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Money Printing

Discussion in 'Off-Topic' started by Hygro, Dec 6, 2016.

  1. innonimatu

    innonimatu Deity

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    They may borrow abroad, but that borrowing is dwarfed by the internal one. And China's net value for external debt makes it one of the biggest creditor countries.

    A sovereign state's only intractable problem with finance is with covering any trade deficits it may have. Those must be paid for with currency or goods that the state cannot control.
     
  2. Princeps

    Princeps More bombs than God

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    People do get it. People do like it. And it makes for great politics.

    I see a lot of people bemoaning the public for their apparently contradictory preference for lower taxes and more public services. But the people actually have it right, I think. People want an economy that is running at maximum potential; and it's the misanthropic deficit hawks, those penny pinching idiots who want everyone to be poorer for no reason other than the beauty of balanced nominals.
     
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  3. Bootstoots

    Bootstoots Deity Retired Moderator

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    I think that it's an interesting lens through which to view policy. But yeah, I see little evidence that it provides any useful conclusions that are different from standard Keynesianism.

    The 1976 bailout occurred during the transition of the IMF and the global monetary system from Bretton Woods, where its primary role was to fix exchange rates to the USD and negotiate devaluations, to its new role of providing loans on condition of structural adjustment. I don't really understand why the UK needed that bailout - it seems to have been issued mostly to ward off speculative attack, but even if that happened, why couldn't the Brits just ride through it like they did in 1992? Did the UK public or private sectors have large amounts of dollar-denominated debt at the time? Or was everyone still not used to a world of floating exchange rates, and devaluation was seen as much worse then than it is now?

    I don't really understand why the world had so much more inflation in the 1970s than it does today. Back then, it was fairly common for developed countries to have double-digit inflation and developing countries to have high double-digit, triple-digit, or worse inflation. Was it just that the monetarists hadn't taken over the world yet and fiscal+monetary policies were more devoted to full employment than they are now, plus a bit of a shock from oil prices as a secondary factor? Or was there more going on? It's strange that high inflation used to be really common, but now a country has to be as mismanaged as Venezuela or Zimbabwe for hyperinflation to happen, and that developed countries can't seem to generate much inflation even when they try, short of doing anything truly insane.
     
  4. innonimatu

    innonimatu Deity

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    Devaluation would wound the pride of the UK's politicians, and cause them problems with trade with the remnants of the "sterling area" - it meant an irrevocable admission that this area was history. Do recall that just a few decades earlier the previous generation of politicians clung so much to the gold peg that they created the situation leading to WW2. The political importance attached with having a "strong currency" took a long time to decline.

    Inflation depends on demand. So long as there were effective trade unions demanding wage raises, and keeping the portion of labour compensation in the entire economy high, there was inflation. And that was not a problem: demand and supply are not naturally at equilibrium and a double-digit inflation by itself would be temporary and manageable. The problem was stagflation: there was increased demand, but production failed to rise within a reasonable time frame. I blame the oil shock for this having happened on a global scale in the 70s. We're still living with the consequences of a stupid middle east war.
     
  5. EnglishEdward

    EnglishEdward Deity

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    We did not need it. As Innonimatu indicates, a bailout from the IMF was seen as politically better than a devaluation.

    In this our Prime Minister then, James Callaghan, was quite wrong and in part lost the 1979 election necause it.

    A similar thing occurred with John Major who decided to hold the pound targetting the ERM and lost the 1997 election in part because of it.


    The UK was burdened with unpaid war debt to the USA in both 1976 and 1992. But that was not the reason.


    Yes; that was true. But also.
    The rich people in the UK held their money in sterling and no they did not want to see it devalued.
    And governments do what the rich people want.

    In the 1960s and 1970s there was competition in the UK between trade union leaders as to who could get the largest pay rise for their members.
    They correctly assumed that employers could put prices up and government raise taxes, but they forgot about loss of international competitiveness.
    Another thing that is forgotten is that most workers were paid in cash, and fewer had banking or credit facilities so there was less ability and because
    of full employment less perceived need, to save wages: so a small increase in wages resulted in a cascade in the amount of money going round and infation.
    It is difficult for people to understand now but in the 1960s nuclear war was a larger perceived threat to full employment (and savings) than a recession.

    There are different types of inflation. Some types such as excess property prices are not reflected in official statistics
    particularly when central banks are suppressing interest rates and therefore the amount being paid to service mortgages.

    An odd thing going on now is that although UK rents have been experiencing rapid inflation, officially UK inflation was, prior to the recent exchange rate slump, minimal.
     
  6. Mise

    Mise isle of lucy

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    @Bootstoots - they could have done things to avoid an IMF bailout, yes. However, my point was that the conditions in which the UK sought a bailout (high public spending, large deficits, high public debt, etc), and the conditions for accepting that bailout (reduce public spending, reduce deficits), are the same. My point, therefore, was that the UK was held to the same standards as any other nation, even though it was a rich country.
     
