Gertjan Vlieghe is a member of the Bank of England Monetary Policy Committee.
He gave an important speech last week on monetary policy in the coronavirus crisis, addressing the way issues such as the roles of QE and direct monetary funding (DMF) of government spending by central banks work.
The speech is important. In effect in section 7 he said that 'monetary financing as financing fiscal spending with central bank money rather than government bonds' is something that 'central banks are always doing', In other words, direct monetary funding of government spending by central banks without using bonds or tax is in fact normal.
So when is this going to be recognised as a fact and be built into our macroprudential frameworks, with an emphasis on inflation control that he quite specifically says remains possible in that situation, with the aim of preventing another round of austerity when this crisis is over, which I note when of his predecessors is already calling for?
In effect, when is it going to be recognised that modern monetary theory explains what is already being done at the Treasury, and that inflation control in the form MMT prescribes makes direct monetary funding of government spending by central banks not just possible (because it's already being done, as the Treasury admits) but desirable if another round of penal cuts are to be avoided?
I strongly recommend reading the speech.
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I may read it twice Richard! There are many quotable passages, but the following short extracts are certainly worthy of juxtaposition –
“But the central bank is owned by the government.”
And in the conclusion, he explicitly refers to central bank independence ONLY in terms of their inflation remit –
“This in no way detracts from the central bank’s independence and its ability to hit the inflation target.”
(although we might query the word “ability”)
And he gets pretty close to agreeing with your oft-repeated point that QE will never be unwound.
He does effectively say that on QE, I agree….it’s the nearest thing to an admission as yet
Figure 8 (Ways & Means balance as % of net public sector debt ) is very revealing. He says the W&M facility is a rarely needed backup, not used since 2008. But the graph shows continuous, and significant, use throughout the previous 8 years.
Absolutely
In other words, it was commonplace and QE replaced the need for it for a while
Now QE is dead
So back we go…
Acknowledging the contents of Section 7, I nevertheless consider my comments made on the speech which I offered on another thread, taken as a whole still apply; albeit there, I concede that I phrased my objections somewhat over-polemically. For example Vlieghe offers this monetary policy injunction at the end of Section 1: “So the current priority for monetary policy, with a lot of help from fiscal policy, is to return the economy to that pre-virus trajectory as soon as possible”; without providing evidence whether, from where we find ourselves at the end of lockdown, this is strictly either possible or even desirable. Simply recreating the past, viewed from the middle of an economic calamity, is not necessarily the wisest aspiration for future recovery, still less if there are serious resource corrections from that past, required to produce the recovery we all wish; this looks especially doubtful if we propose to treat the process of recovery as a mere abstract, self-regulating monetary mechanism. If an example is required here, I would merely cite the comprehensive destruction of important services over ten years of austerity; I offer specifically the wholesale destruction of the important resilience infrastructure and stocks in the NHS, which quite probably lies behind so many of the problems the Government is now struggling to recoverfrom in adversity, and at great cost of one kind or another.
Within Section 7 Vlieghe’s writes with regard to Weimar and Zimbabwe this closing sentence: “Weimar and Zimbabwe had central banks that issued however much central bank money was required to achieve the government’s financing needs, without any credible action to meet inflation objectives”.
Well, yes but once again I believe he over-abstracts from the critical context to produce a neat, polished answer. I cannot say anything about Zimbabwe since I know nothing about it; but I suspect the framework for decisions, including accurate data would be notably chaotic. In the case of Weimar, they made mistakes, no doubt; nevertheless there is a critical factor (an invariable) that forced itself on the attention of Government, that seriously affected its capacity to produce “credible action” on inflation, or indeed on anything it tried to do: war reparations and the deliberately punitive provisions of the Treaty of Versailles. Context is everything.
His objectives are wrong
And his comments re Zimbabwe do miss the point
The issue in both was foreign currency pressure which he wholly ignored
“First they ignore you, then they say you’re mad, then dangerous, then there’s a pause and then you can’t find anyone who disagrees with you.”
