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The Weekend Quiz – April 17-18, 2021 – answers and discussion

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

These were the Quiz questions for the third week of my edx MOOC – Modern Monetary Theory: Economics for the 21st Century – that recently concluded.

I promised students that I would provide answers and analysis for them after the course finished. So that is what the ‘Weekend Quiz’ for April 2021 will be occupied with.

Question 1

Which of these situations represents an inflationary episode in the macroeconomic sense?

  1. (a) On July 1, 2000, the Australian government introduced a Goods and Services Tax of 10 per cent on most goods and services (with some exemptions). In the September-quarter 2000, the Consumer Price Index rose by 6.1 per cent.
  2. (b) The press reported that Australia’s property prices rose at their fastest rate since 2003 in February 2021.
  3. (c) The Consumer Price Index rose by 9 per cent in month one, six per cent in month two and 3 per cent in month three.
  4. (d) The Consumer Price Index rose by 3 per cent in month one, 6 per cent in month two and 9 per cent in month three.

Answer: Options (c) and (d).

In the video and written material, students were told that inflation is the continuous rise in the general price level.

Deflation is the opposite.

A once-off price rise is not an inflationary episode.

If the inflation rate is falling, prices are still rising but at a slower rate.

Extreme cases of accelerating inflation are referred to as hyperinflation.

They were also taught in the first week that the ‘general price level’ is a composite (unobserved) measure compiled by the national statisticians to reflect some basket of prices of actual prices of goods and services.

That measure is called the Consumer Price Index. There are other composite measures like the Producer Price Index produced by the statisticians, each aimed to convey some information about the underlying inflationary environment.

Option (a) was an example of a once-off price level change as business firms adjusted their prices up to accommodate the 10 per cent GST. It is not what we would call an inflationary episode, although it could have led to one.

Option (b) relates to price rises in a particular sector of the economy (property) and is also not a continuous rise in the ‘general’ price level, even though it may have influenced the course of prices generally.

Option (c) is an example of inflation where the price level is continuously rising but the rate of increase is deceleratng (slowing down).

Option (d) is an example of the price level continuously rising with the rate of increase is acceleratng (inflation rate is rising).

Question 2

In 2008, the consumer price level in Zimbabwe rose by 157 per cent. Between 1998 and 2008, real GDP fell by 50.7 per cent. The hyperinflation arose mainly because:

  1. (a) The Zimbabwean government was spending too much.
  2. (b) The Reserve Bank of Zimbabwe was issuing too much money.
  3. (c) Private banks were issuing too much credit.
  4. (d) The supply side of the economy contracted so much that previously normal (non-inflationary) levels of spending growth were now vastly excessive.

Answer: Option (d).

While we can make judgements about whether the Zimbabwean government was spending too much, or whether the Reserve Bank was creating too many reserves and whether the private bank lending rates were excessive, the overwhelming reason that the nation experienced hyperinflation was that the supply capacity of the economy contracted sharply rendering the existing spending excessive.

The supply contraction began when Robert Mugabe introduced land reforms to speed up the process of equality and allowed the revolutionary fighters that gained Zimbabwe’s freedom from the white colonial masters to take over productive, white-owned commercial farms which had hitherto fed the population and was the largest employer.

Farming output collapsed, which then led to the central bank rationing foreign exchange that was typically made available to manufacturers to import essential capital equipment. As a result, manufacturing output also declined.

The reality was that the Government could have been running fiscal balances and there still would have been hyperinflation.

Please read my blog post – Zimbabwe for hyperventilators 101 (July 29, 2009) – for a more detailed historical account of what went wrong in Zimbabwe.

Question 3

An employment buffer stock scheme involves the government offering an infinite demand for labour. This means that:

  1. (a) the supply of labour is fixed.
  2. (b) the scheme will expand and contract on demand from workers for jobs.
  3. (c) the government allocates a fixed amount of currency to run the program.
  4. (d) unproductive jobs can be created at will.

Answer: Option (b).

The essence of the Job Guarantee (JG) is that the government provides an unconditional, open ended job offer at a socially-inclusive minimum wage to anyone who desires to work.

Instead of a person becoming unemployed when aggregate demand falls below the level required to maintain full employment, the person is able to enter the JG workforce.

