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MMT to the ECB- you can’t inflate, even if you wanted to

Posted by WARREN MOSLER on November 26th, 2011

With the tools currently at their immediate disposal, including providing unlimited member bank liquidity,lowering the interbank rate, and buying euro national govt debt, the ECB has no chance of causing any monetary inflation, no matter how hard it might try. There just are no known channels, direct or indirect, in theory or practice, that connects those policies to the real economy. (Note that this is not to say that removing bank liquidity and national govt credit support wouldn’t be catastrophic. It’s a bit like engine oil. You need a gallon or two for the engine to run correctly, but further increasing the oil in the sump isn’t going to alter the engine’s performance.)

Lower rates sure doesn’t do the trick. Just look to Japan for going on two decades, the US going on 3 years, and the ECB’s low rate policies of recent years. There’s not a hint of monetary inflation/excess aggregate demand or inflationary currency weakness from low rates. If anything, seems to me the depressing effect on savers indicates low rates from the CB might even, ironically, promote deflation through the interest income channels, as the non govt sector is necessarily a net receiver of interest income when the govt is a net payer. (See Bernanke, Reinhart, and Sacks 2004 Fed paper on the fiscal effect of changes in interest rates.)

And if what’s called quantitative easing was inflationary, Japan would be hyperinflating by now, with the US not far behind. Nor is there any sign that the ECB’s buying of euro govt bonds has resulted in any kind of monetary inflation, as nothing but deflationary pressures continue to mount in that ongoing debt implosion. The reason there is no inflation from the ECB bond buying is because all it does is shift investor holdings from national govt debt to ECB balances, which changes nothing in the real economy.

Nor does bank liquidity provision have anything to do with monetary inflation, currency depreciation, or bank lending. As all monetary insiders know, bank lending is never reserve constrained. Constraints on banking come from regulation, including capital requirements and lending standards, and, of course credit worthy entities looking to borrow. With the ECB providing unlimited liquidity for the last several years, wouldn’t you think if there was going to be some kind of monetary problem it would have happened by now?

So the grand irony of the day is, that while there’s nothing the ECB can do to cause monetary inflation, even if it wanted to, the ECB, fearing inflation, holds back on the bond buying that would eliminate the national govt solvency risk but not halt the deflationary monetary forces currently in place.

So where does monetary inflation come from? Fiscal policy. The Weimar inflation was caused by deficit spending on the order of something like 50% of GDP to buy the foreign currencies demanded for war reparations. It was no surprise that selling that many German marks for foreign currencies in the market place drove the mark down as it did. In fact, when that policy finally ended, so did the inflation. And there was nothing the central bank could do with interest rates or buying and selling securities or anything else to stop the inflation caused by the massive deficit spending, just like today there is nothing the ECB can do to reverse the deflationary forces in place from the austerity measures.

So here we are, with the ECB demanding deflationary austerity from the member nations in return for the limited bond buying that has been sustaining some semblance of national govt solvency, not seeming to realize it can’t inflate with its monetary policy tools, even if it wanted to.

Post script:

The only way the ECB could inflate would be to buy dollars or other fx outright, which it doesn’t do even when it might want a weaker euro, as ideologically they want the euro to be the reserve currency, and not themselves build fx reserves that give the appearance of the euro being backed by fx.

73 Responses to “MMT to the ECB- you can’t inflate, even if you wanted to”

  1. Ryan Says:

    Which EU country will central banks around the world call on to make them whole when the Euro held as reserves falls apart? This is the stuff wars are made of. A Big Deal.

    Reply

    WARREN MOSLER Reply:

    i’m arranging a walkathon to help them out

    Reply

  2. Unforgiven Says:

    ….You need a gallon or two for the engine to run correctly, but further increasing the oil in the sump isn’t going to alter the engine’s performance.)

