Monetary Financing: Central Banks should directly fund government expenses during the crisis

The only reason for NOT doing it, is that foreign investors don't want the value of their investments reduced. But since all countries are in the same boat, all can do it without much effect on exchange rates.

- Peter Myers

Date: March 27, 2020; update July 18, 2022

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Plandemic 1 and 2. Judy Mikovits on Sars-2, and the role of Wuhan Institute of Virology: Mikovits-Plandemic.html

Coronavirus Remedies - Chloroquine and Herbal Medicines: coronavirus-remedies.html . Bureaucrats Fiddle while Rome burns

More on Finance at tax-havens.html .

(1) WaPo publishes Michael Hudson call for Debt Jubilee as Only Way to Avoid a Depression
(2) Nicholas Shaxson: Tax havens are the most important single reason why poor people and poor countries stay poor
(3) Fed helicopter has to go to the people, not Wall St - Ellen Brown
(4) Massive Government Spending without incurring a Debt Burden
(5) Governments must act now to avert a Depression - Martin Wolf in the Financial Times
(6) Helicopter money: Central Banks should directly fund government deficits - Martin Sandbu in the Financial Times
(7) Debt Forgiveness for Poor Countries
(8 Debt Forgiveness needed to save Millions in poor countries
(9) The State must act as a Shock Absorber - Ambrose Evans-Pritchard
(10) Dr H. C. Coombs on Central Banking, Wartime Finance, and Monetary Financing in Australia
(11) Government expenditure to meet Covid-19 crisis should come from Monetary Financing, not taxation or debt
(12) Michael Hudson: The Use and Abuse of MMT
(13) Michael Hudson and Steve take issue with Warren Mosler on Trade and Foreign Debt

(1) WaPo publishes Michael Hudson call for Debt Jubilee as Only Way to Avoid a Depression

This is the first time, as far as I know, that the WaPo has published an article by renegade economist Michael Hudson - Peter M.

Hudson: A Debt Jubilee is the Only Way to Avoid a Depression; coronavirus outbreak mind-expansion exercise, making hitherto unthinkable solutions thinkable

A debt jubilee is the only way to avoid a depression

By Michael Hudson

March 22, 2020 at 7:18 a.m. GMT+10

Michael Hudson, author of "É and forgive them their debts" and "Killing the Host," is president of the Institute for the Study of Long-Term Economic Trends and is distinguished research professor of economics at the University of Missouri at Kansas City.

Even before the novel coronavirus appeared, many American families were falling behind on student loans, auto loans, credit cards and other payments. America's debt overhead was pricing its labor and industry out of world markets. A debt crisis was inevitable eventually, but covid-19 has made it immediate.

Massive social distancing, with its accompanying job losses, stock dives and huge bailouts to corporations, raises the threat of a depression. But it doesn't have to be this way. History offers us another alternative in such situations: a debt jubilee. This slate-cleaning, balance-restoring step recognizes the fundamental truth that when debts grow too large to be paid without reducing debtors to poverty, the way to hold society together and restore balance is simply to cancel the bad debts.

The word "Jubilee" comes from the Hebrew word for "trumpet" - yobel. In Mosaic Law, it was blown every 50 years to signal the Year of the Lord, in which personal debts were to be canceled. The alternative, the prophet Isaiah warned, was for smallholders to forfeit their lands to creditors: "Woe to you who add house to house and join field to field till no space is left and you live alone in the land." When Jesus delivered his first sermon, the Gospel of Luke describes him as unrolling the scroll of Isaiah and announcing that he had come to proclaim the Year of the Lord, the Jubilee Year.

Until recently, historians doubted that a debt jubilee would have been possible in practice, or that such proclamations could have been enforced. But Assyriologists have found that from the beginning of recorded history in the Near East, it was normal for new rulers to proclaim a debt amnesty upon taking the throne. Instead of blowing a trumpet, the ruler "raised the sacred torch" to signal the amnesty.

It is now understood that these rulers were not being utopian or idealistic in forgiving debts. The alternative would have been for debtors to fall into bondage. Kingdoms would have lost their labor force, since so many would be working off debts to their creditors. Many debtors would have run away (much as Greeks emigrated en masse after their recent debt crisis), and communities would have been prone to attack from without.

The parallels to the current moment are notable. The U.S. economy has polarized sharply since the 2008 crash. For far too many, their debts leave little income available for consumer spending or spending in the national interest. In a crashing economy, any demand that newly massive debts be paid to a financial class that has already absorbed most of the wealth gained since 2008 will only split our society further.

This has happened before in recent history - after World War I, the burden of war debts and reparations bankrupted Germany, contributing to the global financial collapse of 1929-1931. Most of Germany was insolvent, and its politics polarized between the Nazis and communists. We all know how that ended.

America's 2008 bank crash offered a great opportunity to write down the often fraudulent junk mortgages that burdened many lower-income families, especially minorities. But this was not done, and millions of American families were evicted. The way to restore normalcy today is a debt write-down. The debts in deepest arrears and most likely to default are student debts, medical debts, general consumer debts and purely speculative debts. They block spending on goods and services, shrinking the "real" economy. A write-down would be pragmatic, not merely moral sympathy with the less affluent.

In fact, it could create what the Germans called an "Economic Miracle" - their own modern debt jubilee in 1948, the currency reform administered by the Allied Powers. When the Deutsche Mark was introduced, replacing the Reichsmark, 90 percent of government and private debt was wiped out. Germany emerged as an almost debt-free country, with low costs of production that jump-started its modern economy.

Critics warn of a creditor collapse and ruinous costs to government. But if the U.S. government can finance $4.5 trillion in quantitative easing, it can absorb the cost of forgoing student and other debt. And for private lenders, only bad loans need be wiped out. Much of what would be written off are accruals, late charges and penalties on loans gone bad. It actually subsidizes bad lending to leave them in place.

In the past, the politically powerful financial sector has blocked a write-down. Until now, the basic ethic of most of us has been that debts must be repaid. But it is time to recognize that most debts now cannot be paid - through no real fault of the debtors in the face of today's economic disaster.

The coronavirus outbreak is serving as a mind-expansion exercise, making hitherto unthinkable solutions thinkable. Debts that can't be paid won't be. A debt jubilee may be the best way out.

Michael Hudson: A Debt Jubilee is the Only Way to Avoid a Depression

Posted on March 22, 2020 by Jerri-Lynn Scofield

(2) Nicholas Shaxson: Tax havens are the most important single reason why poor people and poor countries stay poor

Treasure Islands: Tax Havens and the Men Who Stole the World

by Nicholas Shaxson

"From the start, the Mont Pelerin Society had strong links to the City of London"

Tax havens are the most important single reason why poor people and poor countries stay poor. They lie at the very heart of the global economy, with over half the world trade processed through them. They have been instrumental in nearly every major economic event, in every big financial scandal, and in every financial crisis since the 1970s, including the latest global economic downturn.

Without understanding tax havens we will never properly understand the economic history of the modern world.

Nobody disagrees that Britain sits, spider-like, at the centre of a vast international web of tax havens, hoovering up trillions of dollars' worth of business and capital from around the globe and funnelling it up to the City of London.

Despite some vigorous efforts, nobody has come close to overturning the research or analysis showing the sheer scale of the harm wreaked on the world by these elitist, criminal-infested libertarian paradises; these silent battering rams of tax-cutting and financial deregulation.

(3) Fed helicopter has to go to the people, not Wall St - Ellen Brown

Socialism at Its Finest after Fed's Bazooka Fails

Posted on March 21, 2020 by Ellen Brown

In what is being called the worst financial crisis since 1929, the US stock market has lost a third of its value in the space of a month, wiping out all of its gains of the last three years. When the Federal Reserve tried to ride to the rescue, it only succeeded in making matters worse. The government then pulled out all the stops. To our staunchly capitalist leaders, socialism is suddenly looking good.

The financial crisis began in late February, when the World Health Organization announced that it was time to prepare for a global pandemic. The Russia-Saudi oil price war added fuel to the flames, causing all three Wall Street indices to fall more than 7 percent on March 9. It was called Black Monday, the worst drop since the Great Recession in 2008; but it would get worse.

On March 12, the Fed announced new capital injections totaling an unprecedented $1.5 trillion in the repo market, where banks now borrow to stay afloat. The market responded by driving stocks 8% lower.

On Sunday, March 15, the Fed emptied its bazooka by lowering the fed funds rate nearly to zero and announcing that it would be purchasing $700 billion in assets, including federal securities of all maturities, restarting its quantitative easing program. It also eliminated bank reserve requirements and slashed Interest on Excess Reserves (the interest it pays to banks for parking their cash at the Fed) to 0.10%. The result was to cause the stock market to open on Monday nearly 10% lower. Rather than projecting confidence, the Fed's measures were generating panic.

