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.
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Sunday, October 23, 2022
How to fix the government's borrowing costs — NeilW
The government borrows at a price of its choosing.
Robin Brooks has thrown down the gauntlet in respect of MMT. Three recent Tweets:
Why didn't the Bank of England intervene massively in Gilts to bring yields (white) down? Because the Pound (orange) would've collapsed had it done that. Ultimate constraint on monetary sovereigns isn't yields. It's fear of devaluation. Are you paying attention, #MMT advocates?
Here again:
#MMT is based on "monetary sovereignty," the idea that a central bank can always pin down yields via QE. Huge Yen devaluation and the UK bond market blow-up have debunked that. You'd think #MMT advocates would be out there defending their theory. Instead, all you hear is silence.
And here again:
Japan has been a favored #MMT talking point, but now it's the ultimate rebuttal. BoJ is buying tons of JGBs to keep yields from rising. There's no alternative with debt at 260%. That's put Yen into a devaluation spiral. There is no monetary sovereignty. There's only a debt trap.
MMTers have answered back that they never said that it wouldn't affect inflation AND currency values, but to me, that's a weak argument.
If I understand this correctly, the argument has moved from "bond vigilantes" to "currency vigilantes", i.e., you can ignore the former but not the latter. Do a Google search for "currency vigilantes" and you get headlines like this (2016 article):
Currency Vigilantes Ready to Strike Again as Italian Vote Looms
I should note that Brian Romanchuk did address this in a recent article:
The “currency vigilante” story makes a bit more sense, but I think of currencies as just an extended notion of the “price level.” The correct attitude towards the currency is a benign neglect, such as the attitude of modern Canadian central bankers. If your domestic inflation situation is under control, the currency cannot fall too far without relative prices getting too far out of whack. Let the trend followers have their fun, but sooner or later, the currency value will revert.
If you think FX intervention is going to do anything to help the Yen, take a look at this picture. Bank of Japan yield curve control (YCC) pins JGB yields, so rising global rates have sent the Yen rate differential (red) into a huge nosedive. FX intervention can't counter this...
The chart has this for the Yen: "YCC in a global inflation shock"
"MMTers have answered back that they never said that it wouldn't affect inflation AND currency values, but to me, that's a weak argument."
Here's a strong argument.
The currency value isn't a target. It's a safety valve. So you let it go where it needs to go. Like this.
You fix the price of non-discretionary imports like food and fuel and transfer that cost to discretionary imports as a tax. That is the standard MMT 'political' tax mechanism where a 'bad' item is taxed and a corresponding 'good' item is subsidised in a hypothecated manner. For example massively increasing first year Vehicle Excise Duty on cars over £45K with the cost of the energy subsidy.
Since the imports surcharged are discretionary the UK is price maker for them, not price taker. Sellers into the UK get less FX for their items sold, or they don't sell them at all.
Interest rates are then dropped to zero, and any Sterling lending directly or indirectly for currency speculation proscribed by the Bank of England - which means all shorts will be called in by the regulated banks. The carry trade will then unwind and the fundamental shift in the terms of trade the country has suffered will be borne by those who supply discretionary imports.
The limit of that approach is when you run out of discretionary imports to squeeze, which is why MMT economists spend so much time talking about food and fuel security as a prerequisite for true sovereignty.
The myth these characters cling onto is the idea that interest rates drive currency rates. They don't at base - as the Russian experience shows. They only have an impact while there are foreign entities chasing yield rather than propping up 'export led growth'.
Driving the yield chasers out is good for the nation as they are soft holders. As Turkey discovered.
Who the hell is Robin Brooks anyway? The dude has bounced around at so many firms it's ridiculous. He was Chief FX strategist at Goldman for 7 years, and his track record was so bad Zerohedge would make him a regular contrary feature in its posts. Now he's at the never-heard-of Institute of International Finance. The guy needs a paycheck. That about sums him up.
