Bhaskar Sunkara on Blair’s Devastation of the Labour Party

The papers and the media have been doing everything they can to attack the left-wing candidates in Labour’s leadership contest and puff the ‘moderates’. That has meant trying to discredit Rebecca Long-Bailey, the ‘continuity Corbyn’ candidate. She was the subject of a series of smears and untruths last weekend by the Tory press, in which it was claimed that she and her husband were millionaires and so on. At the same time, the remaining liberal papers, like the I, have been promoting candidates like Lisa Nandy. I’ve just heard someone from the Labour party, speaking on a Radio 4 news programme just now, make a few scornful comments about Long-Bailey. He remarked that it was surprising that Keir Starmer and Nandy were so far ahead, considering that the Corbynites had their hands on the centres of power in the party for three years. He was particularly sneering at Long-Bailey for saying that she gave Corbyn ’10 out of 10′. Corbyn, he stated, had lost three elections. And that was the point where I decided to put fingers to keyboard to make a few comments myself, and correct this fellow’s biased and misleading remarks.

For a start, I think Corbyn did exceedingly well, at least initially. The party had lost much of its membership under Blair and Brown. Corbyn managed to turn this around, so that it became the largest socialist party in Europe. Yes, he did lose three elections. But during one of those elections, even though he lost, he won an enormous number of seats from a  low starting point, so that it marked the most gains by the party in several years. And he did this despite massive opposition. This came from the Parliamentary Labour Party, a sizable number of whom were constantly intriguing against him, threatening coups and mass departures. These were aided by the media, including the increasingly far right and wretched Beeb, which did everything it could to smear and vilify Corbyn and his supporters. And then there was the unrepresentative organisations that pass themselves off as the Jewish establishment. These, the Board of Deputies of British Jews, the Chief Rabbinate, Jewish Leadership Council and the Jewish press, did everything they could to smear Corbyn and his supporters as anti-Semites simply for making perfectly valid criticisms of Israel and its ethnic cleansing of the Palestinians.

And from what I understand, Corbyn did not have his hands on the mechanisms of power. Or not completely. When he was first elected I was told by a friend that Corbyn had left himself in a very weak position by not purging the party bureaucracy. This was based on a piece he’d read in an online magazine. The bureaucracy were all Blairites, and had been expecting to be sacked. But Corbyn retained them, preferring instead to run his campaign from his own constituency office. If this is true, then he made a rod for his own back. It is certainly true that he had to struggle for control of the NEC and the Deputy Leader, Tom Watson, also did his best to undermine and discredit Corbyn at every opportunity. I don’t think any Labour leader could have won elections under these circumstances.

The press and the Labour centre – for whom, read ‘Thatcherite entryists’, are nostalgic for Blair, his neoliberal economic policies of privatisation, including NHS privatisation, and restructuring of the welfare state. New Labour under Blair and Brown was in power for 13 years, from 1997 to 2010. This was because they had the support of the mass media and big business, whom they rewarded with government posts. But their leadership decimated the party itself, and ultimately helped to discredit them.

Bhaskar Sunkara describes how Blair and Brown managed to reduce the party to half its former size in his book The Socialist Manifesto. He writes

The Japanese have a word for looking worse after a haircut: age-otori. Its synonym in English should be Blairism. Despite initial electoral success and some attempts on the margins to solve social issues such as child poverty, Blair and Brown pursued policies that undermined their own social base. When Blair became prime minister in 1997, Labour had four hundred thousand party members. By 2004, it had half that. That year Labour lost 464 seats in local elections. With anger over the party’s privatisation agenda and oversight of the financial crisis, as well as its support for the disastrous Iraq War, Labour was out of power and completely discredited by 2010. (p.209).

Part of the reason Labour lost the north was because, under Blair and Brown, the party ignored its working class base in order to concentrate on winning swing voters and appealing to the middle class. The working class were expected to carry on supporting the party because there was nowhere else for them to go. But that base showed its dissatisfaction by voting for Brexit, and then backing Johnson because he boasted that he was going to ‘get Brexit done’. But Corbyn’s left-wing followers and successors realise this, and are determined to start representing and campaigning for the working class again.

The Blairites, the media and the industry want the Labour party back to where it was – numerically small, and supporting big business and the rich against the working class, the NHS and the welfare state. This is the reason they’re attacking Long-Bailey and the other left-wing candidates, and praising and promoting moderates like Starmer and Nandy. But Blair’s success was only possible because the Tories were even more discredited than he was. And there was no need for his Thatcherite policies. They weren’t particular popular with the electorate at large, and with the massive majority that he won in the year, he could have started putting back real socialism instead. But that would have alienated the Tory voters he was determined to win over, Murdoch and the Tory press, and his backers in business.

Corbyn was defeated, but I don’t believe for a single minute that his policies have been discredited. Rather I think it’s the opposite: Blairism has. And while the Tories now have a massive majority, their policies are destroying the country and its people.

Only a return to traditional, old Labour values and policies will restore it.

The Tory Attacks on Health and Safety Legislation Is Causing Carnage

Since almost as long as I can remember, the Tories and their lackeys in the press have been attacking health and safety legislation. The common reasons trotted out are that it is an unnecessary burden to employers, binding them with complicated red tape and costs. More recently the authors of Britannia Unchained and similar works have demanded that such legislation protecting people at work should be rolled back in order to make Britain more competitive against countries in the Developing World, whose workers don’t benefit by such protection. The Tories have tried to make this assault popular by making health and safety legislation seem not only cumbrous, interfering and bureaucratic, but also massively overprotective and silly. Remember all those stories from the Heil years ago claiming that, thanks to the ‘Nanny state’, schools were having to make children wear goggles before playing conkers?

The truth is that when health and safety legislation was introduced in the ’70s, it massively cut down on deaths and injuries among working people – and that’s basically why the Tories would like to get rid of it. They want labour to be cheap and easily disposable, and health and safety laws are an obstacle to that. And the chapter by Hilda Palmer and David Whyte in The Violence of Austerity by Whyte and Vickie Cooper shows exactly how devastating in terms of lives and injuries their attacks on the legislation has been. The government watchdog in charge of overseeing the implementation of the legislation, the Health and Safety Executive, has had its funding cut by 47 per cent. The Tories have also threatened to close it down altogether. In 2013 the government launched a review in order to see whether there was still a need for its functions and if it complied with good governance. The number of staff employed at the executive fell from 3,702 in April 2010 to 2,706 in December 2013. Since the Tories came to power, the number of inspections by the Executive has fallen by a third.

These cuts have resulted in an increase in work-related accidents and injuries, although the authors warn that the government’s figures are almost certainly too low. The real figures are almost certainly higher. They write

Typically, the official ‘headline figure’ published by the HSE records between 140 and 240 deaths per year resulting from sudden injury and 13,000 deaths caused by occupational diseases and illnesses. Those figures, however, only reflect a small proportion of total deaths caused by work. The first figure does not include key categories of deaths cause by work. The Hazards Campaign estimates that seven times more deaths are caused by work incidents than the figure official cited by the HSE. HSE figures exclude work-related road traffic deaths, the workplace deaths recorded in other industries that the HSE does not have formal responsibility for, like the maritime and civil aviation industries, or deaths to members of the public killed by a work activity, such as scaffold collapses or train crashes. A more complete estimate would also include suicides attributed to work related stress. There are approximately 6,000 suicides involving working-age people in the UK each year, and a number of those involve workers driven to despair by work-related stress. In Japan, where work-related suicides are officially recognised and compensated, it is estimated that 5 per cent of suicides are work-related. This estimate, if applied to the UK, would amount to roughly 300 people killed through work related strees.

In sum, a more complete figure of workplace deaths caused by sudden injury, which takes into account all of the above exclusions, would amount to between 1,000 and 1,400 deaths every year, or 3-4 deaths per day. (p. 142).

They also argue that the estimated number of deaths from occupational diseases are also probably grossly underestimated once recent academic studies are taken into account. For example, a 2005 study of the causes of occupational and environmental cancer by Richard Clapp estimated that about 8-16 per cent of all cancer deaths came from occupational cancer. If the mid-range figure of 12 per cent is taken as the number of occupational deaths from cancer, the number of people dying through work-related cancer is 18,000 per year.

A 2005 paper in the journal Occupational and Environmental Medicine estimated tath 15-20 per cent of all cases of COPD – chronic obstructive pulmonary disease – could be work related. Which means 6,000 deaths per year. There is also evidence that up to 20 per cent of all deaths from heart disease are related to conditions at work. This figure adds up to 20,000 deaths per year.

A further conservative estimate that diseases in which work can be a contributory cause, such as Parkinson’s, Alzheimer’s, rheumatoid arthritis and so on comprise a further 6,000 deaths per annum.

They state

All of this adds up to an overall estimate by the Hazards Campaign of up to 50,000 deaths from work-related illness every year – four times the typical HSE estimate of around 13,000 per year. Our contention then, is that the HSE figures grossly underestimate the number of workers whose current working conditions expose them to both the well-known and the newer risk factors, that will produce the workers deaths of the future. (p. 143).

They also make the point that the death toll is still rising, because of toxins to which people may have been exposed to as much as 40 years previously, such as some carcinogens. The EU has estimated that in the 1990s five million workers, or 22 per cent of the working population, were exposed to cancer-causing substances.

They also argue that, thanks to austerity, more workers are suffering under poor working conditions that are damaging their health. These include bullying and harassment, long hours, and the zero hours contracts imposed on 5.5 million workers. The insecurity these contracts cause are linked to stress, heart and circulatory diseases. Workers are also still exposed to dusts and chemicals that cause or contribute to respiratory and heart diseases. They also point to the connection between low paid work and poor safety standards

Low paid work guarantees more than hardship: low pay goes hand in hand with low safety standards. Occupational injuries and diseases such as diabetes and cancer are directly linked to low paid jobs. (p. 144).

