I have promoted the ideas implicit in Modern Monetary Theory (MMT) for some time. Indeed, I think I have done more than most to promote this idea in the UK. However, I am now quite worried that some who think that they advocate MMT are actually going to do significant harm to economic understanding and the necessary political embrace of the ideas implicit within it.
If you want to understand what I think MMT is then please read this blog post. It is still a pretty accurate summary of what I think, including the fact that MMT does not result in policy prescriptions like job guarantees whatever those who promote it might say.
There is good reason for this. MMT is neither modern nor a theory. It was, in fact, completely misnamed by Bill Mitchell who gave it the title. All MMT does Is describe how money works in an economy with its own fiat currency. A fiat currency is one that is issued by the government through its own central bank without any asset backing, meaning that it is nothing more than a promise to pay.
There are some obvious consequences from the understanding that MMT provides. The first is that fiscal policy is always more powerful the monetary policy, and that is most especially the case when interest rates are at or close to zero, as they are now and as they are likely to be for some considerable time to come.
Second, MMT makes clear there is no requirement for a government to balance its budget and that seeking to do so can be positively harmful to the well-being of a country because significant unemployment is likely as a consequence.
Third, MMT makes clear that the idea that the government taxes and then spends is very obviously wrong. It actually has to spend in the first instance to create the currency that is used to settle tax liabilities when it demands that they only be paid in the currency that the government itself creates.
Fourth, this then liberates a government to use tax, fiscal policy and its power to create money to deliver its other social, economic and industrial policies. These might, for example, seek to deliver full employment, reduce inequality, or promote certain activities such as those described as a Green New Deal, and so on. However, MMT does not dictate what those policies are. To claim otherwise is simply incorrect. I will go so far as to say that such a claim is a category error. Because MMT suggest that something is possible does not mean that it has to happen, or be done. Political choice always remains in operation.
Despite these facts there are now those who think that they are promoting MMT when what they are actually doing is ignoring political economic realities. Let me be quite blunt about that. In my opinion MMT does not permit that possibility. So let me note some economic realities that MMT does not let us ignore, whatever some might like to think.
First, governments that understand MMT will still need to issue bonds. I am well aware that in principle MMT suggests that this is not necessary, because a government that is able to follow the principles of MMT could instead simply borrow directly from its central bank on overdraft. However, that ignores some essential economic fundamentals that are at present embedded in our economies which MMT will not alter.
One of these is that people need to save. Another is that when people want to save they seek security. What is certain, and which MMT confirms, is that no one can deliver that security better than the government because it cannot default on its debt, and most saving (rather than investment) is debt. There is nothing contentious about that claim: what MMT makes clear is that every bank deposit account is no more than a debtor/creditor relationship. In that case if a government wants to provide a secure mechanism for people to save, and in every country there is a demand for that facility, then it must issue bonds for this reason. To pretend otherwise is to suggest that either there is no reason for private setting, which is absurd, or that private saving must be subject to high degrees of risk, which is a negation of the responsibility of government. So, let's stop pretending that governments do not need to issue debt. They do. There is a social purpose for doing so. MMT advocates ignore social purpose at their own peril.
Second, let's also stop pretending that there are no other uses for this debt. There are. For example, the overnight bank repo markets would cease to exist if there wasn't government debt. For some bizarre reason some MMT proponents may wish to create massive instability in the banking system, but I don't. In that case we need that to provide security for large-scale overnight deposit taking and that requires that there be significant quantities of government debt in issue. Saying that MMT would let us get rid of this debt is an act of recklessness as a consequence.
Third, let's also note that MMT teaches that there is very good reason why a government should want to have its own debt in issue, and over a wide range of time periods. If the government is able to set interest rates by issuing debt and as such take control of these rates to hold them to the lowest possible level that can be achieved then it is delivering sound economic policy by doing so. Ignoring this possibility for controlling the unnecessary interest that might otherwise arise within an economy would be a recklessly irresponsible act by a government saying that it prescribed to MMT. MMT enthusiast should not encourage that.
Fourth, let us also stop the pretence that there is no connection between taxation and government spending. It is emphatically true that government spending is not funded by taxation. It is just as true, and MMT teaches it, that without taxation there are massive adverse consequences within an economy.
