Tuesday, 29 July 2014
His article is entitled “Drop It: You Can Call for Helicopter Money but Drop the Call for Coordination”.
The word coordination refers to having having government do $X of fiscal stimulus while the central bank (CB) does $X of QE: the net effect being that the public sector / authorities simply print and spend $X net of any changes to tax.
Basically Scott claims there is no point in the latter printing: that is, getting the CB involved has no effect. This is a fundamental point that needs sorting out because not only were there calls for “coordination” when Scott wrote his article a year ago, as he pointed out, but those calls continue. Examples of those making the latter “call” include Positive Money, David Beckworth and Simon Wren-Lewis. Anyway, I’ll run through Scott’s argument, as I understand it, and try to explain where I think the flaw is.
In the paragraph starting “Let’s think for a minute..” Scott argues that when $Y of coordination takes place, the treasury disposes of $Y of debt in the traditional sense of the word (e.g. “Gilts” in the UK or “Treasuries” in the US), but it still has a debt in that $Y of new base money comes into being, and the CB according to Scott pays interest on that (at 0.25% in the US at the time he wrote the article). But in effect that’s treasury debt because CBs remit their profits to their treasury on a regular basis, and if the CB is on the face of it paying interest on reserves, then the reality is, according to Scott, that the TREASURY is paying the interest, so the treasury is still in debt. Therefor, so he argues, coordination (i.e. having the CB print money and buy debt) has no effect.
In his own words (in blue italics): “Now, what happens if instead the Treasury runs a deficit but there is no “coordination” and instead the Treasury issues T-bills? In that case, the Treasury ends up with new debt that it likewise services at essentially or roughly the Fed’s target rate—it’s well known that rates on T-bills essentially arbitrage with the fed funds rate.”
The no interest on reserves scenario.
Now the first and obvious problem there is that in normal circumstances (i.e. prior to the crunch) CBs did NOT PAY interest on reserves. E.g. the Fed started paying interest on reserves in 2008. So in “normal circumstances” Scott’s argument collapses, unless I’ve missed something. That is, contrary to Scott’s claims, there is a big difference between the authorities, 1, borrowing money from the private sector and spending it, and 2, the authorities simply printing new base money and spending it. To illustrate in 2006, the yield on Treasuries was a bit over 4%. Now there’s a big difference between 4%+ and 0%. Moreover, note that the yield on debt with a few months till maturity was much the same as debt with five years to maturity: reason being that banks were prepared to pay good money to acquire reserves, and ownership of Treasuries with a few months till maturity equals the right to extra reserves in a few months time.
The scenario post crunch was different. After the crunch, the economy was awash with base money, thanks to QE and near zero interest rates. In that scenario, the yield on short term debt is near zero, while the yield on longer term debt will be significant because debt holders run the risk of their investment being diminished by inflation (1.66% for 5 year debt, according to the latter link).
In that scenario, it is true to use Scott’s words that “rates on T-bills essentially arbitrage with the fed funds rate.” But that is only true for SHORT TERM debt.
In that scenario, its true that there is no difference between, 1, the treasury borrowing SHORT TERM and 2, the treasury borrowing short term with the CB buying back the relevant debt. After all, the latter short term debt has a yield of near zero and debt with a zero yield is effectively the same as money.
On the other hand if the treasury borrows by issuing LONG TERM debt, there IS A DIFFERENCE between “1” and “2” just above: to repeat, there is significant yield on long term debt even in the current near zero interst rate scenario.
So I’m claiming that the only scenario where Scott’s “coordination is pointless” idea holds is where there is little effective difference between base money and debt ANYWAY.
Monday, 28 July 2014
He should pay more attention to me and Positive Money.
Stefan trotts out the old argument that inflation targetting is problematic in that when interest rates are cut so as to cut unemployment, the interest rate cut can spark off asset price bubbles. As he puts it:
“This illustrates the problem with strict consumer price inflation targeting. When positive supply schocks pushes down prices, central banks are compelled to respond by pursuing monetary policy that creates unsound levels of debt and asset prices.”
Wrong. The problem is not with “inflation targeting”. The problem is with using interest rate adjustments to influence demand.
