Understanding Money, Federal Spending, and Federal Tax Liabilities

Published by Anonymous (not verified) on Mon, 14/01/2019 - 7:17am in

Using common terms to facilitate understanding with the general public, the dollars required to pay federal taxes do not come from the private sector. They do not come from the rich, the middle class, the working class, the poor, large corporations, medium-sized businesses, small businesses, nor do they come from foreign entities such as China. All dollars used by the US private sector to pay federal taxes come from the US federal government. In short, you do not fund the US government, the US government funds you.

The post Understanding Money, Federal Spending, and Federal Tax Liabilities appeared first on Ellis Winningham.

The Devil in the Details: Algal Blooms.

Published by Anonymous (not verified) on Sun, 13/01/2019 - 5:34am in

It is accepted that the recent mass fish kill in the Darling River was triggered by an “algal bloom”. But what on earth is an algal bloom?

Believe it or not, I think some basic, high-school level science could throw considerable light on the whole catastrophe, counter some misconceptions about it and offer valuable, if sobering, lessons for the Left.

Photomicrograph of cyanobacteria, Cylindrospermum sp.[A]
The first detail is that those “blue-green algae” -- more generally referred to as “algae”, period -- behind the bloom strictly speaking aren’t algae: BGA are unicellular, microscopic aquatic bacteria (cyanobacteria, to be precise). Although genuine algae can be unicellular, algae are plants, not bacteria.

BGA, however, do something very unlike other bacteria. They, like plants, photosynthesise:

6 CO + 6 H O --> C H  O  + 6 O
    2     2       6 12 6      2

BGA use energy in the environment (from sunlight, not shown in the equation; that’s the “photo-” prefix) to break down carbon dioxide (CO2) and water (H2O) into its constituent atoms and to “reassemble” them into glucose (C6H12O6) and oxygen (O2): i.e. synthesise those molecules. Some of the energy is stored within the glucose.

During the day, BGA release the oxygen into the environment and accumulate glucose, which they use at night (together with oxygen) for the energy it contains (reversing the equation above: cellular respiration):

C H  O  + 6 O  --> 6 CO  + 6 H O
 6 12 6      2         2      2

Any excess glucose goes into reproducing themselves.

So, like plants, cyanobacteria require water, carbon dioxide (dissolved in the water), light and warmth to survive. All of that, considering their tiny size, is often readily available in their environment.

That, however, is not their complete list of requirements. Like plants, they also need other nutrients, like phosphorus and nitrogen. That can be harder to find.

In their natural environment, nutrient availability constrains define the life-cycle of cyanobacteria: they reproduce to the extent those constrains allow, photosynthesise, net-release oxygen and accumulate glucose. Some die naturally, some are eaten by other organisms and some reproduce. The oxygen and glucose they produce sustain other life forms.

Important human sources of those more naturally scarce nutrients, however, can disturb that cycle: agricultural run-off (plant fertilisers!) and sewerage (human manure!). Farmers deliberately employ fertilisers to promote plant growth. Shouldn’t one expect fertilisers to promote BGA growth?

In a flowing course of water, water inflows can keep the concentration of carbon dioxide and phosphorus and nitrogen compounds low enough. Of course, eventually they will still reach the ocean, where they may trigger algal blooms. But the algal bloom in the inland course of water was averted.

Bacterial bloom south of Fiji on October 18, 2010.[B]
Now, there’s no prize to guess what could happen in hot, sunny days, if the water, because of drought, over-extraction or a combination, stopped flowing: BGA multiply explosively -- algal bloom. All the while, BGA remain bacteria, producing more bacteria-like effects: some of them release toxins.

Eventually, some of those conditions falter (say, temperature and/or luminosity falls) and a mass die-off ensues.

Other bacteria present in the environment feast on the glucose the BGA accumulated, reproducing beyond measure, consuming the oxygen the BGA released and releasing in turn the carbon dioxide BGA had consumed. They do what the second equation indicates.

After suffocating larger life forms unable to leave the area affected, these latter bacteria themselves die.

The end situation is similar to the initial one: concentrated carbon dioxide and phosphorus and nitrogen compounds. Is it conceivable this process could repeat itself? Well, yes. Yes, it is conceivable.

The purpose of this post exceeds delivering a high-school level lecture on science. Neither do I aim to deny the tragic and ominous nature of the events, quite to the contrary. It’s not my intention to cast doubt on the sincerity of the feelings those directly affected expressed. I truly believe you all and I know your situation is really dire. To make things worse, we might not have seen the end of this.

I agree this episode demands great scrutiny of large cotton growers and their links to bureaucrats/politicians. It’s likely that the former exceeded their water entitlements thereby turning a bad situation into an environmental disaster. They, however, aren’t the only large water users or the only large contributors to algal blooms.

It’s likely, too, that bureaucracy and parties were captured by those big farmers; corruption isn’t out of the question. However, governmental ineptitude and simple, garden-variety impotence aren’t out of the question, either: the government may have failed to act when action could have prevented or minimised things; but that was then and this is now. And now they just can’t make it rain. To manage capitalism looks more and more like a fool’s errand.

