Spain, QE chart, Wholesale trade, UK and France industrial production, Import and export prices

Fyi, we will be in Spain next week.

Here are some of the details:

There is a newly formed MMT Group in Spain called APEEP which stands for “Asociación para el Pleno Empleo y la Estabilidad de Precios”.

In an effort to bring MMT into the political debate in Spain, they will be hosting me for a presentation of the Spanish translation of “The Seven Deadly Innocent Frauds of Economic Policy”, starting with a presentation in Madrid on the 14th of September, Valencia on the 15th of September, and Vila-real on the 17th of September.

Here are links for the events, including time/date/location

14th September Madrid
15th September Valencia
17th September VilaReal

And this is the press release for the events containing more details.

Also:

Asociación Para el Pleno Empleo y la Estabilidad de Precios (APEEP) (Association for Full Employment and Price Stability), is a non-profit organization devoted to raising awareness and disseminating Modern Monetary Theory amongst the Spanish public. APEEP believes that full employment and price stability are compatible if public policy is conducted within an MMT framework. The current economic crisis within the Eurozone highlights the need for a Post Keynesian and MMT approach to public policy.

You’d think by now word would be out it’s just a placebo, but ancient beliefs tend to linger on…
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Not good- sales down and inventories remain elevated:

United States : Wholesale Trade
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Highlights
Factory inventories held stable in July as did wholesale inventories, down 0.1 percent against a 0.3 percent decline in sales that leaves the stock-to-sales ratio unchanged at 1.30. Wholesale inventories look light for machinery and apparel but heavy for farm products and metals.

The nation’s inventories are heavier than they were last year which may limit future production and hiring. Next data on inventories will be the business inventories report on Tuesday.

MONTHLY WHOLESALE TRADE: SALES AND INVENTORIES July 2015 Sales. The U.S. Census Bureau announced today that July 2015 sales of merchant wholesalers, except manufacturers’ sales branches and offices, after adjustment for seasonal variations and trading-day differences but not for price changes, were $449.5 billion, down 0.3 percent (+/-0.5)* from the revised June level and were down 4.2 percent (+/-1.4%) from the July 2014 level. The June preliminary estimate was revised upward $1.0 billion or 0.2 percent.

This chart is now looking a lot like prior recessions:
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Inventories/Sales Ratio. The July inventories/sales ratio for merchant wholesalers, except manufacturers’ sales branches and offices, based on seasonally adjusted data, was 1.30. The July 2014 ratio was 1.19.
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Great Britain : Industrial Production
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France : Industrial Production
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United States : Import and Export Prices
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None of this is considered the ‘some improvement’ Chairman Yellen was looking for going into the Fed meeting next week…

Krugman on debt

Debt Is Good

By Paul Krugman

Aug 21 (NYT) — Rand Paul said something funny the other day. No, really — although of course it wasn’t intentional. On his Twitter account he decried the irresponsibility of American fiscal policy, declaring, “The last time the United States was debt free was 1835.”


Which consequently was followed by the worst depression in US history.

Wags quickly noted that the U.S. economy has, on the whole, done pretty well these past 180 years, suggesting that having the government owe the private sector money might not be all that bad a thing. The British government, by the way, has been in debt for more than three centuries, an era spanning the Industrial Revolution, victory over Napoleon, and more.

But is the point simply that public debt isn’t as bad as legend has it? Or can government debt actually be a good thing?

Believe it or not, many economists argue that the economy needs a sufficient amount of debt out there to function well.


Yes, to offset desires to not spend income (save) when private sector borrowing to spend isn’t sufficient, as evidenced by unemployment.

And how much is sufficient? Maybe more than we currently have. That is, there’s a reasonable argument to be made that part of what ails the world economy right now is that governments aren’t deep enough in debt.


Yes, it’s called unemployment, which is the evidence that deficit spending is insufficient to offset desires to not spend income. Something economists have known by identity for at least 300 years.

