Monday, 31 December 2018

How come human beings can talk?


The German economist Heiner Flassbeck highlights the fact that human beings are largely incapable of distinguishing between two senses of the same word: in particular, in his native German language, the word for debt is the same as the word for guilt. That means Germans tend to think that debtors are all guilty: totally illogical of course.

Much the same goes for the word “austerity” which has two quite separate meanings: first, inadequate demand, and second, inadequate public spending (even assuming demand is adequate). About 99% of English speakers who use the word fail to clarify in what sense they are using it. But that doesn’t really matter for them. After all, they’re not really interested in solving austerity related problems (in any sense of the word). Normally the motive for wielding the word is to do some so called “virtue signalling”.

In view of the above failure to understand or use words properly, it’s a wonder is that human beings can talk at all…:-)

Incidentally Heiner Flassbeck and yours truly published (quite separately) a possible solution for Greece and similar countries a year or two ago. That’s to let Greece impose import tariffs. See here.

However, there’s been little interest in that idea, and for reasons alluded to above, namely that Greece is a godsend for virtue signallers. In contrast, if you suggest an actual solution for the Greek problem which requires a concentration span of more than five seconds to get to grips with, then virtue signallers’ eyes glaze over.

And that’s the end of this thoroughly cynical article.


Sunday, 23 December 2018

Why should money lenders be backed by taxpayers?


Under the existing deposit insurance system, people who deposit money at banks with a view to having their money loaned out by their bank are guaranteed against loss by taxpayers. With a view to explaining the flaws in that system, let’s start by considering money and banks from first principles.

1. “Money is a creature of the state” as the saying goes. That is, there has to be general agreement in any country as to what the country’s basic form of currency will be. Plus there has to be some sort of state controlled organisation to issue that currency. Reason is that if too much is issued, excess inflation ensues and if too little is  issued, there is  excess unemployment. (I’m assuming the currency comes in fiat form as is normal nowadays and let’s assume the currently unit is a “dollar”. Plus I’ll assume that the “state controlled organisation is a “central bank”).

2. Assume a hypothetical economy which is switching from barter to money for the first time and that at least initially, commercial banks are barred from issuing money. In that scenario, people and firms will borrow from and lend to each other, sometimes direct person to person (or firm to firm etc) and sometimes via commercial banks.

3. Where depositors choose to have their money loaned on by commercial banks it would be fraudulent of banks to promise those depositors they are guaranteed to get their money back and for the simple reason that loaned out money is never totally safe (although that sort of promise was common prior to WWII: in the 1920s and 30s the fraudulent nature of that promise became blatantly obvious when ordinary depositors lost billions as a result of the hundreds of banks collapsing in the US. So given that those depositors stand to make a loss, they are not actually depositors: they are more in the nature of shareholders in relevant banks.

 



4. A possible optional extra to the above arrangement is to let commercial banks create and lend out their own home made money, as occurs in the real world at present. Those DIY dollars take the form of promises by relevant banks to pay money to whoever.

5. However, that DIY money does not really comply with normal definitions of the word money unless it is guaranteed by taxpayer / government backed deposit insurance. That is, if that DIY money is NOT BACKED in that way, then such “money” is in effect equity / shares as explained above.

6. Now what’s wrong with depositors wanting to have their money loaned on with the risk being carried by some sort of deposit insurance, particularly if that insurance system is run on commercial lines, i.e. assuming it pays for itself? Well the problem is that if people who deposit money at banks with a view to the bank lending on their money are entitled to deposit insurance, what about those who deposit money at any other investment intermediary like a stockbroker or unit trust (“mutual funds” in the US) with the same end in view, i.e. earning interest or dividends?

7. Another popular excuse for deposit insurance is that such insurance boosts the banking industry. Indeed that was the excuse given by the UK’s Independent Commission on Banking (sections 3.20 to 3.24). They claimed deposit insurance encouraged borrowing, lending and investment. (Actually the way the ICB put that point was to say that if deposit insurance WAS WITHDRAWN “the economic costs would be very high.” But that’s the same as saying deposit insurance boosts the economy and withdrawing it harms the economy.)

8. Moreover, the ICB were vague on exactly what form the alleged “costs” would take. For example, if they were trying to suggest the decline in borrowing due to a withdrawal of deposit insurance would raise interest rates and thus cut demand, that is not much of an argument: reason is that any fall in demand can be countered simply by having government and central bank create more base money and spend it into the economy (and/or cut taxes).

Plus current very low interest rates are not an unmixed blessing: they are often cited as a contributory cause of excess debts and asset price bubbles.

9. The next problem is that both the above “stockbroker and mutual fund” point and the latter “ICB / boosts the economy” point can be extended to yet further sectors of the economy. For example, taxpayer backed insurance for ships would probably be popular: if you’re a shipowner, being insured by an insurance company that cannot possibly fail has distinct attractions. So such insurance would “boost” the shipping industry and hence the economy as a whole, if the ICB argument is valid.

10. This is clearly getting silly: i.e. what is needed here is some form  of natural dividing line between valid forms of state interference or assistance for banking, shipping and so on, and on the other hand, INVALID  forms of assistance.

11. Well there is actually a natural dividing line which is that it is widely accepted that it is not the job of taxpayers or governments to back COMMERCIAL activity, unless there are obvious reasons for doing so, e.g. social reasons. (I actually argue that point in more detail in an article entitled “A New Justification for Full Reserve Banking”).

To illustrate, long ago in Europe, education and health care were commercial activities: people had to pay for tutors and medical treatment. It was then decided that for social reasons, governments should take over much of that work. But that sort of social reason hardly applies to money lending, i.e. banking, or shipping.

12. Now anyone who deposits money at a bank with a view to having their money loaned out so as to earn interest is clearly into commerce just as much as where they deposit money with a stockbroker with the same aim in view.

In contrast, there is a clear social case for everyone having a totally safe method of storing and transferring money where their motives are not commercial, i.e. where they do not aim to have their money loaned out. Indeed the latter “totally safe” facility is a basic human right.


Conclusion

The advocates of full reserve banking are right: the bank system should offer totally safe accounts for those who want them, while those who want their money loaned out so as to earn interest should bear relevant risks, just as they do when they deposit money with a stockbroker or unit trust.

And of course a consequence of that arrangement is that it is impossible for banks to fail: that is, if a bank makes silly loans, all that happens is that the value of the above mentioned shares / equity falls in value.

Saturday, 22 December 2018

Should banks take climate risks into account?



The latest article (at the time of writing) from the New Economics Foundation is “Greening the Banks” by Frank Van Lerven.

The article claims “Climate change has the potential to wipe out trillions of pounds worth of assets, making the devastation of the 2008 Global Financial Crisis seem like a walk in the park.” That is followed a few sentences later by “This poses severe financial risks…”.

Er  - no I don’t think it does. Reason is that climate change is coming sufficiently slowly that no bank is likely to be caught out by those risks. To illustrate, central London may well be flooded and have to be evacuated at some point, and clearly that will involve a huge loss in the value of assets which back bank loans, e.g. houses and office blocks. But that flooding, according to climate scientists, will not happen SUDDENLY: e.g. by this time next year. It will take around fifty or a hundred years to materialise. 



Of course it could be argued that there are LESS PREDICTABLE risks arising from climate change than the latter flooding. But if the extent of a risk cannot be predicted, it’s a bit difficult, by definition, to quantify it!
 

The NEF article also considers the loss in value of assets in the form of a contraction of the fossil fuel industry. Well if governments WERE TO significantly contract those industries, and that certainly needs doing, it would be daft to try to do it all in one or two years. I.e. a minimum of about five years would make more sense.

In that case, again, banks have time to adjust.


Penalise dirty lending?

Next, under the heading “Penalise Dirty Lending”, the article proposes extra capital requirements for bank loans which fund CO2 emitting activities. Well the obvious problem there is that extra capital requirements involve little extra expense for banks. Indeed, if the Modigliani Miller theory is right (at least as it applies to banks) there is no extra expense at all!!

