Hondas Grown in Illinois — Der Anbau von Hondas in Illinois

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A post in German and English.

Einige unter den führenden Anhängern von MMT können sich einfach nicht von der Behauptung lösen, dass Exporte Kosten und nichts als Kosten darstellten, wohingegen Importe nutzenstiftend seien und nur nutzenstiftend. Auf einer bestimmten Ebene der Analyse – und die ist relevant für den gegenwärtigen Zweck – ist es eben wichtig, Export und Import als einen Verbundeffekt zu betrachten statt als zwei dichotome Phänomene.

Der von Bill Mitchell vertretene Irrtum wurzelt in dieser Aussage – siehe unten im Original – frei übersetzt: 

Exporte bedeuten, dass wir etwas Reales, wofür wir selbst Verwendung haben, an Fremde abgeben.

Gemeint ist also ein durch nichts kompensierter Nutzenverzicht zugunsten Anderer. Ein Akt der Schlechterstellung.

Doch dergleichen muss nicht im Spiel sein, wenn man Export und Import als einen Verbundeffekt ansieht. Selbst die Sicht auf Export und Import als dichotome Phänomene kann zeigen, dass Mitchells Annahme irrig ist.

Die Bewohner von Illinois haben mehr als genug Weizen, um die Bedürfnisse, die sie mit diesem Produkt stillen können, restlos zu befriedigen. Dennoch bauen sie noch mehr Weizen an – Weizen, den sie nicht benötigen. 

Zugleich haben die Bewohner Japans mehr als genug Pkw, um die Bedürfnisse, die sie mit diesem Produkt stillen können, restlos zu befriedigen. Dennoch stellen sie noch mehr Pkw her – Pkw, die sie nicht benötigen.

Die Bewohner von Illinois haben keine Autoindustrie und die Japaner haben nicht genug Weizen. Deshalb verschiffen die Menschen aus Illinois Weizen nach Japan, während die Japaner Pkws von Japan nach Illinois verfrachten. Die Bewohner von Illinois und Japan tauschen also das, was sie nicht benötigen, gegen das aus, was sie benötigen. Keine der beiden Parteien erleidet einen schmerzlichen Verlust dringend benötigter Realressourcen. Im Gegenteil, sie geben ab, was sie gerne abgegeben, um zu erhalten, was sie sich wünschen.

Natürlich entstehen Kosten bei der Bereitstellung des Exportguts, aber diese ermöglichen den Bezug eines gewünschten Gutes, dessen Verwendung einen Wert besitzt, der höher ist, als die Exportkosten. Die Kosten des Imports sind nicht Opportunitätskosten, die einen schmerzlichen Verlust bezeichnen, sondern die Kosten für den Erwerb eines gewünschten und anderweitig nicht beziehbaren Gutes – zum günstigsten Austauschverhältnis, das möglich ist (denn Eigenherstellung, wenn überhaupt möglich, wäre teurer als Bezug vom günstigsten Exporteur).

Wäre man nicht bereit, die mit dem Export verbundenen Kosten in Kauf zu nehmen, würde man also gar nicht erst exportieren, wäre der durch den Export ermöglichte Nutzen (Bezug gewünschter Waren) nicht zu erzielen und man wäre ärmer/weniger wohlhabend als nötig.

One of the pet themes of some proponents of MMT is this:

For an economy as a whole, imports represent a real benefit while exports are a real cost. 

Exports mean that we have to give something real to foreigners that we could use ourselves – that is obviously an opportunity cost.

  

Imports represent foreigners giving us something real that they could use themselves but which we benefit from having. The opportunity cost is all theirs!

I beg to differ. Americans purposefully enlarge the number of real things (wheat) available to them domestically being intent on exporting them, while the Japanese produce more real things (cars) than they can use domestically in a similar and complementary eagerness to export them to America.

The error in the quoted reasoning is to suggest that something is being given away "that we could use ourselves". No, says the American, we cannot use still more wheat and therefore are happy to give up the surplus attaining in return something (cars) we are not good at/capable of producing but "that we could use ourselves" — and how!

Of course, imports involves costs. But these costs are not the expression of an absolute loss (of what "we could use ourselves" but must give up without compensation) but the price to be paid for a good desired and received at the best possible exchange rate.

Not incurring the costs associated with exports that give access to desired imports (a benefit from exporting) would imply needless impoverishment.

Try and Run Germany Like the EU

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If Germany were run like the EU, some of its Federal States would be in a calamitous state as suffered by Greece. The hypocritical pro-EU-Germans have no qualms about fiscal transfers within Germany that as "Europeans" they deny Greece.

Here is why you cannot run the EU like Germany, or like the USA for that matter:

America is a nation, Europe is not. 

