I have done a lot of this type of modelling, including at the very sophisticated end.

Capital is more interested in chasing profit-making opportunities.

A well governed, rule of law abiding Britain with a government building and maintaining first-class infrastructure, with excellent public services (energy, transport, health, education, training, environmental certainty, etc), with a highly skilled labour force, and regulative certainty, would be a magnet for profit-seeking private investment.

Why would anyone think that the currency markets would dump the pound when it would be the vehicle that was necessary to acquire in order to pursue these profitable investments?

And, if, in some extreme and rare instance, speculative agents started to act in a destructive way, then the government has the capacity to insulate the economy from those effects.

Think about what Iceland has just demonstrated.

Conclusion

The claim that running continuous fiscal deficits and not issuing debt would drive a currency worthless discloses a deep insecurity in those who propagate it.

It also buys into the neoliberal frame that seeks to stop governments spending on welfare for the low-income citizens, while retaining the corporate welfare from debt-issuance.

The financial markets are just not that powerful – that is the reality.

They rely on the legislative framework and the regulative structure set by government to operate. Without that framework being supportive to destructive speculation, they are considerably constrained.

Further, the central bank can always control yields on government debt, which makes domestic bond markets supplicant not in any way running the show!

Finally, there have been a lot of Tweets saying that the position taken by MMT proponents on macroeconomics (for example, that the government does not need to tax to raise funds in order to spend) is not politically savvy and that progressives have to frame macroeconomics in the language and metaphors that dominate in the public debate.

I have written about this regularly. The last blog post that covered this sort of reasoning in any detail was – The ‘truth sandwich’ and the impacts of neoliberalism (June 19, 2018).

As George Lakoff, a leader in understanding how people come to accept statements that pertain to their reality, said:

Start with the truth (if you lead with the lie, you privilege it) …

Avoid retelling the lies. Avoid putting them in headlines, leads or tweets … Because it is that very amplification that gives them power.

This advice is well grounded in cognitive linguistics and cognitive psychology. Those who think they are playing a politically savvy game by using neoliberal concepts to advocate progressive policy agendas just reinforce the neoliberal policy agenda.

A huge literature from those who know these things supports that conclusion. It is political idiocy to use neoliberal framing to advance progressive policy debates.

The smart guys out there who purport to give advice to Labour parties around the world don’t seem to understand the knowledge that that extensive research literature has generated.

That is enough for today!

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

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    57 Responses to MMT is just plain good economics – Part 3

    1. Korual says:

      Look at the Labour party in NZ, who are in government now. They promised a balanced budget (ie like the British Labour “Fiscal Rule”) before they got elected. Now the nurses are on strike, the teachers are on strike and the government can’t give them a pay rise. Progressive?

    2. larry says:

      A tour de force, Bill. It does appear as though McDonnell can not dispense with the microeconomic thinking he utilized when he was with the GLC. Now, he appears to ask the advice of Mazucatto, Pettifor, and this idiot, but does he listen to the former two. McDonnell’s behavior seems to fit well with the notion of confirmation bias with respect to the ideas he accepts and those he rejects. At least in the short term. If he and Corbyn are engaged in some political strategy in regard to their advocacy of economic policies, which some suggest, then I agree with you that it would be better were they up front about some kind of progressive agenda. Though Sanders wasn’t as progressive as he might have been, the progressive economic programs that he did mention didn’t seem to hurt him any.

    3. Mel says:

      One quibble: “if you lead with the lie, you privilege it”. I really would have liked to see quotation marks in the title. Most of the words are James Meadway’s, after all.

    4. Schofield says:

      Is there a sort of weird race between two trains going on here? Weird in the sense that one train’s going in the opposite direction to the other. Is it possible the capital spend which has no proposed fiscal collar can be large enough to generate a sufficient increase in taxation it will close down the fiscal gap on the current spend? And by which time the capital spend having hugely increased employment and therefore demand and finally well-being will have gathered such a critical mass the majority of voters won’t give a tinker’s fart (if you’ll excuse my language) for Neoliberals wanting to balance both sets of government’s books or MMTer’s insisting on saying why bother except in emergency? Note I’m keeping stum about trade gap implications except if the capital spend is also targetted in part to close this particular gap there’s another Marianna Mazzucato “entrepreneurial state” thing going on here too!

