An economics, investment, trading and policy blog with a focus on Modern Monetary Theory (MMT). We seek the truth, avoid the mainstream and are virulently anti-neoliberalism.
Mike's videos over the last fortnight have been brilliant.
They have been that good they obviously throw up some questions.
Warren Mosler and Michael Hudson have spent years saying
a) All spending is inflationary
b) The ideology of the last 40 years has been banks control the allocation of skills and real resources instead of governments that the government should be small and drowned in the bath tub.
c) Most of the recent economic expansions have been built on the back of the private sector spending more than their income. Private sector debt until the debt the music stops playing.
We have all seen central banks and the government are all now run by the banking cartels.
So is what the FED doing right now not just a continuation of that failed ideology that brought the whole thing crashing down in 2008. Build the economy on the back of private sector debt so the banks can allocate the skills and real resources as they think they are better at it than elected government ?
Certainly comes across that way listening to Mike's videos. Michael Hudson has warned everyone about this for decades.
Second the leverage ratio....
Because all spending is inflationary was the leverage ratio introduced to try and stop inflation due to bank lending ?
Because all recent economic books was due to the private sector spending more than their income until the music stopped. Was the leverage ratio introduced to help combat inflation while they all took out loans and started spending them. Where they trying to curtail bank lending as an inflationary pressures ?
If so.... If that is the case because I do not think they had anything in place to stop inflation from bank lending before the leverage ratio was introduced. They just let it get out of control then call it a recession.
Surely what they have done is yes strip interest income out of the economy but replaced that with loans. Looking at the loans figures considering everyone is sitting at home and production of goods and services have fell off a cliff.
This must be inflationary no wonder Goldman is telling everyone to run to gold.
You cannot attempt to stimulate demand in the face of a massive supply shock.
If MMT doesn’t fight this, we are going to be blamed for the inflation. Point out that creating money to purchase real resources, that are no longer going to be for sale, will not end well.
MMT should all be very concerned at the number of policymakers that acknowledge we need to slash the productive capacity of the economy, by telling all but essential workers to sit at home, whilst simultaneously trying to ensure that the purchasing power of all households and some) firms remains at levels only slightly below pre-crisis levels. Incomes of all, both those still working and those whose job is effectively to now stay at home, have to fall to match the fall in the productive capacity of the economy. After all, if the plan is only to supply essential goods and services, then it is only essential goods and services that we will be able to buy. We won’t need any income above what is necessary to buy what is available for sale. Maintaining incomes at 80% of pre-crisis levels or higher will inevitably lead to price inflation of those essential goods and services that are still being produced (which we’re already seeing). It’s a horrible message to have to get across, but it’s very simple. We cannot consume more than we are producing and we should not even be attempting to try to do so. ”
So are we relying too much on ideological driven governments doing the right thing ?
Does our fate lie in the hands of the idealogues?
1. They can keep incomes high as long as spending stays low. There are good reasons to do this, tools they can use to keep spending down, and good reason to think spending may stay down on its own.
2. They could keep incomes high at the lower end to help people pay down debt and accumulate some savings. They can hope spending stays down because
a) People don’t want/ can’t spend that much at the moment anyway.
b) They can just ask them not to spend (volunteer saving policies),
c) They can order the public not to spend (although I doubt that would be necessary) and/or
d) If it gets that bad and there ends up being shortages and they need to ration, the rationing itself will prevent three public from spending.
e) Job guarentee/ deficit spending in the form of a helicopter drop.
f) Will they tell that outfit that is swapping illiquid assets for liquid ones to stop doing it. The asset has to be a government liability – Will they make it a long dated govt bond, but that’s still pretty liquid. Would they make it a bond that cannot be sold, and cannot be pledged. Will they make a registered bond (gov has the name of the person who owns it) and not redeemable until the maturity date.
g) Will they do things like deferred pay and introduce refundable taxes.
Or will the ideologues since they have their hands on the levers. Do what they always do and not let a good crises go to waste. Allow inflation to explode and blame MMT and reset policies to match the ideological agenda.
Stay tuned and find out on the next episode of soap……
The US not so much because Trump has an election to face and will do everything to get the economy back on track.
