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The Campaign to Protect Christmas Profits from Omicron

Published by Anonymous (not verified) on Mon, 29/11/2021 - 10:03pm in

Omicron updates along with some of the considerable noise.

Countries than run continuous deficits do not seem to endure accelerating inflation or currency crises

Published by Anonymous (not verified) on Mon, 01/11/2021 - 12:28pm in

There was a conference in Berlin recently (25th FMM Conference: Macroeconomics of Socio-Ecological Transition run by the Hans-Böckler-Stiftung), which sponsored a session on “The Relevance of Hajo Riese’s Monetary Keynesianism to Current Issues”. One of the papers at that session provided what the authors believed is a damning critique of Modern Monetary Theory (MMT). Unfortunately, the critique falls short like most of them. I normally don’t respond to these increasing attacks on our work, but given this was a more academic critique and I was in an earlier period of my career interested in the work of Hajo Riese, I think the critique highlights some general issues that many readers still struggle to work through.

Who was Hajo Riese, you might ask?

He was an German economist who died earlier this year (born 1933) and was considered to be the founder of the so-called “Berlin School of Monetary Keynesian”.

What was that?

I have written before about the way that the work of John Maynard Keynes was quickly hijacked by the dominant neoclassical orthodoxy of the 1930s and became, especially in the US and the main macroeconomic textbooks, the ‘neoclassical synthesis’, which treated Keynes as a special case of orthodox theory that applied if wages were rigid downwards.

So, macroeconomics failed to jettison a lot of the neoclassical baggage about real wage cutting to cure unemployment, crowding out consequences of using deficits, inflationary consequences of using overt monetary financing and more, which, ultimately led to Monetarism and then the current New Keynesian orthodoxy, which is little of Keynes left in it.

Hajo Riese spent his academic career working on strengthening the insights of John Maynard Keynes to avoid the conclusions of the ‘neoclassical synthesis’ and in that respect his work was admirable.

But the critique unveiled at the conference recently doesn’t really deal with any of that.

It starts by arguing that:

Economists of the MMT persuasion polarize with the claims that … a state with its own currency has ‘no budget constraint’

The authority for this assessment is that characters like “Fed chair Yellen”, “ECB President Lagarde”, Larry Summers, Mr Dodgy Spreadsheet Rogoff and others don’t like MMT so we are polarising.

Go figure that one.

The authors present a reasonable rendition of the basis MMT propositions that they consider to be ‘strengths’ although it is not how I would have written it.

They then turn to the “Weaknesses of MMT”.

The first attack is on a comment that they draw from Randall Wray’s 2015 Primer (Palgrave) that “households need the government to spend before they can pay taxes!”

They claim this is “astonishing” given that MMT also “emphasizes the endogeneity of money which is based on banks borrowing money from the central bank ” and thus means that “there is no intrinsic linkage between the volume of central bank money and government spending”.

But, of course, this criticism reflects a misunderstanding of the way in which we order the pedagogy which introduces our work to the general public.

In some cases, we use simple conceptual vehicles (heuristics) to begin a discussion with those interested in MMT who have no prior background.

Representative of these heuristics are these blog posts:

1. A simple personal calling card economy (March 31, 2009).

2. Barnaby, better to walk before we run (February 8, 2010).

3. Some neighbours arrive (February 15, 2010).

There is no sense that these ‘models’ can represent reality as we know it. Reality is much more complex and multilayered.

But these heuristics allow us to explore some intrinsic characteristics of the monetary system, the capacity of the currency issuer and the options that such a government might have to advance its policy agenda.

As an example, in a highly simplistic, logical model, we might show how a new currency achieves its status by requiring all people to pay their taxes in that currency and then we show that that capacity doesn’t exist in the non-government sector until the government spends that currency into existence.

For introductory audiences, I often present a small accounting model (in the MOOC we even had a game show format), to illustrate this point.

It allows us to establish a clear causality that taxes cannot intrinsically fund government spending. In that simplistic world, it is the other way around.

Government spending provides the currency in which the non-government sector can pay its taxes and any outstanding debt that such a government might issue just represents previous fiscal deficits, which haven’t been taxed away yet.

As it stands, that simplistic model serves a purpose.

But it should never be the end of the story. The academic MMT economists certainly don’t hold this sort of reasoning as the definitive MMT statement, even if others might.

The point is that once we layer that simple heuristic with real world institutional insights and reality then the simple heuristic quickly becomes inadequate for analysis.

For example, to say that MMT says that taxes cannot be paid before spending is obviously an incorrect statement on two counts.

First, MMT doesn’t say that beyond our simple heuristic models, which are highly stylised and the assumptions used are transparent and deliberate abstractions of reality.

Second, in the real world, I can walk into a bank and borrow funds to pay my tax obligations without having built up any prior financial assets. Abstract from the financial record I might have had to demonstrate in order to access the loan from the bank.

But it is clear, in that instances, taxes can be paid without government’s spending the money into existence first. That is because there are real world institutions such as commercial banks that create deposits when they make loans, and which are absent from the simple heuristic models.

The latter insight forms the basis of the endogenous money idea.

This doesn’t invalidate the insights in the simple models. It just adds layers of complexity that have to be augmented with deeper insights.

In a pedagogical sense, we need to walk before we run. So the simple heuristic models allow us to start thinking in terms of MMT concepts – currency-issuance, government/non-government, flows and stocks, income and wealth, etc – which then allow us to make the next steps as we layer the analysis with more real world complexity.

But hanging onto the simple logic and denying the real world complexity is a dangerous strategy and not one that the academic MMT economists adopt.

In this specific tax payments case, how we extend the complexity of understanding is to note that while it is obvious that banks can create deposits (and liqudity) everytime they create a loan, the transactions associated with that loan (in this case, me paying my taxes) have to ‘clear’. The funds have to come from somewhere.

And that then takes us into a deeper analysis of the role of bank reserves and central bank funds. We then note that ultimately, claims on that deposit at my bank, must be backed by reserves, which is a different to saying that the loan was made possible by the prior existence of reserves.

But clearly, when I tell the government I am paying my taxes and transfer funds from the deposit the bank has created as part of my loan, the government instructs the central bank to debit the reserve accounts of the bank in question and credit its own account with the amount of the tax payment.

If the bank in question has insufficient reserves or there are insufficient reserves within the banking system at that time, then the only place those reserves can come from is the central bank (which in MMT is considered to be part of the consolidated government sector).

In that sense, the correct statement is not that taxation requires prior spending but that the solvency of the non-government financial system ultimately rests on government making loans to the non-government sector in the currency that the government issues and that these loans allow the banks to always meet the demands on them for bank reserves.

Now, it is clear that not everyone who uses (and demands) the currency pays taxes.

But, the tax-driven currency argument that underpins MMT reasoning does not require everyone to be ‘taxpayers’. Once a currency is established then their are many reasons why it becomes broadly acceptable to the population, not the least being that transaction costs are lower if everyone uses the same currency.

The way in which MMT represents taxation is also rather simplistic. In our simple heuristics, it appears as a lump sum that everyone has to pay (although we represent it as a total non-government sum to simplify matters).

We can clearly introduce complexity into the tax system, with progression in the income tax structure, an array of non-income taxes (such as GST or VAT), and other complexities (death duties, wealth taxes, expenditure taxes, etc).

That has never been a necessity in my view, although I acknowledge that a government has to contend with those complexities when it is operating the tax system in the real world.

But introducing such complexity will not alter the fundamental insight that if you require a significant proportion of the population to extinguish their tax liabilities in the currency that only the government issues then that will elicit a demand for that currency, irrespective of whether you can get that currency by working for the government, working on contracts paid for by the government, or borrowing that ‘currency’ from commercial banks who have reserve accounts at the central bank denominated in that currency, or from other financial institutions that ultimately have to work through banks that have such reserve accounts.

So it is, in fact, ‘astonishing’ that these German MMT critics didn’t understand that complexity in our work.

Quoting from an ‘airport book’, designed to provide simple heuristics is not a legitimate academic exercise.

