Viktor Orban Uses Pandemic to Become Dictator of Hungary

The onward march of the extreme right in eastern Europe takes another fateful goosestep. Viktor Orban, the already very authoritarian president of Hungary, has used the Coronavirus crisis as the pretext to pass legislation destroying the last vestiges of the democracy there, establishing him as the country’s virtual dictator.

On Monday, Zelo Street posted a piece based on an article in the Groaniad, reporting that Hungary’s parliament, dominated by his xenophobic Fidesz Party, was expected to grant him sweeping powers. These will give Orban the ability to rule by decree. Elections will be banned. The speaker of the Hungarian parliament and parliamentary groups will be informed of the government’s actions. However, spreading false information will become a criminal offence punishable by a long prison sentence. It will be prerogative of Orban’s Fidesz MPs to decide when the emergency is over. Orban has said that when it is, he will surrender all his powers without exception. However, there’s absolutely no guarantee of this, as the laws he passed in 2016 against asylum seekers, which were also supposed to be temporary, are still in place. It’s therefore possible that a compliant parliament will allow Orban to hang on to some or all of them.

Zelo Street stated unequivocally that the EU should expel Hungary because of this seizure of power. The Sage of Crewe pointed out that when the EU was the EEC, and only consisted of France, West Germany, Italy and the Benelux countries – Belgium, the Netherlands and Luxembourg, the dictatorships to the east and west of the bloc stood absolutely no chance of getting. This meant the Fascist dictatorships of Portugal and Spain, Greece under the military rule of the colonels, Ceausescu’s Romania and the DDR (East Germany) under Erich Honecker. He remarks that Hungary’s continued membership of the EU has been a test for its remaining member states, one that they have so far failed to tackle. He concludes

‘Viktor Orbán may be more Chaplin than Hitler. But if the values of the EU are to mean anything, the Union cannot permit a dictatorship within its club. So expel the SOB.’


Zelo Street describes this legislation as an ‘enabling law’. The reference is to the Enabling Act which formally made Adolf Hitler dictator of Germany and suspended parliamentary democracy. And the Nazis, and the Italian Fascists before them, also seized power in response to a crisis. Fascist governments are crisis regimes. In the case of Italy and Germany, the crisis was first of all the breakdown in parliamentary democracy, as the pillars of the liberal regime in those nations stopped cooperating. In Germany this led to the president, Hindenburg, ruling by decree. This was succeeded by the recession caused by the Wall Street Crash and the massive uncontrolled inflation that saw the Mark as worth far less than the paper it was printed on. This discredited capitalism for millions of Germans, leading to a surge in votes for the Nazis and the Communists. And finally there was the Reichstag fire, which allowed the Nazis to declare a state of emergency and begin rounding up subversives. Which meant anybody who didn’t cede power to Hitler, and particularly Communists and the democratic socialists of the SPD.

Fidesz is extremely xenophobic and, like many political parties in the former eastern bloc, in particular anti-Semitic and islamophobic. I’ve no doubt Orban would be overjoyed if he could somehow blame the pandemic on Gypsies, Jews, homosexuals and Muslims. And I’m afraid that where Orban’s gone, other countries will follow, such as Poland under the Law and Justice Party. Or even Britain, where Boris has also passed legislation granting him extraordinary sweeping powers to deal with the pandemic emergency.

The EU’s failure to do so is an indictment of the hypocrisy of its leading politicos. Years ago Private Eye published an account of the EU’s dictatorial attitude towards the states then seeking membership in its ‘Brussels Sprouts’ column. The terms and conditions were very detailed and were not open to negotiation. Or at least, not very much. One of the countries joining was the Czech Republic. It’s president, Vaclav Klaus, was so outraged by his country’s dictatorial treatment, and told the EU negotiating team that his country had not suffered such treatment for nearly 30 years. This was in the late ’90s – early 2000s, so he was probably referring to the Russian invasion which ended the Prague Spring, the attempt by Czech premier Anton Dubcek to make Communism popular and democratic. This infuriated two of the EU’s team, the French former radical, Daniel Cohn-Bendit, and a German MEP. They immediately climbed on their high horses and started angrily shouting about how the EU was the opposite, and was the champion of democracy. And I can remember how, about ten years ago, the EU managed to leave many people highly unimpressed when it sanctimoniously awarded a peace prize to itself, claiming that it had successfully kept the peace in Europe. Well, possibly. But I also think NATO and a general fear across the continent of another war had played a major party. If the EU is unable, or unwilling, to do anything about Orban’s seizure of power, then all the verbiage about defending democracy is simply empty, vacuous nonsense. As readers of this blog will know, I am absolutely no supporter of Brexit. But it is true that EU is an immensely flawed institution.

It’s too much to claim that the EU is some kind of authoritarian superstate, an EUSSR, as the Kippers and Brexiteers liked to describe it, or some kind of successor to the Third Reich or Napoleon’s empire. But with Orban seizing dictatorial power, it is true to say now that the EU is no bulwark of democracy either.


Norwood Hanson, Paul Krugman and MMT

Published by Anonymous (not verified) on Sun, 29/03/2020 - 10:00pm in

Phil Armstrong, University of Southampton Solent and York College



 1. Norwood Hanson: Is the sun going around the Earth or the Earth going around the sun?


Norwood Russell Hanson (1961) considers the conceptual foundations of science; he notes that the work of scientists involves observation. However, such observation is likely to be interpreted differently by different observers, as consistent with an acceptance of the view that all facts are theory-laden (but, importantly, not theory determined). Hanson focuses upon how we conceptualise what we see into general systems, ‘Let us examine not how observation, facts and data are built up into general systems of physical explanation, but how these systems are built into our observations, and our appreciation of facts and data’ (Hanson 1961: 3).

Hanson considers how different observers perceive things differently. He talks about Tycho Brahe[1] and Kepler looking up at the sky, and asks a question, ‘Kepler regarded the sun as fixed: it was the Earth that moved. But Tycho followed Ptolemy[2] and Aristotle in this much at least: the Earth was fixed and all other celestial bodies moved around it. Do Kepler and Tycho see the same thing in the east at dawn?’ (Hanson 1961: 5). Hanson argues that ‘people, not their eyes, see’ (Hanson 1961: 6) and develops his story by noting, ‘Tycho and Simplicius[3] see a mobile sun, Kepler and Galileo see a static sun’ (Hanson 1961: 17) and later notes, ‘Our sense observation shows only that in the morning the distance between the horizon and the sun is increasing, but it does not tell us whether the sun is ascending or the horizon is descending…For Galileo and Kepler the horizon drops; for Simplicius and Tycho and the sun rises’ (Hanson 1961:182). Hanson points out that ‘There is a sense, then, in which seeing is a ‘theory-laden’ undertaking (Hanson 1961: 19) and ‘The observer…aims only to get his observations to cohere against a background of established knowledge’ (Hanson 1961: 20).


2. Paul Krugman like Tycho and Simplicius


Moving on from the solar system to the financial system we move from asking whether the sun revolves around the Earth (or vice versa) to asking if taxes fund spending (or vice versa); specifically, when we consider the dynamic nature of the efflux and reflux of credit and debits in relation to government’s account we might conceptualise what we observe in two ways:  first we may ‘see’ the taxation (or borrowing) as funding the spending or (lending) [view A]  or second, as the spending (or lending) funding the taxation (or borrowing) [view B].[4]

In this context, we might reasonably compare Paul Krugman to Tycho and Simplicius. By way of example, I might consider a recent series of Twitter posts from Krugman (I have collected them into one passage below).

“I’ve been getting some questions from readers wondering about the cost of the not-a-stimulus (it’s actually disaster relief) package. “Where’s the $2 trillion coming from? Thin air?” Basically, yes. We went through this argument back in 2008-2009, when many people (including some who should have known better) worried that government borrowing was going to “crowd out” private investment. There are times when that happens, but this isn’t one of them. In the most immediate sense, the govt. is going to borrow the money — and its borrowing costs are near record lows, despite the surging deficit…But where does the borrowed money come from? Basically, right now we have trillions in private savings with no place to go, because private investment demand isn’t sufficient to use them; who’s going to invest in the face of a plague of unknown duration? So government borrowing just draws on this pool of excess savings. Furthermore, in so doing it helps prevent an even steeper economic contraction” (Paul Krugman, combined 5 tweets 27/03/20, emphasis added).

It is clear from the text that Krugman implicitly accepts view A. The italicised sections show this most clearly. By acknowledging the possibility of ‘crowding out’[5], arguing that ‘the govt. is going to borrow the money’ and that ‘government borrowing just draws on this pool of excess savings’, it is clear that Krugman conceptualises the government as a currency-user; a position that, as I will show below – in common with Ptolemaic astronomy -is not consistent with the evidence.