As financial analyst George Gammon observes, the Fed's massive $1.5 trillion in expanded repo operations had few takers. Why? He says the shortage in the repo market was not in "liquidity" (money available to lend) but in "pristine collateral" (the securities that must be put up for the loans). Pristine collateral consists mainly of short-term Treasury bills. The Fed can inject as much liquidity as it likes, but it cannot create T-bills, something only the Treasury can do. That means the government (which is already $23 trillion in debt) must add yet more debt to its balance sheet in order to rescue the repo market that now funds the banks.

The Fed's tools alone are obviously incapable of stemming the bloodletting from the forced shutdown of businesses across the country. Fed chair Jerome Powell admitted as much at his March 15 press conference, stating, "[W]e don't have the tools to reach individuals and particularly small businesses and other businesses and people who may be out of work É. We do think fiscal response is critical." "Fiscal policy" means the administration and Congress must step up to the plate.

What about using the Fed's "nuclear option" ­ a "helicopter drop" of money to support people directly? A March 16 article in Axios quoted former Fed senior economist Claudia Sahm:

The political ramifications of the Fed essentially printing money and giving it to people ­ there are ways to do it, but the problem is if the Fed does this and Congress still has not passed anything É that would mean the Fed has stepped in and done something that Congress didn't want to do. If they did helicopter money without congressional approval, Congress could, and rightly so, end the Fed.

The government must act first, before the Fed can use its money-printing machine to benefit the people and the economy directly.

The Fed, Congress and the Administration Need to Work as a Team

On March 13, President Trump did act, declaring a national emergency that opened access to as much as $50 billion "for states and territories and localities in our shared fight against this disease." The Dow Jones Industrial Average responded by ending the day up nearly 2,000 points, or 9.4 percent.

The same day, Democratic presidential candidate Rep. Tulsi Gabbard proposed a universal basic income of $1,000 per month for every American for the duration of the crisis. She said, "Too much attention has been focused here in Washington on bailing out Wall Street banks and corporate industries as people are making the same old tired argument of how trickle-down economics will eventually help the American people." Meanwhile the American taxpayer "gets left holding the bag, struggling and getting no help during a time of crisis." H.R. 897, her bill for an emergency UBI, she said was the most simple, direct form of assistance to help weather the storm.

Democratic presidential candidate Andrew Yang, who made a universal basic income the basis of his platform, would go further and continue the monthly payments after the coronavirus threat was over.

CNBC financial analyst Jim Cramer also had expansive ideas. He said on March 12:

How about a $500 billion Treasury issue É [at] almost no interest cost, to make sure that when people are sick they don't have to go to work, and companies that are in trouble because of that can still make their payroll. How about a credit line backstopped by É the Federal Reserve. I know the Federal Reserve is going to say they can't do that, Congress is going to say they can't do that, everyone is going to say what they said in 2007, they can't do that, they can't do that - until they did it. É [W]e heard all that in 2007 and they ended up doing everything.

And that looks like what will happen this time around. On March 18, as the stock market continued to plummet, the administration released an outline for a $1 trillion stimulus bill, including $500 billion in direct payments to Americans, along with bailouts and loans for the airline industry, small businesses, and other "critical" sectors of the U.S. economy.

But the details needed to be hammered out, and even that whopping package buoyed the markets only briefly. In the bond market, yields shot up and values went down, on fears that the flood of government bonds needed to finance this giant stimulus would cause bond values to plummet and the government's funding costs to shoot up.

Extraordinary Measures for Extraordinary Times

There is a way around that problem. To avoid driving the federal debt into the stratosphere, the Treasury could borrow directly from the central bank interest-free, with an agreement that the debt would remain on the Fed's books indefinitely. That approach has been tested in Japan, where it has not generated price inflation as austerity hawks have insisted it would. The Bank of Japan has purchased nearly 50 percent of the government's debt, yet consumer price inflation remains below the BOJ's 2 percent target.

Virtually all money today is simply "monetized" debt ­ debt turned by banks into something that can be spent in the marketplace ­ and the ultimate backstop for this sleight of hand is the central bank and the government, which means the taxpayers. To equalize our very unequal system, the central bank and the government need to work together. The Fed needs to be "de-privatized" ­ turned into a public utility that serves the taxpayers and the economy. As Eric Striker observed in The Unz Review on March 13:

The US government's lack of direct control over the nation's central bank and the plutocratic nature of our weak state means that common sense solutions are off the table. Why doesn't the state buy up majority shares in large corporations (or outright nationalize them, as happened with the short successful experiment with General Motors in 2009) and use the $1.5 trillion at low interest to develop American industrial independence?

Interestingly, that too could be on the table in these extraordinary times. Bloomberg reported on March 19 that Larry Kudlow, the White House's top economic adviser, says the administration may ask for an equity stake (an ownership interest) in corporations that want coronavirus aid from taxpayers. Kudlow noted that when this was done with General Motors in 2008, it turned out to be a good deal for the federal government.

While traditionally considered "anti-capitalist," the government taking an ownership interest in bailed out companies may be the only way the proposed bailouts will get approval. There is little sentiment today for the sort of no-strings-attached "socialism for the rich" that the taxpayers shouldered in 2008 without reaping the benefits. Bloomberg quotes Jeffrey Gundlach, chief executive officer at DoubleLine Capital:

I don't think government bailouts of over-leveraged companies that got over-leveraged by share buybacks at all-time highs, enriching executives and hedge fund investors, will sit well with the American people.

The Bloomberg article concludes with a quote from another chief investment officer, Chris Zaccarelli of Independent Advisor Alliance:

I like how [the administration is] thinking a little bit outside of the box. Something big and bold like that could potentially be what turns the market around É.

Long-term Solutions

Rather than just a stake in the profits, the government could think a bit further outside the box and turn insolvent airlines, oil companies, and banks into public utilities. It could require them to serve the people and the economy rather than just maximizing the short-term profits of their shareholders.

Concerning the banks, the Fed could do as the People's Bank of China is doing in this crisis. The state-run PBoC is giving regional banks $79 billion in stimulus money, but it is on condition that they lend it to small and medium enterprises and forgive late payments, so that economic damage is reversed and production can recover quickly.

Another model worth studying is that of Germany, which also has a strong public banking system. As part of a package for coronavirus aid that the German finance minister calls its "big bazooka," the government is offering immediate access to loans up to ¤500,000 for small businesses through its public bank, the KfW (Kreditanstalt fuer Wiederaufbau), administered through the publicly-owned Sparkassen and other local banks. The loans are being made available at an interest rate as low as 1%, with interest only for the first two years.

Contrast that to the aid package President Trump announced last week, which will authorize the Small Business Administration to offer business loans. After a lengthy process of approval by state authorities, the loans can be obtained at an interest rate of 3.75% ­ nearly 4 times the KfW rate. German and Chinese public banks are able to offer rock-bottom interest rates because they have cut out private middlemen and are not driven by the insatiable demand for shareholder profits. They can lend countercyclically to avoid booms and busts while supporting the economy as a whole.

The U.S., too, could create a network of publicly-owned banks backed by the central bank, which could lend into their communities at below-market rates. And this is the time to do it. Times of crisis are when change happens. When the Covid-19 scare has passed, we will have a different government, a different economy and a different financial system. We need to make sure that what we get is an upgrade that works for everyone.

(4) Massive Government Spending without incurring a Debt Burden

Subject: [BULK] Is coronavirus leading to a revolution of the system? From: "Stan, Positive Money EU" <>

An incredible amount has happened in the last few weeks and changed all our lives quite dramatically. Just like most people the Positive Money Europe team is working from home, however, we have never been busier!

Covid-19 has pushed politicians and central bankers into making decisions that would've been unthinkable just a few weeks ago:

Governments have put hundreds of billions on the table to support companies and SMEs. How can they suddenly afford to spend all that money after years telling of us we should tighten our belts to reduce deficits?

One reason for this is they have the support from central banks. In an unprecedented move, the ECB has announced a new 750 billions euros of quantitative easing.

Meanwhile, EU leaders are discussing the possibility of joining forces by issuing common European debt ­ a concept known as « Eurobonds » which used to be a taboo in the EU.

All these measures were unthinkable even a few weeks ago and strongly contradict past decades of mainstream neoliberal policy making in Europe. We've been told for years that we must tighten our belts to reduce the deficit; and now they want to spend like crazy.

Has economic orthodoxy suddenly been turned on its head?

But let's not fool ourselves: most of this money will not end up in the hands of ordinary people, and, after governments spend this amount of money, they will find themselves left with a tremendous pile of debt.

Unless we truly shift the economic paradigm once and for all, then the deadly mentality of austerity is bound to return with a vengeance afterwards.

To stop this from happening, European governments and institutions should implement alternative measures so that they can tackle the economic fallout of Covid-19 whilst avoiding a massive unsustainable debt burden in the future.

Helicopter Money is the best of these key measures as it would give the right boost to the eurozone economy in the long term, when the current health crisis is over. Why? Because it puts money directly where it is most needed and can be easily spent from: people's pockets. And it does it without increasing the debt burden!

Not acting now would dramatically worsen the recession we've already been thrown into and likely result in an economic crisis the likes of which Europe has not experienced since 2008. That's why Positive Money Europe will fight tooth and nail in the coming weeks to push the EU into taking the kind of transformational measures we desperately need.

