'Bracket creep' and better budget benchmarks

Published by Anonymous (not verified) on Tue, 15/05/2018 - 8:16am in



With a 'progressive' income tax scale, and fixed $ values for tax bracket thresholds, a taxpayer's average tax rate increases for every extra taxable dollar received.

Harry Flim Flam

Published by Anonymous (not verified) on Tue, 15/05/2018 - 2:02am in



Finanspolitiska rådet överlämnade idag sin årliga rapport till regeringen. Man konstaterar att svensk ekonomi går bra och att det därför är läge att strama åt statsfinanserna … – Finanspolitiken kan inte anses vara väl avvägd i förhållande till konjunkturen, säger Harry Flam som är ordförande för finanspolitiska rådet. De menar att den expansiva finanspolitiken ökar […]

A Currency-Issuing Government Spends on its Own Terms

Published by Anonymous (not verified) on Tue, 15/05/2018 - 1:23am in



An alternative title to this post could have been, ‘The Interest Rate on Public Debt is at the Discretion of Government’. This remains true even though, in the neoliberal era, governments usually require themselves to follow various unnecessary rules on how their spending is to be conducted. These rules are voluntary and can be removed at a later time. But even while these rules are in place, they do not prevent government from dictating the terms on which it spends.

Consider a currency-issuing government that requires itself either to deduct taxes from non-government accounts or to issue debt to non-government before it spends. This is quite typical of governments today. At first glance, these requirements may seem problematic. From inception, it would clearly be impossible for a currency issuer to receive tax payments in its own currency or to auction off public debt in the form of treasuries in exchange for its own currency before the currency itself had actually been issued. The resolution to this apparent conundrum is that government can always (and currently does) advance to non-government the currency it requires to purchase newly issued public debt.

More specifically, the central bank, as the monetary arm of government, issues currency in the form of reserves (by crediting reserve accounts) while requiring collateral in the form of previously issued treasuries. Non-government is then in a position to purchase newly issued treasuries, with reserve accounts debited in settlement.

Typically, there will be a bidding process at a Treasury auction. The treasuries will go to the participants with successful bids – all those bids that offer an interest rate on government debt that is at or below the cutoff. If the central bank is prohibited from purchasing treasuries directly from the Treasury (which may or may not be the case, depending on the country in question), it will be necessary to auction off all newly-issued treasuries to non-government. In that case, the cutoff between successful and unsuccessful bids will be determined in the auction itself.

Considering that the sale of public debt is typically subjected to a bidding process, it may be wondered how government can nonetheless maintain control over the terms on which it spends. In particular, it may be unclear what prevents the rate of interest on public debt from rising above the rate that government actually wants to pay.

The answer is simple. The central bank can always purchase financial assets in the secondary market (the market for previously issued financial assets) so as to drive down the interest rates (yields) on those assets. The more the central bank’s actions drive down interest rates, the more attractive newly issued treasuries become in comparison. Since the central bank can credit reserve accounts without limit, there is never any risk whatsoever of the government somehow being forced to pay an interest rate on its debt that it is not fully prepared to pay. If the government wants the interest rate on newly issued treasuries to be lower than it otherwise would be, the central bank will simply inject more reserves into the system in exchange for financial assets purchased in the secondary market, thereby driving down the interest rates applicable to financial assets seen as close alternatives to newly issued treasuries.

Since both reserves and newly issued treasuries have zero default risk, and since reserves offer less interest than treasuries, there will be a willingness within non-government to exchange reserves for interest-bearing treasuries.


Shame — a gender pay gap solution

Published by Anonymous (not verified) on Tue, 15/05/2018 - 12:22am in



By making companies publicly air their salary information, Britain intends to force a reckoning. Officials in London hope the embarrassing revelations in the reports … will shame companies into doing more to close the divide. The push is one of a growing number of efforts among countries to promote the principle of equal pay. Australia […]

Lower bond yields do not save the Japanese Government money

Published by Anonymous (not verified) on Mon, 14/05/2018 - 6:09pm in


Economics, Japan

I was going to write about the situation in Timor-Leste after its national elections were held on Saturday. But I will hold that over for another day as I get some more information. So today, I think we can learn a lot from an issue raised in the Bloomberg article (May 14, 2018) – Kuroda’s Stimulus Saves Japan $45 Billion, Easing Debt Pressures – which discusses the QE program in Japan and introduces several of the basic errors that mainstream financial commentators make when discussing these issues. The article traverses all the usual suspects including the misconception that numbers in official accounts are ‘costs’ to government and that smaller numbers in official accounts mean the government can put larger numbers in other accounts than it might have been able to. These articles are as pervasive as they are erroneous. Hopefully, as the precepts of Modern Monetary Theory (MMT) spread and are understood more journalists will endure scrutiny of the rubbish they write and the public commentary and debate will progress towards a more reasonable – realistic – appraisal of what is going on in the world of finance and money. This article is one of the worst I have read this year so far. And there have been some real terrors!

