Can governments ever run out of money?

14 Dec, 2019 at 15:26 | Posted in Economics | 57 Comments

Whether it’s more nurses, frozen tax promises, free broadband internet or more social housing in the UK; or tax cuts and green energy investments in America, public spending is set to surge. This sudden abandonment of fiscal rectitude comes amid the rise in prominence of a way of thinking about money, spending and the economy – Modern Monetary Theory (MMT).

MMT_twitter

According to its key architect, US businessman Warren Mosler, it is based on a simple idea – that countries that issue their own currencies can never run out of money in the same way a business or person can. This is important to understand because it means when someone says the government can’t do something for want of money, that’s simply not applicable, says Mr Mosler. A government can no more run out of money than a football stadium can run out of goals scored …

MMTers say they do believe in being fiscally responsible, and that critics misunderstand. The story starts with any government’s desire to fund public services, which it does through taxation. Citizens need money to pay that tax, and they work to get it, Mr Mosler says …

The tax-and-spend orthodoxy embraced by most governments should be rethought. What’s actually going on is tax liabilities come first, then spending, and then payment of taxes, which paints guiding economic principles such as the debt and deficit in entirely different lights.

Howard Mustoe / BBC

In modern times legal currencies are based on fiat. Currencies no longer have intrinsic value (as gold and silver). What gives them value is basically the simple fact that you have to pay your taxes with them. That also enables governments to run a kind of monopoly business where it never can run out of money. A fortiori, spending becomes the prime mover and taxing and borrowing is degraded to following acts. If we have a depression, the solution, then, is not austerity. It is spending. Budget deficits are not a major problem since fiat money means that governments can always make more of them.​

In the mainstream economist’s world, we don’t need fiscal policy other than when interest rates hit their lower bound (ZLB). In normal times monetary policy suffices. The central banks simply adjust the interest rate to achieve full employment without inflation. If governments in that situation take on larger budget deficits, these tend to crowd out private spending and the interest rates get higher.

What mainstream economists have in mind when they argue this way, is nothing but a version of Say’s law, basically saying that savings have to equal investments and that if the state increases investments, then private investments have to come down (‘crowding out’). As an accounting identity, there is, of course, nothing to say about the law, but as such, it is also totally uninteresting from an economic point of view. What happens when ex-ante savings and investments differ, is that we basically get output adjustments. GDP changes and so makes saving and investments equal ex-post. And this, nota bene, says nothing at all about the success or failure of fiscal policies!

It is true that MMT rejects the traditional Phillips curve inflation-unemployment trade-off and has a less positive evaluation of traditional policy measures to reach full employment. Instead of a general increase in aggregate demand, it usually prefers more ‘structural’ and directed demand measures with less risk of producing increased inflation. At full employment deficit spendings will often be inflationary, but that is not what should decide the fiscal position of the government. The size of public debt and deficits is not — as already Abba Lerner argued with his ‘functional finance’ theory in the 1940s — a policy objective. The size of public debt and deficits are what they are when we try to fulfil our basic economic objectives — full employment and price stability.

That governments can spend whatever amount of money they want is a fact. That does not mean that MMT says they ought to — that’s something our politicians have to decide. No MMTer denies that too much of government spendings can be inflationary. What is questioned is that government deficits necessarily is inflationary.

57 Comments

  1. Sorry, but I stopped reading at “The central banks simply adjust the interest rate to achieve full employment without inflation”. What “full employment” is that? Is there some new definition going around?

  2. Two cheers for MMT. But, only two.
    .
    The neoclassical rhetoric of loanable funds is beyond stupid, and enemy of my enemy, but does MMT have to be quite so simplistic? And, arrogant?
    .
    I do not know about you but I work for money because money can buy goods. Taxes are a very much a secondary motivation; if money did not buy goods, paying taxes would be much less painful. But, the usefulness of money to facilitate commerce and finance is primary, not secondary. A territorial state has to maintain a fiat currency acceptable for trade with people who do not owe it taxes. This can get trickier than MMT acknowledges.
    .
    A marketable national debt, managed by a central bank, is critical to making a fiat money work. MMT seems very careless about this aspect of the situation. Also, the fiscal capacity to tax economic rent is neglected by MMT.
    .
    I sometimes have the suspicion that MMT is preparing the world not for the full conscious acceptance of fiat money as reality (as opposed to the mythos of gold or loanable funds), but for ushering in its failure and dismantling.

