Thursday, 23 July 2020

OMG: Jagjit Chadha of the NIESR writes another article.

Jagjit Chadha, director of the National Institute of Economic and Social Research has unfortunately written another article. It’s entitled “Should Modern Monetary Theory inform economic policy in the crisis?”

His first mistake comes in his third paragraph where he said “The central idea of MMT is that government expenditure can be directly funded by the issuance of fiat money, or what is now more generally defined as ‘central bank money’…”.

Well fiat money is not necessarily central bank money. Fiat money, as the Oxford Dictionary of Economics says, is anything of no intrinsic value which comes to be accepted as money. For example banknotes issued by private banks are form of fiat money. Certainly the latter dictionary says nothing about fiat money necessarily being state or central bank issued. But that’s a minor mistake. More important are the following mistakes.

“Critical differences”.

Next, Chadha lists a number of what he calls “critical differences between the orthodox programme and MMT.” Now I shouldn’t need to explain this, but to set out the difference between two things involves explaining, for example in the case of sail powered ships and steam powered ships that sail powered ships are driven by sails, whereas steam engine powered ships are powered by steam engines.

Unfortunately Chadha does no set out anything can be described as a difference. To illustrate, his second alleged “difference” is set out in two paragraphs as follows (which I’ve put in green italics).

“Second, central bank money is not issued by the central bank to provide resources or tokens to the state. When the policy rate (Bank Rate in the UK) is above the ELB, the central bank, having decided on the appropriate level of Bank Rate to meet its inflation target, supplies currency and reserves elastically to the banking system. The banking system economises on its demand for central bank money, as those assets do not offer a good rate of return relative to lending, but will wish to meet any demand for the conversion of bank deposits into cash and for the settlement of payments (see Goodhart, 1989).

In fact, central banks typically stress that the system as a whole can always access however much central bank money it requires to meet its needs. The price of that access is Bank Rate, which, away from the ELB, is set according to a well-understood set of procedures.”

Well did you notice an explanation as to what the “difference” between one thing and another was there? I didn’t! But quite apart from that, those two paragraphs are nonsense anyway.

Let’s take the first half of his first para. He claims there that under conventional policies, central banks only issue central banks money with a view to influencing interest rates.

Well that was true prior to the 2007/8 bank crisis. But that all became totally irrelevant when central banks embarked on QE. Under QE, government borrows $X and gives $X worth of bonds to lenders, while the central bank creates new money and buys back those bonds. That all nets out (contrary to Chadha’s suggestions) to: “the central bank provides resources or tokens to the state.”

In short, what Chadha THINKS is something unique to MMT, i.e. having the central bank create money with government spending it, is actually not unique to MMT at all!

The fourth “difference”.

This is contained in these two paras, again in green:

“Fourth, the fiscal authority starts from the premise of meeting its present value budget constraint, which means that plans are formulated ex ante so that the present value of tax revenues meets the present value of expenditures plus the value of the existing stock of public debt.

In practice, this means that in response to any increase in government expenditure, tax revenues increases are either implemented now or deferred. In the case of deferral, the government must sell its debt to the (non-bank) private sector or sell it abroad, in order to tap the pool of private and foreign savings.”

Well certainly it’s true to say that where government spending exceeds tax, the difference is initially made good by borrowing, as Chadha says. But Chadha evidently has not caught up with the fact that over the last five years or so, central banks have created new money out of thin air and bought back nearly all of that debt!

That means that the government machine as a whole (i.e. including the central bank) has not “tapped the pool of private and foreign savings” at all!

Chadha clearly doesn’t have the faintest idea what’s going on. How he ever came to be director of the NEISR is a mystery.

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