Looking like it was another ‘buy the rumor sell the news’ near term.

After you do the maths it still doesn’t add up.

It can’t add up.


Given today’s institutional structures- pension funds, insurance reserves, etc.- that include massive, tax advantaged, demand leakages where private sector credit expansion is bound to periodically fall short full employment levels. And with the private sector necessarily pro cyclical, counter cyclical fiscal adjustments are, for all practical purposes, entirely in the realm of the issuer of the currency- the ECB, and not the users of the currency- the euro member nations.

In other words, as previously discussed, the maths can’t add up without the ECB, directly or indirectly, writing the check.

And that includes the banking system, which, to serve public purpose, requires credible deposit insurance, again meaning support from the issuer of the currency.

The last few weeks have demonstrated that the ECB does ‘write the check’ for bank liquidity even though it’s not legally required to do that,(and even though some think it’s not acting within legal limits) but it won’t just come out and say it.

And, apart perhaps from the Greek PSI (100 billion euro bond tax), which they still call ‘voluntary’, no government has missed a payment, also with indirect ECB support either through bond buying or via the banking system, but, again, it won’t just come out and say it’s an ongoing policy.

So while the ECB can and has ‘written the check’ as needed, there has been no formal proclamation of any sort that it will continue to do so. Nor does it look like there will be any such over policy announcement for a considerable period of time.

This means any manager of ‘other people’s money’ with any fiduciary responsibility will continue to remain on the sidelines.

And even as markets fluctuate, and then some, underneath it all payments are met on a timely basis and the banking system continues to function to service deposits and loans.

And budget deficits will continue to be deemed too large, (at least until private sector credit expansion exceeds the ‘savings desires’/demand leakages) ensuring the maths don’t ever add up without the assumption of the ECB writing the check.

One last thing.

Publicly, at least, they all still think the problem in the euro zone is that the public debts/deficits are too high. And to reduce debt the member nations need to cut spending and/or hike taxes, either immediately or down the road.

A good economy with rising debt and ECB support to keep it all going isn’t even a consideration.

They’ve painted themselves into an ideological corner.

And deficit spending, exacerbated by austerity, may nonetheless be high enough for it all to muddle through at current (deplorable) levels of economic performance.

This economic ‘torture chamber’ of mass unemployment can, operationally, persist indefinitely, even as, politically, it’s showing signs of coming apart.

The founders of the euro believed a single currency would work to prevent a third great war. So they did what it took politically to get the consensus needed to create the euro. Ironically not realizing what they created to promote unity has turned out to be the instrument of social disintegration.

82 Responses

  1. I am starting to hear “United States of Europe” in financial press. It seems they are moving in that direction as Germany realizes what would happen to its exports if a break-up happened.

    What countries/groups blocking such a move are left? Do you think a United States of Europe will happen?

    1. @Crake,

      It would seem a simple (not necessarily easy) thing to do in a fiscal sense. My sense is a US of E won’t be happening politically any time soon, to any great degree.

    2. @Crake,
      How vulnerable do you think german exports are for a strong currency?
      A hard currency is good for them as commodity importer.
      The component of labor costs in the goods they manufacture and export is relatively small.

      1. @walter,

        I might be wrong but I think a majority, or very large chunk if not quit a majority, of their exports are to other European countries. Wouldn’t a rising currency of Germany hamper its export a lot? Or the input savings is enough to lower prices to off-set?

      2. @Crake, Yes, majority of german exports is within ez, but the center of gravity is shifting towards China etc.
        Rising currency will work against export, but the off setting factors in their model (high commodity input; low labor intensive output) are often forgotten and are not small.
        I think they are well aware of that and it probably partly explains their current stance in negotiations with other ez member states.

        Germany buying euros to weaken their new DM, like the Swiss are now doing, looks strange to me. I think they would not want their new DM to be backed by EUR, the currency they disliked so much and which they just left.
        Probably it would then be better for them to lower their taxes in order to increase their deficit if they want to weaken their currency.

  2. The progressive base has eroded with little effect on international unity. The conservative base is still gaining seats and still supports national and internationall unity.

    Austerity has been driven by conservatives while most cuts have fallen upon progressives who, inherently, put a high value on social unity.

    Conservatives, around the world, seem quite happy with the status quo. Bill Gross types seem to be able to weather a drop in plankton as long as government monetary policy supports bond prices. The question remains whether the internationalists can/will impose cuts in fiscal spending that isn’t offset by monetary policy.

