It’s indicative that banks don’t worry so much about not getting deposits to fund their lending, but instead worry that their liabilities will over time reprice at a higher rate while their assets remain fixed, or that their liabilities remain fixed while their assets over time reprice at lower rates.

When a bank buys a branch property, it has to be funded by a corresponding liability - its own equity, a loan from somewhere else, or via deposits - and we know banks can’t buy stuff using customer’s deposits. That would be misappropriation of customer’s funds. #

If it were true that banks can just credit the money to buy anything, why haven’t they bought everything yet? When a bank buys a loan, it expects a positive income from the spread between the loan and the cost of the liability that results from it. When a bank buys property for a branch, or a computer printer, there are no income assumptions, they’re an expense outlay for the bank. 

While it is true that purchases or payments are created as an accounting entry by the bank, if they result in net equity outflow, that outflow cannot be compensated by the bank by printing reserves into existence.

Loans and branch locations are two different animals. You have to distinguish whether that payment is for an expense or for a loan. Anything that is considered an expense outlay is not new money created by the bank. And any net cost that results from that purchase is not funded with new money, as is the case with capital that has to be raised to maintain the ratio. That’s why, as Tom said, the bulk of horizontal money creation comes from credit extension, not asset purchases or payments on their own account.

Not all liabilities created by the bank are new money. Not all payments it makes, though they’re paid as credits to accounts, are new money. Often that credit results in a debit, and the debit is from their equity.  For example, if they buy their office supplies, pay their workers, or settle their utility bills, it does not add new money to the economy. It uses its earnings (part of its equity) which is money received from elsewhere, it is not money created at the point of credit. 

A bank that has no earnings or no equity cannot continue spending just because it can create money out of thin air by crediting an account.

“your question should be: why havent they bought all property yet? believe me they would like to!”

Well, you could be talking about your banks over there in the US. But in the rest of the world, banks are not in the business of owning property. They are in the business of extending loans, and they want to get paid back the loans and earn the interest rather than owning the property. In the rest of the world, capital tied up in property is capital they cannot use to churn new loans and any properties they end up with because of soured loans are immediately disposed of. Again, you could be right in the US setting though. Who knows anymore.

It would likely result in higher property bubbles if banks are given unlimited leeway to bid for these commercial properties. This should not be allowed. I thought Basel rules disallowed it, in that property assets are given 100% risk weight, meaning all property purchases should be funded wholly with bank equity capital. I guess the US hasn’t been following Basel rules if they’re doing this on a major scale there.

Under Basel rules, if it’s a bank affiliate that invests in investment banking or in real estate properties, all their capital will need to be bank capital. Basel rules limit what banks can lend to affiliates as a percentage of their total portfolio, and any loan amount above that percentage gets deducted from the bank’s calculation of its capital. No way around using crediting ability to make unlimited purchases. 

Also, it would appear that banks have greater leeway to keep crediting, even when insolvent, vs. regular folks and companies. The system relies a lot on the regulator, and particularly bank examiners, to keep it honest. There’s enough regulation out there to keep things honest, as long as they’re being followed.

It boggles me how economists purport to be able to calculate the ‘natural rate’ or the ‘equilibrium rate of interest’ in the ‘absence of the capital markets’. Since everything is linked to the capital market, how are they able to compute for the rate without it, and how do they at all know it is the ‘equilibrium’? Furthermore, what is the conceptual significance of a rate of interest in the absence of a capital market?

Personally, I have my own personal ‘natural rate of interest’, but that is personal to me. I’m sure the ‘natural’ rate would be different for you, and different for the next person. Furthermore, the ‘natural’ rate would be different for me tomorrow, and different again next week. It depends on a lot of personal factors that affect how I value whether or not to take out that new loan. Kind of like the risk premium, it’s going to be a different value for everyone, and its value would change as their personal circumstances change. There’s no economy-wide risk premium, and there’s no economy-wide natural rate.  One thing I’d point out is that averaging everyone’s natural rates ends up with people with higher than average natural rates who could misallocate funds (and end up affecting everybody else’s natural rate). As you could tell, I tend to equate the natural rate with risk premium, except the private sector’s risk premia are considered exogenous to any interest rate decisions made by the central bank.#

I realize that inflation targeting by interest rate has worked because it rations capital to businesses whose internal returns meet the hurdle rates set by both the rate and their risk premia.