3. Modern Monetary Theorists like Copernicus, Galileo and Kepler


Returning to our discussion of the solar system we might note that the eventual triumph of heliocentrism did not come quickly or easily. Much hard work from astronomers was required but eventually, the battle was won and, ‘By the eighteenth century, after the successes of Galileo, Kepler and Newton, the universe was construed as an intricate geometric-arithmetic puzzle’ (Hanson 1961: 66). I might argue that shifts in worldview are prompted by the observation of some deeply significant anomaly (or anomalies) (Kuhn 1962). In this context,  Hanson (1961: 68-9)  notes, “We ask, ‘What is its cause?’ selectively: we ask only when we are confronted with some breach of routine, an event that stands out and leads us to ask after its nature and genesis.” Hanson refers to retroduction[6] and argues “A theory is not pieced together from observed phenomena; it is rather what makes it possible to observe phenomena as being of a certain sort, and as related to other phenomena. Theories put phenomena into systems. They are built up ‘in reverse’ – retroductively” (Hanson 1961:90).

In the same way that Tycho and Kepler ‘see’ the same things, those who conceptualise the government as a currency-user – such as all mainstream economists and many so-called ‘progressives’ such as Krugman – and those who conceptualise it as a currency-issuer – notably the advocates of MMT – ‘see’ the same things. The issue is how to decide which view is consistent with the development of a theory with the most explanatory power? Returning to the issue of anomalies – or unforeseen observations – we have a clue to the answer. The economics profession has long argued that heightened public deficits would lead to higher long term interest rates and, in turn, that these higher interest rates would lead to lower private investment or ‘crowding out’. This hypothesis follows from their view of the government as a currency-user which borrows from a ‘fixed pot’ of saving in competition with private borrowers.  This prediction was decisively falsified during, and immediately after, the global financial crisis when all the world’s major nations with their own currencies, operating under floating exchange rates, saw declines, not increases, in long term interest rates on government debt[7]. It is true that some, although by no means all – Eurozone nations did see a rise in long term interest rates. However, since MMT explicitly recognises the distinction between Eurozone nations (which have ceded currency-issuing power to another entity – the ECB) and currency-issuing nations, it recognises that Eurozone nations should be conceptualised as currency-users meaning that this outcome is exactly in line with the expectations of MMT[8].

An understanding of MMT removes the supposed element of ‘surprise’ from what is a highly significant anomaly from the perspective of mainstream economics, The advocates of MMT are able – retroductively – to posit the structures and mechanisms which explain this contrast between currency-issuing and currency-using states and I would, therefore, argue that MMT provides the basis for the provision of a satisfying explanation of observed phenomena – absent from mainstream thinking based upon ‘seeing’ the state as a currency-user.

In contrast to perspective which underpins the comments made by Krugman, above, Modern Monetary Theorists contend that when a nation has its own sovereign currency and operates under floating exchange rates, ‘borrowing’ by the state is not operationally required. The government should be thought of as a currency-issuer; it spends first and creates reserves, ex nihilo. It is never revenue-constrained as a currency-user might be. The so-called ‘borrowing’ operation which removes the reserves is voluntary (Mosler 2012). It could allow any untaxed spending to remain in the system. However, such a policy would result in the overnight rate falling to zero (if no other action was taken, such as the central bank agreeing to pay interest on excess reserves).

However, it must be conceded that the difficulties involved in replacing deeply-embedded theories (or paradigms in Kuhn’s [1962] terminology) should not be underestimated and I would argue that this is particularly the case in economics. The economics academy has been highly successful in reducing the ability of alternative perspectives to gain traction. Contrary to their professed acceptance of the principle of falsification, mainstream economists have introduced numerous ad hoc modifications to their apparently failed theories (Armstrong 2018) to avoid falsification. However, despite this disappointing situation, the position of mainstream economics is far from impregnable and the advocates of MMT must continue to challenge its hegemonic status. We can only hope that mainstream economics and its conceptualisation of the state as a currency-user is eventually destined to be consigned to the status of an episode in the history of economic thought, following in the footsteps geocentric thinking in astronomy.




Armstrong, P. (2018), ‘MMT and an Alternative Heterodox Paradigm’, Gower Initiative for Modern Money Studies,

Bhaskar, R., (2017), The Order of Natural Necessity, Gary Hawke (ed.), Luxemburg: CreateSpace Independent Publishing Platform.

Galilei, G. (1632/1953), Dialogue Concerning the Two Chief World Systems (Dialogo sopra i due massimi sistemi del mondo), Berkley: University of California Press.

Hanson. N (1961), Patterns of Discovery, Cambridge: Cambridge University Press.

Kuhn, T. (1962), The Structure of Scientific Revolutions, Chicago: University of Chicago Press.

Mosler, W (2012), Soft Currency Economics II, US Virgin Islands: Valance.



[1] Tycho Brahe (1546 – 1601) was a Danish astronomer who developed a view of the solar system which recognised that the moon orbits the Earth and the planets orbit the sun, but retained the position that the sun orbits the Earth.

[2] Claudius Ptolemy (c. AD 100 – c. 170) was a Greek mathematicianastronomer and astrologer whose Ptolemaic approach suggests that the Earth is at the centre of the universe.

[3] Galileo compares the Copernican with the Ptolemaic systems in Dialogue Concerning the Two Chief World Systems (1632). In the text, Simplicio presents the case for the Ptolemaic system and argues against the Copernican alternative. The character’s name is generally supposed to be derived from that of a sixth-century follower of Aristotle, Simplicius of Cilicia.

[4] A third view might be summed up by the question, ‘Is the distinction important?’ I would argue that the distinction is important since the government can spend without prior tax revenue whereas prior spending (or lending) is logically and historically required for taxes to be paid. Thus only view B above is valid.

[5] The crowding-ou hypothesis suggests that heightened government deficits lead to higher long term interest rates and that,  in turn, these higher rates, reduce – or ‘crowd out’ – private investment. Little or no evidence to support this hypothesis exists (Armstrong 2018).

[6] In the retroductive moment, a scientist imagines a mechanism or structure which, if it were true, would explain the event or regularity in question. It is the use of the imagination to posit explanatory mechanisms and structures’ (Bhaskar 2017: 28).

[7] Armstrong (2018).

[8] Armstrong (2018)



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Money Printer Go Brrr ... And No Inflation?

Published by Anonymous (not verified) on Thu, 26/03/2020 - 3:55am in



 U.S. Breakeven Inflation, Real YieldAlthough a big fiscal package is in the pipeline (admittedly the Greatest Deliberative Body in the World is playing its usual log-rolling games), smashed supply, and rampant "money printing" (ha!), breakeven inflation in the United States is cratering (figure above). This is exactly what should have happened, although the big question is whether current pricing is an overshoot of fundamentals. (I leave that market call to the reader.) I outline why this puzzling inflation perspective is the correct call -- top down inflation analysis will not work, we need to go bottom up.

Market CommentsBefore I get to the inflation analysis, I want to comment on the market action behind the charts above. To be perfectly clear, I am making comments based on media chatter, and extrapolating the experience of 2008. I have no background sources giving me juicy information.

The first thing to note that the indexed yield (typically called the "real yield", but I have pedantic objections to using "real yield" for the quoted yield on inflation-linked bonds) has been jumping around far more than the breakeven inflation rate. This is exactly what we should expect: the breakeven inflation rate is the true valuation metric, and the real yield is the residual. (This is discussed in Section 4.2 of my book, Breakeven Inflation Analysis (link to Books2Read page). If any of my readers are stuck in self-isolation, I would remind you that my books are attractively priced, and available as e-books.

This is not to say that breakeven inflations will exactly match forecast inflation right now. This is exactly what happened in 2008 (as I discussed in Section 3.5). Inflation-linked bonds are de facto risk assets that can be purchased by many government bond funds. Overweighting linkers is a classic way for bond investors who are bearish on rates to position without blowing up other risk limits, and one of the adorable things about bond fund managers is that the vast majority of them are permanently bearish on rates. Meanwhile, levered long positions in inflation-linked bonds was a core strategy for "risk-parity" portfolios.

Another comment I have seen was to the effect that "breakevens have nothing to do with inflation, it is just oil." This is a puzzling sentiment, given the high sensitivity of headline inflation to gasoline prices in the United States. (I discuss this in Section 3.2, "The Role of Energy Prices".) I think the idea is that people want the market to price core inflation, but that would require a different investment product.
Short-Term Inflation ForecastingI will now turn to the issue of inflation forecasting. The key is to eschew top-down techniques (e.g., any approach where the money supply appears), and go bottom up. This is discussed at greater length in Section 3.3 of Breakeven Inflation Analysis.