    5. Anthony Molloy says:

      “there is no extra inflation risk involved from a government that runs a fiscal deficit and matches it with debt issuance compared to a government that runs the same fiscal deficit and just instructs the central bank to credit relevant bank accounts in the non-government sector”

      Forgive me if this is a naive question but is it not true that, insofar as the aggregate effect of a Job Guarantee programme is not neutral in terms of supply and demand, in order to prevent inflation the associated spending will have to be funded out of taxation/borrowing rather than money creation? I understand the benefits – both economic and social – of maximising the capacity of the economy, but does doing that not depend on what jobs you are creating? While jobs that create goods and services will kind of “pay for themselves”, would paying people to dig holes and fill them in again not stimulate demand without any effect on supply and therefore drive inflation? And does this not mean that the Labour Party emphasis on “infrastructure investment” has some nugget of truth in it?
      All that said, I was living in France between 1997 and 2002 when the “Emplois Jeunes” programme was up and running. It was a kind of state-funded Job Guarantee (that was employing 380,00 under-26 year-olds when it was terminated by the incoming right-wing government) and, in my limited experience, it worked very well, both for the young employees and in terms of what was made possible. I lived in an isolated village and the two youngsters that the programme made it possible for the commune to employ got a great deal done in their five years: rebuilding walls, environmental clean-up, looking after and helping elderly villagers, etc. Most of this hard work was “economically useless”, at least in the short term, but nevertheless improved the quality of life of many relatively deprived citizens. Moreover, both of the kids were from extremely underprivileged backgrounds, one with a criminal history, and they got a lot out of this opportunity (although I don’t know their long-term outcomes).

    6. larry says:

      Anthony, when you think of JG, think of FDR. FDR’s WPA and other programs were eminently successful, as the French program seems to have been, though FDR’s lasted longer than 6 years. Then think of Keynes who contended that paying people to dig holes and fill them up again was a way of employing people but not a socially useful way, as the society got virtually nothing out of it. (Actually, neither do the people engaged in this sort of work.) As you point out, JGs do not have to be strictly economically useful; they only have to be socially useful. The economic utility would come from the JGers themselves. After all, hardly any of them are going to hoard the money they get for the work they put in, except in certain exceptional circumstances. Yes, there will be some inflation, as there is more money circulating in the system, but it is money that is ‘doing work’ rather than being the object of speculation, which creates no value for the society at all. A little of the right kind of inflation is good for the system, just as a little of the right kind of cholesterol is good for your heart. Mainstreamers, when talking about inflation, want you to think of asset bubbles without having you necessarily put that thought into words. Such inflation is highly unlikely with the JG.

    7. Mike Ellwood says:

       
      Schofield says:
      Tuesday, August 14, 2018 at 22:47
       
      Is it possible the capital spend which has no proposed fiscal collar can be large enough to generate a sufficient increase in taxation it will close down the fiscal gap on the current spend?

       
      It may well do, but what MMT teaches us is that closing down the fiscal gap should never be the explicit purpose of taxation. Spend what you (the government) need to spend to eliminate unemployment. Tax what you need to tax in order to control inflation (and perform other socially useful things, such as increase equality and control use of resources), and the fiscal balance will lie wherever it falls, be it in surplus, deficit or in balance. It is the least important of all the economic measures. Unfortunately, orthodox economics, mainstream politicians, and most of the media regard it as the most important.

    8. Willy says:

      You are pushing people to take responsibility for the unequal hardship surrounding them. By your maieutic method you are in effect trying to take the ‘filter’ off the mirror they look into everyday. That makes this very personal, and so they have in desperation moved to ad hominem. Much like a person who thinks faith means blocking out real doubts in their literal understanding of their foundational text, there is a misunderstood meaning of “faith” here too. As we see throughout history and now, that is very personal and dangerous. As for this construction worker, I would like to say thank you and keep fighting the good fight!

    9. Alan Longbon says:

      A brilliant series of posts.

      When you are angry and motivated you write at your best and cut to the core of the subject and make it more understandable and clear-cut.

      Great work.

      Thank you.

      Alan

    10. Yok says:

      I’m with 100 percent Bill.
      You know when I started to realize the lying? Long before I discovered MMT. I looked at the long string of budget deficits, decades, and at the constant claims of deficit disaster. I thought, What if the deficits were not the problem claimed, but manipulative. What if the budget deficit and the growing national deficit was a normal and natural process of the economic system. Hey, I’ve lived through decades of relative prosperity, and if it hadn’t happened after 50 years, it’s not the problem portrayed.

    11. Jo Michell says:

      Hi Bill, please could you point to where I accused you of “of claiming that public capital investment is a neoliberal policy”

    12. Andrew Anderson says:

      It also buys into the neoliberal frame that seeks to stop governments spending on welfare for the low-income citizens, while retaining the corporate welfare from debt-issuance. Bill Mitchell

      Let’s not ignore that fiat deposits at the Central Bank, aka “reserves” in the case of banks, are also the debt of the monetary sovereign and are thus inherently risk-free. Therefor, interest on reserves (IOR) is also corporate welfare.

      Moreover, as the shortest maturity wait of any sovereign debt (i.e zero maturity wait) and since no sovereign debt should have a positive yield (to avoid welfare proportional to account balance, i.e. “corporate welfare”), it can be argued that negative interest should be levied against fiat deposits at the Central Bank, aka “reserves” in the case of banks.