The sub-titles to the articles were:

Driving down borrowing costs is saving the government money

But low rates hurt savers, pensioners and even the BOJ itself

In the first case, there is no sense that the government ‘saves’ its own currency.

In the second case, it is true that lower yields provide less income to holders of the bonds, which might include “pensioners” but to take it further and suggest that the BOJ is in the same boat is to invoke the ‘household budget’ metaphor, which is wrong at the most elemental level.

We will explain that presently.

The article’s main argument goes like this.

1. The Bank of Japan’s “massive monetary stimulus has saved Japan’s government about $45 billion in borrowing costs, helping the world’s most indebted developed nation pay for its debt pile”.

How so?

This graphic is provided.

So they worked out the outstanding debt liabilities by maturity and multiplied them by the average yield for each maturity in 2012 and compared them with the actual yield in 2018.

They think this allows them to say that the difference between the blue and black rectangles represents ‘saving’.

The heading is more accurate – the difference is ‘money not spent’.

But for a sovereign government the concept of saving is not applicable.

For an entity in the non-government sector, say a household, the act of saving is equivalent to foregone consumption. We save to expand our future consumption possibilities and are prepared to sacrifice current consumption to earn compound interest on the financial assets we accumulate via that foregone consumption.

That compound interest means – in a stable inflation environment – we can have more later through saving.

So you can easily see that when we talk about saving in this way that there are some underpinning notions.

Most importantly, we realise that for a given income flow for a non-government sector entity, expanding future consumption possibilities requires three elements to be present:

1. That there will be available real goods and services at some future time period to satisfy our future consumption expenditure.

2. That price rises do not outpace the growth in the nominal value of the financial assets we store our savings in.

3. That there is a financial constraint on the entity such that they must sacrifice now to gain more later.

The first element also applies to a currency issuing government. While it is not intrinsically financially constrained in its spending capacity it can only purchase what is for sale in its own currency.

For example, a national government can always provide first-class health care as long as there are sufficient doctors, nurses, medicines etc available to cater for that goal.

The second element affects governments too but not as a constraint in the same way it impacts on households. Ultimately, a non-government entity can only purchase the real equivalent of their nominal income.

So the real equivalent in average terms is the nominal income deflated (divided) by the price level. Simplifying, if a person has an income in dollar terms of $1,000 per week and there is only one commodity available for consumption and its price is $100 per unit, then the real equivalent of that income is 10.

If the price was to rise to $200 per unit, then the real income drops to 5.

Thus the purchasing power for an individual depends not only on the level of nominal income they enjoy but also on movements in the prices of goods and services they purchase.

One could envisage a situation where the inflation rate outstrips the gains in compound interest earned on a person’s saving, which reduces the future consumption possibilities.

For government, inflation does not constrain its real spending capacity as it can for a non-government entity.

It would simply mean that the nominal value of a government’s spending outlays for a given basket of goods and services would rise.

So if the government bought 20 items that currently sell for $10 now. Its outlays would be recorded in the public accounts as $400 if it maintained the same orders (quantities) but the product it was buying doubled in price.

A nominal adjustment but not a real constraint.

Finally, the third element is inapplicable to a sovereign government.

Such a government can, in each period, purchase whatever is for sale in its currency, including all idle labour, irrespective of what its fiscal balance was in past periods.

Which is not to say that the fiscal balance of previous periods doesn’t have implications for the desired fiscal balance in the current period.

I say that because if fiscal policy has been properly calibrated in the past then the spending space that the government has available will be less without any shifts in taxation policy because all available resources will be productively engaged.

To see what I mean by proper calibration, please read this blog post – The full employment fiscal deficit condition (April 13th, 2011).

Please also read the following introductory suite of blog posts – Fiscal sustainability 101 – Part 1Fiscal sustainability 101 – Part 2Fiscal sustainability 101 – Part 3 – to learn how Modern Monetary Theory (MMT) constructs the concept of fiscal sustainability.

In other words, given saving is the act of expanding future consumption possibilities (spending), the concept has no meaning when applied to a currency-issuing government that faces no financial constraint on its spending.

All the Bloomberg article is really telling us, in relation to the Japanese government is that some officer(s) in the Ministry for Finance are typing smaller numbers into various accounts than they were in 2012.

In terms of its impact on the holders of the government bonds the shift in yields downwards reduces their nominal incomes and that is likely to have an impact on their spending patterns.

