The Economist

1 Ikus http://bilbo.economicoutlook.net/blog/?p=31954.

2 Zeinak “offers authoritative insight and opinion on international news, politics, business, finance, science and technology”.

3 Besteak beste, ikus ondoko hauek: Defizit fiskala, berriz: Grezia eta Britainia Handia: https://www.unibertsitatea.net/blogak/heterodoxia/2015/08/16/defizit-fiskala-berriz-grezia-eta-britainia-handia/; Gobernuek ez dituzte behar aberatsen aurrezkiak, ezta haien zergak ere!: https://www.unibertsitatea.net/blogak/heterodoxia/2015/08/19/gobernuek-ez-dituzte-behar-aberatsen-aurrezkiak-ezta-haien-zergak-ere/; PQE (politika fiskala) eta QE (politika monetarioa): https://www.unibertsitatea.net/blogak/heterodoxia/2015/08/20/pqe-politika-fiskala-eta-qe-politika-monetarioa/; Korporazio transnazionalez eta ezkerraz hitz batzuk: https://www.unibertsitatea.net/blogak/heterodoxia/2015/08/22/korporazio-transnazionalez-eta-ezkerraz-hitz-batzuk/; Monetaristentzat: https://www.unibertsitatea.net/blogak/heterodoxia/2015/08/27/monetaristentzat/; Likidezia monetarioa(ren operazioak) eta politika fiskala(ren parte hartzea: https://www.unibertsitatea.net/blogak/heterodoxia/2015/09/04/likidezia-monetarioaren-operazioak-eta-politika-fiskalaren-parte-hartzea/; Zor publikoaz hitz bi: https://www.unibertsitatea.net/blogak/heterodoxia/2015/09/05/zor-publikoaz-hitz-bi/.

4 Ikus, halaber, Corbynomics and the Current Budget Balance: http://www.3spoken.co.uk/2015/09/corbynomics-and-current-budget-balance.html?utm_medium=twitter&utm_source=twitterfeed.

5 Ingelesez: “To recap on PQE: it is a radical twist on a policy that the Bank of England has pursued since 2009. Instead of using newly created money to buy government bonds, as happens under ordinary QE, Mr Corbyn seems to want the BoE to use that cash for more productive purposes, by buying bonds from a proposed national investment bank. “

6 Irakur PQE is sound economics but is not in the QE family.

7 Ingelesez: “1. QE does not change the net financial asset position of the non-government sector at all – that is, the net wealth remains unchanged. It is an asset swap. The non-government sector just rearranges is wealth portfolio – more cash, less bonds. No net change.

That is the essence of a – monetary policy operation – which alters the liquidity in the economy. It does it by portfolio swaps and in doing so influences the interest rates and the term structure.

2. PQE (or OMF) means the central bank, as one part of the consolidated government sector, the other being the Treasury, would use the currency-issuing capacity of the government to facilitate the purchase of real goods and services to build productive infrastructure.

The NIB is just a fancy title for a government agency and would be engaged in public spending – that is, in a fiscal operation. It would be spending out of some account the Bank of England created on its behalf and filled with numbers, presumably with many zeros after the first few digits.

PQE is not QE because it is a fiscal operation, which means it would increase the net financial assets in the non-government sector because it would increase national income (via spending on infrastructure).

PQE as envisaged is a fiscal operation, not a monetary operation, whereas QE as practiced by the Bank of England, the Federal Reserve Bank of America, the Bank of Japan etc are not fiscal operations.

That is a fundamental difference and so the arrogant assertion that PQE is just a “radical twist” on QE is plain wrong and betray the ignorance of the writer. I suppose the intent was to get the “radical” in there somewhere early in the article to ensure the reader was already feeling a little insecure about Jeremy Corbyn proposed policies.”

8 Ingelesez: “The rest is immature undergraduate stuff – the sort of stuff that indoctrinated students regurgitate in examinations thinking an uncritical rendition of some erroneous textbook they are using is what constitutes education.

First, there is the attack based on PQE’s alleged compromise of central bank independence. The Economists trots out the usual line that central banks are largely independent and that is good because “it makes it less likely that politicians will engineer a pre-election boom”.

You know the line – the crazy politicians will go and spend like drunken sailors with all that central bank money so they have to have some unelected officials in the central bank stopping them.

But the reality is that governments appoint central bank offiicals (boards etc). In many nations, the elected government can change the monetary policy decision if it doesn’t like it. Yes, this would create a major issue but it can be done.

More importantly, and apparently not understood by the Economist author is that every single day the government (treasury/finance) and the central bank are in close dialogue about the patterns of government spending and taxation and the impacts those patterns will have on the state of liqudity in the system.

The central bank needs to manage that liquidity in order to ensure its monetary policy targets are met.

So, in practice, they work together which makes the appeal to ‘independence’ look a little wan: The sham of central bank independence.”

