I think it worth sharing this from an article on the Brave New Europe website (where articles from this blog also appear, frequently) in which Stanislas Jourdan of Positive Money Europe notes this:
Central banks are public institutions which have been given the powerful role of creating a legal tender and supervising credit creation by private banks. Logically, and as explained extensively in the literature, a central bank cannot lack something it can create infinitely. It is, therefore, possible for a central bank to run into negative equity — that is, to appear financially insolvent on paper — without any immediate operational problems.
In this context, it is extremely reassuring that the ECB President Christine Lagarde has made a remarkably clear statement on this, when asked by French MEP Manon Aubry in a Written Question to the ECB:
“In response to your question on how the Eurosystem technically provides liquidity to the financial system, the Eurosystem, as part of its monetary policy measures, purchases securities — in net terms — and by doing so creates central bank money. Central bank money is also created when commercial banks, through the Eurosystem's refinancing operations, borrow money from the Eurosystem against adequate collateral. The electronically created central bank money is held on the commercial banks' accounts with their NCBs, which are also referred to as bank reserves with the central bank. As the sole issuer of euro-denominated central bank money (i.e. banknotes and bank reserves), the Eurosystem will always be able to generate additional liquidity as needed to fulfil its mandate. Therefore, as I had the opportunity to clarify at the last hearing at the ECON Committee, by definition, the ECB will neither run out of liquidity nor fail.”
This matter of fact should have been made clear long ago. But for reasons unknown, it was not mentioned, or at least not stated so clearly. For example, we remember an epic episode where Mario Draghi was asked a similar question by a Swedish journalist. Draghi was laughably embarrassed.
In contrast, Lagarde's clear-cut response illustrates how ECB's doctrine on this issue has finally evolved. It should now be put to bed for good.
I agree.
This debate should be over, for good.
For the elimination of doubt, the Bank of England is in exactly the same position.
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Hooray!
Where are the conspiracy theorists and the nutjob right wing Neocons, telling us its lizards or Austrian Austerity that can save the world…. When in truth it’s the central banks who are servants of the government’s or commissions, who can at a stroke change the world….. Not some raving right wing fascist, or a spaced out alien hunter.
They’ll be here shortly…. And I will as usual ignore the Eejits.
“They’ll be here shortly”. It took only 24 minutes. Is this a record? (sorry)
So what?
You are presenting this as something totally new and unheard of, but economists have understood that governments/central banks can print money for well….ever basically.
It’s also well understood that creating more of a fiat currency doesn’t directly increase wealth or GDP. Which is the insinuation you are aiming at, isn’t it.
So the questions you should be asking are what are the effects of printing money on an economy and what are the risks?
Because, you know, there are quite a few – again quite well understood by economists going way back when.
Ah, so capital – and money is a form of capital – has no impact on the capacity of an economy
But then, neoclassical economics has no room for cash at a macroeconomic level, has it?
And since when did an economist get cash flow – when it can all be eliminated by discounting
Frankly, economics has not understood this for decades and still does not – and that is exactly why it has to be said – because they are in open denial of this truth
The MMT revolution is not to say something especially new, but to actually say it in a way that is being heard, and that’s little short or revolutionary, because like alchemists of old, economists have sought to deny the reality of what is actually happening
despite which I will answer your question. The effects are delivering full employment and a Green New Deal. The risks – that we will fail top do both at immeasurable cost
Quentin
I’m neither an academic nor intellectual, but I have been interested in economics since an undergraduate, 40 years ago. For me MMT *is* a new, now more and more public (and exciting, sad old geezer that I am) discourse, that simply hasn’t been present in the MSM or for that matter most economics writers of either left or right, Marxist or of any other persuasion for that matter.
It took me a while to gain the limited (I fondly imagine) understanding I now have of MMT, and for me the issue isn’t about printing money (that now seems, I have now come to believe, a deliberate trap set by those of the the Austrian school persuasion) but about the ability of the state to direct and allocate resources – public money for public purposes. Oh, and the issue of inflation, btw, is really about the state not being stupid enough to try to buy what isn’t available.
And I didn’t get the insinuation that creating currenccy creates wealth. Richard, along with others who write about MMT, seem to me to be very clear about that… again, as above, it’s about the ability (of the state) to direct and allocate resources – public money for public purposes – as opposed to the ‘fill yer boots’ chumocracy we have at present.
Thanks
And it sounds like you are getting it
@ Marc Gibson
MMT is just a rehash of Lerner’s functional finance with a dash of chartalism thrown in. Literally nothing MMT has so far presented is in any way new.
MMT ignores various facts – including what happens when the state tries to direct money. Apart from the repeated evidence that the state is very bad at it, MMT doesn’t bother to tell us what happens when inflation does start to rise.