Not so much in the UK we have just had the election so they could allow inflation to explode to keep their gold standard, fixed exchange rate myths alive. Nobody will listen how we would have done it differently they would simply add spending + inflation = MMT.
So I wouldn’t celebrate in the UK just yet. The virus could make or break MMT.By the end of it all if the idealogues allow inflation to explode.
It will not be the first time they did it.
Simon Wren Lewis and his merry band of liberals will be screaming louder than ever for his unelected, technocratic, fiscal councils made up of the usual suspects.
Many say it will never be same after this.
The establishment are laughing saying oh yes it can. Let’s have inflation rates of 10%. We will show you how to keep things the same. We’ll train the public to shout MMT instead of Venezuela and Zimbabwe. Could very easily be the end result.
"because all spending is inflationary was the leverage ratio introduced to try and stop inflation due to bank lending ?"
Its always been there... seems like they have it there to LIMIT the amount of total assets the bank can acquire... but then the unintended consequences are that when the CB thinks its a good idea to add Reserve Assets (for what ever reason their deranged Art Degree brains conjure up....) they can put the whole system into regulatory violation... and the whole credit system shuts down...
It seems to me changing the leverage ratio rules is to support these HUGE loan numbers and because they are swapping interest bearing assets for reserves.
It must be because of inflation. Those with the art degrees think QE is a good way to control inflation in a downturn.
Mike's right instead of loading up the reserves by AS they should be spending directly instead of issuing loans.
If they left the interest income in the economy
Created reserves via spending
Change the leverage ratio to support these HUGE loan numbers.
That has got inflation written all over it.
They do not seem to be doing anything to try and stop private sector spending either. With the same government spending levels prior to the virus. With less goods and services in offer.
We could end up shit creek here very quickly.
I am trying to listen to Mike's videos and think what does all this mean for inflation
Mike's videos have been excellent a couple of mins talking about what these changes means for inflation at the end of each video would be very helpful.
It’s a horrible message to have to get across, but it’s very simple. We cannot consume more than we are producing and we should not even be attempting to try to do so.
As far as I can see none of things they have done so far tackled this. Apart from maybe stripping interest income out of the economy.
Rent, mortgage and utility strikes by the population would institute a partial gift economy. No risk of inflation there. The lack of fiscal support in the US may make this inevitable.
any policy that makes the fuction increase is perhaps bullish (if you have to use figurative language) and any policy that makes the function reduce is bearish...
The constant USED TO BE 0.095 but now they have modified the policy so WHAT IS THE NEW CONSTANT????
WE DONT KNOW.... YET....
in any case, When they increase the risk free IOR rate they will make the NPV of existing bank assets fall which will else equal REDUCE the function and it will be bearish...
this is what happened in 2018 and we had a big 20% sell off into end of December and they stopped and were quickly having to reverse and reduce the IOR in 2019...
they couldnt be seen to be raising rates to prevent their figurative "inflation!" meanwhile the stock market is crashing down...
This change to existing NPV is immediate while any insterest income increase would not be immediate... the interest income channel takes TOO LONG to be bullish...
so they may be stuck here at very low rates for a very long time...
They could probably raise the rates 0.25% per year for 20 years and get back to 5% a couple of decades from now without too much negativity... perhaps no discernible negativity at all...
But they seem like they generally like to move faster than that... when they raise as fast as they prefer they are going to cause another crash... then when they see the crash they will quickly stop raising and reverse to lowering rates...
17 comments:
Mike's videos over the last fortnight have been brilliant.
They have been that good they obviously throw up some questions.
Warren Mosler and Michael Hudson have spent years saying
a) All spending is inflationary
b) The ideology of the last 40 years has been banks control the allocation of skills and real resources instead of governments that the government should be small and drowned in the bath tub.
c) Most of the recent economic expansions have been built on the back of the private sector spending more than their income. Private sector debt until the debt the music stops playing.
We have all seen central banks and the government are all now run by the banking cartels.
So is what the FED doing right now not just a continuation of that failed ideology that brought the whole thing crashing down in 2008. Build the economy on the back of private sector debt so the banks can allocate the skills and real resources as they think they are better at it than elected government ?
Certainly comes across that way listening to Mike's videos. Michael Hudson has warned everyone about this for decades.
Second the leverage ratio....
Because all spending is inflationary was the leverage ratio introduced to try and stop inflation due to bank lending ?
