By how much should the Bank of England increase interest rates in a traditional monetarist economy

[ks.234]

The newly created money was indeed swapped for bonds (mostly government, some corporate) but it was a swap and the balance sheets of the (commercial) banks stayed the same size and just shifted in composition. The idea was to increase liquidity and therefore stimulate the economy.

It was a pretty shit idea and they should have actually printed money and given it to people (aka "helicopter money"). But mostly they were hamstrung by the government that had completely abandoned fiscal policy at the very worst possible time so they (and therefore us) were basically screwed.

MMT has nothing to do with Friedman's 'helicopter money'. That's random transfer payments for whomever finds a bag of money in a field. It's not targeted spending. They could just put in a box under the bed.

This 'newly printed money' swapped for bonds to 'create liquidity'. QE is not bond sales it is bond purchases and then returning the reserves to their position of being excess reserves in the banking system, since they somehow think this puts the banking system in a more stable lending position. Though we know they don't need (or want) excess reserves.

In reality bonds didn't stop getting sold anyway, they still did it because they have a fixed mechanism - no matter how meaningless it is - for justifying fiscal injections.

 

[matthewr]

My Goldman Sachs employed brother-in-law pronounced me as bonkers when I made such a suggestion during the 2008 financial crisis. Definitely a bit of MMT was needed then.

Helicopter Money is Keynes, no need for MMT.

 

[ks.234]

Helicopter Money is Keynes, no need for MMT.

“The name "helicopter money" was first coined by Milton Friedman in 1969”

 

[matthewr]

“The name "helicopter money" was first coined by Milton Friedman in 1969”

As a way of ridiculing the Keynesian response to a liquidity trap as part of his argument for replacing it with Monetarism.

One of the most famous part of the General Theory in Keynes typically obfuscated prose:

"If the Treasury were to fill old bottles with banknotes, bury them at suitable depths in disused coalmines which are then filled up to the surface with town rubbish, and leave it to private enterprise on well-tried principles of laissez-faire to dig the notes up again… the note-bearing territory), there need be no more unemployment and, with the help of the repercussions, the real income of the community, and its capital wealth also, would probably become a good deal greater than it actually is. It would, indeed, be more sensible to build houses and the like; but if there are political and practical difficulties in the way of this, the above would be better than nothing."

Although I only have a Centrist Dad understanding of all this from Krugman op-eds so I might have it all wrong.

 

[Joe Hutch]

Just for clarity, I am not an economist and have never studied economics. I worked for 20 years in the City as a computer programmer mostly interest rate and bond trading systems which is where most of my knowledge, such as it is, comes from.

Although it should be said that generally the city is not a good place for finding out about economics for a number of reasons and most of what I did learn on the subject came from reading.

I see. Well, I've got an A level in Economics (from 1972, so it predates monetarism and MMT.)

For reasons best known to herself, Mrs H bought the textbook the A level course was based around (Intermediate Economics, by Jack Harvey) from a charity shop. I haven't opened it as the memories of A level classes, which were held in a conservatory, are still fresh in my mind. Nor has Mrs H, so it may as well go back to from whence it came.

 

[TheDecameron]

I see. Well, I've got an A level in Economics (from 1972, so it predates monetarism and MMT.)

.

Did you answer the essay question on Disraeli’s Treasury forecast for return on investment in the first 30 years of normal operation of the Suez Canal and the interest rate negotiations with Rothschild’s Bank?

 

[Joe Hutch]

Actually the A level exams are a bit of a blur, unsurprisingly after 50 years, though Mrs H remembers hers quite well and has copies of the exam questions. Nobody was more surprised than me when I got my results. I have a sneaking suspicion that some poor sod got my predicted grades (ie Ds all round) and I ended up with his (ABBB).

