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White Paper: Modern Monetary Theory (MMT)

Published by Anonymous (not verified) on Sun, 05/07/2020 - 3:39am in

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Published online 4th July 2020


Full Document




The purpose of this white paper is to publicly present the fundamentals of MMT.

What is MMT?

MMT began largely a description of Federal Reserve Bank monetary operations, which are best thought of as debits and credits to accounts as kept by banks, businesses, and individuals.

Warren Mosler independently originated what has been popularized as MMT in 1992.  And while subsequent research has revealed writings of authors who had similar thoughts on some of MMT’s monetary understandings and insights, including Abba Lerner, George Knapp, Mitchell Innes, Adam Smith, and former NY Fed chief Beardsley Ruml, MMT is unique in its analysis of monetary economies, and therefore best considered as its own school of thought.










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The post White Paper: Modern Monetary Theory (MMT) appeared first on The Gower Initiative for Modern Money Studies.

Eurozone inflation heading negative as the PEPP buys up big – don’t ask the mainstream to explain

Published by Anonymous (not verified) on Thu, 04/06/2020 - 3:57pm in

Governments save economies. Never let a mainstream economist tell you that government intervention is undesirable and that the ‘market’ will sort things out. Never let them tell you that large-scale government bond purchases by central banks lead to inflation. Never let them tell you that the government, when properly run, can run out of money. There is unlimited amounts of public purchasing capacity. The art is when to apply it and how much to release. That can only be determined by the behaviour of the non-government spending and saving and the state of idle capacity. It can never be determined by some arbitrary public debt threshold or deficit size. And the central bank can always buy however much debt they choose. At present the ECB is buying heaps and keeping the Member States solvent. That is not its state role but given there is no other institution in the Eurozone that can serve the fiscal function effectively and ‘safely’, it has to do that. Otherwise, the monetary union would quickly dissolve. I would take their bond buying programs further and write off all the debt they purchase. Immediately. Go on. Just type some zeros where they have recorded large positive Member State debt holdings. That would be something good to do in a terrible situation.

The fictional world of mainstream macroeconomics

I stumbled on an old edition of the IMF’s Finance and Development series yesterday while looking something up. I read this quarterly publication because it gives a good summary of where orthodox views in macroeconomics and development economics are heading.

The September 2007 edition of FD (Volume 44, Number 3) carried an profile of American economist Robert Barro – Topping the Charts – which for its timing (just before the GFC) and now (during the worst downturn since the 1930s) makes interesting reading.

I am an insider – I have been trained as an economist.

I did all the hard postgraduate courses in theory and maths and econometrics.

I was exposed to all the psychobabble that reinforces and protects the mainstream Groupthink (absorbing none of it!).

Yet I am still surprised how the nonsense that forms the basis of mainstream thinking has been able to survive for so long.

I know why. It protects and advances the interests of the top-end-of-town.

But the surprise is in the fact that the overwhelming majority of us who are not served very well – and increasingly so – by they system they have created – are largely compliant.

Sure, when a black man is murdered by the cops in the US, there is a response, but like the Rodney King bashing, the reaction dies down again.

Re-reading the 2007 article in FD profile of Robert Barro reinforces how a body of fiction became the orthodoxy and has blighted the lives of thousands.

And how a generation or more of young students end up with postgraduate qualifications in fiction and enter the labour market in positions of influence and a swagger built on the arrogance that these mainstream qualifications engender and push out policies that can never work in the interests of the workers and their families.

And then they overreach (GFC) or a unpredicted crisis occurs (pandemic) and their blathering nonsense is exposed for all to see.

Barro was “one of the ringleaders of the Chicago School” that “supplanted … Keynesian macroeconomics” in the early 1970s and paved the way for the current orthodoxy in macroeconomics.

This new approach rejected the ideas of Keynes who “popularized the idea that government policies could smooth out ups and downs in income” using fiscal policy.

I have analysed Barro’s work previously and I don’t want to repeat that exercise:

1. The fantasy Barro(w) is still being pushed (May 14, 2012).

2. Pushing the fantasy barrow (February 25, 2010).

The summary, which the FD article covered well, goes like this.

He claimed that the effective role of government intervention should only be:

… to define and protect property rights … ensuring (but not producing) a baseline level of education, providing a minimal welfare net, and participating in a narrow range of infrastructure investments, such as highways and airports

Beyond that, any government activity “is detrimental to growth”.

His 1970s work argued that:

… governments should take a laissez-faire approach to smoothing out fluctuations in income.

That is, let the ‘market’ sort them out.

This idea that consolidated in the 1980s “was part of the so-called rational expectations revolution that supplanted the dominant Keynesian view of the time that governments should use macroeconomic policies actively to tame the business cycle.”

The idea was based on the claim that if the central bank increased base money growth and people anticipated that decision, then the central bank would lose “their credibility as inflation-fighters” and accelerating inflation would occur.

Further, on the fiscal policy front, Barro’s 1974 paper (in JPE) argued that fiscal deficits would be counterproductive because rational agents would thwart their effectiveness.


Higher deficits would be seen as higher future taxes, so households and firms would simply stop spending to save up to pay the higher taxes.

Truly! That is what this lot argued and it led to a widespread rejection of fiscal deficits.

And, if governments borrowed in order to deficit spend (note the fictional causality), the same story played out.

The upshot of all this mumbo jumbo was that:

… the government’s ability to get today’s generation to spend more by running budget deficits would be nullified.

And that became a mainstream view – as the FD article notes – “Barro’s model became standard, so that even its critics were forced to use it as the starting point for their own models.”

This is how nonsense permeated the profession and poisoned the minds of young aspiring economists who didn’t have the moral fibre to stand up to the professors pushing this fiction, and, instead, complied to get good grades and access to jobs that the mainstream ‘network’ (Groupthink fosters these pathways) generated.

Soon enough, they youngsters became the professors and senior officials and the brainwashing and lack of courage continued.

But none of it stands the test of time does it?

The only reason the capitalist system continues is that government is at the centre propping it up.

As is now.

The bail out of all bail outs.

European inflation

In this blog post – Monetary policy has failed – we must reprioritise fiscal policy (February 5, 2019) – I discussed the ECB failure to meet its most basic legal responsibility – to meet its price stability targets.

By way of summary, the ECB’s monetary policy charter requires it “to maintain price stability”, which they define as:

… a year-on-year increase in the Harmonised Index of Consumer Prices (HICP) for the euro area of below 2% … the ECB aims at maintaining inflation rates below, but close to, 2% over the medium term.

The definition is clear enough and certainly allow some latitude around the 2 per cent target in the short run. But, equally, the definition would certainly exclude systematic departures from the target over an extended period.

On May 29, 2020, Eurostat published the latest inflation data – Euro area annual inflation is expected to be 0.1 % in May 2020, down from 0.3 % in April 202 – the title being self-explanatory.

The following graph shows the history of the All-Items HICP [prc_hicp_midx] series since the first month of 1997. The inflation rate is computed as the annual change in the index. The red line is the ECB’s definition of price stability, which

The data shows that the inflation rate has been anything but stable under the watch of the ECB.

And, last week’s news that deflation is on the way only reinforces that message.

How does one reasonably interpret this apparent failure?

The only conclusion that could be drawn is that the ECB has just plain failed to fulfill its stated policy mandate.

In other words, the claims that the euro has been a success in terms of maintaining price stability are just nonsensical.

The behaviour of the data is not surprising to an analyst cognisant with Modern Monetary Theory (MMT).

In the absence of an institutional bias towards inflation (indexation schemes, etc) or a imported raw material (for example, energy) shock, inflation will be low if not negative if aggregate spending growth in the relevant ‘economy’ is weak (in relation to what is required to maintain high pressure and low unemployment).

So the specific lack of correspondence between the actual Euro area inflation rate and the ECB’s price stability target provide us with evidence that the Euro area has been wallowing in a low growth environment, contrary to claims by Euro officials that the euro has been a “historic success” in terms of promoting strong real growth.

But it also reflects on validity of the core ideas of mainstream macroeconomics and the type of thinking that Robert Barro injected into the profession.

Theirs is a fictional world.

PEPP update

Last week, just before the latest inflation data came out in Europe, I wrote this blog post analysing the latest ECB asset purchasing programs – ECB asset purchase programs are the only thing keeping Member States solvent (May 28, 2020).