    Too much oil for the size of the oil pan would alter the engine’s performance, for the worse (foaming, etc). Maybe consider “switching to a higher capacity sump won’t change the engine’s performance”

    Reply

    WARREN MOSLER Reply:

    how about a larger battery?

    Reply

    Hugo Heden Reply:

    @WARREN MOSLER,

    Or more petrol

    Reply

    Gary Reply:

    @Unforgiven,

    I also use engine and oil analogy when trying to explain how money relate to economy to others.
    I usually say something like – that money to economy is like oil to engine; that (motor) oil’s purpose is to be used in engine; that you need the right amount of oil – not too much and not too little, and that it is stupid to try to skimp on oil because that would wear the engine out. It is much more important for the engine to function at full capacity than some arbitrary limits on oil use. Also it is stupid not to use the oil you have and instead keep borrowing from the neighbor when both are the same (for euro zone discussion).

    Like any analogy – it is not perfect. Especially borrowing from the neighbor part, since it is possible to retort that oil that neighbor has is not the same.

    @Hugo Heden
    Perhaps gasoline and a car is a better one

    Reply

    Tristan Lanfrey Reply:

    @Gary,

    Maybe you could say that the government is a genetically enhanced mechanic that has a special gland called the central bank, and that this gland is capable of secreting motor oil on demand :)

    Reply

  3. Ken Says:

    The counter-argument I’ve been getting lately from Monetarists is that:

    1. There **is** inflation … at least 4%, maybe higher, due to #3 below
    2. Excluding food and energy from the core measure is improper
    3. CPI and other measures underestimate true inflation for other reasons
    4. Inflation **is** from monetary policy
    5. Transmission channel for above is speculators taking advantage of Fed “easy money” to drive up prices via the futures market (or alternate version, the specs drive down the dollar with same results).

    I think this is mostly garbage, but if anyone knows of good resources to combat … I’m finding this a sticking point when arguing MMT position.

    Ken

    Reply

    Kristjan Reply:

    @Ken,
    Monetarists admit that central bank sets price of money, not quantity. They admit that when you ask if central bank can set quantity and price at the same time.
    Most of the people you argue with don’t think, they take mainstream for granted. “It cannot be wrong”, so there is no point really arguing with them.
    It must have been hard for Copernicus to prove his point.
    In a way I can understand these economists who might understand but don’t admit It. Why complicate things for yourself and for your family perhaps? You are going to be excluded from being taken seriously. Who cares about the earth not being flat if my career is going to be gloomy. The truth might prevail in 200 years but what do I care about that?

    Reply

    Anders Reply:

    @Ken, Ken –

    The market’s *belief* that loose monetary policy would lead to asset price inflation, rather than the loose monetary policy *itself*, provides a sufficient explanation for the asset price booms post March 2009. There is simply no evidence of extra liquidity resulting from loose monetary policy inflating asset bubbles.

    Further, meeting monetarists on their own terms, right now there is huge contraction of broad money (deposits) as a result of a contraction in corporate and personal credit.

    But monetarism founders on micro-foundations: it neglects the fact that money is endogenous. Their paradigm requires that asset managers, who have had govt bonds swapped for deposits by QE, are unable to shed these new deposits, and so bid up asset prices to restore the ratio of deposits to total assets. Of course, this is nonsense: asset managers will shed unwanted deposits promptly by buying assets from banks.

    Finally, yes there is inflation; businesses, who always want to increase prices, are showing that they have the ability to keep increasing prices. The first response is that the inflation is benign, since conditions are such that no wage-price spiral looks conceivable – so there will be no acceleration of inflation. But second: if things are bad at present, how much worse do the inflation hawks want the economic outlook to get, in order for businesses to judge it impossible to put through any price increases?

    Reply

    Ken Reply:

    @Anders,

    I’m actually skeptical that food and energy price increases have anything to do with the US Monetary policy at all … first, because I don’t really believe that futures speculation can drive real prices, unless the physical commodity is somewhere hoarded, and second, because I think real-world global demand for these items can explain it adequately.

