Exogenous v/s. Endogenous Money Theory!

I found this statement by Raghuram Rajan in the Deccan Herald of December 29, 2014 (p.13):

"Some budgetary incentives for household savings could help ensure that the country's investment is largely financed from domestic savings ... Domestic demand has to be financed responsibly, as far as possible through domestic savings."

The conventional circular flow and endogenous money

Once again a report in the Livemint of 27-11-2014 caught my attention;

“Perhaps the reason we have been so willing to protect the borrower against the creditor is that the hated moneylender looms large in our collective psyche. But the large borrower today is not a helpless illiterate peasant and the lender today is typically not the sahukar but the public sector bank. In other words, we are the lender,” said Rajan in his speech on Tuesday, adding that when the large promoter defaults wilfully, he is essentially robbing the taxpayer and making it costlier to fund new investment in the economy.*

This sounds so much like the conventional circular flow reasoning - that deposits come before lending.  Endogenous money questions this view; loans create deposits.

I am not questioning the fact that growing NPAs are a cause of concern but simply raising the point that economists still cling to the conventional view that banks use savings to lend just like the moneylender.


* Read more at: http://www.livemint.com/Money/TaNyxECKa6pbuWYuS7vAaN/RBI-ready-to-give-more-flexibility-in-recasting-distressed-l.html?utm_source=copy

Here is some conventional macroeconomic rhetoric, extracted from an article in the Livemint of Friday, Nov.7, 2014.  MMTers can obviously see through the anxiety that is being raised here.


... “Given the sluggish growth of tax revenues in (the) first half of 2014/15, meeting the disinvestment target would be crucial to ensure that the fiscal deficit remains in line with the budgeted level,” said Aditi Nayar, an economist at ICRA, the Indian arm of rating agency Moody’s.

... Officials worry that a shortfall in proceeds from share sales and lower tax collections due to the weak economic recovery could force them to cut budgeted spending again.

... “The situation is not as bad as last year, but we may need expenditure cuts, maybe of Rs20,000-25,000 crore,” said the first source, adding there could be savings in capital spending as some ministries were unable to spend allocated funds.

Read more at: http://www.livemint.com/Politics/fUvEGpLThR9rVAtYvpDinN/Govt-may-fall-short-of-its-95-billion-privatisation-target.html?utm_source=copy

German austerity: will the euro zone break up?

Anyone familiar with MMT would see the misery Germany is heading towards.  Even worse it will take with it the rest of Europe.  Excerpts below from an article that appeared in the Livemint today (25 October 2014) (http://uk.reuters.com/article/2014/10/24/uk-eu-summit-idUKKCN0ID0VF20141024) clearly highlights the fears that many modern money theorists have been warning us about.  What is surprising is that there is no popular political voices coming from Germany that make an MMT argument against German austerity.

Stagnating euro zone seeks German shift

BY FRANCESCO GUARASCIO AND ROBIN EMMOTT

…

After the bloc's revival came to a halt in the second quarter, France and Italy want to shift course away from the spending cuts that marked the bloc's response to the 2009-2012 crisis Germany says debt discipline must continue.

Seated around a large oval table in the EU summit's red marble building, Merkel said no country with a national debt greater than its economic output should be borrowing more, diplomats said.

…

According to people in the room, Merkel said record low interest rates gave the euro zone "room to breathe" and that a mix of private investment, fiscal discipline and openness to fast-growing Asian economies was the way forward.

…

The debate is complicated by EU rules that seek to keep country's public finances in order and Germany's promise to balance its books next year for the first time since 1969.

…

How mainstream macroeconomics thinking finds its way into popular discourse.

Two excerpts from articles that appeared in the Livemint of 20 October 2014 show how the need to achieve a fiscal deficit target is becoming an end in itself.  More than the fiscal deficit number per se the debate needs to focus on the real effects of subsidies in distorting resource allocation (if that is so) and the unproductive expenditure of the government that fails to ease supply side constraints and raise productivity.  There is surely space for an MMT perspective on these issues.

Is the centre finally cracking down on subsidies?