At that time, the detailed breakdown of the latest bailout, aka the ‘ECB Member State deficit funding scheme disguised as a bank liquidity measure’ – which goes by the title the – Pandemic emergency purchase programme (PEPP) – had not been released.

We only knew that as at May 22, 2020, the ECB had purchased a total of 211,858 million euros worth of bonds under the PEPP.

Well, a week later and the ECB has now released the detailed country and public/private purchases breakdowns.

They tell an interesting story and reinforce the narrative above about the lack of inflation pressure.

As at May 30, 2020, the ECB had purchased a total of 234,665 million euros worth of bonds under the PEPP.

This table gives the break down across the categories of assets purchased.

The breakdown of the private bonds was interesting – mostly commercial paper.

The next table shows the Member State breakdown and the weighted average maturity (WAM) of the purchases under the PEPP.

Not suprisingly, the ECB has been purchasing a lot of Italian government debt and the maturity profile of that debt is longer than, for example, Germany, where the ECB is buying more short-term debt.

The question of interest though is the extent to which these purchases are deviating from the capital contributions of the Member States to the ECB.

Please read last week’s blog for more detailed discussion of the capital key.

The following graph shows the PEPP shares by Member State – as a percent of the total purchases – from March to the end of May 2020 (blue bars) and the Capital share (orange bars).

ECB purchases of German debt dominates and is above their capital share as is the case of Italy and Spain. Of the large purchases, France is the only Member State under-represented.

To see this in another way, the next graph shows the percentage point deviation from the capital key of the ECB bond purchases.

Once again, we conclude that there has been massive central bank funding of Member State fiscal deficits – Italy is the stand out – in a deflationary environment.

Not only has there been no inflation but the bond-buying has not driven an expansion in real GDP growth – quite the opposite.

The only conclusion is that this form of aggregate policy intervention is largely ineffective in the face of Member State’s not being able to expand their fiscal deficits sufficiently.

I know that the European Commission has relaxed (for the moment) the Excessive Deficit Mechanism and the strict fiscal rules, but there remains a mentality in Europe that fiscal deficits should still be constrained.

The only effective function that the ECB is performing is keeping the Member States from becoming insolvent, which prolongs the life of the common currency, but little else in that austerity-biased world.

MMTed Q&A Live Stream clarification

Last night, we launched the first episode in our MMTed Q&A.

You can see the – Video – of the program, if you missed the live program.

At the end of the live stream there were issues with the saved file for some reason (I am guessing my incompetence).

We were, however, able to save it but lost the streamed version.

At that time, there were still many people watching a delayed version of the live footage. They were lost in the process.

Further, all the comments were lost.

The archived version, thankfully survived.

You should jump 4 minutes or so to miss the “Starting Soon” screen, which was in play before the actual program began to stream the rest of the content.

So for all those who commented – thank you very much and I am sorry they didn’t survive for others to share.

We will be back next week with Episode 2.

All production difficulties will be worked out by then – learning as we run!

That is enough for today!

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

Inflation Expectations in Times of COVID-19

Published by Anonymous (not verified) on Wed, 13/05/2020 - 9:00pm in

Olivier Armantier, Gizem Kosar, Rachel Pomerantz, Daphne Skandalis, Kyle Smith, Giorgio Topa, and Wilbert van der Klaauw

Inflation Expectations in Times of COVID-19

As an important driver of the inflation process, inflation expectations must be monitored closely by policymakers to ensure they remain consistent with long-term monetary policy objectives. In particular, if inflation expectations start drifting away from the central bank’s objective, they could become permanently “un-anchored” in the long run. Because the COVID-19 pandemic is a crisis unlike any other, its impact on short- and medium-term inflation has been challenging to predict. In this post, we summarize the results of our forthcoming paper that makes use of the Survey of Consumer Expectations (SCE) to study how the COVID-19 outbreak has affected the public’s inflation expectations. We find that, so far, households’ inflation expectations have not exhibited a consistent upward or downward trend since the emergence of the COVID-19 pandemic. However, the data reveal unprecedented increases in individual uncertainty—and disagreement across respondents—about future inflation outcomes. Close monitoring of these measures is warranted because elevated levels may signal a risk of inflation expectations becoming unanchored.

The Survey of Consumer Expectations (SCE) is a monthly, internet-based survey produced by the Federal Reserve Bank of New York since June 2013. It is based on a twelve-month rotating panel (respondents are asked to take the survey for twelve consecutive months) of roughly 1,300 nationally representative U.S. household heads. An important feature of the SCE is that respondents receive an invitation to complete the survey on different days spread out throughout the month. This way, consumers’ expectations are captured relatively uniformly throughout the month. The SCE elicits different measures of inflation expectations. This post focuses on the short- and medium-term inflation density forecast questions in which respondents are asked to state the percent chance that the rate of inflation will fall into various bins. These density forecasts are used to calculate the three measures we focus on in this post: the individual inflation density mean (the mean of a respondent’s density forecast), the individual inflation uncertainty (measured as the interquartile range of a respondent’s density forecast), and the inflation disagreement across respondents (measured here as the interquartile range of the distribution of the respondents’ individual inflation density means).

The chart below shows the smoothed daily median of the individual inflation density mean at the one-year and three-year horizons, where the median is the point at which 50 percent of respondents expect inflation to be above this level, and 50 percent below. We also added vertical bars to the chart to mark some of the key dates in the development of the COVID-19 pandemic. We distinguish health-related events (marked by long-dashed vertical lines), from policy-related events (marked by short-dashed vertical lines). The chart shows that the medians of the short- and medium-term density means have moved up and down substantially since the outbreak of COVID-19. Thus, so far, the pandemic does not seem to have had a clear upward or downward impact on this aggregate measure of consumers’ inflation expectations.

Inflation Expectations in Times of Covid-19

The next chart shows the smoothed daily median of the individual inflation uncertainty at both horizons. Unlike inflation expectations, this measure of inflation uncertainty exhibited a clear monotonic increase during the first three weeks of March. In fact, the sharp increase in one-year ahead inflation uncertainty is unprecedented and in March it reached levels never seen since the inception of the SCE in June 2013. After peaking toward the end of March, inflation uncertainty has remained elevated in recent weeks compared to the pre-COVID-19 period. Thus, respondents have expressed more diffused beliefs about future inflation since the beginning of the pandemic. In particular, on average, they have assigned higher probabilities to extreme inflation outcomes, such as the possibility of deflation or the risk that inflation may end up being higher than 4 percent.

It is interesting to note that inflation uncertainty in the SCE is generally higher at the three-year horizon than at the one-year horizon, simply reflecting the fact that respondents usually find it more difficult to predict inflation further in the future. In contrast, since the beginning of the pandemic, inflation uncertainty has been uncharacteristically higher at the one-year horizon. This result suggests that people are especially uncertain about the impact of the pandemic on the economy in the shorter term.

Inflation Expectations in Times of Covid-19

Finally, we plot in the chart below our smooth daily measure of inflation disagreement across respondents for the short- and medium-term horizons. Inflation disagreement increased steadily through the month of March, and subsided somewhat after the signing of the CARES Act on March 27. In other words, as the crisis initially progressed SCE respondents became more divergent in their inflation expectations (that is, in their density means): some respondents expected the pandemic to produce high inflation, while others expected it to yield low inflation. In particular, the proportion of respondents who think there will be deflation next year (that is, with a density mean below zero) jumped from less than 10 percent at the end of February to more than 20 percent a month later. Likewise, the proportion of respondent who expect short-term inflation to be higher than 4 percent jumped from around 30 percent to almost 45 percent during the same period.

Note also that our measure of disagreement has been higher for short-term inflation since the start of the pandemic. This is in contrast with historical trends. Indeed, SCE respondents usually disagree more about which path inflation will take in the medium term. This inversion in the term structure of disagreement may reflect the uniqueness of the impact of COVID-19 on the economy. Indeed respondents may find it difficult to agree whether the dominant short-term economic disruption will be mostly a supply or a demand shock, and in turn whether the pandemic will produce higher or lower inflation in the year ahead. Relatedly, we also see an increase in disagreement across respondents for many other variables, including for perceived layoff risk, household spending and income growth, and expected credit access conditions. Thus, it appears that respondents have very dispersed views on where the economy is headed in the months ahead.