    Reply

    Unforgiven Reply:

    @Ken,

    Changes in the price of oil can’t really be addressed by the Fed, so they’re right not to consider it. Increases in the price level of a commodity isn’t inflation. Inflation is a continuous increase of all prices measured over a period of time. So even increases in a basket of goods affected by oil prices can’t be addressed by the Fed because they can’t be affected by monetary policy. The “inflation” in point #1 doesn’t fall within the definition.

    In the case of oil, it simply drains more money from the domestic sector and stores it with the foreign sector, looking rather like a tax to us, which means we now have less money against all goods and services (the part we lost got shipped abroad).

    Now the bone I have to pick with CPI is it can show an increase in a basket of goods and services, but it doesn’t say anything about how many baskets went out the door. Check retail sales here:

    http://research.stlouisfed.org/fredgraph.png?g=3yf

    WARREN MOSLER Reply:

    as can burning up 30% of our corn crop for fuel

    jim Reply:

    @ Warren who wrote:
    as can burning up 30% of our corn crop for fuel
    _____________________________________

    That is far better than the alternative.
    The US has never done anything useful with that excess corn. Prior to being used for ethanol Uncle Sam was spending a lot more in corn subsidies than they are today.

    We have used corn exports to prop up dictators like Mubarek in Egypt. Today, the Egyptian farmers are living in slums in Cairo and their land has been converted to villas and golf courses. And this is due to a flood of US grains that destroyed their livelihood. And the portion of the corn that the US doesn’t use to put 3rd world farmers in Mexico and Egypt out of business, is used in the US to produce large quantities of animal fat and soft drink sugars.

    The price of corn has only increased about 250% from where it was in the 60′s. Farmers and rural economies all over the world have been stuck with stagnant prices on their productive output for almost 5 decades. What we are seeing today is not inflation. It just a long overdue correction in the price of grain.

    WARREN MOSLER Reply:

    how about the price per acre of corn?

    jim Reply:

    Yes, production/acre has doubled, but the cost of production has gone up as much as everything else.

    How about the price per acre for land?

    Corn ground in Iowa has increased by a factor of 20 since the 60′s.

    WARREN MOSLER Reply:

    Also all a function of biofuels as well

    WARREN MOSLER Reply:

    yes, it’s all garbage or misses the point, but understood it’s what happens as people try to reconcile mmt with what they hear elsewhere

    Reply

    ESM Reply:

    @Ken,

    Best reply I think is to tell them to look at the TIPS market, which implies less than 2.25% inflation for the next 30 years. Although that won’t convince them if they think the CPI is not measuring inflation accurately.

    Reply

  4. Roger Erickson Says:

    I’ve found the only successful way to argue MMT includes patience, time, & steady feeding of ancient anecdotes, like the one from Marriner Eccles on this page.

    It sinks in if you let it. & no amount of pounding makes the logic go through a square hole any faster.

    There are whole swaths of people who “reason” purely by analogy & momentum. Once they hear the same message 12x times, they’re comfortable with it.

    Then ya gotta worry how fast they’ll forget it, or let it be displaced by repetitive propaganda.
    It’s never over ’til it’s over – and that hasn’t happened yet.

    There are multiple quotes from the ’30s/’40s indicating satisfaction that we’d never again do something as stupid as what we did in the ’20s. Yet here we are.

    Reply

  5. Roger Erickson Says:

    http://i.imgur.com/JE1ww.jpg

    Reply

  6. Alex the Great Says:

    the issue is wage inflation NOT monetary inflation. In the western world there is a class war going on – main street vs. banking cartel and government employees vs. main street.

    MMT might get unemployment to zero in theory but in real world as long as government workers continue to make 5X the equivalent of a private sector worker and a banking cartel criminal earns 100,000 X that of a private sector worker then no amount of MMT theory is going to fix the economy.

