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C. J. Polychroniou, reflecting on the results of the European Parliament elections: The stunning victory of Marine Le Pen’s National Front in France that came in first with 25 percent of the vote—when it had won less than 6.5 percent in the last European elections—is quite indicative of the general political and social trends in Europe today. The parties of the far right scored quite well in Europe’s parliamentary elections … What all these parties have in common … is their opposition to the current EU regime, which they blame directly for the loss of national sovereignty, the high levels of unemployment, the corrosion of traditional beliefs and values and the massive flows of immigrants. […] [I]t is also not clear whether the far right parties will form a political alliance amongst themselves in the new European parliament. It is not certain at all that UKIP, or even the Finns Party, will collaborate with Marine Le Pen’s National Front. In short, it is highly unlikely that the parties of the far right will pose a systemic threat to the status quo in the EU. What seems to be happening in Europe today is that the far right is simply taking advantage of the growing bitterness and resentment all across the continent towards the “New Rome”[*] and citizens’ lost faith in… Read More

In yesterday’s Financial Times, Jörg Bibow addressed Mario Draghi’s recent announcement that the ECB will take new steps (including cutting its deposit rate to -0.1 percent) in an attempt to deal with (or, one might argue, in an attempt to appear to deal with) the fact that inflation in the eurozone is too low, according to the ECB’s own alleged target. For Bibow, the proposed measures are unlikely to get the job done, and the same could be said, he argues, for any last-ditch attempt at quantitative easing (a prospect mentioned by Wolfgang Münchau in his last column). The problem is that it’s hard to characterize eurozone disinflation as some unforeseen bump in the road: The driving force behind the eurozone’s disinflation process is wage repression – exercised to a brutal degree across the currency union. In fact, wage repression – joined by fiscal austerity – is the eurozone’s official policy meant to resolve the euro crisis … With wages in übercompetitive Germany creeping up at a mere 2 to 3 per cent annual rate, the rest are forced into near, if not outright, deflation to restore their lost competitiveness. … The ECB was late to diagnose the issue and super-late to act. But the real issue is that neither its recent move nor any imagined future quantitative easing will do anything to reverse deflationary wage trends any time soon… Read More

It’s well known that the wages of US workers have become disconnected from productivity growth, with real wages growing much more slowly than advances in productivity over the last several decades. This is a key part of the story of widening income inequality. But these observed trends actually understate the degree to which working people have been left behind. New research reveals that the US economy is doing a worse job passing on productivity gains to workers than the wage growth (or even stagnation) numbers suggest. The Levy Institute’s Fernando Rios-Avila and the Atlanta Fed’s Julie Hotchkiss looked back to 1994 and tried to see what proportion of real wage growth since then can be accounted for by key changes in the demographic profile of the labor force: principally, the fact that the average worker has become older (i.e., more experienced) and more educated. What they found is that over 90 percent of real wage growth between 1994 and 2013 was due to demographic shifts. And the 2002–13 period, commonly referred to as the decade of flat wages, is more accurately described as “a decade of declining real wages within age/education worker profiles.” If we control for demographics, wages are back to where they were in 1998. That’s what you’re seeing in the red line below: Of course, generally speaking, the fact that we have a more educated workforce… Read More

Paul McCulley, a familiar face at Levy Institute events (he gave a keynote at our Rio conference and at last year’s Minsky Summer Seminar), is back at PIMCO and his first note is (predictably) worth a read. His latest essay looks at Federal Reserve policy from the standpoint of what McCulley terms the Fed’s “secular victory in the long War Against Inflation” and discusses, among other things, how the Great Moderation fed into Minskyan financial instability, how we should think about the Fed’s “neutral” real policy rate, and what this means for the question of whether stocks and bonds are overvalued. Here he is on the Taylor Rule: The “neutral” real policy rate is not secularly constant. It evolves as a function of changing “real” economic variables – demographics, technological progress, productivity, etc. – as well as changing institutional arrangements, notably changes in the degree of regulation of banking and finance, domestically and internationally. Thus, the notion of a “fixed” center of real policy rate gravity for prudent monetary policy is an oxymoron. Which is why, for me, it is so befuddling that the Fed, and thus the markets, still clings – even if reluctantly – to one man’s estimate of an “equilibrium” real fed funds rate, made in 1993: John Taylor, who assumed it to be 2%, which, in… Read More

