Bank of England Blows the Whistle

June 3, 2015
Written by: John Kelly
61 Replies

If anyone thought that banks lend depositors’ funds instead of creating new money when lending, which then become deposits, they should read The Bank of England’s latest working paper No. 529, which explains how the creation of new money becomes a deposit.

Issued on 29th of May 2015, the paper clearly states what Modern Monetary Theorists have been saying for over two decades. It also restates its own quarterly bulletin 2014 Q1, Money Creation in the Modern Economy.

In a way, it is a somewhat surprising move that blows the whistle on the popularly held view that banks are essentially intermediaries between depositors and borrowers. Importantly, it states quite emphatically that the current text book approach, and what most people believe, is erroneous.

The paper says, “The currently dominant intermediation of loanable funds (ILF) model views banks as barter institutions that intermediate deposits of pre-existing real loanable funds between depositors and borrowers. The problem with this view is that, in the real world, there are no pre-existing loanable funds, and ILF-type institutions do not exist.”

What this means is that current economics courses that teach how banks operate in the real world, are pie in the sky. The paper states that banking does not operate the way current standard, student textbooks outline, which effectively renders the mainstream economists approach to debt and deficits and macroeconomic policy in general, as wrong.

In short, banks are not constrained by reserve holdings anymore than Central Banks are constrained by tax receipts.

The paper also buries the money multiplier, or fractional reserve lending theory when it goes on to say, “in the real world, there is no deposit multiplier mechanism that imposes quantitative constraints on banks’ ability to create money in this fashion. The main constraint is banks’ expectations concerning their profitability and solvency.”

It says, “in the real world, the key function of banks is the provision of financing, or the creation of new monetary purchasing power through loans, for a single agent that is both borrower and depositor.”

It states, “The bank therefore creates its own funding, deposits, in the act of lending. And because both entries are in the name of customer X, there is no intermediation whatsoever at the moment when a new loan is made. No real resources need to be diverted from other uses, by other agents, in order to be able to lend to customer X.”

This paper is a vindication of Modern Monetary Theory taught by a small number of economists including Bill Mitchell, Warren Mosler, Randall Wray, Steven Hail, Stephanie Kelton and others. The Bank of England, however, is not the first to do so.

The U.S. Federal Reserve, back in September 2008, in their Economic Policy Review, acknowledged that mainstream macroeconomic textbooks were flawed.

Bill Mitchell writes, “The problem is that the core of the mainstream approach is wrong – at the elemental level and economists refuse to give up these notions because if they did the whole edifice of the macroeconomic theory they preach would fall to the ground. The whole shebang is flawed and of no use for those keen to understand how the monetary system operates.”

So, one might well ask what chance is there that our central bank, The Reserve Bank of Australia, would issue a similar statement? I have scanned its website as thoroughly as I can and found nothing along those lines.

I have placed a call to their public inquiries office and await their emailed response with no small interest.

Whether it’s there or not doesn’t matter, our politicians can no longer treat us like mushrooms, assuming they are not mushrooms themselves.

My unnamed RBA friend did agree, however, that as a sovereign nation and a monopoly currency issuer, we are not constrained in our spending other than by our ability to produce goods and services, otherwise recognised as our GDP.

This renders the concept of national debt and borrowing, redundant. It renders the question, ‘How are we going to pay for it?’ redundant. It renders all the ‘debt and deficit disaster’ rhetoric redundant.

It renders the government’s case for fiscal austerity redundant.

But if you are hoping that they will now see the light and embark upon a stimulus package to get people back to work, don’t hold your breath. Old habits die hard and it will be very difficult for the neo-liberal’s side to eat humble pie.

The Bank of England’s working paper also puts the MSM economists on notice to correct the error of their ways. For that, it may not be welcomed.

It is to be hoped, however, that at the very least, they might be more open and better prepared to make a more meaningful contribution to the macroeconomic debate than they have in the past. It will be interesting to see if they take up the challenge.

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mikestasseJune 3, 2015 at 12:37 pm

Ah the irony……….. didn’t the Bank of England invent the modern monetary system to pay for the Napoleonic wars?

JexpatJune 3, 2015 at 12:47 pm

It’s hard enough to get MSM reporters to frop their debt hysteria and pass along accurate information regarding progressive economic policies that are based on proven working models.

If you start going around saying that “we are not constrained in our spending other than by our ability to produce goods and services,” they’re going to laugh in your face (or behind your back).

markJune 3, 2015 at 1:13 pm

Theres no ‘irony’ – the whole financial system is a sham – all markets are controlled and the hostile elite that rules over us conjures up money out of nothing – and then charges us commoners exhorbitant amounts of interest to borrow said magic money, in the meantime inflation (real name magic money monetary debasement – deliberately built in to the system to steal from us commoners) is constantly reducing real worth.

stephentardrewJune 3, 2015 at 1:29 pm

Jexpat:

There is a time when one must ignore what convention demands to step out on your own and challenge the status quo.

Timidity, due to fear of laughter and denigration by the doyens of convention, changes nothing.

You can laugh in my face if you like but I don’t give a damn.

A paradigm changes through radical challenge not by expecting others to follow your misgivings.

I might be partially wrong however, regardless, I will not continue to support failure.

Remember no one has absolute knowledge consequently we are simply trying to understand our limitations and reduce the level of ignorance.

stephentardrewJune 3, 2015 at 1:32 pm

By the way great article John.

Keep up the good work it is much appreciated.

mikestasseJune 3, 2015 at 1:47 pm

we are not constrained in our spending other than by our ability to produce goods and services

Therein lies the REAL issue……. because as we slam into Limits to Growth, we will be seriously constrained. GLOBALLY. Humanity is virtually bankrupt already, or illiquid at best…….

JexpatJune 3, 2015 at 2:09 pm

Stephen:

“There is a time when one must ignore what convention demands to step out on your own and challenge the status quo.”

Even assuming that John’s assertion was correct (which it’s not) but for the sake of argument: policy makers, elected representatives- and more importantly, people aren’t going to jump over such an inferential chasm- and certainly not over the course of weeks, months or even a few years. At least, not in the absence of some profound national emergency.

Not.Going.To.Happen. That’s just realpolitik.

And worse, it forgoes and thwarts whatever real progress might be made toward changing dysfunctional policies, paradigms and ideology using evidence based approaches (as has slowly been occurring with regard to debt hysteria and austerity).

That’s just how it is- even if “print as much free money as you need” bonanzas didn’t ultimately result in adverse and often severe consequences:

Which they do:

“There are plenty of examples of governments trying to finance their operations through the printing press, and the outcome is always the same: inflation at first, then hyperinflation, then the end of the currency. Zimbabwe, which now has no currency of its own, is just the latest example.

There are various possible mechanisms by which this outcome occurs, but the central point is that the monetary base is typically around 10 per cent of GDP…. Any substantial increase in the monetary base can be sustained only if interest rates are pushed down to low levels, ultimately to zero. And, except in crisis conditions… zero interest rates will lead fairly rapidly to inflation in asset prices and ultimately in consumer prices….”

http://delong.typepad.com/sdj/2013/10/john-quiggin-mmt-noted-for-october-1-2013.html

flyboy48June 3, 2015 at 2:18 pm

methinks that LNP ideology dictates that this will be all to hard to fathom … how will this fit in with the “divide and conquer” and “keep the plebs frightened” while the “rich get richer and the poor get poorer” mentality? …

LeeJune 3, 2015 at 2:21 pm

I doubt that this information is only being put forward by a small number of economists. I posted a link to a video last week featuring a “news” story on NZ tv about how banks create money by lending. An economist interviewed in that segment said it is taught in first year economics, so is no great secret. I’ve also seen numerous posts on social media from economics students and recent graduates saying that what they have been taught at uni is very different from what the politicians are telling us.

LeeJune 3, 2015 at 2:26 pm

““There are plenty of examples of governments trying to finance their operations through the printing press, and the outcome is always the same: inflation at first, then hyperinflation, then the end of the currency. Zimbabwe, which now has no currency of its own, is just the latest example.”

Zimbabwe had already ruined agriculture before turning on the printing press (the president took farms away from farmers and gave them to his incompetent friends). It was unable to meet the demand with supply.

