Saturday, 19 October 2019

J.K.Galbraith says, correctly, that deficits crowd out private money printing.

There’s an article by Galbraith in The Nation which is interesting. It’s entitled “In Defense of Deficits”. In it, he says (I’ve put his words in purple italics):

"For ordinary people, public budget deficits, despite their bad reputation, are much better than private loans. Deficits put money in private pockets. Private households get more cash. They own that cash free and clear, and they can spend it as they like. If they wish, they can also convert it into interest-earning government bonds or they can repay their debts. This is called an increase in "net financial wealth." Ordinary people benefit, but there is nothing in it for banks.

And this, in the simplest terms, explains the deficit phobia of Wall Street, the corporate media and the right-wing economists. Bankers don’t like budget deficits because they compete with bank loans as a source of growth. When a bank makes a loan, cash balances in private hands also go up. But now the cash is not owned free and clear. There is a contractual obligation to pay interest and to repay principal. If the enterprise defaults, there may be an asset left over–a house or factory or company–that will then become the property of the bank. It’s easy to see why bankers love private credit but hate public deficits".

Actually I very much doubt that “Wall Street, the corporate media and right-wing economists” are smart enough to realize that deficits crowd out private money printing. I suggest the latter collection of economic illiterates have just fallen for the ever popular idea that government and household budgets are comparable: i.e. the idea that government debt is some sort of “burden” and that that debt necessarily has to be repaid at some stage.

The latter “household analogy” is debunked for example by Steven Keen, the New Economics Foundation, and Richard Murphy.

At any rate,  Galbraith’s point ties up with (though is not identical to) the point I have been making for a long time, which is thus.

Full employment can perfectly well be achieved with just one form of money, namely central bank issued money or “base money” as it is often called. Private banks CAN BE allowed to then create their own rival form of money, but that will raise demand which means taxes have to be raised and base money has to confiscated from the citizenry.

Thus in effect, central and commercial banks are rival money printers. Both realise that excessive money printing leads to excess inflation. But at the same time,  both – certainly private / commercial banks – are keen to maximise the amount of money printing they do. And to that end, private banks devote very large amounts of money to bribing and cajoling politicians into leaving their money printing activities untouched.

The latter bribery and propaganda works a treat: politicians are fooled every time. Even self styled “progressives” are fooled.

And finally, please note that I am indebted to Kathryn Cannon for drawing my attention to the above Galbraith article.

Friday, 18 October 2019

The inane drivel produced by the Harvard economics department.

Kenneth Rogoff and Carmen Reinhart, professors of economics at Harvard, have published dozens of papers and articles promoting the idea that if national debts grow too large, a heavy price has to be paid to reduce them. Other “economists” at Harvard have produced similar nonsense.

R&R’s basic reason is that cutting the debt probably requires what they call “financial repression” – a term Rogoff invented. Indeed he has introduced other emotive terms into this argument like “debt overhang” in place of the single word “debt” (which would do perfectly well). The reason for employing emotion may be that R&R’s command of logic and the facts is not too good, as indeed I show below. 

Or perhaps they are just a good propagandists, and have realised that very few people (academics included) are swayed by logic or facts, whereas if you can wield emotion in the right way, then you’ll have about 90% of your audience by “you know which part of the male anatomy”.

Anyway, R&R us a definition of financial repression (FR) at the bottom of p.8 of NBER working paper No. 18015. The paper is entitled “Debt Overhangs: Past and Present.” The definition, which I’ve put in green italics runs as follows.

Financial repression includes directed lending to the government by captive domestic audiences (such as pension funds or domestic banks), explicit or implicit caps on interest rates, regulation of cross-border capital movements, and a tighter connection between government and banks, either explicitly through public ownership of some of the banks or through heavy “moral suasion”. It is often associated with relatively high reserve requirements (or liquidity requirements), securities transaction taxes, prohibition of gold purchases (as in the US from 1933 to 1974), or the placement of significant amounts of government debt that is nonmarketable.

So in general terms, FR consists of one or more damaging / distortionary measures the aim of which is to cut government debt or make it easier for government to deal with its debt.

There is of course another and very obvious damaging way of cutting the debt, namely a period of excess inflation. And R&R (several times) mention inflation as a way of cutting the debt (in real terms). But curiously, they do not classify excess inflation as a form of FR. I don’t regard that as a very logical classification, but never mind: I’ll stick with it in the paragraphs below.


R&R’s central claim is complete nonsense.
So the central claim is that governments are forced to employ damaging strategies to cut their debts. That claim is actually nonsense: that is, it is very easy for a country which issues its own currency to cut its debt. All it has to do is print money, buy back the debt and as to any excessive inflationary effects of that money printing, that can be dealt with simply by raising taxes and/or cutting public spending.

And what do you know? We’ve been doing just that, and big time, over the last five years or so under the guise of quantitative easing (QE)! And where are the serious inflationary effects of QE? They’re nowhere to be seen!!! You really have to wonder whether Harvard economists have heard of QE, don’t you?

So while some sort of tax increase is probably needed to counter the inflationary effects of buying back debt, it looks like the actual amount of extra tax needed is not much.

Now the economically illiterate (e.g. Harvard “economists”) could respond to that by claiming that more tax equals a cost just like the other undesirable elements making up FR or excess inflation. But note that the SOLE EFFECT of those raised taxes is to keep demand at its full employment level: i.e. stop demand rising ABOVE that level.

Thus demand and GDP are not affected!! So where is the REAL COST associated with the latter method of cutting the debt? It doesn’t exist: at least it does not exist in the “real standards of living decline” sense.

Or to be more accurate, there DOESN’T NEED to be any effect from that tax increase other than to keep inflation under control. In contrast, when raising taxes, government MAY CHOOSE to impose some sort of distortionary tax, but to repeat, there is no need for any distortion.

Moreover, there’d be no big difficulty in using the above strategy to cut the debt to zero: or put another way, as advocates of Modern Monetary Theory (MMTers) keep pointing out, the government of a country which issues its own currency has complete control over the rate of interest it pays on its debt.

Debt held by foreigners.

The only exception to the above argument to the effect that cutting the debt is costless comes with debt held by foreigners, or more accurately, by internationally mobile investor / savers. That is, some of the internationally mobile, when they find they get no interest from the US government for example, may choose to invest their money in some other country – or they may invest their money elsewhere in the US.

But if they take their money out of the country, i.e. convert their US dollars to another currency, that means a temporary decline in the dollar on foreign exchange markets, which means a temporary cut in living standards for US citizens.

The effect there is essentially the same as a household which borrows from some entity outside the household, e.g. a bank – let’s say to buy a new car. The initial effect of the loan is to raise the household’s standard of living: it has a new car to drive around in. But the day of reckoning has to come at some point: the household has to work extra hours to earn the money to pay back the loan.

The latter fall in the household’s standard of living approximately equals the earlier rise due to being able to driver around in a new car.

But needless to say, R&R do not deal with the latter distinction  between debt held domestically, and debt held by foreigners or the internationally mobile. 

Any costs involved in repaying debt result from paying interest on the debt.

A final point here is that the latter foreign exchange related costs involved in repaying the debt would largely vanish if (as suggested by MMT) little or no interest is paid on the debt.

In other words if a government offers no reward to those holding its currency, then in the event of its raising taxes and cutting the amount of that currency in private sector hands, there is no reason for foreigners to hold any less of the currency, because the interest earned on their currency holding is at or near zero before and after the latter tax is imposed!

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”!