Thursday, November 22, 2018

Bill Mitchell — Japan still to slip in the sea under its central bank debt burden

President Trump banned a CNN reporter only to find his position overturned by the judicial system. Well CNN is guilty of at least one thing – publishing misleading and alarmist economic reports about Japan. In a CNN Business article last week (November 13, 2018) – Japan’s economy has a $5 trillion problem – readers were told that the Bank of Japan has no “dwindling options to juice growth if a new crisis hits” because “it’s now sitting on assets worth more than the country’s entire economy”. The real story should have been that the Bank of Japan continues to demonstrate the categorical failure of mainstream macroeconomics and, conversely, ratify the core principles of Modern Monetary Theory (MMT). That is what the Japanese experience since the early 1990s tells us. And all the stories about special cases; cultural peculiarities, closed markets, etc that the mainstream economists wheel out when another one of their predictions about how Japan is about to sink into the sea as a result of its public debt levels, or that interest rates are about to go through the roof because of the on-going and substantial fiscal deficits; or that inflation is about to accelerate because of the massive monetary injections; and more, are just smokescreens to divert our attention from the poverty of their analytical framework. The Japanese 10-year bond trade is called the ‘widow maker’ because hedge funds who try to short it lose big. The Japanese monetary system is my real-time, non-linear economic laboratory which allows all the key macroeconomic propositions to play out live. And MMT is never very far off the mark. Try juxtaposing New Keynesian theory against Japan – total dissonance....
Bill Mitchell – billy blog
Japan still to slip in the sea under its central bank debt burden
Bill Mitchell | Professor in Economics and Director of the Centre of Full Employment and Equity (CofFEE), at University of Newcastle, NSW, Australia

79 comments:

Konrad said...

I read Mitchell’s post, and I agree with it.

The purpose of this CNN article is to spread lies about national finances. The next step is for CNN to claim that Medicare and Social Security must be cut or privatized.

CNN: “An epic bond-buying spree by Japan's central bank means it's now sitting on assets worth more than the country's entire economy.”

So what? A lot of money has been deposited in Bank of Japan savings accounts. What’s the problem?

CNN says the reason why there are so many deposits is “years of money printing,” and “heavy stimulus.”

Nonsense.

If Japan has any problem, the cause is not stimulus, but austerity. In 1997, Japan’s nationwide sales tax was 3%. In 2014, neoliberal Prime Minister Shinzo Abe increased the tax to 8%, thereby causing a recession. In Oct 2019 Abe will increase the tax to 10%. This is austerity, not stimulus. The IMF wants Abe to increase the tax to 15%, in order to keep Japan from “running out of money.” This is standard IMF garbage. The Japanese government can create infinite money out of thin air to keep paying retirement pensions, keep paying interest on Treasury securities, and so on. Meanwhile revenue collected from the ever-increasing national sales tax is destroyed upon receipt. It’s basic MMT.

Meanwhile 28 million foreigners visited Japan last year, all of which brought in foreign currency. The Japanese government is about to legalize casino gambling, which is expected to boost tourism to at least 40 million each year. Japan has so many tourists that the media is referring to “kankō kōgai,” or “tourism pollution.” (Many places have this same problem, such as Barcelona Spain, Venice Italy, etc.) People who live along transportation routes that go through sightseeing areas find it difficult to use local buses because they’re crammed with tourists. Restaurants are always booked because of social network hype. And foreign visitors are often inconsiderate — eating on the street, and making too much noise in general.

Tourists boost Japan’s economy, but there are serious downsides.

Then CNN goes off the rails…

“The US Federal Reserve's total assets are about one fifth of the size of US GDP…”

Twenty percent? The Fed’s total assets (i.e. the “national debt”) are $21 trillion, which is 108% of the US GDP of $19.39 trillion. Not that this means anything. For the USA, the debt-to-GDP ratio is meaningless.

A lot of nonsense in the CNN article.

AXEC / E.K-H said...

MMT = Trumponomics
Comment on Bill Mitchell on ‘Japan still to slip in the sea under its central bank debt burden’

Bill Mitchell reports: “I took the UK Guardian’s ― How populist are you? ― quiz yesterday. I thought the quiz was an odd cultural artifact. The Tweet by Ronan Burtenshaw … summarised how these sort of quizzes reflect underlying biases.

Anyway, I did the quiz and I won’t say who I was most alike because I am actually very much unalike the person (which just shows the categorisation errors in the exercise) but I felt relieved that I did score this outcome: You are least similar to Donald Trump.”

Now, this is curious at least with regard to economics because if one takes away the social populism then MMT is economically identical to Trumponomics, that is to say, it produces exactly the same amount of macroeconomic profit for the Oligarchy.#1

In Bill Mitchell’s words, this “shows the categorisation errors in the exercise.” No, this shows how MMT’s social brainwashing works.

Egmont Kakarot-Handtke

#1 Keynes, Lerner, MMT, Trump and exploding profit
https://axecorg.blogspot.com/2017/12/keynes-lerner-mmt-trump-and-exploding.html

Matt Franko said...

“CNN: “An epic bond-buying spree by Japan's central bank means it's now sitting on assets worth more than the country's entire economy.”

This just a usual stock/flow conflation from a Journo Art Major....

Matt Franko said...

K,

“The Fed’s total assets (i.e. the “national debt”) are $21 trillion,”

Fed assets monitored here:

https://www.federalreserve.gov/releases/h41/current/default.htm

Reported weekly....

Currently at $4.191T....

Konrad said...

Deposits in Fed savings accounts are also Fed assets (in addition to being Fed liabilities). I didn't see deposits on that page. Therefore the page seems like a partial accounting.

André said...

"Deposits in Fed savings accounts are also Fed assets (in addition to being Fed liabilities)"

By "Deposits in Fed savings" you mean bank reserves? They are a liability. They are not an asset. Or maybe I just couldn't understand what you said.

Matt Franko said...

You understood him just fine he doesn’t understand the accounting....

K, I will work to explain this to you going forward....

Matt Franko said...

