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Journey to the heart of Argentina

Published by Anonymous (not verified) on Mon, 16/05/2022 - 6:00pm in
By Carlos García Hernández

Originally published in Spanish in El Común on 13th May 2022

 

Women and a child walking past ouses in La boca Buenos Aires, ArgentinaImage by Fernando Hidalgo Marchione on Flickr. Creative Commons 2.0 license

Between May 2nd and 5th, 2022, I had the opportunity to join economist Warren Mosler’s visit to Buenos Aires organized by Pymes para el Desarrollo Nacional and Grupo Bolívar.

In this way, the interest in modern monetary theory has allowed Mosler’s analysis to be oriented towards the specific case of Argentina. It has been a fascinating experience that has taken us to the bowels of the country’s economy.

The organizers asked Mosler to focus his proposal on two things: the possibility of achieving full employment without inflation (an economic state I have dubbed the Lerner point) and Argentina’s latest agreement with the International Monetary Fund.

Mosler presented his proposal at several public events, to managers of the Central Bank, to the leaders of the public financial institution Banco Nación, at the University of Moreno, in a visit to the Río Santiago shipyard and on the radio program Teoría Monetaria Moderna Presenta. His conclusion is that Argentina’s problem is primarily of a fiscal nature, since Argentina currently spends 8% of its GDP on interest payments derived from public debt securities and Mosler estimates that this figure will soon rise to 20%. On the other hand, the official unemployment figure is not very high (7%), but youth unemployment is over 30%. In addition, the real unemployment rate is much higher than the official one and poverty reaches 37.3% with a marginal poverty rate of 8.2%. Added to this is the enormous problem of inflation, which currently stands at 55.1% per year, but is expected to exceed 60% by the end of the year.

The specific measures he proposed were threefold: the adoption of floating exchange rates, a permanent 0% interest rate policy, and the implementation of job guarantees based on employment buffer stocks.

The adoption of floating exchange rates is the measure that would make it possible to carry out the other two, since only floating exchange rates allow for permanent full employment policies and 0% interest rates decided by the central bank. Currently, Argentina has a fixed exchange rate of the peso against the dollar. The reason for this is that there is a belief among the leadership and the general population that Argentina’s main problem is external constraint. Therefore, it is believed that the Argentine peso is worthless and that it is necessary to maintain large foreign exchange reserves in order to import and grow. This puts the Argentine economy at the mercy of financial speculators, since Argentina has to defend the exchange rate by buying Argentine pesos through its dollar reserves. The consequence is that Argentina periodically suffers debt crises and the risk of running out of reserves, which drives up interest rates, inflation and unemployment. Mosler’s proposal is to adopt floating exchange rates so as not to have to defend a fixed exchange rate by means of foreign exchange reserves and for the Argentine economy to function exclusively through the national currency. He gives as an example the debt crises of Mexico in 1994 and Russia in 1998. Both countries adopted floating exchange rate policies in the face of explosive debt crises resulting from fixed exchange rates. The consequence was that after the introduction of floating exchange rates, there was a sharp adjustment in which the Mexican peso and the ruble lost 66% and 75% of their exchange value against the dollar respectively. Thereafter, the value of the currencies stabilized and then gradually recovered. According to Mosler, something similar would happen in Argentina because the Argentine economy is similar to that of Russia and Mexico. Currently, the official exchange rate of the Argentine peso is 116.25 pesos per dollar and the exchange rate in the black market (the so-called blue dollar) is 202 pesos per dollar. Therefore, the devaluation resulting from the floating exchange rates would bring the value of the official peso to approximately the value of the blue dollar. After this adjustment, the value of the peso would stabilize and then recover progressively, as occurred with the Mexican peso and the ruble.

In response to this proposal, Argentine leaders argue that such a devaluation of approximately 60% would increase the price of imports and that the poorest classes would not even be able to buy food for subsistence. However, Mosler argues that this problem would be solved by means of subsidies in pesos to those who need them and an indexation of salaries that require it. In addition, Mosler also points out that the price of Argentina’s exports would become cheaper and therefore the devaluation would increase the country’s exports. In addition, annual inflation is already at about 60% or so, forcing periodic wage indexations. Therefore, floating exchange rates would require a new and final indexation before entering the period of stability.

This leads us to the second proposal, permanent 0% interest rates and the renunciation of issuing any public debt. Currently, Argentine interest rates are 47%. This reflects a self-defeating attitude similar to that of fixed exchange rates. Argentines believe that without very high interest rates like the current ones, the Argentine peso would lose all its value and therefore high interest rates are the only incentive for the currency markets to accept the peso. This generates a constant flow of pesos directly into the international currency markets where pesos are exchanged for dollars. This dynamic floods the foreign exchange markets with pesos and causes the peso to devalue constantly. This, according to Mosler, is the main source of inflationary pressures in Argentina.

Currently, Argentina spends 8% of its GDP on interest payments, but according to Mosler’s estimates, this figure will soon be 20%, mainly due to interest payments on inflation-linked debt securities, real monetary time bombs that already represent 20% of the total public debt and amount to 70 billion dollars. Mosler proposes to eliminate the issuance of public debt securities, since Argentina is a country that enjoys monetary sovereignty and therefore does not need to either collect taxes or issue debt to finance its public spending. He also urges Argentine policymakers to stop talking only about the primary fiscal deficit (which does not include the interest payments derived from the debt) and suggests that when dealing with the fiscal deficit, they should do so taking into account the enormous and unnecessary amount of pesos that are permanently going to the foreign exchange markets to be exchanged for dollars. In response to the unfounded expressions of fear about the value of the peso, Mosler pointed out that the value of the peso corresponds to the Argentine GDP and to all the products that can be purchased with pesos. To maintain that the peso would lose all its value if interest rates were 0% is as absurd as saying that meat, soybeans, grain, gas, oil, tourism and all the products produced by the Argentine economy would lose all their value. That is simply not going to happen, especially at a time when Argentine exports are reaching record levels. As long as taxes have to be paid in Argentine pesos, the value of the peso will never be zero. Only in an unimaginable case in which no taxes would have to be paid in Argentina would the value of the peso be zero.

With floating exchange rates, interest rates would no longer be determined by the markets, but by the Central Bank. Therefore, once floating exchange rates are adopted, the level of interest rates in Argentina should be 0% and the Argentinian government should renounce the issuance of debt securities.

All of the above brings us to Mosler’s last proposal, job guarantees based on employment buffer stocks. This proposal is only sustainable over time with floating exchange rates that avoid having to adopt fiscal austerity measures to defend fixed exchange rates. In addition, the job guarantee would eliminate any inflationary pressures that may have subsisted from floating exchange rates and the elimination of positive interest rates, since guaranteed labour acts as a wage anchor in both downturns and upturns.

As Mosler tirelessly repeated in his expositions, the price level of an economy, and therefore its level of inflation, can only be explained by the price that the State is willing to pay for the goods and services it needs to supply itself. This especially concerns the price of labour reflected in wages, since the origin of all goods and services is socially embodied human labour. According to Mosler, the wage level is not the cause of inflation in Argentina. Therefore, the State would have no difficulty in setting up a program similar to (but broader than) the so-called Plan Jefes y Jefas, which until a few years ago served as a job guarantee in Argentina. Under this model, anyone who wants and is able to work, but cannot find work in either the private sector or the permanent public sector, should receive a transitional job until he or she can be incorporated into work in the private sector or the permanent public sector. The purpose of the job guarantee is not production per se but to demonstrate the beneficiaries’ work capabilities, since the private sector generally only likes to hire people who are already working. Therefore, guaranteed work should be implemented after the government has decided on the desirable size of the public sector to ensure good quality public services.

The job guarantee wage would become the minimum wage of the economy and would act as an automatic price stabilizer in both expansionary and recessionary economic periods, while eliminating poverty and unemployment.