We will continue releasing articles as the situation develops so please do keep an eye on our blog and follow us on Facebook and Twitter to stay up-to-date.

Other great reads:

The virus is an economic emergency too and governments must act now to avert a depression, warns Martin Wolf, chief economics commentator at the Financial Times

Coronavirus has shattered the myth that the economy must come first, writes Adam Tooze in The Guardian

The ECB Must Finance COVID-19 Deficits, writes Paul De Grauwe in Project Syndicate

Coronavirus: the moment for helicopter money - a great article by Martin Sandbu in the Financial Times

The ECB's Pandemic Emergency Purchase Programme is a big deal, suggests Jens van 't Klooster

COVID-19 Is an Opportunity for Europe, argues Lucrezia Reichlin, a former director of research at the European Central Bank

Helicopter Money "would provide strong stimulus without increasing the public debt burden", writes Adair Turner

Higher public debt levels will become an economic feature and be accompanied by private debt cancellation, Mario Draghi, former ECB President writes in the FT

Italy will be Europe's canary in the coalmine for the post-Covid economy, opinion from Marchel Alexandrovich, The Guardian

"Though the ECB is rightly aiming at addressing the coronavirus crisis, there is a risk that fossil fuels free-ride on those measures gain even cheaper financing to maintain their activities," our Stan Jourdan told Climate Home News

Quote of the month

"Another option would be for fiscal support to be financed by a permanent increase in money supply, created by central banks, which could substitute for debt-financed programmes. This approach should not raise fears of inflation as long as growth remains below potential, and central bank independence is respected. And it would reassure markets about the capacity of governments to support the economy."

Laurence Boone, Chief Economist at the OECD

Stay healthy and safe, and we will keep you informed!

Stan Jourdan

Executive Director, Positive Money Europe

(5) Governments must act now to avert a Depression - Martin Wolf in the Financial Times

The virus is an economic emergency too

As borrowers and spenders of last resort, governments must act now to avert a depression

Martin Wolf

March 17, 2020

The pandemic was not unexpected. But reality always differs from expectations. This is not just a threat to health. It may also be a bigger economic threat than the financial crisis of 2008-09. Dealing with it will require strong and intelligent leadership. Central banks have made a good start. The onus now falls on governments. No event better demonstrates why a quality administrative state, led by people able to differentiate experts from charlatans, is so vital to the public.

A central question is how deep and long the health emergency will be. One hope is that locking down countries (as in Spain) or parts of countries (as in China) will eliminate the virus. Yet, even if this proved to be true in some places, it will clearly not be true everywhere. An opposite extreme is that up to 80 per cent of the world's population could be infected. At a possible mortality rate of 1 per cent, that could mean 60m additional deaths, equivalent to the second world war. This calamity would probably also take time: the Spanish flu of 1918 came in three waves, over a year. Yet it is more likely that this ends up in the middle: the death rate will be lower, but the disease will also not disappear.

If so, the world might not return to pre-crisis behaviour until well into 2021. Younger people might behave normally, sooner. But older ones will not. Moreover, even if a few countries do eliminate the disease, quarantines will be maintained against others. In sum, the impact of the coronavirus is likely to be severe and prolonged. At the very least, policymakers must plan on that.

The pandemic has already squeezed both supply and demand. Lockdowns halt essential supplies and a wide range of purchases, especially entertainment and travel. The result will be a sharp fall in activity in the first half of this year.

Above all, a depression threatens. Many households and businesses are likely to run out of money soon. Even in wealthy countries, a large proportion of the population has next to no cash reserves. The private sector - above all the non-financial corporate sector - has also gorged itself on indebtedness.

So consumer demand will weaken even more. Businesses will go bankrupt. People will refuse to sell to businesses deemed likely to go bankrupt, unless they can offer payment in advance. Doubt about the health of the financial system will re-emerge. There is a risk of a collapse in demand and economic activity that goes far beyond the direct impact of the health emergency.

It will also be particularly hard to contain the spread of disease in countries with limited social insurance and weak social control. This will affect the US above all: many sick people will refuse to go to hospital and will also be forced to work. Social insurance is efficient.

As lenders of last resort, the central banks must ensure liquidity by keeping the cost of borrowing low and financing credit supply, both directly and indirectly. But central banks cannot deliver solvency. They cannot underpin household incomes or insure businesses against this collapse in demand. As borrowers and spenders of last resort, governments can and must do so.

Long-term government debt is so cheap that they need feel no fear of doing so, either: Germany, Japan, France and the UK are now able to borrow for 30 years at a nominal rate of less than 1 per cent, Canada at 1.3 per cent and the US at 1.4 per cent.

This, then, is a time-limited crisis, with economic and health consequences that governments must manage. Domestically, the bare minimum is generous sick pay and unemployment insurance, including to freelance workers, for the period of the crisis. If this is too difficult, governments can just send everybody a cheque.

Yet even this will not be enough if the costs of mass bankruptcy and a depression are to be avoided. Emmanuel Saez and Gabriel Zucman of Berkeley argue that: "The most direct way to provide ... insurance is to have the government act as a buyer of last resort. If the government fully replaces the demand that evaporates, each business can keep paying its workers and maintain its capital stock, as if it was operating ... as usual. Anatole Kaletsky of Gavekal has recommended a similar response.

Providing such relief will not create moral hazard. Being helped through a once-in-a-century pandemic will hardly encourage egregious irresponsibility. If businesses have borrowed too much, they will still go bankrupt, in the end.

This plan is far better than loans and loan guarantees, as proposed by the German government. Businesses will take up loans only to ensure their survival through the crisis, not necessarily to pay their workers. Moreover, loans will have to be repaid, creating a burden when the pandemic ends. In this proposed programme, however, payments can be made conditional on keeping workers. The programme will also end naturally, with the pandemic itself. Governments can then impose additional taxes to recoup their outlays.

Maintaining incomes and minimising the long-term costs of collapsing businesses are essential. In addition, within the eurozone it will be essential to help governments whose ability to borrow is limited. Globally, vulnerable emerging countries will also need help managing the health and economic crises. It will be vital, too, to roll back the zero-sum nationalism of today's policies, which will make it difficult to rebuild a co-operative and healthy global order.

This too shall pass. But it will not do so tomorrow. The pandemic risks creating a depression. Salus rei publicae suprema lex (the safety of the republic is the supreme law). In war, governments spend freely. Now, too, they must mobilise their resources to prevent a disaster. Think big. Act now. Together.

Follow Martin Wolf with myFT and on Twitter

(6) Helicopter money: Central Banks should directly fund government deficits - Martin Sandbu in the Financial Times

Coronavirus: the moment for helicopter money

Economic taboos are being broken to finance the huge government deficits needed to fight the crisis

Martin Sandbu in London

March 20, 2020

The Covid-19 pandemic that is ravaging lives and livelihoods around the world has also claimed a more subtle victim: conventional taboos in economic policy thinking are swiftly being swept away.

Economic proposals that a week ago looked radical now appear timid. Fiscal packages bigger than anything seen in years are considered too small only a few days after they were announced.

Robert Chote, the head of the watchdog charged with monitoring UK fiscal discipline, said this week the government should not worry about short-term deficits because it was facing something like a "wartime situation".

"This is not a time to be squeamish about one-off additions to the public debt," he told MPs.

There has been a "recognition that this shock is absolutely different" from previous crises, says Beatrice Weder di Mauro, an economics professor and president of the Centre for Economic Policy Research. "Things are moving very fast, and minds are too."

The result is that a series of policy ideas which were once the province of a small number of mavericks and limited to purely theoretical discussions are taking centre stage.

The most important of those unorthodox approaches is the "helicopter drop" - printing money and handing it out to everyone, with no strings attached.

Ms Weder di Mauro has co-edited two ebooks on the economics of the virus crisis in as many weeks. She observes that the mainstream of economics has moved very fast towards the view that the best policy would assure that "nobody should lose their job or their income because of the virus".

Even supporters of this once unthinkable approach acknowledge it will be expensive. "We have to be willing to accept fiscal deficits on the scale of 2009," says Adair Turner, the former head of the UK's Financial Services Authority.

Given the need for large fiscal deficits, the debate about helicopter money really involves two separate policy questions, he says. The first is how to finance the stimulus - should the central bank pay for it through direct monetary financing, effectively printing money, or should governments borrow in the usual way? The second is how the money is then distributed, whether through cash handouts or other government spending.

As it is, economists and policymakers are warming to radical answers to both questions.

Central banks have not yet explicitly offered to monetise deficits, but they have opened the taps on big new asset purchase programmes to buy the glut of bonds governments will soon issue. In the eurozone, there are live discussions about issuing a joint "corona bond" or ramping up credit lines from the European Stability Mechanism, the monetary union's rescue fund for sovereigns, in the expectation that the European Central Bank would keep the cost of such borrowing low.

Some economists now call openly for explicit helicopter money in the sense that central banks should directly fund government deficits. "I do think the time is right for monetary finance," says Lord Turner. "There would be a clarity of assuring people that there is no limit on the money available."

