Monday, April 14, 2014

Bill Mitchell: Video Of Toronto Presentation On "Integration, Currency Unions and Balance Payments"

   (Commentary posted by Roger Erickson)

This was recorded by INET, as part of the "Human After All" economics conference.

Scroll ~4/5ths down the page to "Friday April 11,2014 ("Integration, Currency Unions, and Balance of Payments")" - where Bill's talk starts at ~36:45 (2nd in a 4-person panel, with subsequent discussion)

Bill uses this presentation to review how and why the entire process for building consensus on the common euro-monetary union was a disaster from the outset, given the arbitrarily fixed - not dynamic - input biases maintained throughout.

This is a classic lesson in how adaptive systems can and cannot work, which is also echoed in classic campaign theory, whether business, political or military, or all forms of dynamic navigation.

The simplistic statement of that lesson is that all the dynamic adjustments required for tuning the growth (or navigation) of complex systems cannot be predicted, so that the easiest way to proceed is to set a Desired Outcome and then simply make, on an ongoing basis, any & all adjustments dictated by context, in order to approach that outcome.

Conversely, the classic failure pattern for all naive beginners is to try to dictate or predict given methods or tactics up front, and then attempt to "insist" that predetermined presumptions can be forced to guide populations to where they want to go. This path, of course, generates all the later excuses that "no one could have predicted" the unpredictable. [Well no shit, Sherlock Cheney!]

Given how many disciplines HAVE known these lessons about adaptive systems - literally for thousands of years, even the entire history of the human species - it is truly astounding that the economics discipline has (along with various "organized" religions, aristocracies, criminal gangs, and political parties) managed to ignore or deny learning the recurring lesson. At least politicians, royalty and crooks have the honesty to admit that they just lie, constantly, about everything.

What excuse does the economics profession have? That they're bought by the same lobbyists that buy politicians? And who dole out pennies from their ill-hoarded public fiat to "fund" public education systems that should be (and once were) publicly mandated as an absolute requirement for a growing culture?


Unknown said...

At one point Bill says that the single ECB interest rate was "too low" for Greece, Spain, Ireland etc.

This seems odd given that Bill advocates permanent ZIRP..

Peter Pan said...

What some would term a disaster, is a desired outcome. If all else fails, move the goalposts.

I hope BM appreciated Canadian hospitality and civility.

Peter Pan said...

What excuse does the economics profession have? That they're bought by the same lobbyists that buy politicians?

That's not an excuse, that's an incentive. Shitloads of fiat to the right people for a desired outcome. All nicely predictable.

Roger Erickson said...
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Roger Erickson said...

Actually, the point that stood out the most, for me, was the "hypocrisy & austerity" promoted & led by the largest German industrial, Volkswagen, against it's own citizens & employees - in the form of an "internal devaluation" of labor wages.

And the vaunted German trade unions accepted serfdom, "on behalf" of their working class members.

And all for what? To maintain Germany's right to send things to other countries?
These people can build CERN, and they can't figure out anything better to do with themselves than the S&G pact? That smacks of a pack of Central Planners failing, and urging one another to "slow down" the serfs, Tsar-style.

As the other comments (here & at MNE) indicate, the original issue runs far deeper than just the economics profession. Nevertheless, the main tool in the farce seems to be the systematic misuse of "economic theory" to miseducate whole electorates, and trap them into lower adaptive rates.

What, exactly, are they afraid of? The future? None of this makes any sense.

Except as another setback for SETI. In retrospect, it's downright embarrassing.

Roger Erickson said...

re: Interest rates "too low" ... or ZIRP.

No confusion. MMT founders talk openly of different "states" for fiat currency operations.

1) "IF" you're gonna retain T-securities & CB-managed inter-bank interest rates ..... then manage the rates appropriately, as workable (if not ideal) policy.

2) Or, best policy, use ZIRP, and dramatically simplify monetary policy.

That's like saying that you can ride a bike backwards IF YOU INSIST, but then must be more careful, since it's more complicated. Nevertheless, the CONSISTENT suggestion is to ride it forward.

Roger Erickson said...

Kudos to Bill for coming right out and advising Europe to fold the existing euro-currency-zone.

The current "monetary masochism" is deeply counterproductive, and delaying adaptations serves no excusable utility.

Ever seen a whole continent "cutting" itself?

Roger Erickson said...

Richard Koo takes the predictably easy way out, thereby offending none?

Does Martin Wolf strike any as self-promoting?

Overall, it's tragecomedy,
UK (home of financial fraud, trashes old enemy France)
France is fixated on recent German relations
Ponderous Germany is still finding that both France & UK are running political circles around it - and feeling like the proverbial deer in the headlights, again, about to get up off the road and kick someone, anyone, yet again.