My point is that the situation is more complex than it seems. To deny that does a disservice to us all.

The Darling catastrophe could be a smallish dress rehearsal for what is to come at much larger scale (I’m not kidding: put yourself in the shoes of the second bacteria.). Everybody, but particularly Lefties (I’m looking at you, MMTers), should pay attention.

Let me sum up my conclusion: excessive faith in governmental technocratic management and too much business for too little natural resources was the road to this chaos.


What Exactly Is a Red Tide?
By Danielle Hall, August 2018

Toxic Algal Blooms
Department of Primary Industries and Regional Development
Government of Western Australia, page last updated: Thursday, 4 January 2018 - 1:33pm

[A] "Photomicrograph of cyanobacteria, Cylindrospermum sp. Cyanobacteria are capable of nitrogen fixation, which takes place in the anaerobic environment of heterocysts". Author: Matthew Parker. 22 January 2013. Source: Wikimedia. File licensed under the Creative Commons Attribution-Share Alike 3.0 Unported license. Nobody endorses me or the use I make of that file.

[B] "Bacterial bloom south of Fiji on October 18, 2010. Though it is impossible to identify the species from space, it is likely that the yellow-green filaments are miles-long colonies of Trichodesmium, a form of cyanobacteria often found in tropical waters".
Author: Norman Kuring, NASA Earth Observatory. Source: Wikimedia. Public domain.

13-01-2019. Although this appeared yesterday, I've just read it. Check the underlined within the brief summary, at the bottom:


Macroeconomic System for Climate Change

Published by Anonymous (not verified) on Mon, 07/01/2019 - 9:01pm in

Macroeconomic System for Climate Change A U.S. Patent Application Inventor:  J.D. ALT (acknowledging all advocates of modern fiat money) Assignment:  To all citizens of democratic free societies Abstract: A macroeconomic system including the issuing of a fiat currency by a … Continue reading →

The post Macroeconomic System for Climate Change appeared first on New Economic Perspectives.

Knut Wicksell on Knapp’s “State Theory of Money”

Published by Anonymous (not verified) on Sat, 05/01/2019 - 2:18am in


Uncategorized, MMT

For some reason, was selling the “Selected Essays in Economics” of Knut Wicksell and edited by Bo Sandelin (two volumes) for €7.51 per volume, so I had them shipped over to Germany. They arrived this morning and I went to read the book review of “The State Theory of Money” in volume II on pages 210-219 (Some pages are readable at Google Books, btw). It was originally published in Ekonomisk Tidskrift in 1907, two years after Knapp’s book.

Wicksell, very much concerned with the connection between the state of credit and the interest rate and, very importantly, the changes in the level of (consumer goods) prices, does not like that Knapp aims to have a fixed exchange rate as the ultimate goal. This is one of the instances of the debate of what anchors a currency: a fixed exchange rate or a stable domestic price level.

Nevertheless, Wicksell agrees with Knapp and ends with this: “it can probably be said that in terms both of its content and its form – though most of all its form, its refined dialectical style, the elegance which the brief account given above has only been able to hint at dimly – it is to be counted among the pearls of economics literature.

There is more on Wicksell and MMT in my working paper – written with Nicolas Barbaroux – published here.

Where does the Magic Money Tree Grow?

Published by Anonymous (not verified) on Sat, 29/12/2018 - 3:48am in

Magic Money Tree IllustrationThis week GIMMS extends a very warm welcome to Phil Armstrong, our guest MMT Lens author. GIMMS published his paper “Modern Monetary Theory and a Heterodox Alternative Paradigm” earlier this week in our new blog MMT Long Read. Currently studying for a PhD at Southampton Solent University, Phil is a ‘broad church’ Post-Keynesian whose research focus is pluralism with particular reference to Modern Monetary Theory.

Back in 1983, Margaret Thatcher set in motion a line of thinking that suggested that governments needed people’s tax or to borrow before they could spend. Thirty-five years later that false household budget narrative is still being repeated by politicians, journalists and think tanks alike.

In this factual, thought-provoking piece Phil debunks the mainstream theory of money and guides readers to challenge their deeply held beliefs about where money comes from and how it works.


The term ‘magic money tree’ is much beloved of the critics of modern monetary theory (MMT). Their story of the magic money tree begins with money’s traditional creation myth; money springs from barter and represents a cost-saving alternative to barter [1]. In the story, money is a private-sector invention, and only later do governments get in on the act. According to their fable, private sector business generates money from ‘productive’ activity. The state siphons off some of this ‘proper’ money in the form of taxation in order to fund public services.

This is an often wasteful and invariably inefficient process. The government can, of course, borrow money from the private sector, but this brings its own dangers; borrowing must be repaid and it places a burden on future taxpayers. Of course, the higher borrowing will raise interest rates, adding to the supposed intergenerational burden. This was famously noted by Margaret Thatcher.

“The state has no source of money, other than the money people earn themselves. If the state wishes to spend more it can only do so by borrowing your savings, or by taxing you more. And it’s no good thinking that someone else will pay. That someone else is you.”

