by Felipe Rezende
This is the first in a series of blog posts on the Brazilian crisis.
A consensus has emerged in Brazil (and elsewhere) blaming Rousseff’s “new economic matrix” policies for the country’s worst crisis since the Great Depression (see here, here, here, here, and here). With the introduction of policy stimulus through ad hoc tax breaks for selected sectors seen as failing to boost economic activity and the deterioration of the fiscal balance — which posted a public sector primary budget deficit in 2014 after fifteen years of primary fiscal surpluses — opponents argued that government intervention was the problem. It provided the basis for the opposition to demand the return of the old neoliberal macroeconomic policy tripod and fiscal austerity policies. There was virtually a consensus that spending cuts would create confidence, reduce interest rates, and stimulate private investment spending. Fiscal austerity, according to this view, would be expansionary and pave the way for economic growth.
However, there is an alternative interpretation of the Brazilian crisis: as the result of endogenous processes that created destabilizing forces, reducing margins of safety and increasing financial fragility. As Minsky put it, “stability is destabilizing.” The success of traditional stabilization policies over substantial periods has created endemic financial fragility and rising domestic and external private indebtedness, causing the deterioration of the current account and the fiscal balance. This crisis was aggravated by the pursuit of structural stabilization policies in 2015, in an attempt to produce a fiscal surplus, which caused further deterioration of fiscal deficits and government debt followed by the collapse of economic activity.
1. Minsky’s Instability Theory
In Minsky’s work, he extended Keynes’s investment theory of the cycle to add the financial theory of investment to demonstrate that, in a modern capitalist economy, investment decisions have to be financed and the liability structure created due to those investment decisions will generate endogenous destabilizing forces. His theory of the business cycle, grounded in his financial theory of investment, shows that a capitalist economy is inherently unstable due to the interconnectedness of balance sheets of economics units and cash flows. From this perspective, while the financial system in a capitalist economy plays a key role in providing the financing to business to promote the real capital development of the economy, it also plays a key role in creating destabilizing forces.
Minsky’s framework not only sheds light on how to detect unsustainable financial practices, the position adopted in this paper is that the current Brazilian crisis does fit with Minsky’s instability theory. continue reading…
by Abhishek Anand and Lekha Chakraborty 
The global market was eagerly waiting for the July Monetary Policy Statement of the Bank of England (BoE). Speculation was rife that, post Brexit, the BoE would become the latest entrant into the set of central banks experimenting with negative interest rate policy (NIRP) in a desperate bid to reinvigorate its economy.
Remember that the global financial markets were shaken after the referendum result and the pound plunged to a three-decade low. The BoE governor Mark Carney had to step in with a pledge to provide $345 billion for the financial system of the country. He also issued a statement that “the BoE has put in place extensive contingency plans” to deal with a “period of uncertainty and adjustment.” Analysts had their own predictions regarding the BoE’s possible monetary policy stance. JPMorgan Chase & Co., Goldman Sachs, and ING Bank were of the opinion that the BoE could lower its key interest rate in its July meeting. The result of a Bloomberg survey showed that in the event of Brexit, credit-easing measures such as quantitative easing (QE) and rate cuts may be the immediate options resorted to. The global importance of Brexit could be gauged from the fact that the Fed has had to delay to the fourth quarter of this year its plan of a possible interest rate hike in a bid to support global economic recovery.
However, the market was left surprised by the BoE’s decision to maintain its bank rate unchanged. The Monetary Policy Committee at BoE voted 8-1 to leave borrowing costs at 0.5 percent and hinted that it would launch a stimulus package in August. Today, the BoE reduced rates to 0.25 percent.
But why did NIRP not find favor with the BoE? After all, by the end of March 2016 as many as six central banks had adopted NIRP in an attempt to counter sluggish growth and deflationary pressures (fig 1). The latest country to join this mad race is the Bank of Japan, which announced in its January 2016 monetary policy statement a negative interest rate of –0.1 percent to current accounts that financial institutions hold at the Bank. continue reading…
A new book edited by Michael Jacobs and Mariana Mazzucato and featuring contributions from Joseph Stiglitz, L. Randall Wray, Stephanie Kelton, and others will be released tomorrow:
The TOC is below:
You can download the introductory chapter here (pdf).
L. Randall Wray has an essay in the recent issue of the World Economic Review. Wray’s target is the belief that “government needs tax revenue to pay for most (or even all) of its spending.” According to Wray, a version of this belief distorts our understanding of what are the limits of, say, the US federal government’s ability to spend. (In terms of the sense of “limits” here, Wray wants to distinguish between the constraints imposed by the particularities of US law and broader financial/economic constraints.)