Thus, the JG pool expands (declines) when private sector activity declines (expands).

Hence the JG fulfils an absorption function, which minimises the costs associated with the flux of economic activity when aggregate spending fluctuates.

It means that instead of the government setting some fixed ‘budget’ amount for a program, which then limits the scope of the spending, the government maintains an open-ended spending commitment and allows the actual expenditure in any period to be determined by how many workers turn up to get a Job Guarantee position.

This is what we call spending on a ‘price rule’. The government sets the price and lets the quantity float.

Accordingly, the outlays on the program vary according to the strength of the non-government sector econoy.

Question 4

A major criticism of mainstream economists of the use of fiscal deficits is that they crowd out productive private spending. That criticism errs because:

  1. (a) A currency-issuing government can buy whatever is for sale in its own currency.
  2. (b) Banks create deposits when they make loans to credit-worthy customers.
  3. (c) The central bank is part of government.
  4. (d) Interest rates are now at very low levels.

Answer: Option (b).

Mainstream economists assert that when national governments run deficits and issue debt, they crowd out more productive private spending.

The assertion is a central part of the mainstream attack on government fiscal intervention.

At the heart of this conception is the Classical Loanable Funds theory, which creates a fictional rendition of the way financial markets work. I won’t go into the full history of this theory, although if you want to get a serious understanding of the debates in macroeconomics then you have to become familiar with this literature.

For our purposes, the crowding out hypothesis is based on the claim that at any point in time, there is a limited supply of private sector saving for which government and private sector borrowing compete.

If government tries to borrow more, by issuing and selling more bonds, then the competition for finance would push up interest rates as the demand for saving rises relative to a scarce supply.

The upshot is that some private firms would then find that the higher borrowing rates render their investment projects unprofitable and so private investment expenditure falls.

They also claim that private investment spending is always more productive and desirable than wasteful government spending, because private firms have to face the market test to survive while there are no shareholders to ‘keep government honest’.

A careful understanding of what drives saving and how banks actually operate shows that the basic crowding out hypothesis is inapplicable in modern monetary systems.

First, government deficits stimulate sales, which leads to higher GDP (income).

As a result, the pool of savings expands because saving is a function of GDP (income).

The other way of understanding this is that government deficits generate non-government surpluses that accumulate to increased wealth holdings in the non-government sector – as students learned in Week 1 of the MOOC.

Since there are more savings and greater financial wealth, government borrowing does not reduce the pool of funds available to private sector borrowers.

Quite the contrary.

Second, if we examine the way modern banks operate, it further becomes obvious that the crowding out conjecture does not apply to the real world.

Students in mainstream banking courses are told that commercial bank lending is reserve constrained.

That is, banks are considered to solicit deposits from lenders, which then allows them to build up reserves that they can then loan out.

But in the real world, bank loans are not reserve-constrained.

Banks do not just sit around waiting to dollop out their current deposits to lenders in some sort of rationing plan.

Banks solicit credit-worthy borrowers to extend loans to.

Importantly this means that loans create deposits, not the other way around.

To extend the discussion, we need then to understand the role of bank reserves.

The commercial banks all have to maintain reserve accounts with the relevant central bank.

The funds in those accounts are used exclusively as a means to settle all the daily transactions between banks.

Loans create deposits which can then be drawn upon by the borrower.

No reserves are needed at that stage.

The loan desks of commercial banks have no interaction with the reserve operations of the monetary system as part of their daily tasks.

They just take applications from credit worthy customers who seek loans and assess them accordingly and then approve or reject the loans.

The reserve accounts are a centralised way to resolve the various cross-bank claims each day. Refer back to the previous discussion on fiscal and monetary policy.

If a bank is short of reserves on any particular day, they can seek loans from other banks with excess reserves.

If they cannot source sufficient reserves to cover all the transactions drawn against them, then they can always borrow from the central bank.

The central bank stands ready to ensure there are always sufficient reserves to ensure financial stability is maintained.

The reality is that banks only loan excess reserves among themselves as part of the payments system (cheque clearing) and that lending is not constrained by deposits (and hence, reserves). Banks do not loan out reserves to customers. They do not need to. They can create loans with a keyboard entry.

