Tuesday, 17 October 2017

More fiscal space nonsense.


Christina and David Romer have a new paper published by NBER – working paper 23931 – which claims, to judge by the abstract, that stimulus is more effective given fiscal space and monetary space (i.e. a low national debt to GDP ratio).

The actual reason for this would seem to be that the authorities implement more fiscal and monetary stimulus when there is “space”. As the second last sentence of the abstract puts it, “We find that monetary and fiscal policy are used more aggressively when policy space is ample.”

Quite. So “space” itself is irrelevant: what’s really important is economists’ BELIEF in the importance of space.

Likewise if I believe I get more benefit from jogging when there’s a full moon, then I’ll probably do more jogging when there’s a full moon. And lo and behold, as a result, I will actually derive more benefit from jogging when there’s a full moon. But of course that does not prove that a full Moon is the direct cause of jogging conferring extra benefit: the benefit is an INDIRECT one, which relies entirely on my beliefs!

Thus the Romer paper in no way tempts me to moderate my claim expressed in earlier articles on this blog that “fiscal space” is one huge nonsense: a sentiment shared by Bill Mitchell, unless I’ve got him wrong. (Title of Bill's article: "The ‘fiscal space’ charade – IMF becomes Moody’s advertising agency.")

But never mind. “Fiscal space” keeps the numpties, charlatans and time wasters at the IMF employed, as Bill eloquently explains.


Monday, 16 October 2017

Is Ed Balls talking balls?


Ed Balls would seem to be well qualified when it comes to economics. He used to be lead economics writer for the Financial Times and studied economics at Oxford and Harvard.

Unfortunately, like many people at the top of the economics profession, he doesn’t understand the basic book-keeping entries done by treasuries and central banks.

Reason I say that is that he claimed recently that Positive Money’s proposals are out of the same mold as monetarism – a claim also made by Ann Pettifor. That claim can only come from people who don’t understand the latter basic book-keeping entries, for reasons I’ll set out below.

I’ve been thru this before on this blog, but unfortunately getting simple points across normally requires repeating those points ad nausiam, so here goes.

Positive Money (PM) and others claim that the best way of implementing stimulus is simply to have the state print money and spend it, and/or cut taxes. And the effect of that (as is hopefully obvious) is to increase the money supply, or more accurately to increase the private sector’s stock of central bank created money (base money).

The Balls and Pettifors of this world then jump to the conclusion that PM & Co are advocating monetarism Milton Friedman style.

Well the first flaw there is that a money supply increase also occurs under conventional forms stimulus. That is, one conventional form of stimulus is fiscal stimulus, which consists of government borrowing more and spending what it has borrowed (or cut taxes). But that extra borrowing is likely to raise interest rates, and assuming the extra borrowing takes place because stimulus really is needed rather than because politicians are being plain irresponsible, then the central bank won’t allow an increase in interest rates. It will therefor print money and buy back some of that government debt.

Indeed, assuming stimulus really is needed, the central bank is likely to go further and actually cut interest rates. So it will print even more money and buy back even more government debt!

Now as you may have noticed, this all involves a money supply increase in much the same way as PM policy involves a money supply increase.

And not only that, but given low interest rates of the sort we have had over the last five years or so, the central bank may go even further and buy back almost every single dollar of extra debt that arises from fiscal stimulus! I.e. the central bank may go for QE. The money supply increase is even bigger!

But for some strange reason, the Balls and Pettifors of this world do not accuse governments which implement interest rate cuts or QE of adopting Friedman style monetarism, which rather makes it look like Balls and Pettifors are scratching around for any old jibe to throw at PM.


Friedman’s monetarism.

So what did Friedman’s monetarism actually consist of? Well I’m not the world’s authority on that but certainly Friedman in his 1948 American Economic Review paper “A Monetary and Fiscal Framework for Economic Stability” argued that stimulus should take the form of the same annual increase in the stock of base money, and that should be effected by the state spending more than it received in taxes. I.e. he argued against discretionary stimulus.

So to summarise, the form of stimulus advocated by PM & Co comes to much the same as conventional stimulus, but with the difference that under PM’s system, monetary and fiscal policy are joined at the hip: they are merged. But in both cases, a money supply increase derives from stimulus. Thus the “PM equals monetarism” jibe is nonsense.

As to Friedman’s monetarism, that also involves an increase in the money supply, but it’s the same increase each year.

Thus while PM policy has similarities to monetarism, the similarities are no more than the similarities between monetarism and conventional economic policy, all of which makes a bit of nonsense of the claim that PM policy is flawed because it has similarities to monetarism.

I.e. all three of the above options (PM, conventional stimulus and Friedman’s monetarism) involve a money supply increase. What actually differentiates Friedman’s monetarism from PM and conventional stimulus is that the latter two involve discretion while Friedman advocated no discretion.

And finally, I am not saying the Balls and Pettifor should be totally ignored. I particularly like Ed Balls: he has a sense of humour. And Pettifor’s work “The Economic Consequences of Mr Osborne” is quality stuff.