John KellyJune 3, 2015 at 2:32 pm

Yes Lee, it is information currently spread far and wide across the Internet. But there is not much of it in the MSM. I’m not aware of what is taught in Uni today but I would certainly like to see government members (and opposition for that matter) quizzed publicly, if only to see how they would reply.

revolutionarycitizenJune 3, 2015 at 2:34 pm

All Central Banks create money, that’s their job. They can also print whatever volume of money they so desire, that’s also their job.

It is also their job to manage the risks of doing those things.

One of those risks being volume related devaluation of currency causing inflation to hyper-inflation. (Which is why central banks don’t just print money to pay off the debts accrued by the government’s of the country they supply currency to)

If the US Central Bank decided tomorrow to print US$18T to pay out the Treasury Bonds the end result would simply be that no-one would accept US Currency in trade, it would cease being a reserve currency, and it would be a completely devoid of value. Thus causing the prices of US Imported Goods, of which there are many to increase in price at a rate that would destroy the economy as a whole.

Like printing money did in Germany in the 1930s and as it is doing to the economy of Zimbabwe today.

Australia is a significant importer of consumer items, simply printing money would destroy our economy faster than you could ever imagine.

And articles like the above is reason why those on the left should never ever be in charge of monetary policy.

John KellyJune 3, 2015 at 2:34 pm

Jexpat, the very mention of Zimbabwe in this context is completely irrelevant and over the top.

LeeJune 3, 2015 at 2:37 pm

“Like printing money did in Germany in the 1930s ”

Since currency only ceased to be tied to the gold standard in 1971, an example from the 1930s is completely irrelevant.

JexpatJune 3, 2015 at 3:21 pm

@”revolutionary citizen”

Those on the left to whom you presumably refer are not MMT’rs -and at times, have (as you’ve seen here) some rather critical views on them.

The usual (albeit Americano-centric) term for progressives is “Saltwater macroeconomists,” and they have a long track record of getting their predictions right- and their evidence based policies when enacted have been widely successful -enriching nations, and creating robust, diverse and forward looking economies.

Right wing economists on the other hand- exemplified by the Chicago School (or the overlapping Austrian school) -the “Freshwater Macro” types have a long track record of getting it wrong (often laughably and egrgiously wrong) -and their policies (this can be seen time after time in country after country, on the record) impoverishing nations and their populations. The only success that they can claim is advancing a dysfunctional ideology that results in needless suffering, appalling inequality and the subversion of vibrant democracies into stangant plutocracies.

LeeJune 3, 2015 at 3:37 pm

Jexpat, you might want to think about what happens with supply and demand during wartime.

JexpatJune 3, 2015 at 3:51 pm

Lee:

An excellent comparative illustration of that (along with competing versions of monetary policy) can be seen with the US Civil war:

Have a look: http://www.socialstudies.org/system/files/publications/se/6506/650607.html

LeeJune 3, 2015 at 5:08 pm

Jexpat, proponents of MMT say that when creating extra money, hyperinflation will not result so long as supply can meet demand. Which means that spending has to be allocated to carefully considered projects for their effects upon the system. You keep providing examples where supply was unable to meet demand and cite that as evidence that MMT is wrong.

silkwormJune 3, 2015 at 5:09 pm

Sorry, Jexpat, but I do not accept your “realpolitik.” You seem to be telling us that we should just give up. That sounds like fatalism to me. We can and must change the popular conception, through education.

totaramJune 3, 2015 at 6:03 pm

The Zimbabwe example is dealt with there.

http://bilbo.economicoutlook.net/blog/?p=3773

supermundaneJune 3, 2015 at 6:13 pm

@Jexpat. Citing Zimbabwe demonstrates that you’ve not understood MMT at a fundamental level.

As Lee stated, the supply of currency must meet demand in the economy. The Zimbabwean destroyed its productive base while simultaneously creating money resulting in an enormous pool of surplus liquidity. Absolutely no one who has even a modicum of understanding about MMT would advocate this and as a central tenet, MMT states clearly that spending needs to be targeted with a view to raising productivity and employment and by doing so, miminise the amount of surplus liquidity in the economy.

For the Weimar Republic it had to meet war reparations in foreign denominations meaning that its debts were in foreign currencies (the pound sterling and the franc) and in hard goods and resources. Additionally its productive heartland, the Ruhr Valley was held by the victors, which hobbled Germany’s capacity to meet repayments. Any MMTer will tell you that a sovereign issuing government can meet liabilities in the currency it issues but liabilities in foreign currencies are an altogether different matter.

The Nazis who precipitated the collapse of the Weimar Republic essentially and perversely prove the point. Once in power, they unilaterally cancelled their foreign debt obligations, issued a new currency and began to spend on infrastructure and on building a war machine. No reasonable person would suggest emulating the Nazis however there is a lesson if considered objectively – and that is how quick and decisive the transformation was when the German government no longer had to meet debt obligations in foreign currencies and when its spent the currency it issued in expanding its industrial base and increasing employment. The new currency effectively was a reset and the Nazis pursued targeted domestic spending. This is in no way an endorsement of the Nazis, their ideology or the nature of their spending 8on a war-machine to conquer Europe). It is merely an object comparative lesson between the Weimar Republic (debts in foreign currencies, non-targeted spending combined with a collapsing productive base) and the Third Reich (no foreign debt obligations, targeted spending on the productive sectors of the economy while minimising surplus liquidity within the economy).

paul walterJune 3, 2015 at 8:45 pm

It’s a fascinating thread..I wont comment, but will come back after I’ve thought more on housing price bubbles.

reality checkJune 3, 2015 at 9:45 pm

and i rest my case.

reality checkJune 3, 2015 at 9:59 pm

and fairly amazed that people still don’t believe the Bank of England when they explicitly say to the market, in a formal report, that they create currency out of nada, nothing, zip, zilch, or that if the government did the same we’d all be roooooooooooned, or Wyalla will fall off the map, or we turn into Zimbabwe. that takes some amazing feats of selective vision and talk to the hand skills.

mark delmegeJune 3, 2015 at 11:06 pm

all the more reason why small countries shouldn’t join the Euro.
And while the Yanks Japs and Euro’s didn’t quite print notes they created a shed load of something to try to float their economies.
Anyone remember how keating removed (or reduced?) the SDR’s and another limiter on the banks? Something they are now scrambling to undo. (just thought I’d throw that in)

JexpatJune 3, 2015 at 11:30 pm

Silkworm wrote: “Sorry, Jexpat, but I do not accept your “realpolitik.”

You might as well curse the weather.

“You seem to be telling us that we should just give up.

Far from it. Running with the analogy above, I’m telling you to grab and use appropriate gear for the weather -and not cry out like “a voice in the wilderness,” wishing you had a bit of rope and a raincoat.

“That sounds like fatalism to me.”

Fatalism is Burke and Wills starving on Nardoo.

“We can and must change the popular conception, through education.”

Precisely.

JexpatJune 3, 2015 at 11:52 pm

supermundane wrote:

“… you’ve not understood MMT at a fundamental level.”

That’s pretty much the same, standard refrain that MMT’rs use (and have used for how long now?) whenever they’re called on anything.

But don’t take my word for it- look it up for yourself.

JexpatJune 4, 2015 at 12:20 am

Lee wrote: “…spending has to be allocated to carefully considered projects for their effects upon the system.”

We have some considerable agreeement here, but as the thought experiment in this area goes:

“If the Treasury were to fill old bottles with bank-notes, bury them at suitable depths in disused coal-mines which are then filled up to the surface with town rubbish, and leave it to private enterprise on well-tried principles of laissez-faire to dig the notes up again (the right to do so being obtained, of course, by tendering for leases of the note-bearing territory), there need be no more unemployment and, with the help of repercussions, the real income of the community, and its capital wealth, would probably become a good deal greater than it actually is.”

Could be- what do you think?

And what does the evidence on point show?

mark delmegeJune 4, 2015 at 12:47 am

http://ihatebanks.com.au/deregulated.htm

in case you were wondering

John ArmourJune 4, 2015 at 6:40 am

The rest of the quote goes:

“…and with help of the repercussions the real income of the community would probably become a good deal larger than it is. It would, indeed, be more sensible to build houses and the like; but if there are practical difficulties in the way of doing this, the above would be better than doing nothing”

Which was Lee’s point.

