tag:blogger.com,1999:blog-2546602206734889307.post8349107121441711086..comments2024-03-28T04:29:22.717+00:00Comments on mainly macro: Confidence as a political deviceMainly Macrohttp://www.blogger.com/profile/09984575852247982901noreply@blogger.comBlogger37125tag:blogger.com,1999:blog-2546602206734889307.post-9192768572004673312016-01-14T14:18:12.554+00:002016-01-14T14:18:12.554+00:00I realize I didn't actually ask a question. I&...I realize I didn't actually ask a question. I'm specifically referring to Krugman's claim in his Mundell Fleming lecture that a country with its own currency is "invulnerable" to a Greek-style crisis, btw. I'm not an economist so I am in no way challenging the economic models he uses. In fact when he initially applies the models he gets the results one would expect. My observation is that when he seemingly reverses conventional wisdom and obtains a result he agrees is "counter-intuitive," that he's doing so by making some false assumptions, and he's not actually modeling the scenario correctly (he assumes static input conditions when they are in fact dynamic). Further, his "historical proof" regarding post-WWI France is merely an anecdote, and does not include the specific data needed to form a robust conclusion one way or the other.<br /><br />To me, he seems to be making a very strong assertion ("invulnerable") that is based on a premise that seems to violate Econ 101 (you can increase demand by increasing supply). For these reasons I would expect academic audiences to be very skeptical, and yet while this paper has been discussed by very prominent economists recently no one has challenged it - so I have to suspect that I'm the one making the mistake.<br /><br />Nevertheless, the assertion that interest rates wouldn't go up because they're set by the central bank which would have no reason to raise them seems.... wrong.<br /><br />My question, then, is what am I missing? Does the argument actually follow, even on its own terms?<br /><br />Steve S.https://www.blogger.com/profile/15276218411346368617noreply@blogger.comtag:blogger.com,1999:blog-2546602206734889307.post-32609494218648087172016-01-13T20:09:36.360+00:002016-01-13T20:09:36.360+00:00I feel like this argument conflates several issues...I feel like this argument conflates several issues. I agree that a spontaneous crisis of confidence does not seem likely in the US or UK. Further, it seems clear that avoid a technical default through intentional inflation. However, any modeling that enables a country to do this at no economic cost seems to be assuming the existence of a free lunch - that while one might think that a drop in demand for government bonds would require a corresponding price reduction or cut back of supply, that a government with its own currency can do the seemingly impossible and increase demand by increasing supply. Doesn't seem plausible - and in fact the models showing how this can work seem to be considering the impact of an increase in money supply without considering the action needed to bring that increase about. Finally, if there were a triggering event such as a real drop in demand (e.g., the Chinese stop buying) then the presumptions of your starting condition would no longer apply.<br /><br /> Steve S.https://www.blogger.com/profile/15276218411346368617noreply@blogger.comtag:blogger.com,1999:blog-2546602206734889307.post-68948303311295036282016-01-11T23:37:03.347+00:002016-01-11T23:37:03.347+00:00I think they really argue for the creation of gros...I think they really argue for the creation of gross assets, and yes it would increase welfare, or at least make the system safer. Argument is partly that attempts to manufacture safe assets before the crash were a disastrous failure. Mainly Macrohttps://www.blogger.com/profile/09984575852247982901noreply@blogger.comtag:blogger.com,1999:blog-2546602206734889307.post-64400098046773084132016-01-11T23:31:17.742+00:002016-01-11T23:31:17.742+00:00For the UK only part of the answer. The models sug...For the UK only part of the answer. The models suggested we entered at a rate overvalued by around 10%.Mainly Macrohttps://www.blogger.com/profile/09984575852247982901noreply@blogger.comtag:blogger.com,1999:blog-2546602206734889307.post-71103300590011638402016-01-09T11:03:14.463+00:002016-01-09T11:03:14.463+00:00NK economists make two mistakes. They assume FX ha...NK economists make two mistakes. They assume FX has infinite liquidity when it doesn’t (because there are no market makers in FX as such) and they assume Bonds have finite liquidity when they don’t (since the market makers have to offer a price and are inevitably backed by the state).Randomhttps://www.blogger.com/profile/04445772572707818311noreply@blogger.comtag:blogger.com,1999:blog-2546602206734889307.post-5549236135095771262016-01-08T17:30:25.318+00:002016-01-08T17:30:25.318+00:00To answer the question on why financial economists...To answer the question on why financial economists demand consolidation even tough it is contrary to their demand for more safe assets.