  7. Bootstoots

    Bootstoots Deity Retired Moderator

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    Yeah, I don't dispute that the IMF imposes the same conditions on any country it bails out. It's nice to see that, in the Greek case, they've demonstrated that they learned their lesson about the necessity of debt forgiveness, subject to reforms of course, but with a bit less emphasis on austerity than they used to have (contra the ECB and Eurozone countries, which are stuck in the IMF's 1980s and 1990s paradigm). It only took them about three decades to come around to that viewpoint.

    It appears that, based on all three of your responses, the reasons for requesting the loan were mostly political remnants of the era when Britain was an imperial power and was on the gold standard. I figured that might have been the main cause.

    What I was getting at is that, at least since the 1980s, First World countries can run up very high debt-to-GDP ratios and perpetual deficits without having serious consequences, while developing countries run into inflation and high bond yields with policies that seem similar according to the macroeconomic statistics. I think that there are preferred currencies that are offered substantially more leeway before investors start to panic, in large part because there's nowhere else to run to.

    As for the labor share of income and trade union arguments that @innonimatu and @EnglishEdward make, is it true that the proportion of national income spent on wages is one of the biggest factors in determining the inflation rate? If so, it would seem that the monetarist/neoliberal reforms of the 1980s were designed mostly to drop the wage proportion of GDP, not just for corporate profitability but also because doing so leads to low inflation. If that's true, it certainly worked, albeit at a rather high price whose consequences are still being unfolding today.

    It seems that stagflation really is addressed most effectively by austerity, while deflationary or low-inflation recessions/depressions are better addressed by government stimulus. Does anybody have an argument against that? And, to repeat a question I asked earlier, would anyone here have done anything differently if you were Paul Volcker in 1979-83?
     
  8. Naskra

    Naskra Emperor

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    Volcker's fed funds targets in 1980:

    Jan 14%
    Mar 20%
    Jun 8.5%
    Sep 12%
    Dec 20%

    I don't see why anyone would replicate this series.
     
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  9. Bootstoots

    Bootstoots Deity Retired Moderator

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    Yeah, that's really erratic. What was going on there?

    I guess I meant the Volcker Shock more broadly - shooting nominal rates to stratospheric levels from 1979-82, with all the consequences that had. Was it worth it? Could inflation have been curbed with more moderate policy?
     
  10. Hygro

    Hygro soundcloud.com/hygro/

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    Yes.
     
  11. Bootstoots

    Bootstoots Deity Retired Moderator

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    Okay. Maybe push rates to like 2 or 3% in real terms, which would come out to about 14-15% nominal at the height of the inflation? Or are there other options? In general, do most MMTers ever think that there is a time for hawkish policy?

    Also, what options do stagflating economies (e.g. Brazil today) have besides austerity and continuing to stagflate?
     
  12. Mise

    Mise isle of lucy

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    @Bootstoots: It's partly because investors are confident that a rich country will cut spending to repay debts, if it becomes necessary. Investors give rich countries more leeway to take on debt precisely because rich countries don't abuse that leeway in the manner in which many MMTers seem to suggest.

    There are many such paradoxical or ironic policy implications in economics. Indeed, one of the problems with, for example, the government guaranteeing that it will prioritise employment over inflation is that unions have no incentive to exercise the wage restraint necessary to ensure that inflation doesn't outstrip wages. This was one of the problems with the Labour government's policies that led to the IMF bailout: by explicitly stating that they would target full employment at the expense of inflation, they incentivised unions to demand higher and higher wages, making it impossible to hit targets for either full employment or inflation. The lesson wasn't that inflation should be prioritised, nor that full employment shouldn't be prioritised, but rather that the incentives must remain in tact: there must be a credible risk that the government simply cuts spending or raises rates to combat inflation, even if, in reality, a government wouldn't actually pull the trigger. Part of the reason why we can have near full employment with above inflation pay rises is precisely because we refuse to guarantee full employment or above inflation pay rises. Maintaining that credible risk in the UK is the presence of a Conservative Party that is hell-bent on reducing spending no matter the human cost. The threat, of course, is more than credible -- it's real and extant; and the trigger is pulled far, far more often than is necessary to maintain the risk.

    Compare that to the paradox of rich country debt levels: if we were to guarantee that our public spending were to remain as high as they are today, we would never be able to maintain public spending as high as it is today. We are only able to maintain this level of public spending and debt because investors know that we are willing to cut spending, raise taxes, or otherwise suffer lower standards of living in the future, if our economy contracts.

    I personally find this aspect of economics one of the most interesting.
     