John ArmourJune 4, 2015 at 7:39 am

Another bit of selective quoting from Jexpat yesterday at 2.09 pm

Here’s the rest of Professor Quiggin’s comment that Jexpat omitted:

“The higher the debt ratio, the stronger the incentive for the government to default or inflate their way out of trouble, and therefore the higher the interest rates they will face. At some point the capacity to borrow runs out.”

This goes to the substance of the Bank of England’s paper on banking, especially the doctrine of loanable funds. Quiggin’s statement would be applicable to Greece but not a currency issuing government.

First we had the BoE’s earlier bulletin on the myth of the money multiplier, now the myth of bank intermediation and loanable funds, issues proponents of MMT have been hammering for decades.

Paul Ormerod’s prediction of the “Death of Economics” in 1993 might’ve been a bit premature but these pillars of orthodox economics are now starting to crumble.

Frank Newman’s “Six Myths that Hold Back America” attacks the myth of the national debt and when the BoE gets around to dealing with that, that will be the end of this neo-liberal nightmare.

Our 220-odd MHRs will have to be sent off to re-education camps.

Jexpat:

“Tell that to Professor Quiggin, whose quote in context it is, or Cal Berkeley professor Brad DeLong, who endorses the quote in his blog Grasping Reality.”

DeLong endorsed nothing. He cryptically “Noted” Quiggin’s comments.

In an earlier post on MMT, DeLong wrote this:

“When will our deficits and debt accumulation start the process of beginning to create real financial risk we need to guard against? We don’t know. But we do know that the bond market will be very happy to tell us when the process starts.

Until then, Uncle Warren is right.”

“Uncle Warren” is Warren Mosler, one of Bill Mitchell’s mates. DeLong is starting to “get it”. I doubt Krugman ever will.

A lot of water has flowed under the bridge since then. Stephanie Kelton is now the Democratic Chief Economist on the US Senate Budget Committee.

diannaartJune 4, 2015 at 9:17 am

Interesting thread.

What would happen if Greece decided to simply not pay their ‘debt’? Cancel all agreements, reset to zero and told the EU to eff off?

Would the sky fall in?

ZathrasJune 4, 2015 at 9:21 am

Once upon a time currency was labelled with the guarantee that the government held the equivalent in silver (or gold?) but now it’s based only on IOUs held by Banks as well as things like the credit limit on issued Credit Cards that are somehow magically seen as assets that can be used to create loans.

Money is an illusion with no basis in reality – the ultimate Ponzi Scheme and exists only as perpetual and ever-increasing debt.

LeeJune 4, 2015 at 9:21 am

Jexpat can deny until the cows come home. Every author promoting MMT I’ve read says the same as Bill Mitchell below, perhaps paraphrasing:

“Doesn’t Modern Monetary Theory (MMT) tell us that a currency-issuing government can spend what it likes? Well, not exactly. What MMT tells us is that a currency-issuing government can purchase whatever is for sale in its own currency and that propensity is limited by the availability of real resources. Here is a classic demonstration of the limits of government nominal spending.”

It comes from a very interesting article he wrote about Japan and resource availability.
http://bilbo.economicoutlook.net/blog/?p=29385

LeeJune 4, 2015 at 9:34 am

“What would happen if Greece decided to simply not pay their ‘debt’? Cancel all agreements, reset to zero and told the EU to eff off?”

Bill Mitchell has been saying they should leave the EU and get back to rebuilding their nation and economy using their own currency. I would think their debt in euros would still stand and have to be paid off at some stage. I’m not sure what they would need to do to get out of that.

Argentina is facing bankruptcy as a currency-issuing nation because they have a huge debt in $US that they cannot pay. Mitchell discussed a possible solution here. http://bilbo.economicoutlook.net/blog/?p=28217

stephentardrewJune 4, 2015 at 9:49 am

Thanks Lee and John Armour for your much needed input

diannaartJune 4, 2015 at 11:05 am

Thanks for your reply, Lee

Something I have been considering for a while (a PollyAnna moment) – particularly regarding developing nations (who are virtually held to ransom on debt owed to the big fish in the pond).

… what if.. all outstanding national debt was reset to zero? OK I do understand how simplistic this sounds – however, given that the monetary system is mostly fictitious, it is not entirely impossible. The wealthy nations are still managing despite their debtors – unless debt owed is counted as a resource – which is probably true and this is where my head hurts.

However, the cancellation of debt would be perceived as a loss of power – and we cannot have that now can we?

LeeJune 4, 2015 at 11:15 am

Not only would it be a loss of power, but the political leaders would have to come clean on many of the lies they hold over their electorates. There’s a lot at stake for them.

diannaartJune 4, 2015 at 11:25 am

Everything… always… comes back to power – who has it, who wants it and how to get & keep it.

Pathetic really, considering the deep truth of the old saying – “You can’t take it with you” – Something Gina & co need to understand.

We really could fix this situation – if not for the power-hungry.

Pingback: Bank of England Blows the Whistle | THE VIEW FROM MY GARDEN

John ArmourJune 4, 2015 at 12:04 pm

“Would the sky fall in?”

Bill Mitchell doesn’t think so:

“But once Greece leaves the Eurozone, then it will become obvious to all that the austerity lie is a lie. Greece would grow quite quickly from day one and demonstrate, just as Argentina did, the capacity of one’s own currency.”

He also said:

“The elites are desperate for Greece to remain in the Euro because it can never become a demonstration case of how bad the common union actually is. While it stays in the monetary union, it can be blamed for profligacy and the workers can be accused of being lazy or overindulgent, especially when spurious comparisons are put out with Germany.”

The incommensurate aims of the Greek people

The reference to Zimbabwe should bring a wry smile given some of the ill-informed comment earlier.

John ArmourJune 4, 2015 at 12:18 pm

” I would think their debt in euros would still stand and have to be paid off at some stage. I’m not sure what they would need to do to get out of that.”

Lee, I think default means exactly that. They might offer to pay off those debts but it would be using the new devalued drachma. Either way, it’s a haircut for the creditors. I think it was always going to end like this.

I think the Troika would be greatly relieved if Greece chose of its own volition to exit because Greece could then be cast as the bad guy, whereas if there was any kind of cancellation of debt or accommodation by the ECB, the other members of the Eurozone would go apeshit at such “special treatment”.

LeeJune 4, 2015 at 12:40 pm

Thanks for the link John. I’m a bit behind with reading Bill’s blog over the last 2 weeks. And I agree, I expect that Greece would not pay back the full debt.

Jexpat.June 4, 2015 at 12:44 pm

Much ballyhoo from the Mitchell acolytes.

Let’s begin with the Keynes:

The point of the thought experiment was that spending stimulates the economy regardless of whether its for a purpose deemed useful by most people. Thus, the basic macro principle involved does no require careful consideration of the purpose or effects on the system. The example we most often see is military spending on boondoggles. In terms of responsible public policy choices (opportunity costs) such spending is unwise- but it is nevertheless stimulatory and better than nothing when in deep recessionary conditions.

That you can endlessly create money to fund such boondoggles is of course absurd- but that’s essentially what you’re being asked by the MMT’rs, against all real world evidence to the contrary, to believe.

And sell to the the public.

Who in turn will think that you’re crazy- and associate such craziness with other notions tht actually do have merit.

JexpatJune 4, 2015 at 12:50 pm

John Armour wrote: “When will our deficits and debt accumulation start the process of beginning to create real financial risk we need to guard against? We don’t know. But we do know that the bond market will be very happy to tell us when the process starts.

Until then, Uncle Warren is right.”

“Uncle Warren” is Warren Mosler, one of Bill Mitchell’s mates.

Far from “coming around,” that is a statement implying brinksmanship.

How fast can I go in my car before I blow the tires out.

JexpatJune 4, 2015 at 1:03 pm

btw:

For anyone who’s like to expand their knowledge base in macro, I recommend University of Oregon Professor Mark Thoma’s blog:

http://economistsview.typepad.com

It’s not all wonkish- and there’s a snippet from and link to an interview with Richard Thaler, who Rossleigh discussed in a recent piece.

https://theaimn.com/?s=Thaler

LeeJune 4, 2015 at 1:24 pm

“That you can endlessly create money to fund such boondoggles is of course absurd- but that’s essentially what you’re being asked by the MMT’rs, against all real world evidence to the contrary, to believe.”

