Sunday, 19 November 2017

Francis Coppola’s “money from thin air” argument.


 Her "thin air" argument appears in the initial paragraphs of an article of hers entitled “Money Creation in a Post Crisis World”.

Her argument is that the money created by commercial banks is not “created from thin air” because the money is backed by a debt. That is a flawed argument for the following reasons.

When a bank grants a loan, it credits the account of the borrower and in doing so “creates money”. But not unreasonably, the bank will want that money back at some stage, and to represent that obligation to repay, the bank debits another account with the borrower’s name on it. That’s the debt owed by the borrower to the bank.

But both book-keeping entries are just that: book-keeping entries. That is, both obligations arise out of thin air. Why does the fact that they are equal and opposite obligations created out of thin air make them “non-thin-air” rather than “thin air”? Darned if I know.

Next, there is no question but that governments and central banks create money out of thin air (as Francis herself points out – para starting “But in fact…”).  Thus there is nothing inherently wrong with creating money out of thin air. What MAY BE wrong in the case of private banks creating money out of thin air is that they reap an unjustified profit from doing so. And in fact I argue (as have others) that there is indeed such an unjustified profit there in a paper entitled “Taxpayers subsidize private money creation.”

Thus the “thin-airness” of money is irrelevant: the important point is the possible unjustified profit.


 

Donations to charity.

Next, there is nothing to stop a commercial bank crediting someone’s account WITHOUT there being any corresponding debt owed to the bank. That would be a gift by the bank to the account holder. Indeed, some banks may actually do that, for all I know, when they make gifts to a charity which happens to have an account at the relevant bank.

In that case, the book keeping entries would be: “credit charity Y” and debit “gifts to charities” account, which in turn will be debited to the profit and loss account at the end of the year.

Of course gifts to charities by banks are a small proportion of banks’ turnover. “Gifts” to politicians and political parties with a view to getting bank favorable legislation passed are doubtless more common, though even those will be a small proportion of banks’ turnover. But the important point here is that contrary to Francis’s claim, a debt owed to a bank is not needed in order for the bank to create money “out of thin air”.


Unproductive loans.


Next Francis Coppola criticises the claim by Zoe Williams in the Guardian that too much is loaned to allegedly unproductive sectors of the economy like mortgages, with not enough going to SMEs. I fully agree with Francis there. The fact is that the proportion of SMEs which fail to repay loans is double the equivalent proportion for mortgagors. I.e. there just aren’t all that number of viable potential loans to SMEs out there.

It is also a mistake by Zoe Williams to claim that mortgages which fund the purchase of existing houses are less productive than mortgages which fund to construction of new houses. Basic reason is that the purchase existing houses pushes up the price of houses, which in turn induces builders to build more houses. I go into that in more detail in an article entitled “Borrowing to BUILD houses is no more productive…”.



Positive Money and debt.


Next, Francis says “Those who propose "sovereign money" to replace money creation through bank lending appear to be driven by an irrational, though perhaps understandable, fear of debt. And they also, to my mind, place far too much faith in central planners, as this comment from Zoe Williams shows.”

The comment by Zoe Williams is thus:

“The nature of centrally created money should itself be opened up for debate, whose starting point is: if we agree that commercially created money is skewing the economy, can we then agree that it should be created by a public authority, even if we don’t yet know what that authority would look like.”

Re “Those who propose “sovereign money””, that’s a reference to Positive Money which (far as I know) is the only organisation to use the phrase “Sovereign Money”, though it’s not the only organisation to advocate full reserve banking (a system under which private money creation is banned).

Re Francis’s reference to “irrational fear of debt”, I agree that about 95% of those who write on the subject of debt are motivated by the negative emotional overtones of the word debt rather than by reason or logic. Indeed that phenomenon is even worse in Germany, where the word debt (schuld) also means “guilt”. Yup: I’m afraid about 95% of the human race are motivated by emotion rather than reason.


Central planners.

Also in the above passage quoted from Francis’s article, she refers to “placing far too much faith” in mysterious “central planners” who would decide on the amount of money to periodically create in a “central bank money only” system (i.e. full reserve banking).

Well I have news: money created by the state and spent into the economy is simply a way of imparting STIMULUS, something a committee of “central planners” already does.!!! Those “central planners” are more popularly referred to in the case of the UK as the “Bank of England Monetary Policy Committee” and the "Treasury". Plus the latter to bodies actually effect stimulus in much the same way as Positive Money proposes.

Now what happens if the Treasury and BoE agree that stimulus is needed? Well the Treasury borrows and spends more, and the BoE (with a view to making sure that extra borrowing does not raise interest rates) will very likely print money and buy back some of that debt. And what d’yer know? The net effect of that is: “the state prints money and spends it into the economy”. Indeed, over the last few years, the BoE has bought back virtually ALL the debt incurred by the Treausury via QE.

Hey presto: the existing system is little more than a roundabout way of doing what Positive Money (and others) propose.