One of these is that government created money will lose its claim to value. Any other currency might be used instead. An immediate, disastrous, consequence might be that the government could lose control of the macroeconomy. Tax is an essential component of MMT as a result.
Another use for taxation is the control of inflation, which would have to be a priority for any government that prescribed to MMT, just as it is for any other government.
And, since, we know that the scales of deficit that can be sustained without significant inflation risk arising, most especially when full employment is reached (as I hope it would be) are very small, it follows that at the point where MMT delivers on its promises there will appear to be a direct relationship between government spending and taxation, even though we will still have to emphasise that spend comes before tax.
Finally, using MMT jargon does not change reality. So, for example, MMT is inclined to discuss matters like asset swaps. It does so, for example, when discussing quantitative easing. The claim is that bond issues, where cash (on which interest is not paid) is replaced by bonds on which interest is paid are just ‘asset swaps'. The reverse is then claimed to be the case for quantitative easing. The claim is made by some within the MMT community that this is inconsequential. Politely, that is absurd.
What has been described is, of course, an asset swap. But then, there is also an asset swap on every occasion when money is exchanged. This is true without exception. Double entry requires it. But double entry is not neutral. Double entry records changes in obligations and the nature of assets and liabilities that are in existence so to pretend that an asset swap has no consequence is to quite literally to seek to suspend reality. MMT should not be doing that. It should be describing reality.
When QE takes place Government bonds in issue are replaced in the hands of their owners with money. That money was created for the purpose, like all money created by loan transactions is. The government debt is cancelled. There is more government created money in the economy as a consequence. The profile of savings opportunities available within the economy changes as a result. Indisputably the risk profile of saving is increased. The outcome of that has been increased inequality resulting from substantial increases in speculative asset trading as a result of which their prices have risen with substantial socially significant consequences arising.
To pretend that this is without consequence, as some in MMT are doing, is to behave as irresponsibly as do those who promote the operation of free markets as if they are without social consequence, which neoliberals do. The claim that this asset swap can be ignored is as far removed from reality as is the theory driven dogma of those neoliberals that has done so much harm to our society over the last 40 or so years.
Any MMT group is, of course, at liberty to promote myths unrelated to what MMT actually explains as to economic reality, but they should then know that if they do I will criticise them as strongly as I do the fantasists who pursue other economic falsehoods. As far as I am concerned MMT is simply a tool that assists understanding in some areas. And that is it. It does not mean that I have to suspend my judgement. And it does not answer political questions. It does not prescribe policy. It does not let you pursue economic fantasies. It just explains how money works. To those who think otherwise I have one simple message: get real.
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Completely agree with your position Richard. I got attacked a lot for saying something similar.
The label is unfortunate, as you say neither modern, nor a theory. And as you say, the way this label gets attached to policy is also unfortunate. Question is do we need the label at all? Can we just talk about how money works?
Maybe that’s exactly what we need to do
Thank you for this – I think that the way it is written is certainly redolent of the ‘double entry’ concept and answers some fundamental questions. The overall emphasis is about ‘balancing’.
There is however one element of MMT that I am actually quiet focussed about and that is the role of sovereignty in the production/provision/creation of money.
MMT, money creation – whatever we want to call it – belongs firmly with the State who created or enables it to be created as legal tender.
The creation of money therefore is NOT a private issue. It is a social utility that the State may be concerned about in terms of its effective distribution and use.
If a State has created a currency that can be used (abused) by tosspots in the financial sector to get rich with things like credit default swaps (where you can effectively insure something belonging to someone else in the pursuit of making a profit out of something going wrong), then the state must also ensure that society at large has enough money too. That’s only fair.
So money is also a moral issue as well.
The issue of sovereignty over money is one that must be promoted energetically in a world where the concept of the State is being constantly undermined and undervalued or/and where the State is being used by the rich to look after their interests only.
As you once said Richard ‘When will we get the money that we need?’.
Banks and financiers seem to be able to make their money when they like under license. So the above question applies to the rest of us. And MMT/whatever should show us that it is reasonable for us to expect Government to provide the money that we need.
