The most striking thing about the Fed’s “Operation Twist” is that the banks and the markets don’t like it.
As soon as Bernanke spoke yesterday and it became clear that Operation Twist was all there was the markets hit the ‘sell off’ afterburner. Overnight the Asian markets did the same. The Hong Kong market, the Hang Seng, lost nearly 5%! And this morning European Bourses are down just under 4%. Why?
First let’s be clear about what Operation Twist actually does. The Fed is in charge of selling US debt/bonds in its regular auctions of US Treasury bonds. The Treasury says how much, the Fed holds an auction at which the Primary dealers (the select biggest bail-out banks) other central banks and sundry others bid for it. Whatever the Primary dealers buy, they then sell on in the wider market. However, the Fed doesn’t just sell it also buys. The interest rate the US has to offer on its debt depends on, if people are queuing up to buy it or have to be enticed with higher interest rates. Part of the fed’s job is to make sure the auctions are always over-subscribed – to make sure it’s a sellers and not a buyers market.
What money does the Fed use to buy all this debt? Well either with money it already has in the system OR as has been the case for every year since the banks imploded, it prints up brand new dollars and uses them to buy the debt. This is actual printing of money or QE if you’re squeamish.
OK now we can get back to ‘Operation Twist’. The Fed has little political room left to print up more money. We’ll leave to one side the MMT arguments that they could print more if they used it to invest in actual economic activity as opposed to bank bonuses. At this point it is what the Fed believes that is determining what happens, not reality.
There is now huge political pressure for America not to print any more money. And yet it is clear that despite trillions already printed the plan has not worked, two of America’s largest insolvent banks, Bank of America and CountryWide which BoA now owns, have just been downgraded by Moodys. So what to do?
Operation Twist will see the Fed buying up debt as usual but now concentrating on buying up Long duration debt of 6 to 30 years duration. But to make sure this isn’t just printing they will balance the amount they buy with selling the same amount in short duration debt. This will change the profile of US debt but not increase its over all amount. Why do this, you might ask?
It is generally accepted that the interest rate America has to pay on its long term debt is what sets the rate for mortgages. I won’t go in to arguments over how true this still is. So the plan is that by buying lots of Long Term debt the Fed will ensure that the rate on that Long Term debt stays low and then sell short term debt whose rate may therefore rise a little. This ‘twists’ the shape of the graph which plots how much America pays for different duration debt. Hence the name.
Buying up long term debt will, so the logic goes, keep mortgages low and help build back confidence in the Housing market. And by balancing purchases of long term debt with selling short term debt, the net is no printing. That’s the official story.
Of course it has been pointed out that rates are already very low and even those badly short of common sense, who seem to gravitate towards finance for some reason, can see that 46 million Americans on food stamps and the rest worried about their job prospects are not going to see low rates and think “Yippee, now I shall rush out and buy a house”, America is not like the UK there is no chronic shortage of housing or land zoned for building. So I think operation Twist will not do a great deal for housing.
I think the real significance of Operation Twist is not going to be domestic but international. The worry for America is that the big buyers of its debt will either buy less or even think of selling. What Operation Twist will do is allow those feeling unhappy about American debt, to reduce their exposure to American debt without actually holding any less of it. The trick is to remember that how long a debtor has your money for, before you can get it back, is almost as important as how much he has.
When you become worried about a debtor, but don’t want to cut him off entirely, you can reduce your risk by simply lending for shorter periods. Operation Twist will start, but only start, to change the profile of American debt. There will be an increase of 400 billion in short term debt that buyers may feel more comfortable buying, BUT which will have to be rolled over in only a few years time. This heads off a possible reluctance to buy now, but at the cost of making America’s funding less stable and more volatile in the near future. I think they are storing up problems. Once again the financial experts are hoping that the debt roll over glut they are now creating for a few years hence won’t be a problem because the fabled recovery will sweep it away by magic. Sadly that was also their hope when they started printing three years ago.
As I said at the start the most significant thing is how no one likes ‘Operation Twist’. The banks were hoping for there to be something significant in addition and there wasn’t. The only other thing was teh anouncement that money from debt that matures will be ‘re-invested’ not in Treasury debt, but in buying up Fannie and Freddie debt. Another sign of how desperate the US government is to do something about the on going disintegration of the housing market. But once again I think it will do little and do very, very little for the banks and markets in the short term.
And frankly the short term is all they care about. Thus at the banks and in the markets, with so little provided to them this time, the other bad news about Europe, American bank downgrades and slow down in China all suddenly weighed far more heavily. I don’t think you could get a clearer proof that the markets the banks and the alleged recovery are all totally dependant upon regular gorging upon public wealth and that without it there is no revcovery, there is no market and the banks are rotting sucking parasites.
The truth is ‘Operation Twist’ will not be enough to keep the banks alive. Something more will be announced, but later. In the mean time the markets are furious that the banks have not been served and there is no spray of cheap money.
Golem
So if I understand it right, the US is now running on debt that is heavily biased towards short term funding.
Isn’t this a bit like a sovereign version of the situation with the banks in 2007-2008 who were heavily dependent on short term funding – i.e. a liquidity addiction. In that situation the banks were only kept afloat if they could roll over debt on a daily basis, and hence when the credit crunch came, their funding was squeezed overnight.
As with the banking crisis isn’t this just a means of disguising an endemic solvency issue by actually upping the liquidity dependence??
If that analogy is right, then isn’t this a highly risky / desperate situation??
A sure sign of a potential Sovereign level credit crunch on the horizon?
Becoming more dependant on short term debt, when you’ve got a vast deficit and during a period of unparalled sovereign debt crises, doesn’t seem all that smart to me.
Isn’t that why italy’s in such a state, because its’ debts are all so short term?
Haweye and Synopticist,
In my opinion you are both spot on. This is an exact replay of 06-08 but now on the larger more perilous sovereign scale. Our leaders began this replaying when they aggregated all the private bank debts which had become too large and toxic to contain in the bank vaults andf simply collected it all in the larger Sovereign vaults. And then aggragated it again by moving it to the super vault of the ECB and even the IMF.
Unless there are bankers in outer space who happen to regard festered debt as food, then the game is running out of vaults large enough.
Synopticist,
It isn’t smart. It’s desperately stupid and one of the reasons Italy is vulnerable is, as you say, because it has so much short term debt. As do other nations.
Another problem was highlighted by Bill Gross http://www.ft.com/cms/s/0/04868cd6-d7b2-11e0-a06b-00144feabdc0.html#axzz1XHFOpTWt
The flattening of the yield curve reduces the amount of money a bank can make by borrowing short and lending long.
Dave Holden,
Yes indeed. I forgot about that. And that trade has been quite an important life-line for the banks. Thank you for pointing it out.