“Then the story tells us that the Bank of Japan’s balance sheet has expanded by some massive amount. Okay.

Why is that a problem?”

It’s aproblem because the depositories have to accept the $T of the new non risk reserve assets and don’t have the regulatory capital to support them ... so they have to mark down the price of their risk assets in response in order to maintain a compliant regulatory Leverage Ratio causing price instability and crashes.... when the FRA says “stable prices with maximum employment “... ie they are acting to violate the law that authorizes them to exist ...

Bill needs to seek further understanding of banking regulations.... so does the MMT brain trust in general....

André said...

Well, if that is the case, what worries me more are misunderstandings about the concepts. Accounting is just a consequence of those concepts and some arbitrary rules.

Looking at the consolidate government as a whole (which, in MMT standard, includes the central bank), bank reserves are nothing more than a right that someone has against the government. The right to settle tax liabilities when and if that someone wants it, for example. For the government, it is an obligation (to settle the tax obligation when the person wants it).

Central banks do hold assets, but bank reserves are not one of them...

Matt Franko said...

“The Japanese monetary system is my real-time, non-linear economic laboratory which allows all the key macroeconomic propositions to play out live. And MMT is never very far off the mark. ”

Ok and we have another one coming up in EZ starting next month with the ECB supposed to stop expanding its assets by 40B per month....

What say MMT?

I assume they are all still bearish in the EZ like they’ve been in the US due to “deficit too small!”, etc...

So if we see any acceleration in EZ in response (like as happened in US) then MMT would logically be ‘very far off the mark” in this regard....

Matt Franko said...

“Well, if that is the case, what worries me more are misunderstandings about the concepts.”

Konrad is still a bit new to all of this here (accounting details) .... I will work to put some things up wrt the accounting... he’ll figure it out then...

André said...

"Leverage Ratio causing price instability and crashes..."

Oh great... we already had Andrew who believes that the lack of a direct access to bank reserves is the biggest problem in thr world. He still repeats it in every single post in this blog, I don't know why he didn't appear here yet.

Then we have that AESC or something troll who repeats in almost every post that he has some superior theory that actually is not scientific at all - it is just some self referencing material with zero empirical validation.

And now we have you, Matt, that repeats in every single post that the Leverage Ratio is not only relevant but the biggest problem in the world.

This was once an interesting blog with some interesting discussions. Now it is a craziness nest. Don't know why I keep reading. Must be habit.

Andrew Anderson said...

It’s aproblem because the depositories have to accept the $T of the new non risk reserve assets ... Franko

That's a consequence of "the banks" being the only entities in the private sector that may have accounts at the Central Bank; with that privilege comes regulation, whether good or bad.

If banks want to be free of regulation then they should lobby to end their privilege too.

Andrew Anderson said...

Also, if deposits are now a problem for the banks, then why not charge (negative interest) for them?

S400 said...

These three stooges all know it all but don’t get along...

Andrew Anderson said...

More precisely, if excess reserves are now a problem for banks, then why not charge (negative interest) on deposits?

Greg said...

@Andre

Very true, obsessing about leverage ratio is akin to worrying about debt ceilings.

Andrew Anderson said...

we already had Andrew who believes that the lack of a direct access to bank reserves is the biggest problem in thr world. André

"Bank reserves" are simply fiat account balances at the Central Bank where the account holder is a bank, credit union, etc.

The natural question then is why may not individual citizens, their businesses, State and local governments, etc. also be able to use their Nation's fiat in inherently risk-free account form at the Central Bank too?

Matt Franko said...

Andre, if you think I’m wrong then watch Europe after December....

If I’m wrong and you’re right then Europe should roll over completely... if I’m right then Europe should stabilize and start to turn around...,

Especially watch Deutsche Bank in perennial surplus Germany.... the reserves have to end up in the surplus nation... if I’m right then DB should stabilize and start to turn it around...

Imo, You don’t know what you are talking about neither does Konrad and neither does Bill....

Greg, shouldn’t you be checking my math or something?

Matt Franko said...

“deposits are now a problem for the banks, then why not charge (negative interest) for them?“

I think in EZ they currently are... what is ECB policy rate these days? I think it was negative...

Noah Way said...

FRANKO's Bachelors in Electrical Engineering clearly gives him a wide margin of intelligence and experience in global financial matters.

You guys must have arts degrees.

Matt Franko said...

“Matt, that repeats in every single post that the Leverage Ratio is not only relevant”

It certainly is relevant it’s the current operative regulatory ratio due to CB monetary policy...

Banks are way over capitalized from a risk ratio perspective..

Matt Franko said...

“This was once an interesting blog ”

Just go back to reading Zero Hedge then... or some other Monetarist shit show....

Matt Franko said...

Hey André this isn’t my words here: “Then the story tells us that the Bank of Japan’s balance sheet has expanded by some massive amount. Okay. Why is that a problem?”

They are BILL’S words...

I’m telling you why that is a problem (directly causes instability of prices) citing the relevant bank regulations and using the accepted accounting principles and principles of time domain analysis...

As opposed to Bill and you guys who resort to conspiracy theories for your explanation .... go ahead and take it back over to your Monetarist pals at Zero Hedge go ahead...

Greg said...

Again, reserve ratios are just like debt ceilings, self imposed constraints, based on faulty logic. ... kind of logic which gets you looking at whether a commenter has a B.A or a B.S. to determine if they know what they are talking about.

Andrew Anderson said...

Understanding banking does not require any degree at all but basic math skills and an understanding of basic accounting (Assets = Equity + Liabilities, i.e. double entry book-keeping).

So let's drop the BS vs BA bs, please.

Matt Franko said...

Yo I’m not talking about a “Reserve Ratio”...

Matt Franko said...

Yeah let’s get clarinet players to regulate the banking system .... oh,., wait...

Matt Franko said...

Greg, depositories have TWO regulators ... the OCC and the Fed...

Matt Franko said...

Fed regulates Reserve levels and OCC regulates capital...

Ie Fed adds reserves then the depositories violate the OCCs leverage limits/requirements...

Matt Franko said...