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  13. Hygro

    Hygro soundcloud.com/hygro/

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    I don't buy it. I don't buy that a bond buyer is going to think that Japan is just about to change policies toward the austere and that's why they, in 2016, are willing to buy Japanese bonds. Having the credibility to say "these low interest rate bonds will be worth their inflation offset", i.e. pursuing a stable inflation money/fiscal policy, is not the same as "these bonds have value because we're going to constrain money in the future" even if that threat changes perceived expected inflation.

    Merry Christmas.
     
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  14. EnglishEdward

    EnglishEdward Deity

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    Maintaining levels of public expenditure and taxation that result in large budget deficits and rapidly increasing
    national debt i.e. being profligate hardly inspire investor belief that that country will willingly opt for future austerity.

    It has as much credibility as the proverbial fat man stuffing himself with as many burgers as he can
    manage, while confidently claiming that he is going to go on a stringent diet tomorrow.

    I am not that familiar with the details of the USA or Japanese deficit history to care to comment now.

    However there were in the UK few things more absurd than George Osborne cutting taxes and running a massive
    deficit while promising a magicly balanced budget at the end if this parliament, oh, the next parliament and having
    the cheek to introduce a hyocritical law requiring future chancellors to do what he was manifestly failing to do.

    It was very fortunate for his general public reputation that the Labour party abysmally failed to properly challenge
    this and that the vote Leave relieved him of his job, and enabled him to walk away blaming the Brexiteers.
     
  15. Mise

    Mise isle of lucy

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    Two quick points to start: 1) The scope of my post is much more limited than you're inferring. Japan has a myriad other things going on, and what I'm saying is only part of the explanation for low bond yields in advanced economies today. Bond yields are clearly a function of many things, and Bootstoots question went beyond the major ones. I'm talking to that "beyond" element only. 2) I don't think there is a huge difference between those two statements. In practice, the people who say the former and the people who say the latter are identical; while the people who advocate policies that break the former almost always advocate policies that will break the latter as well (sometimes the same policies break both).

    More generally, Bootstoots question was regarding economies with apparently similar levels of debt, deficits, public spending, and so on. I think the fact that liberal Western democracies have broadly committed to the neoliberal consensus, whereas many developing nations either haven't committed to it or have actively rebuffed it, explains a lot of the remaining difference. There are of course plenty of developing economies that have committed to the neoliberal consensus; these countries typically have low bond yields, small public sectors, low taxes, and so on. These countries may not want to exploit their low bond yields by running larger deficits, precisely because they have committed to the neoliberal consensus.

    I think there is a vast difference between the South American economies that have large public sectors because they have embraced socialism and the European economies that have large public sectors because they tax and spend a lot. European social democracy still has capitalism and neoliberalism at its heart, and with it, a commitment to returning money to investors who have bought their bonds, whatever the cost. Germany took a massive dump on Greece so that it could stick to this principle; investors surely factor that into their decisions.
     
    Last edited: Dec 28, 2016
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  16. Hygro

    Hygro soundcloud.com/hygro/

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    Deficits drive down bond yields.
     
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  17. Mise

    Mise isle of lucy

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    Yeah, all else equal, that's true. If you compare two different scenarios for the same country, the scenario with higher deficits (to a point) will have lower bond yields. I'm talking about why two countries might have differing starting levels of bond yields, given similar macroeconomic indicators. Part of the difference is their commitment to certain economic policies.

    I also don't think Bootstoots was asking specifically about bond yields; I think he was using that as an example of the way an investor's perception of a country might change their investment decisions; bond yields would be an indicator of a difference in investor's reactions to a country, based (putatively) on their status as "Western" or "non-Western". My argument is simply that those perceptions are (or might rationally be) based on real factors, rather than simply a blind preference for Western countries.

    My argument, beyond responding to Bootstoots' question, is that a commitment to neoliberal economic orthodoxy has value beyond the "first round" consequences of the policies themselves; my argument is that the commitment is valuable, to investors, to businesses, to consumers, and to the voting public. We in the West have been unwitting beneficiaries of this commitment, even as we believe that the policies that this commitment entails might, from time to time, be wrongheaded.

    (I don't think the value of that commitment is so great as to warrant austerity as we've had in the past 7 years though.)
     
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  18. Naskra

    Naskra Emperor

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    Because increasing supply drives up prices? Whoddathunk.
     
  19. Hygro

    Hygro soundcloud.com/hygro/

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    On both ends.
     
  20. Cutlass

    Cutlass The Man Who Wasn't There.

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    A very tight economy from the Vietnam War and Great Society, then OPEC, and accommodating monetary policy because labor still mattered, and so efforts were made to keep unemployment low. After Thatcher and Reagan were in office, labor was neutered, and so unemployment was allowed to be higher to keep inflation lower. At the same time, by the early-middle 80s OPEC had lost it's power to really push prices.
     

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