So what they are doing is clearly madness. But a peek into their heads suggests that they think they have a cunning plan (my Lord):
http://www.financialsense.com/node/5487
If this article is right, then not only was “Financial Repression” achieved covertly and successfully between 1945-1980, but that so far in many countries since 2007 they have got away with it again (using modest inflation, negative real interest rates, compulsory funding and capital controls – for the plebs).
Except this time I don’t share the author’s optimism that they’ll be able to pull the wool over our eyes long enough to get away with it. Cheap fossil fuels and major industrialisation enabled a benign climate of Financial Repression to occur Post World War 2, but only because general living standards improved too.
The global economy is not so fortunate second time around.
The only thing that saved UK a year or so ago was the fact that Merv. made sure most of our debt was long-term duration.
If USA has to roll over and renew its debt repeatedly, how can they keep a lid on interest rates? Is it just ‘cos he thought he had to do something, anything?
At least the banks will get paid fees and commission for re-circulating this rubbish.
My gut feel is Benny is trying to sidle away from Wall St., but hasn’t the cojones to say it in public. I think he has woken up to the damage done, but don’t ask for an explanation…..
it is as if we are approaching a separation of church and state
Golem — Excellent description of Fed activities. Small quibble with your description::
“What money does the Fed use to buy all this debt? Well either with money it already has in the system OR as has been the case for every year since the banks imploded, it prints up brand new dollars and uses them to buy the debt. This is actual printing of money or QE if you’re squeamish.”
As I understand it, the Fed doesn’t “print money” or “brand new dollars”. It credits banks with “reserves” through computer strokes. These reserves are then converted into “money” by the banks. Money is created by the banks as they loan out more than their reserves using “fractional banking” techniques. It may be a small point but a lot of people get their knickers in a knot by focusing on whether the Fed is “printing money” or not.
gene,
Fair enough. I was, I admit, using a fairly lazy short hand. Fair cop guvnor!
Hawkeye September 22, 2011 at 12:52 pm #
So what they are doing is clearly madness. But a peek into their heads suggests that they think they have a cunning plan (my Lord):
http://www.financialsense.com/node/5487
..
Interesting article. Of course it doesn’t provide any obvious suggestions. In a world of finite resources it is inevitable, I believe, that commodities will hold their ‘value’ in turbulent times. It will also be difficult for governments to control their price, although they have tried in the past. The problem I see is that the problems are reaching a peak. Savings have been dropping over the last 30 years as people have been encouraged to take on debt. Incomes are declining to subsistence levels, not just for the poorest, but soon the middle class as well. That will just leave the rich to plunder, but I cant see that being popular. If we had wage inflation rather than commodity based inflation, then I could picture inflation being used to erode debts. But at present we have living standards being eroded as a result of inflation and debt. Both are having a negative effect on demand. And that will continue to make government debt worse not better by reducing GDP.
Keekster
I agree on those counts:
– Key commodities (energy, fuel & food) will increase in price (along with lots of volatility)
– The middle class will get hit very badly
– GDP will fail to increase in real terms (notwithstanding some gerrymandering of inflation figures to make nominal growth appear as real growth to disguise the true decline)
I guess my feeling is that the Financial Repression will not go as smoothly as the author of that report suggests, but then nor will it completely collapse either. I suspect that there will be a bumpy stagnation for a long time as the UK population is distracted (new season of Strictly starting soon!!) and palmed off with lame excuses time and time again – just look how long the Japanese have just limped along – 20 years of being stuck in a rut!
Hawkeye
I suspect the ‘sheeple’ will be distracted for a while longer. To be honest I am astonished that the greeks have not stormed their parliament and thrown them out. Because what they are having to put up with is intolerable.
I read a study recently that demonstrated that revolutions in the 18th century were linked to economic crises, and that the more repressive a government was the more violent the revolution was. We shall see if that theory proves to be correct over the next year I’m sure.
Morgan Stanley, the little bank that everyone continues to ignore…..
http://www.zerohedge.com/news/morgan-stanleys-exposure-french-banks-60-greater-its-market-cap-and-more-half-its-book-value
Golem
“The worry for America is that the big buyers of its debt will either buy less or even think of selling. ”
By which, & following comments, you are implying some consideration of risk on the part of buyers?
I’m sorry Golem, but this just isn’t right. The buyers of US $ bonds know there is absolutely zero risk of default as they know the US government, monopoly +issuer+ of a sovereign fiat currency, can in ALL circumstances meet its debt obligations. There has been, & continues, a massive flight to safety in purchase of US bonds. During the debacle of the US debt/deficit nonsense & subsequent ‘downgrading’ of US debt, the bond markets did nothing but yawn.
The reason for higher ‘coupon’ on longer maturity bonds is purely a market estimation of inflation – no ‘default’ risk whatsover.
IMO, one reason for the (equity) market falls following the ‘Twist’ announcement is because there had been much speculation & expectation (cf Zerohedge etc) of a more substantial ‘QE’ operation. As these markets always do, this had been already priced in to a large extent, so got ‘priced out’ again on the news. Another reason is that the focus now shifts back to the Euro mess and, of course, the continuing bad news re economic fundamentals pretty much everywhere.
Bill Mitchell has blogged a lot on these topics. I’m not sure if I’ve found the best links, but these may offer some relevant commentary:
http://bilbo.economicoutlook.net/blog/?p=15580#more-15580
http://bilbo.economicoutlook.net/blog/?p=15591#more-15591
One of the things often said about MMT is that it has been very badly termed ‘Theory’. Nothing could be further from the truth – it is entirely based on the actual reality of current monetary operations, as carried out by the Fed/Treasury & BoE all.
MMR (for Reality) would be a better moniker, but someone coined MMT & regrettably it stuck. (Not a good one for vaccine refuseniks, like me, tho’! )
Bill Mitchell is travelling back from Brussels to Oz just now, but I think we’ll get a blog on the Fed’s latest machinations when he gets back. (Hope so)
My interpretation is that the ‘Twist’ operation is nothing than a very minor interest rate manipulation. I can’t imagine that anyone really believes that a minor short term boost to banks’ reserves will have any effect whatever. ie, it appears in reality that Fed knows full well it can do absolutely nothing to help ‘growth’, but wants to give some appearance for the sheeple that it is.
That notwithstanding, there’s no shortage of neo-liberal ‘useful idiots’ that will continue to blather ad nauseam about some supply side fairy that will magically return us to growth. They have, after all, been reading from this script for 30yrs. The guys at the top know different, but of course don’t care – their system must be protected at all costs.
@ Mike Hall
I must profess to getting very confused about this MMT, US printing money thing. Are you saying that no matter what, the US cannot go bust. Please can you explain the why of it, nice & simply for Dumbos like myself.
Hello Mike Hall,
1) I am indeed implying some consideration of risk on the part of the buyers. However I did not anywhere specify their worry was default. As a matter of fact I agree with you that their more major worry is that inflation will rob their debt holdings of buying power. It is somehting I have written about since Guardian days back in 2008.
