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Understanding the UK's monetary financing

  • 12-02-2021 5:58am
    #1
    Dannyboy83
    Registered Users Posts: 4,236 ✭✭✭


    Forgive my ignorance, I'm aware that monetary theory has evolved but my grasp of economics is still stuck in 2012 and there are some concepts I am struggling to understand.

    I've read the excellent thread here on "Bank of England to directly fund UK Government Spending".
    Some of it I can grasp - but not all - and I think some of it I must have misunderstood.
    It leaves me with further questions with regard to the decisions being taken by Central Government which I'd appreciate some help understanding.

    I understand why theoretically the UK cannot become insolvent, there is a compelling argument here:
    https://www.taxresearch.org.uk/Blog/2020/06/02/mythbsuter-the-uk-national-debt-is-heading-for-100-of-gdp/

    In short, the UK cannot become insolvent, because the BoE can just print more money whenever the government needs it, and keeps it off the government's balance sheet. (I've seen US investors disagree and say it's all part of the same system, so the semantics don't matter to them, but I digress)

    I don't understand why the BoE isn't seen as a Special Purpose Vehicle. Ultimately it's still public debt - behind a facade. I seem to recall that when it came to the crunch, Bond Markets didn't agree to pretend NAMA didn't exist. Ireland had to turn to the Troika.

    I understand that the UK doesn't have to go to the Bond Markets because it can print money.
    I don't understand why they are then still bothering with gilts?
    Is there a red line beyond which the BoE cannot go?

    Also, I simply don't understand why this is not supposed to result in runaway inflation, if not HyperInflation. I've seen many UK economists claim that the government's plan is to inflate their way out of debt, but it's not working. The MPC keep writing letters to raise concerns over this.

    If this is a viable method of financing that doesn't cause inflation, then why don't the ECB adopt the same measure? Spain still still to be selling 50 year bonds?

    (Anecdotally, I am seeing what I believe is some real inflation here on the ground in the South East - particularly in food - but it's possible this is related to Brexit costs.)

    There are reports that 60% of trucks returning to Europe are empty. Thus demand for the pound is decreasing rapidly.
    I don't understand why is this no longer a threat to the UK? Won't a volatile pound and collapse in demand still risk a deflationary spiral?

    Why are the Office of Tax Simplification suggesting eye-watering tax increases and contractionary measures during the worst recession in 300 years, if the debt technically never has to be repaid?

    Why have the government killed off their flexible workforce of contractors through IR35 and set back industry by a decade, if the government can just plug the gap through borrowing?

    If the government can run up endless debts - why do banks still have capital reserve rules?

    Why are Councils going bankrupt if the government can just borrow money and bail them out?

    If the debt arising from QE can simply be cancelled, then why don't the government simply do this in perpetuity and eliminate taxation?

    If people start spending like crazy once the Covid restrictions are lifted, won't that result in huge inflation, especially considering the level of QE, which all seems to have resulted in asset price inflation (even though the FTSE is dead)?

    That's a lot of questions and I guess some of my assumptions are based on misunderstandings, so I will pause there before I ask anything further.


Comments

  • #2
    Dannyboy83
    Registered Users Posts: 4,236 ✭✭✭Dannyboy83


    I have been keeping an economic journal of big events happening here in the UK, including some trajectories. Most of the headlines are from the Financial Times.

    I see an extremely worrying economic situation emerging here, but most British people seem to have their head in the sand.
    I just don't get it.
    I was in Ireland during the Celtic Tiger and it feels even worse now than it did then. (And BJ still has 39% approval rating, while FF were wiped out)

    Some news stories don't make sense to me, in respect of this magic money tree.
    For example, Scotland had to scrap their "Help to Buy" program, which caused a lot of bitterness at a time when Scotland are making serious noises about leaving.
    Why didn't Central Government just print some money and let them carry on?

    Boris Johnson is talking of hiring 50k nurses at a cost of £2.8 billion and has allocated £3 billion to cladding, while the tax take has collapsed and borrowing is going through the ceiling. Doesn't make much sense to me.


    What has happened over the last 12 months:
    • Debt is over 115% of GDP (over £2.2 Trillion), with £280 billion already spent on Covid measures in the first 12 months.

    • Unemployment trending toward 7.7% and 10% over a slightly longer timeframe. The true rate of employment is thought to be higher as 9.9 million people are on furlough schemes

    • Estimates are that 1.3 million have emigrated. This is the largest decrease since WW2 and composed of a large amount of EU migrants. The UK’s foreign-born population decreased by 843,000 people to approx. 8.3million during the third quarter of 2020.

    • Immigration monitoring tools were suspended last March, so immigration figures are not clear, but the UK has had a quite consistent immigration of 250,000 annually for the last 10 years. On average, over the last 2-3 years, 80% were non-EU. The 10-year average is 70% non-EU.