Which, in turn, is likely to mean the government deficit has to be larger to offset the decline in non-government spending, unless the external surplus increases to create that offset – or a combination of the two.

Because the Bloomberg journalists start from the wrong premise their deductions that follow the empirical world they are describing are also false.

So we read:

Those savings are about enough to pay for Japan’s defense spending for a year, and were possible because the Bank of Japan’s massive bond purchases have driven borrowing costs to around, or even below, zero. As finance ministry bureaucrats plan next month’s medium-term economic plan, how much the nation can borrow, and how sustainable the existing debt is, will be a key question.

Whether those questions are “key” in the next plan is unlikely. The Ministry of Finance officials know full well that Japan can continue to service any outstanding liabilities for time immemorial. They are not stupid.

They also know that should their operational matching of debt issuance to continuing flows of net public spending (deficits) read a point where the private bond markets are saturated with public debt then the Bank of Japan has all the capacity it needs to take up the slack.

The only consequence of a discrepancy between the targeted yields and the market expectations of future yields (that is, the bond traders considered rates would rise eventually) would be that the Bank of Japan would end up owning all or most of the targeted Japanese Government bonds.

In other words, no consequence.

The bond traders might boycott the debt issues and the central bank would then take up all the volume on offer. So what? This just means that the private buyers would be missing out on a risk-free asset and would have to put their funds elsewhere. Their loss!

Eventually, if the government bond was the preferred asset the bond traders would realise that if they didn’t take up the issue the bank would. End of story – the rats would come marching into town piped in by the central bank resolve.

Please read my blog post – The last eruption of Mount Fuji was 305 years ago – for more discussion on this point.

Moreover, trying to match the lower interest payments (lost non-government sector income) with items of government expenditure is fraudulent.

The inference that these lower payments made it “possible” for the Government to allocate the funds to the defense area is ludicrous.

Nothing of the sort was made possible.

The Japanese government could fund all the military needs it desired (given real resource availability) whether it was paying 10 per cent on its bonds or zero per cent.

There is no sense in the statement that by sending out less flows in the form of interest payments on outstanding debt that the Government has more ‘money’ to spend.

The article then traverses the usual scaremongering by telling its readers that Japanese:

… general government debt will be the highest in the developed world at about 2.4 times the size of gross domestic product

Sure enough that is a fact.

Is it relevant. Not at all.

The bond markets consider JGB to be “the widow-maker” which refers to the fact that anyone who tries to bet against the bonds (short-selling etc) will lose big time.

As the Financial Times article (September 5, 2017) – The fears about Japan’s debt are overblown – noted:

… despite two decades of warnings about fiscal Armageddon, a debt crisis never arrived. It never even came close, despite shocks on the scale of Lehman Brothers and the Tohoku earthquake.

Further, why didn’t the Bloomberg article also tell the readers that once we take into account the foreign financial assets that the Japanese government owns the net public debt is around 113 per cent of GDP.

Neither figure is relevant to an assessment of the Japanese government to service the debt or maintain its continuous fiscal deficits.

The Bloomberg article also dives head first into the myths about the Bank of Japan balance sheet.

They say that the lower yields on Japanese government bonds engineered because “the BOJ has replaced the market in setting bond yields” is:

… also cutting into the net income of the BOJ itself, which in turn means it can’t pay as much money each year to the government as it once did. While the BOJ is meant to send most of its surplus to the government each year, it has been reducing that payment so it can increase the amount it has in reserve to cover any future losses on assets purchased as part of the stimulus program.

The accounting gymnastics involved here are basically irrelevant to any real capacity the central bank or the Ministry of Finance possess.

The fact is that the government may be transferring via accounts less from the right pocket to its left pocket.

They may have rules that say that if financial assets the central bank holds lose value then they have to transfer some numbers from one account to another.

And any number of voluntary and largely meaningless accounting conventions.

The facts are:

1. The left pocket’s ‘loss’ of income from the right pocket doesn’t constrain the expenditure capacity of the Japanese government one yen!

2. There is no sense that the central bank can run out of money, which means a financial loss (marking down numbers in its balance sheet) has no fundamental meaning. A central bank can trade with negative capital forever should it wish to.

3. Intergovernmental transfers (between central banks and treasuries) are accounting structures. They do not give or take spending capacity from the government.

Please read my blog posts:

1. The consolidated government – treasury and central bank (August 20, 2010).

2. The US Federal Reserve is on the brink of insolvency (not!) (November 18, 2010).

3. Better off studying the mating habits of frogs (September 14, 2011).

4. The ECB cannot go broke – get over it (May 11, 2012).


These articles are as pervasive as they are erroneous.