“There is no such thing as public money. There is only taxpayers’ money.”

Margaret Thatcher, speech to Conservative Party Conference, October 1983.

A third option for funding exists but this is to be avoided at all costs; printing money. Any money printed by the government hasn’t arisen from productive private sector activity and must be inflationary; excessive money printing inevitably leads to hyperinflation. The magic money tree grows in the government’s garden but picking its fruit must be eschewed; such a harvest leads only to inflation and eventual economic collapse.

MMT advocates reject this myth and replace it with a new and far more convincing narrative based not on fables but history, anthropology and a deep-rooted knowledge of how the monetary system actually works. First, MMT rejects the orthodox money creation myth. It denies the notion that a unit of account can spring from the action of private individuals and instead argues that the state first introduces the unit of account and decides upon the medium which it will accept in settlement of tax liabilities [2]. Once the state has sufficient power it can use its control over the monetary system to provision itself. It first places some of its citizens in debt and requires them to pay a tax levied in the unit of account it has determined and payable by the means it is prepared to accept in settlement.

The state can now purchase the goods and services it requires, redistributing resources to itself from the private sector. Taxes serve first to create sellers of goods and services desiring the state’s currency in exchange. Private individuals need to acquire state money to pay their debts to the state. Second, the state is able to use its net spending to manage aggregate demand. It must net spend sufficiently to allow the non-government sector to meet its tax liability and satisfy net savings demand at the full employment level of income – otherwise, it will allow deflationary forces to exert downward pressure on income. Excessive net spending will generate inflationary pressures [3]. However, the key insight provided by MMT is that government must spend (or lend) before it can tax (or borrow). Taxes do not fund spending in a functional sense.

This logic is clear in a system where the state predominantly spends in coins. Clearly, a private sector taxpayer cannot mint her own coins without state permission. The state would need to spend them before she could acquire them. In the modern financial system, the government spends by data entry and the working of the financial system can cloud the issue; however, the logic still applies. When the government spends, it credits a bank account at the same time, adding reserves to the account-holder’s bank’s reserve account at the central bank.

It may appear that a private individual can pay their tax bill using bank money, however, on further reflection, this view can be seen as an illusion. If a private sector individual or institution pays taxes by means of a cheque its bank deposit falls by the amount of the payment but the settlement of the tax liability occurs when the taxpayer’s bank’s reserve account at the central bank is debited by the same amount. It is the transfer of bank reserves from the taxpayer’s bank’s reserve account to the Treasury account that settles the tax bill. To quote Mosler, ‘You can’t have a reserve drain before a reserve add.’

Before the private sector can pay its taxes the state must have spent or lent the money. Of course, the central bank might provide the reserves to the taxpayer’s bank by repo or buying bonds, but those transactions are merely the reversals of the central bank’s earlier draining of reserves by bond sales. The provided reserves originated from state spending. Thus it is apparent that state spending (or lending) precedes taxation; the only other way would involve counterfeiting of state money by the private sector!

We can now see where this fictitious magic money tree really grows; it grows in the non-government sector garden and must be used by private-sector agents who somehow want to pay their taxes before the government has spent the required state money into existence! Of course, MMT advocates know a magic money tree can’t provide state money; only the myth-believing critics believe such a thing exists.

In conclusion, we might amend Thatcher’s quote and make it an accurate reflection of reality, not an ideologically-based fable of a magic money tree growing in a free-market garden.

“The non-government sector has no source of state money except the state itself, it can only create bank money which can be used in private sector transactions but not to pay taxes. If the state wishes to spend more it can only do so without limit by data entry. Taxing or borrowing simply reduce the purchasing power of the non-government sector and serve to give value to state money and provide a means to manage demand.”

“There is no such thing as taxpayers’ money. There is only public money.”

Phil Armstrong, December 2018.

[1] See Menger (1892)  The Origin of Money for a typical example of the story

[2] G.F. Knapp (1924) The State Theory of Money

[3] See Warren Mosler (2012) Soft Currency Economics II

GIMMS welcomes submissions from MMT bloggers and authors. If you would like to contribute a piece for publication on the MMT Lens please send it to email hidden; JavaScript is required
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Upcoming event:

1-2 February 2019 – GIMMS will be attending the 1st International European Modern Monetary Theory conference in Berlin. We will be speaking about our project and plans for promoting MMT and the Job Guarantee in the UK. Full details of the conference are available here. Registration for the conference is here.

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Post-Growth and MMT

Published by Anonymous (not verified) on Sat, 22/12/2018 - 3:22am in

Crowd of people shopping with placards which read Hurry! Buy More StuffCopyright – (C) John B. Henderson

In an age of endless consumption which keeps the economic wheels turning it is no surprise that our leaders have failed dismally to address adequately the very real and long-term global issues of climate collapse and it has been left for too long on the political backburner. This week GIMMS extends a very warm welcome to Andrea Grainger, our guest MMT Lens author. Andrea takes a look at how modern monetary reality sheds a vital light on how to address the challenges we face to avoid global environmental catastrophe and extinction whilst still meeting human needs and keeping within the resource limitations of our life-giving planet.