The next criticism is that it is an:

… untenable thesis that a sovereign state whose liabilities are denominated in the national currency cannot become insolvent as it can always print enough money to service its debt.

Note, we never use terms such as ‘printing money’, which is a mainstream concept built on a flawed understanding of how governments spend (every day) and monetary operations that might accompany that spending.

All government spending enters the economy in the same way – digital entries to banking systems – irrespective of how central banks might operate to maintain a target rate of interest or target a maturity yield (QE).

The mainstream idea that governments either spend tax revenue or spend bond issuing revenue or turn on a printer has no application to the real world.

That is a stylised version of the government based on a flawed household budget analogy.

But aside from terminology, what is the criticsm based on?

They say that:

MMT goes one step further and views fiscal policies aimed at high employment and output as expedient and risk-free in general … What MMT tends to neglect are the economic consequences of such monetary financing …

They recognise that MMT economists “do acknowledge the link between monetized budget deficits and inflation” but we fail to “appreciate inflation as a cumulative process with price-wage spirals and currency depreciation that erodes the quality of the currency.”

Apparently, we fail to understand that money is a “store of value” – “an asset that competes with domestic securities and stocks as well as foreign assets” and there is no certainty that people who receive money “will want to keep the cash in their portfolio at given valuations”.

Sure enough.

But they always have to have enough government currency to meet their tax and other liabilities that are denominated in that currency.

But the critics jump to the conclusion that an “increase in the supply of money or domestic securities creates a higher demand for foreign assets”, which leads to a depreciation in the domestic currency.

The critics conclude that “if the government continuously uses newly created money to service its debt service” then “continuous depreciation” is inevitable.

Which, in turn, creates accelerating inflation.

And if “investors anticipate the money expansion” then they will shift out of domestic currency, which exacerbates the situation.

This asserted causality then forces investors to demand higher yields on government debt, which leads to “Higher interest rates”, which “negatively affect the government’s fiscal position and depress investment”.

They then argue that if the government tries to control yields using QE, the investors will abandon the currency as per the previous assertion.

Then the workers retaliate and there is a wage-price spiral and a “further increase in inflation”.

So all of this is standard mainstream reasoning, which has floundered in the real world.

First, governments all around the world have run continuous fiscal deficits for decades, which inject net financial assets, initially denominated in the government’s currency, into the non-government sector.

Where is the systematic depreciation and inflationary impacts via import price rises evident for these nations?

Why is the demand for Australian government bonds so strong always and continuously held in Australian dollars, when there has been an external deficit mostly since the 1970s and governments have run fiscal deficits regularly, of varying magnitudes?

Why has the Japanese public largely held government bonds in yen and why hasn’t the yen collapsed in the face of massive fiscal deficits, significant government bond issues, and very large-scale QE programs?

Why has Japan fought deflationary rather than inflationary pressures since the 1990s given its fiscal and monetary policy settings?

Why has the Bank of Japan been able to control short-term interest rates and yields on government debt despite the massive QE programs, while simultaneously observing deflationary rather than inflationary pressures?

Second, there are notable instances of currency-issuing government facing currency pressures as investors shift their portfolios into foreign assets.

The experience of Britain in the 1990s is one example.

But that arose because Britain had pegged its currency and thus had lost its sovereignty.

Speculators knew that if Britain insisted on maintaining its membership of the ERM, then it could be targetted with short trades.

Ultimately, the ‘currency crisis’ came to a head on September 16, 1992, when the government finally abandoned its ERM membership and floated the pound.

MMT always considers nations that compromise their currencies with any pegged-typed arrangements will face ‘investor pressure’.

Third, there are also cases where a floating exchange rate can be targetted.

The GFC-example of Iceland is important to understand.

They had a very large banking collapse during the early days of the GFC and they prevented a currency-collapse and inflation by imposing capital controls.

I have regularly written about the need for capital controls in some circumstances.

MMT economists clearly understand that large private capital holders can cause trouble for a small nation through speculative ventures that can be thwarted by the imposition of capital control, which are clearly the remit of the legislative authority, as the Icelandic experience shows.

Fourth, the idea that recipients of a nation’s currency, acquired in the course of government spending on contracts to produce infrastructure, provide services, procure private activity, employ people, have the choice on how to store their wealth portfolio.

In a growing economy, which high levels of employment and wealth generation, it is implausible to assume that recipients of government currency, in the normal course of events, will seek to transfer those holdings into foreign assets.

The fear of these conversions was also raised in the context of Chinese purchases of US government bonds and there were many erroneous claims that the Chinese were funding US government spending.

The reality is that the holdings of US dollar-denominated assets were only able to be accumulated because the Chinese economy ran export surpluses and deprived their citizens of the use of the resources embodied in those exports.

But the value of those foreign currency denominated assets will be sensitive to what the holders do with them.

It would be very odd behaviour to build up these assets in one’s wealth portfolio and then undermine their value by selling them off via foreign exchange transactions.

The point is that there is no inevitability in which currency people choose to hold their wealth portfolios.

But the lack of evidence that ties fiscal deficits to currency fluctuations tells me that the critics who believe it is inevitable that deficits will create inflation, higher interest rates and depreciating currencies are wrong.

Conclusion

One of the strengths of MMT is that it maintains empirical credibility, something that cannot be said for the views expressed in the paper discussed.

The possibilities that the German authors raise are theoretical and derived from a macroeconomic framework that is flawed.

The real world does not accord with the theoretical linkages declared inevitable by the authors.

That is enough for today!

(c) Copyright 2021 William Mitchell. All Rights Reserved.

The Supply Chain Crisis: How We Got Here

Published by Anonymous (not verified) on Mon, 11/10/2021 - 3:26pm in

On some of the key management practices and fads that produced dependence on extended and revealed-to-be-fragile supply chains.

They never wrote about it, talked about it, and, did quite the opposite – yet they knew it all along!

Published by Anonymous (not verified) on Mon, 20/09/2021 - 5:30pm in

Tags 

Inflation, Japan

During the GFC, a new phenomenon emerged – the ‘We knew it all along’ syndrome, which was characterised my several mainstream New Keynesian macroeconomists coming out and claiming that some of the insights provided by Modern Monetary Theory (MMT) economists were banal and that their own theoretical framework already accommodates them. The pandemic has brought a further rush of the ‘We knew it all along’ syndrome. Apparently, mainstream macroeconomics is perfectly capable of explaining the fiscal reality the world has found itself in and there is no need to MMT, which, by assertion, is saying nothing new. These sorts of statements are not coming from Facebook or Twitter heroes who might have done a few units in economics or even acquired a degree in the discipline. They are coming from senior professors in the academy. The curious thing, which really lifts their cover, is that if you examine the academic literature you won’t find much reference to these sorts of ‘insights’ at all. What you find, and what students are taught, are a completely different set of propositions with respect to fiscal policy. So if they ‘knew it all along’ why didn’t they ever write about it? Why is their published academic work replete with conclusions that run contrary to the conclusions MMT economists make? You know the answer. These ‘knew it all along’ characters have just been caught out by the poor empirical performance of their paradigm and now they are trying to salvage their reputations and position by trying to blur history. They really should be sacked.

I was sent an Op Ed – Should governments obsess about debt? Yes, say traditionalists. No, says the theory – from three Australian economics professors yesterday which typifies this issue.

It was published on July 7, 2020 in Crikey, which is a self-style ‘with-it’ sort of on-line news source.

There is another version that was published subsequently, which has minor variations but which is substantially the same.

The three authors have at various times in Op Eds or social media made ridiculous attacks on MMT. They seem to have a thing about it.

Their approach in this Op Ed is to simultaneously reduce both ‘conventional economics’ and MMT to absurdly simplistic and incoherent characterisations.

That sort of reduction is characteristic of most of the MMT critiques I have ever read.

For example, the authors write that MMT proponents argue:

… we should not worry about budget deficits at all.

Now here we have to be clear.

MMT is not what Twitter advocates say it is.

Social media is not the domain where you define an academic discourse.

I know some social media activists feel slighted when I criticise their vehemence etc but that is the reality.

