For some years now (since the pandemic), I have been receiving E-mails from those interested in the Eurozone telling me that the analysis I presented in my 2015 book – Eurozone Dystopia: Groupthink and Denial on a Grand Scale (published May 2015) – was redundant because the European Commission and the ECB had embraced and was committed to Modern Monetary Theory (MMT) so there was no longer a basis for a critique along the lines I presented. I keep seeing that claim repeated and apparently it is being championed by MMT economists. While there are some MMTers who seem to think the original architecture of the Economic and Monetary Union has been ‘changed’ in such a way that the original constraints on Member States no longer apply, I think they have missed the point. They point to the fact that the ECB continues to control bond yield spreads across the EU through its bond-buying programs (yes) and that the Commission/Council relaxed the fiscal rules during the Pandemic (yes). But the bond-buying programs come with conditionality and the authorities have now ended the ‘general escape clause’ of the Stability and Growth Pact and are once again enforcing the Excessive Deficit procedure and imposing austerity on several Member States. The temporary relaxation of the SGP rules (via the general emergency clause) did not amount to a ‘change’ in the fiscal rules. Indeed, the EDP has been strengthened this year. The Member States still face credit risk on their debt, still use a foreign currency that is issued by the ECB and is beyond their legislative remit, and are still vulnerable to austerity impositions from the Commission and their technocrats. To compare that situation with a currency-issuing government such as the US or Japan or Australia, etc is to, in my view, commit the same sort of error that mainstream economists make when they say that ‘the UK is at risk of becoming like Greece’ or similar ridiculous threats to discipline fiscal authorities in currency-issuing nations.
There are various interrelated questions that bear on this subject....
William Mitchell — Modern Monetary Theory
The 20 EMU Member States are not currency issuers in the MMT sense
Bill Mitchell | Professor in Economics and Director of the Centre of Full Employment and Equity (CofFEE), at University of Newcastle, NSW, Australia
11 comments:
Bills latest piece about Japan and the Yen.
Looks like I'm the only MMT'r who believes the $ is now on an oil standard.
Neil mentions the Norweigan Krone.
Just plot crude against it and look at the 1 year and 5 year charts. What do you see ?
Same with the Yen.
Yen seems to come with a lag compared to all the rest. My view on that is they were playing silly buggers and trying to interfere with the exchange rate with limited capacity to do that.
But as the 1 year and 5 year charts shows regardless what they try and do the Yen will ultimately gravitate towards the crude price.
We are just about to find out if crude continues to rise. All will be revealed.
This what many believe.... The current framing and narratives.
" The dollar index weakened again below 101 on Thursday, reversing gains from earlier in the session as investors continued to assess the implications of the latest Federal Reserve policy decision. The Fed delivered an aggressive 50 basis point rate cut on Wednesday for its first rate reduction since the early days of the Covid pandemic. The central bank indicated confidence that inflation is moving sustainably toward 2% and moved to prevent a slowdown in the labor market. Meanwhile, Powell said the central bank is not in a rush to ease policy and that half-percentage point cuts are not the “new pace.” His comments prompted traders to buy the dip on the dollar, but the greenback slowly erased those gains amid concerns that other major central banks could ease policy less aggressively than the Fed. "
Bill said the same thing regarding the Yen.
Yet, Brian has proved this framing to be false.
Here :
Why Cross-Currency Bond Yield Spreads Do Not Matter
http://www.bondeconomics.com/2018/03/why-cross-currency-bond-yield-spreads.html
Many MMT'rs and the mainstream have been scrambling around in the dark trying to figure out why during the highest inflation episode in recent memory the $ remained very strong.
Why now that inflation has dropped the $ dropped with it. Turned their textbooks they use upside down.
To me the answer is obvious and all you have to do is believe what you see when you look at the charts and understand the US energy dominance geopolitical strategy and what took place during Trumps first term.
If I am wrong. I will hold my hands up and admit it. Not look to blame others like most people do.
FX traders don't get it and think we are still on the old paradigm and an inverse relationship.
But as the charts show ultimately since 2017/18. They will revert to the crude price.
If I am right. It is the creme de la creme zombie trading platform to fill your bushel basket.
Those that believe like Bill that Cross-Currency Bond Yield Spreads Matter will forever be running for the exits.
Matt believes or used to believe. I don't know if he still does. That mainly what moves FX is changing prices of exports. When large exporters move their prices up or down.
My view is that was before but hasn't worked since 2017/18.
Mike believes we had a strong $ during high inflation due to something to do with US oil exports.
Yet, when you watch US Crude oil export growth. US refineries have shown US shale absorption can reach saturation levels. The same will happen outside US. Refineries can only handle a maximum volume before capacity restraints.
The capacity restriction is caused by the lightness (high API ) of shale. Shale contains much higher levels of Light ends than does an Arab light, urals and also a far lower amount of residue.