I know that may sound crazy. After all, we’ve spent much of the past five or six years in a state of fiscal panic, with all the Very Serious People declaring that we must slash deficits and reduce debt now now now or we’ll turn into Greece, Greece I tell you.

But the power of the deficit scolds was always a triumph of ideology over evidence, and a growing number of genuinely serious people — most recently Narayana Kocherlakota, the departing president of the Minneapolis Fed — are making the case that we need more, not less, government debt.

Why?


This is the right answer- because the US public debt, for example, is nothing more than the dollars spent by the govt that haven’t yet been used to pay taxes. Those dollars constitute the net financial dollar assets of the global economy (net nominal savings), as actual cash, or dollar balances in bank accounts at the Federal Reserve Bank called reserve accounts and securities accounts. Functionally, it is not wrong to call these dollars the ‘monetary base’. And a growing economy that generates increasing quantities of unspent income likewise needs an increasing quantity of spending that exceeds income- private or public- for a growing output to get sold.

One answer is that issuing debt is a way to pay for useful things, and we should do more of that when the price is right.


Wrong answer. It’s never about ‘when the price is right’. It is always a political question regarding resource allocation between the public sector and private sector.

The United States suffers from obvious deficiencies in roads, rails, water systems and more; meanwhile, the federal government can borrow at historically low interest rates.


Wrong answer. Yes, there is a serious infrastructure deficiency. The right question, however, is whether the US has the available resources and whether it wants to allocate them for that purpose.

So this is a very good time to be borrowing and investing in the future, and a very bad time for what has actually happened: an unprecedented decline in public construction spending adjusted for population growth and inflation.


I agree it’s a good time to fund infrastructure investment, due to said deficiencies.

However, whether or not it’s a good time to increase deficit spending is a function of how much slack is in the economy, as evidenced by the unemployment rates, participation rates, etc. And not by infrastructure needs.

And my read based on that criteria is that it’s a good time for proactive fiscal expansion.

Nor in any case is deciding whether or not to increase deficit spending rightly about whether or not to increase borrowing per se for a government that, under close examination, from inception necessarily spends or lends first, and then borrows. As Fed insiders say, ‘you can’t do a reserve drain without first doing a reserve add.’

Beyond that, those very low interest rates are telling us something about what markets want.


Wrong, they are telling is something about what level market participants think the fed will target the Fed funds rate over time.

I’ve already mentioned that having at least some government debt outstanding helps the economy function better. How so?


Right answer- deficit spending adds income and net financial assets to the economy to support sufficient spending to get the output sold.

The answer, according to M.I.T.’s Ricardo Caballero and others, is that the debt of stable, reliable governments provides “safe assets” that help investors manage risks, make transactions easier and avoid a destructive scramble for cash.


Wrong answer. Net govt spending provides in the first instance provides dollars (tax credits) in the form of dollar deposits in reserve accounts at the Federal Reserve Bank. Treasury securities are nothing more than alternative deposits in securities accounts at the Federal Reserve Bank for those dollars. Both are equally ‘safe’.

Now, in principle the private sector can also create safe assets, such as deposits in banks that are universally perceived as sound. In the years before the 2008 financial crisis Wall Street claimed to have invented whole new classes of safe assets by slicing and dicing cash flows from subprime mortgages and other sources.

But all of that supposedly brilliant financial engineering turned out to be a con job: When the housing bubble burst, all that AAA-rated paper turned into sludge. So investors scurried back into the haven provided by the debt of the United States and a few other major economies. In the process they drove interest rates on that debt way down.


Rates went down in anticipation of future rate setting by the fed.

What investors did was reprice financial assets. Investors can’t change total financial assets. The total only changes with new issues and redemptions/maturities.

And those low interest rates, Mr. Kocherlakota declares, are a problem. When interest rates on government debt are very low even when the economy is strong, there’s not much room to cut them when the economy is weak, making it much harder to fight recessions.