Before going into the IMF agreement, Mosler also pointed out that in Argentina there is a problem with market regulation. According to Mosler, this is due to a high concentration in strategic productive sectors that leads to oligopolistic practices. His proposal is to regulate these oligopolistic markets to limit their excessive profit margins and avoid speculative practices, especially in the banking and primary sectors.

Finally, he delved into the tempestuous field of the agreement with the IMF. This agreement includes a loan of $45 billion and numerous conditionalities that are very harmful to Argentina, such as the issuance of long-term debt securities and fiscal austerity measures. Mosler proposes to replace this agreement with one that is more beneficial to both Argentina and the IMF. His proposal is to repay the loan through a 3% tax on Argentina’s gross exports. These exports amount to a total value of approximately $100 billion per year. Dedicating 3% of that figure to loan repayment would be beneficial to the IMF because it would ensure that it would receive dollars from the only source of dollar inflows into the country, exports. This means that no currency exchange would have to take place to make payments. Moreover, the IMF would no longer have to worry about imposing any kind of conditionality on Argentine policies. For its part, the Argentine government would be able to exercise its political sovereignty without any constraint from the IMF in the form of conditionalities. Moreover, the 3% tax could be deducted from exporters’ other taxes if it deemed it appropriate, so that there would be no mandatory increase in the tax burden.

I believe that the Argentine government should listen to Mosler’s message and implement the measures he proposes. The achievements of an Argentina with full employment, price stability and well-regulated markets would be beyond imagination. If such a situation were sustained over a prolonged period of time, I am convinced that Argentina could once again become the great world economic power it once was and regain its rightful place of relevance on the international scene.

Euro delendus est

 

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The post Journey to the heart of Argentina appeared first on The Gower Initiative for Modern Money Studies.

Reblog – No, MMT Didn’t Wreck Sri Lanka

Published by Anonymous (not verified) on Sun, 15/05/2022 - 8:37pm in

Debunking Bloomberg with Fadhel Kaboub

Written by Stephanie Kelton

Originally published on Stephanie Kelton’s “The Lens” on 29th April 2022.

Two poor men sitting on a trolley on a street of closed shops. Petta, Colombo, Sri LankaImage by Harshabad on Pixabay

Last week, Bloomberg touted an opinion piece (written by one of its regular columnists) claiming that “Sri Lanka was the first country in the world to try MMT” and that “the experiment has brought the country to ruin.” A few days later, The Washington Post republished the article. So it garnered a fair bit of attention. Unfortunately, the essay offers little insight into what’s really gone wrong in Sri Lanka. But, hey, editors and writers have discovered that MMT drives clicks, so there’s no dearth of efforts to shoehorn MMT into almost anything.

A number of people sent me the link and asked me to respond. I sat down to do just that, but then I remembered that MMT economist Fadhel Kaboub talks about Sri Lanka in some of his presentations and that he’s been studying the country for years.

Fadhel is an Associate Professor of Economics at Denison University and President of the Global Institute for Sustainable Prosperity. He brings deeper knowledge of the Sri Lankan economy and the policy decisions that have paved the way for their current predicament. So I reached out to invite him to respond to Mihir Sharma’s main claims about the so-called MMT experiment in Sri Lanka.

Sharma’s big claim is that “two cherished heterodox theories…became official policy in Sri Lanka and, within two years, they brought the country to the brink of default and ruin.” The government has halted payments of its foreign debt and warned that it may default. Import prices are surging. It’s hard for people to buy food and fuel. There are periodic blackouts and rationing. Inflation is close to 19 per cent and the central bank has recently doubled interest rates. Sharma acknowledges that there are ’structural factors’ at play, and he concedes that the pandemic hammered the nation’s tourism sector while the Russian invasion of Ukraine made everything worse. But he argues that “the deeper problem” is that the ruling elite “turned Sri Lanka’s policymaking over to cranks.” One of the heterodox theories that is supposedly responsible for the crisis is MMT.[1] What follows is a lightly-edited transcript of my Q&A with Professor Kaboub.

KELTON: Sharma claims that “Sri Lanka is the first country in the world to reference MMT officially as a justification for money printing.” He blames former central bank governor, Weligamage Don Lakshman, for listening to monetary cranks who convinced him that “nobody needs to worry about debt sustainability” as long as you “increase the proportion of domestic debt [relative to debt denominated in foreign currency].” Is there anything in MMT that says that as long as you “increase the proportion of domestic debt” you can “print money” without worrying about debt sustainability or inflation?

KABOUB: When I first read the statement of Sri Lanka’s Central Bank governor, Mr Weligamage Don Lakshman, back in 2020, it was very clear to me that he does not understand the basic MMT insights. He was under the impression that what matters in terms of monetary sovereignty is the proportion of foreign currency debt relative to domestic currency debt and that there was no need to rethink the foundation of the economic development model that his country has used since the late 1970s. Governor Lakshman focused on the proportion of debt but never questioned what the external debt was fueling, and never articulated how a higher proportion of domestic debt was going to build economic resilience in Sri Lanka.

MMT economists have been very clear all along that a country’s fiscal spending capacity is constrained by the risk of inflation, which is determined by the level of productive capacity (availability of real resources, productivity, skills, logistics, supply chains, etc.) and the level of abusive market power enjoyed by key players in the economy (cartels, exclusive import license holders, shell companies, cross-border traffickers, speculators, corrupt government procurement systems, etc.). Therefore, increasing a country’s fiscal policy space must be done via strategic investments to boost productive capacity and regulation of abusive market power. Sri Lanka’s economic policy choices (pre-pandemic and Russia-Ukraine war) do not even come close to what MMT economists would have suggested.

As I will explain below, Sri Lanka has three structural economic weaknesses that were systematically reinforced via mainstream economic policies: 1.) lack of food sovereignty, 2.) lack of energy sovereignty, and 3.) low value-added exports. These deficiencies imply that accelerating the country’s economic engines leads to more pressure on its external balance, a weaker exchange rate, higher inflationary pressures (especially food/fuel/medicine and basic necessities), and, as a result, it leads to the classic trap of external debt.

Here is how it all started. Sri Lanka, like many countries in the Global South, began the liberalization of its economy in 1977, and adopted a classic IMF-style economic development model based on exports, foreign direct investment (FDI), tourism, and remittances. This development model remained tamed during the civil war (1983-2009), but it was fully unleashed in 2009, and that is when external debt began to skyrocket, going from $16 billion in 2008 to nearly $56 billion in 2019. The value of the Sri Lankan rupee dropped from 114 to 178 LCU/USD. Thanks to a massive increase in government subsidies and transfers reaching more than 30 per cent of government spending in recent years, Sri Lanka struggled to keep inflation below 5 per cent. Yet, economists celebrated Sri Lanka’s great achievements with an average growth rate exceeding 5 per cent in the decade after the civil war, and a real per capita GDP growth putting the country officially in the upper-middle-income economy category. Sri Lanka was following the mainstream economic development model like a good student. In the decade starting in 2009, exports grew from $9.3 to $19.1 billion, tourism quintupled from 0.5 to 2.5 million visitors annually, FDI inflows quadrupled by 2018 to a record $1.6 billion, and remittances doubled to nearly $7 billion annually. These are the four engines of Sri Lanka’s economic growth, but they are also the engines driving the country deeper into the structural traps of food and energy dependency, and specialization in low value-added exports.

Here is how these engines constitute a trap. An increase in tourism induces more food and energy imports. An increase in remittances means more brain drain. An increase in low value-added exports induces more imports of capital, intermediate goods, fuel etc.; and an increase in low value-added FDI does the same plus the repatriation of profits out of Sri Lanka. On a global scale, these neocolonial economic traps have suctioned $152 trillion from the Global South since 1960.

KELTON: Sharma argues that it was the “printing of money” that caused inflation to hit record highs. He cites the rate of growth of the Sri Lankan money supply and concludes that inflation hit record highs because the central bank expanded the money supply by 42 per cent from December 2019 to August 2021. Why isn’t this a critique of MMT, and how do you think about the current inflationary pressures?