2) That said I think you need to remember when discussing what other people’s worries are – they may have worries that you think are silly – like the possibility of defauit. What matters is what THEY think, what they worry about, not what You think it is sensible for them to worry about. Some people think there are limits to how much a nation can print or borrow. If they have those worries they will act on them. It matters not a lot that you think their worries are silly.
So if the market, or some players in a market use a world view you think is wrong – so what. If they are acting on their ‘false’ view then they are acting on it. Thus even if MMT is correct, if people are acting in accordance with another theory, then talking about what that theory says and what actions people following that theory might take is important is it not?
That is what I am doing. I do not have to share their beliefs to still write about what I think they will do based on their beliefs. I think that is as important and in some cases more important to understand what other people think and do (even when misguided) than simply repeating that they are wrong and telling people what they should be thinking.
3) You say that because the US is “a monoply issuer of sovereign fiat currency” it can “in ALL circumstances meet its debt obligations.” If this were the case why have other nations, who were similarly’ monopoly issuers of sovereign fiat currencies’, defaulted? That many have seems to me to cast some doubt on the sweeping nature of your statement.
I suggest that between reality and the theory is a small matter of political stability and will power. I would agree that Nations who control their own currency have huge power to make good on their debts so long as they have the consent of the people to extract taxes and to spend it as they wish. SO to proclaim there is no default risk at all is I think presumptuous.
It seems to me you should find room to allow people to worry that the American People might CHOOSE not to make good on their debts. Or not all of them or not to the full value. Thus talking about investor worry is not some silly mistake. It is pondering on a political possibility about which no financial theory has much to say.
4) You say the reaction was due to Twist having been priced in and the markets expecting something more. I couldn’t agree more. That is precisely what I said. I am sorry If I didn’t make it clear.
5) now it’s my turn to be sorry. I am sorry MMT IS a theory. It is a theory in a deep philosophical sense in that nothing in our minds is ‘reality’. The mind does not ‘see’ as if looking through a clear glass. The mind constructs theories and models of everyting. Everything in your mind is presented to your consciousness as a model/theory/grammar.
MMT is a theory the way relativity and Natural Selection and Quantum Mechanics are theories. All are, to the best of our knowledge, approximations to how reality works. But none are ‘reality’ None are even a faithful and complete capture of reality in a theoretical construct. They are always simplifications of reality.
And lastly, alarm bells ring loudly in my head whenever I hear anyone at all proclaim that their pet idea, theory, theology or philosophy IS reality. Such claims have, in my opinoin one purpose – even when the person making the claim does not realize it – and that is to truncate further thought and questioning.
Proclamations of certainty are to thought what Facism is to politics.
MMT may be a good theory. Even a very fine one. But it is not ‘reality’.
Nations can default. They have done and therefore may well do so again. It may be they don’t have to but they do. nations, even those who control their own fiat currency cannot, in my opinion, borrow without end or print without end – not in a world where other people think such printing and borrowing is unwise and may act according to THAT belief.
Nations can print too much. It is true that given enough time they can make good on even exhorbitant promises. But it is the ‘given time’ that matters. The wealth and work that governments can potentailly command take time. If a creditor is in a hurry there may not be time for the nation to produce the wealth. Time matters.
And as I said, there is a world of difference between what a nation and its people have and what any given government or political system can command. The people may say no or the system may fall apart. EIther one can result in a default.
As for the neo-liberal supply side fairly tale and its supporters I agrere with you. It won;t work, we will not be magically reurned to growth but those wedded to that theiry will continue to proclaim their theory as reality and stick to it in the face of any evidnce to the contrary.
Mike, don’t get me wrong. From what I know of MMT I think it is a good theory. I don’t think some of your more sweeping statements are true but that doesn’t mean I don’t have time for MMT or don’t think it has much to offer.
If I have over racted then I appologize. But proclamations about theories being reality always alarm me.
Golem
I must take issue with the assertion that the UK housing market has high prices due to high demand and short supply, as you know I listen to radio 4 wake up with money most mornings, some time ago there was a housing analyst who pointed out that for every buyer there were 16 seller and the only reason prices were not falling sharply was because estate agents do not want buyers to know. Ive never been sure about this whole house price thing because it has always seemed that everyone in the game has a vested interest in rising prices. You would think that a free market would throw up some sort of buying agent, who would help folk get a lower price, but alas no. The same type of thing happens in the labour market, in the late 80s I was working on the building sites in London. In 87 it was not too hard to find a job and being young and wild I would work for a while quit and party hard until the money ran out get a new job……. Well if the labour market is going to be flexible then it should work both ways. But anyway 87 not hard to find a job but low wages, in 88 it was very easy to get a job one phone call was all it took but wages did not rise even though there was a labour shortage because we didn’t realise that we could get more money. In 89 it was even easier to get a job and because I wanted to travel I was looking for a job with overtime, I kept change jobs and every time I changed I got more money mainly because I changed agency’s all the time as well, by the end of the year my hourly wage had risen by 50% and then the bottom fell out and recession hit, but I didn’t care cos I had money in the bank and went to the Americas for three years. Anyhow my point is this price discovery can happen very fast of course if we had of had unions wages would have gone up long before and enticed more folk into the building trades and there would not have been the crazy wage explosion in 89 in the same way because there is no real counterweiight to estate agents, true price discovery when it happens will be very sudden. This probably doesn’t make any sense, sorry for rambling.
Richard,
I think you are right about price discovery. The theorist witter on about it as if it happened as per the theoritcal world. But as you say it doesn’t. It happnes in a variety of ways or sometimes doesn’t at all.
As for house prices I have always accepted the statement that there is a shortage of housing available for habitation (there are of course many empty properties but, for a variety of reasons, not available) in the UK and a shortage of land zoned for building. Perhaps I shouldn’t. I certainly don’t have any firm facts to back it up.
Point taken.
Hi Golem,
Thanks for your in depth reply 🙂
Let me respond to your points
1) Sorry if I misread your article, but I didn’t see inflation risk mentioned anywhere?
2) It’s not a question of what I think – or what MMT proponents think – what the bond market players themselves think, & +know+ is plain to see both for the US and Japan. That is why I refer to the ‘reality’ of MMT. Regardless of all sorts of idiotic commentary & ‘warnings’ of dire outcomes MMT is based on what the guys at the sharp end actually do. Lets not conflate things such as equity markets, where all sorts of behaviour is possible, with the markets involved in monetary operations. The latter is entirely composed of insiders & very limited by that.
3) I must get a bit more thorough, but did I really need to specify ‘debt denominated in its own currency’? I don’t think the Fed/Treasury borrows in any other – if they do, it must surely be a trivial sum, & not what we’re talking about anyway. (‘free floating’ re FX is another condition, which the $ meets)
Under these circumstances, the US can always create enough $$ to meet its obligatons. This isn’t theory either – Greenspan stated this as fact before a congressional committee. (He coudn’t say anything else – the laughing on Wall St. bond desks would have been audible in Washington.)