Because all recent economic books was due to the private sector spending more than their income until the music stopped. Was the leverage ratio introduced to help combat inflation while they all took out loans and started spending them. Where they trying to curtail bank lending as an inflationary pressures ?
If so.... If that is the case because I do not think they had anything in place to stop inflation from bank lending before the leverage ratio was introduced. They just let it get out of control then call it a recession.
Surely what they have done is yes strip interest income out of the economy but replaced that with loans. Looking at the loans figures considering everyone is sitting at home and production of goods and services have fell off a cliff.
This must be inflationary no wonder Goldman is telling everyone to run to gold.
Or what am I missing ??
What have I not thought through properly.
You cannot attempt to stimulate demand in the face of a massive supply shock.
If MMT doesn’t fight this, we are going to be blamed for the inflation. Point out that creating money to purchase real resources, that are no longer going to be for sale, will not end well.
MMT should all be very concerned at the number of policymakers that acknowledge we need to slash the productive capacity of the economy, by telling all but essential workers to sit at home, whilst simultaneously trying to ensure that the purchasing power of all households and some) firms remains at levels only slightly below pre-crisis levels. Incomes of all, both those still working and those whose job is effectively to now stay at home, have to fall to match the fall in the productive capacity of the economy. After all, if the plan is only to supply essential goods and services, then it is only essential goods and services that we will be able to buy. We won’t need any income above what is necessary to buy what is available for sale. Maintaining incomes at 80% of pre-crisis levels or higher will inevitably lead to price inflation of those essential goods and services that are still being produced (which we’re already seeing). It’s a horrible message to have to get across, but it’s very simple. We cannot consume more than we are producing and we should not even be attempting to try to do so. ”
So are we relying too much on ideological driven governments doing the right thing ?
Does our fate lie in the hands of the idealogues?
1. They can keep incomes high as long as spending stays low. There are good reasons to do this, tools they can use to keep spending down, and good reason to think spending may stay down on its own.
2. They could keep incomes high at the lower end to help people pay down debt and accumulate some savings. They can hope spending stays down because
a) People don’t want/ can’t spend that much at the moment anyway.
b) They can just ask them not to spend (volunteer saving policies),
c) They can order the public not to spend (although I doubt that would be necessary) and/or
d) If it gets that bad and there ends up being shortages and they need to ration, the rationing itself will prevent three public from spending.
e) Job guarentee/ deficit spending in the form of a helicopter drop.
f) Will they tell that outfit that is swapping illiquid assets for liquid ones to stop doing it. The asset has to be a government liability – Will they make it a long dated govt bond, but that’s still pretty liquid. Would they make it a bond that cannot be sold, and cannot be pledged. Will they make a registered bond (gov has the name of the person who owns it) and not redeemable until the maturity date.
g) Will they do things like deferred pay and introduce refundable taxes.
Or will the ideologues since they have their hands on the levers. Do what they always do and not let a good crises go to waste. Allow inflation to explode and blame MMT and reset policies to match the ideological agenda.
Stay tuned and find out on the next episode of soap……
The US not so much because Trump has an election to face and will do everything to get the economy back on track.
Not so much in the UK we have just had the election so they could allow inflation to explode to keep their gold standard, fixed exchange rate myths alive. Nobody will listen how we would have done it differently they would simply add spending + inflation = MMT.
So I wouldn’t celebrate in the UK just yet. The virus could make or break MMT.By the end of it all if the idealogues allow inflation to explode.
It will not be the first time they did it.
Simon Wren Lewis and his merry band of liberals will be screaming louder than ever for his unelected, technocratic, fiscal councils made up of the usual suspects.
Many say it will never be same after this.
The establishment are laughing saying oh yes it can. Let’s have inflation rates of 10%. We will show you how to keep things the same. We’ll train the public to shout MMT instead of Venezuela and Zimbabwe. Could very easily be the end result.
"The US not so much because Trump has an election to face and will do everything to get the economy back on track."
idk about that he seems to be pivoting to "war time president"...
they wrecked the economy ... he can see that... has to pivot to something else..
"because all spending is inflationary was the leverage ratio introduced to try and stop inflation due to bank lending ?"