    • Bruce,

      You are correct that no one has paying taxes as a primary motivation for obtaining money. You earn money to obtain goods and services, but the reason you are able to obtain goods and services for money is because others want it. So you want money because you trust that others want it. There’s a chicken and egg problem: the desire for money must be universal (or at least sufficiently wide spread) within a group in order for the trust in the desire for money to exist.

      Obviously all societies that use money today have transitioned from non monetary economies at one point in time. How could that have happened ? Did a critical mass of individuals attend a meeting and decide that from then on they would all desire tokens of no intrinsic value ?

      How often do you “decide” to want or trust something ? I can try very hard and trust that the sun doesn’t exist, or try very hard to want fiat tokens that I don’t believe have any value, but I can’t.

      Imposing a tax in a fiat currency on a population instantly causes everyone to want the currency. Anyone that wants to avoid the penalty for non payment of taxes will start wanting money whether they like it or not. Once everyone wants the currency, it becomes exchangeable like a commodity.

    • If you are trying to explain an idea to regular people who think the government is just like a big household or private business, then yes- you probably want to make the explanation as simple as possible while managing to be accurate. I can’t see how that comes across as arrogant. And there are plenty of more complicated explanations available if complicated is what you are looking for 🙂

      • I am not looking for complicated, so much as I am looking for something that does not look so much like the hypnotic trance induction at the beginning of an infomercial.
        .
        I recognize that my wonky interest in the mechanics of money are probably not all that widely shared — and I think MMT is doing good service by pointing out that mainstream economists are lying about the most basic mechanics and therefore you cannot trust the rest of their moral hectoring about “the burden” of public debt and “the dangers” of deficit spending and so on.
        .
        But, here’s the thing: most people are not interested in personally having a critical understanding of the mechanics of money and finance beyond what they need to run their own households. As far as what they want to understand with regard to public policy is how to read the rhetorical signals regarding what is a prudent path for public policy. That’s what they hunger for. Having a sound foundation in the mechanics isn’t useful if it is only “complication” — at least not useful in the context of doctrines of popular politics — what is useful are clear imperatives drawn from a reasonably accurate sketch of the mechanics. An accurate sketch of the mechanics just proves the advocate’s bona fides (and willingness to accept that people may have diverse perspectives on what is desirable — the distinction between ought and is, remains important). People will remember the clear imperatives concerning what constitutes prudent public policy. And, yes, human psychology does want something to slot into that empty archive of “shared sacrifice” that is built into the deep of human political psychology.
        .
        I think MMT, as currently propagated, is something of a mixed bag. There are real and serious deficiencies with regard to the mechanics and those deficiencies affect the principles of public policy that follow.
        .
        I mentioned three specifically: the public utility nature of a marketable national debt gets slighted in a lot of MMT screeds, where advocates like to titillate with the suggestion that the state does not need to borrow to spend — which is sort of true, and there may actually be circumstances where spending without creating public debt is good public policy, but in general the marketable public debt is a critical feature of a fiat currency and we need the sovereign state to borrow as well as spend, even if those are two policy choices share no mechanical linkage. I also mentioned the importance of taxing economic rents; MMT could use a much bigger dose of Henry George in its thinking, imho.
        .
        And, finally, I mentioned the problem of international trade. Using the U.S., a huge economy with a fiat money valued as the global reserve currency as an exemplar, makes for a seriously misleading economics. Somebody has to be Argentina, and a floating exchange rate is not really an answer.
        .
        Having laid it out again, I think I might reduce my enthusiasm for MMT to one-and-a-half cheers.

        • Thanks Bruce for the thoughtful reply.
          I agree that the government debt as currently issued by, for example, the US Treasury provides some utility in the form of an ultra-safe savings vehicle for the public. MMT just points out that providing that savings vehicle is really not necessary to enable the government to spend and that it is the government that sets the return on that savings- not bond vigilantes or whatever. Some MMT advocates might not prioritize that utility the same way you might or I might.
          .
          Somewhat similar is the position on taxation. Government taxation is really the foundation of the MMT theory of money- it doesn’t make any sense at all without taxation being at least one of the reasons that people provide real goods and labor to the government in exchange for pieces of paper or numbers in some account. The whole idea is most easily explained by using property taxes as the example of a tax- and most of them use that tax (often called a ‘hut tax’) as the simple explanation. So I mean it’s kind of not that MMT ignores what Henry George had to say about taxes but that different MMTers will prioritize what should be taxed differently from you or me.
          .
          I, also, have quite a few issues with what MMT often seems to say about international trade and trade deficits. But they are similar to the issues I have with most other economists that consider ‘free trade’ always to be a benefit.

