How Can A Floating Currency Sovereign Default?

I have been toying with an idea of writing a book with the title "How Can a Floating Currency Sovereign Default?" As a follower of Modern Monetary Theory (MMT), this is a bit of a joke, since the text of the book would just be: "They can't." The book can then be submitted to the World's Shortest Book Competition.

Thinking about this has led to me to the realisation that the usual way of discussing sovereign default is inherently defective. (This criticism extends to my earlier book Understanding Government Finance, unfortunately.) The usual technique is to describe the mechanisms for default, look at some models, and argue why a default is unlikely. This then runs into a hurricane of whataboutery - what about the external constraint, Russia, Iceland, etc.

The Financial Instruments Associated With Crises

This article is a continuation of previous comments on financial crises, with two lines of discussion. The first is a bit of a primer, explaining why I and other commentators associate financial crises with a buildup of private debt. The second part discusses the main problem with associating crises with private debt buildups: growth in debt stocks is by itself not enough to trigger a crisis. The catch is a variant of the efficient markets hypothesis: if we could easily forecast crises, it would be easy to outperform markets. However, other market participants are trying to do the same thing.

Do Central Governments Need To Issue Bonds (Again)?

The old "should the government issue bonds" debate has come up again. I would point the reader to this article at Mike Norman Economics, as well as the Richard Murphy article it refers to. I would argue that there is limited room for debate. The Treasury of the central government certainly can stop issuing bonds, conditioned on there being changes to the legal/regulatory framework for the central bank. The more important question is whether such a policy is a good idea. My argument is that doing so would run into a variety of consequences, and other policy decisions would need to be rethought (mainly the structure of pension provision).

Breakeven Inflation Analysis

The retail rollout of Breakeven Inflation Analysis has started. The ebook version is now available at some Amazon regional stores, and will appear at other retailers within a few days.

Universal book link: books2read.com/BreakevenInflationAnalysis

The publication of the paperback edition will take a few weeks.

Book Description

The great inflation of the 1970s in the developed countries provoked strong economic (and political) reactions. In finance, investors searched for ways to protect themselves from inflation. The United Kingdom launched the first modern inflation-linked bonds in 1981. In addition to being of interest to investors looking for protection against inflation, these bonds also provide a market-based measure of inflation expectations. Since investors have “skin in the game,” the resulting forecasts might be better than a purely survey-based inflation forecast. More reliable inflation forecasts should be useful for policymakers that aim to control inflation.

This report discusses the breakeven inflation rate that is implied by pricing in the fixed income markets. For those with a casual interest in the subject, it is probably good enough to view those inflation breakeven rates as a market-implied forecast for inflation. However, if one wants to delve into the analysis, it is necessary to come to grips with the complications in the subject. Is the forecast biased? Are there technical factors in the bond market that affect pricing? The objective of this report is to offer an intermediate-level introduction to these issues. The target audience is either those with an interest in finance and who are unfamiliar with inflation-linked bonds or economists who want to understand better the factors that affect inflation breakeven rates.

Publishing Update

My next book - Breakeven Inflation Analysis - is in its final stages before publication. Unless something goes wrong, the Amazon ebook (Kindle) version should appear within a few days; the non-Amazon ebooks (Apple, Kobo, ...) may face unknown delays.

I have been fighting with various formatting issues for the non-Kindle ebooks. One solution was to have nice generic formatting (courtesy of the document conversion of my distributor), but at the cost of breaking endnote links. Since all of my reference material is in endnotes (footnotes in paperback), this was not particularly attractive. I have instead gone a different route, but it embeds custom encrypted fonts in the EPUB file. The presence of the encrypted fonts may cause difficulties with acceptance with some retailers. I will probably only find out the magnitude of the problem once I actually submit to distribution.

Comments On Eric Lonergan's Fiscal Rules Post

Eric Lonergan has recently written a post about the fiscal rules debate that has cropped up around the U.K. Labour Party's adoption of such a rule. As usual, his post covers a lot of territory -- if I were to attempt to cover all the points he raised when following my preferred writing style, it would be a 10 part article. Meanwhile, I am supposed to be working on finishing off my breakeven inflation book, as well as dealing with other projects. As a result, I just want to respond to a couple big picture points.

The article is interesting, but I would note that Eric Lonergan and I disagree on a subject (starts with "m," rhymes with "honey") that I want to abolish from economic discourse. Therefore, even though I like the article, I have reservations that I do not wish to pursue.

The Myth Of The Myth Of Monetary Sovereignty

Frances Coppola recently wrote “The myth of monetary sovereignty,” that rehashes some old complaints about Modern Monetary Theory (MMT), which could be summarised as saying that MMT is only applicable for the United States. There are perhaps some claims within the article regarding developing economies that are worth debating, but they are not of interest to myself. My background and writing interests are in the analysis of the developed economies, and I largely stick to my knitting.

(As an update on "Inflation Breakeven Analysis": the book should be ready for ebook publication by next week, unless something else goes wrong with formatting.)