    • The largest immigrant groups up until 2019 were from from India, Poland and Pakistan respectively. India has now become the most common country of origin for migrants in the UK, due to the emigration of Poles since Brexit. EU Migration was typically 50,000-60,000 people until Brexit. Non-EU immigration now composes most of the immigration since Brexit.

    • Immigrants must now clear a reduced salary threshold of £25,600 per annum. This was reduced from £30,000 per annum. The IT and Financial sectors are predicted to be the largest beneficiaries of the new cheaper workforce. There will no longer be a cap on the number of skilled migrants who can receive work visas. The “resident labour-market test”, under which employers have to show there is no suitably qualified British candidate for the role has also been removed.

    • Surveys have found that 1 in 3 people aged 16 to 35 are open to the possibility of leaving the UK to work. 1/3 of those in IT and telecoms (31%), real estate (37%) and media, marketing and advertising (33%) said the pandemic and uncertainty over the outcome of Brexit have made them consider moving to the EU to work. In contrast, those in manufacturing (70%), transportation and distribution (68%) and education (69%) said they will be staying in the UK for work.

    • 9/10 Local Authorities are warning of impending bankruptcy and need an extra £10.1 billion to cover costs. 4 in 5 councils are warning they cannot avoid bankruptcy without bailouts or austerity programs over the next year, including Kent, Leeds, Manchester and Nottingham.

    • Croydon Council declared Section 114 in November. At the time of writing, 12 Councils are in rescue talks with Central government due to bankruptcy. This number is predicted to increase.

    • Figures from The Gazette, the official public record for the UK, found 3,126 businesses voluntarily appointed liquidators during the third quarter of 2020, the highest for any third quarter since 2000. The figure was up 52 per cent on the same period in 2019.

    • The government have brought in a profits-based “digital services tax”. Treasury proposals are thought to include an additional tax on consumer deliveries or a levy of 2 per cent on all goods bought online. These measures will primarily hurt US businesses and are expected to significantly undermine the possibility of a UK-US Post-Brexit Trade deal.

    • Amsterdam has now ousted London as Europe’s top share trading hub, there was an immediate shift of €6.5bn of deals to the EU when the Brexit transition period concluded at the end of last year.

    • Trading in a key euro-denominated derivatives market flooded out of London last month to rival financial centres in New York, Amsterdam and Paris, in the latest evidence of the blow dealt by Brexit to the UK financial centre.


    What looks probable over the next 12 months:
    • Debt on track to hit 130% of GDP before vaccinations go over 70%
    • Covid debt on track to hit £394 billion by mid-2021.
    • UK Unemployment to pass 2.5 million by mid-2021
    • 4 million unemployed within the next 12 months once Furlough and bailout schemes end.
    • Demand on Social Welfare will surge over the next 6-12 months.
    • Property Crash: The Centre for Economics and Business Research (CEBR) has issued a forecast of a 13.8% drop in average house prices next year.
    • Stamp duty holiday Bubble bursting: The UK Nationwide house price index fell 0.3 per cent in January.
    • Surveys indicate the majority of business bailouts have been used to prevent a default on commercial rents. Once bailouts are withdrawn there is a high probability of a commercial sector property market crash.
    • The collapse in business rates will probably crash Councils. UK borrowing is already out of control, so the gaps must be plugged through taxation or austerity – most likely both.
    • UK Companies will have borrowed more than £60 billion to help them to survive the pandemic by the end of this year


  • #3
    Wanderer78
    Registered Users Posts: 28,775 ✭✭✭✭Wanderer78


    Central banks can never run out of money, so technically, no country can truly become insolvent, money just becomes debt, issues arise when those debts cannot be serviced. It's also important to remember, the majority of the money supply comes from private sector financial institutions or banks, in the form of credit, and this has been proven many times to be the more serious element of the money supply, particularly when a country is unable to service these debts, I.e 08


  • #4
    Dannyboy83
    Registered Users Posts: 4,236 ✭✭✭Dannyboy83


    Wanderer78 wrote: »
    Central banks can never run out of money, so technically, no country can truly become insolvent, money just becomes debt, issues arise when those debts cannot be serviced. It's also important to remember, the majority of the money supply comes from private sector financial institutions or banks, in the form of credit, and this has been proven many times to be the more serious element of the money supply, particularly when a country is unable to service these debts, I.e 08

    Correct me if I am going wrong here:

    If I understand Modern Monetary Theory correctly; then the BoE can print money endlessly - when ordered to - and keep it off the government's balance sheets.
    Essentially, the government have a blank chequebook.

    And where they were previously restrained by Bond Markets - they can now spend at will with no constraints - neither parliamentary nor constitutional - and no concern for bond markets.

    Ultimately the taxpayer must repay it at some stage.
    But in essence, the government now have a credit card drawing from every taxpayer's bank account.

    If this is correct - why did this always result in hyperinflation in the past, but doesn't anymore? What changed?


