Bill Mitchell — Inverted yield curves signalling a total failure of the dominant mainstream macroeconomics

At different times, the manias spread through the world’s financial and economic commentariat. We have had regular predictions that Japan was about to collapse, with a mix of hyperinflation, government insolvency, Bank of Japan negative capital and more. During the GFC, the mainstream economists were out in force predicting accelerating inflation (because of QE and rising fiscal deficits), rising bond yields and government insolvency issues (because of rising deficits and debt ratios) and more. And policy makers have often acted on these manias and reneged on taking responsible fiscal decisions – for example, they have terminated stimulus initiatives too early because the financial markets screamed blue murder (after they had been adequately bailed out that is). In the last week, we have had the ‘inverted yield curve’ mania spreading and predictions of impending recession. This has allowed all sorts of special interest groups (the anti-Brexit crowd, the anti-fiscal policy crowd, the gold bug crowd, anti-trade sanctions crowd) to jump up and down with various versions of ‘I told you so’. The problem is that the ‘inverted yield curve’ is not signalling a future recession but a total failure of the dominant mainstream macroeconomics. The policy world has shifted, slowly but surely, away from a dependence on monetary policy towards a new era of fiscal dominance. We are on the cusp of that shift and bond yields are reflecting, in part, the sentiment that is driving that shift....

Bill Mitchell – billy blog
Inverted yield curves signalling a total failure of the dominant mainstream macroeconomics
Bill Mitchell | Professor in Economics and Director of the Centre of Full Employment and Equity (CofFEE), at University of Newcastle, NSW, Australia

Debt Worries Yet Again — Brian Romanchuk

J.W. Mason posted an interesting list of arguments to not worry about government debt levels in "A Baker's Dozen of Reasons not to Worry About Government Debt." On reading it, I realised that one could cut through the whole thing by arguing as follows: the reason why we should not worry about government debt in a country like the United State is that nobody can come up with a (not highly disputable*) reason why that the stock of debt matters.

I will largely leave that assertion for the reader to chew on. However, I would note that I chose my wording carefully....

Bond Economics
Debt Worries Yet Again
Brian Romanchuk

J. W. Mason — A Baker’s Dozen of Reasons Not to Worry about Government Debt

Good summary of the main points regarding public debt.

J. W. Mason's Blog
A Baker’s Dozen of Reasons Not to Worry about Government Debt
JW Mason | Assistant Professor of Economics, John Jay College, City University of New York

There are no financial risks involved in increased British government spending — Bill Mitchell

On July 26, 2018, UK Guardian columnist Phillip Inman published an article – Household debt in UK ‘worse than at any time on record’ – which reported on the latest figures at the time from the Office of National Statistics (ONS). He noted that the data showed that “British households spent around £900 more on average than they received in income during 2017, pushing their finances into deficit for the first time since the credit boom of the 1980s … The figures pose a challenge to the government … Britain’s consumer credit bubble of more than £200bn was unsustainable. A dramatic rise in debt-fuelled spending since 2016” and more. While keen to tell the readers that British households were “living beyond their means”, there was not a single mention of the fiscal austerity drive being pursued by the British government over the same period. Nor was there mention of the fact that the entire British fiscal strategy since the Tories took office was predicated, as I pointed out years ago in this blog post – I don’t wanna know one thing about evil (April 29, 2011), on this debt binge continuing. A year later (July 20, 2019), the same columnist published this article – Labour and Tories both plan to borrow and spend. Is that wise? – which like its predecessor fails to present a comprehensive, linked-up, analysis for his readers and makes basis macroeconomic errors along the way. 

The latest article is attacking both the variously announced intentions of the British Labour Party and the Tory government to increase net public spending....