      But then won’t the banks simply pass on the negative interest to poor depositors? Yes, which is one reason among many why individual citizens should also be allowed accounts at the Central Bank, accounts that are exempt from negative interest up to a reasonable balance limit, e.g. $250,000 US or so.

    13. Simon Cohen says:

      ‘Overall, education is a slow burn process. It needs in-depth analysis and discovery. My blog posts are long because I take the time to provide that analysis. I am an educator not a social media hero.’

      Absolutely! And this is a vital insight. Your recapping of material over years of posts, your refusal to thin out or dumb-down the material and high expectations of your readership are what make this blog exceptional and enriching! Prof. Mitchell, many of us ‘out here’ are massively indebted to you, for your unstinting work. As someone trying to educate themselves I feel privileged and grateful to have come across your work. It’s sometimes hard going (I’m perhaps not on the ‘cognitively enhanced’ part of the IQ Bell curve!) and at first the learning curve felt very steep but because you demand the effort from the reader I think many of us have demanded more of ourselves than we might otherwise have done. You emphasis on providing enriching historical contexts deepen the learning experience and facilitates understanding.

      There should be no compromise regarding education expectations and I’m glad you don’t!

      Today’s blog really brought to mind how fortunate we are to have you work available like this.

    14. Schofield says:

      @ Mike Ellwood

      “It may well do, but what MMT teaches us is that closing down the fiscal gap should never be the explicit purpose of taxation…. Unfortunately, orthodox economics, mainstream politicians, and most of the media regard it as the most important.”

      Yes I understand all this Mike but what I’m trying to convey is the idea this so-called Labour “New Keynesian Fiscal Rule” is an attempt to box clever and call off the Tory Neoliberal Austerian “nutter” pack by appearing to commit to a balancing of government books at least on the current spend whilst knowing the Tory “nutters” won’t have much idea about the reductive effect of automatic tax stabilisers on the current fiscal gap due to a large scale government capital spend over the five year rule period.

    15. Heim says:

      But if neoliberal/austerity policies have not worked up until now does that not mean we have not tried hard enough to implement them? Wait, that may be the definition of madness. Would not be easier to crowdfund the wealthy and cut out the middleman?
      Brilliant series of posts. Thank you.

    16. Mike Ellwood says:

       
      Andrew Anderson says:
      Wednesday, August 15, 2018 at 2:39
       
      Let’s not ignore that fiat deposits at the Central Bank, aka “reserves” in the case of banks, are also the debt of the monetary sovereign and are thus inherently risk-free. Therefor, interest on reserves (IOR) is also corporate welfare.

       
      Good point Andrew.
       
      Something which occurred to me as a result of thinking about the above is that, of course, that interest will presumably be paid in the form of additional reserves, credited to the account of the bank in question. Where do those reserves come from? Well, “out of nowhere”, presumably, “by keystroke”, or more likely, as the output of a computer programme. No taxes were raised, no bonds were sold, no additional budget was passed in the legislature, and no animals were harmed in the making of these reserves. Just another example of the government (or its central bank) creating “money” when it needs to. Yes Virginia, there is a Magic Money Tree.

    17. Andrew Anderson says:

      Yes Virginia, there is a Magic Money Tree. Mike Ellwood

      Indeed, yes. And good point yourself. But here’s the problem. Government privileges for the banks mean they have a Money Tree too and not for the common welfare but for the private welfare of the banks themselves and for the most so-called creditworthy of what is then, in essence, the public’s credit but for private gain. And the leaves from their Money Tree compete in the same politically allowable price inflation space as fiscal spending does, do they not?

    18. John says:

      Anthony Molloy says:
      Tuesday, August 14, 2018 at 22:52

      Hi Anthony

      Forgive me if you are an expert MMT economist but from your question about inflationary impact of methods of government spending I wondered if you were relatively new to MMT. If so I thought you may find it useful to see a youtube video from a few years ago of Steven Hail explaining some of the key insights of MMT to South Australian green party https://www.youtube.com/watch?time_continue=5&v=qBpm5sVmGYc . I found it very clear and from your linked web site I can see you we may well share a number of political perspectives and so I thought you might also find it useful.

      Having spent some time trying to absorb MMT insights that I would now say your comment that the work of the two young “Emplois Jeunes” workers was “economically useless” despite the good it did for them and the community is the result of us all being subjected to a relentless right wing indoctrination over many years at many levels. We are taught to believe that only work which delivers a private profit is real or genuinely productive and all government spending is construed as a burden. I think this results from the neo liberal frames which Steven Hail describes near the start of the video at about 13.30 mins. In fact archaeological and anthropological work seems to show that delivering shared benefits whether through public work of various types appears to be the reason for the creation of monetary economies back into antiquity.

