Tag Archives: MMT

Rising Deficits Pose Major Threat to Economy: Bernanke

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Not much progress here:

Rising Deficits Pose Major Threat to Economy: Bernanke

By Jeff Cox

Feb 2 (CNBC) — Rising federal budget deficits are posing a significant threat to the U.S. economy and are likely to cause a crisis if not brought under control, Federal Reserve Chairman Ben Bernanke told Congress Thursday.

Calling the situation “unsustainable,” the central bank leader pointed out that surging health-care costs, along with the high level of government spending used to pull the economy out of recession, are creating fiscal hazard.

“Having a large and increasing level of government debt relative to national income runs the risk of serious economic consequences,” Bernanke told the House Budget Committee. “Over the longer term, the current trajectory of federal debt threatens to crowd out private capital formation and thus reduce productivity growth.”

At the same time, he also warned Congress not to pull the reins too tightly so as to threaten growth.

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Japan Fiscal Pressure Rises as Tax Increase Not Enough

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Good luck to them:

Prime minister Yoshihiko Noda told parliament that he will move to double sales tax to 10pc, saying the future of the world’s third-largest economy depends on tackling its massive public debt.

Mr Noda said the country has “no time to spare” in cutting its fiscal burden.

“It’s impossible for young people to believe that things will get better tomorrow in a society where debts resting on future generations continue growing,” he said. “It is not too much to say that the revival of hope of the entire society depends on the success of this combined reform.”

Japan Fiscal Pressure Rises as Tax Increase Not Enough

By Mayumi Otsuma

Jan 24 (Bloomberg) — Japan’s government said it will probably miss its goal of balancing the budget by 2020 even with its proposed doubling of the sales tax, underscoring the scale of the nation’s fiscal challenges.

The primary budget deficit, which excludes the cost of servicing debt, will be the equivalent of 3.1 percent of gross domestic product for the year through March 2021, the Cabinet Office said in Tokyo today. Hours after the release, Prime Minister Yoshihiko Noda reiterated his call for opposition lawmakers to engage in talks on boosting the sales levy.

Addressing the shortfall through faster growth may be a limited option for Japan, where the central bank has already cut the key interest rate near zero and the traditional boost from a trade surplus last year evaporated — for the first time since 1980. Absent structural changes that boost incentives to spend and invest, today’s report signals further fiscal tightening will be needed to rein in the world’s largest public debt.

“To balance the budget, the rate needs to rise further,” said Takuji Okubo, chief Japan economist at Societe Generale SA in Tokyo, referring to the sales-tax level. “We’ve passed the point where we can soft-land the fiscal situation. The question is how hard the landing is going to be.”

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Monetary Theory, Crony Capitalism and the Tea Party

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Just posted on CNBC:

Monetary Theory, Crony Capitalism and the Tea Party

By John Carney

Dec 21 (CNBC) — The past few years have taught us a lot about the effects and operations of monetary policy in the United States.

The Federal government responded to the economic downturn by spending enormous amounts and Federal Reserve responded to the financial crisis with an enormous expansion of its balance sheet — what the proles call “printing money” — and both occurred without any attendant inflation or giant soaring of interest rates.

The so-called “bond vigilantes” turned out to be mythological creatures, at least as far as U.S. federal debt is concerned. Even the crisis over the debt ceiling and the downgrade of the U.S.’s credit rating only lead to lower interest rates.

The school of economics that best explains this phenomenon is called “Modern Monetary Theory” or MMT. The MMT school is made up of scholars, businessmen and online advocates who have a deep understanding of the operations of the actual operational aspects of our monetary system.

They argue, quite persuasively, that our monetary system is built in such a way that our government is never revenue constrained, which is to say it can spend as much as it likes, because the government creates our money. The real constraint on government spending is price inflation, which occurs when government and private spending outpace economic output.

I was first attracted to MMT because of the focus on monetary operations. I really enjoy figuring out the nitty-gritty details of how things like swap lines, Treasury auctions, and payment of claims on the Treasury occur. I like reading detailed papers on the daily meetings of the Treasury and the Fed estimating what Federal spending will amount to. Many of the MMT people have studied this stuff in detail.

Monetary nerds of the world unite, you have nothing to lose but the interest of your cooler friends.

