A correspondent called James Meek asked a number of what I might call quite normal intelligent questions about MMT yesterday. Let me address them. First he said:
First, your point about the bond vigilantes and currency fluctuations. I can see how your bond point works for some British buyers of bonds, but what about overseas buyers, or British buyers who count on strong sterling vis-a-vis other currencies? Isn't the fundamental reason bond rates go up and down that buyers have not just inflation expectations but currency exchange expectations? It's easy to see how you can create pounds to buy bonds; less easy to see how you can create more pounds and expect to buy more euros.
There are two answers to this. First, we don't have to buy foreign-owned bonds in anything but sterling. And we would not. The owner of them has a sterling asset after all: we'd not offer to buy it from them in another currency. Nor are we obliged to do so. The currency risk is all theirs then.
Second, if the buyers of new bonds are overseas and they threaten not to buy we just don't sell bonds: we could QE new issues instead whilst they imposed their embargo on buying. We could go for several years on that basis if we wished. There is then no issue here.
So, on to the second point:
Second, a related point — if the implementation of some form of MMT in the UK were to lead to a radical devaluation of the pound in respect of the euro, dollar etc, how severely would that impact on inflation — regardless of what was happening to the labour market, demand and supply etc — just because of the high level of our imports? It's certainly interesting to see how despite the drop in the value of the pound since Brexit inflation hasn't rocketed upwards, but I'd slightly turn the question around — what does inflation since Brexit tell us about how a further, deeper devaluation might affect inflation in future?
That is an interesting question but let's ask why using MMT would devalue the pound. There is simple case study to use. QE of £435 billion did not apparently devalue the pound. Brexit did. In other words, it's not money creation that changed value: a real change in potential value because of a changed political circumstance did do that. And that change in circumstance only had an impact because it was likely to change buying power.
All exchange rates revolve around buying power at the end of the day - speculators can only change that for limited periods at most at a time. So will MMT change buying power? Well, if it sucked in too many imports, yes it might, a bit. But I stress, a bit. And so it has to be managed to make sure it does not do that. And suppose instead of sucking imports in that investing in the UK economy, and that most especially substituting local power for expensive energy imports (as MMT plus the GND would do) did the reverse? Suppose it increased the relative value of activity in the UK economy? And why would'nt it do that? I can't see why it would not. Or to put it another way I can see no reason why sensible MMT - only designed to use available resources in the UK economy - could in any way trigger the crash you imagine. So why worry about something that is not only not going to happen, but where the reverse, being a currency appreciation, is more likely?
And so to the third point:
The third kind of follows on from the first two, which is that a fair degree of distancing from the as-is global economy seems to be baked in to MMT implemented by Britain alone — not just devaluation, with a consequent fall in imports and perhaps rise in exports, but perhaps currency controls as well. That's all fine, and would be absolutely fine in an essentially self-sufficient economy like the US or the EU. But my question relates to the capacity of the British economy specifically — not capacity in an abstract, theoretical economics sense, ‘the economy is at full capacity' and so on, but in a concrete sense of the British economy having become so specialised and globally interlinked that it just isn't capable of producing all that is required without a consequent increase in imports, from roadbuilding equipment to specialised engineers. Isn't MMT an argument, in a specifically British context, for a much higher degree of industrial and educational self-sufficiency than we — thanks to 40 years of Thatcherism — currently possess, and isn't the restoration of that self-sufficiency a project requiring 20 years of political consensus, rather than five years of a radical reforming government? If one possible MMT answer to the devaluation question is ‘our trading partners would see that we were using extra ‘debt' to build real assets and create real jobs in the real economy', that question remains — currencies respond to their traders' (not normally left-wing sympathetic) scepticism about an agenda before they respond to their grudging admission of its success many years down the road.