  • #5
    Victor
    Registered Users Posts: 78,233 ✭✭✭✭Victor


    I've not followed the proposals, but I got the impression it was focused on funding the COVID-19 response, not general government operations.
    Dannyboy83 wrote: »
    Also, I simply don't understand why this is not supposed to result in runaway inflation, if not HyperInflation.
    Well that really depends on the amount of money, doesn't it?


  • #6
    Wanderer78
    Registered Users Posts: 28,775 ✭✭✭✭Wanderer78


    Dannyboy83 wrote:
    If I understand Modern Monetary Theory correctly; then the BoE can print money endlessly - when ordered to - and keep it off the government's balance sheets. Essentially, the government have a blank chequebook.


    Please be aware, ive a very limited knowledge on such matters, other boards members have far superior knowledge than me, hopefully they'll respond, so we both can understand better

    But my limited understanding is that technically governments such as the UK can indeed continually keep creating money, as far as the economy can service those debts, even to itself. it's important to remember how money is created, it's effectively an accountancy activity, hence the term 'double entry bookkeeping'. When the debt is paid off, the money is effectively destroyed, even when a country borrows from itself, it's also important to remember, citizens deposits are not used directly in the process, deposits are simply held in reserves. So again, it comes down to serviceability, if an economy is unable to service it's debts, it's in trouble, this is what has occurred in the past, 08 being a perfect example, baring in mind, 08 had little or nothing to do with public sector, as it was largely a private debt problem, but the same problem, I.e. unserviceable private debt


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  • #7
    Victor
    Registered Users Posts: 78,233 ✭✭✭✭Victor


    Wanderer78 wrote: »
    baring in mind, 08 had little or nothing to do with public sector
    Not quite.

    While the initial debt problem was private and business (primarily property speculation) debt, there were a number of ways this interacted with the public finances.

    The government's tax take was over-dependent on non-recurrent capital taxes and income taxes on construction and retail service workers. When this tax take disappeared, the government finances fell apart.

    While governments in Eurozone countries tried to separate the public and private finances, the markets took the traditional approach that the two were linked.

    Separately, the government was likely overspending on capital projects with doubtful merits, e.g. building separate motorway to Cork, Limerick and Waterford was unnecessary. If they had built two of the these motorways, they would have had the money to build substantial parts of motorways between Cork, Limerick and Waterford.


  • #8
    Wanderer78
    Registered Users Posts: 28,775 ✭✭✭✭Wanderer78


    Victor wrote: »
    Not quite.

    While the initial debt problem was private and business (primarily property speculation) debt, there were a number of ways this interacted with the public finances.

    The government's tax take was over-dependent on non-recurrent capital taxes and income taxes on construction and retail service workers. When this tax take disappeared, the government finances fell apart.

    While governments in Eurozone countries tried to separate the public and private finances, the markets took the traditional approach that the two were linked.

    Separately, the government was likely overspending on capital projects with doubtful merits, e.g. building separate motorway to Cork, Limerick and Waterford was unnecessary. If they had built two of the these motorways, they would have had the money to build substantial parts of motorways between Cork, Limerick and Waterford.

    yes, our public tax take was primarily based on a rapidly rising building boom, which was backed by a rapid escalation of private debt, i.e. our public books collapsed because of this, as our economy was unable to maintain this level of private borrowing, which in turn collapsed the public books, i.e. it was primarily a private debt problem that sparked the whole thing, you can see it clearly in the following graph. we had an over reliance in the private sector element of the money supply, i.e. credit supply, which generally creates asset bubbles, and an under reliance on the public sector element of the money supply via the bond markets, always baring in mind, in order to have a growing economy, you must always have a growing money supply in order to do so.

    the graph clearly shows both the public and private sector elements of the money supply, and as you can see, the private sector was rapidly growing, via credit creation, when in fact the public sector was slowly falling, as we were running regular surpluses and balanced budgets. this is where fiscal conservatism becomes extremely dangerous, i.e. an over reliance of the private sector for the money supply, and an under reliance of the public sector.

    i would some what disagree with you analogy of motorway spending, major infrastructure such as is known to create long term economic benefits to interlinking regions, its also important to realize, one of the most catastrophic decisions after the crash, was in fact, was to impose austerity, as its a well known fact, it causes astonishing amounts of damage to an economy and society, some of which is irreversible


  • #9
    andrew
    Moderators, Science, Health & Environment Moderators, Society & Culture Moderators Posts: 3,368 Mod ✭✭✭✭andrew


    Dannyboy83 wrote: »
    Forgive my ignorance, I'm aware that monetary theory has evolved but my grasp of economics is still stuck in 2012 and there are some concepts I am struggling to understand.

