Brad DeLong has written a primer on Modern Monetary Theory (MMT), and just gave an important lesson about MMT: if you want to understand MMT, you need to read a primer written by a MMTer. I am not going to hold myself out as an expert on DeLong's thinking, but I would argue that a fear of bond market disruptions is a constant theme in his writings.Bond Economics
On August 1, 2018, the 10-year Japanese government bond yield, shot through the roof (albeit a very low one). Yields shifted from 0.05 per cent on July 31 to 0.129 on August 1, which was the largest one-day rise since July 29, 2016 (when the yield rose 0.101 per cent). The Financial Times article (August 1, 2018) – Japanese bond market jolted as traders test BoJ resolve – wrote that “traders wasted no time in testing the Bank of Japan’s resolve to loosen its target range for the debt benchmark”. So what was that all about? And what key point does it demonstrate that seems to be lost on mainstream economists who continually claim that government debt is, or can become a problem once bond markets demand higher yields? The Japanese bond market has shown once again that private bond traders cannot set yields on government bonds if the central bank intervenes. Next time you hear some mainstream economist claiming a currency issuing government is running deficits at the will of the investors (read bond markets) politely tell them they are clueless. Japan once again provides the real world Modern Monetary Theory (MMT) laboratory – every day it substantiates the underlying insights contained within MMT and refutes the core mainstream propositions. The bond market over the last month or so demonstrates that the Japanese government is increasingly net spending by using credits created by the Bank of Japan, whatever else the accounting structures might lead one to believe. With inflation low and stable, these dynamics surely put paid to the various myths that a currency-issuing government can run out of money and that central bank credits to facilitate government spending lead to hyperinflation....Bill Mitchell – billy blog
The article had a picture of the latest progressive political star – Alexandria Ocasio-Cortez with the caption that she:
... backs the view that restraints on a government’s spending are primarily set by the amount it can borrow without fuelling inflation.Progressive types then thought it was useful to retweet this incessantly for a few days.
My response – I certainly hope that Alexandria Ocasio-Cortez does not back that construction of the limits on spending for a currency-issuing government.
And I certainly hope that progressives do not embrace it either.
Why?
It is fundamentally incorrect and just reframes the way neoliberals think and uses their sort of language....
Last week (February 8, 2018), we witnessed the US Senate spectacle with Rand Paul embarrassing himself with his lack of economic knowledge but also embarrassing both major parties – the Republicans for their gross hypocrisy and the Democrats for their gross idiocy. The – Congressional Record – of Paul’s speech (starting S817) is a classic. Also, last week, the stables were stirring apparently, as the ‘bond vigilantes’ were strapping on their saddles and getting ready to make the US government suffer for its so-called fiscal ‘ill discipline’. These characters apparently emerge out of the darkness of fiscal profligacy to defend our interests and force the government to run surpluses. Fantasy stuff all round. In fact, Rand Paul should resign and get a job he is more suited for (which would be?) and the bond vigilantes should make sure their Shetland ponies are not to wild for them. These bond traders play this elaborate game of bluff and pretend they have the power over the government. In fact, they are mendicants queuing up for their daily dollop of corporate welfare and the government could play them out of the game anytime it chose to. The problem is that the bluff works because governments are captive to the neoliberal nonsense that my professsion preaches.Amazing that anyone still believes the "bond vigilante" nonsense after "Bond king" Bill Gross was ignominiously humbled.