“Founded through the National Currency Act of 1863, the OCC monitors banks to guarantee they operate safely and meet all requirements. The OCC oversees several areas including capital, asset quality, management, earnings, liquidity, sensitivity to market risk, information technology, compliance, and community reinvestment.

Read more: Office of the Comptroller of the Currency (OCC) https://www.investopedia.com/terms/o/office-comptroller-currency-occ.asp#ixzz5XglSkWp9
Follow us: Investopedia on Facebook

FRS controls SYSTEM LEVEL reserves...

Greg said...

So what, the leverage limits are a policy choice.

Its funny you throw around monetarist at others but you are the one quoting monetary ratios/levels and their affects on prices which is Monetarism 101.... QTM. Just like Trump is a wannabe artist you are a closet monetarist, hilarious if not so pathetic.

Bankers are the largest cohort of monetarists in the fucking world, they think they can fine tune the economy by getting banking rules juuuuuuuust right. What most aren't are supporters of wide spread deflation like the idiotic Austrians, but they do like selective deflation. Deflation of the things they dont already own.

André said...

Matt,

I agree with you that most self-declared MMTers resort to conspiracy theories and that it is also craziness. I don't think that people actually know how government finances work and are just pretending they do not to conquer the world or something.

I don't know much about Japan, so everything I say about that may be wrong. But I believe that most of BoJ assets are Japan treasury bonds. If that is the case, then SLR is even less important.

Europe economic problems are related to its profundly disfunctional fiscal and monetary structure. It isn't relared to SLR. And I don't believe those problems will be solved anytime soon.

Thanks god at least now you understand the distinction between equity and reserves requirements... unfortunately, not everyone seems to understand such basic concepts here...

Matt Franko said...

“hanks god at least now you understand the distinction b”

I always did. ??????

Matt Franko said...

“BoJ assets are Japan treasury bonds. If that is the case, then SLR is even less important.”

No it is important the jgb are the left side entry and “tier 1 capital “ is the corresponding right side entry...

So if BOJ increases systems reserves (increase bank LHS) then to comply with Leverage ratio depositories first reduce risk assets on LHS and then they will seek to eventually add non risk jgb on LHS to correspond with a capital increase on RHS in order to be able to grow risk assets again... as long as cb doesn’t continue to add reserves at system level banks eventually can retain earnings in jgb on LHS which increases reg capital on RHS and they can start to add risk assets again...

André said...

Matt,

Assuming that I'm are and that BoJ assets are gov bonds (which I don't know if is the case), then no banks or depositary institutions are involved.

BoJ does not need to comply with any equity requirements. So it doesn't matter whether it has $ 1 or $ 100 trillions in gov bonds assets, with will not need to hold equity.

For the Treasury, the gov bonds are liabilities. And the Treasury does not need to comply with any equity requirements either.

So I don't know what you are talking about.

Matt Franko said...

“So what, the leverage limits are a policy choice.”

LOL!!!! It’s ALL a policy choice...

So you are saying hiring a bunch of unqualified Art Degree clarinet and chess playing morons where the one side is increasing non risk assets by $T s “so the banks have munnie to lend out,!” Then meanwhile the other moron side comes in later and says “hey! Now you’re violating the Leverage Ratio with all of those non risk assets our moron cohorts just put in your balance sheets so we’re going to have to shut you down!” THIS is GOOD POLICY??????




Matt Franko said...

And THEN, in the face of THIS POLICY, The MMT braintrust says “it’s not a problem!”.... and banks are somehow conspiring to lose all their munnie...

UN qualified....

Andrew Anderson said...

UN qualified.... Franko

NO ONE is qualified to run an inherently unstable, inherently unjust banking model is the lesson of history.

The solution then is 100% private banks with 100% voluntary depositors.

What's so hard to understand?

Matt Franko said...

That’s like saying a 747 is unstable because a chimpanzee is at the controls...

Matt Franko said...

Andre if the BOJ buys JGb then new reserves are created at the depositories...

Let’s say at time 0 you have 100 overnight jgb, 0 in your deposit account , and your bank has 200 reserve assets and corresponding 200 deposit liabilities for other depositors....

Time 1 BOJ morons decides to add 100 reserves “to lend out!” You try to roll over your bonds but the BOJ steps in front of you and buys the 100 at rollover, now you have 0 jgb, you left with 100 in a deposit account , BOJ has 100 jgb, your bank has 300 in reserves and 300 in deposit liabilities... AND the denominator in their LR has increased by 100 and caused the regulatory LR has plummeted and they are out of regulatory compliance... so they immediately liquidate risk assets to maintain Compliance..

Matt Franko said...

MMT: “All prices are necessarily a function of... what the govt allows banks to lend against things...”

If govt forces trillions of amounts of non risk reserve assets on to bank balance sheets then “necessarily as a function” the prices of risk assets have to be reduced to maintain regulatory compliance...

This is textbook MMT 101...

Andrew Anderson said...

A 747, like all aircraft meant to be directly* controlled by humans, is designed to be inherently stable, i.e. once in stable flight, the pilot can let go of the controls and the plane will continue on indefinitely.

The reason is that such aircraft are designed with NEGATIVE FEEDBACK.

For a bank, the negative feedback is supposed to be the liabilities for fiat that the bank creates one-for-one with the new deposits created when the bank lends.

However, the non-bank private sector may not even use fiat except for mere physical fiat, aka "cash." Hence there is essentially NO feedback wrt to the non-bank private sector so the banking cartel AS A WHOLE is unstable.

I'm surprised that you Franko, as an engineer, don't realize the NECESSITY of negative feedback for stability of a non-trivial system.

*As opposed to some aircraft which, for performance, stealth, etc. reasons, are so unstable that they must be directly controlled by computer with only pilot requests as input from a human.

André said...

Matt,

Well, again, I don't know much about Japan, and those things are very affected by the institutional arrangements of each country, so I may be wrong. I would have to look at all the data and, unfortunately, for the next weeks I will not have much time for it.