    I've read the excellent thread here on "Bank of England to directly fund UK Government Spending".
    Some of it I can grasp - but not all - and I think some of it I must have misunderstood.
    It leaves me with further questions with regard to the decisions being taken by Central Government which I'd appreciate some help understanding.

    I understand why theoretically the UK cannot become insolvent, there is a compelling argument here:
    https://www.taxresearch.org.uk/Blog/2020/06/02/mythbsuter-the-uk-national-debt-is-heading-for-100-of-gdp/

    In short, the UK cannot become insolvent, because the BoE can just print more money whenever the government needs it, and keeps it off the government's balance sheet. (I've seen US investors disagree and say it's all part of the same system, so the semantics don't matter to them, but I digress)

    I don't understand why the BoE isn't seen as a Special Purpose Vehicle. Ultimately it's still public debt - behind a facade. I seem to recall that when it came to the crunch, Bond Markets didn't agree to pretend NAMA didn't exist. Ireland had to turn to the Troika.

    I understand that the UK doesn't have to go to the Bond Markets because it can print money.
    I don't understand why they are then still bothering with gilts?
    Is there a red line beyond which the BoE cannot go?

    Also, I simply don't understand why this is not supposed to result in runaway inflation, if not HyperInflation. I've seen many UK economists claim that the government's plan is to inflate their way out of debt, but it's not working. The MPC keep writing letters to raise concerns over this.

    If this is a viable method of financing that doesn't cause inflation, then why don't the ECB adopt the same measure? Spain still still to be selling 50 year bonds?

    (Anecdotally, I am seeing what I believe is some real inflation here on the ground in the South East - particularly in food - but it's possible this is related to Brexit costs.)

    There are reports that 60% of trucks returning to Europe are empty. Thus demand for the pound is decreasing rapidly.
    I don't understand why is this no longer a threat to the UK? Won't a volatile pound and collapse in demand still risk a deflationary spiral?

    Why are the Office of Tax Simplification suggesting eye-watering tax increases and contractionary measures during the worst recession in 300 years, if the debt technically never has to be repaid?

    Why have the government killed off their flexible workforce of contractors through IR35 and set back industry by a decade, if the government can just plug the gap through borrowing?

    If the government can run up endless debts - why do banks still have capital reserve rules?

    Why are Councils going bankrupt if the government can just borrow money and bail them out?

    If the debt arising from QE can simply be cancelled, then why don't the government simply do this in perpetuity and eliminate taxation?

    If people start spending like crazy once the Covid restrictions are lifted, won't that result in huge inflation, especially considering the level of QE, which all seems to have resulted in asset price inflation (even though the FTSE is dead)?

    That's a lot of questions and I guess some of my assumptions are based on misunderstandings, so I will pause there before I ask anything further.

    The key thing about QE is that it purchases debt on the secondary markets; central banks can only buy debt that private sector primary dealers have purchased anyway. Obviously the existence of a large secondary market created entirely by the central bank affects the primary market (e.g. Euro bond yields narrowing). But it's at a remove from direct monetary financing and inherently limited by what primary dealers think they can sell at a reasonable price.

    To the extent that central banks own a massive proportion of outstanding government debt in some countries, there is an open question as to why this hasn't caused inflation or whether it will. Expectations are key, though. People probably think that if inflation ever took off, central banks would quickly act to stamp it out. But if people's expectations changed - say if a central bank committed to bailing out local councils, - then people's expectations, and hence inflation, would likely change pretty quickly. So that's what limits the central bank's ability to do the things you mention. To the extent that hyperinflation has ever happened, it has been as a result of direct monetary financing. So overall there's good reason to think that there are limits to central bank financing of government debt.

    Speaking to what the BoE did specifically, as i understand it, what they did was use the 'ways and means' facility, to essentially give the government an overdraft while it was in the process of raising debt. Its a special purpose facility, limited in scope, that HMT has to fully pay back. So while it is direct monetary financing, the fact that its temporary, limited, and has to be repaid. This means that it can be used without any broader implications for inflation.


  • #10
    Wanderer78
    Registered Users Posts: 28,775 ✭✭✭✭Wanderer78


    interesting debate about money, may interest some

    https://www.bbc.co.uk/sounds/play/m000s2v5


  • #11
    KyussB
    Registered Users Posts: 2,314 ✭✭✭KyussB


    That's a good article by Richard Murphy.

    It doesn't really make sense to apply the term SPV to a central bank. The key thing to consider about debt, is: Who is the money owed to?

    Looking at an SPV, where a business has offloaded it's debts to an SPV, to make it look like they are carrying less debt: The debts are still owed to someone other than the business, they are a real liability.

    Looking at a central bank, which has exchanged money for government bonds/debt (either directly or indirectly): In the UK, the central bank and the government are part of the state - the state owes money to itself - this is not a real liability.