In the EU, Siemens is reported as depositing 8 Billion euro at the ECB, for safety. It knows that whatever the ECB’s notional ‘balance sheet’ looks like, it can furnish their cash on demand.
If any country, meeting the conditions I’ve specified, defaults on debts in its own currency, that is a purely political decision, not a monetary or economics one. (I can’t imagine any circumstances where that would even make political sense even for the present muppets.) IF the debt is in another currency, or non fiat, or otherwise ‘pegged’ in some way, that is a different story (& fully recognised by MMT).
When I talk about MMT – specifically its statements on monetary operations – being ‘reality’, I am referring to to the accounting transactions that take place already at central banks & associated government accounts. These +are+ facts, not ‘fascism’ or ‘theory’.
Part of the problem we have is that the neo-liberal establishments do all they can to obscure this. (I have studied accountancy, so it’s perhaps easier for me to see how obvious this is.)
I apologise if I seem too strident in supporting MMT, but like all of us who see thru’ the lies & sh1t we are bombarded with on a daily basis (UK gov’s ‘credit card’ – BBC News – WTF? I mean WTF are they talking about, aaargh!!), I get frustrated.
The UK gov (or the US gov) is +not+ FINANCIALLY constrained in any way shape or form in hiring every EVERY unemployed citizen it wants to, +providing+ any associated other resources are available (ie within existing capacity limits) to be purchased, in its +own currency+, without any significant risk of inflation. Some care is required to ensure resource availability, but this +is+ truth.
When UK gov says it must ‘borrow’ or ‘cannot afford it’ – it is +lying+, big time. They are making a purely political decision to impoverish people to protect a system of privilege of which they are part.
Can you see why this is so important? Whilst I have no doubts about its veracity, I’m not an academic macro economist (or a 30yr finance insider like MMt’s other prominent supporters) & just do my best to write about it.
Mike
I get the bit about the govt can always pay it’s way, but that the govt can print Willy nilly without consequence is difficult to believe. If that is so why do we have inflation now
Hello Mike,
My turn to thank you for your reply.
I’m not sure how much we actually disagree. But I think we are sometimes talking at cross purposes.
As for the actions of the bond market you seem to suggest, if I have understood you correctly, that the flight to safetly and eager buying of US debt even after a downgrade shows that MMT is correct to say there is no risk of default. You point to the continued buying as proof that the bond market actions show that what MMT says must be true.
Is it not just as possible to interpret the bond buying as NOT a proof that the US could not or would not default, but rather that the Bond buyers simply believe that the risk is simply less than it is for other currencies? In a world of crap currencies you simply go with the least crap one backed by the most resources and the political system most likely to be able to keep on extracting taxes.
I do not see that as proof of your assertions about the impossiblity of default.
In your reply you yourself seem to agree that default is possible,. You say,
“If any country, meeting the conditions I’ve specified, defaults on debts in its own currency, that is a purely political decision, not a monetary or economics one.”
That is my argument in a nut shell. Countries can and do default. So to say they never do or can’t or won’t is simply incorrect – in any currency. `It doesn’t matter that the decision or events are political rather than financial in origin. Once the bond market knows it is possible then it makes sense for them to worry about what circumstances make such default more likely. Those circumstances are when the neo-libs in charge start to enforce austerity to pay back the borrowing they say is now too much. None of it has to be true. People just have to act on it.
We are in danger of talking in circles I know. You rail against the whole borrowing notion. Why borrow when they don’t have to? I agree but they have, so default is possible. I wonder if you are arguing for what you think should happen. I am arguing about what is happening.
We have a deeper argument over whether there is any necessary limit to printing. I think there are limits which a country can exceed. If the money printed were in an ideal closed economy simply for purchase and pay within a country then fine. But as soon as you include the real world of asking other nations and other people to accept your currency as payment then I do not yet see how your argument works. I worry when arguments in economics come with the idealizing caveats of “providing any associated…” etc. It smells to me like all other economic theories of ‘all other things being equal…etc. Whenever all other things are magically made equal of course the theory works.
Please don’t get me wrong Mike. I am in no way anti MMT. I am not trying to suggest it is not a far better theory than the one our leaders follow so slavishly. I think it is better. It seems to me to be essentially Keynsian in nature. Is that wrong?
I simply am not convinced it is as sweepingly true and clear as you are. Not yet, though I am always happy to learn.
I can certailny see why it is imperative to oppose some of the more corrosive and socially destructive tenets of other economic theories. I share you distaste for them and see, as you do, how they serve the interest of the few at the expense of the many.
I think I just balk at your assertions of TRUTH and that nations can print as much as they like. They can certainly print as long as the printing produces the wealth to make good on the promises on the notes. Printing is just asking the person you offer your fiat note to, to accept tha tthe promise on it WILL be made good on. No problem. But I do not think there is an limitless amount of wealth that any government can promise to get its hands on. Politics gets in the way of the ideal theory.
And I still insist MMT is a theory. Facts are very few. As soon as you interpret how two facts relate to each other you have gone beyond facts and have a theory.
Anyway it’s not important or necessary for you to convince me. I am happy to agree to disagree in what I hope can be a fruitlful exchange until you get bored or I learn that you are coreect.
Golem
Off topic, but faster than light particles. I thought you might be interested but you probably already seen it
http://news.sciencemag.org/sciencenow/2011/09/neutrinos-travel-faster-than-lig.html?ref=hp
I’ve never liked the theory of relativity, so I think ill celebrate with a whisky
Curiouser & curiouser.
Richard,
Rutherford & Soddy never liked the theory either, accusing it of being a fraud / hoax. See my comment on the following thread:
https://www.golemxiv.co.uk/2011/09/world-wide-credulity-crunch/#comment-5568
I’ll be toasting Soddy tonight with a few glasses of home-made port!
Fair enough Golem 🙂 I do hope you will continue to read more on MMT, particularly from the core sources. I feel we are somewhat discussing at cross purposes as you say, & much of that is surely my own inability to espress things clearly. It took me some months of reading to really grasp what I believe I now understand.
I do need to respond to one thing tho’ that you & Richard have commented on.
MMT emphatically +does+ say there are constraints to government spending – in fact this is true to an extent whether such spending is financed by debt or money ‘creation.
The absolutely key constraint is inflation. This is what I mean when I make the caveat ‘providing there are available (idle) labour & other resources to be purchased in the sovereign currency’. IF the government must ‘bid up’ to take labour, for example, away from existing activity, then demand pull inflation WILL occur. The most important resource in this regard is labour. This is why the Job Guarantee that MMT proponents advocate is proposed at or near the minimum wage level. Any higher & there is some risk of wage inflation. If this occurs, the policy must then change to either reducing net money creation spending and/or taxing (effectively removing money – the opposite of the money creation). Of course, in a recession, the scope for spending to hire the unemployed is considerable. As growth resumes, workers will naturally migrate to the new private sector vacancies.