🙂
Then they say it was their idea……
Good article today in the Guardian by Adam Tooze about the practical import of this:
https://www.theguardian.com/commentisfree/2020/apr/27/economy-recover-coronavirus-debt-austerity
Worth reading
Tooze’s article has some mistakes in it. They are principally on taxation function. How important they are I leave to others. In many other respects, this is pretty ok.
Even the Telegraph now admits the existence of the Magic Money Tree…
http://www.progressivepulse.org/economics/surely-a-seminal-moment
As ever, much appreciated Richard.
However, hold on Andrew – be warned everyone, the austerity flagellants are already out there, scaremongering easy to scare MPs right now:
https://www.thesun.co.uk/money/11487224/two-decades-tax-hikes-austerity-economy-recover-coronavirus/
Michael Gove was at it in the Daily Mail on the 29th March.
This is not going to go away and it will be interesting to see what happens in the name of ‘fairness’ afterwards.
Stay alert folks.
Interesting to see how much coverage is given to Ian McCafferty’s prophecies of doom. On one level I can’t believe these people want to repeat the mistakes of the last ten years (and repeat them on an exponentially larger scale this time around). But on another level I believe it’s inevitable (their thinking, that is – hopefully not the outcome).
Also interesting to see he apparently still believes the world is flat. The real Project Fear is up and running already.
Well, he concedes that the central bank does and always has financed the state and is owned by the state, and that printing money or buying gilts are essentially the same thing. However he has an entirely unhealthy obsession with inflation (and of course therefore protecting the interests of the rentier class that own the debts), is mistaken about why the Weimar Republic and Zimbabwe suffered hyper-inflation, and is entirely deluded in thinking only an ‘independent’ MPC can control inflation. What happened prior to 1998 in that case? I don’t recall we had permanent hyper-inflation. In fact in retrospect the 1970s inflation looks like a short aberration.
As I have said the Scottish Currency talks it is informative that the BoE is only required to consider inflation and keeping it around 2%. The US Fed is required to consider full employment, but not us. No, we are only interested in preserving the wealth of those who have lots, and all those that own all the debt. Says it all really – the workers can go hang and we will just worry about the money men. That was exactly what the 1920s and returning to the pre-war parity of $4.86 to the pound was all about. It took mass unemployment and a halving of wages and prices but Churchill got there in the end, so the financiers that lent us the money for WWI got their loans repaid at the 1914 value and without the 100% inflation that had occurred by 1919. Too bad for the unemployed and northern industry (Lancashire cotton, Clyde ship-building) that were crippled in the process.
Thanks Tim
I agree with all that
I chose to bring out just one useful point…
“…. the financiers that lent us the money for WWI got their loans repaid at the 1914 value”.
Only as the Bank of England cover-up of the humiliating and alarming failure of the 1914, 3.5% War Loan issue proved; the financiers clearly didn’t like the odds of war, and they were not prepared to back the British in the War with their money. What it did show was that the government could nevertheless continue writing cheques for goods and services as if it was the great success they continued to claim in the press it was, but funded not by financiers, or foreign capital but, believe it or not – the Head Cashier at the Bank of England, Sir John Nairne (that was some mortgage on his house he must have had …. !).
We should leave room for the thought that Mr Market may have been right in 1914….
The challenge with MMT is that it is amoral and wars of choice are just as fundable as schools and healthcare. This is how the USA operates, eternal deficits and trillion dollar fraud inside the Pentagon.
The best way to rob a bank is to own one is pretty much the philosophy of our political class – their public denial of MMT is because they have their blood funnels jammed in the money fountain and would like to pretend it didn’t exist.
Our fundamental problem is a moral one, not a political economy one.