    If we create a minimum wage job for anyone that wants it AND if all government workers got paid minimum wage with no benefits then that would fix the issues, oh plus about $2,000 banking cartel folks would need to be executed in public, that would do.

    It is wage unbalance, otherwise known as a class war, your worth is primarily based on what class you are a part of and not your productivity – bankers, government, and then main street.

    So today, you should spend ALL of your productive time trying to get into either the banking cartel or into a government job.

    For example, getting an MBA from one of the few schools closely connected to the cartel is the typically first step.

    It is not the eduction but the ability to yourself high up on the pyramid scheme and then start to work your way up the ponzi.

    MMT theory DOES NOT address the real micro-economic problem of labor wage gaps in any sense whatsoever, and that is the real problem.

    Reply

    WARREN MOSLER Reply:

    you havent read my proposals on this website?

    Reply

    JCD Reply:

    @Alex the Great,

    oh plus about $2,000 (sic) banking cartel folks would need to be executed in public, that would do.

    And when you go carrying pictures of chairman Mao
    You ain’t gonna make it with anyone anyhow …..

    Reply

    Anders Reply:

    @Alex the Great, have you considered that perhaps the real story is that the shift since 1970 towards a more shareholder-oriented economy has simply benefited the 1%, or the 0.1%, at the expense of the rest, with the financial sector facilitating this shift (and also being situated within the 1% or 0.1%)?

    I am no great fan of the government, but any wage differentials between public and private sector have little to do with public sector rent extraction. Rather, they reflect the dynamic that the guys who run and own Wal*Mart get better off for screwing down their staff’s wages, whereas the head of the EPA doesn’t. And, the public sector has fewer entry-level unqualified jobs (most arms of government with low level jobs have been outsourced) – which skews the statistics.

    It amazes me when private sector workers, who have had their real wage screwed down over the past couple of decades, resent public sector workers for not getting screwed, instead of the guys who have done the screwing!

    Look, if you want a smaller public sector then that’s a fair argument to have, but blaming public sector workers for the financial predicament of most private sector workers makes no sense.

    Reply

    Danny Reply:

    @Alex the Great,

    You can certainly make the case (and I would agree) that there are too many (non-JG) Fed. government workers, too much redundancy, but almost every study done has shown time and again that government workers make less, not more, than those with comparable education & work experience in the private sector. A JG would cancel out all those private sector McJobs and make the public/private salary averages much more even.

    Reply

    ESM Reply:

    @Danny,

    The studies I’ve seen show the opposite actually, as long as you include retirement and medical benefits. Throw in the additional job security that a government job gives, and, in the case of a high-powered govt job, the future private sector earnings power generated by government connections, and the skew towards a government job is even greater.

    Reply

    John O'Connell Reply:

    @ESM,

    I don’t have any studies, just my own experience. In Phoenix, a mainframe system programmer working at the State of AZ makes about half what he would make (and what he used to make at DHL, in my case) working at a local private sector employer like CVS or IBM. (Or Schwab or AMEX, but I guess they’re in the bankster class so never mind them.) We do still have a defined-benefit plan, but there are no bonuses, and the overall benefits package is quite comparable. We had one unique feature last year, furlough days – 6 days off without pay, which works out to a 3% salary cut.

    I think in the middle-class, non-unionized worker brackets, government employment tends to attract risk-averse people who value job security over high salaries, and they are paid accordingly. It is in the union jobs and executive brackets that government pays way more than the private sector for the same talent. And somehow, they seem to consistently get less talent for their money in the bargain.

    Oh, wait, I do have a study. My employer said last year that they are paying 15% (? I forget the number) less than the going total compensation package in the private sector for comparable jobs, and that because of budget constraints they are giving no raises for the peons, thus falling farther and farther behind. The 15% or whatever was an average of all jobs, not just mine, and the study was done before the furlough days were imposed.