But there is absolutely no “central planning” there: at least there is no central planning in the old Communist / Eastern Europe sense of the phrase: that is, some central organisation deciding whether to expand a steel plant or supermarket in Vladivostok or Manchester.

Put another way, under both the existing system and Positive Money’s proposed system the only job the people “at the center” do is to implement stimulus as required.

Conclusion: both Francis and Zoe William’s references to “central planners” are flawed.


Thursday, 16 November 2017

Former governor of Spain’s central bank is impressed by Positive Money and full reserve banking.


 At least that’s the basic thrust of this video clip which lasts about three minutes.





 

I have just three minor quibbles. First the former governor seems to suggest that modern technology has made it possible for full reserve to work and for everyone to have an account at the central bank – (apologies to him if I’ve got him wrong there).

In fact, full reserve (as indeed the former governor himself points out) is an idea that has been going for decades. E.g. , as he says, the idea was advocated by Milton Friedman.

Thus unless Milton Friedman and other like minded economists were clueless on the practicalities of full reserve, modern technology is clearly not needed in order for full reserve to work: computers and the internet were essentially non-existent when full reserve was first suggested by the Chicago school in the 1930s, or indeed when Friedman advocated the idea in the 1940s, 50s and 60s.

A second quibble is that Positive Money published an article some time ago claiming their preferred bank system was not the same as full reserve. I’ve never been able to work out what the important difference is between PM’s preferred system and full reserve. I.e. I think PM is splitting hairs there.

A final quibble is that the former governor refers to PM as a “left of centre” organisation.  That’s not true in the sense that the arguments for full reserve are entirely technical: they should appeal (or not) to those on the right as well as the left. Indeed, Friedman was not exactly noted for being a leftie.!!

Wednesday, 15 November 2017

Do let’s force mortgagors to pay more interest so as to enable monetary policy to work better.


Many economists at the moment seem to want to raise interest rates back to their “normal” level, and in some cases, they want to do that simply to enable central banks to cut interest rates come a recession. I.e. they want mortgagors to be forced to pay more interest just to enable monetary policy to impart stimulus, when in fact fiscal policy can perfectly well impart stimulus.

There’s an example of this sort of thinking in a tweet by Simon Wren-Lewis where he says “I would add a fiscal policy that sees its primary goal as avoiding interest rates hitting their lower bound….”

So what’s the problem with the “lower bound”? Milton Friedman and Warren Mosler advocated a permanent zero rate. I.e. they argued that government should pay no interest to anyone: it should simply issue whatever amount of non-interest yielding base money is needed to keep the economy at capacity.

A case could be made for artificially high interest rates and hence interest rate cuts working better when needed if it can be shown that interest rate cuts work much more predictably and/or quickly that fiscal stimulus. But there’s little evidence for that, far as I know.

So the conclusion is that the policy set out by Positive Money, the New Economics Foundation and Prof Richard Werner, namely that the state should simply print base money and spend it into the economy (and/or cut taxes) when stimulus is needed, while interest rates are left to their own devices, is the best one.

That policy is certainly supported by a significant proportion of MMTers, though I’m not sure that’s “official MMT policy”, if there is such a thing.

Note that the above “print and spend and/or cut taxes” is not what might be called “pure fiscal policy”: in that new money is created, there’s a bit of monetary policy there. So a better description of the latter Positive Money / MMT policy might be “monetary and fiscal policy joined at the hip”.

Also, the latter print and spend policy is not to rule out interest rate rises in an emergency. I.e. if there was a serious outbreak of irrational exuberance, having the central bank wade into the market and offer to borrow at above the going rate might be a useful tool. However, I suggest that “print and spend” should always be the objective.

Saturday, 11 November 2017

Subversive ideas on money and banking for children.


With a view to leading the country's youth astray, I've done a short Powerpoint presentation on money and banking for children - (3 minute read). It can be downloaded from here . There's just six slides: reproduced below.

How to download.

I’m not the slightest bit computer literate, and the only way I can see of downloading is as follows. There has to be a quicker way, and I’d be grateful for guidance on that. Anyway my “slow” way is thus.


Having got to the site linked to above, click on "help" (top centre). In "search the menus", enter "download". Then choose the format you require (e.g. pdf, pptx, etc). Then retrieve the file from the download  file on your computer.













Friday, 10 November 2017

Goldman Sachs claims to be concerned about the poor. I can't stop laughing.


This is better than "doing God's work".
 

That’s in an article they published entitled “Who Pays for Bank Regulation?”.

Their basic argument seems to  be that the cost of bank regulation has to be born by SOMEONE, but the wealthy and large bank customers can go elsewhere for loans, whereas less well off households can’t. As they put it, “…we find in general that low-income consumers and small businesses – which generally have fewer or less effective alternatives to bank credit – have paid the largest price for increased bank regulation.”