    Looking at Ireland/NAMA etc: Long story short, the government is a part of the state but the central bank (ECB) is not a part of the state (it is an EU-level institution, and NCB's don't change this as they're effectively a part of the ECB), so any government bonds held by the ECB (due to QE or whatnot) - where the state owes the ECB - are a real liability.


    The reason that countries with their own central bank still use government bonds, is due to historical and political reasons - there is no economic reason for it.

    In my view, the main political reason for it is that if a small class of people want to amass significant undemocratic power in a democracy, they have to limit the governments economic power. Controlling the purse strings for governments is the ultimate way to do this.

    The historical reasons are due to bad/outdated economics (e.g. Gold Standard era economics still defines a lot of macroeconomic thinking), and political interference in economic research/study/teaching, which has resisted advances in economic thinking which are politically disfavourable.

    The same way there are armies of think tanks promoting climate change denialism, there are armies of think tanks promoting bad economics - and in the latter case, they are mainstream, not fringe. Much of the bad thinking in economics is innocent, though.


    On inflation: It's wrong to think of inflation in terms of money alone. Inflation depends on the size of the economy, on economic growth. Simplistically, if the UK economy suffered a disaster which wiped out 50% of GDP, and kept spending at todays rate - there would be hyperinflation even with no new money created.

    Long story short: Your economy has room to grow if 1: There are unemployed people, 2: There is useful work those people can do, and 3: If the physical resources required for that work are available.

    If your economy has room to grow, then you can spend printed money on growing the economy without significant inflation. If your economy does NOT have room to grow, then you will be spending printed money chasing scarce resources (e.g. trying to hire scarce workers when there are few unemployed, bidding up wages) - and you WILL get significant inflation.

    The world of governments restricted by Public Debt, is the world of austerity where governments refuse to grow the economy when there is ample room and dire need for this.
    The world of governments funded by money creation, is one where governments must keep spending/inflation in check when the economy is at maximum growth, but will maintain maximum growth 100% of the time, even in massive economic downturns.

    On why the ECB/EU don't adopt these policies: You couldn't design a more perfect system for preventing that. It requires unanimous agreement among all Eurozone states - only 1 member state has to say no.

    There are a lot more questions in the first post I left, unanswered - as some of the above indirectly answer them, and my post is too long.


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  • #12
    KyussB
    Registered Users Posts: 2,314 ✭✭✭KyussB


    Dannyboy83 wrote: »
    Correct me if I am going wrong here:

    If I understand Modern Monetary Theory correctly; then the BoE can print money endlessly - when ordered to - and keep it off the government's balance sheets.
    Essentially, the government have a blank chequebook.

    And where they were previously restrained by Bond Markets - they can now spend at will with no constraints - neither parliamentary nor constitutional - and no concern for bond markets.

    Ultimately the taxpayer must repay it at some stage.
    But in essence, the government now have a credit card drawing from every taxpayer's bank account.

    If this is correct - why did this always result in hyperinflation in the past, but doesn't anymore? What changed?
    Not endlessly or without constraint - (as partly explained at the end of the above post) it has to stop at the point of maximum-growth i.e. Full Output i.e. Full Employment.

    Most cases of hyperinflation in the past were caused by economic destruction which caused a massive loss in GDP (like what I said in the post above - where if e.g. the UK lost 50% of GDP overnight, but kept spending at same rate, there would be hyperinflation). Other common causes are: Foreign-denominated debt, economic sanctions (i.e. another form of GDP collapse), supply shocks affecting imports (like the oil crisis in the 70's).

    There are almost no cases of hyperinflation which are absent such triggers.

    If the central bank of the same state, lends the government money (such that the state owes itself) - it never has to be paid back (or at least: there is no economic reason to, even if countries do pay their central bank back as a formality), and this money is not owed to any taxpayers.


  • #13
    KyussB
    Registered Users Posts: 2,314 ✭✭✭KyussB


    andrew wrote: »
    ...
    Speaking to what the BoE did specifically, as i understand it, what they did was use the 'ways and means' facility, to essentially give the government an overdraft while it was in the process of raising debt. Its a special purpose facility, limited in scope, that HMT has to fully pay back. So while it is direct monetary financing, the fact that its temporary, limited, and has to be repaid. This means that it can be used without any broader implications for inflation.
    The UK government never has to repay the money from the 'ways and means' facility, neither is there a limit to it - that they do so, is only a formality with no legal requirement.

    The decision of whether or not to pay it back, and limits they choose on how to use it, are purely political decisions - with no legal requirements.


  • #14
    Brussels Sprout
    Registered Users Posts: 6,453 ✭✭✭Brussels Sprout


    KyussB wrote: »
    On inflation: It's wrong to think of inflation in terms of money alone. Inflation depends on the size of the economy, on economic growth. Simplistically, if the UK economy suffered a disaster which wiped out 50% of GDP, and kept spending at todays rate - there would be hyperinflation even with no new money created.