In short, fiscal deficits do not reduce the capacity of private borrowers to access funds in the financial markets.

Moreover, given that fiscal deficits provide stimulus to the private economy, they also provide conditions propitious for profit-making and greater investment opportunities.

Rather than crowding out private spending, fiscal deficits actually crowd-in private opportunities.

There is another narrative that an advanced course would relate where fiscal deficits actually create excess reserves in the banking system which places downward pressure on interest rates.

But that story was considered beyond this introductory course.

Question 5

Commercial banks are required to hold reserve accounts with the central bank for which reason:

  1. (a) To protect their shareholders from losses.
  2. (b) To ensure their depositors can earn interest.
  3. (c) To ensure that all daily transactions in the economy that involve claims between banks can be resolved without any ‘cheques’ bouncing.
  4. (d) To make it easier for government to know what is going on in financial markets.

Answer: Option (c).

Each commercial bank has to have a reserve account with the central bank with sufficient balances each day, to ensure that all cross-bank transactions clear and no ‘cheques bounce’.

A Bank A customer might send a cheque to a supplier who banks with Bank B. Bank B must be able to get the funds from Bank A.

These transfers are all accomplished by adjusting balances in the respective reserve accounts.

Reserve account funds have typically not earned a competitive return, although since the GFC, many central banks offered such returns on reserve balances.

Prior to that, if there were excessive reserves in the system, the banks with excesses would try to make loans in the interbank market (a market for overnight or very short-term loans between banks) to other banks, which might have shortfalls on any particular day.

In the absence of central bank intervention, this process would drive the interbank market down towards zero because any return is better than none.

To avoid losing control of its monetary policy target, the central bank conducts daily liquidity or reserve management operations.

When there is a system-wide shortfall in reserves, then the central bank will always make the necessary reserves available to the banks.

When excess reserves arise, the central bank would exchange interest-bearing government bonds for bank reserves and thus eliminate any excesses.

This would ensure the interbank interest rate would remain aligned with the central bank’s policy target rate.

Economists call this an Open Market Operation.

It allows you to understand one function of government debt – to stabilise short-term interest rates so they are consistent with the monetary policy target rate.

Since the GFC, many central banks just pay interest on excess reserves, which accomplishes the same outcome. So, there is no need for government to issue debt at all.

The tie in with fiscal policy then arises because when government spends, bank reserve holdings at the central bank increase.

Tax payments do the opposite.

If government spending exceeds taxes, overall bank reserves grow and if fiscal deficits are of any significant size, excess reserves in the banking system will result.

Banks do not want to hold more than they need for cheque clearing and to meet required reserve ratios (if they exist).

Thus, the central bank and treasury must coordinate their daily operations closely to ensure that the impact of fiscal policy on bank reserves is anticipated and central bank liquidity management is effective to maintain the target interest rate.

That is enough for today!

(c) Copyright 2021 William Mitchell. All Rights Reserved.

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    This Post Has 19 Comments
    1. Bill,

      What’s your take on the inflation comment on Thursday blog post ?

      I would really like to hear what you think about it ?

      For example let’s say a MMT party win an election and the very first thing they do is introduce a job guarentee, reduce the pension age and increase the pension payments.

      What process currently would governments go through to mark those 3 economic policies to find out of they are going to be inflationary ? Apart from ” pay for” which is a nonsense how do they measure inflation risk when introducing any changes ?

      Then play whack a mole in different sectors when inflation starts to appear.

      You compare that with the MMT viewpoint of setting the rate to zero that allows you to see where the inflation is coming from more clearly and then carry out fiscal adjustments to control it. Get as many automatic adjustments baked into the system as possible so they happen naturally. Wage structures etc,etc…

      Do you think the ideas in that inflation comment on Thursday’s blog would be useful when introducing policies to determine if the policy would be inflationary ? Or are the ideas within the comment not really telling us that much ? Does it actually tell us anything about how produtive an economy is ?

      The more and more I think about it. I’m really starting to think for the MMT lens to be used efficiently and effectively the economy has to be as productive as possible. Why you and Warren keep saying the Job guarentee is no silver bullet.