The flaw in that argument is that while higher bank capital ratios do clearly have a deflationary effect, that is easily countered by standard stimulatory measures – which in effect put more base money into the hands of every household and business. Thus while higher bank capital ratios no doubt make life more difficult for less well off households who want to borrow heavily, less well off households who currently borrow relatively little will be better off: they’ll find themselves in possession of more money, which will mean they don’t need to borrow so much, and in some cases, don’t need to borrow at all.

Of course it’s difficult to prove that those two effects exactly cancel out, but if the widespread belief that there’s too much debt is valid, then higher bank capital ratios will on  balance bring benefits: there’ll be less borrowing and less debt.


Tuesday, 7 November 2017

Random charts - 45.

The first two charts are from this "Billyblog" article.

Text in pink on the charts below was added by me.

















Friday, 3 November 2017

Francis Coppola tries to defend private money printing.


That’s in two recent articles of hers. One is on her blog (1) and the second at Forbes (2).  Those two articles are very similar.

The first problem with her articles is that she confines herself to criticizing an “anti private money” article by Zoe Williams in the Guardian (3). But Zoe Williams is just a bog standard broadsheet newspaper journalist: someone without specialist knowledge of banking, though Williams obviously mugged up the subject quite well in preparing her article.

In contrast, Coppola does not mention the numerous leading economists including at least four Nobel laureates have argued for a ban on privately issued money. I.e. Coppola is attacking a soft target. Or maybe she didn’t actually know that several leading economists back a ban on private money.

Anyway, I’ll run through the Forbes article.

First, Coppola criticizes Zoe Williams for saying that money created by private banks is “spirited from thin air”. The flaw in that idea, according to Coppola, is that private banks create money when they lend, ergo such money is backed by a loan, which apparently means it is not “spirited”.

Well that’s a strange argument, isn't it? When a private bank grants a loan, it simply adds numbers to the account of the borrower. That constitutes “spiriting from thin air” in my books.  Also the bank debits its loan ledger. That loan to the borrower is an asset as viewed by the bank. But that loan is also “spirited from thin air”. The fact that a second bit of “spiriting” takes place at the same time as the first does not stop the first being “spiriting”, seems to me.  The whole exercise simply consists of entering numbers in accounts, i.e. “spiriting”.

In contrast, in the case of a commodity based money system, say gold coins, a bank would not lend gold coins unless it actually had gold coins in stock. That gold coin scenario most certainly does NOT constitute “spiriting from thin air”.

Likewise, under full reserve banking, the only form of money is central bank created money (base money). In that scenario it’s the central bank that does the spiriting, not private banks.


Excess inflation and excess debt.

Next, Coppola criticises Williams for saying that private banks can stoke inflation via their money creation activities, whereas according to Coppola it is just governments and central banks that can stoke hyper-inflation.

Well seems to me that Williams gets that point about right. In reference to central bank / government money creation, Williams says:

This does not mean that creation is risk-free: any government could create too much and spawn hyper-inflation. Any commercial bank could create too much and generate over-indebtedness in the private economy, which is what has happened.”


Controlling aggregate demand.

Next, Coppola says, “Williams calls for a “public authority” to create money. But, given how difficult it is to estimate the present and future productive capacity of the economy, I find it hard to see how a public authority can be a better creator of purchasing power than banks. Flawed though it is, money creation through bank lending at least responds to demand.”

Well if it’s “difficult to estimate the future productive capacity of the economy”, why do we have “public authorities”, i.e. the Treasury and central bank determine how much stimulus is appropriate (fiscal and monetary stimulus respectively)?

Moreover, under the existing system, the latter two public authorities actually expand the money supply (Coppola will be shocked to learn) when implementing stimulus. That is, the Treasury borrows and spends more, and/or the central bank prints money and buys back government debt so as to make sure interest rates don’t rise, or they may take that further and implement an interest rate cut. And the latter enables commercial banks to create and lend out more money. In short, money creation is very much under the control of “public authorities” under the existing system. So the differences between the existing system and OVERT money creation by public authorities is less than Coppola seems to think.

Next, let’s consider Coppola’s phrase “money creation through bank lending at least responds to demand.” Presumably she is not advocating that when anyone wants a loan, a private bank should automatically create money and dish it out without looking at the credit-worthiness of the borrower.

I.e. the basic question here is this. Given an increased desire to borrow, should private banks automatically accommodate that demand, as Coppola seems to suggest? Well there’s a big problem there namely that it is PRECISELY the erratic nature of the desire to borrow, and private banks’ freedom to accommodate that desire that is behind the boom bust cycle.

That is, private banks create and lend out money like there’s no tomorrow in a boom, exactly what’s not needed. Then come the bust, they clamp down on loans and call in loans: again, exactly what we do not need. In short, the behaviour of private banks is “pro-cyclical” to use the jargon.

To summarise, money creation under the existing system is very much under the control of “public authorities”, thus full control of money creation as under full reserve banking would not be a big change.

In fact the only remaining question here is whether money should come only in the form of state issued money, or whether that should in addition be levered up by private banks. Well turns out there is a good reason to prefer the former option, a reason which has to do with the basic purpose of economic activity.