We can forgive a well-meaning activist or popular literature writer for stylising and being simplistic.

But the source of what MMT is can only really be found in the academic literature that the main economists have produced.

And for mainstream economists seeking to find out what MMT is, that is where they should research.

What some popular book or Tweet might say is one thing.

But an academic should never use ‘quotes’ or inferences from those sources an authoritative statements on an academic development.

The Crikey authors defy that professional convention because they have a point to make which cannot be made if one consults the academic literature.

No MMT economist, writing in the academic literature, has ever said that fiscal deficits do not matter nor should we disregard them.

It is simple academically dishonest to say otherwise.

Of course, fiscal deficits matter!

They are the lynchpin for government to ensure the economy can reach and sustain full employment and maintain high levels of material well-being.

I outlined an easy version of what the appropriate fiscal position should be in this blog post – The full employment fiscal deficit condition (April 13, 2011).

There is much more detail in our textbook – Macroeconomics (published 2019) – and other academic papers.

Clearly, the Crikey authors have never consulted the academic literature or decided it was too inconvenient for their purpose to render it accurately.

The fiscal position is crucial in any modern monetary economy.

We should always worry about it because it is the way in which non-government saving decisions can be ‘funded’ by government while still maintaining levels of economic activity that will generate full employment and other beneficial outcomes (productivity growth etc).

That ‘funding’ comes from the fiscal deficit filling the non-government spending gap (the difference between income and spending) and maintaining aggregate spending at levels sufficient to generate sales that, in turn, ensure unemployment is at its irreducible minimum.

In our academic work, MMT economists have gone to great analytical depth to outline how fiscal policy works and provides that non-government ‘funding’.

So it is a falsehood, at the most elemental level, to write that MMT says “we should not worry about budget deficits at all”.

Which means that any further inference based on that erroneous conclusion is likely to be equally flawed.

The Crikey authors then seek to invoke a characterisation of MMT based on that introductory falsehood.

They write:

In doing so, MMT makes two claims: one weak and one strong.

The weak claim is that a country that can issue debt denominated in its own currency, say dollars, can always finance a shortfall between its spending and its revenues. The central bank can, at the press of a button, create unlimited new dollars. Because of this a government can never fail to make payment on dollar-denominated liabilities. In this sense, there can never be a problem financing government deficits … This is neither a new nor a controversial idea. It is well accepted by central bankers, treasury officials, academic economists, and other experts — even if it is not well understood by various politicians and commentators who are all too quick to talk as if the government budget is just like a household budget. It is not.

Several points emerge here.

First, the idea that governments have to seek funding first before they spend is developed here.

And certainly an array of accounting structures within government have been created to give that impression.

I wrote about that phenomenon in this blog post among others – On voluntary constraints that undermine public purpose (December 25, 2009).

But, this is not the way MMT conceives of the fiscal process.

Once the government initiates a spending choice it is ‘funded’. Some operational process is triggered where cheques are sent out or bank accounts are credited and that currency is in the system – buying things, etc.

All the other things that might accompany that process are not funding in the conventional meaning of the word.

Second, if it is understood by all that the “central bank can, at the press of a button, create unlimited new dollars” why do mainstream economists including Nobel Prize winners (so not “various politicians and commentators”) publish regular articles about governments running out of money and debt thresholds beyond which the government can no longer ‘fund’ itself and all the rest of the related garbage?

Well the answer is that they know that central banks can do that but they render it taboo because they assert it causes accelerating inflation.

So, it is not really a real world option, even though it is available.

Which then raised further questions.

Why do most central banks do it these days without there being any consequence of accelerating inflation?

The New Keynesian model says that inflation should be accelerating at present, and, certainly well before now in Japan, which has seen the Bank of Japan essentially buying all the government debt that has been issued for many years – certainly long enough for the mainstream predictions to play out.

If the model has no credibility in an empirical sense, then it doesn’t matter that they knew the central bank could do this.

What matters is whether their ‘model’ correctly understood the consequences over time of central banks pressing buttons and creating unlimited new currency, which is now the norm.

And it is there that the mainstream model that these authors use fails dramatically.

The main central banks have been trying for years to elevate their inflation rates with little success.

The scale of the QE that has been undertaken should have, using any feasible elasticities of money demand etc, driven prices sky high at an increasing rate if the New Keynesian model had any credibility.

So the Crikey authors might know the obvious.

But they don’t know why the reality departs from their textbooks.

That is where MMT economists have the edge. They have more or less correctly predicted the current reality and have been much more successful in capturing the macro dynamics than the mainstream economists who have made systematic errors in inflation predictions for years now.

Third, the Crikey authors might be now willing to admit that the government ‘budget’ is not a household budget and that academic economists and other experts know this but then they might want to explain why the opposite assumption often frames academic research papers and statements by economists.

The idea that the government faces a budget constraint akin to that faced by the household in microeconomic choice theory has a long history in the ‘conventional economics’ literature.

It arose as a result of mainstream economics questioning the implications of the work of John Maynard Keynes and trying to make sense of it within conventional, neoclassical microeconomic theory.

That micro theory focused, among other things, on the choice of the consumer between goods and services and saving, and between labour and leisure.

In the first choice decision, it was held that consumers wanted to maximise satisfaction faced with a budget (financial) constraint.

So there was a maximising calculus proposed where the household or individual ration their financially constrained spending to make themselves feel the best.

The attacks on Keynesian macroeconomics accelerated during the 1950s, as Milton Friedman and other neoclassicists, disputed Keynes’ essential insight that real wage cuts would not improve employment, which was a notion derived directly from neoclassical micro theory of the labour market.

Keynes’ view ran counter to the optimising calculus that the micro theory advanced and placed central to their analytical approach.

So to the neoclassical economists, Keynes must be wrong because his views violated the assumptions that individuals were rational and maximising and free markets would deliver optimal outcomes if those individual motivations were allowed to work out.

As a result, there was a lot of effort expended in trying to render the Keynesian macroeconomics consistent with the microeconomic principles that the mainstream held on to in a religious manner.

The way this proceeded in the 1950s, but especially the 1960s, was to formalise the government to replicate the individual consumer in the sense that it was financially constrained by its ‘budget constraint’ and there were thus consequences arising from choosing between one form of ‘finance’ or another.

Don Patinkin wrote about it in his 1956 book – Money, Interest and Prices.

Bent Hansen also referred to it in his 1958 book – The Economic Theory of Fiscal Policy.

In 1965, David Ott and Attiat Ott published an article in the Journal of Finance (XX, March, 71-77) – ‘Budget Balance and Equilibrium Income’.

A definitive article was published in the Journal of Political Economy (Vol 76, No 1, Jan-Feb, 1968) – A Simple Macroeconomic Model with a Government Budget Restraint – by Carl F. Christ.

Don’t be mislead by mainstream economists about this.

The underlying aim of this literature was to unify the microeconomics of consumer demand with the macroeconomics – to render them consistent and obedient to the same analytical principles.

There were nuances but the underlying unity was clear.

Christ wrote:

In choosing a mix of monetary and fiscal policies, government authorities (including the central bank) are bound by a government budget restraint. This restraint is less severe than a private individual’s or firm’s restraint because government authorities can issue fiat money. Nevertheless, the government budget restraint is important.

The nuance then is that governments can “issue fiat money”.

At the level that Christ introduced the idea, one could easily understand that all this ‘constraint’ was referring to was an accounting statement that when the government spends it also does a range of other things – has tax revenue, issues debt, or instructs its central bank to credit bank accounts – and the sum of the spending will ultimately add up $-for-$ to the other things.

In our academic writings, MMT economists make it clear that as an accounting identity that is obvious.

Christ says that the government is not free to assign values in its fiscal process to all the ‘other things’ because once it sets tax rates and debt issuance, and a spending level, then what is left for the central bank to cover is determined by the accounting identity.

That is also obvious for that is what an accounting framework ensures – additive consistency.

But Christ then manipulated a highly stylised ‘model’ where the results really depend on the assumptions that the analysis is based on to conclude that a “Long-run static equilibrium requires a balanced budget”.