Non labour resource availability may cause some cost push inflation in +some+ sectors. The design of Job Guarantee programs should consider this aspect. But it must be realised that these issues also occur no matter what monetary mechanism is driving growth. Also the increased use of imported resources – to be purchased in another currency – eg oil, must be considered. IE overall fiscal policy, including the JG schemes, would need to direct activity, say, toward balancing export production. But again, these are issues which wil crop up regardless of how the growth is stimulated.
I won’t go into them here, but there are ‘Green’ Job Guarantee schemes, quite labour intensive, which could be introduced to take up unemployed workers with significant sustainability paybacks. Just paybacks that can’t compete with short term casino financial returns & current artificially cheap & environmentally destructive energy use.
In short, MMT recognises that government spending on the one hand & taxation on the other are +not+ linked, even now in reality (accounting terms), except by the politics of deceit.
Government spending can (& should) be viewed as distributing resources to the public purpose (health, education services etc) & stimulating aggregate demand as required – creating sufficient money to purchase, as required. Even now, this money is created on a keyboard – it does not have some bank account somewhere into which tax reciepts must be deposited before it can hit the numerical keypad.
Taxation (even now) is merely an excercise, in ‘accounting’ terms, of simply ‘canceling’ a legal obligation on the part of an individual or business. These legal obligations are no more than distributional choices made law by politics.
In MMT, or more accurately in the Abba Lerner based ‘functional finance’ fiscal framework advocated by MMTers to accompany its monetary approach, taxation has an additional vital role – to moderate aggregate demand. Effectively removing money from circulation to avoid either sectoral or overall (demand pull) inflation risk.
I hope you can see, that drawing up some fictional ‘balance sheet’ of spending & taxation is completely irrelevant – they are not ‘functionally’ connected. Except perhaps to realise – counter intuitively – that before taxes can be paid, spending by gov (debt free) or from bank created money (introduced as debt with gov permission) must occur +first+.. Any notional ‘deficit’, artificially derived in this way, is merely a number on screen or piece of paper. As the sovereign created what it spent debt free, there is no ‘repayment’ obligation. This is ‘macro’ economics operation whose sole purpose is the wellbeing of citizens & society in a thriving & inclusive economy. What other purpose should there be? (Unless you wish to wage a ‘class’ war of winners & losers?)
Guys, a quick thought.
You forget that all sovereigns members to the Floating Exchange Rate (FER) mechanism are, to varying degrees, Dollarised economies. So arithmetically speaking, sovereigns other than the USA have only partial control of their currencies. It is this mechanism that allowed the USA to avoid default in the late 60s (abrogation of Bretton Woods) by releasing pent up inflation in the US Dollar into the markets of all new members to the newly established FER mechanism.
I do not subscribe to MMT purely because the theory says that if government invested in economically viable enterprise then government could freely print any amount it pleased without it resulting in debasement of the currency. True that… as it is also true that if my granny had wheels she’d be a trolleybus.
The very nature of government is such that it cannot and will not only invest in economically viable enterprise. La Raison d’Etat and the nature of electoral politics will see to it that it does not happen.
That being the case, MMT is most definitely a theory.
… unless I have misread MMT of course…
Ciao
I think I get the gist of it now, seems to me that MMT like all theories needs an experiment to prove its worth.
Golem,
Let me say I agree entirely with your take on MMT.
I currently think MMT a pretty accurate take on the workings of the monetary system and at least seems well sourced, but economics is a lot more than just that, in particular the relationship between power and capital is something that has been very evident in the response to the crisis. Cnce you get past MMTs technically correct stance that a country in control of its own currency can never default it becomes clear the that along with the politics of money the main constraints are inflation and malinvestment, and these are pretty serious constraints.
@ Dave Holden
If a country that is in control of its money is unable to constantly and perpetually invest in economically viable enterprise, then you can be in control of what you want but the diminishing marginal utility of money will ensure that you debase your currency.
2+2 still = 4
@Guido.
Agreed. Hence my point about inflation and malinvestment.
Guido, (Surely not that Guido?)
“2+2=4” Most money is created on computers using binary code. The number two does not exist and cannot be added to anything. Numbers add up to whatever the accountant says they add up to.
…. huumm…. doh!… yeah, I read your post… ;)…
by the way golem… much easier interface this site… thank you and congrats…
@ Guido
Your post +entirely+ misrepresents & misunderstands MMT (& the purpose of functional finance).
Saying “Printing as much as it wants”, without specifying the particular conditions (avaialable resources, idle labour) or talking about inflation constraining the amount, does +not+ describe MMT!
And the purpose of gov spending (debt free) to hire the unemployed in a +recession+ is +not+ to create viable businesses. The purpose is to stimulate aggregate demand. Obviously, it makes sense to design Job Guarantee programs with some useful public purpose.
Should a JG scheme become a viable business (by accident), then it should be sold off to the private sector. In fact, being ‘viable’ means such a business might then compete & possibly ‘crowd out’ a private sector enterprise. That’s the last thing you want to do if you’re trying increase aggregate demand & lower unemployment.
Note that the JG schemes need to be flexible – expand (in a recession) or shrink (as growth returns) as required.
Personally (and I’m sure many MMT proponents agree) I think there is a strong case for some businesses, eg electricity supply, railways, to be gov owned, but this is +not+ part of MMT.
The people advocating MMT, both academics & people with decades of experience at the monetary operation keyboards, did not dream it up yesterday. They’ve been at this 20yrs carefully examing every detail & to a great extent comparing their understanding with the empirical evidence.
I’ve been reading Bill Mitchell’s near daily, extensive blogs – real world commentary on actual data & events – for months. There are no inconsistencies that I can find. (My background is a BSc in engineering + most of an MBA program – if I’m prone to f*&king up, don’t get too close to Heysham or Torness nuclear powrr stations!)
Compare this with the ‘quackery’ that passes for mainstream economics & like myself, you will just wonder what on earth supposedly intelligent people are doing. ‘Intelectual capture’ just doesn’t get close. But then, for centuries people thought the earth was flat, & some twats still think the earth was ‘created’ in a few days…
That said, the idea – ‘grokking the fullness’ as Heinlein once put it – that the economics of a sovereign (fiat, blah blah conditions..) currency +issuer+ are PROFOUNDLY different to those of a household or business +user+, is damned hard to grasp. But grasp it you must if you want a decent future for humanity.
When you do, you will realise like me, that accepting high unemployment, foot dragging on climate change mitigation & many other ills & existential threats (for lack of money, when resources are available = no/tiny inflation risk) is absolutely INSANE & a testament to humanity’s hubris & cruelty.