KABOUB: Sharma is wrong on two fronts here. First, he is assuming that the central bank actually controls the money supply, when in fact the money supply is an endogenous variable determined by the private sector (consumers, business, and banks). The central bank simply accommodates the needs of the market in order to keep short-term interest rates at a stable target, otherwise it will cause all kinds of instability across financial markets. Second, Sharma is assuming that inflation is caused by an increase in the money supply, when in reality, Sri Lanka’s inflation, like many developing countries, imports its inflation via food and energy imports. The higher the pressure on the external balance, the weaker the exchange rate, the higher the inflation pressure from imported goods. Sri Lanka struggled with these pressures for a decade, and managed to muddle through by accumulating more external debt, which quickly became unbearable after the pandemic (loss of tourism, remittances, FDI, and export revenues) and the massive increase in global food and energy prices after the Russian invasion of Ukraine.

The solutions to Sri Lanka’s inflation problems are not in the hands of its central bank. Raising interest rates in Sri Lanka will not end the war in Ukraine, or end the pandemic-induced global supply chain disruptions. The most effective anti-inflation tools fall under fiscal policy. It is the parliament, and the various ministries and commissions that can design strategic investments to boost productive capacity, and have the legal authority to update and enforce antitrust laws. In fact, raising interest rates can often fuel inflation (and inequality) because it is the equivalent of an income subsidy to bond holders, and a tax on actual investors who might be discouraged from increasing productive capacity

KELTON: Sharma appears to know that he has offered a faulty representation of MMT. He anticipates some of the counterpoints that I suspect you and I would both raise. He writes, “proponents of MMT will likely say that this was not real MMT, or that Sri Lanka is not a sovereign country as long as it has any foreign debt.” You have been studying Sri Lanka for a few years now. What, if anything, have policymakers done that suggest that they have been running any kind of “MMT experiment” over the last two years?

KABOUB: Well, this is where Sharma nails it! As I explained above, Sri Lanka’s economic policies don’t even come close to anything informed by MMT insights. Sri Lanka’s government ignored its structural weaknesses, didn’t invest in food/energy and strategic domestic productive capacity, didn’t tax/regulate abusive market power, has a corrupt political system dominated by a single family, and when it was backed into a corner after the pandemic, it doubled down on bad economic decision by claiming that agricultural fertilizers are unhealthy (when they really didn’t have the foreign exchange reserves to pay for the imports), so they destroyed agricultural output, especially rice, in the middle of global food crisis. If the Sri Lankan government was serious about investing in healthy food or a healthy economy, it would have put forward an actual food sovereignty strategy centred on native seeds, it would have discouraged intensive monoculture farming, it would have invested in regenerative farming to undo decades of damage to the soil, and it would have supported farmers to increase yields with well-defined medium and long term strategies. Clearly, this “organic farming” experiment was sloppy at best, but it should not overshadow the fact that the roots of the agricultural vulnerability have been decades in the making.

KELTON: Sharma chides the government for shunning the advice of “mainstream economists” and for “refusing to even consult the IMF.” Let’s assume he’s right about the central bank and other policymakers turning away from mainstream economists and institutions like the IMF. What kind of advice has the IMF given to Sri Lanka in the past, and what kind of economic development strategies would you recommend if officials called on you to advise them?

KABOUB: Sri Lanka has been following the IMF instruction manual for decades. It has received 16 loans from the IMF since the 1960s, and it is currently negotiating another one. Since 1996, Sri Lanka has never been away from the IMF’s negotiating table for more than 3 or 4 years at a time. Despite the political rhetoric of the Sri Lankan government over the last couple of years, the current Sri Lankan administration has abided by the IMF’s terms and conditions of the $1.5 billion Extended Fund Facility (that’s the 16th loan disbursed between 2016-2020). So maybe the Sri Lankan government has come to realize that the IMF instruction manual is actually harmful. The problem is that they don’t fully understand why, and they certainly haven’t identified an alternative strategy to escape from this trap.

In terms of policy advice, Sri Lanka needs emergency assistance with immediate shipments of food, fuel, medicine, and basic necessities. Sri Lanka needs debt relief rather than debt restructuring. For example, UNDP has recently recommended negotiating debt-for-nature swaps. There are other debt swap mechanisms such as debt-for-development, debt-for-equity, and debt-buy backs. The Sri Lankan central bank should be negotiating FX swap line agreements with the central banks of its major trading partners in order to stabilize the value of its currency.

Sri Lanka should also access the IMF’s newly created $45 billion Resilience and Sustainability Trust (RTS), which, unlike other IMF facilities, is actually a program that funds strategic investments to build resilience and promote sustainability. Sri Lanka would qualify for up to $1.4 billion of concessional loans with substantial grace periods. However, to qualify for RTS funds, Sri Lanka must first have an existing agreement with the IMF. It needs to enter these negotiations with its own strategic vision in order to escape the IMF’s austerity and external debt trap.

The IMF wants countries to establish an economic policy framework that leads to external debt sustainability, but its track record has been a miserable failure. Sri Lanka needs to convince the IMF and other lenders and strategic partners, that it can only escape this external debt trap if it tackles the problem at its source — e.g. by investing strategically in food sovereignty (with an actual long-term strategy rather than half-baked organic farming wishful thinking), investing in renewable energy capacity (energy efficiency, public transportation, etc.), investing in education and vocational training in order to climb up the value chain in the manufacturing sector, and becoming more selective in its support for export industries and FDI projects. In other words, ending the race to the bottom policies, and building resilience to external shocks.

These strategic investments must be coupled with an actual democratization of the political as well as the economic system. The government needs to crack down on corruption, cartels, abusive price setters, and entities that enjoy exclusive economic power and have every incentive to object to the strategic investments listed above.

The sad part of this story is that Sri Lanka is only one of many countries in the Global South facing the same structural traps, struggling with unbearable external debt, soaring food and energy prices, shortages, and rising social and political tensions.

 

[1] The other has to do with a shift toward organic farming that has apparently fueled a precipitous drop in crop yields, farming incomes, and export revenues.

 

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The post Reblog – No, MMT Didn’t Wreck Sri Lanka appeared first on The Gower Initiative for Modern Money Studies.

Fresh audio product: the IMF and debt, Asian Americans

Published by Anonymous (not verified) on Sat, 30/04/2022 - 3:41am in

Tags 

Radio, Debt, IMF

Just added to my radio archive (click on date for link):

April 28, 2022 David Adler of the Progressive International on an impending debt crisis, with an emphasis on the role of the IMF (Guardian article here). • Sudip Bhattacharya on the Asian American population: its diversity, its unity, its politics

IMF and World Bank at odds with each other over interest rate hikes

Published by Anonymous (not verified) on Wed, 20/04/2022 - 5:11pm in

Tags 

IMF, Inflation, Music

Today, Wednesday, we have our regular musical feature (might surprise today) as well as a brief commentary on the growing friction between the IMF and the World Bank on what governments and central banks should be doing to address the current inflationary pressures. One says hike rates (apparently thinking that will get Russia to withdraw, Covid to go away and OPEC to behave) while the other says provide better income support and wait out this transitory inflationary phase.

IMF continues to lose the plot

The latest – World Economic Outlook (published April 19, 2022) – is another example of why the IMF should be disregarded in all of its utterances.

After traversing through a discussion about the negative impacts of the Ukraine War – slowing global growth and pushing up the inflationary pressures = particularly in “low-income countries” who are more vulnerable to rising food and fuel prices, they conclude that:

… many countries have limited fiscal policy space to cushion the impact of the war on their economies … tighter monetary policy will be appro- priate to check the cycle of higher prices driving up wages and inflation expectations, and wages and inflation expectations driving up prices

So just singing off the standard hymn sheet.

At present nominal wages growth is muted and not driving inflation anywhere.

Medium-term inflationary expectations are also not accelerating.

The IMF is also reasserting the ‘forward-looking’ narrative, which the US Federal Reserve abandoned in August 2020.

I wrote about that in this blog post – US Federal Reserve statement signals a new phase in the paradigm shift in macroeconomics (August 31, 2020).