They also make the point that the ‘compensation culture’ the Tories have claimed exists is actually a myth. In fact, many workers don’t receive the compensation to which they’re entitled. They write

One of the first moves of the Coalition government, in October 2010, was to appoint Lord Young, a former Cabinet minister under Margaret Thatcher, to deliver ‘a Whitehall-wide review of the operation of health and safety laws and the growth of the compensation culture.’ He found absolutely no evidence of this ‘compensation culture’, citing figures which actually showed a downward trend to legal claims, but still demanded action to deal with ‘red tape’. Indeed, figures obtained by Hazards Magazine show that fewer than one in seven people suffering an occupational injury or disease ever receive compensation. For occupational diseases alone, this drops to just one in twenty-six. For most occupational cancers, there is barely any prospect of compensation at all.  (p. 145).

They also show that the government’s division of work into high and low risk is also highly dubious and has resulted in an increase in deaths at work. It was done by Cameron’s government in order to restrict HSE inspections to those jobs considered high risk. But the low risk category is wide, and includes textiles, clothing, footwear, light engineering, road and air transport and docks, electricity generation and the postal and courier services. Hazards Magazine found that 53 per cent of all deaths at work caused by sudden injury were in the low risk sector. Palmer and Whyte state ‘In other words, the government’s fiscal purge of health and safety enforcement has meant abandoning scrutiny of the workplaces where the majority of deaths occur’. (p. 145).

Palmer and Whyte state that this death toll should be a ‘call to arms. to any government, regardless of its political stance. But instead, despite the ‘glaring’ evidence that the red tape is good for workers, employers and the economy, governments have doubled down and insisted that such legislation is an intolerable nuisance. This has reached the point where the HSE doesn’t even both to ask ‘what’s so wrong with red tape anyway?’ The government’s ideological obsession with red tape means that ‘there is no room for argument or evidence that health and safety legislation doesn’t burden business, while its absence carries a high cost to business, workers and the public purse.’

This means that when some rag like the Heil, the Depress, or the Scum claims that health and safety legislation is unnecessary, costly and stifling business, they are lying. And lying to defend an attitude to workplace safety that is murderously dangerous to working people.

But then, as the disabled have found, Tory responsibility for mass injury and death is nothing new.



‘I’ Article About Research into Artificial Wombs and their Morality

This is another science story from yesterday’s I for 7th January 2020. It’s about current research into developing artificial wombs. At the moment, these would be for very premature babies, but they could in theory go much further, which raises some serious ethical issues.

The article by Alla Katsnelson, ‘Baby in a bag: could humans be grown in an artificial womb?’ runs

Critically preterm babies face an uncertain future. Although a foetus is considered viable at 24 weeks of gestation, only about 60 per cent of babies born so young will survive, and many will experience life-long complications.

For those born a couple of weeks earlier, the statistics are even more dire: just 10 per cent of babies born at 22 weeks are likely to survive.

building a so-called artificial womb could potentially save these babies. In October, researchers from Eindhoven University of Technology in the Netherlands announced that they had received a grant for E2.9m (£2.5m) to develop a prototype of such a device. But the project isn’t the only artificial womb on the horizon. In 2017, researchers in Philadelphia transferred foetal lambs, aged between 105 and 115 days of gestation (equivalent to about 28 to 30 weeks human gestation), into a so-called biobag filled with artificial amniotic fluid. After several weeks in the bag, the lambs developed normally. And in March 2019, an Australian and Japanese research team kept younger lambs, about 95 days’ gestational age, alive in a different system.

Dr Matthew Kemp, who led the latter work, admits that researchers don’t fully understand foetal growth in the womb, which makes replicating it a challenge. The Dutch group noted plans to roll out a clinic-ready prototype in five years, but Dr Kemp says it will probably take much longer. And because the technology is so costly, it’s unlikely to be widely available any time soon.

So far, what researchers call artificial wombs are essentially souped-up incubators. They provide a fluid-filled space in which a foetus can receive nutrients and oxygen through a ‘placenta’. From there to full-on ectogenesis – incubating foetuses outside a human for the full duration of a pregnancy – is an enormous leap.

But many bioethicists note that technology moves quickly, and proactively thinking through the possibilities is important.

In this more futuristic vision, artificial wombs can do a lot for society, says Dr Elizabeth Yuko, a bioethicist at Fordham University in New York. It could allow people who can’t carry a pregnancy for whatever reason – illness, infertility, age, or gender – to do so. It might also shift some of the childbearing responsibilities carried by women. But it also raises concerns. For example, ex-utero gestation would probably turn reproductive rights on their head, says Elizabeth Chloe Romanis, a lawyer and bioethicist at the University of Manchester. If a foetus can gestate outside a woman’s body, the choice fo whether or not to have the baby might be deemed out of her hands.

Another issue is that our legal rights are predicated on having been born alive. “I don’t think that a gestating subject in an artificial womb necessarily meets that requirement,” says Romanis. “That raises some questions about human entities ex-utero that have never existed before.

There have been newspaper articles about the development of artificial wombs since the 1980s, at least. The Absurder published one c. 1985, and I think the Independent also published one in the 1990s. And the whole area of artificial reproduction has been a live issue since the first ‘test tube’ baby created through in vitro fertilisation in the 1970s. But it also raises the spectacle of the kind of dystopian society Aldous Huxley portrayed in Brave New World, where humans are bred in hatcheries, engineered and conditioned for their future role in society. The Auronar, the telepathic race to which Cally, one of the heroes of the Beeb’s SF series, Blake’s 7, also reproduced through artificial gestation.And one of the predictions in Brian Stableford’s and David Langford’s future history, The Third Millennium, is that during this millennium this will be the preferred method of human reproduction, at least in some extraterrestrial colonies. And over a decade Radio 4 broadcast a series in which various intellectuals created fictional museums. One was ‘the museum of the biological body’, set in a post-human future in which people were neuter cyborgs born from hatcheries. This is obviously very far off, and I doubt anywhere near the majority of humans would ever want to reject gender and sexuality completely, whatever certain sections of the trans community might believe.

As with cloning and Dolly the Sheep, it raises very profound and disturbing questions about humanity’s future and how far technology should expand into the area of reproduction.

Why US Hostility Towards Chinese Tech Groups Feels Like Déjà Vu

Published by Anonymous (not verified) on Thu, 09/01/2020 - 1:55am in

US reactions to Chinese competitive threats are an awful lot like the ones to Japan of the 1980s, but the US now has a lot less leverage.

The No-Waste Goal That Succeeded by Failing

Published by Anonymous (not verified) on Mon, 30/12/2019 - 7:00pm in

The village of Kamikatsu sits among verdant rice fields and mountainous forest on the Western Japanese island of Shikoku. With less than 1,700 residents, it’s the smallest village on the island, but for the last few years, has been garnering headlines around the world.

For decades, the village had given little thought to processing its waste, either burning it in an open incinerator or burying it in the ground.

A failed new incinerator project, however, forced the village to rethink its strategy and a lofty ambition was born — to become a zero-waste town by 2020.

Today, more than 80 percent of the village’s waste is kept out of incinerators and landfill, but the transformation wasn’t easy or quick.

Lifestyle shift

Kamikatsu’s journey towards zero waste started more than two decades ago. The town had recently built, at great expense, a new incinerator to take care of its waste. But it was rendered a health and safety risk by the central government, because of the number of harmful dioxins it released into the air.

So the village had to think again. The most obvious solution was to shift the waste to other municipalities, but this was an expensive move, and it wasn’t a sustainable solution for the small economy.

Instead, the village decided to plough its efforts into reducing as much waste as possible, and the Zero Waste Academy, led by Akira Sakano, was born.

The village of Kamikatsu. Credit: Zero Waste Academy

In practice, the idea is quite simple: waste gets separated into categories and wherever possible is reused, recycled, or reduced.

But while not necessarily revolutionary — after all, millions of streets around the globe offer up color-coded bins to the local governments for collection on at least a weekly basis — Sakano’s scheme goes well beyond that.

For one, the rubbish is separated into at least 45 categories. At the top level, food waste, metals, paper, plastics, glass bottles, food trays, furniture and machines all get separated.

Within that, there are often subcategories, so metal will get separated into aluminum and steel, or paper gets separated into newspaper, cardboard, paper carton, paper carton with aluminum (coated), hard paper tubes, paper cups and shredded paper.

“By doing this level of segregation, we can actually turn it over to the recycler knowing that they will treat it as a high-quality resource,” explains Sakano, who was one of the Co-Chairs at the World Economic Forum’s Annual Meeting at Davos this year.

She says it took some time to persuade the local population at first. Not only did they have to wash and sort their waste at home, but they were also expected to bring it to the waste-collection center.

“It was a real shift in lifestyle,” she explains. “Lots of people were against the new collection system, asking why they had to bring their own rubbish to our waste-management site. They thought that the municipal government wasn’t doing its job properly.”

Credit: Zero Waste Academy

So the municipal office set about organizing gatherings in the local community where conversations could take place.

“They were dialogue and explanation sessions,” says Sakano. “And while there was still a bit of conflict, part of the community started to understand the context and cooperate, so the municipal office decided to start the segregated collection system. Once the residents saw that it had started, they realized that it wasn’t that difficult.”

Word got around and residential groups got behind the scheme, becoming both supporters and advocates. What started with a few turned into the majority, and soon, pretty much everyone.

“You’ll now see people segregating around five to 10 categories in their house and then doing the final segregation at the station,” says Sakano.

Having wasted so much money on a defunct incinerator, the town had to think of a cost-effective setup.

The Zero Waste Academy operates under four Ls — local, low cost, low impact and low tech. There is no big machinery here since residents put their own waste in the correct bin, while some ground staff has been hired to support the segregation and get the full bins ready to turn over to recyclers.

The scheme took off and, by the end of 2018, only 19 percent of the town’s rubbish had to be sent to an incinerator or landfill. But that wasn’t the only reason for its success.

Community matters

It’s that trip down to the waste-management station — the one that so many residents were initially so skeptical of — that sets this recycling strategy apart.

Japan has a rapidly aging population. Some feel so isolated and alone that they resort to committing crimes because they know that, in prison, they’ll have company. Because Kamikatsu is a small, close-knit community, the problem of isolation is not so great. But over half of the population is elderly, and the community gathering aspect of the waste center is critical to their wellbeing. It encourages them to engage with others, stay connected and feel part of the community.

