Friday, January 23, 2015

Warren Mosler — The latest QE policy removes ECB ‘conditionality’

This time it’s different. As part of this broad based fight to reverse the current deflationary forces, the national CB’s will now be buying their own nation’s debt, thereby, for all practical purposes, eliminating default risk. And with no mention of fiscal conditionality. Taken at its word, this means the latest QE policy has removed the ECB’s leverage over national govt fiscal policy, as the ECB did not tie it’s securities purchases to fiscal compliance. 
Therefore Greece and Italy, the two members desiring fiscal expansion, are operationally free to do so without the threat of default driving up their interest rates. They may face EU penalties, etc. but those are a very different matter than the prior default risk. 
So the door is now open to anyone bold enough to step through. However they probably don’t know it and probably wouldn’t go there if they did…
The Center of the Universe
The latest QE policy removes ECB ‘conditionality’
Warren Mosler

22 comments:

mike norman said...

He's been saying "euro bullish" for the last 3000 points down in the euro.

He's been saying the US economy is going to go into a recession for the past three years based on a "shrinking deficit."

All I can say is listen to him at your own risk.

Matt Franko said...

"QE per se is a ..... strong euro bias "

I dont see how at all....

Ken said...

Because it removes net interest payments from the economy, thus fewer Euros in circulation than otherwise.

Kristjan said...

Plus those excess reserves end up being taxed with negative interest rate.

Matt Franko said...

K&K,

EUR/USD is collapsing.....

The continued austerity in the EZ will cause EZ exporters to continue to lower their offers to US customers in order to make up for lost domestic sales (race to the bottom/ie becoming "more competitive" blah blah...).

Banks have to react to these changes in the real terms

Less USDs required for same product means USD stronger from time1 to time2... in real terms

"Fewer Euros in circulation" is a monetarist QTM phrase..... and also doesn't have any application to the subject which is the EUR/USD price relationship. .

Its about price not quantity. .. specifically here the price of a Euro in USD terms....

If EZ exporters are lowering their prices for financed exported goods in USD terms the banks (self-interested) are going to react to this negative development by requiring MORE EUR balances in exchange for a USD balance than before (why would they accept LESS? Being nice? These f-ing people would sell their own mothers...).. more EUR per USD means the EUR is weakened. ..

Banks as fiscal agents of the govt (the "money" monopolist) are the price setters.... and they are self interested. ..

In this way fiscal austerity imposed on an export nation/zone acts to weaken the exchage rate with the import nation.... if the exporters react to the local austerity by reducing the price of the goods in terms of the import nation's currency. Ie race to the bottom ie "more competitive" ie non-bank sector is screwed by zombie morons in govt sector acting in concert with zombie morons in bank sector as usual....

rsp

A said...

Warren is totally wrong about this. The ECB QE program does have strict conditions for countries such as Greece:

http://www.bloomberg.com/news/2015-01-22/draghi-pressures-tsipras-as-greece-hung-outside-qe-plan.html

mike norman said...

Of course he is wrong. It's obvious he is wrong. He's like the "inflationista's" continually warning that hyperinflation is coming from CB monetary operations. The euro has been collapsing. The US economy has been beating all GDP estimates and the deficit is down by three-fourths since 2010.

A said...

how do you make sense of all that if you think MMT analysis is correct?

Tom Hickey said...

Private investment was picking up speed and tax revenue was increasing, especially due to investment in energy — which is falling apart now.

A said...

MMT, at least that put forward by Mosler, doesn't seem to put any emphasis on private investment as an independent variable - everything is seen to be driven by the government budget balance. Hence we get the prediction that a falling deficit means a weaker economy, which turns out not to be correct in this case it would seem.

Ryan Harris said...
This comment has been removed by the author.
Matt Franko said...

"everything is seen to be driven by the government budget balance."

Thats like putting your hand on top of an electric motor and noticing that it is getting warmer at the same time as it starts to increase RPMs/output and thinking that somehow the increase in temperature of the motor is causing the motor output to increase....

Jose Guilherme said...

The US economy has been beating all GDP estimates and the deficit is down by three-fourths since 2010.

