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An economist trying to stay relevant long after he lost it

This is my Wednesday blog post where I write less or perhaps research the blog post less – both of which save me time to do other things. Today a few snippets. One snippet looks at an article in Marketwatch – What Modern Monetary Theory gets ‘plain wrong,’ according to former IMF chief economist (June 11, 2019). This article should put to rest any claims that the mainstream New Keynesian macroeconomic consensus understands Modern Monetary Theory (MMT) or that MMT is somehow explainable within the mainstream framework. The ‘we knew it all along’ camp who are trying their hardest to stay relevant at a time when it is increasingly obvious that the mainstream economics they preach has nothing valid to say about the realities of the world just had the carpet pulled out from under them by one of their own.

An economist trying to stay relevant long after he lost it

Olivier Blanchard is trying his hardest to stay relevant and has even been mentioned as the “best person to replace Mario Draghi” as the boss of the ECB, despite having no central banking experience.

In the Marketwatch article, Blanchard told the audience at some Peterson Foundation event that “I am not an MMT person”.

Which is clear from his next statements.

He was quoted as saying:

The notion that you can finance this [spending] by money is wrong, is plain wrong …

He was responding to a question about whether the “Federal Reserve can just print money to pay for this increase in spending”, which was the way he chose to (mis)understand MMT.

For someone who has a lot to say, his depth of enquiry is pathetic. No MMT economist suggests that public spending is the result of printing money.

All public spending is introduced into the economy in the same way – the government gets its banker to credit bank acounts or to authorise cheques it sends out.

No printer is involved.

And so Blanchard is worrying ignorant of that reality.

Don’t forget, that he was the IMF chief economist who oversaw the Greek bailout disasters and then had to apologise for getting the modelling wrong which left a trail of devastation that Greece has never recovered from.

He should actually be in prison rather than being touted as a potential ECB head.

The Marketwatch article then recounted how Blanchard was asked about the QE policies that the US Federal Reserve Bank and other central banks pursued where, for example, the “Fed did purchase trillions of dollars in assets, known as quantitative easing, to lower long-term interest rates and pull the economy out of the Great Recession of 2008.”

The article says that Blanchard stated that:

… this was not printing money … It was essentially just buying long-term bonds with short-term debt, creating bank reserves at the Federal Reserve, that still paid an interest rate, he said. In effect, QE was government debt transformation.

In this vein, he was quoted as saying:

If … [the Fed] … issued money at zero rate, then we’d have hyperinflation. But we’re basically issuing a new form of debt, which is bank reserves … The notion that for some magical reasons you can do this through money is wrong

And if you put those statements together you realise how confused the mainstream are about monetary economics.

1. QE is not printing money that is true. It is a portfolio swap where assets are swapped for central bank reserves.

2. Deficit spending by government spending also adds reserves to the banking system and if they were not drained by open market operations then the short-term interest rate would fall to zero – à la Japan.

3. The alternative is for the central bank to pay a competitive return on the excess reserves. In which case there is no difference between debt-issuance and no-debt issuance after spending. Both increase reserves and prevent competitive processes in the interbank market from driving interest rates down to zero.

4. Where is the hyperinflation in Japan? Blanchard acknowledged that the Japanese government is spending at zero interest rates but said “this can’t last” – like nearly 3 decades already Olivier.

He was quoted as saying (as mainstream economists have been saying for nearly three decades in relation to Japan):

The day on which Japan has to pay a positive interest rate on bonds, it will have to pay a positive interest rate on the money, otherwise people will not hold it, or there will be hyperinflation.

The Bank of Japan can always ensure that the Japanese government never has to pay a positive interest rate on bonds if it so chooses and it seems bond investors cannot get enough of them.

A very sorry tale of an economist trying to stay relevant long after he lost it.

The ‘new economics’

I have received a lot of E-mails overnight requesting I respond to a UK Guardian article – The new left economics: how a network of thinkers is transforming capitalism (June 25, 2019).

I have very little to say about the article.

It appears the author thinks that there is a rival to the neoliberal mainstream in economics now alive and well in the UK which is taking the world by storm.

I spend time in the UK, keep abreast of all the developments in literature and the like, read the academic output of British academics, and I must say I have barely noticed this revolution.

I haven’t noticed central bankers around the world commenting on it.

I haven’t noticed it being attacked by the leading mainstream economists.

I haven’t noticed it getting headlines in all the major media outlets.

I have noticed some of the characters mentioned advocating fiscal rules that are neo-liberal in substance.

Some of the characters mentioned have continually articulated a view that sovereign governments have to kowtow to the prejudices of the global financial markets or face currency collapse.

