Sunday, 9 May 2021

Artificial interest rate adjustments do not make sense.




Abstract.  There is no evidence that recessions are caused by a failure of interest rates to fall, thus dealing with recessions via artificial cuts in interest rates makes as much sense as dealing with the failure of a car to accelerate properly because of a faulty carburettor by strapping a jet engine onto the roof of the car, rather than by fixing the carburettor.


 It is widely accepted in economics that interest rate cuts are a good way of dealing with recessions, and conversely that an interest rate hike is a good way of damping down excess demand and inflation.

Only slight problem there is that those interest rate adjustments (engineered by central banks) are entirely ARTIFICIAL, and it is widely accepted in economics that while changes to the price of anything brought about by market forces are normally justified, artificial adjustments are not.

Worse still, there is no evidence that recessions are caused by market failure in the sense of interest rates failing to fall, come a recession. Put another way, the market in loans is very much a free market: there are tens of thousands of potential borrowers out there and hundreds of banks and similar, all offering loans. That’s the sort of set up where it is difficult to set up monopolies and cartels: i.e. it’s a set up where the free market works.

To summarise, to implement an artificial cut in interest rates so as to deal with a recession, when the cause of the recession is quite clearly not a failure of interest rates to fall is like dealing with the failure of a car to accelerate properly due to a faulty carburettor by strapping a jet engine to the roof of the car rather than deal with the faulty carburettor.

So what is the cause of recessions?

Well it’s pretty obvious: it’s a failure to spend, or if you like, inadequate aggregate demand, maybe caused by lack of consumer or business confidence. Ergo the solution is  . . . . wait for it . . . . more spending: public spending and or private sector spending. And that can be brought about by a larger deficit, i.e. by fiscal measures rather than interest rate adjustments.

Of course, supporters of interest rate adjustments claim that fiscal changes cannot be brought about quickly. Well the first answer to that is that interest rate changes do not have their full effect for a year according to a Bank of England study. Secondly, the UK implemented two changes to the VAT sales tax very quickly in the wake of the 2007/8 bank crisis.

And how difficult would it be for the UK government to tell every hospital, doctors’ surgery, school, university and local authority in the country that they can up their spending by X% over the next 12 months, and that a cheque will be in the post? I mean would it really take a genius to do that?

Saturday, 8 May 2021

Getting simple ideas across is a herculean task, as MMTers have discovered.


Getting simple ideas into the head of even relatively intelligent folk is like getting through a thick concrete wall with a jack hammer. A classic example is the never ending claims that MMT would result in excessive deficits and excess inflation. A recent example of that claim appears in an Adam Smith Institute article written by Tim Worstall, who I actually have plenty of respect for. But like I said, getting simple ideas across, is a herculean task. (Article title: “It Would Appear that Larry Summers was Right”).

The answer to the above “excessive deficit” claim is (pretty obviously) that it all depends on who is in charge of the printing press (as I pointed out in a comment after the article). And MMTers do not do themselves any favours by being thoroughly vague on that question.

Anyway, if POLITICIANS are in charge of the printing press, then the dangers are obvious. On the other hand if the size of the deficit is decided by some sort of independent committee of economists (maybe at the central bank and maybe not) then the dangers are much less.

And incidentally, the fact that such a committee decides the SIZE OF the deficit does not, repeat not, repeat not mean the NATURE OF the deficit needs to be decided by such a committee: i.e. questions like whether more tax or more public spending are needed is clearly  a POLITICAL question: i.e. it’s a question which should always remain with politicians. Same goes for the decison as to what extra public spending goes on: education, health, etc.

The latter method of separating responsibility for the SIZE of a deficit and the NATURE of a deficit is a truly BRILLIANT and simple idea. Unfortunately (to repeat) getting it into the heads of even the relatively intelligent is a herculean task: I’ve found it necessary to make that “separation” point at least a hundred times in sundry articles. Moreover, a significant proportion of academia has no respect for original and simple ideas: what many academics really like is the opposite: complicated and irrelevant ideas, because that’s what keeps them employed.

Far as I know, credit for the latter original and simple idea must go the Ben Dyson (founder of Positive Money), Josh Ryan-Collins and a few others.  

Another example of a supposedly intelligent individual who appears to be incapable of understanding the above “separation” point is AnnPettifor. In contrast, one former chairman of the Fed and one former vice chairman have obviously grasped the idea (Ben Bernanke and Stanley Fisher).



Wednesday, 5 May 2021

Yawn provoking waffle from the NIESR on fiscal policy.


The UK’s National Institute of Economic and Social Research has just published a very long report on fiscal policy. It’s entitled “Designing a New Fiscal Framework” and it’s around 40,000 words.