Sure, we need democracy (don’t have now) & a functioning media (don’t have that either) BUT, the opportunity that presents right now is to blow apart those gaping cracks in the global ‘economics’ scam. Do this and we also expose the sham that is ‘politics’ as now practised & their MSM lapdogs.
Mike, indeed MMT can be very seductive, personally I’m quite taken by Wray’s jobs buffer stock idea, however I think you have to be careful about confirmation bias and more fundamentally what I personally think all theories of economics suffer from to one degree or other (strangely I would include Austrian-ism in this) and that’s the pretense of knowledge.
We can only agree that the current socio/economic system is a scam.
We singularly differ on what brings about viable economic development and the chronology of it all.
`Stimulating demand” cannot bring about development because although you could conceivably do so, you cannot direct that demand towards something that gives rise to capital formation; i.e. something worth more than the original input.
In other words, consumption can only come about as a function of saving meaning as a function of capital formation. When consumption outpaces capital formation you inevitably stalk bankruptcy.
Thus it is capital formation that drives demand rather than the other way around. If that were not the case, then governments everywhere could simply throw money (whether debt free or debt based) at demand and then sit back to watch the formation of productive capital before their very eyes.
The indiscriminate monetary stimulation of demand cannot in any potential universe you may care to look in, consistently give rise to productive endeavor. That would be akin to winning the lottery the majority of times you buy a ticket.
I am enjoying the to and fro between Golem and Mike Hall regarding MMT. I am still reading up on this and not confident enough to write about it. I think MMT is the way forward as is the post keynes economic theory. As Keynes famously stated “when the facts change, I change my mind, what do you do?”
One fact that won’t change anytime soon is that the USA is unique. It is the worlds rerserve currency and is excepted everywhere for anything. Anyone who wishes to dispute this will meet Americas’ very large army in violent circumstances.
The main point is this. economic reality is what America says it is.
Bill40: “The main point is this. economic reality is what America says it is.”
Which reminds me of this:
“A few days before the 2004 presidential election, Ron Suskind, a columnist who had been investigating the White House and its communications for years, wrote in The New York Times about a conversation he had with a presidential adviser in 2002. “The aide said that guys like me were ‘in what we call the reality-based community’, which he defined as people ‘who believe that solutions emerge from your judicious study of discernible reality’. I nodded and murmured something about enlightenment principles and empiricism. He cut me off. ‘That’s not the way the world really works anymore,’ he continued. ‘We’re an empire now, and when we act, we create our own reality. And while you’re studying that reality – judiciously, as you will – we’ll act again, creating other new realities, which you can study too, and that’s how things will sort out. We’re history’s actors… and you, all of you, will be left to just study what we do’ ”
http://mondediplo.com/2008/01/04scheherazade
Neil,
Thanks for the link, that was the very expression I was groping for ” reality based community” I read this but could not quite recall it.
Needless to say my altar ego TPTB would describe this forum as exactly that.
@ Guido
With your “capital forming drives demand”, you are quoting verbatim from the neo liberal script which got us into the mess and isn’t getting us out any time soon.
But please do post up some links to your favoured economists proposing this, it might be highly interesting to see who +you+ think our saviours might be, and what else they’ve had to say?
It’s not in any way contentious that the worlds’ major corporations are sitting on mountains of cash & refusing to invest (‘form capital’), why do suppose that is?
MMT does not advocate ‘indiscriminate monetary stimulus of demand’
Your post seems to me to be purely contradictory in tone & offering not a jot of actual reasoning or any references. If you want offer some, I’d be prepared to engage, otherwise what’s the point?
@ All
Like everyone here, I really appreciate Golem’s superb blog reporting on the problems that are arising thick & fast in the world’s economies & what that means for ordinary citizens. A breath of fresh air in a sea of MSM mediocrity doesn’t express the half of it.
But….we need solutions, n’est pas?
I’ve spent a +lot+ of time looking for them, reading acres from what I believe has comprised every (macro) economics scool of thought out there.
MMT (& its associated ‘functional finance’) is the only one I’ve found that is comprehensively offering a framework to get us out of the mess & onto a sustainable future.
It contains the accounting methodolgy, sectoral balances approach etc. that Michael Hudson uses – one of the +very+ few who accurately predicted the crash & had a solid basis for doing so. A man who has never uttered a word on the ‘political economy’ that I couldn’t embrace wholeheartedly.
Genuinely, if anyone knows of any better solutions, preferably with a credible commentary that suggests its suitability to help us create a sustainable future that respects all citizens rights to a decent life, then I’m all ears – post up the links.
We do need solutions don’t we?
If you can’t find any others, as I couldn’t, then I urge you strongly to study carefully the source material of MMT. Do the work, make up your own mind. I think you’ll find it worthwhile.
@Mike Hall,
Your being a bit presumption to think we haven’t done the work.. we just may not agree with you.
I’m no expert, but giving MMT a try could hardly produce a worse outcome than the one we are now facing.
Ultimately, however, implementing a financial solution depends on either convincing those in power to adopt it (which seems highly unlikely) or replacing them with people willing to do so, which won’t be easy.
Well Dave, putting aside your use of the ‘we’, if your customary short comment is meant to imply that +you+ have studied the MMT source materials in depth, then why are +you+ not enlightening us us with your carefully considered arguments, as opposed to just one or two sentence, cheap-as-chips +opinions+ ?
My intention was to urge those who are interested in solutions, time poor as many are, that MMT is worth some prority.
As Neil says, it could hardly be worse than the current mess or offerings which are universally rooted in the current failed paradigm.
Yes, I don’t think your going to convince anyone by being insulting. However if I misconstrued you intention I apologise. In fact I’ve just finished Wray’s book and as I’ve said I’m quite taken by many of his arguments, however I’m equally well aware there are some very bright economists and schools of thought out there who aren’t.
See for example http://www.themoneyillusion.com/?p=10178, or http://www.acting-man.com/?p=7693
Personallly as an interested lay person I’m more convinced by Steve Keen who I think agrees with much of MMT but not all.
Fundamentally my view is that our current problems are more to do with what MMTers refer to as horizontal money rather than the vertical. To me it’s about a banking system which is incentivised to create credit irrespective of how that credit is used. What I think needs to happen is debt restructuring and writedowns.
A quick response Dave – it’s late!
Your 2nd acting-man. com link :
“…besides, MMT’s economic policy prescriptions differ from the actual policies that have been implemented by the government by an increment of roughly zero…”
Implying the US gov has been carrying out MMT policies?
Having read Wray’s book, surely you can agree that someone making such an erroneous statement as that isn’t credible?
I’m afraid I couldn’t read anything further after such an absurd assertion.
