Éric Lombard is not "warning" that France may "have to" go begging to the International Monetary Fund. Nor is Rachel Reeves "running the risk" that Britain may. Lombard and the people around Reeves know what the IMF imposes, and that is what they want. It was Jim Callaghan's and Denis Healey's Budget of December 1976 that conformed Britain to the economic policy of Pinochet's Chile, delighting Margaret Thatcher and Geoffrey Howe by wrongfooting the critics of monetarism on the Conservative benches. Thatcher's sex was the only notable thing about the General Election result in May 1979. There was no ideological shift. That had happened in December 1976.
France, moreover, is no longer a sovereign state with its own free-floating, fiat currency. But the United Kingdom is. It has as much of that currency as it chooses to issue to itself, with readily available fiscal and monetary means of controlling any inflationary effect, means that therefore need to be under democratic political control. The responsibility of the Government is to ensure the supply of goods and services to be purchased with that currency.
The absence of that democratic political control is the root of the standoff between Donald Trump and Lisa Cook. Neither is politically any more attractive than the other. But at least Trump is elected and he thinks that that matters. Without a manifesto commitment, Labour farmed out monetary policy. The Liberal Democrats forced the creation of the Office for Budget Responsibility, although they were pushing at an open door with George Osborne. The Conservatives created the Economic Advisory Council out of thin air. Yet on none of those occasions have the salaries of the First Lord of the Treasury, of all other Treasury Ministers, and of all senior Treasury civil servants, been halved, as in each of those cases they should have been. It is difficult to see why those people should be paid anything at all once the Budget Responsibility Bill had become an Act and given the OBR the last word on everything. The same OBR, that is, that Reeves would have us believe had kept her in the dark about the "black hole".
The annual tax take is more than one trillion pounds. £20 billion is not a "black hole". This is just an excuse not to do things, although quite possibly while putting up taxes at the same time. And which taxes? A tax of one to two per cent on assets above £10 million could abolish the two-child benefit cap 17 times over, while merely taxing each of Britain's 173 billionaires down to one billion pounds per head would raise £1.1 trillion, an entire year's tax take. But neither of those is going to happen. Keir Starmer thinks that if anything could be done about child poverty, then it would have been done by now. He has said that.
The thing about what's now called Modern Monetary Theory is that nobody disputes it. "A sovereign state with its own free-floating, fiat currency has as much of that currency as it chooses to issue to itself, with readily available fiscal and monetary means of controlling any inflationary effect" is a purely factual statement describing what happens every day.
ReplyDeleteAlthough would that those with the fiscal and monetary means at their disposal did indeed use them, as they certainly could.
DeleteA state with monetary sovereignty cannot run out of money. It can get into an inflationary crisis but money to buy bonds can always be created by both the central bank and private banks. And that is fundamentally what happens with deficit spending: money supply increases in the private sector. Moreover, money creation can also manipulate interest rates on the bond market and long term loans.
ReplyDeleteFrance does not have full monetary sovereignty but so far they seem to have enough control over the ECB to structurally ignore its budgetary rules. Very different from Greece, for example. Austerity rarely lasts since it is almost always counterproductive in a real economy that is already stagnant.
Mr. Lindsay, you and I are simply describing what actually happens, which can be empirically supported with simple methods such as double entry bookkeeping. Banks and NBFIs get money in their reserves because, for example, the Treasury goes into overdraft. Bonds will be sold to compensate this. Selling these bonds is usually not that much of a problem since it is always better to swap the liquidity for an asset that pays interest. And if the bond market is actually getting into a slump, central banks can step in and simply buy the bonds, which also reduces, and not increases, the rates. This has been done routinely after 2008 and the pandemic.
Is that a good thing? Well, there are signs that these methods prevented mass unemployment and a depression, but it also produced massive asset price inflation. This is why, I think, so many countries have a housing crisis. Nevertheless, data show that austerity – based on e.g. expansionary austerity theory – pretty much never actually works in Western countries in modern times.
The entire idea that states borrow from the private sector is mostly just a wrong narrative. That would mean that money supply in the private sector would be reduced if the government spent more than it took in taxes, but the opposite happens in reality.
Fundamentally, it is not always true that printing money always hurts the economy. More money can introduce a higher velocity of money and thus growth. In fact, you need to grow the money supply since the private sector cannot create money and economists consider some inflation necessary. The only alternative would be a deflationary monetary system but that is not what we have. Even monetarists like Milton Friedman did agree that money supply needed to grow, albeit in a predictable fashion.
The US prints money like no other, essentially producing massive asset price inflation. However, that is a big part of why investors keep investing in the US economy. Investors invest where other investors invest. Will this “everything bubble” eventually burst? Well, that is another question.
Thank you very much indeed. Like you, I am not an uncritical enthusiast for Modern Monetary Theory, or for any particular economic theory. But those who rejected it out of hand as "not serious economics" should take that up with, say, Professor The Lord Skidelsky FBA, while right-wing populists might care to have a word with Viktor Orbán, now directly menaced by the Ukraine of which Skidelsky has been highly critical.
DeleteThey are not uncritical MMT enthusiasts, either. There may be no such thing. But they recognise its strengths. That puts them far more in tune with the voters whom, say, Reform UK needed to retain or stood any realistic chance of attracting. A reckoning is coming.