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
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.
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.
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.
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.