Thursday, 26 November 2020

Robert Peston’s barmy ideas on government debt.



 

Robert Peston published an article on 25th November 2020 entitled “Spending Review: How the UK's Covid-19 debts may turn out very expensive.” The article is complete nonsense, which raises the question as to how he ever came to be the BBC’s business editor or ITV’s political editor.

Dozens if not hundreds of other people on social media and elsewhere have taken the p*ss out of this article. Anyway, my “p*ss taking” efforts, for what they are worth, are as follows.
 
His first nonsensical claim is that the large government debt accumulated as a result of Covid “…represents by implication the fastest transfer of wealth and power to China and Asia in our lifetimes.” Well that might be true if China had bought up large amounts of that debt. Unfortunately the reality is that Chinese holdings of US Treasuries have remained roughly constant for the last ten years: i.e. since long before Covid.


 

The UK’s debt/GDP ratio.

Next, he points to the fact that the UK’s debt/GDP ratio will rise to above 100% which apparently is a problem because “Outside of world wars, this is a uniquely large and fast rise in public sector debt.”

Now hang on. The ratio for the UK rose to well over DOUBLE that 100% figure in 1945.But the years after 1945 were “outside of world wars”!!!!

Of course that high debt was CAUSED BY WWII, but that record debt fell only very slowly in the decades after 1945: falling  to  about 50% a full fifty years later: in 1995.

Now what’s the big difference between a high debt during peace time which was originally caused by a war and in contrast, which was caused by a virus?  Unfortunately (you’ll be amazed to learn) Peston doesn’t explain what the big difference is.

 

What if interest rates rise?

Next, Peston sets out a lot of complicated stuff about “gearing” and government bonds which contains several mistakes, most of which I’ll ignore. For example, he says “The point is that interest rates will have to increase at some point.” He doesn’t explain why. The reality is that if demand stays relatively muted, then there’s no earthly reason to raise interest rates!

But shortly after that, he gets nearer the truth when he says interest rates COULD RISE. To be exact, he says “…..a modest rise in activity could lead to inflationary pressures…”.  Notice the word “could”. If (and that’s a big “if”) inflationary pressures did get uppity, some sort of countervailing deflationary measure would be needed. That could be tax increases or it could be an interest rate increase (as I’ve explained at least ten times on this blog over the years).

But neither of those measures (tax increases or an interest rate rise) would constitute a cost for the population as a whole (as I explained here almost ten years ago). I’ve explained at least ten times on this blog over the years – forgive the repetition). Reason is that the sole purpose of the tax increase or interest rate rise (as indeed Peston very much implies himself) would be to hold demand down to the “full employment” or “economy at capacity” level.

So if no standard of living sacrifice for the UK population is required in order to cut the debt in what sense is there a “cost” there for the UK population? Peston doesn’t explain.

 

Politics.

That however is not to say there are absolutely no conceivable problems involved in cutting the debt. The point is that there are no strictly ECONOMIC OR TECHNICAL problems. In contrast, there is a possible POLITICAL problem: the problem is that, as explained above, cutting the debt involves a rise in tax or a rise in interest rates (which to repeat, do not cause a significant decline in real living standards). But that is not necessarily how the population would see it.

That is, there could be big political objections, even riots in response to significant tax rises, even where those tax rises have no effect on living standards.

So what’s the best thing to do about the latter possible political problem? Well I suggest the best solution is very definitely NOT TO implement DEFICIENT demand NOW so as to ameliorate a problem which may or may not arise in a few years time. I suggest the best solution is to minimise unemployment right now, and then deal with any possible political problems that arise if an when they arise.

Plus, excess unemployment NOW is just as likely to cause riots as tax  rises in a few years time.


Monday, 23 November 2020

Is this the crucial flaw in fractional reserve banking?


 


 

In a “base money only” system, i.e. under full reserve banking, people and firms would lend to each other, sometimes on a peer to peer basis, and sometimes via banks. And under that system there is no obvious reason why the rate of interest established would not be some sort of genuine free market, or “GDP maximising” rate: after all in such a market there’d be millions of borrowers and hundreds of lenders all competing for business, just as in the real world right now. I.e. in that scenario, it is difficult to set up monopolies or cartels to rig the market.

Note that under that system, banks would lend only base money. That is, letting private banks create their own home made money would not be allowed.

However, if commercial banks are allowed to create their own home made money (as under fractional reserve banking), they can lend at BELOW the above rate because they do not to attract deposits to cover 100% of the monies they lend out: they can simply print some of it, at no cost to themselves. (Joseph Huber alludes to this process on p.31 of his work “Creating New Money”). That obviously increases the total amount of lending and debts.
 
That might seem beneficial. Or at least the increased lending might seem beneficial. Only trouble is that, as just intimated, debts rise as well, and there’s an army of do-gooders who witter on about the allegedly excessive amount of debt we as a society have. So to that extent, the latter increased amount of lending and debt is not quite the boon it might seem.

But that’s not the basic point I wish to dwell on here, particularly since I have somewhat jaundiced views about the latter do-gooders.

The more important point is that it’s a widely accepted default assumption in economics that the free market price for anything is the GDP maximising price for reasons given in the economics text books: i.e. it is up to those who want to claim a particular market is flawed to prove their case. Ergo the default assumption must be that money printing by private banks is not beneficial: it will not maximise GDP.

Of course it can well be argued that given the disastrous environmental effects of more GDP, raising GDP should not be an objective. But the answer to that is simply to replace “maximise GDP” with “maximise output per hour”. That is, there clearly isn't any harm to the environment in raising output per hour by X% if the average number of hours worked per person per week is CUT BY X%.