Let me reiterate that if we add value we build the currency. But let me also answer the broader point. MMT is happening now for a reason. Whatever its interesting intrinsic curiosity it is out there now getting attention because of the Green New Deal, which I also happen to have had a hand in. Now your assumption is, in effect, that the GND is going to happen in the UK alone and the rest of the world is going to ignore that and go its own way and keep burning the planet as it has to date. And I stress, that has to be your assumption because MMT and the GND are now, in effect inextricably linked. And I'd suggest that if the scenario you outline happens - that we do in the UK do the GND using MMT (in part, maybe - and we may not need to do that at all - it is a backstop, after all) and the rest of the world does not do the GND then you have very much more to worry about than whether we have an exchange rate difference or not, because candidly sometime soon that exchange difference is quite literally going to be washed up on someone trading desk as it sinks below the waves.
Getting priorities right is the issue here. We either all go for the GND or we're all in trouble. That raises other issues on the role of government, it's power to drive change and the power it has to cooperate. Those are big issues and potential subjects for a book. They're the hardest parts of the GND - much harder than MMT. But worrying about exchange rates is not on anything like that scale. And bluntly, when the alternative is annihilation then I suggest we worry about that before worrying about whether we can go alone. We can't. Our job is to persuade everyone to come with us.
In summary, James' questions are reasonable, but the paradigm is shifting and they belong to another era, I think.
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The things is that these ‘eras’ have a habit of behaving like time ships – enabling the past to control the future. Sometimes that is good; sometimes it is bad.
In this case I do not accept it: market primacy has caused so much bad turbulence but we tolerate it. But we are not prepared to try something new because we are apparently scared of turbulence!!!
This is why the only conclusion you can draw is that MMT is actually held back by vested interests.
MMT in GND, PQE etc., deserves a try.
There are two main issues with the what about “the falling exchange rate” arguments.
The first is that they are generally circular. Why will the change rate fall? Because if the inflationary effect of MMT based policies. Why will the policies be inflationary? Because the exchange rate will fall and so import prices will rise. … Ask them instead what will happen if the government pursues a policy of purchasing idle resources up to the point of full employment, but not beyond such that there is no inflation generated–and the critic is rather stuck for an explanation.
The second point comes back to purchasing power. And beyond this to demand to hold the currency. Investors will demand to hold the currency and to do business with it if there are investment opportunities, if there are customers will money to spend and if there is the physical and educational infrastructure for their business to flourish. Quite clearly productive government activity stimulates the business environment, should be able to work with the private sector, and so it will contribute to a stronger exchange rate.
It is worth saying that stimulated employment up to but not beyond full employment is easier said than done. Especially when one considers spillovers in consumption from markets where there is slack to markets that are tighter. Sadly simple models with “representative consumption goods” fail to consider any of this, and such things need to be considered in more detail, with more realism. But that is the goal, and the prize is survival and flourishing, so I think it’s worth a try.
Absolutely – but all I would say is that you can’t still have the ‘hands off’ non-interventionist mode of Government that we have had.
We have learnt so much about how markets work(!?) now so I think it impossible that we cannot develop the macro economic tools to manage them properly. This may have not been the case in the 1970’s but it is now. Time has moved on – as a result we know more.
The markets have had a very long chance to get things right: they’ve blown it and now they need to be reigned in.
James Meek – author of brilliant book exposing the great Thatcher sell-off: “Private Island – Why Britain now belongs to someone else” ??
I suspect so – but when blogging you can never be entirely sure…..
Thanks for engaging with my questions, Richard, much appreciated. One of the main questions I have now is a political one, but probably not for you – whether the Greens, traditionally economic growth-sceptical, have embraced the MMT-GND model, in the UK or Germany or elsewhere.
I think the honest answer is variably. There is nervousness from some who think it requires material 8nvestment to create change. Others are buying the GND and I would suggest (but then, I would) that MMT is deeply implicit in this. So my answer is I think they are, but slowly.