Come up with something that is not a strawman or not quoted out of context to suit your argument.

stephentardrewJune 4, 2015 at 1:31 pm

Jexpat repeating the same worn out platitudes does not make for an argument.

You may well be wrong like most economist throughout the years.

That is why we are is so much crap.

Radical lateral thinking is required to reform a wholly dysfunctional system of irrational opinionated beliefs.

Mathematical models only have limited applicability and reliability within the framework of the theoretical model and they can be countered by other theoretical models.

Mathematical modeling does not solve the continual structural problems and failures of economics.

JexpatJune 4, 2015 at 2:01 pm

Well, we’re just going to have to agree to differ on the macroeconomics- which as many a progressive economist has noted, is generally the outcome of any discussion with MMT adherents.

However as to the politics- strategy and tactics, I would hope that people would see the wisdom in exercising discretion and finding common ground in the effort to dispell the public of destructive economic policies drawn from dysfunctional right wing ideology. To the extent people are willing to do that- and consider their framing for the audience in the real world- and holding off from making assertions that the aufience will find absurd, it’s all well and good.

Unofrtunately, all too many are so strident that they’re unable to gauge that the reactions they create make them their own (and all of our) worst enemies in the process.

silkwormJune 4, 2015 at 2:42 pm

Jexpat, do you have anything substantial to say, or did you just come hear to lay s#t on other posters? You are coming off as a troll, mate.

John KellyJune 4, 2015 at 2:56 pm

Jexpat, did I sense a conciliatory element in your last post? If you can construct a language that dispels right wing ideological claptrap and avoids public derision at the same time I’m sure we would all like to read it.

On Greece, I cannot see their existing debt ever being repaid. Even a 50% write down, a reconstructed time frame would probably span 50-75 years and even that would be conditional on Germany agreeing to buy everything Greece could manufacture.

Leaving the Euro, cancelling all debt and returning to the Drachma would, it seems to me, be a better way to go.

JexpatJune 4, 2015 at 3:09 pm

silkworm:

I’ve already written much of it- substantively and procedurally (as in how to progressives ought to proceed strategically and tactically). As have many other progresive economists.

And like them, I have no illusions that those wedded to MMT will be convinced- but its helpful for the rest of us to know that this is not the economic framework that most leading progressive economists around the world follow, which is why I present the arguments and provide resources and links to credible sources.

JexpatJune 4, 2015 at 3:28 pm

John:

Constructing language that keeps folks from falling into the usual right wing traps and frames (the most obvious frames being: “profligate spender” “financialy irresponsible” and “living beyond their means” -I’m sure you can think of many others -just as the LNP’s media people can) isn’t that dificult.

Here’s an illustration: recently we had some severe storms in our area that knocked out our phone and internet service. When the techie came by, I asked him about the rollout of the NBN, where the node would be, etc., and approximate costs to hook fibre to the house- rather than the old corroding copper wire. Along the way, we lamented that we’d be getting internet service that was obsolete (not even meeting the FCC’s definition of broadband) wherein he said: but wge can’t afford it because: deficit, everbody’s got to tighten their belts, etc.

Rather than engage the fellow about “households and firms aren’t like governments,” which would have blurred his eyes over, I simply noted that our deficit was tiny relative to every other OECD nation -many of whom have much larger deficits, are doing just fine and have INVESTED in high speed internet that makes ours look like shoddy third world material.

I empasized INVESTMENTs pay dividends to everyone and draws busineses here that would otherwise go overseas (as well as implying: why should the Koreans get all the cool stuff like HD netflix, etc.). Then I said, “you know, it’s like buying a house: a mortgage is more attractive when the rates are low- and as interest rates are at record lows, now it the time to invest in techonolgy like high speed internet, not cut back and crawl into a 20th Century shell, like the Liberal government is doing. That’s insane.

He went away convinced- and with a very juandiced view of Abbott and Turnbull that I’m guessing he didn’t have before turning up at our place.

That’s one less tradie for Tony.

With props to George Lakoff and Drew Westen.

John KellyJune 4, 2015 at 3:54 pm

Jexpat, that argument (discussion) has much merit, but it has been presented time and time again by politicians and economists on the progressive side. It does not seem to have resonated with the MSM because they still float the same old arguments re: ‘how are we going to pay for it?’ It’s as if they file it under ‘Stuff that’s useful to know’ then forget about it as they return to the tired old rhetoric of mainstream economic language. So, how do we keep them from doing that? Your techie friend is unlikely to remember what you told him when he gets home, particularly when he turns on the tele and listens to some dumb-arse politician highlight how much we “owe” and how much “interest” we are paying every day.

supermundaneJune 4, 2015 at 4:55 pm

@Jexpat “That’s pretty much the same, standard refrain that MMT’rs use (and have used for how long now?) whenever they’re called on anything.”

And yet by citing Zimbabwe as your ‘gotcha’ example, you’ve demonstrated precisely that. People here have addressed the oft-cited examples of Zimbabwe and the Weimar Republic. I’m yet to address the responses that people have given you to these examples.

supermundaneJune 4, 2015 at 5:06 pm

@Jexpat

If i understand you correctly from your conversation with a tradie, that you are pessimistic about whether people can be convinced that the government isn’t the same as a household; that as the issuer of the currency it’s not constrained when consuming the products and services denominated in the currency it issues and that critically taxes don’t fund spending.

That may be so (I do believe that the media has a huge part to play in this and is failing us badly – something that I’m sure we can both agree upon) but it doesn’t alter the reality of the situation. The truth and what people may be willing to accept (which is a matter of debate) are two discrete matters.

mark delmegeJune 4, 2015 at 10:06 pm

I thought some of you economic sharps would have something to say about the removal of Statutory Reserve Deposit and Liquid Assets and Government Securities by Keating and how more recently the Government is requiring the Banks back into that game – and the relevance of all this to the BoE paper…yes no?

John ArmourJune 5, 2015 at 9:24 am

Jexpat,

I’m now not sure if your antipathy to MMT is because you believe it’s “nuts” (like Mark Thoma) or whether you think it’s just too complex a message to get across to the citizenry and effect change.

You seem to be running both arguments.

I’ve actually had no trouble explaining the concept of flows and drains of money into and out of the economy to folk like tradies (especially plumbers!) after I used the exact same argument as you to engage the interest.

If you disabused some tradie of a belief that Abbott and Hockey are good managers of the economy, we can all be glad of that (and thank you!) but I think John Kelly is right: how long before the barrage of bullshit from the MSM and seemingly expert opinion from the tv economists would have him questioning your perfectly reasonable argument?

The argument that we don’t have a deficit problem because it’s relatively small has been successfully countered by conservative interests now for nearly 6 years, with no little help from the Labor party itself when it also agrees that we need to get back to surplus.

Whether the underlying logic is badged MMT or not, policies aimed at generating surpluses when the external sector is a drain on spending are idiotic. MMT didn’t “invent” the sectoral balances.

Back to your tradie: if you’d spent a bit more time and explained that deficit spending comes from money that is created out of thin air, flows through the economy, gets people working, and eventually “flows to the sea”, that is, taxed to destruction, he would’ve been left with an indelible truth.

This paper from the BoE that confirms that banks do not lend depositor’s money, that the money they lend is created out of thin air, is enormously helpful in advancing that truth: when our tradie gets that, it’s just a small step to then accepting that’s also where the government gets its money, thin air, and the seeds of doubt are sown.

Hockey’s horror debt scenarios are then easily shown to be total bullshit.

I think spending a bit of effort getting the truth out is preferable to telling “white lies”.

PS. How will Krugman take the BoE paper? In one of his NYT op-eds he ridiculed MMT for saying banks were not simple intermediaries. From memory, he asked where did they think banks get the money to lend.

darrel nayJune 5, 2015 at 9:37 am

United we stand – divided we fall. Can we not focus on the issues on which we are united ie. too many wars/ corruption/ domestic violence/ the influence of corporate lobbyists, etc.