With this in mind, the waste-management center has deliberately morphed into a hub of the local community.

For instance, the onsite “kuru-kuru” (circular) shop takes clothing, tableware and sundries that are still useable, but no longer wanted by their owners, and gives them to others. People can also borrow more than 8,000 items of tableware every year, eliminating the need for residents to buy single-use plates and cups for special events.

Credit: Zero Waste Academy

There’s also an upcycling craft center. Residents bring in old kimonos they don’t need, then the elderly, mostly local, women make products out of the discarded materials.

“Everyone in the town comes through the waste collection point anyway, so they come not only to discard their waste, but to see some of our stuff and talk with our staff. It’s not just waste collection but a gathering place for communities,” says Sakano.

Those that don’t have the means of transport to reach the centre can register at the local town hall and have their waste picked up.

“They see this not as a waste-collection service, but an opportunity to socialize with the younger generation and to chat. When we visit them, they prepare lots of food and we stay with them for a while, we ask how they are,” explains Sakano.

On occasion, they alert local services if the resident doesn’t answer the door as expected. In one case, the elderly inhabitant was lying prostrate and unmoving, so they called an ambulance for help.

“It’s almost like social welfare,” says Sakano. “It’s an opportunity for Japan to see waste collection services as something that connects with other functions of society, whether that’s good community engagement or policy targets.”

Global potential

Sakano believes it would be simple to replicate the idea globally — and says through seeing exactly what happens to their waste, residents understand the circular economy better and want to change their consumer habits.

“The specific elements of what we have is very much dedicated to our location and geography. But how the community is built and the basic idea of how you can move towards zero waste can be copied anywhere,” she says.

Credit: Zero Waste Academy

“The main issue with waste is that residents rarely have to think about what happens to it or where it goes; it’s invisible and out of sight, out of mind. But at the waste-collection center, we report back on the exact amount that has been recycled, where it has gone and what’s happened to it.

“Here they see where it goes, what it will turn into, how much it costs to do that but also, how we can also sell some of the resources and make money for the town. It makes people consider, once they see the price or once they see this is recycled or this is not, that their actions make a contribution towards the town community as well as to future generations.”

The year 2020

As 2020 looms into view, Sakano ruefully admits that their target of 100 percent zero waste will not be possible without the contribution of the bigger system and wider stakeholders. She believes it’s now time to start pressuring others to contribute.

“Our target of 100 percent cannot be achieved while manufacturers continue to use non-recyclable products,” she says.

“Products need to be designed for the circular economy, where everything is reused or recycled. These actions really need to be taken to businesses and incorporate producers, who need to consider how to deal with the product once its useful life has ended.”

With that in mind, in 2016, Sakano started the Zero Waste Accreditation scheme, where local shops and businesses are given approval according to their effort to reduce waste and avoid as much unnecessary packaging and single-use items as possible.

“Local shops can make a big difference,” she says. “They are also consumers, they also purchase products and pass them down to their customers. If they change their purchasing and even stop using certain products, that feeds back to producers.”

Sakano’s ultimate dream is to see the program replicated on a global scale. She says that that 80-90 percent progress towards zero waste is achievable — if towns and villages are creative.

“It’s important,” she urges, “no matter the obstacles, to keep striving to achieve the 100 percent goal. It’s important that world leaders now take their turn to make circular economy happen.”

This article was originally published by the World Economic Forum.

The post The No-Waste Goal That Succeeded by Failing appeared first on Reasons to be Cheerful.

Video of the V-9: the German Missile Against America

Published by Anonymous (not verified) on Thu, 26/12/2019 - 10:14pm in

Hi peeps! I hope you had a great Christmas Day, and are enjoying Boxing Day.  Here’s another piece about German World War 2 aerospace technology. It’s a video from Mark Felton’s channel on YouTube about the America Rocket. Felton posts vlogs about World War II fighting machines, and in this video he describes how the rocket was designed by Werner von Braun to hit New York. It was a two-stage version of the V-2. Unlike its predecessor, however, it was to be piloted. The German guidance system couldn’t work over such a long range without beacons. The German navy tried placing these in Greenland and other places on the other side of the Atlantic, but they were quickly found and destroyed by the Allies. This left them with creating a piloted version of the missile their only option. It was not, however, a suicide weapon like the Japanese kamikaze. Just before or during its final dive, the pilot was expected to bail out and parachute to safety. Lack of funding and the turn of the War against the Nazis meant that this was fortunately never built. If it had been, not only would the Nazis have built the world’s first ICBM, but they would have been the first nation to put a man in space.

Again, I should say that while I’m impressed with the scientific and engineering expertise in the development of the V-2 and this missile, I despise its purpose. The V-2 was responsible for thousands of deaths in London, and the prospect of a missile that could hit New York is terrifying. Particularly if the Nazis had succeeded in developing nuclear weapons. And the Third Reich was, of course, a brutal dictatorship dedicated to the enslavement and extermination of millions.

After the War there was a plan by the British Interplanetary Society to adapt a captured V-2 so that it could carry a man into space. Nothing came of it, however, as when the plan was finalised the Ministry of Supply weren’t interested and the missiles and their parts were no longer available.

Q&A Japan style – Part 5b

Published by Anonymous (not verified) on Thu, 05/12/2019 - 6:24pm in



This is the final part of a two-part discussion about the consequences of a currency-issuing government exercising different bond-issuing options. The basic Modern Monetary Theory (MMT) position is for the currency-issuing government to abandon the unnecessary practice of issuing debt (which is a hangover from the fixed exchange rate, gold standard days). Currency-issuing governments should use that capacity to advance general well-being and providing corporate welfare to underpin and reduce the risk of speculative behaviour in the financial markets does not serve any valid purpose. However, when we introduce real world layers (politics, etc) we realise that some pure MMT-type options are not possible. This question introduces just such a case in Japan. Given the political constraints, we are asked to choose between two options for central bank conduct, when the government does issue debt: (A) Buy it all up in the secondary bond markets. (B) Leave it in the non-government sector. In this final part, I go through some of the considerations that might influence that choice.


In the first part – Q&A Japan style – Part 5a (December 3, 2019) – the proposition was put that in Japan both sides of politics – the progressive Left parties and the conservative parties on the Right – eschew any notion that:

(a) the Japanese government runs deficits but dispenses with the unnecessary practice of matching those deficits with debt-issuance. This is the pure Modern Monetary Theory (MMT) position.


(b) the Japanese government issues debt, which is then bought on secondary bond markets by the Bank of Japan.

I find this to be a very odd position for progressives to take.

Certainly, a person with an MMT understanding would realise that the first option is desirable and the second option has no fundamental negative consequences, but does allow the central bank to control bond yields (and prices).

We learned that the considered opinion is that the only politically acceptable option is that the government issues bonds to the non-government sector (currently via an auction process), where selected financial institutions are licensed to ‘make the market’, by placing bids for volume and price (yield), which then determines the overall yield on each bond issue.

Under this ‘politically acceptable’ option, we also learned that there is considerable disagreement as to what the central bank should do in this case.

I was asked by my Japanese friends to discuss two options from an MMT perspective:

(A) Should the central bank purchase these bonds in the secondary market which has the effect of transferring the interest return to the consolidated government sector and allows the central bank to control all yields and hold rates at zero if they desire?


(B) Should the central bank refrain from purchasing these bonds in the secondary market and leave the bond holders in the non-government sector to earn interest returns and principal payment on maturity?

It transpires that many progressives in Japan oppose Option A because they believe by creating bank reserves the policy approach plays into the hands of the so-called New Keynesian ‘reflationists’ (such as Paul Krugman) who were prominent in the ‘Great Stagnation’ debate in the late 1990s and early 2000s.

But the rival view is that, under Option (B), the central bank loses control of interest rates, and, ultimately, yields become market determined, which may ultimately lead to rising interest rates.

In this sense, many marginal firms who are just surviving in the present situation, would be adversely affected by interest rate changes, which would have the consequence of reducing investment and overall aggregate demand.

So the question really was about what might an MMT perspective bring to this debate?

In – Part 1 (December 3, 2019) – I dealt with the so-called New Keynesian ‘reflationists’.

These characters correctly understood that the in the period after the first consumption tax hike (May 1997), the Japanese economy went into a recession that lasted for six quarters (from December-quarter 1997 to the March-quarter 1999) and then struggled to resume growth for the rest of 1999.

This was the period that became known as the ‘Great Stagnation’ and attracted the attention of the ‘reflationists’ from within Japan and abroad.

The following graph shows quarterly real GDP growth from 1995 to the September 2019 (using Cabinet data) with the consumption tax hikes impacts shown in the red bars.

It was clearly a recession induced by poorly constructed fiscal policy. There was no need at all to increase the consumption tax. The Japanese government bowed to pressure from conservative economists who spun the story that it was running excessive deficits and building up too much debt, which would eventually create uncontrollable inflation, higher interest rates and bond yields, and ultimately, government insolvency.

All the usual fake narratives about currency-issuing governments.

The May 1997 consumption tax hike caused an almost immediate reaction in real private consumption expenditure, which fell by 0.66 per cent in the June-quarter 1997 – a substantial immediate response.

The decline in consumption expenditure growth resonated for several quarters.

The following graph shows the quarterly growth in real private consumption expenditure from the March-quarter 1995 to the March-quarter 2005.

Similarly, as would be expected, as the collapse in consumption expenditure created excess capacity, business investment also fell sharply as a generalised pessimism set in.

The following graph shows the quarterly growth in real private non-residential investment expenditure from the March-quarter 1995 to the March-quarter 2005.

The negative response was a lagged reaction to the downturn and investment spending didn’t recover as quickly because the renewed growth in late 1998 was accommodated by existing productive capacity.

So trying to suggest that the prolonged recession was due to a ‘mythical’ real interest rate being too high, because the inflation rate was too low relative to the near zero nominal interest rates (the ‘reflationists’ ‘liquidity trap’ fantasy) really missed the point.

And trying to suggest that if the Bank of Japan engaged in large-scale bond-buying in return for bank reserves would lift the inflation rate significantly – via the erroneous money multiplier and Quantity Theory of Money theories – was always going to fail.