Ignored in all these talks about blame is why on earth most of the little countries on the periphery, from Greece to Poland to Finland ... went along with the big idiots. Czechs alone, of the central-europe actors had the sense to stay out of the euro zone (along with the traditional maritime trading nations, Sweden-to-UK).

A fascinating story. No criticism for all the politicians in small countries who simply sold their electorates down the obvious river?

Tom Hickey said...

If a country doesn't issue its own currency and borrows to much in a currency it doesn't issue, then it can encounter solvency issues. Low rates encourage borrowing, which in the EZ is in euro. So the periphery became indebted in a currency they neither control nor even have much of a say about managing, since the core is in control.

Jose Guilherme said...

There is a possible way out for small periphery countries to regain their independence under the present rules of the euro game - one possibility that has not (yet) been presented by Bill Mitchell and other MMTers.

I tried to pursue this line of reasoning in the following paper published on slideshare:

See especially the footnote number 10 on page 9, for further discussion.

Comments would be much appreciated.

Roger Erickson said...

By the end of the discussion here, the concept of Europe "lacking adjustment mechanisms" has been repeated many times over.

That simplistic statement, however, completely leaves out the fact that there's a lack of innovative people willing & able to CHANGE methods & mechanisms when & as needed.

Anyone feel another Napoleon, or worse, coming on?

Where's the Marriner Eccles of the Euro-Parliament, cutting through all the BS, and stating the obvious policy suggestions TO the clear culprits?

What is the Euro-Parliament saying to the citizens of the euro-zone? The EZ has no adaptive mechanisms? "Let them them eat innovative leadership?"

They might want to be more careful what they wish for.

Roger Erickson said...

The final note? How credible will the imagined threat of Russia be in herding Europe into further coordination?

Those are questions for all the voters & politicians who are NOT economists. Almost no point in asking that question to a bunch of economists. :)

Roger Erickson said...

Sorry, don't want to sign up for yet another account, demanding access to my linked-in or local contacts. So I'll comment here.

Only immediate hurdle I see is the boldness required for Portuguese politicians & bankers to step outside current channels. Might lessen their usual advancement routes, of moving on to the European Parliament, the ECB, BIS, IMF, WB ... or taking cushy jobs with multi-nationals and/or the many captive think-tanks that such lobbyists fund so well.

In short, it will take the sort of bold leadership that has been missing all along.

A minor issue, surely. :(

Peter Pan said...

I suspect that most EU voters would prefer affordable Russian gas to another cold war.

Unknown said...
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Unknown said...


nice paper. Clever, practical, possible... perhaps.

I saw one thing I wasn't sure about. You say the CGD bank could get around possible capital constraints if the Portuguese government added new capital to the bank... That means the government would borrow from the bank and then use that money to inject capital into the bank...

Jose Guilherme said...
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Jose Guilherme said...


Thanks for your comments.

The Portuguese government could simply order the public sector pension funds to inject capital in CGD bank or - perhaps even better - in a private sector bank.

In fact the government has recently instructed the funds to buy 4 billion euros in government debt. That was too timid a step. The funds could instead inject 4 billion or more in a couple of banks - and the banks would automatically be free to lend ten times as much to the government. The government would then use the new deposits to pay the troika creditors via TARGET2.

Let's pick up the case of Espírito Santo Bank, the only private sector bank that refused troika aid. It has been posting enormous losses.

The Bank has about 7 billion of Net Worth (book value). Let us say the pension funds inject 7 billion of fresh capital in the bank. The bank could then lend 70 billion euros to the government.

The troika package for Portugal was about 78 billion euros. In a single stroke, the government could use that new funding to free itself from more than 90% of that burden.

And the private shareholders of the bank (as well as the pension funds) would profit immensely from this.

With a 5% spread on a 70 billion euro loan (lending to the government, long term, at 5% and getting automatic financing from the central bank at nearly 0%) that would mean 3.5 billion euros in profit for the first year. A 25% ROE.

Last year the bank posted a loss of 600 million euros. With this operation it would have an impressive turnaround. A result that might guarantee escaping the risk of bankruptcy. With no need to resort to public aid.

And the country would free itself of its foreign debt burden. By courtesy of the euro rules and ECB/NCB zero rate financing for commercial banks.

It would all be perfectly legal. An implementation of basic rules of the euro system.

Why not try it?

Jose Guilherme said...


It's true that the Portuguese politicians and bankers have shown an impressive deficit of "cojones", as the Spaniards would say, but that might change one day, if incentives change.

For instance Portugal's largest private banking group (Espirito Santo) has been posting huge losses. It refused troika aid in order to preserve its independence. It might me saved, however, if it just decided to lend massively to the government at 5%, finance itself at the Portuguese central bank at nearly 0% and then transfer government deposits abroad in order to pay the troika creditors .

That kind of incentive (billions in profits from a 5% spread) might help concentrate minds and lead towards some bold decisions - perhaps.