The first thing I noted is that I am skeptical about our ability to forecast the overall economy on an unconditional basis using any mathematical model. (Yes, that includes stock-flow consistent (SFC) models, which are the subject of another book that I am plugging.) The best we can hope for is to do conditional forecasts: given some scenario, what will happen to the economy? The current situation is a very good example: we could only have forecast the upcoming collapse in activity if we had a very good idea about the spread of COVID-19. Although a mathematical epidemic model might give insights, that model is not a traditional economic model.*

However, I carved out an exception for "short-term" CPI forecasting. We can quite often build a pretty good forecast for CPI inflation, conditional on gasoline prices. The various components of CPI are relatively slow-moving, and respond with a lag to underlying factors. We can stitch together partial models, and get a good estimate of the overall CPI. Obviously, these partial models break down over longer forecast horizons.
Why I'm Not Worried About InflationAlthough I am wildly uncertain about outcomes, I do not see CPI inflation as being a particular issue right now. The main reason is that in order to get an inflationary spiral, we need wages to rise. Although there are some pockets where workers are getting wage boosts (as well they should, as they are the front line workers taking the greatest risk), this will not happen across the board with expected double digit unemployment rates.

Anyone who looks at central bank balance sheets ("the money supply") is simply going to get wildly wrong inflation forecasts. These are just shifts in holdings of financial assets, and mean diddly-squat about the real economy. The only significance they have is relative to the counter-factual scenario where the central bank lets the financial system implode in a debt death spiral. Inflation is higher relative to that counter-factual, but it does not mean that prices are going to go up.

As for the fiscal response, some will just be used to fill in cash flow gaps of firms (and line rich people's pockets). This does not put demand pressure on anything (other than relative to the total implosion counter-factual). The rest is income replacement households, and I see no appetite for this to be a permanent universal basic income in any jurisdiction.

A temporary income replacement is just preventing the deflationary liquidation of the household sector. Once again, this is only "inflationary" relative to a disastrous counter-factual. (Right now, I would argue that the Canadian and American responses are too small, but that might be rectified as reality bites politicians in the nether regions.)

Even if money is sent to households that do not really need it, they cannot spend it on much of anything. Everything except grocery stores and pharmacies are closed, and physical delivery infrastructure is going to be maxed out. There is no sign of price gouging by physical retailers. Everybody with a couple brain cells to rub together knows that this is a shared event, and will be seared into everyone's memories for a very long time. Running around acting like a sociopath -- a course taken by a few idiot employers -- is going to be remembered by a lot of people after the dust settles.

As I will discuss later, some prices will be going up, but they are unlikely to be enough to move the CPI by a lot.

The easiest thing to buy are electronic downloads (like my books!). Since the marginal cost of production is nil, the usual strategy is to keep pricing fixed, and hope for a volume increase.
Supply Chain Horror StoriesThe big potential scare story is the collapse in supply chains, and rising import costs. I have some sympathies for that story, but it is somewhat self-limiting. Right now, on-shoring production is catching a lot of interest. Overseas suppliers starting a price-gouging campaign would put populist protectionism movements on steroids.
CPI WeightingI will now run through the sectors of the United States CPI. I will not attempt to give forecasts, but give a qualitative outline of my thinking. Although there are a few areas where price behaviour are different, it would be a similar story in at least some other developed countries (Canada and the United Kingdom at least).

I am using the weights from the February 2020 U.S. CPI report: I will keep the categories in the original order, which may make the discussion somewhat jumpy, and round off to one decimal place. I have skipped some smaller categories.

  • Food (13.8%). This one of the few categories where we will actually have legitimate retail prices, given the shutdown of other sectors. However, note that "Food" is not just groceries: it is split between food at home (7.6%), and away from home (6.2%). Restaurants will be struggling to survive, and so it is hard to imagine them ramming through price increases. As for food at groceries, a significant portion is processed, and thus prices are administered. Supply bottlenecks will almost certainly appear in fruit and vegetables that rely on masses of workers for harvest, but that categories is only 1.3% of the CPI. Grains require low levels of labour input, and energy costs are extremely important (fuel and fertiliser).
  • Energy (6.7%). Retail prices will not fall as much as wholesale crude prices, but the collapse in crude prices will blow a big hole in CPI. Outside the U.S., the larger share of gasoline taxes will reduce the deflationary shock in the CPI.
  • Household Furnishings and Supplies (3.7%). People stuck at home might see more things to spend on, but hardly a high priority given income uncertainty most households face.
  • Apparel (2.8%). People under stay-at-home orders are probably not worried about fashion trends. Office workers working from home just need a good shirt to give a veneer of presentability.
  • New Vehicles (3.7%): Automakers are desperate to survive. Nobody can go anywhere.
  • Used Vehicles (2.5%): Hawking a second car is probably going to be a standard way to raise cash.
  • Medical Care Commodities (1.6%): (Note: "commodities" = goods in CPI jargon.) There are some obvious shortages, but once again, most firms do not want to be seen as high profile sociopaths. The exception are pharmaceutical firms, but their prices are normally hidden behind the veil of insurance.
  • Recreation Commodities (2.0%). Probably some demand here, at least for delivered items.
  • Education Commodities (0.5%). Probably increased interest, but prices are administered.
  • Alcoholic beverages (1.0%). Low energy prices will reduce price pressure on grain inputs and processing, and bars and sporting venues will be shut for a long time, blowing a hole in demand.
  • Tobacco and smoking products (0.6%). Let's smoke in the midst of a killer pandemic that goes after weak lungs in a grisly fashion!
  • Shelter (33.1%). A category with a huge weight and extremely slow-moving price dynamics. Split between rent (7.8%) and owner's equivalent rent (24.0%). Rent contracts are negotiated on an annual basis. and we have a massive income shock to renters. Very hard to see how rents go up. In any event, will be extremely slow-moving, so even if rents somehow went up, won't show up for awhile.
  • Medical Care Services (7.2%). I leave researching what will happen here to the reader. I think this is largely mediated by insurance, and I would not hazard a guess as to what the numbers will be.
  • Transportation Services (5.4%). Travel is not exactly a hot spot for price pressures.
  • Recreation Services (3.7%). Largely digital, and follow the "keep prices stable, go for volume" strategy.
  • Education and Communications (6.4%). What happens with education is anybody's guess, but it is hard to see how hefty fees can be charged for remote education services. Communication services are a huge growth area right now, but once again, they are likely to aim for increased volume at unchanged prices.
  • Other personal services (1.7%). Largely the domain of small businesses, that are under severe pressure.

In summary, although we can see some problem areas, without wage pressures hitting across the board, hard to sound an alarm about inflation.


* There are various heterodox academics that insist that economics ought to be multi-disciplinary, and include things like epidemic models. Although I can agree with the sentiment, it is very difficult to see how such models can be calibrated to data. Why not include asteroid strike scenarios? Killer bees? Etc.
(c) Brian Romanchuk 2020

The government’s spending promises have shown the need for austerity is a lie and a sham. It’s time to hold the government to account for its political decisions, not its fiscal prudence or otherwise.

Published by Anonymous (not verified) on Sun, 15/03/2020 - 10:21pm in

Man teaching girl to wash her hands properlyImage by CDC on Unsplash

In 2010 the newly elected Conservative government, using smoke and mirrors, turned what was a private debt crisis caused by global reckless greed and speculation by financial markets into a sovereign debt crisis. Liam Byrne’s stupid joke note left in the Treasury, suggesting that there was no money left, gave them the perfect opportunity to cash in by claiming that was no alternative to austerity and cuts to public spending. The then Prime Minister David Cameron and his Treasury sidekick George Osborne declared that ‘maxing out the credit card’ and putting off dealing with the problem would make it worse and suggested that without spending cuts we could end up like Greece. The Chancellor declared in his Spending Review – ‘we have taken our country back from the brink of bankruptcy.’

Believing that their own household budgets were like the state’s public accounts (a constantly reiterated message) it’s no wonder that the nation gave a huge sigh of relief. People were mistaking the prospect of “healthy” public accounts for a healthy economy. The nation, which accepted the false premise that there wasn’t any money left in the treasury coffers, subsequently paid a heavy price for this misunderstanding; a misunderstanding that was endlessly promoted by successive Chancellors.

What followed allowed the government to deliver a political agenda which had nothing to do with balancing the budget, even if presented as such. It was quite simply the mechanism to further hollow out our public services, reform the welfare system and sell-off and privatise public assets. It brought to its conclusion a decades-old plan which began as early as the 1970s and was pursued by Margaret Thatcher, as a result of her love affair with the ideas of the economist Friedrich Hayek and the Chicago School of economics; continued by Tony Blair and New Labour.

