Japan is Testing MMT
Last week the Japanese central bank announced it was buying most if not all of the next issue of Japanese Government bonds. Aka: Government debt.
Stock markets wet sharply up around the world at this “good news”. We’d point out the timing of the “good news” by a US ally just before a US mid-term election is probably just a coincidence.
We also believe pigs can fly.
That set aside, let’s look at MMT’s definitions of “Money” and “Government debt”. Money is created by the Government, and in the current neo-liberal environment either spent by the government or given to Banks in order to encourage them to lend.
Of course the Banks will lend the money to those who don’t need it (standard banking practice), or just gamble in the markets on their own account. These activities will obviously benefit the workers who will then spend and create demand (sometime after the next ice age).
When the Government issues bonds (opens interest-bearing accounts at the central Bank), then others with large amounts of money (banks) can deposit their money and have the Government pay interest on the money. The interest on this money then flows into the hands of workers who then spend it and create demand – oh wait – no it doesn’t – it goes to the wealthy who have large bank balances, and it becomes an integral part of upward wealth transfer, because then money could have been given to the workers in the form of tax cuts, free college attendance, healthcare, or other activities currently deemed unnecessary by our Neo-Liberal masters.
Japan has, unwittingly opened up this upward transfer of wealth scam, and decided not to pay the wealthy interest — not for any benevolent reason, but because of a complete lack of understanding of the sectoral balances at the heart of Modern Monetary Theory, and which are supported by very basic accounting.
We are not accusing the Japanese government of a radical act – we are just pointing out the consequences of their actions by looking at sectoral balances.
By “monetizing the debt,” (as if bonds being fungible were not already money,) the Japanese have decided not to continue the upward transfer of wealth, for the present. Or course the wealthy and their finance-sector pawns have decreed the wealth transfer, and have claimed the sky will fall because they’ve received a pay cut. However, the truth is that the Japanese have stumbled on a basic tenet of MMT: if you issue non-interest-bearing debt (i.e., money), you have no interest expense and thus your government has more money to spend on your economy.
The Japanese government’s ostensible reason for the bold move is to increase inflation. More on this after the next paragraph.
We must repeat, we are not accusing the Japanese Government of a brilliant act – because they also increased sales taxes to an average of 8% from 4% which takes money from the private sector and transfers it to the government sector, which is both regressive (it affects the elderly and poor disproportionately), and deflationary (it cuts demand by removing money from those who will spend it).
From the sectoral balances point of view, the Japanese government has cut the lower 95%’s available cash by increasing sales taxes and cut the top 5%’s income by not paying interest.
And IF the Japanese government wants inflation to increase, while reducing the amount of money available to the populace, how is it that they don’t realize that their actions are deflationary, because all classes of people now have less money? Good luck with that inflation objective.
If the Japanese government wants inflation, they should provide the bottom 95% with MORE disposable income, not reduce their spending money by 4%. Stupid.
They could easily increase demand by putting more money in the 95%’s hands – preferably by giving the poor and the old more spending money. That would actually accomplish what they want to do.
But we digress. Now to the predictions:
If we follow the MMT sectoral Balances model,
- Cutting spending money in the private sector leads to deflation – that is less demand, and lower prices.
- Issuing money instead of debt may cut speculation but will not change demand if the money goes to the wealthy, because the wealthy have no unfilled needs, and thus will not spend.
It’s not complicated. If they want to create inflation so that their economy gives the appearance of reviving, they should give the money to people who will spend it, not those who will leave it in their bank accounts. We give the Japanese government an “A” for unintended consequences, a “C” for effort and an “F” for implementation.
And thank them for providing an interesting test of MMT.