Re your first link, beyond the author’s incredibly obtuse arguments, which, having read lots of economics papers & blogs that seem to find no need for that by a large margin (raising great suspicion that the author is being deliberately obscure), lies his faith in QTM (quantity theory of money) apparently in all circumstances.
(I don’t know if you have the same impression, but one thing that’s given me great confidence in the MMT blogs is the clarity, care & patience displayed in their writing?)
I don’t find that very credible either. I seem to recall Steve Keen debunking QTM? (Like you, I regard Keen highly & note his agreement on the same ‘facts’ of monetary operations as MMT) I’m certain I’ve read an MMT debunking of QTM too. Bill Mitchell mentions it briefly here:
http://bilbo.economicoutlook.net/blog/?p=15753
I’m sure I’ve read more than that, but can’t recall where at the moment.
I do agree with you about the issues with respect to banking & your point is well made that MMT does not in itself address this. (Nor does it claim to include such in the scope of their work, of course, but they do share the opinions of those credibly addressing this separate issue, specifically William Black.)
However, I do regard the issue of government macro economic & fiscal operation as equally important. And presently linked & encouraging of the fraud perpetrated by banking by the lies, corruption & fraud in their own sphere of operation. If we had a clear, honest & open framework for governments’ roles, I think we’d find it easier to implement non-fraudulent or usurious banking & finance.
Certainly perhaps people in Greece & my country, Ireland, might see monetary & fiscal reform (with its implications for austerity & unemployment) as even more pressing? The bankster ‘horse’ having already bolted? (Tho’ said horse will be back some time if we don’t act.)
Must get some sleep now, good night!
Hi Mike,
On the two links I gave it was more to highlight the fact that their are very bright people with radically different perspectives who aren’t convinced about MMT. And I agree with you both critics are flawed, but I come at this as a layman and with a layman’s humility (at least I try) so I don’t consider myself to be in a position to outright discount them.
Of the two, flawed as it is (in particular I think Bill Mitchell as address the Robert Murphy critic) I lean more toward the acting man critic and I do think it worth the read.
On your point about the QTM, I agree. however, I read the blog to try and counter my own confirmation bias. I read Krugman for the same reason 😉
As an aside, a fascinating analysis of QTM can be found here http://www.cargocultist.com/?p=1586
Recently on the Moneyillusion blog someone posted a link to one of Steve Keen’s (excellent) behavioural economics lectures, a reasonably prominent Keynesian economists replied that he’d started watching it but spotted an error within the first five minutes so thought it wasn’t worth watching further. I give this as an example of what I think is one the main things wrong with this field, i.e., a basic inclination to confirmation bias.
Rightly or wrongly It’s this kind of thing that makes me wary of theoretically driven interventionist macro policy – I don’t consider economics to be a hard science.
I’ll also add I’m still trying to distill my own thinking on macro economic policy particularly in the context of “realpolitik”.
Fundamentally however I see this as a private sector debt crisis created by private sector banks and it’s there I think the problem should be addressed.
Now I’ve just this morning received my copy of the revised edition of Debunking Economics so I’m off to try an educate myself further!
Further to the point of Golem’s original post acting man on the aftermath of “Operation Twist”
http://www.acting-man.com/?p=10475
“One of these is that insurance companies, pension funds and banks are now faced with lower ‘risk-free’ long term yields. This upsets the actuarial calculations pension funds and insurers base their contracts on and means that existing commitments will eat into their profit potential, while new commitments will have to reflect the lower yield landscape, meaning that the expected payouts to their new clients will decline.”
Can anybody explain this? I’ve just been looking at general fund performance in a laughably small personal pension scheme I have, and 19 out of the top 20 best performers over the last month are US funds.
True, their performance over 3 and 6 months is overwhelmingly negative, but obviously they’ve picked up significantly over the last month, with the top fund showing a nearly 20% rise and even the 20th up over 10%.
Similar story with unit trusts generally: 15 out of the current top 20 over 1 month are American.
Is this all due to the Euro crisis and flight to the dollar? What’s going on?
@Mike & @Dave
Ah sure, technicalities, we are all singing from the same prayer sheet, Steve Keen, Golem, & Bill Mitchell. Nobody as ever come up with a script that everyone agees with. The fact is that I am sure you guys can come up with an evolution from the present dog eat dog system that will be an improvement. Meanwhile let’s stick together in the hope that the present feral system will collapse & the chance for a much more progressive system can be put in place. I, who have no head for economics, accounting, or the compexities of banking practise am grateful for your expertise, i may not fully understand these things, but I know that whatever you are putting forward has a strong moral base which aims to produce a much fairer society, that’s good enough for me.
Remember the opposition are many, united & in a position of power, we must stick together, the finer detail can be sorted out later,
“With your “capital forming drives demand”, you are quoting verbatim from the neo liberal script which got us into the mess and isn’t getting us out any time soon.”
It is my opinion you have been taken-in by the suggestion of the monetary authority that credit is capital.
Debt Based Fiat Money cannot contemplate capital formation because it cannot contemplate saving. Hence the need to constantly induce progressively greater degrees of inflation in the system by a combination of progressively lower interest rates, creation of political interest groups (unions), creation of state champions (GE) and expansion of state power till the state becomes the largest actor in the economy. This strategy is necessarily uneconomic leading to a hollowing of the productive capacity of society… and the expatriation of productivity…
Neo liberal script most definitely does not peddle capital formation. It peddles credit expansion on the pretense that credit is capital… which of course it most certainly is not.
And that is what is biting us in the ass today. Politicians, wittingly or not, follow blindly the instructions of the monetary authorities and promote the expansion of credit. Unions and state champions clamor for more handouts lending credibility to the calls of politicians. Politicians themselves are falling over each other to throw more money at already failed policies (i.e. the support of the GSEs) thus requiring even more credit.
The companies you mention that are sitting on cash, do so because they cannot invest due to already great commercial and industrial overcapacity and, mostly, due to waning demand. Similarly, the banks that are sitting on stashes of cash, do not lend it because there is no demand from industry to invest in already existent overcapacity and, because there are few if any credit worthy borrowers. Finally, banks are sitting on cash because they know that the toxic assets they have off balance sheet may need to be written off shortly…
Credit (debt) can only be productive if invested profitably. A government cannot consistently invest profitably. Thus monetary stimulation of demand in times of recession cannot be a viable solution.
Maybe we’re at cross purposes here?
You say:
“…companies…cannot invest….mostly due to waning demand…”
Entirely agree, but that ‘s not what you appeared to say previously? You appeared to be suggesting that it is (supply side) capital formation that’s the driving force, not demand? Hence my comment re neo liberal narrative.
With regard to your comments about credit & financialisation of the economy – entirely agree. This is what Michael Hudson, particularly, writes about.
Do you understand that MMT would reduce considerably the ‘debt proportion of money base (from its 100% now!) over time?
