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British legislation must be able to override EU law – that is what independence means

Published by Anonymous (not verified) on Mon, 14/09/2020 - 1:10pm in


britain, Eurozone

Piety has no bounds it seems. The Sunday Times ran an Op Ed at the weekend (September 12, 2020) – John Major and Tony Blair: Johnson must drop shameful no-deal Brexit bill or be forced to by MPs (paywall) – which told us how angry former British Prime Ministers Tony Blair and John Major are with Boris Johnson about the Government’s intention to introduce the Internal Market Bill to ensure the so-called Withdrawal Agreement is compatible with national law. They started by appealing to the international treaty status of the Withdrawal Agreement, which outlined Britain’s terms of exit from the EU. The Op Ed called the decision by government as “shocking”. The Remainers are jumping on the ‘breach of international law’ bandwagon like there is no tomorrow. Of course, they never highlight the fact that they want to be part of an arrangement, which is created by international law and which regularly violates that law to serve its own political and elite interests. And those breaches, which include gross human rights abuses and deliberately undermining the prosperity of its own citizens through mass unemployment and more, have had severe consequences for humanity. The fact that the British government is now declaring national law will no longer be subjugated and subservient to international agreements is not in the same ball park of international violations.

The Blair/Major Op Ed stated:

How can it be compatible with the codes of conduct that bind ministers, law officers and civil servants deliberately to break treaty obligations? As we negotiate new trade treaties, how do we salvage credibility as “global Britain” if we so blatantly disregard our commitments the moment we sign them? …

… if the government itself will not respect the rule of law, then the High Court of Parliament should compel it to do so,

Both Blair and Major were clearly pro-Europe.

When Major was Prime Minister and introduced the Maastricht Treaty into British law, he was met with a major internal Tory Party rebellion (the so-called Maastricht Rebels).

He was dumped by the electorate in the 1997 general election after a period where he oversaw a massive recession while pushing ahead with his destructive privatisation program (British rail, coal etc). His period in office was marked by a series of high profile financial and sex scandals (which penetrated into his cabinet).

Importantly, he was PM during Black Wednesday (September 16, 1992), which led to Britain finally realising it could not participate in the European Exchange Rate Mechanism, despite his zeal for fixing the British pound within the ERM.

In his 10-year period as British Prime Minister, Tony Blair hardly respected international law.

He deployed British troops more than “any other prime minister in British History” (Source).

He put British troops at the convenience of the US in illegal invasions of Afghanistan, and, later Iraq. He lied to the British people about the claim that Saddam Hossain had weapons of mass destruction, which he intended to use against the US, despite no evidence being provided to justify that claim.

The link between Saddam Hossain and Al-Qaeda was never substantiated.

The Iraqi invasion essentially created ISIS and has made the world a much more dangerous place.

The Independent article (December 15, 2006)- Diplomat’s suppressed document lays bare the lies behind Iraq war – disclosed that the nature of Blair’s lies about the war in Iraq.

Britain’s key negotiator to the UN, who had been kept silent “because he was threatened with being charged with breaching the Official Secrets Act”, subsequently revealed that:

… at no time did … Her Majesty’s Government … assess that Iraq’s WMD (or any other capability) posed a threat to the UK or its interests.

He admitted that British diplomats had “warned US diplomats that bringing down the Iraqi dictator would lead to the chaos … ”

He told a British government enquiry (chaired by Lord Butler) that:

There was, moreover, no intelligence or assessment during my time in the job that Iraq had any intention to launch an attack against its neighbours or the UK or the US …

A formal Dutch government enquiry (chaired by Dutch Supreme Court judge Willibrord Davids) later found that the 2003 invasion was not justified in international law.

This was endorsed in statements by the then UN Secretary-General who said in 2004 that (Source):

I have indicated it was not in conformity with the UN charter. From our point of view and the UN Charter point of view, it … was illegal

Even the British – Chilcot Enquiry – which largely avoided considering the legality issue, concluded that the invasion had:

… undermined the authority of the United Nations.

Further, it was fairly clear that Blair mislead the British Parliament on the invasion. Even his Deputy PM, John Prescott admitted the invasion was illegal (Source).

The point is that it is a bit much for Tony Blair to come out now and claim that ‘international law’ should take precedence in determining British interests.

Further, the Remainers are once again becoming apoplectic about the ‘international law’ issue, as a last-gasp attempt to salvage their neoliberal dream of being part of the European Union, if not as an official member, as a nation tightly bound by the single market rules and tight constraints on democratic choice and sovereignty.

Yet, they are desperate to be part of a organisation – the EU – that regularly violates international agreementsand has a shocking record of human rights abuses in terms of its border policies.

An Oxfam Report from April 5, 2017 – A dangerous ‘game’: the pushback of migrants, including refugees, at Europe’s borders – noted that:

In 2015 and 2016, more than a million people arrived in Europe after crossing the sea from Turkey to Greece and continuing their journey along the so-called Western Balkan route. In response, European Union Member States and other European countries hastily erected fences on their borders …

Rather than being places of safety … EU member states – have used brutal tactics, such as attack dogs and forcing people to strip naked in freezing temperatures.

The EU approach to the migration disaster – the “pushbacks” – violated Article 4 of Protocol No 4 to the European Convention on Human Rights (ECHR).

A recent Oxfam report (July 2, 2020) concluded that (Source):

Greece’s new law is a blatant attack on Europe’s humanitarian commitment to protect people fleeing conflict and persecution … The European Union is complicit in this abuse, because for years it has been using Greece as a test ground for new migration policies.

On June 18, 2019, the Council of Europe concluded that (Source) the European Union was “breaking international law with its treatment of migrants and refugees”.

I can cite many examples where the EU undermines its own international obligations.

The curious part is that the EU is founded on the principle that international treaties supercede national law.

Think about the Eurozone, which is a creation of international law.

The rules are regularly broken and the enforcement mechanisms are not applied consistently.

Germany, for example, consistently breaks the rules.

I considered that in this blog post – Germany’s serial breaches of Eurozone rules (May 11, 2015).

Thinks back to 2003, where France and Germany were the first nations to violate the Stability and Growth Pact and the EU changed the rules to suit.

Germans violated the SGP for several years from 2001 to 2005.

See this blog post – The hypocrisy of the Euro cabal is staggering (November 14, 2011).

But when Greece violates the international laws, all hell breaks loose and a nation is destroyed by pernicious policy interventions from Brussels (EU), Washington (IMF) and Frankfurt (ECB).

And what about the ECB, legally prevented from funding fiscal deficits among the Member States, buying government debt as if there was no tomorrow, and clearly funding fiscal deficits?

Smoke and mirrors.

All the time, international law being breached.

And the Remainers, the Woke, Blair, etc are all quiet as mouses about all of this.

They only get their voices back when the British government actually starts to assert its regained independence from the EU cabal and proposes to use its legislative independence to determine what is in the national interest rather than what serves the interests of the European elites.

An article in Spiked (September 11, 2020) – ‘The EU can’t handle British independence’ – gets to the point clearly:

Therefore, there is this group of people, particularly those who used to be known as Remainers, who, while they see international treaties as the highest form of law, in fact, support an organisation – the EU – that is prepared to depart from international law when it suits its interests.

It goes on to make the next obvious point in all of this:

Most people would not buy the idea that a government should put a deal it has done with foreign powers before the interests of its own people. The idea of international treaties being sacred is a piety and a lot of the faux outrage after the government’s announcement is just more of the kind of pearl-clutching we have been seeing over the past few years.

The British Brexit negotiator, David Frost summarised it clearly:

That’s what being an independent country is about, that’s what the British people voted for and that’s what will happen at the end of the year,

The conclusion the Spiked article (which is an interview with Brussels journalist for The Times, Bruno Waterfield) channelled this sentiment in a different way:

… the EU just can’t handle the fact that Britain is now an independent and sovereign country that isn’t part of its order.

