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:

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.
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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…!]


Poll Results

Results are in!  I’ve opted for a tabular summary, as it’s easier than a graph – sorry.  Many thanks to all those who responded…




Not sure

Even before the banking crisis hit in 2008, the UK was borrowing too much money to pay for public services that, in the long term, we could not afford. 




Dealing with Britain’s deficit and debt is the only way to get back to a strong economy. 




What has happened in Greece could just as easily have happened here. 




If the government manages to clear the deficit by the end of 2017, it will be a significant achievement which benefits our entire economy. 








The most immediately noteworthy element, I feel, is that, while an overwhelming number of people disagreed that what has happened in Greece could just as easily happen in the UK, a majority nonetheless agreed that the UK has overspent on public services and now needs to clear its debts!

Some food for thought (I hope!)…

Why did Greece implode?

Greece and other Euro states have ceded currency sovereignty (= ability to create central bank reserves from thin air) to the European Central Bank, which does not have a mandate to create reserves in the interests of any particular member state.  This means there is a genuine need for member states to sell bonds at market rates to fund their deficits, leading to potential funding crises in the event of a recession.  The UK, by contrast, issues its own currency, and thus cannot ever go bankrupt.  Markets know this, as reflected in the low rates for UK bonds.

How is this relevant to the UK’s deficit?

As sovereign issuer of its own currency the UK possesses an infinite ability both to run deficits and pay down debt – how could it be otherwise for a state that issues its own currency??  Furthermore, in the midst of a global downturn affecting all major economies and trading partners, there is only one feasible way of reviving the private sector, and that’s by running a large government deficit.  As the three people who read my previous post on the sectoral balances will recall, a government  deficit, by definition, equals a private sector surplus – the larger this surplus, the greater the ability of the private sector to pay down its debt – simples!

Please take this short poll…

Ok, so earlier today my parents handed me a mailing they’d received from one David Cameron.  Now, while it’s jolly nice of “Dave” to write and all that, my regular readers (who, according to WordPress stats,  number approximately 3) won’t be surprised to learn that the contents of the mailing, in particular the economics section of the questionnaire, did rile me a little.

Before commenting  any further, however, I thought it might be interesting to conduct my own little poll, using Dave’s questions (as word for word as polldaddy will allow), just to get a snapshot of where the public are at on these issues.   Please note:  answers are completely anonymous and once results are in, I’ll conduct a thorough statistical analysis and feed back to readers through the medium of dance…  sorry, I mean graphs.

Here’s the poll – knock yourselves out, people!

Economic suicide?

Every now again, you happen across some truly mesmeric graphs.   Here they are, courtesy of the always insightful Neil Wilson over at 3spoken:

Debt levelssectoral balances

Are you mesmerised?  If not, you certainly should be.  Here’s why…

Graph 1 illustrates that the UK, like most neoliberal economies, is presently suffering from a PRIVATE debt crisis.  That’s private debt, not public debt.  Indeed, public debt has remained fairly constant – yes, it’s trickled upward in recent years, but it’s certainly nothing to write home about in macroeconomic terms, and way lower than the historic high of 250% that prevailed at the end of WW2 (at which point the government of the day made the entirely correct decision to SPEND in order to get the economy moving).  So, why the hysteria about our public finances?  Why the shrieks of terror that our deficit (the dreaded fucking deficit!) is about to plunge us into the economic abyss?  Which brings me to Graph 2…

Graph 2 is pictorial confirmation of the important macroeconomic accounting identity long pointed out by Modern Money theorists, namely that the public sector deficit = the private sector surplus, and vice-versa.  Hence, the mirror image.  Put another way, this means that the government, by running a deficit, is supplying the net assets required by the private sector to spend, save, and pay down the record debt depicted in Graph 1.  By contrast, official mainstream policy apparently aims to cut the deficit, which, by corollary,  must reduce the private sector’s ability to pay down its debt.  In other words, the graph confirms that official UK government policy is to commit economic suicide.

Trebles all round, everyone?

Car Crash Economics

Here’s an article I published recently at Cheltenham & Gloucester Against Cuts, which, if I do say so myself, sums things up rather well 😉

“Someone asked me recently what I thought of the ConDem government’s management of the economy.  My response?  Like a car crash, only rather more horrific.  Allow me to explain…

Back in 2007/8, the UK economy nose-dived.  The uncontroversial cause was the bursting of a credit bubble, which left the private sector with huge debt relative to its wealth.  In response, the sector attempted to restructure its collective balance sheet by restricting its lending to only the most gold-plated of borrowers, while saving, Scrooge McDuck-like, to pay down debt and insulate against future economic uncertainty (for more on this “balance sheet recession” phenomenon, see Koo).  This sucked demand out of the economy and led to economic contraction, unemployment, and general misery for a great many.

In these circumstances, the government had one economically viable option:  deficit-spend (i.e. spend in excess of tax receipts) to restore demand, inject confidence back into the economy, and get the private sector hiring again.  Instead, however, under the entirely spurious pretext that to deficit-spend would lead to ever higher interest rates and eventual national bankruptcy, the ConDems implemented a series of massive cuts to public spending that, utterly predictably, sucked further demand out of the economy, and led us, majestically, into double-dip recession.

To be clear: there remains but one route out of this economic car crash, and that is for the government to DEFICIT-SPEND, for a sustained period, probably years (yes, YEARS).

Contrary to ConDem spin, prolonged deficit-spending is perfectly feasible for a monetary sovereign like the UK.  Monetary sovereigns are governments that issue their own floating currencies, meaning they can spend whenever they wish and, by definition, cannot EVER bankrupt themselves.  Monetary sovereigns also have full control over interest rates, and need not EVER be forced into higher rates by markets.  On the contrary, markets lap up bonds issued by monetary sovereigns, since they are risk-free, interest-bearing assets.  This is borne out in practice, but is particularly noticeable in Japan, where the government has continually sold its bonds at low interest despite running deficits for the best part of 20 years. 

Inevitably, when all other arguments fail, the cry of INFLATION! goes up in response to calls for deficit-spending.  However, this simply illustrates a complete lack of understanding of how/why inflation occurs.  In short, as long as the spending (however financed) creates additional productive capacity, there won’t be any (demand-pull) inflation.  This leaves monetary sovereigns free to put the unemployed to work doing any number of socially useful things, such as building new energy-efficient homes, insulating existing homes, or providing better care for the elderly.

The maths is clear: the longer the ConDems are allowed to govern, the bigger the economic car crash they will create.

Let’s all make sure these clowns are voted out at the next election.”