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
Bills latest piece about Japan and the Yen.
ReplyDeleteLooks 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.
ReplyDeleteBut 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.
ReplyDeleteMy 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.
ReplyDeleteYet, 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.
ReplyDeleteThis 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.
ReplyDeleteThe 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.
ReplyDeleteIt 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 ?
ReplyDeleteI 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.
ReplyDeleteJust 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.
ReplyDeleteSo 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.
If a foreign bank has USTs as assets and US cb modifies the risk free rate thrn the value of those USD financial assets in the foreign bank is going to also change and the exchange rate will be effected..,
ReplyDelete“ That mainly what moves FX is changing prices of exports.” Only as those changes in product prices effect the asset values (collaterals) at the banks that are financing them…
ReplyDelete"That mainly what moves FX is changing prices of exports.”
ReplyDeleteNot anymore that's the old paradigm. Along with the textbooks on inflation. Everything changed in 2017/18.
I believe because most FX is paired with the $. The $ is now on an oil standard that is what is now moving fx.
What the 1 yearly and 5 yearly charts prove beyond any doubt ( in my opinion ) is that FX traders still think we are on the old paradigm. You can actually see them move on the old inverse paradigm.
When you plot any major $ currency pair against the crude price they end up running for the exists. This is what we are watching right now. When the crude price rises they go the wrong way.
If it keeps rising from here, they will be running for the exits it is typical zombie behaviour.
If I am right that is. The 1 year and 5 year charts continue to perform as they have done since 2017/18.
Well, looks the war in the middle East has begun and the EU has just passed a resolution to lift current restrictions hindering Ukraine from using Western weapons systems against legitimate military targets in Russia.
https://www.europarl.europa.eu/news/en/press-room/20240913IPR23906/meps-ukraine-must-be-able-to-strike-legitimate-military-targets-in-russia
Peter what I am saying is looking at the YEN tells you absolutely nothing about MMT. Bill has moved it to centre stage on a false narrative. Brian has already proved that.
If the $ is now on an oil standard even more so.
If you plot crude v's the $ index it explains everything.
ReplyDeleteThe reason the $ was strong throughout the inflationary period is because crude went from $20 to $120.
The reason the $ is weak now that inflation has plummeted is because crude went from $120 to $60.
It is so obvious since Rex Tillerson and Gary Cohen put the $ on an oil standard for geopolitical purposes around 2017.
No other theory explains it. None ! as the textbooks got turned upside down and inside out.
A whole article in The Economist puzzling over the situation (“Norway’s weak currency presents a mystery”).
It is no mystery whatsoever once your starting point of analysis is the $ is now on an oil standard.
Just plot the Krone against the crude price.
Da, Da !
Mystery solved.
When you crude went from $20 to $120.
ReplyDeleteThe $ went from 90 to 120
When crude went from $120 to $60.
The $ went from 120 to 60
The textbooks got turned upside down and inside out. Absolutely nothing MMT'rs or the mainstream have said explains it. In truth they mainly ignored it as their theories no longer worked.
Using a starting point of analysis is the $ is now on an oil standard. Is the only theory that makes any sense.
Especially, when we now know what Rex Tillerson and Gary Cohen did as the centre piece of their energy dominance geopolitical strategy.
If true, Bill has just created a rod for his own back moving forward. There was absolutely no need basing the success of failure of MMT on what the YEN does.
I posted several times on his blog it was dangerous always using Japan to validate MMT.
Because what happens if Japan changes and an election brings in a new face that has different ideas.
Norway can keep handing over a load of Krone to the Oil Fund who then sells that Krone for FX to buy foreign investments.
ReplyDeleteJapan can keep playing silly buggers interfering in the FX market.
As long as their currencies are paired with the $ and the $ is now on an oil standard. None of that matters.
It matters that It will stretch the elastic band for a while, however, ultimately as the 1 year and 5 year charts prove since 2017. They will revert to the crude price.
No matter what they do.
If you rip up the text books just throw them away.