I also think all the arguments about the Internal Market Bill constraining Wales and Scotland to follow British law are weak.

Are they a part of Britain or not?

If they want to be free of such a legislative fiat then they can restore their sovereignty in the same way Britain left the EU.

The whole point of the Bill is to ensure the integrity of the ‘country’ is preserved. That country is Britain.

Of interest to me, is the fact that the ‘British question’ is once again bugging Europe.

Charles de Gaulle vetoed British accession throughout the 1960s because he didn’t want a big nation like Britain inside the tent, given that his ambitions were for France to becomes the ‘Kings’ of Europe and exploit the shame that Germany was facing after its conduct during the War.

He knew that without Britain’s efforts during the War, France would not be in any shape at all. Which gave Britain the status of giants in the region.

And now, as Britain leaves the EU and reasserts its independence and desire to drive policy in different directions, Europe is again exhibiting signs of paranoia.

The Spike interview considers that:

Having a powerful country that has announced it wants to make a radical departure does rattle the EU. It’s worried about having to compete with Britain, which would be much more nimble-footed because it would be able to make decisions quickly without notifying Brussels. Again, it’s often dressed in a load of fretting that Britain would ‘race to the bottom’ in terms of tearing up labour standards or environmental standards, but it really is motivated by the fact that the EU doesn’t like the idea of having to engage in competition with a country right on its doorstep.

And in closing, I remind people that most nations signed up to the – The Universal Declaration of Human Rights – on December 10, 1948.

Article 23(1) says that:

Everyone has the right to work …

So which governments do not violate their international agreements in this respect?


I will pass no judgement on the specifics of the ‘Internal Market Bill’ until I have had more time to evaluate it.

But the principle that a nation has legislative primacy is a basic tenet of any democracy.

The European Union nations, especially the Eurozone 19 subset, have subjugated national interests to international agreements, which are not consistently applied and generally serve the interests of the elites at the expense of the workers.

The distributional consequences of the inconsistent way Brussels applies the international law, which gives it an existence are staggering.

And the basic human rights violations on the EU borders outstrip anything that Britain is planning to do with the Internal Market Bill.

That is enough for today!

(c) Copyright 2020 William Mitchell. All Rights Reserved.

Scotty From Marketing Tipped To Name Abbott Special Envoy To Aged Care

Published by Anonymous (not verified) on Thu, 03/09/2020 - 8:04am in


Australia’s Prime Minister Scotty from marketing is tipped this week to name former Prime Minister Tony Abbott as a ‘Special Envoy’ to the aged care industry, with a mandate to eliminate all problems.

”I won’t confirm or deny that I have been in talks with Tony about playing a role in our aged care industry,” said Prime Minister Scotty. ”However, if he were to take on the speculated role, I feel he would do as well in this role as he has in other roles.”

”Sure, we could get someone like Christopher ”the fixer” Pyne to handle the job, but why fix a problem when you can eliminate it.”

When asked on whether he shared Mr Abbott’s view that we should sacrifice the elderly for the economy, Prime Minister Scotty said: ”I reject the premise of your question.”

”There are many ways to make an omelette, but the one thing in common is that to do so you have to break a few eggs.”

”And I don’t know about you, but if there’s anyone I want in charge of breaking my eggs it’s Tony Abbott.”

”Now, if you’ll excuse me, all this talk of eggs and omelettes has got me hungry, might pop down to Engadine Maccas.”

Mark Williamson


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Australians Ecstatic For Abbott To Head Overseas As Long As It’s On A One-Way Ticket

Published by Anonymous (not verified) on Thu, 27/08/2020 - 7:34am in


With news breaking that former Australian Prime Minister Tony Abbott has been granted leave to travel to Britain to take on his new role as the UK’s trade ambassador, the majority of Australians have reported that they’re non-fussed by the move, as long as he is travelling on a one-way ticket.

”Ah, look it does seem a bit of one rule for some and another rule for the rest but in the grand scheme of things if it gets rid of him for good then I can live with that,” said Northern Beaches Tradie Johnno. ”Heck, maybe we can see if he’ll take Kevin Rudd or Sam Dastyari with him.”

The news of Mr Abbott’s move overseas is seen as a stroke of genius from current Australian Prime Minister Scotty from marketing.

”The last decade of Australian politics has been rife with sniping, back stabbing and in-fighting,” said Parliamentary Observer Peter Poll. ”If the current Prime Minister can rid the country of the main protagonists like Mr Abbott, then who knows how long he will reign.”

”It does seem that he has also managed to rid the country of the Opposition leader as well, has anyone heard from him lately?”

Mark Williamson


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The British government did not approach insolvency in March 2020

Published by Anonymous (not verified) on Thu, 25/06/2020 - 7:24pm in



Insolvency is a corporate term which refers to a situation where a company is unable to pay contractual liabilities when they become due. From a balance sheet perspective, it means that the assets are valued below the liabilities. The term cannot be applied to a national government that does not issue liabilities in foreign currencies. Such a government can always meet its nominal liabilities irrespective of institutional arrangements it might have put in place to create contingent flows of numbers from one ‘box’ (account) to another ‘box’. Those arrangements do not override the intrinsic capacity of the legislator. So when the British press went crazy the other day reporting comments made by the Bank of England governor that the British government was on the cusp of insolvency, they did the British public a disservice. Donald Trump would have been finally justified in accusing the media of pushing out ‘fake’ news.

As background, this blog post is instructive – On voluntary constraints that undermine public purpose (December 25, 2009).

The UK Guardian decided to go the ‘fake’ news path in its article (June 23, 2020) – Britain nearly went bust in March, says Bank of England.

The lurid headline clearly exercised the imagination of some copy editor or whatever they are called but doesn’t help the reader understand the situation that they were reporting at all.

The UK Guardian continued:

Britain came close to effective insolvency at the onset of the coronavirus crisis as financial markets plunged into turmoil

Note the term “effective insolvency” which has no real meaning anyway.

The interview that started all the hooha was aired as a podcast on the Sky News program The World Tomorrow (June 22, 2020).

The segment saw the “Ed Conway and Sajid Javid talk to Andrew Bailey about the Bank of England’s intervention at the start of the pandemic”.

Conway is Sky’s economics head and Javid is the ex-Chancellor.

Some of the early comments from the interviewers were ridiculous – like those relating to the Bank of England “running out of ammunition to fight the pandemic”.

The Bank of England governor appeared first at the 6:22 minutes mark.

The comments that set the media into a lying frenzy begin at 6:46:

You may remember in the first week, we basically had a pretty near meltdown of some of, some of the core financial market When you get to, I got to Wednesday afternoon, and the markets team came down here, and, in the afternoon. And you know it’s not good when they turn up, en masse. And you know it’s not good when they say we’ve got to talk, and it wasn’t good. We were in a state of borderline disorderly, I mean it was disorderly in the sense that when you looked at the volatility in what was core markets, I mean core exchange rates, core government bond markets, we were seeing things that were pretty unprecedented certainly in recent recent times, and we were facing serious disorder.

Of course it was clear why we were facing it in terms of what was going on outside in this unprecedented shut down of the economy, effectively that was going on.

At 8:02, Ed Conway asked “How scary was that? I mean what were the prospects if the bank had not actually stepped in”.

Andrew Bailey replied:

Oh I think the prospects would have been very bad. Oh, and by the way, I should say that the other major central banks were also doing very similar things and we were all closely coordinated. I think it would have been very serious. I think we would have had a situation where in the worst element, the government would have struggled to fund itself in the short run …

Obviously we had, there are things you could do at that point. It is not, it’s not outright failure in that sense We have got backup mechanisms that you can use.