  7. ayahuasca Says:

    I understand that bank lending is not reserve-constrained and that monetary policy can only set the price of money but I don’t see how it follows that monetary policy is therefore unable to cause inflation. Lending may not be reserve-constrained but investment borrowing is surely constrained to positive expected returns. It would seem that these statements can only be reconciled if investment spending is also not inflationary – which is a bit difficult to swallow, since it creates demand.

    What am I missing here?

    Reply

    WARREN MOSLER Reply:

    usually investment follows and responds to demand, present and anticipated future demand, though cost cutting investment and maint. is ongoing.

    but yes, lower rates are a plus for investment, but they likewise reduce income which can reduce demand and be a negative for output and employment

    Reply

    ayahuasca Reply:

    Right, that’s what I was missing. So my understanding is: loose monetary policy will reduce net income due to taxation on the investment-bolstered gross income. This will manifest as an overall hit to bank reserves which can only be balanced by a higher savings rate, sale of assets or borrowing at the discount window. The first two represent directly deflationary forces and the last will be reflected by a reversal of the interest rate cut that caused the inflationary pressure from the demand side.

    If that sounds about right – someone please correct me if I’m wrong! – then I wonder if there is some mathematical or accounting basis for these twin pressures on the price level from monetary policy *precisely* cancelling each other out, such that inflation can never be a monetary phenomenon. Is this assertion merely an observation from historical data? Or perhaps I am taking you too literally when you say that the ECB could not cause monetary inflation even if it wanted to. :-)

    Reply

    WARREN MOSLER Reply:

    i see these two immediate channels:

    low interest rates reduce interest paid by govt to the economy, which is a net saver to the tune of the national debt.

    and qe reduces interest payments more so.

    John O'Connell Reply:

    @WARREN MOSLER,

    Am I hallucinating or do I remember you writing that the reason we have a positive inflation rate is that the Fed has a target of 2-3% inflation? (I know someone said it, maybe it was Rodger and not you?)

    If you did say that, then what are the mechanics by which they seek to achieve it? The conventional wisdom is that low interest rates increase the money supply, stimulating demand and causing the inflation, but you are saying the opposite here (low interest rates depress interest income and thus reduce aggregate demand).

    Reply

    WARREN MOSLER Reply:

    Not me

    Hugo Heden Reply:

    @ayahuasca,

    MMT considers monetary policy to have ambiguous effects. Low interest rates, yes, sometimes somewhat inflationary, but also possibly dis-inflationary — depending on various features of the economy in question (wage structures, spending propensities, I don’t know). Take a look at page 16-17 in this paper by Wray for some discussion:

    A Post-Keynesian View of Central Bank Independence, Policy Targets, and the Rules-versus-Discretion Debate

    Reply

    ayahuasca Reply:

    Great, thanks!

    I read Warren’s suggestion that the ECB is incapable of causing monetary inflation to mean that monetary policy is never able to cause inflation. Even if it’s not strictly true it was a productive thought experiment to see if I could arrive at that conclusion. See my reply to Warren above for my reasoning there – perhaps you can spot a mistake or answer the new question I’ve arrived at.

    Reply

    Hugo Heden Reply:

    @ayahuasca,

    Your other comment above too technical for me, I don’t follow, sorry.

    But just one thing:

    Decreasing interest rates could possibly be stimulatory, yes. But only if the economy out there is in a reasonable healthy state.

    And contrarily, in a slump when unemployment is high and sales are low, you won’t be able to stimulate investment regardless of interest rates. Why would firms start investing in new machinery etc if sales are slumping and future looks gloomy? They won’t.

    That is, MMT (and fiscalists in general) holds that investment decisions depend first and foremost on aggregate demand, with interest rates only as a secondary criterion.

    (So people came up with the idea of Quantitative Easing instead, in the hope that that would work better. MMT prediction on that too would be “umm, no, it won’t”. (Let me know if you want me to dig up a reference on that.))

