Wednesday, 29 June 2016

The split of responsibilities as between central banks and politicians / treasuries.


It is not necessary, as suggested by Janet Yellen, to separate the central bank from the treasury in order to keep politicians’ hands off the printing press. Plus there’s a flaw in the “Yellen” or conventional way of keeping politicians away from the printing press: that “conventional way” gives power over stimulus to two arms of the state (central bank which does monetary policy and the treasury which does fiscal policy). That makes as much sense as a car with two steering wheels.


Janet Yellen recently said, “In normal times I think it’s very important that there be a separation between monetary and fiscal policy and its primary reason for independence of the central bank…….. We have seen all too many examples of countries that end up with high or even hyper-inflation because those in charge of fiscal policy direct their central bank to help them finance it by printing money.”

Yellen is not of course saying anything unusual there. Indeed, it’s me that’s going to be the oddball and argue below that there’s something wrong with that passage and with the conventional wisdom. So here goes.

Under existing or conventional arrangements, central banks (CBs) have the right to adjust interest rates and do QE, while treasuries / politicians have the right to borrow money and spend it and/or cut taxes. “Borrow and spend” is widely regarded by economists as stimulatory, as is cutting interest rates.

But what’s the point of two arms of government having a say on stimulus? What if they disagree? That all makes as much sense as a car with two steering wheels driven by a husband and wife having a row.

Another anomaly.

A second anomaly in the existing system is this. It’s widely accepted that measuring inflation and deciding how much extra stimulus the economy can take next year is a very technical job. Certainly you won’t get a job on a CB committee that makes that sort of decision unless you have first class qualifications in economics and about twenty years’ experience as a professional economist. Of course those committees make mistakes, but it’s widely recognised that it’s better to have those committees made up of economists rather than plumbers and bricklayers.

But as against that, politicians (most of whom don’t even have the most basic qualifications in economics) are allowed a say in fiscal stimulus.

Why demand tip top qualifications for those implementing stimulus one way, but require so such qualifications for those implementing stimulus a different way?

Privately owned central banks.

A possible objection to the above “arm of the state” point is that some CBs are PRIVATELY owned. The answer to that is that ownership is simply a series of rights over something, and ownership is normally a pretty INCOMPLETE series of rights. For example I own my house, but that wouldn’t stop government compulsorily purchasing it and knocking it down to build a road.

Same goes for CBs, but even more so. For example while some CBs are nominally in private hands, those private hands have almost no rights. Reason is that the rules or customs governing the CB force the CB to act in the public interest, not in the interests of those private so called owners.

So the above description of a CB as an “arm of the state” is fair enough even when the CB is nominally in private hands (assuming the above rules and customs force the CB to act in the public interest.)


To summarize so far, there two anomalies in having two arms of the state having a say on stimulus. First, that arrangement is like a car with two steering wheels. Indeed the latter arrangement contravenes the so called “Tinbergen principle”. Jan Tinbergen was an economics Nobel laureate and his principle stated roughly speaking that for each policy objective there should be one policy instrument and one only.

The second anomaly is that those working in one of the latter “arms” have to be highly qualified, while those working for the other arm need no qualifications.

So how can those anomalies be disposed of while still keeping politicians away from the printing press? Well it’s easy: just give OVERALL responsibility for stimulus (monetary AND fiscal) to the CB, while leaving clearly POLITICAL decisions with politicians. (To be more accurate, the body or committee that decides the TOTAL AMOUNT OF stimulus does not need to be based at the CB: the important thing is that it is kept at a distance from political influence.)

Now it might seem that separating the total amount of fiscal stimulus from POLITICAL decisions is near impossible: after all, if politicians decide for example to borrow more and spend it on say education, that is stimulatory plus it’s clearly a political decision. Certainly if more is spent on education, then all else equal, the proportion of GDP allocated to public spending rises, and that’s obviously a political decision.

In fact the latter “separation” can be achieved very easily and as follows.

The job of the CB should be to decide the TOTAL AMOUNT of extra spending or “aggregate demand” that is suitable during the next six months or year. And that includes private as well as public spending. As to politicians, they DO NOT have the power to spend more than they collect in tax because that is stimulatory. But they ARE FREE to raise or cut both taxes and public spending by the same amount.

So for example if politicians want to raise public spending by $X a year and raise taxes by $X to pay for that, they’re free to do so. They also have complete control over HOW that public money is allocated as between defence, education, road building, law enforcement and so on.

Central bank dominance.