But the thing is that usually in those cases the treasury in simply issuing bonds directly to the central bank (or, if it is not allowed to do it directly, it is using banks just as temporary intermediaries). The central bank issues currency, gives it to the treasury, and receives bonds in exchange. There is no injection of currency in the private market.

Matt Franko said...

“the pilot can let go of the controls and the plane will continue on indefinitely.”

The last 10 years have been pretty stable....

Feedback is required not negative feedback in a control system... when the depositories reduce risk assets in response to cb adding non risk assets you could consider that as an adjustment due to feedback...

Matt Franko said...

“The central bank issues currency, gives it to the treasury, and receives bonds in exchange. There is no injection of currency in the private market.“

If the cb AS POLICY buys more Treasury securities than what Treasury net issues that day, then cb is increasing system reserves at depositories and corresponding deposit account balances for bank customers... for the bank: LHS +Reserve Assets RHS +Deposit liabilities...

Here:

https://fred.stlouisfed.org/graph/fredgraph.png?g=maJw

Goes straight up in response to CB policy implemented starting in Sept 2008 when they bankrupted Lehman Bros and kept going up thru QE1 and QE2.... probably same for Japan going back all the way to the 1990s when Japan pioneered QE.... Japan hasn’t had higher equity prices since like 1989....

Matt Franko said...

MMT: “Treasury issuance is a reserve drain”

If Treasury does not increase the rate of treasury securities issuance in response to a CB increase in creation of reserve assets then reserve assets increase on LHS of bank balance sheets and deposit liabilities increase on RHS...

Calgacus said...

Matt:If the cb AS POLICY buys more Treasury securities than what Treasury net issues that day, then cb is increasing system reserves at depositories and corresponding deposit account balances for bank customers.

Not if the CB is buying bonds from the banks. Nothing to do with bank customers.

I'm fairly sure you are misreading some regulations and probably reversing cause and effect elsewhere. The Fed certainly didn't directly bankrupt Lehman etc. They did it themselves (in the Fed's criminogenic regulatory environment.)

Andrew Anderson:For a bank, the negative feedback is supposed to be the liabilities for fiat that the bank creates one-for-one with the new deposits created when the bank lends.

The bank liabilities are the deposits - they aren't something different created one-for-one. They're two different words for the same thing. There is no negative feedback there. The "negative feedback" comes from the IOU that the bank customer, not the bank, creates.

Andrew Anderson said...

The bank liabilities are the deposits - they aren't something different created one-for-one. Calgacus

Duh! Do you ever read anyone else's comments? Then you should know by now that I understand that bank deposits ARE liabilities for fiat. But for the purpose of discussion I left out the deposit aspect.

There is no negative feedback there. Calgacus

That's my point. The liabilities for fiat the banks create wrt the non-bank private sector are largely a sham since the non-bank private sector may not even use fiat, except for physical fiat, coins and bills. Therefore the negative feedback function that true liabilities wrt the non-bank private sector (necessary for long term stability) is a sham too.

The "negative feedback" comes from the IOU that the bank customer, not the bank, creates. Calgacus

Only in the grossest sense when the non-bank private sector can no longer bear the debt it is driven into by a banking cartel with only sham negative feedback.

André said...

Matt,

Well, I believe that something like that is happening:
1) Most (if not all) bonds BoJ is buying is from the Treasury;
2) The remaining is probably from banks. And it is not compulsory. If banks are selling, is because they want to, for profitability and risk management;
3) If something remains, it isn't a problem for banks. Even if suddenly companies and private individuals decided to sell their bond holdings and deposit the received money into banks, there wouldn't be much problem. Banks charge fees, and work leveraged. So, for example, for each $ 100 deposited, a bank must hold $ 5 in equity (I don't know how the Leverage Ratio was implement in Japan, I'm guessing here it is 5% for big international banks and 0% for others). If the bank charges a fee of 0.5% a year, it is a $ 0.5 revenue a year, and, considering the $ 5 of equity, it is a 10% a year return on equity. Not bad, hm? Don't think banks would mind it. Actually, I guess a lot of investors would pour equity in it.

Andrew Anderson said...

correction/addendum:

Therefore the negative feedback function that true liabilities wrt the non-bank private sector (necessary for long term stability) would provide is a sham too.

So how can we have honest accounting with sham liabilities toward the non-bank private sector?

Or does it matter to you, Calgacus, that citizens are cheated and/or driven into debt by what is, in essence, a government-privileged counterfeiting cartel?

Matt Franko said...

“I'm fairly sure you are misreading some regulations and probably reversing cause and effect elsewhere. The Fed certainly didn't directly bankrupt Lehman etc. “

I’m fairly sure I am not and have provided applicable references....

You guys just parrot the MMT brain trust who’ve been mailing it in for years.

Matt Franko said...

“And it is not compulsory”

Yes it is compulsory.... Primary Dealers have to transact with the CB in CB conduct of monetary policy ... it’s not a choice... if they don’t engage they lose their Dealer status...




André said...

Why would a bank remain as a Dealer if it is so unprofitable? Maybe because it isn't actually unprofitable...?

Andrew Anderson said...

Maybe because it isn't actually unprofitable...? André

You mean as a guaranteed carry-trade profit from the Treasury to the Central Bank? Under the pious premise of exposing sovereign bond sales to the free market?

A free market does not change that it's still welfare proportional to account balance.

AXEC / E.K-H said...

Calgacus, Matt Franko, André, Noah Way

Compared to microfounded mainstream economics, macrofounded MMT is a real improvement. While mainstream economics is absolutely false, MMT is half-true. So, Bill Mitchell correctly summarizes “that the Bank of Japan continues to demonstrate the categorical failure of mainstream macroeconomics …”

MMT is correct on these points:
• A growing public debt does NOT cause inflation.
• The limit of growth of public debt is further out than doom-merchants always claimed.
• Fiscal policy is the main game.
• The government has all the fire power it ever needs.
• The central bank (CB) can buy any amount of gov bonds without increasing the inflation rate.
• The CB can maintain yields on gov bonds “at whatever level it chooses, at whatever maturity range it targets, and for as long as it likes.”