    Long story short: Your economy has room to grow if 1: There are unemployed people, 2: There is useful work those people can do, and 3: If the physical resources required for that work are available.

    If your economy has room to grow, then you can spend printed money on growing the economy without significant inflation. If your economy does NOT have room to grow, then you will be spending printed money chasing scarce resources (e.g. trying to hire scarce workers when there are few unemployed, bidding up wages) - and you WILL get significant inflation.

    Thank you for that explanation. It's something that I've been reading about lately. Some questions:
    1. How can you measure that slack in the system? Unemployment rates alone seem far too simplistic, especially when it comes to the knowledge economy
    2. Whose responsibility should that be? As in, if some suitable metric was found for my first question then who would call "Enough" when it comes to injecting money into the system?
    3. If you do reach that point where inflation starts to bite are you then basically back in the land of conventional thinking? As in no more budget deficits (Fiscal) and start cranking up that rate of interest (Monetary)?
    4. Is a smaller currency issuer such as the Bank of England more limited than the ECB or the Fed when it comes to this kind of monetary policy? Or is it a case that the actual limit is in the underlying economy so the smaller economy of the UK will overheat with a smaller amount of stimulus?


  • #15
    KyussB
    Registered Users Posts: 2,314 ✭✭✭KyussB


    1: The reason unemployment rates are chosen, is because workers are the primary 'resource' that can't be substituted for something else, in an economy at Full Output.

    If you're economy is below Full Output, and your supply of steel for e.g. construction falls below demand - it can be substituted for other materials, or local production can be increased.
    If you run out of workers due to all of them being employed, you can't produce more (although you can encourage immigration, but it will be slow) - and so this is the ultimate hard-limit for the economy.

    You can increase output even more when at Full Employment, by shifting workers into sectors that are more productive/competitive etc. - but that's more about the structure of the economy, and less about Full Output.


    2: Ultimately it's the governments responsibility. In the UK that's true even today, because central bank independence and control over this, is really just a facade.


    3: Sort of, yes - except you can get Full Employment and Full Output 100% of the time.

    It's not as simple as a balanced budget, though (you can cut government spending going into a below-capacity sector, and redirect half of that into an over-heated sector, and actually increase inflation despite cutting the deficit) - and monetary policy and the rate of interest, are very blunt/inconsistent tools for managing inflation - so a different system of inflation management is needed.

    Today we actually use unemployment to manage inflation. We set monetary/fiscal policy at a level that allows workers to be pushed out of the private sector, into unemployment, thus putting a downward pressure on wages and demand in the economy. This can lead to long periods of being below Full Output.

    This is pretty unjust, and a better way to manage inflation is the Job Guarantee policy - where fiscal policy is also used to push workers out of the private sector, but into the Job Guarantee program instead - which pays a lower wage that the private sector, also putting downward pressure on wages/demand. This keeps us at Full Output 100% of the time.

    Additionally, because interest rates are a very blunt/inconsistent tool for managing inflation, taxes should be used instead: Overheating sectors should be targeted with high taxes to depress them, moving workers either into the Job Guarantee or into other sectors which are not overheating. Instead of depressing the whole private sector (both below-capacity and over-capacity sectors), with higher interest rates.


    4: The BoE is far less limited than the ECB politically/legally, because the structure of the EU is almost as if it was expressly designed to prevent this type of policy.

    The BoE would be more limited than the Fed, though - because the US dollar is the world reserve currency, which gives the US a huge advantage in their ability to sustain imports and currency valuation - which means the US is capable of pushing this type of spending significantly further than the UK.

    For the BoE, the value of the pound would undergo more fluctuations until the private sector fully recovers (not a bad thing: also makes the UK more competitive in trade during recovery), so there would need to be more care about the trade balance and capital account - but this can be expected to level out once the private sector fully recovers.

    Ultimately, the main limit is Full Output, not money. Unless there are exceptional circumstances, like e.g. foreign sanctions in one form or another etc. - then a country with its own currency can normally always afford to immediately return to Full Output - money is never the limit, resources and workers are the limit.


    Sorry if a bunch of this is quite verbose - the change in perspective in how macroeconomics works, compared to what people traditionally think and are taught, is quite large and subtly far reaching - so even for questions which are pretty simple, a bunch of different things have to be touched on at once.


  • #16
    Wanderer78
    Registered Users Posts: 28,775 ✭✭✭✭Wanderer78


    ^^^exceptional explanation, thank you. Stephanie kelton was on David McWilliams latest podcast explaining all of this, well worth a listen


  • #17
    Brussels Sprout
    Registered Users Posts: 6,453 ✭✭✭Brussels Sprout


    Wanderer78 wrote: »
    ^^^exceptional explanation, thank you. Stephanie kelton was on David McWilliams latest podcast explaining all of this, well worth a listen
    KyussB wrote: »
    Additionally, because interest rates are a very blunt/inconsistent tool for managing inflation, taxes should be used instead: Overheating sectors should be targeted with high taxes to depress them, moving workers either into the Job Guarantee or into other sectors which are not overheating. Instead of depressing the whole private sector (both below-capacity and over-capacity sectors), with higher interest rates.

