The Manchester (Il)liberal

Ok, so I’ve been having a little ding-dong with right-wing “economist”, John Phelan, who – at his blog – describes himself as a “small “l” liberal”. Now, I’ve just looked up “liberal” in my dictionary, and it says:

liberal
adjective
willing to respect or accept behaviour or opinions different from one’s own; open to new ideas

…which might lead one to believe that Mr Phelan operates a generous and open comments moderation policy at his blog, no? Alas, Mr Phelan does not operate such a policy, and opts instead both to edit comments AND to refuse contributions that reveal flaws in his reasoning.

Fortunately, over here at the blog-o-bot, I run a genuinely liberal ship. And with this in mind, here’s my exchange with John Phelan IN FULL, to include my most recent rejoinder.

Note for right-wing “economists”: if you’re going to chastise people for confusing economic terms such as “deficit” and “debt”, you’d better make darn sure you don’t go on to confuse these very terms yourself!

——

joesucksmith on May 30, 2013 at 11:43 PM said:

“The British government’s out of control spending is the central issue in British politics today…” (manchesterliberal)

No it’s not. The British government’s LACK of spending is the central issue in British politics today. The UK issues its own floating currency, so can and should spend up to the inflation barrier (= full employment). Monetary sovereigns retain control over interest rates, so there is no risk of suffering penal rates due to an increase in the debt. Japan is instructive in this regard.
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manchesterliberal on May 31, 2013 at 9:13 AM said:

Japan certainly is instructive, they’re turning the moneatry spigots and…bond yields are up.

http://www.economist.com/news/finance-and-economics/21578701-volatile-bond-yields-may-spell-trouble-abenomics-shocking
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joesucksmith on June 2, 2013 at 12:03 AM said:

A terrifying spike indeed. Perhaps Japan is about to implode after a mere 20 years of defying neoliberal nostrums – what do you think?
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manchesterliberal on June 2, 2013 at 10:03 AM said:

It might be about to implode after one more stab at Keynesian stimulus after 20 years of failed Keynesian stimulus. Either way, right now Japan certainly does not show that “Monetary sovereigns retain control over interest rates” no matter what.
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joesucksmith on June 2, 2013 at 11:53 PM said:

“failed stimulus”? Dig deeper and you’ll find that the periods of (weak) stimulus map to (weak) growth in GDP, while periods of consolidation map to falls in GDP/recession. That there’s been a tiny spike in yields says nothing about the government’s monopoly control over rates. Bonds will ALWAYS be desired as they are risk-free, interest bearing assets. And in the highly implausible event there are no takers, BOJ steps in and, voila, government can spend!
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manchesterliberal on June 3, 2013 at 12:06 AM said:

In other words, as soon as the stimulus is withdrawn the economy tanks again. If it doesn’t stimulate it’s not much of a stimulus. Since 1992 Japanese government debt has risen from about 50% of GDP to about 230%. On Keynesian theory Japan should have boomed. In fact it’s flatlined.

You say this spike has been tiny, given Japan’s sovereign debt is 230% of GDP you can’t honestly say that. And besides, according to your thinking it shouldn’t be happening at all. Let’s look again at what you said, “Monetary sovereigns retain control over interest rates”. As we see that’s wrong, they don’t always. Sometimes they lose control. Japan might be proving that now. And you brought it up.
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joesucksmith on June 3, 2013 at 5:26 PM said:

There’s some truth in what you say – had the stimulus been big enough, things could have been different. Sadly, even states that are monetarily sovereign can’t resist austerity hawks entirely. But despite this, the reality is that Japan didn’t too bad: low inflation, respectable levels of employment, and low rates… a set of economic markers that persistently, but amusingly, baffles those without a grasp of monetary sovereignty.

And no, I wasn’t wrong about Japan retaining control over bond rates. Yield does not equate to (coupon) rate. Yes, yields can fluctuate in line with market demand, but the rate is ALWAYS at the discretion of the government. And since bonds cannot, by definition, fund the spending of a currency issuer, markets are in no position to start demanding higher rates.
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manchesterliberal on June 3, 2013 at 5:43 PM said:

“had the stimulus been big enough” So you don’t think increasing the deficit from 50% of GDP to 230% of GDP was “big enough”? This is the problem with Keynesianism, it never fails it’s just not tried enough. Or, as Sraffa wrote in his copy of The General Theory, “Head I win, tails you lose”

Your second paragraph is a rather hopeless confusion I’m afraid. The government, assuming it is also the money issuer (you seem to be ignoring central bank independence or that it might have other goals such as price stability), can guarantee that it will never pay more than a desired coupon but only if it promises to buy the bonds from itself if no one will buy those bonds at the cpoupon rate (and that is what the Japanese bond spike suggests is the case). In short, the governing arm issues bonds and the monetary arm prints the money to pay for them. One arm of government prints bonds and the other prints the cash to pay for them.

But what then? The money handed to the government by the monetary authority in exchange for bonds is spent by the government and generates inflation.

In other words, as I’ve put it elsewhere, the argument is that we don’t need to worry about turning into Greece because we always have the option of turning ourselves into Zimbabwe.

PS I have just one rule on this blog; no quoting of old, unfunny adverts.

joesucksmith on June 3, 2013 sometime in the evening [I don’t know precisely when as John refused to publish my comment. Fortunately, I kept a back-up :-)]

>So you don’t think increasing the deficit from 50% of GDP to 230% of GDP was “big enough”?”

Oh dear, someone’s confused their debts and deficits – how ironic! 😉 But seriously, the size of public debt is a complete red herring. What matters (for progressives) is that the government spends sufficiently to offset private sector saving, with a view to maintaining full employment. If this involves a ramping up of the debt, so be it. Look up Lerner’s “functional finance” – it’ll blow your mind.

>”The government, assuming it is also the money issuer (you seem to be ignoring central bank independence or that it might have other goals such as price stability), can guarantee that it will never pay more than a desired coupon but only if it promises to buy the bonds from itself if no one will buy those bonds at the cpoupon rate (and that is what the Japanese bond spike suggests is the case).”

Precisely – the central bank (a part of the GOVERNMENT!) can ALWAYS intervene in the bond market, thereby rendering the concept of “bond vigilantes” null and void. Markets need to tread carefully with savvy monetary sovereigns, since the bond gravy train could just be brought to an end at any time…!

“But what then? The money handed to the government by the monetary authority in exchange for bonds is spent by the government and generates inflation.”

Oh crikey. Just think this through for a minute. Irrespective of whether the CB or private sector purchases the bonds, the money gets spent into the wider economy. Does this, ipso facto, generate inflation? Of course not. For empirical validation, look no further than Japan, which, despite posting budget deficits for the last 20 years, racking up debt to GDP of 200% in the process, has had to battle DEflationary pressure! And to pre-empt: no, the fact that private sector purchase of debt debits reserves makes no difference whatsoever, as there is no direct relationship between the amount of bank reserves and the level of inflation (as should be clear from QE).

>”In other words, as I’ve put it elsewhere, the argument is that we don’t need to worry about turning into Greece because we always have the option of turning ourselves into Zimbabwe.”

The UK is on the edge of a depression (thanks to austerity) and you’re worried about hyperinflation? That’s funny.

>”PS I have just one rule on this blog; no quoting of old, unfunny adverts.”

I can’t believe you edited that out! 😉

[Editorial note: This was a reference to John’s editing out of the word “seemples” from my previous comment – a hilarious sign-off a-la those cheeky little meerkats…!]

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