Last week the ECB’s governing council agreed on interest rate cuts and some fresh liquidity measures. The policy move has sparked off quite some excitement in all kinds of corners. Certainly financial markets highly welcomed the ECB’s much-awaited new easing initiative, with stock indices surging and bond yields plunging to record levels. International commentators generally felt that the ECB was – finally, if belatedly – doing the right kind of thing. And, generally speaking, the European political body seems to be sufficiently famished, and perhaps also a little terrified by the recent EU parliament election results, to welcome any perceived easing of pain. Only one party felt seriously short-changed by the euro’s independent guardian of stability: German savers. In Germany, the ECB’s latest policy decisions, featuring a negative interest rate to be paid by banks to the ECB for lending to the ECB by means of its deposit facility, triggered an across-the-board outcry orchestrated by the German media, ranging from heavyweight tabloid Bild to the mouthpiece of Germany’s conservative intelligentsia Frankfurter Allgemeine Zeitung. German savers appear to be up in arms against the ECB’s outrageous decision to shave 10 basis points off its key policy rate and introducing a negative rate on its deposit facility. The president of Germany’s savings bank association declared that the ECB’s move amounted to expropriating… Read More

This is another installment in the series on the MMT view of taxes. I’m back from China, participating in the annual Hyman P. Minsky Summer Seminar at the Levy Economics Institute. Yesterday my colleague, Mat Forstater, gave a talk on the job guarantee and “green jobs.” Along the way he made two particularly insightful comments on MMT and taxes that I’ll use to introduce this installment. First, he discussed the MMT view of “modern money”—that is to say, the money that has existed “for the past 4000 years,” at least, as Keynes put it in his Treatise on Money. The money of account is chosen by the sovereign and used to denominate debts, prices, and other nominal values. It is the Dollar in the US. It is like the inch, the pound, the meter, the kilogram, the acre or the hectare—a unit of measure. Mat put it this way: the sovereign can no more run out of “money” than it can run out of “acres” or “inches” or “pounds.” We can run out of land, but we cannot run out of acres. We can run out of trees but we cannot run out of the linear feet we use to measure them. You cannot run out of a unit of measure! The “dollar” is the measuring unit in which we… Read More

In The Guardian, Dimitri Papadimitriou warns that the combined forces of persistent inequality, shrinking government budgets, and the US trade deficit are setting the stage for another private-debt-driven financial crisis: Right now, America is wrestling a three-headed monster of weak foreign demand, tight government budgets and high income inequality, with every sign that these conditions will continue. With that trio in place, the anticipated growth isn’t going to be propelled by an export bonanza, or by a government investment boom. It will have to be driven by spending. Even a limping recovery like the one we’re nursing along today depends on domestic demand – consumer spending not just by the wealthy, but by everyone else. We believe that Americans will keep consuming at the same ever-rising rates of past decades, during good times and bad. But for the vast majority, wages and wealth aren’t going up, so we’re anticipating that the majority of Americans – the 90% – will once again do what was done before: borrow, and then borrow more. […] The more – proportionally – that the top 10% has prospered, saved and invested (naturally, the gains found their way into the financial markets), the more the bottom 90% has borrowed. Look at the record of how these phenomena have travelled in lockstep. In the first three decades… Read More

On Saturday, Daniel Alpert delivered the closing remarks at the Levy Institute’s Hyman P. Minsky Summer Seminar: Minsky had the rarely seen ability to stand back from all he had learned—even at times from his own mentors—and not only see and articulate what was misunderstood, what wasn’t working, but also to explain why conventional wisdom is often not always all that wise and why markets often proceed in delusional fashion.  And by this I mean not merely the often irrational animal spirits of markets, nor the Keynes’ casino, nor his beauty contest, but an almost collective agreement to ignore the most obvious of fact-pictures staring right back at us.  And often, to ignore them because they force consideration of exogenous variables that aren’t readily incorporated into existing mainstream models, to ignore them because they are too heterodox to be considered by those who have invested their lives work in developing and interpreting mainstream theory, or to overlook them because they involve understanding the often obtuse complexities of actual market operations that go beyond ivory tower theories of market behavior. Read Alpert’s full remarks here.

