Friday, 29 June 2018
I’ve done a update or “second edition” of the paper I published about a month ago advocating the “no government borrowing / permanent zero interest rate” idea. The update / second edition is here. Title of the update is, "A permanent zero interest rate would maximise GDP - (second edition)".
The basic ideas are the same, but hopefully they are better presented. There’s two or three extra references. The main new idea is in section 15 where I have briefly tried to reconcile the permanent zero interest idea with full reserve banking. In fact they “reconcile” very nicely: that is, the two ideas, if anything, positively support each other.
The “no government borrowing / permanent zero interest rate” idea is very much an MMT idea: i.e. all the advocates of the idea seem to be MMTers at the moment.
Warren Mosler, founder of MMT, has written three articles advocating the idea. See 2nd last paragraph here. See also here and here. (For the article titles, see list of references below, which are in the order they are mentioned in the main text here).
There’s an article by Bill Mitchell here, and one by Dan Kervick here.
And finally, there’s me.
Proposals for the Banking System. Huffington.
The Natural Rate of Interest is zero.
There is no right time for the Fed to raise rates. Huffington.
Mitchell. There is no need to issue public debt. Billyblog.
Kervick. Why does Uncle Sam borrow? New Economic Perspectives.
Thursday, 28 June 2018
The question as to exactly what form deposits should take under full reserve banking (aka Vollgled aka Sovereign Money) is tricky. The paragraphs below are an attempt at an answer.
The basic problem with the existing bank system is that commercial banks (henceforth just “banks”) create money, and as the French economics nobel laureate Maurice Allais said, that amounts to counterfeiting. To be more exact, what’s wrong with that form of money creation is as follows.
Money creation by central banks and governments (henceforth “the state”) can be done at virtually no cost. As Milton Friedman (who supported Vollgeld) 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." In contrast, money creation by banks costs a significant amount because banks have to check up on the credit-worthiness of those they supply money too, allow for bad debts etc. Thus state created money (base money) would seem to be the best option.
In a simple hypothetical Vollgeld economy (i.e. where only base money is allowed) keeping the economy at capacity is no problem: the state just issues enough base money to induce the private sector to spend at a rate that brings full employment.
In that hypothetical economy people and banks would lend to each other, and there is no obvious reason why interest rates would not settle down to some sort of genuine free market rate.
But if banks are not forcefully prevented from doing so, there’s a trick they can play and which they play big time in the real world: when a bank has received $X in deposits, it can lend out around $X while telling depositors their money is still available to them. And as long as only a small proportion of depositors try to withdraw their money at the same time, banks get away with that trick about 99% of the time. Hey presto: $X has been turned into about $2X. Money has been created.
That trick works because it is clearly cheaper for banks to fund loans via instant access deposits (on which little interest needs to be paid) as compared to long term deposits. The total amount of bank loans rises.
But that increases demand, thus assuming (as per the above assumption) the economy is already at capacity, the state then has to impose some sort of deflationary effect, like raising taxes and confiscating some base money off the private sector. In short, the effect of money creation by banks (as pointed out by Maurice Allais) is much the same as the effect of those naughty backstreet printers who turn out fake $100 bills: for every such bill put into circulation, government has to confiscate a genuine bill from the private sector.
The solution to the above problem, as pointed out by Vollgeld advocates, is to ensure that loans are funded via equity or something similar, like long term deposits that can be bailed in. That way, $X is no longer turned into $X. What happens is that when someone wants their money lending out, they buy shares in a bank or make a long term deposit, and that funds the loan, rather than instant access deposits funding loans. Shares and long term deposits, depending on the exact length of the deposit are not money. So there is no “money multiplication there.
Now while there is a clear distinction between shares and instant access deposits, there is no clear distinction between an instant access deposit and a two month or six month deposit. So where do we draw the line? Plus there’s the question as to whether deposit insurance should be allowed under Vollgeld. If it is, then the switch to Vollgled would be less of a wrench than it is commonly supposed.
Well as regards deposit insurance, there’d be nothing to stop people who want to lend out money person to person, and/or those who want their bank to lend out their money in the above hypothetical economy to arrange some sort of insurance. In a free market, anyone is free to arrange any sort of insurance they like. And as for state sponsored deposit insurance, there is nothing wrong with that either, as long as it pays for itself. Thus it is hard to see what would be wrong with deposit insurance under Vollgeld. Indeed, it is not insurance which results in banks creating money: it’s “maturity transformation” (i.e. “borrow short and lend long”) which creates money. Moreover it is precisely borrow short and lend long that makes banks fragile (as pointed out by Douglas Diamond), and results in catastrophes like Northern Rock and Lehmans.
The next question is: exactly how “long” should deposits be where depositors want their money loaned out? Well strictly speaking, if maturity transformation is to be abolished altogether, where for example deposits fund twenty year mortgages, then deposits need to be for twenty years.