For those of you interested in learning more, I suggest you start with the website Pragmatic Capitalism, which is edited by Cullen Roche. Now, Cullen isn’t a fully orthodox MMTer but he is one of its clearest exponents. It was my first doorway into MMT.

Other sites that I regularly read include Warren Mosler’s MoslerEconomics; Mike Norman Economics, which tends toward the combative, and New Economic Perspectives, which tends toward the academic side of things. There are dozens of other sites, which you’ll no doubt encounter if you follow the links to the ones I just named. I’d also recommend reading Mosler’s book, “The Seven Deadly Innocent Fraud’s of Economic Policy.”

There’s a lot more to MMT than its view of monetary operations and government funding, however. They believe the government should guarantee jobs for everyone, that the financial system tends toward crisis and corruption, that capitalist economies are not self-regulating, and that fiscal policy should be measured by its effect on the economy not on whether budgets are balanced. Some of this is fine, other parts I regard as distractions (such as the jobs guarantee).

But my biggest point of departure with the MMTers is they display a political and economic naivete when it comes to the effects of government spending. When they talk about spending it is almost always in terms of abstract aggregates, which is weird for a school of economics so focused on the specifics of monetary operations. What this means is that they miss the distortions of crony capitalism the accompanies so much government spending.

Government spending occurs through specific channels, not in aggregate abstractions. This means that certain companies and sectors of the economy benefit, and others suffer, because of government spending.

The sectors and companies that benefit are not those that bring the most or the widest prosperity but, conversely, those in which prosperity is most concentrated in the hands of a few. The spending is accompanied by regulatory privileges and barriers that also benefit the very same groups. When government spending levels and regulatory operations are high, this has a widely distortive effect on the economy that effectively impoverishes most of the population. This is basic public choice Econ 101 but the MMTers seem blind to it.

If any MMTers want to learn more about this effect of government spending and regulation, a good place to start would be two books by my brother Tim Carney. Tim covers politics for the Washington Examiner, and his columns often address these very points. But for a fuller treatment of the subject I suggest you read “The Big Ripoff: How Big Business and Big Government Steal Your Money” and”Obamanomics: How Barack Obama Is Bankrupting You and Enriching His Wall Street Friends, Corporate Lobbyists, and Union Bosses.”

Likewise, the MMTers seem not to understand the politics of inflation and why government often doesn’t prevent inflation from occurring, even though it is obviously within its power to do so. The problem with inflation was first and best described by Austrian economists, who explained that inflation does not spread evenly through the economy. It benefits some economic players and harms others because it moves through the economy sequentially.

The first recipients of inflated dollars are those closest to government, those on the receiving end of government payments. They get to pay non-inflated prices for the goods and services they consume because other economic actors have not yet realized that inflation is taking place. Those closest to the primary recipients are also advantaged against those further away. The real losers are private citizens whose economic activities are furthest removed from the crony capitalist and financiers who primarily benefit from inflation. This is, again, a case where those receiving concentrated benefits will almost always beat out those suffering dispersed costs. Public choice 101 again.

Because they do not at least publicly address the crony capitalist distortions of government spending and inflation, the MMTers are at a loss when dealing with Tea Party objections to government spending.

Much of the Tea Party’s objection to spending and deficits is not to counter-cyclical stimulus spending or broad-based entitlements. (I doubt very many of them want to reform Social Security, for instance.) It’s to the fact that the government picks winners and losers when it spends, especially when it engages in stimulus, that is, discretionary, spending.

This objection to cronyism is at the very heart of the Tea Party movement. It is controlling the Republican primaries right now. It is why the bailouts irked so many. It is, in fact, a deep part of the Occupy Wall Street movement.

It’s also why the public isn’t really that interested in the things that bother the policy wonks so much. Things like the cost of Social Security or medical care. People don’t mind these so much because they are less prone to cronyism and distort the economy less. This kind of spending is more neutral than discretionary spending. So it doesn’t bother the Tea Partiers or the Occupiers.

And guess what? This aligns the Tea Party with MMT. You guys also don’t think Social Security is in danger of going bankrupt. You know the government won’t run out of money, that Social Security checks will never bounce. The wonks have it wrong; the proles have it right.

Even your Jobs Guarantee might be sellable on the grounds that it is government spending without cronyism.