The Modern Monetary Theory (MMT) economists made that point at the time and many times since.

The ‘reflationists’ were still trotting out these ridiculous ideas during the GFC.

I remind readers of the analysis one Paul Krugman made of the Japanese situation in May 1998 – Japan’s Trap – which echoed what he was also saying during the GFC and since.

He dramatically failed to understand the nature of the problem in Japan in 1998 and recommended a reliance on monetary policy.

In terms of his prescription he claims that his model was subject to “Ricardian equivalence, so that tax cuts have no effect”.

Further, he claims that government spending stimulus would have some impact in the immediate context but would “would be partly offset by a reduction in private consumption expenditures”.

To understand how ridiculous the notion of Ricardian equivalence is please read these blog posts (among others):

1. Ricardian agents (if there are any) steer clear of Australia (June 9, 2014).

2. Ricardians in UK have a wonderful Xmas (January 24, 2011).

3. Mainstream macroeconomics credibility went out the window years ago (October 2, 2017).

Krugman also said in 1997 that while fiscal policy stimulus might provide some marginal short-term growth, previous government spending:

… has been notoriously unproductive: bridges more or less to nowhere, airports few people use, etc … But there is a government fiscal constraint …

He went on to advocate the ‘reflationist’ strategy and claimed that that monetary policy had been ineffective because:

… private actors view its … [Bank of Japan] … actions as temporary, because they believe that the central bank is committed to price stability as a long-run goal. And that is why monetary policy is ineffective! Japan has been unable to get its economy moving precisely because the market regards the central bank as being responsible, and expects it to rein in the money supply if the price level starts to rise.

The way to make monetary policy effective, then, is for the central bank to credibly promise to be irresponsible – to make a persuasive case that it will permit inflation to occur, thereby producing the negative real interest rates the economy needs. This sounds funny as well as perverse … [but] … the only way to expand the economy is to reduce the real interest rate; and the only way to do that is to create expectations of inflation.

History tells us he was completely wrong in his diagnosis at the time as were all the ‘reflationists’.

The only thing that got Japan moving again was a renewed commitment to using fiscal policy to support growth.

and so it was no surprise that the QE they were urging the Bank of Japan to engage in as a means of lifting the inflation rate would fail

In his 2003 book – Balance Sheet Recession: Japan’s Struggle with Uncharted Economics and its Global Implications – Richard Koo wrote:

The reason why quantitative easing did not work in Japan is quite simple and has been frequently pointed out by BOJ officials and local market observers: there was no demand for funds in Japan’s private sector.

In order for funds supplied by the central bank to generate inflation, they must be borrowed and spent. That is the only way that money flows around the economy to increase demand. But during Japan’s long slump, businesses left with debt-ridden balance sheets after the bubble’s collapse were focused on restoring their financial health. Companies carrying excess debt refused to borrow even at zero interest rates. That is why neither zero interest rates nor quantitative easing were able to stimulate the economy for the next 15 years.

While I differ with Richard Koo on other issues, his analysis of the ‘Great Stagnation’ was correct and made Krugman and his fellow ‘reflationists’ look like fools.

Analysing the Options

So what does this all mean for how we should think about the central bank operations under the only ‘politically acceptable’ option that the Japanese government continue issuing debt.

The two options for the central bank in this situation are:

(A) Should the central bank purchase these bonds in the secondary market which has the effect of transferring the interest return to the consolidated government sector and allows the central bank to control all yields and hold rates at zero if they desire?


(B) Should the central bank refrain from purchasing these bonds in the secondary market and leave the bond holders in the non-government sector to earn interest returns and principal payment on maturity?

There is no MMT position on this.

What an MMT understanding provides is a framework for assessing the consequences of each choice, which would then reflect the social and political judgement of those consequences.

Option (A) is the current orthodoxy in Japan as is evidenced by the following graphs.

The first shows the Bank of Japan’s Balance Sheet assets from April 1998 to November 2019. The light blue area indicates the Bank’s holdings of outstanding Japanese government bonds (JGBs).

So the rather dramatic increase in the total assets held by the Bank is largely due to the various QE (bond buying) programs it has been pursuing over the last two decades.

The next graph shows the proportion of total outstanding JGBs held by the Bank of Japan from 1985 to September 2019.

The Bank currently holds 42.37 per cent of the total.

What these graphs (and the underlying data) tells us that the Bank of Japan’s strategy to buy JGBs in large volumes in order to, in their words, increase the inflation rate, has failed.

This demonstrates how ineffective monetary policy is in influencing the path of the inflation rate, despite the massive increase in central bank assets.

There is no relationship between the evolution of the monetary base (driven by the Bank’s purchases of JGBS in large volumes) and the evolution of the inflation rate.

The latest data on inflation expectations is also indicative that the QE policies are not having the desired effect.

The New Keynesian mainstream macroeconomics further suggests that prices are adjusted to accord with expected inflation. With rational expectations, the mainstream models predict that inflation will respond one-for-one with shifts in expected inflation.

The Bank of Japan has been trying to manipulate that ‘theoretical claim’ in real space through its QE experiments but has clearly not succeeded.

Please read my blog post – Japan still to slip in the sea under its central bank debt burden (November 22, 2018) – for more discussion on this point.

An MMT understanding provides us with an explanation of why this strategy (independent of fiscal policy) will be ineffective.

Income implications

What we know is that:

1. The QE strategy has been maintain long-term interest rates around zero. Why? In the hope that it will stimulate investment spending. But if the revenue-earning outlook is pessimistic, borrowers will not seek credit even at low interest rates. This is the point the ‘reflationists’ could not grasp.

2. The QE strategy has thus reduced income flows that would normally go to the non-government sector as a result of their bond holdings in the form of interest payments.

3. To offset that impact, central banks pay interest on excess reserves, to assist in maintaining the profitability of the financial institutions in question.

In Japan, there is a complex system known as the Complementary Deposit Facility – which provides a facility where the Bank of Japan can pay interest on excess reserve balances (above required reserves) for financial institutions that have current balances with the Bank.

However, since January 2016, when the QQE program drove interest rates negative, “excess reserves … have been divided into three tiers, to which a positive interest rate, a zero interest rate, and a negative interest rate are applied, respectively.”

The aim is to provide an incentive to banks carrying excess reserves to loan them to other financial institutions in need of reserves – ” as long as the rate exceeds the rate applied to the Policy-Rate Balances” (those that attract the negative interest rate).

The Bank says that “Rather than merely holding surplus funds in current accounts at the Bank, such transactions improve financial institutions’ profits.”

When the “Policy-Rate Balances increase as a whole … this exerts downward pressure on money market rates.” They increase, in part, as a result of the “Bank’s Japanese government bond purchasing operations”.

To protect “the profits of financial institutions”, the Bank makes adjustments to the benchmarks that determine when the negative interest rate (‘tax’) will cut in, “so as to avoid drastic changes in the Policy-Rate Balances”.

The most recent review was on September 19, 2019, see – Review of the Benchmark Ratio Used to Calculate the Macro Add-on Balance in Current Account Balances at the Bank of Japan – which increased the Benchmark Ratio to 37 per cent (from 36 per cent).

But, of course, the payment on excess reserves only flow to the financial institutions that have accounts with the Bank of Japan.

But, that aside, the payment of interest on excess reserves blurs the difference between Option (A) and Option (B).

The difference that remains is the possible capital gains on the assets held.

The outstanding JGBs not held by the Bank of Japan or other government agencies, are mostly held by various City Banks and Long-term Credit banks, Trust Banks, Regional Banks, and other financial institutions.

This graph (created from the Flow of Funds data available from the Bank of Japan) published in the – 2019 Debt Management Report – issued by the Ministry of Finance, shows the breakdown of JGB holders as of December 2018.

Now, ask yourself, why would these holders sell to the Bank of Japan?

Answer: because the demand from the QE programs push the price of the bonds up in the secondary market and create capital gains for the sellers.

The capital gain will reflect the maturity (principle) value of the bond plus the expected discounted flow of the interest payments that the holder would receive adjusted for inflation risk.

If there was a serious shortfall in the realisable capital gain relative to the principle/interest payments from holding to maturity, then why would a holder choose to sell – unless they had short-run liquidity issues that required emergency liquidation.

The point is that Option (A) and Option (B) may, in fact, not be very different in overall outcome.

1. Option (A) shifts liabilities to the non-government at the central bank from an account labelled ‘Outstanding JGBs’ to ‘Reserves’ and the income flows associated from ‘Interest payments on outstanding debt’ to ‘Interest payments on excess reserves’.

2. It also ensures that the secondary markets will be indifferent to selling the asset to the Bank at a price that reflects the return they would expect by holding the asset and earning interest until maturity (Option (B)).

Further, a progressive objection to Option (A) should not be motivated by the fact that the ‘reflationists’ suggested the strategy but rather that it doesn’t actually achieve its stated purposes.

Implications for liquidity management

Under Option (B), the government cedes control of yield determination at the regular JGB auctions to the private bond markets.

Option (A) allows the central bank to control all primary issue yields, indirectly, through influencing bond prices and yields in the secondary bond market.

At the limit, the central bank can set all rates along the yield curve (at all maturities) if it so chooses through QE-type purchases.

That control lapses under Option (B).

If yields are set in the private auction markets and then subject to speculative transactions in the secondary bond markets, then, clearly, there is the possibility that rates will rise over time.

The concern expressed in the original question (see Part 5a) is that this has the potential to damage marginal firms contemplating investment decisions.

While I considered the question of the sensitivity of investment spending in this blog post – Q&A Japan style – Part 1 (November 4, 2019) – and concluded there are solid arguments that can be made to suggest the sensitivity is low, it remains a possibility that such a negative impact would arise.

That concern does not apply under Option (A) because the yield curve always remains under the control of the central bank.

We should also distinguish between QE-type behaviour by the central bank and the more standard Open Market Operations (OMO), which, historically, have formed the basis of the liquidity management function of the central bank.

OMO involves the central bank buying and selling government bonds on the open market to manage bank reserves by influencing the price and yield of certain government bonds.