Friday, 13 October 2017

Random charts - 42.


Text in pink on the charts below was added by me.


















Thursday, 12 October 2017

Has Bernanke been boozing?


Bernanke is pushing a bizarre idea that has being doing the rounds for some time, namely that given zero or near zero interest rates, central banks should “target” a higher rate of inflation, which apparently means inflation will increase, which in turn means interest rates can be increased.

Well now in the universe I live in, things don’t happen unless something causes them to happen. E.g. excess demand causes inflation to rise. And driving with excess alcohol in one’s blood stream tends to cause road accidents. And being stung by a wasp causes people to say “ouch”.  You get my drift.

But in the Alice in Wonderland  universe inhabited by so called “professional” economists, things happen just because someone “targets” those things. For example if it’s my aim or “target” to be $10,000 richer, a pallet load of dollar bills will appear as if by magic in the middle of my living room apparently.

And it’s not just me who thinks economists living in Cloud Cuckoo land. Lars Syll said the other day that “Mainstream neoclassical economics has since long given up on the real world and contents itself with proving things about thought up worlds.”

Or as the Cambridge economist Ha Joon Chang put it “Unfortunately a lot of my academic colleagues not only do not work on the real world, but are not even interested in the real world.”


Thursday, 5 October 2017

Taxpayer backed support for banks and depositors is absurd.


A bank is an entity at which you deposit money. The entity then invests or lends on your money so as to earn interest for you. Plus the entity makes the absurd promise that your money is totally safe: you’re guaranteed to get $X back for every $X you put it.

That promise is absurd because money which is loaned on or invested is never totally safe.

Indeed, if you deposit money at an entity which does exactly the same job as the one set out above, but it does not have the word “bank” over its front door, then the entity is SPECIFICALLY FORBIDDEN from making the above promise. Examples of those other entities include stock–brokers, unit trusts (“mutual funds” in the US), etc.

So what’s the big significance in ordering the letters B,A,N and K from a sign manufacturer and putting them over your front door, as opposed to putting the letters U,N,I,T, T, R,U,S and T over your front door?  Darned if I know.


Does it make a difference exactly how the letters are attached to the wall or what colour they are? I look forward to enlightenment on that point....:-)

That’s not to say there should NEVER be any sort of taxpayer backed support for those with bank accounts: everyone is entitled to a totally safe bank account. But they are most definitely NOT ENTITLED to let their money be loaned on or invested and then go running to taxpayers for help if the loan or investment does not pay off.

Ergo it’s justifiable to have taxpayer funded support for bank accounts where money really is totally safe: i.e. where it is NOT loaned on or invested (e.g. where the relevant money is simply lodged at the central bank). But there is no excuse for such support for investors and money lenders.

Wednesday, 4 October 2017

Random charts - 41.


Text in pink in the charts below was added by me.
















Tuesday, 3 October 2017

Are Simon Wren-Lewis and Krugman now MMTers?


Lars Syll says “So SW-L has joined Paul Krugman and become an MMTer at the ZLB?” My answer is: “Yes they have”. And here’s my attempt to show why they should be MMTers at ALL TIMES. (I’m sure they’re hanging on my every word, ho ho.)

We’ve established that MMT is a good idea at the ZLB. So is it a good idea when interest rates are higher? Well the answer to that is that interest rates (at least the rate of interest on government liabilities) should basically NEVER be higher.

Warren Mosler (founder of MMT) explained why interest rates should never be higher,  i.e. why a permanent zero rate is desirable in his paper, “The Natural Rate of Interest is Zero”. Milton Friedman agreed with that “permanent zero” idea, incidentally, except that Friedman thought that perhaps government borrowing was justified in war-time. (That’s in Friedman’s American Economic Review paper “A Monetary and Fiscal Framework…”).

As for Mosler’s REASONS for advocating a permanent zero policy, I think I can set out a reason for that policy much more briefly than he does. Here goes.

Assume the yield on government liabilities (i.e. “government debt”) is currently zero or near zero. Assume a rise in demand is required. One way of doing that is simply to issue more government liabilities in the form of zero interest yielding base money. I.e. the state simply prints more money and spends it (and/or cuts taxes). The fact of that spending (on say more education) is to increase the number of teachers employed. Plus the increase in the private sector’s stock of money also increases demand stemming from the private sector.

An alternative and “interest rate increasing” method of raising demand is to issue AN EXCESSIVE amount of government liability and to the extent that government has to rein in some of the resulting demand by raising interest rates.

But what on Earth is the point of issuing an excess amount of “government liability / base money” and then borrowing the excess back? All that does is to artificially raise the rate of interest.

Ergo the optimum arrangement is a permanent zero rate, though I wouldn’t rule out artificial adjustments to interest rates in emergencies. Indeed, that’s more or less what Friedman said, when he suggested that government borrowing was justified in war-time.

Conclusion.  The optimum or GDP maximising arrangement is a permanent zero rate. And from that I conclude that SW-L and Krugman will now declare themselves to be MMTers….:-)