Bill Mitchell: bono merkatua eta beharrezko politika aurrerakoia

Bono merkatua, defizita eta zorra

(i) In Bill Mitchell-en The bond vigilantes saddle up their Shetland ponies – apparently


(…) Here are the major US stock market crashes prior to the GFC, for which I have reliable data:

(a) Wall Street crash 1929 – US government running fiscal surplus in 1929 and 1930 ($0.9 billion in each year) (Historical Statistics of the United States: Colonial Times to 1970 Part 1).

(b) Recession of 1937-38 – brought on by the cuts in net spending as the Conservatives attacked Franklin D. Roosevelt’s New Deal policy.

(c) Kennedy Slide of 1962 (May 28, 1962) – was an adjustment to a long period of strong growth.

Further, the US government hiked taxes and cut spending in 1960 under conservatives pressure to record a fiscal surplus (0.1 per cent of GDP) in 1960.

(d) Black Monday (October 19, 1987) – a global crash in share prices precipitated by “program trading, overvaluation, illiquidity and market psychology”.

In the US, the Government was reducing the fiscal deficit from 1985 by expenditure cuts. But the crash had nothing much to do with the state of fiscal balances.

(e) Friday the 13th mini-crash (October 13, 1989) – Black Friday was precipitated by press reports that the sale of United Airlines had fallen through due to industrial disagreements over the terms.

Nothing to do with the fiscal state of affairs.

(f) Early 1990s recession (July 1990) – was a global event which followed oil price hikes (after Iraq invasion of Kuwait) and nothing to do with US fiscal balances.

(g) Dot-com bubble (March 10, 2000) – overzealousness about technology lead to “excessive speculation”.

The Clinton surpluses began in 1998 and continued for the next 4 fiscal years, including the period of the Dot-com collapse.

Conclusion: none of these events are associated with rising fiscal deficits or the level of outstanding US government debt. Where fiscal positions are implicated the events occur during or just after the US government has tried to or has been running fiscal surpluses.

Rand Paul doesn’t know his history!

10. Finally, on this Paul was on the right track:

When the Democrats are in power, Republicans appear to be the conservative party, but when Republicans are in power, it seems that there is no conservative party …

The hypocrisy hangs in the air and chokes anyone with a sense of decency or intellectual honesty.


Let us be absolutely clear:

1. The private bond markets have no power to stop a currency-issuing government spending.

2. The private bond markets have no power to stop a currency-issuing government running deficits.

3. The private bond markets have no power to set interest rates (yields) if the central bank chooses otherwise.

4. AAA credit ratings are meaningless for a sovereign government – they can never run out of money and can set whatever terms they want if they choose to issue bonds.

4. Sovereign governments always rule over bond markets – full stop.

Nothing a student learns in a mainstream macroeconomics course at university (at any level – and the deception becomes worse the in later years as the student enters graduate school) about the relative powers of governments and bond markets is true.

First, at any time, the central bank can negate the desires of the private bond markets and set bond yields itself.

I have written extensively about this in the past – for example:

1. More fun in Japanese bond markets (February 7, 2017).

2. US Bond Markets cannot bring down Trump (March 9, 2017).

3. Bank of Japan is in charge not the bond markets (November 21, 2016).

4. There is no need to issue public debt (September 3, 2015).

5. Better off studying the mating habits of frogs (September 14, 2011).

6. Who is in charge? (February 8, 2010).

A central bank can buy up government debt at its leisure because it can add bank reserves denominated in the currency of issue anytime it chooses and up to whatever amount it chooses – without constraint.

So the government can then just set a yield and if bond markets don’t like it then the central bank can buy the debt.

There is no question about that.

Further, the inflationary risk would be unchanged as I explain in this blog post – Building bank reserves is not inflationary.

The inflation risk comes from the impact of the net spending on aggregate demand. There is nothing intrinsically inflationary about the government spending without bond issuance.

It also clearly takes the bond markets out of the equation and would serve to disabuse us of notions such as the sovereign government has “run out of money”; or will “go bankrupt”; or “will not be able to afford future health care”; and all the related claims that flow from the flawed intuition that initially is advanced and exploited by mainstream macroeconomics.

Of-course, this approach would change the conduct of monetary policy – either a zero rate policy such as Japan has run for years or paying a positive return on excess reserves (as many governments have done in the crisis) would be required.

The overwhelming conclusion is that far from being dangerous vigilantes, the bond traders are simpering mendicants.

We would see that clearly if there was no debt issuance.

