This is the first of two openletters to Professor Bill Mitchell. Both were submitted as comments to his blog. Both have been rejected.
On Friday 14th August, the Governor of theRBA, Philip Lowe, provided evidence to the House of Representative StandingCommittee on Economics. Modern Monetary Theory (MMT) was referred to several times. See: The Hansard. https://parlinfo.aph.gov.au/parlInfo/download/committees/commrep/868db039-2384-4ce9-a502-1354709677d2/toc_pdf/Standing%20Committee%20on%20Economics_2020_08_14_7974.pdf;fileType=application%2Fpdf#search=%22committees/commrep/868db039-2384-4ce9-a502-1354709677d2/0000%22
On Tuesday 18th August, Bill Mitchell, Professor of Economicsand Director of the Centre of FullEmployment and Equity (CofFEE) at the University of Newcastle, and theAustralian co-founder of MMT, posted a rejoinder on his blog. The rejoinder washeaded “RBA Governor adopts apolitical role to his discredit”. See: http://bilbo.economicoutlook.net/blog/?p=45630
Bill Mitchell,
You have accused the Governor of the RBA, PhilipLowe, of lying: “… a straight out lie”, “Alie”, “A lie” and “… the RBA Governor went further into the mire of lies”.
Supporters of MMT claim that MMT uniquely explainshow modern economies really work. They make the mistake of confusing how modern economies really work with how they believe it should work. Just because Phillip Lowe does not agree with MMT does not mean he is lying. The Governor of the RBA, Philip Lowe, is not a liar. You should withdraw those accusations.
In your blog you are loose with the truth yourself. You criticised the RBA’s purchases of three-year government bonds. Your criticisms are based on misinformation and misrepresentation.
This is your main criticism: “… the RBA hasalready purchased $A45,250 million worth of Australian Government bonds underits so-called – Long-dated Open Market Operations.
I discussed this program in this blog post – The Australian government isincreasingly buying up its own debt – not a taxpayer in sight (May 26, 2020).
The Government has not been saying much about thisprogram for obvious reasons.
They don’t want the public to know that one arm ofthe currency-issuing government is accumulating a large proportion of theliabilities issued by another arm (Treasury) to follow the rise in the fiscaldeficit.
If they explained what was going on in the realworld to the public, it would become very clear that the central bank iseffectively ‘funding’ a significant proportion of the increase in the fiscaldeficit than any notion of some taxpayer account or the reliance on privatebond markets.”
The government can always retire its own debt. In this instance it is not the government that is buying government bonds, it is the RBA. MMT supporters in Australia refuse to acknowledge the operational independence of the RBA.
The program of purchases of three-year governmentbonds is one of a number of steps the RBA took in March as part of its monetarypolicy response to the COVID-19 crisis. The purpose of the program is to better align the yield curve. You chose not to acknowledge that fact.
You stated that “the government has not beensaying much about this program” and that “they don’t want the public toknow”. This allegation is false. The “they” you were referring to is the government and the RBA. The RBA has said a great deal. It is true that the government has not said much, but the government would not be expected to comment on monetary policy. The RBA is responsible for monetary policy, not the government.
In his speech on March 20 the Governor of the RBA announcedthe RBA’s intention to undertake the program. The RBA has regularly updated the public with information on the program in speeches by Philip Lowe in April and July, in a speech by the Deputy Governor, Guy DeBelle, in June, and in statements and reports on the RBA website. All of the speeches and documentation has been available and can be downloaded from the RBA website.
Your allegation that “they don’t want the publicto know” is blatantly false, and you know it to be blatantly false. You cited the speeches and other documentation from the RBA website in your blog.
In the interests of accuracy and balance, this is whatPhilip Lowe said in his speech on March 19 when he announced the program:
“Target Yield on 3-year Australian governmentBonds
Over recent decades, theReserve Bank's practice has been to target the cash rate, which forms theanchor point for the risk-free term structure. We are now extending andcomplementing this by also targeting a risk-free interest rate further outalong the yield curve.
In particular, we aretargeting the yield on 3-year Australian Government Securities (AGS) and wehave set this target at around 0.25 per cent, the same as the cash rate. Overrecent weeks, the yield on 3-year AGS has averaged 0.45 per cent, so thisrepresents a material reduction.
We have chosen thethree-year horizon as it influences funding rates across much of the Australianeconomy and is an important rate in financial markets. It is also consistentwith the Board's expectation that the cash rate will remain at its currentlevel for some years, but not forever.
To achieve this yieldtarget, we will be conducting regular auctions in the bond market. We publishedsome technical details earlier today and we will keep the market informed ofour operations. Our first auction will be tomorrow. As part of this program,our intention is to purchase bonds of different maturities given the high levelof substitutability between bonds. We are also prepared to buy semi-governmentsecurities to achieve the target and to help facilitate the smooth functioningof Australia's bond market.
I want to make it clearthat our purchases will be in the secondary market and we will not bepurchasing bonds directly from the Government.
I would also like toemphasise that we are not seeking to have the three-year yield identically at25 basis points each and every day. There will be some natural variation, andit does not make sense to counter that. It may also take some time for yieldsto fall from their current level to 25 basis points.
I understand why manypeople will view this as quantitative easing – or QE. This is because there isa quantitative aspect to what we are doing – achieving this target will involvethe Reserve Bank buying bonds and an expansion of our balance sheet.
But our emphasis is not onthe quantities – we are not setting objectives for the quantity and timing ofbonds that we will buy, as some other central banks have done. How much we needto purchase, and when we need to enter the market, will depend upon marketconditions and prices.
Rather than quantities orthe size of our balance sheet, our focus is very much on the price of money andcredit. Our objective here is to provide support for low funding costs acrossthe entire economy. By lowering this important benchmark interest rate, we willadd to the downward pressure on borrowing costs for financial institutions, householdsand businesses. We are prepared to transact in whatever quantities arenecessary to achieve this objective.
We expect to maintain thetarget for three-year yields until progress is being made towards our goals offull employment and the inflation target. Our expectation, though, is that theyield target will be removed before the cash rate is increased.”
https://www.rba.gov.au/speeches/2020/sp-gov-2020-03-19.html
The RBAhas not been engaged in Quantitative Easing to increase the stock of money in theprivate sector. The RBA has not been “effectively ‘funding’ asignificant proportion of the increase in the fiscal deficit”.
The purpose of the purchaseby the RBS of three-year government bonds from the secondary market is to betteralign the yield curve.
The use of Open MarketOperations by the RBA to better align the yield curve is standardpractice. This difference this year, because of the COVID-19 crisis, is the size of the intervention.
RogerTonkin
FormerLecturer in Econometrics, Macquarie University (Retired)
20thAugust, 2020