As a statement about the real world, this conclusion carried virtually no relevance.

But the mainstream economists seized on the framework, extended it, and concluded all manner of things about the dangers of fiscal deficits.

Which really formalised the antagonism in modern New Keynesian macroeconomics to continuous use of fiscal deficits.

The ‘government budget constraint’ (GBC) was characterised as a financial constraint and an analysis of its features (in these stylised models) would lead to all sort of negative outcomes if deficits occurred and were not offset by surpluses over an economic cycle.

In my 2008 book with Joan Muysken – Full Employment abandoned – we wrote:

In general, mainstream economics errs by blurring the differences between private household budgets and the government budget. For example, Barro (1993: 367) noted: ‘we can think of the government’s saving and dissaving just as we thought of households’ saving and dissaving’. This errant analogy is advanced by the popular government budget constraint framework (GBC) that now occupies a chapter in any standard macroeconomics textbook. The GBC is used by orthodox economists to analyse three alleged forms of public finance: (i) raising taxes; (ii) selling interest-bearing government debt to the private sector (bonds); and (iii) issuing non-interest-bearing high-powered money (money cre- ation). Various scenarios are constructed to show either that deficits are inflationary if financed by high-powered money (debt monetisation), or that they squeeze private sector spending if financed by debt issue. While in reality the GBC is just an ex post accounting identity, orthodox economics claims it to be an ex ante financial constraint on government spending.

The point is that the modern interpretation of the GBC, and the one that is overwhelmingly taught in universities, is that unless the government wants to ‘print money’ and cause inflation it has to raise taxes or sell bonds to get money in order to spend.

Moreover, the inference is that taxes and bond sales provide the government with funds it doesn’t already have that enables it to then spend those funds.

The Crikey authors can hardly say that Robert Barro is not an ‘expert’ in the way they would classify that category. He is a full professor of standing and a modern proponent of the Ricardian Equivalence idea that has been highly influential (unfortunately) in economic debates and papers since the 1970s.

And there it is in print – the government budget is like a household budget. No fundamental difference. That idea permeates mainstream economics whether the Crikey authors wish to admit it or not.

If everyone who is expert in economics knows it is not so, why is the analogy still used in academic papers.

What is missing is the recognition that a household, the user of the currency, must finance its spending beforehand, ex ante, whereas government, the issuer of the currency, necessarily must spend first (credit private bank accounts) before it can subsequently debit private accounts, should it so desire.

The government is the source of the funds that the private sector requires to pay its taxes and to net save (including the need to maintain transaction balances) as we have seen in the previous section.

Clearly the government is always solvent in terms of its own currency of issue.

Related to this issue is another – the crowding out myth.

If mainstream economics captures all the insights of MMT, ‘we knew it all along’ and so MMT is, as the Crikey authors opine, unnecessary to support an argument for fiscal stimulus then why are there so many mainstream economists who write as if fiscal deficits are dangerous.

Stanley Fischer, who is one of the leading mainstream macroeconomists and William Easterly, also a very senior mainstream economist with influence, published an article in the World Bank Research Observer (Vol 5, No 2, July 1990) – The Economics of the Government Budget Constraint – which is representative of the way the New Keynesian approach depicts fiscal policy.

Yes, they recognise that the government can get the central bank to type some keys and issue currency, which they erroneously call “money printing”, as if the way government spending enters the economy differs according to the accompanying monetary operations (it does not).

But that is hardly what the Crikey authors might depict as ‘knowing it all along’ and hardly absorbs the key MMT insights, making the latter redundant.

They explore the mainstream depiction of “the consequences of the method by which the budget deficit is financed”.

After the usual GBC mechanics, Fischer and Easterly conclude that:

Money printing is associated with inflation; foreign reserve use is associated with the onset of exchange crises; foreign borrowing is associated with an external debt crisis; and domestic borrowing is associated with higher real interest rates, and possibly, explosive debt dynamics as borrowing leads to higher interest rate charges on the debt and a larger deficit.

This is the New Keynesian perspective.

This is what the Crikey authors would teach their students in core macroeconomics courses.

No MMT economist would teach this in any course other than History of Economic Thought.

Why the difference?

Because if you would be hard pressed to consistently match the Fischer-Easterly predictions with reality.

Where is the inflation in Japan? Why are interest rate movements and bond yields not skyrocketing given the continuous and large fiscal deficits?

And one cannot conclude that eventually they will accord with the mainstream prognosis.

Japan has been running large deficits for years with the Bank of Japan buying most of the debt and it sells 10-year bonds at negative yields and inflation is benign.

MMT economists will tell you that the ‘crowding out’ story (higher interest rates from fiscal deficits squeezing non-government investment spending) denies the reality of the banking system.

Banks will loan funds via deposit creation to any credit worthy borrower. The definition of what is credit worthy might vary over the cycle as risk conditions change but there is no finite pool of savings that the government competes with private borrowers over.

Fischer and Easterly also claim after some New Keynesian mumbo-jumbo that:

At some point it will be impossible for the government to sell its debt, and the process will have to be brought to an end by cutting the budget deficit.

So when will the Japanese government find it impossible to sell its debt?

Why are bid-to-cover ratios typically high – meaning that private bond investors fall over themselves to get hold of the debt?

The Kyodo News International feed from June 1, 2004 – Bid-cover ratio for 10-year JGBs hits record high of 59.4 – announced:

The Finance Ministry on Tuesday conducted an auction for 10-year Japanese government bonds that drew the highest bid-cover ratio on record, reflecting the high coupon rate of the offer.

The ministry auctioned 1,615 billion yen worth of the No. 260 JGBs with a coupon rate of 1.6 percent. Bids totaled 94,322.6 billion yen and 1,587.6 billion yen of them were accepted, bringing the bid-cover ratio to 59.4.

The ratio is an all-time high for 10-year JGBs and is much higher than the previous record of 18.6 set in the January 2003 auction.

The strong reception reflects the 1.6 percent coupon rate, which represents the first raise by the ministry in two months and is the same as in September last year when interest rates were rising sharply.

The coupon rate is considered attractive as the growth of long-term interest rates is expected to be curbed against the backdrop of rising crude oil prices and the slowing rise of stock prices that have caused a cautious outlook for Japan’s economic recovery.

There were even higher bid-to-cover ratios in the months that followed as the coupon rate hovered between 1.6 and 1.3. Eventually the ratio returned to more normal levels.

Here is the graph of the monthly bid-to-cover ratios for the 10-year Japanese government bond from Issue No 119 (Auction date April 5, 1989) to Issue No 363 (Auction date July 1, 2021). I excluded the massive outliers between 2002 and 2004 from the graph to provide a more usual view of the movement in this ratio. All excluded values were higher than 8.

The historical data is available – HERE.

The point is obvious – the ratio is usually well above 2, indicating that there are usually always strong demand for the bonds issued by the Ministry of Finance.

And, by any stretch of the imagination, the fiscal aggregates in Japan have exceeded anything that mainstream macroeconomists thought was possible.

So the question is (following Fischer and Easterly’s claim): When will it become impossible for the Japanese government to sell its debt?

The reality is that they will always have high demand.

If the Crikey authors teach their students that fiscal deficits push up interest rates, which all the orthodox macro textbooks teach, then they ‘didn’t know it all along’ and MMT insights go much deeper than their crude representation that we only say governments can get central banks to print money.

The Crikey authors then focus on inflation and say that the “real constraint is inflation” (on government spending) and “the more sophisticated MMT proponents … agree with conventional economics on this point.”

No, the mainstreamers are now agreeing with us.

For years, they responded to our work by first of all focusing on the government running out of money, of deficits driving up interest rates, etc.

So, I suppose it is progress that they now conclude that the “important constraint facing a government is not how to cover liabilities denominated in its own currency” and the main focus should be on inflation.

But I know that is not what they teach their students – the GBC and all the Fischer-Easterly analysis remains dominant – and moribund.

And I agree, that “the real question is, when and under what circumstances is a government likely to run into the inflation constraint”.