At any time, a currency-issuing government can simply decide to end the system of corporate welfare and stop issuing debt at all

And what would happen if the government stopped pumping billions of dollars of debt into the corporate welfare market (aka bond market)?


Well, then you get a 2001 Australian situation.

Basically, the Federal government was running surpluses and not issuing new debt. As a result, the government bond markets became very thin (drying up supply).

As a result, the Federal government was pressured by the big financial market institutions (particularly the Sydney Futures Exchange) to continue issuing public debt despite the increasing surpluses. At the time, the contradiction involved in this position was not evident in the debate.

We were continually told that the federal government was financially constrained and had to issue debt to “finance” itself. But with surpluses clearly according to this logic the debt-issuance should have stopped.

The Treasury bowed to pressure from the large financial institutions and in December 2002, Review to consider “the issues raised by the significant reduction in Commonwealth general government net debt for the viability of the Commonwealth Government Securities (CGS) market”.

I made a Submission (written with my friend and sometime co-author Warren Mosler) to that Review

(Ikus .

The Treasury’s (2002) Review Of The Commonwealth Government Securities Market, Discussion Paper claimed that purported CGS benefits include:

assisting the pricing and referencing of financial products; facilitating management of financial risk; providing a long-term investment vehicle; assisting the implementation of monetary policy; providing a safe haven in times of financial instability; attracting foreign capital inflow; and promoting Australia as a global financial centre.

So a liquid and risk-free government bond market allows speculators to find a safe haven. Which means that the public bonds play a welfare role to the rich speculators.

The Sydney Futures Exchange Submission to the 2002 Inquiry considered these functions to be equivalent to public goods.

Please read my blog post – Living in the Land of Smoke and Mirrors – aka La-La-Land – for more discussion on this point.

So we would watch the banksters (the ‘bond vigilantes’) beg for debt issuance should the US government (or any currency-issuing government) adopt the sensible position and stop issuing debt to match (not fund) its net spending.

Further reading:

1. Currency-issuing governments never have to worry about bond markets (April 3, 2017).

2. Better off studying the mating habits of frogs (September 14, 2011)

3. Who is in charge? (February 8, 2010).


So next time you hear an economist or a politician talk tough about how bond markets have to be satisfied and they use that as a justification for hacking into public spending (and driving up unemployment and poverty rates) you know they are lying and are frauds.

The bond traders never have to be satisfied. They can be forced to live on crumbs by the government if it so chooses.

I advise the would be vigilantes to get back on their Shetland ponies. Well perhaps even those little animals are a little to wild for the vigilantes.

Beharrezko politika

In Bill Mitchell-en Employers lying about the flat wages growth in Australia


(…) The problem is that our Federal government (like most national governments) have become an agent for capital rather than a mediator in the class conflict between labour and capital.

Policy imperatives

In my latest book – Reclaiming the State: A Progressive Vision of Sovereignty for a Post-Neoliberal World (Pluto Books, 2017) – Thomas Fazi and I outline a progressive agenda to reverse these sorts of shifts which characterise the neoliberal period.

In summary, progressives have to push for:

1. Increase reliance on fiscal policy to ensure high pressure is maintained in the economy where firms are continually facing scarcity of labour instead of the current situation where they have a huge pool of underutilised workers (and new entrants) to pick and choose from and use to threaten those in current jobs bargaining for higher pay.

We should abandon the reliance on monetary policy. Central banks claim they have been trying to increase economic activity for years now with near zero nominal interest rates and massive balance sheet expansions (QE).

And still they fail. The point is clear.

Monetary policy is not an effective tool for counterstabilisation. Surely we have worked that out by now.

2. Introduce a Job Guarantee and ensure the wage paid to these workers puts pressure on the low productivity private firms who are lagging behind in giving wages growth to their workforces.

The Job Guarantee would be a force for dynamic efficiency. It would force firms to pay wages and offer conditions that the society judged were the minimum that it was prepared to tolerate.

It would create a shortage of labour – because the desperation element of unemployment and underemployment would be gone.

It would force firms to offer training with adequate wages and invest in new capital to lower their costs or else go out of business.


3. Governments have to stop attacking trade unions and allow them to exercise their democratic right to represent workers and use the withdrawal of labour as a legitimate weapon to extract wages growth from firms who just want to line the pockets of their executives and shareholders.

4. Use the government employment capacity to increase public sector pay, which then acts as a competitive guideline for the non-government employers.