Monetary finance was popularised as a theoretical possibility by Ben Bernanke, former US Federal Reserve chair. Since leaving the Fed, Mr Bernanke has publicly argued that "under certain extreme circumstances" monetary financing of fiscal deficit spending "may be the best available alternative".

This had long been an unacceptable view among economists, who were scarred by the stagflationary 1970s and worried about the dangers of hyperinflation that had ravaged countries in interwar Europe and more recently in the developing world. This changed with the global financial crisis, when central banks engaged in massive money creation without inflationary effects. Warnings about hyperinflation lost their bite.

As for direct cash handouts, they are already happening. In February, the government of Hong Kong decided to transfer HK$10,000 ($1,270) to all residents financially affected by the virus outbreak. Singapore's latest budget, too, provides for small cash payments to all adult Singaporeans.

In the US, support is building for sending cheques directly to all Americans. Former economic advisers to presidents Barack Obama and George W Bush support the idea. President Donald Trump and his Treasury secretary Steven Mnuchin have proposed it, and senators have included it in the stimulus bill currently going through Congress.

One reason why these unconventional ideas are gaining traction is because the financial crisis, growing inequality and the fear of technological automation causing unemployment had already triggered growing interest in new policy approaches. "There is a bit of ÔI always wanted this'," says Ms Weder di Mauro.

Betsey Stevenson, an economics professor at the University of Michigan and a former economic adviser at the Obama White House, points to the broad coalition of people all supporting cash handouts: "People on the left ... saying this is great, people on the right ... wanting to help the middle class; those who like the administrative simplicity of it; and then people who realise time is of the essence."

A second factor behind the interest in these ideas is that they are not entirely without precedent. The financial crisis and its aftermath forced central banks to take actions that brought them closer to monetary financing.

Helicopter money is already here in the sense that "a central bank gives transfers to the private sector", says Eric Lonergan, a macro fund manager. He adds that the ECB now offers loans to banks at a lower interest rate, under certain conditions, than banks receive on reserves held on deposit with the ECB. That margin is an outright money-financed fiscal transfer. Mr Lonergan argues this can be expanded and tied to conditions that in effect would transfer the subsidy to individuals.

Lord Turner says that there is no hard distinction between outright monetary financing and central banks' existing practice of buying government bonds. "Every year the Bank of Japan buys Japanese government debt equal to the government deficit. So the volume of bonds owned by the private sector does not rise. That is permanent monetary finance," he argues.

Governments have also sent no-strings-attached cheques to all citizens before. "[President George W] Bush did direct cash handouts," says Ms Stevenson. The difference is that in the 2001 and 2008 recessions the intention was to stimulate demand, today it is to "put money in the hands of people who will lose their jobs" and prevent a "cascading economic downturn".

Aside from precedent, the most important reason for the interest in helicopter drops - both as monetary finance and as direct cash payments - is the scale of the economic challenge.

If anybody had told you at Christmas that this year would be one [with] an enormous symmetric shock hitting all the advanced countries and that this would cost something like 50 per cent of GDP for a few months or maybe longer ... the kind of thing that happens in a war, everybody would have said you are crazy," says Ms Weder di Mauro. "There was no imagination to see where something like this could come from."

Governments now find themselves needing to spend much more, and to do so much faster, than they are accustomed to. "The attitude should be we're at war with this pandemic, we're going to win this war," and double-digit deficits are a price worth paying, says Ms Stevenson. "If we win the war, we can recoup that money."

(7) Debt Forgiveness for Poor Countries

- by Peter Myers, March 26, 2020

Below is an email from George Soros' activist list Avaaz; I subscribe to it to keep tabs on them. Usually I just delete their emails, but in this particular case, I agree with what they're saying - and that it's important.

Poor countries are poor because rich countries use Tax Havens. That is, companies based in the West ostensibly have their head office located in a Tax Haven, and arrange their transactions so that third-would countries get paid little for their resources, although they are sold for high prices in the West. As a result, they are in debt.

Tax Havens and Transfer Pricing are an invisible form of piracy. My remedy is that countries should repudiate debt owed to entities based in Tax Havens, and deny the legitimacy of asset ownership based there.

The consequent poverty of third-world countries is one of the main drivers of mass immigration from the third-world to the West.

The people who operate the Tax Havens are the 1% of the West, the Rulling Class - based mainly in the City Of London, New York City, Chicago, Seattle, San Francisco and LA.

The Open Borders policy they push threatens the livelihood of the 99% in the West. This is truly a case of Class War.

The Identity Politics they promote, with the co-operation of the 'Progressive' Left, keeps the 99% divided. However, in this crisis, such divisions are diminishing.

Michael Hudson says the IMF loots the Third World by foreclosing on $ loans:

In the video below, he explains how the IMF makes loans to other countries, always in $ not local currency. The goal is not to help them out, not to get interest on the loan, but to foreclose and seize the assets which are collateral for the loan. These might be railroads, water supply systems, electricity or other utilities. When the recipient country's currency collapses, and it can't pay, the IMF seizes the collateral, forcing Privatization of the asset. In that way, the USA lives off the rest of the world.

video at

text at

(8) Debt Forgiveness needed to save Millions in poor countries

Subject: [MARKETING] Covid-19: Stop the next wave From: "Sarah Morrison - Avaaz" <> Date: Wed, 25 Mar 2020 02:01:56 -0400

Dear friends,

"If the virus comes here, it's going to kill everyone."

South African electrician Nicholas Mashabele is terrified his poor neighbourhood won't be able to cope with a Coronavirus outbreak.

Nicholas is not alone. If the virus spreads through some of the world's poorest countries in Africa, Asia and South America, it is thought MILLIONS of people could die.

In some of these places, healthcare systems are fragile. And people simply can't afford to stay home!

But, the G20 leaders are meeting in days to work out a global response to this crisis -- and there's something experts want them to do right now to protect people like Nicholas: forgive the debt of the world's poorest countries, and let governments use it to save lives.

Let's join this global call for debt forgiveness in the time of coronavirus -- when 1 million sign, we'll deliver our voices directly to decision-makers. Sign now!

Poor countries worldwide are saddled with billions of debt to rich countries and institutions like the IMF. But right now, it makes much more sense for them to inject this cash into their healthcare systems, and help their people stay at home, so we can stop this virus spreading.

Pakistan and Ethiopia have already called for debt relief, and even the World Bank has asked G20 leaders to offer debt relief to the world's poorest countries so they can spend their precious resources on the coronavirus pandemic.

Leaders have agreed to this before, but it took huge public pressure. In 2005, G8 finance ministers cancelled debt of the world's 18 most heavily indebted countries to the tune of $40 billion! And After Ebola, the IMF cancelled $100m debt for the world's worst hit places.

So, let's make this call massive, before it's too late! This is a global crisis and we'll only beat it if countries everywhere can contain the virus. Sign now and let's urge G20 leaders to urgently write-off debt and save lives!

Tragedy can birth some of the most beautiful moments of our time, but only if we take this time to join hands. After the II World War, 20 major powers wrote off most of Germany's debt, and the United Nations was created for international peacekeeping. We can create something visionary from this crisis, but we need to urge our world leaders to rise and be the heroes this moment needs. Let's do it together.

With hope and determination,

Sarah, Alaphia, Christoph, Alice, Nell, Bert, and the rest of the Avaaz team.

(9) The State must act as a Shock Absorber - Ambrose Evans-Pritchard

A global depression is avoidable, if we shun defeatism

Ambrose Evans-Pritchard

24 March 2020 o 10:58am

Our economic plight is desperate but not (inherently) serious, to misquote the Habsburgs. Doom loops are not foreordained. It would be a policy choice to let matters spin out of control.

If the Western democracies get a grip on Covid-19 with an immediate and total lockdown ­ which several are not yet doing ­ they can essentially overcome the pandemic within eight weeks.

An economic sudden stop for two months does not fundamentally matter ­ any more than a national holiday fundamentally matters ­ provided that the state acts as a shock absorber and keeps the productive system whole, avoiding mass bankruptcies and hysteresis.

Countries can then switch to the Korea/Taiwan/Singapore strategy of "test, trace, isolate" in order to manage fresh outbreaks, at far lower levels of economic disruption, until we know more about the virus, and as we fine-tune treatment while waiting for a vaccine.

Those that borrow in their own currency and have sovereign central banks can offer this backstop. Sub-sovereigns such as Italy and Portugal will be (are already?) in trouble, and so will fixed-exchange states such as Saudi Arabia, but that is a topic for another day.

Put crudely, a transfer of public funds worth 15pc of GDP to the private sector is an accounting mirage. Firms and households accumulate a surplus while in lockdown/survival mode. This prepares the ground for a V-shaped recovery once pent-up demand is unleashed. The money flows back to governments later as fiscal windfall payments arrive. The debt ratio gradually comes back down. Bingo.

Britain's last three recessions

It is not a pure round-trip. There is leakage: the proverbial haircut that never happens. But it need not lead to an explosive rise in debt ratios if done properly, and by properly I mean the sort of wage subsidies we are seeing in a string of North European countries rather than just emergency loans.