Inflation Expectations in Times of Covid-19

Summing up, we find that, so far, households’ inflation expectations have not exhibited a consistent upward or downward trend since the emergence of the COVID-19 pandemic. However, the data reveal unprecedented increases in individual inflation uncertainty and in inflation disagreement across respondents. These changes in beliefs may in turn affect real activity, although in the current unprecedented conditions it remains unclear in what direction and by how much. Regardless, as discussed here, close monitoring of these measures is warranted because elevated levels may signal a risk of inflation expectations un-anchoring.

Olivier Armantier

Olivier Armantier is an assistant vice president in the Federal Reserve Bank of New York’s Research and Statistics Group.

Gizem Kosar

Gizem Kosar is an economist in the Bank’s Research and Statistics Group.

Rachel Pomerantz
Rachel Pomerantz is a senior research analyst in the Bank’s Research and Statistics Group.

Daphne Skandalis
Daphne Skandalis is an economist in the Bank’s Research and Statistics Group.

Kyle SmithKyle Smith is a senior research analyst in the Bank’s Research and Statistics Group.

Giorgio Topa
Giorgio Topa is a vice president in the Bank’s Research and Statistics Group.

Wilbert van der Klaauw
Wilbert van der Klaauw is a senior vice president in the Bank’s Research and Statistics Group

How to cite this post:

Olivier Armantier, Gizem Kosar, Rachel Pomerantz, Daphne Skandalis, Kyle Smith, Giorgio Topa, and Wilbert van der Klaauw, “Inflation Expectations in Times of COVID-19,” Federal Reserve Bank of New York Liberty Street Economics, May 13, 2020,


The views expressed in this post are those of the authors and do not necessarily reflect the position of the Federal Reserve Bank of New York or the Federal Reserve System. Any errors or omissions are the responsibility of the authors.

No Stimulus for the Weary: The US is Now Sitting on an Inflation Time Bomb

Published by Anonymous (not verified) on Wed, 13/05/2020 - 12:28am in

The consequences of the $2.2 trillion stimulus package are being ignored, even by the White House budget office that put it together, admitting that the package had “come together so quickly,” that they had no time “to do the customary modeling of its fiscal impact.” What does appear to have consensus in financial circles is that after this is over central banks will effectively own the governments of the world, including the United States.

When it is all said and done, President Trump’s stimulus checks will carry an inflationary cost many multiples more than their original $1,200 value in the pre-coronavirus economic reality, a reality that probably won’t become apparent until after the election in November. By then the checks will have served their purpose as a political move, not an economic one. When understood from the vantage point of what is in store for the American working classes as we emerge from this red light on main street, Trump’s checks will only add fuel to the inflationary fire just ahead, according to Neal Kimberley, a macroeconomics analyst for the South China Morning Post.

An economic realignment is unfolding in the wake of the shutdowns prescribed by pandemic response protocols. The coordinated effort to restrict individual participation in the economy spans the globe but is an inherently local matter. While corporations around the world “ride it out” by hoarding their government bailout money in the bond market, regular working people are bearing the brunt of the risk and facing a brave new world on the other side of the COVID Spring, where the distance between them and the richest 0.01 percent will have grown light years further than the recommended six feet.

Shocks to demand elicit certain reactions from the market, whereas shocks to the supply-side call on others. It is exceedingly rare for an economy to suffer shocks on both ends simultaneously, as is occurring at this very moment when both consumers and suppliers are in stasis. 

While governments slash interest rates to keep their borrowing costs low, the unprecedented flood of new money is accumulating in the hands of the wealthiest and most powerful people and corporations, who have parked all of it in bond instruments like a horse at the gate of the Kentucky Derby. As soon as the trumpet is blown and the economy restarts itself, those same trillions of dollars will come rushing out and cause massive inflation, which will only be exacerbated by low-interest rates. In other words, we’re sitting on a time bomb, and it is counting down the last seconds.


Expanding the debt pool

The same will hold true for recipients the SBA CARE Act loans, which has expanded the availability of government debt beyond traditional for-profit businesses and brought faith-based organizations into the public money sweepstakes. 

Beginning in 2001, when Geroge W. Bush first proposed a Faith-based and Community Initiative as part of his Presidential Management Agenda, the gradual inclusion of non-profits like churches and synagogues, but also a myriad other religious organization, into direct government assistance programs has continued unabated and the increasingly blurred line between church and state all but vanished once Trump’s Treasury department issued an “Interim Final Rule” for the CARES Act, making payroll protection loans accessible to faith-based organizations.

To put the $2.2 trillion CARES Act in perspective, the bill allocated a paltry 10 percent of the total ($250 billion) for direct individual assistance in a pie that was divided into hundreds of millions of recipients. $500 billion was allotted to SBA-related loans and the rest, or $1.7 trillion, went directly into the pockets of a comparatively minuscule portion of the population. 

From a macroeconomic perspective, the CARES Act only spread the government’s insurmountable debt further out into the economy, which is already more than “twice what it was before the Great Recession” and is set to increase exponentially in the relatively near future.


Sooner or Later

The dynamics put in play by the COVID Spring mirrors the conditions that led to the 2008 financial crash and its aftermath, in that a giant ball of financial poison had been festering behind the scenes and then metastasized around the world, ruining anyone in close proximity to a toxic derivative and no access to the FED window.

The toxic asset right now is the piles and piles of U.S. dollars and dollar-denominated assets and instruments saturating the global economy, which is tied to a nation – the U.S. – on a completely unsustainable economic path.

The degree to which inflation hits us is still a matter of debate among economists but many are expecting it will happen sooner or later. They concede that it is not out of the realm of possibility that “persistent” inflation is on the horizon. “We think the trade war has set this very real possibility in motion,” advised RBC economists to their clients. “Covid-19,” they continued, “is likely just pushing it further upfield.”

Ultimately, the pressures of a hopelessly indebted nation populated by a hopelessly indebted citizenry who are being told interacting directly with each other is dangerous sets us up for an Orwellian nightmare that no amount of Trump checks can justify.

Feature photo | Phu Dang, left, the owner of i5 Pho restaurant, gets help from a contractor as he boards up his business in Seattle’s downtown Pioneer Square neighborhood, March 30, 2020. Ted S. Warren | AP

Raul Diego is a MintPress News Staff Writer, independent photojournalist, researcher, writer and documentary filmmaker.

The post No Stimulus for the Weary: The US is Now Sitting on an Inflation Time Bomb appeared first on MintPress News.

MMT critiques need to get more inventive – it’s getting boring

Published by Anonymous (not verified) on Thu, 07/05/2020 - 5:02pm in



It is getting to the stage that one gets bored reading critiques of Modern Monetary Theory (MMT) by leading mainstream economists. As the critiques have escalated over the last few years, I can safely say that not one has really said anything: (a) that the core body of work we have developed hasn’t already considered and dealt with – about 20 years ago!; (b) which means, none of the long line of the would be demolition team has achieved their aim. And when they write Op Ed articles that basically just say – oh, MMT economists ignore “the demand for money” and “MMT falls flat on its face” when inflation emerges as part of the emergence out of this crisis, I get bored. Really, is that the best they can come up with. The latest entreaty in the boring stakes comes from Willem Buiter, who seems to have left the commercial banking sector and gone back into academic life. His latest Op Ed – The Problem With MMT (May 4, 2020) – is not his best work. Boring is the best descriptor. Why did he bother? Did he think he had to establish his relevance. He would have been better concentrating on the archaic mess that his mainstream framework is in. Anyway, sorry to end the week like this.

Let me state clearly, at the outset, there may be an inflationary spike coming out of this diabolical mess.

If so, it will be accompanied by hideous unemployment rates.

So we will have what economists call ‘stagflation’ – the combination of accelerating prices and mass unemployment.

And it may come when fiscal deficits remain at elevated levels as governments provide in various ways and to various degrees to support income growth and stop the world sinking into a deep Depression and who knows what.

But be careful of causality and to be sure you put the pieces together properly.

When I provided by criteria for assessing various fiscal policy options recently, regular readers will recall I included an option – Supply Chain.

See my blog posts:

1. The European Commission non-stimulus is a waiting game before new austerity is imposed (April 27, 2020).

2. The advanced nations should take the lead of Pakistan in job creation (May 4, 2020).

I explicitly emphasised that this particular crisis was rather special in several ways. One way was that it was not just a ‘demand phenomenon’ – a lack of spending causing output and employment to fall.

