Friday, 19 April 2019

Joseph Huber tries to criticise MMT.

That’s in an article entitled “Modern Monetary Theory revisited – still the same false promise.”

On reading the article I came across so many errors in the first quarter or so, that I came to the conclusion that Huber does not have much of a clue about MMT, and gave up reading any further. The errors in the first quarter are as follows.

In his first paragraph, Huber says, “MMTers tend to speak of” their ideas “as if it were all their own invention”. Actually MMTers have repeated over and over that they owe a bid debt Abba Lerner (a contemporary of Keynes’s). Plus (speaking as someone who has supported MMT for about ten years) I’m happy to admit that MMT is very much Keyes writ large.

Then in his third paragraph Huber says MMTers do not “see any need for monetary and banking reform.” Well it’s certainly true that MMTers do not concentrate to any big extent on bank reform, but that is not a brilliant criticism of MMT: the fact that a group of people who specialise in one set of ideas do not consider another set is not a good criticism of their ideas on the first set. The fact that a group of biologists concentrate on vertebrate animals and ignore invertebrates is not a brilliant criticism of their ideas on vertebrates.

Moreover it is not entirely true to say that MMTers have ignored bank reform: it would be pretty amazing if Warren Mosler, who founded MMT and runs a bank, had nothing to say on the subject. He actually published an article in Huffington on the subject. (Article title: "Proposals for the banking system.")

In addition, there has been plenty of debate in the comments section of Mike Norman’s MMT blog on the merits of full reserve banking, which is the system that Huber wants.

Central and commercial bank created money.

The next bizarre claim by Huber is where he says “Equally, they (MMTers) were confronted with the question why – if what we have is supposed to be a sovereign currency system – there is that strange ban on the government to create money….”. So who are these MMTers who claim we have a Sovereign Money system (aka full reserve banking). Huber doesn’t tell us who they are and quotes no relevant works by MMTers.

In fact there are articles by Bill Mitchell (co-founder of MMT) which are perfectly clear the existence of commercial bank created money. E.g. see Mitchell’s article “Deficit spending 101 – Part 3.” (Mitchell actually refers to central and commercial bank  money respectively as “vertical” and “horizontal” money.)

Speaking as someone who has written a book advocating a sovereign money system and who has read about a thousand articles by MMTers over the last ten years, I think I’d have come across any MMTers who claim we actually have a sovereign money system at present. I know of no such claims!

No difference between endogenous and exogenous money?

Next Huber produces a novel idea, which got me thinking. That’s in his para starting, “The distinction between endogenous bankmoney and exogenous central-bank money . . . .  is arbitrary and overstated.”

He argues that exogenous money (aka central bank created money)  and endogenous money (aka commercial bank money) are the same in that each is produced in response to demand. Well that’s an interesting idea, but when it comes to exo and endo money, MMTers simply go along with the conventional wisdom, so if as per Huber’s claim there is in fact little distinction between the two forms of money, that is not a criticism specific to MMT.

But returning to his claim that there is little distinction between the two forms of money, it is true that in a very broad sense of the phrase, they are both produced “in response to demand”. But the motives for meeting that demand are very different.

In the case of commercial banks, the producers of endo money, they are motivated by profit: that is, they lend to any viable looking borrower who asks for a loan. In contrast, when a central bank  issues exo money, it is motivated by what it sees as the needs of the country as a whole, and not profit.

Moreover, when a commercial bank supplies £X to a borrower, the latter is in debt to the bank: the borrower is expected to pay that money back at some stage. In contrast, if the state (i.e. central bank and government) created extra money and spent some of it employing me to decorate a government office, I would not be in debt to government or central bank to the tune of whatever they’d paid me.

It has been argued that central bank issued money (exo money) involves a debt in that government can demand that money back via increased taxes. But that’s a questionable argument: it does not invalidate my above point that when government pays me £X to decorate their office, I might at the same time owe them less than or more than £X in tax, but I most certainly do not owe them £X simply because they have supplied me with £X.

So I suggest the conventional distinction made between exo and endo money is in fact valid, contrary to Huber’s claims.

GDP increasing money creation.

Next (para starting “Most Postkeynsians…”) Huber criticises MMT for paying no attention to the distinction between money created for GDP increasing purposes and in contrast, for the finance sector, much of which, according to Huber, does not increase GDP.

Well the answer to that is that there are some apparently non-GDP increasing types of money creation (e.g. a loan to buy an existing house as opposed to a new house) which actually do increase GDP, as I explained here. (Article title: “Borrowing to build a house is no more productive….”)