I’m not sure though that the MMT alternative to rate setting to control inflation, i.e.,more focus on tax policy, rationing, and price controls would have less untoward consequences to those same businesses. But yes, at least having less focus on just moving the interest rate, which greatly affects asset speculation, will tend to decrease direct effects on borrowing-financed asset speculation.

Imagine you, me and Mike are all the inhabitants of Consumer Republic. You cut my and Mike’s hair, I cook for you and him, he entertains the two of us. Yes, we all have a means to earn a living, and money circulates our economy. But when it comes time to buy our car, our furniture, our daily item necessities, we have to buy it outside from Producer Republic.

Producer Republic doesn’t need to buy anything from us, they have their own domestic service providers, and they’re pretty self-sufficient when it comes to producing all their hard goods daily necessities. Meanwhile, all they get from us in return for their goods are tokens that enable them to buy our services, all of which they can provide themselves. What happens if they start hoarding their hard goods and stop accepting our tokens?

This is even more worrisome if Producer Republic prefers to accept someone else’s tokens. How do we get those tokens unless we sell something besides domestic services? And yes, markets for most services have a tendency to be domestic-focused. #

I think government enterprises should mainly be run for the public good. To the extent there are some government enterprises that generate profit should just be icing, but profit should not be a necessary requirement for the government to continue doing the activity if doing it advances a public good.

Profit-making should never be a metric for any government activity, because this takes government focus away from its chief focus, which is to govern. #

Concluding that a nationalized banking system as inherent in MMT is a serious charge, but does explain the diffidence in addressing the counterarguments to the JG, e.g. the buffer stock of failed small businesses, the banking losses that would follow an increase in this buffer stock, or the great capital wastage due to the closing up of businesses, selling off of inventories, etc.

If the government is the sole capitalist in the economy, none of that matters. Only that everyone looking for a job has one.

I add in comments: A lot of MMTers are convinced that there’s nothing wrong with the expansive state they are advocating. They believe that a permanently-fixed JG automatically adjusts its employment rolls up and down with the economy, and it’s as naive as monetarists believing that aggregate demand automatically adjusts up and down with the quantity of money. 

With due respect, the problem is not so much with providing jobs to those unable to find them, but in a JG program that is not localized to where there is rampant unemployment and no history of private sector investment, and in proposing a fixed JG wage that isn’t flexible when private sector employment is already growing. Hence, if JG is not localized to where private sector remains bearish, during the subsequent growth, the fixed JG wage serves as a negotiating ploy by workers in places where there is clustering private investment, so that businesses can only hire at significantly above this level. The more workers a business needs, the higher the clearing level for its wages. And when the economy reaches inflationary levels, the proposed control mechanism is not to flex the JG terms, but to increase taxes, so private sector workers are encouraged to move from private sector back to the JG. Larger companies shed workers, but smaller businesses with tighter cost structures will close. Hence, the JG inflation control mechanism is via a buffer stock of failed small businesses. 

A working JG proposal should be flexible either on the 100% employment guarantee, on the JG wage, or on the duration of the program, depending on the overall economy.  Otherwise, it becomes more than a countercyclical program, but an alternative economy unto itself.

It could just be me who has this perception, but “hiring all ready and willing to work” could easily end up as advocating for the monopoly currency issuer to tilt the playing field and compete with currency-constrained private sector for, if there is an open job offer to everyone, scarce labour resource. And if you’re looking at a low-cost location or basic skill level industry, the $15 fixed wage could very well be the prevailing wage. If you add the JG to labour demand, the local  private sector will need to step up its wage structure. And if this results in a wage spiral during a heating economy in the private sector, does this open JG call for all ready and willing to work get pulled to halt the wage spiral? I’m just trying to understand the nature of what is being proposed. In the same way iron is good for an anemic but bad for someone with hemochromatosis, a permanently fixed JG would be good or bad depending on the state of the economy. I’m merely suggesting this program needs to be localized rather than enforced in aggregate, and be flexible depending on what is going on in the economy. #

What is the mechanism that ensures workers leave the JG job in an expanding economy? What are the ramifications of that mechanism, whatever it is? And why will it halt a wage spiral? What ensures that only crappy jobs are eliminated by the JG? What about when the economy is expanding and the JG is still still permanently there? What other jobs are eliminated? Again, no disagreement that we need a jobs program now. But why continue when the economy is healed?  The proposal is that JG should offer a job to everyone looking. I assume this means it’s guaranteed to anyone anywhere in the economy. Does the mean you can’t choose where your job will be, because the jobs will be localized only where workers are needed by a non-profit? How would JG rolls decrease in size as the economy recovers? Will the government force people to leave the JG? Why is a monetary economy without a JG preposterous? Granted, the current system tends to increase the  gap between rich and poor, but why is the JG the only system that can undo the ills of the current system?

