Tuesday, 15 October 2019

“Sustainability” is not a useful criterion by which to determine the optimum size of the deficit.

Olivier Blanchard, former chief economist at the IMF and Takeshi Tashiro  argue that the deficit should be held to a level such that were it to stay at that level, and all else remained constant, the debt would not continue to grow ad infinitum. That’s in their article entitled “Rethinking Fiscal Policy in Japan” (published by PIIE).

While the word “sustainable” is ultra-fashionable nowadays, the deficit does not actually need to be sustainable in the latter sense.

To illustrate, suppose demand collapses (say because of a collapse of consumer or business confidence), and a deficit bigger than can be sustained long term would solve the problem, do we take it that that deficit should NOT BE implemented: i.e. the unemployed should be left to rot??

I think not. MMT (Mosler’s law in particular) says that the deficit should be WHATEVER deals with unemployment. Keynes said much the same.

Mosler’s law, which used to appear in yellow at the top of Warren Mosler’s site, states: “There is no financial crisis so deep that a sufficiently large tax cut or spending increase cannot deal with it.” (Warren Mosler founded MMT).

Plus the fact that that deficit cannot be sustained long term does not matter, because national debt (as MMTers keep explaining) is a private sector financial asset, and the bigger that asset, the higher will private sector spending be, all else equal.

Ergo, a deficit which is larger than can be sustained long term just isn't going to continue for ever because “Private Sector Net Financial Assets” (an MMT phrase) will eventually rise to a level where demand rises to a point where little or no deficit is needed.

The above is part of a long standing form of schizophrenia that the IMF has had in relation to deficits. That is, it knows that deficits are needed so as to deal with recessions, at the same time as knowing that the resulting national debts cannot be allowed to grow too large. But it does not seem to be able to work out the optimum compromise between those two. E.g. see here and here.

Thursday, 10 October 2019

Opponents of full reserve banking are so predictable they’re a joke.

A popular objection to full reserve is that would result in less lending and in the bank industry contracting, ergo, so the argument goes, economic growth is hit.

The flaw in that argument, as I explained in this series of tweets, is that the bank industry is as big as it is partly because of the subsidies and various forms of preferential treatment it receives, one of those being the right it is given to print / create money from thin air and lend it out at interest. Thus the argument that removing that “right to print” (and full reserve involves removing that right) would cut growth or GDP is nonsense. In fact ALL SUBSIDIES, unless there is a very good reason for them, REDUCE GDP!! Thus removing an unjustified subsidy or form of preferential treatment enjoyed by the bank industry (or any other industry), far from reducing GDP, ought to raise it.

And what do you know? Within about six hours of that series of tweets of mine, Vitor Constancio, former vice president of the ECB, did a tweet which fell for precisely the above flawed argument.

To be exact, he said "Narrow banking or similar approaches do not guarantee the amount of credit to finance investment and economic growth." (“Narrow banking” is just  another name for full reserve.) Of course I can’t be 100% sure he has fallen for the above flawed argument, but it very much looks like he has.

A further weakness in his argument, is that much if not most investment is not funded via bank loans: it’s funded via equity or retained earnings.  Plus large corporations do not as a rule use banks for loans: they go direct to money markets.

Wednesday, 2 October 2019

Rohan Grey’s flawed variation on Positive Money’s Sovereign Money system.

Grey’s variation is set out in this Progressive Pulse article which is not actually written by Grey. The title of the article is “Rohan Grey’s ‘Banking Under Digital Fiat Currency’ Proposal.”

However, Grey gives his blessing to the article in this tweet, so presumably the article is a fair description of Grey’s proposal. I would normally go to the original source of the idea, i.e. Grey’s own article, but that seems to be behind a pay-wall.

The first problem with Grey’s proposal is that it involves the central bank in giving commercial banks the base money they need to make loans in exchange for the mortgages granted by commercial banks. So do central banks do detailed checks on millions of mortgages before dishing out money, or what? This sounds like a bureaucratic nightmare.

Second, central banks are not supposed to be into commerce.

Third, the system gives an artificial preference to banks vis a vis other entities (e.g. non-bank firms and households), and I think we've all had enough of preferential treatment and subsidies for banks. To illustrate, take an economy in stable equilibrium. Banks then spot new and viable lending opportunities. If the CB supplies them with the necessary base money, demand rises, ergo taxes must be raised (or demand reduced some other way, like cutting public spending) So essentially taxpayers fund the new loans, which doesn’t make sense.

In contrast, under PM’s system, if banks want more funds to lend, they have to attract funds from depositors. That raises interest rates, which means the people who OUGHT to fund loans, i.e. savers, actually fund the extra loans. That ought to give a genuine free market rate of interest, which ought to maximise GDP / output per hour.

