There was commentary earlier this week (September 26, 2022) from an investment banker entitled ‘MMT takes a pounding’. I won’t link to it because I don’t want to send traffic to their site. But it is the narrative that the financial market commentators who desire to politicise public debate and use it to attack their pet hates. Modern Monetary Theory (MMT) apparently is a pet hate of this character and like many with similar biases he has been champing at the bit for some semblance of ‘evidence’ that MMT analysis is flawed. This week’s events in Britain have given them more succour. Except when you understand what has actually happened the events demonstrate key MMT propositions....Bill Mitchell – billy blog
The last week in Britain demonstrates key MMT propositions
Bill Mitchell | Professor in Economics and Director of the Centre of Full Employment and Equity (CofFEE), at University of Newcastle, NSW, Australia
The whole thing is caused by the CB coming up off ZIRP (which MMT advocates for) too fast…
ReplyDelete10,000 words to avoid the awkwardness…
“ Clearly, if the interest rate rises, the swap value works in the bank’s favour and vice-versa.”
ReplyDeleteNow Bill believes in the “bond vigilantes!” ??,
“ Clearly, if the interest rate rises”
ReplyDeleteWhat does the interest rate just evolve from the apes by random chance ?
It just “rises!” sometimes ?
It just “falls!” Sometimes?
Bills Darwin is showing..
Yo, it rises and falls because these Art degree monetarist morons DO IT…HEEELLLLLLL-OOOOOOOOOO!
ReplyDelete"The whole thing is caused by the CB coming up off ZIRP (which MMT advocates for) too fast"
ReplyDeleteZIRP is the best approach in the UK. There is no reason on earth for the vertical circuit to pay money to anybody as a matter of course.
That was the traditional approach prior to the 17th century. Interest was a sin, loans to the sovereign were interest free and the loans died with the sovereign died.
Then the bankers turned up and managed to persuade Parliament to pay them. Maybe this Carolean era will finally fix the fundamental mistake of the last one.
What Kwarsi is trying to do is get monetary policy to take the taxation load. In their belief system monetary policy deals with inflation. So if the Chancellor adds inflation to the system it is the job of the Bank of England to take it out again.
Trouble is when you do that the tide goes out and we see who has been swimming naked.
Ok, but then why do you have the CB regulators increase the risk free rate without approval of the pension fund regulators?
ReplyDeleteI thought the liberal Art Socrates Platonist methodology was all about “discussion! “?
Did the CB regulatory Art degree morons ever have a “discussion!” With the pension fund regulatory Art degree morons to see if the magnitude and rate of the increase would conflict with current pension fund regulatory schemes?
THIS is THE problem…
We all already know how to compute NPV of swap or other derivative financial schemes… this is not the problem…
https://www.education.vic.gov.au/school/teachers/teachingresources/discipline/english/literacy/speakinglistening/Pages/examplesocratic.aspx
ReplyDelete“ 3. The Socratic Discussion: Students sit in a circle so that all members can see and respond to each other.”
lol this “discussion!” is the whole basis of these peoples methodology and then they dont even do it when it matters….
Having central bankers sit in a corner may be more effective.
ReplyDeleteNo pudding until they shape up.
"Ok, but then why do you have the CB regulators increase the risk free rate without approval of the pension fund regulators?"
ReplyDeleteThey didn't. The Chancellor did implicitly - by issuing an 'unfunded' budget where he explicitly said that inflation was the remit of the Bank of England.
That's why all the toys went out of the pram. The Market(TM) suddenly realised that the Tories in charge were actually going to do what they said they were going to do during the summer election and it wasn't all rhetoric. And that means the path of interest rate rises will need to be significantly higher than the BoE has indicated.
Remember that the Pension Funds in the UK are considered to be part of the problem by government for failing to invest in firms to drive forward productivity. That pension funds aren't in the game of risk investment goes over this set of politicians heads.
The politicians are also not happy with the way the Bank of England has behaved. There are articles from the economic supporters of the new regime today again complaining that interest rates are not high enough to help investment (!).
“ he explicitly said that inflation was the remit of the Bank of England. ”
ReplyDeleteSounds like same thing the Biden people are doing here… though explicitly…
Truss has to cut the balls off the CB people like Trump and Erdogon did..,, tell them to stop increasing the rates.,, handle the Art degree morons figure of speech “inflation!” Via supply side..,
The longer term rates are going up because the fiduciaries managing the pension funds are taking the CB people at their word who go out every day multiple times and places saying they are going to keep increasing the policy rate into next year and as high as necessary to reverse their figure of speech “inflation!”…
ReplyDeleteSo they have to adjust their hedges against the explicit threats of much higher rates by the other regulators…
Frances Coppola says that it was really about protecting the banks. Here, have a read:
ReplyDeleteWhat was the real reason for the Bank of England's gilt market intervention?
As mentioned before, pension funds hedge the difference between assets and liabilities with interest rate swaps. They have fixed liabilities and variable assets, so they want to swap fixed for floating rate (again I am simplifying - Toby has a more detailed explanation, op. cit.). So counterparties to these swaps must be institutions that want to swap floating rate for fixed. What type of institutions have floating-rate short-term liabilities but longer-term fixed-rate assets? Why, banks, of course.
So this is not a story about pension funds, it's about banks. The gilt market freeze was creating a cash collateral shortfall for pension funds, and as a result banks were at risk of serious losses on derivatives. We've seen this movie before and we know it ends with large quantities of blood on the floor. That's what the Bank of England feared. It intervened to stop the bleeding before it became a haemorrhage.
When you dig deeply enough into a financial crisis, you almost always find it's really about banks.
It's always about protecting banks. That's what the lender of last resort is there to do.
ReplyDeleteThe problem is that there is an obsession amongst economic types with controlling liquidity. It doesn't work and hasn't worked after decades of trying. Yet they cling to it like the Gold Standard.
Banks are regulated entities. Whatever they are doing they are doing as agent of the central bank in the central bank's currency. Therefore the central bank should be prepared to be the investor in the banks backing those activities. If it isn't prepared, then why is it allowing those activities to occur?
“ Banks are regulated entities. Whatever they are doing they are doing as agent of the central bank in the central bank's currency.”
ReplyDeleteThank you!
But this conflicts with the whole MMT Art degree “bankster!” figure of speech explanations..
ReplyDeleteYoure on thin ice Neil…
“ then why is it allowing those activities to occur? ”
ReplyDeleteTo do otherwise would be Art degree anti thesis to Art degree monetarist thesis…… when the latter thesis is dominant…
Under Art degree you have to stick with the dominant thesis…
What happened to the old school thesis, where you get fired when you fail to do your job properly?
ReplyDeleteFed fired 3 VPs iin sep 2019 when they under ran system reserves below the 10% RRR and shut down the FF market…
ReplyDeleteNobody reported it except MNE….
Nobody reported it because they didn't understand it?
ReplyDeleteYes…
ReplyDelete