America is bound by a shared culture within many cultures, a common language, within many languages, and a common identification. 

Europe is none of those things. 

This is why the American states are willing to rely on the federal government for transfers when calamity arises. 

This is why Germany has overseen the destruction of Greece and refuses any ‘reforms’ that would allow permanent fiscal transfers from some ‘federal’ body to one Member State or another. 

And the democratically-elected government in Greece behaves like a rabid neoliberal attack dog on its own people as it gains power under the banner of Socialism. 

This is why, in the face of obvious evidence that nations such as Italy and France are plunging into states of social instability, the European Commission still enforces (unequally) rigid fiscal rules that prevent the democratically-elected Member States from advancing prosperity, and, rather, enforce a pernicious austerity that impinge disproportionately on the most disadvantaged and then seep up to undermine the middle classes. 

This is why the Gilets jaunes have become a reality. They want their nation back from the technocrats who only see ratios, rules and conformity.

The source.

Geldpolitik: Quantitative Lockerung – Warum Banken Vermögenswerte an die Zentralbank veräußern

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Es gibt zentrale Fragen, die beantwortet werden müssen, wenn man einen größeren Zusammenhang verstehen will. Und doch werden sie nirgends beantwortet. 

Das ist mir beim Thema Quantitative Lockerung so ergangen. 

Wieder und wieder heißt es, die Zentralbank kaufe Vermögenswerte von den Banken (die dafür Bankreserven erhalten). Aber warum sollten Banken bereit sein, der Zentralbank Vermögenswerte zu verkaufen? 

Im Video unten stoße ich erstmals auf eine Antwort. 

Den Banken drückt der Schuh – sie haben nämlich Vermögenswerte im Portfolio, die ihnen gar nicht behagen – Anleihen von hoch riskanten Emittenten. Diese Aktiva sind die Banken gerne bereit zu verkaufen.

Eigentlich möchte die Zentralbank, die Banken dazu bewegen, Kredite auszureichen, um so die Wirtschaft zu stimulieren. Nun ist es aber so, dass die Banken das Nullzins-Niveau nutzen, um billiges Geld aufzunehmen, um damit sichere Staatsanleihen zu erwerben, die eine geringe, aber positive Rendite abwerfen. Die Banken nehmen Geld zu nur wenig über null Prozent auf und kaufen Anleihen, die 2 % rentieren. Ein risikoloser Ertrag von fast 2% ist den Banken sicher.

Nun schickt sich die Zentralbank an, diese Staatsanleihen zu kaufen, d. h. der Preis dieser Papiere steigt und ihre Rendite sinkt - sinkt so sehr, dass sie den Banken kaum noch lohnend erscheint. Im Vergleich dazu wäre es interessanter, Kredit zu vergeben – mit einer Rendite von 5%, vielleicht sogar 7% oder 8%.

Das alles kommt mir ziemlich "hebgedreht" vor – zumal vor dem Hintergrund  dieser Analyse der Irrtümer, die der Quantitativen Lockerung zugrunde liegen. 

Was man nicht alles tut für seine ideologischen Götzen. Der Neoliberalismus verteufelt die Fiskalpolitik, mit der sich wirkungsvolle Konjunkturpolitik aber viel eher verwirklichen lässt. Stattdessen wird darauf bestanden, es müsse die Geldpolitik sein, an der die Wirtschaft genesen solle. Und schon ist der Tunnelblick aktiviert und alle Fantasie beschränkt sich auf die Möglichkeiten, die uns das Instrument der Leitzinsgestaltung an die Hand gibt.

Geldpolitik: Quantitative Lockerung

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In diesem Post habe ich auf einen guten Artikel hingewiesen, in dem vom aktuellen Übergang von einer Geldpolitik der Quantitativen Lockerung zu einer restriktiveren Vorgehensweise der Zentralbanken die Rede ist.

Was ist eigentlich Quantitative Lockerung und warum wird sie betrieben?

Der größere Rahmen, innerhalb dessen diese Form der expansiven Geldpolitik gewählt wird, ist ideologisch gefärbt und beruht auf sachlichen Irrtümern.

Geldpolitik sei wirkungsvoller als Fiskalpolitik, die mit dem ideologisch abgelehnten Staatsinterventionismus gleichgesetzt wird. Tatsächlich ist der geldpolitische Impuls, der von Quantitativer Lockerung ausgeht weniger wirkungsvoll als fiskalpolitische Maßnahmen. 