The UK's Sunak umbrella is one of the best anywhere. It is still missing key components, but the Chancellor is plugging the gaps fast.

The much greater danger is to succumb to the canard that we cannot afford these actions, and it is worse yet if leaders listen to those liquidationists eager to send whole sectors to their ruin in a Schumpeterian clearance of "dead wood". This is no time for moral hazard. These firms have been hit by a black swan event that nobody could have predicted ­ unlike the Lehman crisis, which was foreseeable in broad terms 18 months before it happened, and in fact was foreseen.

Free market purists are a danger to society at this juncture. They are also a danger to the free market itself since the outcome of their policies would be a depression, a political revolution, and mass nationalisation of the means of production.

As Franklin Roosevelt understood (read Conrad Black's biography, a capitalist defence of FDR), there are moments when you need a shot of socialism as a vaccine against the real thing.

I assume that Washington will quickly approve trillions in fiscal aid once the Democrats secure their shopping list of social measures and impose terms. It is Donald Trump and the Republicans who face the greater reckoning if they let economic collapse occur after having already let the pandemic run wild.

The immediate risk is that the economic "holiday" will turn into a financial bust, setting off dangerous feedback loops.

Helicopter money is therefore imperative. The Rubicon dividing fiscal and monetary policy was crossed long ago in Japan. It is now being crossed definitively in the US.

The Fed has shifted through all its crisis gears at lightning speed, last week putting up firewalls for the US Treasury market, and for commercial paper and money market funds, and extending its currency swap lines to fellow central banks to backstop the dollarised global system.

This week it went beyond its 2008 or 1930s rescue menu after securing legal consent from Congress for outright purchases of corporate debt, "Muni" bonds, and ETFs, and with pledges to mop up unlimited amounts of Treasury debt if need be.

Both Morgan Stanley and Evercore ISI say the Fed's balance will soon double to $9 trillion or $10 trillion. Tom Porcelli from RBC Capital said it is in effect the Fed's "whatever it takes" moment. "The pigot is open," he said.

It comes in the nick of time. The key stress point right now is the US corporate debt market, including the $3.4 trillion of BBB-rated bonds perched above junk and vulnerable to a cascade of downgrades and forced firesales.

I suspect that the safety net will be extended soon enough to junk bonds, leveraged loans, and much of Wall Street. Economic Intelligence newsletter SUBSCRIBER (article)

Former Fed chief Janet Yellen has already called for direct purchases of equities, and to cover fiscal spending that goes into the veins of the economy and reaches ordinary people.

The Bank of England is already funding the UK fiscal deficit in all but name. Its latest £200bn blast of QE is pure monetisation of government debt. Markets know that it will never be reversed and they don't seem to care. Indeed they applaud it because they can see that Fisherite debt deflation is the greater danger. There was no flight from Gilts after the latest move. Ten-year Gilt yields fell by half and the pound rallied.

Is helicopter money a Faustian bargain that will come to haunt in the future? Maybe, although I am suspicious of morality metaphors in economics. Opponents of QE have been warning for 11 years that there is no free lunch and that inflation would take off, or that something awful would happen. Yet the pathologies of secular stagnation overwhelmed all else.

Have those pathologies changed? Perhaps. Professor Tim Congdon from the Institute of International Monetary Research ­ and the doyen of British monetarists ­ is already predicting an "inflationary boom" of sorts for 2021 and 2022, but he also thinks that this may not be such a bad development if it gets us through the current crisis.

So yes, in the long run there will be an inflationary denouement. Real interest rates will rise in earnest. The extraction process could be tricky. But since I am basically a "wet" Keynesian, I cleave to the great master's 1923 dictum: in the long run we are all dead.

(10) Dr H. C. Coombs on Central Banking, Wartime Finance, and Monetary Financing in Australia.

Dr Coombs was Governor of Australia's publicly-owned Commonwealth Bank (from 1960 renamed the Reserve Bank of Australia) from 1949 to 1968.

Here, he writes that, during World War II, "The government's military expenditure was financed from the proceeds of taxes and public loans but also by borrowing from the Central Bank".

In other words, Australia's war effort was partly funded by Monetary Financing: coombs.html .

(11) Government expenditure to meet Covid-19 crisis should come from Monetary Financing, not taxation or debt

Monetary Financing means that the Central Bank (which creates money ex nihilo) directly purchases Treasury Bonds; the BoJ has done this in Japan in recent years. Where the Central Bank is owned by the Government, there is no increase in debt - no tax burden on future generations to repay. An even better method would be for the Treasury to issue money like Bradbury Pounds - completely debt-free money that Britain used at the start of World War I. - Peter M.

To Help Fight Covid-19 The Bank Of England Must Commit To Direct Monetary Financing

March 27, 2020 by David Barmes

The Bank of England is indirectly financing the Treasury's spending on the response to Covid-19. We welcome this development, but further transparency is needed. Now is the time for the Bank to commit to direct monetary financing.

On the 19th of March, the Bank announced a £200 billion expansion of its Quantitative Easing (QE) programme. The majority of these new asset purchases will be government bonds, although the Bank will also buy more corporate bonds. At Positive Money, we've always highlighted the ineffectiveness and negative side-effects of QE, and will continue to closely scrutinise the corporate bond purchases as further details become available.

In these circumstances, however, there is some positivity in the Bank's move to buy government bonds, because this time around the purpose of the purchases is not to stimulate economic activity. We know that previous rounds of QE failed to accomplish this goal, with much of the newly created money getting stuck in financial markets, inflating asset prices and doing little for the real economy. Now, the purpose of the bond purchases is to address a deterioration in the UK gilt market. In other words, their lowering of yields on UK government bonds is intended to ease the Treasury's financing conditions, rather than to stimulate private borrowing and spending.

Given that the markets are desperately seeking liquidity, buying up government bonds increases their demand, as investors are reassured that they can always sell them on to the Bank in exchange for cash reserves. This means that the Bank of England is in effect indirectly financing the government's deficit spending, which has been massively ratcheted up due to Covid-19 measures. This is the kind of coordinated action between the Bank and the Treasury that Positive Money has been calling for to address other crises, such as climate and ecological breakdown.

That said, there is much more to be done. First, the Bank needs to be more transparent about the intentions and effects of its actions. Although the Bank's announcement cited deterioration in the gilt market as a justification for expanding asset purchases, its website is still using the classic reasoning behind QE to support its actions ­ while mentioning nothing about the fiscal effect. In its market notice, the Bank said "the MPC will keep under review the case for participating in the primary market." Many interpreted this as meaning that the Bank is considering buying government bonds directly, engaging in direct monetary financing of the Treasury. However, on closer reading, we think the Bank is referring to corporate bonds. Either way, this statement is highly ambiguous.

Governor Andrew Bailey has also been unclear on the matter. While he said he'll do "whatever it takes to meet the needs of the economy and the needs of the people" he then claimed that they are not abandoning the philosophy against monetary financing, while simultaneously suggesting that something akin to it was being considered. This confused messaging is not good enough. Especially in this time of crisis, the public deserves full clarity and transparency from the Bank.

At Positive Money, we think the Bank should make an explicit commitment to direct monetary financing. Unless the gilt market shows further volatility, the functional effect on the Treasury's spending would be equivalent to what the Bank is doing now, i.e. bond purchases in the secondary market. But institutionally, a shift to direct monetary financing would represent a big step.

If the Bank purchases bonds directly off the Treasury (or simply credits the Treasury's account), this will shatter once and for all the illusion that the government depends on the market to finance its spending. The idea that austerity was an Ôeconomic necessity' will be laid to rest for good and anyone suggesting down the line that the government has to balance its books following profligate spending in response to coronavirus will surely not be taken seriously. Monetary financing will also mean that financial arguments for delaying our response to other crises, such as climate and ecological breakdown, will terminally lose all credibility. This will then allow for greater public debate and understanding on real limits to government spending, namely inflation.

Furthermore, if the Bank commits to direct monetary financing now, this will avoid the further use of QE in the future as a tool to stimulate the economy independent of government spending. We know that QE simply doesn't work as a stimulus for economic recovery and has fueled inequality in the past. If the Bank shows now that it can do ÔQE for People' by committing to the direct financing of the Treasury's response to Covid-19, there will be no case for any other kind of QE as an economic stimulus once we emerge from this public health crisis.

A national emergency may not be the ideal time for challenging the notion of central bank independence, which is exactly why the Bank should preemptively state that it is prepared to engage in direct monetary financing, especially if there is more trouble in the gilt market. In other words, it should explicitly express that it will not allow investors to interfere with the Treasury's plans to respond to this crisis. This would represent an expansion of the Bank's toolkit, rather than its sudden co-optation.

It's great to see the Treasury taking the lead in responding to the coronavirus crisis. Although there are remaining issues, such as delays in the delivery of financial support, we commend much of the action it has taken so far. But the Bank of England also has a crucial role to play, which demands continued scrutiny. It must commit to full transparency and direct monetary financing now, to support a bail-out for people, not financial markets.