    Greece seems to be the test case for how conservatives respond as the internationalists, finished with progressives, put conservatives under pressure.

    1. @Winslow R.,

      yes, I also suspect that ECB agenda is to force European governments closer together (maybe because that will make ECB even more important?) financially (eurobonds) and fiscally while still keeping up the neo-liberalist rhetoric and policies. They seem to consider this goal important enough to ignore political and social turmoil.
      Currently there is a flight to dollar as reserve currency, but if European integration succeeds – that may reverse.
      However, it will have trouble succeeding if they will keep strangling economy.

      Or maybe ECB

      1. @Gary, I’d like to believe this whole exercise is benign but the pain required to break the conservative resistance to a European fiscal union is likely too much for the ECB/Germany to engineer.

        Mostly because of timing. In the best case, each country will come to the decision sequentially as their economy scrapes bottom. If you’re correct, Greece will choose to take shelter under Germany’s wing rather than switch to the drachma.

        What will be required for the ultimate bailout? My guess is Greek conservatives believe only ‘a fall in labor prices’ is required. Instead Greek conservatives will soon be required to give up control of their Greek assets to the internationalists. How will Greek conservatives respond?

      2. @Winslow R.,

        the interesting question is why do they want to force all those countries closer together?
        Is it because they want Europe to be unable to start another war? Probably not, as Europe was quite peaceful before euro (at least euro zone part).
        Is it because they want better business opportunities? Could be – but would it make sense to ruin economy for better business opportunities?
        Is it because they want Europe to have more weight in the world politically in order to compete with US, China and Russia for political influence? Could be – but then all those other countries would certainly know and oppose it. Does not seem to be the case.
        Is it just a big neo-liberal experiment to dis-empower governments and to dismantle what they consider a European welfare state – so Chinese and Americans would not be envious? Very likely in my opinion.
        In such case, do they care about ruined economies? No, that is what they want. The only thing they have to watch out for is well organized popular opposition.

      3. @Winslow R.,


        “Is it because they want Europe to be unable to start another war?”

        Yes, I believe that was the main reason. Or at least prevent domination by Germany by weighing it down within a sclerotic, bureaucratic structure.

        “Is it because they want better business opportunities?”

        Sort of. They wanted to benefit from having their currency become a reserve currency, although they completely misunderstand what that means or how to make it happen.

        “Is it because they want Europe to have more weight in the world politically in order to compete with US, China and Russia for political influence?”

        Yes, although they fail to understand that you can’t have political influence without military power.

        “Is it just a big neo-liberal experiment to dis-empower governments and to dismantle what they consider a European welfare state – so Chinese and Americans would not be envious?”

        Absolutely not. I think you have it exactly backwards. Unification is much more socialist than capitalist, both in theory and practice.

      4. @ESM,

        It does not seem like they care about social and political turmoil. If they cared about war – they would see parallels with Hitler’s rise.
        Europe was not going military route before euro zone anyway. Germany least of all.

        Reserve currency would benefit them only if they wanted more political power. It is likely that some of European elite wanted that (more political power), but does not seem to be a major goal. The only maneuvering for more political power was among Europeans themselves. Does not seem like they tried any competing with US, China or even Russia.

        In my opinion – looking at all that’s transpired and what is going on – the only real actions are on the austerity front, and that is directed towards social safety nets. The euro story and debt story, and all this drama is a side-show. Real action is dismantling social security, reducing wages, privatizing public assets. That is very visible where resistance is weakest – like in Baltic states.

    2. @Winslow R.,

      “The conservative base is still gaining seats and still supports national and internationall unity.”

      Important that results of the Greek vote (and others) show previously marginalized ideologies gaining ground (e.g., Golden Dawn and Communists, though only the latter officially advocate a return to the drachma). Definitely a sign of “social disintegration,” imo. Also an indication that explanations being provided by mainstream parties/policymakers aren’t satisfying electorates?

      1. @Winslow R.,

        Thanks, hadn’t looked closely at those. Not sure they signal re-integration yet, e.g.: SYRIZA’s significant gain, Golden Dawn holding roughly steady, the recently increased number of parties in contention, and the fact that it was a second election where voters may be more likely to compromise? Time will tell.

  3. Warren,

    1. Not Ok anymore for euro, stocks and oil?
    (now that it all turns out to be looking like another ‘buy the rumor sell the news’)
    2. Do the Fed, BoE, BoJ etc make such formal proclamations to write the checks that the ecb does not make?

