Sunday, 21 August 2016
In a perfectly functioning free market, and given a recession, wages and prices would fall, which would increase the real value of money (base money to be exact). That would encourage spending which would cure the recession. That’s known as the Pigou effect.
Unfortunately in the real world, wages are sticky downwards (to use Keynes’s phrase) thus the free market’s cure doesn’t work too well. However, it can be imitated simply creating and spending extra base money into the economy (helicoptering). That comes to the same thing as the free market cure for a recession. (Incidentally “QE for the people” is another name for helicoptering).
In contrast, while interest rates would doubtless fall in a recession given a free market, there is nothing much to stop them falling in the real world. There is thus little reason to think that additional and ARTIFICIAL attempts to cut interest rates engineered by central banks resemble the free market’s cure for recessions.
Indeed, there are obvious anomalies with interest rate cuts. First, any increased demand resulting from such cuts is concentrated in the capital goods sector of the economy, and that means more dislocation than if the increase in demand is spread more widely thru the economy (as occurs under the free market’s cure for recessions). Second, recessions are not necessarily caused by a decline in demand for capital goods: they can be caused by a decline in consumer confidence, i.e. a decline in demand for consumer goods. Third, even if a recession IS CAUSED by a decline in demand for capital goods, the assumption that that decline should be made good is questionable.
A classic example of that was the decline in demand for housing / property which sparked off the 2007/8 recession. That in turn was caused by the irresponsible lending (particularly in the US) which preceded the recession. Now the idea that the best cure for a recession sparked off by irresponsible lending is to encourage more lending is stark, staring, raving bonkers. It’s LUNATIC.
Yup. The emperors running the show really don’t have any clothes.
The only possible problem with helicoptering comes when it needs to be reversed. Certainly things are more complicated there than in the case of an interest rate hike. However, the fact that some measure is easy for the authorities to implement is not a brilliant argument for it if that measure does not actually have much effect: and the evidence seems to be that interest rate adjustments do not actually have much effect.
Second, if an extra thousand bureaucrats are needed in a country like the UK (with a population of about 60 million) to manage reversing QE for the people, that is a complete irrelevance in the total scheme of things.
As mentioned above, reverse helicoptering has potential problems. Altering sales taxes like VAT doesn’t seem to be too difficult: the UK cut and then increased VAT during the recent recession.
Putting a stop to new orders for government purchased stuff would not be difficult either. On the other hand cutting the state pension or unemployment benefit obviously involves potential political problems.
So I suggest the optimum policy is to use helicoptering as far as possible, while only using interest rate adjustments to the extent that helicopter adjustments prove too difficult.
Friday, 19 August 2016
John Williams of the San Francisco Fed published an article recently advocating a bigger role for fiscal policy.
One relevant passage reads:
"Turning to policies that can help stabilize the economy during a downturn, countercyclical fiscal policy should be our equivalent of a first responder to recessions, working hand-in-hand with monetary policy. Instead, it has too often been stuck in a stop-and-go cycle, at times complementing monetary policy, at times working against it. This is not unique to the United States; Japan, and Europe have also fallen victim to fiscal consolidation in the midst of an economic downturn or incomplete recovery.
One solution to this problem is to design stronger, more predictable, systematic adjustments of fiscal policy that support the economy during recessions and recoveries (Williams 2009, Elmendorf 2011, 2016). These already exist in the form of programs such as unemployment insurance but are limited in size and scope. Some possible ideas for the United States include Social Security and income tax rates that move up or down in relation to the national unemployment rate, or federal grants to states that operate in the same way. Such approaches could be designed to be revenue-neutral over the business cycle; they also could avoid past debates over fiscal stimulus by separating decisions on countercyclical policy from longer-run decisions about the appropriate role of the government and tax system. Indeed, economists across the political spectrum have championed these ideas."
Well quite. In fact why not take it a stage further and simply fund fiscal deficits via new money? I.e. for each dollar of fiscal stimulus, there’d be an extra dollar of base money in the hands of the private sector (which is monetary stimulus of a sort). And that’s what’s advocated by Positive Money, the New Economics Foundation and Richard Werner.
But instead of the latter monetary policy in the form of adjusting the private sector’s stock of base money, Williams seems wedded to adjusting interest rates. Well the problem with that is that is first that there’s a wealth of evidence that interest rate adjustments don’t actually have much effect. Second, the lag between interest rate changes and actual changes in investment spending are long. Third, the GDP maximising rate of interest is presumably the free market rate. That is, ARTIFICIAL adjustments to interest rates are not on the face of it a GDP maximising way of attaining full employment.