Clearly no one wants their money tied up for twenty years, but governments issue bonds with ten and fifteen year maturities. And those who buy those bonds and when they want to cash in can always do so by selling those bonds, maybe at a loss. So in a sense, twenty years would not mean twenty years.
Another possibility stems from the fact that money is defined in most countries as something like “stuff in a bank which is available to the depositor within two months or so”. Thus if that two month dividing line is adopted, then strictly speaking money is not created where a bank funds long term loans via deposits with a minimum two month maturity.
Clearly the latter idea is a bit of semantic trickery because there is not particular logic in making the dividing line two months rather than three or four. However, on introducing Vollgeld, that two month dividing line would be a start: plus it would be away in introducing Vollgeld GRADUALLY. Gradual changes are always better than violent changes.
Saturday, 23 June 2018
Ann Pettifor (AP) claims in an article in the Irish Times that high house prices in Ireland are to a significant extent caused by shortage of land. See under her heading “Inelastic land”. (Title of her article: “Irish house prices sky-high due to finance not scarcity”).
Well now there’s a slight problem there, which is that the population density of the Irish Republic is about one seventh that of England. But house prices in Dublin are not much different to London!
Or if you want a more extreme example, the population density of Australia is around one hundredth that of England, but it’s the same story: house prices in Sydney are not much different to London. Thus high house prices in cities (where most people live nowadays) clearly has a lot to do with the attractions of, and economic benefits of “agglomeration”: i.e. everyone living and working close to everyone else. The fact that the supply of land for the country as a whole is finite is irrelevant: certainly in the case of Ireland and the UK.
Her second main explanation for high house prices comes in two parts. She claims Irish (or more generally EU based banks) have been lending in an irresponsible manner. Second, she claims banks shift money around the world to an excessive extent.
Clearly the 2007/8 bank crisis was largely down to the latter bank irresponsibility. The solution to that is better bank regulation: in particular, bank capital ratios need to be raised. Martin Wolf and Anat Admati (economics prof at Stanford) advocate raising the ratio to 25%: way above it’s present level. Plus Sir John Vickers (chairman of the main UK investigation into banks after the crisis) now says that the rise in capital ratios he proposed in his report was nowhere near adequate.
As for money moving around the world, it is widely accepted that the fall in interest rates over the last twenty years or so, which has cut costs for Western house buyers, is to a significant extent down to the flow of savings from less developed countries. Witness for example the vast amount of US government debt held by China.
The latter movement of funds from less developed to more developed countries brings benefits all round: savers in developing countries get more interest on their savings, and home buyers in the West can buy their houses for less.
So does the decline in interest rates (which comes to the same thing as an “easy availability of money for mortgages”) explain high house prices in Ireland (and indeed high house prices in the UK)? Well clearly given a SUDDEN fall in interest rates, home buyers would quickly rush out and buy more houses, and/or bigger ones. House prices would rise and initially builders would not be able to meet the additional demand. But we have not had a SUDDEN fall in interest rates: the decline (to repeat) has been fairly gradual over the last twenty years or so. (Actually there has been a gradual decline in interest rates for the last five hundred years – see article entitled “The ‘suprasecular’ stagnation” published by Vox.)
Given the latter twenty year GRADUAL decline in interest rates, it would be reasonable to assume that builders have in fact kept up with demand. So what then is the explanation for rising house prices? Well if builders are not making fabulous profits, which they aren’t, the only possible other explanation is rising costs.
Certainly building costs have risen: they have run ahead of inflation in most Western countries. Improved thermal insulation requirements have raised costs.
Another factor, at least in the UK, is the totally absurd price of land with “planning permission” as it’s called in the UK: i.e. land where permission has been obtained to switch from agricultural use to commercial or residential development. That land is now about a HUNDRED TIMES the cost of agricultural land in the UK: i.e. roughly a million or two million pounds per hectare.
And it seems things are about equally absurd in Ireland. According to this article, land for a single house in Ireland costs between €150,000 and €500,000 in the case of “infill” development. That high price can only be down to the above mentioned agglomeration effect or scarcity of land with planning permission.
And if you want evidence for my above theory that it is COSTS that are holding builders back, see this Financial Times article entitled “Central London housebuilding collapses under price pressure.” Incidentally, while the title of that article refers to “central London”, the article makes it clear that the same problems apply the Greater London area. Presumably that bit of economic theory applies in Ireland as well.
Monday, 18 June 2018
The recent Vollgeld referendum in Switzerland lead to a number of so called professional economists opining on the subject and doing little more than displaying their ignorance. Here is a selection of some of the not too clever material.
Lars Syll (for whom I normally have plenty of respect) claimed that Vollgeld would result in “debt deflation”. In fact as the advocates of Vollgeld / Sovereign Money make clear, under Vollgeld, central bank and government implement whatever amount of stimulus they think is needed to keep the economy at capacity / full employment, much as they do under the existing system.