Bill Mitchell – billy blog
There are no financial risks involved in increased British government spending
Bill Mitchell | Professor in Economics and Director of the Centre of Full Employment and Equity (CofFEE), at University of Newcastle, NSW, Australia

Bill Mitchell — Japan still to slip in the sea under its central bank debt burden

President Trump banned a CNN reporter only to find his position overturned by the judicial system. Well CNN is guilty of at least one thing – publishing misleading and alarmist economic reports about Japan. In a CNN Business article last week (November 13, 2018) – Japan’s economy has a $5 trillion problem – readers were told that the Bank of Japan has no “dwindling options to juice growth if a new crisis hits” because “it’s now sitting on assets worth more than the country’s entire economy”. The real story should have been that the Bank of Japan continues to demonstrate the categorical failure of mainstream macroeconomics and, conversely, ratify the core principles of Modern Monetary Theory (MMT). That is what the Japanese experience since the early 1990s tells us. And all the stories about special cases; cultural peculiarities, closed markets, etc that the mainstream economists wheel out when another one of their predictions about how Japan is about to sink into the sea as a result of its public debt levels, or that interest rates are about to go through the roof because of the on-going and substantial fiscal deficits; or that inflation is about to accelerate because of the massive monetary injections; and more, are just smokescreens to divert our attention from the poverty of their analytical framework. The Japanese 10-year bond trade is called the ‘widow maker’ because hedge funds who try to short it lose big. The Japanese monetary system is my real-time, non-linear economic laboratory which allows all the key macroeconomic propositions to play out live. And MMT is never very far off the mark. Try juxtaposing New Keynesian theory against Japan – total dissonance....

Bill Mitchell – billy blog
Japan still to slip in the sea under its central bank debt burden
Bill Mitchell | Professor in Economics and Director of the Centre of Full Employment and Equity (CofFEE), at University of Newcastle, NSW, Australia

Clint Ballinger — Decouple Spending From Bond Sales

I would suggest considering limiting federal government "bond" sales — with "bonds" meaning term secretaries — to short term notes that are essentially cash equivalents that pay a bit of interest. Longer term government securities can be issue without a term limit, which makes them appear to be "debt" comparable to private debt.

The UK has already done this with "consoles."

Consols (originally short for consolidated annuities, but subsequently taken to mean consolidated stock) was a name given to certain government debt issues in the form of perpetual bonds, redeemable at the option of the government. They were issued by the U.S. Government and the Bank of England. The first British Consols were issued in 1751.

In 1752 the Chancellor of the Exchequer and Prime Minister Sir Henry Pelham converted all outstanding issues of redeemable government stock into one bond, Consolidated 3.5% Annuities, in order to reduce the coupon (interest rate) paid on the government debt.

In 1757, the annual interest rate on the stock was reduced to 3%, leaving the stock as Consolidated 3% Annuities. The coupon rate remained at 3% until 1888. In 1888, the Chancellor of the Exchequer, George Joachim Goschen, converted the Consolidated 3% Annuities, along with Reduced 3% Annuities (issued in 1752) and New 3% Annuities (1855), into a new bond, 2¾% Consolidated Stock, under the National Debt (Conversion) Act 1888 (Goschen's Conversion). Under the Act, the interest rate of the stock was reduced to 2½% in 1903, and the stock given a first redemption date of 5 April 1923, after which point the stock could be redeemed at par value by Act of Parliament.

In 1927 Chancellor Winston Churchill issued a new government stock, 4% Consols, as a partial refinancing of the National War Bonds issued in 1917 during World War One...

Consols were created to retire the stock (tally sticks) issued by the Crown and accepted in payment of taxes. They are fully negotiable in markets and are issued with a permanently fixed rate of interest.

Such securities can be considered as a form of equity ("stock") that pays a fixed "dividend" instead of as "debt" that pays interest. They would function in markets in essentially the same way as "bonds" of indefinite term. They could even be inflation-protected.

While this is essentially only an institutional change in legal verbiage, word do matter in persuasion. 

Would you feel safer owning "a piece of the country," or "government debt"? (rhetorical question.) Of course, then the claim would be "selling the country" to pay for whatever rather than "blowing out the debt" that "our children have to pay."

Clint Ballinger
Decouple Spending From Bond Sales

Toluse Olorunnipa — Bolton Calls National Debt ‘Economic Threat’ to U.S.