    WARREN MOSLER Reply:

    (think interest income channels)

  8. Adam (ak) Says:

    This is also an “interesting” proposal for the stimulation of the British economy – forced self-stimulation of the private sector. They have been talking about it since Steve Keen launched his second edition of “Debunking Economics” there.

    http://www.guardian.co.uk/money/2011/nov/21/mortgage-guarantee-scheme-concerns-lenders

    I am sure Mr Osborne must have read the Steve Keen’s prescription how to blow up the economy by pumping up the housing bubble. They are trying to do exactly that – with a stiff upper lip. The first step was giving the rich “once in a life” chance to build a mansion in the countryside – by relaxing planning restrictions. The second step involves releasing first home owner grants also called here in Australia FHOG.

    If you ride a FHOG you’ll end up among the PIIGS, Mr Osborne…

    Reply

  9. Kristjan Says:

    http://www.google.com/hostednews/afp/article/ALeqM5iyil_vk3MIM-Z6uxbFlA5nJVz1PQ?docId=CNG.3c4aa2738386a5badd0deffd173ef2ae.31

    The size of the loan would make it difficult for the IMF to use its current resources so different options are being explored, including possible joint action with the European Central Bank in which the IMF would be guarantor

    Germans are against ECB ‘printing money’ so ECB prints money and lends It to IMF and IMF lends It. I guess It is less inflationary this way.

    Reply

  10. beowulf Says:

    Excellent piece Warren.

    They say generals always fight the last war. Germany’s problem is that they always lose their wars.

    Reply

    WARREN MOSLER Reply:

    thanks!

    Reply

  11. Kristjan Says:

    Warren,
    how do you define monetary inflation?

    Reply

    Hugo Heden Reply:

    @Kristjan,

    Preliminary guessing until Warren shows up and slaps the correct answer in my face :-) Monetary inflation is something like “inflation due to increased spending power” — increased aggregate demand — demand-pull inflation. Should be distinguished from cost-push inflation (such oil price hikes rippling through ).

    Reply

    WARREN MOSLER Reply:

    darn you’re good!
    ;)

    Reply

    WARREN MOSLER Reply:

    a continuous rise in ‘the price level’ caused by ‘excess’ aggregate demand.

    more important what’s not monetary inflation:
    a foreign monopolist jacking up price
    domestics with pricing power jacking up price
    tax hikes like vat and sales taxes that flow directly to cpi
    relative value shifts due to competitive supply and demand issues.

    Reply

    Ken Reply:

    @WARREN MOSLER,

    And yet, the fiscal/monetary authority must ultimately accommodate the price level (by providing sufficient quantities of the medium of exchange to do business), even if other factors (foreign oil, wage price leapfrog battles, etc), and not the gov’t policy, drive that level in the first place. If they fail to accommodate we get recession/depression.

    That’s why we’ve had a more or less steady positive rate of inflation averaging three percent for the past 100 years (doubling the price level roughly every 25 years). Prior to that time this wasn’t so …. price index stayed more or less constant over time. But we also had frequent contractions and bank panics, etc.

    I think most of us here would agree that this positive inflationary bias is better than the alternative. However, many conservatives/libertarians think otherwise, and like to show graphs showing the multiple doublings of the price index since 1913. I get this thrown at me a lot too.

    Reply

    WARREN MOSLER Reply:

    sufficient quantities to do business? you need to read the 7dif and mandatory readings?

    Ken Reply:

    @Ken,

    I have read those things … bad choice of words maybe? An increase in the price level …. for whatever reason …. is eventually going to cause the private sector to want more cash, which gov’t sector must spend into existence, right?