The Crikey authors then assert that while conventional economists have an intrinsic understanding of the inflationary process:

… proponents of MMT don’t have much to say about when the inflation constraint will bind or what consequences follow if it does.

Well, go back to Japan and all the mainstream predictions of accelerating inflation.

None have come to fruition over three decades.

Is that some anomaly or is it that the mainstream theory is bereft.

Why is inflation accelerating from the demand-side in the US, Europe, UK and now even in Australia, as the respective central banks buy increasing quantities of government debt?

That is a question an MMT economist does not ask because they know the answer is largely irrelevant for explaining the inflationary process, despite it being central to the orthodox approach.

The Crikey authors provide another crude characterisation of the MMT inflation view – a reverse-L supply curve where no price rises are experienced before full employment and then only price rises after that as nominal demand increases.

Others have tried to make the same claim.

I covered that point in this blog post – When the MMT critics jump the shark (April 16, 2019) – and in greater, more technical detail in our Macroeconomics textbook.

In the textbook (Chapter 16) you will find this narrative:

… all firms are unlikely to hit full capacity simultaneously. The reverse L- shape simplifies the analysis somewhat by assuming that the capacity constraint is reached by all firms at the same time. In reality, bottlenecks in production are likely to occur in some sectors before others and so cost pressures will begin to mount before the overall full capacity output is reached. This could be captured in Figure 16.3 by some curvature near Y*, thus eliminating the right-angle as prices begin to rise before reaching Y* (full capacity). We consider this issue in more detail in Chapter 17.

Chapter 17 provides more detailed discussion of this point.

So the accusation from the Crikey authors that MMT economists exhibit “simplistic thinking” about the consequences of inflation is just another straw person type criticism.

We also analyse in detail the implications of inflation on income distribution, real wages, etc, which the Crikey authors accuse us of ignoring.

They also pose the question: “can inflation spiral out of control even when an economy is below capacity?”

It can and I have written about that a lot in the past.

While mainstream economists were trying to explain the hyperinflation as the result of excessive ‘money printing’ by the Bank of Zimbabwe and out of control deficits, my analysis showed that even with fiscal surpluses, the hyperinflation would have occurred so great was the supply shock arising from the collapse of the agricultural sector output.

No mainstream analysis provided those insights.

Finally, the Crikey authors claim that their current advocacy of “the need for ongoing fiscal stimulus is very compelling” and “In this sense we come to a similar conclusion to many MMT proponents”.

But their point is that they “get to this conclusion through purely conventional economic thinking.”

And, according to them MMT does “a profound disservice” to progressive policy goals (like Green transition or a larger social safety net) by making it transparently clear that “government mechanically supplies enough currency to cover liabilities denominated in its own currency” and can never run out of that currency.

The point is that ‘conventional economic thinking’ will accompany a short-term acceptance of fiscal deficits to deal with “the largest recession since the Great Depression” but will accompany that acceptance with all sorts of warnings that go back to the GBC and the alleged consequences.

There will be statements about the need for higher tax collections.

There will be predictions of higher interest rates, and bond investors demanding higher bond yields.

There will be predictions of intergenerational inequities as the kids have to pay back the debt the government incurred (by higher future taxes).

And there will be (and are) predictions that the central banks will have to get rid of their large holdings of government debt because any further QE will not on cause inflation to accelerate but also distorts the bond markets.

And more.

Conclusion

No MMT economist will be making those predictions and I will stand corrected in a decade or so if I am wrong.

So far in more than 25 years of doing this stuff, I have not been systematical wrong about my predictions, which are quite converse relative to the mainstream predictions.

So it matters how you come to a conclusion, which might be similar to a conclusion that the rival paradigm reaches. The surrounding body of knowledge is what matters.

And the Crikey authors really have nothing to offer that is worthwhile – its all been said and taught before and it is usually quite wrong in its predictive capacity.

That is enough for today!

(c) Copyright 2021 William Mitchell. All Rights Reserved.

Affordable electricity Decarbonization in OECD countries? Part I

Published by Anonymous (not verified) on Tue, 14/09/2021 - 12:56pm in

After eight extensive posts about the Ontario electricity sector, I am expanding my geographic coverage to look at the electricity sectors in selected OECD countries. My focus will be on the historical and relative performance of each country’s sector with respect to decarbonization and prices. As in the case of Ontario, whole volumes could and have been written about each of these countries, and the electricity sector in general, including with respect to current and future reliability and technologies and preferred vs. feasible future decarbonization pathways and other matters. To keep this manageable, my analysis will be a high-level data-driven overview of past and current generation technology mix, sector emissions and prices only, all based on internationally-comparable data from reputable sources. Interested readers should check out my earlier posts and other writing as to why my focus on the question of affordable decarbonization. In this blog I start with Canada, France, Germany and Japan. Future editions will cover additional countries.

I look at data from 1990 to 2019/20 to ensure to ensure I capture trends in the sector, which, because of its capital intensity, tend to be relatively slow-moving. I look at electricity generation mix by country based on International Energy Agency (IEA) data. I present it in seven groups: nuclear, hydro, non-hydro renewables (this includes wind, solar), natural gas, petroleum products, coal products and biomass and waste. To control for aggregate generation changes over time within a country and for country size differences, I present these in percentage terms. But these technologies are just means to an end, which is sector decarbonization – I source sector emissions directly from the respective country National Inventory Reports (NIR) submitted annually to the Secretariat to the United Nations Framework Convention on Climate Change (UNFCCC). The UNFCCC format combines emissions from public electricity and heat, which is the same combined manner that the IEA presents emissions data. Ideally, we would only include public electricity emissions but relative few countries present this on a stand-alone basis. Public heat provision, generally in the form of district heat systems, is generally a few percentage points of public electricity. To control for differences over time and country differences I present sector emissions intensity (kg CO2/MWh). From an accounting perspective, so as to not “double count”, the UNFCCC does not allocate emissions from the generation of electricity from the combustion of biomass to electricity (the Energy Sector), but rather to the Land Use, Land-Use Change and Forestry (LULUCF) sector. For this analysis, given that I am focussing on the electricity sector only, and not the economy as a whole, I include emissions from the generation of electricity from the combustion of biomass to the electricity sector. Lastly, I source household electricity prices from the IEA, which include base prices, plus any consumer-oriented or taxes and specific levies, in USD(PPP)/MWh. After I provide an overview of the countries I present some initial comparative analysis, which I expect to fine tune as I cover more countries in future blogs, including with more sophisticated multivariate regression analysis.

Country Overviews: Canada, France, Germany & Japan

Starting close to home, Figure 1 shows that the technology mix in Canada has been relatively stable over the last 30 years, with a high percentage (ranging between 70% to 80%) of generation coming from zero-emissions technologies (nuclear, hydro and non-hydro renewables). This has resulted in relatively low emissions intensity over the study period, with three phases: a decrease from the displacement of coal by nuclear and hydro from 1990 to 1996; an increase as some nuclear generation went off line from 1996 to 2003; and a steady decline from 2004 to 2019 as nuclear comes back on line and non-hydro renewables are introduced and expand to 6%, which together with gas increasingly displace coal. Household prices increased moderately during almost the entire period, but started to increase in 2015, primarily due to the increase in high-contracted-priced non-hydro renewables in Ontario (see my earlier blogs).

Crossing the Atlantic, Figure 2 shows that the technology mix in France has also been relatively stable over the last 30 years. France has had an even higher percentage (around 90%) of generation coming from zero-emissions technologies, resulting in relatively very low emissions intensity over the study period. Like in Canada, changes in emissions initially relate to the addition/subtraction of zero-emission technologies, but starting in the mid 2000’s there was also substitution away from higher-emitting coal to lower emitting gas. Household prices were stable until about 2009, after which they increased by about 6% per year in the ten years to 2020.