Note – “there are things you could do”!

The UK Guardian article somewhat down the page admitted that “Although the government said the country would still have had options available” it still persisted with the lurid headline.


1. Britain did not “nearly go bust in March”.

2. Britain as a nation cannot go bust.

3. It is not a corporation.

4. It is not a household.

5. The concept of a corporate balance sheet does not have any application to a currency-issuing government.

So what was this all about?

What the Bank governor was really talking about was the financial market disruption that emerged in the early days of the pandemic. It is clearly the role of the Bank of England to maintain financial stability in British markets.

That was where the uncertainty lay.

We need to understand the different ways in which governments work within the institutional arrangements they put in place around debt and payments.

For Britain, two types of debt are issued via auction:

1. Gilts – are typically liabilities issued by the government which promise to pay a yield (‘coupon rate’) at regular intervals and return the principle at the agreed maturity date (say, 5 years or 10 years).

There are other forms ‘undated gilts’, ‘index-linked gilts’ which have other characteristics but are less significant in the overall picture.

See – About gilts.

2. Treasury Bills – are “zero coupon eligible debt securities” that are typically issued “through regular weekly or ad hoc tenders”. The zero coupon just means that they are issued at a ‘discount’ but redeemed at the ‘par’ value.

For example, say the market yield for short-term debt was 10 per cent. A six-month treasury bill might have a par value of £100 (which is what the holder will receive on redemption).

So the discounted price that the purchaser of the bill at issue would be prepared to pay to the government would be £95.20 (don’t worry about how I calculated that – there is a standard formula and I assumed half-yearly compounding).

Treasury Bill can be issued for just 1 day and up to 364 days but usually they are for 1, 4 and 6 month maturities.

See – About treasury bills.

Treasury Bills are used to match short-run spending needs. The gilts market is less responsive to daily needs – the institutional structure surrounding the auctions, for example, doesn’t lend itself to instant flows of funds.

Under the voluntary institutional arrangements that the government has put in place via legislation and regulation, funds raised from treasury bill tenders are placed in an account from which the Government then draws on when it spends.

If there are contractual or political spending imperatives today, and the treasury bill account cannot cover the funds required then, from an institutional perspective, there is a funding shortfall.

And as Andrew Bailey went on to say – “there are things you could do” – which just refers, in one way, to the fact that the central bank can always fill these gaps for the Treasury department.

One pocket of government can always be replenished by the other pocket any time it chooses, institutional arrangements notwithstanding!

A few months ago there was a bit hooha about the so-called Ways and Means Account held by H.M. Treasury at the Bank of England.

I wrote about this issue in this blog post – Bank of England official blows the cover on mainstream macroeconomics (April 28, 2020).

Effectively, the ‘Ways and Means’ account is an overdraft that the Treasury has with its central bank that allows it to spend freely without satisfying the usual accounting and administrative practices (ex post) relating to treasury bill or gilt issuance.

On April 9, 2020, the British Treasury made this announcement – HM Treasury and Bank of England announce temporary extension of the Ways and Means facility – which told the public that the Bank of England would increase the available funds in that overdraft account if the Treasury needed to spend large sums quickly.

In other words, they can increase fiscal deficits without recourse to the markets ‘matching’ the deficits with debt-issuance any time they like.

We should note, of course, that government spending occurs in the same way, however these administrative, institutional and accounting conventions and practices are exercised.

The Treasury instructs the central bank to credit bank accounts in the non-government sector on its behalf.

Every hour of every day.

That is how spending occurs.

All these other administrative type conventions do not alter that fact.

On April 23, 2020, an ‘external member’ of the Bank of England’s Monetary Policy Committee, gave a speech – Monetary policy and the Bank of England’s balance sheet – where he said that:

1. The Ways and Means account is used to smooth out “government cash flows”.

2. “Such a back-up is rarely needed except in periods of sharp unexpected deviations from the financing plan.”

Or, when there is severe disruption in the short-term money markets due to endemic uncertainty engendered by an event such as the coronavirus pandemic.

The Treasury bills market

The following graph shows the bid-to-cover ratio for the UK Treasury Bills tenders from the beginning of June 2016 to June 19, 2020.

The bid-to-cover ratio is just the the £ volume of the bids received to the total £ volumes desired. So if the government wanted to place £20 million of debt and there were bids of £40 million in the markets then the bid-to-cover ratio would be 2.

The financial media are always predicting the ratios will fall as investors give up on buying government bonds

Over this period, the averages have been:

– 1 month bills = 3.76

– 3 month bills = 3.35

– 6 month bills = 2.95

So mostly, the tenders are strong.

However, occasionally, the demand for the tender can fall well below these average ratios.

So as you can see from the graph, the ratios fell below 1 to 0.87 for 3 month bills on March 20, 2020 but was at 1.56 for 1 month bills on the same day and 1.11 for 6 months bills.

And that ‘weakness’ disappeared by the end of the week, with the ratio of 3.55 in the following week for 3 month bills.

The point is that this behaviour reflected general market uncertainty rather than an assessment that the UK government was about to default on its liabilities or some other such sentiment that would stop the private debt markets from buying British government bills.

Later on in the interview, the Bank of England governor sought to clarify what he had said earlier given that clearly in the short-term bills market, except for the blip on March 20, 2020 in the 3 month bills, there was no question the ‘markets’ were willing to purchase British government bills across the maturity range offered (1, 3 and 6 months).

Andrew Bailey said his concern was really about “market instability” rather than whether the government would be able to ‘fund’ itself.

After discussing how extraordinary nature of the Bank’s response, he went on to say (starting around 18:49):

I was worried. And let me explain that because it is an important point. So I think one way, I think how would this have played out if we hadn’t taken the action that we and other central banks took? I think what you could have easily seen, would have seen actually a, a risk premium enter into interest rates, I think markets would have priced in a risk premium, and it could have been quite substantial given the degree of instability we were seeing. That would have raised the effective borrowing cost throughout the economy. Now, and that would have, in terms, in terms of the Bank of England’s objectives, that would have made it harder for us to achieve our objectives, both in terms of inflation and in terms of economic stability and economic growth that underlies that.

So it is clearly not in our interest to see that happen. Now the fact that the government, at that point in time, the government is the largest borrower – not the only borrower by the way because the corporate sector was borrowing quite heavily, the big corporates were borrowing heavily in anticipation at that point. But the fact that the government is the largest borrower is actually largely irrelevant to that argument about the risk premium and the increase in the effective rate of interest. So I don’t see that as compromising
our independence …

So, in effect the £200 billion intervention (the largest QE and quickest to be introduced in British history) was nothing to do with government funding requirements under the existing institutional structure.

It was about providing liquidity to the non-government sector to ensure interest rates didn’t spike, which the bank considered would make the economic consequences of the pandemic even more dire.

He wanted to stop irrational asset sales by wealth holders driving down prices and pushing up yields across the relevant maturity ranges.

In other words, insolvency fears had nothing to do with the Bank’s actions. It was a standard QE exercise to keep interest rates low and stable.

While we understand that the media is always trying to sensationalise things one should draw the line about fake and lurid beat ups!

The British media – progressive and otherwise should hang their heads in shame.

They missed the whole point of the interview.

Gilts market remains strong

Further, if you look at the gilts market, the demand for longer-term government debt has remained strong throughout.

I wrote about the evolution of that market in this recent blog post – Britain confounding the macroeconomic textbooks – except one! (May 21, 2020).

Not a lot has changed since then in terms of robustness.

The bid-to-cover ratio is just the the £ volume of the bids received to the total £ volumes desired. So if the government wanted to place £20 million of debt and there were bids of £40 million in the markets then the bid-to-cover ratio would be 2.