Tuesday, 1 October 2019

Positive Money’s odd claim that full reserve banking is different from their “Sovereign Money” proposal.

PM make that claim in an article entitled “Sovereign Money and full reserve banking proposals aren’t one and the same.” Author of the article is Frank van Lerven.

The crucial passages of the article, which I’ve put in green italics are as follows.

Sovereign Money proposals are often mentioned alongside FRB proposals. And they do indeed have a same goal; that is to stop banks creating money in the process of making loans (or buying assets). However, the method is different – and there happens to be a number of other goals and benefits of implementing a Sovereign Money system.

In the case of FRB it is done by forcing banks to hold reserves against their deposits. As the Bundesbank correctly notes, this doesn’t necessarily stop banks creating money – that is, it is quite possible for there to be money creation by the banking sector with 100% reserves.

Now wait a moment. According to Milton Friedman, one of the most heavy-weight advocates  of full reserve, money creation by private banks IS PROHIBITED under full reserve. He refers in this paper to “A reform of the monetary and banking system to eliminate both the private creation or destruction of money…”. (Title of his paper is “A Monetary and Fiscal Framework for Economic Stability”.)

On the subject of why full reserve allegedly does not stop private banks creating money, Van Lerven continues…

Simply put, banks create money and look for the reserves later. Central banks always accommodate private banks’ demand for reserves. So even in an FRB system, private banks could create new money through the process of lending, and then get the required reserves from the central bank.

Well under the EXISTING bank system banks may “create money” and get supplied with reserves later, but that would not happen under full reserve! What would happen under full reserve is as follows.

First, banks are informed that they are not supposed to create money: i.e. if they wish to grant loans, they must first obtain the necessary base money needed to make the loan, and that money must be VOLUNTARILY placed by relevant depositors in accounts specifically advertised as being for those who want their money loaned out or invested (which PM calls “investment accounts”). Plus holders of those accounts buy into what are in effect unit trusts / mutual funds, where the value of their stake in such funds can rise or fall dependent on the performance of the relevant loans or investments.

However, it is of course possible a miscreant bank or two would disobey the latter rule, and simply fire ahead and try to create and lend out money. But such a bank and the private bank system as a whole would then face a problem, namely that a proportion of the recipients of that new money would want it put into safe accounts (accounts which are supposed to be backed by reserves at the central bank). So relevant banks would need to come up with reserves.

But they wouldn’t get anywhere asking the central bank for reserves because the reaction of the central bank would be (on the simplifying assumption that no stimulus was needed): “The amount of base money in circulation is just fine, thankyou very much. We have no intention of supplying you with reserves. You’ll just have to rein in your activities and thus reduce your need for reserves. But to get you out of difficulties for a while, we’ll supply you with reserves, but at Bagehot’s “penalty rate” of interest. That will concentrate your mind no end, and get you do what we want you to do, i.e. rein in your activities.”


There may be some small differences between full reserve and Positive Money’s “Sovereign Money”, but essentially they’re the same thing. Indeed, every advocate of full reserve promotes a different variation on the basic full reserve theme. But they all have some basics in common, and Positive Money’s “Sovereign Money” shares those basics.

Thursday, 26 September 2019

Positive Money vindicated.

I’m delighted to see Chris Giles (economics editor at the Financial Times) advocate the idea, which has been advocated by Positive Money for about ten years, namely that the central bank (or some other committee of economists) should decide the SIZE OF the deficit, while politicians retain control of strictly political matters, like what proportion of GDP is allocated to public spending, and how that is split between education, health, law enforcement, etc. Article title: “Britain needs a new fiscal and monetary framework”.

Ben Bernanke actually gave an approving nod to that sort of idea a year or so ago.

Only trouble is that Chris Giles claims the idea as his own. Cheek!

Reminds me of the phrase “first they ignore you, then they laugh at you, then they fight you, then you win”.  There really needs to be a fifth item added to that phrase: “then they claim your idea as their own”!

Sunday, 22 September 2019

Is MMT too monetarist?

Frances Coppola claimed recently on Twitter that Warren Mosler (founder of Modern Monetary Theory) is too monetarist. I beg to differ: i.e. I think the extent to which MMT accepts monetarism is about right. Reasons are as follows.

MMTers certainly tend to claim that given inadequate demand, the private sector’s attempts to save money must be higher than usual, thus the solution is to create more money (base money in particular) and spend it into the private sector. And clearly that claim is not a million miles from the monetarist claim that GDP varies with the size of the stock of money (base money in particular), and the even more extreme version of monetarism, namely that the best way of controlling demand is simply to control the size of the stock of money.