    1. Just one of many interim ‘pull backs’ as markets feel threatened by unknowns, disorder, etc.

      But underneath it all the banks and member nations get funded by the ECB, directly or indirectly.

      And deficits may be high enough for enough demand to muddle through at or near current, depressed levels.

      1. @WARREN MOSLER,
        I agree with you. Ecb keeps it all going, be it without explicit guarantees. Looks like more and more market participants start to realize that.

        I do think though that there will be a few negative surprises for q2.
        For example, Holland reported last week that retail sales for April had gone down 8.7% (y/y). Prices increased 2.1% , but volume dropped 10.6%. And soon austerity measures like VAT increases are going to be introduced.
        In next weeks the views, concepts, plans for the future of euro will be made more clear. Holland is the first member state that will have elections after that (Sept). Dutch election results could well be an indication of what the people think about those new plans we go to hear coming weeks.

      2. @walter,

        Since 2H2011, financial indicators have been signalling a recessionary mid-2012 for Europe, but of short duration, maybe six months or less? Those same indicators deteriorated a bit in recent months, but haven’t broken down, and shouldn’t as long as muddle through remains in effect. So I think Europe could surprise to the upside a bit in 2H12, though it will be more of a technical recovery than a durable bull market. Could be wrong, of course–please see the disclosures:


  4. This “deadly innocent fraud” about pension funds being a demand leakage is totally wrong. Pension funds and all similar retirement plans invest money in secondary markets where assets are purchased in exchange for cash. This does not remove demand from the economy. It just shuffles the cash around from the buyer to the seller of the asset.

    When the pension fund manager buys stocks through the plan he is exchanging cash for stocks. The buyer gets cash. This is not a demand leakage. It’s an exchange. No innocent fraud here at all.

    1. @FDO15,
      Demand leakage refers to demand for goods and services. Stocks are neither. The exchange of money for other financial assets does not contribute to the economy until the asset is sold to buy, say groceries.

      1. Yes, and the stock market isn’t stopping people from buying their groceries. Most people invest in the stock market because they don’t need the money to buy their groceries. And if you’re investing in the stock market with money that you need to buy groceries with then you’re an idiot.

        Money on secondary markets is not holding back economic growth. In fact, it represents a big chunk of the net worth upon which our credit based money system relies on to function smoothly. All securities issued are held by someone at all times and those securities represent the net worth of the private sector. If they weren’t held they wouldn’t be able to be issued. Secondary markets are not some conspiracy by capitalists to undermine the economy. The idea that this is an “innocent fraud” speaks volumes about the level of misunderstanding within MMT, which I am now beginning to see is quite pervasive.

      2. @FDO15,
        In usual economic terms saving is a flow that accumulates in a stock of net worth. By definition saving is the opposite of consumption of goods and services. A household can consume, save, and pay taxes. Stock purchase is a manner of saving and may be better or worse than sticking the money under the mattress.

        I don’t think it is an argument against capitalism. It’s just accounting. A single household can accumulate wealth through saving. If all households do the same it detracts from overall consumption/demand.

      3. real savings is the accounting record of real investment

        nominal savings is the accounting record nominal/financial assets called nominal liabilities

      4. Buying stocks is not saving. You are misunderstanding the transactions at work here. When you buy stocks on a secondary market someone else is selling stocks and buying your cash. It is an exchange. If I buy $100 of Apple then someone else is selling $100 of Apple and I am giving them cash in exchange for the stock. Now they have the cash. This did not reduce anyone’s purchasing power or suck life out of the economy. That’s not how secondary markets work.

      5. @FDO15,

        “Buying stocks is not saving.”

        There are three things a private sector actor can do with money: save, consume, or invest. I suspect you don’t disagree that buying stocks is not consumption. You actually make a very good argument that it’s not investment either since as you point out, there must be a buyer and a seller in the secondary market. That leaves savings.

        Think about it like this. If I make and sell $1000 worth of widgets; spend $900 on food, housing, etc; and stick the rest in my brokerage account without buying stocks I’ve “saved” $100. Now, if at some point in the future I buy stock X at 100, my account gets 1 share and loses $100. Someone else’s account loses 1 share and gets $100 — there has been no change. There is still a net $100 saved.

        If that other person decides to withdraw the money and buy a (very cheap) car or something then that is no different from anyone else spending down their savings (i.e., negative savings), which happens. The problem is that the private sector as a whole are net (positive)savers, so some other sector needs to spend more than they take in.