Cheers

John ArmourJune 5, 2015 at 11:32 am

mark delmege,

I’ve got no interest in revisiting Keating’s deregulation of banking in the 1980s.

He was just following trends. These days very few central banks have reserve requirements.

The GFC forced the Basel committee on bank regulations to revisit some of the old practices and Basel III I think is now in the process of being implemented.

You might find this speech by Guy Debelle of the RBA of interest.

The Committed Liquidity Facility

I found the following statement in your link confusing and contradictory. As loans create deposits, liabilities and assets always balance on the loan book.

“Prior to deregulation, about 90% of banks’ liabilities were made up of customer deposits. This ratio fell to 60% by the mid 90’s, and has likely dropped like a bomb more recently, compounded by the very low rates of interest paid for depositors’ money and the bank’s appetite to lend big and continue to fuel the housing bubble (making it all the harder for the average Australian to afford a home).”

Banks still need domestic deposits however, for a number of reasons, and the need fluctuates with activity as anybody shopping for rates on term deposits would know.

I’d be very cautious accepting anything that author said.

HarquebusJune 5, 2015 at 12:44 pm

Energy to do the work to manufacture and produce the required goods and services is what is needed. We are past peak energy per capita and therefore, productivity and growth can only decrease. As populations increase, each share of the energy pie shrinks. This why governments and treasurers globally can not balance the books. We are losing productivity as a result of population overshoot.
The laws of physics, despite what politicians say, can not be changed through legislation nor by the propagation of flawed ideology. Joe Hockey will fail simply due to physical realities.
Labor’s growth ideology puts them in the same circus of losers.

China want’s the yuan to be part of the SDR basket of currencies. This means it will have to disclose its holdings of physical gold probably before the end of this year. Should be interesting.

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mikestasseJune 3, 2015 at 12:37 pm

Ah the irony……….. didn’t the Bank of England invent the modern monetary system to pay for the Napoleonic wars?
JexpatJune 3, 2015 at 12:47 pm

It’s hard enough to get MSM reporters to frop their debt hysteria and pass along accurate information regarding progressive economic policies that are based on proven working models.

If you start going around saying that “we are not constrained in our spending other than by our ability to produce goods and services,” they’re going to laugh in your face (or behind your back).
markJune 3, 2015 at 1:13 pm

Theres no ‘irony’ – the whole financial system is a sham – all markets are controlled and the hostile elite that rules over us conjures up money out of nothing – and then charges us commoners exhorbitant amounts of interest to borrow said magic money, in the meantime inflation (real name magic money monetary debasement – deliberately built in to the system to steal from us commoners) is constantly reducing real worth.
stephentardrewJune 3, 2015 at 1:29 pm

Jexpat:

There is a time when one must ignore what convention demands to step out on your own and challenge the status quo.

Timidity, due to fear of laughter and denigration by the doyens of convention, changes nothing.

You can laugh in my face if you like but I don’t give a damn.

A paradigm changes through radical challenge not by expecting others to follow your misgivings.

I might be partially wrong however, regardless, I will not continue to support failure.

Remember no one has absolute knowledge consequently we are simply trying to understand our limitations and reduce the level of ignorance.
stephentardrewJune 3, 2015 at 1:32 pm

By the way great article John.

Keep up the good work it is much appreciated.
mikestasseJune 3, 2015 at 1:47 pm

we are not constrained in our spending other than by our ability to produce goods and services

Therein lies the REAL issue……. because as we slam into Limits to Growth, we will be seriously constrained. GLOBALLY. Humanity is virtually bankrupt already, or illiquid at best…….
JexpatJune 3, 2015 at 2:09 pm

Stephen:

“There is a time when one must ignore what convention demands to step out on your own and challenge the status quo.”

Even assuming that John’s assertion was correct (which it’s not) but for the sake of argument: policy makers, elected representatives- and more importantly, people aren’t going to jump over such an inferential chasm- and certainly not over the course of weeks, months or even a few years. At least, not in the absence of some profound national emergency.

Not.Going.To.Happen. That’s just realpolitik.

And worse, it forgoes and thwarts whatever real progress might be made toward changing dysfunctional policies, paradigms and ideology using evidence based approaches (as has slowly been occurring with regard to debt hysteria and austerity).

That’s just how it is- even if “print as much free money as you need” bonanzas didn’t ultimately result in adverse and often severe consequences:

Which they do:

“There are plenty of examples of governments trying to finance their operations through the printing press, and the outcome is always the same: inflation at first, then hyperinflation, then the end of the currency. Zimbabwe, which now has no currency of its own, is just the latest example.

There are various possible mechanisms by which this outcome occurs, but the central point is that the monetary base is typically around 10 per cent of GDP…. Any substantial increase in the monetary base can be sustained only if interest rates are pushed down to low levels, ultimately to zero. And, except in crisis conditions… zero interest rates will lead fairly rapidly to inflation in asset prices and ultimately in consumer prices….”

http://delong.typepad.com/sdj/2013/10/john-quiggin-mmt-noted-for-october-1-2013.html
flyboy48June 3, 2015 at 2:18 pm

methinks that LNP ideology dictates that this will be all to hard to fathom … how will this fit in with the “divide and conquer” and “keep the plebs frightened” while the “rich get richer and the poor get poorer” mentality? …
LeeJune 3, 2015 at 2:21 pm

I doubt that this information is only being put forward by a small number of economists. I posted a link to a video last week featuring a “news” story on NZ tv about how banks create money by lending. An economist interviewed in that segment said it is taught in first year economics, so is no great secret. I’ve also seen numerous posts on social media from economics students and recent graduates saying that what they have been taught at uni is very different from what the politicians are telling us.
LeeJune 3, 2015 at 2:26 pm

““There are plenty of examples of governments trying to finance their operations through the printing press, and the outcome is always the same: inflation at first, then hyperinflation, then the end of the currency. Zimbabwe, which now has no currency of its own, is just the latest example.”

Zimbabwe had already ruined agriculture before turning on the printing press (the president took farms away from farmers and gave them to his incompetent friends). It was unable to meet the demand with supply.
John KellyJune 3, 2015 at 2:32 pm

Yes Lee, it is information currently spread far and wide across the Internet. But there is not much of it in the MSM. I’m not aware of what is taught in Uni today but I would certainly like to see government members (and opposition for that matter) quizzed publicly, if only to see how they would reply.
revolutionarycitizenJune 3, 2015 at 2:34 pm

All Central Banks create money, that’s their job. They can also print whatever volume of money they so desire, that’s also their job.

It is also their job to manage the risks of doing those things.

One of those risks being volume related devaluation of currency causing inflation to hyper-inflation. (Which is why central banks don’t just print money to pay off the debts accrued by the government’s of the country they supply currency to)

If the US Central Bank decided tomorrow to print US$18T to pay out the Treasury Bonds the end result would simply be that no-one would accept US Currency in trade, it would cease being a reserve currency, and it would be a completely devoid of value. Thus causing the prices of US Imported Goods, of which there are many to increase in price at a rate that would destroy the economy as a whole.

Like printing money did in Germany in the 1930s and as it is doing to the economy of Zimbabwe today.

Australia is a significant importer of consumer items, simply printing money would destroy our economy faster than you could ever imagine.

And articles like the above is reason why those on the left should never ever be in charge of monetary policy.
John KellyJune 3, 2015 at 2:34 pm

Jexpat, the very mention of Zimbabwe in this context is completely irrelevant and over the top.
LeeJune 3, 2015 at 2:37 pm

“Like printing money did in Germany in the 1930s ”

Since currency only ceased to be tied to the gold standard in 1971, an example from the 1930s is completely irrelevant.
JexpatJune 3, 2015 at 3:21 pm

@”revolutionary citizen”

Those on the left to whom you presumably refer are not MMT’rs -and at times, have (as you’ve seen here) some rather critical views on them.

The usual (albeit Americano-centric) term for progressives is “Saltwater macroeconomists,” and they have a long track record of getting their predictions right- and their evidence based policies when enacted have been widely successful -enriching nations, and creating robust, diverse and forward looking economies.