Certainly any extra expense via the latter means will be MINUTE compared to the extra expense for motorists that derives from tax on petrol and diesel. Tax accounts for around 65% of the price of petrol and diesel for motorists in the UK at the moment. That dwarfs any extra costs that might be loaded onto “dirty lenders” and CO2 emitters via the capital requirement method.


Conclusion.
 

Something urgently needs to be done about global warming. But there are effective ways to solving that problem and ineffective ways. I prefer the former.

Friday, 21 December 2018

The IPPR falls for the “fiscal space” myth.


The fiscal space myth is an idea which is popular with plonkers in high places, particularly at the IMF and OECD. It’s the idea that if a national debt is too high, interest on that debt will also tend to be high, which in turn will allegedly make it difficult for a government to implement fiscal stimulus (i.e. “borrow and spend”) come a recession.

Well if interest rates on the debt are relatively high, that means there is plenty of scope for implementing stimulus via interest rate cuts! So to that extent, the fiscal space idea is nonsense! Plus as Keynes pointed out  nearly a hundred years ago, a solution for recessions is for governments and central banks to simply create money and spend it (and/or cut taxes) - i.e. there is no need to incurr more debt in order to implement stimulus.

As for the IPPR, there is a passage in a work of theirs (authored by Tony Dolphin and entitled “Setting the Fiscal Rules”) which goes as follows.

“The long-run fiscal objective of the UK government should be to reduce the ratio of government debt to GDP. Academic research has not come up with a definitive answer to the question of what the optimal level of debt might be. But debt in the UK has doubled since the onset of the financial crisis and, as a result, it may be harder to respond to a future severe downturn in economic activity through an easing of fiscal policy. Debt needs to be reduced to create room for it to be increased again if needed.”

Let’s take that sentence by sentence. First: “The long-run fiscal objective of the UK government should be to reduce the ratio of government debt to GDP.”

Really? Why so?

Government debt, as MMTers keep pointing out, is a private sector asset. What’s wrong with the private sector having paper assets? Darned if I know.

Of course if the rate of interest paid on the debt is excessive, then certainly the debt needs to be reduced. On the other hand if the rate of interest is zero or near zero, then government debt comes to much  the same thing as base money (bundles of £10 notes if you like). What’s wrong with the private sector having bundles of zero interest yielding £10 notes, if that’s what the private sector wants? Again, darned if I know.

Next Dolphin says “Academic research has not come up with a definitive answer to the question of what the optimal level of debt might be.” Well MMTers have answer for that, which is that since private sector spending almost certainly with private sector net assets, the debt (plus the stock of base money) needs to be whatever induces the private sector to spend at a rate that brings full employment. MMTers sometimes refer to the sum of the latter two quantities, government debt and base money, as “Private Sector Net Financial Assets”.

As for how much of PSNFA should consist of debt and how much should consist of base money that’s not too important, since as already intimated, the two merge into each other: that is, base money is effectively debt which yields no interest (as pointed out by Martin Wolf in the Financial Times a year or two ago).

Incidentally, I’ve made most of the above points about a hundred times before on this blog, but if MMTers keep explaining basic simple points about economics till they’re blue in the face, the incompetents in high places at the IMF, OECD and IPPR may eventually understand them.


Thursday, 13 December 2018

Guiseppe Fontana and Malcolm Sawyer’s claim that full reserve advocates are “cranks”.


Guiseppe Fontana and Malcolm Sawyer (F&S) published a paper in the Cambridge Journal of Economics in 2016 entitled “Full Reserve Banking: More ‘Cranks’ Than ‘Brave Heretics’”.

The paragraphs below are quick summary of reasons for thinking that if any group of people are cranks, its Fontana and Sawyer rather than advocates of full reserve banking (FRB).

I’ve actually dealt with Fontana & Sawyer’s ideas on FRB before on this blog (Google: Ralphonomics..Sawyer….full reserve). But I thought I’d do a proper paper in the new year and place it at the Munich Repec. The draft of that paper is proceeding nicely, but I thought I’d do a quick summary or “taster” of it meanwhile. Some of the points below are repetitions of points made in the latter blog articles and some are new. So here goes….

1. F&S accuse FRB advocates of “disregarding established theoretical literatures”.

Well now that’s an odd claim given that the main target of F&S’s criticisms are works authored by  Ben Dyson (founder of Positive Money) and co-authors, and the fact that Ben Dyson and Andrew Jackson wrote a book entitled “Modernising Money” which contains around 160 works in its list of references.

Being moderately well acquainted, if not intimately acquainted with 160 works on a particular topic, does not equal “disregarding established theoretical literatures” on that topic in my books. But what do I know?

2. One of the main arguments for full reserve was put by Joseph Huber in his work “Creating New Money” (p.31), which is that the right of commercial banks (aka money lenders) to simply create the money they lend out from thin air is a subsidy of those money lenders.

F&S however do not deal with Huber’s point. Plus Huber does not appear in F&S’s list of references. That rather raises the question as to exactly who is guilty of “disregarding established theoretical literatures”.

Another point which calls into question F&S’s grasp of “established theoretical literatures” is they seem to be unaware that several Nobel laureate economists have backed FRB, e.g. Milton Friedman, Maurice Allais and Merton Miller.

F&S do mention Friedman, but not his support for FRB. As for Miller and Allais, they are not mentioned at all.

3. F&S devote between a quarter and a third of their paper to criticising an idea put by some advocates of FRB, including Dyson & Co, namely what is sometimes called “overt money creation” (OMC).  That’s the idea that the state (i.e. government and central bank), when stimulus is needed, should simply create new base money and spend it (and/or cut taxes).

The problem with that criticism of FRB is that OMC is not an inherent characteristic of FRB: it’s simply for the form of stimulus favoured by SOME FRB advocates. To illustrate, Ben Bernanke and Adair Turner have made approving noises about OMC without at the same time advocating FRB. (For Bernanke, see passage starting “So, how could the legislature….” here)

Put another way, it would be perfectly possible to implement FRB while sticking with the existing methods of adjusting demand, like interest rate adjustments.

4. In their section 2 sub-section 4, F&S challenge the claim made by FRB advocates that “The new supply of bank loans creates an equal increase in the amount of outstanding debt in the economy.”

Well the first problem there is that it’s not just FRB advocates who make that claim: it’s a fairly widely accepted truism in economics that commercial bank created money “nets to nothing”. I.e. that for every dollar of such money there is a dollar of debt owed to a commercial bank.

For an example of an economist who is not an FRB advocate but who nevertheless supports the latter “nets to nothing” point, see articles entitled “Deficit spending 101 – Part 3” and “Money Multiplier and other Myths” by Bill Mitchell.

Thus it rather looks like F&S have not got to grips with the basic book-keeping entries that commercial banks make when granting loans.

5. F&S’s section 2, subsection 5 starts with the bizarre claim that “The current accounting of money as a debt–credit relationship is a relic of the past, when banknotes were backed by and redeemable for gold.”

Well that will be news to Bill Mitchell. It will also be news to the authors of numerous economics text books. For example Armen Alchain and William Allen in their book “University Economics” Ch29 say “A possibly surprising idea is that debt is money, provided the debt is a particular kind owed by a commercial bank….”.

6. Another indication that F&S do not understand the basic book-keeping entries done by central and commercial bank comes in this passage of theirs.

F&S start by quoting a passage from one FRB advocate, Herman Daly which is thus. “With 100% reserves every dollar loaned to a borrower would be a dollar previously saved by a time account depositor (and not available to the depositor during the period of the loan), thereby re-establishing the classical balance between abstinence and investment. With credit limited by saving (abstinence from consumption) there will be less lending and borrowing and it will be done more carefully.”

