Michael Woodford and Adair Turner Agree: CBs Won’t (and Shouldn’t) Sell the Bonds Back
Old news: April 3. But still: Following up on yesterday’s post, see here from Ambrose Evans-Pritchard in The Telegraph (emphasis mine):
“All this talk of exit strategies is deeply negative,” [Woodford] told a London Business School seminar on the merits of Helicopter money, or “overt monetary financing”.
He said the Bank of Japan made the mistake of reversing all its money creation from 2001 to 2006 once it thought the economy was safely out of the woods. But Japan crashed back into deeper deflation as soon the Lehman crisis hit.
“If we are going to scare the horses, let’s scare them properly. Let’s go further and eliminate government debt on the bloated balance sheet of central banks,” he said. This could done with a flick of the fingers. The debt would vanish.
Lord Turner, head of the now defunct Financial Services Authority, made the point more delicately. “We must tell people that if necessary, QE will turn out to be permanent.”
The write-off should cover “previous fiscal deficits”, the stock of public debt. It should be “post-facto monetary finance”.
Lord Turner knows this breaks the ultimate taboo, and that taboos evolve for sound anthropological reasons, but he invokes the doctrine of the lesser evil. “The danger in this environment is that if we deny ourselves this option, people will find other ways of dealing with deflation, and that would be worse.”
A breakdown of the global trading system might be one, armed conquest or Fascism may be others – or all together, as in the 1930s.
Taboos are made to be broken. The Fed should just burn all those bonds. Welcome to MMT World.
Also some very interesting history in that article that I wasn’t aware of, a great counterpoint to the standard-issue What-About-Weimar!? hyperhysteria:
Less known is the spectacular success of Takahashi Korekiyo in Japan in the very different circumstances of the early 1930s. He fired a double-barreled blast of monetary and fiscal stimulus together, helped greatly by a 40pc fall in the yen.
The Bank of Japan was ordered to fund the public works programme of the government. Within two years, Japan was booming again, the first major country to break free of the Great Depression. Within three years, surging tax revenues allowed Mr Korekiyo to balance the budget. It was magic.
Cross-posted at Asymptosis.
A little worried that the linked article is confusing monetary operations with fiscal policy in spots. Did Japan “order” the BOJ to fund projects? I believe the Japanese government funded the projects, meaning their treasury credited contractor checking accounts, then they sold the debt issued to the BOJ. So in aggregate they deficit spent. QE is different that it is not adding any net spending above what congress has authorized, just creating/swapping reserves for bonds.
Also, the article left out that Wiemar Germany owed debts in foreign currency. They issued currency then had to dump it in large amounts in the foreign exchange markets. When that selling stopped so did their inflation. That is very different than owing debt in your own currency. Now that does not mean that the foreign entity wouldn’t sell the currency after receiving it.
Central bank rates have been too low for too long. But now it is a very bad time to start tightening monetary policy. There is no profit rate traction in the business sector. Tightening should have started back at the end of 2011 before the situation became as unstable as it is now.
And now the possibility of permanent QE… which I think will happen because we will go into a recession soon after tapering starts… and QE will have to start up again.
Ed, why are rates “too” low? Seems like rates are where rates should be based on a lousy economy. The instability is the economy.
IMO we will go into recession not as a result of tapering but the slowdown in government deficit spending (lower deficits) combined with a persistent trade deficit.
If QE stops then long rates will go up a bit, which could be a mixed bag of positives and negatives. It will add interest income to the economy, but might hurt borrowing with higher long rates.
Matt, The rates are low in comparison to the natural rate of capital. A natural rate of interest of 6% for capital means that in equilibrium, there should be a 6% yield on bonds to soak up their excess cash liquidity. Yet with bond yields so low, owners of capital are awash in cash.
A natural rate of 1% for labor means that in equilibrium labor needs low bond yields to entice them to have cash and spend. And as you say, rates are low because the economy is lousy, but the economy is lousy because labor’s income is lousy.
IMO, we will go into recession because profit rates are peaking, and the market is depending too much on QE for profit reach. Once you take away QE, the house of cards collapses. QE is not substantially creating real growth. It’s turned into a bubble thing, due to what I see as the spread between the natural rates of interest for capital and labor.
” Taboos are made to be broken. The Fed should just burn all those bonds. Welcome to MMT World. ”
Before we set them ablaze , I suggest we add another $100 trillion or so to the pile for the purposes of funding future SS and Medicare liabilities , so we don’t have to listen to all the drama about entitlements bankrupting the country. Also , we should boost current and future SS benefits. We’re cheapskates compared to other advanced economies.
I don’t think anyone will complain. I mean , it’s free money , right ?
I have read in various places that the German economy recovered in 1933-35 faster than the rest of the world because they followed an essentially Keynesian plan. But also because they based their “money” on productivity and not on debt. And the latter made the international banking system mad at them.