      6. @FDO15,

        We need to distinguish between spending on purchasing real goods and on operations related to financial assets and equity. We also need to be careful not to confuse flows and stocks.

        Saving (a flow) should be defined as an increase in the position in financial assets that is general “not spending” over a period of time. I am referring to an absolute increase, not a net increase.

        Any other definition (for example “not spending on consumption goods”) is confusing. Looking at the net effect over the period of time (i.e. one year) we need to consider what happens to the flow of money which is flowing into the stock market. If we have pension funds only re-purchasing existing shares then the net effect is zero except for pumping a bubble. If the previous owners of shares spend money on purchasing newly produced capital goods or on consumption then we may discover that some money has been spent and aggregate demand was increased during that period of time. However if the net effect is that the money “invested” by pension funds ends up parked on Treasury bonds or remains in the banking system as long-term deposits then it is 100% saved and Warren’s slightly simplified assertion holds water.

        The only sub-flow which is pretty much spend on true investment is the money spent over the period of time on freshly issued shares of companies raising new capital.

        The analytical framework (sectoral balances) which depicts these transactions correctly has been created by Kalecki and his successors (Kaldor, Godley, Laski etc).
        Please have a look at this paper:

        Bill Mitchell’s blog which belongs to core popular MMT literature may also be helpful.

        The so-called mainstream economists confuse investment spending financed by freshly created credit and investment financed directly by saving in the narrow sense. If I “save” by not buying a new car and buy freshly issued shares of a company (which purchases machinery or pays its staff) then this activity still does not violate S=I identity but it has absolutely different macroeconomic effects to leaving money on my deposit account. The mainstream economists also get the causation wrong but this is another issue.

      7. You are all confused on this topic. Secondary markets are exchanges. Primary markets are where investment occurs. Calling the secondary market saving is confused logic.

        When you buy $100 of Facebook at IPO the funds are most certainly invested by Facebook on various things. From there the shares trade on the secondary market where other people exchange them based on a perceived value of the firm’s investment decisions. They do not represent saving by private actors. They represent the initial investment made in the primary market at issue. The amounts may fluctuate over time, but that just represents the value of this initial investment.

        Secondary markets are exchanges. They are not siphoning life out of the economy. Calling this an “innocent fraud” or implying that it is somehow a net negative for the economy is, quite frankly, idiotic and exposes MMTers as having a very low economic IQ. Sadly, this is not even close to the worst of MMT’s sins.

      8. @FDO15,

        It’s not because you keep repeating the same idiotic message which only shows that you didn’t understand the previous messages, that MMT is idotic.

      9. @FDO15,

        You need to think a little wider than just the individual exchanges.

        The temptations of the secondary market provide an incentive to save, which means that savings are created so as to take part in the secondary market.

        So I spend $900 of my $1000 income and decide to save $100 because the secondary market exists. That $100 then runs through the secondary market as a series of exchanges as you point out.

        But the secondary market largely consists of people who are in saving mood, and so the exchanges are more likely to end up with somebody switching out of shares and buying Treasury bonds, than a Ferrari.

        If the secondary market wasn’t there (and like private companies you had to find a buyer for the entire business) then it is very likely that the propensity to consume would alter in favour of consumption. Because the person who wanted out of shares and into Treasuries would be frustrated and it is is less likely that I want to save directly in Treasuries.

        The secondary market smooths the path allows my desire to save in shares to be translated into a demand for government bonds or central bank backed savings accounts. And that means the chances of a paradox of thrift event are greatly increased.

      10. Neil, if the secondary market did not exist then there would be no IPO’s and share issues in which companies raise funds. The purpose of primary markets (and thus secondary markets) is to facilitate capital raises. I know you and the other MMTers hate capitalism and corporations, but IPOs and primary markets exist to help fund companies. Not to help capitalists rape and pillage the economy.

        The MMT views of the world are disturbingly wrong.

      11. @FDO15

        Please do not use straw-man arguments such as one about Warren’s views on saving and investment (yes, reading again relevant sections of 7DIF in order to understand what the author really meant would not hurt) or accusing the opponents of a certain political bias.

        If you want to engage in a debate you have to treat your opponents with a sufficient level of respect.

      12. @FDO15,

        “Neil, if the secondary market did not exist then there would be no IPO’s and share issues in which companies raise funds.”

        That is not how companies raise funds. It is largely how companies pay off their leveraged initial investors by finding a greater fool.