Thanks
@Charles & Richard. Totally agree labels such as MMT can have a destructive quality and give rise to name calling. Inserting “money works” into a response is better and doesn’t immediately allow a well thought out argument to be cancelled.
Another mental block for me is how QE works. I’ve read it up, but a good Adams’ diagram (like his tax explanation) might solve it for me. For example, QE leads to increasing stock prices how does that work into the flow of money (or labour that those magical money holders can purchase)?
And Happy New Year Richard.
That is on my agenda….
Hmmm – quite a meaty piece. I am guessing that it is prompted by some argument that has kicked off in the “MMT world”.
First, I agree entirely MMT is neither modern nor a theory…. it is just a statement about the nature of money in a fiat currency world.
Second, it is, therefore politically neutral. There is no reason why Rishi Sunak et al. should not accept its truth….. other than to disguise other hidden agenda.
Third, if understanding MMT is merely an academic exercise then what’s the point. It MUST give us ideas that are valuable in the real world…. and here, of course, Rishi and I might have different ideas.
On some of the more detailed issues.
Absolutely yes, we do need government bonds. Any understanding of the modern banking system makes this fairly obvious. If anyone suggesting otherwise then they are advocating such a huge overhaul of our monetary system as to make them unimportant in the real world we live in.
Singapore, I think illustrates this quite well. Over many years it has not run deficits; rather it has accumulated huge asset portfolios (both domestically and overseas). Nonetheless, it still issues government bonds because they are essential for the banking system. In addition, individuals save through CPF (for retirement etc.) and whilst these funds can be used to buy equities and even a flat, any cash not so utilised carries interest from the government (at a rate higher than Government bonds) because they recognise that individuals need somewhere safe to save.
So, a fairly smart government with no need to borrow still chooses to issue bonds…. case closed.
…. I have more to say but the sun is out and my wife wants to take me out for a walk. I’ll be back!
Thanks
Enjoy the walk
The walk was curtailed by very muddy conditions as the early frost has melted – I was not allowed off the lead.
Continuing with the Singapore theme, they are one of very few countries that operates a truly counter cyclical fiscal policy. During the 2008 financial crash they embarked on building new subway lines, they gave cash sums to individuals on low incomes, they supported small businesses. Indeed, more recently they were first out of the blocks to make direct cash payments to people/businesses as the pandemic gripped the country.
On the other hand, in boom times they have taken action to curb property prices and raised taxes to cool things down and execute a switch towards taxing consumption (raising GST, a longstanding policy).
In addition, given that trade is such a large part of the economy, they target the exchange rate, too. (Something I think MMT pragmatists need to think about more deeply).
Now, you may agree or disagree with the government on a lot of things in Singapore but last time I checked, Singapore was still the darling of the neo-liberal right… yet they operate a combined monetary, fiscal and FX policy that is, in effect, inspired by MMT. I think this illustrates that (1) MMT is not left/right political (2) MMT does not imply “printing money” – merely that this is one option among several to manage the economy (3) a combined taxation, spending and monetary policy can deliver excellent economic results if delivered by trusted, sound political institutions.
More on “Asset Swaps” later.
Thanks
Thank you Clive. It has been prompted by a bit of a spat. An unfortunate one.
“So, a fairly smart government with no need to borrow still chooses to issue bonds…. case closed.” Richard has made me understand this in blog posts, and I’m not sure if many MMT-ers would really dispute it. I suspect that the MMT community has been focussed so much on trying to make the general public (GP) aware that Bonds are not a pre-condition of spending by govts, that some confusion has arisen.
larry, above, has summed up very well in his first para, why MMT is not really “modern”. It can be considered a “theory” in the same sense as the Theory of Gravity, but the GP may take “theory” to mean a hypothesis. Yes, Modern Monetary Theory is a misleading title, but it’s probably too late, too well-embedded, to be changed now.
Your second point is agreed widely, I think. On the third point, I suggest there is a difference of emphasis between the MMT community (for want of a better term). and Political Economy. MMT is more concerned primarily with educating the GP about the reality of the financing of govts, so keen to avoid that understanding being undermined by accusations of political bias. But certainly not unaware of the political implications of the MMT lens.
In fact, apart from a dispute over the precise nature of QE, which is highly technical and a little obscure for many, I suggest that the MMT community, and Political Economy led by Richard, are heading in the same broad direction, by slightly different paths. And should agree on that, amicably.