The last month has been a big one for environmental news. We saw the Global Climate Conference in Poland, where politicians and scientists from all nations have gathered to further develop the agreement reached in Paris last year. We also saw the launch of the Extinction Rebellion activist group. Six-thousand people gathered in London to declare rebellion against the British Government. The group states that we are on the path to global ecological catastrophe; the mass extinction of animal species and the collapse of human civilization, due to the criminal negligence of British and foreign governments.


These two events highlight where western society is at the moment, with dealing with our environmental crisis. Politicians of all political stripes mostly accept the problem of climate change, but their rhetoric on the issue is largely self-congratulatory; praising their own parties’ policies regardless of how little they are actually doing. Rarely in the mainstream political discourse do we hear anything close to what scientists say is necessary on climate change, and other environmental issues are largely ignored. Only recently has plastic pollution managed to get any hearing, and other issues like soil erosion, freshwater depletion, ocean eutrophication, peak minerals and biodiversity loss get no hearing at all.


Part of the reason for the huge gap between what politicians are doing and scientists are saying is obviously public ignorance; but there are also huge economic factors. One is vested interests; particularly the fossil fuel lobbies who still have huge wealth, and spend massive amounts to lobby politicians, create think-tanks, and influence media groups.


Another economic factor is neoliberalism which maintains tens of millions of people across the world in pointless unemployment to create a scarcity of jobs, so that desperate workers can be underpaid, and private shareholders can rake in more profit for themselves. This is appalling at any time, but climate change makes it more so, now that we have desperate need for a rapid transition to a sustainable economy.


The MMT critique of neoliberalism is essential for breaking its ideological hold on society. It is necessary, but not sufficient, for tackling the third barrier to a sustainable society, that of limits to growth. Ecologists have been warning for decades that it is not possible to protect our planet if we keep trying to consume more stuff each year than the year before. Technology has allowed us to be more efficient with our resources, and allowed us to ‘decouple’ our economic growth from environmental damage. But there are limits to how fast we can do this; humanity has never managed to achieve ‘absolute decoupling’, where growth happens without any environmental damage. We have only ever been able to slow down the rate at which we destroy our Earth. Partly this is because of the ‘Jevons Paradox’; as first recognised by William Jevons; as technologies are introduced to improve resource efficiency, they also drive down costs for consumers, leading to more consumption, so the benefits of resource efficiency are lost.


If we want to protect our planet, then slowing down our economic growth is inevitable. As British citizens, we can see that our country is much richer than other nations, and poorer nations need growth much more than we do, so it would be wise to shoulder much of the burden ourselves, and slow our growth down more to give space to developing nations. We may need to move to a ‘steady state’ economy, where no growth happens for a decade or more.


The idea of no economic growth seems very foreign to us today, as humanity has seen exponential growth for two-hundred years, ever since the industrial revolution. But the idea that growth would one day stop has been considered by economists for almost as long. Adam Smith, John Stuart Mills, David Ricardo and Keynes all spoke of a future end to economic growth. Keynes claimed that his grandchildren would live to see this, described it as ‘state of abundance’ and said that

“People would find themselves liberated from such economic activities as saving and capital accumulation, and be able to get rid of ‘pseudo-moral principles’ — avarice, exaction of interest, love of money — that had characterized capitalistic societies so far. Instead, people would devote themselves to the true art of life, to live “wisely and agreeably and well.”

Since the Bretton Woods conference in 1940s, GDP growth has been used as the main metric of a nation’s economic success. Economic growth has become synonymous with progress and wellbeing. But the original populariser of GDP, Simon Kuznets, said that GDP was never meant to be used in this way. He did not consider it a good measure of wellbeing, because it didn’t consider income distribution, or the social and environmental costs of production.


Since the 1970s the field of ‘happiness economics’ has evolved to look at what really drives human wellbeing and how to design economies to provide it. What has been found is that for poor individuals and poor nations gains in income are very important, but as individuals and nations become richer gains in income become less significant, and other factors like income inequality and strong social bonds become much more so. If a steady-state society focused on improving these things, then we could see our wellbeing improve much faster than it is today. A steady-state society does need to mean the end of technological innovation, so we could keep developing technologies to improve labour efficiency, but rather than using that to produce more goods for ourselves we would instead focus on increasing our leisure time and approach the 15-hour week working once envisioned by Keynes.


A steady-state society is necessary, and could be better than our society today, but it needs significant restructuring of our economy to work. If economic growth stops, then the return on investment for private companies will fall sharply, and private investment from shareholders will plummet. If we significantly reduce income inequality then this will be worse, as workers’ wages go up, and shareholders profits fall.