          • Jerry,
            .
            Imagine an economy without a government, could it have money?

            • Can you have an economy without a government? Societies without a government sometimes have money but it tends to be used for regulating social relations rather than commercial exchange.

            • I find it hard to imagine a society with more than just a few hundred people that need to interact in order to survive not having at least some type of government or power structure. So I guess I don’t really know if there is even an economy (let alone ‘money’) without any kind of government.
              .
              What do you think?

          • Jerry,
            .
            I wasn’t asking if there is an economy without a government.
            .
            The point I was trying to get you to concede was that an economy intrinsically needs neither government nor taxation to have a monetary system.

            • “The point I was trying to get you to concede was that an economy intrinsically needs neither government nor taxation to have a monetary system.”

              Henry, I don’t concede that because I just don’t know. It’s definitely way outside my experience. But if you know of some society that consisted of more than a few hundred individuals that has no power structure similar to government yet uses an otherwise worthless token as a way to obtain goods or labor from others, then I will consider conceding something.

              • The dollar is used internationally yet taxes are only required to be paid in dollars in the US. Thus international firms such as Apple or Amazon work hard to avoid paying dollar taxes. I would argue that the community of international businesses constitute a society of more than a few hundred individuals that has no power structure similar to government. No international institution forces Amazon to pay dollar taxes and Amazon avoids paying dollar taxes in the US. Thus the dollar is used for international settlements without need for any taxes. The dollar is a preference of international businesses and avoiding paying taxes in dollars seems to be one of its main attractions.

                • “Amazon avoids paying dollar taxes in the US”

                  What about Amazon’s workers, contractors and suppliers?

                • “What about Amazon’s workers, contractors and suppliers?”
                  .
                  Even if Amazon automates and outsources fully, it will still use dollars because dollars are the international private sector’s preferred unit for final settlement. This preference has nothing to do with US taxes …

        • Bruce, I happened upon this video of Bill Mitchell discussing some of where MMT might disagree with Henry George. On the chance you might still be interested, I will try to post a link. The Georgist part really begins at minute 17:30 or so. But I enjoyed the entire lecture. In any event- Happy New Year!
          .

          • I appreciate the link. I did Bill Mitchell’s weekly quiz (on his website) for a while, trying to educate myself on the MMT perspective, so I have some familiarity with his views.
            .
            I did not try to listen to the whole lecture; I skipped ahead to the 17 min mark as you suggested. He did correctly identify “the Panic” [of 1873 — the beginning of a worldwide depression and a five-year long recession in the U.S.] as essential context for Henry George’s 1879 book, Poverty and Progress. But, he blamed that depression on overbuilding by U.S. railroads. (As far as railroads are concerned, he may well be confusing somewhat the Panic of 1893 with the panic of 1873.) That’s a curiously Austrian and ad hoc explanation for an MMTer to grab hold of, for a depression that has been conventionally tied to the gold standard fetish and consequent deflation. And, he very specifically sidesteps what George saw concerning the relation between “economic rent” (for land) and the building of railroads, by claiming that railroads were overbuilt (“railroads went crazy” “building parallel lines” and “so much fixed capital investment could not be supported by the traffic and the prices”). Railroads could not be financed except to the extent that the railway builders could make a claim on increased value of land along their routes — this was widely understood at the time and George extrapolated from that widely shared insight to the general observation that the technological and economic development of communities enhanced the value of the land where the communities were located.
            .
            I do not feel one can dismiss all of this as Mitchell simply being a poor George scholar or a lousy historian. There’s a huge lacunae here, touching not on George per se, but on tax incidence and the value of the unit-of-account thru time, and the function of the marketable public debt in private finance and leverage.

            • Bruce Wilder, I am honestly flattered that you would take the time to listen to something I recommended. Thank you. And I am not surprised that you came away from it with a different take on it than I did, and that is also very helpful to me- so thank you again for your analysis and commentary on it.