But then comes the fraudulent MMT sales slogan: “… normally for most countries it will require continuous fiscal deficits of varying proportions of GDP as the overall saving desires of the private domestic sector vary over time.”

What MMTers never talk about are the distributional effects of a permanently growing public debt.

What exactly happens if the government runs a deficit in an elementary production-consumption economy?#1 From the general macroeconomic Profit Law Qm=Yd+(I−S)+(G−T)+(X−M) follows that Public Deficit = Private Profit if all other variables are taken out of the picture.

So, at the end of the first period, the business sector’s deposits at the CB (= money) are exactly equal to the government’s overdrafts. If deficit spending is repeated period after period, then the government’s debt in the form of overdrafts grows permanently and the same holds for the business sector’s deposits. Under the assumption that the interest rate is zero for overdrafts and deposits at the CB, there is NO interest effect and no interest burden on public debt. The stock of money increases but there is no inflation.

However, things do not stop there. Basically, two liming cases are possible. The government issues bonds and the business sector buys them. Then gov overdrafts at the CB go to zero and business sector’s deposit go to zero and are replaced by the interest-bearing gov bonds. Both sides of the CB’s balance sheet return to zero. The additional money from deficit spending vanishes. The business sector now earns interest which is taxed from the household sector. This is what Bill Mitchell calls corporate welfare.

The other limiting case is that the CB buys the gov bonds. Then gov overdrafts at the CB go to zero but the business sector’s deposits (= money) remain unchanged. The CB switches on the asset side from overdrafts to long-term interest-bearing bonds. This interest increases the profit of the CB and is later on recycled to the government. So, this variant is distributionally neutral with regard to interest.

Reality is between the limiting cases.

So, while MMT is descriptively correct with regard to many monetary phenomena it lacks sound scientific foundations because it is based on a mathematically false sectoral balances equation. Both MMTers and mainstreamers get macroeconomic profit wrong. This is disqualifying for an economist.

Egmont Kakarot-Handtke

#1 The elementary production-consumption economy is for a start defined by three macroeconomic axioms (Yw=WL, O=RL, C=PX), two conditions (X=O, C=Yw) and two definitions (profit/loss Q≡C−Yw, saving/dissaving S≡Yw−C). Legend: Yw wage income, W wage rate, L employment, O output, R productivity, C consumption expenditures, P price, X quantity bought/sold. It always holds Q+S=0 or Q=−S. This is the most elementary form of the macroeconomic Profit Law. The market clearing price is derived as P=W/R. This is the macroeconomic Law of Supply and Demand.

Matt Franko said...

“Why would a bank remain as a Dealer if it is so unprofitable?”

Dealer operations are only one part of the bank ... They pocket the spread on every transaction... it’s profitable...

This doesn’t have anything to do with the results of the transaction creating reserve assets... the CB directly controls reserve levels as part of monetary policy not the “bond vigilantes!”...

And if the CB implements policy to rapidly increase reserves then the depositories have to liquidate risk assets or cut off credit lines (Lehman Bros Sept 2008) or whatever else to comply with leverage ratio requirements...

Causes assets prices to go down... look at China this year Shanghai is down almost 30%... property prices down, etc...

Calgacus said...

AA:Duh! Do you ever read anyone else's comments? Then you should know by now that I understand that bank deposits ARE liabilities for fiat.

Then why did you write a comment that implied you didn't understand that?: "liabilities for fiat that the bank creates one-for-one with the new deposits"
They aren't liabilities "for" fiat. They're liabilities, period. But that is a fine point.
Banks don't create anything one-to-one with new deposits, and never have, so who would suppose that there was some negative feedback coming from a process that never existed?

The liabilities for fiat the banks create wrt the non-bank private sector are largely a sham since the non-bank private sector may not even use fiat, except for physical fiat, coins and bills.

They aren't "sham" liabilities either. There really isn't any such thing. Even if the nonbanks couldn't "use fiat" (which is false) - how would that make the liabilities the banks have toward the nonbanks a "sham"? Answer - it wouldn't and they aren't, and they do provide substantial "negative feedback" - far too much at times, in financial crises.

Here, as in many other places, critics of MMT should look to their own ideas first if they want to practice criticism. I'm glad you said "duh" though. That is the aim, to have everything connected by "duhs". The problem is that there is not enough good "duh" work or "duh" criticism. Far too much pseudo "criticism" that needs more criticism than what it pretends to criticize, that will never pass the "duh" test, because it is more like "MMT is false because it contradicts my 10 personal theories and assumptions" People state wild non-sequiturs and personal theories that nobody else understands or cares about - that nobody else will ever say "duh" to (because they are wrong) - and pretend that it refutes solid and careful work

Or does it matter to you, Calgacus, that citizens are cheated and/or driven into debt by what is, in essence, a government-privileged counterfeiting cartel?

AA: I do not think your analysis and concepts are correct. Nor do I think Matt Franko's or Egmont Kakarot-Handtke's are. If people disagree with the validity of your analysis or the importance of the factors you point out - that does not mean that they are not concerned with negative effects that everyone agrees with. Do you ever think that you just might be wrong? That you might benefit by thinking and writing more slowly, with fewer wild leaps of logic, fewer personal assumptions, theories and vocabulary?

EKH:What MMTers never talk about are the distributional effects of a permanently growing public debt.

This is just not true. They do talk about that, I believe I have given you at least one reference. They just don't wildly exaggerate them and remove them from context. There are nonfinancial assets. It matters a great deal who holds the debt. Most of the time this is the top end of town, true, but even more it is institutions. The positive distributional effects of a permanently growing public debt incurred by following MMT/ New Deal policies are far, far greater than the usually trivial financial effects.

Matt: the CB directly controls reserve levels as part of monetary policy not the “bond vigilantes!”...
Everyone agrees this is just plain false. That was the monetarist contention. Volcker tried and he couldn't do it. Everybody including Milton Friedman concluded it is impossible. CBs control interest rates, not reserve levels.

Andrew Anderson said...