That MMT sites should not pretend QE has no consequence, which is the core of the dispute
It seems that some MMT-ers say that because we don’t HAVE to issue bonds to finance expenditure then we should NOT issue bonds. All I wanted to say was that Richard is right – there is a role for Government bonds beyond just financing deficits.
I used the Singapore example because whether you accept MMT or not, you have a country with no need to borrow to fund expenditure but still runs a bond market for other reasons (that Richard mentioned).
I want to get across to the public that economic management should be using a combination of measures to promote good economic activity and stable/low inflation. That means spending on the things we badly need that the market fails to deliver, taxing to promote good behaviour and control inflation, issue bonds to control asset price inflation, target interest rates (and possibly FX rates) to control inflation, too.
Hi Richard, I have tried to share this post a couple of times to FB, however, on each attempt your post is replaced by a government announcement listing the 39 towns seeking City status!
Is it possible to find out why?
Sorry – not a clue! I tried and it works
Clear your cache?
Richard,
I have banged on about thisfor a while BUT what about the issue of what was once lalled ‘Usury’ making money out of money by non governmental actors -basically the ‘finance’ sector
Any thoughts?
Ye – bit not now….too much else on
Richard healthy new year to you & all your readers
Meanwhile
I may have resolved in my mind my bug bear problem of where exactly is the double entry on the creation of money by the Govt.
Dr, Bank
Cr. Capital ie the people in a democratic society. This is similar to shareholders issue in a limited company . The capital account belongs to the owners which would be returned to them on the termination of the company, In the case of money creation by the Govt. there will never be any return to the theoretical owners .But we do need a written constitution to stop any surplus going to the crown —The Windsors dont you just love them
Pretty much…..
MMT seems to focus on domestic economics. Not sure how it covers international trade. If trade deficits need to be paid for in other currencies, the main options to address this appears to either be a significant adjustment in the value of the trade deficit currency to reduce international demand/increase UK international supply, or selling assets. On either of these, the UK’s ability to either benefit from or continue to do, seems limited. Or doesn’t the UK’s decades long trade deficit matter within MMT?
International exchange rates are not determined by the volume of currency and use that are instead based upon the relative rates of productivity within the trading nations, as academic research basically shows, albeit subject to short-term speculative trends. Consequently if MMT encourages additional investment which does in turn enhance productivity it will have impact on the exchange rate in a favourable manner.
“albeit subject to short-term speculative trends”….. hmmmm – I fear that these few words need more unpacking and can’t be ignored.
First, and importantly for MMT, money creation is not a big driver of FX rates…. if it were then the yen would have been in a steady downward trend for the last 20 years. That is not the case so FX volatility is not a reason to abandon MMT BUT governments (whether operating on an MMT basis or otherwise) need to have an FX policy. This could be anything from complete neglect (USA) to currency union (France/Germany) and everything in between.
Second, speculative flows are huge in FX. Never more so than today with the advent of algo and momentum trading.
Third, benign neglect might work as a policy for closed (ish) economies but in open economies a sharp random speculative devaluation would have a corresponding feedback into inflation that might justify the weaker FX rate or even push it further. It certainly might have an impact on domestic interest rate and fiscal policy.
Fourth, even without speculative flows , investment flows swamp trade flows. Hot money flowing in and out of relatively small economies can be problematic.
Fifth, the only real conclusion from studies (both academic and 35 years losing money as an occasional FX punter) is that we have no real idea why FX rates move.
Sixth, FX volatility does have a cost. Whatever one may think about the Euro and its forerunner the EMS it was an attempt to solve a real problem. We can argue whether the cure (EUR) is worse than the illness (FX volatility)… but FX volatility is a problem in open, connected economies.
Seventh, currency “status” is sticky. Ie. it takes a generation or more for perceptions to change. For example, GBP owes its ‘reserve currency status’ (and, therefore its high level of ownership around the world) to our imperial past rather than our current performance.
So, the questions for me are (and they will have different answers for different countries)…
How vulnerable to an FX move is a country?
How damaging would that move be?
What could be done to ameliorate the effects?
Do developed/developing countries need different approaches?