If they fail to match the wage rule then they risk losing skilled labour to an expanding public sector.

5. Introduce a national productivity distribution process (like Australia used to have) where annually wages rise in line with estimates of national productivity growth.

This would force firms to share the productivity growth with workers in a more equitable manner and stop the ripoff that has been characteristic of the neoliberal era.

These policies would help and should be at the forefront of any progressive political movement. They have universal relevance (with different institutional manifestations).

They are sadly lacking in the platforms of most so-called progressive political parties around the world.


It is clear the low wages growth is nothing to do with capacity to pay arguments (the ‘competitive squeeze’) that corporations are continually mounting in defense of their squeeze on wages growth and their calls on government to further deregulate working conditions.

The low wages growth reflects policy failures in several ways.

Reversing these failures should be a major aim for progressive political movements around the world.

Iruzkinak (1)

  • joseba

    Bono merkatua eta DTM
    Bill Mitchell-en Bid-to-cover ratios and MMT
    (…) One question I often get asked is what would happen if the bond market investors in a nation stopped bidding for the debt instruments being offered in the regular auctions. Interestingly, overnight I was sent some news from a Deutsche Bank information service written by their New York-based Chief International Economist, who signs himself off as “Torsten Sløk, Ph.D”. It related to these issues. The problem is that Dr Sløk seemed to want to take a snide shot at Modern Monetary Theory (MMT) and just made a fool of himself. It goes on. This is what the point is.
    Dr Sløk has a Ph.D. Okay. That doesn’t mean much if it has come from a mainstream economics graduate program.
    Every day, PhDs from that sort of program make statements that should disqualify them from any further participation in the debate.
    The title of Dr Sløk’s snippet was “Bid-to-cover trending down” and the accompany message had this text:
    The bid-to-cover ratio at auctions for 2s and 10s have been trending lower in recent years see also here. You wonder how this fits into the MMT theory.
    Followed by this graph:
    [Ikus grafikoa linkean]
    Some education to follow.
    1. “MMT theory” is redundant. The T in MMT makes it so.
    2. What is a bid-to-cover ratio and is it important?
    I explain bid/cover ratios in this blog post – D for debt bomb; D for drivel (July 13, 2009).
    The bid-to-cover ratio is just the the $ volume of the bids received to the total $ volumes desired. So if the government wanted to place $20 million of debt and there were bids of $40 million in the markets then the bid-to-cover ratio would be 2.
    First, the use of the ratio assumes it matters. It doesn’t matter at all where the government issues its own currency and is thus not revenue-constrained.
    Second, such governments choose the way in which the debt instruments are issued. The organisation of debt issuance is not dictated by the ‘market’ but a matter of government prerogative.
    For example, in Australia, the Federal government changed the way government bond markets operated in the 1980s.
    The changes to the ‘operations’ of the bond markets was a voluntary choice by the Government at the time based on a growing acceptance of neoliberal ideology.
    They were also the result of special pleading by the private bond dealers who wanted to refine their dose of corporate welfare (the ability to purchase risk-free assets).
    There was nothing essential about the changes. Further, they were largely cosmetic.
    The Government replaced the former ‘tap system’ of bond sales with an ‘auction model’ to eliminate the alleged possibility of a ‘funding shortfall’.
    Previously, governments (such as in Australia) ran what were called ‘tap systems’ of bond issuance.
    Accordingly, the government would determine the maturity of the bond (how long the bond would exist for), the coupon rate (the interest return on the bond) and the volume (how many bonds) that was being sought.
    If the private bond traders determined that the coupon rate being offered was not attractive relative to other investment opportunities, then they would not purchase the bonds.
    The central bank, typically, would then step in and buy up the unwanted issue.
    This system, which was very effective and allowed the government to completely control the yield (it set the coupon) was anathema to the neo-liberals, who considered it gave the central bank carte blanche to fund fiscal deficits.
    Tap systems were replaced by competitive auction (tender) systems, where the the issue is put out for tender and the private bond market determine the final yield of the bonds issued according to demand.
    Bonds are issued by government in the so-called ‘primary market’, which is simply the institutional machinery via which the government sells debt to the authorised non-government bond dealers (some banks etc).
    In a modern monetary system with flexible exchange rates it is clear the government does not have to finance its spending so the the institutional machinery is voluntary and reflects the prevailing neo-liberal ideology – which emphasises a fear of fiscal excesses rather than any intrinsic need for funds (of which the currency-issuing government has an infinite capacity).
    Once bonds are issued in the ‘primary market’ they are traded in the ‘secondary market’ between interested parties (investors) on the basis of demand and supply.