Außerdem muss man sich die Frage stellen, warum geldpolitische Eingriffe weniger staatsinterventionistisch sein sollen – ist das durch die ineffektive Quantitative Lockerung unnötig perpetuierte Brachliegen volkswirtschaftlicher Ressourcen (siehe unten) nicht ein massiver Eingriff des Staats in die Wirtschaft? Und wäre es nicht gescheiter, den Staat dazu zu benutzen, um die Gesamtnachfrage anzukurbeln, wozu keine Eingriffe in die Wirtschaft erforderlich sind, die wir nicht schon längst praktizieren und allerseits gutheißen, wie etwa den Straßenbau oder die Bereitstellung finanzieller Mittel für privatwirtschaftlich betriebene Projekte? 

Und schließlich sind die Gründe für die Quantitative Lockerung (QL) und deren vermeintliche Wirkungsweise irrig.

Die falsche Theorie hinter der QL nimmt an, dass Banken zuerst mit Reserven versorgt werden müssen, bevor sie weitere Kredite ausreichen können (Falsch!). Diese Kredite sollen die Wirtschaft ankurbeln. Doch der Grund, wieso die Banken das Kreditvolumen nicht ausweiten besteht darin, dass die beiden unerlässlichen Voraussetzungen für die Bereitschaft von Banken Kredite auszureichen, nicht gegeben sind: Kreditnehmer, die Kredit nachfragen und ausreichende Bonität aufweisen.

Wären letztere Voraussetzungen erfüllt, bedürfte es keiner QL. Die Banken könnten Kredite nach Herzenslust ausreichen und sich gegebenenfalls nachträglich mit Reserven versorgen. 

Die Reserven werden also nicht benötigt, um die Kreditvergabe durch die Banken, sondern um den Zahlungsverkehr zu ermöglichen, der einsetzt, wenn Kreditnehmer Kreditmittel an Kunden anderer Banken überweisen. Diese Überweisungen zwischen Banken erfolgen durch Übertragung von Bankreserven  von der zahlenden an die empfangende Bank.

Zurück zur QL.

Nachdem die Zentralbanken mit ihrem herkömmlichen geldpolitischen Latein am Ende sind – die Zinsen lassen sich nicht mehr senken, da sie auf null abgesunken sind –, soll nun ein besonderer Einfall die Lösung bringen. 

Wenn die Wirtschaft schwächelt, bedeutet herkömmliche Geldpolitik: Zinsen senken. Die Hoffnung ist, dass niedrigere Zinsen, Unternehmen dazu bewegen, Investitionen zu wagen, die sie bei höherem Zinsniveau nicht in Angriff nehmen würden. Für sich schon eine fragwürdige Annahme, denn in einem günstigen Wirtschaftsumfeld werden Investitionen auch auf hohem Zinsniveau vorgenommen. Geht es der Wirtschaft hingegen schlecht, werden auch dann keine Investitionen getätigt, wenn die Zinsen niedrig sind. Letzteres haben die Erfinder der QL nicht begriffen. Sie versuchen etwas anzuschieben, in dem sie eine Schnur nach vorne drücken – die aber legt sich nur in Falten.

Die Zentralbanken hängen einer irrigen Theorie an, nämlich dass Banken Kundeneinlagen einsammeln, um so Reserven aufzubauen und einen Teil davon mit einem entsprechenden Aufschlag in Form von Krediten an Investoren weiterzugeben.

Basierend auf einer falschen Vorstellung von der Arbeitsweise des Banksystems, ist man mit der Politik der QL also darum bemüht, etwas zu bewirken, was nicht nötig ist und nicht funktionieren kann, nämlich Banken mit Reserven zu versorgen, auf dass diese ihr Kreditvolumen (trotz fehlender Kreditierungsanlässe) ausdehnen mögen. 

Zu diesem Zweck ermutigt die Zentralbank Banken zu Asset-Swaps, dem Tausch von Vermögenswerten bestimmten Typs gegen solche anderen Typs. Sie kauft den Banken z. B. Staatsanleihen ab und schreibt diesen den Kaufpreis als Guthaben auf deren Konten für Bankreserven bei der Zentralbank gut.

So, nun haben die Banken Reserven, aber noch immer keinen Grund, Kredite zu vergeben.  

Die andere Idee, die hinter der QL steckt ist, dass der Ankauf langlaufender Anleihen durch die Zentralbank die Zinsstrukturkurve am langen Ende herabdrückt und somit auch die Zinsen für längerfristige Investitionen. Doch ist ungewiss, ob dieser Effekt in nennenswertem Umfang greift  – warum sollen Unternehmen Investitionen tätigen, wenn sie selbst oder ihre Kunden überschuldet sind – und ob er nicht wieder zunichtegemacht wird durch die Nachteile, die Anlegern und letztlich der Wirtschaft (aufgrund geringer Zinseinnahmen und geringerer Konsumneigung) daraus erwachsen.