Clearly, there was a significant ‘supply-side’ aspect to the crisis – factories being forced to shut, production constrained by lockdowns, global supply chains being interrupted.

We don’t know yet how disrupted the supply-side of the world economy has been and what the implications for delivery of goods and services into various markets will be.

But inasmuch as there are significant disruptions occurring, while at the same time governments are stabilising (to some extent) income levels, there will be a break in the expenditure-income-output cycle, which may trigger inflationary impulses.

Remember the basic rule of macroeconomics – Spending equals income equals output, which drives employment growth.

In this crisis, fiscal intervention is aiming to reduce the fall in income arising from the enforced lockdown.

But if the income from one period is cycled into the system next period but output has fallen in that next period then where does the spending go?

Into accelerating prices is where!

If that was to happen, then it says nothing about MMT’s relevance or validity. My face will be intact (not having fallen flat on it!).

But Willem Buiter thinks otherwise.

He starts with an error by referring to the “policy agenda implied by Modern Monetary Theory has become all the more appealing”.

He hasn’t read much I suspect to construct his opening salvo in this way.

What is the “policy agenda implied by Modern Monetary Theory”?

Here we get two tensions.

1. There is no policy agenda implied by MMT – there are principles established, causalities that deliver consequence, descriptive components – but what MMT delivers is an understanding of these things. To operationalise that understanding you have to impose a set of values (an ideology).

A person who has a deep understanding of MMT but who has a Right-wing type ideology will apply that understanding to come up with a totally different policy set than I would come up with.

What is implied there? Nothing.

2. In their haste to trip over themselves to make the point, many mainstream macroeconomists have written Op Eds about MMT saying there is nothing new and that they knew it all along.

They write things like ‘everyone knows that you have to increase fiscal deficits when there is a serious shortfall of private spending’.

What is implied there? Well, that they have only said that when it became obvious to all that their beloved monetary policy bias hasn’t done the trick and the only way to save economies has been through fiscal policy – GFC and now!

But, moreover, if all these characters are jumping on the fiscal deficit train as they are then Buiter is really having a go at all them as well.

He talks about MMT offering “a dangerous half-truth” – and refers to an MMT economist writing in the FT recently, whom he quotes:

They’re going to have massive deficits. And it’s fine.

Apparently, that is a “half-truth” because “while this assessment is correct for now, it won’t necessarily be correct in the future”.

So it is fully true now and if circumstances change then what? Our assessment might change based on our understanding of the role of fiscal deficits – which means it would be fully true then.

Two fully trues struggles to make one half-truth!

Here is a little interview I did with myself just now.

Question: Does the core body of MMT work care about fiscal deficits?

Answer: Definitely – they are central to our thinking.

Question: Does the core body of MMT work say that deficits are ‘fine’?

Answer: Sometimes. It all depends on context. How many times have I written that over the last 16 years of writing blog posts and articles and books, and, before that, in academic publications?

I posed a question within my answer, which has the answer: lots!

Question: Does the core body of MMT work say that deficits can always be large relative to GDP and be that way forever?

Answer: Definitely not.

Please read this blog post – The full employment fiscal deficit condition (April 11, 2011) – which specifies the exact condition that fiscal policy has to match.

And the inference to be drawn is if non-government spending accelerates after a lull, then the larger than normal fiscal deficit will have to be lower and will fall somewhat anyway via the automatical stabilisers.

So when you go through that routine it is hard to know what the ‘half-truth’ is.

Yes, at present, fiscal deficits have to be much larger than in more usual times.

Should they remain that way if things settle down again?

Definitely not – then they would risk driving inflationary pressures from the demand-side.

But Willem Buiter clearly hasn’t taken any of that nuance into account and thinks that:

… we should anticipate that the year following the end of the COVID-19 lockdown could be when MMT falls flat on its face – starting, perhaps, with a burst of inflation in the UK.

As above.

Whenever there have been substantial supply-side constraints in history we see inflationary pressures rising.

As I noted above, we don’t know yet how deep the supply constraints will impact. But if they do, there might be some price spikes. Whether they shift into an inflationary spiral is also uncertain.

There is no reason they should if factories restore the supply chain relatively quickly.

And while we are not spending in cafes and restaurants at present we are redirecting that demand to supermarkets, and apart from the irrational run on toilet paper and flour at the outset of the crisis, my local supermarket seems to be getting back to normal and I haven’t observed any flagrant inflationary pressures.

Yesterday, the Australian Bureau of Statistics published the latest – Retail Trade, Australia, Mar 2020 – and it showed that turnover:

1. Cafes, restaurants and takeaway food services fell 22.9 per cent in March 2020 with “Cafes, restaurants and catering services (-30.3%), and Takeaway food services (-13.0%)”.

2. Food retailing rose 24.1 per cent in March 2020.

Substitution in action.

And further households that have maintained their incomes and not travelling as much or buying this or that are diverting that income into saving and reducing their debt.

Remember that households around the world have variously built up massive debt levels and a period of constrained spending is allowing them to restore some safety into their balance sheets. While the source of this motivation is bad, the outcome, in this particular instance is good.

But, Willem Buiter then thinks he is on a roll and tries to get pithy:

… policymakers are flirting with disaster if they accept MMT’s main message, which can be paraphrased as: “Deficit, schmeficit. Just boost public spending or cut taxes, then monetize the resulting imbalance.”

Depending on which style manual one uses “” infer a quotation.

In this instance, Buiter is not quoting from anything that has ever been written by any credible MMT writer.

MMT’s main message is nothing like that.

Refer to my discussion above about CONTEXT!

But let’s focus a little on the ‘monetisation’ angle.

I wrote about these issues in this blog post (among many others) – Building bank reserves is not inflationary (December 14, 2009).

First, central banks are crediting bank accounts on behalf of treasuries every day. That is how government spending occurs – some central bank official types some numbers into relevant accounts – and zap! – government spending occurs.

Second, the mainstream narrative (within which Willem Buiter’s story line site) create a fictional account of this process.

The mainstream macroeconomic textbooks all have a chapter on fiscal policy, where the so-called ‘Government Budget Constraint’ (GBC), begins with the construction that governments have to ‘finance’ all spending either through taxation; debt-issuance; or central bank money creation.

But, as noted above government spending is performed in the same way irrespective of the accompanying monetary operations.

The textbook argument claims that money creation or in Buiter’s words “monetisation” (borrowing from central bank) is inflationary while the latter (private bond sales) is less so.

These conclusions are based on their erroneous claim that ‘monetisation’ adds more to aggregate demand than bond sales, because the latter forces up interest rates which crowd out some private spending.

All these claims are without foundation in a fiat monetary system and an understanding of the banking operations that occur when governments spend and issue debt helps to show why.

What would happen if a sovereign, currency-issuing government (with a flexible exchange rate) ran a fiscal deficit without issuing debt to the non-government sector?

Like all government spending, the Treasury would instruct its central bank to credit relevant commercial bank accounts.

The transactions are clear: The commercial bank’s assets rise and its liabilities also increase because a new deposit has been made.

Further, the target of the fiscal initiative enjoys increased assets (bank deposit) and net worth (a liability/equity entry on their balance sheet).

Taxation does the opposite and so a deficit (spending greater than taxation) means that reserves increase and private net worth increases.

What happens next depends on how the central bank manages the extra reserves in the system.

When there are excess reserves, there is downward pressure on the overnight interest rate (as banks scurry to seek interest-earning opportunities).

The central bank has three options:

1. Do nothing and allow the overnight interest rate to fall Japan-style to zero – that is, leave the excess reserves in the banking system.

2. Conduct open-market-operations (OMO) by exchanging government debt for bank reserves – thereby draining the reserves. It will do this if the central bank desires a non-zero (positive) target short-term policy interest rate to be the expression of its monetary policy.

Note that if this option is pursued, the public debt sold to the non-government has no correspondence with any need to fund government spending.

The debt serves an interest-maintenance strategy by the central bank when used for this purpose.

And note further that as long as the central bank has a mandate to maintain a target short-term interest rate, the size of its purchases and sales of government debt are not discretionary if only open market operations are relied on to manage liquidity.

Once the central bank sets a short-term interest rate target, its portfolio of government securities changes only because of the transactions that are required to support the target interest rate.