The Federal Reserve Chairman told an audience at Jackson Hole on August 27, 2020 that the bank would no longer push rates up in advance of actual inflation revealing itself.

Rather it would take backward looking approach to ensure that employment reached the highest levels possible rather than prematurely creating unemployment just in case inflation might appear.

The IMF is trying to push a reversion of that backward-looking approach by claiming:

A well-telegraphed, data- dependent approach to adjusting forward guidance on the monetary stance—including the unwinding of record-high central bank balance sheets and the path for policy rates—is the key to maintaining the credibility of policy frameworks.

The forward-looking approach just elevates unemployment and other forms of labour wastage (underemployment, hidden unemployment) and causes households to default on their precarious debt levels and lose their houses, among other travesties.

The IMF also claim that there were ‘huge … fiscal expansions in many countries during the pandemic’ but what really happened was that the governments were replacing lost spending and income from the non-government sector.

Once we net out the lost non-government spending, the fiscal ‘stimulus’ packages were not very large at all.

The fact that GDP fell so far in many countries tells us that total spending in these economies fell, which means the increase in net government spending did not fully offset the decline in non-government spending.

That puts a different slant on the term ‘stimulus’.

The fiscal interventions were more sandbagging attempts than expansionary impulses to nominal spending.

But the IMF only sees its own flawed framework so:

1. “debt levels are at all-time highs”.

2. “governments are more exposed than ever to higher interest rates.”

3. “need for consolidation”.

So the IMF maintains its irrelevance to any realistic interpretation of what is going on.

The rising debt levels just mean that the non-government sector has chosen to increase the holding of government debt in its overall wealth portfolio.

Rising bond yields just mean (for currency-issuing governments) that they are paying more income to the non-government sector than before, but interest payments are small relative to total expenditure anyway.

Wealth rising, income rising – why is that something to be alarmed about?

If my personal debt was rising and interest rates started moving up then I might be cautious, then worried – depending on the circumstances. If I lost my job, or my discretionary income was squeezed by the rate rises and inflationary pressures, then I might get really worried.

But I don’t transfer those thoughts and deliberations onto the government situation.

I know that the government does not have the financial constraints that I face.

The problem is one I have outlined several times in recent months.

The inflationary pressures are not coming from excessive growth in nominal spending.

Yes, nominal spending is somewhat out of whack with available supply, particularly in the goods sector, but that is because supply is out of whack.

Purging demand through interest rate rises (which will take very significant increases in rates and many insolvencies) doesn’t fix the out of whack supply.

It doesn’t get Russia to behave.

It doesn’t get OPEC to behave.

It just creates more gloom via rising unemployment – adding further woe.

It also seems that the World Bank, the IMF’s co-partner in neoliberalism, has discovered a slightly different hymn sheet.

The World Bank President said recently that central banks should not be relying on interest rate hikes:

The inequality gap has widened materially, with wealth and income concentrating in narrow segments of the global population. Rate hikes, interest rate hikes, if that’s the primary tool, will actually add to the inequality challenge that the world is facing.

So what are they proposing?

Fiscal support for the poor to reduce the impact of fuel and food price rises. In other words, income support to maintain nominal spending in real terms.

Why would they do that if there is inflation?

Because they seem to understand that the inflationary surge is not a demand event and will not be resolved by further cutting nominal incomes.

That’s progress.

I will write at more length how governments should handle this tricky period ahead in another blog post soon.

Music – Groovin’

This is what I have been listening to while working this morning.

It was a beautiful sunny morning today so I thought I would accelerate time (bring Sunday afternoon forward) and play this song from 1967 – Groovin’ – from – The Young Rascals.

It is the only album of this band that I have – because (a) I don’t particularly like soft R&B music; and (b) they didn’t record other good songs.

Arethra Franklin’s version is also good by the way.

The Young Rascals grew up quickly and became ‘The Rascals’ and were seen as rivals to – The Righteous Brothers – in the so-called white blue-eyed soul genre.

They eventually broke apart because their keyboard player and vocalist – Felix Cavaliere – wanted the band to release albums with some substance rather than pop singles.

Their attempts at breaking out of the ‘singles’ mould coincided with their experimentation in all things psychedelic and the material than emerged was uninspiring although they demonstrated their social progressiveness with songs such as – People Got to be Free (released 1968) – which offered support for the civil rights struggles in the US.

But at least they left us with this smooth song which always reminds me of sunny days as a teenager in Melbourne walking along the creek as I played truant and explored the world beyond the petty authority of the education system in Victoria.

That is enough for today!

(c) Copyright 2022 William Mitchell. All Rights Reserved.

The IMF forecast tough times ahead for the UK, but they are being much too optimistic

Published by Anonymous (not verified) on Wed, 20/04/2022 - 4:38pm in

As the FT noted yeseterday afternoon:

The IMF predicted that Britain’s economy would increase by just 1.2 per cent in 2023 and that its inflation would be higher than every other G7 member and slower to return to its 2 per cent target.

As they added

Pierre-Olivier Gourinchas, IMF chief economist, said: “What we are seeing is that the UK is facing elevated inflation, and tight monetary policy is weighing down on economic activity this year and next.”

I have on problem with this observation, which is that I think that they  are far too optimistic.

The IMF have themselves said there are downside risks that might mean that their forecasts are too optimistic. These include escalation in the war in Ukraine; inflation pressures building; the COVID 19 pandemic getting worse again; financial instability as interest rates rise and, crucially:

We have also the potential for social unrest given the increase in energy and food prices in many countries

I would say all those risks are significant for the reason the IMF ignore. That is that within the aggregates they like to deal in they are overlooking the real poverty being created around the world now.

In the U.K. we now have energy companies forecasting 40% fuel poverty, which is inability to keep a house warm next winter.

And still there appears to be no real political awareness of the crisis that we are hearing for. I really have no explanation in the face of the obvious truth that we are facing, which is that there really is a crisis now and we have to deal with it immediately.

Advanced countries should invest in fair trade ventures (without ownership claims)

Published by Anonymous (not verified) on Tue, 22/03/2022 - 1:52pm in

Tags 

IMF, Inflation

According to the International Coffee Organization (ICO), the price of coffee has risen for 17 consecutive months and the sector is being hit with sequential shocks, the latest being the Ukrainian conflict, which is having impacts on both the demand and supply sides. I was talking with a friend over the weekend just gone and they were complaining that a cup of coffee had risen to $A7 or thereabouts, which was really squeezing people’s incomes. As a disclaimer, I have never had a cup of coffee in my life – just the aroma is enough to turn my stomach. But I was thinking about coffee over the last few weeks for another reason. I am currently doing some research on Timor Leste in anticipation of a change in the Presidency. The first round of the elections were held last weekend and it looks like Ramos-Horta will win the second round run-off in April. One of the things I am working on is a plan to diversify the nation’s exports as the inevitable decline in oil revenue starts to impact. I am also in developing models of fair trade that allow for sustainable agriculture (that is, not cash crop mania that wrecks subsistence farming and ends in farmers being locked up in international debt) but also allow the nation to diversify their export portfolio. Fairness and sustainability are good ideals to have. There is an opportunity here for a nation such as Australia to reform its ways and break out of the dog-eat-dog ‘free trade’ mantra and actually start doing some good in our region. That is what this blog post is about.

What follows is not yet definitive. Rather it is a set of notes that help me understand the situation and start the process of mapping out a blueprint for sustainable development – sector by sector.

Global coffee trends

In the latter part of 2021 into 2022, coffee exports from South America (Brazil, Columbia) plunged – down 16.1 per cent between October 2021 and January 2022.

Further production falls are expected.

Global shortages are expected relative to demand.

This ABC article (September 20, 2021) – A coffee shortage is coming, and it could last three years, importers warn – foreshadowed the problem:

limate change-related weather events have affected key coffee-producing regions and global supply chain issues are hurting importers.

Drought and severe frost are estimated to have destroyed about 20 per cent of Brazil’s coffee plants.