They aren't liabilities "for" fiat. Calgacus

That's just a falsehood. Look at a check - "Pay to the order of ___________ Dollars." And banks settle differences among themselves with fiat account balances at the Central Bank. So admit your wrong here.


They aren't "sham" liabilities either. There really isn't any such thing. Calgacus

It's a sham to be owed fiat that, except for physical fiat, mere coins and bills, one cannot use. One could hope for the complete abolition of physical fiat just so that point will be inescapable to those who deny it.

Even if the nonbanks couldn't "use fiat" (which is false) ibid

Prove it is false except for mere coins and bills which I concede.

- how would that make the liabilities the banks have toward the nonbanks a "sham"? ibid

The non-bank private sector may, except for mere coins and bills, use only bank liabilities for fiat, not fiat itself.

... and they do provide substantial "negative feedback" ibid

Not enough since physical fiat is too unwieldy, too unsafe for effective bank runs by the non-bank private sector.

- far too much at times, in financial crises. ibid

The only reason we have financial crisis is the non-bank private sector may not have debit/checking accounts of their own at the Central Bank and because of other privileges for the banks such as government provided deposit insurance.

Andrew Anderson said...

Do you ever think that you just might be wrong? Calgacus

How can being for equal protection under the law be wrong?
How can being against bank privilege be wrong?
How can insisting that citizens be allowed to use their Nation's fiat be wrong?
How can insisting on genuine as opposed to sham liabilities be wrong?
How can opposing welfare for the rich be wrong?

Matt Franko said...

“Matt: the CB directly controls reserve levels as part of monetary policy not the “bond vigilantes!”...
Everyone agrees this is just plain false. That was the monetarist contention. Volcker tried and he couldn't do it. Everybody including Milton Friedman concluded it is impossible. CBs control interest rates, not reserve levels.”

Calg ever hear of QE? What are you talking about?

Monetary policy has two aspects they use the policy rate AND les frequently the quantity of reserves , this was the whole point of the QEs ie to add system reserves for the depositories to “lend out!”... ever hear of “loanable funds!” ???

It’s “Quantitative Easing”, quantity of WHAT? it’s quantity of RESERVES....

Look at the FRED graph here:

https://fred.stlouisfed.org/graph/fredgraph.png?g=mbnP

They went straight up due to Fed policy of QE adding them and now they are coming back down due to Fed policy of reducing them....

Fed controls reserve levels that is their “job”...





Matt Franko said...

“But QE is fundamentally different from conventional open market operations. QE is conducted in a financial environment in which there are excess reserves outstanding in the financial system. Given the interest rate on excess reserves (IOER), other interest rates and quantities adjust so that banks are willing to hold the reserves supplied by the central bank. It is generally recognized that a financial system flush with reserves, as has been the case in the U.S. since late 2008, is subject to a liquidity trap. That is, given IOER, which is set administratively, if the Fed simply swaps reserves for Treasury bills, then this may have no effect because reserves and Treasury bills might be viewed as roughly identical short-term assets.”

https://www.stlouisfed.org/publications/regional-economist/third-quarter-2017/quantitative-easing-how-well-does-this-tool-work

Matt Franko said...

“Quantitative easing involves central bank purchases of securities in the open market, financed by the creation of bank reserves held at the central bank.”

https://www.brookings.edu/wp-content/uploads/2017/10/bernanke_rethinking_macro_final.pdf


Helllooooo!!!!!

Matt Franko said...

Show me here where Bernake considers the short term effects of this monetary policy on regulatory Leverage Ratios of the Depositories????

Matt Franko said...

Reification of Accounting abstractions from Bernanke here with use of word “hold”: “quantities adjust so that banks are willing to hold the reserves supplied by the central bank.”

You can’t “hold” an accounting abstraction... they are simply recorded in the Accounting statements...

André said...

"And if the CB implements policy to rapidly increase reserves then the depositories have to liquidate risk assets or cut off credit lines (Lehman Bros Sept 2008)"

In 2008 there was no Leverage Ratio requirements and I am sure that banks did not consider bank reserves as risky assets

AXEC / E.K-H said...

Calgacus

I said: ‘But then comes the fraudulent MMT sales slogan: “… normally for most countries it will require continuous fiscal deficits of varying proportions of GDP as the overall saving desires of the private domestic sector vary over time.” What MMTers never talk about are the distributional effects of a permanently growing public debt.’

You disagree: “This is just not true. They do talk about that, I believe I have given you at least one reference. They just don’t wildly exaggerate them and remove them from context.”

When I talk about distributional effects I refer to the core of distribution theory, that is, the relation of wages to profits or what is called the wage share/profit share.#1

The fact of the matter is that Bill Mitchell talks about the “overall saving desires of the private domestic sector” and by this he makes the profit effect of deficit-spending/money-creation disappear.#2

There is NO such thing as the “private domestic sector” there is the business sector and the household sector and the balance of the household sector is saving/dissaving and the balance of the business sector is profit/loss. And both cannot be lumped together to overall saving. Methodologically, this is called the Humpty Dumpty fallacy, politically this is plain fraud.#3

In the MMT balances equation (G−T)+(I−S)=0 for the closed economy, profit does not appear at all. So, MMT’s distribution theory is a priori false.

The correct balances equation reads (G−T)+(I−S)−(Q−Yd)=0. From it follows that Public Deficit = Private Profit. And this tells one that the relation between overall profits and wages, which is generally considered as a distributional scandal, is produced by ― guess who? ― yes by MMT deficit-spending/money-creation.

MMTers NEVER speak about this pivotal distributional effect of their policy because underneath their butoxed social populism they are agenda pushers for the Oligarchy.#4

Egmont Kakarot-Handtke

#1 There is NO such thing as a “labor share of income”
https://axecorg.blogspot.com/2018/09/there-is-no-such-thing-as-labor-share.html

#2 Rectification of MMT macro accounting
https://axecorg.blogspot.com/2017/09/rectification-of-mmt-macro-accounting.html

#3 Down with idiocy!
https://axecorg.blogspot.com/2017/12/down-with-idiocy.html

#4 Keynes, Lerner, MMT, Trump and exploding profit
https://axecorg.blogspot.com/2017/12/keynes-lerner-mmt-trump-and-exploding.html

Calgacus said...