Decisions on diesel prices and cooking gas subsidy will help meet centre’s fiscal deficit target of 4.1% of GDP

Remya Nair

…

The move will also enable the government to meet its fiscal deficit target of 4.1% of gross domestic product (GDP), even after taking into account the expected shortfall in revenue collections.
…

A Union cabinet minister, who did not wish to be identified, pointed out that the government cannot afford to continue with the current subsidy regime. “There are no freebies. We cannot afford to bankrupt the state exchequer,” the minister said, signalling the central government’s intent to overhaul the subsidy regime.
…

Read more at: http://www.livemint.com/Politics/h9P8fnfqgoehC9iRbAHzuL/Is-the-centre-finally-cracking-down-on-subsidies.html?utm_source=copy

What it takes to make in India

The first and most important condition for manufacturing success in India is to have a low inflation regime

Narayan Ramachandran 
…

The first task in ensuring a low inflation environment is to eliminate the primary deficit. This deficit is the difference between the total revenue and total expenditure of the government with debt payments netted out of the calculation. India must begin to deliver upon both a primary and fiscal deficit target as measures of fiscal consolidation in its annual budget. The elimination of the primary deficit and a reduction in the fiscal deficit (to say 2.5% of GDP) will ensure that we live within our means each year, do not increase the stock of debt and crowd out less capital from the productive economy.

…

Read more at: http://www.livemint.com/Opinion/ZNh0XaD02lIvreFus5PHlL/What-it-takes-to-make-in-India.html?utm_source=copy

IMF, India's fiscal deficits and the need to question the obvious

I just read a news report from Business Today (19-Sept-2014) that speaks of the IMF asking the RBI to raise interest rates.  The infatuation over fiscal deficits as being the most serious problem that Indian macroeconomic policy needs to address runs throughout the article.  But there were also some contradictions that I came across, reading between the lines.  Here are some statements from the article that I want to highlight:

"...IMF said the government needed to take more steps to reduce stubbornly high inflation and the large fiscal deficit."

"The IMF said removing supply bottlenecks would lead to more sustainable growth. It also called for increasing public spending on infrastructure to ease supply bottlenecks and support economic development."

"While lauding the new government's emphasis on fiscal consolidation, it said "the quality and durability of the consolidation remain a cause of concern.""

"The government proposes to bring down the fiscal deficit to 4.1 per cent of gross domestic product (GDP) in current year from 4.5 per cent last fiscal ... fiscal deficit has to be brought down to three per cent of the GDP by 2016-17."

On the one hand the IMF wants to cut the fiscal deficit while at the same time they want an increase in public spending on infrastructure.  When they say the quality of the deficit is important, what do they mean?  What are the items that the government should cut spending on?

Also, like MMT warns us, why this concern about fiscal deficit numbers like 4.1% and 3% of GDP?  Will achieving these numbers solve India's macroeconomic problems?

It's time for MMTers to question what is now being seen as obvious in India.



Follow this link to read the article in Business Today:

http://businesstoday.intoday.in/story/rbi-should-raise-policy-rates-to-cut-inflation-imf-g20-cairn/1/210504.html

My book entitled, "In Search of Stability:  Economics of Money, History of the Rupee" should be out soon.  As the title suggests, I have traced the history of the rupee from 1542 to 1971 and added an epilogue which extends the study up to present times,  All this is done from a positive economics standpoint.  The book, however, does not take a critical stand on the colonial regime by asking what would have happened if things had been different; say, for instance, if India would have been better off had we moved on to a gold standard instead of the gold exchange standard in the late 19th century.  Rather we explore what the gold exchange standard was and its implications of price and exchange rate stability for India.  With this understanding, students and economic historians could pose more critical questions for further study.  The book has been accepted for publication by Manohar Book Publishers, New Delhi, India.

After completing the book I was keen to further explore the more recent history of the rupee, specifically post-1971.  It is while to trying to find a suitable theoretical framework within which I could place my study that I came across Modern Money Theory or MMT.  Over the last few months I have gone through several books, blogs and videos by the main proponents of MMT.  It's not only fascinating but has opened up a whole new world for me.  I had studied Keynesian macroeoconomics during my M.A. at Bombay (now Mumbai) University but was then exposed to a completely different macroeconomics at Cornell while doing my Ph.D.; if I recollect rightly it was dynamic optimization (micro was supposedly static optimization).  Confused about what I was really learning from all those models, my interests shifted altogether to political economy.  Luckily for me I got back to teaching Macroeconomics 101 to management students in India and have been able to hold on to simple Keynesian theory.

My interest in the economic history of the rupee and Keynesian macroeconomics somehow comes together when I read through the literature on MMT.  As I mentioned, it has opened a new window for me to understand fiscal and monetary policies in India today.

I will share things that I come across from sources including newspapers, magazines and TV that I think are important and need a re-look.  I do not intend to make any theoretical contribution to MMT right now at least; those interested could Google "modern money theory" and easily find material from the masters. I think there is a dire need of MMT for India; this is where I hope to make some contribution.