This is the second part of my response to an article posted by American political analyst Jared Berstein (January 7, 2018) – Questions for the MMTers. Part 1 considered the thorny issue of the capacity of fiscal policy to be an effective counter-stabilising force over the economic cycle, in particular to be able to prevent an economy from ‘overheating’ (whatever that is in fact). Jared Berstein prescribes some sort of Monetarist solution where all the counter-stabilising functions are embedded in the central bank which he erroneously thinks can “take money out of the economy” at will. It cannot and its main policy tool – interest rate setting – is a very ineffective tool for influencing the state of nominal demand. In Part 2, I consider his other claims which draw on draw on the flawed analysis of Paul Krugman about bond issuance. An understanding of MMT shows that none of these claims carry weight. It is likely that continuous deficits will be required even at full employment given the leakages from the income-spending cycle in the non-government sector. Jared Bernstein represents a typical ‘progressive’ view of macroeconomics but the gap between that (neoliberal oriented) view and Modern Monetary Theory (MMT) is wide. For space reasons, I have decided to make this a three-part response. I will post Part 3 tomorrow or Thursday. I hope this three-part series might help the (neoliberal) progressives to abandon some of these erroneous macroeconomic notions and move towards the MMT position, which will give them much more latitude to actually implement their progressive policy agenda....Bill Mitchell – billy blog
An MMT response to Jared Bernstein – Part 2
Bill Mitchell | Professor in Economics and Director of the Centre of Full Employment and Equity (CofFEE), at University of Newcastle, NSW, Australia
1 comment:
"Western academics like Paul Krugman advised the BOJ to administer quantitative easing to stop the deflation. Ultimately – and reluctantly – the BOJ took their advice, and in 2001 the Bank expanded bank reserves dramatically from ¥5 trillion to ¥30 trillion.
Nonetheless, both economic activity and asset prices continued to fall, and the inflation projected by Western academics never materialized.
The reason that quantitative easing did not work in Japan and has not achieved its aims since is elementary. MMT economists have been providing the answer for more than two decades now.
No-one in the private sector wanted to borrow and without borrowing and subsequent spending how will inflation evolve!"
This is 'confidence fairy' stuff...
then here:
"The economic decline in the 1990s in Japan was driven by the non-government debt build up that began in the 1970s and accelerated during the 1980s."
This is "stability creates instability!" nonsense here Bill is channeling his inner Minsky...
Its not that the private sector doesnt want to borrow (I personally know people who lost their Dealerships in 2009 because they couldnt get floor planned...), its that the BOJ forcing the additional 25T yen assets onto the left side of depository institutions requires those institutions (at the system level) to come up with an additional 2.5T of Yen in regulatory capital... which they cant do in the time required...
so it creates a credit contraction and more bankruptcies as (again at system level) depository institutions have to raise the additional 2.5T capital first before being able to providing credit..
The "loanable funds" falsehood or "banks lend out reserves" paradigm is NOT benign... it creates all recessions if you look back at the history of system reserve levels...
So when we say here:
"During the GFC, the US Federal Reserve, like many central banks bought large proportions of the outstanding debt (usually on secondary markets) with no inflationary consequences. The reason? Adding reserves to the banking system is not intrinsically inflationary."
You have to go beyond that and look at what is happening on the balance sheet of the depository institutions wrt the regulated ratio of Capital : Assets
This ratio (at system level) is reduced to below the target level of 0.1 and there are insolvencies that result (at the localized level)...
So yes it is not "intrinsically inflationary" but that does not identify the harmful effects.. it leaves the reader with the impression that the policy is benign..
The policy is not benign..
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