MMT helps us to understand that this is not necessarily a problem. If a foreign company decides to pull their investment out of Britain and shut down their factories, the Government can always move those workers onto the Job Guarantee scheme for a time, while they look for a British company that can expand or be formed to rehire those workers. The transition to a steady-state economy is however more complex than this, as all the for-profit sectors of our economy start to stagnate, decline and eventually collapse. A steady-state economy would necessitate a broader transition away from for-profit businesses to non-profits and cooperatives; businesses focused not on the profits of private shareholders, but on the benefits provided to their workers, customers and local communities. This kind of economy is known as ‘market socialism’ and is similar to what Keynes talked about when he advocated for the death of rentierism. With a more cooperative and democratic economy, the people making key business decisions would be held more accountable for their actions, and we could develop a more meritocratic society, where people’s income and wealth more accurately reflects their contribution to society.


To make such a society function effectively, we would need a much more developed cooperative sector, with cooperative business studies becoming a normal part of our education curriculum, and to create a culture where customers and community members are encouraged to engage with their local coops and hold them accountable. We would also need new institutions to replace the role now performed by private investors, hedge funds and for-profit banks, who constantly seek out new opportunities for investment and get finance where it is needed to create jobs. This could be done by credit unions, non-profit banks and local councils in a decentralised and accountable way, so finance serves the interests of the society.


This is still a significant economic and cultural shift for humanity to undergo, but it is necessary. Those of us who understand MMT can be more confident that it is possible, and lead the way in making it happen sooner. The faster humanity accepts what is necessary and gets started, the more lives we can save from being destroyed by ecological damage.


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Published by Anonymous (not verified) on Mon, 03/12/2018 - 2:24am in

Aerial view of students wearing mortar boards at a graduation ceremonyAnd in the news this week…




Last week the Public Accounts Committee published its findings on the sale of the student loan book.  The government was criticised for having sold yet another public asset for half its face value, but it explained that net government debt would fall as a result, enabling it to borrow more. The PAC, in its turn, said in its report that it had expected the Treasury to get the best possible deal on behalf of the taxpayer and achieve its aim of reducing the public sector net debt.  And then according to the Office for Budget Responsibility, in its Student Loans and Fiscal Illusions working paper published earlier this year, the sale was also a ‘perverse incentive’ to make it appear that the public finances had improved. It then went on to estimate that the government’s plans would, in addition, deprive the Treasury of billions in repayments over the lifetime of the loans thus making the country poorer in the long term.

The fiscal language of government and its institutions cited above is instructive, and demonstrates how government’s success or failure is being measured in household accounting terms rather than the effects of its spending policies on environmental, economic and social well-being of the nation.  A good deal for taxpayers, reducing public deficit and debt, depriving government of revenue, borrowing from the future and debt burden are all examples of recurrent tropes which are fed into the public arena daily by politicians, journalists and institutions. So, it is no surprise that people are led to believe that the state finances resemble their own household budgets and they judge a government by how much it reduces or increases the deficit or debt. The vocabulary of income, spending, borrowing and debt however does not apply to a government which issues its own currency and the term fiscal responsibility should be confined to measuring how such a government balances the economy by ensuring that money creation does not exceed the productive capacity of the nation.


And in more news on education


“Privatisation, marketisation, neo-liberalism and austerity are beams of the same sun.”

Steve Watson, Faculty of Education (Cambridge University).


While the government focuses on accounting gymnastics to balance its accounts, the dire state of higher education has been in the public spotlight this month as it was revealed that the universities watchdog was forced to give a struggling institution an injection of cash so that it could remain afloat. This followed news earlier this month that three universities were on the verge of bankruptcy and having to rely on bridging loans to keep going.  The financial uncertainty was said to be linked to falling numbers of 18 year olds applying to go to university, increased competition for students and more stringent immigration controls on foreign students who, in the absence of adequate government funding, bring much needed revenue to university coffers.  The University funding policy and funding report published in 2016 noted that given limited government funding and the fact that not all universities can borrow more over the long term, they will need to maintain and grow their student numbers, including those from outside the EU, to fund increased investment.  As governments fights over allowing foreign students to access higher education and adequate funding streams from government a train crash would seem inevitable.

How have we come to this pass? The process started in the 1990s with the first steps towards the marketisation of higher education.  New Labour followed the Tories lead and gave universities the right to charge tuition fees, thus changing the very basis upon which universities were funded. Private debt instead of government spending became a primary mechanism to finance higher education. As Steven Watson who lectures in the Faculty of Education at Cambridge University notes:

“The introduction of student loans, tuition fees and subsequent increases are all part of the commodification and privatisation of higher education. The Higher Education and Research Bill that was hurried through before the general election in 2017 further embeds the consumerization of higher education, with the creation of the Office for Students and providing opportunities to establish challenger institutions to increase competition in the sector.”

Universities have become businesses with a product to sell and students have become customers with choices. University management elites command huge salaries whilst lecturers increasingly face the prospect of insecure contracts and low pay. According to an analysis by UCU published in 2016 university teaching is now dominated by zero-hours contracts, temp agencies and other precarious work.  It also noted that the richest Russell Group institutions rely heavily on insecure academic workers.

Instead of higher education being about learning, exploration and creativity, it is increasingly becoming commodified; serving the interests of capital rather than the development of the individual for life and the benefit of society. Already, as Steve Watson notes, there is the potential for subjects that do not have a direct link to the world of work to disappear or be reconfigured for employability.  And while universities struggle for funding and try to cut costs, students face the prospect of a lifetime of education debt without even the certainty of finding a good, well paying job at the end of it.