This Wednesday the new Chancellor of the Exchequer, Rishi Sunak, stood at the despatch box to give his first Budget. The public, from being told over 10 years ago that Labour had spent beyond its means and as a result, the nation would have to cut its cloth and make a sacrifice to restore the public accounts to order, suddenly discovers that the money we were told we didn’t have for public services which were previously “unaffordable”, can inexplicably appear, as if by magic. From apparent scarcity to abundance. Along with the Bank of England cutting its base rate in an effort to fight the impact of Covid-19 on the economy, the money taps have also been miraculously switched on.

As an aside, when public and business confidence is at rock bottom and fear is rampant, it beggars belief that the central bank believes that cutting rates will stimulate people to consume (unless it’s toilet roll, pasta or hand sanitiser) or businesses to invest. Ten years of reliance on central bank monetary policy to stimulate the economy has proved ineffective. The fiscal approach, i.e. government spending to support the economy and its public infrastructure, is the only route left to any government, left or right, if they are to address the prospect of recession as a result of 10 years of austerity or indeed economic collapse because of the coronavirus outbreak.

More importantly, the fiscal approach is also the only route available to fight the immediate consequences of the virus in terms of containing it; the government must use the power of the public purse, alongside its legislative powers, to ensure that resources are freed up to get help to where it is needed. Whether that’s financial support for individuals or businesses caught up in the coming economic slowdown or bringing private sector health companies into public use – meaning hospitals and trained staff – to meet increased demand.

That said, we cannot avoid the stark fact that after ten years of austerity, which have gouged out our public services and left them pared down and in an appalling state of decay with those working in them struggling to pay their way using food banks or in deep debt, it remains to be seen what can be achieved immediately. Austerity reduces our domestic productive capacity, laying the foundation for inflationary pressure when the economy needs to grow or when the nation has to respond to a crisis. The corona crisis will create inflationary pressures which will result in rationing access to real resources and public services. This and many other governments have for decades put bankers and the financial sector before the health of their nations and their citizens.

Just to be clear, in case there is some confusion, turning on the taps has nothing to do with printing money in the Treasury basement, collecting tax or borrowing from the market to fund its spending programme. It is doing what all sovereign currency-issuing governments like the UK’s can do and have been able to do since 1971 – spend the money into existence via a computer keyboard at the central bank, where an employee authorised by the Treasury enters numbers onto a screen and transfers to the appropriate accounts whatever sum of funding it requires to deliver its capital programmes or fund its day to day spending. The fact that government spending is still couched in household budget terms of collecting tax or borrowing serves an agenda and nothing else. It is worth repeating here that there was no such scarcity of money when it was a question of spending it to feather the nests of corporations, reduce taxes for the same or serve a specific government agenda, from bailing out the “too big to fail” banks after the 2008 financial crash to buying votes in the House to keep the government in power.

So, having presided over 10 years of the destruction of our public and social infrastructure, the ravaging of our public services and social security system and all that that has meant for the economy and some of the nation’s most vulnerable citizens, now suddenly it appears the government’s austerity breaks have been taken off and the gears crunched into fourth! If you are wondering how this has this happened, when up until quite recently being fiscally prudent has been all the rage, according to a government minister the sacrifice of the great British public has now paid off, enabling the government to spend. Dear Rishi and any others promoting this nonsense, please pull the other one, it has bells on! The veil pulled over the eyes of the British public who are now suffering the very real physical and economic consequences of government policies is now being torn away in the most brutal way.

The harsh reality is that the sacrifice was unnecessary and indeed damaging. It was justified on the back of a monstrous lie about how the state finances actually work. We heard them say that the nation had been living beyond its means and this required drastic remedial action to avoid bankruptcy. The myths about how money works have left our public and social infrastructure in such a state of decay that the last 10 years of austerity combined with the risks that the spread of coronavirus pose and its effects on the world economy are increasingly becoming self-evident. Government’s ideological choices, with their focus on keeping markets and corporations sweet, have been responsible, not lack of public funds. To put it bluntly, political choices are killing us.

However, before we get too excited about a change of direction (and how the government will explain it) whilst one can obviously support a fiscal programme of government spending as the right approach, one has to question who it will benefit. Whilst, of course, there is a role for the private sector in delivering big infrastructure projects they will continue to feather the bank accounts of big business. This means public money pouring into private profit whilst top management continues to pay itself big salaries, pensions and other bonuses. Whilst investment in our privatised railways has been promised, top management will continue to benefit from public money and pay itself handsomely whilst at the same time failing to provide good, reliable services as many travellers will attest. Government pours money in, but fails to dictate the terms in the public interest.

Sunak neither mentioned the perilous state of social care nor the appalling consequences of the introduction of Universal Credit on the lives of many involuntarily unemployed people and those with disabilities. And whilst he has announced a spending review, which will include local government, the combined effects of 10 years of cuts to funding will take more than a future spending review to improve the dire financial situation of local councils and the current parlous state of local infrastructure and services.

The economy is not some nebulous presence overseeing things from the heavens; it is us. From nurses, doctors and other health professionals, those that teach our children or lecture in other institutions of learning to ensure a healthy and educated society for today and tomorrow to those who sweep the streets and remove the rubbish along with the army of social carers looking after our loved ones in their own homes or in residential care. The government has failed the economy. It has failed us. It has, in fact, decided that some of us are expendable; surplus to requirements.

The ‘spend, spend, spend,’ message has however not gone down well in some circles and whilst we may think that household budget narratives have been swept away in favour of fiscal spending, the question of how it will be paid for still hasn’t gone away. A quick perusal of the government’s own Executive Summary for this week’s budget in which it talks about ‘creating a fair and sustainable tax system to fund first-class public services’, mentions that ‘over the past decade it has taken action to restore the public finances and reduced the deficit by four-fifths’ and suggested that the ‘historically low cost of borrowing means that it can support the economy and provide significant investment in public services and infrastructure’ is still nodding its cap to household budget narratives of how governments spend.

The reaction of the Adam Smith Institute which suggested that ‘spending like a drunken sailor…wasn’t the way to create a thriving entrepreneurial economy’ or the IFS which remarked that ‘The Chancellor seems to think the only best way to boost growth is through public spending’ shows that we still have a way to go in changing the institutional and press narrative.

With the mantra of low interest rates and borrowing to spend still prevailing even amongst what one might call ‘progressive’ left-wing economists and journalists, we seem to still be stuck in the household budget box of taxing and borrowing. Indeed, one economist and commentator claimed that ‘spending on growth-promoting investments would ensure that government wouldn’t have any trouble repaying its debts over the long term’. It is now the job of the left-wing not to question the fiscal prudence of government as in the usual ping pong of debate about the state finances – that train has now left the station – but to hold it to account for its political choices.

The house is still on fire, the emergency suddenly grew into one of huge proportions with increasing climate uncertainty, environmental catastrophes, the prospect of an economic collapse which will affect vast swathes of the world population and we still have people talking about being fiscally prudent in one way or another. It is time to wake up to the reality that it is not a balanced budget that will save us, it is a government which puts human beings at the top of its priorities instead of polluting, exploitative corporations and is willing to make the policies and spend within its resource capability to address the challenges we face for the future.



Challenging the narrative about how governments pay for public services – Northampton

March 28 @ 1:30 pm – 4:30 pm


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The post The government’s spending promises have shown the need for austerity is a lie and a sham. It’s time to hold the government to account for its political decisions, not its fiscal prudence or otherwise. appeared first on The Gower Initiative for Modern Money Studies.

Targeted Versus Non-Targeted Stimulus

Published by Anonymous (not verified) on Thu, 12/03/2020 - 12:01pm in


Inflation, MMT

I've run across yet more lazy critiques of Modern Monetary Theory (MMT), arguing that "MMT says governments should just print money to stop the virus!", or similar nonsense. I may only be speaking for myself, my reading of MMT would lead to cautiousness with respect to the limits of fiscal policy at present. Given that we face considerable constraints on output capacity, we can see theoretical inflationary risks if fiscal policy was too active. (My base case view is in line with the collapsing inflation-linked market: inflation is likely to head lower, given the swoon in energy prices.)