        Private companies outside the stock market raise funds all the time without any thought or suggestion that it will end in a stock market floatation.

        And they are the majority employers in the economy.

        Have you never spent any time at the investment and financing level in a real income earning business? People there laugh at the antics of ‘high finance’ and the stockmarket.

      13. more leading with your chin, mate. low risk/reward strategy.

        if any one agent doesn’t spend his income, sales are that much less, unless some other agent spends more than his income.

        this is by identity, not theory, and beyond dispute by any school of economics.

        please re read the chapter.

      14. @FDO15,

        “IPOs and primary markets exist to help fund companies”

        Lol. I can repeat – LOL. Shall we ask “FB US Equity” about the reason behind its existence?

        You are incredibly mistaken. The primary market and IPOs exist to allow capitalists to exit their investments. Obviously at the expense of retail idiots who were sold into the idea of investments, savings and retirement. The more idiots there are to “save” the higher the prices capitalists can dump their assets at. It is not about MMT or Marxism. It is the history of stock market. Stock market, the poster child of capitalism, is the most useless market of all. It eats up tons of real resources and produces almost nothing in return. Actually, net-net it stock market can easily be negative.

      15. to be a ‘stable store of value’ in that sense means the issuer has to spend/lend/somehow provide enough to offset savings desires.
        so i think we agree on that part.

        the way i’d say it is net financial assets added by the issuer are needed to offset the demand leakages to keep the currency a ‘stable store of value’ such as via an employed buffer stock policy.

    2. why lead with the chin? doesn’t seem like a good risk/reward strategy?

      aggregate demand/sales/output/jobs is about spending.

      if pension funds spend, directly or indirectly, it’s not a demand leakage.

      if instead the funds contributed are not spent on real goods and services it’s a demand leakage.

      it’s spending that is ‘lost’ and not financial assets.

      the 7dif call it ‘unspent income’

      1. @WARREN MOSLER, WM – When you buy a stock the money does not get captured in the stock market. The seller gets your cash. Saying that this is an “innocent” fraud is like saying that buying a hot dog is an innocent fraud. It’s only an innocent fraud if that money is never utilizes again. But that’s incorrect to assume. Every transaction that occurs in a credit based economy is based on the net worth of the debtors. I am assuming you’ve applied for a credit card or a mortgage before, right? When they issued your credit line did they take into account your net worth? Of course they did.

        The existence of markets are a net positive for society. Not a net negative. The stock market is one of the primary drivers of economic growth in this country (please everyone ignore Neil Wilson’s comments above as he has no idea what he’s talking about) by allowing companies to raise capital and expand. This is not a game of greater fools (only a fool or someone with not experience in the world of i-banking would say such a thing).

      2. @FDO15,

        “The stock market is one of the primary drivers of economic growth in this country”

        Hardly surprising that you push the neo-classical line then with that belief system.

        Very few businesses are on the stock market in any country, and therefore very little of the employment has anything to do with it.

      3. @FDO15,

        Of course markets are a net positive. MMT does not imply anything to the contrary.

        Saying that the existence of the stock market, which facilitates saving by providing a liquid and accessible excess return asset class, represents a demand leakage is not the same thing as saying it’s a bad thing. Frankly, I think demand leakages are good things. They just need to be offset if the economy is to operate at maximum capacity.

      4. ESM,

        The stock market does not exist so you can buy Apple on the secondary market. It exists so Apple can raise capital on the primary market (and then possibly again in the secondary market) so it can expand, invest, hire employees, etc. None of you are understanding this point. You all seem to think the stock market exists so mom and pop can go flip shares in their Etrade account. This is not correct.

      5. @FDO15,

        “Neil, the market cap of the Wilshire 5,000 in the USA is over 15 trillion or about 100% of GDP. Roughly 30% of the entire net worth of the USA.”

        5000 business out of how many in the US? How many employees engaged in the US in those businesses out of total employment in the USA?

        I mentioned nothing about market capitalisation – which is just another largely meaningless financial ratio. So why did you bring it up?

        ” As I said before, you don’t know what you’re talking about and everyone here should just ignore you.”

        And yet the stats support what I said. Very few businesses are on the stock market, and therefore very little of the actual employment has much to do with it.

        Of course you are going to go around suggesting that the evidence is ignored.

        Because it renders your argument null and void.