OMO is part of the strategy central banks use to ensure the short-term interbank rates (and subsequent longer maturity rates) are in line with the policy rate that it chooses.

OMO involves the central bank managing reserves by exchanging government securities for reserves (in either direction) with financial institutions that maintain accounts (current balances in the Japanese context).

The two arms of government (treasury and central bank) have an impact on the stock of accumulated financial assets in the non-government sector and the composition of the assets.

The government deficit (treasury operation) determines the cumulative stock of financial assets in the private sector, whereas, central bank decisions then determine the composition of this stock in terms of notes and coins (cash), bank reserves (clearing balances) and government bonds.

Money markets are where commercial banks (and other intermediaries) trade short-term financial instruments between themselves in order to meet reserve requirements or otherwise gain funds for commercial purposes.

All these transactions net to zero. At the end of each day commercial banks have to appraise the status of their reserve accounts.

Those that are in deficit can borrow the required funds from the central bank, usually at a penalty rate.

Alternatively banks with excess reserves are faced with earning nothing or some support rate on these excess reserves if they do nothing.

Clearly it is profitable for banks with excess funds to offload those reserves via loans to banks with deficits at market rates. Transactions in the interbank market necessarily net to zero and cannot clear the system-wide surplus.

Competition between banks with excess reserves for custom puts downward pressure on the short-term interest rate (overnight funds rate) and depending on the state of overall liquidity may drive the interbank rate down below the operational target interest rate.

When the competitive pressures in the overnight funds market drives the interbank rate below the desired target rate, the central bank drains the excess liquidity by selling government debt.

This is a different motivation to that used to justify QE, which broadens the scope of the standard OMO to more comprehensively control yields and bond prices.

When the government runs a deficit that is matched by bond-issuance, the non-government sector swap reserves for the bonds.

If the deficit spending then stimulates further excess reserves, then the central bank has to drain them or pay the support rate if it is to maintain control of its monetary policy target.

In the case of Japan, the Bank of Japan has effectively maintained zero short-term rates aligned with its policy rate by not draining all excess reserves.

Option (A) is an extreme version of this. Option (B) is not incommensurate with the Bank of Japan maintaining the tools necessary to manage bank reserves.

Some might raise concerns under Option (A) about the Bank of Japan incurring capital losses should yields subsequently rise while they have massive JGB holdings.

Those who do not understand the concept of a currency-issuer cannot also understand why negative capital for a currency-using business is problematic but of no application or relevance to a central bank.

Please read my blog post – The ECB cannot go broke – get over it (May 11, 2012) – for more discussion on this point.


My preference is clearly for the government not to issue debt to match any deficit spending. It is unnecessary and amounts to corporate welfare.

But, when we introduce real world layers (politics, etc) we realise that some pure MMT-type options are not possible.

This question introduces just such a case in Japan.

Given the political constraints, we are asked to choose between two options for central bank conduct, when the government does issue debt.

(A) Buy it all up in the secondary bond markets.

(B) Leave it in the non-government sector.

My preference is for Option (A) because I also have a preference for zero short-term interest rates and Option (B) makes that aspiration difficult to manage.

But, equally, I resent handing out capital gains to bond holders (which makes the corporate welfare even more advantageous) and absorbs the risk of holding the bonds within the government sector.

That is enough for today!

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

Q&A Japan style – Part 5a

Published by Anonymous (not verified) on Tue, 03/12/2019 - 6:52pm in


Japan, Q&A

This is a discussion about Modern Monetary Theory (MMT) and the bond-issuing options for a currency-issuing government such as Japan and Australia. We will consider the three options that such a government has and discuss each from an MMT perspective. What an MMT understanding allows is a thorough appreciation of the consequences of each option. The conclusions we reach are quite different from those presented in mainstream macroeconomics, mostly due to the fact that we do not consider the bonds to be necessary to fund government spending beyond tax revenue and construct the operations of the central bank and the commercial banks to accord to the way they operate in reality rather than in the fictional world of the mainstream. This discussion also recognises the political dimensions of government rather than the technical way we often consider things in MMT. This is the first-part of a two-part answer which I will conclude on Thursday. Today, we consider the emergence of the so-called ‘reflationists’ in Japan who advocated large-scale, non-standard monetary policy in the late 1990s as a solution to the ‘Great Stagnation’ that had beset the Japanese economy.

There are three main options facing a government in relation to bond-issuance:

1. It can recognise its currency-issuing capacity, which among other things, makes the necessity to ‘fund’ deficits redundant. This leads to an exploration of what other purposes such debt-issuance might serve and the conclusion is that there is no useful purpose, in terms of advancing the well-being of the overwhelming majority of the citizens, of continued issuance.

2. The government can issue bonds to the central bank as an accounting match for the central bank then crediting bank accounts to facilitate government deficit spending. In this option, the central bank accumulates the government debt receives interest payments from the treasury side of government. In a consolidated government accounting, the liabilities and assets, thus net to zero.

3. The government issues bonds under one system or another to the non-government sector. In the current period, this is usually done via an auction process, where selected financial institutions are licensed to ‘make the market’, by placing bids for volume and price (yield), which then determines the overall yield on each bond issue.

These options then led to the following question from a Japanese professor that is worth answering because it involves a number of interesting aspects that will help you achieve an MMT understanding.


In Japan, the political consensus is that Option 3 is preferred. This is a position taken by both the progressive Left parties and the conservative parties on the Right, largely as a result of them being seduced by the mainstream myths about debt.

However, there is disagreement about what the central bank should do in this case.

(A) Should the central bank purchase these bonds in the secondary market which has the effect of transferring the interest return to the consolidated government sector and allows the central bank to control all yields and hold rates at zero if they desire?


(B) Should the central bank refrain from purchasing these bonds in the secondary market and leave the bond holders in the non-government sector to earn interest returns and principal payment on maturity?

Many progressives in Japan oppose Option A because they believe by creating bank reserves the policy approach plays into the hands of the so-called New Keynesian ‘reflationists’ who were prominent in the ‘Great Stagnation’ debate in the late 1990s and early 2000s.

However, a rival view is that under Option (B), the central bank loses control of interest rates, and, ultimately, yields become market determined, which may ultimately lead to rising interest rates.

In this sense, many marginal firms who are just surviving in the present situation, would be adversely affected by interest rate changes, which would have the consequence of reducing investment and overall aggregate demand.

The other observation is that there is recognition that under Option (A), the price of bonds rises (because of the central bank demand pressure in the secondary market), and the bond holders enjoy capital gains, which would reflect the discounted sum of the expected future interest returns.

So the central bank purchases of the debt in the secondary market imply an interest return anyway and an equivalence with Option (B) in this respect.

What does MMT say about this debate?

Given the political reality in Japan that the government must continue to issue bonds to the non-government sector to match its fiscal deficits, would the intrinsic MMT position be to prefer Option (A) rather than Option (B) and maintain a zero interest rate environment?

The New Keynesian ‘Reflationists’ and Japan

The first thing is to understood the meaning of the term ‘reflationist’ in the Japanese context.

In the period after the massive commercial property crash in Japan in the early 1990s, Japan returned to growth under the support of fiscal deficits.

However, the 1990s also saw a period of subdued price movements, with the wholesale price index starting to decline in 1994, followed by a simular fall in the CPI in 1997.

Then, under pressure from conservatives, the Japanese government introduced a consumption tax in May 1997, which caused a slump in economic activity and a period of sustained economic malaise, which has become known as the ‘Great Stagnation’.

The discussion in Japan at the time was focused on countering deflation.

This discussion was conditioned by the experience of Japan during the transition from the Bretton Woods system when the then Minister for Trade and Industry, Yasuhiro Nakasone, advocated using policy to increase the rate of inflation in order to offset the appreciation of the yen, as the currency broke with the peg.

There was a vigorous debate over this in Japan in early 1972, which is documented in the excellent book by the now Deputy Governor of the Bank of Japan, Masazumi Wakatabe – Japan’s Great Stagnation and Abenomics: Lessons for the World (Palgrave Macmillan, 2015).

The Endnotes for the book provide further information:

16. Nakasone suggested it on August 9, 1972. “Yen Saikirisage wo Fusegu tame ni wa Chosei Infure mo” (We may need adjustment inflation to prevent yen’s reap- preciation) Asahi Shimbun, Tokyo, August 10, 1972, 9).

17. The Asahi Shimbun quickly criticized Nakasone’s “Chosei Infure Ron” in its edito- rial titled “Chosei Infure Yonin Ron ni Hantaisuru” (We oppose the adjustment inflation argument) (Asahi Shimbun, Tokyo, August 13, 1972, 5).

The policy, labelled “Chosei Infure Ron (adjustment inflation argument”, resonates whenever reflationary strategies are raised.

Many economists tried to disabuse Japanese policy makers from using expansionary macroeconomic policies, and, instead advocated “deregulation and other structural reform measures” to combat deflation.

The typical neoliberal approach.

Masazumi Wakatabe notes that the deflation debate was really the “first gloablized economic debate for Japan” because it “attracted a considerable amount of attention from abroad”.

While many non-Japanese economists entered the debate, Masazumi Wakatabe considers “The most powerful argument for reflation came from Paul Krugman”, who argued against central banks “aiming for zero inflation”.

So, it was the more moderate New Keynesians that entered the fray as the ‘reflationists’.

In the early 1990s, as the inflation era arising from the OPEC oil crises came to an end (largely due to the 1991 recession), many economists advocated central banks adopting zero inflation targets.

In 1996, Krugman argued that Japan should “adopt as a long-run target fairly low but not zero inflation, say 3-4%”.

His (flawed) logic was that markets desire the capacity to run inflation ahead of nominal wages growth (to cut real wages) and an inflation rate of zero would make this impossible, given the downward rigidity in nominal wages.

Krugman basically claimed that with zero nominal interest rates, if there are deflationary expectations, the real interest rate (difference between the nominal interest rate and the rate of inflation) would remain too high to stimulate investment and end the stagnation.

This is Krugman’s so-called ‘liquidity trap’ argument, which supports his contention that pushing inflationary expectations up with macroeconomic stimulus, will drop the real interest rate towards its full employment level.