(12) Michael Hudson: The Use and Abuse of MMT

The Use and Abuse of MMT

April 10, 2020

By Michael Hudson, with Dirk Bezemer, Steve Keen and T.Sabri Öncü

Michael Hudson is a research professor of Economics at University of Missouri, Kansas City, and a research associate at the Levy Economics Institute of Bard College. His latest book is "and forgive them their debts": Lending, Foreclosure and Redemption from Bronze Age Finance to the Jubilee Year

Dirk Bezemer is a Professor of Economics at the University of Groningen in The Netherlands..

Steve Keen is a Professor and Distinguished Research Fellow at the Institute for Strategy, Resilience and Security of University College London ( He blogs at

Sabri Öncü ( is an economist based in Iústanbul, Turkey


After being attacked by monetarists and others for many decades, MMT and the idea that running government budget deficit is stabilizing instead of destabilizing are suddenly gaining applause from the parts of the political spectrum that long opposed MMT: the banking and financial sector, especially the Republicans. But what is applauded is in many ways something quite different than the leading MMT advocates have long supported.

Modern Monetary Theory (MMT) was developed to explain the logic of running government budget deficits to increase demand in the economy's consumption and capital investment sectors so as to maintain full employment. But the enormous U.S. federal budget deficits from the Obama bank bailout after the 2008 crash through the Trump tax cuts and Coronavirus financial bailout have not pumped money into the economy to finance new direct investment, employment, rising wages and living standards. Instead, government money creation and Quantitative Easing have been directed to the finance, insurance and real estate (FIRE) sectors. The result is a travesty of MMT, not its original aim.

By subsidizing the financial sector and its debt overhead, this policy is deflationary instead of supporting the "real" economy. The effect has been to empower the banking sector, whose product is credit and debt creation that has taken an unproductive and indeed extractive form.

This can clearly be seen by dividing the private sector into two parts: The "real" economy of production and consumption is wrapped in a financial web of debt and rent extraction ­ real estate rent, monopoly rent and financial debt creation. Recognizing this breakdown is essential to distinguish between positive government deficit spending that helps maintain employment and rising living standards, as compared to "captured" government spending to subsidize the FIRE sector's extraction and debt deflation leading to chronic austerity.

Origins and Policy Aims of MMT

MMT was developed to explain the monetary logic in running budget deficits to support aggregate demand. This logic was popularized in the 1930s by Keynes, base on his idea of a circular flow between employers and wage-earners. Deficit spending was seen as providing public employment and hence consumer spending to absorb enough production to enable the economy to keep producing at a profit. The policy goal was to maintain (or recover) reasonably full employment.

But production and consumption are not the entire economy. Modern Monetary Theory (MMT) was formally developed in the 1990s, with roots that can be traced by Abba Lerner's theory of functional finance, and by Hyman Minsky and others seeking to integrate the financial sector into the overall economic system in a more realistic and functional way than the Chicago School's monetarist approach on the right wing of the political spectrum. A key point in its revival was Warren Mosler's insight that a currency-issuing country does not "tax to spend", but instead must spend before its citizens can pay tax in that currency.

MMT was also Post-Keynesian in the sense of advocating government budget deficits as a means of pumping purchasing power into the economy to achieve full-employment. Elaboration of this approach showed how such deficits created stability instead of the instability that results from private-sector debt dynamics. At an extreme, this approach held that recessions could be cured simply by deficit spending. Yet despite the enormous deficit spending by the U.S. and Eurozone in the wake of the 2008 crash, the overall economy continued to stagnate; only the financial and real estate markets boomed.

At issue was the role of government in the economy. The major opponents of public enterprise and infrastructure, of budget deficits and market regulation, was the financial sector. "Austrian" and Chicago-style monetary theorists strongly opposed MMT, asserting that government budget deficits would be inflationary, citing Germany's Weimar inflation of the 1920s, and Zimbabwe, and portraying government deficits (and indeed, active government programs and regulation) as "interference" with "free markets."

MMTers pointed out that running a budget surplus, or even a balanced budget, absorbed income from the economy, thereby shrinking demand for goods and services and leading to unemployment. Without government deficits, the economy would be obliged to rely on private-sector banks for the credit needed to grow.

That occurred in the United States in the final years of the Clinton administration when it actually ran a budget surplus. But with a public sector surplus, there had to be a corresponding and indeed identical private sector deficit. So the effect of that policy was to leave either private debt financing or a trade surplus as the only ways in which economic growth could obtain the monetary support that was needed. This built in structural claims for interest and amortization that were deflationary, ultimately leading to the political imposition of debt deflation and economic austerity after the 2008 debt crisis.

Republican and Financial Sector Opposition to Budget Deficits and MMT

If governments do not provide enough purchasing power by running budget deficits to enable the economy to grow, the role of providing money and credit will have to be relinquished to banks ­ at interest, and for purposes that the banks decide on (mainly, loans to buy real estate, stocks and bonds). In this respect banks are competitors with government over who will provide the economy's money and credit ­ and for what purposes.

Banks want the government out of the way ­ not only regarding money creation, but also for financial and price policies, tax policy and laws governing corporate behavior. Finance wants to appropriate public monopolies, by taking payment in natural resources or basic public infrastructure when governments are, by policy rather than necessity, short of their own money, or of foreign exchange. (In times past, this required warfare; today foreign debt is the main lever.)

To get into this position, banks need to block governments from creating their own money. The result is a conflict between private bank credit and pubic money creation. Public money is created for social purposes, primarily to maintain production and consumption growth. But bank credit nowadays is created largely to finance the transfer of property and financial assets ­ real estate, stocks and bonds.

Opposing the Logic for running Budget Deficits

The Reagan-Bush administration (1981-82) ran budget deficits not to pay for social spending, but as a result of tax cuts, above all for real estate.[1] The resulting budget deficit led to proposed "cures" in the form of fiscal cutbacks in social spending, starting with Social Security, Medicare and education. This aim became explicit by the Clinton Administration (1993-2000), and President Obama convened the Simpson-Bowles "National Commission on Budget Responsibility and Reform" in 2010. Its name reflects its recommendation that "responsibility" meant a balanced budget, which in turn required that social spending programs be rolled back.

Opponents of public spending programs saw the rise in government debt resulting from budget deficits as providing a political leverage to enact fiscal cutbacks in spending. Many Republicans and "centrist" Democrats had long sought a reason to scale back Social Security. Austrian and Chicago-School monetarists urged that government shrink its activity, privatizing as many of its functions as possible to let "the market" allocate resources ­ a largely debt-financed market whose resource and monetary allocation would shift away from governments to financial centers ­ from Washington to Wall Street, and in other countries to the City of London, the Paris Bourse and Frankfurt. However, no such critique was levied against military spending, and the government responded to the 2000 and 2008 junk-mortgage financial crises by enormous monetary subsidy and bailouts of the economy's credit and asset sector.

The Obama and Trump Financial Bailouts as a Travesty of MMT

To advocates of MMT, and indeed to most post-Keynesian economists, the positive function of budget deficits is to spend money and therefore income into the economy. And by "the economy" is meant the production-and-consumption sector, not the financial and property markets. That "real" economy could have been saved in a number of ways. One way would have been to scale back mortgage debts (and debt service) to realistic market prices and rent rates. Another would have been simply to create monetary grants and subsidies to enable debtors to remain in their homes. That would have kept the financial system solvent as well as employment and existing home ownership rates.

But Obama double-crossed his voters by not rolling out bad mortgage debts and other obligations to realistic market prices, and instead bailing out the banks for credit creation in the form of bad loans ("liars' loans" to NINJA borrowers, and bad financial bets on derivatives by brokerage firms that were designated as "banks" in order to receive Federal Reserve credit and bailouts. With bank balance sheets impairing their ability to create new credit, the government stepped in by creating its own credit. This gave the banks, shadow banks and other non-bank financial institutions a bonanza of credit ­ replete with the opportunity to buy up foreclosed homes and create rental properties This policy was organized by Blackstone, and turned the crisis into an opportunity to make enormous rates of return for its participants. The effect was to intensify the economy's polarization, as investors typically needed a minimum $5 million tranche to join.

The Federal Reserve's $4.6 trillion in Quantitative Easing did not show up as money creation, because it was technically a swap of assets ­ like Aladdin's "new lamps for old, in this case "good credit for junk." The effect of this swap was much like a deposit inflow. It enabled banks to ride out the downturn while making a killing in the stock and bond markets, and to lend for takeover loans and related financial speculation.

Wall Street's Financial Capture of MMT To Inflate Asset Prices, Not Revive the Economy

At issue is how to measure "the economy." For the wealthy One Percent, and even the Ten Percent, "the economy" is "the market," specifically the market value of the assets that they own: their real estate, stocks and bonds. This property and financial wrapping for the "real" production-and-consumption economy has steadily risen in proportion to wages and industrial profits. It has risen largely by government money and credit creation (and tax breaks for property and finance), along with its economic rent, interest and financial charges and service fees, which are counted as part of Gross Domestic Product [GDP], as if they were actual contributions to the "real" economy.