Do countries with old/aging populations need a different approach to younger ones?
Can exchange controls be effective in 21st Century?
…. and more.
I have noted those as questions to answer
Couple of inaccuracies in your piece
1) O/N Depos are unsecured. So Repo has nothing to do with that at all.
2) Also the repo market would exist with or without govt debt. At it’s core repo is just a mechanism to lend (any liquid) assets to manage liquidity, enhance return or leverage or from the other side cover shorts.
Of course they are unsecured
That is why repos are used instead
It’s hard to imagine a world with a reasonably liquid repo market where Government debt was not the main collateral. Volumes traded in non-government repo are tiny (with the possible exception of US Agency repo) and always come up against the problems of quality/marketability/liquidity in extreme circumstances. After all, you only need to liquidate collateral when your repo c/p has gone bust and that is, by definition, an extreme event with market dislocation.
Also, regulation is all about keeping fire-breaks between banks. Banks do not really borrow from each other on an unsecured basis because the money you borrow can’t really be used for anything. They must borrow with collateral to insulate the lender…. but this only works if the collateral is government bonds. No point in Barclays borrowing from HSBC and posting Lloyds Bank bonds as collateral… it has to be gilts.
Most activity in non-government repo is, as you do note, driven by firm financing desks who are trying to cover trading shorts…. but this is not what this is really all about.
Thx
No, neither issuance of gilts nor QE is an asset swap – unless one uses the term VERY loosely and in a non-financial market sense…. and I don’t understand why you would.
The key point about a swap is that there is no exchange of underlying principal – just an exchange of cashflows associated with that principal. In this case it is interest rates swaps and I might do a GBP 100 million 10 year swap trade at (say) 1% fixed versus SONIA. There would be NO movement of cash when the trade is done but each year I would pay GBP 1 million and receive the overnight rate (compounded) for that year on GBP 1 million… for the next 10 years.
An owner of a gilt might do an asset swap on the gilt by exchanging the fixed rate coupons associated with the gilt with a floating rate (eg. 1.5% versus SONIA +0.50%). This is quite different from QE where the BoE buys the gilt from the owner and gives them cash.
In the former, the owner gets no cash but has eliminated interest rate risk. In the latter, interest rate risk is eliminated but the owner then has cash. Both have done the same job from an interest rate risk management perspective….. but the person who sells the gilt and gets cash will behave very differently from the owner who has swapped the gilt and has no cash. So, clearly, QE is not “just an asset swap”.
Fantastic post
Sorry – I forgot to add – it might be worthwhile putting each clause of your blog above in a table that on one side describes the MMT or Government activity and then what the balancing action is on the other side – almost like a typical cash up sheet or summary might look like?
Just an idea that’s all.
It’s on its way….
As I understad it, one of the core claims of MMT is that unless an economy hits full capacity or full employment, there will be no inflation.
How do you square this with what is going on in the world? Clearly the world or most economies are not at full employment yet inflation is racing higher!
What would MMT do about it, as you seem to be saying MORE money should be printed and spent which seems at odds with controlling inflation.
That is not what MMT says
It says money creation will not create inflation until then
That does not mean supply shortages cannot do so
And that politics itself cannot
Inflation is a multi-dimensional issue
MMT explains one dimension
I think I understand what Patrick is getting at.
Firstly, as we have seen with QE, money creation has created inflation in certain prices. So it is impossible to say that money creation doesn’t cause inflation, which poses a huge problem for MMT’s basic claim. It might not be broad based price level increases but given we measure inflation as a basket, MMT already falls down at this hurdle.
Secondly, if as you claim MMT doesn’t affect certain types of prices (“supply shortages” for example) you still have an issue regarding how inflation is to be managed. Which is I think what Patrick was getting at.
If inflation is high and rising, even if it due to supply constraints, what would MMT do to reduce inflation?
It sounds like you are saying MMT can do nothing to manage that problem. Basically incapable of dealing with any externalities.
More to the point, you are saying MMT should print and spend more money even in the face of such a situation. Don’t you think that creating more money chasing the same or fewer goods would increase inflation even further?
Isn’t that the very definition of inflation and the very recipe for it to explode higher?