      The more I think about it productivity is the silver bullet. Productivity allows policy makers to add policies onto the MMT lens so that inflation can be managed and measured. So would it not be better to get the Productivity of the economy sorted out first rather than play whack a mole with inflation afterwards ?

      I need to understand how po!icy makers measure productive capacity the slack and whether not an economic policy when introduced will be inflationary today. What exactly do these guys in government look at?

      How would MMT government officials measure that and what would they look at to say if a policy is going to be inflationary or not ? Do MMT economists have a view of what they would measure apart from replacing a budget constraint with an inflation constraint ?

      I mean why play fiscal adjustment bingo in different sectors of the economy if the baked in fiscal adjustments don’t catch inflation. If you can make the economy productive as possible first. Then everything becomes more effecient and the backed in fiscal adjustments become more effective ?

      Which then leads to the question – How would MMT economists make an economy more productive first ?

      Without increased productivity is the MMT lens just an inflationary piece of glass ?

    2. Bill,

      For example.

      The Tories when they introduced a spending bill for the police. They said a third of that money given to the police had to be used for recruitment.

      What did they look at in UK Treasury ?

      To determine a third was to be used for recruitment and not a half or a quarter. What measures and indexes where they looking at ? As this was a productivity – inflation decision.

      Or was it pick a number out of a bag, divide by how many Y’s are in the names of the day of the week and multiply by how many runs England make in the first innings of the most recent cricket match. To determine a third.

      Then hope they don’t have to play too much whack a mole ?

    3. Some economists (maybe the majority) have concentrations in specific industries. I took a macro course as a freshman in college, and a micro one too regarding the steel industry. So the disparaging remark ‘whack a mole’ is inappropriate. History has some nice examples of how an active government can move an economy forward without producing too much inflation. Read some books about the New Deal programs of FDR in the 1930s. And of course WWII was almost a complete socialist takeover of the private economy to prosecute the war effort. I don’t believe inflation was a worrisome by product in either example.

    4. So what do THEY look at Chris ?

      What are WE going to look at when we replace a budget constraint with an inflation constraint ?

      A list of the exact indexes and measures would be very helpful.

      Another example would be giving the public sector a 3% pay rise? Would that be inflationary ?

      Why did the NHS not get the pay rise they deserved ?

      What were they looking at that made them decide if they did give the NHS workers got 3% then it would be inflationary ?

      Whack a mole is the right description when they use interest rates, Whack a mole is probably the right description. If we set the rate to zero then carry out fiscal adjustments to control inflation.

      The key being you have to ” bake in ” as many automatic fiscal adjustments into the structure as possible. So they happen naturally without being managed. Only whack a mole after that if you need to.

      However, for the ” baked in ” fiscal adjustments to work efficiently and effectively the economy has to be as productive as possible. So how do THE mainstream and MMT measure that ?

      I know MMT is a lens

      I know the accounting that takes place

      But list the things we are going to measure after replacing a budget constraint with an inflation constraint?

      How are we going to decide if we reduce the pension age and increase pension payments and give the public sector a pay rise etc, etc, etc . If it will be inflationary or not ?

    5. What do they look at in the Treasury

      If they want to increase NHS staff’s pay to 3% ?

      A list please ?

      At what they look at.

      Money multiplier and other myths
      Money multiplier – missing feared dead
      Building bank reserves will not expand credit
      Building bank reserves is not inflationary
      Lending is capital- not reserve-constrained
      The role of bank deposits in Modern Monetary Theory
      The so-called government budget constraint is just an ex post accounting entity rather than a causal, a priori, financial constraint.
      John Y. Campbell and Robert Schiller introduced the – Cyclically adjusted price-to-earnings ratio (CAPE)

      What else ?

      After we’ve replaced a budget constraint with an inflation constraint. What are we going to look at ?

      A list please ?

      1. A macroeconomy is in a steady-state (that is, at rest or in equilibrium) when the sum of the injections equals the sum of the leakages. The point is that whenever this relationship is disturbed (by a change in the level of injections, however sourced), national income adjusts and brings the income-sensitive spending drains into line with the new level of injections. At that point the system is at rest.

