Category Archives: Monetary Policy

Japan’s Monetary Expansion

Source: ZeroHedge, Nov 2019

The main lessons that global economies should learn from Japan are the following:

  1. No country can offset the problem of demographics and productivity with higher debt and money printing. It simply kicks the can further but leaves the economy weaker and in permanent stagnation.
  2. The technology and productivity challenges cannot be solved incentivizing malinvestment and government spending. It is a massive constant transfer of wealth from the productive to the unproductive, which makes high productivity sectors stall and crony and obsolete sectors remain zombified.
  3. Doing the same with different names will not generate a different outcome. Calling the same policy something different will not make citizens get excited about the economy.
  4. The wrong diagnosis will lead to worsening outcomes. When the government is surrounded by economists that tell them that the problem of the economy is that there are too many savings, the government will decide to raise taxes and create a larger problem attacking consumption. With private debt at 221% of GDP. Japan has many issues, none of them being a “savings glut”.
  5. If you abandon structural reforms, the results will be worse. The QQE program was based on three “arrows”: monetary policy, government spending, and structural reforms.
    Guess which arrow they forgot to implement? Exactly. Structural reforms never happened, and when they did, they came in the form of higher taxes and more interventionism, the opposite of what the economy needed.
  6. The biggest lesson from Japan is not that the central bank can buy equities and keep kicking the can further.
    The biggest lesson from Japan is that monetary and fiscal policy is not designed to kickstart the economy and improve growth or productivity but to perpetuate the imbalances created by excessive government intervention and transfer wealth from salaries and savings to the government and the indebted crony sectors.
  7. The lesson from Japan is that no government can make two plus two equal twenty-two, but they can prolong budget imbalances for much longer than logic would dictate.

The true lesson from Japan is that central planners will continue to prefer to gradually nationalize the economy before even considering a moderate reduction in government size and control of the economy. The result will be almost no growth, poor productivity, and rising discontent, but the bureaucratic machine will be safe.

Will MMT Collapse the Financial System?

Source: ZeroHedge, Nov 2019

Governments facing soaring demands and limited tax revenues are naturally tempted to meet these demands with “free” new currency, since the political and financial pain caused by skyrocketing taxes leads to governments being tossed from power.

This temptation explains the regular occurrence of hyperinflation and debt default, as the temptation to over-borrow and pile up interest payments leads to governments defaulting on their debt. In both cases — hyperinflation and debt default — there’s a currency/ governance/ financial crisis that upends the status quo.

This is one common objection to MMT: the freedom to issue new currency is difficult to limit, as there will always be more demands for government spending. Without some “governor” to limit the issuance of new currency to align with the expansion of goods and services, then governments tend to issue new currency far in excess of what the real economy is creating.

This generates inflation, which impoverishes everyone using the currency.

MMT advocates claim that since MMT generates goods and services, it won’t generate inflation. But rebuilding a bridge doesn’t actually create any new goods and services, or increase productivity: it generates wages and consumes materials and energy.

Since it doesn’t generate more consumable goods and services, the expansion of wages and demand for materials will drive prices higher.

The core difficulty here is that the democratic political process is intrinsically skewed to short-term, politically expedient dynamics: politicians focus by necessity on winning re-election, and they will naturally approve new issuance of currency and new spending to placate the demands of constituents, lobbyists and campaign donors.

I honestly don’t see any intrinsic limit on political expediency. Politicians need to be forced to say, “I know your need is legitimate, but the money’s simply not there.”

Without some real-world limit on the issuance of new money, money will be issued in surplus because the issuance isn’t an economic process, it’s a political process.

ultimately, “wealth” (as measured in new goods and services generated by capital and labor) is generated by increasing productivity, via investment in greater efficiencies.

Much of the spending people want — repairing bridges, supplanting natural gas electrical generation with solar or wind, and so on — are not necessarily increasing productivity: the repaired bridge carries the same number of vehicles as it did before, so there is no increase in productivity.

In other words, efficiency and productivity are core dynamics, yet the MMT process is fundamentally political, and politics has little interest in efficiency or productivity. It is, as noted above, politically expedient, with a default setting to put off tough decisions into the future.

In the private sector, return on capital and the productivity of labor and processes are the core dynamics. These rationalize decisions to prioritize efficient use of capital, labor and resources. Absent this rationalization, resources can be squandered for politically expedient reasons.

In other words, capital, resources and labor can be mal-invested, which brings up the opportunity cost: all the capital, labor and resources squandered on “bridges to nowhere” and other pork-barrel projects are no longer available for truly productive use.

The key question here is: How do we harness our intrinsically scarce capital, labor and resources to increase productivity and socially/ecologically beneficial investments in a sustainable way?

MMT’s diagnosis is that a lack of currency is the primary problem. The MMT solution assumes the new currency can be efficiently invested within the existing political system without disrupting the increasingly precarious existing financial system.

While the appeal of MMT is self-evident, it seems to me that both the financial and political systems are broken in ways that MMT, no matter how it’s managed, cannot fix.

The problem is we’re misallocating capital, resources and labor on a vast scale. That’s the problem. Adding more currency and capacity/”growth” doesn’t fix this problem, it actually makes it worse.

If we look around at the trillions of dollars in recently issued currency floating around the world looking for a yield, the trillions poured into asset bubbles that only benefit the few at the top, the gargantuan waste of capital, it’s hard not to see MMT as a “green” Band-Aid for a profoundly broken, wasteful, unsustainable system.

MMT leaves the existing status quo essentially untouched and adds a new layer of newly issued currency and spending, and a new layer of “growth” and consumption, consumption that no matter how socially beneficial is still an additional burden on resources.

In effect, MMT is another attempt to preserve a dysfunctional status quo by adding another layer of newly issued currency and “growth.” More “growth,” even the sort envisioned as “Green,” is simply adding to a destructive system.

This is a fatal flaw in MMT. Relying on politicians to impose limits on their own desire to win re-election is to deny human nature.
To sum up: MMT is presented as the solution to the “problem” of insufficient government funding, but that’s not the real problem:

The real problem is the purchasing power of the fiat currency that will be issued in the trillions of dollars.

It’s a recipe for the collapse of money as we know it.

Mini-Revolt @ Fed Monetary Policy Conference

Source: Bloomberg, Jun 2019

The research conference, hosted by the Chicago Fed, is the centerpiece of a yearlong internal review of the central bank’s inflation target announced in November. Since then, the issues at hand have become more pressing. Inflation has drifted below the Fed’s 2% target and an escalating trade war has pulled forward concerns about recession risk.

advocates of another approach — targeting the growth of nominal income — staged a mini-revolt at Wednesday’s first session. After noted monetary economist Lars Svensson gave that approach short shrift in his presentation, a trio of conference participants pointed to its advantages during the question and answer period, including St. Louis President James Bullard.

Under such a strategy, the Fed would target the growth of nominal gross domestic product — which unlike real GDP isn’t adjusted for inflation. (So if inflation rises 2% and real GDP rises 4% then nominal GDP goes up 6%.)

Svensson argued that a nominal GDP target would not be consistent with the Fed’s dual mandate to achieve price stability and maximum employment.

“Lower GDP and employment is fine as long as prices are higher,” Svensson, a Stockholm School of Economics professor and former Swedish central banker, said.

Bullard took issue with that assessment. “I think Lars is off base here,” he said.

He argued that contract holders, such as homeowners with 30-year mortgages, were concerned with the growth of the overall income they have to meet those obligations.

Related Resource: Twitter, Jan 2018