Archive for June 19th, 2019

Book Review: The Bank of England and the Government Debt (1928-1972) (Another way of looking at MMT?)

June 19, 2019

A new book by William Allen who worked for Bank of England from 1972 to 2004 on monetary policy formulation and financial market operations.

John Wood reviews the book:

 Central banks do more than conduct monetary policies aimed at price level and employment objectives. They also — and this was the Bank of England’s (the Bank’s) original and primary task for most of its history — raise money (issue/sell securities) for governments, and in the course of debt management support orderly and otherwise attractive markets for those securities, including gilt-edged bonds in the UK, or gilts, so called because their paper certificates had gilded edges. The purpose of this book “is to describe the [Bank’s] operations in the gilt-edged market” from 1928 to 1972, “and to suggest possible reasons why they were at times conducted in a way which most economists found quaint and incomprehensible” (p. xiii). The author worked for the Bank from 1972 to 2004 on monetary policy formulation and financial market operations, and his book endeavors with a good deal of success to connect these activities.

The market for gilts has largely been conducted by the brokers and jobbers (dealers/market-makers) of the London Stock Exchange since the eighteenth century. (UK bonds are also known as Treasury stock, and historically were among the main securities traded on the Stock Exchange.) Not being an Exchange member, the Bank dealt through a broker, the Government Broker, the senior partner of Mullens and Co. A primary goal, and the one emphasized in this book, was “to maintain the liquidity of the gilt market,” and in this connection act as market-maker of last resort. This role of central banks “has been discussed extensively in the context of the crisis of 2008-09,” but the present study shows that the Bank had long acted in this manner, and even, at times, as market-maker of first resort (pp. 2-3). “The term ‘market liquidity’ refers to the ease with which large amounts of an asset can be bought or sold; ease embraces both the amount of time it takes to complete the transaction, and how close the transaction price is to the price ruling in the market just before the transaction was undertaken” (p. 6).

The Bank’s financial activities depended on the monetary policies chosen by the government. In particular, its interventions were dictated by the government’s frequent preferences for interest rates that differed from market equilibria. The Bank acted pretty much as a price taker during the 1930s, when yields rose with recovery from the Great Depression, but was a substantial buyer during World War II as it supported interest-rate ceilings on government debt. From after the war to near the end of our period, the Bank (along with other central banks) was torn between the often contradictory goals of a fixed exchange rate and full employment, forcing devaluations of the pound from $4.20 to $2.80 during Labour’s “cheap money” policy in 1949 and to $2.40 in 1967, which was a delayed reaction to the Tories’ growth policies of the late 1950s and early 1960s. Among the unfortunate side effects of the misalignment of policies were foreign exchange controls and the suppression of private demands (including investment) by means of controls on consumer credit and bank lending.


This is another way of looking at MMT.

MMTers say the central bank works a lot with government than we are made to think.  Much of central bank policies are done while actively managing the government debt. The central banks not just buy the debt but also manage the yields. Pre-central bank era they did so based on government orders and post-independence era, do it by stealth. Infact legally too, central banks change their balance sheets by changing the composition of government bonds.

Thus, even if you disagree whatever MMTers have to offer you cannot deny this is how central banks actually work!


The fallout of overestimated Indian GDP: Scrap RBI’s monetary policy panel or give it a dual mandate?

June 19, 2019

All  kinds of things being written after Arvind Subaramaniam’s research paper was released which said India GDP growth rate is overstated by 2.5%.

From being labelled a scoot and shoot economist to being accused of intellectual treason! It is such a pity when you are given all the names for merely writing a paper! I mean one can disagree with the ideas but accusing someone of treason! Really? How bad is it going to get? Cannot believe that a leading financial daily actually agreed to publish such acerbic stuff. How low is it going to get?

Anyways, another piece questions the role of RBI’s MPC:


The Overuse of Mathematics in Economics: View from an economics student

June 19, 2019

Luka Nikolic, Master’s student (Business and Economics) at the University of Ljubljana writes:

If you enrolled at university today, you would find economics modules filled with mathematics and statistics to explain economic phenomena. There would also be next to no philosophy, law, or history, all of which are much more important to understanding the way our world works and how it impacts the economy.

The reason is that since the end of the 19th century, there has been a push toward turning economics into a science—like physics or chemistry. Much of this has been done by quantifying phenomena and explaining it through graphs. It has been precisely since this shift that there has been such a poor track record of public policy, from fiscal to monetary.

What many contemporary economists fail to realize is that economics is as much of a philosophical pursuit as a mathematical one, if not more so.

What follows is a short history of economics and why Maths despite being important only answers so much.


Italy’s Mafia Uses the Old Lira as Its Own Parallel Currency

June 19, 2019

As Italy plans fiscal money to subvent ECB and Euro, there is another interesting story from the country.

Italian Mafia still uses Old Lira notes!

Italy’s proposed mini T-Bills may be pie in the sky for now, but it appears the country already has another currency floating around — the old lira.

A senior police officer revealed this week that domestic criminal organizations are still using the pre-euro currency for illicit transactions. It’s not clear how the former notes are ultimately exchanged for euros, if at all, though he said officers are still uncovering them. The lira ceased to be legal tender at the end of February 2002.

“We still discover big amounts of liras,” Giuseppe Arbore, a deputy in the Guardia di Finanza, which investigates financial crimes, said at a parliamentary hearing on Thursday. “Italian liras still constitute parts of illicit transactions.’’

Arbore’s remarks prompted amazement among lawmakers of the Senate Finance Committee, where he was testifying on a government bill aimed at simplifying the tax system. When pressed to provide examples, he said he couldn’t elaborate, citing ongoing investigations.

“When a banknote is accepted by an organization internally, even if it is outside the law as a legal value, it can settle transactions,’’ he said. “We are obviously talking about illicit organizations.’’


Under current legislation, it’s not possible to convert lira, and the Bank of Italy years ago transferred the equivalent value of the currency still in circulation to the state, around 1.2 billion euros, according to the central bank’s website.

It’s not the first time that the mob and the former currency have been linked. In 2012, the central bank’s Financial Information Unit report said it worked with the Bureau of Anti-Mafia Investigation on “suspicious transaction reports’’ relating to lira-euro conversions.

Italy and its Mafia!

Though the bold bit is how anything becomes a currency and if backed by State becomes legal tender.

History of Australian equity market: 1917-79

June 19, 2019

Thomas Matthews of RBA in this paper:

This paper presents stylised facts about the historical Australian equity market, drawn from a new hand-collected unit record dataset on listed companies from 1917 to 1979. Among other things, I show that: i) dividends for the early 20th century were lower than previously believed; ii) the realised returns on equities has averaged about 4 percentage points above that on government bonds since 1917, somewhat lower than previous estimates; iii) the share of profits paid out as dividends increased substantially after the introduction of franking credits in the 1980s; iv) the current industry composition of the stock exchange is atypical relative to history, despite it being dominated by essentially the same companies for the past century; and v) price-to-earnings ratios are currently almost exactly at their very long-run average, in contrast with the experience of some other countries.

Good stuff!

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