True, but cutting rates doesn’t fight recessions. In fact low rates reduce interest income paid by govt to the economy, thereby weakening it.

There may also be consequences for financial stability: Very low returns on safe assets may push investors into too much risk-taking — or for that matter encourage another round of destructive Wall Street hocus-pocus.


That would be evidenced by an increase in the issuance of higher risk securities, but there has been no evidence of that. In fact, it was $100 oil that at the margin drove the credit expansion that supported GDP growth, as evidenced by the collapse when prices fell.

What can be done? Simply raising interest rates, as some financial types keep demanding (with an eye on their own bottom lines), would undermine our still-fragile recovery.


It would more likely very modestly strengthen it from the increase in the govt deficit due to the increased interest income paid by govt to the economy. However, I’d prefer a tax cut and/or spending increase to support GDP, rather than an interest rate increase. But that’s just me…

What we need are policies that would permit higher rates in good times without causing a slump. And one such policy, Mr. Kocherlakota argues, would be targeting a higher level of debt.


Mr. K isn’t wrong, but again I’d rather just have a larger tax cut to get to the same point, but, again, that’s just me…

In other words, the great debt panic that warped the U.S. political scene from 2010 to 2012, and still dominates economic discussion in Britain and the eurozone, was even more wrongheaded than those of us in the anti-austerity camp realized.


True, and this author…

Not only were governments that listened to the fiscal scolds kicking the economy when it was down, prolonging the slump; not only were they slashing public investment at the very moment bond investors were practically pleading with them to spend more; they may have been setting us up for future crises.


True but for differing reasons. It’s never about investors pleading. It’s always about the public purpose behind the policies.

And the ironic thing is that these foolish policies, and all the human suffering they created, were sold with appeals to prudence and fiscal responsibility.


The larger problem with this editorial is that the wrong reasons it gives for what’s largely the right policy are out of paradigm reasons that the opposition routinely shoots down and shouts down, easily convincing the electorate that they are correct and the ‘headline left’ is wrong.

Feel free to distribute

Sanders endorsement, Greece, Passenger transportation services index

A bit of press for my endorsement of Bernie Sanders for President after a chat with Stephanie Kelton which included how they’ve been working together on his economic agenda.

Warren Mosler – An International Leader in Modern Monetary Theory Endorses Bernie Sanders

Varoufakis completely misses the point.

First, the only way public debt, for all practical purposes, need be ‘paid back’ is via refinance.

Second, with the implied guarantee of the ECB’s ‘do what it takes’ policy, rates are down and market forces not applicable for those members ‘in good standing’ and not at risk of losing that ECB support.

Third, Greece, and the entire euro zone, is in desperate need of larger deficits/more public debt, either through tax reductions or spending increases (that choice is political). So even if Greece ‘wins’ on all points currently being negotiated the economy still deteriorates, just at a slower pace.

Fourth, if Greece attempts to go to drachma or any kind of ‘parallel currency’, based on discussion I’ve heard and read, it will most likely be a case of out of the frying pan and into the fire. The expertise required to do it right is not evident at any level.

Varoufakis demands slash to Greek debt

June 15 — Greek finance minister Yanis Varoufakis said that his country desperately needed some of its debts written off if it is ever to pay anything back.

“Only [with debt cuts] can we guarantee the repayment of as much of our debt as possible and actually deliver,” Varoufakis told Bild on Monday.

He claimed that he would immediately agree to further financial aid from the country’s creditors – which he and Prime Minister Alexis Tsipras have until now resisted due to the harsh conditions attached to it – if some of Greece’s debts could be cancelled

Another index in decline:
passenger-trans-services

Udine presentation

These are the slides of one of my presentations here in Italy.

One of the main points is that the deficit limit functions to limit the euro denominated net ‘savings’ of the economy, with the unemployment the evidence that 3% currently falls short of the ‘demand for savings’.

