Another good overview of MMT - MMT 101

Pragmatic Capitalism has picked up the baton by the look of it.

Their article on MMT is well worth a read.

The failure of Quantitative Easing in a nutshell

Commenting on Japan

"The central bank’s implementation of QE at a time of zero interest rates was similar to a shopkeeper who, unable to sell more than 100 apples a day at $100 each, tries stocking the shelves with 1,000 apples, and when that has no effect, adds another 1,000.  As long as the price remains the same, there is no reason consumer behavior should change–sales will remain stuck at about 100 even if the shopkeeper puts 3,000 apples on display.  This is essentially the story of QE, which not only failed to bring about economic recovery, but also failed to stop asset prices from falling well into 2003."

It's either madness or a very severe case of Cognitive Dissonance for this policy to be even on the table anywhere.

Flat Rate VAT gotcha with Xero

If, like me, you're using the Xero accounting system to look after your books and you're on, or thinking about, the UK Flat Rate VAT scheme then I have some good news and bad news for you.

The good news is that Xero provides primary support for the Flat Rate VAT scheme in its VAT system - which is at least is better than nothing.

The bad news is that the setup is a bit of a hack and it doesn't do it properly. Specifically it doesn't set the VAT rate correctly on Revenue accounts.

The Flat Rate VAT scheme requires that you apply the percentage to all your turnover - including that which would normally be VAT exempt.

So if you have Interest Income from your bank, or other income that would normally be VAT exempt (such as Property income within a company) then the Xero Flat Rate VAT report will be wrong by default. What you have to do is go into the Chart of Accounts and manually change them from No Vat to the correct current VAT rate.

The line I got from Xero was "Where a business is becoming VAT Registered and moves on to the Flat Rate Scheme we'd recommend they ask advice from their accountant to help them set up the default VAT rates for accounts within their Chart of Accounts.". Which is frankly a slope shoulders excuse for not doing the job properly.

The solution to the European debt crisis?

Modern Monetary Theory (MMT) and neo-chartalism point out that essentially money is debt. The currency issuer (usually the state) issues a 'promise' in return for real goods and services from the economy. That's the reason it still says 'I promise to pay the bearer...' on the front of a twenty pound note.

So I chuckle when I hear about how Ireland and Greece have to appease the terrible market demon in case they demand a high interest rate on their bonds and therefore they have to cripple their economies with terrible measures.

And the reason is that MMT shows there is a simple solution. The Irish bank can issue debt, but also the Irish government can tax -  both independently of the European Central Bank. (It's a bit like having the Bank of Scotland able to tax the Scots as well as print those decorative fivers).

Since money is debt, all you need to do is turn this debt into money. And you do that by declaring that you will accept any Irish bond as settlement of Irish government taxes and charges at face value.

That immediately puts a floor underneath the Irish debt market and ensures that there is always a demand for the stuff - in both the primary and secondary markets. Essentially you have created a parallel currency usable only in Ireland.

And of course since taxation destroys money it would eliminate the bond reducing the stock of outstanding bonds.

No doubt there are rules against this in the EMU, but then there were rules against the Greek situation and they let them get away with it. The solution for Greece and the Greeks is the same, although they'll have to remember to collect the tax this time...

Update

Of course Professor Bill Mitchell has already blogged about this - referring to California which has the same issue.

• California IOUs are not currency … but they could be!
• My letter to the Governor (arnie)

Godwins Law - economic collary

It looks to me that there is a economic collary to Godwin's Law arising:

"As an online economic discussion grows longer, the probability of a comparison involving Zimbabwe or the Weimar Republic approaches one."

There are good posts that explain the situation, if you want to know more about Zimbabwe or Weimar.

Otherwise, I'm afraid you just lost the debate.

An unsustainable economy?

An insight from Tom Hickey which deserves a wider audience.


"Institutionally, the global economy is being run by the wealthy and powerful chiefly for their interests, with trickle down or hand outs for the rest. Labor arbitrage is keeping wages (incomes) low. The wealthy think this is great because it increases profits and keeps goods inflation in check. However, this lowering of income results in constriction of demand, which in turn results in overcapacity. To make up for this, the game plan was to substitute debt for income, and that blew up since it was unsustainable. Now everyone is trying to export their way out, and this is unsustainable, too."


Time for 'bubble up' to replace 'trickle down'? I have no problem with people getting rich, but surely that should be a reward for pulling the rest of society out of relative poverty, not putting them in it.

'Functional Finance' and budget surpluses

Functional Finance is another name for Modern Monetary Theory (MMT). The paper compares the approach with 'sound finance', which is the classical view of money.

It's worth a read in its own right, however the summary is extracted below.

From FUNCTIONAL FINANCE AND US GOVERNMENT BUDGET SURPLUSES IN THE NEW MILLENNIUM by L Randall Wray

All modern governments spend by emitting High Powered Money (HPM), normally by having the Treasury issue a check. Taxes are never necessary to “finance” spending, nor, indeed, is it possible for them to do so. The government must first provide the HPM before it can receive HPM in tax payment. Thus, taxes serve a different purpose. The primary function of taxes is to create a demand for HPM—for why would the private sector provide goods and services to government in return for HPM unless it needed HPM for taxes? Of course, we recognize that HPM can be used for many things other than tax payment, but these other uses must be derivative. Taxes also serve another useful purpose, as Lerner emphasized: they remove disposable income and destroy private sector net wealth.

Far from recommending perpetual deficits come what may, the functional finance approach recognizes that the private sector can become overheated, which is remedied through rising taxes to drain HPM and disposable income. Deficits can be too large, but also too small. We normally expect that a deficit will be required, however, for the simple reason that the private sector prefers to accumulate some net wealth in the form of HPM and Treasury bonds. For this reason, the government will usually be required to run a deficit, which means that its outstanding debt stock will grow over time. This is nothing to be feared. The government never faces a “financial constraint”, so long as its offers of HPM for goods and services are taken. Bond sales come after government spending, so, like taxes, cannot possibly be required to “finance” spending. Rather, bond sales are used to drain excess HPM to maintain a positive overnight interest rate. Whether that interest rate target is high or low, it must be set discretionarily by the central bank and then maintained by ensuring banks have the desired level of reserves. While taxes and bond sales both remove HPM from the economy, taxes drain income and wealth while bond sales merely offer an interest-earning alternative to non-interest-earning HPM.

The functional finance approach concludes that there is no magic deficit-to-GDP ratio or debt-to-GDP ratio that ought to be maintained or avoided. It also demonstrates that there is no sense in which budget surpluses in one year can be “locked away and saved” for spending in future years. And it leaves one perplexed when faced with the argument advanced by Nobel winners that running surpluses today—hence, destroying private sector income and wealth—is the best way to encourage investment in order to enhance living standards into the future.