It literally claims that you won’t get any until “resources” are fully utilized, which normally means employment is full. Though they don’t bother to provide a proper treatment of inflation – they just say it can’t happen.
Which is a bit of a problem, as we know inflation can happen without resource use being maximised, and we also know that inflation doesn’t spread evenly through an economy, and it matters who “gets the money first.
MMT just ignores all these issues and says if we do see any inflation, we’ll just raise taxes a little. Which in itself has another huge set of problems MMT don’t bother to answer. Which taxes? By how much?
It’s all just guesswork with MMT – with a nice utopian sheen on it – that we can have anything we want except for some nasty “chumocracy” preventing it by limiting the money supply.
Which in itself makes no sense at all – printing money makes the asset rich FAR richer – and hurts the asset poor and those on fixed incomes the most. You’d have thought that the chumocracy would be all for it – if it wasn’t just a conspiracy theory.
So, there we have it
You got to page seven, and never reached the bit that shows that maybe no economic system has a more comprehensive and practical explanation of how to control up inflation than MMT
But why the venom? Because what MMT says is that the state has to play a critical role in economic management. And you hate the state. And so we have to suffer your crass analysus based on total irrationality. I think your time here is already over.
And it would appear that this is by no means your first identity here.
“So what?”
Well, where to start? It was really kind of all these economists to work so assiduously, for longer than anyone can remember to keep the public in the pitch dark for so long about this, ‘so what?’. Which raises the question, why? Please explain – because if they knew, then I have no idea why the priesthood of economic knowledge, the teachers of the discipline were so dedicated to keeping it a secret from the public; and please do not attempt to claim that the public knew all along, because quite obviously, they didn’t, and most of them still don’t; and if nothing else, that really is the responsibility of the economists, above all others; if not them, whom?
You need to do a lot better than that.
It’s been in every economic text book since the year dot.
Maybe you’ve just woken up to this, but it is a basic quality of fiat currencies – they can be printed without limit as they are not asset backed.
Which itself should be a hint. No asset backing the fiat currency means creating more of it doesn’t increase your net assets.
You misunderstand
There is a great difference between saying something and comprehending it
But I am not expecting you to appreciate that
You are attempting to deflect from the issue raised. If your attempt to judge what I knew (something about which you know precisely nothing), is the measure of your approach to tackling facts, you have clearly lost the plot already, and you are scarcely worth wasting my time. My question, I should remind you was specifically why economics were not teaching the facts if they knew them (I am frankly sceptical of what economists thought they knew or understood), and publicising it when the issue was raised in the public sphere, and explaining it fully and frankly rather than attempting to rationalise it into irrelevance.
Incidentally, you seem erroneously to imply that professional economists are entitled to be taken seriously as authorities.There are many disciplines that are entitled to that privilege, based on the success of their methodology; but I doubt if economics provides a convincing case for being one of them; certainly not on the basis of its performance as a science capable of making rigorous and accurate predictions (the real purpose of ‘science’). Indeed it has demonstrably, and catastrophically failed that specific test; and that is an indisputable fact.
Professional economics? So what.
Robert Peston on ITV news at 10 last week, declared that a government didn’t have to budget as a household when asked about the national debt.
Did he get Stephanie Kelton’s book for Xmas?
I hope so
He follows me on Twitter (as does Laura Kuensberg) so they see the message from here
“Central bank money is also created when commercial banks, through the Eurosystem’s refinancing operations, borrow money from the Eurosystem against adequate collateral.”
Would this be a fair take-away abbreviation –
…. money is created …. against collateral
No, because that is only a private sector phenomenon
Pity Lagarde wasn’t at the ECB when the Greek debt crisis arose and the ECB refused any further credit to the Greek government. She could have prevented the further deterioration of the Greek economy and the dreadful suffering that has occured since.
With this understanding that would have been possible
Christine Lagarde was the head of the IMF at the time of the Greek crisis so could have said the same thing then. The IMF was involved in those negotiations.
So it is stretching credibility too far to suggest there is a new understanding on the part of the top bankers. They have always known very well how the system they designed, the eurozone, works.
The difficulty has been to get them to share that understanding
I disagree
I think that the understanding has changed
Welcome it and use it
That’s a better weapon that denying it
Why was the EU so keen to involve the IMF during past EZ crises?
And why didn’t the IMF tell the EU they could get all the money they needed from the ECB?
Because this understanding did not exist, despite what some revisionists like to claim
I guess it’s because I have been following your site for a few months that this doesn’t come as any surprise.