The Keynesianism make sense to me…. I don’t know enough to understand it’s limitations, but I have not been impressed by the monetarists (if that’s what they are called. The non-debt money system sounds do me like MMT though I have never heard you describe it that way in so many words… and again, i don’t know enough.
The “international banking system…” sounds too close to “jewish conspiracy” for my comfort, but the idea that big banks conspire to increase their profit doesn’t sound too unlikely at all.
What do you make of this?
Coberly, the hyperinflation ended well before 1933, then came austerity some years later, and Hitler came to power because of that Austerity. Hitler implemented Keynesian policies and the economy recovered but then he showed his true colors and destroyed the place with his war forays.
Post-Keynesian Flow of Funds Framework for Germany
thanks. i think i knew all that. i was wondering how what he did threw light on the “eternal debate” we are having. Seems to me that fiscal policies work. they may need rational monetary policy that does not destroy the effectiveness of good fiscal policy, but monetary policy will NOT work in circumstances where “the money” is afraid to invest.
and i don’t know how “realistic” the “conspiracy of central banks” is, but from what i have read about more recent times, i’d have to say i can’t discount the possibility.
none of this changes the fact that hitler was a bad guy, and i think his “true colors” were shown long before 1935.
i have heard it said that hitler’s use of money is an example of MMT.
the resource based not debt based makes a good deal of sense to me but not complete sense because MMT people are always very quick to call for printing money to pay for SS, and I don’t think you can go that far with “printed” money. and MMT ers like to say that taxes are not “necessary” “except to restrict consumption.” but, that is exactly what not printing excess money does, and arguably “rations” consumption to those who “produce.” so i don’t see how MMT gets us any further than just saying to the debt hysterics… stand aside while we get this thing moving again, and then tell us about your problems.
There are limitations to printing money, which is too much inflation. Not to be confused with inflation caused by a commodity that is in tight supply like oil might be. But inflation fueled directly by that money printing. On the flip side if you do not issue enough money to support the demand for that money, a growing population and demand leakage, then you have another very serious problem, which is where we are at now.
Here is a brain teaser, for every dollar of deficit spending that goes to wages (money “printing” via fiscal policy) then social security is credited 12.4 cents. So if you deficit spend in one year $1 Trillion on wages subject to FICA then social security gets credited $124 Billion.
my brain does not feel teased. If you “print” money to pay for a Trilion dollars worth of useful work, you have not “printed” money. You have effectively “created” the money and introduced it into the economy where it does its function of “accounting for” work done.
And absolutely, one of the best ways to “pay for” the projected shortfall in SS would be to “create work” or “raise wages for work.”
Only we can’t afford to wait for that to happen while the Petersons are pulling down the economy trying to destroy Social Security with the Lie that it is going broke or causing huge deficits.
If we simply pay the 80 extra cents per week per year to keep it “actuarially solvent”, the “crisis” goes away, and we can start to give our attention to raising those wages and creating that work (and the money to pay for it.)
There’s lots of contradictory opinions about the 1931-36 Korekiyo period.
One big problem is there are at least three real GNP series (Japan Economic Planning Agency, Mitchell and Okhawa et al.) and a real GDP series (Okhawa et al.) for this period. Okhawa’s series are probably the most highly regarded and they give very different pictures of how the economy performed, as RGNP never declined during this period. His RGDP series (the same one used in Angus Maddison’s dataset) is probably the most relevant and it shows RGDP declined 7.3% in 1930, and increased by 0.8%, 8.3%, 9.9%, 0.2%, 2.8% and 7.3% in 1931-36 respectively.
Prior to Korekiyo Japanese government borrowing had been for specific purposes, so this was the first time borrowing was for general government expenditures. The BOJ underwrote the bonds and then resold them to the public. This also essentially marks the beginning of open market operations for the BOJ. Although conventional arguments are that the BOJ was forced to underwrite the bonds, evidence from archived documents suggests that the BOJ willingly accepted the responsibility as it they thought it would reinforce their influence over financial markets.
The various sources all seem to portray a fiscal expansion over FY 1931-33 (fiscal years begin in April) with much of it centered on 1932 followed by a swift contraction in 1934 and further tightening in 1935-36. The budget appears to have been in deficit throughout 1931-33 and balanced thereafter.
Probably the earliest best account of Korekiyo’s policies is by Nanto, Dick K. and Shinji Takagi, “Korekiyo Takahashi and Japan’s Recovery from the Great Depression,” American Economic Review 75, No. 2 (May 1985): 369-74. they use Okhawa’s GNP and GDP data and state that (Page 372):
“…Net central government expenditures, which had fallen by 19 percent since their peak in 1928, rose by 32 percent in 1932 and another 16 percent in 1933. Over these two years, increased government consumption and capital formation accounted for 29 percent of the total increase in real GDP…”
Thus my reading of this period is that this is an example of Overt Monetary Finance which gave way to expansionary monetary policy after a couple of years.