Friday, September 21, 2018

John Weeks — Why the public debt should be treated as an asset

Overt money financing.

Open Democracy
Why the public debt should be treated as an asset
John Weeks | Professor Emeritus, School of Oriental & African Studies, University of London, and author of 'Economics of the 1%: How mainstream economics serves the rich, obscures reality and distorts policy', Anthem Press


Andrew Anderson said...

Overt monetary finance Tom Hickey

Not yet, not while non-negative (because even 0% is welfare, given overhead costs) yields are welfare proportional to account balance.

I note a couple of the regular commentators at NC are baffled - perhaps because those who would have explained it to them have been banned.

And perhaps this "twit", while not necessarily a prophet, is not so far behind in his thinking as many so-called Progressives.

Konrad said...

This article makes the right conclusion, but for the wrong reasons. The author clings to the false belief that the U.K. government runs on loans and on tax revenue.

“The UK public debt poses no threat to economic stability. Its size is modest and its burden on taxpayers is minor.”

Wrong. Its size is huge, but its burden on taxpayers is zero.

This article says the U.K. government will never default on Treasury securities, since the government can create new securities: “The debt is nothing more than pieces of paper that the government promises to buy back on a specific date. These pieces of paper can be bought back with new pieces of paper (new bonds) with later buy-back dates.”

Huh? Why not keep it simple? The U.K. government will never default on Treasury securities denominated in pounds, since the U.K. government creates limitless pounds out of thin air.

“Implementing a fair and progressive taxation system will ensure interest payments to domestic bond holders don’t have negative redistribution effects.”

No. The U.K, government does not run on tax revenues. Nor does the presence or absence of tax revenues have anything to do with the U.K. government’s ability to service Treasury securities.

“Any speculative pressure on government bond interest rates can be prevented by selling bonds to the Bank of England.”

No. Any speculative pressure can be prevented by the Bank of England simply changing the rate of interest it pays on T-securities.

Andrew Anderson said...

Here's a plausible comment at Naked Capitalism that is nonetheless misleading:

My bet is that no one there at NC can refute it.

AXEC / E.K-H said...

Why the MMT benefactors of humanity never talk about profit
Comment on John Weeks on ‘Why the public debt should be treated as an asset’

The most curious thing about economics is that most models ― Walrasian, Keynesian, Marxian, Austrian does not matter ― do NOT contain macroeconomic profit in explicit form. And when it appears occasionally it is misspecified.#1 This is why economics is a failed/fake science. MMT is no exception.

In John Weeks’ post about the mistreatment of public debt as perennial problem instead of a long-term benefit, the word profit does not appear once. The bottom line of his argument is that the public debt is not as massive as everybody thinks and on closer inspection, not a burden but, on the contrary, has a lot of advantages for WeThePeople. In detail he argues:

• People are told that public debt 1) must be repaid, 2) threatens the country with bankruptcy, and 3) is a burden on future generations. All these arguments are wrong.

• The British government can never default on its debt.

• A good portion of the national debt is held by the public sector, i.e. Bank of England, this is what the public sector owes itself.

• The interest paid on debt held by pension funds is income to retired households.

• At the end of 2016, private corporate and foreign gilts holders owned 41% of the UK’s national debt. Only the £524 billion of gilts held by foreign creditors could be considered a “burden” in that the associated interest payments are from UK taxpayers to non-UK creditors.

• A fair and progressive taxation system could ensure that interest payments to domestic bond holders don’t have negative redistribution effects.

• Sound management of the national debt means more public borrowing for investment and current expenditure, which is justified by the modest size of the effective debt.

The whole argument boils down to a plea for more deficit spending/money creation. This is what MMT policy guidance is all about.

Fact is:

• MMT is a macroeconomic theory that is refuted on all counts.#2

• John Weeks does not mention once the profit effect of deficit-spending/money-creation.#3

• From the scientifically correct Profit Law follows (I−S)+(G−T)+(X−M)−(Q−Yd)=0 which boils down to Public Deficit = Private Profit.#4

• MMT economic policy boils down to the permanent growth of public debt which is nothing else than the permanent self-alimentation of the oligarchy.#5

• All the social benefits MMTers promise are paid in real terms by WeThePeople themselves via stealth taxation.#6

• Public debt is deferred taxation of WeThePeople which is simply pushed beyond the time horizon. Public debt is NOT an asset but a time bomb.