Robin Brooks' arguments are childish. Either you want floating exchange rates or not. If not, then fix the currency to something and give up fiscal and monetary autonomy. Simple. You can't have both. Stop whining that your currency's exchange rate is moving around when you conduct monetary and fiscal policy. It's SUPPOSED to do that.
As MMT points out, a rise in the price level is not inflation because it is not continuous. Left alone, a terms-of-trade shock would mean the price level would stabilize, we all become a little poorer, and the problem solves itself.
The problem however, as central banks point out, is that inflation expectations become un-anchored, unions start striking for higher wages, and we end up with a wage-price spiral. Then we have inflation.
Personally, I prefer wage controls until the price level stabilizes, say capping wage increases to 3% for a year or two. Instead, we're going to throw a bunch of people out of work until we hit the NAIRU, to scare the rest of the workers from asking for wage increases. It's wage controls by another means.
For the purposes of clarity, a quote from Bill Mitchell:
First we should make sure what we are talking about. Many conservative commentators think that when workers get a pay rise it is inflation. It is not. Those on the left think that when the corporate sector increase the price of a good or service it is inflation. It is not.
It is also not inflation when the exchange rate falls pushing the price of imports up a step. So a depreciation in the currency does not constitute inflation. It might stimulate inflation but is not in itself inflation.
It is also not inflation when the government increases a particular tax (say the VAT or GST) by x per cent to some new level.
So while a price rise is a necessary condition for inflation it is not a sufficient condition. Observing a price rise alone will not be sufficient to categorise the phenomena that you are observing as being an inflationary episode.
Inflation is the continuous rise in the price level. That is, the price level has to be rising each period that you observe it. So if the price level or a wage level rises by 10 per cent every month, then you have an inflationary episode. In this case, the inflation rate would be considered stable – a constant rise per period.
If the price level was rising by 10 per cent in month one, then 11 per cent in month two, then 12 per cent in month three and so on, then you have accelerating inflation. Alternatively, if the price level was rising by 10 per cent in month one, 9 per cent in month two etc then you have falling or decelerating inflation.
If the price level starts to continuously fall then we call that a deflationary episode.
Hyper-inflation is just inflation big-time!
So a price rise can become inflation but is not necessarily inflation. Many commentators and economists get this basic understanding wrong – often and continually.
The answers won’t affect just individual households but the economy as a whole. The reason: central bankers and academic economists view inflation partly as a self-fulfilling prophecy. If consumers believe prices will rise at a faster pace, they may behave in ways—buying a refrigerator or asking for a raise—that will fuel more inflation. More money chasing a fixed number of refrigerators will drive up their price, and more people asking for a raise will prompt employers to mark up the prices of goods or services they sell to make up for higher labor costs. Federal Reserve Chairman Jerome Powell expressed that concern at a recent press conference, when he announced a half-point increase in the Fed’s key interest rate: “We can’t allow a wage-price spiral to happen,” he said. “And we can’t allow inflation expectations to become unanchored. It’s just something that we can’t allow to happen.
"The problem however, as central banks point out, is that inflation expectations become un-anchored, unions start striking for higher wages, and we end up with a wage-price spiral. Then we have inflation."
That's the myth. The reality is that doesn't happen. There is no sign of a wage price spiral anywhere.
And the reason for that is the automatic stabilisers. The amount of tax collected goes up, but government struggles to buy things because supply is so tight. That means the flow injection into the system is lower than the leakage to excess savings and that stops inflation taking root. The system starts to run out of spending capacity.
Inflation then only happens if government chases prices without adjusting taxes at the same time.
It doesn't matter what your expectations are. The reality of lack of monetary flow will disturb those expectations.
The whole theoretical basis of expectations assumes government has a balanced budget and cannot buffer the issue.
If prices increase once by 10% in March then every month after that for a year the Art degree morons “inflation!” is going to be 10% until April of the next year when all of a sudden their “inflation” is going to be zero and all the Art degree morons will be high fiving each other celebrating their success…
Robin Brooks has thrown down the gauntlet in respect of MMT. Three recent Tweets:
ReplyDeleteWhy didn't the Bank of England intervene massively in Gilts to bring yields (white) down? Because the Pound (orange) would've collapsed had it done that. Ultimate constraint on monetary sovereigns isn't yields. It's fear of devaluation. Are you paying attention, #MMT advocates?