Brazil is the world’s largest coffee producer and accounts for about half of the world’s supply.

Brazil has cut its production by 25 per cent.

It is clear that the world is in another wave of escalating coffee prices as is evidence by the next graph, which shows the ICO Composite Indicator Price from January 1990 to March 2022.

The ICO indicator price system began in 1965 and is a summary measure based on four separate price groups:

– Colombian mild arabicas.
– Other mild arabicas.
– Brazilian and other natural arabicas.
– Robustas.

The ICO say that “The current composite indicator price is calculated by taking a weighted average of the indicator prices for the four separate groups, weighted according to their relative shares in international trade.”

According to the latest ICO – Monthly Coffee Market Report – February 2022 – the global coffee price in futures market has fallen as a result of the Ukrainian conflict.

But the ICO Composite Indicator Price continued to rise (+3.2 per cent) in February 2022 (“17 consecutive months of increase”).

Together, Russia and Ukraine accounted for 3.8 per cent of global consumption of coffee.

On the supply-side, Russia is a significant supplier of ammonia, which is a fertiliser ingredient, which will likely push up input costs for coffee growers.

Further, on-going disruptions to shipping sees “several containers of Honduran coffee stranded in international waters”.

So, on-going chaos is expected.

Diversifying exports in Timor Leste

Timor-Leste has what is referred to as a ‘narrow export basket’, which just means that a significant proportion of its exports are dominated by few commodities.

Oil and gas exports account for over 75 per cent of the nation’s total exports.

The WTO – Fact Sheet – provides more detail.

The following graphic summarises the 2019 shares of exports by commodity groups.

Fuels and Mining Products – 75.6 per cent
Coffee – 16.6 per cent
Other – low

Timor-Leste also mainly trades locally – Singapore, South Korea, China, Indonesia, India and Japan.

Its overwhelming reliance on oil and gas is finite.

At present, with the escalation of energy prices, Timor-Leste is benefitting but the medium-term projections are not good.

The Petroleum Fund that the nation has built up since independence is massive but the additional oil revenue is declining as the fields run dry.

I have written extensively about this problem and you can consult the relevant blog posts – HERE.

Clearly, the Petroleum Fund will not last for ever.

But that should not be used as a further argument for austerity and a smaller drawdown from the Petroleum Fund. The reality is that the global uncertainty makes it more imperative for Timor to fast track its human capital and physical infrastructure development.

Currently, with Timor’s dollarised monetary regime, the massive Petroleum Fund is the only viable financial resource available to government to address the crucial issues of unemployment reduction, skill development, food security, and infrastructure development.

While introducing its own currency is the medium-term goal and a strategy has to be mapped out to define that transitional path, we must recognise that a significant amount of work can be done now, within the context of the dollarised monetary system and the vast Petroleum Fund resources, to prepare the nation for that transition and provide major short-term gains in material prosperity and environmental sustainability.

One aspect of that work now is to diversity if non-oil exports.

There are several parts to a sustainable development plan for a nation such as Timor-Leste, as an alternative to the sort of car crash plan that the likes of the World Bank and the IMF offer.

Those institutions typically want to reduce the size of the agricultural sector and shift it into cash crops for exports. This strategy not only floods the world with produce and depresses prices but also undermines the subsistence nature of farming in poorer nations.

So the farmers end up in worse debt predicaments and the local citizens lose food security.

However, criticising that strategy doesn’t mean that food exports are to be eschewed.

It just means that nations have to be smarter in the way they build export markets.

Advanced nations can also help.

While there is a narrative emerging that ‘globalism’ is dead and nations will look to becoming more self-sufficient given Covid, Russia, China etc, there is still a lot of ‘free trade’ talk going on.

At present, Australia is negotiating a ‘free trade’ agreement with India, despite the latter nation being sympathetic to Russia.

You can be sure that any such agreement will be laced with neoliberalism and will aid corporations over people.

Australia is also a poor world citizen when it comes to foreign aid.

Despite promising to meet agreed global targets on direct aid as a proportion of GDP, the Australian government has refused to honour that promise.

It even now counts the expenditure it outlays to keep legitimate refugees in off-short concentration camps as foreign aid, such is the morality deficit among our political class.

I wrote about that shame in this blog post among others – Australia’s Overseas Aid cuts reveal a nation that has lost its spirit (May 15, 2017).

Our inability to stick to our agreements with the UN and others places our nation in the toxic category unfortunately.

Just last night, the UN secretary general said that Australia was one of the G20 holdouts in terms of climate action. Another example of how this nation has lost its way.

The Australian government responded to that criticism by claiming that the UN chief “António Guterres …. [was] … a member of the UN ‘chattering classes'” (Source).

All these elements can be brought together to assist the development of the coffee industry in Timor-Leste, which has some very unique features.

The – Coffee industry of Timor Leste – is the largest non-oil export sector, although tiny by world standards.

It is a relatively large employer and source of investment funds.

But it produces the largest supply of ‘organically’ grown coffee globally and its output is considered to be of the highest quality as a result of the volcanic soils available.

A significant portion of the sector is organised along cooperative lines.

The – Cooperativa Café Timor – for example, was formed after the nation gained its freedom from Indonesia in 1999.

The Cooperative was formed in 1994 and now has 28,000 planter members supporting 44,000 families – “It is divided into 16 cooperatives and 493 producer groups.”

It trades under a Fairtrade certification, which provides stronger income security for the farmers.

The Coop provides free health care (general medical, dental and maternal and child health services), business development and other benefits to members.

However, the sector still faces massive problems – largely due to a lack of working capital and poor infrastructure (transport etc).

A plan

So with world coffee prices rising, Australian consumers complaining, and Australia in need of doing something right as a global citizen, and its desire to enter trade agreements with other nations, here is the plan.

Australia enters a fair trade agreement with Timor-Leste to invest without ownership in improving the capital available to Timor’s coffee cooperatives.

We also agree to purchase a substantial proportion of our coffee needs from Timor-Leste up to their supply capacity which we would be helping to expand.

The purchase price would be under ‘fair trade’ rules, which would help the farmers increase their incomes and material standards of living.

There are several other benefits to this plan.

First, we could reduce the price of coffee to Australian consumers (is that a benefit?)

Second, by purchasing imports closer to home we reduce the carbon footprint of our coffee consumption, which would allow us legitimately to say we are trying to change our ways with respect to global warming.

Third, we improve our shocking foreign aid/GDP performance while genuinely improving the standards of living for one of our nearest neighbour.

We could also extend the plan to Papua New Guinea, which is also a coffee producer in need of substantial investment, and even closer to our shores than Timor-Leste.

Conclusion

There is nothing wrong with nations seeking to export agricultural commodities as long as the producers get fair prices on world markets and the production process doesn’t destroy traditional practices and undermine the quality of the local environment.

The coffee plan for Timor-Leste would be a win-win for both Australia and Timor-Leste.

Of course, it won’t happen given the lack of generosity and foresight of our political class.

But it should.

That is enough for today!

(c) Copyright 2022 William Mitchell. All Rights Reserved.

Vast majority of NZ economists seem to support MMT

Published by Anonymous (not verified) on Thu, 03/03/2022 - 4:24pm in

Yesterday, I published a full analysis of the national account release in Australia, so today I am pretending it is my Wednesday ‘news’ blog with the music segment that seems to be popular. The news is all floods in Australia, death and destruction in the Ukraine and big talk (about 2 or more decades too late) from the Western governments. I note that the German government has confiscated a luxury yacht owned by some Russian ‘oligarch’ (don’t you just love their terminology) while stacks of other oligarch yachts are heading or are in the Maldives to avoid such a fate. Stupid question: if these oligarchs are so bad and their fortunes ill-gotten why have we waited so long to do something? Today we talk briefly about the resolve of the RBA to resist the gambling addiction of speculators in the financial markets. We also consider a discovery I made last week that top New Zealand economists seem to support Modern Monetary Theory (MMT), and then if that isn’t enough – some music.