The central bank’s lack of control over the quantity of reserves underscores the impossibility of debt monetisation when only OMO are deployed.

The central bank would be unable to monetise the federal debt by purchasing government securities at will because to do so would cause the short-term target rate to fall to zero or to the support rate.

However, if the central bank purchased securities directly from the treasury and the treasury then spent the money, its expenditures would show up as excess reserves in the banking system.

Under the exclusive OMO option, the central bank would be forced to sell an equal amount of securities to support the target interest rate.

In that case, the central bank would act only as an intermediary. The central bank would be buying securities from the treasury and selling them to the public. No monetisation would occur.

3. The central bank, as is the norm these days, may agree to pay the short-term interest rate to banks who hold excess overnight reserves.

This eliminates the need by the commercial banks to access the interbank market to get rid of any excess reserves and would allow the central bank to maintain its target interest rate without issuing debt.

With that background (core MMT) it is then hard to make sense of Buiter’s argument about monetisation.

The point is that the only difference between the Treasury ‘borrowing from the central bank’ and issuing debt to the private sector is that the central bank has to use different operations to pursue its policy interest rate target.

If it debt is not issued to match the fiscal deficit then it has to either pay interest on excess reserves (which most central banks are doing now anyway) or let the target rate fall to zero (the Japan solution).

There is no difference to the impact of the deficits on net worth in the non-government sector.

Mainstream economists would say that by draining the reserves, the central bank has reduced the ability of banks to lend which then, via the money multiplier, expands the money supply.

However, the reality is that:

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

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

3. The money multiplier process so loved by the mainstream does not describe the way in which banks make loans.

4. Inflation is caused by aggregate demand growing faster than real output capacity. The reserve position of the banks is not functionally related with that process.

So the banks are able to create as much credit as they can find credit-worthy customers to hold irrespective of the operations that accompany government net spending.

This doesn’t lead to the conclusion that deficits do not carry an inflation risk. All components of aggregate demand carry an inflation risk if they become excessive, which can only be defined in terms of the relation between spending and productive capacity.

It is totally fallacious to think that private placement of debt reduces the inflation risk. It does not.

Willem Buiter then allows some faint praise enters the picture.

He writes:

To be sure, some parts of MMT make sense. The theory views the treasury (or finance ministry) and the central bank as components of a single unit called the state. The treasury is the beneficial owner of the central bank (or, put another way, the central bank is the treasury’s liquidity window), which implies that central-bank independence is an illusion, especially when it comes to its fiscal and quasi-fiscal operations. MMT holds, correctly, that because the state can print currency or create commercial bank deposits with the central bank, it can issue base money at will.

All this is obvious.

And if we accept that then significant aspects of mainstream macroeconomics is then to be dispensed with.

His language suggests he has not really read much of the MMT literature because we never use the term “print currency” and actively disabuse that connotation.

He continues making the most obvious point that he assumes we haven’t thought about. To make that assumption he would have had to also consider that we were deeply incompetent as professional economists, and, more pertinent, not very bright.


Apparently, a currency-issuing government can get itself in a bad situation that goes like this:

1. The government services its outstanding debt (pays interest) by the central bank crediting bank accounts, which Buiter calls “monetization”.

2. Then it gets confusing because we shift from “debt servicing” to the overall “deficit” and back again.

3. But his point is that if the central bank is crediting reserve accounts on behalf of the treasury, it is possible that it creates inflation.

4. Why? Just assertion.

5. But this leads to his conclusion that the government may default on the debt if it requires public ‘spending’ that might provoke inflationary pressures.

So all we learn from that interchange is nothing more than if spending from any source (household consumption, business investment, export revenue, and/or government spending) might drive total nominal expenditure ahead of the real capacity of the economy to absorb it via increased output.

And he knows that because he says “To get to the heart of the matter, forget about issues such as bond financing” – that is, let’s move on because there was nothing to gain from going down that path anyway but I did because it sounded erudite!

The point he wants to make is this:

Assume that public spending and tax revenues are fixed in real (inflation-adjusted) terms. The resulting real deficit will be equal to the increment in the real stock of base money that the private sector must be willing to absorb each period.

In English, he is trying to get to a point where he concludes that spending will be so strong relative to the productive capacity of the economy to absorb it that the only result will be “upward pressure on inflation”.

Yes, this is his “Problem with MMT”.

After some jargon-ridden gymnastics about “real-money balances”, “monetized increases in public spending”, etc and a claim that we might “quickly” shift from low interest rates to “a normal monetary regime”, although the fact that with “Japan stuck at or near the ELB for the past 20 years, the concept of “normal” may require some rethinking”, Willem Buiter writes, after inferring MMT is “reckless” for assuming large deficits are no problem ever (we do not assume that):

… there still would be no inflationary threat so long as the economy has excess capacity (idle resources). But when … the unbridled monetization of state deficits eventually would eventually exhaust what slack there is, putting upward pressure on the rate of inflation.

That’s really the article.

That if spending growth is excessive, nations achieve full employment and then inflation.

MMT 101 really.

MMT doesn’t ‘ignore’ this “at its peril”.

It is core MMT.

I don’t know why Project Syndicate continues to publish this sort of misinformation.


In the blog post I cited above – Building bank reserves is not inflationary (December 14, 2009), I wrote the following.

It is clear, however, that if interest rate changes do impact on spending such that low interest rates are more expansionary than higher interest rates, then a fiscal expansion and a zero interest rate policy will be stimulatory. The issue is not that this will be intrinsically inflationary as is asserted by the mainstream.

It just means that the extent of the fiscal injection that is required to achieve full capacity utilisation is reduced. The government always has the capacity to balance aggregate spending to match the capacity of the economy to absorb it.

11 years ago approximately.

That is enough for today!

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

Where the Government’s money comes from, and who it goes to, makes a big difference

Published by Anonymous (not verified) on Sun, 03/05/2020 - 4:10pm in

[Published 3 May at Independent Australia]

Stephanie Kelton, Modern Money Theorist

Why would the Government buy bonds as it sells bonds? Why would it borrow money when it has its own money?

Various explanations have been appearing lately that purport to explain how the Government is raising the money it is suddenly splashing around to support (some) people through the Covid-19 shutdown. There are also explanations of how the Reserve Bank of Australia is engaging in ‘quantitative easing’ (QE) to support the economy through the shutdown and beyond.

It seems there may be at least three things happening: the RBA is buying bonds in order to inject extra money (‘liquidity’) into the financial sector and keep interest rates low; the RBA is funding some spending by the Government; the Government is borrowing money from the private sector by selling bonds.

Well, to be honest, I’m not sure if the RBA is funding any Government spending because most of the commentary speaks of a Government deficit, and of the Government borrowing money it will have to pay back, with interest. Yet the RBA has in the past conceded that it could directly fund Government spending.

In any case it seems the Government is buying bonds with one hand (the RBA doing its QE) and selling bonds with the other (borrowing to spend). Why would it do that? Because that’s what it has always done? Because that’s how it was done before President Nixon took the US off the gold standard in 1971? Because you can’t just let the Government spend money, because Weimar, Zimbabwe, hyper-inflation, horrors!

Well the RBA trades bonds to manipulate the interest rate (although at the moment it is countering its own professed goal by trading in both directions). Is it not strange that in a supposedly free-market financial system one of the central variables is centrally manipulated? The reason is supposedly to regulate the money supply, though it is largely ineffectual. It would be much more effective for the government to use taxes and spending for that purpose, or even (more horrors) to regulate private bank credit, as Bob Menzies used to do. But you can’t do those things because that would be interfering in the market.

By the way I implied above that the RBA is one ‘hand’ of the Government. That is true, despite the alleged independence of the RBA in how it manages the money supply, interest rates and so on. That ‘independence’ was legislated by the Hawke Government and could be un-legislated. The RBA acts as an agent of the Government, backed by the full authority of the Government.

But there’s another question lurking here. Where is the RBA getting the money to buy bonds? Answer: it gets the money by typing numbers into accounts. It creates money out of nothing. (Well, money has to come from somewhere, and most of it these days is not printed paper.) Commercial banks create a lot more money out of nothing, but that’s another story.

We have arrived at a basic fact. The Government creates and issues money. It might buy bonds or it might fund Treasury, but still it does create money.

Big question: if the Government creates money, why would it want to borrow money? Answer: because it is confused? Perhaps it is confused because some people want it to be confused.