F&S then say…

“The second inconsistency is that it is not clear where the prior savings alluded to by Daly and other advocates of FRB have come from. It is technically impossible for banks as a whole to collect deposits without at the same time granting loans for the same amount. Therefore, at least initially there must have been a process of credit creation in the economy, which was completely unconstrained and unrelated to pre-existing resources. More importantly, the quote above indicates an inherently deflationary bias of FRB proposals, which is likely to produce recessions and financial instability.”

Well for anyone who understands how banks, commercial and central, actually work, the question as to where the latter “prior savings” come from is not too difficult. It is thus. Under present arrangements, governments engage in fiscal stimulus which consists of their borrowing $X, spending $X back into the private sector and giving bonds  worth $X to those they have borrowed from. The result is that private sector paper assets rise by $X. Hey presto: we have uncovered a source of “prior savings” (of a sort, anyway)!

Of course central banks can then create base money and buy back those bonds as they see fit (with a view to cutting interest rates and/or implementing QE). In that case, the latter bonds in the hands of the private sector are converted to dollars. But that just alters the nature of the “prior savings” a bit. But note that those dollars have been created WITHOUT a commercial bank making a loan, which according to F&S is impossible.

And moving on to OMC (where the state by-passes the latter bonds and simply creates money and spends it), if the state simply creates $X and spends it, then private sector “prior savings” rise by $X. And that’s just a slightly different way of creating those allegedly “impossible to create” dollars.

To summarise, that all makes a nonsense of F&S’s claim that “It is technically impossible for banks as a whole to collect deposits without at the same time granting loans for the same amount.”

7. In section 3 (and in their abstract), F&S accuse FRB of having a “deflationary bias”.

Well it’s certainly true that lending and borrowing are more difficult under FRB, i.e. that interest rates would be higher. But any deflationary effect of that is easily countered by standard stimulatory measures, the one favoured by most FRB advocates being OMC. Magic: problem solved!

Moreover, as Milton Friedman rightly said, stimulus dollars cost nothing in real terms. So the solution to F&S’s alleged problem is costless.

Plus it is far from clear that the low interest rates that obtain at the time of writing are an unmixed blessing: they have resulted in record levels of debt and an unprecedented rise in house prices.

8. In their section 3, F&S make the revelatory pronouncement that “However, one of the main lessons from the work of Minsky and other Post Keynesian economists is that the demand for and supply of bank loans via the financing of the production of goods and services (investment) are an integral aspect of the operation of real-world economies.”

Good heavens – so bank loans are an essential part of 21st century economies? You learn something every day, don’t you?

I suspect we’d all be aware that bank loans are a good idea without any assistance from Minsky or Post Keynsian economists. I mean was no one aware that bank loans are good idea BEFORE Minsky and Post Keynsians appeared on the scene?

And another flaw in the latter F&S claim is that bank loans do not suddenly become impossible under FRB: all that happens (to repeat) is that interest rates rise a bit.

9. In their section 4, F&S claim that the difference between the transaction accounts and investment accounts under FRB is sufficiently small that banks would be able to turn investment accounts into what are effectively transaction accounts and thus get instant access money to fund loans.

Well that depends on exactly how the two types of accounts are structured. Clearly it would be POSSIBLE to have the difference between the two so small that there is effectively no difference.

On the other hand under the type of FRB system advocated by Laurence Kotlikoff, investment accounts simply take the form of unit trusts (mutual funds in US parlance), no different from the hundreds of unit trusts already available. Far as I know, no one has claimed that such unit trusts constitute instant access money. Certainly if anyone putting £X into a unit trust tried to claim they had a right to have their £X back when the trust performed poorly, they’d be laughed at.

10. F&S make the tired old claim that under FRB, the cost of transaction (aka instant access) accounts would rise for bank customers.

Well true: costs certainly would rise. But costs (aka bank charges) are only as low as they are at the moment because instant access accounts are subsidised by banks’ money lending activities. 

There is no particular merit in cross subsidisation: e.g. there is no particular merit in apple growers subsidising potato growers. Indeed, cross subsidisation is normally frowned on in economics.

11. A  final indication that F&S have little grasp of basic central bank and commercial bank transactions and book-keeping entries is that in their section 5 they say “Another controversial aspect of FRB proposals is the claimed relationship between the money creation process and budget decisions. Currently, the government decides the level of expenditure, and then the Treasury finances it through a loan from either commercial banks or the central bank.”

That quote should cause your jaw to drop, or to cause you to fall off your chair laughing.

First, governments do not finance expenditure, at least in the first instance, “from either commercial banks or the central bank”.  The reality is that government spending is financed mainly via tax.

Next, to the extent that income from tax is not enough to cover spending, governments resort to borrowing, though in some years there is no need to resort to borrowing because tax covers spending.

Next, where borrowing does take place, governments do not borrow primarily from “commercial banks or the central bank”. What they actually do is offer to borrow, with absolutely ANYONE being entitled lend, i.e. to purchase government bonds. The main purchasers (contrary to F&S’s suggestions) are pension funds, insurance companies and foreign entities of one sort or another (e.g. foreign governments). E.g. this source gives the proportion of government debt purchased by domestic commercial banks as just 4%.

https://www.justfacts.com/nationaldebt.asp
Next, government spending is not covered in the first instance by loans from central banks. To repeat, governments borrow from all and sundry. Relevant central banks may or may not subsequently create money and buy back some of the bonds issued by government (i.e. in effect, lend to governement ). Central banks will do that if they think interest rate cuts or QE is needed, but not otherwise.


Conclusion.

I do not wish to suggest that advocates of FRB never make mistakes. Indeed F&S do correctly identify one or two. But, to put it mildly, Fontana and Sawyer are not exactly up to speed on the subject of full reserve banking: if anyone is a “crank”, it’s Messers Fontana and Sawyer.

As for whether I’ll submit my paper to the Cambridge Journal of Economics, I certainly won’t. They appear to be more interested in pseudo intellectual wind and waffle than actually solving economic problems.









Guiseppe Fontana and Malcolm Sawyer’s claim that full reserve advocates are “cranks”.
Guiseppe Fontana and Malcolm Sawyer (F&S) published a paper in the Cambridge Journal of Economics in 2016 entitled “Full Reserve Banking: More ‘Cranks’ Than ‘Brave Heretics’”.

The paragraphs below are quick summary of reasons for thinking that if any group of people are cranks, its Fontana and Sawyer rather than advocates of full reserve banking (FRB).

I’ve actually dealt with Fontana & Sawyer’s ideas on FRB before on this blog (Google: Ralphonomics..Sawyer….full reserve). But I thought I’d do a proper paper in the new year and place it at the Munich Repec. The draft of that paper is proceeding nicely, but I thought I’d do a quick summary or “taster” of it meanwhile. Some of the points below are repetitions of points made in the latter blog articles and some are new. So here goes….

1. F&S accuse FRB advocates of “disregarding established theoretical literatures”.

Well now that’s an odd claim given that the main target of F&S’s criticisms are works authored by  Ben Dyson (founder of Positive Money) and co-authors, and the fact that Ben Dyson and Andrew Jackson wrote a book entitled “Modernising Money” which contains around 160 works in its list of references.

Being moderately well acquainted, if not intimately acquainted with 160 works on a particular topic, does not equal “disregarding established theoretical literatures” on that topic in my books. But what do I know?

2. One of the main arguments for full reserve was put by Joseph Huber in his work “Creating New Money” (p.31), which is that the right of commercial banks (aka money lenders) to simply create the money they lend out from thin air is a subsidy of those money lenders.

F&S however do not deal with Huber’s point. Plus Huber does not appear in F&S’s list of references. That rather raises the question as to exactly who is guilty of “disregarding established theoretical literatures”.

Another point which calls into question F&S’s grasp of “established theoretical literatures” is they seem to be unaware that several Nobel laureate economists have backed FRB, e.g. Milton Friedman, Maurice Allais and Merton Miller.

F&S do mention Friedman, but not his support for FRB. As for Miller and Allais, they are not mentioned at all.