The purpose of the economy is to produce what people want, both in the form of the items they purchase out of disposable income, and the items they vote at election time to have delivered to them via public spending. Thus given inadequate demand, the obvious remedy is to increase both household spending e.g. via tax cuts and increase public spending, with private banks competing for those new funds on equal terms with other businesses as occurs under full reserve, rather than private banks being given the special privilege of being able to boost the above money supply increase by printing more of their own DIY money.

The latter is a subsidy of private banks, and it is widely accepted in economics that subsidies are not justified, unless there is a clear social reason for them.

_______

References.

1. “Money Creation in a Post Crisis World.”
2. Article title: “How Bank Lending Really Creates Money, And Why The Magic Money Tree Is Not Cost Free”.
3. “How the actual money tree works”.
.




Thursday, 2 November 2017

No rate rise without a pay rise, says Positive Money.


Nice catchy phrase, but is there any substance behind it? The quick answer is “not much”.

The most relevant article on the above topic published by Positive Money seems to be this one entitled (unsurprisingly), “No rate rise without a pay rise”. And what will bring about a pay rise apparently is a “robust programme of government spending”.

Well the obvious problem there is that the Bank of England’s judgement is that the economy is at capacity, or put another way that any further increase in demand (e.g. in the form of more government spending) will be inflationary, which would raise “pay” in terms of pounds, but would probably not raise pay in real terms, and might even reduce real pay because of the costs of excess inflation.

A much better argument against an interest rate rise was produced a few days ago by Simon Wren-Lewis who claimed that inflation is currently to a significant extent cost push, and thus that a rise in demand, or at least leaving interest rates and demand at present levels, will not be inflationary.


Wednesday, 1 November 2017

Shock, horror: UK finance minister may abandon “fiscal targets” (yet again).



That’s according to this Financial Times article entitled “Philip Hammond ‘between a rock and a hard place’…”.

Given that UK finance ministers have abandoned fiscal targets about ten times in as many years recently, you’d think that by now some of those in high places (e.g. at the FT and the Treasury) would have tumbled to the fact that there’s something a bit wrong with “fiscal targets”. But seems they just don’t get it.

Incidentally Ann Pettifor recently penned an article criticizing the above “target” nonsense entitled “The Deficit and the IFS….”.     .  You may prefer her article, though the paragraphs below cover a few points which she doesn’t, and vice-versa.

I’ve been thru this target nonsense before, but I’ll go thru it again. After all, constant repetition is a much better form of persuasion than logic or reason.

The deficit, as explained by Keynes, needs to be whatever keeps unemployment as low as is consistent with not too much inflation. As he put it, “Look after unemployment and the budget will look after itself.” And that’s very much how MMTers see things. So the “target” for the deficit should simply be whatever deals with excess unemployment.

But that raises an obvious question, at least in the minds of debt and deficit-phobes, namely what happens if the national debt and deficit are higher than normal? Should we worry?

Well a POSSIBLE problem with a higher than normal debt is the debt holders will demand a higher than normal rate of interest for holding that debt. But if they AREN’T demanding that elevated rate of interest (as is the case at the moment) or put another way, as long as the real or “inflation adjusted” rate of interest is near zero, then why worry? Darned if I know.

And if debt holders DO START to demand a higher rate of interest, the solution is easy: tell them to shove off. Or to be more exact, print money and pay off debt as it matures, and tell those who have been paid off that if they want to buy more UK government debt, then they can’t.

The latter strategy of course amounts to QE which is mildly stimulatory and hence possibly inflationary. But that’s easily countered by raising taxes and “unprinting” the money collected. In that debt is held by native UK people and institutions, there won’t be any effect on aggregate demand or average living standards, though there will be re-distributive effects.

In contrast, and in as far as UK debt is held by foreigners or other internationally mobile investors, those investors when they find they can’t buy UK debt, will tend to sell Sterling and seek investments elsewhere in the World, and that will result in Sterling falling a bit on foreign exchange markets, which in turn means a finite drop in UK living standards. On the other hand if the debtor country manages to get a loan at a zero or near zero real rate of interest for several years, why complain?


The correct “targets”.

If some sort of randomly chosen figure for the deficit and debt as a percentage of GDP is not the right “target”, what is? Well one was set out above: that’s Keynes’s point that the deficit needs to be whatever brings full employment.

As to the debt, it is important to realize that government debt and base money are virtually the same thing, as Martin Wolf once explained. Thus the basic question here is: what should the total of debt plus base be? Incidentally MMTers have tumbled to the importance of the latter quantity “debt plus base” and sometimes refer to it as “Private Sector Net Financial Assets”.

As to the debt, i.e. the interest yielding part of PSNFA, it is debatable as to whether there should be any at all. Milton Friedman and Warren Mosler argued for zero debt. I pretty much agree with them, one reason being this: if the state can print money or grab any amount of money from the citizenry via tax, why borrow the stuff and pay interest on it?