Krugman also claimed that QE-type bond purchases would help stimulate the desired inflation.

This is clearly a loanable funds type of argument (the real interest rate issue) with Quantity Theory overtones (the inflation from QE).

It is erroneous and I will come back to that soon.

As Masazumi Wakatabe notes, Krugman was railing against those who considered the ‘Great Stagnation’ to be the result of supply-side factors which needed further deregulation and structural shifts to cure.

His argument, even though it was established on spurious grounds (real interest rates etc), was that:

Japan’s problem was a macroeconomic demand shortage, so the necessary remedy was expansionary macroeconomic policy.

Krugman was joined by a host of New Keynesian economists, including Lars Svensson and Ben Bernanke, in advocating expansionary policies based on driving the inflation rate up.

They were called the “reflationists”.

At the time, this argument was strongly opposed by leading Keynesian economists in Japan (for example, Hiroshi Yoshikawa, a professor at Tokyo University).

His point was:

1. The problem was a lack of effective demand (a la Keynes).

2. Expansionary policy will not work because there is “demand saturation”.

3. Only creating new markets with new goods previously unavailable will spur new spending by households and firms.

4. Krugman’s arguments were based on flawed New Keynesian analysis – loanable funds and Quantity Theory – which Keynes had firmly debunked in the 1930s.

As Masazumi Wakatabe notes, Professor Yoshikawa nonetheless, did support fiscal expansion in the late 1990s, after the meltdown caused by the consumption tax hike in 1997.

The representation of the Japanese problem as a ‘liquidity trap’ by the ‘reflationists’ was spurious and not reflective of the insights of Keynes who analysed the liquidity trap phenomenon in the 1930s.

I wrote about that issue in these blog posts (among others):

1. Whether there is a liquidity trap or not is irrelevant (July 6, 2011).

2. The on-going crisis has nothing to do with a supposed liquidity trap (June 28, 2012).

But, moreover, the New Keynesian or ‘reflationist’ causality, which motivated the likes of Krugman et al. was deeply flawed.

I touched on the problems with the narrative in this blog post – Q&A Japan style – Part 1 (November 4, 2019).

The relevant summary points:

1. The reflationists believed that monetary policy could cause a reflation in Japan because they believe in the validity of the Classical loanable funds doctrine, the Wiskellian real interest rate link, and the Quantity Theory of Money to understand the inflationary process.

None of these concepts, theories are valid in a modern monetary economy and were categorically debunked by Keynes and others in the 1930s and beyond.

2. The natural rate of interest is a central concept in the Loanable Funds theory, where the loanable funds market brought savers together with investors, the natural rate of interest is that rate where the real demand for investment funds equals the real supply of savings.

This remains a core concept in New Keynesian macroeconomics.

Accordingly, when the money interest rate is below the natural rate, investment exceeds saving and aggregate demand exceeds aggregate supply. Bank loans (shifting the savings to investors) create new money to finance the investment gap and inflation results (and vice versa, for money interest rates above the natural rate).

The orthodox position is that the interest rate somehow balances investment and saving and that investment requires a prior pool of saving are both incorrect.

In the modern sense, the New Keynesians construct the narrative in this way – the central bank controls the nominal interest rate by managing bank reserves and the interbank market.

They manipulate the interest rate to target a given inflation rate which then allows them to influence the real interest rate, which is determined outside of the monetary system in the loanable funds market, which mediates saving and investment preferences, which are, in turn, reflective of factors such as productivity and preference for future consumption over current consumption.

If those preferences and real forces are stable, the natural interest rate will be stable. So, the policy regime then tries to target an inflation rate via a nominal interest rate setting that will deliver the appropriate natural rate of interest.

Given the same approach contends that fiscal policy expansion will put upward pressure on interest rates (‘crowding out’), it is considered a destabilising force and eschewed.

The reality is that investment brings forth its own saving through income adjustments.

Saving is a monetary variable dependent on income.

Further, banks will extend loans to any credit worthy customer and are not constrained by the available saving.

Loans create deposits, which, if spent, will stimulate income and saving as a residual after consumption. There is no financial crowding out arising from increased fiscal deficits.

3. The ‘reflationists’ believed that if the Bank of Japan expanded bank reserves through massive bond buying campaigns, this would increase the capacity of the banks to extend loans, which would stimulate economic growth and drive up the inflation rate.

They considered the increased central bank money (bank reserves) would multiply into increased broad money growth and via the Quantity Theory of Money, would drive the inflation rate up.

As expectations of inflation rose, this would start to drive the inflation rate up independently.

A rising inflation rate at low nominal interest rates would drive down the real interest rate, which according to the loanable funds model would stimulate investment and the economy in general.

As above, the supply-side model of banking, where reserves are built up before loans are made, is not representative of reality. It is one of the fictions of the mainstream monetary theory.

Further, the idea of the money multiplier is erroneous.

In the real world, as banks extend credit to borrowers and loans create deposits, the central bank is obliged, as part of its charter to preserve financial stability, to ensure there are sufficient bank reserves to guarantee the integrity of the payments system.

So the reserves adjust to the broad aggregates not the other way around.

The reality is that the central bank does not have the capacity to control the money supply.

The banks then ensure that their reserve positions are legally compliant as a separate process knowing that they can always get the reserves from the central bank.

The only way that the central bank can influence credit creation in this setting is via the price of the reserves it provides on demand to the commercial banks.

What the ‘reflationists’ failed to understand (and still get it wrong) is that quantitative easing involves the central bank engaging in an asset swap (reserves for financial assets) with the private sector.

The net financial assets in the private sector are in fact unchanged although the portfolio composition of those assets is altered (maturity substitution) which changes yields and returns.

This might increase aggregate demand given the cost of investment funds is likely to drop. But on the other hand, the lower rates reduce the interest-income of savers who will reduce consumption (demand) accordingly.

How these opposing effects balance out is unclear but the evidence suggests there is not very much impact at all.

For the monetary aggregates (outside of base money) to increase, the banks would then have to increase their lending and create deposits. This is at the heart of the mainstream belief is that quantitative easing will stimulate the economy sufficiently to put a brake on the downward spiral of lost production and the increasing unemployment. The recent experience (and that of Japan in 2001) showed that quantitative easing does not succeed in doing this.

Should we be surprised. Definitely not. The mainstream view is based on the erroneous belief that the banks need reserves before they can lend and that quantitative easing provides those reserves. That is a major misrepresentation of the way the banking system actually operates. But the mainstream position asserts (wrongly) that banks only lend if they have prior reserves.

Building bank reserves does not increase the bank’s capacity to lend. Loans create deposits which generate reserves. Bank lending is not ‘reserve constrained’.

Please read my blog posts for more detailed discussion:

1. Money multiplier – missing feared dead (July 16, 2010).

2. Money multiplier and other myths (April 21, 2009).

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

In turn, this failing means that the invocation of the Quantity Theory of Money is spurious.

The Quantity Theory of Money which in symbols is MV = PQ but means that the money stock times the turnover per period (V) is equal to the price level (P) times real output (Q). The mainstream assume that V is fixed (despite empirically it moving all over the place) and Q is always at full employment as a result of market adjustments.

In general, to operationalise this identity and create a causal link between M -> P, requires one to assume that V and Q fixed – which in turn, implies the economy is always at full employment (the neoclassical economists assumed that flexible prices would sustain this state).

Under those assumptions, changes in M cause changes in P – which is the basic ‘reflationist’ claim that expanding the money supply is inflationary. They say that excess monetary growth creates a situation where too much money is chasing too few goods and the only adjustment that is possible is nominal (that is, inflation).

Keynes departed from his Marshallian (Quantity Theory) roots by observing price level changes independent of monetary supply movements (and vice versa) which changed his own perception of the way the monetary system operated.

Further, with high rates of capacity and labour underutilisation at various times one can hardly seriously maintain the view that Q is fixed. There is always scope for real adjustments (that is, increasing output) to match nominal growth in aggregate demand. So if increased credit became available and borrowers used the deposits that were created by the loans to purchase goods and services, it is likely that firms with excess capacity will respond by increasing output rather than prices.

The reason that the commercial banks were reluctant to lend much during the late 1990s in Japan was because the potential borrowers had become risk averse and were not presenting themselves to the banks.

It had nothing to do with a lack of ‘reserves’. Adding more reserves by quantitative easing was never going to alter the pessimistic outlook.

The ‘reflationists’ were correct in suggesting the Great Stagnation was a demand-side problem, which any amount of structural changes (wage cuts, cutting job protection, privatisation, welfare cuts, etc) would not be able to solve.

But they were wrong to believe it had something to do with a real interest rate being too high.

Their belief that non-standard monetary policy (QE, etc) was necessary because the nominal rate had hit zero or thereabouts was also flawed.

Other relevant blog posts that provide more detail are:

1. Investment and interest rates (August 10, 2012).

2. The natural rate of interest is zero! (August 30, 2009).

3. Why investment expenditure is insensitive to monetary policy (June 22, 2015).

4. Monetary policy is largely ineffective (April 8, 2015).

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

6. Printing money does not cause inflation (March 17, 2011).

7. Modern monetary theory and inflation – Part 1 (July 7, 2010).

8. Modern monetary theory and inflation – Part 1 (January 6, 2011).


The point is that no MMT economist would support the sort of narrative that the ‘reflationists’ applied during the late 1990s in Japan.

It was clearly spurious and when applied, failed to achieve its stated purpose for reasons discussed above.

However, we do not have surrender to the ‘reflationist’ vision or causality to see the value of Option (A), in the politically constrained environment in Japan.

On Thursday, I will relate this knowledge to the specific question under investigation and further explain that last statement.

That is enough for today!

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

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.