But what I would appreciate a reply to: how can Italy (or Greece or name your country) not run out of money when there is a crisis like Covid?
In a way that is a different way of looking at another question I posed here before: if MMT gives the UK a strength that other countries without a currency-issuing central bank lack, how come the UK hasn’t done very much better than (say) Germany?
I’m not criticising, it’s just that a theory fails if its predictions don’t match reality (I am a scientist by training/background). But most likely I am misunderstanding the theory, or generating false corollaries.
I have two MMT videos for this week already
It looks like I need to add a third
If there is any choice, I am one of those who prefers an answer to a video.
Sorry, but I’ve done one….
Jonathan,
Even though the U.K. has the greater “power” to be able to create enough money to achieve what it wants to do, in principle, you’re not taking into account the pink squishy bits which sit in Westminster and Downing Street, who have no interest in using this power to its fullest, or even partial extent – aside from lining their own pockets.
So you’ve got part of your model correct, but, to use scientific parlance, you have ignored the dominant effect – the humans wielding the power.
That’s it, really… no failure of mmt to line up with predictions. The model works- we’ve seen record money issuance by the BoE with no real inflation.
We’ve done badly here because of the stupid ideology and complete inability of the government to organise and direct for the good of the people; I don’t believe any amount of money could have mitigated against that, any more than it has already done.
Johan G, I agree – in fact I would go further and say (assuming my non-expert understanding is reasonably close to the mark) that MMT is a politics-independent theory explaining the creation, transactional use, and removal of money by a currency-issuing central bank. What that process might be used for is then a political matter.
It is a concern because MMT seems to have got a bad name among some for being left-wing. But that is because there are political thinkers who see how understanding of the money supply could be used to drive full employment and decent social provision, aims of left-leaning politicians. To me that is a separate consequence, essentially an update of what I understood Keynsianism to be.
Because as you say, MMT is also a tool of right-leaning politicians even though they may pretend their QE is something different. In a post today Richard talks about the “bubble” in equity prices that some commentators are worried about. My conclusion is that the MMT used by the right through QE is no less inflationary than MMT used to boost employment – it is just that the inflation is not in CPI but in asset prices (including property prices as well as share prices). If that is right it is important, because Richard tells us that the other side of MMT is that removal of money through taxation is required to control inflation. For me that means a government whose monetary policy drives asset inflation will need to find a way to tax assets in the end.
I am sure Richard will be along in a minute to tell me where my logical error is!
I agree with you
And most especially the first para
I see a lot of comments here about “no real inflation”.
I just wondered what this actually means? are we talking inflation on everyday items (e.g. supermarket shopping) or some overall figure?
Isn’t there massive asset price inflation? Is that how inflation is manifesting?
Sorry if I’m completely missing something here, I am but a novice trying to get my head around all this
I am basically referring to consumer price inflation, measured by an index
Exactly!
My feeling (and I have done no research beyond thought experiments) is that MMT is seen to be a left wing prescription, because it removes the obfuscation that the right use to deny the ability to carry out work, generally based on arguments about “being able to afford it”.
If arguments cease to be about balancing budgets, then, horror of horrors, they hopefully move on to discussions about what is valuable work and what are valuable services for the population.
Agree re all the rest about QE and asset inflation as well. Nail on head, as far as I’m concerned
Better one sinner repent….but is this the same CL when at the IMF from 2011 was an enthusiastic supporter of austerity?
Love this video. As with all central bankers their “resources ” are always “ample”. Their computers have a never ending reserve of zeros and ones, in the past a pen and piece of paper would suffice just the same.
But why the obvious awkwardness ?
Draghi’s problem is that he has had to push the limits of his powers in his role like no other predecessor. He is in fact actually acting way beyond his remit at times and he has been openly honest about that. He offered to do “whatever it takes ” to save the EZ, despite not having any real plan or even such blank authority. He took a risk and it paid off. He bought EZ Sovereign bonds to help member state govt debt costs and allowed member states central banks to run up credit for their ailing banking sectors, though that “tab” has and is used as a political instrument at times. So Draghi is getting his permission from somewhere.
He often says that politicians must do more than they are, he does what he can, which is quite a bit monetary policy speaking, but he frequently says the politicians will have to do more “heavy lifting”. He has bought them some time and a way out, but the ECB cannot do this all on its own forever. This is the major challenge for the EU, joint debt is a subject that spreads terror in the halls of some EU governments
@ Quentin
You need to read some Gary Gorton or Tri Vi Dang and figure out what they mean when they say debt upon debt is the strongest collateral for ensuring the maintenance of value in a medium of exchange and then ask yourself why fiat currency is the best answer to this prescription. From there you can go on to ask yourself why you are attacking MMT.