These two interview segments, with Marshall Auerback and Edward Harrison (at 23mins), feature some basic discussion of Hyman Minsky and his view of financial crises: [iframe width=”427″ height=”255″ src=”http://www.youtube.com/embed/ppjeupTYPz4?feature=player_detailpage&start=895″ frameborder=”0″ allowfullscreen></iframe]  

This is another short post on MMT, a sort of follow-up to my post from a couple of days ago. There was an interesting response to various comments on my piece, which was posted up on Mike Norman’s website. We got the typical: “oh you MMTers always want to consolidate the Fed and Treasury, but really the Fed is a private institution that is not a part of government,” and “in reality the Treasury cannot spend unless the Fed will allow it to spend, otherwise it must get tax revenue before it can spend,” and hence “really, government spending is constrained by its revenue, just like a household or firm.” In reality, what MMT has shown—from the very beginning of the creation of the approach—is that you can consolidate or deconsolidate and the balance sheets end up in exactly the same place. The MMT logic holds no matter how you do it: government creates a money of account, imposes a tax in that unit, spends currency denominated in the unit, and collects taxes paid in its own currency. And, of course, the Fed is not a private institution but rather is a creature of Congress and no more independent of government than is the Treasury, the DOD, the DOT, or the IRS. The Fed is normally allowed to set the overnight interest rate… Read More

Ann Pettifor, “Out of thin air — Why banks must be allowed to create money” “In his regular column, Martin Wolf called for private banks to be stripped of their power to create money. Wolf’s proposals are radical, and would give a small committee – independent of the state – a monopoly on money creation. … Furthermore, Wolf argues, private commercial banks would only be allowed to: ‘…loan money actually invested by customers. They would be stopped from creating such accounts out of thin air and so would become the intermediaries that many wrongly believe they now are.’ Because I am a vocal critic of the private finance sector, many assume that I would agree with Wolf and Positive Money on nationalising money creation. Not so. I have no objection to the nationalisation of banks. But nationalising banks is a different proposition from nationalising (and centralising) money creation in the hands of a small ‘independent committee’. Indeed, the notion to my mind is preposterous. It is an approach reminiscent of the misguided and failed monetarist policy prescriptions for controlling the money supply in the 1980s. Second, the proposal that only money already saved should be made available for lending assumes that money exists as a consequence of economic activity, and equals savings. But that is to get things the wrong way around.” Related: Jan Kregel, “Minsky and the Narrow Banking Proposal: No Solution for Financial Reform” Jayati Ghosh, “Locking… Read More

Horatio:  He waxes desperate with imagination. Marcellus:  Let’s follow. ‘Tis not fit thus to obey him. Horatio:  Have after. To what issue will this come? Marcellus:  Something is rotten in the state of Denmark. Horatio:  Heaven will direct it. Marcellus:  Nay, let’s follow him.  Hamlet Act 1, scene 4 Marcellus is right, the Fish of Finance is rotting from the head down. It stinks. As Hamlet remarked earlier in the play, Denmark is “an unweeded garden” of “things rank and gross in nature” (Act 1, scene 2). The ghost of the dead king appears to Hamlet, beckoning him to follow. In scene 5, the ghost tells Hamlet just how rotten things really are. Denmark, is of course Wall Street or London. Far more rotten than anyone can imagine. In the aftermath of the Great Recession, we all wax “desperate with imagination,” looking for explanation. For solution. For retribution! The financial system is rotten. Our banking regulators and supervisors failed us in the run-up to the crisis, they failed us in the response to the crisis, and they are failing us in the reform that we expected in the aftermath of the crisis. Heaven will not save us, either. The Invisible Hand is impotent. Just wait for Scene 5! In times like these, we thrash about, desperate for ideas, for imagination,… Read More