I have a reason for asking the questions I ask. I understand how demand can be created by deficit spending, and how government is the only entity that can do it when the rest of the economy is contracting/hoarding/deleveraging/correcting. I understand the need for a jobs program. I’m trying to connect this with the current MMT proposal of a permanent JG program. When the JG gets the economy to start having its own legs, some companies will start hiring again, some new companies may get started.but there’s a reason MMT claims a JG program can also be a price stability program. Paired with tax and interest rate policy, inflation can be slain without increasing unemployment, by increasing rates and taxes, so companies scale back operations and lay people off, or businesses close, so people go back to the lower paying JG job.

Businesses do not fall by virtue of the boom. They will fail if the government will try to slay any increasing inflation via taxation. This is my assumption: In a JG-less economy in recession, labour demand can be at 80%, while in a booming economy, it will be at 100%.  In a permanently-fixed JG economy, labour demand during recession will be at 100%, while during a boom, it will be at 130%. Inflation-fighting taxation will be a lot harsher in the JG economy with 130% labour demand than in an economy with only 100% labour demand. Government will have to kill more private sector companies when it is trying to get that 30% excess demand back to 100% than when it’s trying to get 100% down to 96%. The most obvious casualties during a boom, when government starts fighting inflation, will likely find it harder to raise funding to even get started before the boom. Why? Because everybody knows it will only take a heating economy before the government sacrifices it for the sake of price stability.

Since a permanently-fixed JG involves a buffer stock of failed small businesses,  banking losses will always follow an increase in this buffer stock due to fighting inflation, and there will be great capital wastage due to the closing up of businesses, selling off of inventories, etc. following this increase.  In short, I’m getting that under a JG, both bankers and private entrepreneurs will be reluctant to start or fund new small businesses. Whatever jobs get created going forward will have to come from big business, or the JG itself. There might be less competition yes, but mainly because of less small businesses. #

***

Prof Mitchell, thanks for this re-exposition on the JG, but could you clarify the mechanism that ensures workers automatically leave the JG job in an expanding economy without pricing out a lot of the smaller businesses who now have to pay a lot higher to attract workers to the private sector?   I ask because as I understand it, you propose the JG to permanently guarantee a job at a set wage to anyone looking for a job. I understand the need for a jobs program now, when the rest of the economy is contracting/hoarding/deleveraging/correcting. But when the JG gets the economy starting, companies will hire again. If more than a sufficient few businesses get started, the economy overheats, and results in higher inflation. We then get to the mechanism, as I currently understand it, that makes MMT claim that a JG program can also be a price stability program. Paired with tax and interest rate policy, inflation can be slain without increasing unemployment, by increasing rates and taxes, so companies scale back operations and lay people off, or businesses close, so more people go back to the lower paying JG job. Am I misunderstanding this, or is there something else in the mechanism I’m still missing? It seems that for permanent JG to work, the private sector has to stay only up to a certain size, beyond this, the government starts squashing them to ensure price stability.

The comparisons of permanent JG and no permanent JG in my mind are: In a JG-less economy in recession, labour demand can be at 80%, while in a booming economy, it will be at 100%.  In a permanently-fixed JG economy, labour demand during recession will be at 100%, while during a boom, it will be at 130%. Inflation-fighting taxation will be a lot harsher in the JG economy with 130% labour demand than in an economy with only 100% labour demand. Government will have to kill more private sector companies when it is trying to get that 30% excess demand back to 100% than when it’s trying to get 100% down to 96%.  It seems the need to kill more businesses will be much lower if the JG was instead preemptively scaled down by government when the economy starts growing. #

………the JG is already proposed to offer the living wage, so all business that can only offer up to the living wage get priced out. I’m assuming here a perfectly competitive economy where small businesses are already priced at the margin.

But let’s take this”one-off” price level boost as a given, and suppose that the economy does brighten up sometime and more businesses want to get started. Since the government is already putting a demand floor to wages, any heating up in the private sector results in demand shooting above 100% for labour. This means significantly more inflation in wages than if the JG had been deliberately ended by government on the upswing. That means the government has to step back in to ensure price stability, which means much of that private sector boom would have to be eliminated. That’s my understanding, and that’s the concern I have yet to see addressed.