If Sir Humphrey Appleby deliberately tried to produce pages of meaningful sounding but essentially meaningless waffle, he couldn’t have done better. The contrast to the simple, clear ideas on fiscal policy advocated by MMT is stark, as I’ll show below.

The NIESR’S basic idea if it can be summarised in a sentence is that existing government committees should do more work in relation to fiscal policy and more committees should be set up: music to the ears of Sir Humphrey. To be exact the NIESR’S main conclusions or suggestions come in the form of five so called “building blocks” which are set out in bold and read as follows (p.20 onwards). If you feel yourself nodding off after the first or second, feel free to skip nos 3,4 and 5.

1 The Chancellor should set out a structured timetable for fiscal events and deliver a Budget speech focused on the state of the economy and on the government’s socioeconomic objectives that is more extensively debated and scrutinised by Parliament and by a fiscal council.

2 The OBR, or a separate fiscal council, should publish pre-fiscal event reports with key issues to which the Budget and the Autumn Statement should respond.

3. Given the uncertainty regarding the economic cycles, the Chancellor should provide more guidance as to how fiscal policy would respond if certain risks materialised and the OBR should produce economic forecasts and scenarios to inform government thinking about fundamental fiscal choices in different states of the world.

4. HM Treasury should create a new body of independent experts for ex ante advice and ex post evaluation of the key fiscal choices.

5. Fiscal strategy has to be joined up across the UK and all its constituent parts, with particular attention paid to distributional effects, productivity, well-being and ecological sustainability.

As distinct from the parts of this report written by NIESR staff and in particular by Jagjit Chadhar director of the NIESR, there are several chapters written by outsiders (e.g. Alistair Darling, former UK finance minister). Those chapters are about specific aspects of fiscal policy, and I am not passing comment on those here: though some of them seem interesting.



In contrast, the basic principles underlying fiscal and monetary policy as advocated by MMT (or at least my interpretation of them) are as follows. But be warned, this actually contains some INTERESTING ideas. You may die of shock if you’re of a Humphrey Appleby disposition.

1. The deficit needs to be whatever keeps employment as high as is possible without causing inflation to exceed the inflation target.

2. The size of the debt / stock of base money that results from deficits does not matter: all that matters, to repeat, is ensuring that unemployment is as low as is consistent with acceptable inflation.

3. As MMTers have explained over and over, a country which issues its own currency has complete control over the rate of interest it pays on its debt.

4. As to whether the deficit should accumulate as zero interest yielding base money or base money which yields interest (e.g. government debt), there is basically no point in paying interest on base money or in having a national debt, as pointed out by Milton Friedman. Thought that’s not to rule out interest rate hikes in  emergencies (as also pointed out by Milton Friedman).

An obvious possible exception to the latter policy of aiming for zero interest on base money and the debt occurs where such debt funds public investments. However, the government debt in the UK is not specifically allocated to funding public investment at the moment, so for the UK (and indeed some other countries) that point is of no relevance at the moment.  

5. One reason for aiming for a zero rate of interest on the debt is that such interest simply rewards money hoarders, with those interest payments being funded by taxpayers in general, including the less well off.

6. There is not much difference between the latter MMT policy and the policy advocated by Simon Wren-Lewis (former Oxford economics prof). The main difference is that he advocates having the rate of interest on the debt hover between zero and just above zero.

Tuesday, 4 May 2021



This is Jack Dorsey, founder of Twitter. Jack Dorsey backs wife beating, female genital mutilation, killing authors and cartoonists, mistreating apostates, abducting school children in Nigeria, trashing Buddha statues, Halal animal cruelty, hate preachers, beheading etc etc.

Or to be more accurate, if you criticise Islam for the above barbaric practices on Twitter, you’re likely to be banned. I got a one week ban for making the incontrovertibly true statement that Muslims were responsible for 9/11, and have now been banned permanently. Of course the latter depraved "pro barbarity" views are hardly unusual in woke circles.

Perhaps even more hilarious / depraved (take your pick) is that the super intelligent algorithm that Facebook uses to weed out images that involve nudity and sex is incapable of distinguishing between people who have relatively few clothes on and people who are actually in the nude and engaged in sex.

I got a one week ban for a cartoon which showed four men dressed just in bathing trunks and quite clearly not engaged in sex. And Russian Television got a ban for showing scantily clad and emaciated Jews in Nazi concentration camps on the grounds that the image contravened FB’s “community standards” on nudity and sex.

The very idea that starving people in concentration camps had the energy for sex is depraved.


Wednesday, 21 April 2021

George Selgin tries to argue that fractional reserve banking is not fraudulent.


That’s in his work entitled “Should we let Banks Create Money?” published by the Independent Review.

