Assignment 4 What Is Money
Assignment 4 What Is Money
Assignment 4 What Is Money
that imply for public debt denominated in the sovereign currency? How is her core argument
about the role of budget deficits (financed by bond sales, including to the central bank) consistent
with Will Bateman’s discussion of the consolidated public budget and Adam Tooze’s discussion
about the need to consider “unorthodox” central bank policies in the current moment?
Finally, consider the European Monetary Union (say Greece) and countries in the CFA franc
zone (say Senegal). Why do the governments and central banks in these countries not benefit
from monetary sovereignty and thus the ability to run large fiscal deficits to stimulate their
respective economies?
Every sovereign country with their own money supply would have their version of money
reserves. With sufficient reserves, the government is able to have space to leverage with a lot of
aspects of improving citizen lives, building basic infrastructure, establishing a more dynamic
health care system (if they choose to), building a stronger military, scientific research
investments, aid programs for the poor population. The government collects their revenue and
spending from a variety of sources, including but not limited to payroll taxes, individual income
taxes, excise taxes, admissions to national parks, social security taxes. However, as global
competition, domestic matters and public emergency crisis arise which all requires huge
spending, Does government ever run out of money to spend?
Many economists have different view points to this question, some may believe that government
can definitely run out of cash supply to spend, and some may believe that government is like the
issuer in the monopoly game, can never run out of money. Stephanie Kelton, American
economist and leading proponent of Modern Monetary Theory, professor at Stony Brook
University also the advisor to the 2016 Bernie Sanders campaign believes government would
never run out of money supply. In the following, Kelton’s statement will be observed, analyzed
and discussed, followed by connection to Dr Will Bateman, Associate economic law professor of
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Australian National University’s viewpoints on national budgets. Then followed by Adam
Tooze’s view on expansive policies.
Kelton describes some of the primary myths of public/national debt in ‘The Deficit Myth’.
Kelton talked about American politician Warren Mosler, who believes that government do not
‘run out’ of money, just like how a score keeper sporting event can run out of points. As long as
the country is still operating and have sovereignty, the country manages their own currency, that
includes trade, produce, print, issuing of which. They can never run out of currency. “Our
government will always be able to meet future obligations because it can never run out of
money.’ (Kelton) The government acts like a currency monopolist in the economic ‘game’ and is
the issuer of the game. The players (firms and industries) are the players of the game, which can
go broke, but the issuer, however, would never run out of money. This theory mentioned above
is called the Modern Monetary Theory. Such theory opposes ideas and theories that suggest the
more money the government prints, the lower the value of which becomes and hyper-inflation
happens.
Even though the money monetary theory suggests that government could simply print more
money units without limits, but in reality, that is not how it works. Limits exist and apply in
every aspects. And Kelton definitely acknowledge the existence of inflation.
Using Venezuela as an example, which had a large proportion of its foreign-held debt
denominated in US dollars, that being said, they would not be able to print their way out of debt
like United States. Kelton argues that by using history as our lesson, people’s anxiety over
potential rising budget deficit would lead to pressure to reduce the fiscal support to wrestle
deficits lower. Which would have disastrous outcome. Kelton believe the most financially
responsible method to manage such crisis is with high deficit spending. Bond sales is another
type of security/property that could be sole by governments, as a way to raise capital for
financial purposes. The Great Recession contributed to the change in Federal Reserve’s
conducting monetary policy. In November 2008, quantitative easing program was introduced to
the public, central bank of country would purchase long dated government bonds from large
banks, in hopes to stimulate the US economy, the FED also lowered the long-term interest rates.
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In the opinion of David Frum, central banking in the twenty-first century is fundamentally
different from the conventional understanding of what it is intended to achieve. He argues that
we require a new monetary system to function properly.
There is a greater proportion of the informal sector in emerging nations than in industrialised
ones. A lack of legal standing as a business means that financial institutions are wary about
lending money to these organisations. Recovery of a loan when the borrower does not pay on
time is difficult without collateral. There are also doubts as to whether microcredit can solve this
problem on its own. More than 1.8 billion people and 360 million families might benefit from
microfinance products in the developing countries. (Sebastian Dullien)
Unconventional monetary policies have pushed central banks into unchartered territory. Will
Batman believes that QE profoundly undermines the constitutional status quo for central banks.
It describes how monetary (monetary) and fiscal (treasuries) institutions interact legally and
monetarily under QE. While all QE programs feature a range of debt instruments, in the US, EU
and UK non-sovereign debt purchases are very minor. The ECB insists on describing its "Public
Sector Purchase Program" as just "Asset Purchase Programs" (APP). Counter-majoritarian: The
Bank of England was established with the goal of operating independently of politics and the
financial market. The free-market Washington Consensus was eroded in the 1990s as a result of
the actions of autonomous central banks. In the last several decades, central banks have grown in
strength to unprecedented levels. With increasing responsibility comes the tendency for them to
lose sight of their initial objective. COVID-19 is transforming states, and even the United States,
as a result of its implementation.
Constitution. A central bank that intervenes as substantially as today's central banks would
inevitably alter the price and economic incentives of a market. Will it attempt to redistribute
wealth in a deceptive manner? According to a well-known model, central bank independence has
eroded during the course of the 1990s. Those central banks that were earlier set up to combat
inflation are now battling to keep the economy from slipping into deflation.