Before going into that, let’s see how the Government could proceed. Customers have stopped spending because of the virus shutdown, but there are still wages, rents, mortgages and so on to be paid. So the Government goes to Parliament and seeks authorisation to spend lots of money on wage subsidies, unemployment benefits and so on. Parliament agrees. That part has actually happened. From there, the RBA could just key $130 billion into Treasury’s account and Treasury could set about spending.

First, let’s be clear that the Government would not just decide to spend a lot of money. Parliament would decide to spend a lot of money, using its normal process for authorising spending, which would apply regardless of the source of the money. So this is not Zimbabwe.

What about inflation? Inflation happens when there is too much money chasing too few goods. But there is not too much money at the moment, there is a big shortfall of money being spent, and the Government spending is to make up some of that shortfall. There is no immediate danger of inflation. If inflation should begin as the economy starts to recover, some of the extra money could be withdrawn from circulation through fees and taxes.

There would be no debt, in the usual sense. The Government’s money would be out there facilitating exchange, keeping the economy well oiled, and it could stay out there as long as it was needed. Nor would there by any interest due, so there would be no burden now or on future generations.

Ah, but there would still be a horrendous tax bill in years to come, to make up for the Government’s profligacy, would there not? Let’s be clear, the Government is being responsible, not profligate, and if that results in the economy returning to health then tax revenues would rise again. Taxes would not be a large burden, horrendous or otherwise.

There was a larger ‘debt’ at the end of World War II, but it was paid off within a few years because the economy was structured for full employment and full production, which resulted in the post-war boom. 

Also the commercial banks would still be busy creating money, and debt, as well. We already carry a far larger burden of private debt than government debt. The ‘horrendous burden’ language comes from those who don’t want the Government to realise it can spend its own money.

Now let’s come back to the RBA’s QE. During the Global Financial Crisis, some Governments did QE, which puts money mainly into the financial sector. Mostly the QE money financed lower bond rates and higher asset prices (stocks, property). So the QE was great for financiers and not much use to the rest of us, and economies still went through recessions.

Except in Australia, where the Rudd-Swan Government spent directly into the economy, through pension bonuses, home insulation, school construction and so on. It worked and we were the only major nation to avoid a recession.

The lesson is that it makes a big difference whether the RBA buys bonds (for QE) or funds Government spending directly. QE mainly pushes up property and stock prices. Direct spending is of immediate benefit to people and the economy.

The financial sector hates this story because it wants politicians to think they have to borrow from it. This gives the financial sector both large profits and significant control over the Government. That’s why there is a lot of scare talk about hyper-inflation if the Modern Money Theorists suggest the Government just spend its own money. We need to be aware that many of the financial commentators work in the financial sector.

The Meat Supply Story

Published by Anonymous (not verified) on Fri, 01/05/2020 - 1:23am in



 Meat component of U.S. CPISince I am supposed to focusing on formatting my book*, I am not able to spend too much time following the news flow. Right now, one of the more interesting economic stories is the situation of meat production in North America. This is one of the most visible cases of potential supply side bottlenecks due to the pandemic. Is this purely a problem with an industry that has not taken worker safety seriously, or will it be repeated elsewhere as other industries attempt to ramp up production?

This week has seen a certain amount of central bank activity. Central bank watching is a popular sport among finance journalists, but it seems to me that the implications are limited. Central banks are not going to let the wholesale financial markets implode, and will use whatever trick in the book they have access to in order to achieve this end. Whether saving the wholesale markets can save small businesses, or doomed industries like airlines, is another question.

As has been pointed out repeatedly, not all economic activity has ceased completely. Food and essentials are still being produced, utilities are running, as well as shipping. Even take-away restaurants are operating. (For my personal situation, almost all the retailers I normally shop at are available via delivery services, or via store visits under safety protocols.)

At the same time, community transmission of the virus has largely stopped in the countries that are locked down. (Deaths are rising in Canada largely due to the rapid spread through old age homes, which were not protected properly.) So it appears that some activity is consistent with a slow decline in infections. The question is what can be done safely?

One of the hot spots has been large meat packing plants in Canada and the United States. The question is whether this is specific to North American industrial agriculture practices. (I have not seen similar levels of complaints in other countries, where animal slaughter is less concentrated, but that is obviously not a researched claim.)

One possible explanation is that large North American meat processing plants are ignoring safety protocols. These plants have never been noted for their concern for worker safety. (See this article by Yves Smith.) Alternatively, this is just the result of meat packing plants being one of the few large industrial concerns operating right now, so that is where the cases are. With reopenings starting across North America, this will need to be watched closely.

The somewhat optimistic take is that most manufacturing in developed countries is capital intensive, not labour intensive, so it will be possible to resume production at a lower throughput rate in a safe manner. Given the fall in demand, losing peak capacity in most industries will not matter that much. In that case, we mainly face a situation of declining demand, and supply is not impaired to the same extent (other than for industries that are shuttered completely -- and thus have no prices associated with them).

However, people still need to eat, so the demand for meat is steadier. As seen in the chart at the top of the article, increases in meat prices have not filtered through to the U.S. CPI data in March.

It seems quite likely that meat prices will rise over the coming months. However, this is probably not enough to move the aggregate CPI index (as I discussed in an earlier article). Consumers will necessarily be forced to adapt their diets to be less meat-oriented. Given the excessive amounts of proteins consumed by North Americans, as well as the buffer created by food waste, this is not necessarily that catastrophic. However, it seems safe to forecast that hard money proponents will wail continuously about meat prices, and how that the CPI is fraudulent.

The consensus appears to be that inflation is not a concern, and I see no reason to disagree with that assessment. The key seems to be to see whether any other industries suffer similar problems, and it will take time for them to appear.

Finally, the meat industry appears to provide a very good test for the theories floating around that either COVID 19 is not particularly dangerous, and/or whether herd immunity is possible. By all accounts, the large meat packing plants were infection hot spots, and if any group was going to achieve herd immunity, those workers would be at the front of the line. If they still face difficulties, the authorities will have to re-consider any strategy that involves just attempting to cope with the virus. In which case, objectives need to be raised, as discussed at


* Nearing the end of getting the text formatted for EPUB, at which point it will be available for sale at the remaining e-book sales sites. The paperback edition requires the creation of an index, as well as an examination of the physical proof. (A previous book had its file mangled during an internal processing step at the printer, and the electronic proof did not match the physical output.) Since I cannot guarantee that will not happen again, I need to wait to see the printed proof, since I do not want to sell defective paperbacks to new readers.

(c) Brian Romanchuk 2020

Modern Monetary Theory and the COVID-19 induced economic slowdown.

Published by Anonymous (not verified) on Sat, 25/04/2020 - 9:00pm in

Peter Martin with his bicycle next to a street name sign for Peter Martin StreetGIMMS welcomes this week’s guest MMT Lens author Peter Martin. 

Peter has always taken an interest in politics and economics and considered himself vaguely Keynesian. He first came across MMT around seven years ago and like many others found it rather strange at first but once the penny dropped economics suddenly started to make a lot more sense than it had done previously.
Along with one of the GIMMS founders, he organised the fringe event with Bill Mitchell which took place at the Labour Conference in Brighton in 2017.



Woman wearing face mask watching stock market fallImage by Gerd Altmann from Pixabay

“We are all MMTers now” is a phrase I’ve heard more than once recently. Governments are spending big-time to address economic concerns so this must prove they are converts! Or does it? The association of MMT with the printing press is a fallacy in any case. We all know that the COVID-19 virus is causing us lots of economic problems as well as health concerns. So, how do we use MMT to understand the issues?

The partial shutdown of the economy is causing both a reduction in aggregate demand and aggregate supply. The much-predicted coming recession won’t be like the last one; that was mainly a problem of lack of demand. So, we need to be careful about saying things like ‘pounds and dollars are just like runs on a scoreboard’, ‘the Government can never run out’ etc. This is as true as ever it was, but if there are supply reductions due to factories closing down, and crops not being harvested in the fields, the amount of produce which is available for the Government and everyone else to buy is going to be reduced too. A reduction in aggregate supply will inevitably make us worse off in total but the extent of the reduction, left to the workings of the ‘market’, is likely to be very uneven and add to the already previously high degree of inequality which was prevalent in our society. Probably we shouldn’t be too ambitious and try to use the crisis to reduce previous levels of inequality. We’ll be doing well to ensure they don’t become too much worse.