  3. GDP is the measure of our productive economy. GDP is the sum of household, business and government spending (and likewise the income of those sectors equals that spending because all spending is someone else’s income). Our economy depends on household spending (2/3 of GDP). That spending is limited by household income (which comes only from those three sectors). Business provides that income to the extent demand (business opportunity) exists, and government provides the rest (by way of bookkeeping entries to household bank accounts). All that’s important to the economy is maintaining this flow, and with a fiat currency (whose value, by definition, depends only on currency-users perception), there are no limits other than that perception.

    I see this as the accurate description of our economy – & the rest of which others so often include in the economy as nothing more than one big gambling casino.

  4. fredtorssander,

    That paragraph starts out “In the mainstream economist’s world …”
    Prof. Syll is explaining the *mistake* that prevails in most of conventional economics. He starts explaining the true things two paragraphs down.

    • That section begins with “In the mainstream economist’s world” and I have never ever heard any mainstream economist – or any keynesianist or any other creed say that “The central banks simply adjust the interest rate to achieve full employment without inflation.”. The difference that full employment – according to any practical definition as 3 or 4 percent unemployment – makes, is that workers can get themselves compensation for the continuous write up of prices which is motivated by new models and higher quality etc. So you get wage-inflation added.
      Or you can change the definition of full employment to be the level that can be reached without wage-inflation. The unemployment level that prevents strikes and wage-gliding(?) (pay-drift?) etc. The common NAIRU-variety of employment level re-defined as “full employment”.

      • The Fed is legally required to target full employment and zero inflation. In practice it sees these as mutually exclusive (the Phillips curve) and cares much more about inflation so defines ‘full’ employment as whatever level employment happens to settle at once zero inflation is reached. Mainstream economists justify this approach with their NAIRU nonsense. They do, in effect, say “The central banks simply adjust the interest rate to achieve ‘full’ employment without inflation.”

        • Ok so there is two (at least) definitions of Full employment. One definition built on full employment from the perspective of workers, “It means having always more vacant jobs than unemployed men, not slightly fewer jobs. It means that the jobs are at fair wages, of such a kind, and so located that the unemployed men can reasonably be expected to take them; it means, by
          consequence, that the normal lag between losing one job and finding another will be very short. “William Beveridge 1944 in Full Employment in a Free Society.”
          The other definition is – if I may simplify just a little – whatever level of unemployment that does not cause immediate revolt. As the former chairperson of the Swedish Riksbank Lars EO Svensson defined the concept: att “…stabilisera inflationen runt inflationsmålet och arbetslösheten runt en (lägsta) långsiktigt hållbar nivå…” to stabilize the inflation around the inflation-target and the unemployment level around the (lowest possible) long-term tenable level. https://ekonomistas.se/2013/09/09/asidosatter-riksbanken-prisstabilitetsmalet-vad-ar-i-sa-fall-kostnaderna/
          The question is if one should should accept the re-definition by the new paradigm, which is not according to US-laws, (the employment acts) or the UN Charter – without comment?

  5. My criticism of MMT is it doesn’t confront the core reality that the controlling macroeconomic variable is total private debt to GDP. Government deficits are indeed axiomatic to private surplus, but there is no guarantee such surplus will be used to pay down private debt. Indeed, many institutions including banking and finance are eager to encourage higher private leverage enabled by the new collateral private surpluses represent. If you can’t explain how total private debt can be reduced by your policy prescriptions you need to go back to the drawing board and read some Michael Hudson, some Hyman Minsky, and some Steve Keen.

  6. If prices are arbitrary, noisy, and administered, price stability simply means the arbitrary status quo is treating policy makers well and they fear change. The Greenback Party of the 1870s wanted inflation to help poor farmers. If your income increases with inflation, inflation is not a concern. Policy makers too benefit from inflation if their incomes increase at least as fast. Treating inflation as a public policy constraint is illogical.