With the aid of references to the history of American colonial paper currency, Wray presents a competing conception of tax revenues as “redemption,” according to which taxes support the value of the notes that have been issued, rather than being the means by which the government raises its “income” and a precondition of its ability to spend.
What’s the upshot of this “taxes as redemption” story?
While affordability is not in question, inflation is a danger. To be sure, inflation can occur even at low levels of aggregate demand (witness the stagflation of the 1970s in the USA), but if government spending should drive the economy beyond full employment, then inflation will result. Government spending can also be inflationary before full employment if it is directed to sectors with a low elasticity of output (where additional demand causes prices to rise without increasing output much). One could envision additional ways in which misdirected spending and poor policy could cause inflation. The point is, however, that the danger is not affordability but rather inflation.
Currency depreciation is also a possibility for floating exchange rate systems […]
Hence, “more austerity” can be the right answer, but only in specific circumstances. If government is spending so much that prices are rising faster than desired, or if the currency is depreciating more than desired, then the answer could be to reduce spending or raise taxes. The difference here is not subtle. In these cases, it is not affordability but rather inflation or currency depreciation that is the problem. Policy makers ought to be able to see the difference: austerity is needed not because government is running out of its own currency but rather because prices are rising or currency is depreciating more rapidly than desired.
You can read the essay here: (pdf) “Taxes are for Redemption, Not Spending“
Writing in The Hill, Paul McCulley argues that his profession’s fussy obsession with the Fed’s zero-point-whatever monetary policy is leading us into a dead end: “after a financial crisis, itself spawned by bursting of a bubble in private-sector debt creation, the power of monetary policy to generate robust aggregate spending growth is severely truncated.”
The policy problem we need desperately to solve — whose solution is key to a robust recovery, McCulley argues — is fiscal: “fiscal deficits need to be dramatically bigger.” To that end, he adds, it’s time to place the concept of “central bank independence” in its proper context:
Central bank independence has its time and place. But when economic growth is milquetoast and the reality is that inflation is too low, not too high (with the risk of outright deflation in the event of a recessionary shock), there is no reason whatsoever for the monetary and fiscal authorities to act independently — as if they were oil and water — in pursuit of the common public good.
Right now, what the country needs is for the fiscal authority to exercise its latitude to purposely ramp up its spending more than its taxing, and for the monetary authority to print however much money is necessary to keep interest rates low, unless and until inflation smacks the economy in the face. And the fiscal and monetary authorities need to openly declare that these actions are a political joint venture.
Yes, my profession needs to remember that macroeconomics, as a discipline, is about solving collective action problems. The solutions are often politically messy, offending the sensibilities of the moneyed class. Such is the nature of effective democracy: Messiness that delivers for all.
Read it all here.
Related: “Central Bank Independence: Myth and Misunderstanding“
Pavlina Tcherneva was interviewed by Joe Weisenthal yesterday to present the case against a universal basic income policy (a proposed version of which was just voted down in Switzerland). Watch:
Tcherneva has written about the UBI versus Job Guarantee debate, including this contribution (pdf) to a special issue of the journal Basic Income Studies (paywall).
She also spoke about this last November at a roundtable convened by Dissent magazine:
Confusions about so-called helicopter money (HM) continue unabated. My recent letter to the editor of The Financial Times, titled “’Helicopter money’ is a muddled fiscal policy by another name,” has not met with universal approval. In fact, it seems to have ruffled some feathers and caused some annoyance.
Simon Wren-Lewis is a case in point. In a response to my letter (and a piece in the FT by John Kay) published on the Mainly Macro blog, Wren-Lewis reiterates his concerns that trying to distinguish fiscal from monetary policies is ultimately pointless and that central banks need to have HM in their armory since otherwise delegating stabilization would be dangerously incomplete. Mr. Wren-Lewis is perhaps best known for his selfless efforts at trying to wring any sense out of mainstream macroeconomics – an endeavor that takes a lot of wringing indeed. Another case in point is fellow helicopter warrior J. Bradford DeLong, who re-published Wren-Lewis’s HM elaborations on his own blog with the remark “intellectual garbage collection.” The wisdom of HM is just too obvious to be challenged, it seems.