Modern central banks are unconcerned about the size of the money supply, regardless of how
large it becomes. According to the conventional paradigm, politicians were seen to be fiscally
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irresponsible, and as a result, independent central banks were needed to bring them back into
line. Since the 1970s, we haven't seen a constant increase in debt, but rather a succession of
unsuccessful attempts to bring the books back into balance. This year, central bankers have been
more concerned with financial instability than they have been with trade unions or political
leaders. They have taken it upon themselves to serve as the whole backup for the financial
system.
In Stephanie kelton book, Modern Monetary Theory is used to analyze the federal deficit
(MMT). Using MMT, it is possible to show that government deficits are good for the economy in
almost every case. Instead, then pursuing the erroneous goal of balancing the federal budget,
MMT advocates should focus on harnessing our public money. When it comes to John Maynard
Keynes's Modern Monetary Theory (MMT), it's all about the larger economic and social
ramifications of a proposed policy change rather than the budgetary ones. Real limits are
distinguished from fictitious ones set by the observer. Not at all. The problem is not our
government's ability to spend money, but rather inflationary pressures and the resources that are
actually accessible in the real world.
The Bank of Japan, which was once a key player in financial speculation, has now become a
pawn in the Japanese bond market, according to the Financial Times. When interest rates are
low, it is detrimental to the interests of savers, pension funds, and life insurance firms. With a
glut of savings and low investment rates, the federal funds rate is likely to decline further. In an
effort to stave off deflation, central bankers have resorted to a never-ending supply of stimulative
measures. Throughout the 1990s, the Bank of Japan conducted one monetary policy experiment
after another in order to see what might work.
Following the eurozone crisis, the European Central Bank (ECB) embarked on a series of
experiments of its own. They elevated central bankers to the status of heroes and fundamentally
altered the notion of independence. During the early years of the Euro, the compromise worked
out rather nicely. It was, on the other hand, a fragile creature. In response to the global financial
crisis of 2008, the European Central Bank expanded its interventionary powers significantly,
acting to regulate interest rates paid by the weakest eurozone member states and boosting bank
lending through complex interest rate manipulation. Following this, it was expected that there
would be conflict.
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Cheap credit, according to proponents of free market economics in Germany, is a danger to
market discipline. Members of the European Central Bank's (ECB) management have been
accused of partaking in redistributive Keynesian policies that were camouflaged as monetary
measures. In the shape of the Alternative for Germany, a right-wing economic alternative to
Berlin's cooperation with the European Central Bank arose in early 2013. A recent decision by
the German Constitutional Court came in the matter of Bernd Lucke, who was one of the
plaintiffs in the case. A persistent impediment to the uncontrolled expansion of European
authority during the 1990s was the judiciary's ability to intervene.
When monetary policy becomes considerable in scope, however, it loses its relevance. Given in a
courtroom where social isolation was strongly enforced, however the judges did not wear face
masks when they delivered their decisions. As the COVID-19 scenario approaches, Chief Justice
Andreas Voßkuhle voiced worry that the judgement would be seen as a danger to the need for
unity in the European Union. The German court's challenge to the European Central Bank's
quantitative easing plan has called into question the fundamental assumption of central bank
independence. The German Constitutional Court has rendered an important ruling on the price-
stabilization competence of the European Central Bank (ECB). This is a landmark decision.
This is not a decision made by the ECB, but rather one that has been imposed on it as a result of
historical circumstances, which the court fails to acknowledge in its judgements. Steppen bacher
questions if a case made by an employee who was dismissed as a result of the rulings would have
been heard by the court. The Bundesbank is a member of the Euro system, and the Federal
Constitutional Court is in charge of the Bundesbank's operations. As a result, there is a
possibility that the Bundesbank and the German government will come into conflict.
Misguided fears stand in the way of better public policy, so let's try to fix our thinking. MMT
economist doesn't agonize over "my share" of the national debt, and I never worry about the US
ending up like Greece. I don't fret over the possibility that China might one day shut off the US
of the dollars we need to pay our bills. As of May 2019, China held $1.11 trillion in US
Treasuries. Americans paid for goods with US dollars, and those payments were credited to
China's bank account at the Federal Reserve.
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"Borrowing from China" involves nothing more than an accounting adjustment. When Greece
abandoned the drachma in 2001, it became a currency user. Under the euro, all of its existing
debt was redenominated into euro, a currency that the Greek government could not issue.
Lending to Greece was a lot like lending to an individual US state, say Georgia or Illinois. In
terms of risk, it was comparable to lending to a state in the United States, such as Georgia or
Illinois. When Greece entered the eurozone, the country was left without a central bank selected
by the government of the day. Greece had to come up with the money before it was required to
do so in order to meet its debts and obligations.
References:
Tooze, A. (2020). The death of the central bank myth. Foreign Policy, 13, 2020.
Despain, H. (2020). Book review: The deficit myth: modern monetary theory and the birth of the people’s
economy by Stephanie Kelton. LSE Review of Books.
Burnham, T. C. (2020). Stephanie Kelton, The Deficit Myth: Modern Monetary Theory and the Birth of the
People’s Economy.
Hogan, T. L. (2021). Stephanie Kelton, The Deficit Myth: Modern Monetary Theory and the Birth of the
People’s Economy. New York: public affairs, 2020. Xi+ 325 pages. 30.00 USD (hardback). The Review of
Austrian Economics, 1-4.
Begović, B. (2021). The Deficit Myth: Modern Monetary Theory and How to Build a Better Economy by
Stephanie Kelton. Panoeconomicus, 68(3), 405-414.
Dullien, S. (2009). Central banking, financial institutions and credit creation in developing countries (No.
193). United Nations Conference on Trade and Development.