If we step back to the 1960s-1970s. we saw a divide between the mainstream (Old) Keynesians and Hyman Minsky. To offer a simplified version of events, Minsky argued that the Old Keynesian emphasis on aggregate demand management posed inflationary risks since they ignored the institutional effects that led to higher wages and prices. The Old Keynesian religion failed in the inflationary 1970s, but the congregation listened to Monetarist critiques, not Minsky's. Within a few decades, the New Keynesian faith was solidified, almost entirely premised on aggregate demand management via monetary policy.  However, the pendulum is swinging back. The upset of the Financial Crisis and the Zero Lower Bound revived Old Keynesian attitudes towards fiscal policy among at least some of the left-leaning New Keynesians.

Nevertheless, the mainstream emphasis is on aggregate demand management. The pandemic is going to blow a hole in aggregate demand, so fiscal packages are being demanded.

My base case view is that we are unlikely to see a wage-price spiral, which is the form of "inflationary pressures" that policymakers need to worry about. The argument is straightforward: labour has a weak bargaining position across the developed countries, and the primary worries about workers' incomes being disrupted due to "social distancing." People who are worried about survival are unlikely to hold out for higher wages.

That does not imply that the CPI must remain stable; we do not know how badly supply chains have been disrupted. However, rising consumer prices represents a fall in living standards that policymakers can do very little about. (There is no way to rebuild off-shored supply chains in a matter of months.) Without wages rising to meet rising consumer prices, volumes will fall, and matters will be corrected. Meanwhile, the collapse in oil prices means that headline CPI is likely to remain weak, even in the face of supply disruptions. (Much of the CPI weight consists of services, and those prices are likely to remain weak in the face of disrupted domestic activity.)

However, one could imagine scenarios where the supply side is disrupted for an extended period, and policymakers are panicking and pushing hefty non-targeted fiscal stimulus. That would presumably impose inflationary risks. The key to the MMT world-view is what matters is the real side -- what resources will be under inflationary pressure? The key is that we cannot try to extract some level of "potential GDP" using some econometric mumbo-jumbo, we have to pin down the areas where resource constraints would be hit. Since we do not even know what the policy response will be, it is far too early to guess what those constraints are -- never mind how far we are from hitting them.

The key point is that the preference is to target fiscal policy, to best deal with the crisis without blowing through real constraints. Dropping money from helicopters to everyone is not exactly the optimal way to achieve that.

(c) Brian Romanchuk 2020

Inflation Is NOT The Most Significant Factor Determining Bond Prices

Published by Anonymous (not verified) on Thu, 20/02/2020 - 6:55am in

One of the pieces of pseudo-science that floats around in popular discussion of bonds is the belief that bond investors are deadly afraid of inflation. In particular, bonds "lose money" every time the Consumer Price Index rises -- which is most months, in most developed countries. As far as I can tell, this is the legacy of some Economics 101 textbook story that has been passed on from "expert" to "expert" over the decades.

The correct answer is that nominal yields largely reflect the expected path of the short-term nominal policy rate, and is thus a reflection of the central bank's "reaction function." (At this point, some people will jump in and start going on about the term premium. However, unless we using an obviously dysfunctional term premium model, the term premium is only a small deviation from the fair value determined by rate expectations.)

The advent of inflation-linked bond markets adds some extra qualifications to the previous statements. (My previous book discusses the inflation-linked markets.) If a bond investor is overweight inflation-linked bonds, they can get a big fat bonus if inflation turns out higher than expected. However, the beliefs about bond investors that I am discussing here were formed in an era when inflation-linked markets did not exist, so economics textbook writers were free to write in whatever campfire ghost story they wished.
IntroductionThe genesis of this article is a question that showed up on the Economics Stack Exchange. The person who posed the question quoted from a primer that came from a less authoritative website. The underlying premise behind the question is that real yields are constant.

Since the arguments I am discussing were pretty shaky, it is difficult to trace where they came from. However, my guess is that the logic worked as follows.

  • Irving Fisher came up with the story that we can decompose nominal bond yields into inflation expectations and a real yield. (I.e., nominal yield = real yield + inflation expectations.) This fit the biases of classical economists.
  • Historically, economists lacked the mathematical tools to deal with yield curves, and so they made up toy models in which a short-term interest rate, and a "bond yield" floated as somewhat independent variables. (Note that this was not purely a "classical economics" view, it goes back to Keynes. Although Keynes was a market participant and was aware of rate expectations, putting an entire yield curve into an economic model was difficult.) They assumed that bond investors were not leveraged, and only cared about the real value of their bond holdings.* As such, they assumed that bond markets cleared based on the real yield.
  • Since it was unclear what would cause the market-clearing real yield to shift, the story went that almost all nominal bond yield movements were due to changes in inflation expectations.

This logic was hard to refute when the only data available was nominal yields. However, the advent of inflation-linked bond markets means that we can dig further.Inflation Means Bonds Lose Money!The story that inflation causes bonds -- and only bonds -- to "lose money" is frankly bizarre. 
Imagine that you hold an equity mutual fund, a bond mutual fund, and a money market fund. Each fund has a certain Net Asset Value (NAV). The government suddenly raises the sales tax and boom! -- the price level rises. According to the usual story, you were hit by "losses" on your bond and money market funds, while the equity fund did not lose money. Really?
If we think about this for more than five seconds, we need to look at what happened to the NAV of the funds. Guess what? Since the early 1980s, the United States and other developed markets were in a secular bond bull market. Meanwhile, there was a positive inflation rate most of the time. Bond funds were rising in value, both in nominal and real terms. 

You need to look at actual returns data, and funnily enough, the story is that practically anything can happen, particularly over short holding periods.U.K. ExperienceThe first modern inflation-linked bond market was developed in the United Kingdom. At the time, the U.K. had quite poor inflation performance, and in fact, the markets did feature stable real yields and oscillating inflation expectations. U.K. 10-year Real (Zero) Yield
The chart above shows the 10-year (zero) real rate from the Bank of England historical yield curve data set. We see that the real yield was in fact stable near 4% in the 1985-1995 period.
However, inflation finally got under control, and the volatility moved to the real yield. The collapse in nominal yields coupled with steady inflation meant that real yields went quite negative. If we look at other developed markets like Canada and the United States, we see an initial period of mis-pricing then the inflation breakeven stabilising around the 2% level. This meant that the big swings in nominal yields resulted in real yield volatility.
In other words, inflation was no longer a source of returns volatility. This is what we would expect to happen if policy results in inflation sticking near target. (Whether the policies that drove this outcome is monetary policy versus other policies is a point of debate between the mainstream and MMTers.)
(Nick Rowe periodically discusses this, and attributes this to Milton Friedman's "thermostat analogy." The idea behind the analogy is that if a home heating system is functioning properly, there will be no correlation between furnace energy consumption and interior temperature -- since the interior temperature is roughly constant. However, this does not imply that the furnace has no effect interior temperatures. Given my control systems background, this point seemed so obvious that I never saw a need to dig into which economists said what about it.)What Determines Nominal Bond Yields?The following factors determine nominal bonds yields. (Note: this list is comprehensive, but I wrote it quickly, and may have missed something.)

  • Base fair value is rate expectations, which is an embodiment of the central bank's reaction function. To what extend inflation matters, it is showing up here.
  • Term Premium. There is good evidence that investors want compensation for taking duration risk, although this was not always the case. There are various wacky academic models that allegedly model term premia, but my argument is that those models tend to be GIGO exercises. (The remaining factors might be lumped in with the "term premium," but should be thought of as distinct entities if we are being careful.)
  • Institutional pressures. Regulators can do things to force investors into various parts of the yield curve, distorting markets. (Could be lumped in with a term premium.)
  • Funding cost differentials. If you can fund a bond cheaper than other bonds, its yield should be lower. Regulations can influence funding costs.
  • Taxes. Most of the distortions from taxes have been removed over the years, but we can premiums for discount/premium bonds for tax reasons.
  • Market Squeezes. There are investors with big positions, and dealers test whether they are vulnerable to squeezes.
  • Fat fingers, or rogue algorithms. (Everything else.)

In summary, there are lot of things that can affect bond prices in the real world. To what extent inflation shows up, it is how central banks react to it.What About Hyperinflation?I tweeted earlier about this, and the topic of really high inflation "breaking" my arguments was raised. I do not see that as a serious dissent from my view -- the inflation surprise would likely cause a reaction by conventional central bankers. However, based on my experience, almost every time an economist interjects "inflation!" into a discussion of bond yields, they are about to be totally wrong on the duration call. 
* Even if you are concerned about the real value of your portfolio, that does not mean that you are worried about the real yield of bonds. For example, imagine that inflation is 2%, and the bond yield is 1%. Although that is allegedly bad, apply enough leverage to that sucker, and you get a 20% nominal return (if you are lucky...). To be clear, I am not recommending that investors run out to leverage bond portfolios, but want to make it clear that pricing is driven by relative value traders that apply leverage to their positions. As such, they are just interested in positive nominal returns, which are then dialed up.
(c) Brian Romanchuk 2020

Marc Lavoie On A Podcast Episode ❗

Published by Anonymous (not verified) on Wed, 12/02/2020 - 4:08am in

Marc Lavoie On A Podcast Episode ❗

Marc Lavoie recently appeared on David Beckworth’s podcast, Macro Musings, where he discusses his recent paper on the Canadian settlement system and its relation to monetary policy. He also discusses a few more things such as inflation and Post-Keynesian perspectives on this.