Eine falsche ökonomische Theorie lässt Zentralbanken die im Vergleich zu fiskalpolitischen Maßnahmen (Staatsausgaben/Steuersenkungen) viel ineffektivere Geldpolitik (Leitzinsgestaltung) favorisieren.

Ergebnis: Viel Lärm um Nichts.

Halt. Gleichgültig ist der Irrtum nicht. Es findet eine enorme Ressourcenverschwendung durch Nichtnutzung statt.

For an English account click here.

The Union of European Colonies

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Writes Thomas Fazi ...

... the EU’s economic and political ‘constitution’ is structured to produce the very results that we are seeing today – the erosion of popular sovereignty, the massive transfer of wealth from the middle and lower classes to the upper classes, the weakening of labour, and more generally the rollback of the democratic and socioeconomic gains that had previously been achieved by the subordinate classes. Indeed, it is designed precisely to impede the kind of radical reforms to which progressive integrationists or federalists aspire. 

[...] 

In the EU – and especially in the monetary union – macroeconomic policies are effectively insulated from the popular-democratic process, as member states lack the basic economic tools that would allow citizens to steer their countries’ economic polices away from the Berlin-Brussels-Frankfurt consensus. The European Commission’s ‘ridiculously ferocious attack on Italy’s mildly supportive fiscal policies’, in the words of Michael Ivanovitch, former senior economist at the OECD – as well as, of course, the treatment reserved in 2015 to the SYRIZA government – provide ample proof of this. 

As the late, great British economist Wynne Godley presciently wrote in 1992, ‘the power to issue its own money, to make drafts on its own central bank, is the main thing which defines national independence’. Thus, by adopting the euro, member states effectively acquired the status of local authorities or colonies, as is becoming increasingly clear. The scope of the European treaties, however, extends well beyond fiscal and monetary policy. The treaties effectively embedded neoliberalism into the very fabric of the European Union, outlawing the ‘Keynesian’ polices that had been commonplace in the previous decades. 

That said, it is certainly true that many technical measures could be taken at the European level to stimulate the economy and make debt permanently sustainable, even within the current treaties. Countless such proposals have been put forward over the years. But the current balance of power among the member countries and the neoliberal path dependency of the European Union and eurozone makes such change politically unviable. 

[...] 

Still less realisable is a radical reform of the treaties in a more solidaristic and Keynesian direction. This would require a ‘eurozone government’ to run budget deficits with the support of a reformed ECB, full debt mutualisation, permanent fiscal transfers between countries, and so on. Let’s take a minute to think about what such sweeping institutional reform would entail. First of all, it would require left-wing governments coming to power in every single country of the union more or less at the same time (we have already seen what happens when one country tries to go it alone). After all, the only way to modify the treaties is through unanimity in the European Council. One doesn’t have to be particularly pessimistic to see why that is never going to happen.

The source.

Loanable Funds Theory and Financial Crowding Out

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Bill Mitchell offers an excellent exposition of the false loanable funds theory on which the inaccurate argument is based that government deficits supposedly locks out the private sector from sources of funding. 

In reality, a government's ability to finance its spending is unlimited. It neither requires government to bar out private investors from markets providing funds, nor does it inevitably cause interest rates to rise — in fact, it will tend to put downward pressure on the rate at which banks can borrow reserves. At the same time, the level of interest rates is controlled by government, who may or may not alter — at its discretion — the interest rate determined in the interbanking market.

In addition to this, the loanable funds theory (LFT) has a number of serious problems.

(1) LFT begs the question where the money comes from that savers are supposedly lending to banks which, according to LFT, in turn lend it on to investors. Of course, LFT does not have the right answer to that question, as it fails to account for the fact that ultimately new money is spent into existence by deficit spending government and banks empowered to issue credit money ex nihilo. 

(2) How is significant non-deflationary economic growth supposed to be brought about, when consumers turn into non-consumers by becoming lending savers. To put it less awkwardly: the funds that go into funding investments are no longer available to fuel effective demand. Logically related to this is the question:

(3) How are temporal lags avoided, when changing interest rates shift the relative proportions of investments and savings? And then there is the Achilles heel of classical economics: Say's Law (supply creates its own demand and thus equilibrium) — what is it that ensures correct investment decisions and successful implementation? It is not clear how changed interest rates per se achieve these twin requirements.

On a technical note, I am sick and tired of having to go through all that reformatting in Blogger that needs to be done when using the function that makes quotes visible by indentation. So, I italicise my writing, the remainder is the quoted piece. 

ooo

The normal presentation of the crowding out hypothesis, which is a central plank in the mainstream economics attack on government fiscal intervention is more accurately called financial crowding out.

At the heart of this conception is the theory of loanable funds, which is a aggregate construction of the way financial markets are meant to work in mainstream macroeconomic thinking. The original conception was designed to explain how aggregate demand could never fall short of aggregate supply because interest rate adjustments would always bring investment and saving into equality.