RBA stays firm on interest rates

On Tuesday (March 1, 2022), the Reserve Bank of Australia decided to keep interest rates constant.

In the – Statement by Philip Lowe, Governor: Monetary Policy Decision – the RBA governor acknowledged that:

Inflation in parts of the world has increased sharply due to large increases in energy prices and disruptions to supply chains at a time of strong demand … increased further due to the war in Ukraine …

How long it takes to resolve the disruptions to supply chains is an important source of uncertainty regarding the inflation outlook, as are developments in global energy markets …

The Board is committed to maintaining highly supportive monetary conditions to achieve its objectives of a return to full employment in Australia and inflation consistent with the target. The Board will not increase the cash rate until actual inflation is sustainably within the 2 to 3 per cent target range. While inflation has picked up, it is too early to conclude that it is sustainably within the target range. There are uncertainties about how persistent the pick-up in inflation will be given recent developments in global energy markets and ongoing supply-side problems. At the same time, wages growth remains modest and it is likely to be some time yet before growth in labour costs is at a rate consistent with inflation being sustainably at target.

Kick in the pants for all the financial market players who have been screeching, almost on a daily basis, how the ‘markets have priced in rate hikes’, as if that is a foregone conclusion.

The RBA is not buckling to that pressure and should not.

There are no long-term structural forces present to push this inflation into an accelerating spiral just yet.

The RBA knows that, which is why they talk about the modest wages growth constantly.

Vast majority of NZ economists seem to support MMT

I gave a talk to the Law and Economics Association of New Zealand last week on the inflation issue.

The seminar was on the same day that the RBNZ raised interest rates to ‘fight inflation’.

The other speaker was a former governor of the Reserve Bank of New Zealand and now an academic at a unversity in Wellington.

His presentation was mainstream standard stuff – inflation out of control, interest rates must rise and fiscal policy has to turn to austerity.

All the normal arguments we have heard over and over that have never been correct.

After my contribution, there was a discussion with a question and answer segment.

At one point, the other speaker said that Modern Monetary Theory (MMT) was crazy and totally unsupported by the profession.

To evidence that assertion he referred to a recent – Survey – conducted by the New Zealand Association of Economists, which is the professional body for economists in that country.

There were several questions and Question 3 was about Modern Monetary Theory (MMT), which served as his ‘gotcha’ point or so he thought.

Here is the question and the responses.

So read the question carefully.

And guess what I would have answered?

Answer: Strongly disagree (Confidence 100%).

What?

Yes, some character in the Economics Association thought they were being clever by summarising Modern Monetary Theory (MMT) with this proposition that they suspected all the participants (mainstream economists) would reject strongly.

End of MMT. Discredited by the profession. Move on.

However, the person(s) who framed this question clearly do not understand what MMT is about.

No MMT economist has ever claimed that a nation that borrows in its own currency or for that matter just issues its own currency without borrowing can finance as much “real” spending as it wants by creating money.

That is the point of the shift in focus that MMT provides from financial to real resource constraints.

Governments spend in nominal amounts – so many dollars, so much yen.

They secure real resources (productive inputs, products) with that nominal spending as long as the productive sector can respond to the spending in output terms and the resources are not already engaged.

If they want to secure a greater share of real resources through nominal spending and they try to compete with existing users then inflation results.

They must then reduce the capacity of existing users to deploy those resources and there are several strategies the government can employ to accomplish that end, including taxation.

Taxation frees up real resource space by creating idle resources, which the government can bring back into productive use or realise sales through nominal spending.

But the limit on nominal spending is available real resources or resources that can be diverted to public use through taxation and other strategies, as above.

At some point, the hard resource constraint binds and no amount of nominal spending by government in the short-term will change that. Inflation will result.

So you can see, these experts in NZ, who are in top positions in the RBNZ, Treasury etc all thought they were answering a question that would expose the fallacies within MMT.

All they were doing was ratifying a key proposition of MMT.

Which makes you wonder what goes for an expert in New Zealand.

The legacy of shock therapy

I wonder how the likes of Jeffrey Sachs are now thinking given all the shocking destruction in the Ukraine right now?

I imagine, given their hubris in the 1990s when they marched into the wreckage of the Soviet Union and proceeded to impose – Shock therapy – on Russia and the satellites.

Instead of taking the time to build the social, legal and political institutions that protect nations against dictatorships this gang of Washington-consensus economists created havoc – dramatically increasing inequality and poverty, reducing life expectancy and setting the new nations up for failure and a return to authoritarian regimes.

The IMF and the gang of economic consultants from US universities and elsewhere that went into these nations seemed to believe that if social protections for citizens were abandoned, public wealth handed over to a new generation of bandits, and an open slather was created for greed and speculative ventures that somehow the nations would mature and become havens for democracy and stability.

The arrogance and idiocy of that lot is beyond imagination.

They marched into Russia under Boris Yeltsin’s impramatur and forgot to see what the people who lived there would like to see for their nations freed from the Soviet rule.

In their haste to sell the wealth off and kick old people out of their apartments and turn of their heaters – as market prices were imposed on housing etc – they didn’t think for a moment that a legal framework, based on a constitution that gave rights and freedoms would be necessary.

I saw this first hand when I did some work in Kazakhstan some years ago.

There were old people living in tin sheds in the harshest of winters on the outskirts of Almaty, who had lost their housing and pensions when the Shock Therapy gang rode into town.

I learned a lot first hand of the consequences of the approach taken immediately after the Soviet system collapsed.

They also didn’t eliminate the culture of authoritarianism – and the resentment to the so-called ‘liberalisation’ allowed it to consolidate under a new set of authoritarian types.

They also created a new breed of capitalist who commandeered the public wealth and companies and created untold personal wealth at the expense of the people.

This wealth found its way into property markets in London and elsewhere, into luxurious possessions and has been used to pervert political processes around the world by capturing Western political parties through funding and personal payola.

And remember the so-called – 1993 Russian Constitutional Crisis – which saw the elected parliament dissolved after they rejected a decree by Boris Yeltsin who rode into Moscow with tanks, and had the army storm the Supreme Soviet Building (parliament)and murder at least 137 citizens and injure many more as he imposed Presidential rule by decree.

The likes of Putin were on training wheels watching all that.

And in 1996, Yeltsin, on the advice of his close adviser, engineered things to have Putin installed as the President of Russia (Source).

Putin wasn’t elected – he was installed by an authoritarian predecessor under a constitution that allowed Presidential decree.

Putin had played along with the Shock Therapy gang and enriched himself in the process, along with his mates.

But his Presidency has largely rejected that approach and consolidated power among a cabal of … ‘oligarchs’.

And as an aside – don’t you just love the terminology of the West – ‘oligarchs’. The Koch Brothers and their types are financiers or industrialists or entrepreneurs. But the Russian capitalists are ‘oligarchs’.

Meanwhile, the IMF and the Jeffrey Sachs types have moved on – oblivious to their on-going destructive legacy and reinventing history to absolve themselves of responsibility.

I also could talk about the role the IMF and the West, in general, has played in modern day Ukraine.

This article is interesting in that regard – What You Should Really Know About Ukraine (January 27, 2022).

Don’t get me wrong though.

I do not intend to ameliorate the Russian behaviour which is unambiguously shocking.

Further, on the new confiscation drive – luxury yachts etc – if these fortunes are so illegitimate, why are we just confiscating their ill-gotten gains now.

Why has the British government – both parties – allowed these characters to distort property markets in London and why have they taken funding from them?

Why don’t the Western governments immediately stop buying gas and oil from Russia – sales of which dominate their massive current account surplus which gives Russia the capacity to continue to buy whatever imports they desire?

Why hasn’t the banking restrictions been imposed on Sberbank and Gazprombank, which facilitate those trades?

I also note that the British Labour Party bosses are now threatening expulsion of any members including MPs who dare to question NATO or the role of the West in all of this.

The freedom party it seems.

Shocking hypocrisy given its role in Iraq.