Indeed, there are campaigns aimed at cutting the working week to four days, and partially on the grounds that while total number of hours worked declines, productivity increases more or less compensate for that.

   

Saturday, 21 November 2020

Ignorant drivel from Iain Macwhirter on MMT.

 

 



That’s in an article of his entitled “How governments learned to stop worrying and love debt.”

 

He claims MMTers think “Governments can run big deficits indefinitely so long as the debts aren’t called in.” Complete BS. MMTers are well aware that inflation poses a limit (gasps of amazement) to the size and duration of deficits.

 

In similar vein he claims MMTers “say that an independent Scotland shouldn’t bother about debt either, so long as it has control of its currency, because it can just print Scottish pounds to pay for it.” Yet more bollocks.

 

But then Macwhirter contradicts himself when he says MMT “contains an important kernel of truth: that government spending, given low inflation, does not need to be directly financed by tax revenue.”

 

Quite. Put another way the basic MMT claim is that the size of the deficit and the debt do not matter as long as the effect is not excess inflation.

 

So what was all the stuff a few paragraphs above about MMTers being totally unconcerned about inflation?

 

Macwhirter’s article is self-contradictory BS.

 

Afterthought: how do I get a job writing for some respectable newspaper or think tank? Ah yes: I think I’ve got it. Talk BS..!!!!!

 

 

 

Friday, 20 November 2020

Bank of England discussion paper entitled “Central Bank Digital Currency”.



 

The above paper invites comments. So I sent one, as follows.

P.7  The first “key point” says that the only way for the public to hold BoE issued money is in the form of physical cash. That is debatable in that in the UK, any member of the public can open an account at National Savings and Investments whose only assets are base money and government debt. Thus arguably those accounts at the NSI come to the same thing as holding base money in digital form.

The latter point rather detracts from the claim made on p.37, para starting “But CBDC could also introduce risks for financial stability”, namely that the introduction of CBDC or a loss of confidence in commercial banks could lead to a run on commercial banks. That is, depositors at commercial banks have been free for decades to “run to” NSI, but have not done so. In particular, they did not run during the 2007/8 bank crisis.

Plus I would argue that any run from commercial banks is a flaw in those commercial banks, not a flaw in CBDC. My reason for saying that is that one of the main activities, if not THE main activity of commercial banks is basically fraudulent. That is, those banks, 1, accept deposits, 2, grant loans, and 3, promise depositors their money is safe, which it cannot possibly be because loaned out money is NEVER safe.

Indeed if any organisation other than a bank indulges in the latter “three point” activity (e.g. pension funds, unit trusts, mutual funds etc) those other organisations are liable to be prosecuted.


So why are banks allowed to engage in an activity which is fraudulent when done by anyone else? Well I suggest the absolutely VAST AMOUNTS of money spent by the finance sector (about £100million a year) buttering up politicians might have something to do with it.


In other words runs just wouldn’t occur in a full reserve system where (shock horror) banks are not allowed to engage in the latter fraud, as explained by Prof John Cochrane.

Wednesday, 18 November 2020

Mary Mellor says UBI should be funded out of new publically created money.


 


 

In a "Brave New Europe" article entitled “UBI: Public Money for a Public Purpose”, Mary Mellor argues that UBI (Universal Basic Income) should be funded out of new publically created money (henceforth “base money”), rather than out of tax on the rich.

In fact she goes much further than that. She says “….basic income and other democratically identified public and social initiatives should be funded by new public money which should then be retrieved by taxation.”

Well assuming the gap between issuing the new public money and retrieving it via tax is relatively short, then that comes to the same thing as the more traditional way of funding public spending, namely collecting the tax first and then spending the relevant money. To take the extreme case, what’s the difference between government collecting £X in tax and spending it a week later, and on the other hand, spending that money first, and then retrieving it via tax a week later? No difference!



Tuesday, 17 November 2020

Bankers have got politicians and economists suckered.



 

 A central bank can create and distribute whatever amount of money an economy needs. Plus that form of money is TOTALLY safe. But those running PRIVATE banks have convinced politicians and economists that the bulk of the money supply should be issued by those PRIVATE banks and should come about as a result of those banks making loans: that type of money is created when private banks grant loans. That means that in order to ensure the safety of households’ stock of money, politicians have to devote billions of pounds taxpayers’ money to bailing out money lenders, when those money lenders c*ck it  up. 

The naivety of politicians and economists, and sheer brass nerve of money lenders are jaw dropping.
 

 


Wednesday, 11 November 2020

Richard Murphy makes a video.

This video made by Richard Murphy earlier this year is OK except that near the start he claims that because Bank of England £10 notes say that the bank “promises to pay the bearer the sum of £10” that therefor such notes really are a promise to pay.



 

Now there’s a slight problem there, namely what exactly is the BoE promising to pay? The reality is that if you turn up at the BoE and ask them make good on their promise, you’ll be told to shove off.

That “promise to pay” sentence on BoE notes is actually just a left over from the days when banks (including the BoE) really did have to make good on their promise: they had to supply anyone who wanted it with real gold in exchange for those paper “promises to pay”. But those days are long gone.

So in what sense are BoE notes a promise to pay? Well you could say they are a promise to pay in the sense that they are a totally vacuous promise to pay, but presumably that’s not what Richard Murphy has in mind.

As to what he DOES HAVE IN MIND, hopefully all will be revealed at some stage.