      I think I agree with you on Land value tax and also wondered if you might find MMT work on the use of taxation interesting. It often leads from the 4 main reasons for taxing identified by Beardsley Ruml Chair of the Federal Reserve in 1946 on the second page of this article http://www.constitution.org/tax/us-ic/cmt/ruml_obsolete.pdf

      Thanks John

    19. bill says:

      Dear Mel (at 2018/08/14 at 10:45 pm)

      Yes, your point is valid. I have changed the titles of the blog posts (three parts) to reflect the facts so I don’t privilege the lie. I note on Twitter that Meadway is now claiming I did not read anything he said, which by implication, suggests he is denying he even said the quoted passages.

      Thanks for your help.

      best wishes
      bill

    20. Derek Henry says:

      You can also see from those graphs the inflation rate follows the interest rate

      As Volcker quickly found out.

      https://realmoney.thestreet.com/articles/10/19/2016/hey-volcker-thanks-nuthin

      The chart, which tracks the Fed funds rate and annual changes from 1954 in the Consumer Price Index, shows clearly that the relationship between interest rates and inflation are highly correlated and not in an inverse way.

      So you see, it’s practically a one-to-one correlation. You could pretty much superimpose these two lines.

    21. Darrell Kavanagh says:

      Really good stuff, Bill, certainly adds to my understanding, particularly on the interest rate/inflation rate question (which is currently driving orthodox commentators crazy in relation to Turkey).

      One disagreement, though: I don’t read the “eliminating the deficit over a 5 year rolling period” the same as you. The way I see it is that we (I say “we”, as I’m a member of UK Labour) are saying that each year, there will be a plan to eliminate the deficit 5 years hence. The crunch point never arrives, so it’s always “jam tomorrow”.

      As such, in practical terms, therefore, it might not be as damaging as you suggest, though only to the extent that the rule is practically meaningless, and obviously it fails the “do not lead with the lie” test: as a socialist, I have always believed that we should tell the truth to the people we aim to represent.

    22. eg says:

      @Yok

      Precisely. I’m old enough to have heard all the deficit hysterias promulgated by the deficit chicken-hawks.

      As I enjoy winding up my neoliberal friends, “if the sky is always falling, why hasn’t it hit the ground?”

      I’ve been hearing the same tired refrain since the late 70s, and am rather embarrassed to say that it took the GFC and subsequent monetary operations to wise me up to the origins, purpose and function of money.

      Better late than never, eh?

    23. eg says:

      @Anthony Molloy

      The JG workers are similar to public sector workers who provide efficient services in natural monopolies. Their contributions reduce the costs of private sector operations either by remediating externalities (eg. environmental cleanup) or lowering business input costs (eg. training; daycare)

      Beware the “digging/filling holes” canard — there are many socially useful contributions that local communities will set as JG priorities before running out of ideas (though in theory even the lowest productivity options crowd out the negative effects of idleness, feelings of worthlessness and skill degeneration caused by persistent unemployment)

    24. Ken says:

      Professor Bill, can you please transfer your website to https instead of http? It best practice.

    25. Mr kevin Harding says:

      Slightly disappointed there is no direct answer to the question of
      the potential for a radical government whether MMT influenced or not
      to come under speculative currency pressure.
      I guess i have to look through the 23 links to see if Bill thinks this likely,
      problematic and easily dealt with.I certainly understand raising interest rates
      is neither logically or empirically a sound counter inflationary tool . I understand
      central banks can set the interest rates on their bond issues as Japan have done
      but not so confident that government can control their exchange rates going down
      in a floating regime I understand that there are winners and losers in cuurency
      depreciation but import inflation would be a problematic for a government defending
      itself from inflation hawks.

    26. bill says:

      Dear Ken (at 2018/08/15 at 1:51 pm)

      It is best practice if you want encryption. There is no need for that. I am not selling anything or receiving private information via the http protocol.

      But thanks for the suggestion.

      best wishes
      bill

    27. bill says:

      Dear Jo Michell (at 2018/08/15 at 2:13 am)

      Please see today’s blog post.

      best wishes
      bill

    28. bill says:

      Dear Mr Kevin Harding (at 2018/08/15 at 4:08 pm)

      Sorry, there was a direct answer. Yes.

      And some discussion, summarising the 23 links, on when it is more likely and what can be done about it.

      best wishes
      bill

    29. Nicholas says:

      Hi Kevin, you should read Bill’s blog post entitled Why Capital Controls Should Be Part Of A Progressive Policy. The date of that post is 6 July 2016.

    30. Mike Ellwood says:

      Andrew Anderson says:
       
       
      Wednesday, August 15, 2018 at 6:53
       
      But here’s the problem. Government privileges for the banks mean they have a Money Tree too and not for the common welfare but for the private welfare of the banks themselves and for the most so-called creditworthy of what is then, in essence, the public’s credit but for private gain. And the leaves from their Money Tree compete in the same politically allowable price inflation space as fiscal spending does, do they not?