And, finally, my friends at the Rose Mark Campaign in Japan have recently issued (February 26, 2022) a statement – [Statement] No War! Let us condemn the invasion of Ukraine along with the struggle between Great Powers for spheres of influence – which is worth reflecting on.

Which of the Western powers in recent years has not been complicit in given the Putin regime in the Russian Federation the scope to pursue his agenda?

I just wish Russia would stop killing children and citizens in general.

Our edX MOOC – Modern Monetary Theory: Economics for the 21st Century continues

Week 4 – the final week – began yesterday in our MMTed/University of Newcastle MOOC – Modern Monetary Theory: Economics for the 21st Century.

The course is free and will run for 4-weeks.

You need to invest about 2 hours of time per week, so if you have the will to catch up you can.

So, it is not too late to enrol and became part of the already large class.

Learn about MMT properly with lots of videos, discussion, and more.

We have already had two live events this year which added to last year’s material. And next week another two live, interactive sessions will occur.

So even if you completed the course last year, these live events might be a reason for enrolling again, just to be part of these sessions.

Further Details:

https://edx.org/course/modern-monetary-theory-economics-for-the-21st-cen...

Music – New version of a classic

Here is a contemporary interpretation (2020) of a classic R&B number from the 1960s – I’m a Man.

It was first recorded by – The Spencer Davis Group – and released in January 1967.

It was the last single that the band recorded with organ player – Steve Winwood – before he departed for – Traffic – another great band.

He wrote the song with record producer – Jimmy Miller – who later produced some of the great Rolling Stones’ records.

The album of the same name, released later in 1967, is worth listening to regularly. One of my favourites among many.

Unfortunately, the song has been used by many spurious advertising campaigns, which I consider to be totally inappropriate, but that is the way Capitalism perverts our culture.

Every budding musician in the 1960s who got their hands on a guitar learned this song and played it in garage bands – few chords, great pattern, and strong riff. All the hallmarks of a jamming track.

This version from a studio performance from Steve Winwood at his own studio – Wincraft Studios – which is in the west of England (Cotswolds).

And for purity, here is the original from Spencer Davis Group, which I prefer.

But whenever a Hammond B3 and Leslie Cabinet is involved it is hard not to like the offering.

Aah, the late 1960s, when nothing made sense to us teenagers, yet everything seemed possible, and revolution was hope.

And, those hopes were disappointed.

That is enough for today!

(c) Copyright 2022 William Mitchell. All Rights Reserved.

The IMF shows us that the central bank monetary financing taboo has no substance

Published by Anonymous (not verified) on Tue, 01/03/2022 - 2:44pm in

Recently (February 22, 2022), I received the latest E-mail update from the IMF blog advertising their new post – Should Monetary Finance Remain Taboo? – which obviously attracted my attention. One of the most deeply entrenched taboos in economics relates to central banks directly facilitating government spending without any other monetary operation. In an important sense, the characterisation of ‘monetary financing’ by the mainstream economists is erroneous and leads to all sorts of fictions that undermine sensible and responsible economic policy making. But, we can work through those fictions to discuss what the IMF is talking about. Importantly, they find that this taboo, which has been broken during the pandemic in many countries (although Japan has been leading the way for decades) does not lead to enduring inflation or a rise in inflationary expectations. Another major plank of mainstream macroeconomics gone. That is something to celebrate.

The opening lines in Chapter 17 of my 2015 book – Eurozone Dystopia: Groupthink and Denial on a Grand Scale (published May 2015) – were:

Taboo

noun

… a social or religious custom prohibiting or forbidding discussion of a particular practice or forbidding association with a particular person, place or thing.

adjective

… prohibited or restricted by social custom.

verb

… place under prohibition.

[Oxford Dictionary]

Jens Weidmann, President of the Deutsche Bundesbank

“we have to ensure that the prohibition of monetary financing is respected.”

Interview with MNI, March 21, 2014.

The Chapter was about ‘overt monetary financing’ and I began by noting that while taboos in western society are ways to reinforce the status quo and resist change, they also, obviously function to allow dominant hegemonies to isolate options if they consider exercising them would undermine their capacity to maintain ideological control over public policy.

I asked: How can a relatively simple monetary operation between a central bank and its corresponding treasury department (both part of what we call the ‘consolidated’ government sector) possibly be considered a taboo?

‘Overt Monetary Financing’ (OMF) simply means that in some form or another, the treasury arm of government tells the central bank it wants to spend a particular amount and the latter then ensures those funds are available for use in the government’s bank account.

Various accounting arrangements might accompany that action. For example, the treasury might sell some government bonds to the central bank to match the value of the funds that are placed in the treasury’s bank account.

None of these accounting arrangements should cloud, in the words of former Bundesbank chief Jens Weidmann – during a Speech in Frankfurt – Money Creation and Responsibility – on September 28, 2012, that:

… the fact that central banks can create money out of thin air … many observers are likely to find surprising and strange, perhaps mystical and dreamlike, too – or even nightmarish.

That is, the currency-issuing government via its central bank can create as much of its currency as it likes but to do so has been considered taboo by economists.

Why?

Inflation anxiety is the stated reason.

Actual reason?

The elites want to reserve that capacity to advance their own interests and suppress the capacity when it might empower those below them in the pecking order.

Well the events since the GFC, accelerated by the pandemic are exposing all sorts of truths that taboos require to remain suppressed.

IMF talks about taboos

The IMF article define “monetary financing” as:

… the financing of government via money creation.

They relate it to “Milton Friedman’s metaphor of a helicopter dropping money from the sky” – or cruder characterisations which still abound today = ‘printing money’.

The term ‘printing money’ is not used in Modern Monetary Theory (MMT) because it is not descriptive of the actual process that underpins government spending.

The term also invokes irrational emotional responses about hyperinflation with the Weimar Republic or Zimbabwe immediately entering the conversation and reasoned debate then becomes impossible.

The IMFs depiction of ‘monetary financing’ is drawn from the erroneous mainstream macroeconomic framework for analysing the so-called ‘financing’ choices faced by a government – taxation, debt-issuance, and money printing.

This choice is analysed within the so-called ‘government budget constraint’, where the currency-issuer is reduced to a household facing the need to raise currency in order to spend.

You can see even at the most elemental level, the framework quickly enters the world of fiction.

Students in mainstream programs are told that in order to spend, the government has to raise funds from taxpayers (which allegedly undermines incentives to work and invest).

If they want to spend more than the tax revenue they can raise, then they have two options.

They can issue debt – which allegedly squeezes scarce savings in the loans markets, drives up the cost of borrowing (interest rates), which undermines (‘crowds out’) private investment spending. It also allegedly leaves a legacy of higher tax burdens for future generations.

So debt-issuance is discouraged.

Alternatively, the central bank can just ‘print money’ to cover the deficits. But this is taboo because allegedly too much money enters the system, which undermines its value (inflation).

Taken these negatives together, the mainstream economist is thus persuaded to advocate for small fiscal footprints where low taxation generates just enough revenue to cover essential government functions such as law and order and defence of property rights (including external borders) and the government achieves fiscal balance or surplus.

However, these depictions are fiction and designed to reinforce the ideological message – small government and (the unstated) fiscal handouts only to the elites.

The reality is that every day, new currency enters the economy via government spending and currency leaves the system via taxation.

The idea that the government spends out of different kitties (tax, debt, printing) is false and obfuscates the reality.

In a sense, ‘monetary financing’ is happening all the time anyway.

But we can advance the discussion by agreeing that what the IMF is referring to, while erroneously constructed by them, is the situation where the central bank arm of government credits bank accounts or sends out cheques on behalf of the treasury arm of government to match government expenditure, without there being any offsetting tax revenue raised or debt issued to the private bond markets.

The IMF also thinks that the taboo against that practice began in the 1970s:

The 1970s struggle to contain inflation, and the many catastrophic episodes during which monetary policy became hostage to a country’s fiscal needs, however, made monetary finance taboo.