  7. Whither MMT?
    .
    Personally, I believe MMT is peaking. It has only come to prominence because monetary policy has failed. The exercise of monetary policy in the major countries has resulted in asset price bubbles and has failed to stimulate an acceptable level of inflation in goods markets and in many countries was accompanied by austerity economics.
    .
    Progressives, hearing that there is no financial constraint on government, think MMT is the panacea for all of society’s ills. However, MMT plainly says that there is a real resources constraint, always, and in effect I would argue, the fact that there is no financial constraint is almost irrelevant. So, in reality, MMT can offer nothing much more than is any different than “normal” economic prescriptions.
    .
    There is an element that is novel and that is the Job Guarantee. Again, when progressives realize that MMT prescribes cutting private sector employment to keep inflation in check and that the JG is designed to soak up the resulting unemployment, they may think twice about the JG.
    .
    And of course, MMT argues there is no foreign exchange constraint. While there is a functioning private market system, private owners of capital can always walk. MMT argues that capital controls work. They might in the immediate short term, but capital owners have long memories.
    .
    MMT will have a legacy and that is that it has shown that there is a novel way of looking at government finances and that this new way is a foil to austerity economics.
    .
    It seems to me that what is left are essentially standard Keynesian prescriptions.

    .

    .

    .

    • Henry, I thought you asked a very good question of David Glasner-
      .

      ““Central banks set a rental price for reserves, thereby controlling the quantity of reserves into which bank deposits are convertible that is available to the economy. ”
      On the one hand you want the credit multiplier based on reserves theory euthanized, then you write the above.
      Is there not a contradiction?
      In what sense do CBs control reserves? Don’t they merely supply the reserves the banks want at the price the CBs want to set?”
      .
      He should have just said ‘yeah- you’re right’ but he didn’t. But anyways- that’s the kind of question that MMT brings right up front and shows where the economics I learned in school was just completely wrong. Just completely wrong and while Glasner kind of sort of gets it, he still gives you that answer that makes no sense.
      .
      It’s tough to make accurate predictions. I wouldn’t write off MMT just yet.

      • So I probably should have included Glasner’s answer to you rather than just stating that it makes no sense. So here that answer was.
        .
        Henry,
        .
        Because the CB can set a price at which it is prepared to provide whatever quantity is demanded, it controls the quantity. That’s exactly what every monopolistic supplier of a commodity does: set a price and provide the quantity demanded at that price. That’s the theory of bank rate.
        .

        Makes no sense to me but what the heck do I know. Controls the quantity because it provides whatever quantity demanded at a set price- seems to me that would mean it doesn’t control the quantity it provides if it wants to set the price.

    • Jerry,
      .
      I’m not writing MMT off either. I’m just saying it’s peaking. And when people look closely, saying that a money creating government has no financial constraint isn’t really saying much at all.
      .
      The other reason it’s peaking is the adoption of MMT by the Green New Dealers. Once they accept there is a real resources constraint then what is it they can actually deliver? And anyway, private enterprise is getting on with delivering renewable energy solutions at a great pace, despite the inertia shown by governments all over the world. Renewable energy is cheaper than conventional power and is complemented by emerging storage technologies (battery systems) and recirculated hydro. Who needs the Green New Deal?

      • I would agree that saying a money creating government has no financial constraints is no big deal when (and if) there is actual full employment in the economy. But wouldn’t you agree it could be a huge deal if there is significant unemployment? I remember President Obama declaring that the Federal US government had to ‘tighten its belt’ in the middle of a huge recession, and I remember the Speaker of the House of Representatives of the US Congress telling Americans that the US Government had ‘run out of money’ around the same time.
        .
        Correcting errors like those happens to be a HUGE deal in my opinion.

    • “And of course, MMT argues there is no foreign exchange constraint.”

      What do you mean by “constraint”?

      • Allan,
        .
        If governments inflate to much, according to the capital markets, by creating money, capital will take flight across the exchanges, depreciating the currency and probably adding to the inflationary pressure.
        .
        Some governments might be fearful of such reactions, limiting their creation of money – the constraint.
        .
        MMT says forget markets. Capital flight can be forestalled by capital controls and does not consider the long term consequences of such action – hence not admitting to any constraint.

        • Capital has to go somewhere, and that somewhere is overwhelmongly the US dollar. The more dollars there are, the stronger the dollar gets.
          .
          As long as countries are allowed access, politically, to money markets, they can borrow dollars in money markets to meet dollar obligations. Venezuela has been barred by political sanctions from accessing money markets; but other countries such as Argentina, Brazil, etc. still have access.
          .
          Capital flight is not much of an issue when you can print your currency to engage in dollar swaps and keep rolling them.
          .
          Finance trumps outdated economic models of capital movements.

        • Robert,
          .
          “Capital flight is not much of an issue when you can print your currency to engage in dollar swaps and keep rolling them.”
          .
          So would you swap your US$s for Venezuelan bolivars?

