Ann Pettifor has been getting all worked up lately about the rather
obvious fact that when base rates rise, so too will rates for mortgages, which
will be a problem for a proportion of mortgagors. See images below for some examples of her near hysteria.
Now that rather contradicts the disdain with which she regards Positive
Money. Reason is that PM, along with the New Economics Foundation, Prof Richard
Werner and others, advocate a system under which interest rate adjustments ARE
NOT used to adjust demand: rather, what’s varied is the amount of new base
money that the authorities create and spend (net of any tax increases or cuts
government chooses to make).
Thus under that system, interest rate gyrations ought to be LESS PRONOUNCED, all else equal, than under
the existing system: something that Ann Pettifor would presumably welcome.
Perhaps she'd like to re-consider her disdain for Positive Money.
1. Does PM advocate changes in base money by open market operations (e.g. quantitative easing)? MMT and recent experience suggest that this has little effect on aggregate demand.
ReplyDeleteAlternatively, is PM is simply advocating old fashioned Keynesian fiscal policy? This would affect aggregate demand (unlike open market operations).
In this case why all this confusing monetarist talk about "new base money"?
New base money may be useless unless it results from fiscal policy - government expenditures less taxes.
2. Please clarify how the economy can be steered by base money without fluctuations in interest rates. Doesn't the failure of Friedmanite monetary policies in the 1970's show that this is impossible?
“New base money may be useless unless it results from fiscal policy - government expenditures less taxes.” I wouldn’t use the word “useless”, but I agree that the best form of stimulus is to combine fiscal and monetary policy because it’s far from clear how effective either of them alone is. I.e. I don’t agree that when a household’s stock of money rises, that has no effect: what do people do when they win a lottery?
DeleteRe your “2”, if the authorities create new base money and spend it (while ignorning interest rates) I fail to see how that cannot have an effect. First, the fact of the public sector hiring more people has an effect: employment rises. Or alternatively, if taxes are cut, then people spend more when they see their after tax incomes rise. That also raises employment.
Second, the latter “print and spend” policy raises the amount of money in private sector hands (or “private sector net financial assets” to use MMT parlance.) And when people find they have more money, their spending tends to rise: that’s what happens when people win lotteries.
Thanks for your response. I largely agree with what you say. But here you are only talking about fiscal policy. Yes indeed, government spending and taxes influence demand through well known Keynesian mechanisms. And yes, there is indeed an associated change in base money equal to the fiscal deficit.
ReplyDeleteBut changes in base money can also be achieved by open market operations (sales and purchases of government bonds). These merely change the composition of net private sector assets, in particular the portfolios of financial enterprises. In contrast to fiscal policy measures, OM operations cause zero change in the overall financial assets of the private sector, and there is little effect on demand. For example, the several rounds of QE in recent years multiplied base money several fold with little effect on aggregate demand.
So when you advocate steering the economy through base money, are you recommending QE as a policy tool?
If you are not NOT really advocating steering the economy by changing base money, e.g. QE, then you are simply advocating a policy of steering the economy by fiscal policy. A change in base money is neither an objective nor a tool for implementing fiscal policy. It is merely a side-effect.
My criticism of Positive Money is that it is confusing and misleading to call fiscal policy by a phrase which is merely refers to a side effect, especially when this effect which can result from measures which are not fiscal policy at all (e.g. QE).
I don’t think PM is confused, as you suggest in your final sentence. That is, I think they’re aware of the fact (certain I am) that when the authorities print new base money and spend it, there are two effects: what might be called a fiscal effect and a monetary effect. That is, when the authorities print money and hire more bureaucrats, nurses or whatever, that is an effect: numbers employed rises.
DeleteIN ADDITION, there is a monetary effect, which is that the private sector’s stock of base money rises, and that tends to increase households spending.
Alternatively, if the new base money is used to cut taxes, then households’ after tax income rises. That in itself will increase household spending. Plus (as above) households’ stock of base money rises. So there are two effects there as well.