Limited Passthrough From Exchange Rates To Inflation: Canadian Example

Published by Anonymous (not verified) on Mon, 03/02/2020 - 3:12am in


Canada, Inflation

 U.S. and Canadian Core Inflation, Exchange Rate
The inflation story in Canada and the United States has not been particularly exciting for some time, and I am not in a position to argue that this will change any time soon. I just want to update a chart that I think is extremely useful when discussing the alleged external constraint on floating currency sovereigns. As seen above, even Canada -- a small floating currency sovereign with a economy highly open to external trade -- has extremely limited passthrough from exchange rate movements to (consumer price) inflation.

The top panel shows two measures of core inflation for Canada (the "excluding 8 volatile items" measure) and the United States (CPI less food and energy). As is well known, extremely flat since 1995, when the various structural changes were made to the economies (including an explicit inflation target in Canada).

Looking at the top panel, there is not a lot to say. One could argue that central banks have done a great job hitting inflation targets (an implicit target in the United States) -- or someone more skeptical of the power of inflation targeting would argue that structural changes to the labour markets and the opening of trade to low-cost developing countries has eliminated pricing power. There are some small movements that appear to be cyclical, but the magnitude is very small when compared to the inflation volatility of earlier eras. In any event, there's not a lot more to say about this, other than raising the possibility that the environment can change (which can obviously happen).

The bottom panels are more interesting -- they show the exchange rate between the Canadian and U.S. dollars. Although Canada is a large trading partner of the United States, we would not expect much of an effect of Canadian dollar movements on U.S. inflation, as the U.S. is a relatively closed economy, and has many other trading partners that manage their currency value versus the USD. However, Canada is an open economy, with extremely large North-South trade flows. (In practice, it can be easier for some firms to send output to the United States than it can be to other Canadian provinces.)

The top panel shows the annual percentage changes in the exchange rate (with a positive number indicating a weakening Canadian dollar or strengthening U.S. dollar). If we look at the period around 2008, we see that the Canadian dollar strengthened considerable before and after the Financial Crisis -- but crashed during the crisis itself.

One may note that the 20% movements in the Canadian dollar had almost no perceptible effect on core Canadian inflation. Wages represent a large part of the domestic cost structure, and they are not indexed to the currency value. Meanwhile, there are large fixed costs in retail (particularly rent) which have to be covered. The fluctuation in import prices is absorbed in someone's profit margins (and to a certain extent, nullified in the short term via currency hedging).

One key distinguishing factor for Canada is its experience with floating exchange rates. Other than an 8 year interruption, the Canadian dollar has floated since 1950. Firms and consumers have learned to adapt to a floating currency, and are not as obsessed with its value. (My observation as an outsider is that this is very different than the United Kingdom, were movements in the pound are seen as having political significance. This seems to be a legacy of a recent memory of a fixed exchange rate, notably the embarrassing ejection from the ERM. That event was viewed as political disaster by the locals, but for those of us living on a Canadian dollar scholarship, it was a great event.)

If one follows the Functional Finance line that the only true constraint on a floating currency sovereign is inflation, the lack of pass-through from the currency value to domestic inflation greatly downgrades the importance of the external sector as a "constraint."

(c) Brian Romanchuk 2020

The time has come to talk of many things; of taxing and spending and an economic system that needs mending. 

Protest placard with a picture of the Earth in space and the slogan "One World"Photo by Markus Spiske on Unsplash

In the news, the Prime Minister tells millions of  WASPI women affected by the changes to the state pension age that he couldn’t promise to magic up the money for them despite having found lots in the magic money pot for Tory manifesto pledges; the Home Secretary, Priti Patel, whilst visiting a food bank, claims that the Tory government was not to blame for poverty in the UK and, shifting the blame onto local councils, forgets to mention that central government funding has been cut by nearly 50% since 2010/11.

After 9 years of austerity, the consequences couldn’t be starker for our public and local government services, however, it is UK citizens, families and their children who have borne the distressing costs of cuts to social security benefits, both on their health and financial well-being. It cannot be clearer that the steep cuts to tax credits, child and disability benefits, ESA and Incapacity benefit and housing along with the introduction of Universal Credit have been behind the increases in child malnutrition, food bank use, homelessness and suicide.

The IPPR this week published its report ‘Divided and Connected’ which reveals that the UK is more regionally divided than any comparable advanced economy.

In the same week, the Resolution Foundation published its report ‘The Shifting Shape of Social Security’ It notes in its analysis of the manifestos of the main parties that child poverty is set to continue rising under the Conservative Party’s social security plans, whilst Labour’s £9bn of extra spending would mean 550,000 fewer children in poverty, it would not reverse the effects of the £5bn benefits freeze and could still see more children living in poverty in 2023 than do today. It noted that major policy changes have reduced support for working-age households since 2010 resulting in overall spending in 2023-24 being around £34bn a year lower on current plans than if the 2010 benefit system had remained in place, and that the cuts in support had fallen almost entirely on low-to-middle income working age families. It also noted that the Conservatives’ 2019 manifesto makes no changes to existing policy and as a result child poverty risks reaching a 60-year high of 34%.

Although the conservatives are promising more spending on health and education, it seems clear that they intend to carry along the same policy paths they have followed since they came to power in 2010 which have involved cuts to benefits, conditionality, sanctions and welfare to work. Clearly, they have no intention either of reversing the already implemented cuts or reforms which have done so much damage and left a trail of devastation in many people’s lives. Priti Patel’s remark about who is to blame for poverty is indicative of Tory neoliberal credentials of denying governmental responsibility and passing the buck along to others, whether local government who have been firefighting for lack of funds or indeed shifting the blame onto citizens themselves. Her position has not changed much since 2015 when she said, ‘There is no robust evidence that directly links sanctions and food bank use.”

In the light of the very real consequences on people’s lives of government spending decisions and policies, it is all the more depressing to read the two analyses of the party manifestos by the Resolution Foundation and the IFS which instead of looking at the real effects of government spending policies on the lives of real people, examine them in purely financial terms and arbitrary fiscal rules which as we may now be realising bear no relationship with how money really works.

Hunkered down in household budget explanations, the IFS, rather than considering the spending promises of all three parties from the perspective of potential outcomes for the economy and its citizens, examines them in relation to the prospect of raising taxes or borrowing and the likely impact on the deficit and national debt.  As usual, the question, if not asked directly, is how will the parties pay for their spending plans? When, instead, they should be acknowledging that the real question is how will a future government manage existing resources to meet government goals? This will be the real constraint that any future government will face, however progressive that government may be. The resource balancing act will be key to maintaining spending within the productive capacity of the nation to deliver public purpose.

The Resolution Foundation summed it up depressingly in its conclusion in saying that:

‘The priority that both main parties have placed on credible fiscal frameworks in this campaign is laudable. Such rules are hugely important for the government’s overall economic priorities. In setting out new fiscal rules, it is vital that they provide a clear framework for sustainable public finances, constraining the temptation for policy makers to promise unfunded giveaways.’

Such institutions unsurprisingly have focused on the notion that it is the role of government to balance its budget rather than serving citizens and improving their economic and social well-being. It is regrettable that a recent poll has suggested that many people doubt whether such spending plans are affordable and yet given the reality of the consequences of not spending adequately how could we possibly afford not to?

The nation is now paying the price for politicians pedalling the lie of the last forty years that money is scarce, that there is no such thing as public money and that good government is about fiscal discipline. Even if changing that notion in the public consciousness will take time, in the light of the urgency of the challenges to address climate change and social inequality we need an urgent step change in economic thought on a planetary scale since it is our survival on this planet which is at stake.

This is not, however, a time to make compromises with an economic system which has already done such huge damage. The seeds of an alternative model are already being hijacked by companies cynically promoting their green credentials with one aim in mind: to create more growth to keep the profits rolling. Reducing our plastic use and buying electric cars will scarcely make a dent in the scale of the changes we need to implement. We may have a broad vision, but that now needs to be developed into concrete realities. It may be still a work in progress, but it is a vital one we must not ignore.