ReplyDeleteThe starting point of your analysis is to assume the $ is now on an oil standard. Everything becomes clear.
Infact, it is impossible to miss it. It is on the end of everybody's face. Right in front of everybody eyes.
“ There was absolutely no need basing the success of failure of MMT on what the YEN does.”. I don’t think he would say he did that .,, the only thing MMT says about Japan is they’ve had massive deficits for decad3sxandctheyvecnever gone bankrupt, etc.., I don’t think MMT even has forex as part of their theory other than maybe indirectly “it’s about price not quantity”…
ReplyDeleteUntil I'm proven wrong, The MMT economists are making a HUGE mistake. Using the YEN like that.
ReplyDeleteWarren won't listen. Chris Cooke and Big Orrin took Warren to task over his Saudi is the swing producer and thus determined the oil price theory.
They tore it to shreds on Twitter but Warren still believes he is right. Doesn't realise they is a large group of buyers of oil now that horde it in huge quantities and have become the swing demander.
What we have been watching right now is a buyers strike from them to drop the oil price lower. Which allows them to fill up their strategic reserves at lower prices. Saving them $ billions in the process. They are buying cheap now that they have their lower prices to be delivered and processed end of year and start of next year.
Physical traders rarely negotiate fixed price for their oil.
https://threadreaderapp.com/thread/1836300388032504300.html
" If you are buying for the SPR like China, then price matters. the lower the better because you are effectively doing nothing with the crude oil. You may then hedge it.
But as most crude is processed absolute price is not something that refiners worry too much about"
How european buyers use their Long Term Contract with saudi Arabia.
https://threadreaderapp.com/thread/1742845871434109026.html
Let's have a look at how China buys it's crude oil.
https://threadreaderapp.com/thread/1722921871748767962.html
Mike's latest video is bullish on oil. Never go against the producers. He's right.
Yet, the price plummeted.
The group the swing demander stopped buying at higher prices ( demand from China fell the zombies say ).
It didn't they were just using their strategic reserve to help push prices lower. Now they are filling their boots, but you won't see this show up until it lands in China. In December or January.
Come December and January ( China demand has picked up the zombies will say) they are always months behind what has actually happened.
They don't understand China's demand anymore. The role of the group of buyers who have become the swing demander. Who can determine prices for a little while. Price really matters to this group.
Once this group has had their beaks wet at these lower prices. With 2 wars on the price of crude should rise again, until the producers change their posistion.
By artificially reducing its OSP’s (differentials) to way below market levels, Saudi will force all other crude producers to reduce their differentials as well or otherwise everybody will try to buy from Saudi. Therefore all Crudes will improve versus the benchmark.
https://threadreaderapp.com/thread/1236703607728345088.html
Saudi OSPs, They increase them sometimes to try and reduce demand for their crude, because they cannot fulfill demand otherwise.
Saudi crude oil is expensive, because it gives much poorer refinery margins than does other crude oil.
https://threadreaderapp.com/thread/1665981646720364545.html
So a case is made that Warren has it backwards. Even if he accepts the $ is now on an oil standard.
“ There was absolutely no need basing the success of failure of MMT on what the YEN does.”. I don’t think he would say he did that .,, the only thing MMT says about Japan is they’ve had massive deficits for decad3sxandctheyvecnever gone bankrupt, etc.., I don’t think MMT even has forex as part of their theory other than maybe indirectly “it’s about price not quantity”…
ReplyDelete" The ‘MMT is dead’ crowd are silent now the yen is appreciating"
So what is Bill going to say if crude goes back up to 90 and the Yen gets hammered again ?
Will the MMT is dead crowd be shouting MMT is dead at him again ?
He's built a rod for his own back Using a false narrative.
Because Bill doesn't recognise the $ might now be On an oil standard.He won't even recognise why it is happening.
ReplyDeleteNow MMT is alive or dead if the Yen is appreciating or falling.
It's bonkers !
