Responses to Blog #31: Functional Finance

All: thanks to some for attempts to come up with some realworld JG jobs suggestions in answer to my challenge last week. We will move onto the JG after dealing with a few more issues related to JG. Keep thinking! Ialso saw that Neil has done a good job around the blogosphere defending JG.Keep it up!

We are more than half-way through the MMP. My responses toquestions/comments are going to become more focused. In part because manyquestions concern issues we already covered, or those we will cover. But moreimportantly, I’ve put a lot of work to the side to do the Primer over the past6+months and now must catch up with a variety of other work and deadlines. So,the Primer will continue, maybe with fewer side issues, but my responses willbe more focused on those questions/comments that respond to the current week’sblog.

So just a few responses today.

Q1: I thought it was the MMT position that adjustments tothe interest rate are not and cannot be matters of open market purchases, whichare only used defensively to maintain the target rate.  Instead, the Fedchanges interest rates by announcing the new rate (it’s unclear to me what theactual threat is for the rate to change) or paying IOR at the target rate(unless this is the threat???).

A: That is pretty much what the blog says and what Lernerthought. If banks are short reserves, they drive fed funds rate (in US) abovetarget, Fed buys bonds (OMP), provides reserves, increases the ratio ofreserves/bonds. Just like Lerner (and I) said. On the other hand, when Fedannounces new interest rate target (say, increase from 1% to 2%) it does notneed to change Res/Bonds ratio at all since it is likely banks have the ratiothey want and the demand for reserves is not interest elastic. So I thinkyou’ve confused two different things—using bond sales/purchases to satisfyprivate sector demands for high powered money (to hit a rate target), versusannouncing a new interest rate target (which normally does not require any openmarket sales or purchases).

Q2: What is the government budget constraint?

A: OK this is the idea that even sovereign currency-issuinggovernment is subject to a spending constraint. I’m sure BillyBlog has writtenon this. It came to life in the late 1960s—government is like a household andmust “finance” its spending: taxes, borrowing, or (unlike households) printingmoney. But that is false. Government spends through keystrokes. Yes it canself-impose budget constraints (ie in the US we pass a budget and we alsoimpose a debt limit). But this is nothing like a household, that faces a marketimposed constraint.

Q3: What drove inflation?

A: This is not the time for that. We already talked abouthyperinflation and a bit about CPI inflation. We might return to it againlater; and note that the JG is a price stabilizer. We can have full employmentwithout stoking inflation pressure—a topic for later.

Q4: Can the Euro nations create net financial assets?

A: I already discussed this. Domestically, yes, in the sensethat claims on the Greek government are net financial assets for thenongovernment sector. But I do take the point that ultimately Greece (etc) areusers of the currency so it all depends on the ECB to create true NFA for thesystem as a whole. (or the US which can create NFA in dollars for Eurolandersto hold)

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