Next, there was Jeremy Warner (for whom I have very little respect). For some of his nonsense, see this "Ralphonomics" article.
Next there was David Beckworth. To judge by the material under his heading “The knowledge problem” he is clearly under the illusion that under Vollgeld, lending decisions are taken by central banks. Had he bother studying the subject he would have discovered that under Vollgeld, lending decisions are actually taken by commercial banks or other private sector lending organisations, just as they are now.
Confirmation that Beckworth really does labour under the above illusion comes where he says “With such large balance sheets and the sole power to determine who gets money, central bankers would find…”. In fact, under Vollgeld, the central bank and government simply create new money where needed (as suggested by Milton Friedman in his 1948 American Economic Review paper), and spend that money into the economy. It is then up to tens of millions of firms and households to compete for that money just as they compete for money under the existing system.
But top prize for complete gibberish must go to Richard Murphy.
First, he claims Vollgeld “puts inflation at the core of economic policy”. Well it already is at the “core”: central banks decide how much stimulus to implement depending on what the inflation outlook is!!!
Second, he claims that money which is not debt based is not money. That’s BS. Gold, cowrie shells and other commodity based currencies have nothing to do with debt. Those holding British “sovereign” gold coins between 100 and 200 years ago owed nothing to anyone, and no one owed them anything.
Third, he says there is a “very real danger is that a central bank would underestimate the amount of money needed in an economy because their perpetual concern would be the risk of inflation meaning that they would always are on the side of caution.” Well that problem arises under the existing system: sometimes central banks and governments pitch demand too low. Indeed they were doing that BIG TIME during the recent crisis!!!!! What planet has Murphy been living on for the last ten years???
Fourth he says “Give central bankers control of the money supply, and you can forget democratic control of the economy for evermore.” What – so the electorate cannot vote to have government collect more in tax and spend more on health, education etc (or simply print money and spend on health and education)? BS again.
Fifth, he says “since central bankers would also then control the ability of the government create money to spend on its own programs guarantee that this would also mean perpetual austerity, and enforced government balanced-budget, with all the crushing implications that this has the public services.”
Had Murphaloon actually read Positive Money’s proposals (and the proposals of other V/SM advocates) he’d have discovered that under a PM system, the central bank creates whatever amount of money per year it thinks is needed to keep the economy at capacity and give us the 2% inflation target, with government then spending that money (and/or cutting taxes). In fact Ben Bernanke gave his blessing to that idea: see para starting “A possible arrangement…" here.
Sunday, 17 June 2018
The reasons for the above are quite simple and are as follows.
It would be perfectly feasible to have an economy where the only form of money was state issued money, e.g. Fed issued dollars in the US. And issuing enough of that money to induce the population to spend at a rate that brought full employment, while not exacerbating inflation too much would not be difficult: at least it would be no more difficult than gauging the right amount of stimulus under the existing system.
However, the reality is that private banks are allowed to issue money as well. But if private banks started doing that in an economy which was already in the latter full employment position, the result would be an excessive money supply: excess inflation would ensue (as indeed is explained by George Selgin - not that I’m suggesting he would agree with the basic thrust of this “Ralphonomics” article). Thus government would have to impose some sort of demand reducing or “deflationary” measure to counteract the latter excess inflation: like raising taxes and confiscating a portion of the population’s stock of money.
Thus if you’re in debt to a bank, remember that is partly because banksters have hoodwinked politicians into driving you into debt so that your bank can make money from lending to you.
Friday, 15 June 2018
Richard Murphy keeps flipping between saying the state (i.e. governments plus their central banks) can create money and saying they can’t. Today in this short article he is in “can” mode….:-)
That’s good to see because most of us tumbled some time ago to the fact that the state can in fact create money at will (base money to be exact).
However there’s just one fly in the ointment. He says “Quite simply quantitative easing is creating new bank deposits. As modern monetary theory suggests, money advanced creates what are, in effect, new savings, even if in this case they are reserves held by banks with the Bank of England.”
Well those two sentences are not entirely clear, but I’m 90% certain he’s saying that QE creates “new savings”. Well no it doesn’t: QE involves the central bank printing money and buying £X of government debt off the private sector. Thus the private sector loses approximately £X worth of government issued bonds and gains £X of cash. Where are the “new savings” there?
Of course it could be argued that those bonds now in the hands of the central bank are a form of savings. But quite honestly, is a debt owed by one arm of the state to another arm a form of saving? If I declare that my right hand pocket owes my left hand pocket one million, am I better off to the tune of one million? I think not.
Moreover having supported Modern Monetary Theory for the last ten years, and having read several hundred articles written by other MMTers, it’s news to me that MMTers adhere to Murphy’s strange idea that QE creates “new savings”.