<br />It is all about QE. QE reduces available safe assets while seamingly increasing government debts (if CB balance sheet is viewed as government debt).<br /><br />Even tough you complain about MMTers keep repeating the same thing over and over, the answer is there. But since you never studied government finances and banking so you can not connect the dots.<br />QE is taking safe assets out of the banking sistem and leaving them with excess reserves. Reserves can not be loaned to nonbanking or to nongovernment sector. Banking reserves can be loaned only to government or other banks. If CB is taking out safe assets and leaving excess reerves that itself is showing lack of safe assets.<br /><br />And as Random explained that deficit spending is creating extra reserves, compartmentalized nature of banking is showing how narrow focus of some financial advisers who demand consolidation and more safe assets at the same time, they want to solve only one "problem"; excess reserves.<br /><br />Another reason might be that consolidation ultimately creates more debt/ safe assets. In long term, reduced debt is the excuse to reduce taxes on wealthy which creates more government debt/ safe assets.Critical Tinkererhttps://www.blogger.com/profile/08540226813192385645noreply@blogger.comtag:blogger.com,1999:blog-2546602206734889307.post-17999882069163143312016-01-08T17:18:23.603+00:002016-01-08T17:18:23.603+00:00It is true that confindece is crucial.
But confide...It is true that confindece is crucial.<br />But confidence can come only from one source; selling all you produce.<br />If consumers demand more of what is being produced (which means consumers have confidence and spend all they earn which comes only from not fearing unemployment) that itself holds up the confidence of investors. Investor's confidence can not be established by any other way then by buying all they produce, which means increasing purchasing power of public at large.<br /><br />Increase employment and wages and that will solve all other "probems" automaticaly. "Problems" like business confidence, deficit, or public debt.Critical Tinkererhttps://www.blogger.com/profile/08540226813192385645noreply@blogger.comtag:blogger.com,1999:blog-2546602206734889307.post-10918758029067307822016-01-08T11:18:01.509+00:002016-01-08T11:18:01.509+00:00Excellent post. Anyone interested in the 'conf...Excellent post. Anyone interested in the 'confidence' point should read Kalecki, 1943:<br />"Under a laissez-faire system the level of employment depends to a great extent on the so-called state of confidence. If this deteriorates, private investment declines, which results in a fall of output and employment (both directly and through the secondary effect of the fall in incomes upon consumption and investment). This gives the capitalists a powerful indirect control over government policy: everything which may shake the state of confidence must be carefully avoided because it would cause an economic crisis. But once the government learns the trick of increasing employment by its own purchases, this powerful controlling device loses its effectiveness. Hence budget deficits necessary to carry out government intervention must be regarded as perilous. The social function of the doctrine of 'sound finance' is to make the level of employment dependent on the state of confidence."<br />The full paper is at http://mrzine.monthlyreview.org/2010/kalecki220510.htmlPaul Segalhttps://www.blogger.com/profile/00339143454877152145noreply@blogger.comtag:blogger.com,1999:blog-2546602206734889307.post-76541443086731656342016-01-08T08:51:36.150+00:002016-01-08T08:51:36.150+00:00"... I want to as well but this time pull Dan..."... I want to as well but this time pull Dani Rodrik from behind the sign. In his excellent new book..."<br /><br />I hope we do not get a whole of chummy back-patting and hubris from this (although not accusing you in particular of this). We would like an honest review about whether you think the 'filing system of models' (when we have what looks like X pull out model X) is the way forward or does it distract from engagement with other disciplines, things that abstraction does not handle well, and the real world. Lars Syll has done a series of critiques on Rodrik and the "smorgasbord of models" which agree with him or not, I think articulates well a lot of the scepticism critics have.<br /><br />NK.Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-2546602206734889307.post-35840066767354692222016-01-08T03:23:18.789+00:002016-01-08T03:23:18.789+00:00Interesting, did these models tells us what the &#...Interesting, did these models tells us what the 'correct rate' was?