      6. @FDO15,

        “The stock market does not exist so you can buy Apple on the secondary market. It exists so Apple can raise capital on the primary market…”

        The stock market exists because there are people who want to buy and sell stocks. It has many ancillary benefits, one of which is that companies can more easily raise capital by selling stock. I believe this is less important than the fact that an initial public offering provides an exit strategy for early investors, the confidence in which helped incentivize the early investment in the first place. Few public companies use the stock market to raise money actually, although many do use their stock as currency to make acquisitions.

        I agree that there are many here who do not understand the financial markets or what benefits they provide. I am not one of them. From your comments, I suspect you are.

      7. @FDO15, have you read Brealey Myers? You do realise that external equity raised in the US represents 95%?

        As ESM and Neil have pointed out, whilst some companies can indeed raise funding from the stock market, it’s predominantly there to provide an exit for early investors (families/VC/private equity) and to provide access to an asset class that many households can aspire to.

        The more asset classes households can access, the more they will be encouraged to postpone consumption. Sure, a household buying a stock per se doesn’t increase saving, since the cash is transferred to the seller. However, the decision to accumulate deposits at a brokerage account rather than buying something – which is a necessary first step to buying stocks – is very definitely demand leakage.

        Plus, there is the fact that lower-income low-MPC households buying stocks from higher-income high-MPC households represents a transfer of spending power towards people who are more likely to hold cash and not to spend.

      8. “Few public companies use the stock market to raise money”

        No, every single company that goes public is raising funds. There is no “few companies”. If you go public you’re raising funds by selling your firm to the public. It’s that simple. Your comments are wrong.

        “The more asset classes households can access, the more they will be encouraged to postpone consumption.”

        Again, this is wrong. If you own a portfolio of $100 of equities your purchasing power has not been reduced by $100 just because you buy stocks. Go get a credit card showing the bank that you own $100 of stock. They’ll accept that as collateral for credit issuance any day of the week. The stock market does not capture money. Money flows through a secondary market. You are misunderstanding a very simple concept. This idea that the stock market constrains spending by reducing consumption is easily proven false. Just look at the stock market bubble of the 90’s and the surge in consumption expenditures. The correlation is very clearly positive, not negative, as would be expected with increasing net worth in the private sector.

      9. @FDO15,

        Now, why would you want to go and get a credit card against that $100 dollars worth of stock, unless your purchasing power had been reduced?

      10. @FDO15, please can you go easy on the insults: anyone who gets MMT is extremely focussed on stocks vs flows. Of course we all agree that money flows through the secondary market; in aggregate it flows from people with a higher MPC (buyers) to people with lower MPC (sellers), meaning that it promotes a ‘tightening’ of the aggregate private sector propensity to spend. A tighter propensity to spend requires a looser fiscal stance to achieve the same GDP performance.

        The late-1990s equity bubble did indeed have a wealth effect (much like the 2000s housing bubble), which encouraged households to run a deficit. But these are anomalous: do you really expect that many households today are bringing forward consumption by borrowing against their equities?

      11. I didn’t say ‘that’ was an innocent fraud.

        The innocent fraud is the idea that we need ‘savings’ to be able to fund investment.

        And the pardox of thrift shows how if everyone decided to spend nothing there would be no jobs, no income, no (monetary) ‘savings’

      12. @FDO15,

        ESM: I believe this is less important than the fact that an initial public offering provides an exit strategy for early investors, the confidence in which helped incentivize the early investment in the first place.

        Great. Agree. FDO15 clearly does not understand it. But why don’t we keep the business of owning business with those who do business. Why do you need retail “investors” for that? What is the additional value in that?

        As I mentioned in my previous comment to you on another thread, there is a huge machinery which allows one company to exist certain assets and other company to purchase. These are professional guys who can eat their grandma with a bunch of salt in this topic. I.e. in this circle noone can blame anybody if things go terribly wrong or terrible right. It is like Steve Jobs father not being able to blame anybody for the probably greatest fusk-up in the history of family relationships. Why do you need a stock market for it? What is the added value of retail investors? Or is it a question which is too tough to answer honestly? I believe the latter 🙂

      13. @FDO15,


        I agree that we don’t need retail investors. In fact, retail investors are shut out of most alternative investment asset classes (e.g. hedge funds, private equity funds, PIPEs) by various regulations. For example, you need to be an accredited investor (i.e. affluent) to invest in any type of private placement (Reg D). And you need to be a qualified purchaser (i.e. rich) to be exempt from something called the 99-investor rule. In order to invest in a Reg 144A security (a streamlined public securities offering), even in the secondary market years after issuance, you need to be a qualifed insitutional buyer (QIB).