In Mankiw, which is representative, we are taken back in time, to the theories that were prevalent before being destroyed by the intellectual advances provided in Keynes’ General Theory. Mankiw assumes that it is reasonable to represent the financial system as the “market for loanable funds” where “all savers go to this market to deposit their savings, and all borrowers go to this market to get their loans. In this market, there is one interest rate, which is both the return to saving and the cost of borrowing.”

This is back in the pre-Keynesian world of the loanable funds doctrine (first developed by Wicksell).

This doctrine was a central part of the so-called classical model where perfectly flexible prices delivered self-adjusting, market-clearing aggregate markets at all times. If consumption fell, then saving would rise and this would not lead to an oversupply of goods because investment (capital goods production) would rise in proportion with saving.

So while the composition of output might change (workers would be shifted between the consumption goods sector to the capital goods sector), a full employment equilibrium was always maintained as long as price flexibility was not impeded. The interest rate became the vehicle to mediate saving and investment to ensure that there was never any gluts.

The following diagram shows the market for loanable funds.

The current real interest rate that balances supply (saving) and demand (investment) is 5 per cent (the equilibrium rate).

The supply of funds comes from those people who have some extra income they want to save and lend out.

The demand for funds comes from households and firms who wish to borrow to invest (houses, factories, equipment etc).

The interest rate is the price of the loan and the return on savings and thus the supply and demand curves (lines) take the shape they do.

Note that the entire analysis is in real terms with the real interest rate equal to the nominal rate minus the inflation rate.

This is because inflation “erodes the value of money” which has different consequences for savers and investors.

Mankiw claims that this “market works much like other markets in the economy” and thus argues that (p. 551):

The adjustment of the interest rate to the equilibrium occurs for the usual reasons. If the interest rate were lower than the equilibrium level, the quantity of loanable funds supplied would be less than the quantity of loanable funds demanded. The resulting shortage … would encourage lenders to raise the interest rate they charge.

The converse then follows if the interest rate is above the equilibrium.

.

Mankiw also says that the “supply of loanable funds comes from national saving including both private saving and public saving.” Think about that for a moment.

Clearly private saving is stockpiled in financial assets somewhere in the system – maybe it remains in bank deposits maybe not. But it can be drawn down at some future point for consumption purposes.

Mankiw thinks that fiscal surpluses are akin to this. They are not even remotely like private saving. They actually destroy liquidity in the non-government sector (by destroying net financial assets held by that sector).

They squeeze the capacity of the non-government sector to spend and save. If there are no other behavioural changes in the economy to accompany the pursuit of fiscal surpluses, then as we will explain soon, income adjustments (as aggregate demand falls) wipe out non-government saving.

So this conception of a loanable funds market bears no relation to “any other market in the economy” despite the myths that Mankiw uses to brainwash the students who use the book and sit in the lectures.

Also reflect on the way the banking system operates – read Money multiplier and other myths if you are unsure.

The idea that banks sit there waiting for savers and then once they have their savings as deposits they then lend to investors is not even remotely like the way the banking system works.

This framework is then used to analyse fiscal policy impacts and the alleged negative consequences of fiscal deficits – the so-called financial crowding out – is derived.

Mankiw says:

One of the most pressing policy issues … has been the government budget deficit … In recent years, the U.S. federal government has run large budget deficits, resulting in a rapidly growing government debt. As a result, much public debate has centred on the effect of these deficits both on the allocation of the economy’s scarce resources and on long-term economic growth.

So what would happen if there is a fiscal deficit. Mankiw asks: “which curve shifts when the budget deficit rises?”

Consider the next diagram, which is used to answer this question. The mainstream paradigm argue that the supply curve shifts to S₂.

Why does that happen? The twisted logic is as follows: national saving is the source of loanable funds and is composed (allegedly) of the sum of private and public saving. A rising fiscal deficit reduces public saving and available national saving.

The fiscal deficit doesn’t influence the demand for funds (allegedly) so that line remains unchanged.

The claimed impacts are: (a) “A budget deficit decreases the supply of loanable funds”; (b) “… which raises the interest rate”; (c) “… and reduces the equilibrium quantity of loanable funds”.

Mankiw says that:

The fall in investment because of the government borrowing is called crowding out …That is, when the government borrows to finance its budget deficit, it crowds out private borrowers who are trying to finance investment. Thus, the most basic lesson about budget deficits … When the government reduces national saving by running a budget deficit, the interest rate rises, and investment falls. Because investment is important for long-run economic growth, government budget deficits reduce the economy’s growth rate.

The analysis relies on layers of myths which have permeated the public space to become almost “self-evident truths”.