Whilst not endorsed (or otherwise commented on) so far by core MMT proponents (I’ve been trying to get them to comment), I found this quite extensive modelling study produced by a Japanese Prof for their economy which shows the effect government spending, debt free, over time: (interesting results imho)
http://www.monetary.org/yamaguchipaper.pdf
I’m not sure why you say “…government cannot consistently invest profitably…” ? Surely there are many long standing examples of reasonably well operated state enterprises? For example, we have the ESB (electricity supply board) here in Ireland which has done a reasonably good (& profitable) job over decades. Interestingly, irisheconomy.ie linked & discussed a paper looking at the EU wide experience of ‘competition’ driven privatisation over the last 2 decades. It was quite clear in its conclusion that the supposed objective of increasing competition & lowering consumer prices has not been met, nor will it be in the foreseeable future. It regarded the outcomes of state owned vs private as roughly even. A reasonable interpretation would be that supposed state ‘inefficiency’ & somewhat higher wages levels were cancelled out by higher private executive remuneration
& company profits. I know which I would rather have if the outcome for consumers is roughly even. In the face of impending climate change & energy resource constraints, it is obvious that the state owned sector would be/are far more capable of delivering strategies to address these issues. Far easier to introduce policies for the wider public good than when a private company, whose only interest is (typically short term) profit.
I don’t think anyone in the UK would regard railway privatisation as a success, most certainly not for consumers or a in respect of progressing a sustainable transport policy. For the Tories who introduced it (& New Labour who continued with it) it’s definitely a ‘taboo’ subject.
Are you saying that there is no place for state owned enterprise?
I’m not dogmatic about this (or anything else), but it seems to me there’s an overwhelming case for some enterprises to be in public hands. If you consider the marginal cost (if any) of supposed state run ‘inefficiency’ versus the social and other state costs of greater private sector employment volatility during economic downturns, then ‘privatisation’ dogma looks even more pointless & destructive in an MMT & ‘functional finance’ world. I don’t think it’s rocket science to identify ‘natural’ monopolies where the (near universally mythical) ‘free’ markets simply don’t work work to ordinary citizens benefit. Personally, I would favour a presumption that private enterprise must prove its benefits for certain sectors, with a buyback right to the state if they fail to deliver following a ‘privatisation’ experiment.
Anyhow, I don’t see why you connect your conclusion “…monetary stimulation of demand in times of recession cannot be a viable solution…”?
But leaving that aside, the key proposal in MMT for demand stimulation in a recession is primarily a +fiscal+ operation. And the monetary aspect of financing it does not create ‘debt’, so I’m not sure what the reason for your objection is?
Nor does MMT suggest this policy is about creating ongoing state enterprises, if that’s what you thought?
Their Job Guarantee, paying at or near minimum wage (to prevent ‘crowding out’) is intended to maintain incomes for the otherwise unemployed & apply greater (temporary) counter cyclical demand stimulus. With careful scheme design there can be socially useful outcomes too which would otherwise be impossible to finance (vis viability, inflation) during times of near full private sector employment. Win-win for the public purpose.
In an environment of electoral politics (and particularly in representative democracy rather than in direct democracy), the state cannot possibly invest economically. Electoral politics will see to it that interest groups are formed and that some groups go on to acquire greater weight in the electoral process.
We agree on the desirability of debt free money… but… even in this context, the quantity of money must somehow be restrained by some parameter lest we fall in the same trap of DBFM… that is, that the entities that operate closest to the point of injection of the currency (which for all practical purposes cannot reach all economic actors simultaneously) benefit disproportionally from all subsequent users…. thus, once again, leading to the mathematical concentration of profits.
Addendum: there is a limit to productive investment. But as the monetary authority constantly debases the currency, economic actors are compelled to not save and to make use of credit incrementally and for increasingly non productive investment (services)…
Once government is the largest actor in the economy and capacity is excessive and interest rates are perilously low and the monetary authority is burdened with toxic assets… that’s when you can see that credit is not productive capital…
@ Guido
Just wondering about your thoughts on how the situation in Italy might transpire in regards to the Northern league etc. i have an old friend who lives in Rome who is worried that if things deteriorate further there might be a push from the prosperous North to seperate from the poorer south. He is saying that Berlusconi is kept in power by these people who are very right wing. He is a keen follower of Italian football & was telling me how Italian football fans, ( Ultras ) are often divided by region & also right/left loyalties. He reminded me of a game he attended a few years ago when after a rumour was spread that a fan was killed by the police, both Lazio & Roma fans rioted resulting in 187 police being hospitalised. He is worried that these right/left divisions could come to the surface as the political & economic situation worsens.
Stevie,
I haven’t lived in Italy for now 35 years and only follow passingly the political and economic evolution there.
That said, left right animosity is nothing new. Left right animosity is the hallmark of grade school and almost a right of passage. During the “anni di piombo” of the second half of the 70s (the last time I lived there), we had to pay particular attention to the type of clothing we wore to school or the stickers we placed on our mopeds in order to be identified with one side of the political spectrum or the other and according to the part of Rome we were visiting or just going through.
I don’t know if things are still that extreme today but what I can say is that Italian politics is terribly fractious and petulant. When visiting Italy today if one relied purely on tv and newspapers to keep up with world events, one would feel horribly isolated. The 1pm national news cast consists of approximately 20min of petty school yard childish bickering packaged in live political interviews (the type of bickering that goes: “he said something so I will do something and show him who’s boss”). Then you have about 5min of international news. Then you have about 30min of sport of which the first 20min are national soccer news and here too you get live interviews of soccer executives bickering petulantly. The remaining 5 minutes concern culture as in food and drink, theater or cinema. And that’s your news diet when you are in Italy.
Can it possibly get any worse in a declining economy? I suppose so. But I hate to speculate what it would look like.
@ Guido, thanks, a potential tinderbox anyway.
By the way, with regards to Bossi and the secession of Padania, they have by and large already achieved their goal. All they need is administrative and political acceptance.
I spent two weeks in the resort area of Aprilia Marittima, Legnano and around Pordenone in summer 2010 visiting friends and family. You could not recognize the area for Italy. Dark skin is rarely visible. Street peddlers are all but gone. All you see as far as the eye can see, is a sea of white Caucasians with blond hair and blue eyes. I may be exaggerating a bit, but it was eerie.
Uncannily, in relation to the rest of Italy, the North East would be the equivalent of Germany at European level. The North West of Italy is heavy industry country with state ties and state subsidized. The North East of Italy is the independent family owned industrial area with a degree of administrative autonomy; very hard working, surprisingly creative and reliable folk. Few know for example that “Jacuzzi” is a family name… and yes, they created the baths and sold the brand to Whirlpool if memory serves.
So, Bossi has to a great extent already achieved his separation. Can he go on to get full political separation? I don’t know but I doubt it.
Im grateful for the article.Really thank you! Awesome.
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