QE is not what MMT prescribes so the outcome is not an MMT outcome
And of course, MMT does not explain how inflation arises for non-monetary reasons within the real economy – why should it?
What would MMT do to reduce non-money created inflation? It would suggest the answer is in other areas – just as I did in this piece
I am saying MMT helps us appreciate that
And your conclusion is not remotely close to what I am saying
So you are simply here to troll
Goodbye!
“MMT is neither modern nor a theory.” Anyone who knows anything about the MMT literature will know that the framework derives from the work of Abba Lerner, Michal Kalecky, Wynne Godley, and others. Although additional features were added by Mitchell, Wray, and Mosler. This much is, I think, indisputable.
It is the second part of your statement where you make a logical error. MMT is a descriptively accurate theory. This contrasts with what can be called a normative theory. Game theory is a normative theory. It describes what would take place were players to play the game ‘correctly’. Einstein’s theory of relativity, on the other hand, is a descriptive theory; in fact, a descriptively accurate one. MMT is the latter kind of theory.
As I have construed it, in a simpified way, a theory is an explanatory framework that consists of a set of empirically testable conjectures. If the conjectures are not empirically confirmed, the theory is false. Otherwise, the theory is true. MMT consists of a set of empirically testable conjectures which can be seen to be observably true. This is in contrast with the mainstream neoliberal economic theory, with which it is in contention, and which is empirically false. The mainstream theory also rests on assumptions that are logically incoherent, such as the notions of the rational actor and the ergodic axiom. From an empirical perspective, and some others, they are nonsensical.
So, let’s call it fact then
From my perspective, a theory is a conceptual construct and a fact is something that empirically exists in the real world. This is a subtle distinction but I would argue that theories and facts are distinct and, therefore, not equivalent.
For some time now, I’ve been trying to explain that MMT is an explanation of how Modern Money works rather than a Modern Theory of how money has always worked.
🙂
Would your reason no 3 for issuing debt ( control of interest rates) mean that deficits must always be matched pound for pound with debt?
No
A mix is always possible
@IanGourlay
Mostly we don’t pay for imports in foreign currency. We pay in pounds, and it’s up to the foreigns to decide whether to keep them in the bank, or buy UK investments/bonds or exchange them for other currency. We get foreign currency for exports, and make the same decisions – mirrored.
Only a very tiny amount – just a few percent – of international movements of money are anything to do with trade. Over 90 percent is useless speculative movements of capital looking for quick profits.
“Mostly we don’t pay for imports in foreign currency. We pay in pounds”.
‘3. How does the UK finance its current account deficit?
If a country’s outgoings (debits) to the rest of the world are greater than its incomings (credits) from the rest of the world, then it is running a “current account deficit”. In other words, there is a need to purchase foreign currency in order to meet these due payments to the rest of the world. To meet this need, the country in deficit has to either draw down on its financial assets (that is, sell assets) or incur liabilities (for example, a loan) from foreign institutional units such as foreign banks or foreign investors.’
https://www.ons.gov.uk/economy/nationalaccounts/balanceofpayments/articles/ukscurrentaccount/insightsanddefinitions
See also – 5. Does a current account deficit matter?
‘mass purchasing of foreign currency (and therefore, selling of the domestic currency) can depreciate the value of that domestic currency if enough of this activity happens’.
‘should foreign investors lose confidence and decide to pull out their investments from host country, a large sell-off of that currency may begin to take place and rapidly depreciate the value of the domestic currency. This could lead to a currency crisis that can have a negative and lasting impact on the common resident via the closure of businesses, loss of jobs, and a government financially struggling to minimise an impending economic downturn’.
Increasing domestic productivity utilising MMT would be helpful if it replaced the need for imports or created something that other nations want, but doing so appears to be the UK’s current account deficit achilles heel.
You are ignoring the willoingn3ss of some to simply hold pounds, which has made the economy balance for some time
[…] Cross-posted from Tax Research UK […]
Thanks Richard, an excellent, refreshing, straightforward exposition, if I may offer my opinion. May I also suggest that you flag it somewhere prominent on the website, for easy reference (until it is replaced in time, of course!), for newcomers and ease of access for others (and retaining the comments, which include valuable commentary).