MMT claims to push the agenda of WeThePeople but in fact pushes the agenda of WeTheOligarchy. MMT is failed/fake science and the proponents of MMT are NOT benefactors of humankind but quite ordinary political swindlers.#7

Egmont Kakarot-Handtke

#1 For details of the big picture see cross-references Profit

#2 For the full-spectrum refutation see cross-references MMT

#3 Keynes, Lerner, MMT, Trump and exploding profit

#4 Down with idiocy!

#5 MMT: Redistribution as wellness program

#6 MMT, money printing, stealth taxation, and redistribution

#7 MMT: academic snake oil for the people

Andrew Anderson said...

Jammers comment at Naked Capitalism has so far gone unrefuted and that's a shame since he apparently has a good mind and some inkling of the issues involved. So, since I'm banned at NC, I'll try to correct him here:

Let’s take it one step further. The Gov spends 1 Billion in cash on improving highways. There is now 1 Billion more in circulation which would create some inflationary pressure. If they sell bonds instead of paying cash, they have actually taken 1 Billion out of circulation from the bond purchase so the net effect is a wash. from Jammer comment at Naked Capitalism [bold added]

1) If the purchaser is a bank, a bond sale is a risk-free asset swap (the fiat of the monetary sovereign for the debt of the monetary sovereign) with no decrease in the money supply since the non-bank private sector may not even use fiat* but is limited to bank deposits. So no wash here but a net increase in the money supply.

2) If the purchaser is the non-bank private sector, then if the purchaser is rich then:

a) It is not at all likely that his/her consumption will decrease. So no decrease here in potential price inflation so no wash.

b) If the purchase is a replacement of existing sovereign debt that has matured, then there is no decrease in the spending power of the purchaser. So no wash here either.

c) If the purchase is funded at the expense of real investment that lowers real costs, then the economy will suffer for the government having provided a risk-free asset instead UNLESS the economy is at full capacity and the government has a better use for real resources.

3) If the purchaser is the non-bank private sector, then if the purchaser is non-rich or an aggregate of the non-rich then:

Welfare is best provided only for those who need it, not according to account balance.

*Except for mere physical fiat, aka "cash."

AXEC / E.K-H said...

Andrew Anderson

You say: “Jammers comment at Naked Capitalism has so far gone unrefuted and that’s a shame since he apparently has a good mind and some inkling of the issues involved. So, since I’m banned at NC, I’ll try to correct him here.”

Then you go on to elaborate on the difference between deficit-spending for investment goods and consumption goods/services.

This distracts from the main point, i.e. the profit effect of public deficit spending. When the axiomatically correct Profit Law, which is given by Qm=Yd+(I−Sm)+(G−T)+(X−M) for the simple case, is extended for deficit spending on public investment Qm=Yd+(Ib+Ig−Sm)+(G−T)+(X−M) with Ib indicating business investment expenditures and Ig indicating government investment expenditures and I=Ib+Ig then it becomes obvious that for the profit effect it makes no difference whether the government spending is on investment goods or consumption goods/services.

While in the first case public debt=liability is ‘backed’ by a real asset, in the second case public debt is ‘backed’ by nothing. In any case, it would be false to follow John Weeks’ suggestion and to treat public debt as an asset. This is a verbal shell game.

The economic fact of the matter is (i) that public debt is a liability, (ii) that this liability may be backed by real assets or not, and (iii), that this does not matter for the profit effect of deficit spending. It always holds Public Deficit = Private Profit and MMT is fake science and corrupt politics.

Egmont Kakarot-Handtke

Andrew Anderson said...

Profit is undoubtedly good in the Old Testament; the problem is that profits are not justly shared.

The reason we should be firmly against government privileges for the banks is that those allow those with equity, the so-called credit-worthy, to bypass the necessity of "sharing" that equity (common stock issuance) or honestly borrowing at true market interest rates*.

So, with respect, I must protest that you're barking up the wrong tree wrt profit.

*Not that interest rates may not be low, even very low, but the means to lower them must be ethical such as equal fiat distributions to all citizens.

Andrew Anderson said...

It always holds Public Deficit = Private Profit ... Egmont Kakarot-Handtke

Ethical concerns dictate that the risk-free debt of the monetary sovereign, including its fiat, have negative yields/interest EXCEPT for a reasonable individual citizen exemption since some risk-free savings is legitimate for initial capital formation and needed liquidity.

Another source of unjust profits is rents since all citizens should have a decent place to live rent-free.