    A. Yes, I listened to that yesterday and it inspired me to ask those questions as it was very interesting. Either in that interview or in McWilliam's monologue afterwards that issue of using taxation as a control of inflation came up. If you use taxation to control inflation what then happens with the rate of interest? Does it get held constant (at say 2%) or does a Central Bank still use it as a lever to control things in a more long-term manner?
    KyussB wrote: »
    You can increase output even more when at Full Employment, by shifting workers into sectors that are more productive/competitive etc. - but that's more about the structure of the economy, and less about Full Output.

    B. Yes, this was kind of what I was getting at. For example, a lot of middle eastern autocracies are known for placating their people by handing out public sector jobs where they don't do any real work. A scenario like that would show lower unemployment but clearly there is a lot of slack in that system.

    Is it a case that unemployment is still a good measure here since it would take more money to entice those people to leave their jobs to take productive jobs and that would lead to inflation?
    KyussB wrote: »
    This is pretty unjust, and a better way to manage inflation is the Job Guarantee policy - where fiscal policy is also used to push workers out of the private sector, but into the Job Guarantee program instead

    C. Ok so this is the Federal Job's guarantee that I've heard AOC talk about in the USA context? What exactly would those workers be doing?

    That kind of thing has an unfortunate historical context in this country with Famine Relief programs building roads to nowhere. What kind of work is there that people can easily slot into and out of without requiring much training or prior knowledge?
    KyussB wrote: »
    Ultimately, the main limit is Full Output, not money. Unless there are exceptional circumstances, like e.g. foreign sanctions in one form or another etc. - then a country with its own currency can normally always afford to immediately return to Full Output - money is never the limit, resources and workers are the limit.

    D. Let's do a thought experiment. What would happen if you got a country such as the Democratic Republic of Congo (DRC) and cancelled all of their debt that was in foreign currencies. This is an extremely poor country that is extremely rich in natural resources (it has gold, diamonds, oil, rare earth minerals, timber and lots more). The DRC has their own currency, the Congolese Franc. They have a population of 86 million where over 70% live on less than $2 a day.

    What would be the roadblock to the DRC using MMT to pump money into their economy, either directly to people or to their primary extraction industries?

    KyussB wrote: »
    Sorry if a bunch of this is quite verbose - the change in perspective in how macroeconomics works, compared to what people traditionally think and are taught, is quite large and subtly far reaching - so even for questions which are pretty simple, a bunch of different things have to be touched on at once.

    Not at all. It's fascinating and mind-blowing stuff. I'm from an Engineering & Scientific background so have not studied Economics at any level since a module in Transition Year (a long time ago). I first got wind of this new way of thinking about Economics when McWilliams had Kelton on his show last year. I bought her book off the back of that - read half of it and it was blowing my mind but I had loads of questions that I wanted to ask someone so I paused (for way too long). I want to go back now and read the whole thing with a fuller comprehension of it all.


  • #18
    KyussB
    Registered Users Posts: 2,314 ✭✭✭KyussB


    Brussels Sprout wrote: »
    A. Yes, I listened to that yesterday and it inspired me to ask those questions as it was very interesting. Either in that interview or in McWilliam's monologue afterwards that issue of using taxation as a control of inflation came up. If you use taxation to control inflation what then happens with the rate of interest? Does it get held constant (at say 2%) or does a Central Bank still use it as a lever to control things in a more long-term manner?
    Ya that was a good interview, and the followup afterwards in particular (almost skipped that) - "most economists don't understand money":
    https://podcasts.apple.com/ie/podcast/the-david-mcwilliams-podcast/id1462649946?i=1000513498995

    The experience of the other guy on the interview, of mind-bending cognitive dissonance trying to understand it at first, unfortunately seems to be a universal experience (myself included ~10 years ago) - but once you grok it and it 'clicks', it makes so much sense (but you'll practically never stop learning new angles to it, in debate).

    MMT supporters tend to argue that parking the interest rate at 0% and using just taxation to manage inflation, is best.
    Brussels Sprout wrote: »
    B. Yes, this was kind of what I was getting at. For example, a lot of middle eastern autocracies are known for placating their people by handing out public sector jobs where they don't do any real work. A scenario like that would show lower unemployment but clearly there is a lot of slack in that system.

    Is it a case that unemployment is still a good measure here since it would take more money to entice those people to leave their jobs to take productive jobs and that would lead to inflation?
    The thing about that example of public sector jobs in autocracies, is that if those people would remain unemployed otherwise, then that's still a benefit to the economy by keeping it closer to Full Output - and by those workers spending their money in the private economy, helping to boost it back up. In this case, inflation would still be determined by monetary/fiscal policy, and wouldn't be related to such jobs.