However, that’s not to say there are no murky, clever-clever transactions done in financial centres like the City of London which are very suspect and non-productive. Adair Turner was doubtless right to say that much of what the City of London does is “socially useless”.

However, the fact that MMT ignores the latter “socially useless” problem is not actually a weakness in MMT. Reason is that it is perfectly reasonable to assume that if the economy is not at capacity, and the state creates and spends more money, that some of the extra activity will be socially useful and some will be useless.

Ergo one of MMT’s basic claims (also spelled out by Keynes) namely that creating and spending money (and/ or cutting taxes) is at least to some extent useful in a recession, is perfectly valid.

Only Huber (apparently) understands the difference between money and credit.

Next, in his para starting “Present day means of payment….”, Huber claims that not only MMTers, but also neoclassical and Postkeynsian economists do not understand the difference between money and credit.

Well I think just about every economist, MMTer or not, has tumbled to the fact that trade credit, i.e. a debt owed by one non-bank firm to another, is not a form of money.


I’ve only got about a quarter of the way thru Huber’s article. It is clearly riddled with errors. So I can’t be bothered with any more of it.

Tuesday, 16 April 2019

The flaw in deposit insurance.

Suppose person X lends money to person Y, or hires out something else to Y like a car or house. If Y fails to repay the item borrowed, is there any obligation on taxpayers to reimburse X?

Well the answer is  clearly “no”. And why is the answer “no”? Well it’s because of a widely accepted principle that it is not to job of taxpayers to stand behind commercial transactions or reimburse those engaged in commerce if they make a loss.

Next, suppose person X lends money to person Y via a bank. That is, X deposits money at a bank with a view to earning interest (i.e. having their money loaned on by the bank), and the same happens: that is Y fails to repay the money. Plus let’s assume enough other borrowers fail to repay loans that the bank goes bust.

The same principle applies doesn’t it? That is, where X places money at a bank with a view to the bank lending the money on, X and the bank are into commerce just as much as where X hired out money (or anything else) direct to Y. In fact X is into commerce there just as much as if X placed money with a stock broker or mutual fund that invested in shares or corporate bonds.

Banks actually are intermediaries.

At this point, some readers may be tempted to object on the grounds that commercial banks are allegedly not intermediaries: that is, a commercial bank does not need a deposit from X before lending to Y.

Well, first that doesn’t in any way weaken the above point that when a bank lends money it is into commerce and is thus not entitled to taxpayer funded support if anything goes wrong with its money lending activities.

Second, while it is true that a commercial bank does have some freedom to create money out of thin air and lend it out, it cannot do that willy nilly. If a bank does engage in the latter “willy nilly” strategy, it will run out of reserves That is, the indisputable fact is that banks have to attract about as much money from depositors, bond holders etc as they lend out. Thus banks are to a large extent intermediaries.

To summarize so far, it would seem that government organised deposit insurance does not make sense in that it involves taxpayers standing behind commercial transactions.

However, it could possibly be argued that deposit insurance makes sense if it’s run on commercial lines. Well the first problem there is that it is debatable as to whether a GOVERNMENT run deposit insurance scheme (whether it’s deposit insurance or any other type of insurance) is a genuinely commercial operation: reason is that governments have access to almost infinitely large amounts of money if things go wrong. First, governments can grap near limitless amounts of money off taxpayers, and second, governments (along with their central banks) can print limitless money. And if that money printing leads to excess inflation who cares? If a government faced with large losses by banks prints excessive amounts of money to save those banks and causes excess inflation, at least government has made good on its promise to rescue banks!

A second problem with the idea that deposit insurance is OK if it is run on commercial lines, is that if government is going to have a Rolls Royce totally fail safe form of insurance for banks, that constitutes an artificial preference for or privilege for banks, in that there are a thousand other types of commercial activity, ranging from restaurants to garages and coal mines to aluminium smelters some of whom might like the idea of being insured against losses by a Rolls Royce insurer with an infinitely deep pocket.

To summarise, it looks like the arguments for deposit insurance do not stack up (as argued by the Nobel laureate economist James Tobin in his work “The Case for Preserving Regulatory Distinctions”).

However, that is not to argue that people are not entitled to a totally safe way of storing and transferring money. Clearly they are entitled to that. The point is that once they seek to have their money loaned out, i.e. as soon as they want interest, they are into commerce. They have crossed the Rubicon.