The throughput of a crude distillation column is not determined by the volume of crude coming in but rather by the maximum amount of products it can produce. Each product draw point has a maximum amount that can be produced.
Design of a distillation column would be significantly different if you wanted to run 200kbpd of shale oil or 200kbpd of Svedrup. Why? Because the product slate is different.
You could never run 200kbpd of shale in a column designed for 200kbpd of Svedrup and vice versa. What would happen if you tried to run Shale in a a svedrup designed distillation column?
Shale would easily fill the upper light end section of the column to its maximum. That would equal what svedrup could do. The problem is in the bottom sections of the column. Shale has less gasoil/residue etc. so it would not supply the same amount of heavier products as Svedrup. The bottom part of the column would be underutilized. This means less crude throughput overall.
Trying to increase shale oil throughput to fill the gasoil and residue quantities would also cause excess light ends at the top of the column. Excess light ends means higher pressure creating problems for the temperature profile along the column. This would result in the cut points of the products being affected and off-specifcation being produced.With a higher proportion of light ends than residue as well meaning problems controlling temperature in the column as well.
Most refineries in the world have not been designed to run a full shale diet. They are designed to run a heavier crude oil. Maybe not as heavy as svedrup but definitely heavier than shale. Shale can be blended with other crudes to produce the optimum crude for a refinery.
But as soon as the % of shale increases past the optimum level, then the refinery throughput is reduced. We have seen this already happen in the US where API crude input levels have stabilized (even fallen) after rising as refiners ran as much cheap shale as they could.
It is why the US has to export so much shale oil because their refineries just cannot process it. This will eventually happen outside the US as well. Especially as light sweet production increases more than medium/heavy production.
Therefore, US export growth will flatten for all the reasons above. Not the supply and demand reasons many people think why they have flattened.
Mike believes we had a strong $ during high inflation due to something to do with US oil exports.
Yet, when you watch US Crude oil export growth. US refineries have shown US shale absorption can reach saturation levels. The same will happen outside US. Refineries can only handle a maximum volume before capacity restraints.
The capacity restriction is caused by the lightness (high API ) of shale. Shale contains much higher levels of Light ends than does an Arab light, urals and also a far lower amount of residue.
The throughput of a crude distillation column is not determined by the volume of crude coming in but rather by the maximum amount of products it can produce. Each product draw point has a maximum amount that can be produced.
Design of a distillation column would be significantly different if you wanted to run 200kbpd of shale oil or 200kbpd of Svedrup. Why? Because the product slate is different.
You could never run 200kbpd of shale in a column designed for 200kbpd of Svedrup and vice versa. What would happen if you tried to run Shale in a a svedrup designed distillation column?
Shale would easily fill the upper light end section of the column to its maximum. That would equal what svedrup could do. The problem is in the bottom sections of the column. Shale has less gasoil/residue etc. so it would not supply the same amount of heavier products as Svedrup. The bottom part of the column would be underutilized. This means less crude throughput overall.
Trying to increase shale oil throughput to fill the gasoil and residue quantities would also cause excess light ends at the top of the column. Excess light ends means higher pressure creating problems for the temperature profile along the column. This would result in the cut points of the products being affected and off-specifcation being produced.With a higher proportion of light ends than residue as well meaning problems controlling temperature in the column as well.
Most refineries in the world have not been designed to run a full shale diet. They are designed to run a heavier crude oil. Maybe not as heavy as svedrup but definitely heavier than shale. Shale can be blended with other crudes to produce the optimum crude for a refinery.
But as soon as the % of shale increases past the optimum level, then the refinery throughput is reduced. We have seen this already happen in the US where API crude input levels have stabilized (even fallen) after rising as refiners ran as much cheap shale as they could.
It is why the US has to export so much shale oil because their refineries just cannot process it. This will eventually happen outside the US as well. Especially as light sweet production increases more than medium/heavy production.
Therefore, US export growth will flatten for all the reasons above. Not the supply and demand reasons many people think why they have flattened.
I don't have a bushel basket.
This will restrict US growth far more eventually than anything else. It will limit to a maximum what US shale can produce because the system will not be able to process it.
The US is able to export oil because it imports it.
When you chart US oil exports v's the $ there is a correlation but not as clear as the oil price itself.
So I don't think it is that.
What's really, really, interesting when you plot US oil exports against the $ index and go as far back as you can go.
It all changes around 2017/18
:)
All of a sudden the correlation ( if any ) changes.
The US 10 Year Treasury yield is rising after the rate cut ?
I can't wait to see what happens here if the oil price keeps on rising and rising from here.
The crux of the matter being is if I am right.
Just looking at the YEN to determine if MMT is dead or alive is utterly pointless.
If I am right, Bill has just jumped the shark.
MMT is dead in the policy sphere.
So what if you're right?
The average person doesn't have the means or desire to play financial games.
More people are also realizing that having a fat bank account won't save you from what's coming.
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