The basic reason for claiming the existing bank system (fractional reserve) is fraudulent, as Selgin rightly says, is that where bank depositors are not covered by deposit insurance (DI), any claim by or suggestion made by a bank to the effect that deposits are safe is fraud and for the simple reason that deposits are quite clearly NOT SAFE: witness the hundreds of bank failures thru history. Depositors were not covered by DI prior to the introduction of DI (early 1930s in the US). And today, deposits over some stipulated amount (100k Euros in the EU) are not covered.

In the case of deposits over and above the latter stipulated amount, it is probably fair to say that no fraud is involved because the fact that those excess amounts are not covered by DI is well advertised. But the situation prior to the introduction of DI is another matter.

In the case of the pre 1930s set up, Selgin’s answer to the above fraud charge that is that depositors have always been aware that their money is not entirely safe for the simple reason that depositors normally get interest, at least on term accounts, if not on current accounts (“checking accounts” in US parlance). I.e. how, Selgin asks, do depositors think banks are able to pay interest on deposits if they don’t lend out money at the same time as accepting deposits? And as everyone knows, loaned out money is never entirely safe.

Well the simple answer to that is that a significant proportion of depositors are just not sophisticated enough to ask the latter question. Thus to a significant extent, pre-1930s deposits were a confidence trick aimed at fooling the innocent.

Moreover, if depositors, as Selgin claims, regard their deposits as being much like equity, i.e. you can lose half your money anytime, then why was deposit insurance ever introduced?

The answer is simple: the general view was that a significant proportion of depositors though their deposits were in fact safe and/or that deposits OUGHT TO be safe. By “general view” I mean the view of politicians and millions of depositors.

Incidentally, in addition to the pre 1930s set up, there is always the possibility of that pre 1930s set up being re-introduced (i.e. the possibility of DI being scrapped) since numerous economists are not happy with DI (including, Selgin himself - see here. Thus the discussion here of the fraudulent element in fractional reserve while of obvious relevance to the pre-1930s set up, is also of potential relevance today or in the near future.)


Non-bank lenders.

Another point which supports the claim that a significant degree of deception or fraud is involved in fractional reserve has to do with non-bank lenders like mutual funds, unit trusts and pension funds. The latter three types of organisations (and doubtless some others) are forced by law (at least in the UK) to make it very clear in bold print and those placing money with those organisations can lose as well as make money.
Now if banks are to compete on a level playing field basis with other lending organisations like the above mentioned three, then the wording in the publicity put out by all those organisation should be similar. But any idea that banks prior to the introduction of DI advertised the LACK OF SAFETY of depositors’ money is a joke. No bank would attract deposits if it advertised the lack of safety of its deposits given that other banks kept quiet about the lack of safety of their deposits.

This is clearly a very grey and murky area. It is thus an area where banks will try to get away with any deception that they can.  While Selgin is clearly right to say that sophisticated depositors are not defrauded, that is clearly not the case for less sophisticated depositors.

To summarise, fractional reserve banking, prior to the introduction of DI quite clearly involved an element of fraud, though one can argue forever over the exactly extent of the fraud.

And as for the idea that the fraudulent element in fractional reserve is somehow OK once DI is introduced, that is a very questionable argument. If government were to legalise theft while introducing a government run insurance scheme for everyone which compensated them when anything was stolen from them, that would not be a brilliant argument for legalising theft.


Thursday, 15 April 2021

Warning: social media platforms may be hacking your computer.



Reason for the above title is that one popular platform has deleted part of an image on my PC which suggested there are similarities between the book burning that Hitler’s Nazi party engaged in and censorship that is common on social media nowadays. I’ll be taking legal action against them.

The image is one you may have seen, the top half of which is a black and white image of book burning in Nazi Germany. Obviously social media platforms don't like the suggestion that they have similarities to Hitler's Nazi Party.

Moreover, don’t just copy anything you don’t want them to mess up onto a memory stick or similar and think you are then safe. Reason is that I actually had a copy of the relevant image on an old stick (which I copied onto the stick long ago) but the image there was messed up soon as I plugged the stick into my PC.

This is very sophisticated hacking, seems to me: not that I’m an expert in these matters.

Monday, 12 April 2021

The Chinese wrestled 2,500 years ago with all the monetary and bank problems we worry about today.



The above excellent book by Felix Martin has a few pages on Chinese base money creation long ago. The questions we face today seem to have troubled the Chinese as well 2,500 years ago. E.g.: who should create money: private entities / banks, or just the state? How much stimulus should the state implement in a recession? How do we stop politicians gaining access to the printing press? How much deflation should be imposed given excess inflation?

Here is a part of the relevant passage from the book.

One big advantage the Ancient Chinese had over us in the year 2021 is that they didn't have computers: by the time I'd finished scanning the above, dealing with the PC crashing, and a scanner that wasn't working properly I might just have well have copied all the above out by hand.....:-)