Q&A Japan style – Part 4

Published by Anonymous (not verified) on Mon, 11/11/2019 - 6:27pm in


Japan, Q&A

This is the final part of my four-part Q&A series arising from my recent trip to Japan. In this post, I answer just one question. The answer goes to the heart of the relationship between the national government (finance division) and the central bank and illustrates the complexity of reserve accounting. So it needs some background by way of education. Recall that these questions about Modern Monetary Theory (MMT) were raised with me during my recent trip to Japan. The public discussion about MMT in Japan is relatively advanced (compared to elsewhere). Political activists across the political spectrum are discussing and promoting MMT as a major way of expressing their opposition to fiscal austerity in Japan. The basics of MMT are now as well understood in Japan as anywhere and so the debate has moved onto more detailed queries, particularly with regard to policy applications. So as part of my current visit to Japan, I was asked to provide some guidance on a range of issues. In my presentations I addressed these matters. But I thought it would be productive to provide some written analysis so that everyone can advance their MMT understanding.

The previous parts of this series are:

1. Q&A Japan style – Part 1 (November 4, 2019).

1. Q&A Japan style – Part 2 (November 5, 2019).

1. Q&A Japan style – Part 3 (November 6, 2019).


We need some prior understanding before we get to the Answer.

Some people get initially confused when they confront Modern Monetary Theory (MMT) for the first time and are introduced to the heuristics we use to describe the intrinsic capacities of a currency-issuing government in a fiat monetary system.

So MMT educators start with the proposition that a sovereign government is never revenue constrained because it is the monopoly issuer of the currency.

That means that it has to spend the currency into existence before the non-government sector can do anything with it, including paying taxes.

But that simple first step encounters problems when people start applying their own conception of how they think such a government operates, which immediately creates dissonance.

In the context of this question, people have been told forever that governments that spend beyond their tax revenue have to borrow funds from the non-government sector to cover the shortfall, even though, they intuitively know that it is the government that is the issuer of the money it borrows.

The ‘printing money’ taboo is so strong that they never really question the logic of the bond-issuance and the monetary operations that support it.

For an MMT educator, the challenge then is to somehow marry this dissonance with the simple heuristics as a starting point to further elucidation.

As I indicated in – Q&A Japan style – Part 1 (November 4, 2019) – in the real world, there are institutional layers that complicate matters and often lead to people doubting the veracity of MMT insights.

In that blog post, I mentioned the simple MMT claim that governments have to spend first in order for the non-government sector to pay their taxes. As a starting point, that statement provides elementary insights.

But, of course, once we layer the analysis and allow private banks, for example, to create credit, then it follows that I can still pay my taxes with cash borrowed from the bank, quite apart from government spending. At that point, the analysis becomes more complicated because we have to trace through multiple transactions before we can see the essence.

In that specific case, a deeper understanding is that ultimately the government willingness, through the central bank, to always provide necessary loans of reserves, is what underpins the viability of the financial system.

While the banks can loan me the funds to pay my taxes, they can never generate reserves to clear the transactions if there is a shortfall. That is the unique capacity of the government via its central bank.

The complexity of the system is also reflected in the various voluntary institutional and accounting practices that the government might introduce as part of its spending and borrowing operations.

I discussed these issues in this blog post – On voluntary constraints that undermine public purpose (December 25, 2009).

So governments create accounts with the central bank and channel tax receipts and borrowings into these accounts and have regulations or rules that require certain balances to exist in these accounts from which government spending is then accounted for.

The illusion is that these accounting arrangements are intrinsic constraints.

While they cannot be an intrinsic financial constraint on government, they clearly serve as inertial forces on government spending because they become political tools.

People react negatively when an opposition politician starts accusing the government of rising debt levels, etc.

So for Japan, there are institutional and accounting conventions that would lead to the interpretation that motivates this question.

For example, this Bank of Japan document – Chapter IX Treasury Funds and Japanese Government Securities Services – provides a detailed account of the operational arrangements relevant to Japanese government spending and bond-issuance and the role of the Bank of Japan in facilitating the same.

The BoJ provides “various treasury funds services under acts and ordi- nances such as the Bank of Japan Act (Article 35) and the Public Account- ing Act (Article 34).”

The BoJ says that “these services consist of”:

(1) the receipt of revenues and payment of expenditures; (2) accounting for increases and decreases in government deposits as receipt and payment of treasury funds are carried out; and (3) the sorting of receipts and payment of treasury funds for government agencies and specific government accounts, calculating their respective total amounts, and checking them against those calculated by the government agencies themselves …

In this context, the BoJ interaction with the rest of the Japanese government is more broad than that of the US Federal Reserve and most other central banks.

The BoJ says that concentrating “all the services related to Japanese government’s deposits … enables the Bank, from a unified standpoint, to obtain information on the government’s funds management accurately and swiftly; therefore, the Bank can conduct appropriate open market operations based on the supply and demand conditions in government funds”.

That is a very significant statement.

Notice the reference to “a unified standpoint” – which reflects the Bank’s awareness that the Ministry of Finance functions in the Japanese government are intrinsically related to its own operations.

I discuss the concept of consolidation in thes blog posts (among others):

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

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

This is one of the areas where several critics of MMT have focused, claiming that the MMT focus on consolidation is at odds with their perception of reality.

They claim that MMT presents a fictional account of the world that we live in and in that sense fails to advance our understanding of how the modern monetary system operates.

This fiction is centred on the way MMT ‘consolidates’ the central bank and treasury functions into the ‘government sector’ and juxtaposes this with the non-government sector.

I discussed that issue in this blog post (among others) – Marxists getting all tied up on MMT (May 1, 2019).

But what the critics miss, is that despite the appearance that central banks have become independent of the political process, an appearance that is reinforced by false statements from my profession, the fact is that at the level of substance, the central bank and the treasury departments work closely together on a daily basis.

The BoJ’s statement above reflects that substance.

They realise that if they provide comprehensive services to the Ministry of Finance (in terms of the operations and impacts of fiscal policy on liquidity) that they can manage the state of liquidity in the monetary system, which, in turn, means they can more effectively calibrate their liquidity management interventions (open market operations or bond sales to drain excess reserves) in the face of what they acknowledge are “wide … fluctuations in the government deposits”.

The Bank of Japan also notes that its operations are legitimised under law by “approval of the government – specifically, the Finance Minister”, and these approvals extent to who the BoJ can contract with in the non-government sector to act as “agents” to “receive and pay treasury funds”.

The BoJ provide this diagram to describe the way government transactions are facilitated in Japan.

The record keeping of a tax payment, for example, follows this sequence:

1. Notification of tax liability from government to individual.

2. Taxpayer pays cash to BoJ or agent or their bank account is debited.

3. Tax payment received and is reported.

4. “Funds received by agents of the Bank are then settled by debiting the BOJ account of each agent and crediting government deposits at the Bank.”

5. BoJ processes information.

6. BoJ checks information against change in government deposits.

7. BoJ transmits information to tax authorities.

8. BoJ checks transactions.

The record keeping of a government expenditure (for example, for a public works payment):

1. Government notifies transfer of funds to contractors.

2. Information sent to “Accounting Center of the Ministry of Finance”.

3. “Accounting Center organizes the payment data from the relevant ministries” sends them to BoJ and instructs BoJ to credit “designated deposit accounts”.

4. BoJ sends notice of payment to “designated financial institutions” and relevant credits. BoJ also “debits the total amount of public works expenditures from the government deposits and credits the BOJ accounts of the designated financial institutions.”

5. Financial institutions (banks, etc) credit the accounts of relevant contractors following the BoJ instruction.

6. BoJ checks all transactions on a monthly basis.

The Government deposit account at the BoJ is a central vehicle for recording the “Treasury funds” that “are received and paid to the private sector” in Japan.

There are a “large number of transactions of treasury funds of enormous value” recorded through the deposit account every day. The timing of these flows varies across months according to the policy structure in place.

So shortfalls and surpluses in the deposit account regularly appear across time and seasons.

The BoJ observes that the “flow of treasury funds between the government and the private sector (fiscal balance) affects the balance of financial institutions’ BOJ accounts” on a daily basis, increasing them when a government payment is made and vice versa.

The BoJ and the ministries work closely together so the BoJ can manage the liquidity in the system on a daily basis.

Bank of Japan and MoF bond-issuance

If the Government deposit account “is in need of extra funds in the short term, it raises such funds by” issuing, what are now referred to as – Treasury Discount Bills (T-Bills).

While the government issues these Bills via public auction, the BoJ can underwrite the Bills when the “government is in unexpected need of funds, or when the bids from financial institutions fall short of the amount offered”.

In general, the BoJ can always underwrite the issuance of T-Bills or Japanese government bonds (JGBs) if there is a perceived need.

Further, the – Bank of Japan Act 1942 (Amended 2007) – makes it clear that the “Prime Minister and the Minister of Finance” can “request the Bank of Japan to conduct the business necessary to maintain stability of the financial system, including the provision of loans” (Article 38).

Article 4 of that Act also requires the BoJ to “maintain close contact with the government” to ensure:

… its currency and monetary control and the basic stance of the government’s economic policy shall be mutually compatible.

Again, reinforcing the MMT view that consolidation does not result in loss of insight.

Article 5 of the – Public Finance Act 1947 – is also often cited as probiting the BoJ from underwriting JGBs or T-Bills or making loans to the Government.

The Article does say, however, that the provisions do not apply if the Diet specifies special reasons.

Article 32 of the Bank of Japan Act refers to Article 5.

We learn that the BoJ in the course of its normal business with the national government can:

1. Make “uncollateralized loans within the limit decided by the Diet as prescribed in the proviso of Article 5 of the Fiscal Act (Act No. 34 of 1947)”.

2. Make “uncollateralized loans for the national government’s temporary borrowing permitted under the Fiscal Act or other acts concerning the national government’s accounting”.

3. “Subscribing or underwriting national government securities within the limit decided by the Diet as prescribed in the proviso of Article 5 of the Fiscal Act”.

4. “Subscribing or underwriting financing bills and other financing securities”.

Which should leave one in no doubt that if the national government determines, the BoJ will fund its deficits.

The recent QQE programs that the BoJ has been running just accomplishes that task indirectly by secondary bond rather than primary bond markets.

But like most ‘legal restrictions’ there are ways around and the law can be changed by the government when it desires (mostly).

In relation to the issuance of JGBs, the BoJ provides extensive financial and accounting services.

Here we learn a bit about how ideology enters the construction of the legal and accounting practices.