3. F&S devote between a quarter and a third of their paper to criticising an idea put by some advocates of FRB, including Dyson & Co, namely what is sometimes called “overt money creation” (OMC).  That’s the idea that the state (i.e. government and central bank), when stimulus is needed, should simply create new base money and spend it (and/or cut taxes).

The problem with that criticism of FRB is that OMC is not an inherent characteristic of FRB: it’s simply for the form of stimulus favoured by SOME FRB advocates. To illustrate, Ben Bernanke and Adair Turner have made approving noises about OMC without at the same time advocating FRB. (For Bernanke, see passage starting “So, how could the legislature….” here)

https://www.brookings.edu/blog/ben-bernanke/2016/04/11/what-tools-does-the-fed-have-left-part-3-helicopter-money/
Put another way, it would be perfectly possible to implement FRB while sticking with the existing methods of adjusting demand, like interest rate adjustments.

4. In their section 2 sub-section 4, F&S challenge the claim made by FRB advocates that “The new supply of bank loans creates an equal increase in the amount of outstanding debt in the economy.”

Well the first problem there is that it’s not just FRB advocates who make that claim: it’s a fairly widely accepted truism in economics that commercial bank created money “nets to nothing”. I.e. that for every dollar of such money there is a dollar of debt owed to a commercial bank.

For an example of an economist who is not an FRB advocate but who nevertheless supports the latter “nets to nothing” point, see articles entitled “Deficit spending 101 – Part 3” and “Money Multiplier and other Myths” by Bill Mitchell.

http://bilbo.economicoutlook.net/blog/?p=381
http://bilbo.economicoutlook.net/blog/?p=1623
Thus it rather looks like F&S have not got to grips with the basic book-keeping entries that commercial banks make when granting loans.

5. F&S’s section 2, subsection 5 starts with the bizarre claim that “The current accounting of money as a debt–credit relationship is a relic of the past, when banknotes were backed by and redeemable for gold.”

Well that will be news to Bill Mitchell. It will also be news to the authors of numerous economics text books. For example Armen Alchain and William Allen in their book “University Economics” Ch29 say “A possibly surprising idea is that debt is money, provided the debt is a particular kind owed by a commercial bank….”.

6. Another indication that F&S do not understand the basic book-keeping entries done by central and commercial bank comes in this passage of theirs.

F&S start by quoting a passage from one FRB advocate, Herman Daly which is thus. “With 100% reserves every dollar loaned to a borrower would be a dollar previously saved by a time account depositor (and not available to the depositor during the period of the loan), thereby re-establishing the classical balance between abstinence and investment. With credit limited by saving (abstinence from consumption) there will be less lending and borrowing and it will be done more carefully.”

F&S then say…

“The second inconsistency is that it is not clear where the prior savings alluded to by Daly and other advocates of FRB have come from. It is technically impossible for banks as a whole to collect deposits without at the same time granting loans for the same amount. Therefore, at least initially there must have been a process of credit creation in the economy, which was completely unconstrained and unrelated to pre-existing resources. More importantly, the quote above indicates an inherently deflationary bias of FRB proposals, which is likely to produce recessions and financial instability.”

Well for anyone who understands how banks, commercial and central, actually work, the question as to where the latter “prior savings” come from is not too difficult. It is thus. Under present arrangements, governments engage in fiscal stimulus which consists of their borrowing $X, spending $X back into the private sector and giving bonds  worth $X to those they have borrowed from. The result is that private sector paper assets rise by $X. Hey presto: we have uncovered a source of “prior savings” (of a sort, anyway)!

Of course central banks can then create base money and buy back those bonds as they see fit (with a view to cutting interest rates and/or implementing QE). In that case, the latter bonds in the hands of the private sector are converted to dollars. But that just alters the nature of the “prior savings” a bit. But note that those dollars have been created WITHOUT a commercial bank making a loan, which according to F&S is impossible.

And moving on to OMC (where the state by-passes the latter bonds and simply creates money and spends it), if the state simply creates $X and spends it, then private sector “prior savings” rise by $X. And that’s just a slightly different way of creating those allegedly “impossible to create” dollars.

To summarise, that all makes a nonsense of F&S’s claim that “It is technically impossible for banks as a whole to collect deposits without at the same time granting loans for the same amount.”

7. In section 3 (and in their abstract), F&S accuse FRB of having a “deflationary bias”.

Well it’s certainly true that lending and borrowing are more difficult under FRB, i.e. that interest rates would be higher. But any deflationary effect of that is easily countered by standard stimulatory measures, the one favoured by most FRB advocates being OMC. Magic: problem solved!

Moreover, as Milton Friedman rightly said, stimulus dollars cost nothing in real terms. So the solution to F&S’s alleged problem is costless.

Plus it is far from clear that the low interest rates that obtain at the time of writing are an unmixed blessing: they have resulted in record levels of debt and an unprecedented rise in house prices.

8. In their section 3, F&S make the revelatory pronouncement that “However, one of the main lessons from the work of Minsky and other Post Keynesian economists is that the demand for and supply of bank loans via the financing of the production of goods and services (investment) are an integral aspect of the operation of real-world economies.”

Good heavens – so bank loans are an essential part of 21st century economies? You learn something every day, don’t you?

I suspect we’d all be aware that bank loans are a good idea without any assistance from Minsky or Post Keynsian economists. I mean was no one aware that bank loans are good idea BEFORE Minsky and Post Keynsians appeared on the scene?

And another flaw in the latter F&S claim is that bank loans do not suddenly become impossible under FRB: all that happens (to repeat) is that interest rates rise a bit.

9. In their section 4, F&S claim that the difference between the transaction accounts and investment accounts under FRB is sufficiently small that banks would be able to turn investment accounts into what are effectively transaction accounts and thus get instant access money to fund loans.

Well that depends on exactly how the two types of accounts are structured. Clearly it would be POSSIBLE to have the difference between the two so small that there is effectively no difference.

On the other hand under the type of FRB system advocated by Laurence Kotlikoff, investment accounts simply take the form of unit trusts (mutual funds in US parlance), no different from the hundreds of unit trusts already available. Far as I know, no one has claimed that such unit trusts constitute instant access money. Certainly if anyone putting £X into a unit trust tried to claim they had a right to have their £X back when the trust performed poorly, they’d be laughed at.

10. F&S make the tired old claim that under FRB, the cost of transaction (aka instant access) accounts would rise for bank customers.

Well true: costs certainly would rise. But costs (aka bank charges) are only as low as they are at the moment because instant access accounts are subsidised by banks’ money lending activities. 

There is no particular merit in cross subsidisation: e.g. there is no particular merit in apple growers subsidising potato growers. Indeed, cross subsidisation is normally frowned on in economics.

11. A  final indication that F&S have little grasp of basic central bank and commercial bank transactions and book-keeping entries is that in their section 5 they say “Another controversial aspect of FRB proposals is the claimed relationship between the money creation process and budget decisions. Currently, the government decides the level of expenditure, and then the Treasury finances it through a loan from either commercial banks or the central bank.”

That quote should cause your jaw to drop, or to cause you to fall off your chair laughing.

First, governments do not finance expenditure, at least in the first instance, “from either commercial banks or the central bank”.  The reality is that government spending is financed mainly via tax.

Next, to the extent that income from tax is not enough to cover spending, governments resort to borrowing, though in some years there is no need to resort to borrowing because tax covers spending.

Next, where borrowing does take place, governments do not borrow primarily from “commercial banks or the central bank”. What they actually do is offer to borrow, with absolutely ANYONE being entitled lend, i.e. to purchase government bonds. The main purchasers (contrary to F&S’s suggestions) are pension funds, insurance companies and foreign entities of one sort or another (e.g. foreign governments). E.g. this source gives the proportion of government debt purchased by domestic commercial banks as just 4%.

https://www.justfacts.com/nationaldebt.asp
Next, government spending is not covered in the first instance by loans from central banks. To repeat, governments borrow from all and sundry. Relevant central banks may or may not subsequently create money and buy back some of the bonds issued by government (i.e. in effect, lend to governement ). Central banks will do that if they think interest rate cuts or QE is needed, but not otherwise.