Moving north-east in Europe, Figure 3 shows that the technology mix in Germany has been much more dynamic over the last 30 years. For the period from 1990 to about 2016 Germany had a relatively low percentage (between 30% to 40%) zero-emission generation, resulting in relatively very high emissions intensity. This is specially given the case that its largest emitting generation was coal. Emissions decreased from 1990 to about 1999 as nuclear and hydro increased and gas displaced some coal and then stabilized over the next decade until the large policy-driven decrease in nuclear (in reaction to the Fukushima accident) in 2011 resulted in a large spike in emissions that were not bright back to trend by fast-increasing non-hydro renewables until 2015-16, which by 2020 accounted for 31% of generation. Household prices in Germany were stable until about 2000, after which they increased by more than 8% per year for 13 years to 2013, after which they increased moderately at 1% per year to 2020. As in Ontario, who modeled their Green Energy Act (GEA) on the Energiewende, the increase in prices in Germany are primarily due to the increase in high-contracted-priced non-hydro renewables.

Heading to Asia, Figure 4 shows that the technology mix in Japan has also been relatively dynamic. For the period from 1990 to about 2010 Japan had a relatively low percentage (between 30% to 40%) zero-emission generation, resulting in relatively high emissions intensity. It was lower than Germany, however, because it relied on relatively lower-emitting gas and oil and less on higher-emitting coal. Emissions decreased from 1990 to1999 as nuclear increased and then increased moderately as nuclear decreased slightly until 2010. As a policy matter in reaction to the Fukushima accident in 2011, however, Japan took most of its nuclear generation offline. This decrease resulted in a very large spike in emissions, as zero-emission generation dipped to only 10%. Emissions decreased moderately to 2019 as some nuclear was brought back on line and non-hydro renewables increased to 9% of generation. By 2019 zero-emission generation, at 21% was only half of what Japan had achieved in 1998. Household prices increased moderately until after 2011, when they increased at 4% per year to 2019.

Comparative Analysis and Discussion

Figure 5 shows the emissions intensity for the four countries from 1990 to 2019. It confirms that due to their large legacy zero-emission generation grids of 70%-80% for Canada and 90% for France these are the countries that have already deeply decarbonized their electricity sectors, both hovering around 100 kgCO2/MWh in 2019. After relatively stable but relatively very high emissions for most of the study period, Germany finally broke through the 550 kgCO2/MWh threshold in 2015 and has reduced emissions intensity by 6% since then to reach 420 kgCO2/MWh in 2019. Japan had been unable to make much progress from 350 00 kgCO2/MWh before 2011, after which emissions spiked and have since slowly been reduced to about 400 kgCO2/MW.

Figure 6 plots emissions intensity against the % of zero-emission generation for every year and country in the study. To give a sense of the direction of the movement in this two-dimensional space, I identify years 1990, 2000, 2010 and 2019 for each country. The strong negative correlation (downward sloping trendline) confirms the almost linear tradeoff between the amount of zero-emission generation and emissions. The time progression, with the exception of Japan, is from higher emission down and to the right. I am interested in seeing whether this linearity holds for the USA, a country for which much of the decarbonization has been attributed to the switch from higher–emitting coal to lower-emitting gas. Stay tuned for future blogs.

Figure 7 shows household prices for the four countries from 1990 to 2020 and confirms our earlier observation that while all prices have increased after a period of relative stability, the prices in some countries began increasing earlier and faster than in others. Germany is the outlier in this respect, where prices have almost tripled since 1990.

I am interested in exploring affordable decarbonization. From this perspective, both Canada and France had already achieved this by 1990 and so the process of decarbonization, and whether it was affordable, would involve looking further back in time. For Canada that may be 1960s to 1980s when many of current large hydro-electric projects and nuclear generation stations came online to displaced emitting technologies. For France it would be from the mid 1970’s to 1990 when its nuclear fleet displaced fossil technologies. In both cases, however, given that both countries started the period as the two lowest-priced countries in the sample, it is reasonable to assume that the transition was likely affordable, and certainly no less unaffordable than the approaches adopted in Germany and Japan prior to 1990. After that year and specially for Germany from 2000 and the coming into law of the German Renewable Energy Sources Act (EEG) and the introduction of high-contracted-priced non-hydro renewables, we see very significant price increases to 2015 but no reductions in emissions until that year because, as discussed above, Germany was in parallel reducing nuclear generation.

In these last two figures I start an initial correlation analysis, which I expect to fine tune as I cover more countries in future blogs, including with more sophisticated multivariate regression analysis. In my previous blogs I have discussed studies showing that any increases in electricity prices have been mostly due to the introduction and growth of non-hydro renewables, due to their higher-than market contracted prices and broader integration costs. This is certainly the case in Ontario, Canada and Germany. I am interested if this holds in other countries and what is the likely scale of the impact. I begin with the simple correlation analyses in Figures 9 and 10.

Figures 9 and 10 separate out zero-emission generation into dispatchable nuclear and hydro and intermittent non-hydro renewables and plots them against prices to examine any corresponding correlation. To also provide a sense of the direction of the movement in this two-dimensional space, I identify years 1990, 2000, 2010 and 2019 for each country. Figure 9 shows a generally negative (downward sloping) correlation, indicating that nuclear and hydro are correlated with lower prices. Figure 10, on the other hand, shows a generally positive (upward sloping) correlation, indicating that non-hydro renewable are correlated with higher prices. Based on prior studies, we knew that for Canada (via Ontario) and Germany this non-hydro renewables/higher price association had been shown to be stronger, of statistical significance suggesting causation, but it is good to replicate this via a simple correlation analysis. Looking at Figure 9 and 10 together, this correlation also holds for France and to lesser extent Japan. Note to my inner econometrician – there could be some time effect in the last decade or two (for example the introduction of liberalized electricity markets) that could separately be contributing to higher prices and thus could be a confounding variable to the simple non-hydro renewables/higher price association… That statistical question to be resolved down the road once I review a larger number of countries.

Next Steps

I am expecting to be able to cover four other OECD countries in the edition of this series, hopefully to come out in a few weeks, time permitting. I am aiming to include the USA, either Australia or New Zealand, and two countries in Europe.

Affordable electricity Decarbonization in OECD countries? Part I

Published by Anonymous (not verified) on Tue, 14/09/2021 - 12:56pm in

After eight extensive posts about the Ontario electricity sector, I am expanding my geographic coverage to look at the electricity sectors in selected OECD countries. My focus will be on the historical and relative performance of each country’s sector with respect to decarbonization and prices. As in the case of Ontario, whole volumes could and have been written about each of these countries, and the electricity sector in general, including with respect to current and future reliability and technologies and preferred vs. feasible future decarbonization pathways and other matters. To keep this manageable, my analysis will be a high-level data-driven overview of past and current generation technology mix, sector emissions and prices only, all based on internationally-comparable data from reputable sources. Interested readers should check out my earlier posts and other writing as to why my focus on the question of affordable decarbonization. In this blog I start with Canada, France, Germany and Japan. Future editions will cover additional countries.

I look at data from 1990 to 2019/20 to ensure to ensure I capture trends in the sector, which, because of its capital intensity, tend to be relatively slow-moving. I look at electricity generation mix by country based on International Energy Agency (IEA) data. I present it in seven groups: nuclear, hydro, non-hydro renewables (this includes wind, solar), natural gas, petroleum products, coal products and biomass and waste. To control for aggregate generation changes over time within a country and for country size differences, I present these in percentage terms. But these technologies are just means to an end, which is sector decarbonization – I source sector emissions directly from the respective country National Inventory Reports (NIR) submitted annually to the Secretariat to the United Nations Framework Convention on Climate Change (UNFCCC). The UNFCCC format combines emissions from public electricity and heat, which is the same combined manner that the IEA presents emissions data. Ideally, we would only include public electricity emissions but relative few countries present this on a stand-alone basis. Public heat provision, generally in the form of district heat systems, is generally a few percentage points of public electricity. To control for differences over time and country differences I present sector emissions intensity (kg CO2/MWh). From an accounting perspective, so as to not “double count”, the UNFCCC does not allocate emissions from the generation of electricity from the combustion of biomass to electricity (the Energy Sector), but rather to the Land Use, Land-Use Change and Forestry (LULUCF) sector. For this analysis, given that I am focussing on the electricity sector only, and not the economy as a whole, I include emissions from the generation of electricity from the combustion of biomass to the electricity sector. Lastly, I source household electricity prices from the IEA, which include base prices, plus any consumer-oriented or taxes and specific levies, in USD(PPP)/MWh. After I provide an overview of the countries I present some initial comparative analysis, which I expect to fine tune as I cover more countries in future blogs, including with more sophisticated multivariate regression analysis.

