1/
In response to Q on @RichardJMurphy 's post on MMT and bond market
Have been watching Japan a long time but have not run the numbers for this quick & dirty post.
Long thread, unroll at the end.
In response to Q on @RichardJMurphy 's post on MMT and bond market
Have been watching Japan a long time but have not run the numbers for this quick & dirty post.
Long thread, unroll at the end.
2/
BoJ holds 60% of govt debt, there was no cost in this, merely a reverse of the original reserve drain (QE). Priv banks, with increased reserves should be able to stimulate the economy. However…
BoJ holds 60% of govt debt, there was no cost in this, merely a reverse of the original reserve drain (QE). Priv banks, with increased reserves should be able to stimulate the economy. However…
3/
Low interest, aging population, etc., etc. Priv banks don’t want to invest into econ.
Policies that utilise the observations of MMT… Such as an increase in public sector investment, job guarantee, lender of last resort and price setter would encourage private banks...
Low interest, aging population, etc., etc. Priv banks don’t want to invest into econ.
Policies that utilise the observations of MMT… Such as an increase in public sector investment, job guarantee, lender of last resort and price setter would encourage private banks...
4/
to resume their role in the economy
These policies are specifically designed to overcome the limitations of traditional monetary policy (like QE) and directly encourage private sector activity by ensuring robust demand and financial stability
to resume their role in the economy
These policies are specifically designed to overcome the limitations of traditional monetary policy (like QE) and directly encourage private sector activity by ensuring robust demand and financial stability
5/
Lack of aggregate demand
Instead of pumping reserves into banks and hoping they lend (trickle-down approach of QE), the govt directly spends on infrastructure, green tech, R&D, and care etc. Spending creates jobs, incomes, and contracts for private businesses…
Lack of aggregate demand
Instead of pumping reserves into banks and hoping they lend (trickle-down approach of QE), the govt directly spends on infrastructure, green tech, R&D, and care etc. Spending creates jobs, incomes, and contracts for private businesses…
6/
Creates Creditworthy Borrowers: A construction co that wins government contract to build bridge, now has clear revenue stream. Becomes a creditworthy borrower for a priv bank, to which it will go for a loan to hire workers and buy materials
Creates Creditworthy Borrowers: A construction co that wins government contract to build bridge, now has clear revenue stream. Becomes a creditworthy borrower for a priv bank, to which it will go for a loan to hire workers and buy materials
7/
De-risks Lending: Bank not lending into void of weak demand. Lending to a biz that has a concrete customer (govt). Significantly reduces the risk of the loan. Encourages private banks to resume their role by creating the profitable lending opportunities that have been missing
De-risks Lending: Bank not lending into void of weak demand. Lending to a biz that has a concrete customer (govt). Significantly reduces the risk of the loan. Encourages private banks to resume their role by creating the profitable lending opportunities that have been missing
8/
Job Guarantee (JG)
The govt offers a publicly-funded job at a living wage to anyone who is ready and willing to work but cannot find a job in the private sector. The jobs are typically in areas of public benefit (community services, environmental conservation, etc.)
Job Guarantee (JG)
The govt offers a publicly-funded job at a living wage to anyone who is ready and willing to work but cannot find a job in the private sector. The jobs are typically in areas of public benefit (community services, environmental conservation, etc.)
9/
Effect on Private Banks: Floor on Demand: JG ensures that mass unemployment never occurs. A perm floor under aggregate demand because JG workers have $ to spend. This stable, baseline consumption supports local biz's (retail, services), making them more stable and creditworthy
Effect on Private Banks: Floor on Demand: JG ensures that mass unemployment never occurs. A perm floor under aggregate demand because JG workers have $ to spend. This stable, baseline consumption supports local biz's (retail, services), making them more stable and creditworthy
10/
Disciplines the Private Sector: It gives workers a better alternative to desperate, low-wage work. This forces private employers to offer better wages and conditions to attract workers, leading to a healthier distribution of income and, again, stronger overall demand
Disciplines the Private Sector: It gives workers a better alternative to desperate, low-wage work. This forces private employers to offer better wages and conditions to attract workers, leading to a healthier distribution of income and, again, stronger overall demand
11/
Reduces Risk for Banks: Banks lend to businesses that serve a population with secure income. This is far less risky than lending in an economy with high unemployment and precarious incomes
Reduces Risk for Banks: Banks lend to businesses that serve a population with secure income. This is far less risky than lending in an economy with high unemployment and precarious incomes
12/
Lender of Last Resort (LoLR) & Price Setter (Yield Curve Control) BoJ is ultimate LoLR and YCC for bonds. Key is to ensure it supports, not suffocates, the market.