X Conclusion.

I do not wish to suggest that advocates of FRB never make mistakes. Indeed F&S do correctly identify one or two. But, to put it mildly, Fontana and Sawyer are not exactly up to speed on the subject of full reserve banking: if anyone is a “crank”, it’s Messers Fontana and Sawyer.

As for whether I’ll submit my paper to the Cambridge Journal of Economics, I certainly won’t. They appear to be more interested in pseudo intellectual wind and waffle than actually solving economic problems.









Saturday, 8 December 2018

Banking in the North East of England 200 years ago.




This is an interesting work: especially for me since I live in the area. I’ve only dipped into it and skimmed thru a few pages, but there are plenty of stories about “enterprising” bank related activities in the area long ago, some more honest than others. There are stories about coin clipping, highway robberies, forged bank notes, bank raids and so on, all of which took place on streets and in localities I know well. This makes the Wild West look positively tame.

This work is available here for free. Hat tip to my friend Gerard who lives in Newcastle and supports full reserve banking / Sovereign Money, and who alerted me to this work.

Friday, 7 December 2018

Richard Fuld tried to wheedle money out of Warren Buffet 24 hours before Lehmans collapsed.


I like this story on the above topic told by “J.Hughes” in the comments here. The story goes thus.
 

“Mr. Buffett tells a great story about Lehman Brothers. He was travelling in Canada, incognito, when, to his surprise, he got a phone call from Fuld while he was at his hotel. He was surprised that Lehman's CEO tracked him down but took the call.

He was less surprised when Fuld asked for money. He asked him to summarize the situation in a fax and send it to his hotel. When he returned later that evening there was no fax. He went to bed and found out the next day that that Lehman had declared bankruptcy.

About six months later his daughter was using his ancient flip cell and informed him there was an old message on it. It was Fuld asking for the number of the fax where he could be reached.

When asked if Lehman would have survived if he had gotten the message Mr. Buffett stated that he had reviewed their financials six months prior and concluded there was nothing to be done. He asked for the fax out of politeness.

If Mr. Buffett could see what was obvious six months in advance it is because he uses common sense and is leery of "geeks bearing charts".

It probably explains why he is not involved with GE.”


Friday, 30 November 2018

Great news: the US can help itself to limitless riches!


Stephanie Kelton and co-authors have a great new economic theory which is set out in this Huffington article. (Article title: “We can pay for a green new deal.”)

As they put it, “Here’s the good news: Anything that is technically feasible is financially affordable.” Well that is indeed good news. It’s even better “good news” than the “good news” that Jehova’s Witnesses try to broadcast.

Lets think about this.

It would be “technically feasible” for the US to have a UK style National Health Service. It would also be “technically feasible” for the US to build a nice six bedroom suburban house for every family in the US. Plus it would be “technically feasible” for the US to build 20 new aircraft carriers. So why doesn’t the great US of A go right ahead  and order up all those goodies and more? I’m baffled, as I’m sure you are (ho ho).

Sunday, 25 November 2018

Permanent zero interest rates.


The idea that the central bank base rate should be kept permanently at zero is very much an MMT idea. At least the two co-founders of MMT, Warren Mosler and Bill Mitchell both advocated the idea. Mosler’s exposition of the idea (co-authored by Matthew Forstater) is in a paper entitled “The Natural Rate of Interest is Zero”.

Bill Mitchell’s exposition is in an article entitled “There is no need to issue public debt”.

The idea that interest rates should be kept permanently at zero comes to the same thing as saying that neither government nor central bank should borrow anything: i.e. the only liability they should issue should be zero interest yielding base money.

I found Mosler and Forstater’s paper unnecessarily complicated – or perhaps it’s just me being stupid. Mitchell’s is more common sense and contains numerous good points. Mitchell criticises some of the defective arguments put for government borrowing, but he does not deal with all of those defective arguments.

Milton Friedman also advocated a zero government borrowing regime in a paper entitled “A monetary and fiscal framework for economic stability” (American economic review). But he does not go into much detail.

In short, I think the above three articles leave room for a bit of improvement, so I’ve just turned out my own attempt to argue for a permanent zero interest rate. That’s in a paper entitled “The arguments for a permanent zero interest rate.”

Friday, 23 November 2018

A simple reason to ban private money printing.


Under the existing bank system, a private / commercial bank, when granting a loan, does not need to get the relevant money from anywhere: it can simply produce the money from thin air. See Bank of England article, entitled “Creating Money in the Modern Economy” for confirmation of that point.

If you think that amounts to counterfeiting, then you’re not the first to think that: the French Nobel laureate economist Maurice Allais thought likewise (see article entitled “Credit Markets and Narrow Banking” by Ronnie Phillips).

There is however another reason for banning money creation by commercial banks which seems to have been largely or totally overlooked in the literature, which is as follows.

When a commercial / private bank creates new money and lends it to sundry borrowers, that money gets spent: after all, there’s not much point in borrowing money unless you spend it on something. For example when someone borrows money to buy a newly built house, their money ends up, at least initially, in the pockets of the construction workers, brick and cement manufacturers etc.

On the simplifying assumption that those workers and manufacturers simply bank their newly acquired money and don’t spend it, then in effect, those workers etc have granted a loan to the house purchaser. And those workers will earn interest on that money, especially if they put it into term accounts.

Of course in the real world the latter workers and manufacturers will spend their money fairly quickly, thus the money quickly gets dispersed among THOUSANDS of people. But the above point remains: those thousands of depositors have made a loan (via a bank) to the house purchaser. In short, those depositors are money lenders: they are into COMMERCE.


Should taxpayers back commercial transactions?

But wait a moment: there’s a widely accepted principle that it is not the job of taxpayers or governments to stand behind COMMERCIAL ventures. So when a bank goes bust, what’s the justification for taxpayers / governments rescuing depositors who have deposited money at banks so as to earn interest? There is NO JUSTIFICATION at all!!

Indeed, if you place money with a stock-broker or mutual fund (“unit trust” in UK parlance) or with any other investment intermediary and with a view to earning interest or dividends, there is no taxpayer / government insurance for you, and quite right. So what’s the justification for such insurance in the case of an investment intermediary that happens to call itself a “bank”? I can’t see one.

So if we’re going to to dispense with the latter glaring inconsistency or preferential treatment for banks, we need to have two distinct types of account. First, there need to be totally safe accounts for those who are not into commerce, i.e. who do not aim to have their money loaned out so as earn interest. After all, having a totally safe way of storing and transferring money is a basic human right, I suggest.

Second, there needs to be a category of bank account where depositors want their money loaned out by their bank so as to earn interest, but no taxpayer backed insurance is available.

And what d’yer know? That’s exactly what full reserve banking (aka “Sovereign Money”) has always consisted of!

But strange as it might seem, the above very simple reason for adopting full reserve does not seem to appear in the literature. And I am moderately well acquainted with the literature: I wrote a book on full reserve banking. At the very least, references to the above simple idea are rare, thus the idea needs to be given greater prominence.

So I’ve just published a paper which explains the above simple reason to back full reserve, and which argues for the idea to be given greater prominence. The title of the paper is “A new justification for full reserve banking?”



Sunday, 18 November 2018

Mariana Mazzucato the evangelist.


Far as I can see, all she does is to put the basic left of centre point of view, but with the difference that she uses semi-technical language to do so. That fools everyone into thinking she’s saying something new.  But then fooling people (especially intellectuals) has always been the easiest thing in the World. I’ll run thru this interview with her published by The Wharton School at the University of Pennsylvania.

First, she deals with the defects in the way GDP is measured. She says (para starting “What we include…”) that if you marry your cleaner, GDP as conventionally measured, declines because a cleaner gets paid cash, whereas a wife does not, and that allegedly proves that conventional measure is flawed.  Well economists have always known that housework done by the conventional “stay at home wife” is not included in GDP, and that that is a flaw in the way GDP is measured. Nothing new there.