Reference. 'Monetary policy in a low R-Star world'. John Williams.
Wednesday, 17 August 2016
I’m sceptical about Keen’s debt jubilee idea.
His argument, far as I can see, is thus.
1. Private debts have risen sharply over the last two decades or so.
2. When debts in the aggregate are paid off, or even when their growth ceases, the effect is deflationary.
3. When that deflation comes, governments won’t provide enough stimulus, ergo we need a jubilee.
The weaknesses in that argument are thus.
First, the rise in debts is not surprising given the fall in interest rates over the last two decades. To that extent, paying interest is not a big problem.
Second, the latter theoretical “not a problem” point seems to be born out in practice. That is, the proportion of debts which are “non-performing” is currently not at any sort of danger level. At the height of the crisis, that danger level was arguably approached in the US where “non-performers” rose to near 10% of total debtors. But that US problem has since subsided. As for Keen’s native Australia, which he seems to be particularly concerned about, “non-performance” seems to be a “non-problem” according to this chart.
Third, I agree (as claimed by Keen) that when it comes to implementing the right amount of stimulus, governments and central banks are pretty incompetent. In the recent crisis, that was thanks to the “pro-consolidation, pro-austerity” ideas coming from the IMF, OECD, Kenneth Rogoff, George Osborne, etc.
However, a debt jubilee does not solve the latter problem. That is, it’s perfectly possible for a recession to be sparked off by factors other than excessive debt. I.e. the best solution is to get it into heads of the latter economic illiterates (Rogoff etc) that given a recession (caused by debts being paid off or anything else) there is no reason to hold back on stimulus.
Fourth, it’s impossible to forgive one person $X of debt without robbing someone else of $X of savings, and that’s politically risky. Those robbed are liable to riot, or resort to other violent or illegal counter measures.
Plus, once savers suspect their savings are likely to be confiscated, they’ll charge MUCH MORE for saving/lending for the next two or three decades. Thus it’s very debatable as to whether debtors / mortgagors would gain much in the long run.
However, Keen proposes getting round the latter problems by dishing out as much freshly created money to non-debtors as to debtors! In his words:
“A Modern Jubilee would create fiat money in the same way as with Quantitative Easing, but would direct that money to the bank accounts of the public with the requirement that the first use of this money would be to reduce debt. Debtors whose debt exceeded their injection would have their debt reduced but not eliminated, while at the other extreme, recipients with no debt would receive a cash injection into their deposit accounts.”
Well the obvious problem there is the ENORMOUS amount of stimulus involved: that is, we’d get hyperinflation. Here are some figures.
According to the first two charts in Keen’s article, the private debt to GDP ratio in the US peaked at 300% in 2010, while in Australia, it peaked at 150%. So the “Keen” solution would involve printing and distributing an amount of money equal to 600% of GDP in the case of the US (that’s 300% for debtors and another 300% for creditors to make sure creditors are not unfairly discriminated against in this massive distribution of freshly printed money). And in the case of Australia, the figures would all be half that much.
Those figures are completely lunatic. It couldn’t be done even if the process was implemented over several years. Milton Friedman never had anything like that in mind when he suggested helicoptering.
Obviously the above figures are all halved if we take the Australian 150% figure rather than the US 300% figure. But the stimulus is still of unheard of proportions.
But that’s not the end of the problems. People who are happy going into debt would then find their debts much reduced, thus they’d go running along to their bank demanding far bigger mortgages with a view to buying much larger or more expensive houses.
Unless something was done to curtail that activity, the alleged debt problem would just reappear in a few years. Thus we’d have to implement much stricter rules about who can borrow how much: all thoroughly bureaucratic.
I suggest it’s easier to work WITH the grain of what people and lenders want to do that work against the grain. That is, I prefer a system under which people can borrow what they want, as long as their bank thinks they’re creditworthy: i.e. as long as the bank thinks they’re able to eventually pay off the debt and in the meantime, pay the interest.
The only slight reservation that needs making to the above “hyperinflation” points is that arguably Western economies are not at capacity, thus there is room for some more stimulus (done via the Keen jubilee method or in some other way). Well clearly there is SOME TRUTH in that point. But Western economies have largely recovered from the recession which started in 2007/8, thus there wouldn’t be room for the MEGA STIMULUS package which is inherent to Keen’s jubilee.
P.S. (22nd August 2016). In the original version of the above article (published 19th Aug) I got in a muddle with the above 300% and 150% figures. I estimated the amount that needed to be printed and distributed at HALF the right figues. Correction made 22nd Aug..
