Saturday, 26 May 2018
You think there are good reasons for a government which has the power to print its own money to borrow money? Well think again. The reasons normally offered for that policy are a complete shambles. And I’m nowhere near the first to suggest governments should borrow nothing: Milton Friedman suggested that idea (see his section II) as did Warren Mosler (see Mosler’s 2nd last paragraph).
Anyway, one popular excuse for government debt is that it provides savers with a means of saving and enables savers to earn interest. (Incidentally, I’ll use the word government to refer to government and central bank combined.) Well no one objects to government issuing whatever amount of zero interest earning base money the private sector wants to hold, and neither Friedman nor Mosler objected to that. But why should taxpayers be robbed to fund interest on some of that money just because savers cannot get as much interest as they want from the stock exchange and other private sector investments? There’s no good reason for that robbery. (Incidentally, government debt is nothing more than government issued money on which government pays interest.)
Moreover, the effect of the latter “robbery based interest payments” is to bump up interest rates, which in turn means people will hold a SMALLER stock of REAL savings: housing, investment in machinery for their businesses, etc. So the net effect is to expand the amount of totally fictitious saving (government debt) and contract the amount of REAL savings. Now that’s a stroke of genius, I don’t think.
Another lame excuse for government debt is that it can fund infrastructure and other public investments. Well now, education is one huge investment, but state education for kids is funded via tax in most countries! Advocates government debt need to get their house in order there, to put it politely.
Also, many of the advocates of the “government debt can fund infrastructre” idea seem to be under the illusion that investment justifies borrowing. Not true.
First, no one borrows to fund an investment if they happen to have enough spare cash to fund the investment. Why pay interest to anyone if you don’t need to? And governments have a near inexhaustible source of cash: the taxpayer (plus governments can print a limited amount of money each year).
Second, as distinct from investment spending, it can perfectly well make sense to borrow to fund current or consumption spending. E.g. if someone who is perfectly credit-worthy wants to fund a wedding and honeymoon by borrowing, and pay the money back over a few years, a bank would have no good reason to turn down that loan application.
In short, the real reason for borrowing is shortage of cash, not the fact of making an investment.
Spreading costs over generations.
Another excuse for government debt is that it can allegedly spread the cost of funding infrastructure etc over the generations that benefit from relevant investments. That is, future generations have to repay the debt and pay interest in the meantime, which makes it look like they are paying a cost.
Unfortunately that idea defies the laws of physics, never mind the laws of economics. That is, it just ain’t physically possible to build a bridge in 2018 by using steel and concrete produced by the hard work of people living in 2030. That is, the steel and concrete absolutely have to be produced in 2018 or earlier.
As regards the latter debts and interest, what actually happens is that future generations do not just inherit a liability (the obligation to repay the debt): they also inherit an asset, namely relevant government bonds.
Smoothing out receipts from tax.
Governments receive more from tax in some months than others. Seemingly that irregularity can be smoothed out by government borrowing. Certainly if a microeconomic entity like a household or small firm is short of cash, it must do something about it, e.g. get a bank loan. But government is in a totally different position: it can print as much money as it wants.
But if government deals with the above irregularities by printing, clearly that means the private sector has a relatively large supply of cash in some months. Wouldn’t that be inflationary? Well it wouldn’t because if a firm or household has $X more than usual in its bank account and it knows it will have to pay the tax authorities about $X in a few months’ time, it is unlikely go on a spending spree with that cash!
Borrowing with a view to stimulus.
One form of fiscal stimulus consists of government borrowing money, spending the money, and giving bonds to lenders. But the effect of the latter borrowing, considered in isolation, is anti-stimulatory, i.e. “deflationary”. That is the effect of government simply borrowing money and doing nothing with it is deflationary.
Now what’s the point of doing something anti-stimulatory when the object of the exercise is stimulus? That’s a lunatic as throwing dirt over your car before washing it.
It might seem that the latter borrowing makes the relevant stimulus easy to reverse. Actually that’s not true: assuming a bout of “print and spend” needs to be reversed, and assuming it is to be reversed by government borrowing, government can do that borrowing if and when the reversal is needed.
Do politicians borrow responsibly?
Is it desirable for politicians to have the right to borrow? Well hardly, if the Republicans are anything to go by.
When not in power a few years ago, the complained 27/7 at the top of their voices about the size of the deficit and debt. But that was when a deficit was needed so as to deal with the recession. And now that they’re in power, and a large deficit is not needed because the recession is over, they let the deficit and debt go thru the roof.
It makes more sense to put a fox in charge of a hen house than to give politicians the right to borrow. As David Hume put it, writing around 250 years ago, the freedom to borrow, if granted to politicians “….will almost infallibly be abused”.