“ So what is Bill going to say if crude goes back up to 90 and the Yen gets hammered again ?”. That’s probably what should happen as the US exports oil to Japan and a higher oil price indicates increased US terms of trade… Japan banks financing the oil in USD terms have to increase the value of their collateral in USD so to maintain constant leverage in JPY (which they report in) they have to reduce exchange rate of JPY relative to USD,,,
ReplyDeleteThough perhaps to your point I don’t think the MMT people fully understand bank regulation…
ReplyDeleteBill has used Japan's monetary policies as an example of MMT. But Japanese economists have not acknowledged they are adhering to MMT principles. For MMT to be dead, Japan would have to alter its policy in regard to deficits. What is going on with the oil market and with currencies of major oil producers is a red herring.
ReplyDeleteMike has warned against single variable forecasting.
"What is going on with the oil market and with currencies of major oil producers is a red herring."
ReplyDeleteTell that to the 1 year and 5 year charts since 2017.
Then have a chat with the1 year and 5 year charts pre 2017.
ReplyDeleteAnd ask them why they are completely different but your theory hasn't changed.
"That’s probably what should happen as the US exports oil to Japan and a higher oil price indicates increased US terms of trade… Japan banks financing the oil in USD terms have to increase the value of their collateral in USD so to maintain constant leverage in JPY (which they report in) they have to reduce exchange rate of JPY relative to USD,,,"
But didn't pre 2017.
If this theory was correct Matt it would always show up in the charts. Pre 2017 crude was an inverse relationship with the $. So that theory is out of the water.
When crude went higher the $ fell.
When crude fell the $ got stronger.
The FX traders still see it that way = zombies.
Then other products became cheaper in USD terms .. the exchange rate is a composite index of terms of all trade Not just oil …
ReplyDeleteOf course, but we are talking about oil moving YEN here you can't have it both ways. Pre 2017 every time crude increased it didn't play out as You suggest.
ReplyDeleteChina will keep exporting oil products unless something big happens.
https://threadreaderapp.com/thread/1626601785027891201.html
China has a bigger refinery capacity than it did last year. Demand will go up in China but refinery capacity is much bigger than demand.
Now if China stops oil exports the major beneficiaries are the other refiners outside China. Up goes cracks, up goes crude oil price and China is worse off.
Crude price goes up because demand remains the same for products and other refiners have to buy the crude.There is no change in demand unless price kills it and that is a factor for China as well.
If they try and be sneaky and horde to take advantage of higher future price. It will do as it did this year. Cracks jump, China says will export, cracks drop.No scenario helps China by cutting exports of products unless something big happens and hording is needed. China already has a lot horded.On
What have they just done ?
China Issues New Fuel Export Quotas for Q4
https://oilprice.com/Latest-Energy-News/World-News/China-Issues-New-Fuel-Export-Quotas-for-Q4.html
Shale producers want higher prices, Opec want higher prices , Producers want higher prices - Everyone wants higher prices unless you are China etc,etc.
ReplyDeleteBuy putting it on an oil standard they ensured the $ stays strong as shale producers, Opec and producers get the higher prices they want.
That's what you want if you run a trade deficit. Want countries to send you stuff while They horde treasuries.
They help their geopolitical partners that want weaker currencies like the EU who run massive trade surpluses. As a strong Euro kills European exports.
When a currency goes down, all the others in the world go up in relation to it and nations that rely upon exports (export led nations) start to lose trade - which depresses their own economy.
The US has helped them by putting the $ on an oil standard. That keeps the $ fairly strong.
Exporters need to export, If you import a little then the exporters own you. If you import a lot then you own the exporters - because they then have nowhere else to go.
The shift to manufacturing in the 3rd world has generated a huge export overhang with the West. They need to export to the West or their economies collapse.
Putting the $ on an oil standard has helped them.
Until they realise they are being had, eliminate the export overhang and move to domestic consumption. You’ll note that the Japanese have only just done that, so it ain’t something that is going to happen overnight.China have made noises of doing similar.