Put another way, as Keynes said, a deficit can be funded by printed or borrowed money, and no one, far as I know has explained the reasons for borrowing. The idea that because the state invests in infrastructure and similar is not a reason to borrow: if a taxi driver needs a new taxi and happens to have enough cash to buy one, why would he want to borrow money? He wouldn’t: because taxi drivers have more sense than economists. I’ve been through the possible arguments for borrowing before on this blog, and none of the arguments are impressive.

Thus borrowing makes sense only if there’s no other way of coming by cash.

Returning now to the subject of targets, what’s the ideal size of PSNFA, or put another way, what should the “target PSNFA” be? Well the more PSNFA there is, all else equal, the more the private sector will spend. After all, there is a limit to the amount of state liabilities (PSNFA) that households and businesses will want to hold. And how do we know what that ideal PSNFA size is?

Well we don’t need to know. If the state simply prints and spends base money when unemployment is too high, and does the opposite, i.e. raises taxes and “unprints” money when inflation is too high, then PSNFA always tend towards its ideal size. Whether that is 10%, 60% or 260% of GDP, well that’s wholly irrelevant.


To summarize.

We should forget about arbitrarily chosen and wholly illogical numbers for the debt and deficit and simply follow Keynes’s above prescription, namely print and spend money, and/or cut taxes when unemployment is excessive.

That’s beautifully simple isn't it? And anyone with a grasp of, or interest in science knows that science attaches importance to simple equations or rules which seem to explain a lot. Why is Einstein’s equation E equals MC squared held to be importance? Reason is first that it is simple, and second it seems to explain a lot: it explains things about the movement of plants round the sun and things about sub-atomic particles. That is unlikely to be a coincident: it’s more likely that Einstein’s equation is a fundamental property of the universe.

Sunday, 29 October 2017

Random charts - 44.

Large text in pink on the charts was added by me.













Friday, 27 October 2017

We can’t print and spend money willy-nilly when inflation is at the 2% target.


Quite why it’s necessary to make the above point is a mystery. I’d have thought it was obvious.

One recent attempt to claim we can in fact print and spend like there’s no tomorrow was penned by an anaesthetist and physicist both of whom live within 20 miles of me. Tim Worstall and Richard Murphy respond to their article. The net result is a bit of a car crash. The article itself is fundamentally flawed. Murphy’s response is pure chaos. Worstall’s is much clearer, though I’m not sure about one of his points. Anyway, I’ll wade through this to see what can be salvaged.

The authors of the anaesthetist / physicist article are David Laws and Charles Adams respectively (L&A). (Title of their article: "Is a World-leading NHS healthcare NHS an affordable option."

First, a number of physicists have opined on economics, and some of them have a very good grasp of the subject. For example there is William Hummel, so I don’t automatically reject material written by physicists on economics.

L&A do have some grasp of economics. Unfortunately they seem to think we can just print money willy nilly and spend it on the National Health Service (NHS) – e.g. see their final para.  Well as Keynes explained, the way out of a recession is to have the state print or borrow money and spend it in whatever amounts are needed to end the recession. So what L&A say is true during a recession.

Unfortunately that “free lunch” is not available once the economy has recovered, that is, once inflation has hit the 2% target. And inflation in the UK is currently more like 3%. So no free lunch!!!

The only possible escape from that dilemma would arise if inflation is cost push rather than demand pull: indeed that situation obtained, at least according to the Bank of England, during the first two or three years after the 2007 crisis. Subsequent events proved the BoE right. So congratulations to the BoE for that.

As for L&A, they don’t even consider the “cost push / demand pull” question, thus their claim that we can print money willy nilly and produce a Rolls Royce NHS as if by magic is nonsense.


The multiplier.

L&A’s next mistake is to attach importance to the multiplier (their second last para). Certainly that’s in line with standard economics text books, which also attach importance to the multiplier. However, as I explained here, the multiplier is one big irrelevance.




The dual circuit.

Next, L&A have some strange ideas on what might be called the “monetary dual circuit”. That’s (roughly speaking) the fact that there are two sorts of money: central bank issued money and private bank issued money.

They say “…the commercial bank circuit serves private needs while the government circuit serves collective needs. The bank circuit exists to serve individuals and ‘capitalism’, while the government circuit exists to deliver on democratically controlled promises.”

Actually we could perfectly well have a system where the only form of money is central bank created money. Indeed a system of precisely that sort has long been advocated by several Nobel laureate economists including Milton Friedman. That system is also currently supported by Positive Money, and New Economics Foundation, Laurence Kotlikoff and others.

Incidentally if you’re  wondering why I am responding to L&A here rather than in the comments after their article, one reason is that  L&A seem to be unwilling to publish comments which disagree with their ideas. Certainly a suspiciously large proportion of the comments positively drool over L&A’s article. This “suppression of dissenting voices” is common in academia nowadays. Anyone who thinks academia is a bastion of free speech nowadays is very na├»ve.  I dealt with this problem here.