          • Venezuela has been cut off from international money markets. Other oil states such as Norway and Sweden haven’t …
            .
            Traders will bet on emerging market currencies and government bonds. Turkey has high inflation and uses force to suppress internal dissent as well as invade the Kurds; yet bank publications recommend investing in Turkish bonds. Turkey has been printing money but despite this, is able to avoid capital flight because traders continue to supply dollar liquidity.
            .
            Venezuela however is off trader screens completely because of US sanctions. Turkey is there. Why? Purely because current political consensus favors Turkey and treats Venezuela as a pariah.
            .
            Evidence: I presented the above view to a twitter trader and he said I was basically right. He pointed out however that even pariah states such as North Korea can finagle access to reserve currency liquidity, linking to this screenshot showing “NK Debt Corp”: https://pbs.twimg.com/media/ELkCJCFVAAImxLU.jpg (Note: the NK bonds are denominated in CHF and DEM which I take to mean Deutsche Mark which has presumably been changed to Euro now. The point is even pariah states can find access to hard currencies through financial markets; the key obstacle is political sanctions not trader willingness to speculate …)

          • Robert
            .
            “.. yet bank publications recommend investing in Turkish bonds.”
            .
            Then Turkey is a bad example – you should look elsewhere. If banks are promoting Turkish financial instruments then markets haven’t lost faith in them, obviously. Markets have lost faith in Venezuela – that is the point.

            • The US has forced markets to de-list Venezuela. If a bank buys Venezuelan bonds or offers Credit Default Swaps on Venezuelan bonds, they will not be allowed to transact with US banks. Since US banks are so big and ubiquitous, the US sanctions effectively cut off Venezuela’s access to money markets for arbitrary, political reasons …
              .
              The twitter trader noted that Venezuela might have been able to finagle debt financing as North Korea did; he also mentioned Syrian proxy bonds sold through Russia. Apparently Venezuela is not as good friends with Russia or the Franklin group that sold the NK bonds. But this is psychology and people games, not efficient market functioning.

              • Turkey, Syria, and North Korea get access to international money markets because Trump likes Erdogan and Kim Jong Un and Putin likes Assad. Venezuela is shut off because Trump dislikes Maduro and Putin doesn’t like him as much as he likes Assad.
                .
                With different personalities, access would be different.
                .
                Without Trump’s support, Turkey would not appear on trader screens. Even if traders want to invest in Venezuela, they can’t because of arbitrary political sanctions.

              • Robert,
                .
                “With different personalities, access would be different.”
                .
                The point is, no matter if a country is an international pariah, either for economic, financial or political reasons, it does not matter that it can print its own money. It has no control over the exchange rate unless it is somehow fixed. If it runs a floating currency, it is at the mercy of markets. If it switches to a currency fixed by fiat, international capital will stay shy of it.

                • No, I disagree. Emerging Market traders are arbitrarily prevented from trading Venezuela’s bonds, but can still trade Turkey’s bonds, for entirely non-market-driven reasons. A trader might want to buy or sell Venezuelan paper but the market has been shut down by the US. Turkey prints money but since Trump likes Erdogan, EM traders see Turkey on their screens. Trump doesn’t like Maduro, so Venezuela disappears from EM trader screens. It has nothing to do with markets except in the sense that the US is such a huge market it can do what it likes as far as preventing other countries from accessing money markets.

              • Robert,
                .
                ” Emerging Market traders are arbitrarily prevented from trading Venezuela’s bonds”
                .
                Do you think if the sanctions were removed that traders of whatever ilk would go anywhere near Venezuela?
                .
                You’re still missing the point. The Venezuelans can print their own currency – what good does it do them – even if the financial crisis is induced from abroad?
                .
                Remember what you said above?
                .
                “Capital flight is not much of an issue when you can print your currency to engage in dollar swaps and keep rolling them.”
                .
                Whether the capital flight/strike is due to capital markets pulling the plug or for political reasons, the ability to create money can’t help you.
                .
                And there have been plenty of times when Argentina has had to resort to the IMF for loans because private finance has disappeared, at the cost of imposed austerity.

            • “But this is psychology and people games, not efficient market functioning.”
              .
              So what?
              .
              And so what if politics intrudes?”
              .
              The fact is Turkey is not a good example.

      • Allan,
        .
        I came across an interesting paper today:
        .

        Click to access Bonizzi-et-al89.pdf


        .
        It delves into these issues with considerable detail.