AA:They aren't liabilities "for" fiat.

Like, I said, it is a fine point. They are liabilities first, before the empirical fact that they can be settled by transfer of state money. If what you said was true, then it would not be possible for bank dollars to be more valuable than state dollars, which happened often in the middle ages.

The rest - you're just repeating your non sequitur. The false conclusion "bank liabilities are sham liabilities" does not follow from, has nothing to do with how people can use state money. I do see how your mistake about the "for" suggests the non sequitur a tiny bit, though. Like I said, people might not agree with you because you make wild leaps of logic.

The rule is that when you think something is perfectly obvious and requires no explanation: That's when you're saying something that is jumping to the moon in one leap.

Matt:Calg ever hear of QE? What are you talking about?

Was pretty tired last night. Monetarism was about more monetary aggregates, not reserve levels, though the thought back then was that the aggregates could be controlled through the reserves by the money multiplier, I think. The CB doesn't have fine control of the reserves though, and next to none over the aggregates, as shown by the 70s-80s. But what I was saying was largely wrong. It can happen.

Calgacus said...

EKH: There is NO such thing as the “private domestic sector” there is the business sector and the household sector and the balance of the household sector is saving/dissaving and the balance of the business sector is profit/loss. And both cannot be lumped together to overall saving. Methodologically, this is called the Humpty Dumpty fallacy, politically this is plain fraud

I have to say, I think this is the weirdest, most illogical, most anti-scientific thing ever said here. It is unimaginably, strangely, uniquely wrong.

The "sectors" are like photographs of action on a stage. People can decide how to point the camera and how much of the action they can take in. Somebody can take in his photo exactly what somebody else used two photos to take in. There isn't any law about it. One isn't valid or invalid. It is just how you point and focus the camera.

You're saying that some particular way that some people decided to describe and divide up economic activity was engraved in stone AND even more incredibly, that there is some mystical problem with putting together what they happened to separate.

This is a very rare case when someone is "reifying" excessively and more. Almost all criticism of reifying is pernicious nonsense IMHO - everybody reifies all day long and should. Nobody can talk without reifying.

Again, not sure if I posted this before, but the weirdness of this is underscored by the fact that in practice, one has to understand and define the private domestic sector to get the actual household and business numbers. Was reading about Morris Copeland and the flow of funds a while ago and noted that he said that the way these household numbers are calculated relies on aggregated numbers - the forbidden "private domestic" ones! Because of the many small proprietors that mix their household and business accounts- So people have to or had to look at combined numbers, which is all that they have, and then based on predefined proportions gotten from surveys, impute part of the total to "household", part of the total to "business".

Redefining common words like Humpty-Dumpty is not at all the same thing as an idiosyncratic and incredibly obsessive-compulsive and entirely arbitrary attitude toward definitions. So if anyone is acting like H.D., it is E.K.H.

Rule: If people talk about methodological fallacies, especially using fancy words, they're almost certainly committing, not describing them.

AXEC / E.K-H said...

Calgacus

You say: “I have to say, I think this is the weirdest, most illogical, most anti-scientific thing ever said here. It is unimaginably, strangely, uniquely wrong.”

I have news for you. You cannot think, that’s merely self-delusion. To blather and to think are quite different things.

You maintain: “You’re saying that some particular way that some people decided to describe and divide up economic activity was engraved in stone AND even more incredibly, that there is some mystical problem with putting together what they happened to separate.”

No, I have proved that MMTers are too stupid for the elementary mathematics that underlies macroeconomics and that they got the foundational concepts profit and income wrong.#1 In this, they follow in the footsteps of Keynes and the Post-Keynesians.#2, #3, #4

It is pretty obvious that if the concepts of macroeconomic profit and income are ill-defined distribution theory runs straight into a dead end. This happened also to MMT.

Economists, including MMTers, are scientifically incompetent. Their foundational concepts lack consistency and this is why this sorry bunch of blathering Humpty Dumpties was unable in the past 200+ years to rise above the proto-scientific level.#6, #7

Get out of wish-wash and answer the question which of the two macroeconomic relations is true/false:
(i) (I−S)+(G−T)+(X−M)=0
(ii) (I−S)+(G−T)+(X−M)−(Qm−Yd)=0

Egmont Kakarot-Handtke

#1 Wikipedia and the promotion of economists’ idiotism (II)
https://axecorg.blogspot.com/2018/07/wikipedia-and-promotion-of-economists.html

#2 Macroeconomics ― dead since Keynes
http://axecorg.blogspot.com/2016/12/macroeconomics-dead-since-keynes.html

#3 Post Keynesianism, too, is indefensible
https://axecorg.blogspot.com/2017/09/post-keynesianism-too-is-indefensible.html

#4 Why Post Keynesianism Is Not Yet a Science
https://papers.ssrn.com/sol3/papers.cfm?abstract_id=1966438

#6 Profit, income, and the Humpty Dumpty Fallacy
https://axecorg.blogspot.com/2018/02/profit-income-and-humpty-dumpty-fallacy.html

#7 Humpty Dumpty is back again
https://axecorg.blogspot.com/2015/11/humpty-dumpty-is-back-again.html

Matt Franko said...

“The CB doesn't have fine control of the reserves though, ”

Yes I’d agree with this “fine point”... but macro level they can increase system level reserves by significant percentages in a very short period of time that depositories have to react to by marking down prices of risk assets in response in order to maintain total Leveragd ratio above threshold...

Causes price instability in risk assets....

Matt Franko said...

Calg is correct here: “You're saying that some particular way that some people decided to describe and divide up economic activity was engraved in stone AND even more incredibly, that there is some mystical problem with putting together what they happened to separate. ”

Egmont in systems analysis any analyst can establish a system boundary wherever they want if it leads to better understanding and accurately predictive results...

AXEC / E.K-H said...

Calgacus, Matt Franko

MMTers call themselves Progressives and are the first and loudest to condemn the distribution of income/financial wealth between the one-percenters and the ninety-nine percenters as unjust, absurd, socially destructive, etcetera.