In short, the best system is where anyone who wants a totally safe method of storing money is provided with that option, provided their money is not loaned out. And that do you know? That’s full reserve banking: what James Tobin, Milton Friedman and some other Nobel laureate economists have long argued for.


Lending out “safe money” imparts stimulus?

A popular argument against the latter conclusion is that allowing “safe money” to be loaned out would be stimulatory, plus it allegedly cuts interest rates and encourages investment. Or put the other way round, the argument is that a ban on lending out safe money would raise interest rates and damage the economy (an argument put by the UK’s Vickers Commission, sections 3.20 – 3.24). Well the answer to that is that if stimulus is needed, that can be implemented at no real cost. As Milton Friedman put it, "It need cost society essentially nothing in real resources to provide the individual with the current services of an additional dollar in cash balances." 

Thus there is absolutely no need to subsidise banks or give them any sort of artificial preference to enable stimulus to be imparted.

Saturday, 13 April 2019

Debt jubilees are caught between a rock and a hard place.

The “rock and hard place” conundrum that faces the whole debt jubilee idea is as follows.

If a law is passed saying that a selection of debts no longer exist, then relevant saver / creditors are robbed. To illustrate with a simple example, if the debts owed to a particular bank are wiped out, i.e. declared to be null and void, then the shareholders, bond holders and depositors at the relevant bank are wiped out. Or to be more exact, the stakes that the latter three groups of people had at the bank become worthless, assuming for the sake of simplicity that the bank has no other assets.

An alternative is to wipe out a selection of debts and reimburse saver / creditors with money freshly created by government / central bank. But assuming the economy is already at capacity, that cash injection into the private sector will be inflationary.

To be more exact, debtors who find they no longer have to dish out interest every month will have cash to spare, plus their net assets will have risen, so they’ll go on a spending spree. And as to saver / creditors, they will now be too liquid: that is, cash will now make up a larger proportion of their net assets than previously. So they too will go on a spending spree: they’ll tend to buy up assets like a larger house or stock exchange quoted shares.

The conclusion so far is that the whole debt jubilee idea is a non-starter. However, that is clearly not to say we should not be concerned about inequalities. That is, it is possible that some of the less well-off incur excessive debts because the latter inequalities are excessive.

But the solution to that is to deal with the above inequalities via the usual mechanisms: relatively high taxes on the rich and social security, minimum wage laws etc for the less well off.

Having done that, if some of the less well-off incur excessive debts, that’s entirely their fault. Same goes for the well-off.

Conclusion: there is no place for debt jubilees.

Wednesday, 10 April 2019

Mariana Mazzucato’s “mission-oriented” clap trap.

Mariana Mazzucato (economics prof at University College London) advocates what she calls “mission oriented” projects (like President Kennedy’s moon shot) since the latter can allegedly bring greater benefits in the form of technological progress etc than conventional methods of research. That’s in her book “The Value of Everything”.

Now any normal person (never mind a university professor) when trying to show that X is better than Y would try at least in a rough and ready way to estimate the costs and benefits of X and Y and try to show that the cost/benefit ratio for X is better than for Y. After all, we’re living in the 21st century, not the 13th century: we do try to measure things nowadays. But MM says absolutely nothing about the total costs of the moon shot, nor does she try to estimate the total benefits of technological spin offs from it.

She does exude a lot of impressive and flowery language in connection with the alleged benefits of moon shots and similar “missions”. But there is no actual measurement or even an attempt at measurement.

But it gets worse: she seems to claim that as long as something amounts to a “mission” it just has to be better value for money that boring old stuff like infrastructure improvement. That’s in this passage which I’ve put in green.

“The epigraph opening this chapter, in which Keynes argues the need for governments to think big – to do what is not being done – shows that he believed that government needs to be bold, with a sense of mission, not merely to replicate the private sector but to achieve something fundamentally different from it. It is wrong to interpret him as believing that what is needed from policy is to simply fix what the private sector does not do, or does badly, or at best invest ‘counter-cyclically’ (i.e. increase investments during the downside of the business cycle). After the Great Depression, he claimed that even paying men simply to dig ditches and fill them up again could revive the economy – but his work inspired Roosevelt to be more ambitious than just advocating what today would be called ‘shovel-ready projects’ (easy infrastructure). The New Deal included creative activities under the Works Progress Administration, the Civilian Conservation Corps and the National Youth Administration. Equally, it is not enough to create money in the economy through quantitative easing; what is needed is the creation of new opportunities for investment and growth – infrastructure and finance must be embedded within the greater systemic plans for change. President John F. Kennedy, who hoped to send the first US astronaut to the moon, used bold language when talking about the need for government to be mission-oriented. In a 1962 speech to Rice University he said:

“We choose to go to the moon in this decade and do the other things, not because they are easy, but because they are hard, because that goal will serve to organize and measure the best of our energies and skills, because that challenge is one that we are willing to accept, one we are unwilling to postpone, and one which we intend to win, and the others, too.””