MMT describes how the system works
It can also be sued for policy prescription
But you are right: that could be for policy some may think amoral
Indeed there seemed to be something missing from the transcript of Gertjan Vlieghe’s speech and I think what’s missing is neatly encapsulated in part of a paper that Warren Mosler prepared as background reading material for his tour to explain MMT to an Italian audience in 2014. The paper’s entitled “ME/MMT: The Currency as a Public Monopoly” (ME standing for Mosler Economics). The relevant part reads as follows:-
“ME/MMT is distinguished by its explicit recognition that the currency itself is a public monopoly, which is the micro foundation of fiat currency. MEMMT then builds the ramifications of that fundamental understanding. These include, as points of logic, that the object of monopolization – in this case the currency – is, necessarily, not ‘neutral’; that a monopolist is ‘price setter’ and not ‘price taker’; that the monopolist has the choice of setting price or quantity; and, critical to public purpose, unemployment is necessarily the evidence that a currency monopolist is restricting the supply of the financial assets need to pay taxes and satisfy savings desires.”
http://www00.unibg.it/dati/corsi/910003/64338-Warren%20Mosler%20Bergamo%20paper%20March%2010.pdf
I admit I do not think that Warren’s best presentation but this point is fair
In the context of very possible high levels of future unemployment in the UK stemming from the economic effects of the coronavirus pandemic, the very real possibility of a No-Deal Brexit, and a prime-minister who seems utterly and primarily obsessed with developing his skills as a one-man Churchillian tribute band not understanding that your sovereign currency is a vital public monopoly is the road to perdition. Warren Mosler got very rich understanding this and the Chinese Communist Party dragged China out of poverty too in the sense they’ve used it to currency rig to achieve price point in global markets.
“MMT is distinguished by its explicit recognition that the currency itself is a public monopoly, which is the micro foundation of fiat currency”.
I have to doff my hat to Mosler for the crisp clarity of his thought. Thinking of the currency as a public monopoly seems a strikingly good way of thinking how the State is able effectively to demonstrate its ‘de facto’, and not simply ‘de jure’ sovereignty. Of course this also demonstrates sovereignty only works effectively for a genuine fiat currency.
Indeed this characterisation of the idea must help to inform understanding of the weakness of, for example the Gold Standard. If you trust the currency you in effect must trust the sovereignty of the State (the politics of individuals is neither here nor there, it is only how they act that matters); if you are dependent on gold (or some other independent variable) to reinforce your claim to sovereignty, or your citizens/subjects are given to ‘clipping’ the coinage (or other behaviour indicative of either lack of confidence or trust), then your sovereignty is much more likely to be hanging on a shoogly peg.
“I admit I do not think that Warren’s best presentation but this point is fair”
I have to part company with you there. It just might be the most insightful thinking in 80 years in the sense it actually puts the “half-baked” into Hayek’s “market fundamentalism” ideology and of course is a big deal in the context of Green New Deal to tackle climate change. Here’s the relevant bit of Mosler’s paper for thinking this:-
“Keynes vs the Classics
The Classical economists said that without monopoly markets would clear and there would be no mass unemployment. That is, it’s only a monopolist, such as a labor union, that causes unemployment and excess capacity in general. Keynes, on the other hand, said that even in the absence of monopoly there could be persistent mass unemployment, and then discussed characteristics of the monetary system that caused this to be the case. This ongoing impasse alone, which has continued unabated in academia for over 80 years, is sufficient evidence that neither side has yet to recognize that the currency itself is the monopoly in question.
It is ME/MMT that recognizes both sides are correct. The classics were correct in stating it was a monopoly that was the cause of unemployment. And Keynes was correct in stating that it was the characteristics of the monetary system as he described them that caused unemployment. And the reason for the continuing disagreement is simply that neither side has yet to specifically recognize that the currency itself is a monopoly causing the unemployment in question.”
On page 11, first para “And since 1995 the government has had a stated policy in place of fully funding its needs.”. Could someone elaborate please?
Can I also ask a more general question about MMT principals? If government created money is only about 3 percent of the money supply ( the other 97 percent created by commercial banks) , how come a tiny percent change in a tiny percent of the total has apparently such a large impact on politics, the economy, and everything?
The reference to 1995 is, I think , a reference to a policy to use gilts by default
And it is not true that government-created money is 3% of the total
Notes and coin are 3% of the total
The rest is bank created money – all of it underpinned by the BoE
Note there’s further explanation of the concept of “Currency as Public Monopoly” in Warren Mosler’s first comment in the following February 2018 Tax Research UK article:-
http://www.taxresearch.org.uk/Blog/2018/02/24/why-mmt-a-discussion-with-warren-mosler/
The blog has been reposted
Richard