We can, generally speaking, divide up stay-at-home individuals according to whether their income has been significantly reduced, or even been lost completely, or whether they have managed to carry on nearly as usual, and are still receiving close to a full income. For the latter group, which might include both wealthy retirees and well-paid footballers, life may be somewhat boring in that they don’t have much to spend their money on right now. They are therefore very likely to notice a considerable improvement in their bank accounts. They still have spending power they would otherwise have used on holidays, restaurant meals, clothing, hairdressing, drinks in nightclubs and pubs, petrol for their cars, air travel etc. Those who are less fortunate and have been ‘furloughed’ will probably include those who were previously working in hotels, restaurants, retail, nightclubs and pubs etc. There have been fewer financial transactions after the lockdown than before it. There will likely be significant exceptions but, generally speaking, the ones who are doing well at the moment were the ones doing well previously. Those who weren’t doing so well are now likely to be doing even worse.

Many neoliberals have used the crisis to renew calls for a Universal Basic Income which isn’t at all a recommended MMT solution. Those who still have their full income don’t need any extra spending power just at the moment; this would cause additional problems further down the line when the economy does finally get started again. The MMT solution of a Job Guarantee (JG) is problematic at present because individuals aren’t allowed to leave their homes without good reason. But why not just use some lateral thinking and define a job as simply staying at home? This can be a valid temporary measure, providing it isn’t treated as a second job for those who wouldn’t take up a JG job in more normal times. A JG on this basis has the advantage that scarce resources are directed towards those who need them rather than being handed out indiscriminately.

We are starting to hear the inevitable ‘how do we pay for it?’ question from the neoliberals. The correct question should be if tax rises are going to be needed to prevent a surge in inflation when the economy starts to get underway again but productive capacity hasn’t fully caught up with aggregate demand. This is not certain, but it is possible. Those lucky enough to have received their full incomes during the lockdown may well decide to catch up with their spending; their healthier bank accounts will allow them to do just that. On the other hand, those who have been struggling won’t be able to compete and so they could lose out again in a flurry of price rises. It will be important to direct any tax rises that may be necessary towards the lucky group. One way this could be achieved would be to levy a one-off income tax targeted at earnings made during the period of the lockdown with, of course, an exception made for key workers. Inevitably this will be messy and throw up anomalies but some thought should be given to making sure that those who have had it relatively easy during the lockdown do lose some of their spending power afterwards, and those who have had it more difficult should be given a little more help, should overall higher taxes be temporarily needed.

What we don’t need from this Government is a repeat of the mistakes made by the Tory/Lib Dem coalition, spooked by a high deficit following the 2008 Global Financial Crisis, which erroneously cut government spending, and raised taxes, in the middle of the worst recession since the Great Depression. Yes, we should raise taxes, but only if we need to dampen down inflation. Otherwise, we concentrate on steering a sensible course between having too much unemployment on the one hand and too much inflation on the other. It’s probably not realistic to expect a JG just at the moment. We can rely on both the exchange rate and the Government’s deficit to take care of themselves.









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The post Modern Monetary Theory and the COVID-19 induced economic slowdown. appeared first on The Gower Initiative for Modern Money Studies.

The cost of government austerity has been a one of infrastructure decay and human suffering. Our nation has paid the price. Are we ready yet to re-imagine our world?

Published by Anonymous (not verified) on Sat, 18/04/2020 - 9:09pm in

Blackboard with the slogan "Upgrade thinking" written in white chalkImage by Gerd Altmann from Pixabay

‘No society should need permission from wealthy people to operate in a high functioning way’

Nick Hanauer


A day of reckoning is coming. The exponential rise in deficit spending to manage the COVID-19 emergency is coming to crush future generations and will need action to address the prospect of a future burden of higher taxes to pay for it. Or so a briefing paper published by the Social Market Foundation claimed this week. The SMF (funded by Vodaphone, Barclays and KPMG amongst others) states in its report that public sector net borrowing could rise above £200bn per year which raises the prospect of an ‘Austerity Round Two’ leading to tax rises and spending cuts once the worst of the crisis is over. It calls for the economic costs of responding to the coronavirus pandemic to be shared fairly across the generations and says that ‘as we emerge from the crisis, older generations must uphold their part of the contract by bearing a fair proportion of future tax rises and welfare reforms.’

In short, it is suggesting that there will be a financial price to pay for the government’s increase in spending and recommending that the ‘triple lock’ which ensures substantial rises in the Basic State Pension should be replaced with a ‘double lock’ tying increases to earnings or inflation. This it says could contribute £20bn to deficit reduction over the next five years and reduce the fiscal burden on the working-age population.

Economic orthodoxy lives on. After the initial positive buzz which resulted from the government’s announcement of a huge spending programme to manage the economic and human fall out of the COVID-19 crisis (before we realised its shortcomings) the debt sirens are back beating the debt drum. Not surprisingly. The neoliberals have caught up with the challenge to their economic and monetary supremacy and are fighting back by posing the customary question about how it will be paid for. We can expect more as the weeks roll on. On this line of thinking someone, somewhere has to pay the financial cost sooner or later and the question will be who.

Of course, the usual response to the question is the taxpayer and that narrative is not just the line pursued by the right-wing. The household budget narrative dominates both on the right and the left. On the right, low taxes are the aim and have justified the slimming down of public services and infrastructure. Those who rightly wish to address economic inequality, do so by falsely suggesting that tax avoidance or evasion is a drain on the public purse, and we must ensure that the rich pay their fair share. The ‘solution’ on the left is to bring back that ‘ol magic money tree’ located in the Cayman Islands. Indeed, earlier this week, an editorial in the Morning Star suggested that the government should open up tax havens and tax the super-wealthy to raise the extra funds needed for welfare benefits, job support, training schemes and public services including the NHS.

The truth is that we are not dependent on the rich (or indeed anyone) paying their tax to fund public services and we don’t need to grovel or expect them to do the right thing as if somehow it is a charitable exercise in goodwill. We need instead to recognise the currency-issuing powers of government to pursue a public purpose agenda which serves the interests of the nation. Make the rich pay their tax for the right reasons, which are to do with redistribution of wealth through progressive taxation and not because it funds government spending. It doesn’t.

We need to recognise that the real costs of austerity are not financial but human ones. In fact, we are now paying the costs of that burden imposed in 2010 by the Conservatives when they cut public spending on our public and social infrastructure including our public services and welfare. The burden was never the financial one it was dishonestly described as; it has been the subsequent burden of infrastructure decay and human suffering as a result of austerity. We are now seeing its effects on the lives of our friends and families as we struggle to cope with the effects of lockdown; counting the harrowing cost on our financial, physical and mental health. It is a sad thing indeed that it had to be coronavirus that brought it to our attention as life as we know it stopped like a broken clock.

Past austerity has cut our productive capacity. That has built in the potential for inflationary pressures which could prove to be an issue with a critical global shortage of PPE and other vital equipment and import restrictions from affected nations.  While the government isn’t like a household in financial terms, it is clear that it has failed our nation on the very yardstick it chooses to measure itself by.  It has run down the essential supplies of critical equipment and materials to keep the public safe and compromised our national security by running the NHS at full capacity without the slack required to cope in a crisis. This will be the deficit that we inherit; not the spreadsheet balances. As Fadhel Kaboub noted in a recent podcast ‘It’s not about having the money it’s about having the real, physical productive resources’

And yet the economic orthodoxy that precipitated this destruction still looms like a bad penny on our horizon. Once again, the neoliberals are proposing to hit those who can least afford to pay with the very real costs of any future austerity. The SMF’s economic illiteracy, which suggests that today’s government spending will have to be paid back at some point in time and would thus be a burden on future generations, is a blatant misrepresentation of the truth.

The government does not need to find savings now and scrapping the triple lock on pensions in order to restore what is referred to as ‘intergenerational fairness’ will quite simply create more pensioner poverty than already exists, which in turn will have a detrimental effect on the economy. Quite simply, whether it is retired or working people, involuntarily unemployed or underemployed people, less money in their pockets translates into less money being spent into the economy which is what keeps it turning. Tightening the money tap will quite simply send the economy into a death spiral if it is not already there. And that cost will be even harder to bear, not just for the most vulnerable in society but also for the future of the planet.