As i said, the JG doesnt just price out businesses that pay below living standards, since JG as proposed will offer the living wage, all business that can only offer up to the living wage potentially get priced out. They have to offer more to get people more than indifferent to getting the JG. But that’s not the main concern here.

The JG is not automatically ended by JG workers leaving for the private sector. That kind of magical thinking is no different than believing that increasing money supply automatically increases its velocity. No, the JG ends only by private sector bidding up wages so as to attract workers away from the JG. If this happens by more than a sufficient level, there could be higher inflation than is acceptable. The JG, as presented, will not stand idly by. The JG will try to get prices back to the government’s stated level by getting people back into the lower wage JG, and away from the private sector. How, by all means that wil make it less profitable for business to thrive – taxation, interest rate policy, whatever. This is what I meant when I say a permanently fixed JG economy replaces a buffer stock of unemployed with a buffer stock of failed small businesses. Large companies may weather this price stabilization drive by shedding workers, but smaler businesses will close completely.

In my scenario, this doesn’t kick in before the stabilization, it kicks in anytime the private sector expands by more than a certain level. And it won’t take much private expansion to kick in price expansion. If a permanent JG keeps labour demand at 100%, any private sector increase over a certain point will kick labour demand above 100%, and drive wages and resulting prices higher. The higher above this certain level, the quicker prices will rise, because the only way new firms attract workers is to drive them ever higher above not only what the JG pays, but above what the first few firms to hire are already paying.

Prof. Mitchell, it would be helpful to add here that i’m not against the JG as a countercyclical policy, but using it as a price stability mechanism means that 1) it seeks to keep private sector only up to a certain level, and 2) with onset of inflation, its price stability mandate kills a lot of new private sector growth just when it’s gaining momentum.

As far as I know, there has been no testing of JG on a significant scale, perhaps only in certain areas where there really is no interest from private sector to invest. In which case, we really need a JG of some sort in that area. But it cannot be enacted on a similar scale, and permanently, in urban centers where private sector already tends to congregate. It will only end up squashing the grassroots initiative, and the JG will eventually become an alternative economy unto itself, not a bridge for when private sector is weak.

some guy, when you leave a job yes, they stop paying you. But you only leave a job when someone bids up your wage. When the economy is not in recession, and the government is still there adding to labour demand, there will be more bidding up. The difference therefore “between JG workers leaving for the private sector because there is a boom, and the JG being ended by the government because there is a boom” - is that there will be less bidding up when the government ends JG after average wages rise a certain percentage above JG level.

You’re only thinking of it in the first phase. Yes, in the first phase, the JG increases aggregate demand, and therefore, more businesses will want to start. But after the economy passes “a certain level”, you know that the government will want to get people going back to the JG in the name of price stability. Hence, if you’re one who starts your business once the economy passes this level, you’re going to have to think again, because government will be expected to tighten (not by dropping the JG, but by making it more expensive to maintain a small business). Because the government keeps this floor on labour demand even during the boom times,  when the economy gets booming, the boom acceleration will be much faster than if the government withdraws its additional demand instead. So again, if you’re a businessman, you’ll likely obsess about where this “certain level’ is at. 

Neil:”As things tighten JG starts to anchor wages – because the staff on it are hire ready and provide a substitute for those already employed. So the employed don’t bid wages.”

Why would gainfully employed JG workers be an anchoring substitute FOR private sector workers? I’m assuming here that the JG will pay a living standard. So I see it the other way around - the JG becomes a substitute TO private sector employment. So yes, you’re right. JG eliminates bad jobs with crappy wages due to competition. But during a strong expansion, when more businesses are expanding and therefore hiring, the excess demand the JG maintains for workers makes labour scarcer, and therefore businesses will need to bid up higher to attract people. The more people a firm needs, the higher the labour clearing price for the firm.  The higher the clearing price, either less firms start, or high inflation ensues.

“are you honestly suggesting that you are happy to have real people living in drain pipes in Vegas and dumpster diving just as long as businesses are protected?”

This is a cop out. I’m asking for how JG will be managed when the economy is already booming. Don’t keep bringing back the discussion to the current unemployment. As is said, what I have concerns about is proposing a permanently fixed JG program, not the jG itself.