I can’t be totally sure what Mazzucato means by “creative activities” above. She doesn’t elaborate. But presumably she’s referring to the fact that under the Work Progress Administration hundreds of people were employed paint pictures and do other forms of artistic work.

So there you have it. Instead of filling potholes in roads and repairing or renewing bridges, Mazzucato would spend tens of billions sending people to Mars and having unemployed artists paint pictures.

Is there an enormous demand for more pictures to adorn the walls of supermarkets, offices and public buildings etc near where you live? Can’t say there’s much demand in my neighbourhood. As for expeditions to the Moon and Mars, well I’d rather see the money (and we’re talking tens of billions) spent on infrastructure improvements.

Saturday, 6 April 2019

How to cut UK carbon dioxide emissions by nine million tonnes a year.


 The UK dumps nine million tonnes of wood in landfill sites a year according to this source. That wood eventually rots down and the carbon in the wood is converted by microbes to carbon dioxide. But that’s carbon dioxide which is produced to no effect: that is, the wood could be used to heat buildings or generate electricity. Ergo if the wood was used for the latter purposes rather than being left to rot, millions of tonnes of coal and oil currently used to generate electricity would no longer be needed.  So the net amount of carbon dioxide produced by the UK would decline by roughly nine million tonnes. 

Of course given that wood consists of hydro-carbons, a significant proportion of wood consists of hydrogen rather than carbon. But that doesn’t make much difference in that that hydrogen could be used to generate electricity rather than just letting microbes mess around with it. 

Obviously the above is a very crude calculation. It is over-optimistic in that….

1. Some of the wood dumped in landfill has a significant water content. By the time that was dried prior to burning, that would cut the above 9 million to a smaller figure.

2. Transporting the wood to electricity generating plants results in carbon dioxide emissions.

But against that, the above “don’t let wood just rot” policy could be extended to woodlands: i.e. why not make it illegal to let trees and branches above a certain diameter just lie on the ground rotting away?

Of course rotting wood in woodlands does return some minerals to the soil and those minerals would be lost under the above “don’t let wood just rot” policy. But against that, the ash that results from burning wood contains some of those minerals, so that could be returned to woodlands. 

P.S. I’m not an expert on this, but wood which is buried in landfill presumably is somewhat starved of oxygen, which means it won’t produce much carbon dioxide when rotting. I.e. aerobic bacteria presumably don’t thrive under-ground. On the other hand there are anaeorobic bacteria, and they presumably produce methane when rotting the wood. Methane of course is an even worse global warming gas then carbon dioxide.

But to repeat, I’m not an expert on this. The above article is just a kite flying exercise. 

Thursday, 4 April 2019

Stephanie Kelton demolishes some of the more simple minded ideas about deficits and debts.

Stephanie Kelton demolishes some of the more popular and simple minded objections to deficits and rising national debts.


On the other hand I’m not entirely happy with her claim (about 30 minutes in) that we do not need to worry too much about where the money will come from to pay for a better social security system, more infrastructure spending etc. If taxes do not need to rise to pay for extra public spending, why do countries with high levels of public spending relative to GDP, also have high levels of tax relative to GDP?

(Hat tip to Lars Syll).

Tuesday, 2 April 2019

Open Democracy: the organisation which claims to back “free thinking” but hates free speech.

An article just published by Open Democracy entitled “Banking for the many” claims "A new retail bank should be established to provide a full range of retail banking services in every community..". 

Well if small bank branches in every village and suburb were profitable, existing banks would already be providing that service. But it's not, so they don't. Ergo the small branches proposed in the above article would need to be subsidised.

Plus given the ever increasing amount of bank business done online, and at ATMs the above proposal sounds to me like a return to the nineteenth century.

I tried to make the latter point in a comment after the article, but was told I’ve been banned from making comments there. Would be nice if they’d told me exactly WHY I’ve been banned, but evidently that’s too much trouble for them. My guess is that Open Democracy is scared of free speech: they don’t like being contradicted.