Acting-President John Bolton speaks nonsense from his bully pulpit again.

• National security adviser says to cut discretionary spending
• Many budget experts say entitlements are bigger threat

“It is a fact that when your national debt gets to the level ours is, that it constitutes an economic threat to the society,” Bolton said. “And that kind of threat ultimately has a national security consequence for it.”...

Bloomberg
Bolton Calls National Debt ‘Economic Threat’ to U.S.
Toluse Olorunnipa

FRED Blog — How expensive is it to service the national debt? : A battle between interest rates and growth rates

Not that affordability is relevant from the MMT POV, but it's worth looking at anyway. "They" view it conventionally in terms of the interest rate "r," that is, the policy rate, and the growth rate "g" measured as change in GDP.

This is the ratio of r to g, or "r : g". As long as r is greater than g, "they" consider the increasing interest affordable. In fact, "r > g" has become a meme and entered the jargon since the publication of Thomas Piketty's Capital in the Twenty–First Century.

While MMT regards this ratio is irrelevant to affordability for a currency sovereign, MMT economists also point out that that it is under the control of the central bank as the monetary policy authority that sets "r" as the policy rate. The central bank can set the policy rate where it chooses relative to its mandate of growth, employment and price stability ("inflation"), although price stability usually predominate, since central banks tend to target an inflation rate and use employment rate as a tool under NAIRU.

There are no bond vigilantes that control interest rates in a currency zone where the government is sovereign in its currency and does not undertake obligations in terms where it is not sovereign and therefore could get squeezed.

So from the MMT perspective, concern over the affordability of the national debt is a canard that distracts from the issues that are actually important for policy. Neither fiscal payments by the Treasury nor monetary payments like interest on excess reserves are constraints on the government to spend. According to MMT, the real constraint is availability of real resources and the nominal constraint is inflation. "Affordability" is not an issue for a currency sovereign as the monopoly issuer of its currency as the unit of account in the currency zone.

The classic MMT paper on this issue is "Interest Rates and Fiscal Sustainability" by Scott T. Fullwiler (2006).

FRED Blog
How expensive is it to service the national debt? : A battle between interest rates and growth rates

Lars P. Syll — Give the public debt some respect and end austerity!

Too little public debt can be as damaging economically as to much public debt, since public debt is the one-to-one measure of deficit spending, and public spending increase flows, both financial and economic, in the economy.

On the other hand, MMT shows that issuance of public debt is unnecessary for funding governments that are currency sovereigns and suggests that interest payments on public debt constitute a subsidy to bond holders. 

Thus, the need arise to justify the continued issuance of interest-bearing public debt beyond cash-equivalents (short-term notes) for convenience of finance and commerce.

One such justification, and likely the most significant one, is that default risk-free debt reduces overall risk in the financial system. For example, financial institutions and fiduciary institutions like pensions are often required to keep a percentage of their assets in public debt instruments in order to reduce risk-exposure.

The ratio of private and public debt is an indication of the risk exposure in an economy, with higher levels of private debt to public debt indicating increased systemic risk.

Fiscal deficits result in changes in net financial assets in aggregate for non-government. This affects non-government saving. Issuance of public debt provides non-government a default risk-free vehicle for saving the aggregate net financial assets injected by net pubic spending.

Thus, there may be a sweet spot economically for the amount of both public spending and public debt  with respect to functional finance and economic policy.

Lars P. Syll’s Blog
Give the public debt some respect and end austerity!
Lars P. Syll | Professor, Malmo University

John Weeks — Why the public debt should be treated as an asset

Overt money financing.

