Goodhart says ‘sack’ DMO to bolster UK economy
Posted by WARREN MOSLER on January 14th, 2009
Professor Goodhart is one of the rare central bankers who fully understands monetary operations and therefore recognizes as obvious that the treasury not selling securities is functionally equivalent to the treasury selling them and then having the Fed/CB buy them, apart from the transactions costs.
This also shows that those that understand monetary operations often have remaining differences on ‘theory’ aspects.
For example, Professor Goodhart sees interest rates as a much stronger force as regards the macro economy, output and employment than I do.
I have proposed that sales of treasury secs should be permanently suspended. They keep long term interest rates higher than otherwise and the long term rate ‘market’ is part of the ‘investment’ market.
However, I don’t see how not issuing treasury securities has any further effect, as Professor suggests, than that of the lower interest rate, as demonstrated by Japan and now the US with their zero interest policies and excess reserves.
In fact, while I support a permanent zero interest rate no treasury securities policy, I further recognize that an additional benefit is that it reduces aggregate demand and thereby allows for a higher federal deficit. Professor Goodhart would likely take the position that lower rates add to aggregate demand and therefore at least partially substitute for fiscal adjustments.
Goodhart Says ‘Sack’ DMO to Bolster U.K. Economy
by Svenja O’Donnell
Jan 13 (Bloomberg) — Prime Minister Gordon Brown should “sack” the UK Debt Management Office and refrain from issuing government bonds as a way of bolstering the economy, former Bank of England policy maker Charles Goodhart said.
“The one single thing that I would like to see, in a sense to get us out of the present problem, would be very simple,” Goodhart told lawmakers on Parliament’s Treasury Committee today. “It would be: sack the Debt Management Office and just not issue gilts for quite a long time so that the huge deficit simply comes into the system in the form of increases in liquidity and increases in the money supply.”
Policy makers are seeking new tools to fight the recession as interest rates approach zero. Brown’s government plans an unprecedented 146.4 bln pounds ($214.15 bln) of debt sales in the fiscal year ending March 31 to finance bank bailouts amid a decline in tax revenue.
“To keep the system sufficiently liquid and monetary growth sufficiently high, the government ought to be under- funding the deficit,” Goodhart said. “When banks are having difficulty in lending to the private sector, there needs to be a much greater expansion of lending to the public sector.”
Underfunding the gap would see the government selling fewer bonds than are necessary to pay for its budget deficit. That leaves more money in the hands of investors who may have spent them on gilts, keeping more money in the economy than would otherwise be the case. Brown forecasts a deficit of 118 bln pounds in the year through March 2010, or 8 % of gross domestic product, the most since modern records began in 1970.
“Under-funding the deficit would be far less damaging to the economy that to force some minimum of lending,” Goodhart said yesterday.
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January 14th, 2009 at 12:56 pm
Nice post. It points out a difference of opinion on the effectiveness of interest rates between you/SCE and other PK sympathizers.
There is an intramural game going on within Austrian economics called the “De-homogenizing” of Mises and Hayek that points out key differences in their thought. It’s a great way to learn more about both.
It would be interesting to de-homogenize SCE from PKers. Besides Goodhart on interest rates, we’ve talked about Godley and his trade deficit hobbyhorse. I’d also like to hear what you think about Paul Davidson’s (Moore?) idea of a global currency unit for clearing payments (as means to correct imbalances). My guess is you would object on several fronts; the reduced fiscal flexibility of a sovereign or the need to even fix those imbalances in the first place, at least before trying the ideas of SCE first.
Is SCE the most orthodox version of Post Keynesianism (ie the most logically consistent pure demand-side pardigm)?
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January 14th, 2009 at 2:30 pm
right, floating is better for sustaining output, employment, and real terms of trade for whoever does it.
thing is, paul agrees, but thinks his is more politically feasible, but doesn’t say that in his proposal.
i talked to basil in 96 about savings being the accounting record of investment. he asked if he could use the phrase. i agreed and i understand the book he did was pretty good. haven’t seen it yet.
SCE is pretty much telling it as it is. i just noticed a small bit mark mcnary had written (i dictated, he wrote, i edited) that was a bit ambiguous so i just redid it a bit. it implied i thought something about interest rates that was supposed to read how the fed thought.
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January 14th, 2009 at 3:10 pm
I forgot to ask about one other divergence:
Davidson mentioned Keynes’ definition of money as a means of contractual settlement vs Wray/Mosler’s Chartalism. Do you see this as an important difference. To me, Chartalism is an easy way of understanding money as a public monoopoly while Davidson’s adoption of Keynes’ definition is less clear.
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January 14th, 2009 at 3:34 pm
I know this is for Warren, so forgive me (can’t stop myself . . sorry). Maybe he’ll agree, maybe not.
As far as PK goes, the main adherents to SCE/neo-chartalism are associated in one way or another with UMKC (profs, graduates, research associates at CFEPS or sister research institute CofFEE in Oz, etc.). There aren’t many others outside that group that are completely on board with all aspects of SCE/neo-c, but a good many Pk’ers do agree with Warren’s 4 statements on his endorsement page (and many have put their names there). So . . while there’s significant overlap, not complete. The flex fx proposal, zero-interest rate policy, ELR, and govt bond sales as interest rate maintenance tend to be the biggest points of contention in terms of what non-SCE/neo-c have trouble with.
Wray wrote an alternative interpretation to Davidson regarding Keynes on Chartalism in his 1998 book. They were both on a panel in Chicago in 1998 discussing their differences on this (first time I ever saw Warren, actually).
Whether SCE/neo-c is most logically consistent, I guess we’d say we are, as grounding analysis in actual operations and appropriate accounting for transactions is the core of the methodology. Non SCE/neo-c folks would disagree, I’m sure.
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January 14th, 2009 at 3:56 pm
“grounding analysis in actual operations and appropriate accounting for transactions”
Got it, Thanks Scott.
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January 14th, 2009 at 4:55 pm
Paul talks about what ‘money’ does to define the term.
I talk about what a currency is.
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