So the solution is . . . . don’t use interest rate adjustments to control demand. Instead simply create and spend more base money money, net of any changes to tax, when stimulus is needed, a policy advocated by Positive Money, the New Economics Foundation and Prof.Richard Werner.
Plus as I pointed out here, there is a long list of problems and defects in using interest rate adjustments to influence demand apart from the one mentioned above.
Sunday, 27 July 2014
It’s hardly surprising politicians haven’t a clue about the debt or deficit given the advice they get from the CRS. Rebecca M. Nelson authored some defective advice for Congress: entitled “Sovereign Debt in Advanced Economies.
The first mistake is in the first paragraph which claims “Even if economic growth reverses some of these trends, such as by boosting tax receipts and reducing spending on government programs, aging populations in advanced economies are expected to strain government debt levels in coming years.”
The idea that increasing a particular form of spending will result in increased debt is of course nonsense: government can perfectly well fund increased spending from tax: a point that the average ten year old can probably work out. But it gets worse.
In the section entitled “Policy Options”, Nelson lists five ways of reducing the debt, most of them involving significant problems. She misses out a method of reducing the debt which involves no problems at all (of which more below). Her five solutions are thus.
1. Fiscal consolidation. That, as she rightly points out involves raising taxes or cutting public spending. I.e. it involves austerity.
2. Debt restructuring. As Nelson rightly points out, that can involve extending the period of the debt or cutting the rate of interest. Both of those involve breach of contract: i.e. they involve robbing lenders.
3. Inflation. Well that hardly brings benefits for the country as a whole. Plus it involves, again, robbing lenders: in particular if inflation is SUDDENLY AND DRAMATICALLY increased specifically so as to rob lenders or debt holders.
4. Growth. That is certainly the least harmful.
5. Financial repression. According to the author, the latter “generally refers to the use of government policies to induce or force domestic investors to buy government bonds at artificially low interest rates…”.
Essentially that’s just a tax, and if government wants to increase taxes why not increase the more normal types of tax, like sales tax? There’s no need for the convoluted process involved in forcing people to buy debt which pays an artificially low rate of interest.
The problem free solution.
As I’ve pointed out time again on this blog, this is to print money and buy back debt (i.e. implement QE). And as to any inflationary consequences, that can be dealt with by increased taxes. Assuming the stimulatory effect of the QE equals the anti-stimulatory effect of the tax, then GDP remains the same: i.e. no austerity is involved.
However, the inflationary effect of QE does not seem to be DRAMATIC, to judge by the QE that has taken place over the last two or three years, thus the amount of increased tax would probably be equally small.
By the way, I normally need a few cups of coffee in order to get my brain sufficiently active to write a post on this blog. But I wrote the above in 20 minutes on one of my “caffeine free dozing around all day doing nothing” days.
Saturday, 26 July 2014
Congratulations to Alan Greenspan for highlighting the point that asset price crashes are not much of a problem where those funding or owning the assets are equity holders rather than creditors whose stake in the asset is fixed in dollar terms. See paragraph starting “All bubbles expand…”.
Former governor of the Bank of England, Mervyn King actually made the same point in his “Bagehot to Basel” speech. See paragraph starting "At the heart...".
Now under full reserve banking, loans are funded just by shareholders, not depositors, bond holders, etc. That is, the liability side of a lender / bank’s balance sheet can vary in value. That makes insolvency virtually impossible.
So bye bye credit crunches. What more do you want?
Ann Pettifor has been getting all worked up lately about the rather obvious fact that when base rates rise, so too will rates for mortgages, which will be a problem for a proportion of mortgagors. See images below for some examples of her near hysteria.
Now that rather contradicts the disdain with which she regards Positive Money. Reason is that PM, along with the New Economics Foundation, Prof Richard Werner and others, advocate a system under which interest rate adjustments ARE NOT used to adjust demand: rather, what’s varied is the amount of new base money that the authorities create and spend (net of any tax increases or cuts government chooses to make).
Thus under that system, interest rate gyrations ought to be LESS PRONOUNCED, all else equal, than under the existing system: something that Ann Pettifor would presumably welcome.
Perhaps she'd like to re-consider her disdain for Positive Money.