The financial media are always predicting the ratios will fall as investors give up on buying government bonds.

Here is the record of bid-to-cover ratios in the British gilts market from January 5, 2016 to the latest gilt auction on June 24, 2020.

Even in the early days of the pandemic, the demand for gilts was strong.

I still get sent blog links or papers written as sorts of ‘gotcha’ moments – in the ‘ah, I have you now, you stupid MMT cultists’ tradition that has evolved, which tell me that Modern Monetary Theory (MMT) is plain stupid because it is obvious there are financial constraints on governments as evidenced by these institutional arrangements.

Nothing could be further from the truth.

The point is that MMT makes it clear that there is a difference between the intrinsic capacity of a currency-issuing government in a fiat monetary system and the capacities that they render for themselves through their legislative and regulative volition.

Refer back to the blog post from 2009 where I discuss that in detail.

The difference between the intrinsic state and the state on the ground at any point in time reflect ideology and political choice.

And by exposing that difference, MMT brings the public a long way forward in understanding than if they remain in the world of mainstream macroeconomics which alleges the institutional reality is the intrinsic monetary reality.

Thus blurring the ideological element and covering up a whole raft of lying behaviour by governments who do not want to undertake certain policy options.


The important point is that legislation and regulation can be changed by the majority government.

The British government could always change any of the voluntary arrangements it has set in place and, for example, instruct its central bank to ensure any spending demands have financial integrity irrespective of what numbers appear in different accounts (gilts, treasury bills, tax etc)

It is very disturbing that the media misleads people so manifestly.

That is enough for today!

(c) Copyright 2020 William Mitchell. All Rights Reserved.

Britain confounding the macroeconomic textbooks – except one!

Published by Anonymous (not verified) on Thu, 21/05/2020 - 6:28pm in



Remember back just a few months ago. We are in Britain. All the Remainers are jumping up and down about Brexit. We hardly see anything about it now as the UK moves towards a no deal with the EU. Times have overtaken all that non-event stuff. Now the developments are confounding the mainstream economists – again. There will be all sorts of reinventing history and ad hoc reasoning going on, but the latest data demonstrates quite clearly that what students are taught in mainstream macroeconomics provides no basis for an understanding of how the monetary system operates. All the predictions that a mainstream program would generate about the likely effects of current treasury and central bank behaviour would be wrong. Only MMT provides the body of knowledge that is requisite for understanding these trends.

Imagine we provide an intermediate macroeconomics class at almost any university in the world with the following facts:

1. According to the – IMF Policy Responses to COVID-19 Monitor – the government has just embarked on a massive fiscal expansion worth around 4.5 per cent of GDP.

In the previous year, government debt rose by 2.6 per cent of GDP. In the current year, it will rise by a further 10 per cent of GDP.

The official agency that helps the government on fiscal matters called this “the biggest ‘fiscal loosening’ from almost any government in almost three decades” (OMB)

2. The central bank has increased its “holding of UK government bonds and non-financial corporate bonds by £200 billion”, has “agreed to extend temporarily the use of the government’s overdraft account at the … [central bank] … to provide a short-term source of additional liquidity to the government”, has made direct “loans and guarantees available to businesses” worth 14.9 percent of GDP.

3. This graph shows the central bank’s holdings of government bonds (in millions of currency) and they dominate the total assets of the bank.

In the last three weeks (since April 22, 2020), the central bank has increased its holding of government bonds by 40,497 million.

What would the overwhelming number of students in the class conclude as an application of the theories they have been taught (dominated by New Keynesian thought) as a result of being confronted with these facts?

Well, many mainstream economists will deny this to avoid humiliation but I have done this exercise in the past with classes I have inherited.

The students would predict:

1. That the government bond yields would rise significantly as the auctions ensued after this sort of fiscal shift.

They would write explanations about how there was an increasing risk of inflation (too much money chasing too few goods) and the bond buyers would have to be compensated for that risk.

They would emphasise that this was especially going to be the case for longer-term bonds – beyond say two-years.

They would also introduce the argument that the risk of insolvency (credit risk) had risen and this required higher returns to bond investors to compensate for the elevated levels of risk.

2. The students would also argue that the willingness of bond investors to purchase the primary issues in the auction process (where government bonds are first issued) would diminish because of increasing fear of insolvency.

The better students who might explore the more technical literature about bond auctions would claim that the so-called bid-to-cover ratio would be falling in successive auctions as the fiscal deficit rose as investors got spooked about the situation.

3. All the students would suggest that the rate of inflation would accelerate, not only because of the fiscal deficit pumping cash into the economy but also because the central bank was obviously – in their words – ‘printing money like there was no tomorrow’ (or words to that effect – ‘printing’ would definitely figure strongly in their answers).

Most would conclude this part of their answer with a rather triumphant appeal to ‘don’t you know about Zimbabwe’ – as if that is the end of the story.

4. And, the more complete answers would then attempt to score bonus marks by introducing and applying the ‘loanable funds doctrine’ to argue that it would be obvious that interest rates would be rising and damaging private investment – fancy terms like ‘crowding out’ would dominate this part of the answer.

They would tell us that there is only so much saving (funds) to go around and that banks adjust loan interest rates to ration that finite pool of savings out among the competing demands for loans.

If the competition heats up – because the government is running large deficits and trying to get the cash from the loanable funds market to cover the tax shortfall on their spending – then the banks will push up interest rates and choke of investment in the non-government sector.

Some students, eager to impress that they belong in the community of economists and share the values they perceive to be a requisite part of membership would then extend this analysis of crowding out to introduce morality type stories about how governments waste resources because they are not disciplined by shareholders and by diverting scarce (finite) investment resources to wasteful government projects from ‘robust’ private projects (yes, the language would all be there – I have seen it in my career as a teacher), the overall well-being of the economy suffers.

Some might even go the next step and start talking about the government using up finite savings to build statues for dictators (seen that too!).

Confusion then enters

And then these characters consult the latest data and obviously get confused.

In fact, the problem is they don’t.

In his great 1972 book – Theories of poverty and underemployment, Lexington, Mass: Heath, Lexington Books), David M. Gordon wrote about how the mainstream deal with cognitive dissonance. Think denial.

His context was mainstream human capital theory, which at the time had been exposed as being deeply at odds with the facts about earnings distributions and other crucial labour market characteristics it sought to explain.

David Gordon said that mainstream economists continually responded to empirical anomalies with ad hoc or palliative responses.

So whenever the mainstream paradigm is confronted with empirical evidence that appears to refute its basic predictions it creates an exception by way of response to the anomaly and continues on as if nothing had happened.

Please read my blog – In a few minutes you do not learn much – for more discussion on this point.

That is a hallmark characteristic of a community crippled by Groupthink.

But the facts are so confronting that any one of these mainstream economists just embarrass themselves when they try to relate their theories and predictions drawn from it to the reality.

All the students in the mainstream courses would be given a deep F grade (fail) by yours truly if they presented that sort of answer to me. And I have done it in the past!

Latest data

The graph shown above documents the decisions of the Bank of England’s Monetary Policy Committee to pursue quantitative easing in three different episodes.

The first episode started in November 2009 with the MPC announcing it would purchase £200 billion worth of government bonds.

In late 2011, the second episode began (after the shocking first two Osborne fiscal austerity cuts threatened to push the UK into a triple-dip recession) and the Bank purchased government bonds in the secondary markets to the take its holdings to £375 billion.

Then in August 2016, the bank launched a third, smaller quantitative easing program which not only combined gilts but also corporate debt. By the end of that episode, the total public debt holdings had risen to £435 billion.

On March 1, 2020, the Bank’s holdings had fallen slightly to £420.4 billion.

And the latest weekly data shows that on May 13, 2020, the holdings had risen to £529.5 billion, an increase of 25.9 per cent.