So if you want to know where students get their anti free speech tendencies from, it looks like they get it to some extent from the elders and betters, i.e. their teachers – of course I use the phrase “elders and betters” advisedly.


Tim Worstall’s response.

Tim Worstall’s response to L&A is roughly speaking the same as mine, namely (and to repeat) that it’s perfectly possible to print money and spend it in a recession so as to bring about more NHS (or anything else). Or at least TW says “It is possible to get all Kenyesian about this and say when in recession we can boost output of all things – and maybe there’s some truth to that.”

Well is TW supporting Keynes or not? It isn't entirely clear is it? If he wants to challenge the basic point made by Keynes, namely that the way out of a recession is to “print and spend” then TW needs to spell out his reasons in detail.

So if TW is supporting Keynes, then I agree with TW. If he isn't, I want to see detailed reasons.


Richard Murphy.

Murphy’s response to L&A and TW is shambollic. It is long, complicated and I haven’t got time for it. Murphy claims one minute that we can print and spend like there’s no tomorrow, while a para or two later, he concedes that option is not available once the economy is at or near capacity, as explained above.


Thursday, 26 October 2017

Interest rate adjustments do not make sense.


Assume an economy needs stimulus. One way to implement it is for the state to run a deficit funded by new base money (as suggested by Keynes in the early 1930s). There is of course more than one way of doing that: more public spending is one, and tax cuts are another. For the purposes of the argument here is doesn’t make any difference which of those two is chosen.

A second way to implement stimulus is to cut interest rates. But there’s a problem or two there, as follows.

Assuming a fall in interest rates is the free market’s only or main way of dealing with recessions, and assuming there is some artificial obstruction to such a fall, then it would make sense for the authorities to try to overcome that obstruction by employing artificial means to get interest rates down.

Unfortunately, neither of the latter two conditions hold. As to obstructions to a fall in interest rates, I’m darned if  I know what they are. Indeed interest rates seem to have fallen all of their own accord over the last twenty years or so.

As to ways of dealing with recessions, interest rate cuts are not the only way. There is another free market “recession ending” mechanism. That’s the Pigou effect: the fact that in a recession in a totally free market, wages and prices would fall, which would raise the real value of the monetary base, which would raise spending. Moreover, there is a very obvious obstruction to that mechanism, namely the “wages are sticky downwards” phenomenon to which Keynes referred.

That suggests that running a deficit funded by new money is better than fiddling with interest rates: instead of the value of the base rising because of a rise in the value of each unit of the base (dollars, pounds, etc), the number of units rises. But the effect is the same (as Keynes himself pointed out, or so Lars Syll told me).


A zero government debt scenario.

Another problem with fiddling with interest rates is this.

Milton Friedman and Warren Mosler argued that governments should borrow nothing at all. Assuming F&M are right (and I certainly do not strongly disagree with them), then how do you cut interest rates? Cutting rates is normally done by having the central bank sell government debt. But if there’s no government debt (as per F&M’s prescription), then rates cannot be cut!!!

Alternatively, if it does actually make sense for government to borrow (and let’s say government debt needs to be X% of GDP), and if debt is then bought back by the central bank so as to cut rates, then the debt will no longer be at it’s optimum or GDP maximising level

Provisional conclusion: interest rate adjustments are in check mate.

The only possible escape from check mate might be available in the form of the claim that interest rates work more quickly than fiscal adjustments. Unfortunately there’s not much evidence to support that idea. According to the Bank of England, interest rate adjustments take a year to have their full effect. Plus if government decides, for example, to spend more on health and education, the effect comes as quickly as new teachers, nurses, etc can be interviewed and allocated to jobs. That ought to be possible in less than a year.

Plus in the recent recession, the UK government implemented two fiscal adjustments at the flick of a switch: it first cut VAT and raised it again two or three years later.


Wednesday, 25 October 2017

Is base money a liability of the state?


Eric Lonergan recently devoted about 4,000 words to considering whether base money is a liability of the state without coming to any clear simple conclusions far as I can see. (Title of his article: “MMT part III – conclusion, and a conversation with Ben Bernanke”).

Here is a simple clear answer in just thirty words.

The state has the power to grab any amount of base money off the private sector via tax whenever it wants, ergo base money is not a liability of the state.

If you want me to expand on the latter point, here are another hundred words or so.

If you lend me £X and we sign an agreement covering that loan, stipulating rates of interest, and so on, but I have the power to break into your house, and confiscate your copy of the agreement, and then tell you to whistle for your money, then that £X liability  of mine is a bit of a strange liability. In fact it’s not a liability at all.

Or as Warren Mosler, founder of MMT, put it, base money is like points awarded by an umpire in a tennis match: they are an asset of the players, but not a liability of the umpire.

Hope that’s sorted that out….:-)

Tuesday, 24 October 2017

Random charts - 43.