The public is fed a daily diet of the benefits of choice, competition and private-sector efficiency and innovation, whether we are talking about education, the NHS, or the energy, rail and water sectors, when the reality is that it has more to do with accruing capital, than providing high quality public services. We are also fed the daily lie that the government has no other alternative as it has no money of its own and must seek to balance its accounts to prove its financial competence.

BUT the national economy is not one great big household, and a government which issues its own currency could, by making a political choice, spend on our public services tomorrow. Why would it not do so?  Education is an investment which is not just about economics. It gives people the skills they need for life, enables them to ask questions and seek solutions as well as confront the challenges of our times from social issues to environmental ones. Getting with monetary realities is a first step in challenging the neoliberal, market driven status quo.





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How Can A Floating Currency Sovereign Default?

Published by Anonymous (not verified) on Mon, 19/11/2018 - 1:00am in


default, MMT

I have been toying with an idea of writing a book with the title "How Can a Floating Currency Sovereign Default?" As a follower of Modern Monetary Theory (MMT), this is a bit of a joke, since the text of the book would just be: "They can't." The book can then be submitted to the World's Shortest Book Competition.

Thinking about this has led to me to the realisation that the usual way of discussing sovereign default is inherently defective. (This criticism extends to my earlier book Understanding Government Finance, unfortunately.) The usual technique is to describe the mechanisms for default, look at some models, and argue why a default is unlikely. This then runs into a hurricane of whataboutery - what about the external constraint, Russia, Iceland, etc.

Part I: The Easy PartI think we need to follow a different tack, and I expect to turn that into a somewhat longer book.

  1. We first assume that a theoretical country is immune to default.
  2. We examine the theoretical properties of this country.
  3. We can then compare real world countries to this ideal default-free country. The unproven argument is that what MMT refers to as "floating currency sovereigns" match the description.

That's basically the first part of the book. It would no longer qualify for the "World's Shortest Book," but it would be pretty short. The most interesting part would be the discussion of the steps needed to make sure a real world country qualifies as being default risk free. (For a number of countries, I have seen legal arguments that default is already impossible. I lack the legal training to judge those arguments; I will instead have to look at financial/economic institutions.) 
For readers interesting in MMT, the first part of the book may be the most interesting; if I know what I am doing (which remains to be determined...), I will keep that first part as easily understood as possible.Part II: Whataboutery...Part II of the book would be where I would get bogged down in details, dealing with the "What about X?" issues. Although I am not aiming to make this an academic tome, it should be more advanced than my first few books (such as Understanding Government Finance), and have more literature references. I expect that 90% or more of the references will show up in the second half.
In my view, the "what about" questions are broadly misleading. The reason why is straightforward: there are many possible mechanisms for a country to miss payments on its debt. The issue is whether they matter for economic/financial analysis.
I will put forth first a non-controversial example. Let us fix a country X. Imagine then that the government of X disappears as a result of being wiped out by an attack by aliens from Pluto (Yuggoth in their language), who are still mad about being downgraded from planet status. It is clear that surviving bond holders will not be seeing any scheduled coupon or principal payments from that government. (I will put aside the question of legal default; it is unclear whether anyone would have legal standing to have default declared.)
Although my example is deliberately over-the-top, any examination of history shows that extreme risks to the status quo always exist. The question is whether we can expect any analysis of the economy to offer any insight to the risk? It seems straightforward that examination of economic time series of country X does not give us any insight to the probability that the country will be obliterated by the advanced technology of the Plutonians. 
If we want to get closer to the concerns of those who are worried about the default risk of floating currency sovereigns, we will rapidly see that almost all the non-geopolitical risk revolves around politics. Even if the government cannot be forced to default, it can choose to do so. The implication is that we are judging political risks, not economic/financial risks. (This was my argument in Understanding Government Finance.)
Discussing all the "what about" scenarios requires plowing through the usual suspects, and demonstrating how the risks discussed are political. To take a particular example beloved of Post-Keynesian critics of MMT: the so-called external constraint. We will need to run through the mechanisms that allegedly imply the need for default, and show that any default is still the result of a political decision by the government, and not in the hands of those darned foreigners.

In order to keep the scope of the book manageable, I will confine my attention to floating currency sovereigns. This makes life much easier, as it basically excludes looking at historical default episodes. If I wanted to write a book on sovereign default, then 90% of the book would be a discussion of various fixed exchange rate systems, and the woes of developing countries. Although I have some familiarity with those cases, I would be on territory that I am much less familiar with, and writing would be much more difficult.
Final RemarksThe final formatting of the paperback edition of Breakeven Inflation Analysis has been completed, and its publication will be after I have seen the printed proof. I will start running excerpts once the paperback edition is ready. By implication, I am ready to start work on my next book. I am currently debating whether to do a book on business cycles (more specifically, the causes of recessions), or on floating currency sovereign default. The beauty of floating currency sovereign default is that even with the sections on whataboutery, the book would be compact and easy to write. By doing it first, it gives me time to do more research and writing on recessions.