<br /><br />An important historical explanation was that it was a problem of timing: German reunification was pushing up interest rates in Germany making the peg difficult to maintain. <br /><br />NKAnonymousnoreply@blogger.comtag:blogger.com,1999:blog-2546602206734889307.post-57361350258859685842016-01-07T23:31:54.102+00:002016-01-07T23:31:54.102+00:00"one big reason why governments issues bonds ..."one big reason why governments issues bonds rather than just create money: it gives them another option to inflation if it gets into budget difficulties"<br /><br />Do you really believe that? Sounds highly implausible to me that governments think like that. Surely governments issue bonds because: they always have done, investors like safe assets and the taboo against 'printing money'? <br /><br />Also, as MMT-ers and (I think) Corseti Dedola point out, if the government (via the CB) pays interest at the CB target rate on the bank reserves created by its spending, it would have no need to issue bonds and the default or inflation question goes away.Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-2546602206734889307.post-81533249460915544132016-01-07T20:22:43.847+00:002016-01-07T20:22:43.847+00:00"For example the very existence of banks depe..."For example the very existence of banks depends on confidence (that depositors can withdraw their money when they wish), and when that confidence disappears you get a bank run."<br /><br />Have you ever heard of deposit insurance?<br /><br />Why can't the state offer services via a post office bank?<br /><br />The lending banks we need are the ones that can lend development capital effectively and stick to doing just that. If we are to have private lending banks, then they need to be able to make a decent profit doing development capital lending.<br /><br />The way I would narrow banks is to offer them an incentive - an unlimited cost free overdraft at the Bank of England. 0% funding costs. In return they must drop all the side businesses and just do capital development lending on an uncollateralised basis - probably in the form of simple overdrafts. In other words they become an agency businesses delivering state money to those that require it.<br /><br />I'm not even sure a capital buffer is required here. Losing your lending licence if your underwriting isn't that good should be sufficient incentive to run a tight ship. Backing off the entire thing to the central bank reduces the barriers to entry in lending - making self-employed, highly dispersed and, importantly, locally focussed underwriters a possibility (the 'Provi Model').Randomhttps://www.blogger.com/profile/04445772572707818311noreply@blogger.comtag:blogger.com,1999:blog-2546602206734889307.post-2956434234475967782016-01-07T19:57:13.882+00:002016-01-07T19:57:13.882+00:00Not directly relevant to this post but wanted to g...Not directly relevant to this post but wanted to get it out there. Mostly because of the despair I feel at the ability of our government to successfully misinform:<br /><br />What the Chancellor said today:<br />"I worry about a creeping complacency in the national debate about our economy. A sense that the hard work at home is complete and that we’re immune from the risks abroad."<br /><br />What the chancellor meant:<br />"My complete mismanagement of the economy over the past 5 years has left us particularly vulnerable to shocks from home and abroad. I aim here to do two things: 1) Get the blame out early so you all don't realize the real cause of the problems and 2) Make the case that whilst my economic policies in reality are the heart of the problem I will scare you in to thinking there is no alternative. It's what is technically called a win-win situation.<br /><br />Or to put it another way; we've bled the patient. He's much weaker. So we'll bleed him again.<br /><br />AFZ alienfromzoghttps://www.blogger.com/profile/11204842446369918262noreply@blogger.comtag:blogger.com,1999:blog-2546602206734889307.post-51649618918710480312016-01-07T19:49:25.697+00:002016-01-07T19:49:25.697+00:00Simon
I believe that the MMT position is that ...Simon<br /> I believe that the MMT position is that the government will never have to choose between default and inflation because bond issuance is not inherently any less inflationary than money creation. See for example this post by Bill Mitchell: <br />http://bilbo.economicoutlook.net/blog/?p=15753<br /><br />what do you think of this?<br />what do you think of this?Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-2546602206734889307.post-47096873311474205372016-01-07T18:38:53.653+00:002016-01-07T18:38:53.653+00:00(cont)
Very simply you cannot make a silk purse o...(cont)<br /><br />Very simply you cannot make a silk purse out of a sows ear. You can't fix things by putting on a few training courses. People don't work like that. <br /><br />There are strict limits to fungibility. Ignore them at the higher skill levels as happened with 1970s style Keynesian injections and you will get supply side INFLATION. Noted?