Thursday, 24 May 2018
There is a recent article by Paul Schmelzing entitled “The ‘suprasecular’ stagnation”, which has some interesting material about the decline in interest rates over the last six hundred years or so. See chart below.
The only slight fly in the ointment is that the article starts with the myth put about by Lawrence Summers that a fall in interest rates equals some sort of “stagnation”. Summers’s reasoning, as I understand it, is that interest rate cuts are used to impart stimulus to economies, thus if interest rates are at or near zero, then such cuts are not possible, which allegedly condemns us to permanent stagnation.
Well it now seems, to judge by Schmelzing’s article that we have been “stagnating” for six hundred years! But wait: output per head in European economies has risen about ten fold over the last six hundred years. Add to that the population increase over that period, and the GDP of European economies will have expanded about thirty fold, if not fifty fold. That’s not my idea of “stagnation”.
Moreover, Summers’s claim that stimulus cannot be imparted just because interest rates are at or near zero is nonsense. As Keynes pointed out in the early 1930s, stimulus can be imparted by simply having government and central bank create more base money and by spending that money and/or cutting taxes.
Indeed, the latter is exactly what several governments have done over the last five years or so, only in a round-about way. That is, they have implemented fiscal stimulus in the form of “government borrows $X, spends $X and gives $X of bonds to borrowers”. Central banks have then created new money and bought back those bonds via QE. That all nets out to “the state (i.e. government and central bank combined) prints $X and spends it”!
Tuesday, 22 May 2018
Tuesday, 8 May 2018
Advocates of JG claim it can work as a counter cyclical measure. Unfortunately there’s a problem they’ve overlooked, as follows.
Where demand for all the usual stuff produced in a 21st century economy falls (public sector and/or private sector stuff), clearly unemployment rises and there’s a recession. The cure for that is to RAISE spending on the latter bog standard stuff, if you’ll forgive a statement of the obvious. I.e. it is certainly true that counter-cyclical measures of some sort are needed.
But there’s a problem in trying to cure a recession by spending fresh money on what for want of a better phrase might be called “non bog standard” stuff, e.g. JG schemes. The problem is that assuming the non bog standard expenditure cures the recession, in the sense that the JG scheme brings unemployment back down to its pre-recession level, then the economy has PERMANENTLY changed its shape, or make up. That is, a number of normal or “regular” jobs will have been replaced with JG jobs, which is not the object of the exercise.
The same would apply if, to take a silly example, recessions were cured by paying people to dig holes in the ground and fill them up again (a suggestion actually made in jest by Keynes).
Of course if a recession is cured after a year or two by expenditure on bog standard stuff reverting to its pre-recessionary level, then JG provides temporary jobs as a stop gap while the recession lasts. But that’s not a clever ploy because at the start of a recession it is impossible to say how long it will take for expenditure on bog standard stuff to revert to its pre-recessionary level.
Conclusion: the best cure for a recession is the simple obvious one, namely to get spending on bog standard stuff back to its pre-recession level. I.e. as I pointed out here, JG comes into its own in getting unemployment down to below NAIRU, or below the level of unemployment at which excessive inflation kicks in, if you don’t like the NAIRU acronym.
Sunday, 6 May 2018
The criticisms I’m referring to are in an article of his entitled “Why Positive Money is Wrong”, published today (6th May 2018).
First, congratulations to Murphy for at least having a reasonable grasp of PM’s ideas. However, that’s where the congratulations cease.
The first weakness in Murphy’s criticisms is that it’s not just PM that advocates a PM type system. The New Economics Foundation also backs the same system. Plus Ben Bernanke made approving noises about that sort of system.
Second, it’s a bit of a joke for Murphy to write about banks and money given that there’s a glaring self-contradiction in his own writings on the subject: to be exact, he claims here that commercial banks create the bulk of money in circulation. While in contrast here, he claims the opposite, namely that they don’t!!
Anyway, Murphy’s first criticism of Positive Money is that under a PM system, stimulus is effected by having an independent committee of economists decide how much base money to create and spend into the economy (which is done via extra public spending or via tax cuts depending on the wishes of democratically elected politicians). However, he objects to an “…unelected committee taking control of our economic policy”.
Well the first answer to that point is that the latter committee does not “take control” of all aspects of “economic policy”: it is limited simply to deciding how much base money to create, as I explained just above.
Moreover, as Murphy himself rightly says, the undemocratic nature of the above committee is no different to the undemocratic nature of the EXISTING method of imparting stimulus. That is, while the “democratically elected” finance minister under the existing system can implement a budget deficit, the central bank has the right to overrule the stimulatory effect of that deficit by using interest rate rises if it sees fit.