So we are dealing with two economic spheres: the means of production, tangible capital and labor on the one hand (what is supposed to be measured by GDP), and the market for financial and property assets, along with their rentier charges that are taken from the income earned by this labor and real capital.

Financial engineering replaces industrial engineering ­ along with political engineering by lobbyists seeking tax breaks, rent-extraction privileges, and government subsidy. To increase property and financial asset prices and corporate behavior, companies are drawing on credit and government subsidy not to increase their production and employment, but to bid up their stock prices by share buyback programs and high dividend payouts. Buybacks are called "repaying capital," so literally this policy is one of disinvestment, not investment. It is favored by tax laws (taxing "capital" gains at a lower rate or not at all, as compared to taxes on dividends).

The Blind Spot of Vulgarized MMT: The FIRE Sector vs. the "Real" Economy

Much superficial confusion between the FIRE sector and the production-and-consumption economy comes from repeating the over-simplification of classical monetary formula MV=PT, namely, dividing the economy into private and government sectors. Setting aside the balance of payments (the international sector), it follows that government spending will pump money into the domestic economy, and that conversely, budget surpluses will suck money out.

The problem is that this analysis, used by many MMTers, for instance, the Levy Institute's typical chart, does not distinguish between government spending into the FIRE sector and asset markets as compared to spending into the "real" economy on employment and production (including the building of public infrastructure, for instance). Without this distinction it is not possible to see whether deficit spending is productive by aiming at supporting employment and output, or merely aims at supporting asset prices and making sure that creditors do not lose the value of their financial claims on debtors ­ claims that have become unpayable and thus are a bottomless pit of government deficit spending in the end.

Trying to keep the financial sector and its debt overhead afloat implies imposing austerity on the rest of the economy, IMF-style. So "MMT for Wall Street" is an oxymoron, and is the opposite of MMT for a full employment economy.

MMT, Public and Private Debt

Money is debt. Government money creation for public purposes ­ to pay for employment and output ­ spurs prosperity. But in its present form, private-sector debt creation has become largely extractive, and thus leads to the opposite effect: debt deflation.

Governments can pay public debt without defaulting, as long as this debt is denominated in their own domestic currency, because the governments can always print the money to pay. To the extent that public debt results from spending that supports output, employment and growth, this process is not inflationary. The government gives value to money by accepting it in payment of taxes. So the monetary system is inherently bound up with fiscal policy. The classical premise of such policy has been to minimize the economy's cost structure by taxing mainly unearned income (economic rents), not wages and profits in the production-and-consumption sector.

The problem nowadays is private debt. Most such debt is created by banks. This bank credit ­ debts owed by bank customers ­ tends to increase faster than the ability of debtors to earn enough income to pay it. The reason is that most of private debt is not used for productive, income-generating purposes, but to finance the transfer property ownership (affecting asset prices in proportion to the rate of credit growth for such purposes). That use of credit ­ not associated with the production-and-consumption economy ­ leads to debt deflation. Instead of providing the economy with purchasing power (as in running government budget deficits), private debt works over time to extract interest and amortization from the economy, along with servicing fees.

The typical mortgage, including its interest charges ends up exceeding the value that the property seller received. As a result of compound interest, the mortgage debt is repaid several times to the bank. The effect is to make banks the main recipient of rental income (as mortgage debt service) and ultimately the main beneficiaries of "capital" gains (that is, asset-price gains).

What gives bank credit its monetary characteristics ­ and enables debt to be monetized as a means of payment ­ is the government's willingness to treat banks as a public utility and guarantee bank deposits (up to a specified limit) and ultimately to guarantee bank solvency.

A budget deficit resulting from a financial bailout reflects the inability of the economy to carry its exponentially growing debt overhead. Because this overhead increases as a result of the mathematics of compound interest, the size of bailouts must increase ­ and with it, the budget deficit (plus swap agreements) to subsidize this debt overgrowth as an alternative to imposing losses by banks and financial investors.

That is what we have seen since the financial crisis of 2008, both in Europe and the United States. Led by the financial sector, much of the economic mainstream finally has come to embrace the idea of budget deficits ­ now that these deficits are benefiting primarily the financial and other parts of the FIRE sector, not the population at large, that is, not the "real" economy that was the focus of Keynesian economics and MMT.

This kind of endorsement for government money creation thus should not be considered an application of MMT, because its policy goal is almost diametrically opposite. Much as the Reagan-era budget deficits were used as the first part of a one-two punch to roll back social spending (Social Security, Medicare, education, etc.), so today's Obama-Trump deficits are being used to warn that the economy must preserve fiscal "stability" by rolling back social programs in order to bail out the financial economy. Wall Street magically has become transmogrified into "the economy." Labor and industry are viewed simply as deadweight expenditures on the financial sector and its attempted symbiosis with the central bank and Treasury.

The Financial Sector, Private Capital and Austerity and Central Planning

If Wall Street is bailed out once again at the expense of the "real" economy of production and consumption, America will have turned decisively away from democracy into a financial oligarchy. Ironically, the initial logic is the claim that an active state is inherently less efficient than the private sector, and thus should be shrunk (in the words of lobbyist Grover Norquist, "to a size so small that it can be drowned in a bathtub"). But relinquishing resource allocation to the financial sector leads to its product ­ that is, debt ­ creating a crisis that requires unprecedented government intervention to "restore order," defined as saving banks and financial investors from loss. This can only be achieved by shifting the loss onto the economy at large.

Today, the financial sector ­ banks and financial investors ­ play the role that the landlord did in the 19th century. Its land rents made Britain and continental Europe high-cost economies, as prices exceeded cost-value. That is what classical economics was all about ­ to bring market prices in lines with actual, socially and economically necessary costs of production. Economic rent was defined as unnecessary costs, which were merely payments for privilege: hereditary landownership, and monopolies that creditors had carved out of the public domain or won as legal compensation for financing public war debts.

The rentier class not only was the major income recipient of the economic surplus, it controlled government, via the upper house ­ the House of Lords in Britain, and similar houses across continental Europe. Today, the Donor Class controls electoral politics in the United States, via the Citizens United ruling. Political office has become privatized, and sold to the highest bidders. And these are from the financial sector ­ from Wall Street and financialized corporations.

The post-2008 stock market and bond-market boom raised the DJIA from 8500 to 30,000. This gain was engineered by central bank support far in excess of what a "free market" would have priced stock at. Before QE, U.S. shares had fallen only slightly below the market average for the previous century. QE drove it to its highest level outside the 1929 and 2000 bubbles. Even after the Coronacrash, shares are still overpriced compared to pre-"Greenspan Put" prices.

The result is best thought of as a blister, not a bubble. Its only hope of surviving without bursting is for the government to continue to support it in the face of a drastically shrinking post-coronavirus economy.

So the question is what will be saved: The economy's means of livelihood, or an oligarchy of predators living in luxury off this shrinking livelihood?

All this was explained by classical economists in their labor theory of value, which was designed to isolate economic rent and other non-production overhead charges (perceived to be mainly services in the 18thand 19thcentury, especially by the wealthy classes).

The Hudson Paradox: Money, Prices and the Rentier Economy

Without distinguishing between the FIRE sector and the "real" economy there is no way to explain the effects of government budget deficits on asset-price inflation and commodity-price inflation

Here is a seeming paradox. Bank credit is created mainly against collateral being bought on credit ­ primarily real estate, stocks and bonds. The effect of increasing loans against these assets is to raise their prices ­ mainly for housing, and secondarily for financial securities. Higher housing costs require new home buyers to take on more and more debt in order to buy a home. Their higher debt service leaves less disposable income to spend on goods and services.[2]

The asset-price inflation effect of money creation by banks is thus to exert a downward impact on commodity prices, to the extent that the carrying cost on bank credit reduces the net purchasing power of debtors to buy goods and services. This deflationary effect of bank money ends in a bad-debt crash, to which the government responds by bailing out the financial sector with a combination of money creation and central bank swaps (which do not appear as money creation). This is just the reverse of the MV = PT tautology, which only measures the volume of new money (M) without considering its use­ what it is spent on. By failing to distinguish the use of bank credit to buy assets (hence, adding to asset-price inflation) as compared to government deficit spending, both the old monetary formulae and the frequent MMT contrast between public and private sectors neglect the need to distinguish the FIRE sector's "wealth and debt" transactions from how wages and profits are spent in the production-and-consumption economy.

The commercial banking system's "endogenous" money creation takes the form of credit at interest. The volume of this interest-bearing debt grows exponentially, absorbing and extracting more and more income from industry and labor. The effect on the overall economy is debt deflation.

It may be epitomized as

Give a man a fish, and you feed him for a day;

Teach him how to fish, and you lose a customer.

But give him a loan to buy a boat and net to fish, and he will end up paying you all the fishes he catches. You have a debt servant.