Tuesday, 16 August 2016
I don’t have time to do a complete demolition job on this Guardian article, but I’ll deal with one key point which is the claim (an ever popular one) that “Britain, like Switzerland, relies on migrants not just to fuel its economy but to prop up key public services such as healthcare.”
The answer to that point is that Britain is only reliant on immigrants to run the health service because successive governments, Labour and Tory, have failed abysmally to train enough medics. To put that another way (for the benefit of low IQ cretinous Guardian readers) had Britain trained the right number of medics over recent decades, there’d be little need for immigrant medics.
That of course is not to criticise ALL IMMIGRATION. That is, even if each country aims to train the right number of bricklayers, plumbers, lawyers, medics, etc there will always be temporary shortages and surpluses of specific skills. But there is no excuse for a total failure to train anywhere near the right number of people for each profession.
But if failure to train a sufficient number of medics is a brilliant idea, perhaps we can look forward to some dim-wit effete Guardian journalist advocating the same total failure in respect of chefs, bricklayers, electricians, you name it.
Reference: "Theresa May's Swiss holiday will show her just how bad Brexit could be". Ian Birrell. The Guardian.
P.S. (Same day, 16th August, 2016). I could of course have tried to answer that Guardian article in the comments section after the article. But unfortunately The Guardian is terrified of free speech: normally it won't publish strident criticisms of it's articles, or so I've found.
Monday, 15 August 2016
That’s in a recent article of his entitled “Essays on modern monetary policy….”.
Kay starts by claiming (para starting “Bookkeeping by double entry..") that double entry bookkeeping is a good system and under that system it is impossible to create a financial asset without at the same time creating a liability, ergo helicopter money, which seems to be an asset of the private sector, but not a liability of the public sector must be a nonsense.
Well there’s an obvious flaw in that argument, namely that double entry is not the only possible form of financial record keeping. Double entry did not exist in Europe till the 13th century, and wasn’t introduced to Britain till about 300 years ago. Plus even today, it is often not used by very small firms.
So do we take it that helicopter money is possible in a country which employs some system other than double entry, but not possible in a country which does? That argument is clearly absurd.
Next (para starting “But notes and coins..”), Kay cites the argument put by Randall Wray, namely that since helicopter money, or base money to give it its more normal name, can be used to pay taxes to government, such money must be a liability of government. Well there are several problems with that argument, as follows.
1. What about someone who has a stock of base money, but will never have to pay taxes, for example because they’re a pensioner on a low income? In what sense is that stock of base money a liability of the state? None that I can see.
2. There is no obligation to pay your taxes using base money. Certainly in the UK, the tax authorities (out of the kindness of their hearts) are very cooperative and flexible when it comes to paying taxes: they’ll accept jewellery, antique furniture, valuable paintings, land, you name it in settlement of tax debts.
Of course when they do that, they try to make sure that the relevant jewellery etc is worth more than the amount of tax owed. But that’s their business. The important point is that the tax debt is extinguished when the jewellery is handed over.
So…to the extent that people settle tax debts in the latter way, base money just isn't a liability of the state. Indeed, numerous countries thru history have collected taxes in the form of agricultural produce (e.g. in Roman Britain). It would be perfectly possible to have a system under which ALL TAXES were paid that way, with the state still issuing a form of money. In that case, it is very hard to see in what sense that state issued money would be a liability of the state.
Of course the latter arrangement wouldn’t make much sense: half the point of introducing state issued money thru history has been to make the collection of taxes more efficient. But the important point is that having the state issue a form of money, while taxes were paid with agricultural produce would be perfectly possible.
3. Even to the extent that base money really is a liability of the state, what of it? The IMPORTANT point here is: does helicoptering work? If so (and assuming it’s a good way of imparting stimulus) then we should go ahead with it.
Indeed, and still assuming that base money really is a liability of the state, the reason helicoptering works is that when the private sector’s paper assets rise in value, the private sector spends more. And that helps cure recessions. End of story.
The fact that some of those paper assets could be construed as a liability of the state is irrelevant because that liability does not REDUCE spending by the state.
An example of helicoptering.
Kay then runs thru a hypothetical example of helicoptering (para starting “Let us suppose now…).
He points out (correctly) that given a helicopter drop, the notes concerned will end up back in the vaults of the central bank, which in turn increases commercial banks’ reserves, which Kay claims to be a liability of the central bank or the state.
Well we’ve already dealt with that point above. Just exactly what does a central bank owe a commercial bank where the latter has $X of reserves? The only obligation is to supply the commercial bank with reserves (i.e. base money) in a slightly different form, that is, in PAPER form (dollar bills, pound notes etc) if that’s what the commercial bank and its customers want. And dollar bills are inherently worthless bits of paper. It costs central banks next to nothing to produce them. It’s a bit difficult to see in what sense there is any sort of REAL LIABILITY there.