The $64k question is: exactly what do we do about that flaw? Do we take it to the point that the time people spend tending their gardens is added to GDP? No easy answers there, and Mazzucato does not provide any answers.

Second, in answer to the question “Do you think the next recession….”, Mazzacato claims the next financial crises will be worse because Europe has a number of anti-immigration parties in power or nearly in power.

The logic there eludes me. Why does wanting tighter controls on immigration mean your knowledge about running the finance sector is defective? I’m baffled.

Moreover, the bank crisis ten years ago (the worst in living memory) took place under relatively pro-immigration regimes. That’s hardly evidence that pro-immigration folk are good at bank regulation.

Third, Mazzacato makes the point (which any half educated person has always known) namely that government funds nearly all basic research (mainly at universities). That research has, as Mazzacato says, made possible smart phones and other technological improvements.

The explanation for that is of course that basic research is very expensive and risky: the only institution likely to fund it is government. But that again is not news.


Excessive debts.

Next, in this Medium article she claims that private debts have become excessive and that the “only” way out of that problem is to find a better way of valuing publically produced stuff, like the output of the UK’s National Health Service. Again, I’m baffled. Just assuming some magic way can be found of valuing the output of the NHS (and there’s nothing on the horizon in that regard that I’m aware of), why would  that cut bank’s tendency to lend and build up private debt? In contrast, Positive Money (and other advocates of full reserve banking) have a very SPECIFIC proposal for cutting private debts: those debts would decline under a full reserve banking regime.

Positive Money and its supporters, of which I’m one, have done a hundred times more than Mazzucato to get private debts down. (Incidentally there’s a paper by me, with what I think is a new idea on that subject, due to be published in the next day or two. I’ll do an article about it this coming week all being well.)


Mission orientation.

One of Mazzucato’s main ideas is “mission orientation”. That’s the idea that government should spent astronomic sums on projects or types of research with a SPECIFIC AIM. She gives two examples: the Appolo moon shot and the recent German Energiewende (research into new forms of green energy production).

Well now there are major problems with both those examples. Re Apollo, that was a complete farce from the strictly economic point of view. The basic purpose of Apollo, as was made clear by President Kennedy when he first announced it, was to enable the US to get one up on the Russians. If that’s Mazzucato’s idea of a sensible way of spending money, it’s not mine.

Of course Appolo brought FINITE benefits. Given the billions that it cost, it could hardly fail to. For example it improved our understanding of the geology of the Moon. But it was a LUDICROUSLY expensive way of doing that, given that had the US waited a few decades, it would have been able to do the same thing with unmanned robots sent to the Moon.

Apollo also improved rocketry. But there was no need to go to the Moon to do that.

As for the German Energiewende, that addresses a problem which is unique in the last million years or so during which humans have been on planet  Earth: the fact that humans are about to wreck the climate of the planet they live on. Clearly that calls for some sort of spending on the scale of the Marshall Plan or World War II. But what other areas justify that sort of spending? Darned if I know.




Friday, 16 November 2018

Random charts - 65.


Large pink text on charts below was inserted by me.
















Wednesday, 14 November 2018

I’m tired of fake progressives.


So is Bill Mitchell. See for example his article entitled “When neoliberals masquerade as progressives.” But if you Google the name of his blog (“Billyblog”) and “progressive”, you find plenty more articles by him criticizing self-styled progressives.

Of course there are some genuinely progressive progressives. Unfortunately there are about as many people who haven’t the faintest idea how to bring about “progress” who describe themselves as progressive because that’s the cool thing to do nowadays.

Moreover, the very word “progressive” is a bit silly. Reason is that anyone who advocates X presumably thinks that X represents progress. Indeed, and to take an extreme example, no doubt Adolf Hitler thought that invading most of Europe and half of Russian represented “progress”. For that reason, I never describe myself as a progressive: the word is superfluous.

An example of a fake or defective progressive is Peter May and his “Progressive Pulse” blog. In this article entitled “Positive Money and MMT (continued)” he makes the classic mistake that dozens if not hundreds of critics of PM have made (including Ann Pettifor). The mistake is the assumption that because some independent committee of economists (e.g. a Bank of England committee) decides how much new money is to be created and spent each year, that therefor that committee has usurped powers which should be those of democratically elected politicians.

The flaw in that criticism of PM, as I’ve explained umpteen times, is as follows.

Under the existing system central banks (assuming they have a fair degree of independence) have the final word on how much stimulus is imparted over the next few months. Reason is that governments / politicians can impart as much or as little fiscal stimulus as they like (i.e. “borrow and spend”), but the central bank can negate that decision by governments via interest rate adjustments. E.g. if a central bank thinks there’s been too much fiscal stimulus, it can negate that by raising interest rates.

To summarise so far, in the case of the UK, the Bank of England ALREADY DETERMINES the amount of stimulus. But it DOES NOT take strictly political decisions, like what proportion of GDP goes to public spending or how that is split between education, health, etc. And quite right. To illustrate, if government wants to expand public spending by £Xbn a year and raise taxes by £Xbn to pay for that, it is free to do so.

Under the PM system, stimulus is implemented simply by government and central bank creating new money and spending it (and/or cutting taxes). The decision as to how much new money to create, i.e. the decision as to how much stimulus there needs to be is in the hands of a Bank of England committee or some other committee of economists. In contrast, politicians are totally free, as under the existing system to raise public spending and raise taxes to pay for that extra spending.

Incidentally, and in relation to Ann Pettifor, the above referred to article of hers was published in 2014, so it is conceivable that she has changed her mind since then. However, as it happens I have been followed her blog for years and I have not seen any sign of her changing her mind on the above topic.

To summarise, under both systems (the existing system and the PM system), a central bank committee or some other committee of economists decides on the amount of stimulus, while the decision as to what proportion of GDP goes to public spending and how that is split between education, health, etc remains with politicians.

Ergo a PM system would not usurp any democratic rights of politicians.

And finally, if you’re wondering why I haven’t made the above point in the comments after the fantastically “progressive” articles at the “Progressive Pulse” site, I have actually tried to. But it seems the fantastically progressive “Progressive Pulse” site does not like publishing comments which criticise its articles in too direct a manner. At least mine don’t get published there.

Strikes  me that part of being “progressive” ought to consists of an open debate which allows all views to be aired, with the possible exception of views and comments which a downright offensive or plain stupid. But as you ought to have gathered by now, it tends to be the political left (which devotes half its time to telling all and sundry how “progressive” it is) which opposes free speech.

Tuesday, 13 November 2018

Academia’s aversion to free speech is pathetic.


But people are fighting back: there’s a new journal where people can write articles anonymously. So if you suspect you might be accused of what George Orwell called “wrong-think”, you can try publishing what you have to say there.   And on the same theme, I like this article by Scott Sumner (economics prof at Bentley University, Bentley University, Massachusetts) in which he says in relation to the national debt, “So how large a debt should we have?  I don’t know.” (The article is entitled "Peak fiscal indiscipline")

Now given that SS writes about a million words a year on interest rates, national debts, monetary policy, fiscal policy, and related matters, that “I don’t know” admission is a bit strange.

I actually called him out on that one in the comments after his article, and suggested what the optimum debt might be (which is actually not a hundred miles from the amount that would result from adopting the new Labour Party “fiscal rule”).  My comment appeared, but SS evidently didn’t like it, because it then disappeared. Like I say, some academics are not too keen on free speech.

I actually said:

"The debt ideally needs to be whatever induces the private sector to spend at a rate that brings full employment when the rate of interest on the debt is zero. I’ll explain.

As to best rate of interest on the debt, I see no reason why money should be confiscated from taxpayers just to pay interest to people who want to hoard dollars. I.e. agree with Milton Friedman who advocated the issuance of base money, but thought the size of the debt should be zero.

