William Mitchell — Modern Monetary TheoryA government cannot run continuous fiscal deficits! Yes it can. How? You need to understand what a deficit is and how it arises to answer that. But isn’t a fiscal surplus the norm that governments should aspire to? Why frame the question that way? Why not inquire into and understand that it is all about context? What do you mean, context? The situation is obvious, if it runs deficits it has to fund itself with debt, and that becomes dangerous, doesn’t it? It doesn’t ‘fund’ itself with debt and to think that means you don’t understand elemental characteristics of the currency that the governments issues as a monopoly. These claims about continuous deficits and debt financing are made regularly at various levels in society – at the family dinner table, during elections, in the media, and almost everywhere else where we discuss governments. Perhaps they are not articulated with finesse but they are constantly being rehearsed and the responses I provided above to them are mostly not understood and that means policy choices are distorted and often the worst policy decisions are taken. So, while I have written extensively about these matters in the past, I think it is time for a refresh – and the motivation was a conversation I had yesterday about another conversation that I don’t care to disclose. But it told me that there is still a lot of work to be done to even get MMT onto the starting line....
Some debriefing on continuous fiscal deficits and debt issuance
14 comments:
“ The logic doesn’t change when we complicate the story with real world institutions and behaviours.”
This is oversimplification… the recessions are caused by the regulatory effects which occur in the institutions… At some point these MMT people are going to have to address these regulatory effects in the institutions… their Art degree figurative language household analogies aren’t working…
File from the Pun Police:
In French Polynesia there is an uninhabited island named Eiao.
Nothing but vowels. U won't be found here, either.
A bold prediction would be the 10 year yield won't rise until oil rebounds from its current lows. As the 10 year has tracked the crude price since Rex Tillerson and Gary Cohen put the $ on an oil standard during Trumps first term for geopolitical reasons. Just look at the yearly and 5 yearly charts. The crude price is driving the 10 year not the other way around.
When you chart oil v $ index the yearly and 5 yearly charts reveal all. All major currency FX now track the crude price it is as clear as day. Sure intra day and monthly may diverge but yearly and 5 yearly clearly show that ultimately they all revert to the crude price.
It has never been easier to trade FX thanks to Rex Tillerson and Gary Cohen and I doubt Trump even knew what they were doing. As they called it the energy dominance economic policy.
If the oil price goes up then the dollar is going up with it. That’s what we’re actually seeing. And that means that the relationships that we’ve seen historically between currencies are breaking down.
Look at the changes that have taken place in emerging markets against the dollar. And we’re talking virtually all of them. Look at the changes that have taken place against the Chinese currency, since oil was put on a $ standard.
China are now doing things for geopolitical reasons, for market power. They are now the biggest buyer in the world. They overtook the US. Not all of that buying is for use. In fact, that’s one of the things that has clouded the market price, has been the fact that they were stashing away 1.5 million barrels a day. It wasn’t being used.
They have created massive storage facilities for just about everything to get ready for sanctions and maybe war with the US. Try not to buy oil when it is expensive and buy when it is cheap and store it on a massive scale. The Chinese are now talking to the Indians. They’re talking to all the Asian buyers. They’re looking to put together a buyers’ club. Imagine an OPEC, but on the other side of the coin. They can nowactually stashed away nearly a billion barrels of crude oil bought at cheaper prices.
What it means is they are now able to back off in the markets. Basically something like a buyers’ strike, if they wanted to – and what then happens to the price?
Now that oil is On a $ standard the 10 year yield follows that action. So does the $.
Energy dominance, and the re-inflation of the price, went together. And that was part of the policy which was sold to the President. But I believe underpinning it was a separate financial motive which we’ll get to. Energy dominance is about control of oil market pricing.
We’re seeing the tail end of a transition from the – let’s call it the petrodollar system, which was about T-bills. Basically, the Saudis (or anybody who actually sold oil), this was the deal. They put their dollars into the US – that was the deal that they did – and they did that by buying T-bills.
Now, I believe that what’s happened is that we’re now seeing direct prepay. Prepay has, if you like, moved on. Where the prepay used to involve the investment banks as middlemen between the Fed and the markets, I think we’re now seeing funding flowing more directly in. It is, if you like, an intergovernmental flow.
At the end of the day, the Federal Reserve Bank maintains reserves. I believe that what we’re seeing is something more like a central bank of oil, that the reserves against which the dollar is now repo’d – you know how the Fed works, without market operations – what we’re seeing is closed market operations.
What is going on in this central bank of oil – and we’re talking about not just SPR (Strategic Petroleum Reserve) here, we’re talking about the Texas and all the oil in it is essentially potentially monetizable. And that is what is going – that has to be it. The market price needs to be supported, , in order for that to be viable.
The US needs a high price in order to keep this reserve liquid, if you like. So they have an interest in high oil prices. Despite what Trump is saying. The US, which is producing, Russia , Saudi . All have an interest in high oil prices.
The other side of the market is not keen at all on this level of prices. They want to buy cheap and have formed a buyers club and store it then step away from the market to bring the oil price down.
It is all like everything else nowadays geopolitics. Trump says he wants cheaper oil but can't be done as digs will close. The shale guys needs higher prices to pay back their loans or they go bust and close the wells.
Watching Mike's video's lately on his predictions for the $ based on the leading flows are wrong. The $ is now on an oil standard for geopolitical reasons.
The $ been linked to leading flows ended with Rex Tillerson and Gary Cohen . The pandemic proved that beyond any doubt.
We were in a high inflation period and the $ got stronger not weaker !!!!!!
Why ?
Absolutely nothing to do with the leading flows and the macro textbooks. The $ was tracking the oil price it is now on an oil standard.
My prediction is Mike's wrong in his latest video's regarding his $ posistion. Based on leading flows those days are over. The $ will follow the oil price.
If trump wins oil price is going down…
“ Energy dominance, and the re-inflation of the price, went together.”
Energy dominance is Trump policy.., the current higher prices are due to the Biden Democrat climate morons..if trump gets back in he’s going to reduce the current cost of US production and distribution..,
10 yr yield is a function of Fed overnight risk free rate policy….
Inflation went from 2% to 8% and the $ got stronger as trillions were pumped into the economy.
Inflation went from 8% to now below 3% and the $ got weaker.
The textbooks have been turned on its head. Because we are now in an oil standard.
The charts prove it and not one person has been able to point to the charts and prove I'm wrong.
If trump wins oil price is going down.
The shale guys better find something else to do then.
Energy dominance is Trump policy which was put the $ on the oil standard. Point to any chart and prove me wrong.
You can't.
You might as well be saying Trump wants a lower, weaker $. Put a target on his back.
The oil cartel people are losing political influence …
Dick Cheney a never trumper
Dick Cheney inviting Trump to go duck hunting...
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