When all this ‘comes out in the wash’, the Bank of England, like many central banks now engaging in large-scale government bond purchases in the secondary markets, will have basically bought all the debt issued by the British government in pursuit of its fiscal stimulus.

Right-pocket of government working with the left-pocket. Take your pick which pocket is the bank and which one is the treasury.

It doesn’t really matter does it?

And yields?

The UK Debt Management Office provides detailed data on the – Gilt Market.

The latest data shows that on May 20, 2020, the UK government issued a three-year Gilt (bond, expiring in 2023) worth a total of £3,869 million (quite a tidy sum) at a auction yield of -0.003%.

A week before, they issued £2,250 million worth of 21-year Gilts (maturing in 2041) at a yield of 0.594 per cent.

And on May 6, 2020, they issued a 34-year bond totalling £1,750 million at 0.495 per cent.

Now make sure we know what the latest auction means.

Well we need to tie it together with the latest release from the Office of National Statistics (ONS) – Consumer price inflation, UK: April 2020 (May 20, 2020) – which showed that the annual CPI inflation rate was 0.9 per cent in April 2020, down from the March reading of 1.5 per cent.

For the last two months, the monthly inflation rate for CPI including housing costs (CPIH) has been recorded at zero.

The one month CPI series was zero in March and -0.2 in April.

In other words, generalised price inflation is negative (that means prices fell in April) while the Bank of England was merrily adding £200 billion to bank reserves in exchange for gilts – which means it was effectively covering all the deficit increase.

Who would have thought! Certainly not the students we started this post by interrogating.

Here is the graph provided by ONS (Figure 1) which compares the CPI including with the owner occupiers’ housing costs (CPIH), the CPI itself (CPI) and the owner occupiers’ housing costs (OOH) component (the latter which “accounts for around 16% of the CPIH” and, is therefore, the “main driver for differences between the CPIH and the … CPI inflation rates”).

And the clear signal from the Bank of England is that the bond buying is far from finished.

As the fiscal deficit rises and the government issues matching debt (making sure you understand that there is no necessity for this in relation to the expenditure capacity the government has), the Bank will be out in force buying up all the debt.

Talk about ‘money printing’! The students would be getting feverish.

Pity they don’t understand it is a non event – right and left pockets remember.

It doesn’t do anything to increase the capacity of the government to spend. All it does is offer a portfolio swap for the non-government sector – reserves for bonds.

Now why does that matter for the bond auction?

The negative yield on the latest gilt issue means that the investors are paying a ‘tax’ (sort of) to the government in order to give them transfer bank reserves held by the banks back in return for a nominal public liability.

Effectively, the central bank just shifts numbers from reserve accounts to government debt accounts and a nominal liability on government is incurred.

It has to pay back £3,869 million in 2023. A nominal position.

Whoever holds those gilts to maturity will get back less than they paid (as a result of the negative yield).

What does that signal?

First, in the words of the Financial Times:

The robust demand underscores the appeal of gilts, long considered to be a haven due to the UK’s strong creditworthiness and economy. It also suggests market fears over the large increase in borrowing the UK has undertaken due to the Covid-19 pandemic has not yet weighed on market appetite for the debt.

There is that word – “robust” – again, in a meaningful context this time.

Second, the strong demand for the gilt issue and the negative yields means that the investors do not think that there will be an outbreak of inflation any time soon.

And the fact that 34-year gilts were yielding just 0.495 per cent reinforces that point clearly.

Third, this also means that the bond markets think that the Bank of England will try to push their policy rate down further from its present value of 0.1 per cent.

Further, that means negative!

And so the whole business model of neoliberal investing is being shot to pieces by the reliance on monetary policy ‘to generate inflation’.

We don’t know what the longer term consequences of this weird pandemic are going to be. But you can bet the storyline is going the way the mainstream economists predict.

Bid-to-cover ratios

What about that robust demand for the gilts?

Well, this relates to the concept of bid-to-cover ratios.

I wrote about bid-to-cover ratios in these blog posts (among others):

1. Bid-to-cover ratios and MMT (March 27, 2019).

2. D for debt bomb; D for drivel (July 13, 2009).

Essentially, the bid-to-cover ratio is just the the $ volume of the bids received to the total $ volumes desired. So if the government wanted to place $20 million of debt and there were bids of $40 million in the markets then the bid-to-cover ratio would be 2.

The financial media are always predicting the ratios will fall as investors give up on buying government bonds.

It is not even a case of the dead clock being correct twice every 24 hours. These predictions are never correct.

Here is the record of bid-to-cover ratios from January 5, 2016 to the latest gilt auction on May 20, 2020.

That is the ‘robust’ demand the FT was talking about.

The ratio was 2.15 for the negative yield May 20, 2020 auction. That means that the investors actually wanted to buy bonds worth £8.32 billion (that is what they bid for) but the government rationed the corporate welfare out at £3,869.624 million.

And as the pandemic struck and the deficits have risen, the ratio has been rising.

And the average ratio over the period shown has been 2.18 – more than twice the debt wanted than issued.

How does the mainstream explain that in an environment of rapidly rising deficits and huge bond buying from the central bank? They cannot!


So you can see the students haven’t done very well have they?

The reason is that the mainstream macro framework is incapable of explaining anything of importance – I actually haven’t found it useful for unimportant things either.

Only MMT provides the body of knowledge that is requisite for understanding these trends.

And I didn’t get to talk about the massive central bank payments (like up to £57.6 billion) to the large corporations in Britain that have been revealed by the Bank of England under freedom of information requests – see Update to the Covid Corporate Financing Facility (published May 19, 2020).

Where did that money come from? Just kidding.

That is enough for today!

(c) Copyright 2020 William Mitchell. All Rights Reserved.

JobKeeper wage subsidy – some strange arithmetic is afoot

Published by Anonymous (not verified) on Wed, 29/04/2020 - 11:59am in

It is Wednesday so music and some snippets. I have updated the US unemployment claims data with a new map and state table. Shocking. We are working on updated estimates of what the Australian government would need to invest to run a Job Guarantee. We haven’t done that for a while because I didn’t want the press to get obsessed with dollar amounts. But as I am currently talking a lot about the Job Guarantee in the media, I thought some numbers would be useful as a comparative exercise against the JobKeeper wage subsidy, which is the central stimulus plank of the Australian government. The current estimates suggest that to create around 685 thousand jobs might require an outlay of $34 billion over the course of a year. That got me thinking. The main response of the Australian government is the $A133 billion over 6 months JobKeeper wage subsidy scheme. The Treasury claims it will be the difference between an unemployment rate of 10 per cent and 15 per cent. That difference is 685 thousand jobs. Then start doing some division and multiplication and you start to see that this doesn’t make sense as I explain below.

Strange arithmetic – Australia’s JobKeeper wage subsidy

We are working on updated estimates of what the Australian government would need to invest to run a Job Guarantee. We haven’t done that for a while because I didn’t want the press to get obsessed with dollar amounts.

After all, as I have said often, the ‘cost’ of a public policy program is not the numbers that come out in government financial statements under ‘outlays’. The cost is the extra real resources that are consumed as a result of the program.

But as I am currently talking a lot about the Job Guarantee in the media, I thought some numbers would be useful as a comparative exercise against the JobKeeper wage subsidy, which is the central stimulus plank of the Australian government.

Well when I started digging things started to look pretty strange.

Here are some facts:

1. When the Treasurer announced the JobKeeper initiative on April 14, 2020 – Jobkeeper payment supporting millions of jobs – he said:

Given these actions and the position of economic strength from which we approached the coronavirus crisis Treasury expects the unemployment rate to rise to 10 per cent in the June quarter from 5.1 per cent in the most recent data.