Country Overviews: Canada, France, Germany & Japan

Starting close to home, Figure 1 shows that the technology mix in Canada has been relatively stable over the last 30 years, with a high percentage (ranging between 70% to 80%) of generation coming from zero-emissions technologies (nuclear, hydro and non-hydro renewables). This has resulted in relatively low emissions intensity over the study period, with three phases: a decrease from the displacement of coal by nuclear and hydro from 1990 to 1996; an increase as some nuclear generation went off line from 1996 to 2003; and a steady decline from 2004 to 2019 as nuclear comes back on line and non-hydro renewables are introduced and expand to 6%, which together with gas increasingly displace coal. Household prices increased moderately during almost the entire period, but started to increase in 2015, primarily due to the increase in high-contracted-priced non-hydro renewables in Ontario (see my earlier blogs).

Crossing the Atlantic, Figure 2 shows that the technology mix in France has also been relatively stable over the last 30 years. France has had an even higher percentage (around 90%) of generation coming from zero-emissions technologies, resulting in relatively very low emissions intensity over the study period. Like in Canada, changes in emissions initially relate to the addition/subtraction of zero-emission technologies, but starting in the mid 2000’s there was also substitution away from higher-emitting coal to lower emitting gas. Household prices were stable until about 2009, after which they increased by about 6% per year in the ten years to 2020.

Moving north-east in Europe, Figure 3 shows that the technology mix in Germany has been much more dynamic over the last 30 years. For the period from 1990 to about 2016 Germany had a relatively low percentage (between 30% to 40%) zero-emission generation, resulting in relatively very high emissions intensity. This is specially given the case that its largest emitting generation was coal. Emissions decreased from 1990 to about 1999 as nuclear and hydro increased and gas displaced some coal and then stabilized over the next decade until the large policy-driven decrease in nuclear (in reaction to the Fukushima accident) in 2011 resulted in a large spike in emissions that were not bright back to trend by fast-increasing non-hydro renewables until 2015-16, which by 2020 accounted for 31% of generation. Household prices in Germany were stable until about 2000, after which they increased by more than 8% per year for 13 years to 2013, after which they increased moderately at 1% per year to 2020. As in Ontario, who modeled their Green Energy Act (GEA) on the Energiewende, the increase in prices in Germany are primarily due to the increase in high-contracted-priced non-hydro renewables.

Heading to Asia, Figure 4 shows that the technology mix in Japan has also been relatively dynamic. For the period from 1990 to about 2010 Japan had a relatively low percentage (between 30% to 40%) zero-emission generation, resulting in relatively high emissions intensity. It was lower than Germany, however, because it relied on relatively lower-emitting gas and oil and less on higher-emitting coal. Emissions decreased from 1990 to1999 as nuclear increased and then increased moderately as nuclear decreased slightly until 2010. As a policy matter in reaction to the Fukushima accident in 2011, however, Japan took most of its nuclear generation offline. This decrease resulted in a very large spike in emissions, as zero-emission generation dipped to only 10%. Emissions decreased moderately to 2019 as some nuclear was brought back on line and non-hydro renewables increased to 9% of generation. By 2019 zero-emission generation, at 21% was only half of what Japan had achieved in 1998. Household prices increased moderately until after 2011, when they increased at 4% per year to 2019.

Comparative Analysis and Discussion

Figure 5 shows the emissions intensity for the four countries from 1990 to 2019. It confirms that due to their large legacy zero-emission generation grids of 70%-80% for Canada and 90% for France these are the countries that have already deeply decarbonized their electricity sectors, both hovering around 100 kgCO2/MWh in 2019. After relatively stable but relatively very high emissions for most of the study period, Germany finally broke through the 550 kgCO2/MWh threshold in 2015 and has reduced emissions intensity by 6% since then to reach 420 kgCO2/MWh in 2019. Japan had been unable to make much progress from 350 00 kgCO2/MWh before 2011, after which emissions spiked and have since slowly been reduced to about 400 kgCO2/MW.

Figure 6 plots emissions intensity against the % of zero-emission generation for every year and country in the study. To give a sense of the direction of the movement in this two-dimensional space, I identify years 1990, 2000, 2010 and 2019 for each country. The strong negative correlation (downward sloping trendline) confirms the almost linear tradeoff between the amount of zero-emission generation and emissions. The time progression, with the exception of Japan, is from higher emission down and to the right. I am interested in seeing whether this linearity holds for the USA, a country for which much of the decarbonization has been attributed to the switch from higher–emitting coal to lower-emitting gas. Stay tuned for future blogs.

Figure 7 shows household prices for the four countries from 1990 to 2020 and confirms our earlier observation that while all prices have increased after a period of relative stability, the prices in some countries began increasing earlier and faster than in others. Germany is the outlier in this respect, where prices have almost tripled since 1990.

I am interested in exploring affordable decarbonization. From this perspective, both Canada and France had already achieved this by 1990 and so the process of decarbonization, and whether it was affordable, would involve looking further back in time. For Canada that may be 1960s to 1980s when many of current large hydro-electric projects and nuclear generation stations came online to displaced emitting technologies. For France it would be from the mid 1970’s to 1990 when its nuclear fleet displaced fossil technologies. In both cases, however, given that both countries started the period as the two lowest-priced countries in the sample, it is reasonable to assume that the transition was likely affordable, and certainly no less unaffordable than the approaches adopted in Germany and Japan prior to 1990. After that year and specially for Germany from 2000 and the coming into law of the German Renewable Energy Sources Act (EEG) and the introduction of high-contracted-priced non-hydro renewables, we see very significant price increases to 2015 but no reductions in emissions until that year because, as discussed above, Germany was in parallel reducing nuclear generation.

In these last two figures I start an initial correlation analysis, which I expect to fine tune as I cover more countries in future blogs, including with more sophisticated multivariate regression analysis. In my previous blogs I have discussed studies showing that any increases in electricity prices have been mostly due to the introduction and growth of non-hydro renewables, due to their higher-than market contracted prices and broader integration costs. This is certainly the case in Ontario, Canada and Germany. I am interested if this holds in other countries and what is the likely scale of the impact. I begin with the simple correlation analyses in Figures 9 and 10.

Figures 9 and 10 separate out zero-emission generation into dispatchable nuclear and hydro and intermittent non-hydro renewables and plots them against prices to examine any corresponding correlation. To also provide a sense of the direction of the movement in this two-dimensional space, I identify years 1990, 2000, 2010 and 2019 for each country. Figure 9 shows a generally negative (downward sloping) correlation, indicating that nuclear and hydro are correlated with lower prices. Figure 10, on the other hand, shows a generally positive (upward sloping) correlation, indicating that non-hydro renewable are correlated with higher prices. Based on prior studies, we knew that for Canada (via Ontario) and Germany this non-hydro renewables/higher price association had been shown to be stronger, of statistical significance suggesting causation, but it is good to replicate this via a simple correlation analysis. Looking at Figure 9 and 10 together, this correlation also holds for France and to lesser extent Japan. Note to my inner econometrician – there could be some time effect in the last decade or two (for example the introduction of liberalized electricity markets) that could separately be contributing to higher prices and thus could be a confounding variable to the simple non-hydro renewables/higher price association… That statistical question to be resolved down the road once I review a larger number of countries.

Next Steps

I am expecting to be able to cover four other OECD countries in the edition of this series, hopefully to come out in a few weeks, time permitting. I am aiming to include the USA, either Australia or New Zealand, and two countries in Europe.