Pre 2017 when crude went higher as everybody wanted higher prices. The $ went lower and that hurt the Eurozone and manufacturing in the 3rd world. As their currencies for stronger.
It makes sense why the US did it. Unless you are Trump that doesn't understand trade.
Energy importers have to reduce consumption in response to higher energy prices. That's a supply issue for a keystone commodity. Will Japan de-industrialize as Germany has? If they do, what happens to exports produced by energy intensive industries within Japan? They shrink.
ReplyDeleteThat's a separate and more serious issue as opposed to worrying about deficits and exchange rates. High energy prices lower the standard of living for energy importers. Meanwhile, energy exporters benefit.
Japan and Europe will maintain their policies in regard to debts and deficits. Changing them wouldn't alleviate supply issues. MMT recognizes that real resources are a limiting factor to consumption. Everyone except for economists living in finance fantasy land recognizes this. Be thankful that economists and speculators are not in charge of the oil market.
Speculators ARE in charge of the oil market Peter.
ReplyDeleteYou didn't read it did you ?
Or have been a sleep over the last decade ?
Here read it.
https://www.macrovoices.com/podcast-transcripts/419-chris-cook-energy-markets-are-manipulated-in-multiple-timeframes
Do you think Chris Cook is just some guy who walked off the street. Chris ran the international petroleum exchange.
Is the actual price of oil determined by a producer selling to a refiner or is it from a computer algo selling to a computer algo? In this case absolute price is important to one but price movement important to the other.
More that algos trade worse price signal for oil and its actual real value. It is now about just acheiving price movement for most trades than price determination. They dont care if it is $10 or $100. Making money is all that matters. Therefore, real oil price is unknown.
Spreads used to be where professional traders worked but because of the algos that has been bastardized as well. Backwardation and Contango levels now dont tell you the true extent of the physical market because the volumes traded have widened between months so much.
So looking at the actual futurs benchmark today, it really is not efficient. It has too much speculation which takes away price detemrination, too much liquidity which causes huge overshoots and it uses poor quality metrics to determine price.
The fact you haven't even heard of " Dark inventory " debate is really quite something. Or the " big long '
Chris being head of the international petroleum exchange saw it, studied it and saw what Rex Tillerson and Gary Cohen did along with John Shapiro at Morgan Stanley.
What you call a red herring.
He also lost everything while exposing them. When cancel culture and the attack on free speech wasn't even a thing. Whistle blowers were supposed to be protected.
ReplyDelete" Energy importers have to reduce consumption in response to higher energy prices. That's a supply issue for a keystone commodity. Will Japan de-industrialize as Germany has? If they do, what happens to exports produced by energy intensive industries within Japan? They shrink. "
ReplyDeleteYou haven't listened to a word I have said have you Peter?
Who are the countries that are in this buying club and have become the " swing demander"?
Have started hording energy on a massive scale. Who after hording go on a buyers strike to bring the price way down then fill their strategic reserves ? Then full their boots.
What is BRICS all about ?
“ Will Japan de-industrialize as Germany has?”. That was due to the climate nut jobs in Germany… not due to prices..,
ReplyDeleteProducers are in charge of the oil markets. Speculators are third parties who have no legitimate business to be trading in oil futures. If this were an issue negatively affecting supply, it would be reformed to curb speculation.
ReplyDeleteGo against the producers if you believe otherwise. It's your money.
Yes Matt, a decade of green-washing increased the cost of energy, and the break with Russia accelerated Europe's demise. Price is everything, especially with industrial processes.
ReplyDeleteYou haven't listened to a word I have said have you Peter?
ReplyDeleteWho are the countries that are in this buying club and have become the " swing demander"?
Have started hording energy on a massive scale. Who after hording go on a buyers strike to bring the price way down then fill their strategic reserves ? Then full their boots.
What is BRICS all about ?
BRICS is about living in a fantasy world where the entire world's growing energy needs can be met by playing financial games. It's the world we live in now, historically controlled by 'the West'.