Wednesday, 24 June 2020

Governor of the Bank of England does not get MMT.

What’s going on in the brain of Andrew Bailey is exactly the sort of thinking that MMT has been battling with over the years.

According to a Bloomberg article entitled “BOE’s Bailey Signals Dramatic Shift….”, Bailey wants to roll back QE because that would “give officials more firepower in future crises”.

Well now, strikes me the amount of QE needed right now is whatever minimises unemployment without exacerbating inflation too much. So Bailey would seem to be saying we should endure excess unemployment right now in 2020, so that we have enough ammunition to deal with future recessions.

That sounds to me like complete nonsense: the amount QE, or more generally the amount of stimulus needed in any year is the amount needed (as suggested just above) to minimise unemployment in any given year.

Moreover, there’s a long way to go before the entire national debt is QE’d, so it’s far from clear that we are short of ammo.

But would there be something wrong with QEing the entire national debt? Well far from it! Milton Friedman and MMTers have for a long time advocated that whether we’re in a recession or not, interest yielding government debt does not make much sense. Thus QEing the entire debt, far from being a problem, would arguably be beneficial.

Of course Andrew Bailey is right in a narrow sense. That is, if one rules out negative interest rates, and fiscal deficits funded by new money provided by the central bank, then one could argue that some central banks are currently near out of ammunition.

But that’s a bit like a soldier claiming he is near out of ammo when he has run out of ammo for his 3mm calibre machine gun, when there’s a 4mm and 5mm calibre machine gun plus plenty of ammo for them  plus several rocket propelled grenades right next to him!

In other words as MMT says, there is essentially no limit to the amount of stimulus a central bank, assisted or not assisted by its government, can implement – a point also made by Keynes. 

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