Text in pink on the charts below was added by me.













Monday, 23 October 2017

Money issued by private banks is counterfeit money.



I’ve just published an article on the Medium site which shows that money issued by private / commercial banks is counterfeit money, as suggested by the economics Nobel laureate, Maurice Allais. Here is the abstract.




The word counterfeit according to dictionaries refers to producing an imitation of something valuable with an intention to defraud. Dollars issued by private banks are certainly imitations of Fed issued dollars. Plus where privately created money is introduced to an economy which has just base money, base money has to be confiscated from households so as to counterbalance the inflationary effect of the new privately created money. I.e. households are defrauded to make room for privately issued money. Ergo the money created by private banks is counterfeit money.

Another flaw in privately created money is that creating it costs almost nothing just as it costs the Fed almost nothing to create dollars. In contrast, under a “base money only” system, private banks have to borrow or earn every dollar they lend out, thus those banks compete on equal terms with other businesses. Thus allowing private money results in the profits of seigniorage subsidizing bank loans, which results in artificially low rate of interest and artificially high levels of debt. That does not maximise GDP.

A third flaw in a private money is thus. Those who deposit money at private banks with a view to earning interest are in effect money lenders: they have entered commerce. But they are guaranteed against loss by taxpayers and it is not normally the job of taxpayers to stand behind commercial ventures. On the other hand everyone is entitled to a totally safe bank account. That conflict is resolved by full reserve banking (a system which bans privately issued money) because under full reserve, zero interest yielding bank accounts are totally safe, while interest earning ones are not.


Saturday, 21 October 2017

Racist tweet by Positive Money.


Positive Money claim that top jobs at the Bank of England should reflect the racial mix of the country of a whole and moreover that there should be more women in top BoE jobs.



I suggest there is just one criterion for choosing people for a job, and one only: ability to do the job. Moreover, it could be that white males excel at economics related jobs (in that the performance of central banks or economists in general can be described as “excellent”, which of course is debatable.)

About 95% of the letters to the Financial Times are from men rather than women, which is prima facie evidence that women are just not all that interested in economics.

Moreover, while corruption in white countries is bad enough, corruption in Africa and Arab countries is even worse, which is prima facie evidence that blacks and Arabs are more corrupt than whites, and we do not want corruption at the top of central banks, or any more corruption than there already is at central banks.

Also, some psychologists claim blacks and Arabs have lower IQs than whites: see image just below.








Moreover, the IQ distribution of males and females is not the same: there are more genius IQ and idiot IQ males than in the female section of the population. Thus assuming top jobs at central banks go to top IQ individuals, you'd expect to see more males there than females.


Speaking as a white male, I have no objection at all to people from the Indian sub-continent being over-represented when it comes to running convenience stores. I have no objection to women being over-represented in some professions, e.g. medicine: at least around ten years ago 60% of trainee doctors were female. As for law, about 67% of trainees are female in the UK.

To repeat, there should be just one criterion for choosing people for jobs: ability to do the job.

Thursday, 19 October 2017

“Progressive” objections to QE are nonsense.


Most self-styled “progressives” are wittering on about interest rate cuts and QE causing asset price increases, and thus increasing inequality: inequality in capital rather than income, that is.

But the same people are complaining about the effect of the forthcoming or probably forthcoming interest rate INCREASES.!! Those increases will of course hit those who are heavily in debt and will benefit the cash rich.

So what do “progressives” want? Darned if I know.

Progressives will however be pleased to know that there is a solution at hand: it was advocated by (shock horror) the very person who progressives most like to hate, i.e. Milton Friedman.

He (along with Warren Mosler – founder of MMT) advocated that there should be no government debt.  That is, Friedman and Mosler advocated that the only state liability should be base money, which yields no interest.  And that Friedman/Mosler set up amounts to a permanent zero rate of interest.

I’m inclined to agree with that F/M system, though (like Friedman) I wouldn’t rule out interest rate rises in an emergency.

But to get to that ideal situation, if that’s what it is, it would be necessary for central banks to print even more money and buy back even more government debt.

Oh no: that means asset prices rise even further! Progressives at this stage will be ringing up their shrinks for an appointment.

To summarise, progressive objections to interest rate cuts and QE are a bit of a nonsense because progressives also object to interest rate increases.

As to the inequality increasing effect of QE, that’s a once and for all effect. Moreover, that effect can perfectly well be negated by increased taxes on the better off. Thus the important question (way above the heads of most progressives this) is: what set up maximises GDP or what set up is Pareto optimum?

If in fact the Friedman/Mosler “no debt” set up is the one that maximises GDP, then that’s the one to go for. Why not maximise GDP?  As to resulting inequalities, as Vilfredo Pareto explained, those can be dealt with via redistribution, i.e. taxes on the better off.

Tuesday, 17 October 2017

More fiscal space nonsense.


Christina and David Romer have a new paper published by NBER – working paper 23931 – which claims, to judge by the abstract, that stimulus is more effective given fiscal space and monetary space (i.e. a low national debt to GDP ratio).