Fortunately, or unfortunately, my mother was anti-clutter before it became fashionable. I came home from a day out shortly after I'd left school and asked her where my old school books were. 'Oh, you didn't want them, did you? They went in the bin yesterday and the binmen came this morning.' So if I had hung on to the exam papers, they soon went.

 

[Marchbanks]

I see. Well, I've got an A level in Economics (from 1972, so it predates monetarism and MMT.)

If you should be unavailable for consultation, I’m happy to stand in (O level, grade 1, also 1972 (ish))

 

[Joe Hutch]

Of course, in our day, exams were properly difficult, so a 1972 A Level is probably the same as a PhD, and a 1972 O level is an MA, or MSc, as it seems Economics can be studied as either an art or a science.

 

[tonerei]

Helicopter Money is Keynes, no need for MMT.

It should have been used during the 2008 debt crisis.

 

[ks.234]

Monetarism came in after the economic problems of the 70’s on a promise to solve those problems, yet in 2022 we are facing the same inflationary problems.

Since the inflationary problems of the 70’s we have had monetarism of one flavour or another. When Thatcher came to power inflation spiked to a similar high as before and inflation has fluctuated much as it ever has. We also had 2008.

Monetarism has failed on it’s own terms, to seek a solution on those same terms again is a triumph of hope over experience.

There are many different causes of inflation, but monetarism sees just one and therefore only offers one solution, interest rates.

Monetarism has failed to control inflation in the past and will fail again today because it is applying the wrong tool to the problem and because monetarism is a failure even on it’s own terms.

 

[ks.234]

It should have been used during the 2008 debt crisis.

2008 was caused by monetarism and the austerity that followed was the product of monetarism. Helicopter money is Milton Friedman’s term to describe how government spending is always and everywhere inflationary. It isn’t. Simply giving money away randomly is not the same as targeted government spending.

 

[Jim Audiomisc]

I would add Malthus to that. Its many years since I read his work but some of it has stuck with me. He expounds on how we (humans) have a tendency to use all our surpluses and repeatedly fail to prepare for lean times. Malthus wrote about much more than overpopulation and is somewhat overlooked now.

I'm temped to 'see' that and 'raise' you Marx. But I suspect both may lack the sheer readability and amusement you can get from Galbraith along with illumination. I keep smiling when I read him making wry comments about the errors in conventional wisdom. However maybe not everyone gets the dry, academic 'wit'. I suspect he was a good lecturer as they don't call them lecture theatres for no reason.

 

[Jim Audiomisc]

That’s like me saying if the govt can print unlimited currency, why give people £400 towards their energy bill, just give everyone £1M.

Anything under 5% base rate will historically still be very cheap money. The question is, will cheap money cure a high inflation problem? Hmm…

The critical question is: what you spend the money *on*. The point is to both help the eonomy and the popuation. Not just chuck money at things as they have been done, when that is clearly failing or not fit-for-the-purpose-now.

 

[Jim Audiomisc]

Here is a modest proposal that might be useful. (ahem)

As it stands the Gov is handing out some dosh with the claim it can then help people pay their energy bills. Thus simply feeding the sellers and justifying their price hike. The money ends up with their shareholders who have a laugh at our expense. Many such companies are parts of a 'group' - one offshore that does rhe extraction, the other onshore which gets the gas to you and bills you for it. This is useful for, erm, their 'tax purposes', etc. (cough)

Instead of handouts to people, Gov could issue what they call, say, a National Emergency Decree (1) that requires all the producers in the UK sector of the North Sea to sell to the supplier companies in the UK at the prices/kWh that ruled before the invasion of Ukrain. Anything left over, they can sell elesewhere at the 'world price' with UK Gov taking its usual percentage of that in return for the lease to extract.

This would mean the price in the UK would remain low, subsidised by the higher price the extraction companies get abroad for the residual. No need for desperate 'catch up' with wild price inflation by (sic) printing money. No need for higher UK taxes.