<br /><br />The people you need to start with on any project are the designers, architects and project managers. Plus the initial civil engineers. <br /><br />It's called the Onion structure of team building. You need a set of core competence to get anything done. The labourers are on the outside of the onion. <br /><br />Now at the moment we have a construction boom running, and pretty much anybody that can be a labourer is working as a labourer. Construction people are constantly dealing with poaching issues. There are supply side issues, and that's with all the Poles and East Europeans they can eat. But hey what do I know over the great brain of Simon Wren Lewis. <br /><br />The core competency people have a large pipeline of work ahead of them. Lead times of three to six months are not uncommon at the moment. <br /><br />You have to get core competency people onto the public projects in a manner that will actually work. Rather than taxing people, which then tries to price people out of the market - and therefore doesn't and will not work. <br /><br />The point is to show that you don't need to raise taxation to get public works done. In fact it is likely counter productive because of the dynamics of construction. <br /><br />The other issue on the supply side, which is rarely mentioned, is that rich people have a lot of work done and therefore they get the priority. a one off public sector job isn't enough to get people to abandon their rich patrons. Construction work is project based and you always need to have a view to your pipeline. "They give me a lot of work." <br /><br />That's why you need to make sure that public investment spending is CONSTANT. Construction people need to know that the public pipeline is secure. Otherwise they'll go work for rich property magnates instead.<br /><br />In addition, by concentrating on finding the available actual resources at your disposal, you end up realising that the engineering talent within the armed forces exists and is much better deployed repairing riversides in Rochdale than rearranging the rubble in some distant land.<br /><br />It's all very straightforward once you think about it properly in terms of actually getting stuff done.Randomhttps://www.blogger.com/profile/04445772572707818311noreply@blogger.comtag:blogger.com,1999:blog-2546602206734889307.post-69968437811410207842016-01-07T18:38:46.167+00:002016-01-07T18:38:46.167+00:00Also sorry if I am a little grouchy. With all this...Also sorry if I am a little grouchy. With all this human misery around I don't have a lot of sympathy for idiot politicians and their economist lackeys coming out with nonsense statements. <br /><br />Let us take an example - the floods :(<br /><br />Both sides are as bad. The Tories for failing to invest in flood defences and pretending climate change isn't happening, and the Labour lot for either suggesting foreign aid should be cut, or trotting out their usual 'tax the rich' line as though either of those approaches will cause flood defence engineers to rise fully formed from the primordial soup.<br /><br />They need to take a Modern Money approach.<br /><br />What Modern Money tells us is that the state can command any resources available for sale in its own currency. And it tells us that the only constraint on what resources it can command is the inflation constraint - in other words multiple bids for the same item that causes the price to rise.<br /><br />So the correct approach is to forget about the numbers. They just happen automatically as a consequence of taking action. And they always add up as a matter of accounting. What you need to concentrate on is the engineering resources required. Where are they and what else are they doing at this point in time?<br /><br />If what they are currently doing is less important than fixing flood defences, then you suspend what they are currently doing and reallocate them to fixing flood defences.<br /><br />Within construction that is fairly easy because everything needs the State's permission to proceed anyway - via planning and building control. That means you can delay any project currently proposed or operating via advanced policy tools rather than using the primitive price mechanism to bid away resources.<br /><br />So the State can set a price for a job, and if it doesn't get enough bids from free resources it can suspend activity around the area to free up capacity until it does get enough bids for the job. Projects are then reordered in time with the state's requirements coming first. Since the mechanism used eliminates other offers there can be no multiple bids. Therefore no change in prices and no inflation.<br /><br />The real costs are then borne by the businesses whose projects are delayed and by the banks whose lending volume will drop as projects are prevented from starting due to lack of available resources. Which would always be the case however you get there.<br /><br />So, with a correct Modern Money understanding, you end up with a much more precise and direct approach to resource allocation. The correct people and stuff are found, surgically extracted and reallocated in a way that the carpet bombing approaches of 'tax the rich', 'cut foreign aid', or 'expansionary fiscal austerity' could never achieve.Randomhttps://www.blogger.com/profile/04445772572707818311noreply@blogger.comtag:blogger.com,1999:blog-2546602206734889307.post-62699849521368776142016-01-07T18:24:45.091+00:002016-01-07T18:24:45.091+00:00Agreed. Which is why it pains me so much.