The actual reason for this would seem to be that the authorities implement more fiscal and monetary stimulus when there is “space”. As the second last sentence of the abstract puts it, “We find that monetary and fiscal policy are used more aggressively when policy space is ample.”

Quite. So “space” itself is irrelevant: what’s really important is economists’ BELIEF in the importance of space.

Likewise if I believe I get more benefit from jogging when there’s a full moon, then I’ll probably do more jogging when there’s a full moon. And lo and behold, as a result, I will actually derive more benefit from jogging when there’s a full moon. But of course that does not prove that a full Moon is the direct cause of jogging conferring extra benefit: the benefit is an INDIRECT one, which relies entirely on my beliefs!

Thus the Romer paper in no way tempts me to moderate my claim expressed in earlier articles on this blog that “fiscal space” is one huge nonsense: a sentiment shared by Bill Mitchell, unless I’ve got him wrong. (Title of Bill's article: "The ‘fiscal space’ charade – IMF becomes Moody’s advertising agency.")

But never mind. “Fiscal space” keeps the numpties, charlatans and time wasters at the IMF employed, as Bill eloquently explains.


Monday, 16 October 2017

Is Ed Balls talking balls?


Ed Balls would seem to be well qualified when it comes to economics. He used to be lead economics writer for the Financial Times and studied economics at Oxford and Harvard.

Unfortunately, like many people at the top of the economics profession, he doesn’t understand the basic book-keeping entries done by treasuries and central banks.

Reason I say that is that he claimed recently that Positive Money’s proposals are out of the same mold as monetarism – a claim also made by Ann Pettifor. That claim can only come from people who don’t understand the latter basic book-keeping entries, for reasons I’ll set out below.

I’ve been thru this before on this blog, but unfortunately getting simple points across normally requires repeating those points ad nausiam, so here goes.

Positive Money (PM) and others claim that the best way of implementing stimulus is simply to have the state print money and spend it, and/or cut taxes. And the effect of that (as is hopefully obvious) is to increase the money supply, or more accurately to increase the private sector’s stock of central bank created money (base money).

The Balls and Pettifors of this world then jump to the conclusion that PM & Co are advocating monetarism Milton Friedman style.

Well the first flaw there is that a money supply increase also occurs under conventional forms stimulus. That is, one conventional form of stimulus is fiscal stimulus, which consists of government borrowing more and spending what it has borrowed (or cut taxes). But that extra borrowing is likely to raise interest rates, and assuming the extra borrowing takes place because stimulus really is needed rather than because politicians are being plain irresponsible, then the central bank won’t allow an increase in interest rates. It will therefor print money and buy back some of that government debt.

Indeed, assuming stimulus really is needed, the central bank is likely to go further and actually cut interest rates. So it will print even more money and buy back even more government debt!

Now as you may have noticed, this all involves a money supply increase in much the same way as PM policy involves a money supply increase.

And not only that, but given low interest rates of the sort we have had over the last five years or so, the central bank may go even further and buy back almost every single dollar of extra debt that arises from fiscal stimulus! I.e. the central bank may go for QE. The money supply increase is even bigger!

But for some strange reason, the Balls and Pettifors of this world do not accuse governments which implement interest rate cuts or QE of adopting Friedman style monetarism, which rather makes it look like Balls and Pettifors are scratching around for any old jibe to throw at PM.


Friedman’s monetarism.

So what did Friedman’s monetarism actually consist of? Well I’m not the world’s authority on that but certainly Friedman in his 1948 American Economic Review paper “A Monetary and Fiscal Framework for Economic Stability” argued that stimulus should take the form of the same annual increase in the stock of base money, and that should be effected by the state spending more than it received in taxes. I.e. he argued against discretionary stimulus.

So to summarise, the form of stimulus advocated by PM & Co comes to much the same as conventional stimulus, but with the difference that under PM’s system, monetary and fiscal policy are joined at the hip: they are merged. But in both cases, a money supply increase derives from stimulus. Thus the “PM equals monetarism” jibe is nonsense.

As to Friedman’s monetarism, that also involves an increase in the money supply, but it’s the same increase each year.

Thus while PM policy has similarities to monetarism, the similarities are no more than the similarities between monetarism and conventional economic policy, all of which makes a bit of nonsense of the claim that PM policy is flawed because it has similarities to monetarism.

I.e. all three of the above options (PM, conventional stimulus and Friedman’s monetarism) involve a money supply increase. What actually differentiates Friedman’s monetarism from PM and conventional stimulus is that the latter two involve discretion while Friedman advocated no discretion.

And finally, I am not saying the Balls and Pettifor should be totally ignored. I particularly like Ed Balls: he has a sense of humour. And Pettifor’s work “The Economic Consequences of Mr Osborne” is quality stuff.



Friday, 13 October 2017

Random charts - 42.


Text in pink on the charts below was added by me.