Hopefully, as the precepts of Modern Monetary Theory (MMT) spread and are understood more journalists will endure scrutiny of the rubbish they write and the public commentary and debate will progress towards a more reasonable – realistic – appraisal of what is going on in the world of finance and money.

Real Progressives Interview today

Earlier today I had a talk to Steve Grumbine from Real Progressives in the US. We covered a lot of issues in the 80 minutes and you may find it interesting.

Thanks to Steve for inviting me on his show and all the listeners who were active in the discussion.

That is enough for today!

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

The number of companies per head of population in the UK has doubled this century

Published by Anonymous (not verified) on Mon, 14/05/2018 - 3:34pm in



I am doing a lot of research on companies, corporation tax and the tax gap at present. All is part of what I call 'day job'. But let me share this chart:

In 2000 there was one company for every 37 people (near enough) in the UK.

Now the number is one for just under 17 people. The number of companies per head of population has doubled this century.

Corporatisation is rampant.

Data is from Companies House and the ONS.

NB: Some people did not like the labelling of the original chart: it has been amended for the sake of clarity.

Budget cover-ups

Published by Anonymous (not verified) on Mon, 14/05/2018 - 11:03am in



When someone does something they shouldn't, it's often the cover-up that heralds their downfall rather than the original error.

The myth of the self-made person

Published by Anonymous (not verified) on Sun, 13/05/2018 - 5:20pm in



I had already been writing about what I think the true meaning of a company is when I read this in an email from The Sunday Times this morning:

 No one builds their own fortunes.

No one is self-made.

The Sunday Times might like to promote the myth at the behest of, or to flatter, Rupert Murdoch. But the simple fact is that everyone has to work in company. And the bread has to be shared.

Those who think otherwise need to be reminded, often, of the folly of their thinking and, too often, their ways..

We need to get back to the essence of the company

Published by Anonymous (not verified) on Sun, 13/05/2018 - 5:07pm in


Economics, Ethics

I have long known of the etymology of the word company, but it came up in conversation yesterday and I thought it worth sharing. This is from the Online Etymology Dictionary:

From Late Latin companio, literally "bread fellow, messmate," from Latin com "with, together" (see com-) + panis "bread," from PIE root *pa- "to feed.

As it was explained to me by someone with rather more Latin training than I have,  ‘com pani’, means ‘to share bread with’.

The image is powerful. For those familiar with the Christian tradition this may be particularly so: the sharing of bread is part of a sacrament.

However, relatively few partake in that sacrament now, so think instead of this understanding as it relates to a social construct. Bread is for many the basic food of subsistence. To share it is to provide in an essential of life. But it is more than that. By sharing that essential we recognise the importance of the other person. That is why shared meals are so important in so many cultures.

A few are, of course, symbolic and are statements of power. But they, surely, miss the point. The real essence of eating together - sharing our bread - is to get to know a person; to converse with them; to indicate our commonality and respect and to make clear our mutuality: in the act of eating we are equals even as the essential individuality of the act - we fuel ourselves, of course - is acknowledged.

There is then much that com pani implies that should be embodied in our notion of a company. Forget the statements of power: they are an obvious corruption of the essential nature of the sharing of bread. Companies need to be built on the idea of sharing, of mutual respect where differences are combined and valued for a common good. And communication is key. After all, very rare exceptions apart, the sharing of bread is very rarely an occasion for silence.

We need to better embrace the idea of com pani. Companies are places where people work together for a common good - which is the essential sustenance of all who partake, whoever they might be. It’s an understanding too many have forgotten.

Why interest rate rises are very unlikely

Published by Anonymous (not verified) on Fri, 11/05/2018 - 6:11pm in



The world seemed surprised that the Bank of England did not increase bank rate yesterday. It should not have been. Nothing suggested that was appropriate.

The government is sucking money out of the economy as fast as it can by trying to balance its budgets.

As a direct result growth is suffering since government spending is a component of GDP.

Investment is tanking in the face of Brexit uncertainty.

Inflation is reducing as, entirely predictably, the impact of the Brexit rate change works through the system (simple maths makes this totally predictable).

And house prices are falling as the attraction of the UK as a location goes into rapid decline meaning overseas demand is falling and taking heat out of system.

Underneath all that consumption is reducing.

There are no reasons for interest rates to rise.

There could be grounds for a cut.

And there is massive reason for a fiscal policy intervention by boosting government spending, although giving lifetime visas to bricklayers might be necessary to achieve that as they are in cripplingly short supply (absurdly).

That a rate rise was even thought possible is how absurd some economic thinking is. Interest rate rises would make no sense in the foreseeable future.