It could be argued that the existing system is not so bad in that given an independent central bank, any excess stimulus deriving from those irresponsible politicians can be countered by interest rate increases imposed by the CB. But where that happens we get an artificially high rate of interest, and that does not make sense. Isn't it better to prevent excessive fiscal stimulus happening in the first place?


The system advocated above under which the CB controls the AMOUNT OF stimulus, while politicians retain control of strictly political matters is an eminently logical division of labor.

Of course that all represents a HUGE CHANGE to the EXISTING split of responsibilities as between CBs and politicians. And certainly persuading politicians to relinquish their freedom to influence the total amount of stimulus (aka “mess up the economy”??) would be difficult.

Still, I think we should have the latter split of responsibilities as a long term goal.

And what do you know? That split of responsibilities is advocated by Positive Money, the New Economics Foundation and Prof Richard Werner here. The latter work actually advocates full reserve banking as well, but FR banking is not NECESSARILY an ingredient in the above new split of responsibilities.

Monday, 27 June 2016

The fall in the pound does not prove Brexit was a poor choice.

Brexit means the UK re-arranges the way it trades with other countries. In particular, tariffs and non-tariff barriers are re-arranged.

Assuming extra tariffs imposed by the EU against UK exports is exactly matched by a REDUCTION in tariffs facing UK exports from other countries (and same goes for tariffs imposed by the UK against imports) then roughly speaking, there shouldn’t be an effect on Sterling when the dust has settled.

On the other hand, if raised tariffs by the EU exceed the effect of REDUCED tariffs by other countries, then the pound will fall in value.

But where would those increased tariffs erected by the EU actually get the EU? The answer is: “nowhere”. That is, as explained in the introductory economics text books, if country A erects tariffs against goods coming from country B, then BOTH COUNTRIES are likely to be hurt to the same extent. I.e. countries which impose tariffs against other countries shoot themselves in the foot.

People voted for Brexit for several reasons. One was the lack of democracy in EU institutions. Another was the fact that totally free and unrestricted movement of people for some strange reason is regarded as “sacrosanct” in the EU. That’s a problem because the EU has now lost control of its borders: Africans, Muslims etc are marching into the EU like an invading army. Plus it looks like there’s a good chance of Turkey joining the EU in the next five or ten years. In short, Brexit offers the chance of reducing the speed at which Britain becomes an Afro-Islamic state. (The fact that Islam is ten miles to the right of European “far right” parties, combined with the fact that the political left is positively in love with Islam is a self-contradiction that political left refuses to explain, far as I can see.)

So if the view of Brits is that they’d rather quit the EU because of the latter two and similar reasons, that’s not unreasonable. If the EU reacts by imposing relatively high tariffs against the UK, that is illogical behavior by the EU. It will result in a fall in Sterling. But that does not prove Brexit was a poor choice: you could equally well argue it proves the EU has gone into a sulk and decided to shoot itself (and the UK) in the foot. Plus those who attach a lot of weight to the above "democracy" and "Islam" point, may regard any cut in living standards that results from a Sterling devaluation as being a price worth paying for the benefits of more democracy and less Islam.

Friday, 24 June 2016

Fantastically moving reaction by Financial Times reader to Brexit.

The above words of alleged wisdom from a Financial Times reader have gone viral on Twitter. “Wisdom” is an unduly flattering description of those words I think, but let’s examine them. (I’ve interspersed the passage – in green italics - with my comments)

“They have merely swapped one distant and unreachable elite for another.”

Wrong. Under rule from London, the supreme political authority, i.e. democratically elected politicians, can be voted out at the next election. That’s not true of the EU. MEPs can of course be voted out, but they don’t have much real political power. I.e. a large amount of political power rests with unelected bureaucrats.

As regards “distant”, a look at a map will confirm that London is about three times nearer the home of the average Brit than Brussels.

“Secondly, the younger generation has lost the right to live and work in 27 other countries.”

Wrong. People have simply lost the AUTOMATIC right to live and work in other countries.

“We will never know the full extent of the lost opportunities, friendships, marriages and experiences we will be denied.”

So you live in a country with about 50 million people (the UK), where you can travel from one end of the country to the other very easily. Plus you can communicate at the speed of light with any of those people. And you don’t have an adequate choice of friendships and marriage partners? Complete BS. What must it have been like in the average village in the middle ages where people had a choice of about two marriage partners? Was everyone miserable because of that? If so, I don’t remember reading anything about that when I did history at school.

Moreover, after the Brexit process is complete, Brits will not stop visiting mainland Europe, nor will mainland Europeans stop coming to Britain for whatever reason.