This is a time to reimagine the world. A fairer and more sustainable approach to replace the one of endless growth which currently defines our capitalist economic system and puts profit before people and the planet.

Progressives on the left are beginning to initiate a much-needed conversation about what we need to do to reverse the decades of social injustice and challenge the idea that we can maintain the engine of growth on a finite planet.

However, and most regrettably, politicians on the left are still trying to have that conversation stuck in old economic paradigms of how money works. When they are asked how they will pay for these vital programmes the response is always one of tax and spend or borrowing to invest. Raising corporation tax, bringing back the magic money tree from the Cayman Islands, taxing the rich until the pips squeak or borrowing on the markets because interest rates are low. Instead of talking about taxing the wealthy to redistribute wealth by removing their colossal purchasing power and ability to influence politicians, they talk about funding our public services with the proceeds.

Again, on the left some politicians are suggesting that the government is akin to a business and that renationalising transport, our utilities, mail and the NHS will allow the government to plough back the profits back into public services. Yes, we need to end the rip-off of privatisation which has not benefited citizens and has allowed public money to flow into private pockets for profit motives, but let’s not buy into the idea that the government resembles a large corporation with a profit and loss sheet. It doesn’t.

The government is the currency issuer and neither needs to tax nor borrow in order to spend and nor does it need the profits of renationalised industries for us to have public services.  It just needs the political will to deliver them.

The role of government is to create the framework for markets to exist and dictate through legislation how they will function and in whose benefit. It taxes the populace, not to fund its spending but to manage its economic policies, from the redistribution of wealth to expressing public policy and is one of the key tools it can use to manage inflationary or deflationary pressures.

Government not only has the power of the public purse to improve the lives of its citizens it also has the power to legislate to drive its political agenda. All a question of choices which are not dependent on the state of the public accounts. Indeed, not only does it have the power to spend for the public purpose, it has the power to change the rules of the game. For example, it might regulate the financial sector to ensure that when people’s savings of whatever kind are put to work it is done to shift our negative and damaging behaviours towards creating a positive impact on society and our environment instead.

Outcomes are the measure of any government’s success. With the political will it could:

  • create the framework for good quality universal public services provide a social security system which is both not punitive in its functioning but also ensures a decent standard of living for those unable to work through disability, sickness or old age,
  • pay for a just Green transition,
  • offer a Job Guarantee as standard to create price stability and act as an automatic stabiliser for the economy to give people the dignity of proper, well-paid employment when needed.

All of these things are fundamental to the good functioning of society.

What are we so afraid of? A better future for our children? A more sustainable and fairer economy for all? Indeed, a planet for us to live and breathe on? What is not to like? So, when you hear interviewers berating left-wing politicians (who have not quite made the leap into monetary realities) about how they will pay for their progressive agenda ignore those questions and remember instead that a government’s economic record will be defined by how it serves the nation’s economy as a whole, improves the lives of its citizens and how it uses the resources it has at its disposal to achieve its agenda – not whether it balanced the budget.


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Interview with Asahi Shimbun in Tokyo – November 6, 2019

Published by Anonymous (not verified) on Mon, 25/11/2019 - 1:06pm in


Inflation, Japan

During my recent trip to Japan, where I made several presentations to various groups, including a large gathering in the Japanese Diet (Parliament), I received a lot of press interest, which is a good sign. I am slowly putting together the translated versions of some of the print media articles. Today, I provide a translation (with my annotations) of an interview I did with the centre-left newspaper – Asahi Shimbun – on November 6, 2019 in Tokyo. This is a daily newspaper and is one of the largest of five national newspapers in Japan. It has an interesting historical past but that is not the topic of the blog post today. The article opened with a statement introducing Modern Monetary Theory (MMT) and then followed a Q&A format. I have expanded the answers reported in the paper to reflect the actual answers I gave to the two journalists during the interview and to a wider press gathering at an official press conference the day before in Tokyo.

The article (November 20, 2019) – 消費増税「信じがたい」 異端「MMT」の名付け親語る (“Consumption tax hike ‘It’s hard to believe’) – records the conversation I had with the two journalists, Tetsuya Kasai and Kazuo Teranishi, at the Japanese Parliament on November 6, 2019.

This was the day after my formal presentation to the Diet. The face-to-face interview lasted about an hour and was in English.

The article also uses material from the main press conference on November 5, 2019, which followed the formal presentation. The open press conference also lasted about an hour but was interpreted.

I am also just reporting the English-translation, rather than the original Japanese version, but you can check it against the article linked above if you can read Japanese.

The photos were published in the Asahi article and came from the interview (November 6, 2019) and the press conference (where I am wearing translation earphones) (November 5, 2019). The photo effects (colouring etc) were their doing.

The article opened with a statement introducing Modern Monetary Theory (MMT).

Countries that can issue government bonds in their own currency, such as Japan and the United States, will not face the need to default, so they should expand their net public spending to increase their income growth and employment if they have real resources available.

Inflation can also be controlled through a range of policy levers.

Modern Monetary Theory (MMT) is a theory that is considered to be heretical by the mainstream macroeconomics. But interest in MMT has grown in many countries as the reliance on moentary policy to stimulate growth has failed and central bank governors are calling for a change in policy emphasis.

The former President of the European Central Bank (ECB), Mario Draghi, who recently retired, said, that policy makers should be open to MMT.

So, why should we be considering MMT now?

We asked Professor Bill Mitchell from Newcastle University in Australia, who is one of the original developers of MMT and who is visiting Japan at the moment, for his view on the growing popularity of MMT.


Why do you think MMT is attracting attention now?


Mainstream macroeconomics advocates an economic policy which relies on monetary policy to stabilise growth and prevent recessions.

The problem is that it has reached a point where almost everyone can see that it has not been able to answer the challenges it has set itself. In many countries, real wages have fallen and/or nominal wages growth has been flat.

Inflation is low despite the massive injections of bank reserves via QE and negative interest rates in various nations.

We are starting to reach a consensus that the way we are organising our socio-economic system is invoking damaging climate change, which will have to be addressed with a massive transformation in the way we produce and consume, which, in turn, will require a substantially greater role for government intervention and fiscal policy.

When governments engage in war, they spend a lot of money on the military. During the global financial crisis, even though the banks had behaved in an irresponsible and often criminal manner, the governments bailed them out immediately with vast sums to prevent a financial collapse.

We didn’t ask then: Where is the money coming from? We instinctively knew it came from the currency-issuer, the government.

But, when the government is pressured to allocate spending to improve the lives of the socially vulnerable, the unemployed or the poor, or to provide outlays to protect our environment, the first question that is asked is ‘where is the money coming from’.

And that question is often asked by conservative interests that, in one way or another, benefit from military expenditure or financial bailouts.

But the issue that is highlighted is this: Why can the government use its currency to benefit the military or the financial sector but cannot use it to build and maintain first-class public infrastructure?

Once we see the hypocrisy in that dichotomy, then we can move on to understand that the currency-issuing government is not financially constrained at all. Rather, it is constrained by real resources, and, ultimately, by what the natural environment can sustain in terms of economic activity and consumption.

And that revelation, at the heart of MMT, opens up the policy debate in ways we have not considered, while operating in the mainstream austerity-bias environment.

There is a growing understanding now, that fiscal policy has to dominate into the future.

And the only economists who were unambiguously advocating that position when it was not popular, were the MMT economists.


The former ECB President Draghi has recently started talking about the need for fiscal policy. At the recent G20 meeting, at meetings of Finance Ministers and Central Bank Governors, there is an opinion that monetary policy has reached its limit, and that if the global economy is susceptible to recession in the future, then fiscal policy will have to become more important.

What is your view on that?


In his farewell speech to mark his retirement, Mario Draghi indicated that monetary policy has reached its limits.

He also said that policy makers should be open “to ideas such as Modern Monetary Theory (MMT)”.

He said “These are objectively pretty new ideas … They have not been discussed by the Governing Council. We should look at them”.

In Australia, the RBA governor Philip Lowe has also almost begged the federal government to introduce fiscal stimulus given our economy is heading towards recession and unemployment is rising.

Now, the central bank governors around the world appear to be ‘singing off the same sheet’.

In other words, the promise that mainstream economists held out about the capacity of monetary policy to deliver benefits can no longer be sustained.

A reliance on monetary policy cannot be supported.

I think this is the beginning of a new era of fiscal policy dominance.


But, if you expand government deficits and increase the issuance of government bonds, won’t it lead to a rise in interest rates, and isn’t that a negative for economic growth?


That logic is just repeating the standard mainstream economics myths.

If the propositions were true, then there should have been a financial crisis in Japan by now, given the fiscal policy settings of the government.