       
      Absolutely. And although, as we keep saying, MMT is not prescriptive, this is one of the first things that a truly progressive, MMT-aware government should look at very seriously.
       
      We’ve had lending controls in the UK before, and we can have them again, if there is sufficient political will. Of course, the financial system has become far more “sophisticated” since the last time we had such controls, and it’s questionable to what degree they worked anyway. But on the other hand, the tools which a government could use to control them have also become more sophisticated – we’ve had a complete IT revolution since those days, for example.
       
      And of course, there remains the option of nationalising the commercial banks, and forcing them to work in the public interest. This may seem a bit heavy-handed, and would only work with the right people in charge of them. However, I’d certainly nationalise at least one of them “pour encourager les autres”. :-}

    31. Andrew Anderson says:

      And of course, there remains the option of nationalising the commercial banks, and forcing them to work in the public interest. This may seem a bit heavy-handed, and would only work with the right people in charge of them. However, I’d certainly nationalise at least one of them “pour encourager les autres”. :-} Mike Ellwood says:
      Wednesday, August 15, 2018 at 19:12

      If nationalized banks are not to discriminate in favor of the richer as more so-called worthy of the public’s credit (as “private” banks do) then the ability to repay should not matter as far as loan eligibility is concerned. But then why lend at all but simply give grants to advance the welfare of citizens?

      Besides there is one option that has not been properly explored by MMT theorists to my knowledge and that is 100% private banks with 100% voluntary depositors. Some will say this was tried during the “Free Banking Era” and failed but when have the following conditions ever existed at the same time?
      1) no government privileges for the banks such as positive yields on the inherently risk-free debt of the monetary sovereign, i.e. “corporate welfare.”
      2) all citizens have the option of checking accounts of their own at the Central Bank or Treasury.
      3) inexpensive fiat is the rule so the every citizen may use fiat instead of largely just banks as is the case with expensive fiat, i.e. the Gold Standard.

      So how can it be said that 100% private banks with 100% voluntary depositors has ever been tried? How is Warren Mosler’s “The hard lesson of banking history is that the liability side of banking is not the place for market discipline” relevant to today except to warn us that we should make sure that the liabilities of the banks toward the non-bank private sector are genuine liabilities and not largely a sham?

    32. kevin harding says:

      Thanks I will check out the other blogs referencing capital controls.
      Want a bit more detail than “the government has the capacity to insulate the economy
      from these effects”

    33. robertH says:

      It occurs to me that one of the saddest things things about this whole episode of Labour’s fiscal rule is that they’re stuck with it now – for ever.

      Were they now or at any time in the foreseeable future to see the error of their ways (some hope!) and disown it, there could be no more clear-cut and irrefutable “proof” of their fiscal irresponsibility than that. It would return ever after to haunt them again and again and they would never be allowed to live it down.

      So they will never be able to disown it. They’ve willfully and madly hung an albatross round their own neck. Thanks a million, John.

    34. robertH says:

      Andrew Anderson says:
      Wednesday, August 15, 2018 at 22:46

      Agree 100% with this comment (and your others too).

      I’m especially sold on the “citizens having central bank accounts” idea (which I believe the BoE itself has canvassed, albeit possibly in conjunction with a distributed ledger (aka blockchain) system – but the technology’s incidental). But why not the rest of your package too: it all makes equal sense to me.

    35. GrkStav says:

      “How is Warren Mosler’s “The hard lesson of banking history is that the liability side of banking is not the place for market discipline” relevant to today except to warn us that we should make sure that the liabilities of the banks toward the non-bank private sector are genuine liabilities and not largely a sham?”

      Forget the liability side of the balance sheets of banks. Focus on the asset side of their balance sheet. Regulate that directly, by stipulating NOT what is prohibited, but specifying precisely what is “allowed”.

    36. Andrew Anderson says:

      Focus on the asset side of their balance sheet. Regulate that directly, by stipulating NOT what is prohibited, but specifying precisely what is “allowed”. GrkStav

      Shall the finance of automation to dis-employ the public with what is, in essence due to government privilege, the public’s credit but for private gain be allowed? Or is Ludditism to be government policy wrt bank lending?

      And what precisely is wrong with genuine, as opposed to sham, liabilities of the banks toward the non-bank private sector, i.e. honest as opposed to sham accounting? Other than that honest accounting would impede the looting of the non-bank private sector by the banks themselves and by the rich, the most so-called creditworthy?

    37. Nicholas says:

      I’ve pondered the same questions as Andrew, especially:
      1. Why not allow every individual and business to have their own reserve account? Why does there need to be an intermediary (retail banks) in the payments system?
      2. Why not require private banks to be 100% funded by private deposits with no deposit insurance? Depositors could enjoy high returns but would have to accept the risks too.

    38. Mike Ellwood says:

      ““citizens having central bank accounts”” – oh dear, sounds worryingly like Positive Money’s proposals, as does Nicholas’s posting.