  8. Correlation between unemployment and credit ie time derivative of total private debt/GDP trailing three decades is over 80%. Include total private debt in two term expansion and it’s over 90%. Loanable funds says lending just moves money from savers (slow spenders) to fast spenders with no net effect. Actually, banks create new money by lending, not by intermediating. New credit money creation drives unemployment downward but increases total private debt. At some point total private debt becomes unsustainable and credit contracts so unemployment grows. Basic Minsky, Hudson, Keen.
    Fed ignores all of this, and should act to reduce private debt directly. ECB may try this through cyber money issuance.

  9. “At some point total private debt becomes unsustainable …”

    That assumes no new capital stock is being created and that all lending is for purchasing already existing capital stock. If that were the case, then the loans can’t be repaid in aggregate.

  10. “If it switches to a currency fixed by fiat, international capital will stay shy of it.” What does that sentence mean Henry? Specifically, what does ‘fixed by fiat’ mean?
    .
    The U.S. has a fiat currency and a floating exchange rate yet doesn’t seem to have problems attracting international capital. If anything, most markets are more at the mercy of the US government rather than the other way around. Are you saying that would change dramatically if the U.S. actually acted like it could create the U.S. Dollar by implementing something like a Job Guarantee?
    .
    Anyways, a country always is able to control the upward limits of the value of its currency, even if it can’t always keep it from losing value. But other countries will usually have some interest in not having inexpensive foreign products put into their markets based solely on currency values if it damages their own industry. So there is some control (even if not by the issuing government) rather than no control over the exchange rate.
    .
    I realize you were having a discussion with Robert more focused on smaller economies and that maybe I am taking this too far out of that context.

    • Sorry to barge in but I was just reading a twitter thread on Lebanon at https://twitter.com/EHSANI22/status/1208096421519466501
      .
      I take from this thread that the Lebanese Central Bank has large dollar loans that it services by printing lira and swapping them for dollars. Enough traders will do currency swaps even with falling exchange rates if the country can keep printing and selling lira for dollars.
      .
      Venezuela however has been cut off from access to traders by US sanctions. Twitter traders can trade with Lebanon but Venezuela never appears on the lists of countries in the bank research documents they post screenshots of.
      .
      My point: plenty of countries print money with apparent impunity, including the US. Plenty of private firms also create dollar-denominated assets without the knowledge of central banks. Venezuela is treated as a pariah state and cut off from money markets. The difference between Venezuela and Norway is, chiefly, access to world money markets …

    • Jerry,
      .
      “I am taking this too far out of that context.”
      .
      Yep.
      .
      “What does that sentence mean Henry? ”
      .
      A country can set its currency exchange rate to whatever it likes but then has to defend it if the markets either “bull it” or “bear it”.

      • Well Henry, I’m just happy you agreed with me about something for a change. 🙂

      • Markets can also hedge currency changes. Carry trades allow traders to swap into currencies, buy bonds, and swap back for more than their own dollar borrowing cost. The country can keep printing currency faster than prices rise. I believe Turkey has been doing this for a long time, just lopping off zeros from the currency tokens once in a while. As long as they have access to dollars they keep printing lira to buy dollars.
        .
        Answering your earlier question: yes, I think traders would trade Venezuelan paper. Traders will trade anything and if they had an oil-backed asset, they could use it as a hedge for other international trades and swaps.
        .
        Venezuela should learn to do something like Norway, which decided in the 1990s to create an Oil Fund that uses finance to hedge against falling oil prices. Then inflation need never have taken off.
        .
        The IMF, in conjunction with the Fed and other world central banks, should be providing insurance to distressed countries; the best form of insurance is a universal basic income denominated in automatically inflation-protected dollars. The major world central banks already share an explicitly unlimited currency swap network, so the framework is already there …

        • Robert,
          .
          “I think traders would trade Venezuelan paper.”
          .
          Your focus (even obsession) seems to be with traders. These people operate at the margins. (I would question what you say they would do, anyway). What you should focus on is trade and capital investment. These are the drivers of long economic health.
          .
          ” The major world central banks already share an explicitly unlimited currency swap network….”
          .
          Yes but these swap arrangements can also come with conditions which are in effect a constraint.