    If we replace this with the Job Guarantee though, then your question touches on an additional benefit of the Job Guarantee :) the JG is inherently an inflation management mechanism (so that would not be a problem), but what you touch on is that it also bolsters workers bargaining power with businesses/employers.

    No more shit pay for jobs that nobody likes, because workers can just go on the JG instead - nursing home workers having to clean up after pensioners etc. would probably have to be paid multiples of what they get now (and rightly so) - people wouldn't be pushed into sex work due to financial circumstances etc..
    Brussels Sprout wrote: »
    C. Ok so this is the Federal Job's guarantee that I've heard AOC talk about in the USA context? What exactly would those workers be doing?

    That kind of thing has an unfortunate historical context in this country with Famine Relief programs building roads to nowhere. What kind of work is there that people can easily slot into and out of without requiring much training or prior knowledge?
    I'm not sure exactly what AOC has advocated, but yes I believe AOC and Sanders advocated the same thing - though perhaps a lighter form of it.

    The problem with discussing what the workers can do, is that the sheer breadth of work that can be and needs to be done is so large, and the different skills and limitations in the potential workers is of such a large variety, that no matter how good or thorough the examples presented, they are really easy to attack rhetorically by trying to play-up potential mismatches between work and skills.
    The JG would offer training as well as work, and the breadth of work available would be so wide that there will almost always be a matching role - but that won't matter to someone engaging in a rhetorical attack.

    Straight away though, there are things which we need to immediately be working on in massive numbers, like retrofitting economies to eliminate climate changing emissions, R&D in this area as well, rapidly expanding accommodation and public transport infrastructure - there is decades of urgently needed work in these alone - and that is not even scratching the surface of the scope of potential work that a JG can offer.
    Brussels Sprout wrote: »
    D. Let's do a thought experiment. What would happen if you got a country such as the Democratic Republic of Congo (DRC) and cancelled all of their debt that was in foreign currencies. This is an extremely poor country that is extremely rich in natural resources (it has gold, diamonds, oil, rare earth minerals, timber and lots more). The DRC has their own currency, the Congolese Franc. They have a population of 86 million where over 70% live on less than $2 a day.

    What would be the roadblock to the DRC using MMT to pump money into their economy, either directly to people or to their primary extraction industries?
    The problem is you can't separate politics and economics - Congo's main problem is that it's basically being pillaged through neo-colonialism, lead by multinationals and intelligence agencies, who'll prop up into power, whoever will assist.

    It's a very unstable country, so if they undertook MMT policies and e.g. rebels got control of key areas of the economy - causing a large drop in GDP - or if there were, for example, economic sanctions against the country - then that's the perfect recipe for hyperinflation (some of the true causes of hyperinflation: economic collapse and/or sanctions) - which would be likely in that circumstance, even without creating money.

    So, their problems are political and a problem of international foreign policy against Congo - MMT can't fix that.
    Brussels Sprout wrote: »
    Not at all. It's fascinating and mind-blowing stuff. I'm from an Engineering & Scientific background so have not studied Economics at any level since a module in Transition Year (a long time ago). I first got wind of this new way of thinking about Economics when McWilliams had Kelton on his show last year. I bought her book off the back of that - read half of it and it was blowing my mind but I had loads of questions that I wanted to ask someone so I paused (for way too long). I want to go back now and read the whole thing with a fuller comprehension of it all.
    Ya people from a scientific background have a waaay better chance at groking this accurately and not going down a false path, than the average economist, heh :)

    Steve Keen is another good guy to read (he is Post-Keynesian, the same general economic school that MMT is a part of) - but his 'debunking economics' book is perhaps too dense - he has a good Patreon (you might find his Minsky macroeconomic modelling software very interesting, from a science/engineering viewpoint).

    One of the best resources I know of (where I indirectly found most of the people and economics resources I learned from), is Naked Capitalism - which is more a journalism resource, and does some of the best political/economic news collation/analysis I've seen anywhere (some of the earliest/best writing on scandals in the aftermath the economic crisis, one of the earliest prominent MMT supporters, the best writing/political-economic-analysis on all of: the Greek Debt crisis in 2015, Brexit all the way up to today, and the coronavirus).


  • #19
    Wanderer78
    Registered Users Posts: 28,775 ✭✭✭✭Wanderer78


    KyussB wrote:
    Steve Keen is another good guy to read (he is Post-Keynesian, the same general economic school that MMT is a part of) - but his 'debunking economics' book is perhaps too dense - he has a good

    His podcast, also called debunking economics, is very good, but you have to pay for it, in order to listen to it in full, but he does give short teasers for free. I downloaded minsky a long time ago, still haven't managed to use it though, keens YouTube channel is very good, which includes minsky tutorials. Ann pettifor is also very good at explaining money


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