Housewives and Downing Street by Joanna Bright (1935).
Tax Research UK
The origins of the ‘household analogy’
Richard Murphy | Professor of Practice in International Political Economy at City University, London; Director of Tax Research UK; non-executive director of Cambridge Econometrics, and a member of the Progressive Economy Forum
11 comments:
Mrs Thatcher was right!!!
Sovereign governments are like households in essential respects.
Both households and governments can print their own currency for INTERNAL use, and both can benefit from saving and dis-saving financial assets denominated in other currencies for use in EXTERNAL trade.
Misunderstandings stem from MMTers such as Bill Mitchell who dogmatically chant the slogan that "a sovereign government is not like a household".
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Both sovereign governments and households can print their own tokens/private currencies to signify internal debts and obligations. See:
Warren Mosler - The Seven Deadly Innocent Frauds of economic policy (2010), page 18
http://moslereconomics.com/wp-content/powerpoints/7DIF.pdf
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And both sovereign governments and households have budget constraints regarding spending in currencies other than their own.
Sovereign wealth funds (if invested in assets which can be sold for foreign currencies) are like the savings of private households in that they permit greater future spending than would otherwise be the case.
"And both sovereign governments and households have budget constraints regarding spending in currencies other than their own."
Sovereign government don't spend in currencies other than their own. They can't. It's an illusion.
"Sovereign wealth funds (if invested in assets which can be sold for foreign currencies) are like the savings of private households in that they permit greater future spending than would otherwise be the case."
How's that working out for Russia?
This is such fixed exchange rate thinking it is difficult to know where to start with it.
In a floating FX world everybody pays for things in the currency they have and receives the currency they want to hold. The banks *create money* by discounting the currencies against each other to make that a reality.
Currency rates shift as the banks eliminate risk by increasing their discount.
If you tried to spend the 'sovereign wealth fund' you'd suddenly find it was worthless as the currency rates moved against you - because there is insufficient production to command.
“household analogy”
Figure of speech… textbook Art degree 101…
Neil the collateral product value adjusts first then the banks have respond to that by adjusting the value of their foreign currency assets opposite as regulatory capital is fixed for the relevant period of time….
eg right now the value of outstanding Tesla loans is being adjusted down because Musk reduced the price of new Teslas last week…. iow the exchange rate of USD to a Tesla has increased…
To a bank foreign currency assets are just like any other asset they possess and their regulatory capital is fixed for the relevant time period…
@NeilW
Here are a few examples where sovereign governments can and often do spend in currencies other than their own:
- interest and redemptions regarding loans denominated in foreign currencies
- purchases of military and other equipment produced by foreign countries
- spending abroad by defense, diplomatic and intelligence services
- purchase from abroad of equipment, food supplies etc during emergencies due to natural disasters and wars
- contributions to international emergency funds
- purchase of foreign assets to build up sovereign wealth funds when the country is enjoying an export boom eg due to the exploitation of oil or mineral resources. This will reduce currency appreciation and excessive domestic spending in the short run, provide the means to mitigate possible future emergencies due to wars or natural disasters, and provide the means to encourage developments to sustain living standards after the exhaustion of natural resources (cf the responses of Norway and the UK to the exploitation of North Sea oil)
- purchases of the domestic currency on foreign exchange markets to manage/stabilise the exchange rate, eg to prevent excessive short-term fluctuations due to crises and speculation.
And all those examples are incorrect, and again suffer from the fixed exchange rate thinking fallacy.
Firstly sovereign nations don't have loans denominated in foreign currencies. If they do they are not sovereign.
Secondly when any sovereign nation spends abroad they appropriate their own currency and spend that. The FX system then reflects that back into the sovereign nation and it ends up paying the costs of national exporters instead.
When a foreign country builds up a 'sovereign wealth fund', it is creating its own money against that reserve to mask the fact that they are in fact discounting the power to tax. The Norwegian Oil Fund being the classic case of that happening. The tax on the oil companies is in Kroner, not foreign currencies. As I explained here
A computer appears to be able to run multiple applications simultaneously. It can't. The Operating System makes it look like it can by establishing an abstraction.
It's the same in FX. You're talking about an application. I'm talking about the Operating System.
KongKing,
"Misunderstandings stem from MMTers such as Bill Mitchell who dogmatically chant the slogan that 'a sovereign government is not like a household'."
You are right that a household could issue their own currency for internal use, and even for external use, and MMT authors have confirmed that view. For example in Modern Money Theory: A Primer from Randall Wray, he claims that anyone can issue their own IOUs, the challenge is getting them accepted.
But have you ever heard about any household doing that? That's not how households behave. Households acquire external government and/or bank money by working, selling goods, investments etc, and they use that money to buy goods and services, and invest.
This is not how a sovereign government works. A sovereign government mostly acquires resources with its own currency (via fiscal policy). This doesn't rule out the possibility that governments sometimes act as currency users (when using foreign currency). A lot of governments in the Covid crisis acquired US dollars, Euros and/or Yuan to buy vaccines from the US, Europe and China as they were unable to produce themselves. But this is generally and exception and represents just a small percentage of government spending.
“ You're talking about an application. I'm talking about the Operating System.”
Neil you had me until you wind up with this figurative language…
No need for it…
Just stick to the accounting abstractions and regulatory effects…
Neil: “ The banks *create money* by discounting the currencies against each other to make that a reality.”
They don’t do this just because they have nothing better to do…. They have regulations that require them to do this in order to remain in compliance.,,
Banks have no control over their non forex asset values (Musk has control over the current value of a new Tesla hence Musk controls the loan value of a Tesla loan, FHLB controls the price of a new home hence FHLB controls the value of a home loan, Fed controls the risk free rate of interest, OPEC+ controls value of oil…) ….
Banks only control the foreign exchange rate with other banks… this is in response to changes in value of their other assets over which they have no control…
Neil Wilson,
"Firstly sovereign nations don't have loans denominated in foreign currencies. If they do they are not sovereign."
If you admit that definition, probably the US would be one of the few sovereign country in the world.
Japan, for example, would certainly not be a sovereign country, as it issued dollar denominated debt. However, this goes directly against MMT's claim that Japan is a sovereign nation (see http://bilbo.economicoutlook.net/blog/?p=50605 for example).
This applies to other countries as well (for example, Brazil and India, see their debt denominated in foreign currencies here: http://databank.worldbank.org/data/embed-int/T2.1/id/4bca864).
So your definition is necessarily at odds with MMT.
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