I will keep doing initial drafts in parallel, and then pin down which book to pursue first some time early in 2019.

(c) Brian Romanchuk 2018

Some governments really are like households

Published by Anonymous (not verified) on Sat, 17/11/2018 - 4:12am in


MMT, money, trade

In my last post, I said that the fact that a government can buy anything that is for sale in its own currency is not sufficient to confer monetary sovereignty. A country which is dependent on essential imports, such as foodstuffs and oil, for which it must pay in dollars is not monetarily sovereign. Some people disputed this on the grounds that such a country could earn the dollars it needs through exports. So I thought I would write a post discussing how realistic this is in practice.

Strictly speaking, the only country in the world that can always pay for everything it needs in its own currency is the United States. However, most developed  countries that issue their own currencies have deep and liquid FX markets that enable them to exchange their currencies freely for other currencies; many also have swap lines with the Federal Reserve. Eurozone countries don't issue their own currencies, but the bloc as a whole issues the world's second reserve currency. It is not going to run out of the means to buy imports.

In practice, therefore, developed countries can generally use their own currencies to pay for imports. But this is not true of developing countries - and most countries in the world are developing countries. In my view, a definition of monetary sovereignty that does not work for most countries in the world is not much use.

A developing country with poor creditworthiness and a thinly-traded currency is unlikely to be able to pay for imports in its own currency. It must obtain what used to be known as "hard currency," usually dollars. A country that must obtain FX to buy essential imports is effectively using the currency of another country even if it issues its own currency with a floating exchange rate. The government may be able to buy everything that is for sale in its own currency, but it is not able to buy everything the country needs. It is dependent on external sources for hard currency.

There are essentially three ways of obtaining hard currency: earning it through exports, buying it on FX markets, or borrowing it. None of these fully protect the country from FX crisis. A negative terms-of-trade shock, such as happened to commodity exporters in 2014-15, can quickly wipe out net export earnings, turning a current account surplus to a deficit and forcing the country to borrow FX. Exchange rate collapse (which may be associated with a terms-of-trade shock) can make buying FX on international markets to pay for imports all but impossible. And borrowing in foreign currencies quickly becomes unsustainable if the exchange rate drops. Floating exchange rates do not confer monetary sovereignty, even for a developing country that issues its own currency, if the country is dependent on imports for essentials such as basic foodstuffs. This is true even if the country normally runs a current account surplus.

Those who say that developing countries can always pay for essential imports with money earned from exports are really saying that developing countries should never under any circumstances run current account deficits. Where imports are concerned, the country must "live within its means." It can spend only what it earns from exports, and no more. These governments really are like households.

Since the Asian crisis of 1997-8, many developing countries - particularly those with dominant extractive industries - have done exactly this. They have opted to run persistent current account surpluses, building up FX reserves to protect themselves from "sudden stops" and enable them to support their exchange rates. In theory, these countries earn all the FX they need to pay for imports. They do not need to borrow FX.

And yet many still have FX debt, particularly in the private sector. As I noted in my previous post, a developing country with high private sector FX debt is vulnerable to exchange rate collapse. Servicing debts in ever-more expensive foreign currencies is damaging for indebted corporations, and the rising cost in domestic currency of obtaining dollars seriously hinders trade and business development. This applies whether or not the country has sufficient FX reserves to support businesses that need dollars, and whether or not the government can obtain more FX by exchanging its own currency. The rising cost of dollars as the exchange rate falls is itself enough to push the economy into recession.

But if the current account is in surplus and there are ample FX reserves, why does the private sector, and sometimes the public sector too, have FX debt? There are two reasons.

The first is cash flow. Businesses may overall have an FX surplus, as indeed the country might. But cash doesn't always arrive when you want it to, and suppliers have to be paid. So corporations can be forced to borrow FX to pay essential bills in advance of the necessary FX funds arriving. In theory, a currency-issuing government should not have to borrow FX - it should simply be able to exchange its own currency. But if the currency is thinly traded, selling it can cause the exchange rate to fall precipitously, especially if the government is printing the currency it is selling. Because of the adverse effect of sharp exchange rate falls on domestic inflation and indebted private sector actors, many governments prefer to borrow FX to cover short-term shortfalls.

The second, and more significant, is investment. Consider a company that is buying plant to establish a new business in, say, Morocco. It is likely to have to pay for that plant in dollars. It could borrow dirhams and exchange them for dollars, but as this would most likely have to come from a local bank rather than from the cheaper international capital markets, it could pay very high interest on the loan. Furthermore, if it is planning to manufacture goods for export in dollars, borrowing in dirham would create a currency mismatch on its balance sheet which would expose it to exchange rate fluctuations. For these reasons, many companies prefer to issue dollar debt rather than borrow in local currencies. But this means that they have FX debt on their balance sheets even if the cost of their imports in dollars is lower than their export earnings in dollars.

The same is also true of the government. And this brings me to the core weakness in the argument that developing countries can always earn the FX they need through exports.

