Sunday, 13 August 2017

A not very clever article on banking by Tim Congdon.

It’s this recent article in the Telegraph entitled “Our zeal to punish the bankers only stoked the Great Recession”.

Tim Congdon has the impressive sounding title of: “Chairman of the Institute of International Monetary Research at the University of Buckingham”. Unfortunately his ideas have never been equally impressive, as I’ve explain in earlier articles on this blog.

The basic point he has banged on about for many years (and in his Telegraph article) is that GDP is related to the money supply, ergo (so his argument goes) if the money supply is expanded, GDP rises. Ergo it is essential for commercial banks to be encouraged to lend more (as the title of the above article implies).

The flaws in that idea should be obvious enough to anyone with a decent grasp of economics, but for the benefit of readers not sure what the flaw is, I’ll run through it.

Two sorts of money.

The problem with Congdon’s argument is that there are two very different forms of money: central bank issued money and private bank issued money. The former is a net asset as far as the private sector is concerned. To illustrate, one way of expanding the private sector’s stock of CB money would be for the CB to print dollar bills or pound notes and to have government hand them out in the form of extra unemployment benefit or increased state pensions.

That would induce pensioners etc to spend more.

In contrast, there is commercial bank issued money. That money comes into being when a commercial bank grants a loan. But note that while it’s nice for the borrower to have $X at their disposal as a result of the loan, the borrower is of course indebted to the bank. So on balance the borrower is no better off (unlike the above mentioned pensioners.) Or to quote a commonly used phrase (which Congdon has presumably not caught up with), commercial bank issued money “nets to nothing”. Certainly there is no mention of the two basic forms of money in Congdon’s article.

Congdon is correct to suggest that increasing either form will increase demand. The reason why pensioners etc spend more when they find more pound notes in their wallets is obvious enough. As to how and why increased loans by commercial banks raises demand, that should be equally obvious: if I borrow $Y with a view to having a house built, that will increase demand for bricks, timber, bricklayers, plumbers and so on.

For more details on how, why and the extent to which increased bank loans increases demand, Steve Keen’s short and very readable book “Can we avoid another financial crisis” is a good source.

To summarise so far, if we want to increase demand, that is easily done EITHER by expanding the stock of central bank money or the stock of commercial bank money. And the way governments normally induce commercial banks to lend more to their customers is to cut interest rates.

Why expand the amount of dodgy private money?

There is however a glaring problem with privately issued money: the private banks which issue it, not to put too fine a point on it, are big time criminals. To be more exact, total fines and out of court settlements paid by US banks in recent years in the US comes to a staggering $200bn or so. And then there’s the small matter of the risky practices they indulged in which caused the worst recession since World War II.

So, contrary to Congdon’s suggestions, there are EXTREMELY GOOD reasons for clamping down on various commercial bank practices. And as for Congdon’s complaint that that exacerbates recessions, the simple answer to that is to expand the private sector’s stock of CENTRAL bank money: exactly what various governments have actually done in recent years.

It could be argued that the WAY in which the private sector’s stock of central bank money has been expanded, namely QE, has not been very effective because QE is just an asset swap. That is, the central bank prints $Z worth money and buys up $Z of government debt. And from that you might concluded that private sector net assets have remained about constant.

Actually that’s a bit misleading. Reason is that prior to QE and during the initial stages of QE there was a much larger than normal government deficit. And a deficit consists of: “government borrows $A and gives lenders $A of government bonds and spends $A back into the private sector. Lo and behold the private sector’s stock of paper assets rises by $A! Then comes QE, which consists of “central bank prints $A and buys back $A of bonds. Net result: the private sector has $A more cash (just like the above mentioned pensioners).

And finally, for anyone interested in delving a bit further into Congdon’s ideas, there is a transcript of a discussion between him and Prof Robert Skidelsky here in which Skidelsky tries to explain to Congdon the error of his ways.

Wednesday, 9 August 2017

Random charts - 34.

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

Sunday, 6 August 2017

Random charts - 33.

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

Thursday, 3 August 2017

My Job Guarantee theory proves correct, unfortunately.

Job Guarantee (JG) is a name for what are sometimes called “make work” schemes. “The Job Creation Programme” which operated in the UK about 40 years ago was one of many examples. And the WPA in the US in the 1930s was another example.

I’ve been arguing for twenty years that if Job Guarantee schemes take the form that they did under the WPA, namely having large numbers of unemployed people work on specially set up schemes, there is a danger that the ratio of unskilled to skilled employees is too high, with disastrously low levels of productivity being the result. For example I argued that point quite recently here.

The fact that productivity was not too bad on many WPA schemes in the 1930s proves nothing. Reason is that given VERY HIGH levels of unemployment (as existed in the 1930s), there is a decent availability of skilled labour from the ranks of the unemployed. But JG is not a good solution for VERY HIGH unemployment levels: the best solution there is simply to run a bigger deficit, as Keynes explained. Ergo where JG performs the role for which it is ideally suited (reducing unemployment even further where unemployment is relatively low) the latter “skilled / unskilled” danger exists. (Unfortunately that point is too subtle for many of the windbags inside and outside academia who witter on about JG).

Anyway, some local government people turned up in my neighbourhood recently and said they were going to employ some youths on probation to fill potholes in a road near where I live (see picture below which was taken after the holes had been filled).

For the benefit of non-Brits, probation is a system in the UK for dealing with miscreant youths: they are given supervised work, and so on. So it’s SIMILAR to JG but clearly not EXACTLY the same.

Now this road has a slight slope on it (left to right in the picture) which means that excess rainwater runs down the right hand side, out of the way of vehicles. That’s desirable because if water stands in the middle of a hardcore or dirt-track road, car tyres force water out of the pot-holes at high velocity, which forces hardcore out of the holes and makes them worse.

So I told one of the men in charge that that slope needs to be retained. And what d’yer know? They ended up giving parts of the road a slope the wrong way or giving it no slope at all, with the result that water will accumulate in the middle of the road. Least that’s what my spirit level says – see second picture.

The ratio of “unskilled miscreant youths” to “normal intelligent adults” looked to me to be about two to one.

The moral is that, as explained in the economic text books, if the amount of skilled labour in any economic activity, including JG, declines to much below normal levels, productivity falls dramatically, even where a simple job like filling pot-holes is involved.

Ergo JG people should be subsidised into work with EXISTING EMPLOYERS, not concentrated on specially set up schemes which involve high levels of unskilled, low IQ labour.

Unfortunately, and to repeat, that’s all a mile above the heads of most of those who witter on about the potential wonders of JG.

Wednesday, 2 August 2017

New Zealand proves Brexit isn’t such a bad idea.

Those who want the UK to stay in the UK, i.e. “remainers”, often argue that it is important to be able to trade with countries which are geographically close. As I pointed out here recently, that idea looks a bit silly in light of the fact that the average distance travelled by Australia’s exports and imports is around 6,000 miles. Same goes for New Zealand.

Further significant characteristics of NZ in this connection, are that it has a similar land mass to the UK, it speaks the same language, it has a similar culture plus it is slightly better off than the UK: at least GDP per head is a bit higher. And its population is a mere five million.

Now that all rather blows a hole in the idea that the UK needs a constant flow of immigrants from the EU or indeed from elsewhere. That is, if there was significant net EMIGRATION from the UK for the next twenty years, such that its population declined to five million, it would then be very similar to New Zealand: better off than it is now!!

Tuesday, 1 August 2017

Random charts - 32.

Text in pink on these charts was added by me.