Its always been there... seems like they have it there to LIMIT the amount of total assets the bank can acquire... but then the unintended consequences are that when the CB thinks its a good idea to add Reserve Assets (for what ever reason their deranged Art Degree brains conjure up....) they can put the whole system into regulatory violation... and the whole credit system shuts down...
This time I'm watching this video while imagining I'm a Coronavirus.
“ You are Unique - Distinctly Unique.”
Exactly... and for many what makes them unique is that they are stupid...
Or evil, or greedy, or substance abusers, or psychos , or wtf...
This isn’t helpful....
Cheers Matt
It seems to me changing the leverage ratio rules is to support these HUGE loan numbers and because they are swapping interest bearing assets for reserves.
It must be because of inflation. Those with the art degrees think QE is a good way to control inflation in a downturn.
Mike's right instead of loading up the reserves by AS they should be spending directly instead of issuing loans.
If they left the interest income in the economy
Created reserves via spending
Change the leverage ratio to support these HUGE loan numbers.
That has got inflation written all over it.
They do not seem to be doing anything to try and stop private sector spending either. With the same government spending levels prior to the virus. With less goods and services in offer.
We could end up shit creek here very quickly.
I am trying to listen to Mike's videos and think what does all this mean for inflation
Mike's videos have been excellent a couple of mins talking about what these changes means at the end of each video would be very helpful.
Inflation is the real danger in this scenario we are in especially for MMT as they will just blame us.
I can even see how they are going to do it.
If inflation ticks up the art degree lot will increase interest rates to fight it.
Then MMT will become the new Zimbabwe and Venezuela.
I can see the headlines already.
Mike's videos have been excellent a couple of mins talking about what these changes means for inflation at the end of each video would be very helpful.
Inflation the way MMT sees it.
It’s a horrible message to have to get across, but it’s very simple. We cannot consume more than we are producing and we should not even be attempting to try to do so.
As far as I can see none of things they have done so far tackled this. Apart from maybe stripping interest income out of the economy.
Rent, mortgage and utility strikes by the population would institute a partial gift economy. No risk of inflation there. The lack of fiscal support in the US may make this inevitable.
“ Inflation is the real danger in this scenario we are in especially for MMT as they will just blame us.”
Yes they would I think this is what would happen...
OTOH no way in hell Trump let’s them raise the rates ...
"If inflation ticks up the art degree lot will increase interest rates to fight it."
That also has a bearish effect so the rate increases would be very limited...
Maybe this way:
look at the regulatory function as (A-L)/A = A CONSTANT
it kind of doesnt matter WHAT EXACTLY the constant is... what is important is to just know IT IS A CONSTANT AND IT IS LESS THAN 1
https://en.wikipedia.org/wiki/Mathematical_constant
any policy that makes the fuction increase is perhaps bullish (if you have to use figurative language) and any policy that makes the function reduce is bearish...
The constant USED TO BE 0.095 but now they have modified the policy so WHAT IS THE NEW CONSTANT????
WE DONT KNOW.... YET....
in any case, When they increase the risk free IOR rate they will make the NPV of existing bank assets fall which will else equal REDUCE the function and it will be bearish...
this is what happened in 2018 and we had a big 20% sell off into end of December and they stopped and were quickly having to reverse and reduce the IOR in 2019...
they couldnt be seen to be raising rates to prevent their figurative "inflation!" meanwhile the stock market is crashing down...
This change to existing NPV is immediate while any insterest income increase would not be immediate... the interest income channel takes TOO LONG to be bullish...
so they may be stuck here at very low rates for a very long time...
They could probably raise the rates 0.25% per year for 20 years and get back to 5% a couple of decades from now without too much negativity... perhaps no discernible negativity at all...
But they seem like they generally like to move faster than that... when they raise as fast as they prefer they are going to cause another crash... then when they see the crash they will quickly stop raising and reverse to lowering rates...
The other thing is that the Fed has to make munnie...
They have to pay IOR on now probably 3T of Reserve Assets to the Depositories...
Plus they have about 7B per year of operating expenses...
So if they raise the IOR too fast their payments to the Depositories may exceed their portfolio income and they would think themselves bankrupted...
so this acts to slow the achievable rate of policy IOR rate increase too...
Cheers guys..
You should feel very proud that you were the very first to notice this.
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