First, there is nothing basically wrong with monetarism (on the dictionary definition of the word, i.e. the idea that GDP tends to vary with the size of the stock of money, base money in particular). To illustrate, when people win a lottery, or come by some other windfall, their weekly spending rises. Ergo if the central bank were to print tons of new money and distribute wads of it to everyone, total spending, i.e. aggregate demand would rise, and assuming the economy had spare capacity, GDP would rise. Alternatively, if there was no spare capacity, the only effect would be to raise inflation.

However, clearly monetarism can be taken too far: e.g. the idea that demand can be accurately controlled simply by adjusting the money supply is over-simple. But MMTers do not advocate the latter over-simple idea.

What they do argue (speaking as a self-appointed spokesman for MMT, ho ho) is that come a recession, the best solution is for the state (i.e. government and central bank) to create money and spend it, and/or cut taxes. Keynes advocated much the same. And that will have two effects.

First there is what might be called a fiscal effect: e.g. if the extra spending comes in the form of extra spending on education, then an immediate effect will be more jobs for teachers.

A second and more delayed effect is that the stock of money (base money in particular) rises, which will itself also raise demand.

Thus it can be said that not even extreme monetarists are extreme monetarists – in the sense that there is an inevitable fiscal element involved in feeding more money into the private sector.

Who controls the printing press.

Of course there is an obvious problem with creating money and spending it, namely that if POLITICIANS are in control of the money printing press, they may well be tempted to engineer pre-election booms. 

But the solution to that little problem was set out by Positive Money several years ago: have some sort of independent committee of economists, perhaps based at the central bank, decide the SIZE OF the deficit, while politicians retain control of strictly political matters, like what proportion of GDP goes to public spending, and how that is split between education, health, infrastructure, etc. Ben Bernanke incidentally gave an approving nod to that sort of system.


Another point in favour of the MMT stance here is that while MMTers do not claim adjusting the stock of money should the SOLE method of adjusting demand, their claim that inadequate demand proves there’s an inadequate stock of money is nevertheless true by definition – at least in the following sense.

If the private sector is spending an inadequate amount, that ipso facto means they are trying to save too much, or trying to save an amount that results in Keynes’s “paradox of thrift” unemployment. Put another way, if people are saving too much, those people must in their own estimation, have an inadequate stock of liquid savings (in the form of base money – or government debt, which as MMTers have often pointed out, is pretty much the same thing as base money). Ergo the claim by MMT, Keynes and others namely that given unemployment, there must be an inadequate stock of savings is true by definition.  And that is an argument in favour of at least a partial acceptance of monetarism.

Conclusion: the extent to which MMT accepts monetarism is about right.

Wednesday, 18 September 2019

A less than brilliantly clever article by Grace Blakeley.

This New Statesman article by Grace Blakeley isn't too clever. (Article title: "The next recession won't be like...") She argues that we’re doomed because given that interest rates are near or at zero, central banks won’t be able to cut interest rates come the next recession, plus she claims the automatic stabilisers won’t do the trick. And that’s it basically. Only slight problem is that she’s left out DISCRETIONARY fiscal stimulus. That is, the latter stabilisers are what might be called “non discretionary” i.e. they happen automatically. But in contrast, any government (particularly the government of a country which issues its own currency) is free to implement as much fiscal stimulus as it likes over and above the latter automatic fiscal stimulus. Indeed, that’s exactly what most governments did in the last recession.

But I’m not being desperately clever in making the latter point: I’m simply repeating what Keynes said almost a hundred years ago. You’d think Blakeley, who got a degree at Oxford in politics, philosophy and economics would have heard of Keynes and understood his basic message.

It could perhaps be argued that Blakeley is implicitly ruling out Keynsian fiscal stimulus in that she very briefly refers to the allegedly excessive levels of “total global debt”, which in her own mind presumably includes national debts, though she is not clear on that. That’s where she says,  “The global economy is facing a debt overhang (around $246trn) many times larger than that which preceded the financial crisis. Total global debt is three times the size of global GDP…” Well there are two answers to that.

First, as Keynes explained, there is no need to incur any extra national debt at all in order to fund fiscal stimulus: as he said, a country which issues its own currency can simply create new money and spend it, and/or cut taxes.

Second, the tired old argument that we can’t do too much fiscal stimulus because of the increased national debt that involves was PRECISELY the argument used by George Osborne, David Cameron and other Tories to limit stimulus (i.e. impose austerity  - in the “inadequate demand” sense of the word) in the last recession.

Though in fairness to the Tories, many if not most economics commentators employed the same crass argument, as Simon Wren-Lewis has pointed out over and over.

So if Grace Blakeley IS EMPLOYING the latter argument, then Blakeley, the left wing firebrand is agreeing with Tory pro-austerity arguments.

Now that’s a giggle.