The BoJ document cited above states that these prohibitions (in the relevant Acts) are driven by the:

… lessons learned through the histories of major countries, including Japan. These lessons tell us that if a central bank were to provide credit to the government by, for example, underwriting JGBs and TBs, the government might lose its ability to maintain fiscal discipline (the self-discipline to balance revenues and expenditures). In such a case, there would be no brake to stop the government from making the central bank increase the amount of central bank money, which would induce spiraling inflation. This would end up in a loss of confidence, both domestically and internationally, in the country’s currency and its economic policy.

Which is a somewhat farcical statement given the modern history of Japan that is summarised by these facts:

1. Japan has run continuous deficits since 1992, sometimes reaching over 10 per cent of GDP.

2. Japanese government debt to GDP has risen to around 240 per cent.

3. The Bank of Japan total assets have risen to (November 19, 2019) 575,670,234,193 thousand yen, of which 484,844,756,867 thousand yen are held as Japanese government bonds.

On January 10, 2009, total assets were 116,551,962,006 thousand yen, of which 63,525,289,021 thousand yen were held as Japanese government bonds.

4. The Bank of Japan now holds around 43 per cent of all government bonds up from about 8 per cent just before the crisis.

5. Inflation is low verging on negative.

6. Long-term bond yields are negative.

7. Interest rates are low to negative.

8. The long-term inflation expectations by firms are flat and very low.

The BoJ JGS services for the government are comprehensive.

In the case of public auctions of JGBs (JGS), the – JGB Book-Entry System – provides the accounting and procedural framework whereby successful bidders receive notification and payments are made.

The transactions are all conducted within the “Bank of Japan Financial Network System — BOJ-NET Funds Transfer System (FTS) and the BOJ-NET JGB Services”.

The various categories of participants that can purchase JGBs have financial accounts either directly with the BoJ or linked to accounts at the BoJ.

The clearing system for payments for JGBs is fairly complicated given the diversity of participants, but, in essence, can be distilled to some simple accounting.

1. Customers who wish to buy JGBs request a purchase from a so-called direct participants directly or via other intermediaries (indirect participants, Foreign Indirect Participants (FIPs), who then communicate the requests to the Bank of Japan.

2. Ultimately what happens is that the bank account of the customer are debited and then through a sequence of debits and credits through the intermediaries, a credit is made at the Bank of Japan to the relevant account.

3. So we understand that a bond purchaser has funds in an account somewhere, which comprise a component of their current wealth portfolio, and are not destined for consumption or productive investment spending. The customer chooses to alter their wealth portfolio in order to purchase some JGBs.

In terms of accounting for bond-issuance, the BoJ also facilitates payments of principle and interest on outstanding JGBs via the Government deposit account.

It debits the Government account to “make payments for the principle and interest” to the relevant beneficiaries.

The BoJ “receives principal and interest on behalf of all the JGS holders from the government (MOF) and credits the funds directly to partici- pants’ BOJ accounts; and the participants then pay their customers.”


We are now in a position to answer the question.


One interpretation of MMT that is often heard in Japan is that the government first issues government bonds and then spends the proceeds. In this case, government bonds appear as assets in the balance sheets of the private banks who purchase the debt. The same amount appears as deposits (liabilities) in the banking system as the government spends an equivalent amount. This would suggest there is no increase in the monetary base. So a lot of debate in Japan claims that MMT denies the necessity of government expenditures being accompanied by an increase in the monetary base. Is this view a correct interpretation of MMT?

From the Background information provided above, we can conclude that:

First, the interpretation, which implies that government bond issuance is necessary to facilitate the government’s yen expenditure is incorrect.

Clearly, the accounting arrangements with the BoJ might lead one to think that the causality runs from bond sales -> credits of Government deposit account at BoJ -> debits of account and credits of private bank accounts (via the relevant Current Account Deposits at the BoJ) to account for the government spending.

But while that is a convention, the BoJ can fund the government directly (as per the special cases in the relevant Acts).

And the government can change the accounting arrangements anyway via legislative changes.

These ‘rules’ and ‘accounting’ conventions that governments erect are all political and ideological artifacts that keep most of us from seeing what the true arrangements and operations are.

Second, the conclusion that bond sales accompanied by government spending of an equivalent value (in currency terms) do not “increase the monetary base” is not necessarily correct and depends on some other factors, which I specify below.

According to the Bank of Japan’s – Explanation of “Monetary Base Statistics” – the monetary base is “Currency Supplied by the Bank of Japan and is defined as follows”:

Monetary base = Banknotes in Circulation + Coins in Circulation + Current Account Balances (Current Account Deposits in the Bank of Japan)

They note that:

1. “The ‘Banknotes in Circulation’ and ‘Coins in Circulation’ in the monetary base include cash (banknotes and coins) held by financial institutions, while “Currency in Circulation” in the Money Stock Statistics does not.” So, they exclude liquidity created by the the private banks from the definition.

2. In April 1981 they substituted the term “Current Account Balances” for the previously used term “Reserve Balances”.

The reason they gave is that “Current Account Balances … includes deposits by institutions not subject to the Reserve Requirement System”, whereas “Reserve Balances” apply to the financial institutions regulated for required reserve balances.

So the Bank of Japan “accepts deposits from financial institutions to their current accounts they hold at the Bank”.

We learn that (Source):

Financial institutions hold current accounts at the Bank. The Bank also provides current account services to governments, central banks, and international organizations. It does not accept deposits from individuals or firms. This is because the main objective of the Bank’s acceptance of deposits is to maintain smooth and stable functioning of payment and settlement systems in Japan, as part of its role as the nation’s central bank.

There are three functions played by these accounts:

(1) Payment instrument for transactions among financial institutions, the Bank, and the government;

(2) Cash reserves for financial institutions to pay individuals and firms; and

(3) Reserves of financial institutions subject to the reserve requirement system.

Impact on monetary base of bond-issuance

Say that the government sells bonds to the non-government sector worth 100 yen (could be trillions, billions, or whatever unit).

It doesn’t really alter the analysis if the commercial banks buy the bonds directly or facilitate purchases made by other non-government customers.

When the government issues bonds, it exchanges the bond asset for a payment of currency, which leads the BoJ to mark down the Current Account Balances of the relevant purchasing bank or bank of the purchaser.

So, at that point, the monetary base declines by 100 yen.

While the monetary base declines, the net wealth of the non-government sector is unchanged in levels but altered in composition – increase in JGB holdings, decrease in deposits held in banks (in the first instance).

The national Government deposit account at the BoJ rises by 100 yen as a result of the sale of the bonds to the non-government sector.

Impact on monetary base of government spending

When the government net spends, there is an overall increase in non-government sector bank deposits of 100 yen (in this instance), representing payments for goods and services sold to the government.

At the same time the reserves held by the private banks at the BoJ increase by 100 yen, which represents an additional asset for the private banks and a liability for the central bank.

The rise in the liabilities of the private banks, via the rise in deposits of the non-government, is matched by their increased holdings of reserves at the central bank.

Thus, the net positions of the central bank and the banks are unchanged.

And, the balance in the national Government deposit account at the BoJ falls back to its initial level.

Importantly, the monetary base rises by 100 yen as a result of the government spending adding to the reserves in the non-government banking system.

Further, while the bond sale did not change the net financial position of the non-government sector, a basic insight drawn from Modern Monetary Theory (MMT) is that government spending increases net financial assets in the non-government sector – yen-for-yen (in this case).

At this stage, the monetary base has returned to its previous level as the reserve balances fall and then rise again.


Think about the initial bond sale and swap of reserves. Where did the banks get the reserves from to accomplish this transaction if at that point there were no excess reserves in the system?

Typically, the central bank will offer so-called repurchase agreements where the central bank buys bonds from the banks who promise to buy them back at some specified date.

This provides sufficient reserves to allow for a settlement to go forward on the bond auction. So the monetary base increases before the bond auction to facilitate it and then shrinks when the bonds are purchased at the completion of the auction.

How the repurchase reversal plays out is not important for this story.

Further, consider the situation for the central bank which may desire to maintain a positive target, short-term interest rate.

The reserves held by the private banks at the central bank, which enable the operation of the payments system, have risen by 100 yen, and, while economic activity has increased, the private banks may be reluctant to hold an additional 100 yen in reserves.

Assume the banks only desire to hold 10 yen of these extra reserves to meet the expectations of increased payments activity that will probably accompany the increased economic growth following the government spending injection.

So overall, there are 90 yen of excess reserves in the Current Account Balances at the BoJ.

Those private banks holding excess reserves will try to loan them to other banks in the Interbank market.

Given that there is a system-wide excess, that is, an overall excess supply of reserves, the Interbank rate would be driven down below the central bank’s target level by this lending activity in the absence of central bank action. In fact, it would be driven down to zero in the absence of any support measures (interest payments on excess reserves).

In this situation, the BoJ would normally offer and additional 90 yen worth of government debt to the private banks, which will attract an interest rate in excess of the interbank rate.

The banks will thus have an incentive to buy this treasury debt.

This action by the central bank will remove the downward pressure on the Interbank rate and thus protect the integrity of monetary policy, which is identified with setting of a target interbank rate.

Thus the coordination of central bank and treasury operations is required to implement this program of government deficit spending.

The point of our example is that:

1. Where the monetary base is defined as the total bank reserves, held at the central bank plus currency held by the non-government sector, a bond sale reduces the monetary base because reserves are exchanged for the bond assets. But if there are repurchase agreements in place to facilitate the auction settlement then the impact on the monetary base could be different.

2. The increase in government spending creates an increase in bank reserves and the monetary base.

3. If the central bank is targetting a positive interest rate, then it has to drain the excess reserves created by the increased government spending by swapping government bonds (or other interest-bearing assets) for the bank reserves. In that case the monetary base shrinks by the amount of the draining operation – in this case 90 yen.

4. The net financial assets held by the non-government sector are defined as their holdings of net financial assets plus the monetary base. They have increased.

For basic Modern Monetary Theory (MMT) concepts, please read the following introductory suite of blog posts:

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

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

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


There were other questions and I will get to them at another time.

That is enough for today!

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