I agree that Green Parties’ support for the GND is variable. Underlying these diffferences (and not just for Greens) are questions about the material flows involved in GND type interventions. I don’t think any proponents of the GND have engaged with this issue seriously. I spell this out in my blog piece here: https://steadystatemanchester.net/2019/02/28/what-kind-of-a-green-deal-the-implications-of-material-and-monetary-flows/ (which also touches on MMT, but that’s not the point of this response). Essentially the problem is the multiplier: by stimulating economic activity in the clean sectors, GND interventions would also have non-specific impacts in the dirty sectors of the economy. Moreover, even the clean sectors (renewable energy etc) rely on mineral extraction and produce wastes (there will be a growing problem, for example of unrecyclable turbine blades). The challenge facing us all is not just CO2 emissions and climate change but also the impacts on all the other planetary boundaries.
I’m not against a Green New Deal but it does need to be ecologically (and politically and economically) literate. That means setting and enforcing caps on energy and resource throughput. That means a society and its economy founded on the principles of sufficiency, stewardship and equality. Green Growthism doesn’t get us there.
I do not think the GND is about green growth
But I do note all your concerns
Hi Richard. For various reasons I haven’t read your blog for a while. Tonight, I’m glad I have! You have a way of cutting through the BS that has made me chuckle, “Worry about exchange rates or human extinction? Umm…which to choose?” Thank you!
“we could QE new issues instead whilst they imposed their embargo on buying. ” By “new issues” here, do you mean of gilts or pounds?
Gilts
I am not sure what you mean by new issues of pounds
There are no such things
On the other hand it could also be said that is because they are continuous
“I am not sure what you mean by new issues of pounds. There are no such things” Of course there is: “spending” 😉 That’s where new pounds always come from of course.
At any rate, I was just confused by what you wrote: “we could QE new issues instead whilst they imposed their embargo on buying. We could go for several years on that basis if we wished.”
An emitter of tax-credits can emit them forever with no bond issuance whatsoever, not “for several years.” They will be valued, of course, because they are tax-credits. Bonds, much less “QE,” do nothing when the accounting is sorted out (except needlessly pump HPM into the economy, increasing inflationary pressures in the long run, and helping the wealthy increase their wealth).
Unless you were thinking of how savers (such as institutions for pensions etc) would save 100% safely in a government token. It would, of course, make more sense to allow people to warehouse their savings directly as tax-credits, rather than continuing with the purely vestigial practice of having banks convert their savings into “bonds” for them.
At any rate, the “QE” reference and statement “We could go for several years on that basis if we wished” do not accord with how pounds are emitted; there is no reason whatsoever that the UK tax-credit can’t be issued with no bonds forever (with PZIRP on them of course).
(Savers would have to invest in the real market to earn %; but pensions should be directly funded anyway, and not need to rely on an % return to serve their purpose of transferring real goods and services to the elderly/infirm; that transfer is always the political decision of the current generation, and has nothing to do with “finance”.)
Clint
Without knowing where you were on the comprehension scale because as far as I can see yo/u have not commented her before this issue arose I had no idea where to pitch a response
I can see I got it wrong
You knew the specific answers
I offered generalities – partly because I am on holiday and am trying not to spend too long here
I am not disagreeing with you
Richard
Hello Richards, thanks.
Excellent posts on your blog, and a good comment section. Nice to see MMT in the UK context as not a lot are writing about it there (relatively).
Enjoy your holidays! look forward to more discussion,
Clint
[…] Cross-posted from Tax Research UK […]
The commenter you mention (James meek) wrote “Isn’t MMT an argument, in a specifically British context, for a much higher degree of industrial and educational self-sufficiency..”
James – curious where you got that from. Not saying it is right or wrong, just it is not the usual “takeaway” people seem to have from reading MMT blogs etc. Can you elaborate?
Thanks, Clint
I think if mixed with a Green New Deal that almost inevitably follows
I am not sure it does by itself
But as I see the two as inextricably linked. Maybe James does too