German Economist sees MMT across the sea

update (25/1/2021) – sroll down for original post –

Peter Bofinger  “Corona – Krise  :  Stunde der MMT?”

Plurale Ökonomik  : “Wie funktioniert unser Geldsystem, was macht eine Zentralbank und welche Ursachen haben Finanzkrisen? Diesen und weiteren Fragen wird in der Ringvorlesung Finanzkrisen und Geldsysteme“ nachgegangen….”

more on youtube       or watch below:

Vortrag zu “Corona – Krise: Stunde der MMT?” von Prof. Peter Bofinger  RVL FU Berlin 29.06.2020

update 10/01/2021)  gaiamoney post “De facto MMT disequilibrating DSGE?  “Turns out Peter Bofinger  is not the only German economist who can see MMT across the sea…”    more here 

original post:   German Economist sees MMT across the sea

In a recent socialeurope article entitled “The ‘bazooka’: Modern Monetary Theory in action”, Peter Bofinger argues that  “… the monetary and fiscal policies which have been pursued in the United States over the past six months are perfectly in line with the recipes of Modern Monetary Theory (MMT).”

Die amerikanische Bazooka : Die Geld- und Fiskalpolitik der USA zur Bewältigung der Corona-Krise stimmt perfekt mit den Rezepten der Modern Monetary Theory überein.       Hier den Artikel auf Deutsch lesen

He concludes:

“It is too early for a comprehensive evaluation of the MMT strategy practised by the US government and the Fed in the past six months. But it is surprising that famous US economists who dismissed MMT—such as Larry Summers (‘recipe for disaster’), Paul Krugman or Kenneth Rogoff (‘Modern Monetary Nonsense’)—have so far not criticised the joint fiscal- and monetary-policy response to the economic consequences of the pandemic. Indeed, Krugman even praised the CARES act and called for its extension.

As the end of World War II approached, the British prime minister, Winston Churchill, is reputed to have said: ‘Never waste a good crisis.’ For economists the extreme fluctuations of key macroeconomic variables caused by the coronavirus crisis, and the attempts to deal with it, provide a fascinating object of analysis and the chance to gain new insights into macroeconomic processes.

So, for example, prominent economists may believe that household ‘savings’ finance government debt, which it is then implicitly shameful for governments to increase. Yet the crisis clearly shows that it is government debt, financed by the financial system—and so the central bank—which generates private saving.”

Read the whole article here or below

Peter Bofinger politely points to the faith based foundations of Mainstream Equilibrium Economics. Like that old favourite about savings creating investments (and then jobs…).  As Victoria Chick memorably reminds us, the regression to the classical idea that deposits create loans is rather irritating.

So if savings don’t go into investment, where do they go?

Bofinger provides a useful link to this recent Harvard paper by Atif Mian, Ludwig Straub and Amir Sufi

Abstract:  “There has been a large rise in savings by Americans in the top 1% of the income or wealth distribution over the past 35 years, which we call the saving glut of the rich. The saving glut of the rich has been almost as large as the global saving glut, and it has not been associated with an increase in investment. Instead, this rise in savings has been associated with substantial dissaving by the non-rich and dissaving by the government. A process by which the financial sector is unveiled reveals that rich households have accumulated substantial financial assets that are direct claims on household and government debt. Analysis using variation across states shows that the rise in top income shares has been important in generating the saving glut of the rich.”

So there.

Just Follow the money…

Copy of Bofinger’s article:

Let’s start with fiscal policy. In the second quarter of 2020 the federal government’s fiscal balance reached -30.2 per cent of gross domestic product. This value by far exceeds the previous quarterly record deficit of 11.6 per cent, in the second quarter of 2010. What did the government do with all the money? A large amount was used for transfers to private households. The Coronavirus Aid, Relief, and Economic Security (CARES) Act, enacted in March, gave the unemployed an extra $600 a week in benefits. This supplement played a crucial role in limiting extreme hardship; poverty may even have gone down.

What about monetary policy? In line with MMT the Fed started already in the first quarter to purchase huge amounts of Treasury securities. In a longer-term perspective the amount of these transactions far exceeded any historical precedent. During the ‘quantitative easing’ period in the first quarter of 2011, the Fed purchased a maximum amount of Treasuries, totalling 8.4 per cent of GDP. In the first quarter of 2020 the purchases reached 18.9 per cent and 21.2 per cent in the second quarter (see graphs).

While MMT envisages direct central-bank lending to the government, the Fed typically purchases bonds on the secondary market from primary dealers—large, globally active banks. But if the banks know that the Fed is willing to purchase, in effect, unlimited amounts of Treasuries, this does not make an economic difference.

Immediate impact

What were the economic effects of this strategy? It had an immediate impact on disposable personal income—again, way beyond any precedent. Net transfers (after tax) reached almost one-fifth of GDP; in the Great Recession the maximum was 7.5 per cent, in the first quarter of 2010. Thus, the transfer payments did not only compensate for the decline in wage incomes: they boosted the disposable incomes of American households to a record high (see bar chart).

What did households do with all the money? Due to the coronavirus-related restrictions in the second quarter, they nevertheless reduced their consumption significantly. Their disposable income in the second quarter was $1.6 trillion (on an annualised basis) higher than in the fourth quarter of 2019 but their consumption expenditures declined by $1.8 trillion. As a consequence, the personal saving rate also reached a record high of 25.8 per cent; the previous record was 17.3 in May 1975. This boosted the growth rate of the money stock M1, which increased by 27 per cent from the fourth quarter of 2019 to the second quarter of 2020.