So my recommendation to the MMTers is that they stop talking about spending in the abstract. Start talking about spending that leads to crony capitalism and spending that does not. Get on the side of the anti-crony, Tea Party brigades. There’s a natural friendship to be made.

Let’s make it happen.

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ECB Wants New Capital Rules Amid Credit Crunch Fears

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It’s supports the notion that they understand that for govt debt to go down with the current institutional structure they need private sector debt (and/or exports) to increase.

However with the private sector necessarily pro cyclical (which is what Minsky boils down to),
at best this policy will keep mainly keep things from getting worse than otherwise.

ECB Wants New Capital Rules Amid Credit Crunch Fears

December 15 (MNI) — The European Central Bank, fearful of a looming credit crunch, is pushing regulators to alter new recapitalization rules in a way that will dissuade banks from shrinking their balance sheets to reach the 9% core tier 1 ratio required by the middle of next year, well-placed Eurosystem sources told Market News International.

In late October, the European Banking Authority (EBA) said it was requiring the region’s biggest banks to establish an exceptional and temporary buffer: the ratio of their highest quality capital to the assets on their balance sheet, weighted for risk, must reach 9% by the end of June 2012.

Eurosystem central bank officials as well as some EU governments are concerned that this new capital requirement could lead to a massive deleveraging by banks in Europe, which would entail selling off assets and significantly tightening conditions for lending.

There is widespread fear that such a development would depress loans to households and businesses. Some say it is already partly to blame for the big selloff in sovereign government bonds last month that led to sharply higher borrowing costs for Italy and Spain.

The original idea behind the EBA directive was that banks would need to maintain a constant 9% ratio over the entire period during which the requirement was in force. They could do so either by raising new capital — a big challenge in current market conditions — or by dumping assets and not acquiring new ones, which turned out to be the easier route.

“If you combine [asset] disposals with an aggressive fiscal tightening, you are creating the conditions for a sharp contraction,” a Eurozone central banker warned. He projected that the combined hit on GDP from fiscal tightening and bank retrenchment could be as much as two full percentage points. “That means a recession next year,” he said.

In recent public comments, ECB President Mario Draghi expressed concern about the potentially pernicious impact of bank deleveraging to meet the new capital targets. “We want to make absolutely sure that this process does not aggravate the credit tightening that is going on now,” the ECB president said. “It is important that banks raise capital, but not in a way that affects lending.”

Sources said that under a new proposal intended to address this problem, banks would be required not to reach a 9% ratio but to raise a specified, fixed amount of capital by the mid-2012 deadline.

Based on figures banks provided to the EBA as of end-September, the regulators would calculate the amount of capital a bank would have needed to hit the 9% capital ratio at that time. Banks would then be required to raise that level of capital regardless of what they had done with their assets since then or what they might do with them in the future.

Because banks would be required to raise the same amount of core tier one capital regardless of subsequent balance sheet moves, they would no longer have the same incentive to dump assets as a means of meeting the capital requirement.

A senior EU source said that a recent letter from the chairman of the EBA and the Polish EU presidency had noted that bank deleveraging was hurting the recovery, and it laid out a plan by which the 9% ratio would be calculated on the basis of risk-weighted assets on banks’ books as of September 30.

If the plan is approved, “you won’t see a change to the actual ratios or the sums [to be raised], but there will be a clarification that this should not be achieved through asset disposal,” this source said. “It should slow the aggressive [asset] disposal, which many people think is killing any chance of an upswing.”

After releasing new figures last Thursday on the total capital shortfall of European banks, totaling E114.7 billion, the EBA told banks to raise the money from investors, retained earnings and lower bonuses. Banks may only sell assets if the disposals do not limit overall lending to the economy, the EBA said.

However, it is not clear how bank regulators and supervisors would enforce this and whether there would be a level playing field, a well-placed Eurosystem source said. A new EBA requirement of the type now being discussed could address this issue, he said.

The decision on whether to switch from a capital ratio to a fixed amount of capital that each bank must raise lies in the hands of supervisors and regulators. It is too early to tell whether regulators will adopt the recommendation, since deliberations are still going on, another Eurosystem source said.

In its own effort to ensure the Eurozone’s economy won’t be starved for credit, the ECB last week announced a radical set of new liquidity measures, including a looser collateral framework and refinancing operations with a maturity of three years.

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

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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.

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