As to the AMOUNT of Fed issued dollars to issue, private sector spending varies with the stock of the private sector’s stock of liquid assets, thus the number of dollars issued, ideally, needs to be whatever brings full employment.

Obviously attaining the above ideal is difficult, but monetary and fiscal policy should always aim at moving towards it. Indeed, that’s pretty much what the UK Labour Party’s recently announced “fiscal rule” does".


Monday, 12 November 2018

Don’t speak the truth on Twitter!



As you ought to be aware, it is now illegal to suggest that Mohammed was a pedophile, despite the fact that all the evidence is that on normal dictionary definitions of the word “pedophile”, he was actually a pedophile. That’s because of a recent European Court of Human Rights ruling.

However, the odious little leftie jerks who can’t stand free speech have taken it a stage further: it seems you’ll get banned (permanently or temporarily) from Twitter if you have the temerity to suggest what everyone with  an IQ over zero knows perfectly well, namely that Muslims are far more likely to commit terrorist offences than Buddhists, Hindus, Athiests, etc. Indeed, that blindingly obvious fact is backed by UK government (Home Office) figures.

The author of the Tweet below was temporarily banned for referring to the above indisputable point about Muslims and the Home Office figures which support the point. I’ve removed the name of the author.

You hef been varned. We hef veys off making you think only PC thoughts.









Sunday, 11 November 2018

Are women interested in economics?


I noticed on social media recently someone claiming to have done a quick count of the number of males versus females leaving comments after economics blog articles. So I thought I’d repeat that.

I trawled through the comments after one article from several different blogs. And what do you know? Out of a hundred “commentators” who had obviously male or female names, ninety six were male. Quite extraordinary.

Incidentally that ties up approximately with male to female ratio found in the letters column of the Financial Times. At least someone had a letter in the FT a year  or so ago saying they’d done a count of male and female names and found that about ninety percent were male.

Obviously caveats are in order here. For example, to get better statistical significance, a number nearer a thousand rather than a hundred would be better. Plus it would be better if those doing the counting had no idea what the purpose of the count was. Plus it would be better to have several individuals, each counting up to perhaps a hundred, rather than one individual doing all thousand.

Still the above “ninety six” is not statistically totally insignificant.

Another point: just in case anyone thinks I’m unaware of the existence of a number of outstanding female economists, I am perfectly well aware of those individuals. For example I follow Frances Coppola’s blog.

This calls for a more thorough investigation.


Friday, 9 November 2018

Richard Murphy tries to claim government debt is essential.


That’s in a recent (and fairly short) article of his entitled “Why governments need to issue bonds despite modern monetary theory”.

His first reason, or perhaps I should say “blunder” is the idea that “people need safe places to save.” Well of course!! But if there’s no debt, and the state (i.e. government and central bank) just issue enough base money to keep the economy ticking over, then people can get “safe savings” in the form of zero interest yielding base money!

His second reason is that “those with pensions need locked in and guaranteed income streams.” Nonsense!

The reality is that the “income streams” for pension schemes do not need to take the form of interest from government debt, or indeed interest from anywhere else: the biggest pension scheme in the UK is the STATE PENSION SCHEME, and same goes for many other countries. That UK scheme has no income from government debt or any other form of interest yielding investment: money for today’s pensioners is supplied by people who are in work and who make contributions to that state pension scheme. Their employers also contribute.

That sort of pension scheme is known as “pay as you go”, and in addition to the latter state scheme, there are PRIVATE pay as you go schemes.

Murphy’s third reason is that “the banking sector has, post 2008, needed government bonds as a mechanism to secure overnight deposits.”

Well frankly I’m baffled. If Murphy is referring to “deposits” by normal retail depositors, why does a bank need a stock of government bonds before it can accept £X from someone who walks thru its door wanting to deposit that £X? Darned if I know.

Secondly, why has that bizarre need for government bonds suddenly appeared since 2008? Do you know? I don’t.

Alternatively, Murphy may be referring to “deposits” in the sense of “overnight loans from the Bank of England or other commercial banks”. But banks since QE have been awash with reserves (aka base money). They JUST HAVE NOT needed to go running to the BoE for reserves recently.


There’s a big demand for public debt.

Next, Murphy says there is a big demand for government debt. I bet there is!

What with the fall in interest rates over the last twenty years or so, people and institutions with cash to spare will be itching for government to issue bonds paying marginally above the going rate of interest for totally safe investments. But remember it’s taxpayers who fund interest payments made by governments.

Why on Earth should money be confiscated from taxpayers, many of whom earn less than the national average wage, just to fund interest payments to people with piles of cash under their metaphorical mattresses?


Government debt can fund public spending?

In his final paragraph, Murphy argues that government debt can fund public services. Well true: it can. But the fact that A, B or C are methods of funding something is not in itself an argument for doing the funding  via A, B or C, rather than via D, E or F.

Milton Friedman and Warren Mosler (founder of MMT) have argued that government debt makes no sense. So it looks like Murphy needs to go away and look at their reasons before making over-simple statements like “government debt can fund public spending”.

The pros and cons of government debt are actually quite complicated. That’s not “complicated” in the sense that you need to be particularly clever to understand the relevant issues: it’s “complicated” in the sense that you need to spend a few hours or days reading up the subject in order to get a grip on it.

I actually published a paper on this subject recently entitled “The arguments for a permanent zero interest rate”. I’ll tidy that up a bit over the next few weeks and submit it to a journal.

And finally, for another take on Murphy’s article, see this article on the Mike Norman site entitled “Richard Murphy — Why governments need to issue bonds despite modern monetary theory.”




Monday, 5 November 2018

The EU’s defective fiscal rules assist the “far right”?



Jeremy Smith (co-director of PRIME) complains about what he calls the EU’s “dysfunctional fiscal rules” harming economic growth in EU periphery countries and helping the rise of the far right. There are several flaws in that argument.

First, in Germany (where the fiscal rules do not seem on the face of it to have dented economic growth), the “far right” is on the rise as much as anywhere else in Europe.  That rather suggests it is not those fiscal rules or any harm to economic growth that is causing the rise of the “far right”.

Second, it’s entirely unclear who the “far right” are, and for the following reasons.

1. In the UK it was the main left of centre party, Labour, who implemented the jingoistic policy of invading Iraq for no good reason. In contrast, the two supposedly “far right” parties, the BNP and UKIP opposed the Iraq war from day one. 

2.  Labour is riddled with anti-semitism.

3. It’s the political left which is in love with arguably the most conservative, “far right” and backward organisation in the World, namely Islam.

Third, it is fatuous to complain about the EU fiscal rules unless you can produce a better alternative. Those fiscal rules exist to deal with changing relative competitiveness of different EU countries: that is, if a country becomes uncompetitive, it has to undergo a period of deflation (in both senses of the word) so as to regain competitiveness, rather than devalue, which was an option before the Euro was introduced. Of course you can argue the above deflation is a barmy way of dealing with the latter competitiveness problem. But that’s common currencies for you. I.e., and to repeat, people who complain about that barmy system should keep quiet unless they can think of a better alternative.

Saturday, 3 November 2018

Money for old rope.



Warning: this article contains sarcasm, p*ss taking, criticism etc which has been known to cause distress, nervous breakdowns, and occasionally an attack of the vapors. Anyway….

Do you want to know how to get hold of hundreds of thousands of pounds with a view to funding a nice well paid and respectable job for yourself in some nice location like central London? Here’s how.

Set up a worthy sounding organisation and apply to government and charities like the Joseph Rowntree Foundation for loads of dosh. The so called “Finance Innovation Lab” is a good example of this sort of wheeze.

It’s important to plaster your web-site with meaningful sounding and technical sounding phrases. For example on the Finance Innovation Lab home page we find the phrase (in large bold type), “Stand out as a purpose driven leader in financial innovation”.




Crickey: I’ve spent my entire life engaged in utterly purposeless activities, and now I’ve learned that activities should have a purpose. You learn something every day.