      2. The injections come from export spending, investment spending (capital formation) and government spending.

      3. The leakages are household saving, taxation and import spending.

      4. An economy at rest is not necessarily one that coincides with full employment.

      5. When an economy is ‘at rest’ and there is high unemployment, there must be a spending gap given that mass unemployment is the result of deficient demand (in relation to the spending required to provide enough jobs overall).

      6. If there is no dynamic which would lead to an increase in private (or non-government) spending then the only way the economy will increase its level of activity is if there is increased net government spending – this means that the injection via increasing government spending (G) has to more than offset the increased drain (leakage) coming from taxation revenue (T).

      So in sectoral balance parlance, the following rule hold.

      To sustain full employment the condition for stable national income defines what I named the Full-employment fiscal deficit condition:

      (G – T) = S(Yf) + M(Yf) – I(Yf) – X

      The sum of the terms S(Yf) and M(Yf) represent drains on aggregate demand when the economy is at full employment and the sum of the terms I(Yf) and X represents spending injections at full employment.

      If the drains outweigh the injections then for national income to remain stable, there has to be a fiscal deficit (G – T) sufficient to offset that gap in aggregate demand.

      If the fiscal deficit is not sufficient, then national income will fall and full employment will be lost. If the government tries to expand the fiscal deficit beyond the full employment limit (G – T)(Yf) then nominal spending will outstrip the capacity of the economy to respond by increasing real output and while income will rise it will be all due to price effects (that is, inflation would occur).

      What that means in relation to the issues I identified above is that there is a difficulty in defining pro-cyclicality in terms of a given fiscal balance.

      It is nonsensical to say a fiscal surplus is always pro-cyclical and a deficit is always counter-cyclical. It all depends on the spending and saving patterns of the non-government sector.

      We can only really appraise the impact of the fiscal balance in terms of changes at specific points in the cycle.

      So if an economy was at full employment and the fiscal deficit was, say 2 per cent of GDP and that satisfied the condition specified above.

      That is not a pro-cyclical position even if the economy is growing – it is maintaining a steady-state growth path.

      Should the government, with no other changes evident, increase its net spending to say 3 per cent of GDP, under those circumstances, we might consider that a pro-cyclical policy change because it is pushing the cycle beyond its full employment steady-state growth path.

      So the fact there is a fiscal deficit coinciding with strong GDP growth should not be taken as a case of irresponsible and dangerous policy.

      What about running surpluses when recovery is apparent?

      The same logic holds. It might be that the non-government spending and saving decisions drive overall spending so fast that total spending then starts to outstrip capacity.

      Then, to restore the full employment steady-state (and this also requires stable inflation), the fiscal stance has to contractionary – which might require a fiscal surplus.

      What else ?

      That’s the theory but what indexes and measures are we looking at and where do we find them ?

      After we’ve ” baked in” the natural fiscal adjustments into the system ?

    6. Simply ..

      If I worked in HM Treasury and a letter came across my desk saying the government wanted to increase all public sector pay by 4%. Will it cause inflation ? Is the private sector produtive enough to handle it?

      As a MMT’r

      a) Using MMT- What would I look at ?

      b) Where would I find it ?

    7. Lots of good questions Mr. Henry. But not my job to give you all the answers (even if I could). You might start by buying the macro textbook written by Professors Mitchell, L. Randall Wray and Martin Watts. Or you could go through the various subject matters listed on the right at the top of this blogsite.

    8. Seeking those lists, I think we’d be seeking an analytical model of the economy, where we can ask things like:
      If we tweak the yearly_public_sector_wage variable, multiplying it by 1.03, what variables do we counter-tweak to make the yearly_global_price_multiplier variable come out to 1.0 ?
      I don’t think we (or anybody else) have that model. An MMT-aware government will have to regard the whole national situation, comprehending a host of reports, the “Australian Labour Market” report that we read here every week being just one example.

    9. Chris,

      I won’t find it there.

      Mel,

      I think you are right. Why MMT is a lens meme infuriates me.

      Very few people know what replacing a budget constraint with an inflation constraint analytical model would even look like. Never mind how many people in the world are ready to do that job. With so many students being trained in mainstream economics.

      Which only makes me think we are not ready to win an election. One more white paper on what the accounting looks like will drive me mad. When there are still so many very important white papers still to be written.