    39. Nicholas says:

      “citizens having central bank accounts”” – oh dear, sounds worryingly like Positive Money’s proposals, as does Nicholas’s posting.”

      Not really. There is nothing wrong with credit creation that responds to demand from credit-worthy borrowers whose loans are backed by realistic projections of the income stream from the asset they are borrowing money to buy. But why should private banks be doing that? Why not public banks?

      Also, why do private banks need to be involved in the payments system at all? If I want to pay my plumber by electronic funds transfer, why shouldn’t I be able to authorize a transfer directly from my reserve account to his? Why do two private banks need to be involved in that transfer?

    40. Mike Ellwood says:

      @Nicholas:
       
      Is this part of the same idea that says we should all have reserve accounts at the central bank?
      (sounds like a Positive Money proposal).
       
      It doesn’t sound very practical to me. It sounds as though the central bank would be getting involved in retail banking, and that is not its proper function.
       
      What would happen if you wanted a loan? Would you still approach a private bank, or would you expect the central bank to provide that as well? I don’t think the latter would be very practicable, and if it was the former, then the reserves would still need to be created to cover the loan. So would that go in the private banks reserve account, or in your reserve account? Either way, a private bank is still involved. And you’d want a debit card. Would that come from a private bank or the central bank? Again, the latter would not be very practicable, but if from the private bank, then inevitably, it would have to be involved in the reserves transfer, I would have thought.
       
      I just don’t see how this would work.
       
      At the moment, clearing happens between the reserve accounts of a relatively small number of financial institutions. A relatively simple process. If we all (and all businesses) had a reserve account at the central bank, then that would be a lot more individual clearing transactions.
       
      And what if your cheque “bounced”? (or standing order, or direct debit, or whatever)? In other words you, and not your private bank, had run out of reserves? Who would chase you up? The private bank or the central bank? It wouldn’t be practicable for the central bank to be doing it, so again it has to be the private bank that is involved.
       
      I’m not a big fan of private banks either, but they do perform a useful function (not always very well, admittedly).

    41. Henry Rech says:

      Bill said:

      “And, if, in some extreme and rare instance, speculative agents started to act in a destructive way, then the government has the capacity to insulate the economy from those effects.”

      MMT’s main argument about foreign exchange instability is couched in terms of speculative attacks.

      The context for these attacks is not clearly enunciated. Attacks do not just happen. Money quits a currency because Money thinks it’s money is at risk, generally, because it is at risk of losing value because of inflation.

      If a government can keep the value of money stable there will be no speculative attacks.

      Speculative attacks are just a convenient bete noir to justify a rationale for capital controls. They should not ever be necessary as long as a currency is perceived as being stable within the bounds of reasonable expectations.

    42. robertH says:

      Mike Ellwood says:
      “citizens having central bank accounts” – oh dear, sounds worryingly like Positive Money’s proposals, as does Nicholas’s posting.

      So…? Does that axiomatically condemn it? C’mon Mike – surely you can do better than that sort of knee-jerk reaction.

      Personally I disagree with the 100% reserve bit, but that’s not interdependent with people having central bank accounts.

    43. robertH says:

      @Mike Ellwood

      “I just don’t see how this would work”

      May I humbly suggest you try a thought-experiment (which is what’s usually required when mould-breaking ideas are under discussion)?

      No, the CB wouldn’t be involved in retail *banking*: it would be involved in the retail *payments system* – let’s not confuse the one with the other. Modern IT is perfectly capable of coping (securely) with the complexity and the volume of transactions, given good design. There’s no intrinsic reason whatsoever for private banks to be awarded a monopoly/oligopoly over the payments system, which is the principal factor causing them to have become TBTF and thereby to be enabled to blackmail governments into bailing them out when their gambling goes wrong.

      The proposal doesn’t necessarily entail excluding the private banks from continuing with the existing payments system (although more radical versions of it do, and personally I would). It just destroys their monopoly – which was what the (highly successful, which was why it got privatised – then murdered) National Giro did for a while.

      The (state-sponsored) takeover by the private banks of the nation’s entire payments system, aside from the minute proportion of transactions using cash, is a textbook example of neoliberal skullduggery whereby private interests were allowed/encouraged to take the place of “the commons” and put toll-booths at the entry-points to it.

    44. Andrew Anderson says:

      robertH says:
      Thursday, August 16, 2018 at 18:04

      Yes, Robert you get it. Thanks for the support. A couple of clarifications for the others:

      1) The CB would not be involved in retail banking. We’re talking about an additional, risk-free, always liquid payment system at the CB in addition to the one that must work through banks.
      2) Banks could still create as many deposits/liabilities for fiat as they dare but only they and entirely voluntary depositors and other creditors would bear the risk.
      3) I am not an advocate of Positive Money.