"s...Agreed. Which is why it pains me so much.<br /><br />"so what matters is the government choosing to default (does MMT talk about this)"<br /><br />"which is one big reason why governments issues bonds rather than just create money: it gives them another option to inflation if it gets into budget difficulties."<br /><br />Please lay out the other reasons.<br /><br />They can do this anytime nutjobs are in power (e.g Republican teabaggers.) It is never necessary.<br /><br />Why should a government pay 'interest' (in reality welfare payments) to non-specified foreigners for years and years on end, when a 'windfall tax' achieves the same savings confiscation as a 'voluntary default' .<br /><br />If you don't pay interest then you reduce the savings of wealthy people month on month, which reduces the need for a 'windfall tax' in the first place. Savings and interest can then be better structured towards specific domestic individuals via National Savings instruments (e.g. granny bonds). <br /><br />The MMT approach is functional finance and it does not involve confiscation of saving and never will. Saving aka government 'debt' does not lead to inflation. Functional Finance focuses on the real circuit and maintaining appropriate level of *flow* around the economy. No need to 'default' or confiscate savings.<br /><br />And fixing the *distribution* so people do not unfairly amass wealth.<br /><br />What you need to understand is saving effectively acts as a voluntary tax:<br /><br />Government can't get into 'budget difficulties.' The government will get all its money back if there is no financial saving for any positive tax rate.<br /><br />So government 'borrowing' is like your bank 'borrowing' your salary - a function of non-government<br /><br />In a monetary economy there has to be enough money in circulation to ensure that all real output that can be created is created. <br /><br />If there is any unemployment, then you are leaving real output on the table and operating inefficiently. <br /><br />The primary cause of this is the paradox of thrift - savings are not spent. That means there is no effective demand signal, and things don't get made. Hence unemployment. <br /><br />There are three ways to deal with that. You confiscate excess savings via taxation (i.e. money expires if not spent). You allow the economy to boom and bust so that the excess savings are destroyed in a depression - along with lots of sound capital. Or you accommodate those financial savings because they act as a voluntary tax anyway. <br /><br />No other mechanism can balance the flows. You need an oil pump in the engine of the monetary economy or the oil drops to the sump and the engine seizes up. <br /><br />MMT takes the third way via the functional finance approach - following from the insights of Post Keynesianism. Randomhttps://www.blogger.com/profile/04445772572707818311noreply@blogger.comtag:blogger.com,1999:blog-2546602206734889307.post-32311009596908851492016-01-07T17:26:19.076+00:002016-01-07T17:26:19.076+00:00Thanks for replying Simon. Yes, I note that you di...Thanks for replying Simon. Yes, I note that you did speak about safe asset shortages. Sorry. You are one of the few. The MM boys, Sumner, etc., don't talk about it at all and they won't listen to me so they may listen to a real economist, like you. As far as the economists, they all listen to Larry Summers who says you either have secular stagnation or bubbles, and no in between. That is a dreadful choice. I suppose they feel secular stagnation is a better choice than bubbles. Mostly I think that as well, but, when they start talking about a cashless society and massively negative interest rates, I long for easy money while they call cash a barbarous relic. But then I remember, easy money toxic loans hurt a lot of people in the last decade. So, is there no other way to sustain growth than to give folks a small stipend? One MM guy, Benjamin Cole said the Fed could buy treasuries and load them into the Social Security trust fund but I told him I thought there were not enough treasuries as is. So, solutions seem elusive, but surely speculation must be stopped for any solution to work. Gary Andersonhttp://www.talkmarkets.com/content/us-markets/sumner-and-his-market-monetarists-compared-to-mish-libertarians-and-keynesians?post=81981noreply@blogger.comtag:blogger.com,1999:blog-2546602206734889307.post-82561279319133838792016-01-07T15:04:13.358+00:002016-01-07T15:04:13.358+00:00Excellent post. This is Michal Kalecki territory.