    WARREN MOSLER Reply:

    Or reduce govt secs and/or reserve balances at the fed

    Hugo Heden Reply:

    @Ken,

    I think you got it pretty much right, Ken :-)

    For example, John T. Harvey writes about the 70s

    http://www.forbes.com/sites/johntharvey/2011/05/14/money-growth-does-not-cause-inflation/4/ (links to article page 4 out of 4)

    As the price of oil skyrocketed, so costs of production rose for many, many US businesses. Because there is a lag between purchasing inputs and selling output, most firms have to borrow money (working capital) to bridge the gap. As the ripple effect of the OPEC price increases moved throughout the economy, the demand for cash by these businesses rose. Quite reasonably, private banks and the Fed did what they could to accommodate. These were fair requests on the part of US entrepreneurs. Loans were extended and government debt sold by the private sector to the central bank. This raised the supply of money. Therefore, the rising prices led to an increase in the supply of money and not the other way around. QE, QE II, and the federal government deficit cannot by themselves cause inflation.

    Ken Reply:

    @Hugo,

    Yes, sort of, except the accommodation would have to be fiscal as well, because we all know here that Fed monetary operations by themselves have very limited effect.

    Hugo Heden Reply:

    @Ken,

    Hmm, not sure about that though. If there is an episode of increasing prices due to cost push inflation (say oil), you would argue that some fiscal stimulus would be appropriate to accommodate for the “lack of money”? Not sure. Increasing prices is not typically regarded as a “lack of money” problem.

    But I see how you’re thinking — if costs increase, more money may be needed as grease to keep the wheels spinning. MV=PT.

    Never thought about it like that.

    Well, maybe.. If the cost-push inflation increases costs so that businesses go under, unemployment will rise. (You’ll then have a stagflationary episode — both inflation and unemployment).

    To counter the unemployment, fiscal tools could be employed. But how to do that without enforcing the current inflation? Well, the decent-minimum-wage-job-guarantee is a good price anchor. It could help stabilize prices as well as fix the unemployment problem.

    I’m tired.

    Unforgiven Reply:

    @Hugo,

    I would think that in the case of cost/push causing an increase in net foreign sector savings, the money would have to be replaced in the domestic sector. Little different from a tax, in that respect.

    Ken Reply:

    If you have cost-push inflation or a wage price spiral, but the economy is still operating below capacity, gov’t deficits would have to keep up with the inflation or risk throwing the economy into an even deeper recession. It is possible that the recession will halt the inflation, but this is too blunt an instrument and we really should find a better way, right?

    But this is still a case where gov’t spending and money creation is merely following the inflation, not causing it as monetarists would say.

    Hugo Heden Reply:

    @Ken,

    Something you wrote above was:

    > “Yes, sort of, except the accommodation would have to be fiscal as well, because we all know here that Fed monetary operations by themselves have very limited effect.”

    Yes, MMTers say that “monetary policy” (interest rate management, QE) has weak, ambiguous and indirect effects on the economy.

    What is meant though is effects on aggregate spending power, investment decisions and unemployment levels. To use QE or lower interest rates to stimulate the economy is like “pushing on a string”. Fiscal policy is the preferred tool.

    However, the Fed’s function as a lender of last resort is something else. That’s sort of separate from “monetary policy”, isn’t it? The lender-of-last-resort function can be pretty crucial.

    When the string is pulled from out there, the Fed accommodates by lending.

    Ken Reply:

    Lender of last resort just ensures sufficient liquidity in the banking system to prevent old fashioned bank run … doesn’t inject net financial assets into the real economy.

  12. rodney Says:

    somewhere in the comments someone mentioned that inflation is an increase in all prices. It doesn’t make sense to me that all price would rise equally. Would it be true that some prices would rise more than others reflective of demand but measured by the cpi as a percentage general increase? /qtm people present it as if the money itself is losing value when it seems to me the resourses it buys are becoming more valuable while the price of money stays the same. Maybe I’m rambling but thats been bothering me?

    Reply

    WARREN MOSLER Reply:

    yes, that’s called a relative value shift

    Reply

  13. rodney Says:

    I would say that demand pull is just that, demand that exceeds the available resources. Cost push would be a shift in the availability of that resource or an increase in price while demand stays relativly constant. Let’s see what Warren says.