But first recall here that Bradford DeLong is the supposedly “New Keynesian” macroeconomist who a few years back published a piece titled “The Triumph of Monetarism?” in the Journal of Economic Perspectives, arguing – quite correctly actually! – that New Keynesianism was really muddled New Monetarism by another name. It is also the same new monetarist economist who not so long ago published a piece together with Larry Summers titled “Fiscal Policy in a Depressed Economy,” in which the two argued that the time was right for governments to ramp up their investment spending and not worry about debt. That argument made quite a bit of sense to me at the time – and it still does today, as I suggested in my FT letter.
In any case, I was quite amused when at an event at the Brookings Institution on May 23 Larry Summers proclaimed that: “Helicopter money, hear me, helicopter money is fiscal policy. There is no such thing as helicopter money that isn’t fiscal policy.” That may well be just yet another useless point to make of course. But I will leave it to Messrs. Wren-Lewis and DeLong to do the intellectual garbage sorting of Mr. Summers’ remark.
Moving on, a rather interesting piece was published on VoxEU by Claudio Borio (together with Piti Disyatat and Anna Zabei). Borio’s earlier research at the BIS focused on central banks’ operating procedures. He isn’t someone who can be easily fooled about what central banks are doing or not doing. Furthermore, and this may not be a coincidence, he is also one of those rare cases among monetary economists who clearly identified what I long ago dubbed the “loanable funds fallacy” in Ben Bernanke’s “saving glut hypothesis” (see here). continue reading…
In the Financial Times, Jörg Bibow writes in reaction to an article by Stephanie Flanders on “helicopter money” — the idea of having the central bank directly credit citizens’ bank accounts (or, in the thought experiment, to print bank notes and drop them from helicopters) with the aim of generating increases in consumer spending.
Bibow observes that helicopter money is really just fiscal policy, properly understood, and adds that it is preferable that elected fiscal authorities actually do their job — increase spending — during a period of inadequate demand; perhaps by investing in the “energy infrastructure,” as Bibow suggests.
Read the letter here.
The case for or against a British exit from the EU – #Brexit – is headline news. For the moment the earlier quarrel about a possible Greek exit from the Eurozone – #Grexit – seems to have taken the back seat – with one or two exceptions such as Christian Lindner, leader of Germany’s liberal FDP. Most EU proponents are deeply concerned about these prospects and the repercussions either might have on European unity.
Yet, while highly important, neither of them should distract Europe from zooming in on the real issue: the dominant and altogether destructive role of Germany in European affairs today. There can be no doubt that the German “stability-oriented” approach to European unity has failed dismally. It is high time for Europe to contemplate the option of a German exit from the Eurozone – #Gexit – since this might be the least damaging scenario for Europe to emerge from its euro trap and start afresh.
Germany’s membership in the eurozone and its adamant refusal to play by the rules of currency union is indeed at the heart of the matter. Of course, it was never meant to be this way. And it was not inevitable for Europe to end up in today’s state of never-ending crisis that impoverishes and disunites its peoples. I have always supported the idea of a common European currency as I believed that it could potentially provide a monetary order that is far superior to the status quo ante of deutschmark hegemony: the Bundesbank – in pursuit of its German price stability mandate – pulling the monetary strings across the continent. While I have also always held that the euro – the peculiar regime of Economic and Monetary Union agreed at Maastricht – was deeply flawed, I kept up my hopes that the political authorities would reform that regime along the way to make the euro viable.
In this spirit I proposed my “Euro Treasury” plan that would, among other things, fix the Maastricht regime’s most serious flaw: the divorce between the monetary and fiscal authorities that is leaving all key players vulnerable and short of the powers required to steer a large economy like the eurozone through anything but fair weather conditions, at best. Watching developments over in Europe from afar my hopes are dwindling by the day that the failed euro experiment will usher in reforms that could save it. Instead, the likelihood of some form of eventual euro breakup seems to be rising constantly. It is undeniable that the euro has turned out to be an instrument of widespread impoverishment rather than shared prosperity. It seems increasingly unclear for how much longer pro-European politics will be able to somehow cover up the blunder and hold things together – particularly as politics is turning more and more nationalistic and confrontational everywhere.
The quest for monetary stability in Europe was always about two things: price stability and the absence of “beggar-thy-neighbor” distortions in competitiveness and trade. Monetary stability was seen as a pre-condition for peace and shared prosperity. Today, the eurozone is on the verge of deflation, domestic demand is still below the level reached eight years ago, and unemployment remains extremely high, especially in over-indebted euro crisis countries. How did we get here? And how could #Gexit help? continue reading…