Warren Mosler at his best
Warren Mosler’s response to Dr Raghuram Rajan’ speech at DBS Bank conference.
Dr Rajan: the central bank has been expanding its balance sheet.
Mosler: SHIFTING PRIVATE SECTOR BALANCE SHEET ASSETS FROM WHAT WOULD HAVE BEEN GOVT SECURITIES TO OVERNIGHT RESERVE BALANCES
While proponents of modern monetary theory say deficit monetisation needn’t be limited, Raghuram Rajan countered it. https://bit.ly/3hqY3c0
2020 uzt. 25·
RR: and buying government debt on the back of excess liquidity
WM: THIS EXCESS LIQUIDITY IS CAUSED BY THE DEFICIT SPENDING ITSELF
RR: amid the economic slowdown but cautioned that this comes at a cost and cannot be a lasting solution.
WM: THERE WAS NO PROBLEM IN ANY CASE SO ‘SOLUTION’ IS INAPPLICABLE
RR: CBs in many emerging markets are resorting to such strategies and disagreed with votaries of the “modern monetary theory” who support this, making it clear that there are no free lunches.
WM: I DO NOT SUPPORT IT OR NOT SUPPORT IT, AS IT IS INCONSEQUENTIAL FOR THE ECONOMY
RR: “RBI has been expanding its balance sheet and it has been buying Government debt. But effectively, in that process, what it is doing is borrowing from the banks at the reverse repo rate and lending on to the Government”
RR: It can be noted that at present there is excess liquidity in the system.
WM: DUE TO THE DEFICIT SPENDING
RR: as people get more risk-averse and save more and the demand for credit is sluggish.
WM: DEMAND FOR CREDIT DOESN’T REDUCE THESE BALANCES IN RBI ACCOUNTS
RR: Banks are parking the money with the RBI in the reverse repo window, earning very less. It can be noted that monetisation of the fiscal deficit is one of the suggestions put forth by a slew of economists and analysts as a prescription to tackle the current environment.
WM: THERE’S NO REASON TO RECOMMEND IT OR NOT RECOMMEND IT. IT’S INCONSEQUENTIAL
RR: Rajan said there are limits to monetisation and the process can go long only for a limited period of time. “When does this process end? When people start fearing the extent of monetisation that
is going on when they start worrying about inflation when they start worrying about whether the debt that has been accumulated will be paid back
WM: THAT DOESN’T ‘END’ IT. THE EXCESS RESERVES CREATED BY DEFICIT SPENDING REMAIN UNTIL USED TO PAY TAXES OR SHIFTED TO TSY SECURITIES
RR: Or, once growth starts picking up and banks find other uses for the money than passively holding on to central bank reserves,” he explained.
WM: WRONG. BANK LOANS CREATE NEW BANK DEPOSITS, WHILE RESERVE BALANCE REMAIN AS BEFORE.
The View From Mars@PaulMeli1
Naysaying commentators continue to dig sand from under their own feet. It’s fun to watch.
Super stuff Must read