Here again:
#MMT is based on "monetary sovereignty," the idea that a central bank can always pin down yields via QE. Huge Yen devaluation and the UK bond market blow-up have debunked that. You'd think #MMT advocates would be out there defending their theory. Instead, all you hear is silence.
And here again:
Japan has been a favored #MMT talking point, but now it's the ultimate rebuttal. BoJ is buying tons of JGBs to keep yields from rising. There's no alternative with debt at 260%. That's put Yen into a devaluation spiral. There is no monetary sovereignty. There's only a debt trap.
MMTers have answered back that they never said that it wouldn't affect inflation AND currency values, but to me, that's a weak argument.
If I understand this correctly, the argument has moved from "bond vigilantes" to "currency vigilantes", i.e., you can ignore the former but not the latter. Do a Google search for "currency vigilantes" and you get headlines like this (2016 article):
Currency Vigilantes Ready to Strike Again as Italian Vote Looms
I should note that Brian Romanchuk did address this in a recent article:
The Markets Made Me Do It!
The “currency vigilante” story makes a bit more sense, but I think of currencies as just an extended notion of the “price level.” The correct attitude towards the currency is a benign neglect, such as the attitude of modern Canadian central bankers. If your domestic inflation situation is under control, the currency cannot fall too far without relative prices getting too far out of whack. Let the trend followers have their fun, but sooner or later, the currency value will revert.
Robin Brooks at it again today.
ReplyDeleteIf you think FX intervention is going to do anything to help the Yen, take a look at this picture. Bank of Japan yield curve control (YCC) pins JGB yields, so rising global rates have sent the Yen rate differential (red) into a huge nosedive. FX intervention can't counter this...
The chart has this for the Yen: "YCC in a global inflation shock"
Here's the link, so you can see the chart:
Robin Brooks Tweet
Set the exchange rate to parity then either trade with th nation or not…
ReplyDeleteeg Right now we would not be trading with Russia but ruble: USD would be 1:1
"MMTers have answered back that they never said that it wouldn't affect inflation AND currency values, but to me, that's a weak argument."
ReplyDeleteHere's a strong argument.
The currency value isn't a target. It's a safety valve. So you let it go where it needs to go. Like this.
You fix the price of non-discretionary imports like food and fuel and transfer that cost to discretionary imports as a tax. That is the standard MMT 'political' tax mechanism where a 'bad' item is taxed and a corresponding 'good' item is subsidised in a hypothecated manner. For example massively increasing first year Vehicle Excise Duty on cars over £45K with the cost of the energy subsidy.
Since the imports surcharged are discretionary the UK is price maker for them, not price taker. Sellers into the UK get less FX for their items sold, or they don't sell them at all.
Interest rates are then dropped to zero, and any Sterling lending directly or indirectly for currency speculation proscribed by the Bank of England - which means all shorts will be called in by the regulated banks. The carry trade will then unwind and the fundamental shift in the terms of trade the country has suffered will be borne by those who supply discretionary imports.
The limit of that approach is when you run out of discretionary imports to squeeze, which is why MMT economists spend so much time talking about food and fuel security as a prerequisite for true sovereignty.
The myth these characters cling onto is the idea that interest rates drive currency rates. They don't at base - as the Russian experience shows. They only have an impact while there are foreign entities chasing yield rather than propping up 'export led growth'.
ReplyDeleteDriving the yield chasers out is good for the nation as they are soft holders. As Turkey discovered.
Who the hell is Robin Brooks anyway? The dude has bounced around at so many firms it's ridiculous. He was Chief FX strategist at Goldman for 7 years, and his track record was so bad Zerohedge would make him a regular contrary feature in its posts. Now he's at the never-heard-of Institute of International Finance. The guy needs a paycheck. That about sums him up.
ReplyDeleteRobin Brooks' arguments are childish.