In some respects it seems to me to have with some resonance with aspects of Mehrlings ‘Money View’, and I feel especially comfortable when I see such compatibilities with MMT.
I agree MMT is neither Modern nor Theory – indeed, since it must envelope Credit too, it is not even, strictly money (MMT isn’t ‘MMT’!): since the Hierarchy of Money is essentially relavistic, depending on your perspective view, and your place in the hierarchy: credit at one level is money at a higher level, but in the whole system, whether it is functionally transacted at a given level as money or credit may vary, depending on the time, the circumstances, and the nature of the liquidity pressures (contracting or expanding, and the rate of change) in the system.
Time for a name change?
Yes….probably
Thanks Richard,
Completely agree.
For those concerned about fx trading, Scotland will not replicate the city of London ( international settlements etc) the London Stock exchange is a global exchange and lots of fx takes place because of this. Banks try to minimise their exposure/ risk and will buy and sell to settle real trades ( aggregated across their customer base). That’s not to say that speculation will not take place but a floating currency removes much of the risk to a country. Commodities are in a global market place so that helps regulate price ( to an extent). Scotland will have to build up its already impressive exports and reduce imports by building up out own manufacturing capacity where possible.
There are lots of nonsensical things going on. The fish processor who found it cheaper to fly scampi to the Far East for processing then back again than employ folk here for eg. Taxes can be used to discourage such behaviour and thus increase local employment and economic activity.
Eventually sources of cheap labour may dry up. That is happening to China with production fleeing to Vietnam or Bangladesh.
If we taxed carbon in transport properly much production feeding consumption would come home.
Disclaimer – I’m a novice and know relatively nothing. I have done quite a bit of research over the last few years, but the more I learn, the more I realise how little I know. Please let me know where I am wrong in my thinking.
On the subject of QE, logic leads me to the asset swap camp, and as such, QE would appear to be a placebo at best. The Government could just as easily create the currency required. The asset swap, as I see it, is a transfer back and forward between M3 (which I interpret as reserve accounts at CB) and M1 (which I interpret as savings – bank account balances, gilts and bonds etc).
The origin is where authorised government spending instructs bank accounts to be marked up in the private sector. This creates new currency.
I’m unsure by what process, and how often, a deficit is calculated but it appears that there is a policy to mirror deficit spending (gov spending – tax revenue) by selling gilts to the private sector, I suppose in a bid to curtail the additional spending power of the private sector by reducing the more liquid forms of money supply.
So, the deficit amount is removed from M1 accounts. To all intents and purposes, this currency is destroyed, but to carry on the charade, the gilt purchase currency is now in reserve accounts at the B of E. (M3). The buyer has a document guaranteeing them interest payments every 6 months and a payout at the end of the term of agreement. This currency would be created anew by the Central Bank, ie. bank accounts marked up accordingly, however the charade will show a corresponding reserve balance drop at the Bank of England. Either way, we continue…
QE is the process in reverse. It can’t happen without the gilts being there to buy, so, when the central bank buys the gilt, it is simply replacing the currency that the gilt originally deleted/saved in reserve accounts. The Central Bank then marks-up bank accounts in the private sector. The reserve account is marked down.
Therefore, QE does not create new money, the new money was created before the gilt was even purchased. Society has had the benefit of the spending, the provisioning of society being the real purpose of government, after all.
So, I think the asset swap thinking is quite a logical one.
The question of necessity of bonds is more one from the ‘funding’ fallacy. They, obviously, don’t fund anything for a currency-issuing government on a fiat system. They do provide a safe and virtually risk-free vehicle for parking loads-a-money and can provide a fine profit for the mega rich in times of low inflation. Wouldn’t it be just as easy to give these groups or individuals the ability to save in central bank accounts and gain a little interest that way? The country would then measure national savings rather than national debt, and although nothing had fundamentally changed, it would give the media and politicians a rest from worrying about a negative debt and instead, pat themselves on the back for a positive balance on the national account.
As I said at the beginning, I realise this is probably wrong and I’ve picked it all up and interpreted it to suit my own thinking. I’ve been wrong often in the past but am here to learn. If anyone would take the time to let me know my errors, I’d be very grateful.
I will be writing about this over the weekend
And yes,you are wrong