A little bit of plain English and Basque¹…

(i) Dirua inprimatzeak hyperinflazioa sortzen du

Taboo: money printing creates hyperinflation

Bill Mitchell-en Friday lay day – the tide is turning but there is a long way to travel yet

http://bilbo.economicoutlook.net/blog/?p=32225

“… I still think that the ‘money printing creates hyperinflation’ is the basis of the greatest taboo facing a currency-issuing government…

Gogoratu Warren Mosler-ek dioena ondoko link honetan:

QE, Europar Batasuna, inflazioa eta deflazioa…, Schäuble, progreak eta abar

(ii) Politika fiskalaren rola

In this era of ‘anti-knowledge’ there are some huge myths surrounding the role of fiscal policy.

(…)

The government/non-government dichotomy is the most aggregated relationship in macroeconomics.

(Gobernu /ez-gobernuko dikotomia)

Importantly, these balances are not levels of spending or revenue flows. So a 2 per cent government deficit as a percent of GDP could be associated with very large government spending (and revenue) as a proportion of overall GDP just as much as it could be associated with a very small government relative to the rest of the economy.

The example might be as follows (I know it is extreme):

The balances also do not assume a constant GDP. Indeed, it is the movements in national income (GDP) that ensure that the balances maintain their unique relationship which is summarised by the statement:

Government deficit (surplus) exactly equals the Non-government surplus (deficit).

(Gobernu defizitak (superabitak) zehazki berdintzen du ez-gobernuko superabita (defizita).)

But that equality can occur with vastly different levels of GDP and rates of GDP growth.

(…)… we have to have theories of national income determination.

(Errenta nazionalari buruzko teoriak behar ditugu, kasu DTM.)

(a) First, we have to understand that the players in these balances are hardly equal in terms of their capacities within the monetary system.

The government issues the currency, which the non-government sector uses. The capacity to issue a currency means that the government is the only player in this story that can increase or decrease net financial assets in the monetary system by dint of its net spending decisions.

When it spends a $1, non-government net financial assets increase by $1 irrespective of the form in which those assets are held. It is anything but a zero sum game.

An increase in the government deficit, for example drives an equal increase in the non-government surplus because the non-government sector increases its income relative to its spending. How do we know that? Theory tells us that saving is a function of income and an increased public deficit stimulates increases in national income, which promote higher saving.

Net spending decisions in the non-government sector do no change the net financial position of that sector. For example, when the non-government sector is spending more than it is earning, the increased indebtedness overall is exactly offset by an increase in assets overall – every liability must be matched by a corresponding asset within the sector.

That doesn’t mean that the increased non-government indebtedness may not become a problem (…). But it means that we have to have deeper than accounting understandings of the national accounts to appreciate the point.

(…)

(Kontabilitate nazionalaren ulermen sakonago bat behar dugu.)

(b) Second, … we have to have theories of household consumption and saving and private sector capital formation to understand why income changes impact on the private domestic balance. Accordingly, we learn that household saving is a residual after consumption decisions are taken and are influenced by the level of disposable income.

(Familien kontsumoaren eta aurrezkiaren teoriak behar ditugu. Baita sektore pribatuko kapital eraketarenak ere.)

This is significant because saving was not always considered to be a function of income. Classical theory constructed saving as a function of the real interest rate which Keynes and others in the 1930s were at pains to debunk.

So there is deep theory underlying these balances even though they are by construct an accounting perspective of the measured national income flows.

(…)… the Non-government sector cannot be equated with the private sector.

The Non-government sector is the sum of the external sector and the private domestic sector. The former included official (that is, foreign government) foreign transactions.

(…)

So if the government runs a surplus, the non-government goes into deficit.

But the private domestic sector may, in fact, also be in surplus if the external sector (such as in Norway) is in surplus of a sufficient magnitude to more than offset the spending drain coming from the government and private domestic surpluses taken together.

(…) if the government reduces it debt (by running surpluses and not turning over the existing debt upon maturity) the non-government sector has to increase its debt because it is running deficits and as a user of the currency that the government issues it has to fund spending in excess of income.

(c) Third, the statement “everyone else has to go into debt in exactly that proportion in order to balance their own budgets” is … misleading…

The statement “balance their budgets” in usage means that the spending is equal to income. Households borrow to fund deficits in the spending-income relationship. So when the non-government sector is increasing its indebtedness it is because it is running deficits – that is, spending more than it is earning – and the borrowing is the way it maintains those deficits.

But the sector is not by any constructing balancing its budget in these situations.

(Aurrekontuaz jakin behar da, oso sakonki gainera.)

(…) if the government does “balance its books”, then the non-government is also doing the same thing – spending exactly the same amount it earns. And if the government fiscal balance is zero, the private domestic sector could still be in surplus if there is an external surplus.

(…) It is as equally fraught as comparing the government to a household when discussing is ‘budget’.

(iii) GFC: Great Financial Crisis

The three recessions before the GFC – the Roy Jenkins’ austerity in the late 1960s, Nigel Lawson’s austerity in the late 1980s and Gordon Brown’s fiscal squeeze in the late 1990s – were all associated with increasing external deficits, which guaranteed that the fiscal surpluses were also associated with rising private domestic indebtedness.

(…) The increased precariousness of the private domestic sector also requires an increased financial exposure to the external sector via the current account deficits.

It was the deterioration in the private domestic balance sheet that has caused the period of appalling economic performance since the GFC. The unsustainable private debt accumulation was not just the result of a few periods of fiscal surplus.

I agree that the same dynamics are in place again – the government is relying on increased private sector indebtedness for growth as it engages in fiscal austerity and that that strategy is doomed to fail.

Eventually, the private domestic sector’s willingness to increase its level of indebtedness will stall as will its spending. Then the fiscal drag will be shown to be unsustainable.

But you cannot leave out the external sector from this narrative…”

(Austeritate fiskalak eta sektore pribatuaren zorpetzeak ez dute balio(ko) krisia gainditzeko.)