British Labour Party policy while progressive in intent is still hamstrung by two things:

1. A continued use of neoliberal framing and language – with associated policy settings.

2. A continued belief that Britain must stay in the EU or face collapse.

This “new economics” they talk about reflects both of those points.

They talk a lot about a “democratic economy” but are dominated by Europhiles.

Membership of the EU might salve the cosmopolitanism that dominates the “new economy” literature but is the anathema of what we mean by being a member of a democratic state.

While claiming that the “new economics” is a blueprint for a Left future, the “long read” article finds no space to discuss macroeconomics – which is the main game in a fiat monetary system whichever way you want to look at it.

All the “new” ideas about local communities, cooperatives etc must exist within the macroeconomic settings of the national government.

There cannot be a challenge to neoliberalism until a rival contender based on an understanding of how fiat monetary systems operate is recognised.

That rival now, whether you like it or not, is unambiguously Modern Monetary Theory (MMT).

In that sense, it was extraordinary MMT was not mentioned at all in the article.

I found it typical that they chose to claim some association with Alexandria Ocasio-Cortez – they published a rather large photo of her – but failed to acknowledge that the American congresswomen is seeing Modern Monetary Theory (MMT) as the alternative economic narrative to neoliberalism.

The silence was deafening.

Call for financial assistance to make the MMT University project a reality

As previously announced, I have created the – Foundation for Monetary Studies Inc. – aka The MMT Foundation.

The Foundation serves as a legal vehicle to raise funds and provide financial resources for educational projects as resources permit and the need arises.

Its legal structure allows people can make donations without their identity being revealed publicly.

The first project it will support is – MMTed (aka MMT University) – which will provide formal courses to students in all nations to advance their understanding of Modern Monetary Theory.

At present this is the priority and we need some solid financial commitments to make this project possible and sustainable.

Some sponsors have already offered their generous assistance.

We need significantly more funds to get the operations off the ground.

The Foundation for Monetary Studies, Inc. (“FMS”), is a non-profit corporation registered in the State of Delaware as a Section 501(c)(3) company.

In order for FMS to solicit tax-exempt donations while our application to the IRS is being processed, the Modern Money Network, Ltd. (“MMN”) has agreed to serve as a fiscal sponsor, and to receive funds on FMS’s behalf.

MMN is a non-profit corporation registered in the State of Delaware, and is a federal tax-exempt public charity under Section 501(c)(3) of the Internal Revenue Code.

Donations made to MMN on behalf of FMS are not disclosed to the public.

Furthermore, all donations made to MMN on behalf of FMS will be used exclusively for FMS projects.

Please help if you can.

We cannot make this viable without support.

Music for today

If only the political-economy of Europe was as beautiful as – Europa – by Carlos Santana.

It was originally published on his Amigos album which was released on March 26, 1976.

As a guitar player, one almost has to like Carlos Santana’s playing. He coaxes great sounds out of his custom JRS guitar.

Sure there is a lot flash stuff that can be disregarded but his lyricism certainly stands out. And when you think he had Michael Shrieve on drums in the early days it is hard to see things going wrong.

And I can tell you that guitarists searched music shops for sustain pedals to emulate that sound. I remember plugging in a Big Muff, in a guitar shop at Camberwell junction in Melbourne and getting such sustain that I thought it would be easy to emulate Peter Green’s Supernatural, although the latter derived his sound from pure volume.

I think Peter Green was a strong influence on Carlos Santana – the sustain, the songs etc.

I never did buy the Big Miff as I was continually broke at the time.

Jimi Hendrix bought one from Manny’s Music Store in New York City. But everyone thought that Carlos Santana got his sustain with the box (apparently he didn’t).

I saw Carlos Santana live at a concert in the Rodahal in Kerkrade (on the Dutch-German border) during the 1990s. It was an interesting evening.

Anyway, here is Europa which I dug out of my archives this morning while I was working. Yes, I have several of Carlos Santana’s early albums.

And for students of jazz, you will recall your early attempts to put together a working set of standards so you could have versatility. One of those standards – Autumn Leaves – has a 16-bar chord pattern that Europa is built upon.

And if you think Carlos wrote the song you would be correct but he must have also heard Alain Barriere’s 1967 song – Emporte Moi) – at some point before he came up with Europa.

Or perhaps he heard the Chilean group “Los Angeles Negros” who recorded Y Volveré – the Spanish version of Barriere’s song.

And here is a beautiful interpretation of the song by one of my favourite free jazz tenor players Gato Barbieri.