In fact, Abba Lerner in the 1940s was keenly aware that the conservative economists considered the ‘printing money’ option to be taboo.

In his 1943 article – Functional Finance and the Federal Debt (published in Social Research, Vol 10(1), 38-51), he referred to the:

… almost instinctive revulsion that we have to the idea of printing money, and the tendency to identify it with inflation, can be overcome if we calm ourselves and take note that this printing does not affect the amount of money spent (p.41).

He had earlier said that common people are (p.38):

… easily frightened by fairly tales of terrible consequences …

The money financing taboo was used to elevate the sense of fright in order to prevent otherwise sensible ideas becoming politically acceptable and benefiting the broader population.

The IMF also claim that the taboo was useful because it allowed the central banks to operate independently from government and suppress inflation in the post-1970s period.

That claim is also false.

The OPEC-induced inflation was finally driven out of the system by the deep recession in 1991 rather than any specific conduct by the central banks.

Around the globe, different central banks embraced the ‘inflation-first’ targetting approach in very different ways and experienced broadly similar inflation outcomes.

Further, the so-called great moderation came after the 1991 recession and by then inflation was generally low and stable.

And, whenever you hear a mainstream economist preach the virtues of ‘central bank independence’ ask them what happens each day of the working week where treasury and central bankers work closely together to ensure there is a correspondence between the impacts of fiscal policy on the ‘cash’ system and the implications for the monetary policy interest rate target.

There can be no ‘independence’ between these institutions in a modern monetary economy.

Please read my blog posts for more discussion on that topic:

1. The central bank independence myth continues (March 2, 2020).

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

3. Central bank independence – another faux agenda (May 26, 2010).

The IMF blog post asks the questions:

Should monetary finance remain taboo? Or are there merits to recent calls for using this tool during times of severe crises?

If you want a more detailed analysis of their answers, then consult the IMF Departmental Paper No. 2022/001 – Monetary Finance: Do Not Touch, or Handle with Care? – which was published on January 13, 2022.

The blog post really is sufficient though to understand their argument.

Their reasoning is totally mainstream and incorrect.

They claim that:

Proponents of monetary finance argue that it has a stronger effect on aggregate demand than a debt-financed fiscal stimulus. Because there is no increase in public debt, monetary finance does not need to be paid for with future tax hikes, making consumers more likely to spend.

This claim rehearses the so-called Ricardian Equivalence theorem that says government spending in ineffective because consumers realise that the deficits will have to be paid back with higher taxes and so they save up to ensure they can pay the extra tax burden and as a consequence consumption spending falls to offset the new government net spending.

It is a ridiculous notion that has never found any empirical resonance.

You can find out more about that notion in this blog post – Ricardian agents (if there are any) steer clear of Australia (June 9, 2014).

I would guess that if we conducted a sample of households they would not reveal any knowledge of the relations between treasury and the central bank, and would not form any view of future tax hikes in this context.

And every generation chooses its own tax structure when it reaches voting age.

Next we are told by the IMF that:

Monetary finance may also prevent self-fulfilling runs on government debt. If investors suddenly lose confidence in debt sustainability, the central bank may avert a default by partially monetizing debt. Importantly, if the central bank commits to this strategy—and does not abuse its power to monetize debt outside of self-fulfilling runs—investors are unlikely to lose confidence in the first place, without requiring the central bank to intervene.

As if the bond markets are in charge or something.

What we have all learned (I hope) during the years of GFC then pandemic is that the currency-issuing government controls the yields on the debt it issues whenever it wants to.

The bond markets only get latitude if the government gives it to them.

The bond markets can never threaten the spending capacity of such a government.

Investors are supplicants for the corporate welfare that the government debt offers them.

They do not call the shots.

Please read my blog post – Who is in charge? (February 8, 2010) – for more discussion on this point.

We are then appraised of the IMF concern that democracy might prevail:

The primary concern is that it may pave the way to fiscal dominance whereby monetary policy decisions are made subordinate to the fiscal needs of the government.

So our elected representatives, who are accountable to us via the ballot box, might actually represent our interests and make sure the unelected technocrats in the central bank, who play revolving doors with the private speculating institutions (hedge funds, etc) and who are not accountable to us, play ball.

Worrisome in the extreme.

Suppressing the quality of our democracies has been one of the primary purposes of this taboo, among others in the economic sphere of our lives.

The IMF then offer some empirical research to see if “monetary expansion” is highly inflationary.

I won’t go into their methods, which are flawed.

But even with those flawed methods, the findings are that over time there is very little impact on inflation even when the initial inflation rate is high and the fiscal deficits are large.

Further, the IMF differentiate between monetary financing (buying government debt in the primary issuing market) and quantitative easing (purchasing the same debt in secondary markets after it has been issued to private investors in the primary market).

They claim the difference is that QE carries the expectation that the central bank will sell the debt back to the non-government investors, which is another imaginary piece of reasoning.

Ask yourself, how much debt has the ECB, the Bank of Japan, the Federal Reserve, the Bank of England, etc sold back rather than allowed to mature while still on their books?

The answer is not much!

They find that during the pandemic, that neither central bank option that were used variously by nations had any:

… systematic effects … on inflation expectations …

Which means that all the hype that surrounds the ‘taboo’ about the private sector fearing inflation if the government acts in this way is based on nothing substantive.

But that doesn’t stop the IMF falling back into lockstep with the fiction when they conclude that “departures from central bank independence can be very dangerous … [and have] … devastating effects on economies and livelihoods”.

Conclusion

Phew, for a moment I thought the IMF might be turning the corner

That is enough for today!

(c) Copyright 2022 William Mitchell. All Rights Reserved.

The IMF’s 2018 Stand-By Arrangement with Argentina: An Ultra Vires Act?

Published by Anonymous (not verified) on Sun, 16/01/2022 - 7:41am in

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A good paper by Karina Patricio and Chris Marsh that deserves a wider readership, in particular if you are interested on the International Monetary Fund (IMF) and it's policies. The paper argues that the IMF agreement is legally void, and might lend support (the authors do not say so) to a more radical view, suggesting that Argentina should not pay. From the abstract:

The 36-month exceptional access Stand-By Arrangement (SBA) with the Republic of Argentina approved by the International Monetary Fund (IMF) in June 2018, later augmented in October 2018, represents the largest programme in the history of the Fund. The programme, however, has failed in all its core objectives. While the programme has been subject to macroeconomic critiques, this is the first study that integrates such analyses into a comprehensive legal evaluation, with resort to general Public International Law, the law of the IMF and, where international law is uncertain, relevant analogies with English private law.We introduce the hypothesis that the SBA violated the core purposes of the IMF as per its Articles of Agreement and, therefore, constitutes an ultra vires act. To explain why, we proceed as follows. Section 1 provides the legal foundations of our analysis. First, it explains the ultra vires doctrine in international law and outlines key considerations drawn from case law of the International Court of Justice for the recognition of ultra vires acts. Second, it draws on core provisions of the Articles of Agreement to discuss relevant purposes of the IMF, as well as a set of authorisations and limitations to its powers established in the treaty to achieve such purposes. Section 2 draws on macroeconomics to discuss how those substantive rules were violated in the SBA in a way that is too manifest to be open to reasonable doubt, thereby raising suspicion that the SBA’s approval was ultra vires. In particular, the programme was characterized by egregious assumptions and accounting inconsistencies that meant the objectives were impossible to attain. Section 3 considers the impact of the IMF’s recently published Ex-Post Evaluation of Exceptional Access Under the SBA on our legal analysis. Section 4 draws on the premise that the SBA’s approval constituted an ultra vires act to discuss the potential legal implications of its invalidity. Section 5 concludes this piece by summarising its key findings and reflecting upon the need for clarification on the legal validity of the SBA, as well as further scholarly research on ultra vires lending by the IMF.

Read full paper here. This is in accordance with recent critiques on the IMF role by Joe Stiglitz and Kevin Gallagher. Note that the IMF itself has done a mea culpa of sorts on the lending to Argentina (see here).