In the absence of the $130 billion JobKeeper payment, Treasury estimates the unemployment rate would be 5 percentage points higher and would peak at around 15 per cent.

More than 800,000 businesses have already registered for the JobKeeper payment which will allow the economy to recover more quickly once we are through to the other side of the crisis.

I was immediately suspicious.


By their own statements, the JobKeeper is the difference between a 10 per cent unemployment rate and a 15 per cent rate.

5 per cent of the current labour force is equal to 686.8 thousand jobs – not millions.

But then I thought about it.

2. The announced injection is $A133 billion.

The wage subsidy is a $A1,500 fortnightly payment “per eligible employee until 27 September 2020”. Firms have to pass the full amount on per worker and meet all other employment costs outside of the scheme.

Okay, so each worker gets $A1,500 per fortnight.

The specifics of who is eligible etc is one thing. I discussed my antagonism to the scheme in this blog post – The government should pay the workers 100 per cent, not rely on wage subsidies (March 31 , 2020).

Those criticisms remain but are not the point I am making here.

So if the outlay of $A133 billion is to protect 685 thousand jobs, that means $A193,651 per job protected, yet the workers are only getting $750 a week for 6 months.

A worker receiving the subsidy will get $A18,000 over the course of the scheme as long as the employer keeps them on.

Okay, that would imply 7,388,889 workers are being funded if the full $A133 billion was taken up. The March 2020 labour force was 13,736.2 thousand.

Which would mean that the JobKeeper was protecting something around 54 per cent of the labour force.

Which would mean the Treasury estimates that the JobKeeper would be the difference between a 10 per cent unemployment rate and a 15 per cent rate doesn’t make sense.

3. Then there are those 800,000 businesses the Treasurer claims have registered. Even if they employed just one person that would be more than 686.8 thousand.

And if the 7.3 million figure was correct, then they would on average be claiming for 9 workers. That sounds too many.

4. Then we hear – in Senate Estimates yesterday – that only 540,000 firms have enrolled in the scheme covering 3.3 million workers. See JobKeeper payments start next week, but hundreds of thousands of businesses hit by coronavirus aren’t signed up.

More confounding statistics.

Conclusion: I have written to Treasury to request their analysis. They have not released it publicly. I am waiting – probably in vain. Next step will be an FOI request. I would expect lots of blacked out sheets from that.

The points are:

1. Our Job Guarantee estimates so far, which I will release when we have double-triple and more checked them, suggest that the government needs to invest about $A34 billion to create 685 thousand jobs at minimum wage – which is close to the JobKeeper subsidy.

$A34 billion is a lot less than $A133 billion.

If we are right, then something is awfully wrong with the JobKeeper arithmetic and the statements the Treasurer has been making about it.

2. If businesses are not taking up the JobKeeper program – as today’s reports suggest – then the government will not go close to spending the $A133 billion.

Which means the stimulus will be much lower than suggested and the consequences will be very bad for Australia.

As my previous writing on the subject suggest, the stimulus is only about a half of what I think is required.

The latest data suggests it is even worse than that.

So I am waiting for the Treasury to enlighten me. As it stands, the $A133 billion figure does not make sense given other statements the Treasury have been making about the scheme.

US update to April 18, 2020

Here is the latest update (as for the week ending April 18, 2020) from the US Department of Labor’s weekly data releases for the unemployment insurance claimants.

I first started tracking this data for this downturn in my last commentary on the monthly US labour market data release – Tip of the iceberg – the US labour market catastrophe now playing out (April 6, 2020).

The Department of Labor provides an archive of the weekly unemployment insurance claims data back to July 1, 1967 – HERE.

The weekly data can be found in the – UI Weekly Claims Report.

Bringing together the archived data and the most recent release (April 18, 2020), the following table tells the shocking story.

Week ending
Initial Claims (SA)
Weekly Change
Cumulative sum since March 7, 2020

March 7, 2020

March 14, 2020

March 21, 2020

March 28, 2020

April 4, 2020

April 11, 2020

April 18, 2020

If we assume all those new claimants were unemployed then the unemployment level by mid-April would have been around 32,522 thousand which would mean that the unemployment rate would have been 19.9 per cent compared to the BLS March figure (taken up to March 10) of 4.4 per cent.

So within a month and a bit, the unemployment rate has probably jumped from 4.4 per cent to 20 per cent (give or take).

That is a shocking deterioration.

The peak unemployment rate during the Great Depression was 24.9 per cent in 1933, before the New Deal brought it down somewhat.

The next graph show the full sample to (week-ending April 18, 2020).

The spike at the end of the graph shows how drastic the situation is in the US.

This is a quite extraordinary graph.

Last week, I also provided some spatial analysis – US downturn very harmful to low wage workers and their communities (April 14, 2020).

In the Department of Labor report cited above, we saw there were sharp differences in initial claimants across the US states.

The next map shows the cumulative sum of unemployment insurance claimants since the end of February 2020, expressed as a percentage of the Working Age Population in each state (Alaska was 11.8 per cent and Hawaii was 16.1 per cent).

This graph more starkly demonstrates where the loss of jobs is impacting most significantly. You can compare this map with the map I produced last week to see where the virus job losses are having shifting impacts.

The following Table presents the same data for those who prefer numbers.

Call for MMTed Support

I imagine the current crisis will put a halt on people donating to causes.

But we are making progress in developing the program that will become – MMTed.

I ran my first Masterclass in London recently and it was well attended. I received good (useful) feedback from several people which will help tune the way we run these face to face classes.

The planned further Masterclasses (May in Australia, June in Europe, September in the US) are on hold while we assess the state of the world. But I hope we will be able to offer them sometime this year.

And on-line curricula is being developed.

But we still need significant sponsors for this venture to ensure that we can run the educational program with negligible fees.

If you are able to help on an ongoing basis that would be great. But we will also be appreciate of once-off and small donations as your

You can contribute in one of three two ways:

1. Via PayPal – which is our preferred vehicle for receiving donations.

The PayPal donation button is available via the MMTed Home Page or via the – Donation button – on the right-hand menu of this page (below the calendar).

2. Direct to MMTed’s Bank Account.

Please write to me to request account details.

Please help if you can.

We cannot make the MMTed project viable on a sustainable basis without funding support.

We will always maintain strict anonymity with respect to donations received, except if the donor desires to be publicly associated with the venture and gives their permission in writing to appear on the Donors Page.

Thanks to all who have kindly donated to date.

An announcement is forthcoming.

Shuggie Otis – one of my favourites

Johnny Otis – was one of the great blues, R&B musicians, vibrophone player, keyboard player, drummer, bandleader, composer – he did it all.

He was referred to as the “Godfather of Rhythm and Blues.” He is credited with ‘discovering’ the marvellous Etta James as a 13-year phenomenon.

Shuggie Otis – was one of his sons and also does it all. In the early 1970s he put out three wonderful albums, which most people will never have heard but are among my real favourites and are on my iPhone wherever I go.

As it goes, the music press called him the ‘heir’ to Jimi Hendrix. His guitar playing was phenomenal, which is where I became interested in his work in the early 1970s.

He was to be the gap between Stevie Wonder and Prince. The Rolling Stones invited him to join to replace Brian Jones.

In addition to putting out his own albums, upon which he played most of the instruments, he also played (as a teenager) on Kooper Session – with Al Kooper and – Hot Rats – with Frank Zappa.

His most famous song – Strawberry Letter 23 – was on his second album – Freedom Flight (1971) – was a bit hit for – The Brothers Johnson and produced by Quincy Jones. Here is a link to remind you what was happening in 1977 as disco started taking over. Obviously, I preferred the original.

Shuggie Otis’s third album is the best in my view – Inspiration Information – and it was released in 1974. A short album (31:38) but full of classics.