For nearly 30 years, Japan has been running substantial fiscal deficits, it now has the world’s largest gross public debt ratio and the central bank now holds around 45 per cent of the outstanding government bonds.

No fiscal crisis has occurred.

Even the yields on 10-year government bonds have been negative recently.

The point is that there is not a finite pool of savings that the government competes with private investors over. Further, the private banks will always make loans to credit-worthy private borrowers. Loans create deposits or liquidity. There is no hard constraint operating.

And, ultimately, those deposits have transactional veracity, because the Bank of Japan will always ensure there are sufficient reserves in the banking system to allow the payments system to function effectively.

So there is no reason interest rates will rise in the future as a result of the ongoing deficits.

The danger of rising government bond yields will not be realized in Japan in the foreseeable future.

That means that the Japanese government should continue to have a relatively large fiscal deficit into the future to satisfy the saving preferences of the non-government sector and ensure there is full employment and first-class infrastructure to meet the challenges of the ageing society and the climate crisis.


What is the role of the central bank?


In MMT’s view, the central bank’s job is to set a policy interest rate and leave it as it is. Zero is zero, 2 per cent is 2 per cent. It’s just a matter of setting the policy rate and leaving it at that.

We prefer a zero interest rate, given that this is the level the system will move to if the government is running continuous deficits and the central bank doesn’t conduct open market operations or set a support rate on excess reserves.

The MMT economists consider monetary policy to be an ineffective policy tool for counter-stabilisation purposes – to adjust economic activity.

Its impact is unpredictable because it relies, in an indirect fashion, on differential distributional impacts of interest rates changes (on lenders and borrowers) which are hard to assess in any reliable manner.

We have also seen that the various QE (quantitative easing) measures taken by central banks over the last few decades have not succeeded in meeting their aims – which has been to increase the inflation rate.

Mainstream economists thought that if QE increased reserves in the system (through the asset-swap – bonds for reserves), then banks would increase loans and economic activity would rise.

But this ‘supply-side’ view of banking is wrong. Banks do not loan out their reserves to the retail market. Their lending is not reserve constrained. The reason that borrowing was weak after the GFC was because firms were uncertain of the future returns on new productive capacity and households became more risk-averse given the elevated risk of unemployment.

Fiscal policy is a direct form of spending intervention and more predictable in its impacts.

Further, the idea that the central bank should be independent from the political process is a myth. There are many reasons why central banks can never been independent from the Treasury functions of government.

Governments appoint the senior officials at the central bank.

But more importantly, the officials from the central bank and treasury (or Ministry of Finance in Japan’s case) have to meet regularly (daily) to ensure the impacts of fiscal policy on the liquidity are commensurate with the bank’s own policy operations.

There is a high level of coordination between the two arms of ‘government’ in all our countries.

The myth of central bank independence just plays in to the neoliberal trend towards depoliticisation of macroeconomic policy, where the elected government can divert the negative publicity associated with harsh economic policies by claiming the ‘central bank’ did it, not us!


I can sympathize with the idea of ​​spending money on healthcare, education, and public infrastructure, but I think there are risks in the MMT concept. If the government increases the budget deficit, how will the financial market react? What will you do if inflation begins to rise? Who will take responsibility at all?


Why will inflation begin to rise? It hasn’t increased in Japan for 20 years ….

Question (interjection):

It has only been 20 years. No one knows when it will go up.

Answer (continues):

If you understand the inflationary process then you will conclude, as I do, that inflation will not accelerate in Japan in the foreseeable future.

20 years is a very long period. If the predictions of the mainstream economists had any veracity then we would have seen inflationary forces before now in Japan, given the scale of the fiscal intervention and the way the Bank of Japan has operated.

It is easy to pose, in the abstract, the “No one knows when it will go up”.

Eventually, if inflation was to accelerate, then the mainstream will say they were correct all along. But that would be a false conclusion. The causality that the mainstream suggest – that fiscal deficits and the Bank of Japan purchases of government bonds are pumping ‘too much’ yen into the economy which will cause inflation because there is too much money chasing too few goods is patently false.

If that was true, then nominal GDP growth should be high. It is not and hasn’t been.

But, moreover, we should understand what government debt is in the first place?

Who holds the government debt?

We do. Pension funds and investment funds hold it. It is one of the components of our financial wealth.

And the government’s so-called interest burden is, in fact, a component of our income flow.

Why do you think that increasing our wealth or income is a bad thing?

The government’s public debt is our financial asset and allows us to hold our stock of wealth in risk-free financial asset.


Isn’t it necessary to balance the fiscal balance? Will future generations be forced to pay the cost of the deficits the government runs now?

No, the future generations never have to repay past deficits.

When I was younger, the Australian government built up a large debt as a result of running deficits as part of the post-WW2 nation building exercise.

I didn’t repay it once I started working.

Rather, I benefited from the excellent education system that the government created when I was younger. My parents were poor and if I hadn’t had access to excellent public education and welfare support, I wouldn’t have been able to reach the position I am in now.

The deficits in the past stimulated social mobility in Australia and allowed children born into working class families to escape that poverty and gain material security through education.

In what sense, then have my generation paid back the deficits?

But, also, when considering what the appropriate fiscal position of the government should be, we have to consider the context, and by that I mean the relevant goals of government and the state of non-government spending and saving desires.

A fiscal deficit, in itself, is neither good nor bad. The only way we can make sense of the appropriateness of the fiscal position is to juxtapose it against the state of the economy and the aspirations of the non-government sector, as expressed through its spending behaviour.

What I mean by that is that the government should always take responsibility to achieve full employment as a starting position.

We know that spending equals income and output, which in turn generates employment. At any point in time, there is one level of spending that will create enough demand to fully employ the available productive resources, given productivity levels.

If the non-government sector’s spending is insufficient to generate that particular level of spending, then the economy will not achieve full employment unless the government sector fills the spending deficiency.

So if the non-government sector desires to save overall and implements a strategy aimed at achieving that goal, then the government sector will typically have to run fiscal deficits on a continuous basis to maintain its goal of full employment.

It’s highly unlikely that a fiscal balance, where government spending exactly equals tax revenue, will correspond to a overall spending level that maintains full employment.

In the case of a nation such as Norway, which generates a lot of spending from its external sector, the North Sea energy resources, the government may be forced to run a fiscal surplus to avoid pushing too much spending into the economy. But that situation is rare.

So before we can say that a 2 per cent of GDP deficit is appropriate, or, a 4 per cent deficit is appropriate, or even a 2 per cent surplus is appropriate, we have to understand the context and the position of the economy in relation to achieving full capacity.


The Japanese government raised the consumption tax rate to 10% from October this year. On the other hand, there are political parties advocating tax cuts and abolition of consumption tax.

What is your view on this debate?


History tells us that over the last three decades, when Japan has used fiscal stimulus to maintain growth and keep unemployment low, the government has eventually come under pressure from mainstream economists to reduce the deficit because the mainstream claim that accelerating inflation and rising interest rates are likely to occur.

The more extreme versions of these fear campaigns have predicted that the government will face insolvency.

Unfortunately, the government has succumbed to this fear mongering and, at various times, imposed austerity measures, which have halted the growth rate and pushed-up unemployment.

For example, a recession occurred after the first consumption tax hike in April 1997.

Anybody who understood economics would have predicted that the growth cycle would end once the impacts of the consumption tax hike were felt. It was obvious that household consumption expenditure would be adversely affected and that’s exactly what happened.

It took some years and a renewed fiscal stimulus to get growth back on track in Japan.

The same sort of pressure occurred in 2014, when the government further increased the consumption tax level, and, again this caused a dramatic decline in household consumption spending and the inevitable move into recession.

The attacks on government fiscal policy, which have formed the basis of these ill-conceived austerity policies, have no basis in reality.

The Japanese government never faces insolvency and is operating in environment where continuous fiscal deficits are necessary to maintain low unemployment in the face of high non-government sector saving.

And so the decision to further increase the consumption tax in October of this year, well, I can only say that the Japanese government is doing something that is incredible.

Incredible in the sense that it has no credibility.

The Japanese government is clearly aware that its recent consumption tax hike will damage spending, which is why, this time, it provided some short-term offsets, but eventually the negative consequences will be revealed.

There is no economic case that can be made for the consumption tax hike and I fully support the political groups, on both the Conservative and the progressive side of politics in Japan, that oppose this austerity.


Thanks to the interview team for an interesting time.

But, as you can see, even the centre-left media elements in Japan, have mainstream-type questions as the focus. The neo-liberal mindset is difficult to penetrate even among progressive forces.

Thanks to Akiko (😙) for the Japanese text (it was behind a paywall).

That is enough for today!

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