As US Prepares to Ban Ivermectin for Covid-19, More Countries in Asia Begin Using It

Published by Anonymous (not verified) on Tue, 07/09/2021 - 8:53pm in

The information war takes a dark turn as the corporate media transitions from misinformation and obfuscation to outright lies and fabrication.

Richard Werner: QE Infinity

Published by Anonymous (not verified) on Fri, 20/08/2021 - 3:01pm in

The wrong kind of QE In a recent report, the House of Lords expressed concerns about the Bank of England’s addiction to, and knowledge gaps, in relation to using quantitative easing. Professor Richard Werner, who invented the term, having first proposed QE as a monetary policy in 1995, is arguably best qualified to critique it. […]

The post Richard Werner: QE Infinity appeared first on Renegade Inc.

Richard Werner: QE Infinity

Published by Anonymous (not verified) on Fri, 20/08/2021 - 3:01pm in

The wrong kind of QE In a recent report, the House of Lords expressed concerns about the Bank of England’s addiction to, and knowledge gaps, in relation to using quantitative easing. Professor Richard Werner, who invented the term, having first proposed QE as a monetary policy in 1995, is arguably best qualified to critique it. […]

The post Richard Werner: QE Infinity appeared first on Renegade Inc.

Curried Narratives: An Indian Revolutionary’s View of Japan

Published by Anonymous (not verified) on Sat, 31/07/2021 - 5:21am in

Published in Japan Forward 26/7/2021

Even during Tokyo’s Covid-induced state of emergency, there was a queue outside Nair’s Indian restaurant in East Ginza. Fortunately, the turnaround at midday is impressively rapid, and I didn’t have to wait long before a table became available.

I ordered the “teiban” (signature dish) known as Murugi Lunch. Excellent value at Yen 1500, it consists of a leg of chicken that has been softened by several hours of simmering, together with turmeric rice, cabbage and mashed potato.

NairJuly8 (2)

As I spooned up the multi-spiced and highly nutritious concoction, I reflected on how historical narratives differ according to who is doing the narrating. When it comes to the story of modern Japan, the signature dish was prepared by the western countries that were on the winning side of the Second World War. Let’s call it the Progressive Club Sandwich.

The Indian take is very different and likely to become more significant as India’s geopolitical footprint grows in line with its economy – which is on track to become the world’s third largest in 2030, according to Japan’s Center for Economic and Business Research. There could be no better symbol of an Indian alternative history of modern Japan than the founder of the restaurant in which I am sitting.

A. M. Nair, who died in 1990, opened his restaurant in the early years of the post-war American occupation. It would be interesting to know what he thought about the G.I.s then strolling around Ginza with their Japanese “pan-pan” good-time girls. It would be equally interesting to know what the American officers and bureaucrats who patronized his restaurant would have thought of their host, had they been fully informed of his personal history.

"Founded in 1948" “Founded in 1949”

In his memoir, “An Indian Freedom Fighter in Japan”, Nair declares that “my close friends used to whisper, after the war, that for fighting against Britain and encouraging my Japanese friends to do likewise, I should have been booked as War Criminal Number One, and that MacArthur missed out on me.”

Nair does not mention the identity of the friends who made this dark joke, but one of his closest military contacts, War Minister General Itagaki, received the death sentence at the Tokyo Trials, while another, General Umezu, died in prison.  Nair remained an Indian citizen all his life, but because of the espionage and undercover work he carried out, he was treated by Japan’s top military figures as equivalent to a major-general in rank.

Nair-san, as he was to be familiarly known, was a native of Kerala on the southwest tip of India. He arrived in Japan in 1928 at the age of 23 to study engineering at Kyoto University. Back home, he had already made a nuisance of himself, organizing India’s first school strike and agitating against caste restrictions and the British colonial authorities. Once settled in Japan, he was bowled over by what he saw.

“Here was a country which, in a matter of about a mere half-century, had progressed from a basically feudal set-up to the status of a great economic power… If Japan could do what she did, why should India at least not be able to break free from its colonial shackles?”

It is a testimony to the seriousness of Japan’s Pan-Asian ambitions that Nair, while still a hard-up student with less than perfect Japanese, was taken up by senior military men. General Yamamoto, commander of a division stationed near Kyoto, treated him “practically like a brother” and introduced him to other members of the elite.

On display in the restaurant On display in the restaurant

Soon he was lecturing far and wide and finding that his anti-British, pro-independence message was greeted with enthusiasm. As the clash of empires heated up, Nair was invited to Manchukuo (now Manchuria), the puppet state that the Japanese army had set up in 1932.

In the following years, Nair led a kind of Lawrence of Arabia existence, travelling through remote areas of Manchukuo, China and Mongolia, doing his best to damage British interests and promote Japanese influence. He disguised himself as a camel dealer, Moslem mullah and Tibetan “living Buddha.” Amongst other adventures, he foiled a British intelligence agent’s plan to map out a route to India across the Himalayas by setting ablaze the entire fuel supply for his vehicles.

When war broke out in the Pacific, Nair became the liaison officer of his mentor and fellow Japan-resident Rash Behari Bose, who led two important Japan-backed organizations, the Indian Independence League and the Indian National Army.  In his memoir, Nair makes it clear that he considers that the work of R.B. Bose has been unfairly minimized and the contributions of the more famous Subhas Chandra Bose, who took over leadership of the I.L.I. and I.N.A.in 1943, has been greatly inflated.

In contemporary India, Subhas’s stature appears to have increased, with Prime Minister Narendra Modi celebrating the 125th anniversary of his birth with a visit to his hometown earlier this year. There was even a series on Amazon Prime, The Forgotten Army, giving a glossy, heavily fictionalized account of the I.N.A.’s disastrous attempt to invade British India from Burma.

Nair is much less impressed. While esteeming Subhas’s charisma and patriotism, he slams his lack of realism and dictatorial tendencies.

Yet, as Nair notes, the I.N.A. indirectly helped to usher in independence. When the British Indian authorities attempted to try former members of the rebel army for treason, a storm of protest broke out nationwide and the Indian component of the Navy mutinied in Bombay. For British India, the writing was on the wall.

Nair chose to stay in Japan after the war, acting on several occasions as interpreter for Dr. R.B. Pal, the only judge at the Tokyo War Crimes Trials to find all “A-Class” (political) defendants innocent. Nair quotes Pal’s stinging counter to allegations of Japanese conspiracy to wage war: “Many powerful nations are living this sort of life, and if these acts are criminal, then the entire international community is living a criminal life.”

India was not one of the 49 nations that signed the US-Japan Peace Treaty in 1951. Nair had secured the unpublished text of the simultaneously effected US Japan Security Pact and brought it to the attention of Jawaharlal Nehru, India’s first Prime Minster. In the Indian view, making the Peace Treaty conditional on the Security Pact violated Japanese sovereignty. Instead, Nehru concluded a separate Bilateral Treaty of Perpetual Peace and Amity with Japan in 1952.

Nair was not an uncritical admirer of Japan. He deplored brutal behaviour in China, the degradation of Korean and Japanese women in the red light districts of Manchukuo and the inability to learn from mistakes. But he saw Japan’s “Asia for the Asians” drive as the key to Indian independence – and in that he was right.

Over time, Nair’s anti-British animus appears to have abated. In 1974, he and his Japanese wife attended a reception for Queen Elizabeth and the Duke of Edinburgh in Shinjuku Gardens. In his later years, he visited India regularly and seemed disappointed by the limited improvement in people’s lives. One wonders what he would have made of the much more dynamic India of today – and of modern Britain with four politicians of Indian subcontinental descent in Boris Johnson’s Cabinet and one of  Pakistani.

The Progressive Club Sandwich, with its assumption of Western moral superiority and Japanese backwardness, is still a popular comfort food. It has a long history, beginning with the “opening” of Japan by Commodore Perry’s gunboats in the 1850s and its influence can be found today in innumerable op-eds, books and academic papers.

Kerala cuisine is richly varied, reflecting the influences of vegetarian Hindus, first century Christians, Moslems, and the Portuguese traders who brought chili peppers from the new world.

Nair’s restaurant alerts us to a very different suite of flavours – and a very different narrative.

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