[1] Real estate was given a fictitiously short accelerated depreciation allowance ­ as if a building lost its entire value in just 71Ú2 years, providing all rental income to be charged as an expense and even to generate a fictitious tax-accounting tax loss. This catalyzed the great conversion of rental properties to co-ops. Landlords (called "developers") took out a mortgage equal to the entire market price of the building, and then sold apartments at a price not only greater than zero, but typically equal to the entire mortgage. It was one of the great "wealth creation" ploys in modern history. And it was left out of the National Income and Product Accounts (NIPA), which used "realistic" depreciation ­ which still pretended that buildings were losing value, despite the maintenance and repair expenditures to prevent such loss.

[2] Higher stock and bond prices lower the yield of dividend income. (Most such income is spent on new financial assets, not goods and services, so the effect of lower yields probably is minimal, and may be offset by a "wealth effect" of higher asset prices and net worth.)

(13) Michael Hudson and Steve take issue with Warren Mosler on Trade and Foreign Debt

Dollar Diplomacy: Michael Hudson and Steve Keen on Real Progressives

Posted on July 15, 2022 by Yves Smith

Yves here. Macro Nı Cheese host Steve Grambine has a meaty talk with Michael Hudson and Steve Keen on some favorite topics: trade, the Fed, the IMF, and the past and future role of the dollar, all with an eye to MMT.

By Steve Grambine. Originally published at <> Real Progressives

Michael Hudson [intro/music]

A central tenet of the World Bank from the beginning is to convince countries not to grow their own food, but to create plantation agriculture to prevent family-owned farming of food, to grow plantation export crops and they become dependent on the United States for their grain.

[00:00:22.610] ­ Steve Keen [intro/music]

If you look at just the shipping involved in international trade, itıs something of the order of 20%, I think, of our carbon production comes out of the entire mechanics of shipping goods around the planet. And we realize weıve massively overshot the capacity of the biosphere to support our industrial sedentary civilization. So, one way to reduce that is by reducing international trade.

[00:01:35.130] ­ Geoff Ginter [intro/music]

Now, letıs see if we can avoid the apocalypse altogether. Hereıs another episode of Macro N Cheese with your host, Steve Grumbine.

[00:01:43.110] ­ Steve Grumbine

All right. And this is Steve with Macro N Cheese. Another great episode for everyone today. I have two guests, two very good friends, and very happy to have them join me today. Professor Steve Keen and Michael Hudson. You canıt get two better guys than this. And weıre going to have a very action packed conversation.

Weıre going to be talking about central banking, the IMF, World Trade Organization, World Bank. And weıre going to be looking at how the US uses the monetary system to bring about its imperial powers that it exerts on the world. And weıre going to look at some of the things that are happening with Russia and Ukraine right now that ship the US control over the global commerce and the behaviors of non US countries.

Theyıre starting to think for themselves and make some decisions, and weıre watching the facade crack a little bit. Steve Keen, who is the author of the book Debunking Economics and more recently The New Economics: A Manifesto, is joining me, as well as Michael Hudson, who has just recently written the book The Destiny of Civilization: Finance Capitalism, Industrial Capitalism or Socialism. So, without further ado, Michael and Steven, welcome to the show, sirs.

[00:03:04.530] ­ Michael Hudson

Good to be here.

[00:03:05.800] ­ Steve Keen

Thank you indeed.

[00:03:06.960] ­ Grumbine

So the reason why I brought us together, you guys are both phenomenal on your own, but together, I think that we can maybe tackle this. As an MMT advocate, I find myself friends with an awful lot of people, and you gentlemen have been doing this for a long time, and I know that you have some pushback within the MMT community.

In particular, this concept of ³imports are a benefit and exports are a cost.² This is a core MMT staple. And some of the concerns that came out as a result of the Covid crisis showed us the resource based failures of a global supply chain and how some of the aspects of our financial system and the shipping of real resources from areas that had high Covid, how it impacted our abilities to take care of life on lifeıs terms.

It also became quite clear that the US hegemony over the world using dollar diplomacy is starting to show cracks in the foundation as well, as we watch Russia thumb its nose at US sanctions. So, getting into this, Steve Keen, I know that you have taken some issue with Warren Moslerıs prescription that imports are a benefit and exports are a cost.

Taking Warrenıs position on this, I believe Warren is saying exports are real goods and services weıre sending out, whereas imports weıre handing pieces of paper to people. And this is a win for the importing nation. And weıve seen the power of the US dollar and the ability to basically create colonial outposts, colonized communities living and dying off of US dollars. So thereıs a power dynamic as well. What is your pushback with Warrenıs import/export model?

[00:05:03.270] ­ Keen

There are quite a few elements to it. First of all, the idea that exports are a cost and imports are a benefit. One term that Iıve seen one Modern Monetary Theory advocate used to explain is to say, the opportunity cost is all theirs. In other words, they have therefore gone by sending a good to us like an automobile to the buyer in return for currency.

Theyıre doing without the opportunity of the vehicle. And when you take a good look at the manufacturing side of things, the reality for most firms is they have diminishing marginal cost and excess capacity. So the standard thing when youıre competing in a domestic market is you have spare capacity youıre not using, but you canıt get enough demand domestically.

Now, I know MMT can say that should be handled by the government using additional spending power and creating the spending power to absorb the excess capacity. But they donıt at the moment. So what tends to happen instead is that countries will use export-oriented industrialization to use their additional capacity more effectively, which is whatıs led to the industrialization of China and in many ways the de-industrialization of America.

Personally, I donıt think the opportunity cost is the right way to think about international trade at all. Itıs a neoclassical way of thinking. It assumes neoclassical conditions about production which are empirically false. I donıt think anything in MMT should be based on bad foundations and I think that is a bad foundation.

Then when you see the discussions about monetary sovereignty and saying that countries who donıt have to issue debt in the currency which is not their own currency, they have monetary sovereignty, those who have to issue debt in a currency which is not their own donıt have monetary sovereignty. One way you end up in not having monetary sovereignty is running large balance of trade deficits and not being the reserve currency of the planet.

So I think the advice that exports are a cost and imports are a benefit doesnıt make sense for countries which have been running a trade deficit, are importing more than theyıre exporting, so theyıre using their own pieces of paper fundamentally, initially, but if they keep on doing it, theyıve got to start using American pieces of paper, and then theyıre in deep trouble. So I just think itıs a nice slogan, but I think itıs a bad idea.

[00:07:20.250] ­ Grumbine

So it makes sense to me given the nature of the pandemic. You and I spoke, I guess it was almost two years ago, about supply chains and pandemics, and we talked at length about how the iPhone is made in some 37 different countries ­ and countries that were isolated due to the pandemic. It also impacted production in general. Right now Iım in Information Technology, and I work with Cisco, and Cisco being the backbone of the entire Internet globally.

They have lead times even today of up to a year for some of the equipment, partially because of semiconductor shortages. But this is a piggyback to that in that there is the accounting identities of trading paper for goods and services, but then there is the actual functional output of that. And for countries like the United States, we do have Most Favored Nation status in the sense that we are the primary world reserve currency.

And I think part of that has to do with the fact that the price gas and gas purchases are done through US dollars as well. But overall, I think that we have to be aware that weıre not being a very good partner on the planet in general. A lot of the power plays the United States uses to be able to get those goods and services into the US Is done through warfare and sanctions, as weıve seen all around the world. We use them to great harm in the global South.

However, we saw Russia here recently thumb their nose at us and say, the only thing weıre really lacking is high tech products, and we got China that can hook us up with that. All youıve done is accelerated our departure from a dollar denominated world, which I guess brings us to you, Michael. Your book talks extensively about this. Can you help piggyback off of what Steve said regarding the supply chains and the impact of that import/export dynamic with whatıs going on right now with Russia, China and Ukraine?

[00:09:34.590] ­ Hudson

Well, MMT has not spent much time talking about the balance of payments. Itıs basically a theory of the domestic economy. The problem of the whole discussion that just took place is that trade is not the most important element of the balance of payments. For the United States, the trade balance has been just about in balance for almost 50 years, 70 years, actually.

Whatıs in balance {should be 'imbalance'} is Americaıs military spending abroad. Thatıs the deficit that is pumping dollars into the world economy. But now to get back to Steveıs point, realizing that weıre dealing with trade, only a small portion of the balance of payments, Steveıs point is, letıs ignore all the other elements of the balance of payments ­ the debt service and the capital accounts and others.

If you import more than you export, and you have to actually pay cash for the imports and get cash for the export, then you have to borrow money. And once you borrow money, because most trade is denominated in dollars, this means you have to borrow US dollars. You donıt buy imports with your own currency. Now, MMT is all about how sovereign governments can create their own money and create their own currency, but they canıt print their foreign currency.

Thatıs the problem with having more imports than exports. And once you begin to borrow dollars, you have to pay interest on it. And all of a sudden, theyıre running a deficit, itıs going to reduce your foreign exchange rates. ...


More on Finance at tax-havens.html .

My other pages on the Coronavirus are

Coronavirus was developed in a Wuhan lab as a BioWeapon: coronavirus.html .

Coronavirus Remedies - Chloroquine and Herbal Medicines: coronavirus-remedies.html . Bureaucrats Fiddle while Rome burns

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