      The theory is excellent. Putting into practice in the real world is a different matter entirely. Never mind the political aspects regarding change. That are so difficult to break down especially the geopolitical aspect.

      When the government announces a spending decision. I would love to be able to work out for myself if it will be inflationary or not. That’s never going to happen not even after getting a degree in economics because it is not a science in its current form.

      You probably have to work in the Treasury and shadow colleague’s for a few years to get a handle on how the mainstream do it. After 12 years I still have no idea what a MMT treasury would look like. What indexes and data they are going to look at and where to find them. If a fiscal adjustment is going to be possible or not.

      Many people think treasuries the world over are ready to simply switch from a budget constraint to an inflation constraint. I could be wrong, but I very much doubt that is the reality on the ground.

      MMT is a lens – Aye, I keep hearing that, but how many people can you count on one hand can actually use it in the real world ? My guess is the majority who can have Chinese names. They know how to put a spending plan together. Working in the Chinese treasury shadowing those guys for 5 years now there’s a learning curve worth learning. Rather than a mainstream economics degree.

      Meanwhile back at the ranch. All I was really asking was a simple question. “IF” knowing the real value of government liabilities was worth adding to the MMT tool box. Whatever, that ends up looking like ?

      Or

      If it doesn’t really tell us that much about inflation.

      We’ve ended up going round the houses.

    10. Derek Henry, Bill gave an analysis of inflation potential in a post titled “Is the $US900 billion stimulus in the US likely to overheat the economy – Part 2?” This would probably be useful to review to see what factors he uses to determine how likely any specific economic policy would be to cause inflation. It was from December 31, 2020. I very much recommend reading it as it will probably answer many of your questions. I will post the link here afterwards but that will take some time to go through moderation. Hopefully it will help.

    11. Derek Henry wrote: “? My guess is the majority who can have Chinese names. They know how to put a spending plan together. Working in the Chinese treasury shadowing those guys for 5 years now there’s a learning curve worth learning.”

      Yes, Ellen Brown (supporter of public banking) supposes the PBofC is operating according to an inflation constraint rather than a budget constraint. Yet China is now mumbling about “reducing stimulation” to bring “debt levels under control”, and worrying about Biden’s fiscal plans that might “export inflation to China”. Which is a real shame; I am (was) hoping the Chinese can show the world how intelligent money creation can create a better community.

    12. Neil.

      “I am (was) hoping the Chinese can show the world how intelligent money creation can create a better community.”

      Perhaps they are.

    13. Thanks Jerry,

      I’m just scared MMT treasury is going to suffer from skill shortages and bottlenecks.

      For example.

      Warren’s blog centre of the universe. Warren posts a topic then posts some graphs. Nothing at all On some graphs and one sentence above and below other graphs. That’s it.

      When I first started reading the blog many moons ago. It was like trying to work out the clues from the TV show 321 dustybin. The clues were impossible to work out and most contestants on the show went home with an empty dustbin.

      Warren’s site you need to have all his books open. Teaching posts open from his site to try and work out why he has picked certain graphs to look at for certain topics. Over time you get a feel for why he has selected certain graphs to look at but no feed back mechanism to confirm it. It is a very slow, long learning curve.

      Imagine a MMT masterclass called- using the MMT lens to determine inflation. With different contexts within the class. Similar to Warren’s website. I can’t imagine the process changes that much using different contexts. A what would happen to the economy if X was introduced type format.

      Showing you what you have to look at and measure for each context. Showing you where you can find them.

      I could name at least 30 people who have been On this journey for a very long time who are ready now to take that course. They understand the accounting and the theory and are ready. So that when the course is finished they can determine themselves the produtive capacity of the economy and if it will cause inflation or deflation and might have to play whack a mole a little bit.

      Go into depth about ” inbaked” natural fiscal adjustments. Like wage scales which is a good example and how the act automatically as wages rise and once in place are easily managed.

      MMT is a lens meme only takes you so far. You need to learn how to use it. I could name 40 people who I would consider are ready. There is probably a lot more than that.

    14. “Very few people know what replacing a budget constraint with an inflation constraint analytical model would even look like. ”

      It’s fairly obvious what it looks like. It it available for sale at a price government is prepared to pay?