The MMT policy of government deficit-spending/money-creation is the very cause of this distributive outcome. Because in a three-sector economy with the household sector’s budget balanced the deficit of the government sector is exactly equal to the surplus of the business sector.

So, there is a logical contradiction in the position of MMTers.

This contradiction is papered over with a semantic shell game, that is, by calling the surplus of the business sector (= macroeconomic profit) surplus of the private sector. The term private sector falsely suggests that WeThePeople is part of it.#1

This semantic shell game is a political fraud to obscure the fact that Progressives are agenda pushers for the Oligarchy.

Academic MMTers are either stupid or corrupt or both. They have to be expelled from academia. This applies first of all to Bill Mitchell.

Egmont Kakarot-Handtke

#1 For the general case, the axiomatically correct sectoral balances equation is given by (I−S)+(G−T)+(X−M)−(Qm−Yd)=0

S400 said...

EKH. Produce value for people instead of using up energy in order for you to be online trolling.

Andrew Anderson said...

The false conclusion "bank liabilities are sham liabilities" does not follow from, has nothing to do with how people can use state money. Calgacus

It's true the non-bank private sector can SAVE fiat such as at US Treasury Direct but before that saved fiat can be USED it must be transfered to a member of the banking cartel.

So tell me what good fiat is if it can't be used such as by check or by debit card?

So tell me Calgacus, why shouldn't individual citizens, businesses, State and local governments, etc. be allowed debit/checking accounts at the Central Bank itself?

Calgacus said...

AA:So tell me what good fiat is if it can't be used such as by check or by debit card?

Because you can pay for stuff with it. It is legal tender for all debts public and private, you know. You can get credit and debit cards with it, too.

So tell me Calgacus, why shouldn't individual citizens, businesses, State and local governments, etc. be allowed debit/checking accounts at the Central Bank itself?

No reason why they shouldn't. I'm for it, for Post Office Banking for instance. But like most of your proposals it just would not do all that much. It doesn't address the real problems.

Andrew Anderson said...

You can get credit and debit cards with it, too. Calgacus

Not to my knowledge: Though TreasuryDirect deals in fiat it has no checking or debit services and while DirectExpress® offers a debit card it does not deal with fiat but through a bank called Comerica.

Until you can prove otherwise, my point stands: the non-bank private sector may NOT use fiat except for mere coins and bills.

But like most of your proposals it just would not do all that much. ibid

First of all, I do not advocate a Postal Bank but merely debit/checking accounts at the Central Bank for all who desire them but free for individual citizen accounts. A Postal Bank, if it lends, creates deposits and thus its deposits cannot be said to be fiat itself but mere liabilities for fiat. What we need is for the non-bank private sector to be able to directly use fiat with the same ease and safety as commercial banks do and nothing less.

The use of those accounts would make bank runs much more potent:

1) by avoiding the need for physical cash (i.e. coins and bills) withdrawals. One would simply make a deposit into his/her CB account of a check written on his/her commercial bank, etc. account without the inconvenience and danger of using physical cash.

2) by transferring reserves completely out of the banking system to suppress the ability of a bank being run-on to borrow from other banks.

3) Since there would be no settlement differences between banks and non-bank accounts at the CB, every transfer of deposits from a bank to a non-bank account (and vice versa) at the CB would transfer reserves, 1-for-1 with the deposit move.

Of course all other privileges for the banks, such as deposit insurance and lender and asset buyer of last resort would also need to be abolished to make bank runs not just a true threat to individual banks but to the entire banking system!

But that would ruin the economy(!!!), you might say. No it wouldn't because with 100% private banks with 100% voluntary depositors all bank deposits would then be, by definition, at-risk and not-necessarily-liquid. The economy should survive a banking crisis while the wreckage is cleared because of the risk-free, always liquid individual, business, State and local government, etc. accounts at the Central Bank itself - which would constitute an additional, but risk-free, always liquid payment system to the one that must work though banks, etc.

So eliminating the ability of the banks to hold the economy hostage "would not do all that much"? And that's just one positive thing a truly ethical fiat and credit system would provide among quite a few.

The Economists Challenge said...

"Get out of wish-wash and answer the question which of the two macroeconomic relations is true/false:
(i) (I−S)+(G−T)+(X−M)=0
(ii) (I−S)+(G−T)+(X−M)−(Qm−Yd)=0"

The second equation is clearly correct..but the problem is that everyone thinks it should be changed or that the elite should have less money, or more of it should be distributed to the poor, or there should be more equality, or some other BS along these lines...what no one seems to factor into their political rhetoric is that our whole 'economy' is based on a fundamental principle of law called the 'right to individual autonomy', and this right includes the right to form debtor/creditor relations and to hold claims against others (i.e. financial wealth). Is everyone suggesting we scrap this law and turn our whole world into a socialist based robotic matrix where everyone has to work according to someone's ideological plan? Who is the person who gets to determine this plan including how many hours I must work a week and what that actual work is going to be in order to satisfy your definition of what I must contribute to society to justify existing in the same space as you?

You all want to get rid of capitalism and replace it with some BS idea of a utopian society based on what? Equality? What the hell is that? The fact that we have these arguments on questions of economics proves there is no such thing as equality, because not everyone is a socialist just like not everyone is a capitalist.

Capitalism should be allowed to exist just like socialism should be allowed to exist, and the two systems should be allowed to operate on their own respective monetary circuits. But noooooooo, no one wants this, instead they would rather fight over who has the best ideology and impose it on everyone else.

André said...

"Get out of wish-wash and answer the question which of the two macroeconomic relations is true/false:
(i) (I−S)+(G−T)+(X−M)=0
(ii) (I−S)+(G−T)+(X−M)−(Qm−Yd)=0"

The first one is true by definition (I mean, the standard definition of GDP). The second one is false if you follow the standard definition of GDP.

If you created another definition for the GDP, you should explain it better, because your pseudo-articles are too bad in explaining anything. They are good at self-referencing and at claiming big things without any support by real world evidence.