          • The volumes of dollars flowing to emerging market economies from finance vastly oustrips physical trade dollar volumes.
            .
            For example, BIS Statistics says at https://www.bis.org/publ/qtrpdf/r_qt1609b.htm :
            .
            “As of end-Q1 2016, banks located in the United Kingdom reported total cross-border lending worth $4.5 trillion.”
            .
            The UK government at https://www.ons.gov.uk/economy/nationalaccounts/balanceofpayments/bulletins/uktrade/october2019 reports trade figures less than a tenth of that volume:
            .
            “The total trade deficit (goods and services) widened £2.3 billion to £7.2 billion in the three months to October 2019. This was because of imports increasing £9.7 billion to £182.7 billion, while exports increased by a lesser £7.4 billion to £175.5 billion.”
            .
            Financial flows far eclipse real trade volumes. Traders are much more important a source of dollars for emerging markets than trading physical goods.

          • See also https://www.bis.org/publ/qtrpdf/r_qt1012x.htm “Foreign exchange turnover versus international trade and financial flows”:
            .
            “Overall, looking at developments since 1992, it is clear that FX turnover has increased more than underlying economic activity, whether measured by GDP, equity turnover or gross trade flows.”
            .
            Finance trumps trade.
            .
            You said: “these swap arrangements can also come with conditions which are in effect a constraint.” Any constraint is purely political and can be at an away-from-market price. During the last financial crisis, the Fed explicitly communicated unlimited swap line capacity, supplied with unlimited rollovers, at an away-from-market, policy rate. Psychology and personalities trump supply and demand.

            • Robert,
              .
              Yes, the activity of traders in all financial markets is enormous. So what?
              .
              The underlying values of securities traded is set by the real world fundamentals. Traders do not determine whether a particular project proceeds or whether a particular trade transaction occurs. It is these transactions which impact on real economic activity and growth. The activity of traders contributes little if anything to real activity.
              .
              In normal times when there is a diversity of opinion, there is minimal impact on markets. If anything they contribute to the inherent riskiness of markets at critical times, when they all panic together.

            • Henry,

              We agree at least that trader panics often spread to the real economy.
              .
              But trader exuberance does as well: stock market trading drove dot-com firms for a decade and mortgage-backed security trading drove housing markets for a decade.
              .
              Thus traders contribute significantly to real activity. Financing for the 1990s and 2000s economic expansions came mostly from traders of financial goods only very loosely tied to underlying real assets.
              .
              Finance is much more important a determinant of the real economy than economic models have yet discovered. Finance is the dog, the real economy is the tail.

              • You’re confusing finance and trading. Entirely different operations.
                .
                Traders are traders because they deal in secondary markets.
                .
                I would not call those that subscribe to primary issues “traders”.
                .
                There are those that stag primary issues, but I wouldn’t call them traders either.
                .
                Traders, by and large, don’t finance anything, by definition.
                .
                Traders generally take very short term positions, generally looking for small movements, at times leveraged with derivatives.
                .
                And, yes, trader’s exuberance can move markets upwards when there is less diversity of opinion.

      • https://www.investopedia.com/ask/answers/forex/forex-hedge-and-currency-hedging-strategy.asp
        .
        Traders could do carry trades with Venezuelan bonds and hedge the currency risk in one of several ways laid out in the investopedia article. Traders can profit even as a country prints money.
        .
        Interestingly, Venezuela might have chosen not to engage in financial insurance, because of the necessity of thinking like a neoliberal. That very uppityness makes neoliberals such as Trump angry and he shuts down Venezuela’s access to dollars …
        .
        Thus politics trumps economic theory. Politicians use economists only when they need to, gleefully trampling over economic cautions about printing money when they get in power. When out of power economist cautions become a valuable and cynical tool to restrain the spending ability of the opposition party. Economists are tools …

  11. Henry, you said:
    .
    “You’re confusing finance and trading. Entirely different operations.”
    .
    But this is an irrelevant distinction. Secondary markets affect the price of primary issues. And firms use short-term secondary markets for funding extensively. An analyst on a TV show just mentioned that US fracking companies are servicing debt using repo markets. Traders finance Aramco’s recent bond offering, by providing at least a secondary market, if they are not also participating in the primary issuance, which they probably are.
    .
    Economists dismiss traders but the flows of dollars in financial markets are at least an order of magnitude greater than real economy flows. Those financial economy dollars trade at par with real economy dollars. When they are irrationally hoarded, recessions inevitably follow.


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