ReplyDeleteEither you want floating exchange rates or not.
If not, then fix the currency to something and give up fiscal and monetary autonomy. Simple.
You can't have both.
Stop whining that your currency's exchange rate is moving around when you conduct monetary and fiscal policy. It's SUPPOSED to do that.
As MMT points out, a rise in the price level is not inflation because it is not continuous. Left alone, a terms-of-trade shock would mean the price level would stabilize, we all become a little poorer, and the problem solves itself.
ReplyDeleteThe problem however, as central banks point out, is that inflation expectations become un-anchored, unions start striking for higher wages, and we end up with a wage-price spiral. Then we have inflation.
Personally, I prefer wage controls until the price level stabilizes, say capping wage increases to 3% for a year or two. Instead, we're going to throw a bunch of people out of work until we hit the NAIRU, to scare the rest of the workers from asking for wage increases. It's wage controls by another means.
For the purposes of clarity, a quote from Bill Mitchell:
First we should make sure what we are talking about. Many conservative commentators think that when workers get a pay rise it is inflation. It is not. Those on the left think that when the corporate sector increase the price of a good or service it is inflation. It is not.
It is also not inflation when the exchange rate falls pushing the price of imports up a step. So a depreciation in the currency does not constitute inflation. It might stimulate inflation but is not in itself inflation.
It is also not inflation when the government increases a particular tax (say the VAT or GST) by x per cent to some new level.
So while a price rise is a necessary condition for inflation it is not a sufficient condition. Observing a price rise alone will not be sufficient to categorise the phenomena that you are observing as being an inflationary episode.
Inflation is the continuous rise in the price level. That is, the price level has to be rising each period that you observe it. So if the price level or a wage level rises by 10 per cent every month, then you have an inflationary episode. In this case, the inflation rate would be considered stable – a constant rise per period.
If the price level was rising by 10 per cent in month one, then 11 per cent in month two, then 12 per cent in month three and so on, then you have accelerating inflation. Alternatively, if the price level was rising by 10 per cent in month one, 9 per cent in month two etc then you have falling or decelerating inflation.
If the price level starts to continuously fall then we call that a deflationary episode.
Hyper-inflation is just inflation big-time!
So a price rise can become inflation but is not necessarily inflation. Many commentators and economists get this basic understanding wrong – often and continually.
The answers won’t affect just individual households but the economy as a whole. The reason: central bankers and academic economists view inflation partly as a self-fulfilling prophecy. If consumers believe prices will rise at a faster pace, they may behave in ways—buying a refrigerator or asking for a raise—that will fuel more inflation. More money chasing a fixed number of refrigerators will drive up their price, and more people asking for a raise will prompt employers to mark up the prices of goods or services they sell to make up for higher labor costs. Federal Reserve Chairman Jerome Powell expressed that concern at a recent press conference, when he announced a half-point increase in the Fed’s key interest rate: “We can’t allow a wage-price spiral to happen,” he said. “And we can’t allow inflation expectations to become unanchored. It’s just something that we can’t allow to happen.
ReplyDelete"The problem however, as central banks point out, is that inflation expectations become un-anchored, unions start striking for higher wages, and we end up with a wage-price spiral. Then we have inflation."
ReplyDeleteThat's the myth. The reality is that doesn't happen. There is no sign of a wage price spiral anywhere.
And the reason for that is the automatic stabilisers. The amount of tax collected goes up, but government struggles to buy things because supply is so tight. That means the flow injection into the system is lower than the leakage to excess savings and that stops inflation taking root. The system starts to run out of spending capacity.
Inflation then only happens if government chases prices without adjusting taxes at the same time.
It doesn't matter what your expectations are. The reality of lack of monetary flow will disturb those expectations.
The whole theoretical basis of expectations assumes government has a balanced budget and cannot buffer the issue.
If prices increase once by 10% in March then every month after that for a year the Art degree morons “inflation!” is going to be 10% until April of the next year when all of a sudden their “inflation” is going to be zero and all the Art degree morons will be high fiving each other celebrating their success…
ReplyDelete