Consider a country which does not produce enough basic foodstuffs to feed its population. It may have poor quality land and water shortages; it may have seriously underdeveloped agricultural production; it may be overpopulated. Whatever the reason, in the short term it must buy the food it needs to feed its population. And because international foodstuffs are invoiced in dollars, it must pay for this in dollars. If its export sector is also undeveloped, it will lack sufficient FX to buy the food its population needs.

The obvious long-term solution is for the country to increase its agricultural production so that it can feed all its people. Alternatively, if developing agriculture is problematic, for example due to persistent flooding, the country needs to increase production for export so it can earn the FX to buy the imports to feed its people. Both of these approaches require investment, and investment requires dollars. Additionally, production takes time to develop - and in the meantime, people must be fed. So the country must in the short-term borrow FX to pay for imports, and it must also borrow FX to invest for the future. If it does neither, then its people will starve both in the short term and the longer term. FX debt is thus inevitable in a country that has an insufficiently developed supply side.

A few people suggested that a job guarantee would help to develop the supply side. This is true, but supply side improvement takes time, and in the meantime people must eat. The story of the Irish famine delivers a cautionary tale about relying on job guarantees to relieve hunger. Starving people aren't productive. They need to eat first, then work. Paying them a job guarantee wage when the country is not earning sufficient dollars to import the food they need to eat is pointless and cruel.

Keeping the current account in balance or surplus by restricting imports and favouring exports is extraordinarily difficult to achieve, especially for a country with weak institutions and widespread corruption. To understand why, we need to think through what forcibly keeping the current account in balance or surplus entails.

  • Imports must be controlled so that the country can never find itself with an FX gap that must be funded. High import tariffs can help the country to restrict non-essential imports. But if FX earnings from exports fall, even essential imports may have to be cut, regardless of the impact on the population.
  • Following from this, exchange rate movements cannot be allowed to wipe out terms of trade advantage. Many developing countries, particularly commodity exporters, fix or manage their exchange rates to prevent them rising.
  • The country must make sure that FX earnings from exports do not leave the country except in payment for imports. This means strict capital controls, including complete prohibition of profits repatriation by foreign industries, and limiting or banning FX and bullion holdings by the private sector.
  • FX borrowing by government must be outlawed completely, and FX borrowing by the private sector must be restricted so that it can only be used for investment. If corporations and households are allowed to borrow in foreign currency to fund consumption spending, the current account will go into deficit.

Keeping the current account in balance or surplus at all times means deliberately suppressing domestic demand, to prevent imports from rising. In a country which depends on imports for essential foodstuffs, this could mean the poorest being constantly at risk of starvation. Additionally, since all resources would be directed to export production and supply-side development, the better-off might struggle to save. And there would be unemployment, since in an FX-dependent economy, full employment is limited by the ability of the import-export sector to generate net earnings. Creating jobs that do not increase export production, and do not substitute domestic production for imports, simply causes inflation.

There needs to be fiscal restriction too. Developing countries with real resource shortfalls that force them to import essentials must develop strong supply sides in preference to boosting domestic demand. The last thing such a country needs is deficit spending in its own currency that boosts domestic demand beyond what its own supply side can satisfy, sucking in imports which must be paid for externally with dollars even if they are sold domestically for local currency. Hey presto, before you know it, you have rising FX debt and a falling market exchange rate, the essential ingredients for an FX crisis.

This has played out time and time again in places like Latin America. Own-currency fiscal stimulus creates a short-term economic boom driven by rising consumption spending, which sucks in imports, creating a FX gap which must be funded with FX borrowing. As FX borrowing rises, investors get nervous and start selling both the FX debt and the currency, causing interest rates to rise and the exchange rate to fall. Servicing the FX debt starts to become more expensive as the domestic currency exchange rate falls. Eventually, the country either runs out of FX reserves or is effectively shut out of FX markets by prohibitively high interest rates on FX debt. When this happens, either the country defaults or it ends up in an IMF programme.

But the social costs of keeping the current account in balance or surplus are high. Consequently, there is always a risk that a populist government, encouraged by reading economic theory that prioritizes deficit-funded social programmes over externally-funded supply-side development, will abandon these restrictions and embark on a fiscal stimulus programme that quickly draws in imports funded by high FX borrowing. Because of this, economic theories designed for rich developed countries are positively dangerous to FX-dependent developing countries.

And if you don't believe me, read Rudiger Dornbusch, and weep for the countries - and they are many - that repeat the same mistakes again and again.

Related reading:

A Latin American Tragedy
Never mind Greece, look at Venezuela
Argentina And The Lure Of Dollars - Forbes

An MMT View of the Twin Deficits Debate

Published by Anonymous (not verified) on Thu, 15/11/2018 - 7:33am in

Invited Presentation by L. Randall Wray at the UBS European Conference, London, Tuesday 13 November 2018 Q: These questions about deficits are usually cast as problems to be solved. You come from a different way of framing the issue, often … Continue reading →

The post An MMT View of the Twin Deficits Debate appeared first on New Economic Perspectives.