This is a great song from that album – Aht Uh Mi Hed.

Shuggie Otis hasn’t had an easy life – the usual issues. But I saw him a few years ago playing live again and he is still a masterful guitar player. Pity the drugs and drink got in the road when his star was really shining.

‘Heir to Hendrix’ Shuggie Otis: ‘I could have been a millionaire, but that wasn’t on my mind’ (April 16, 2016) is a contemporary discussion of Shuggie Otis.

That is enough for today!

(c) Copyright 2020 William Mitchell. All Rights Reserved.

Bank of England official blows the cover on mainstream macroeconomics

Published by Anonymous (not verified) on Tue, 28/04/2020 - 1:40pm in



It is quite amusing really watching the way orthodox economists who know the game is up work like gymnasts to avoid actually spelling out directly what the facts are but spill the beans anyway. Last week (April 23, 2020), an ‘external member’ of the Bank of England’s Monetary Policy Committee, one – Gertjan Vlieghe – gave a speech – Monetary policy and the Bank of England’s balance sheet. If the message was taken seriously, then the way monetary economics and macroeconomics is taught in our universities should change dramatically. At present, there is only one textbook that seriously caters for the message that is inherent in the speech – Macroeconomics (Mitchell, Wray and Watts). The speech leaves out important insights but essentially allows the reader to appreciate what Modern Monetary Theory (MMT) has been on about, in part, for 25 years.

Background reading

Here are some past blog posts I have written on this topic. You will not find anything that the Bank of England official said in his speech that wasn’t covered in these blog posts (among many others).

That is especially the case with the earlier posts – written in 2009, for example.

One wonders why it takes more than a decade for officials in central banks to tell the public what is actually going on rather than what the defunct macroeconomists have led everyone to believe.

The point is that revealing these things is an important step in allowing the public to understand better policy choices – and see, clearly, why, in the current climate, any talk of going back to austerity to ‘pay’ for the coronavirus stimulus packages is nonsensical and damaging.

1. Deficit spending 101 – Part 1 (February 21, 2009).

2. Deficit spending 101 – Part 2 (February 23, 2009).

3. Deficit spending 101 – Part 3 (March 2, 2009).

4. Quantitative easing 101 (March 13, 2009).

5. Will we really pay higher interest rates? April 8th, 2009 (April 8, 2009).

6. Will we really pay higher interest rates? April 8th, 2009 (April 21, 2009).

7. The impact of government on reserve dynamics …/a> (August 19, 2009),

8. Operational design arising from modern monetary theory (September 20, 2009).

9. Building bank reserves will not expand credit (December 13, 2009).

10. Building bank reserves is not inflationary (December 14, 2009).

11. On voluntary constraints that undermine public purpose (December 25, 2009).

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

13. The role of bank deposits in Modern Monetary Theory (May 26, 2011).

14. New central bank initiative shows governments are not financially constrained (January 24, 2012).

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

16. The sham of central bank independence (December 23, 2014).

17. Bank of England finally catches on – mainstream monetary theory is erroneous (June 1, 2015).

18. On money printing and bond issuance – Part 1 (August 26, 2019).

19. On money printing and bond issuance – Part 2 (August 27, 2019).

20. When old central bankers know what is wrong but can’t bring themselves to saying what is right (October 8, 2019).

The important parts of the Bank of England official’s speech

In terms of the UK government’s response to the coronavirus, we read that:

Fiscal policy is best placed to target the most affected sectors, and the government has rapidly launched a wide range of programmes to help both firms and households who have been directly affected.

Which is why, in part, we advocate the primacy of fiscal policy interventions.

Monetary policy changes are uncertain in impact, cannot be spatially or cohort-targetted, and may fuel asset price bubbles. It is clear they cannot prevent recession in the same way as direct fiscal stimulus can always do if there is sufficient political will.

He presented this graph which shows that since the GFC, the Bank of England has been swapping bank reserves (light below) for its holdings of government bonds, which it has been buying in the secondary bond market.

This balance sheet pattern is repeated across many central banks now as they have been effectively ‘funding’ government deficits through their various public bond purchasing policies. They have been saying one thing (that they are not doing that) while doing exactly that.

The Speech recognises that:

By definition, only the central bank can provide central bank deposit accounts. So only the central bank can provide reserves.

He talks about “purchasing government bonds financed by ‘printing’ reserves” and qualifies that statement with:

I using … (sic) … “printing” figuratively here as the transaction is entirely electronic. I use it here simply because many commentators use this terminology to refer to this type of transaction.

So he is not challenging the ‘framing’ and the ‘language’ of the conceptualisation of reserves being swapped for bonds – an entirely digital transaction – as being ‘monetary printing’ despite the ideological baggage that that last term carries.

He knows that the “many commentators” who use this sort of terminology actually misuse it deliberately to evoke emotional memories of wheelbarrows and crazed central bankers in basements running printing presses.

That, in turn, is then used as a scare campaign to continue to issue corporate welfare in the form of government debt to the non-government sector to match deficits, when it would be much simpler and involve less costly administrative machinery for the treasury to just instruct its central bank to credit bank accounts to facilitate government spending (as it does now) without matching deficits with bond-issuance.

The Bank of England official then describes how reserve maintenance (liquidity management) is used to maintain short-term interest rates at the levels the central bank desires.

He then talks about QE:

1. “the central bank purchases government bonds, financed by issuing reserves” – “involves the same basic balance sheet transaction as conventional monetary policy: buy government bonds, sell (or create …) reserves. It is just on a larger scale.”

2. “The central bank is no longer trying to balance reserve supply with the reserve demand from the banks” – in other words, the QE program creates excess reserves as a deliberate consequence. He calls the ‘excess’ “ample reserves” – gymnastics.

3. And, “The fact that central banks pay interest on reserves (IOR) is very important. If reserves did not earn interest, then the supply by central banks of ample reserves beyond what banks need at any given level of interest rates, would push the short- term interest rate to zero …”

This is core MMT but students in monetary economics do not learn about these dynamics typically.

4. Paying a support rate on excess reserves, means that “the macroeconomic impact of ample reserves is probably quite small” – so QE is ineffective.

5. Now it gets interesting:

This willingness by banks to hold even quite large amounts of reserves is crucial. It means that the (old) textbook idea that there is some mechanical link between reserves, broad monetary conditions and inflation is just not right.

He then cites two research papers – one from 2014 (a Bank of England paper) and one from 2019 (an unpublished LSE paper).

But, of course, MMT economists have been writing about this for 25 years. No other monetary or macroeconomist was writing about this and they still teach the money multipier as core pedagogy.

The world is catching up with MMT – but slowly and without recognition.

But abandoning the monetary multiplier is an extremely significant step along the way to ditching the main elements of mainstream macroeconomics.

It means that:

1. All the hoopla about expanding bank resereves causing inflation through money supply expansion is inapplicable.

2. All the claims about crowding out, which is a principle argument against the use of fiscal deficits, is inapplicable.

3. The whole mainstream conception of the banking system and its interface with the real economy, is inapplicable.

Move on!

He does move on to talk about the “Ways and Means” account that the Bank of England keeps for H.M. Treasury.

You will recall that on April 9, 2020, this announcement from the British Treasury was released – HM Treasury and Bank of England announce temporary extension of the Ways and Means facility.

Cover blown is what it told the British people.

Effectively, the ‘Ways and Means’ account is an overdraft that the Treasury has with its central bank that allows it to spend freely without satisfying the usual accounting and administrative practices (ex post) relating to bond issuance.

The announcement on April 9 said that the Bank of England would increase the available funds in that overdraft account if the Treasury needed to spend large sums quickly.

The language was all “temporary and short-term” and that the “government will continue to use the markets as its primary source of financing, and its response to Covid-19 will be fully funded by additional borrowing through normal debt management operations” but the reality was obvious.