Thus Murphy’s complaint about lack of democracy is NOT a specific characteristic of PM’s proposals. I.e. PM is merely advocating a slightly different (but still undemocratic) method of implementing stimulus. I.e. both the existing system and PM’s are undemocratic in that the SIZE of (but not the nature of) a stimulus package is determined by unelected economists.
As to whether it is a good idea for “democratically elected politicians” to have a say in the size of the deficit, it is precisely the fact of politicians having that right that has led to a total and utter shambles in the US, with various other countries being scarcely less shambolic.
To be exact, prior to Trump’s election, Republicans were screaming about the dangers of the allegedly excessive deficit (as they always do when not in power). But that was during the recession when a large deficit was actually needed. Republican politicians thus helped prolong the recession.
Then Trump gets elected, and what happens? Republicans let the deficit go thru the roof, and to add insult to injury, just when a large deficit is not needed: i.e. just when it’ll do more harm than good.
In short, letting democratically elected politicians have a say in the size of a stimulus package is lunacy. In contrast, it is absolutely right, as Positive Money explains, for politicians to retain control of obviously POLITICAL decisions, like what percentage of GDP is allocated to public spending and how that is split between education, defence, etc.
Murphy’s second objection to Positive Money’s ideas is that he objects to “..inflation being at the core of money policy.”
Well the answer to that is very similar to my above answer to Murphy’s above first objection: Positive Money is simply continuing with the conventional wisdom here, namely that excessive inflation is undesirable. I.e. constraining demand when inflation is excessive is NOT, repeat NOT an idea which is peculiar to Positive Money. Moreover, if Murphy thinks inflation is not a potentially serious problem, perhaps he could let us now exactly how high he is prepared to let inflation go: 20%? 50%? Robert Mugabe %?
Put another way, if economists proved that demand should be related to the number of lies told by Tony Blair in the last month, I’ve no doubt Positive Money would be happy to go along with that.
What is money?
Murphy’s third objection starts as follows.
“Third, this policy fails to understand what money is. Money is, in the modern world, simply a promise to pay. It comes into existence when that promise is made. It ceases to exist when it is fulfilled. So, governments create money when they promise to pay when spending, and fulfill that promise when accepting the money that they create as payment for tax.”
Well the first problem there is that the definition of money given in economics text books and dictionaries of economics do not say anything about “promises to pay”. What they do all say is something along the lines of “Money is anything widely accepted in payment for goods and services or in settlement of a debt”. And money has taken a HUGE range of different forms in different societies over the millennia. For example on some desert islands, cowrie shells were accepted as money. But in what sense is a cowrie shell a “promise to pay”? Come to that, in what sense is a gold coin, e.g. the Sovereign gold coins used in Britain in the 1800s a “promise to pay”? Darned if I know.
But that’s not to say that money cannot take the form of a “promise to pay”. As already stated, money can take, and has taken a myriad of forms. And in fact money issued by commercial banks is a “promise to pay”: it’s a promise to pay base money: in fact your bank makes good on that promise whenever you withdraw physical cash from an ATM.
Is base money a “promise to pay”?
One the face of it, the answer might seem to be “yes”: after all, £10 notes say (alongside the signature of the chief cashier at the Bank of England) “I promise to pay the bearer on demand the sum of £10”. Only problem is that that promise is wholly empty: it could even be called “fraudulent”. Reason is that if you turn up at the BoE and demand £10 of gold or anything else in exchange for your £10 note, you’ll be told to shove off.
Worse still, the UK government which owns the BoE is entitled to grab any amount of money off you whenever it wants via tax, which makes that “promise to pay” look a bit silly. To illustrate, if I issue some promises to pay and they end up in the hands of Joe Bloggs, but at the same time I have the right to break into Bloggs’s house and grab the promises to pay and burn them or spend them, then those promises are a trifle empty, wouldn’t you say?
Limiting the supply of money.
Murphy’s fourth objection starts:
“Fourth, the PM proposal rations money. This is exactly what the gold standard did. It said money was in limited supply and countries were not at liberty to create it at will. The limitation in supply created a price for money - or interest - which rewarded those who had it and penalised those who had not in a form of rent extraction that reinforced inequality. We have been eliminating this rent: in my opinion this is the best explanation for the rapid decline in real interest rates and the reason why they will not increase again…”.
Well now there’s a glaring problem with that theory, namely that Britain came off the gold standard in 1931, but the big decline in interest rates occurred in the last twenty years: i.e. starting roughly in 1990!