      If it is government can buy it. If it isn’t then government needs to tax something to release it at that price, or government simply waits until fiscal friction due to lack of monetary circulation drops the resource into the lap of government.

      The structure for such a budget was laid out in Part IV of “Full Employment in a Free Society” as long ago as 1944.

      “What is the essence of this new budgetary policy? It is that the Budget is made with reference to available man-power, not to money”

      The mental reversal is realising that Parliament dictates prices. It decides what it will pay for an item based solely upon what political capital it feels it has to use up to force supply of that item at that price in the timeframe it wants it supplied within. What the ‘market’ wants is no longer relevant.

      And that’s how you constrain inflation. You constrain it by refusing to pay more, and since you are not paying more there can be no inflation. Anything that then looks like ‘price rises’ is simply a lack of competition in that market segment and should be subject to a Monopolies investigation and an explicit public competitor if required.

      The current lack of house building in the UK being a case in point. Why are we instigating demand side policies such as propping up 95% mortgages when there is a demonstrable lack of supply?

    15. Excellent Neil.

      If that’s the case. I will really look forward to reading the economic papers that come out of GIMMS in the future. Using The structure that was laid out in Part IV of “Full Employment in a Free Society in 1944. With an inflation projection attached to any policy.

      For these economic papers that come out of Gimms to be judged by its peers in the economics profession. If the structure that was laid out in Part IV of “Full Employment in a Free Society in 1944 is so robust.

      Which sounds really positive and a step in the right direction and something to get excited about. Sounds brilliant to me ! I really look forward to it.

      Especially, a pension one when you get round to it. That shows cleary what the pension age could be reduced to and what the pension payment can be increased to without causing inflation. How productivity can be increased to achieve that ?

      What the virus has highlighted is an opportunity not to be missed.

      Which I’m starting to believe increased productivity needs to be done now not later. Considering The neo-liberal era has also been marked by a major reduction in Departmental capacity to design and implement fiscal policy – given the obsession with monetary policy and the major outsourcing of “fiscal-type” government services to the private sector. Many of the major government policy departments in the advanced nations are now just contract managers for outsourced service delivery ?

      So this diminution in the overall capacity of the government machine to implement efficiently and speedily complicated nation-wide infrastructure programs has to be addressed as a matter of urgency ?

      One full term or 2 full terms to get that in place ?

      For me that’s an economic paper in itself to be judged by its peers.

      Otherwise any MMT critic and there are many out there. Could simply use a big red marker pen and right across the bottom of anything that comes out of Gimms.

      Will this cause inflation – what are your projections ?

      After MMT wins the inflation debate.

      Surely now is the time GIMMS are going to write economic papers on how to use the MMT lens to be judged by its peers ?

      Everybody is waiting on them. Or are we just going to keep hiding behind MMT is a lens in the UK ?

      Regarding- ” Why are we instigating demand side policies such as propping up 95% mortgages when there is a demonstrable lack of supply? ”

      Especially when nearly all recent inflation episodes in the recent past was caused by bank lending !!!!

      Is a good question. Needs to be written down by GIimms and judged by its peers.

      :)

      You see where I’m going with all of this don’t you ?

      Better me going there than our critics. Me playing the part of devils advocate than our enemies.

      :)

      You know what needs to be done Neil. We need to step in front of the MMT lens and stop standing behind it.

    16. After MMT wins the inflation debate.

      You could hire me Neil.

      Pay me 50p an hour to go to the shops to buy a big red marker pen and write – will it cause inflation, what your projections ? – Across everything that comes out of Gimms.

      To get used to what our critics and other ideologues are going to do.

    17. “If that’s the case. I will really look forward to reading the economic papers that come out of GIMMS in the future.”

      So would I if we had the funding of the IFS and other soothsaying operations.

      The framework is there and has been for decades. The manpower to produce the marketing information isn’t.

    18. Interesting article by James K Galbraith, son of the famous John K Galbraith:
      ” Who’s afraid of MMT” (google, it’s free at Jordan Times). Opening paragraph:

      “As anyone who has ever been responsible for legislative oversight of central bankers knows, they do not like to have their authority challenged. Most of all, they will defend their mystique, that magical aura that hovers over their words, shrouding a slushy mix of banality and baloney in a mist of power and jargon”.

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