The topic centres on an agreement between the US Federal Reserve System (the central bank federation in the US) and the US Treasury to peg the interest rate on government bonds in 1942. What the agreement demonstrated is that a central bank can always control yields on government bonds, which includes keeping them at zero (or even negative in the current case of Japan). What it demonstrates is that private bonds markets, no matter how much they might huff and puff about their own importance or at least the conservatives who are ‘fan boys’ of the bond markets), the government always rules because of its currency monopoly….Bill Mitchell – billy blog
By the time this blog is published I will be heading to Malta. I will have very little spare time in the coming days so the blogs will be shorter and perhaps non-existent or as normal as the case might be. There was an article in the ABC Opinion series (March 8, 2017) – Donald Trump’s presidency might be short-lived, because ‘something’s gotta give’ – which more or less claimed that the private US Treasury Bond markets had the capacity to bring Donald Trump’s Presidency to a halt. Apparently, if the bond markets form the view that Trump won’t deliver on his promises they can somehow end his term in office. What, by driving yields up? Not likely. And even if there was a way that higher US Treasury bond yields had some link to his political tenure, the central bank could control the yields at whatever level they wanted....Bill Mitchell – billy blog
The Japanese bond market has been very interesting in the last week proving yet again that private bond markets cannot set yields on government bonds if the government does want then too. Next time you hear some mainstream economist claiming a currency issuing government is running deficits at the will of the investors (read bond markets) politely tell them they are clueless. Japanese once again provides the real world Modern Monetary Theory (MMT) laboratory – every day it substantiates the underlying insights contained within MMT and refutes the core mainstream propositions. The financial media referred to the Bank of Japan as putting a whipsaw to the bond markets, which in context means that the BoJ is forcing the ‘markets’ into confusion (Source). The bond markets have misinterpreted recent Bank of Japan conduct in the JGB markets (less purchases than expected, and even missing a scheduled buy up) as a sign that the Bank was weakening on its QQE commitment from last September that it would hold the 10-year JGB yield to zero and thereby allow the longer investment rates to fall. Why they doubted that commitment is another matter but within a few days over the last week the Bank demonstrated that: (a) it remains committed to that target; and (b) it has all the financial clout it needs to enforce it; and (c) the bond market investors do not call the shots....Bill Mitchell – billy blog
I read a report on the American news network CNBC the other day (November 15, 2016) – The bond vigilantes are back, and Trump better pay attention – which included some so-called experts in a video claiming to know something about bond markets. The report asserted that “bond vigilantes” might return to force the new US President to “tone down his spending” (as they allegedly did when Bill Clinton was in office). One expert said “we’ve got fiscal policy again and … the prospect of higher interest rates and inflation could even herald the return of the bond vigilantes”. Idiot is a polite term for him. The journalist and the commentators invoked should take time out and learn about what is happening in Japan, which remains the best Modern Monetary Theory (MMT) ‘laboratory’ there is. The Bank of Japan in now putting into operation the decision it took in September 2016 to buy unlimited amounts of Japanese government bonds at a fixed-yield. Which means? In short, it will control the yields across all bond maturities from 2-year out to 40-year and will set them at whatever level they choose. Oh, won’t the bond markets prevent that happening? How? For the bond markets it is a case of “like it or lump it”. Once again Japan demonstrates that mainstream macroeconomic theory is devoid of understanding....Bill Mitchell – billy blog
So, I suspect that these recent rate hikes are not the result of the Russian Bond Market Vigilantes protesting Russian policies and the Russian Central Bank losing control but rather an example of the market rationally responding to the forward guidance of the Russian Central Bank.Overlapping Consensus
On June 2010, Halligan gave an – Interview – to CNBC about the impact of : “If this policy isn’t inflationary, I’m a banana!”
During that interview he claimed the combination of “a big budget deficit and the Bank of England’s quantitative easing policy” would cause inflation to get get worse.
He said:This really is economics 101 … We’re running a budget deficit of 12-13 percent of GDP, if that’s not inflationary I am a banana …
Inflationary expectations start to spiral once inflation is above a significant level
He also claimed that the bond market would see the higher deficit and eventually stop funding the government. This is a government that issues its own currency.
The following graph (courtesy of the BBC) shows the evolution of the Consumer Price Index and the Retail Price Index in the UK since 2000.Bill Mitchell – billy blog
Britain is now heading towards very low inflation.
Oh My Goodness: debt financing by the central bank! Could cause bond yields to rise! Vigilantes on strike.
No, you morons. Government deficits always increase reserves in the banking system. That places downward pressure on the overnight interbank lending rate. Selling bonds normally relieves that pressure. But if you’ve already achieved ZIRP (zero rate target) then you don’t need to sell them.Economonitor
Bottom line: the deficit is mostly an endogenous variable – the result of how existing fiscal policy interacts with private sector savings and consumption decisions. In economic parlance, the deficit is the result of an ex-post accounting identity, not an ex-ante economic variable to target for economic policy. The deficit automatically increases during an economic crisis, as it did after 2009 everywhere in the industrialized world. The deficit also automatically declines when private net savings declines, as it does when an economy recovers from a private sector debt crisis. That’s what’s happening now. In today’s circumstances, it is completely unrealistic to expect high levels of inflation that would force the central bank to raise policy rates. Right now, inflation and inflation expectations are actually decreasing, not just in the US but globally.Credit Writedowns
...central banks are doing the same thing with near zero-bound yields and effective caps on higher rates via quantitative easing.PIMCO Investment Outlook
There is a lot of money to be made in the 2013 financial markets by teaching some people a lesson on how money works.econoblog101
This five part series will explore at length (warning!) and in detail (another warning—wonk alert!) the MMT perspective on the debt ratio and fiscal sustainability. While the approach suggests a macroeconomic policy mix and strategies for both fiscal and monetary policies that most neoclassical economists currently believe are unsustainable, ultimately the MMT preference for a significant role for fiscal policy in macroeconomic stabilization is shown to be consistent with traditional neoclassical views on fiscal sustainability.
This first part defines the correct measure of the national debt and then looks at the mathematics of debt service and the debt ratio.New Economic Perspectives