(Note that when I present it I make the point that ‘savings’ can be held by residents or non residents.)

Udine Presentation

Kelton story in Forbes, attribution

Confused, of course, but in the news!

Watch Out, MMT’s About, As Bernie Sanders Hires Stephanie Kelton

By Tom Worstall

Jan 12 (Forbes) — The idea that Modern Monetary Theory might actually become vaguely mainstream, even an influence on how the Republic is governed, entirely petrifies me. It’s not actually that I disagree very much with the economics that is being laid out in MMT: indeed, I’m terribly tempted to agree that they’re actually correct in much of what they say. Rather, it’s what it will do to the political process if they do gain real policy influence. For at present there does have to be some link, however vague or tenuous, between how much money the government takes in from all of us and how much money the government spends on giving prizes to all. The basic innovation of MMT is to point out that this no longer has to be so: and that’s simply not a tool that I want politicians of any stripe to have available to them.

Dylan Matthews has the story that has me hot and bothered:

President Obama’s biggest problem in the Senate is obviously its new Republican majority, but opposition from the left wing of the Democratic caucus appears to be growing too. Most prominently, Sen. Elizabeth Warren (D-MA) has clashed with the White House on a key Treasury Department position and the CRomnibus spending package. But new budget committee ranking member Sen. Bernie Sanders (I-VT) is poised to break dramatically from traditional Democratic views on budgeting, from Obama to Clinton to Walter Mondale and beyond.

His big move: naming University of Missouri – Kansas City professor Stephanie Kelton as his chief economist. Kelton is not exactly a household name, but to those who follow economic policy debates closely, tapping her is a dramatic sign.

If you want all of the grubby details of MMT then I recommend that piece and those it links to. I’ll just give a pencil sketch here.

It’s most certainly not obvious that MMT proponents are all barking mad or anything. Jamie Galbraith (who I’ve had one or two very limited interactions with) is certainly a reasonable guy. And his insistence that a budget surplus, despite the ribbing he gets about it, is in fact economically contractionary doesn’t seem to have anything wrong with it. Budget deficits are fiscally expansive, a surplus is fiscally contractionary, if there’s any one statement at the heart of Keynesianism that’s it. I might differ on the desirability of a surplus at times but not on that basic point about one being contractionary. My disagreement being that the old standard Keynesianism was based on the idea that at times we want the government to be contractionary. Not as a means of paying down the debt or anything but as just general good management of the economy. Sure, let’s add to aggregate demand in a slump but the flip side of that coin is that in the boom we want to temper things. Just as the old complaint about central banking goes (“the central banker’s job is to remove the punch bowl just as the party gets going” by raising interest rates) a budget surplus is the fiscal equivalent, just part of moderating both the booms and busts to which capitalism is prone.

So I’m certainly not thinking that the MMTers are over there with David Icke and whispering about the Grey Aliens or anything.

And their basic outline about money creation is true as far as I can see. If you’re a country with your own central bank you can print as much money as you like. And sure, you could indeed finance government just by printing more money. Print money, spend it, hey presto, you’ve financed government. Standard monetary theory also recognises this: we know that the Fed makes a pretty profit each year from printing Benjamins (20 cents of paper and 3 cents of ink really is worth $100 these days) and that’s worth perhaps $20 billion a year to the US government in seignorage. We really don’t complain about it either. That standard monetary theory then also says that doing too much of this (in more detail, printing or creating lots of base money, rather than the creation of credit in the manner that the banking system does) will be highly inflationary. Standard theory points to Wiemar Germany, post WWII Hungary and modern Zimbabwe as examples (that last so fun that the end series of banknotes were only printed on one side as they didn’t have enough “real money” left to buy ink).