Right wing economists on the other hand- exemplified by the Chicago School (or the overlapping Austrian school) -the “Freshwater Macro” types have a long track record of getting it wrong (often laughably and egrgiously wrong) -and their policies (this can be seen time after time in country after country, on the record) impoverishing nations and their populations. The only success that they can claim is advancing a dysfunctional ideology that results in needless suffering, appalling inequality and the subversion of vibrant democracies into stangant plutocracies.
LeeJune 3, 2015 at 3:37 pm

Jexpat, you might want to think about what happens with supply and demand during wartime.
JexpatJune 3, 2015 at 3:51 pm

Lee:

An excellent comparative illustration of that (along with competing versions of monetary policy) can be seen with the US Civil war:

Have a look: http://www.socialstudies.org/system/files/publications/se/6506/650607.html
LeeJune 3, 2015 at 5:08 pm

Jexpat, proponents of MMT say that when creating extra money, hyperinflation will not result so long as supply can meet demand. Which means that spending has to be allocated to carefully considered projects for their effects upon the system. You keep providing examples where supply was unable to meet demand and cite that as evidence that MMT is wrong.
silkwormJune 3, 2015 at 5:09 pm

Sorry, Jexpat, but I do not accept your “realpolitik.” You seem to be telling us that we should just give up. That sounds like fatalism to me. We can and must change the popular conception, through education.
totaramJune 3, 2015 at 6:03 pm

The Zimbabwe example is dealt with there.

http://bilbo.economicoutlook.net/blog/?p=3773
supermundaneJune 3, 2015 at 6:13 pm

@Jexpat. Citing Zimbabwe demonstrates that you’ve not understood MMT at a fundamental level.

As Lee stated, the supply of currency must meet demand in the economy. The Zimbabwean destroyed its productive base while simultaneously creating money resulting in an enormous pool of surplus liquidity. Absolutely no one who has even a modicum of understanding about MMT would advocate this and as a central tenet, MMT states clearly that spending needs to be targeted with a view to raising productivity and employment and by doing so, miminise the amount of surplus liquidity in the economy.

For the Weimar Republic it had to meet war reparations in foreign denominations meaning that its debts were in foreign currencies (the pound sterling and the franc) and in hard goods and resources. Additionally its productive heartland, the Ruhr Valley was held by the victors, which hobbled Germany’s capacity to meet repayments. Any MMTer will tell you that a sovereign issuing government can meet liabilities in the currency it issues but liabilities in foreign currencies are an altogether different matter.

The Nazis who precipitated the collapse of the Weimar Republic essentially and perversely prove the point. Once in power, they unilaterally cancelled their foreign debt obligations, issued a new currency and began to spend on infrastructure and on building a war machine. No reasonable person would suggest emulating the Nazis however there is a lesson if considered objectively – and that is how quick and decisive the transformation was when the German government no longer had to meet debt obligations in foreign currencies and when its spent the currency it issued in expanding its industrial base and increasing employment. The new currency effectively was a reset and the Nazis pursued targeted domestic spending. This is in no way an endorsement of the Nazis, their ideology or the nature of their spending 8on a war-machine to conquer Europe). It is merely an object comparative lesson between the Weimar Republic (debts in foreign currencies, non-targeted spending combined with a collapsing productive base) and the Third Reich (no foreign debt obligations, targeted spending on the productive sectors of the economy while minimising surplus liquidity within the economy).
paul walterJune 3, 2015 at 8:45 pm

It’s a fascinating thread..I wont comment, but will come back after I’ve thought more on housing price bubbles.
reality checkJune 3, 2015 at 9:45 pm

and i rest my case.
reality checkJune 3, 2015 at 9:59 pm

and fairly amazed that people still don’t believe the Bank of England when they explicitly say to the market, in a formal report, that they create currency out of nada, nothing, zip, zilch, or that if the government did the same we’d all be roooooooooooned, or Wyalla will fall off the map, or we turn into Zimbabwe. that takes some amazing feats of selective vision and talk to the hand skills.
mark delmegeJune 3, 2015 at 11:06 pm

all the more reason why small countries shouldn’t join the Euro.
And while the Yanks Japs and Euro’s didn’t quite print notes they created a shed load of something to try to float their economies.
Anyone remember how keating removed (or reduced?) the SDR’s and another limiter on the banks? Something they are now scrambling to undo. (just thought I’d throw that in)
JexpatJune 3, 2015 at 11:30 pm

Silkworm wrote: “Sorry, Jexpat, but I do not accept your “realpolitik.”

You might as well curse the weather.

“You seem to be telling us that we should just give up.

Far from it. Running with the analogy above, I’m telling you to grab and use appropriate gear for the weather -and not cry out like “a voice in the wilderness,” wishing you had a bit of rope and a raincoat.

“That sounds like fatalism to me.”

Fatalism is Burke and Wills starving on Nardoo.

“We can and must change the popular conception, through education.”

Precisely.
JexpatJune 3, 2015 at 11:52 pm

supermundane wrote:

“… you’ve not understood MMT at a fundamental level.”

That’s pretty much the same, standard refrain that MMT’rs use (and have used for how long now?) whenever they’re called on anything.

But don’t take my word for it- look it up for yourself.
JexpatJune 4, 2015 at 12:20 am

Lee wrote: “…spending has to be allocated to carefully considered projects for their effects upon the system.”

We have some considerable agreeement here, but as the thought experiment in this area goes:

“If the Treasury were to fill old bottles with bank-notes, bury them at suitable depths in disused coal-mines which are then filled up to the surface with town rubbish, and leave it to private enterprise on well-tried principles of laissez-faire to dig the notes up again (the right to do so being obtained, of course, by tendering for leases of the note-bearing territory), there need be no more unemployment and, with the help of repercussions, the real income of the community, and its capital wealth, would probably become a good deal greater than it actually is.”

Could be- what do you think?

And what does the evidence on point show?
mark delmegeJune 4, 2015 at 12:47 am

http://ihatebanks.com.au/deregulated.htm

in case you were wondering
John ArmourJune 4, 2015 at 6:40 am

“If the Treasury were to fill old bottles with bank-notes, bury them at suitable depths in disused coal-mines which are then filled up to the surface with town rubbish, and leave it to private enterprise on well-tried principles of laissez-faire to dig the notes up again (the right to do so being obtained, of course, by tendering for leases of the note-bearing territory), there need be no more unemployment and, with the help of repercussions, the real income of the community, and its capital wealth, would probably become a good deal greater than it actually is.”

The rest of the quote goes:

“…and with help of the repercussions the real income of the community would probably become a good deal larger than it is. It would, indeed, be more sensible to build houses and the like; but if there are practical difficulties in the way of doing this, the above would be better than doing nothing”

Which was Lee’s point.
John ArmourJune 4, 2015 at 7:39 am

Another bit of selective quoting from Jexpat yesterday at 2.09 pm

Here’s the rest of Professor Quiggin’s comment that Jexpat omitted:

“The higher the debt ratio, the stronger the incentive for the government to default or inflate their way out of trouble, and therefore the higher the interest rates they will face. At some point the capacity to borrow runs out.”

This goes to the substance of the Bank of England’s paper on banking, especially the doctrine of loanable funds. Quiggin’s statement would be applicable to Greece but not a currency issuing government.

First we had the BoE’s earlier bulletin on the myth of the money multiplier, now the myth of bank intermediation and loanable funds, issues proponents of MMT have been hammering for decades.

Paul Ormerod’s prediction of the “Death of Economics” in 1993 might’ve been a bit premature but these pillars of orthodox economics are now starting to crumble.

Frank Newman’s “Six Myths that Hold Back America” attacks the myth of the national debt and when the BoE gets around to dealing with that, that will be the end of this neo-liberal nightmare.

Our 220-odd MHRs will have to be sent off to re-education camps.

Jexpat:

“Tell that to Professor Quiggin, whose quote in context it is, or Cal Berkeley professor Brad DeLong, who endorses the quote in his blog Grasping Reality.”

DeLong endorsed nothing. He cryptically “Noted” Quiggin’s comments.

In an earlier post on MMT, DeLong wrote this:

“When will our deficits and debt accumulation start the process of beginning to create real financial risk we need to guard against? We don’t know. But we do know that the bond market will be very happy to tell us when the process starts.