LoLR function (providing liquidity in crisis) prevents unnecessary bankruptcies and financial panics.
Lender of Last Resort (LoLR) & Price Setter (Yield Curve Control) BoJ is ultimate LoLR and YCC for bonds. Key is to ensure it supports, not suffocates, the market.
LoLR function (providing liquidity in crisis) prevents unnecessary bankruptcies and financial panics.
13/
The price setter function (YCC) keeps government borrowing costs low and predictable
Effect on Priv Banks: Financial Stability: Knowing the LoLR will provide liquidity in crisis reduces systemic risk. Gives banks the confidence to lend, knowing they have a reliable backstop
The price setter function (YCC) keeps government borrowing costs low and predictable
Effect on Priv Banks: Financial Stability: Knowing the LoLR will provide liquidity in crisis reduces systemic risk. Gives banks the confidence to lend, knowing they have a reliable backstop
14/
Certainty for Borrowing: Stable, low government bond yields set a stable benchmark for all long-term interest rates. This gives certainty to banks when pricing long-term loans to businesses (e.g., for investment projects)
Certainty for Borrowing: Stable, low government bond yields set a stable benchmark for all long-term interest rates. This gives certainty to banks when pricing long-term loans to businesses (e.g., for investment projects)
15/
The key is to pair this with fiscal policy. YCC ensures massive public investment is fiscally sustainable (low interest costs). The public investment, in turn, creates the conditions where banks want to lend to the private sector
The key is to pair this with fiscal policy. YCC ensures massive public investment is fiscally sustainable (low interest costs). The public investment, in turn, creates the conditions where banks want to lend to the private sector
16/
Problem in Japan is a "liquidity trap" or, more accurately, a balance sheet recession. QE provided the liquidity (the means to lend) but failed to create the solvency and profitability (the reason to lend)
Problem in Japan is a "liquidity trap" or, more accurately, a balance sheet recession. QE provided the liquidity (the means to lend) but failed to create the solvency and profitability (the reason to lend)
17/
Public Investment & JG → Create Demand & Solvency: They directly create an environment of strong, stable aggregate demand and ensure a pool of creditworthy, solvent businesses and households
Public Investment & JG → Create Demand & Solvency: They directly create an environment of strong, stable aggregate demand and ensure a pool of creditworthy, solvent businesses and households
18/
Private Banks Respond → Resume Their Role: Faced with this environment, profit-seeking private banks have a strong incentive to do what they are designed to do: identify creditworthy borrowers and extend loans to them. Lending becomes profitable and prudent again.
Private Banks Respond → Resume Their Role: Faced with this environment, profit-seeking private banks have a strong incentive to do what they are designed to do: identify creditworthy borrowers and extend loans to them. Lending becomes profitable and prudent again.
19/
LoLR & Price Setter → Provide the Stability: The central bank's roles ensure this entire process happens in a context of financial and interest rate stability, preventing it from being derailed by a crisis or a spike in borrowing costs
LoLR & Price Setter → Provide the Stability: The central bank's roles ensure this entire process happens in a context of financial and interest rate stability, preventing it from being derailed by a crisis or a spike in borrowing costs
20/
Needs a shift from relying on monetary policy alone (pushing on a string) to using active fiscal policy as the primary tool to create healthy economic conditions, with monetary policy playing a crucial supporting role to ensure the financial system remains stable
Needs a shift from relying on monetary policy alone (pushing on a string) to using active fiscal policy as the primary tool to create healthy economic conditions, with monetary policy playing a crucial supporting role to ensure the financial system remains stable
21/
Japan's last three decades: it over-relied on central bank activism while being too cautious with fiscal policy
Japan's last three decades: it over-relied on central bank activism while being too cautious with fiscal policy
22/
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@threadreaderapp please unroll
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