“If you don’t like the MMT JG as part of a macro policy solution based chiefly on fiscal, what macro policy solution do you suggest and what do you suggest doing about a buffer and price anchor. Or are you one of the people that think that government should just butt out and let the invisible hand of the market take its course? There are always trade offs among different economic alternatives. Let’s tear and compare solutions.”

Tom, the stock I could think of using as buffer is the JG itself. In times of higher inflation, the JG is what adjusts, either in price (wage) or quantity of its workers. During a private sector expansion over-all wages don’t rise as fast, and hence, the boom can probably stay for longer, and the fiscal tightening needed to contain it not as harsh. I don’t have suggestions on price anchor, why change what we use now. Call me neoliberal if that’s what this makes me to you, but the permanently fixed JG has a tradeoff, as you acknowledge, and the tradeoff can just be as damaging economically as a buffer stock of unemployed. Less people may venture into private business creation and may end up relying more on government for many things. i’m not new to blogging and you can check that i’m not ‘one of the people that think that government should just butt out’, but i’m not one to go the other extreme. I will be persuaded otherwise if my notion of the JG as having a buffer stock of many failed businesses is proven wrong, but i remain unconvinced of arguments otherwise.

***

Tom, yes, you’re correct about my position so far, unless I can be proven wrong on the permanent JG having a buffer stock of failed businesses. Yes, we’ve discussed this before and I know from our results there is an acceptable middle ground, that is practical both politically and pragmatically, in terms of having a JG and not destroying incentive for private initiative in the process. 

People like Neil also need to get over it about the permanent JG as panacea to solving all unemployment. 96%, 98%, 100%, whatever, is guaranteeing a job to the last 2% unemployable, whatever the overall economic condition, worth making the economy less progressive for the other 98%? If there’s a JG during a recession, then  everyone who can hold a job should be able to get a job. But when the private sector is expanding, then  the JG should be wound down as a matter of policy, not merely as a passive result of people leaving for higher private sector wages. 

Keeping  the JG in such an expansionary environment risks the JG becoming a negotiating ploy for smart workers who know how to use the system, to extract higher wages than they can otherwise. And remember that we’re already talking about a JG program that pays the living wage, so the STARTING POINT for the private sector is to offer higher than this living wage. This means there’s less room for the private sector expansion before it turns into an inflationary environment that would then need to be curtailed by government.

“Look at the inflation level after the war, and especially in countries that maintained some sort of buffer stock employment, like Japan, Austria, Norway, and Switzerland. Not only did these countries have full employment – they did not have to pay for with it by small business failures”

some guy, There can be several reasons if you are right in your assertion that these economies do not pay with small business failures.
1. Privately owned business growth never grew too fast, or beyond a certain percentage of the economy, so the government has never had to slow it down in the name of price stability.
2. The government simply mandates the transfer of people to the JG and never resorts to increased taxation or interest rates to slow down the private sector
3. The government indirectly supports the businesses adversely affected by increased taxation, so while it incentivizes the workers to leave the private sector, it does not cause extreme hardship on the business owner.
I don’t think no. 2 or 3 are part of the proposed JG mechanism, and no. 3 can be gamed.

Without a JG, escalating inflation will be killed by choking off demand from highly indebted enterprises, to discourage overbidding due to borrowing.

With a JG, escalating inflation will be killed by getting more people back to the JG. Because that’s what the JG base case is for. 

Without a JG, inflation will creep up from private sector taking on more risks and more debt.

With a JG, inflation creeps up from people with guaranteed fallback jobs asking higher wages and spending more.

Without a JG, the first businesses to fall off when government starts dampening inflation are the ones who took on most debt and can no longer service higher cost debt, regardless whether they create more jobs out of the process.

With a JG, the first businesses to fall off when government starts dampening inflation are those that employ the most number of basic skill level employees, regardless of whether they took on more debt.

The presence of jG is a game changer because it changes the mindset of everyone, from employees, business owners, to government policymakers. It changes focus from debt to number of privately-employed. It changes levers from a buffer stock of unemployed to a buffer stock of failed small businesses. #

If there’s no transmission mechanism, there’s no credible economic causation.#

I have always had the notion that when there is a lot of opacity, i.e., too little trust, people herd goats. It is in societies where people have a lots of trust, and know that laws and institutions will function the way they expect, where finance and capital markets develop.

I guess there are examples that seem to confirm the reverse, but overall, I think increasing opacity is a recipe for less finance in the future.

commented at Interfluidity