At which point the MMT crowd say ah, but yes, that’s what taxes are for. Print the money, spend it, thereby injecting it into the economy, and if inflation rises then taxes are what sucks that money back out of the economy and thus kills off the inflation. And it’s that bit that absolutely terrifies me. The effect that idea has on the incentives for politicians.

Given that we are discussing monetary policy it seems appropriate to bring Milton Friedman in here. And he pointed out that if you ever have a chance to cut taxes just do so. On the basis that politicians, any group of politicians, will spend the bottom out of the Treasury and more however much there is. So, the only way to stop ever increasing amounts of the the entire economy flowing through government is simply to constrain the resources they can get their sticky little mits on. We could, for example, possibly imagine a Republican from the Neanderthal wing of the party arguing that what the US really needs is another 7 carrier battle groups. And one from the even more confused than usual Progressive end of the Democratic Party arguing that each college student needs her own personal carrier battle group to protect her from the microaggressions of being asked out for a coffee. You know. Sometime. Maybe. If you want to?

A Mea Culpa and Some Comments on MMT and Fiat Currency Economics

By Warwick Smith

Jan 12 — It has recently been pointed out to me that some of my writing on monetary economics has not given proper attribution to the intellectual tradition behind the ideas that I present and that this gives the impression that these are my ideas. I’m embarrassed to admit that the criticisms are spot on and I have made a major misjudgement in how I wrote these articles (one in The Conversation and one in The Guardian). I had no intention of stealing other peoples ideas but, nevertheless, this is in effect what I did. I apologise unreservedly to those who may have felt aggrieved by my actions.

I have a history in public policy activism and I have approached my recent popular political and economic writing somewhat from an activist standpoint where I viewed the main game as advocating and causing public policy change and increasing public awareness. The branch of monetary economics known as modern monetary theory (MMT) has something of an activist element to it where a minority who hold an accurate view of how things are and, perhaps to a lesser extent, how things should be, are vying for airtime against the overwhelming majority who hold (or at least communicate) a false perspective on monetary economics and public finance.

I thought that I could add a new voice and a new strategy to that struggle by simply writing about monetary economics from an MMT perspective but as if it’s just the uncontroversial (among economists) truth about monetary economics rather than a minority view among economists. I think the complexities of intra-discipline disagreement are impenetrable for newcomers and will put most people off investing the effort to understand the arguments.

Taking this line of thinking led me to make a serious misjudgement in what I wrote and how I wrote it because MMT is more an intellectual and academic discipline than it is an activist movement and, as such, people’s careers and their professional profiles are at stake. Again, I apologise to the people whose work has inspired some of my writing who have not been properly acknowledged including Warren Mosler, Perry Mehrling, Bill Mitchell and Steven Hail.

I wrote to the Guardian editors requesting a couple of additions. They agreed to add attribution to a line early in the article that credits Warren Mosler but not to make further edits post-publication. I’m a strong believer in owning up to mistakes and trying to remedy them when others are affected.

I believe MMT faces serious challenges in part because of its name and the way it is usually presented. A better name would be something like Fiat Currency Economics because MMT is not a theory but is primarily just a description of reality and the clear consequences that flow from that reality. No economist that I’ve found has any clear and well reasoned refutation of MMT to offer. All attempts at refutation appear to rely on misunderstandings or misrepresentations. This is why I took the approach of not referring to MMT at all in the pieces that I wrote. Nevertheless, I still should have referred to the people whose work contributed to or provided the ideas for the articles and I greatly regret that I did not. I promise I will not make this mistake again.

Below is a list in rough descending order of significance with respect to influencing my views on monetary economics.

Perry Mehrling’s Coursera course The Economics of Money and Banking
Warren Mosler’s book The Seven Deadly Frauds of Economic Policy
Various presentation given by Steven Hail
University of Newcastle’s CofFEE report on the Job Guarantee
Professor Bill Mitchell’s blog – this is the most comprehensive of the sources here but it’s low on my list because I came to it quite late in the formative period of my thinking on money and finance.