Then in the next sentence, Murphy says in relation to the gold standard: “But, more important than this, the limitation on money availability constrained growth: desirable transactions could not take place because the means to make settlement was said not to exist.” Well that’s a valid criticism of the gold standard (at least during recessions). But the UK has not been on the gold standard for almost a century, so Murphy’s point there is irrelevant.
And as regards any “limitation on money availability” to the extent of causing a recession, i.e. less than full employment, obviously that “limitation” is undesirable. But it is easily dealt with under a Positive Money system by having the state create and spend more base money into the private sector! Problem solved!
Sterling would be undermined?
Murphy’s fifth criticism starts: “Fifth, PM would also hopelessly undermine the use of sterling. The reality is that people borrow and spend in sterling because they need to pay their taxes, and a banking system that can create credit to meet their needs lets them do so.”
Well there’s a glaring flaw in the claim that the commercial “banking system” enables people to pay taxes: it’s that the UK government will not accept commercial bank created money in payment of taxes! Other countries do likewise.
It is true that you can write a cheque drawn on a commercial bank like Barclays in payment of your taxes, but the UK government will not accept that cheque: what it does behind the scenes is to go along to Barclays and demand base money to the amount written on the cheque. In fact not even commercial banks accept each other’s “DIY money”: that is, at the end of each working day, commercial banks (and the UK government) settle up with each other using base money.
Hopefully I’ve demonstrated that Richard Murphy's criticisms of Positive Money are a joke, though credit where credit is due, he is clued up on some aspects of economics. He is an accountant by trade, and unsurprisingly knows a fair amount about tax.
Saturday, 5 May 2018
Chapter 6 of her book “The Production of Money” is entitled “Should Society Strip Banks of the Power to Create Money?”, and stripping banks of the right to create or “print” money is the basic objective of what is sometimes called the “Sovereign Money” movement. Other names for the same set of ideas include “full reserve banking” and “100% reserves”. The book was published last year: 2017.
Her first criticism of Sovereign Money (SM) is that it “shows little concern for high interest rates” (p.94), and certainly interest rates would tend to rise under SM.
However, the first answer to that is that with interest rates currently at record lows, half the country is worried about the undesirable effects of those record lows: in particular the fact that record amount of borrowing, lending and debt that results from those lows. A second possible effect is asset bubbles.
Also in the 1980s, the rate of interest paid by UK mortgagors was almost THREE TIMES the rate they pay nowadays. But for some strange reason the sky did not fall in the 1980s, nor were the streets of lined with the homeless. Indeed, if anything homelessness is worse now than twenty years ago.
However, while the latter points about record levels of debt and house bubbles have an emotional appeal for the economically less literate, the important and crucial question is this: what regime brings about the OPTIMUM or GDP maximising rate of interest?
Well it is widely accepted in economics that GDP is maximised where prices are at the free market level, except where there is a clear social case for setting them at some other level, as is the case with kid’s education, which is available for free. And banks are pretty bog standard commercial operations, thus there is no obvious reason for interest rates not being at free market rates. Put another way, borrowing and lending are straightforward commercial activities: not activities with any obvious social implications in most cases.
Of course there are SPECIFIC types of borrowing where there may be important social considerations, e.g. pay-day lending or lending to less well off or first time house buyers. But as a general rule, and to repeat, borrowing and lending are bog standard commercial activities.
So what sort of regime brings about a genuine free market rate of interest? Well it’s very definitely not one where private banks are allowed to print money. The latter is an obvious subsidy of private banks, just as letting garages print money would be a subsidy of garages. (Although perhaps I should have said “one of the numerous subsidies given to banks” rather than “a subsidy”).
And subsidising an industry results in that industry being able to charge an artificially low rate for its products. Joseph Huber in his work “Creating New Money” (Ch4, p.31) explains how the right to create money enables banks to lend at a lower rate than they otherwise would.
As for any reduction in demand that might stem from higher interest rates that is easily countered by having the state print and spend more money (and/or cut taxes).
Next, at the top of her page 98, Pettifor claims that having just the state or central bank create money is a “Herculean” task. But she doesn’t specify exactly what the big difficulties are. Perhaps she can’t think of any. Milton Friedman claimed that the switch to a Sovereign Money regime would be relatively simple and straightforward. As he put it in Chapter 3 of his book “A Program for Monetary Stability”, “There is no technical problem of achieving a transition from our present system to 100% reserves easily, fairly speedily, and without serious repercussions on financial or economic markets”.
Incidentally, I won’t deal with EVERY point Pettifor makes in her chapter, otherwise this article would end up as long as the chapter itself. I’ll just deal with SOME OF the points where she goes off the rails, rather than with some of vaguer criticisms she makes of SM.