      I’ll be happy to field other objections as best I can but my major point is that 100% private banks with 100% voluntary depositors have never existed and thus the concept cannot be said to have failed and thus deserves a proper exploration by MMT theorists.

    45. robertH says:

      @Mike Ellwood

      Your challenge prompts me to elaborate further, off-topic though this is.

      A payments system seems to me to be unquestionably part of any economy’s infrastructure, and as such a “natural monopoly”. It follows axiomatically that it ought never to be permitted to be captured by private interests for their own profit. Granted that the private banks don’t usually charge customers for that service (and at times may even pay interest on demand deposits, at a paltry rate) I don’t imagine even the most brazen bank apologist would claim they do that out of the goodness of their hearts.

      No, what capturing it gives them is the means for substantially swelling their balance-sheets – at virtually no cost to them – beyond what would have been attainable (other things equal) through the practice of financial intermediation pure and simple (often called “narrow banking”); that is a prize of great value to them. Furthermore, possessing that monopoly brings with it an additional “fringe-benefit” of incalculably greater value:- it makes them “too big to fail”, enabling them to socialise their losses while privatising their gains. We were only able to appreciate how valuable that really is as with growing incredulity we watched the GFC unfold. And keep in mind that they pay not one brass farthing for it.

      Part of the PM proposal is that banks be required to place customers’ demand deposits in segregated “transaction accounts” which would not be permitted to be taken onto the banks’ balance-sheets. That would end their participation in the public payments system (apart from being transmission-nodes), and I agree with that part of PM’s proposal (but not with the other part, each – I stress again – being standalone). Essentially what PM proposes is a more radical and far-reaching form of the idea more recently floated by the BoE in its discussion document – namely for citizens to be able to hold an individual account at the BoE. As a halfway house – which is all it is – I would unreservedly buy-into the BoE’s proposal.

      Why wouldn’t you – given that your objections thus far are either off-target or (IMO) not substantial? Especially in light of your final sentence?

    46. Andrew Anderson says:

      [this is my first attempt at using Mike Ellwood’s attractive formatting technique, so please bear with me.]

      Mike Ellwood says:

      Thursday, August 16, 2018 at 12:33

      And what if your cheque “bounced”? (or standing order, or direct debit, or whatever)? In other words you, and not your private bank, had run out of reserves?

      Instant clearing precludes bounced checks, debit transactions, etc.

    47. robertH says:
      Thursday, August 16, 2018 at 22:18

      Part of the PM proposal is that banks be required to place customers’ demand deposits in segregated “transaction accounts” which would not be permitted to be taken onto the banks’ balance-sheets. That would end their participation in the public payments system (apart from being transmission-nodes), … [bold added]

      How does leaving banks in the loop, i.e. “being transmission-nodes”, of what should be a wholly independent of banks payment system fix TBTF?

      Besides, the services a Central Bank may properly provide to the private sector (including banks, btw, but that’s a different discussion) do not include lending and may be largely if not entirely automated and provided over the Internet and at local Post Offices.

    48. Andrew Anderson says:

      Nicholas says:
      Thursday, August 16, 2018 at 9:31

      2. Why not require private banks to be 100% funded by private deposits with no deposit insurance?

      Once banks are 100% private with 100% voluntary depositors, then they are no longer a threat to the economy any more than gambling casinos are. So why forbid them from creating as many deposits/liabilities for fiat as they dare? Especially since forbidding that activity is controversial (e.g. the endogenous money argument) and would be difficult to enforce anyway?

    49. Nicholas says:

      A payments system seems to me to be unquestionably part of any economy’s infrastructure, and as such a “natural monopoly”. It follows axiomatically that it ought never to be permitted to be captured by private interests for their own profit.

      Yes, that’s what I think. The payments system and retail banking are two separate things.
      Why can’t individuals and businesses have their own reserve accounts for the purpose of making and receiving payments?

      Public retail banks can assess the credit-worthiness of borrowers.

      Private retail banks could try to compete with public retail banks, but given that public retail banks would not need to make a profit, private retail banks would have to be extraordinarily dynamic and innovative to be able to compete. Private retail banks are inefficient because they demand a profit margin and bloated executive compensation. Public retail banks would not be lumbered with those costs.

      Public retail banks can provide an essential public good without needing a profit margin and while providing reasonable compensation to senior managers.

      Banking is a utility service. It is a basic form of infrastructure on which a monetary production economy depends. The federal government underpins its operation. This is not a form of activity where profit-maximization should be the focus.

    50. Andrew Anderson says:

      Nicholas says:
      Friday, August 17, 2018 at 23:03

      Public retail banks can assess the credit-worthiness of borrowers.

      With the richer being more so-called worthy of the public’s credit than the poorer? And why should the public even need to borrow in developed countries in the 21th Century anyway? Where is the citizens’ equity except for the few?

      So how about this instead? A Citizen’s Dividend funded with negative interest on fiat account balances at the CB but with an individual citizen exemption up to a reasonable limit such as $250,000?