Until then, Uncle Warren is right.”

“Uncle Warren” is Warren Mosler, one of Bill Mitchell’s mates. DeLong is starting to “get it”. I doubt Krugman ever will.

A lot of water has flowed under the bridge since then. Stephanie Kelton is now the Democratic Chief Economist on the US Senate Budget Committee.
diannaartJune 4, 2015 at 9:17 am

Interesting thread.

What would happen if Greece decided to simply not pay their ‘debt’? Cancel all agreements, reset to zero and told the EU to eff off?

Would the sky fall in?
ZathrasJune 4, 2015 at 9:21 am

Once upon a time currency was labelled with the guarantee that the government held the equivalent in silver (or gold?) but now it’s based only on IOUs held by Banks as well as things like the credit limit on issued Credit Cards that are somehow magically seen as assets that can be used to create loans.

Money is an illusion with no basis in reality – the ultimate Ponzi Scheme and exists only as perpetual and ever-increasing debt.
LeeJune 4, 2015 at 9:21 am

Jexpat can deny until the cows come home. Every author promoting MMT I’ve read says the same as Bill Mitchell below, perhaps paraphrasing:

“Doesn’t Modern Monetary Theory (MMT) tell us that a currency-issuing government can spend what it likes? Well, not exactly. What MMT tells us is that a currency-issuing government can purchase whatever is for sale in its own currency and that propensity is limited by the availability of real resources. Here is a classic demonstration of the limits of government nominal spending.”

It comes from a very interesting article he wrote about Japan and resource availability.
http://bilbo.economicoutlook.net/blog/?p=29385
LeeJune 4, 2015 at 9:34 am

“What would happen if Greece decided to simply not pay their ‘debt’? Cancel all agreements, reset to zero and told the EU to eff off?”

Bill Mitchell has been saying they should leave the EU and get back to rebuilding their nation and economy using their own currency. I would think their debt in euros would still stand and have to be paid off at some stage. I’m not sure what they would need to do to get out of that.

Argentina is facing bankruptcy as a currency-issuing nation because they have a huge debt in $US that they cannot pay. Mitchell discussed a possible solution here. http://bilbo.economicoutlook.net/blog/?p=28217
stephentardrewJune 4, 2015 at 9:49 am

Thanks Lee and John Armour for your much needed input
diannaartJune 4, 2015 at 11:05 am

Thanks for your reply, Lee

Something I have been considering for a while (a PollyAnna moment) – particularly regarding developing nations (who are virtually held to ransom on debt owed to the big fish in the pond).

… what if.. all outstanding national debt was reset to zero? OK I do understand how simplistic this sounds – however, given that the monetary system is mostly fictitious, it is not entirely impossible. The wealthy nations are still managing despite their debtors – unless debt owed is counted as a resource – which is probably true and this is where my head hurts.

However, the cancellation of debt would be perceived as a loss of power – and we cannot have that now can we?
LeeJune 4, 2015 at 11:15 am

Not only would it be a loss of power, but the political leaders would have to come clean on many of the lies they hold over their electorates. There’s a lot at stake for them.
diannaartJune 4, 2015 at 11:25 am

Everything… always… comes back to power – who has it, who wants it and how to get & keep it.

Pathetic really, considering the deep truth of the old saying – “You can’t take it with you” – Something Gina & co need to understand.

We really could fix this situation – if not for the power-hungry.
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John ArmourJune 4, 2015 at 12:04 pm

“Would the sky fall in?”

Bill Mitchell doesn’t think so:

“But once Greece leaves the Eurozone, then it will become obvious to all that the austerity lie is a lie. Greece would grow quite quickly from day one and demonstrate, just as Argentina did, the capacity of one’s own currency.”

He also said:

“The elites are desperate for Greece to remain in the Euro because it can never become a demonstration case of how bad the common union actually is. While it stays in the monetary union, it can be blamed for profligacy and the workers can be accused of being lazy or overindulgent, especially when spurious comparisons are put out with Germany.”

The incommensurate aims of the Greek people

The reference to Zimbabwe should bring a wry smile given some of the ill-informed comment earlier.
John ArmourJune 4, 2015 at 12:18 pm

” I would think their debt in euros would still stand and have to be paid off at some stage. I’m not sure what they would need to do to get out of that.”

Lee, I think default means exactly that. They might offer to pay off those debts but it would be using the new devalued drachma. Either way, it’s a haircut for the creditors. I think it was always going to end like this.

I think the Troika would be greatly relieved if Greece chose of its own volition to exit because Greece could then be cast as the bad guy, whereas if there was any kind of cancellation of debt or accommodation by the ECB, the other members of the Eurozone would go apeshit at such “special treatment”.
LeeJune 4, 2015 at 12:40 pm

Thanks for the link John. I’m a bit behind with reading Bill’s blog over the last 2 weeks. And I agree, I expect that Greece would not pay back the full debt.
Jexpat.June 4, 2015 at 12:44 pm

Much ballyhoo from the Mitchell acolytes.

Let’s begin with the Keynes:

The point of the thought experiment was that spending stimulates the economy regardless of whether its for a purpose deemed useful by most people. Thus, the basic macro principle involved does no require careful consideration of the purpose or effects on the system. The example we most often see is military spending on boondoggles. In terms of responsible public policy choices (opportunity costs) such spending is unwise- but it is nevertheless stimulatory and better than nothing when in deep recessionary conditions.

That you can endlessly create money to fund such boondoggles is of course absurd- but that’s essentially what you’re being asked by the MMT’rs, against all real world evidence to the contrary, to believe.

And sell to the the public.

Who in turn will think that you’re crazy- and associate such craziness with other notions tht actually do have merit.
JexpatJune 4, 2015 at 12:50 pm

John Armour wrote: “When will our deficits and debt accumulation start the process of beginning to create real financial risk we need to guard against? We don’t know. But we do know that the bond market will be very happy to tell us when the process starts.

Until then, Uncle Warren is right.”

“Uncle Warren” is Warren Mosler, one of Bill Mitchell’s mates.

Far from “coming around,” that is a statement implying brinksmanship.

How fast can I go in my car before I blow the tires out.
JexpatJune 4, 2015 at 1:03 pm

btw:

For anyone who’s like to expand their knowledge base in macro, I recommend University of Oregon Professor Mark Thoma’s blog:

http://economistsview.typepad.com

It’s not all wonkish- and there’s a snippet from and link to an interview with Richard Thaler, who Rossleigh discussed in a recent piece.

https://theaimn.com/?s=Thaler
LeeJune 4, 2015 at 1:24 pm

“That you can endlessly create money to fund such boondoggles is of course absurd- but that’s essentially what you’re being asked by the MMT’rs, against all real world evidence to the contrary, to believe.”

Come up with something that is not a strawman or not quoted out of context to suit your argument.
stephentardrewJune 4, 2015 at 1:31 pm

Jexpat repeating the same worn out platitudes does not make for an argument.

You may well be wrong like most economist throughout the years.

That is why we are is so much crap.

Radical lateral thinking is required to reform a wholly dysfunctional system of irrational opinionated beliefs.

Mathematical models only have limited applicability and reliability within the framework of the theoretical model and they can be countered by other theoretical models.

Mathematical modeling does not solve the continual structural problems and failures of economics.
JexpatJune 4, 2015 at 2:01 pm

Well, we’re just going to have to agree to differ on the macroeconomics- which as many a progressive economist has noted, is generally the outcome of any discussion with MMT adherents.

However as to the politics- strategy and tactics, I would hope that people would see the wisdom in exercising discretion and finding common ground in the effort to dispell the public of destructive economic policies drawn from dysfunctional right wing ideology. To the extent people are willing to do that- and consider their framing for the audience in the real world- and holding off from making assertions that the aufience will find absurd, it’s all well and good.

Unofrtunately, all too many are so strident that they’re unable to gauge that the reactions they create make them their own (and all of our) worst enemies in the process.
silkwormJune 4, 2015 at 2:42 pm

Jexpat, do you have anything substantial to say, or did you just come hear to lay s#t on other posters? You are coming off as a troll, mate.
John KellyJune 4, 2015 at 2:56 pm

Jexpat, did I sense a conciliatory element in your last post? If you can construct a language that dispels right wing ideological claptrap and avoids public derision at the same time I’m sure we would all like to read it.

