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Saturday, 09 January

05:00

Saturday Quiz – January 9, 2016 – answers and discussion Bill Mitchell – billy blog

Here are the answers with discussion for yesterday’s quiz. The information provided should help you understand the reasoning behind the answers. If you haven’t already done the Quiz from yesterday then have a go at it before you read the answers. I hope this helps you develop an understanding of Modern Monetary Theory (MMT) and its application to macroeconomic thinking. Comments as usual welcome, especially if I have made an error.

Question 1:

As a matter of accounting, the financial assets held by the non-government sector rise $-for-$ when a sovereign government issues debt.

The answer is False.

The fundamental principles that arise in a fiat monetary system are as follows.

  • The central bank sets the short-term interest rate based on its policy aspirations.
  • Government spending is independent of borrowing and the latter best thought of as coming after spending.
  • Government spending provides the net financial assets (bank reserves) which ultimately represent the funds used by the non-government agents to purchase the debt.
  • Fiscal deficits that are not accompanied by corresponding monetary operations (debt-issuance) put downward pressure on interest rates contrary to the myths that appear in macroeconomic textbooks about ‘crowding out’.
  • The “penalty for not borrowing” is that the interest rate will fall to the bottom of the “corridor” prevailing in the country which may be zero if the central bank does not offer a return on reserves.
  • Government debt-issuance is a “monetary policy” operation rather than being intrinsic to fiscal policy, although in a modern monetary paradigm the distinctions between monetary and fiscal policy as traditionally defined are moot.

National governments have cash operating accounts with their central bank. The s...

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Wednesday, 06 January

06:38

Democracy in Europe requires Eurozone breakup Bill Mitchell – billy blog

On December 21, 2015, there was an article on the Social Europe portal – A New Plan for Greece And Europe: A Defining Moment For European Social Democracy – which I found interesting, though very incomplete, given its title. In fact, the ‘New Plan’ is really a series of fairly general statements, which at times, are somewhat inconsistent if you extend them into the necessary detail that they imply. For example, one of their key observations is that within the European Union there is a “wide and growing gap between national control over budgets that people have voted for and the post-national governance imposed on them”. Which would suggest that the solution requires that there is an aligning of the fiscal responsibility and control at the level of the currency-issuing unit. However, there is no hint of that in their ‘Plan’. They talk about an “Enhanced respect for the fiscal sovereignty of Greece” but fail to articulate how that can occur within the common currency when the Greek government has no currency-issuing capacity. Of course, if we want to increase the fiscal sovereignty of any Eurozone nation, then the only sustainable way of doing that is for that nation to re-establish its own currency and exit the monetary union. However, this would appear contrary to their “pan-European” sentiments, which dominate their overall vision. In short, once again the bogey person of the pan-European appears to be taken as a given and then specific matters that might appear inconsistent with that old ‘social democratic’ obsession in Europe are glossed over.

Let’s be frank: there will never be a functional European-level federation where the fiscal responsibility coincides with the currency-issuing capacity of the single central ba...

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Tuesday, 05 January

08:15

China Suspends Stock Market Trading After 7 Percent Drop The Diplomat » Pacific Money

A new "circuit-breaker" mechanism for China's stock market kicked in on its first day in effect.

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Monday, 04 January

09:54

British floods demonstrate the myopia of fiscal austerity Bill Mitchell – billy blog

Last year (June 10, 2015), I wrote a blog – The myopia of fiscal austerity – which in part recalled my experiences as a PhD student at the University of Manchester during the Thatcher years. I noted that during my period in the city there were two major failures of public infrastructure – first, a rat plague due to spending cuts that had led to the reduction in rat catchers/baiters who had worked on the canals that go through Manchester; and, second, widespread collapses in the Manchester underground sewers which caused effluent in the streets, traffic chaos and long-term street closures. Major inner city roads were closed for a good 6 months while repairs were rendered. The reason – cut backs in maintenance budgets. The repairs ended up costing much more than the on-going maintenance bills. That experience brought home to me the myopia of austerity. While the austerity causes massive short-term damage, it is clear that it also generates a need for higher public outlays in the future as a response to repairing or attending to the short-run costs. The problem wasn’t confined to Manchester. Margaret Thatcher’s destructive reign undermined public infrastructure throughout Britain. It seems that the Conservative British government is repeating history, this time the impacts are significantly more severe in human and property loss. In early December, the North-West of England experienced devastating floods. Areas south of Carlisle down through Lancaster were inundated with floodwater, which destroyed houses washed away bridges and claimed human life. On November 5, 2014, the British National Audit Office released a report – Strategic flood risk management – which warned the British government that “current spending is insufficient to meet many flood defence maintenance needs...

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Saturday, 02 January

05:00

Saturday Quiz – January 2, 2016 Bill Mitchell – billy blog

Welcome to the Billy Blog Saturday Quiz. The quiz tests whether you have been paying attention over the last seven days. See how you go with the following questions. Your results are only known to you and no records are retained.

Please go to Saturday Quiz – January 2, 2016 to view the quiz

Thursday, 31 December

14:57

Bernie Sanders on the right track but need to address the main game Bill Mitchell – billy blog

On December 23, 2015, the Democrat Presidential candidate Bernie Sanders published an Op Ed – Bernie Sanders: To Rein In Wall Street, Fix the Fed – which, correctly, in my view, concluded that Wall Street (taken to be the collective of banksters wherever they might be located) “is still out of control” and policy reform has done little to alter the “too big to fail” problem that was identified in the early days of the GFC as one bank after another lined up for government assistance. Larry Summers replied to the Op Ed in his blog – The Fed and Financial Reform – Reflections on Sen. Sanders op-Ed – challenging several of the proposals advanced by Sanders. The problem is that the progressive voice of Bernie Sanders labours under some basic misconceptions about how the monetary system operates and therefore plays into the hands of those who have created the mess. Conversely, Summers clearly understands basic elements of the monetary system but continues to advocate policies which avoid addressing the main issue – the power of the financial markets.

Bernie Sanders got off on the wrong foot by suggesting that if any of the big financial institutions:

… were to fail again, taxpayers could be on the hook for another bailout, perhaps a larger one this time.

We, of course, know that taxpayers did not fund the last bailouts, the currency-issuing capacity of the consolidated US government provided the cash injections to ensure that any financial institution it desired to remain solvent did so.

I think it is essential that would-be progressives cease to use these loaded terms such as ‘taxpayer funds’ etc and instead promote new understandings which...

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