9 Ingelesez: “We read that: (…) the criticism is really that monetary financing of government deficits is a problem … The problem is as follows. Let’s assume that inflation rises back to 2% … Prime Minister Corbyn wants to build lots more houses. With PQE, he could lean on the BoE to buy the debt that he had issued to finance those investments. Now, the link between money supply and inflation is far from precise; but you can see why there might be a big problem with allowing the prime minister simply to print money to finance deficit spending. At some point, increasing the money supply will boost inflation to unwelcome levels; and, no matter how much you hate them, international financiers will worry if the BoE’s independence seems compromised.”

10                                                                                                                    Ingelesez: “We might ask the writer to explain why Japan hasn’t had hyperinflation given its expanding money supply over the last twenty or so years?

The crucial phrase is “At some point, increasing the money supply will boost inflation to unwelcome levels”. Ingelesez: “And what point might that be?

The only constraint that the government would have to be aware of would be the limits of the available real resources that it seeks to deploy in productive ways.

When that limit is reached, any further boost to nominal aggregate spending – no matter where it comes from – will add to inflationary pressures.

Why would the government keep increasing the growth of its spending once the economy was beyond full employment and was no longer able to increase output?

But it is false to claim that increasing the money supply will be inflationary. That is Monetarist nonsense. The money supply can increase continuously without there being any inflationary pressures.

OMF does not increase the risk of inflation.”

11 Ingelesez: “The first notion is the rather technical sounding concept of the ‘money multiplier’, which links so-called central bank money or the ‘monetary base’ to the total stock of money in the economy (called the money supply). (…) As is often the case, many financial commentators who wax lyrical about the dangers of OMF do not even fully understand the theoretical route that is alleged to link central bank monetary expansion with inflation.”

Irakur Money multiplier and other myths: (Money multiplier is a flawed concept and inapplicable to the real world.)

12 Ingelesez: “The second notion then links the growth in that stock of money to the inflation rate. The combined causality then allows the mainstream economists to assert that if the central bank expands the money supply it will cause inflation, which is their prima facie case against OMF. The second flawed aspect of the antagonism against OMF relates to the mainstream theory of inflation captured by the so-called Quantity Theory of Money (QTM).

The QTM links the expansion of the money supply with accelerating inflation. It is the most intuitive part of the neo-liberal story and the one that resonates with the public.

While the QTM was formulated in the 16th century, the idea still forms the core of what became known as Monetarism in the 1970s and is the principle reason for the taboo against OMF.

The QTM posits that an expansion of the money supply causes inflation because it adds nominal spending growth to a fully employed economy.

The only way the economy could adjust to more spending when it was already at full capacity was to ration that spending off with higher prices. Financial commentators simplify this and say that inflation arises when there is ‘too much money chasing too few goods’.”

13 Ingelesez: “The fact that economies typically operate with spare productive capacity and often with persistently high rates of unemployment, means that it is hard to maintain the view that there is no scope for firms to expand the supply of real goods and services when there is an increase in total spending growth. If a firm has poor sales and lots of spare productive capacity, why would it hike prices when sales improved?

Thus, if there was an increase in availability of credit and borrowers used the deposits that were created by the loans to purchase goods and services, it is likely that firms with excess capacity will respond by increasing the supply of goods and services to maintain or increase market share rather than push up prices.

In other words, an evaluation of the inflationary consequences of OMF should be made with reference to the state of the economy.”

14 Ingelesez: “If there is idle capacity then it is most unlikely that OMF will be inflationary. At some point, when unemployment is low and firms are operating at close to or at full capacity, then any further spending, whether funded by OMF or some other scheme, will likely introduce an inflationary risk into the policy deliberations. OMF does not increase the inflation risk at all.”

15 Ingelesez: “All components of total spending, private consumption expenditure, private investment, exports and government consumption and investment spending carry inflation risk if they become excessive. Inflation is caused by total spending growing faster than the capacity of the economy to produce real goods and services in response.

In that situation, firms have no flexibility to increase production, and thus ‘ration’ off the spending growth by putting up prices. Significantly, the reserve position of the banks is not functionally related to that process.”

16 Ingelesez: “The central bank can ‘sterilise’ the liquidity impacts of the deficit spending by selling bonds to the private sector. But that doesn’t reduce the inflation risk of the initial spending. It just means the private sector has more bonds and less deposits. The government spending has already occurred. Of course, no responsible government would desire to expand the economy beyond its real limit given the political problems it would face should inflation rise sharply.

OMF thus doesn’t add any new elements to this risk.

On the Economist’s claim that the international financiers would ditch the UK if OMF was introduced – just ask Japan if they cared about them!”

Irakur Who is in charge?

17 Ingelesez: “Students in every mainstream macroeconomics class, and that means almost all students, would have predicted, based on the nonsense they were learning, that the high deficits and high public debt ratios in Japan at the time, should have driven interest rates sky high, that bond markets should have stopped buying government bonds, that the government should have run out of money, and all the time that these disasters were unfolding, that inflation should have been be galloping towards hyperinflation.

These consequences did not happen. Why? The mainstream textbooks are largely wrong.”