On Greece, I cannot see their existing debt ever being repaid. Even a 50% write down, a reconstructed time frame would probably span 50-75 years and even that would be conditional on Germany agreeing to buy everything Greece could manufacture.

Leaving the Euro, cancelling all debt and returning to the Drachma would, it seems to me, be a better way to go.
JexpatJune 4, 2015 at 3:09 pm

silkworm:

I’ve already written much of it- substantively and procedurally (as in how to progressives ought to proceed strategically and tactically). As have many other progresive economists.

And like them, I have no illusions that those wedded to MMT will be convinced- but its helpful for the rest of us to know that this is not the economic framework that most leading progressive economists around the world follow, which is why I present the arguments and provide resources and links to credible sources.
JexpatJune 4, 2015 at 3:28 pm

John:

Constructing language that keeps folks from falling into the usual right wing traps and frames (the most obvious frames being: “profligate spender” “financialy irresponsible” and “living beyond their means” -I’m sure you can think of many others -just as the LNP’s media people can) isn’t that dificult.

Here’s an illustration: recently we had some severe storms in our area that knocked out our phone and internet service. When the techie came by, I asked him about the rollout of the NBN, where the node would be, etc., and approximate costs to hook fibre to the house- rather than the old corroding copper wire. Along the way, we lamented that we’d be getting internet service that was obsolete (not even meeting the FCC’s definition of broadband) wherein he said: but wge can’t afford it because: deficit, everbody’s got to tighten their belts, etc.

Rather than engage the fellow about “households and firms aren’t like governments,” which would have blurred his eyes over, I simply noted that our deficit was tiny relative to every other OECD nation -many of whom have much larger deficits, are doing just fine and have INVESTED in high speed internet that makes ours look like shoddy third world material.

I empasized INVESTMENTs pay dividends to everyone and draws busineses here that would otherwise go overseas (as well as implying: why should the Koreans get all the cool stuff like HD netflix, etc.). Then I said, “you know, it’s like buying a house: a mortgage is more attractive when the rates are low- and as interest rates are at record lows, now it the time to invest in techonolgy like high speed internet, not cut back and crawl into a 20th Century shell, like the Liberal government is doing. That’s insane.

He went away convinced- and with a very juandiced view of Abbott and Turnbull that I’m guessing he didn’t have before turning up at our place.

That’s one less tradie for Tony.

With props to George Lakoff and Drew Westen.
John KellyJune 4, 2015 at 3:54 pm

Jexpat, that argument (discussion) has much merit, but it has been presented time and time again by politicians and economists on the progressive side. It does not seem to have resonated with the MSM because they still float the same old arguments re: ‘how are we going to pay for it?’ It’s as if they file it under ‘Stuff that’s useful to know’ then forget about it as they return to the tired old rhetoric of mainstream economic language. So, how do we keep them from doing that? Your techie friend is unlikely to remember what you told him when he gets home, particularly when he turns on the tele and listens to some dumb-arse politician highlight how much we “owe” and how much “interest” we are paying every day.
supermundaneJune 4, 2015 at 4:55 pm

@Jexpat “That’s pretty much the same, standard refrain that MMT’rs use (and have used for how long now?) whenever they’re called on anything.”

And yet by citing Zimbabwe as your ‘gotcha’ example, you’ve demonstrated precisely that. People here have addressed the oft-cited examples of Zimbabwe and the Weimar Republic. I’m yet to address the responses that people have given you to these examples.
supermundaneJune 4, 2015 at 5:06 pm

@Jexpat

If i understand you correctly from your conversation with a tradie, that you are pessimistic about whether people can be convinced that the government isn’t the same as a household; that as the issuer of the currency it’s not constrained when consuming the products and services denominated in the currency it issues and that critically taxes don’t fund spending.

That may be so (I do believe that the media has a huge part to play in this and is failing us badly – something that I’m sure we can both agree upon) but it doesn’t alter the reality of the situation. The truth and what people may be willing to accept (which is a matter of debate) are two discrete matters.
mark delmegeJune 4, 2015 at 10:06 pm

I thought some of you economic sharps would have something to say about the removal of Statutory Reserve Deposit and Liquid Assets and Government Securities by Keating and how more recently the Government is requiring the Banks back into that game – and the relevance of all this to the BoE paper…yes no?
John ArmourJune 5, 2015 at 9:24 am

Jexpat,

I’m now not sure if your antipathy to MMT is because you believe it’s “nuts” (like Mark Thoma) or whether you think it’s just too complex a message to get across to the citizenry and effect change.

You seem to be running both arguments.

I’ve actually had no trouble explaining the concept of flows and drains of money into and out of the economy to folk like tradies (especially plumbers!) after I used the exact same argument as you to engage the interest.

If you disabused some tradie of a belief that Abbott and Hockey are good managers of the economy, we can all be glad of that (and thank you!) but I think John Kelly is right: how long before the barrage of bullshit from the MSM and seemingly expert opinion from the tv economists would have him questioning your perfectly reasonable argument?

The argument that we don’t have a deficit problem because it’s relatively small has been successfully countered by conservative interests now for nearly 6 years, with no little help from the Labor party itself when it also agrees that we need to get back to surplus.

Whether the underlying logic is badged MMT or not, policies aimed at generating surpluses when the external sector is a drain on spending are idiotic. MMT didn’t “invent” the sectoral balances.

Back to your tradie: if you’d spent a bit more time and explained that deficit spending comes from money that is created out of thin air, flows through the economy, gets people working, and eventually “flows to the sea”, that is, taxed to destruction, he would’ve been left with an indelible truth.

This paper from the BoE that confirms that banks do not lend depositor’s money, that the money they lend is created out of thin air, is enormously helpful in advancing that truth: when our tradie gets that, it’s just a small step to then accepting that’s also where the government gets its money, thin air, and the seeds of doubt are sown.

Hockey’s horror debt scenarios are then easily shown to be total bullshit.

I think spending a bit of effort getting the truth out is preferable to telling “white lies”.

PS. How will Krugman take the BoE paper? In one of his NYT op-eds he ridiculed MMT for saying banks were not simple intermediaries. From memory, he asked where did they think banks get the money to lend.
darrel nayJune 5, 2015 at 9:37 am

United we stand – divided we fall. Can we not focus on the issues on which we are united ie. too many wars/ corruption/ domestic violence/ the influence of corporate lobbyists, etc.

Cheers
John ArmourJune 5, 2015 at 11:32 am

mark delmege,

I’ve got no interest in revisiting Keating’s deregulation of banking in the 1980s.

He was just following trends. These days very few central banks have reserve requirements.

The GFC forced the Basel committee on bank regulations to revisit some of the old practices and Basel III I think is now in the process of being implemented.

You might find this speech by Guy Debelle of the RBA of interest.

The Committed Liquidity Facility

I found the following statement in your link confusing and contradictory. As loans create deposits, liabilities and assets always balance on the loan book.

“Prior to deregulation, about 90% of banks’ liabilities were made up of customer deposits. This ratio fell to 60% by the mid 90’s, and has likely dropped like a bomb more recently, compounded by the very low rates of interest paid for depositors’ money and the bank’s appetite to lend big and continue to fuel the housing bubble (making it all the harder for the average Australian to afford a home).”

Banks still need domestic deposits however, for a number of reasons, and the need fluctuates with activity as anybody shopping for rates on term deposits would know.

I’d be very cautious accepting anything that author said.
HarquebusJune 5, 2015 at 12:44 pm

Energy to do the work to manufacture and produce the required goods and services is what is needed. We are past peak energy per capita and therefore, productivity and growth can only decrease. As populations increase, each share of the energy pie shrinks. This why governments and treasurers globally can not balance the books. We are losing productivity as a result of population overshoot.
The laws of physics, despite what politicians say, can not be changed through legislation nor by the propagation of flawed ideology. Joe Hockey will fail simply due to physical realities.
Labor’s growth ideology puts them in the same circus of losers.

China want’s the yuan to be part of the SDR basket of currencies. This means it will have to disclose its holdings of physical gold probably before the end of this year. Should be interesting.

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