    The bid-to-cover ratio refers to the demand in the primary market by the private dealers for the government debt on offer.
    Clearly secondary market trading has no impact on the volume of financial assets in the system – it just shuffles the wealth between wealth-holders.
    In the primary market, when demand is high, the yield will be lower, whereas, if demand is low, the auction will push the yield up on the issue.
    Imagine a $1000 bond had a coupon of 5 per cent, meaning that you would get $50 dollar per annum until the bond matured at which time you would get $1000 back.
    Imagine that the market wanted a yield of 6 per cent to accommodate risk expectations (inflation or something else). So for them the bond is unattractive and they would avoid it under the tap system.
    But under the tender or auction system they would put in a purchase bid lower than the $1000 to ensure they get the 6 per cent return they sought.
    The mathematical formulae to compute the desired (lower) price is quite tricky and you can look it up in a finance book.
    The general rule for fixed-income bonds is that when the prices rise, the yield falls and vice versa. Thus, the price of a bond can change in the market place according to interest rate fluctuations.
    When interest rates rise, the price of previously issued bonds fall because they are less attractive in comparison to the newly issued bonds, which are offering a higher coupon rates (reflecting current interest rates).
    When interest rates fall, the price of older bonds increase, becoming more attractive as newly issued bonds offer a lower coupon rate than the older higher coupon rated bonds.
    Further, rising yields may indicate a rising sense of risk (mostly from future inflation although sovereign credit ratings will influence this).
    But they may also indicate a recovering economy where people are more confidence investing in commercial paper (for higher returns) and so they demand less of the risk free government paper.
    So you see how an event (yield rises) that signifies growing confidence in the real economy is reinterpreted (and trumpeted) by the conservatives to signal something bad (crowding out, increased cost of government spending).
    The yield reflects the last bid in the bond auction. So if diversification is occurring reflecting confidence and the demand for public debt weakens and yields rise this has nothing at all to do with a declining pool of funds being soaked up by the bingeing government!
    Under auction systems, the process certainly ensures that that all net government spending is matched $-for-$ by borrowing from the primary bond market dealers.
    So net spending appears to be ‘fully funded’ (in the erroneous neo-liberal terminology) by the market.
    But in fact, all that was happening was that the Government is coincidentally draining the same amount from reserves as it is adding to the banks each day and swapping cash in reserves for government paper.
    The bond drain means that competition in the interbank market to get rid of the excess reserves will also not drive the short-term interest rate down.
    The auction model merely supplies the required volume of government paper at whatever price is bid in the market.
    So there is never any shortfall of bids because obviously the auction would drive the price (returns) up so that the desired holdings of bonds by the private sector increased accordingly.
    Third, it is highly interpretative as to what the bid-to-cover ratio signals.
    It certainly signals strength of demand but how strong becomes an emotional/ideological/political matter.
    Even if you believed that the government was financing its net spending by borrowing, then a bid-to-cover ratio of one would be fine – enough lenders to cover the issue.
    Some commentators think that 2 is a magic line below which disaster is imminent. There is no basis at all for that.
    There is also no basis in the statement that a ratio above 3 is successful and by implication a ratio below 3 is unsuccessful.
    After all, anything above 1 tells you that some investors do not get their desired portfolio. That sounds like a failure to me.
    A declining bid-to-cover ratio might signal that investors are diversifying their portfolios in a growing economy where private asset risk is declining for a time.
    That is the most likely reason the ratios have been falling in the US Treasury auctions since arond 2012.
    Fourth, for sovereign governments the bid-to-cover ratio is somewhat irrelevant because such a government could just abandon the auction system whenever it wanted to if the ratio fell to say, 0.00001.
    If the Bid-to-Cover ratios at bond auctions fell to zero – that is, private bond dealers offered no bids for an auction – then the government could simply instruct the central bank to buy the issue.
    They might have to change some regulations to allow that but just as nations shifted away from ‘tap systems’ to ‘auction systems’, they can shift back again easily (in most cases).
    Fifth, what about the world losing ‘confidence in the dollars we owe’ (we being the US government)?
    Presumably this would manifest in the bid-to-cover ratio falling such that the authorised bond dealers no longer wanted to purchase the bonds.
    What then? Not much.
    As above.
    So for obvious reasons, none of this has much bearing on whether MMT is a credible monetary framework for understanding how modern fiat currency systems work.

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