        The SEC could promulgate similar rules for the public stock markets as well, without seriously undermining the economy (although I think financial stocks would generally take a hit). But to what end? I think it hurts the non-rich the most. Why should only rich people have access to good investment opportunities?

        Frankly, I think such a paternalistic attitude towards non-rich people, which is deeply embedded in SEC regulations, hurts the very people the SEC purports to protect. It is a perfect example of what libertarians call nanny-statism. Fundamentally, it is similar to Mayor Bloomberg’s proposed ban on soft drinks over 16oz, except that at least Bloomberg’s proposed soft drink ban doesn’t directly discriminate against poor people.

      14. @WARREN MOSLER, “quantifying the ‘wealth effect’ has been elusive at best”

        Yes I’m very dubious about wealth effects, but presumably one can say at least that whenever households have run a deficit, it must be because of a wealth effect – ie including the unrealised capital gains, households _believed_ they were actually running a surplus?

        If so, this presumably means that if someone is forecasting households to start running a deficit again (as all the UK authorities do), they either need to account for which wealth effect might plausibly underpin this?

      15. @FDO15,

        ESM, that is a fair statement. Questions like “why” and statements like “I think” are the only proper approach to this issue rather than baseless claims that “savings sorry investments into stocks are good” and “stock market creates employment”

        I do not pretend to have answers. And I might even agree with you on some of the points. I challenge not the theoretical idea of whether there should be a stock market and whether retail people should have access to it. There obviously can be a world where both claims get a definitive yes. I challenge the status quo which to me very much looks like a clear abuse of power and mis-information and predatory practices for the benefit of the few at the cost of many. It is hard to imagine how anyone can deny the reality with that flip-flop thing called facebook staring into their eyes.

        Having said that I still have doubts that given the fact that stockmarket, IPOs etc exist for dis-investments then what value the stock market can offer to all those “investors” who buy into the IPO. Until we have an answer to this question we can hardly discuss anything else.

      16. “quantifying the ‘wealth effect’ has been elusive at best.”

        Krugmans graph about net worth of households seem to correspond pretty much perfectly with ups and down of the economy: http://krugman.blogs.nytimes.com/2012/06/15/wealth-destruction/

        Even in the case of private debt creation households can gain better net wealth position if companies go more into debt. In a case of limited liability company owners are not responsible for companys debt.

    3. @FDO15,

      First allow me to point out that Warren Mosler is a very wealthy capitalist. There are socialists on this site but they are not the majority.

      With that out of the way, let me address your argument. I’ve seen many versions of it before and the fundamentals of it are correct. However, it leaves out one important detail: the total valuation of the stock market can increase from one day to the next.

      On Day 1 there are 100 shares of stock owned by 10 different individuals. The shares are worth $5 on average, so the total market cap is $5000. On Day 2 Bob’s Pension Fund show sup with $3000 and starts buying stock. There are no IPOS, so Bob has to buy it all on the secondary market from the individuals. He buys a few shares at a time, offering $5.50 for shares that were previously valued at $5 to entice the individuals to sell.

      The individuals sell to Bob and take a profit. However they do not want to liquidate their portfolios, so they buy other stocks from other individuals to keep their portfolio at the same value it was before. Each time an individual buys a share he bids the price up another 10%. This iterates until Bob has bought the full $3000 worth of stock that he now wants, and the individuals hold the $5000 worth of stock that they have always wanted.

      At the end of the cycle, we have a stock market with 1000 shares, owned by 10 individuals and Bob’s Pension Fund. The shares are valued at an average of $8 and the total market cap is $8000.

      No new shares have been issued and no new money has been invested by businesses, but there has been a net inflow of $3000 into stocks. Assuming Bob’s Pension Fund got the $3000 from people who used to spend that part of their income on consumption, the net effect is a demand leakage of $3000.

      When a pension fund buys stocks from an individual, that individual is not typically cashing out to buy a Ferrari. He keeps the money in the market by buying other stocks, and share prices inflate by the necessary amount to accommodate this.

      1. @Chaz,

        “No new shares have been issued and no new money has been invested by businesses, but there has been a net inflow of $3000 into stocks.”

        There hasn’t. There has been in increase in the value of certain financial assets by $3000 due to asset swaps – which is a balance sheet increase in the entire economy.

        The balancing liability will be in a series of revaluation reserves somewhere.