As Prem Sikka suggests in an article this week in Left Foot Forward, the SMF has failed ‘to assess the impact of pension reduction on the life of retirees. With reduced income, retirees will spend less on good and services and thereby reduce the multiplier effect. The SMF proposals would ensure that retirees surviving the coronavirus pandemic will face a future of severe poverty’.

That is the real burden a human one. The role of government is not to balance its budget, but to serve the common interests of its citizens and in that its function is to ensure that its economic policy decisions result in a more productive nation. Future generations, or indeed retirees will pay the heavy price of both ineffective government inaction today and economic decisions to impose yet more austerity or increase taxes in the future.

In short, today’s government debt will not in itself be a burden on future generations. The real burden will be government’s failure to spend adequately today to ensure a better future tomorrow. Cutting spending once the crisis is over would be tantamount to ensuring economic collapse if indeed we haven’t already reached it before then.  Using ‘intergenerational fairness’ as an excuse to cut spending is designed to create smoke and mirrors and conflict between generations and is a sleight of hand to place blame anywhere but at the government’s feet.

In conclusion, we end this MMT Lens with a quote from a blog by Bill Mitchell.

“…the inclusion of public debt and unfunded pension liabilities for government workers in the index are based on a misunderstanding of what actually will burden the future generation.

The fact is that the current government has as much ‘money’ now as it had yesterday and the same amount it will have tomorrow. That is, it has whatever it wants to spend. It always has that. It has no more or less capacity to spend today because there were surpluses in the past than it would have if there had have been deficits in the past.


Every generation chooses its own tax rates. That is, the mix of public and private sector involvement in the economy is a political choice. If the future generations want more private and less public they will choose lower tax rates etc.

Currency-issuing governments do not draw down on the savings provided by the previous government’s surpluses. It is a nonsensical notion thinking that a sovereign government would ‘save’ in its own currency.”

 “The idea that borrowing ‘takes money from the pockets of future taxpayers’ is nonsensical. The funds to pay for the bonds originate in the government net spending in the first place.

 Clearly, deficits now are in part helping the current generation with income transfers and the like. But they also facilitate public education, public health and other infrastructure which provide massive benefits into the future for the current generation and their children. 

Once you understand that then the idea that there is a future burden will make you laugh.



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The post The cost of government austerity has been a one of infrastructure decay and human suffering. Our nation has paid the price. Are we ready yet to re-imagine our world? appeared first on The Gower Initiative for Modern Money Studies.

Supply And Demand: To Be Determined

Published by Anonymous (not verified) on Sun, 12/04/2020 - 5:55am in



The big macro issue facing us is the question of inflation that results from activity restrictions. I wrote about inflation forecasting earlier, and the key take-away is that CPI prints will depend heavily upon the weight of each component, and the components will be moving in different directions. However, one might want to step up away from CPI forecasting, and ask about the generic supply and demand situation, accepting that the resulting inflation might not be captured by the CPI. My guess is that we will not know for awhile, but I am not exactly holding my breath waiting for inflation.

Uncertainty FadingThe extreme uncertainty that policymakers faced in March is fading. We now have more reliable data on the deadliness of COVID 19.

The main uncertainty revolves around how far and how quickly distancing measures can be relaxed without causing a medical calamity. The biggest challenge is the return to (pre-university) school. Children themselves appear to be less susceptible, but they are certainly a vector for transmitting contagious diseases.
Another thing to note is that many people who have the ability to remain in their homes will do so. The implication that there is no policy switch to throw to turn economic activity back on.Re-Opening OptimismSo long as we view the economy in terms of real activity -- and not GDP -- I am relatively optimistic about re-opening activity most developed countries. 
I will immediately note that I am assuming that some types of activity are dead and buried until there is a vaccine -- international passenger travel, theme parks, bars and dine-in restaurants, live sports events. The other area of concern are high-density cities that rely on public transport. My feeling is that city centres will face a more restrictive regime than the suburbs.
The most important area of disruption revolves around schools and child care. If they are not re-opened, things are extremely difficult for the families involved. However, from a macroeconomic perspective, one may note that student output is not part of GDP.
Once we move beyond businesses that pack their clientele into close quarters (and their support chain), it seems likely that activity can be supported, albeit at a lower level of productivity. Providing safety equipment and spacing workers out should allow for activity with "acceptable" transmission risks.
The real question is testing that theory. We will not find out whether critical production cannot be safely done until persistent shortages appear. Although there are anecdotal reports of highly-centralised industries being crippled by factory outages, many of the apparent problems are the result of the mix of consumption changing, and a lack of supply chains integration. (The most important consumption mix change is the shut-down of restaurant food consumption, while grocery consumption is rising, and the supply chains evolved to be quite distinct. Toilet paper is another example of supply chain splits.) Why No Worries About Supply and Demand?The reason why I am not worried about generic supply and demand issues is that my instinct is that most of the activities that cannot be re-opened are largely optional ones, and might be considered luxuries. For example, the inability to eat at restaurants does not preclude being able to buy food at the grocery store, or even prepared meals.

I would divide household expenditures into a few broad categories.

  • Necessities that need to be purchased at a high frequency (food, gasoline, utilities).
  • Big ticket items that are sort-of necessary (appliances, cars for people who need one to commute).
  • Financial obligations (loan and mortgage repayments, rent.)
  • Optional purchases (entertainment, choosing to dine out).

High Frequency Necessities For many such necessities like gasoline, there does not seem to be plausible supply chain risks. Even if some particular facility is impaired, there is enough capacity to work around it. Energy is a capital-intensive industry; the days of an army of miners working the coal face is long gone. With the demise of long-distance flights, energy demand has probably fallen more than supply. 
The interesting necessity is food. Supply chains are currently snarled, and the production of certain foods is being impaired. However, things like grain production are less affected. Certain foods will spike in price, but others have no reason to rise. Given the ability to substitute foods, household expenditures on foods might not rise by as much as the rise in the CPI.

Big Ticket Items There are some big-ticket products that have complicated supply chains that might be disrupted: cars, appliances. For these items, the purchase timing is often optional. Price hikes would likely cause the deferral of purchases when possible, limiting the scope for sustained inflation.

Roughly speaking, it will be possible to sell forward future production of popular items. People who need the item now will probably be able to buy a less popular item out of inventory. Since people's desires to go shopping at present appears somewhat low, it should be possible to make immediate sales out of inventory.

Financial Obligations One of the big categories of spending (and CPI) is rent or mortgage spending. Mortgage payments are fixed, and it is extremely hard to see how landlords have pricing power in the current environment. Right now, many are thankful for being paid at all. Although there might be increased desire for a detached house by people being quarantined in an apartment, a major recession is not normally a great environment for bidding up house prices. Outside of home purchases, the notion of supply and demand with respect to this spending category makes little sense.
Optional Purchases. We are then largely left with purchases that are optional. One possibility is dining away from home -- which is no longer possible, so the price is moot. The rest of the expenditures are mainly for recreation. In this case. curtailment of supply does not mean that producers have pricing power. In many cases, the ability to buy products in stores may be more impaired than production capacity. Meanwhile, entertainment goods compete against digital products, and the pricing strategy of digital products is to keep prices steady and attempt to win market share. After all, the marginal cost of production of a digital good is negligible (extra server capacity might be needed).

In summary, even if nominal demand is stimulated greater than supply, the immediate necessities required still appear to be supplied adequately. The excess demand would likely translate into delivery delays, or a switch towards digital products.WagesThe only way to create a sustainable inflation is to cause a steady rise in wages. Given the massive rise in unemployment, I find it hard to be concerned about rising wages. 
Various emergency programmes have had the side effect of making it better to remain unemployed than take work. This was somewhat unavoidable, given the difficulty to implement them in a very short period of time, and the objective is to make it easier for firms to re-hire workers. It seems extremely likely that countries will transition to more targeted measures in the coming months, so we can extrapolate these programmes too far into the future.Concluding RemarksSo long as government support is aimed at income replacement (which is largely the case), the inflationary effect appears to be nearly nil. So long as the food supply chain holds, the existing supply is adequate to meet existing demand for necessities that are purchased at a high frequency.

For non-necessities, the either people can wait for delivery,  or the goods and services are often competing against digital products, which have open-ended supply capacity.
Any good inflation story needs a reason for wages to rise, which seems awkward at present.

(c) Brian Romanchuk 2020