At any rate, once the latter paper notes have been deposited at the central bank, Kay claims “And within a few days the banks would have used these deposits with the Central Bank to buy other assets – either from government or with payments which the Central Bank would have to honour.”
Well commercial banks might well TRY TO DO THAT. But they face a problem, namely that on the “all else equal” assumption, the stock of government debt is fixed, as is the stock of other financial assets.
Thus to some extent commercial banks would FAIL in the latter attempt. Indeed, in the most recent attempt by the Bank of England to do more QE, it FAILED because (much to everyone’s surprise), the normal sellers of government debt refused to sell! But to the extent that commercial banks SUCCEEDED in buying other assets, the above mentioned base money would be paid to sellers of those other assets, who in turn would deposit that money back at the central bank (in some cases using a commercial bank as an intermediary).
Thus all the central bank would do is shift money, in its own books from the accounts of commercial banks A,B and C to the accounts of banks X,Y and Z. Bit difficult to see where the “liability” for the central bank is there!
Three points of clarification.
Next comes a section in Kay’s article entitled “Three points of clarification”, which is split into three sub-sections.
In the first two of those, Kay argues that helicopter money has little effect on the private sector’s stock of physical money ($100 bills etc) because physical money is becoming increasingly unpopular due to the fact that it’s largely criminals who use physical cash. Strangely, Kay does not mention the decline in demand for physical cash caused by the increased use of plastic cards, but never mind.
And the conclusion he draws from those two points, to quote, is that, “The implication of points one and two is that there is no reason to think that ‘helicopter money’, in any quantity, would have any material effect on either the volume of currency held outside the banking system or the level of transaction reserves held by commercial banks.”
So what’s the relevance of that? Kay doesn’t explain.
In particular, given the decline in the use of physical cash to which Kay refers, what does it matter if there is no increased usage of physical cash? The important point is that households and firms DO HAVE an increased stock of money held in bookkeeping or electronic form at their bank. And that will induce them to spend more.
Bank assets and liabilities.
The third of Kay’s above mentioned three sub-sections is far from clear, but it reads thus.
“Third, measures of money other than fiat currency – including sight deposits and other entries on bank balance sheets – are manifestly assets which are fully matched by liabilities. Each penny of customer deposit corresponds to a penny of bank obligation. The claim that banks ‘create money’, while true in a certain sense, does not repeal the law that there is a financial liability corresponding to every financial asset. Everything that has been said above about fiat money is true a fortiori of broader money.”
By “fiat currency” I assume Kay refers to central bank issued money, i.e. base money. That being the case, he is right to say that as regards the other main form of money, i.e. commercial bank created money, assets are “fully matched by liabilities”. That’s because that form of money comes into existence when a commercial bank makes a loan (as pointed out in the opening sentences of this Bank of England article – article title, “Money Creation in the Modern Economy” by M.McLeay & Co).
But it is precisely that form of money which is NOT under discussion here. That is, Kay’s article is concerned with CENTRAL bank created money, not COMMERCIAL bank created money.
Then in the second half of the above quoted paragraph, Kay tries to argue that because in the case of COMMERCIAL bank created money there’s a liability to match each pound or dollar of asset, that therefore the same applies to what he calls “broader money” (which I take to mean CENTRAL bank money as well).
Well I’m not falling for that sleight of hand. As explained at length in the above paragraphs, there are big differences between central bank and commercial bank created money.
There is no free lunch.
The final section of Kay’s article is entitled “There is no free lunch”. It starts with this claim: “Helicopter money is simply another mechanism of fiscal stimulus funded by government borrowing.”
Complete nonsense! Let’s run thru this very slowly.
Suppose the state does a helicopter drop, i.e. prints and spends $X of new money. Where’s the borrowing? The borrowing to which Kay refers is a figment of his imagination.
There is of course the argument already dealt with above that base money can at a stretch be regarded as a liability of the state in that such money can be used to pay taxes. But on the “all else equal” assumption, i.e. assuming taxes remain constant, there is no $X increase in that “tax liability” to match the $X increase in base money.
Ergo - roll of drums – that $X is an asset as viewed by the private sector without there being any $X liability that corresponds to it.
P.S. (15th August 2016). Another paper just out which takes a more positive view of helicopter money is by William Buiter: “The Simple Analytics of Helicopter Money: Why It Works – Always.”