        There is no leakage of demand (in a two sector government and non-government model) until somebody somewhere buys Treasury bonds, or leaves their money on deposit at the central bank (ie usually they are a foreign central bank), or there is a net paying down of private sector loans from the share trading (which reduces the balance sheet).

        And of course there is no offsetting response from the government sector (ie they are ‘paying down the debt’).

        You get the same effect with houses.

        The whole wealth effect thing is all about encouraging people to take out more and more loans – based on the belief that savings and loans always balance out automatically and instantly.

        The key MMT point, IMHO, is that savings and loans don’t automatically balance out and clear. Foreign central banks have no incentive to recycle foreign currency they buy with their own money, and people under the influence of uncertainty will hoard cash in its own right whatever the price.

        You have to install an active pump of some description to clear those hoards of cash back into the system. The default one being government bonds.

      2. @Chaz,

        I thought a little more and realized everything I said above is irrelevant (because someone still ends up with the $3000 cash no matter what). Nothing to see here!

  5. Someone may take issue with holding up USA as example of OCA (optimal currency area)

    The founders of the US Dollar believed a single currency would work to prevent a third great war. So they did what it took politically to get the consensus needed to create the us dollar. Ironically not realizing what they created to promote unity has turned out to be the instrument of social disintegration.


    Is the United States an optimum currency
    area? An empirical analysis of regional
    business cycles
    By: Michael A. Kouparitsas

    Mundell argued that the survival of a currency union depends on how close it comes to the notion
    of an optimum currency area (OCA). According to this theory, if a monetary union is not an
    OCA, then some of its members will incur macroeconomic costs (persistent high unemployment
    and low output) that will outweigh the microeconomic benefits of a single currency (lower
    transaction and hedging costs), forcing them to abandon the union.

    Since Mundell’s work, economists have basically agreed that four criteria must be met for a
    group of regions/countries to constitute an optimal currency area: (i) regions should be exposed to
    similar sources of economic disturbance (common shocks); (ii) the relative importance of these
    shocks across regions should be similar (symmetric shocks); (iii) regions should have similar
    responses to common shocks (common responses); and (iv) if regions are subject to region-
    specific economic disturbances (idiosyncratic shocks), they need to be capable of quick
    adjustment. The basic idea is that regions satisfying (i)-(iv) will have similar business cycles, so a
    common monetary policy response would be optimal.

    Using this approach CD find that unanticipated shocks to U.S. monetary policy have very
    different effects on the income of the eight BEA regions. They identify a core group of regions
    including New England, Mideast, Plains, Southeast and Far West and a non-core group including
    the Great Lakes, Southwest and Rocky Mountains. Regions in the core group have very similar
    responses to monetary policy shocks, while regions in the non-core have very different responses
    to monetary policy shocks. Their analysis implies that the U.S. is not an OCA, since it fails to
    meet the common response criteria due to the very different responses of the non-core regions.

  6. At some point ,however right you believe yourself to be, you will need to listen to the ‘marketplace’ . Greeks and other Europeans do not want to go back to individual currencies . They want a regional currency that works . The future is pointing us towards functional regional currencies .
    MMT should focus on fixing the EUR and not getting rid of it .

  7. In my opinion this article is interesting as Ambrose Evans-Pritchard finally spills the beans:


    “The ECB has not purchased any bonds for almost four months and continued to hold fire last week, but the mood is shifting within the governing council.

    Austria’s central bank governor Ewald Nowotny issued a thinly veiled rebuke to the ECB’s hawks yesterday, reminding them that deflation policies led to havoc in the 1930s.

    “Due to misleading theories, a single-minded concentration on austerity led to mass unemployment, a breakdown of democratic systems and in the end to the catastrophe of Nazism. We must avoid the mistakes of the 1930s,” he said. ”

    Who is Ewald Nowotny? He certainly understands what is going on but he may speak very little in a hostile environment dominated by the proponents of austerity.

    E. Nowotny worked with Austrian Post-Keynesian (Kaleckian) economists such as Kurt W. Rothschild and K. Laski

    Let’s hope that sanity prevails in the end.

    1. @Adam (ak),

      Adam, I hold no high regards for Nowonty. He is a professional careerist and end-up as central bank governor in a purely political deal. It is very likely that if not for the governor he had high chances to end up in a court and even prison.

      I also have to mention that I do not know much about his economic views. His political career easily outweighs anything he could have said or done in terms of economy in the past.

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