Sometimes, this makes is hard to know where to start in debunking it.

Obviously, national governments are not revenue-constrained so their borrowing is for other reasons – we have discussed this at length.

This trilogy of blog posts will help you understand this if you are new to my blog – Deficit spending 101 – Part 1 | Deficit spending 101 – Part 2 | Deficit spending 101 – Part 3.

But governments do borrow – for ideological reasons and to facilitate central bank operations – so doesn’t this increase the claim on saving and reduce the “loanable funds” available for investors? Does the competition for saving push up the interest rates?

The answer to both questions is no!

Modern Monetary Theory (MMT) does not claim that central bank interest rate hikes are not possible.

There is also the possibility that rising interest rates reduce aggregate demand via the balance between expectations of future returns on investments and the cost of implementing the projects being changed by the rising interest rates.

MMT proposes that the demand impact of interest rate rises are unclear and may not even be negative depending on rather complex distributional factors.

Remember that rising interest rates represent both a cost and a benefit depending on which side of the equation you are on.

Interest rate changes also influence aggregate demand – if at all – in an indirect fashion whereas government spending injects spending immediately into the economy.

But having said that, the Classical claims about crowding out are not based on these mechanisms. In fact, they assume that savings are finite and the government spending is financially constrained which means it has to seek “funding” in order to progress their fiscal plans.

The result competition for the ‘finite’ saving pool drives interest rates up and damages private spending. This is what is taught under the heading ‘financial crowding out’.

A related theory which is taught under the banner of IS-LM theory (in macroeconomic textbooks) assumes that the central bank can exogenously set the money supply. Then the rising income from the deficit spending pushes up money demand and this squeezes interest rates up to clear the money market. This is the Bastard Keynesian approach to financial crowding out.

Neither theory is remotely correct and is not related to the fact that central banks push up interest rates up because they believe they should be fighting inflation and interest rate rises stifle aggregate demand.

However, other forms of crowding out are possible.

In particular, MMT recognises the need to avoid or manage real crowding out which arises from there being insufficient real resources being available to satisfy all the nominal demands for such resources at any point in time.

In these situation, the competing demands will drive inflation pressures and ultimately demand contraction is required to resolve the conflict and to bring the nominal demand growth into line with the growth in real output capacity.

Further, while there is mounting hysteria about the problems the changing demographics will introduce to government fiscal capacity all the arguments presented are based upon spurious financial reasoning – that the government will not be able to afford to fund health programs (for example) and that taxes will have to rise to punitive levels to make provision possible but in doing so growth will be damaged.

However, MMT dismisses these “financial” arguments and instead emphasises the possibility of real problems – a lack of productivity growth; a lack of goods and services; environment impingements; etc.

Then the argument can be seen quite differently. The responses the mainstream are proposing (and introducing in some nations) which emphasise fiscal surpluses (as demonstrations of fiscal discipline) are shown by MMT to actually undermine the real capacity of the economy to address the actual future issues surrounding rising dependency ratios.

So by cutting funding to education now or leaving people unemployed or underemployed now, governments reduce the future income generating potential and the likely provision of required goods and services in the future.

The idea of real crowding out also invokes and emphasis on political issues.

If there is full capacity utilisation and the government wants to increase its share of full employment output then it has to crowd the private sector out in real terms to accomplish that. It can achieve this aim via tax policy (as an example).

But ultimately this trade-off would be a political choice – rather than financial.

More Italian News on the Faulty Design of the EU

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Writes Paul De Grauwe,

The European Commission can now force countries to increase taxes and reduce expenditures without, however, having to bear the political costs of these decisions. These costs are borne by national governments. This is a model that does not work 

National governments bear the political costs of expenditures and taxes. The risk therefore arises that they will contest the decisions of non-elected officials who do not bear these costs. This has happened a few times in the past. In 2003-04, when their economies were not doing well, the German and French governments collided with the European Commission about their budgets. The European Commission wanted to force these governments to reduce their budget deficits. Both governments refused to do this and the rules were changed ‘à la tête du client’. 

Today the Italian government is doing the same. It is a government that has made a number of election promises and wants to implement them now. That has budgetary implications. The European Commission is now trying to force the Italian government to abandon these election promises without having to bear the political cost of doing so. The new Italian government would pay the political price for shredding its election promises. It will not do so, as the French and German governments did not do in 2003-04. 

The model of top-down budgetary control does not work in Europe. It does not work because the whole process of decisions on taxes and expenditures still exists at the national level. It is also at the national level that the democratic principle of “no taxation without representation” is implemented. The European Commission’s attempts to bring Italy into line today are therefore also attempts to impose exceptions to this democratic principle. It does not work, and fortunately so.