...Excellent post. This is Michal Kalecki territory.<br /><br />The Political Aspects of Full Employment:<br /><br />http://www.cfeps.org/ss2006/readings/Courvisanos_c.pdf<br />Peterhttps://www.blogger.com/profile/08272747870634233567noreply@blogger.comtag:blogger.com,1999:blog-2546602206734889307.post-38755144848892925062016-01-07T14:16:58.809+00:002016-01-07T14:16:58.809+00:00Seems to me that the real argument here is between...Seems to me that the real argument here is between 'My gut tells me something I can't express in a model' and 'okay, give me a model or at least a mechanism'. Between those two, I know which side I'm on.Fred Fnordnoreply@blogger.comtag:blogger.com,1999:blog-2546602206734889307.post-49641830351404648992016-01-07T12:20:58.378+00:002016-01-07T12:20:58.378+00:00Do models of safe asset shortages suggest that the...Do models of safe asset shortages suggest that the government increasing the amount of safe assets in an economy through issue bonds will increase overall welfare? If so, through which mechanism? It seems a strange rationale for the government to borrow more.Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-2546602206734889307.post-41991767962929160852016-01-07T12:00:36.773+00:002016-01-07T12:00:36.773+00:00"You should ask where is the model (or at lea..."You should ask where is the model (or at least a mutually consistent set of arguments), and where is the evidence that this model or set of arguments is applicable to this case?"<br /><br />At last someone is talking sense here. Whether you are arguing algebraically or verbally this is all we want. Nobody can reasonably disagree with that. If we can take this approach we can start ending the tribalism that exists between disciplines and schools of thought, start engaging more with the real world, and really start to get answers - like why US dollar assets actually increase in demand during crises and times of uncertainty and why the financial sector has been pushing for fiscal consolidation.<br /><br />NKAnonymousnoreply@blogger.comtag:blogger.com,1999:blog-2546602206734889307.post-45577830707606163222016-01-07T11:09:40.715+00:002016-01-07T11:09:40.715+00:00Can't you see you are saying very similar thin...Can't you see you are saying very similar things to what I am saying: that there can be no forced default, so what matters is the government choosing to default (does MMT talk about this), and that creating money right now will not cause inflation. Mainly Macrohttps://www.blogger.com/profile/09984575852247982901noreply@blogger.comtag:blogger.com,1999:blog-2546602206734889307.post-6150308949191893532016-01-07T11:05:06.504+00:002016-01-07T11:05:06.504+00:00Can I suggest you stop saying the same thing over ...Can I suggest you stop saying the same thing over and over and read the post. It is all about voluntary default - which is one big reason why governments issues bonds rather than just create money: it gives them another option to inflation if it gets into budget difficulties. Mainly Macrohttps://www.blogger.com/profile/09984575852247982901noreply@blogger.comtag:blogger.com,1999:blog-2546602206734889307.post-22922458503805954632016-01-07T11:02:04.587+00:002016-01-07T11:02:04.587+00:00I noted the safe asset shortage point in the post....I noted the safe asset shortage point in the post. Which is why I think it is more complex than thinking about the 'markets interests'. So why, in the UK and the US, are those economists that have media access who work for financial market firms much more pro-austerity than other economists? Would be interested in your or others thoughts.Mainly Macrohttps://www.blogger.com/profile/09984575852247982901noreply@blogger.com