That is enough for today!

(c) Copyright 2019 William Mitchell. All Rights Reserved.

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    This Post Has 22 Comments
    1. I read the Guardian article yersterday, and I have to say I came away impressed: Managing to write a loooong-winded article about new economic thinking without even mentioning MMT is quite a feat.

    2. I read the Guardian article on my phone while I fed my dog and drank coffee during a break in our morning walk. It was chucking down with rain and I was sheltering in a barn. I was not impressed. I ploughed on to the end expecting to see the letters MMT or some references to Bill and others but they never came. A few years ago I might have been lifted by this article but having followed the blog and read a few books I was thoroughly disappointed. It came as a relief to get back in the rain and walk off my frustration at the fact that the so called LEFT is going into a fist fight against an opposition armed with heavy artillery.

    3. Santana’s sound developed at the time Randall from the later founded company Mesa Boogie tinkered with Fender amps, or so the commercial story goes anyway. I think they added an extra tube gain stage, which gives you that long sustain. His music sounds divine, i think.

    4. I used to not even know who Blanchard was till I started reading this blog. So did a couple of Greek friends of mine. Schäuble is on my top 5 worst Europeans of the new millenium, but at least he put his face behind his deeds. The amount of damage inflicted by practically anonymous technocrats should be enough to dispel any notions about the EU as a force for good.

      While I thank Bill for bringing Olivier out of anonymity for me, he forced me to extend my top 5 into a top 10.

    5. Dear HermannTheGerman (2019/06/26 at 8:42 pm)

      You will need more than a Top 10 if the implication is 10 persons. There are thousands and more – all equally ranked.

      best wishes
      bill

    6. Hermann, who forced you to increase your list? Bill by his comment on Olivier or Olivier himself by his very existence as soon as you discovered him and what he stood for? :-)

      Olivier contradicts both Bernanke and Greenspan in their saner moments, which is quite a feat. Neither of these were great Fed chiefs but, at least when testifying at Congressional hearings, gave the impression that they knew how the system worked. Olivier doesn’t seem to know much of anything. Correct me if I am wrong, Hermann, but I don’t think Germans would even consider Olivier to be a Fachidiot.

      Schaeuble at least, according to Varoufakis, did not say one thing to your face and the opposite behind your back. Those who do that are the worst.

    7. “And if you think Carlos wrote the song you would be correct but he must have also heard Alain Barriere’S 1967 song – Emporte Moi) – at some point before he came up with Europa.:”

      I’ve never heard of Barriere or Emporte Moi.

      But resemblance to the melody line in Europa is striking.

    8. Classic Guardian, paragraph after paragraph of word salad. No mention of *how* things will change, just vague allusions to ‘new economic thinking’. I see it the same way Bill did – the sheer gall to reference AOC and omit to mention the reason what she thinks and why – again some vague amorphous allusion to ‘new economic thinking’ instead.
      I’ve come to the conclusion they’re not interested in helping people, they seem to be more interested in non-existent techno utopias that *might* help in 30/40/50/60/100 etc years time, or they are just plain old neoliberals who love a bit of identity politics. Season with a handful of old school political opportunists who would sell their children to wield power and that is the current offering by the majority of the UK left.
      If you’re a hardcore sadomasochist you might want to take in Molly Scott Cato’s article in the Guardian today as well. Astonishing cognitive dissonance on display – they actually believe they are helping people and the EU can be persuaded to fund an EU wide Green New Deal. They’re completely beyond reason.

    9. I started the Graun article with an open mind, some curiosity even.

      One gushing paragraph after another, I was scouring the words for some real meat… but as the article progressed, I realised that this was extremely heavy on name-checking hype, focused almost entirely on micro-economics, and in fact very thin indeed on any policy at all, let alone anything radical, apart from some wafty suggestions for more employee shareholding and increased localism, and promoting workers’ co-operatives. (But without even mentioning Mondragon, FFS!)

      And that, in essence, was it. A complete and meaningless damp squib.

      But hey, it’s the Graun – house journal of latte sippers and quinoa munchers – what can you expect?

    10. @ Jeff,

      Hehe, you beat me to it.

      My son told me about a political barney he got into the other day with a few of his Guardian-reading, fellow-millenial friends. One of them actually insisted, in all seriousness, that increasing the number of gender-neutral toilets was a more urgent issue than ending austerity!

      What does one even say to that?

    11. Mr S, re the toilet issue, I am completely flummoxed. Gob-smackingly ridiculous. Reminds me of a song by the NY Rock Ensemble with a line: What else can be said, I brought life back to the dead.