Conclusion: lost friendships and marriages my arse, if you’ll forgive my French.

“Freedom of movement was taken away by our parents, uncles, and grandparents in a parting blow to a generation that was already drowning in the debts of our predecessors”.

Wrong. I travelled round Europe before the EU existed. Passport checks at frontiers too about fifteen seconds.

"Thirdly and perhaps most significantly, we now live in a post-factual democracy. When the facts met the myths they were as useless as bullets bouncing off the bodies of aliens in a HG Wells novel. When Michael Gove said, ‘The British people are sick of experts,’ he was right. But can anybody tell me the last time a prevailing culture of anti-intellectualism has led to anything other than bigotry?”
Well can you blame the plebs for taking a jaundiced view of those “professional economists”, “experts” and “intellectuals”?

First there were the plonkers who failed to regulate banks properly prior to 2007/8, which resulted in the bank crisis.

Second, the so called experts then spent far longer getting us out of the subsequent recession than we spent fighting WWII.

Third, at the height of the crisis two groups of so called experts the IMF and OECD were advocating consolidation / austerity: the exact opposite of what was needed.

Fourth, several economics professors at Harvard (e.g. Kenneth Rogoff and Carmen Reinhart) vigorously backed the above IMF/OECD call for austerity.

Fifth, there’s the small matter of catastrophic youth unemployment in Greece and Spain.

Of course the average pleb would not be able to reel off all the above examples of stupidity by “intellectuals”. But plebs probably WILL HAVE read about each of the latter five groups of plonkers at some point, and firmly fixed in the subconscious of the average pleb will be the impression that many self-styled intellectuals are nothing of the sort: many of them are actually pseudo intellectuals, charlatans and poseurs.

The plebs thus decided to rely largely on their own common sense, flawed as they would doubtless admit that to be.

Wednesday, 22 June 2016

70 experts (economists) back Remain – whoopee.

They make the bizarre claim in their first paragraph that given a post Brexit recession, government would not be able to deal with it. Reason apparently is that: “With interest rates near zero and debt still high, the Bank of England and Government would have limited ability to prevent such a recession.”

Well the existing near zero rate may well preclude an interest rate cut. But that doesn’t rule out FISCAL stimulus. Ah, you might argue (as indeed the above 70 seem to suggest): but fiscal stimulus drives up the debt, and that’s already too high. But fiscal stimulus doesn’t have to be funded by debt: as Keynes pointed out in the 1930s, it can be funded by new money. Indeed, that’s exactly what we’ve done over the last three years or so: that is, we’ve implemented traditional fiscal stimulus (government borrows money, spends it and gives bonds to those it has borrowed from), and followed that by QE (central bank prints money and buys back the bonds). That all nets out to “the state prints money and spends it”, as suggested by Keynes.

So…have the above 70 economists actually studied economics?  Have they heard of Keynes? Have they heard of QE?

Only asking.

Tuesday, 21 June 2016

Is Britain leaving the EU regardless of the referendum?

The share of Britain’s exports going to the EU is declining, while the share going to the rest of the world is rising. If that trend continues, then in ten or twenty years’ time, Brits will be asking themselves with even more urgency: exactly what are we doing in the EU?

But the above chart UNDERESTIMATES the declining importance of the EU for Britain. Reason is that at the moment, British trade is clearly skewed TOWARDS the EU because of the tariff free agreements that Britain has with the EU. I.e. if Britain had the same agreements with the rest of the world, then the share of Britain’s exports going to those non-EU countries would be even higher.

The chart is from here.

Saturday, 18 June 2016

Video: Keynes gives a talk on the gold standard.

I do like his upper class accent. Or should I say, "Ay do lake his fraitfully awfully upper class ecksent." (Ha ha). 

H/t to (ironically) a different Lord Keynes. 


Banks and those who deposit money at banks are pampered welfare queens.

Depositors want to engage in commercial activity, i.e. have their money loaned out so they can earn interest. But at the same time they want their money to be totally safe! Bit of a joke that, isn't it?

I mean any normal investor or lender knows perfectly well that they run a risk: at worst, they might lose everything. So what’s the excuse for a taxpayer backed safety net for depositors?

Well I’ll deal with that a few paragraphs hence. But first it’s important to qualify the latter claim that depositor insurance is taxpayer backed. That is, it could be argued that deposit insurance (at least in the US) is not taxpayer funded in that the FDIC is self-funding.