Italian News

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From this readable article:

The Prime Minister Giuseppe Conte was quoted as saying:

The more I study the draft budget, the more I like it.

The fact is that the fiscal plan drawn up by the new government will “fulfill election promises”. That is, the Italian people clearly voted in favour of the policies and the intervention of the European Commission merely highlights the anti-democratic nature of the European Union and its institutions.

[...]

The common currency has only survived because the the ECB has been systematically breaching the Treaty rules, although claiming otherwise, and the Commission has turned a blind eye.

The fact is that the ECB has been funding fiscal deficits since May 2010 and while they can claim they have only been buying trillions of euro of government bonds as a ‘liquidity management’ operation, the truth is obviously otherwise.

Spiegel Online is clearly trying to sheet all the blame home to Italy.

They claim a pending crisis is:

… because a country like Italy doesn’t follow the rules.

They are silent on the on-going current account surpluses that Germany has been running, which have been well in breach of Eurozone rules.

The German external surpluses (three year average) have risen from 6.2 per cent of GDP in 2012 to 8.4 per cent in 2017 where the maximum allowed under the Macroeconomic Imbalance Procedure is 6 per cent of GDP.

Perhaps if Germany spent more domestically, the other Member States would not need to stimulate their own domestic demand quite as much.

It is ridiculous to isolate Italy in this current period and accuse it of undermining the Eurozone.

Last week’s national account data reveals how poorly the overall Eurozone economy is performing. That has nothing much to do with Italy and everything to do with the poorly designed monetary system which requires an austerity bias under its rules in defiance of the responsible use of fiscal policy.

[...]

The impact of the austerity inflicted on Italy over the last many years will resonate for generations to come.

And these are real costs, not the confected ‘debt burden’ that is usually claimed to represent violations of intergenerational equity.

We can expect the unemployment rate to start increasing again as growth has slumped to zero.

(4) Bank Reserves — Taxation

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Here is a link to Stephanie Kelton's (née Bell) classic piece of research: Can Taxes and Bonds Finance Government Spending? Note especially the passage starting at the bottom of page 20 (of the paper, page 22 of the pdf)  down to "Summary and Conclusion" on Page 22 of the paper (page 24 in the pdf).

I chanced on it in my search for a precise account of the role of bank reserves in discharging tax liabilities. Intuitively I become surer and surer of the process, but for the penny to ultimately drop, I'd like to go through a concrete example of the accounting. 

(3) Bank Reserves — Total Amount Driven by Fiscal Policy

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Government (central bank) fiscal stance drives the amount of bank reserves in the system. Government spending adds bank reserves, fiscal drag lowers overall bank reserves. When government spends reserves increase, banks may even come to hold excess reserves that they are keen on getting rid of, if they do not receive any/sufficient interest on them. Hence, they try to lend reserves to other banks in need of them. This can end up in a race to the bottom (zero percent interest), as any positive interest income is better than holding non-interesting paying reserves.

If the government is targeting a 3% interest rate, competitive interbank lending may pass below this level compromising government`s monetary target. 

At this, point the central bank begins to sell bonds to the banks, seemingly in an act of borrowing funds from them. In truth, this has nothing to do with borrowing funds; selling government debt is designed to stop banks from lowering the interest rate below the level desired by the central bank. With the central bank setting the debt's yield at an appropriate level banks will no longer have an incentive to drive down the interest rate below the target rate.

Thus, government "borrowing" is really a monetary operation (in defense of a desired level of interest rates) rather than a fiscal activity (to garner funds to be able to spend).

Exogenous factors (like deficit spending) impact on the amount of reserves in the banking system. If nothing is done about the reserve excess that emerges defined as supply being greater than demand, the overnight interest rate drops and the BOJ loses control of its interest rate target (unless it is zero) as the interbank rate heads south to zero. 

Note that we are in the domain of monetary policy. The fiscal policy decisions have been made and executed – sovereign governments spend by crediting bank accounts or issuing cheques which end up in bank accounts. These actions add to reserves. If net spending is positive then bank reserves will rise and vice versa (if tax receipts are greater than government spending). 

In the case of a budget surplus, bank reserves are destroyed and vanish from the system. The private sector feel the impact of the surplus because there is less income to spend and less employment and less public infrastructure provision and more. But the banking system just notes a decline in reserves. The surpluses do not “go anywhere” – into storage for later use. The transactions are recorded electronically, the bank reserves adjusted and everyone goes home for the night. 

Thus borrowing is about monetary policy. This is a major flaw in mainstream macroeconomics textbooks which always have the borrowing in the fiscal policy chapter based on the flawed – backwards logic that the debt funds spending. 