They can increase fiscal deficits without recourse to the markets ‘matching’ the deficits with debt-issuance any time they like.

So what does the Bank of England official say about this?

He wants readers to confine their understanding of the Ways and Means account as a “short-term cash management tool”:

Rather than the central bank buying bonds, the central bank can lend directly to the government. If you think of a government bond as fundamentally a loan to the government, you can see that, mechanically, it is really just a very similar transaction again as QE and conventional monetary policy: government liabilities on the left, reserves on the right … The main difference from QE is that the initiative of drawing down (and repaying) the facility lies with the government, not the Bank Executive or the MPC.

So he is really saying that QE bond programs amount to the central bank providing ‘funding’ support for government deficits indirectly rather than through the primary debt-issuance process.

And allowing the Treasury to draw down funds in the Ways and Means account is a more direct but equivalent transaction.

We should note, of course, that government spending occurs in the same way, however, these administrative, institutional and accounting conventions and practices are exercises.

The Treasury instructs the central bank to credit bank accounts in the non-government sector on its behalf.

Every hour of every day.

That is how spending occurs.

All these other administrative type conventions do not alter that fact.

Further, what he doesn’t say about QE is that it provides instant capital gains to government bond holders. So, for example, primary dealers bid for the government bonds in the primary auction. They know they will then be able to offload them to the Bank of England ‘next day’ at a higher price than they purchased the debt for.

So just debiting a Ways and Means account and crediting some account of a procurement supplier is quite different to going through the whole hoopla of conducting primary bond auctions and then purchasing the bonds in the secondary market.

And now the ideology part:

The reason the W&M facility is not generally used is that the DMO seeks to use the market for its financing and cash management needs.

The DMO is the British Government’s – Debt Management Office – which was created in 1998 as part of the sham that pretended the Bank of England was now independent of government. It is just a branch of Treasury.

Prior to that, the Bank of England used to conduct all the debt operations on behalf of the government and often participated directly in the primary issuance process.

Many governments deployed the same tactic as an ideologically-motivated decision to promote the pecuniary interests of bond markets and to make it politically more difficult for governments to issue debt.

They knew that if the government had to match their deficit spending with bond-issuance, the debt ratio would become a central topic of conversation and that would limit deficits.

This was one of the legacies that the disastrous Blair Labour government left Britain. A smokescreen to limit government policy that might help the workers and the disadvantaged!

The Ways and Means process survived, however, to smooth out “government cash flows” – as a back up.

He says:

Such a back-up is rarely needed except in periods of sharp unexpected deviations from the financing plan.

That is, when the government knows it needs the Bank to credit bank accounts fast and hasn’t time to go through the ‘smoke and mirrors’ process of issuing debt.

More gymnastics:

The important consideration here, as far as monetary policy is concerned, is that due to the short term nature of these W&M cash management transactions, they do not in any way affect the MPC’s ability of doing its job of meeting the inflation target.

And, they would not affect the policy process if they were not short-term.

Then we move on to the real issue – “Monetary Financing?”

More ‘smoke and mirrors’:

We say we are not doing monetary financing according to our definition21, and someone else says we are in fact doing monetary financing according to a different definition. That is an argument about definitions, rather than about what we are doing.

The Governor of the Bank of England had told the Financial Times on April 5, 2020 – when the Ways and Means announcement was made – that monetary financing involves:

… a permanent expansion of the central bank balance sheet with the aim of funding the government …

What is permanent?

Who can know the aim?

They have been buying up government debt on and off for years now – see the graph above – is that not ‘permament’.

Central banks around the world continue to talk of ‘normalising’ their balance sheets (that is, getting rid of all the debt they have purchased from governemnts) but realise that the process is fraught in terms of asset values in the non-government sector.

Are their holdings not permanent?

They could easily just type some zeros into their accounts and write off all the debt. But they still would have been ‘funding’ the deficits.

Smoke and mirrors!

But we learn more:

One rather mechanical definition is that monetary financing means financing fiscal spending with central bank money rather than by issuing government bonds. The problem is … this description fits most central bank monetary policy operations, in the UK and elsewhere. When a central bank issues reserves, the main counterpart asset on the central bank balance sheet is generally some form of government financing.

Sure enough!

Cover blown 2.0

But clinging to the ‘mainstream’ life rafts he says:

… even though in a strict sense some part of government spending is always financed with central bank money, it is not the same as saying that this part of government borrowing is costless.

Where are we up to – CB 3.0?

He explains:

1. Government issues debt and pays interest to the non-government debt holder.

2. Government doesn’t issue debt, central bank creates reserves and has to pay a support rate on excess reserves not drained from the non-government sector as in Option 1.

Doesn’t this mean that the ‘cost’ of the deficits is the interest on excess reserves?

Cost is a loaded term.

The true cost of a government spending program is the extra real resources that are consumed in the process of policy execution.

But using the term in his way, what he is really saying is that the Bank of England is forced to pay interest on excess reserves if it wants to maintain a non-zero policy rate.

Partially true.

Apart from allowing the policy rate to go to zero (the preferred MMT position), the central bank could issue its own ‘debt’ instrument to drain the reserves, which I do not recommend.

Then reality is presented:

Is it ok for the central bank to finance some, but not too much? How much is too much? Before the crisis, central bank money (notes and reserves) in the UK was about 12% of government debt. Now it is 26% of government debt. In Japan it is 42% of government debt. There is no clear threshold beyond which monetary financing is “too much”, as long as investors believe government finances are sustainable without resorting to inflation. And, given the low levels of government bond yields and break-even inflation rates in the UK, investors clearly do believe that government finances are sustainable without resorting to inflation.

And not to mention the ECB funding the whole Eurozone show at the moment.

And it doesn’t really matter what investors think. They are supplicants.

What matters is whether the deficits are proportional to the non-government spending gaps (different between income and spending) and that total spending doesn’t outpace the productive capacity of the economy.

The bond investors are irrelevant to that process.

He also pulls the rug out from the “short-term” is safe, “permanent” is dangerous myth:

Can we say that a temporary operation is fine, but a permanent one is not? That is problematic too. We carried out several rounds of QE operations after the financial crisis, expecting them to be unwound some years later as the economy improved sufficiently. But the economy did not improve sufficiently, the neutral rate of interest fell more persistently than we expected, with the result that the amount of gilts we own has so far not been reduced.

As I noted above.

And then, while teetering on the balance bar (that long wooden beam that gymnasts always look like they are about to fall off and hurt themselves) we get the trump card:

… Weimar Republic or Zimbabwe …

But, thankfully, he equivocates because, presumably, he doesn’t want to align with the crazies who think the government shouldn’t be taking steps to defend the economic interests of its citizens. There will always be an Austrian economist somewhere in the ‘bushes’.

The equivocation only goes so far though and fails to reveal an understanding of what actually happened in Weimar and Zimbabwe.


The teaching programs in monetary economics and macroeconomics should be radically altered in universities around the world.

Even central bank officials are now, effectively, providing the arguments for that recommendation.

That is enough for today!

(c) Copyright 2020 William Mitchell. All Rights Reserved.

Exodus, Reckoning, Sacrifice: Three Meanings of Brexit

Published by Anonymous (not verified) on Fri, 03/03/2017 - 11:50pm in

Lecture with Kalypso Nicolaidis (St Antony’s College). Respondent: Anand Menon (King’s College London) Convenors: Timothy Garton Ash and Kalypso Nicolaidis (St Antony’s College). The event was co-sponsored by The Oxford Research Centre in the Humanities (TORCH) and the Centre for International Studies at DPIR.

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Published by Anonymous (not verified) on Thu, 26/02/2015 - 10:41am in