Right. And this can all be analysed neatly in terms of "Krugman´s cross" model - fully consistent with MMT, btw - here:

http://krugman.blogs.nytimes.com/2009/07/15/deficits-saved-the-world/?_r=0

In the U.S. private demand has been going up (a rightward shift of the private sector curve), thus increasing GDP and reducing the public deficit.

In many countries of the eurozone it´s been the reverse - reduced government spending and/or higher taxes (an "austerian" leftward shift of the public sector curve) have caused decreases in both GDP and the ex-post budget deficit.

mike norman said...

While it might be true that in the very long term QE "makes the currency harder to get," the statement ignores the additional horizontal money (bank money) created as a result of increased credit demand brought about by lower rates. That can persist for some time, at least until the private sector's ability to service the debt becomes problematic. For every saver there is a borrower.

Roger Erickson said...

"MMT, at least that put forward by Mosler, doesn't seem to put any emphasis on private investment as an independent variable"

Hardly! All discussions of fiat currency operations acknowledge that tremendous variations may occur over time. Private "demand leakages," nevertheless have to develop & dissipate within the framework of existing fiat currency operations.

As Warren says, reality on the street is always a function of policy.

Policy follows political will, which - eventually, not instantly - follows aggregate demand, and aggregate WILL.

None of that can accurately predict day-to-day variance.

I'd say lighten up. And do NOT try to use the MMT framework to drive day trading.

NeilW said...

"While it might be true that in the very long term QE "makes the currency harder to get,""

I doubt that.

The bit that gets missed, IMHO, is that the government will spend an amount based upon what it can get away with politically. Because spending makes governments popular.

Bonds moving to the central bank increase the income of the government usually - via the central bank dividend. And QE makes any political threat of 'bond vigilanties' less credible (of course it is never credible in reality, but we're talking politics here).

So that means that government can open the spigot. My feeling is that the amount of interest 'saved' by QE is leaked out in the form of less tightening of tax rates and less austerity than would otherwise be the case.

So the amount of money injected is the same, it just dribbles out via a different channel with slightly large balance sheet totals.

QE is about giving the other half of the government sector political clubs to beat back the morons suggesting government is about to go broke.

NeilW said...

"Because it removes net interest payments from the economy, thus fewer Euros in circulation than otherwise."

It doesn't though. The central banks pay dividends to their distribution shareholders.

Plus the political environment is changed by the actions - which Warren does allude to at the very least.

Ken said...

"It doesn't though. The central banks pay dividends to their distribution shareholders."

Well, I don't know how it works in Europe, but in the US this makes little difference, because here Federal Reserve member banks are in for a statutory fixed amount of shares, on which they receive six percent, and that's it. The vast majority of central bank profits are remitted back to Treasury, which effectively removes them from circulation.

Matt Franko said...

Roger this all goes towards technical credibility. ...

From the wiki on 'prediction':

"In science, a prediction is a rigorous, often quantitative, statement, forecasting what will happen under specific conditions; for example, if an apple falls from a tree it will be attracted towards the center of the earth by gravity with a specified and constant acceleration. The scientific method is built on testing statements that are logical consequences of scientific theories. This is done through repeatable experiments or observational studies.

A scientific theory which is contradicted by observations and evidence will be rejected. "

So we have to be right or we will be rejected.

Roger, economists do not even record what the govt is spending in their models or what their fiscal agents are lending....

This is like looking at the health of an animal and recording what it is defecated and urinating and energy expended but not looking at what it is eating or drinking... and then trying to predict the health of the animal....

We are all good people in this but just being good people isn't enough... we also have to exhibit technical competency.... sometimes in pursuit of this competence we have to "go back to the drawing board" in areas.... its normal...

Rsp

A said...

Neil,

QE is supposed to reduce bond yields, meaning that new issues pay less interest, thereby reducing net interest payments by government.

Think of the UK government recently refinancing its age-old debts at new super-low interest rates (what Osbourne incorrectly called "paying off the debt").

Matt Franko said...

Warren is doubling down... from his latest:

"And while lower oil costs are a plus for most euro consumers, the lower cost of imports adds to the trade surplus, which is a force for a stronger euro."

Jose Guilherme said...

But only a minor force, because financial flows usually dwarf trade flows.