    Reply

  14. Ralph Musgrave Says:

    Warren says ECB can’t cause inflation because only fiscal can. Strikes me that if the ECB bought up large volumes of PIG bonds, the PIGS would then borrow loads from commercial banks and go on a spending spree, particularly those irresponsible Greeks. And that’s fiscal, isn’t it?

    And even if the inflationary effect was mild, there is the additional problem that the whole point of the austerity imposed on PIGS is to get them to cut costs and become more competitive. Mild inflation in PIG countries effectively kicks the can down the road: it delays the evil day when they just have to start getting competitive.

    I don’t see a way out of this problem . . . . except . . . . if I was economic dictator of Europe I’d enforce a 30% or whatever cut in wages and prices in PIG countries. That would amount to a devaluation of PIG currencies, which would solve the problem.

    Reply

    WARREN MOSLER Reply:

    how about, instead, a 30% increase in everyone’s wages which are 30% too low?

    ;)

    Reply

    Kristjan Reply:

    @Ralph Musgrave,
    Perhaps you should be head on IMF Ralph? :)

    Reply

    Ralph Musgrave Reply:

    @Kristjan,

    If Bill Mitchell is correct, you need to be seriously short of I.Q. to be head of the IMF, and I’m not seriously short of I.Q. – least that’s my opinion.

    Reply

    Kristjan Reply:

    @Ralph Musgrave,
    I didn’t think you were. Bill is right probably

  15. John Derpanopoulos Says:

    The above article attributes German hyperinflation in the mid-war period to large-scale buying of foreign currencies with Deutsche Marks – necessary for war reparations. In other words, a central bank can debase its currency by printing enough of it and exchanging it for other currencies so as to create a cost-push inflation(presumably). Curiously, such policy is labelled “fiscal policy.” Yet I recall having read here (and elsewhere) repeatedly that Quantitative Easing, which is the exchange of one asset for another, is not inflationary. If, in fact, sufficient printing of money led to a rise in asset prices (which was after all the intended purpose of QE), where exactly is the distinction?

    Reply

    beowulf Reply:

    @John Derpanopoulos,
    Exchange rate policy isn’t fiscal policy nor is it monetary policy. This NYRB page explains how Tsy and the Fed make the sausage.
    http://www.ny.frb.org/aboutthefed/fedpoint/fed44.html

    Ravi Batra’s proposal for Tsy and the Fed to create a dual exchange rate policy gives an idea of how powerful this tool can be (frankly its probably the most stimulative thing Obama can set in motion without having to go to Congress).
    http://books.google.com/books?id=bX3XpV1wM64C&lpg=PA205&pg=PA205#v

    Reply

    Adam (ak) Reply:

    @John Derpanopoulos, because the prices of all the imported goods are affected directly when the exchange rate changes while replacing the bonds with reserve account balances changes very. Imagine petrol (gas or whatever) at $10/litre (liter). Would it cause an increase of other products or not?

    BTW this is most likely the transmission mechanism leading to hyperinflation when currency flight occurs and people want to get rid of the savings in the domestic currency (but they can’t as they can only pass a hot potato to someone else).

    Reply

    John Derpanopoulos Reply:

    So if the Fed buys “assets,” it pushes up the price of those assets. Bernake’s 2002 speach (on fighting deflation) extended the list of assets the Fed could buy to include all sorts of private assets and even foreign assets. These could include residential properties or foreign bonds, etc. Hence I guess we are not in disagreement; QE can fight deflation if pushed far enough.

    Reply

    WARREN MOSLER Reply:

    If pushed beyond financial assets

    WARREN MOSLER Reply:

    Buying fx vs local currency financial assets

    Reply

  16. Diatome Says:

    If Japan or the US raised interest rates significantly wouldn’t it be inflationary due to all the interest income from tsy secs? That adds NFA.

    Reply

    WARREN MOSLER Reply:

    that would be my guess.

    Reply

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