That’s a good point. On the other hand, the FDIC only covers small banks, not large ones. And in the recent crisis the larger banks were rescued thanks to a trillion dollar loan by the Fed at derisory rates of interest. (To be more accurate, the largest amount loaned by the Fed at any one time, according to this source, was about one trillion, whereas the AVERAGE amount loaned (over approximately an 18 month period) was about $600bn.)

As to exactly who was rescued by the Fed, it was not of course just retail depositors: it was a mixed bunch – bank shareholders, bond-holders, very large depositors and so on. In short, it’s not just small retail depositors who are featherbedded by deposit insurance, in the widest sense of the term “deposit insurance”: it’s a range of other bank creditors as well. I’ll use the phrase deposit insurance and the word depositor in that wide sense from now on.

A second weakness in the claim that the FDIC is self-funding is that it’s plain impossible for any private sector insurer to give a 100% guarantee that those insured will be rescued when a loss occurs (e.g. when your house burns down or your car is stolen). Reason is that private sector insurers sometimes go bust. In contrast, everyone knows the FDIC, and similar deposit insurance systems in other countries, are backed by an almost limitless source of money: the taxpayer. And that ability of government to rob taxpayers in the event of the FDIC not being able to meet claims is not a free market transaction: it’s a subsidy of the FDIC.

To summarize, while deposit insurance is TO SOME EXTENT self-funding, it is not entirely self-funding: i.e. it relies partially in taxpayers.

The justification for deposit insurance.

Let’s now return to the question posed at the outset above, namely: “What’s the excuse for a taxpayer backed safety net for depositors?”

A common excuse is that the arrangement encourages lending and investment. Indeed that excuse was given by the UK’s “Independent Commission on Banking” (sections 3.20-3.24). Well there are a couple of problems there.

First, if taxpayer protected deposits at banks and hence bank lending is encouraged, that clearly increases lending, but it also increases debts. And in fact the world is awash with people (e.g. the UK’s former business secretary Vince Cable) who advocate more bank lending in one breath, and then deplore the recent growth in debt in the next breath.

Second, if a taxpayer funded safety net for depositors does in fact encourage investment, then exactly the same applies to ALL FORMS of lending, for example bonds issued by corporations and cities. Come to that, why not take it even further and have a taxpayer funded safety net for SHAREHOLDERS?

In short, there’s a big anomaly at the heart of deposit insurance which is this. If you buy bonds in corporation X there’s no taxpayer protection for you. But if you deposit money at a bank which in turn lends your money to corporation X, then you’re protected. I.e. deposit insurance is simply an artificial form of assistance for a collection of middle-men known as “banks”.

Is lending stimulatory?

Another apparent excuse for artificial encouragement for lending is that a rising level of lending / debt is stimulatory: it increases aggregate demand. Indeed Steve Keen produced a good video explaining that point. (I suggest starting at 12.45).

Well a rising amount of lending / debt is indeed stimulatory, as Keen explains. But first, debt is dangerous, especially when there is too much of it. As Keen explains, when a debt bubble deflates, the entire economy deflates, all else equal.

Second, if we have $Y less demand stemming from a rising level of debt, it’s the easiest thing in the world for any government with its head screwed on to implement $Y of stimulus so as to counteract the reduced demand stemming from debt.

To summarize, the idea that lending and debt are beneficial in that they can boost demand is not a brilliant argument.

So what’s the solution?

So how do we ensure that people have a totally safe way of storing surplus cash without the taxpayer being on the hook? Well the authorities in the US have recently solved that problem, at least in the case of the money market mutual funds (MMMFs).

MMMFs will shortly come in two varieties. First, where an MMMF promises depositors they’ll get 100 cents back for every dollar deposited, that money can only be lodged in a totally safe fashion: at the Fed or the money can be put into short term government debt.

Second, where MMMF depositors want their money put into something more risky (something which will doubtless earn more interest, like corporate bonds), then the relevant MMMF cannot make the latter “guaranteed to get your money back” promise. That is, depositors who want the latter more risky option will see the value of their stake in the MMMF float, as is the case with mutual funds which invest in a wide selection of corporate shares (unlike MMMFs which concentrate on relatively safe corporate bonds).

So MMMFs can’t fail!

MMMFs are banks of a sort. But soon they will be banks which cannot fail.

Certainly the above safe MMMFs can’t fail. And as to the riskier MMMFs / “banks”, if they make silly loans, all that happens is that the value of depositors’ stakes in relevant MMMFs falls: the MMMF cannot go insolvent. What more do you want?

That principle should be applied to ALL BANKS. That would make banks fail safe. Plus it would put an end to taxpayer subsidies for banks and depositors.