Open Democracy
Why the public debt should be treated as an asset

John Weeks | Professor Emeritus, School of Oriental & African Studies, University of London, and author of 'Economics of the 1%: How mainstream economics serves the rich, obscures reality and distorts policy', Anthem Press

Bill Mitchell — Precarious private balance sheets driven by fiscal austerity is the problem

The media has been giving a lot of attention in the last week to the 10-year anniversary of the Lehman Brothers crash which occurred on September 15, 2008 and marked the realisation, after months of denial, that there was a financial crisis underway. Lots of articles have been published recently about what we have learned from this historical episode. I thought that the Rolling Stone article by Matt Taibbi (September 13, 2018) – Ten Years After the Crash, We’ve Learned Nothing – pretty much summed it up. We have learned very little. Commentators still construct the crisis as a sovereign debt problem and demand that governments reduce fiscal deficits to give them ‘space’ to defend the economy in the next crisis. They are also noting that the balance sheets of the non-government sector components – households and firms – are looking rather precarious. They also tie that in with flat wages growth and a run down in household saving. But the link between the fiscal data and the non-government borrowing data is never made. So we are moving headlong into the next crisis with very little understanding of the relationship between government and non-government. And we are increasingly relying on private sector debt buildup to fund growth as governments retreat. Everything about that is wrong....

Bill Mitchell – billy blog
Precarious private balance sheets driven by fiscal austerity is the problem
Bill Mitchell | Professor in Economics and Director of the Centre of Full Employment and Equity (CofFEE), at University of Newcastle, NSW, Australia

Bob Bryan — Bob Woodward book: Gary Cohn was 'astounded at Trump's lack of basic understanding' about the federal debt

Funny. Trump gets some of the basics of MMT, which the article mentions. Gary Cohn, not so much.

Business Insider
Bob Woodward book: Gary Cohn was 'astounded at Trump's lack of basic understanding' about the federal debt

Bob Bryan

Bill Mitchell — Bank of Japan once again shows who calls the shots

On August 1, 2018, the 10-year Japanese government bond yield, shot through the roof (albeit a very low one). Yields shifted from 0.05 per cent on July 31 to 0.129 on August 1, which was the largest one-day rise since July 29, 2016 (when the yield rose 0.101 per cent). The Financial Times article (August 1, 2018) – Japanese bond market jolted as traders test BoJ resolve – wrote that “traders wasted no time in testing the Bank of Japan’s resolve to loosen its target range for the debt benchmark”. So what was that all about? And what key point does it demonstrate that seems to be lost on mainstream economists who continually claim that government debt is, or can become a problem once bond markets demand higher yields? The Japanese bond market has shown once again that private bond traders cannot set yields on government bonds if the central bank intervenes. Next time you hear some mainstream economist claiming a currency issuing government is running deficits at the will of the investors (read bond markets) politely tell them they are clueless. Japan once again provides the real world Modern Monetary Theory (MMT) laboratory – every day it substantiates the underlying insights contained within MMT and refutes the core mainstream propositions. The bond market over the last month or so demonstrates that the Japanese government is increasingly net spending by using credits created by the Bank of Japan, whatever else the accounting structures might lead one to believe. With inflation low and stable, these dynamics surely put paid to the various myths that a currency-issuing government can run out of money and that central bank credits to facilitate government spending lead to hyperinflation....

Bill Mitchell – billy blog
Bank of Japan once again shows who calls the shots
Bill Mitchell | Professor in Economics and Director of the Centre of Full Employment and Equity (CofFEE), at University of Newcastle, NSW, Australia

Michael Roberts — Greece: on parole

Backgrounder on Greece (and the IMF and Eurocrats). A sad tale of elite rule and rent extraction off the back of ordinary workers with no power or influence — unless they rise up angry and are willing to pursue it.

Michael Roberts Blog
Greece: on parole
Michael Roberts

Brian Romanchuk — The Yield Curve Provides Limited Economic Information

The relentless flattening of the Treasury yield curve has been a topic of ongoing debate -- is this a signal that a recession is near? The key to interpreting the flattening is that bond market participants are not paid to to anticipate economic outcomes (outside the corner case of the inflation-linked market), rather to anticipate the path of short-term rates (and the term premium). The flattening yield curve tells us that market participants (on average) believe that we are near the end of the rate hike cycle, but that does not necessarily mean that a recession is imminent....