      Not that we don’t largely agree wrt other things such as the need for a payment system that is independent of the banks, mind you.

    51. Andrew Anderson says:

      There is no reason why a currency crisis would follow if the government announced it was no longer issuing debt to match its net spending. Bill Mitchell

      We should not ignore that the demand for fiat is artificially suppressed in that, except for physical fiat, aka “cash”, only banks and other depository institutions in the private sector may even use fiat (i.e. via accounts at the Central Bank).

      Why not fix that both as a civil rights issue, the right of citizens to safely and conveniently use their Nation’s fiat themselves, and as a practical matter to increase the amount of sovereign spending for the common welfare that may be accomplished for a given amount of price inflation risk?

    52. Andrew Anderson says:

      robertH says:
      Thursday, August 16, 2018 at 22:18

      A payments system seems to me to be unquestionably part of any economy’s infrastructure, and as such a “natural monopoly”. It follows axiomatically that it ought never to be permitted to be captured by private interests for their own profit.

      Unless banks are forbidden from having accounts at the Central Bank, they shall continue to have their own payment system – an at-risk, not necessarily liquid (except by government privilege) payment system – that’s unavoidable and not necessarily a bad thing. What is bad is if this is the ONLY payment system since the banks then hold the economy hostage.

      So, to clarify, we need an ADDITIONAL payment system completely independent of the banks consisting of individual, business, State and local government, etc. checking/debit accounts at the Central Bank itself alongside those of the banks and other depository institutions.

      But who will use those inherently risk-free checking/debit accounts at the CB if we continue to privilege the banks with such things as government-provided deposit insurance, a lender of last resort, etc.?

    53. Jerry Brown says:

      Andrew, I agree with much of what you have written in comments here. But it should be clear that currently, the banking system is not the ONLY payments system- we do use cash after all, for a lot of things. At least, I do.

    54. Curt Kastens says:

      An excerpt from the englisch wikipedia entry for Deutsche Post Bank.

      The Postscheckdienst was introduced in 1909 by the German Reich establishing accounts for payment transactions by mail and linking postal and banking services in German states.

      In 1990, following the German Postal Services Restructuring Act (Poststrukturgesetz) of 1989, the German Postal Service (Deutsche Bundespost) was divided into three companies, Deutsche Post, Deutsche Telekom and Postbank. Later that year, Deutsche Post Postbank of the former East Germany was merged with Postbank. From 1990 to 1997, Dr. Guenter Schneider was chairman of the board. The first board of Postbank consisted of Guenter Schneider, Rudolf Bauer and Bernhard Zurhorst.

      On 1 January 1995, following the new postal reform legislation (Gesetze zur Postreform II) of 1994, Postbank became an independent, joint stock company. Postbank then extended operations, and engaged in loans, insurance and homes savings.

      In 1999, Deutsche Post became the owner of Postbank. In that same year, Postbank acquired DSL Bank by the sale of the government’s shares.

      Postbank subsidiary easytrade began offering on-line brokerage services in 2000.

      Postbank purchased BHF (USA) Holdings Inc. in 2001.

      By 2003, Postbank had 11.5 million customers, more than any other bank in Germany.

      On 1 January 2004 the postal bank took over the transaction banking of the Deutsche Bank and the Dresdner Bank. From then on Postbank executed the clearing and settlement of Deutsche Bank and Dresdner Bank’s payment transactions. This agreement strengthened the bank’s new business field “Transaction Bank” in the apron of the announced Initial Public Offering.

      The IPO of Postbank on 23 June 2004 was the largest stock market launch in Germany for the past 2 years. Deutsche Post retained a controlling stake of 50% plus one share.

      On 25 October 2005 Postbank announced its intention to acquire a 76.4 percent stake of the home financing specialist, Beamten-Heimstättenwerk (BHW). With the acquisition of BHW Deutsche Postbank became Germany’s leading financial services provider for retail customers.

      On 1 January 2006 the purchase of BHW Holding by Deutsche Postbank was concluded. Beyond that Deutsche Postbank took over 850 branches from Deutsche Post. Along with the change in ownership, around 9,600 employees switched employer, bringing Postbank’s workforce to over 25,000 employees.

      In September 2008, 30% of Postbank was sold to Deutsche Bank for €2.8 billion.[4]

      In October 2010, Postbank put its Indian finance business up for sale.[5]

      Deutsche Bank gained a majority stake in the firm through a tender offer completed in December 2010,[6] and exercised its option[4] to acquire the remainder of Deutsche Post’s holding in 2012.[6][7] In the end, the total purchase cost Deutsche Bank €6 billion.[8]

    55. bill says:

      Dear Len Smith (at 2018/09/16 at 8:42 am)

      I would not call Palley a friend of the progressive movement. His article is full of the same old myths that have been addressed years ago.

      best wishes
      bill

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