Sunday, 14 August 2016
Rogoff for some bizarre reason is a professor of economics at Harvard, and he has the dubious distinction of having given a huge amount of academic credibility to austerity – arguably more than anyone else in the world. At least he has campaigned against fiscal stimulus and the increased government debt that accompanies it. He’s not the only pro-austerity numptie at Harvard. For example there’s Alberto Alesina with his “expansionary austerity” theory. But I’ll concentrate on Rogoff.
Rogoff’s basic reasons for limiting fiscal stimulus seem to be much the same as the reason given by your average economically illiterate politician and the average member of the public. It’s the simple minded idea that government debt is much the same as the debt of a household, and hence that the debt (or at least much of it) has to be paid back and pain is involved in the paying back process.
That is nicely illustrated in a recent article by Rogoff entitled “America’s Looming Debt Decision”. One of the key passages reads:
“Suppose, for example, that US voters elect as their president an unpredictable and incompetent businessman, who views bankruptcy as just business as usual. Alternatively, it is not difficult to imagine a sequence of highly populist leaders who embrace the quack idea that the level of government debt is basically irrelevant and should never be an obstacle to maximizing public spending. Unfortunately, if the US ever did face an abrupt normalization of interest rates, it could require significant tax and spending adjustments. And the overall burden, including unemployment, would almost surely fall disproportionately on the poor, a fact that populists who believe that debt is a free lunch conveniently ignore.”
OK, let’s run thru this V-E-R-Y V-E-R-Y S-L-O-W-L-Y. So slowly that hopefully even Harvard economics professors can understand it, though I’m not optimistic on that score.
First, Rogoff’s claim that there are people who think “the level of government debt is basically irrelevant” is of course complete nonsense. The average mentally retarded ten year old has worked out that increasing the debt has results. The big question is: when is that a problem?
Next there is Rogoff’s claim that there would be problems (unemployment in particular) if interest rates rose after a government had incurred a larger than normal amount of debt.
Well let’s suppose the Worldwide and gradual decline in interest rates over the last twenty years or so goes into reverse. That would be no problem because it’s easy to adjust to any sort of GRADUAL change.
A sudden rise in interest rates.
Alternatively suppose there is a relatively sudden and large increase in interest rates. Well initially there’d be none of the “tax and spending adjustments” to which Rogoff refers. That’s for the simple reason that 99% of the time, interest on debt issued by governments is fixed at the time such debt is issued. That is, if the interest demanded by potential holders of US government debt doubled tomorrow, there’d be essentially no effect on interest payments made by government next week.
However, over a longer period, an increasing proportion of the total debt would become due for rollover, and the question would then arise as to whether to pay the new higher rate of interest, or simply print money, pay off relevant creditors and tell them to go away.
Now whenever the words “print” and “money” appear the in same sentence, a host of economic illiterates appear from the woodwork chanting the word “inflation”. But apparently unbeknown to the latter numpties, we’ve actually BEEN printing money and buying back government debt like there’s no tomorrow for several years, and under the guise of what’s known as Q-U-A-N-T-I-T-A-T-I-V-E E-A-S-I-N-G. You’ll have heard of QE, but whether Rogoff has, I’m not so sure.
And where’s the inflation? Nowhere to be seen – just as many of us predicted before QE was implemented.
QE raises demand.
But to be fair, it’s quite possible that more QE could raise demand too much and hence raise inflation too much. So what then? Well that excess demand is easily curtailed by cutting the deficit, i.e. by raising taxes and/or cutting public spending.
Now you might think that tax increases and public spending cuts would raise unemployment, as indeed Rogoff suggests.
But hang on: the only purpose of those tax increases / public spending cuts, as intimated just above, is to keep inflation within bounds, i.e. to keep inflation at the target 2% level.
I.e. it’s only the above mentioned “excess demand” that needs to be curtailed. Thus given competent management of the economy, all that happens is that government keeps demand at the full employment / 2% inflation level, and nothing much else happens. In other words the “unemployment” to which Rogoff refers is a complete myth.
Interest rates rise in just one country.
It was assumed above that an interest rate rise is more or less Worldwide. Another possibility is that potential buyers of a particular government’s debt take a dislike to that government IN PARTICULAR and to the relevant country in particular, and increase the rate of interest demanded for holding that government’s debt, or indeed to keeping money in the country at all.
Well in that case, again, there is still no excuse for a rise in unemployment. Former debt holders on receiving cash when their debt was due for rollover would in some cases place the money elsewhere in the world which would depress the value of the relevant country’s currency on foreign exchange markets. And that would depress living standards in that country.
But then if a household or individual person repays debts, that is a painful experience: it involves a temporary decline in consumption, i.e. a decline in living standards.
The unemployment to which Rogoff refers is still a myth.