Bond Economics
The Yield Curve Provides Limited Economic Information
Brian Romanchuk

Bill Mitchell — Governments should not issue debt under foreign law

In examining the implications for an exit from a currency union, one of the issues that arises is the proportion of public debt that is issued under foreign law. This is a separate issue to the implications of foreign-currency denominated debt. Both issues are problematic and compromise a government’s capacity to remain solvent. I covered the former issue to some extent in my 2015 book – Eurozone Dystopia: Groupthink and Denial on a Grand Scale – when I was considering different strategies for exit. There has been some further research on the question of foreign law debt issuance by the ECB and its Working Paper No. 2162 – Foreign-law bonds: can they reduce sovereign borrowing costs? – published June 2018, has relevance. It is clear that a government reestablishing its sovereignty has the upper hand, especially if it has issued debt under its own legal system. Which is why the likes of the IMF and the European Commission has been keen to increasingly pressure governments to issue debt under foreign laws under the ruse that this is a show of faith to the private bond markets. Once again the increasing bias towards foreign-law debt is all about privileging private capital over the interests of citizens in national states. What is absolutely clear is that a sovereign government should never issue debt instruments under any legal system other than their own. What is even clearer – such a government has no need to issue any debt at all.

Bill Mitchell – billy blog

Governments should not issue debt under foreign law
Bill Mitchell | Professor in Economics and Director of the Centre of Full Employment and Equity (CofFEE), at University of Newcastle, NSW, Australia

Brian Romanchuk — The Chimera Of Generational Fairness In Fiscal Policy

Although mainstream economics prides itself on being highly precise and mathematical, this is not apparent when looking at the discussion of fiscal policy. It is very easy to find appeals to intergenerational fairness when discussing fiscal policy. Such a term is essentially meaningless in technical terms; it is mainly used as a ploy to evoke images of doe-eyed grandchildren being robbed by nefarious politicians. This article explains why the concept is largely worthless as an analytical concept....

Bond Economics
The Chimera Of Generational Fairness In Fiscal Policy
Brian Romanchuk

The Week Staff — The national debt, explained

MMT alert.

Could be better, but not bad.

The Week
The national debt, explained
The Week Staff

Ralph Musgrave — What’s the optimum amount of national debt?

Roger Farmer is out with an argument for the optimal level of public debt being 70% of GDP. Ralph provides the MMT answer. It is nicely succinct.

MMTers have solved this one. Others are still floundering, in particular Roger Farmer in this NIESR article on the subject, is all over the place far as I can see (1). So I’ll run thru this vexed question for the umpteenth time....

Farmer bills himself as a Keynesian. Ralph reminds us of the answer Keynes himself gave to the question of public debt optimality and how to determine it.

So, to return to the original question, i.e. what’s the optimum amount of national debt or more properly, PSNFA? The answer is “whatever brings full employment”. And that very much ties up with Keynes’s dictum: “look after unemployment, and the budget looks after itself”. 

Ralphonomics

What’s the optimum amount of national debt?

Ralph Musgrave

Pam and Russ Martens — Puerto Rico’s Debt Is Quietly Sitting in Mom and Pop Mutual Funds as Trump Says It Will Be Wiped Out

There was likely a collective gasp at OppenheimerFunds Inc. yesterday when President Donald Trump made another of those market-moving pronouncements, telling Fox News that Puerto Rico’s debt would have to be wiped out. The President’s remarks suggested he thought the losers would be Wall Street banks. The President stated: “You know they owe a lot of money to your friends on Wall Street. We’re gonna have to wipe that out. That’s gonna have to be — you know, you can say goodbye to that. I don’t know if it’s Goldman Sachs but whoever it is, you can wave good-bye to that.”

The reality is that a large percentage of Puerto Rico’s debt is held in tax-free municipal bonds and municipal bond mutual funds, owned not by Wall Street banks or tycoons, but by mom and pop investors seeking tax-free income….

Wall Street On Parade
Puerto Rico’s Debt Is Quietly Sitting in Mom and Pop Mutual Funds as Trump Says It Will Be Wiped Out
Pam Martens and Russ Martens