Next, Pettifor claims that Keyes (in a letter to Roosevelt) argued against a money supply increase. That passage in Keynes’s letter starts:
“The other set of fallacies, of which I fear the influence, arises out of a crude economic doctrine commonly known as the Quantity Theory of Money. Rising output and rising incomes will suffer a set back sooner or later if the quantity of money is rigidly fixed. Some people seem to infer from this that output and income can be raised by increasing the quantity of money.”
Incidentally it is not entirely clear what the relevance of this is to the SM argument: Pettifor does not explain. But presumably she has in mind the fact that some SM advocates argue for having the central bank create and having the government spend an amount of money each year depending on how much stimulus is needed.
Anyway, and returning to Keynes’s letter to Roosevelt, there is a glaring problem there, namely that Keynes contradicts himself. That is, while he seems to argue against a money supply increase in the above passage, he argues IN FAVOR of such an increase in favor a recession in paragraph 5 of his letter. He says:
“Individuals must be induced to spend more out of their existing incomes; or the business world must be induced, either by increased confidence in the prospects or by a lower rate of interest, to create additional current incomes in the hands of their employees, which is what happens when either the working or the fixed capital of the country is being increased; or public authority must be called in aid to create additional current incomes through the expenditure of borrowed or printed money.”
Indeed, as you may have noticed, Keynes latter “print and spend” idea is almost identical to the “print and spend (and/or cut taxes)” policy advocated by Positive Money and other SM supporters!
Debt free money.
Under the heading “Should or can money be debt free”, Pettifor says “..debt free money is an oxymoron. There is no such thing as debt free money…”.
Unfortunately she completely fails to deal with the basic debt free point made by SMers, namely that there is an important distinction between central bank issued money and commercial bank issued money (base money). In the case of commercial bank issued money, for every dollar of money there is a dollar of debt, as indeed Pettifor herself rightly implies. In contrast, in the case of base money, there is certainly an OSTENSIBLE debt: it’s a debt owed by the central bank to the holders of base money. And indeed, that money appears on the liability side of the balance sheet of central banks.
And not only that, but on Bank of England issued notes, it says (alongside the signature of the BoE’s chief cashier) “I promise to pay the bearer the sum of £20”. Well that all seems a pretty convincing evidence for the idea that base money is a debt owed by central banks. Unfortunately all is not as it seems.
First, as regards the latter “promise to pay”, that’s nonsense: if you turn up at the BoE and demand £10 of gold or anything else in exchange for your £10 note, you’ll be told to shove off, accompanied by the police if you don’t shove off immediately.
Second, government (which owns the BoE) is entitled to grab any amount of base money off the private sector whenever it wants via tax. And that makes the so called “debt” owed by the BoE to the private sector a strange debt. It’s the exact equivalent of me being “indebted” to Barclays Bank on account of the mortgage they granted me, at the same time as me having the right to walk into Barclays Bank any time and grab wads of £10 notes so as to pay off my “debt” to Barclays. If that is a debt owed to Barclays, it would be debt quite unlike any other debt.
As Warren Mosler (founder of MMT) put it, base money is like points awarded by a tennis umpire: that is, base money and tennis points are assets as viewed by those holding base money or tennis points, but they are not liabilities as viewed by central banks or tennis umpires.
To summarise, there is clearly a distinction between commercial bank issued money and base money. The former is definitely a debt. As to whether base money is a debt or is “debt free” that is far less clear. “Debt free” is not a bad description if one is going for brevity.
The circulation of money.
Finally, under the heading “Does money just circulate”, Pettifor makes the bizarre charge against SMers that they claim money “just circulates” rather than doing various wondrous things which apparently only Pettifor has thought of, e.g. that it “creates purchasing power” and “gets used up as investment and in the creation of employment, economic activity and income”. And with a view to tugging at our heart strings, Pettifor also says (as if this is some sort of revelation) that money can also “finance cures for plagues and disease”.
Well the answer to that is that every ten year old has worked out that money can be used for a VAST variety of purposes: including gambling, other nefarious activities, paying for investments, enabling families to do day to day purchases at supermarkets, and yes….paying for research into curing diseases.
It’s amazing that I need to spell this out, but when a firm borrows to make an investment, like a new piece of machinery, the relevant money pays the wages of employees working for the firm that makes the machinery. Those employees spend the money on paying for food and clothing, which in turn pays the wages of those making the clothes and growing the food, etc etc etc. In short, money…….wait for it…..CIRCULATES!!!!!!
Hopefully I have said enough to establish that Pettifor is a long way short of totally clued up when it comes to money and banks.