(1) Government has the right to issue laws by decree or order when circumstances clearly demand it. Just as quite a lot of 'regulation' is issued by Ministers without Parliament actually passing it. But this only happens usually in an 'Emergency'. I'd argue this applies now for this purpose.

 

[PaulMB]

The critical question is: what you spend the money *on*. The point is to both help the eonomy and the popuation. Not just chuck money at things as they have been done, when that is clearly failing or not fit-for-the-purpose-now.

I have a feeling that economic philosophies, be it liberal laissez faire, Keynesianism, monetarism, or MMT (which is not new, a 100 year history as a philosophy) remain fairly remote from actual economic measures. A government may decide to "helicopter" some money to help the poor and give the economic flywheel an extra shove, while at the same time investing in infrastructure that will start bearing fruit 2, 5 or 10 years into the future.
At the same time, it is silly to sweepingly blame monetarism for every economic downturn or crisis in the past 50 years, while presenting MMT as the obvious cure for everything. Incidentally, does anyone know of any practical application of MMT in any "normal" country in recent decades? If so, did it work?

 

[Jim Audiomisc]

For me, the main advantage of MMT, etc, is to help people twig that the 'conventional wisdom(s)' in Economics is (are) a set of flawed beliefs applied often as a quasi-religious dogma. One Size Fits All, TINA. What people actually need are methods that *fit the situation we find ourselves in*. And that will suit the *people* not the bits of coloured paper or the powerful kleptocrats, or, indeed eminent economists.

 

[JensenHealey]

Since the root cause of the current inflation in the UK (and the whole of the rest of Europe too) is a war created and promoted by a bunch of gangsters to the East - please, someone, explain why monetarism is then the root of economic woes we are currently facing.

And please explain how or why an MMT economy could or would have avoided the 'problem'.

Presumably a central tenet of MMT is the currency issuing freedom of the country - that must mean that the EU would not have the MMT option even if it were interested.

 

[PaulMB]

Since the root cause of the current inflation in the UK (and the whole of the rest of Europe too) is a war created and promoted by a bunch of gangsters to the East - please, someone, explain why monetarism is then the root of economic woes we are currently facing.

And please explain how or why an MMT economy could or would have avoided the 'problem'.

Presumably a central tenet of MMT is the currency issuing freedom of the country - that must mean that the EU would not have the MMT option even if it were interested.

Well it would if the ECB did it for everyone. But each country has its own fiscal system and its own national debt, so it is hard to imagine.

I ask, once again, has the MMT "formula" ever been used?

 

[ks.234]

I have a feeling that economic philosophies, be it liberal laissez faire, Keynesianism, monetarism, or MMT (which is not new, a 100 year history as a philosophy)

No, not true

…remain fairly remote from actual economic measures.

Actual economic measures are a direct consequence of economic philosophy. Milton Friedman believed that spending on public services should be cut as much as possible, Friedmans philosophy has been adopted and we have had half century of economic measures to cut spending on public services as much as possible. Cause and effect writ large

A government may decide to "helicopter" some money to help the poor and give the economic flywheel an extra shove,

this is just government spending, it has nothing to do with helicopters

…while at the same time investing in infrastructure that will start bearing fruit 2, 5 or 10 years into the future.

If you want investment in infrastructure, don’t look for it in Monetarism

At the same time, it is silly to sweepingly blame monetarism for every economic downturn or crisis in the past 50 years,

monetarism has failed in it’s core objective, and was responsible for 2008

while presenting MMT as the obvious cure for everything.

No one is presenting MMT as a cure for everything, just those caused by monetarism

Incidentally, does anyone know of any practical application of MMT in any "normal" country in recent decades? If so, did it work?

Yes, it is happening in the U.K. MMT says that government issues it’s own currency. That is happening now. The difference is a monetarist ideology that denies the logic of currency issuance, and says that spending on public services can be no more that the tax intake. Monetarism determines that government requires an income in the same way as a household does, which cannot be true because government issues it’s own currency.