Public borrowing is a monetary policy act because it is one of the means that central bank can use to drain excess bank reserves which stops interbank competition undermining its interest rate target each day. It has nothing at all to do with funding the government spending. That is done and dusted! But the net spending (positive or negative) impacts on the bank reserves and requires a monetary policy response. 

It couldn’t be clearer than that. Budget deficits put downward pressure on interest rates. Financial crowding out does not occur via budget deficits.

The source.

(1) Net Financial Assets — Viewed as a Countercyclical Fiscal Policy Tool

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"Net Financial Assets" — another issue that I have to come to grips with before I shall finally go ahead with writing a comprehensive account of Modern Monetary Theory.

Bill Mitchell:

Clearly the credit creation process of banks creates new deposits. Loans create deposits. But nothing net is created. That is the crucial difference between the Government creating new net financial assets by crediting private bank accounts (that is, deficit spending) and the banks creating deposits (which are always offset by a matching liability.

Scott Fullwiler:

I think the last point is the key one . . . financial assets are always two sided in that the creation of a financial asset adds a liability to one entities balance sheet and adds an asset to another’s. For private credit creation, the asset and the liability remain in the private sector, netting to zero. On the other hand, if the government runs a deficit, the government keeps the liability and the private sector gets the asset only. So . . by definition, the government’s deficit creates net financial assets (net worth) for the non-government sector, while a government surplus by definition is the reduction of the private sector’s net financial worth. Private credit creation, also by definition, cannot add to the private sector’s net worth.

The source.

Tom Hickey:

In the MMT macro view and policy recommendations based on it, fiscal policy — injection and withdrawal of non-government NFA — is used to adjust nominal aggregate demand to nominal aggregate supply at full employment with a view toward achieving full employment and price stability. In this regard, MMT holds that fiscal policy based on "functional finance" is superior to monetary policy, since it can be adjusted to changing non-government desire to save in order to ensure that the balances of the sectors — government, domestic private, and external — sum to zero at full employment.

The source.

EU — A (Willfully) Failed State

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Not only is the EU literally a failed state, it is actually designed to fail as a state. It can only work as a federal state but it is precisely the all-important ability of a federal state to ensure a reasonably homogeneous living standard that the EU is denying itself.

Not only is the EU undemocratic and plutocratic (granting special interests with substantial resources exclusive access to policy makers); not only is the EU based on a dysfunctional economic model (disadvantaging the majority of its member states vis-à-vis Germany) that condemns all of its members to pro-cyclical economic policies, low growth and stagnation — the EU is also incapable of pursuing the kind of solidarity that cements the cohesion of a federal union. 

The irony is that those opposing transfer payments amongst EU-nations are not even aware that they are nationalists who make a genuine European Union an impossibility. They act on faith. On closer inspection their panglossian faith proves to be contradictory and hard to reconcile with the divisiveness and the harsh economic reality of the EU.

The econPOL research project discovered:

7. “there is a striking contrast between high approval rates for inner German transfers – even in donor states – through the German fiscal equalization scheme, and a much lower acceptance of transfers to other euro zone countries.” 

The last conclusion is very significant. 

The “fiscal equalization scheme” within Germany is designed to “to ensure equal living conditions across the German states”, which is one of the preconditions of a successfully functioning federation. 

...

Further, the citizens in the German “states paying more into the scheme than they receive” were very strongly in favour of the scheme. 

This tells us that the Germans share a common sense of identity and this is a common trait in all federal systems. 

This common sense of identity means that citizens are prepared to allow the federal government to make transfers across the regional space (states, or whatever) and, perhaps, redistribute income (and spending) across the regions, to address asymmetrical outcomes. 

These transfers do not attract significant rancour within the population, although from time to time, quibbles might be heard. 

This federal capacity is an absolute pre-condition for a functioning federal system, and, is, of course absent at the Eurozone level. 

The econPOL research also found that while Germans are happy to help the unemployed within different regions of Germany, they are strongly against “transfers to the unemployed in other countries”. 

Again, the willingness to consider all citizens within the (federal) nation as equals is a common trait of a successful federation [...] 

that is missing in Germany, where a lack of generosity to citizens in other nations prevails.

 ...

Conclusion 

The point is that the surveys that ask about the EU in general and tend to reveal strong support among European citizens are not necessarily meaningful guides to the quest for reform. 

Once the survey questions become more specific and go to the heart of the matter – permanent transfers between Member States, for example – then the hostility to any ‘federal’ reform becomes evident. 

And we should keep in mind that the ‘federal’ reform proposal entertained in the econPOL survey was a very weak increase in ‘federal’ capacity. 

The current proposals that have been published do not allow for permanent transfers, require Member States to effectively pay in advance any capacity they might draw upon in bad times, and force weaker states, with a higher probability of claim, to pay in more.
So they are nothing like what is needed to make the Eurozone functional.