    12. @bill
      the list is a work in progress. I have really raised the despicability requirements so I don’t make it to the 1000’s, but being here daily means I’ll eventually make it there anyway. Luckily, it’s a mental list so it is usually reduced to the “what have you botched up recently” individuals. And Schäuble. Because I know he’s doing something bad even when nobody is looking.

      @larry
      you’re right of course, friend. I’m shooting the messenger here.

      I’d say “Fachidotie” requires actual expertise in the field in which you are considered a “Fachidiot”. My German is far from perfect, but I’m confident the proper term would simply be “Idiot”. Maybe “selbstgefälliger Idiot” if you’re not a fool for brevity.

      I recalled Varoufakis description of Schäuble a little differently, but it was also rather bad. Giannis’ work back then was certainly not based on MMT but it provided the vital lesson that you cannot out-neoliberal the neoliberals with refined technocratic policy proposals. They are here to seize, not to negotiate.

      Cheers!

    13. Hermann, IIRC, Varoufakis was comparing Schaeuble to Dijsselbloem, against whom almost anyone would look better. Love your phrasing, out-neoliberalizing the neoliberals; being, as the English would say, just a hiding to nothing. I will borrow it, giving you credit, if you don’t mind.

      ‘Fachidiotie’ as ‘professional idiocy’ does it for me. Ho!

      A thought just came to me: a neoliberal would sing Bryan Adams’ song as Everything I do, I do it for me. What a thought!

      Be well,

    14. @larry

      Djisselbloem. There’s a name that was forgotten and now back high on the list.

      “I will borrow it”
      Please do and keep the credit.

      “‘Fachidiotie’ as ‘professional idiocy’ does it for me. Ho!”
      Suit yourself, friend. As an engineer who delved in artificial intelligence and neural networks in the past I would throw the term “overlearned” into the discussion, but whatever name we decide to give incompetence doesn’t really matter that much:

      “overlearn.- (psychology, education) To learn (something) to the point where responses become instinctive. (modeling) Mostly when talking about neural networks, to learn a task to the point where responses actually start to degrade. Compare with overfit, in model tuning contexts.”

      I try to steer clear of all things Bryan Adams, but I would give your version of the song a chance :)

      Cheers!

    15. @Mr. S.
      “One of them actually insisted, in all seriousness, that increasing the number of gender-neutral toilets was a more urgent issue than ending austerity!

      What does one even say to that?”

      I’d say I’d agree if gender-neutral toilettes were the only toilettes and the number of them was zero. Otherwise: class > gender/race.

      Cheers!

    16. “1. QE is not printing money that is true. It is a portfolio swap where assets are swapped for central bank reserves.”

      What if the Federal Reserve is dealing with non-bank entities? Then the exchange amounts to the Federal Reserve printing “money” and exchanging that money for assets held by the non-bank sector. The Federal Reserve isn’t literally creating bank deposits through QE—it’s creating reserves and giving them to banks, which then credit the deposit accounts of the non-bank entities—but an immediate end result of the exchange between the Federal Reserve and the non-bank sector is an increase in the amount of deposits (i.e. money).

    17. “I am not an MMT person”.

      Sounds like something Groucho Marx could’ve said .

      For these neo-libs- the most appropriate Groucho quote might be:


      ‘Those are my principles, and if you don’t like them… well, I have others.’

      (Very evident in Tory leadership battle scripted by Lewis Carrol)

    18. @ Mr Shigemitsu
      “But hey, it’s the Graun – house journal of latte sippers and quinoa munchers…”

      I strongly resent the association of quinoa-munching with reading the Grauniad! I never read the Grauniad (incidentally, the worst my late dear wife could say of anyone was:- “He, (or she) is a GUARDIAN READER” – spoken with a snarl).

      And I don’t drink latte.

      But quinoa is another thing altogether. Magnificent stuff!

    19. The one I really grin at is this:
      “When you are at zero, debt and money are the same thing,” he said.
      Now he may well be thinking portfolio choice But! really, honestly and seriously,,,,, When we are at 5 then money and debt are not the same thing? LOL.

    20. The Institute for Public Policy Research IPPR and the New Economics Foundation NEF are only one of a number of progressive think tanks, attempting to bring about change. This isn’t to discredit some of the good work they are doing. However from a macroeconomic perspective I am not sure that they have left mainstream economic thinking entirely. Instead I think they are still lurking in the shadows, between two worlds, unsure in which direction to proceed. Maybe in time they will embrace MMT wholeheartedly, but at the moment that doesn’t seem likely.

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