The home page also says “We incubate the people and ideas that can change finance for the better.” I always thought “people” were “incubated” in womens’ wombs – silly me.

As for the idea that people with ideas on finance need to be “incubated” by the Finance Innovation Lab or any similar organisation, that’s news to me. I’ve got loads of ideas on finance – set out on this “Ralphonomics” blog over the last ten years – but I feel no need to be “incubated” by anyone, thank you. Nor, far as I know do the other original thinkers on matters financial (e.g. Warren Mosler who founded Modern Monetary Theory, or Ben Dyson who founded Positive Money).

The Finance Innovation Lab do organise conferences and seminars. But personally I’m not inclined to burn up carbon based fuels just to get to such meetings: nowadays you can discuss ideas with anyone anywhere in the World via the internet.

The Finance Innovation Lab also publishes articles, but anyone can do that. I’ve published about a thousand on this “Ralphonomics blog” over the last ten years, and that’s cost taxpayers nothing, plus the Joseph Rowntree and similar organisations contributed not a penny to my very modest expenses.

Reverting to the subject of dosh, the Finance Innovation Lab are not half capable of pulling the stuff in. On their “support us” page, you’ll see they’ve managed to attract OVER A MILLION POUNDS in the last couple of years or so from the above mentioned Joseph Rowntree Foundation and others. But they still want more: as you’ll see on that page, you are invited to deplete your bank account by donating even more to them. I think I’ll decline that invitation.

Here endeth the p*ss taking.

Friday, 2 November 2018

Malcolm Sawyer’s ideas are pretty much Keynes/MMT compliant.


Sawyer, who is a former economics prof at the University of Leeds in the UK, published a paper last month entitled “Six simple propositions on budget deficits, public debt and money.”

I like the layout of the paper in that the six points are simple and clear. A slight blemish is that the numbers of the sections in the main text do not tie up with the numbering of the six propositions in the abstract and introduction, e.g. proposition No2 in the abstract and introduction is dealt with in section 3 in the main text. I’ll use the numbering as set out in the abstract and introduction. Here goes.

The first proposition is, “Money availability is not a limitation on government expenditure as the central bank is able to provide any required finance. The key considerations should focus on the issues of the social desirability of the proposed expenditure and the eventual funding of the expenditure.”

Well that’s pure MMT / Keynes. So I have no problems with that. Incidentally, Sawyer does not mention MMT as such, but he does mention Abba Lerner who is often said to be the founding father of MMT.


The second proposition.

The second proposition is, “Phrases such as ‘magic money tree’ are designed to confuse and mislead.” Sawyer’s basic point is that the phrase is very emotional and political and adds nothing useful to the debate: quite right.



The third proposition.

This is that, “Proposals such as people’s QE do not enable any stimulus which cannot be obtained from conventional fiscal policy and is anti-democratic putting expenditure decisions in the hands of unelected central bankers.”

The reference to “anti-democratic” is not true. At least under the version of peoples’ QE advocated by Positive Money (and Sawyer specifically cites PM) “unelected central bankers” most certainly do not take political decisions.

As PM has made clear repeatedly, under PM proposals, the central bank decides the AMOUNT of stimulus (which is what it already does in that an independent CB can negate what it regards as excess or deficient fiscal stimulus via interest rate adjustments). In contrast, decisions which are obviously political, like what % of GDP is allocated to public spending and how that is split between education, health, etc is left with politicians. Quite right.


The fourth proposition.

This proposition criticises the idea that public investment should necessarily be funded via public borrowing. I actually criticised that idea myself in a recent paper of mine entitled “The Arguments for a Permanent Zero Interest Rate”. Indeed, I’ve been criticising that idea for years, so I agree with Sawyer there.


The fifth proposition.

This is: “The target for budget position should be to secure full employment and capacity. Funds would be forthcoming to underpin such a position.”

Well that again is pure Keynes/MMT. As Keynes said, “Look after unemployment and the budget will look after itself”.


The sixth proposition.

This is that, “Public debt should be judged sustainable (and not excessive) by reference to the level of debt which results from a budget position as forthcoming from proposition 5. Public debt is to be considered as less of an issue (when government can cover interest through taxation and through money creation) than private debt and foreign debt.”

Sawyer here essentially goes along with the popular myth that the debt should be “sustainable” (popular fashionable word). Well if I were to buy one pint of beer a day and throw it down the drain, that would be “sustainable” and for the simple reason that, like most people, I could afford to buy and throw away one pint of beer a day.

You’ll be amazed to learn that that “sustainability” argument is not a good reason to throw away one pint of beer a day. Or to put it more bluntly: s*d sustainability.

Government debt makes sense if there are good reasons for incurring government debt. (Forgive the statement of the obvious, but seems it’s necessary to make that statement of the obvious.)

Well now Sawyer himself pours a certain amount of cold water on  one of the most popular reasons given for government debt, namely that it can fund public investment, which is ironic. Moreover, I examined the other alleged justifications for government debt in section two of my above referred to paper, and far as I can see they are largely if not complete nonsense.

But there must be at least a hundred economists worldwide who have kept themselves busy over the last year at the taxpayers’ expense writing papers and articles on what level of debt is “sustainable”.  Nice work if you can get it…:-)


Wednesday, 31 October 2018

Warren Mosler on the permanent zero interest rate idea.


Warren Mosler wrote a 700 word article in US News a few years go entitled “Federal Reserve Interest Rates Should Be Near Zero Forever”. I agree with the near zero rate idea, but I think his reasons leave a bit of room for improvement. Here’s a summary of his argument.

The 1st para points to various advantages of low interest rates, like cheaper loans for businesses.

The 2nd para says a disadvantage of low rates is that there’s less income for savers, but that doesn’t matter because the cut in demand that that involves is countered by the money that the state (i.e. government and its central bank) injects into the economy by way of interest on government debt.

The 3rd para (starting “The federal deficit…”) says that the deficit also boosts demand.

The 4th para, to quote in full reads, “So this means that when the Fed lower rates, the Treasury pays less interest to the economy on its debt, and that means less income for the economy. In other words, with the economy on balance a big saver, lowering rates removes interest income and therefore acts much like a tax increase, and this hurts the economy.”

Well I’m not sure about that. Interest paid by the Treasury is funded via tax. So if the Treasury pays out $X less by way of interest, then taxes will fall by $X: net effect on household incomes is zero. In fact given that the weekly spending of less well-off households is more closely related to their income than that of better-off households, it follows that a fall in interest rates  (as per the conventional wisdom) will boost demand.

The 5th and 6th paras (starting “Fortunately there are….”) repeats the point that deficits can make good deficient demand.

The 7th para (starting “Additionally…”) advocates the Job Guarantee, or Warren Mosler’s particular version of JG.

The 8th and 9th para (starting “So yes…” ) repeats the above general message that any cut in demand stemming from low interest rates can be made good by a deficit.

And that’s it. 

So to summarise, the basic argument is that any fall in demand caused by low interest rates can be made good by deficits, ergo low interest rates are beneficial. Well now the first weakness in that argument is that it’s widely accepted that a fall in interest rates causes a rise in demand, not a fall, as intimated above in relation to the 4th para.

Second, the fact that deficits can make good the demand reducing effects of A, B or  C is not a brilliant argument for A, B or C. To take a silly example, it would be possible for government agents steal peoples’ wallets and handbags in a random fashion and burn the dollar bills in them. That would cut demand, and no doubt that could be made good, or could be largely made good by deficits.  But that’s not a good argument for burning peoples’ $100 bills in the above random fashion.


Better arguments for a zero interest rate.

There are actually some better arguments for a zero interest rate and as follows.

First, it is widely accepted in economics that the optimum price for anything, including the price of borrowed money (i.e. the rate of interest) is the free market rate. The only exception comes where there are obvious social considerations involved. For example it is widely accepted that education for kids should be available for free. And it is widely accepted that alcoholic drinks should be sold at way above the free market price: i.e. heavy taxes on alcohol are justified.

Second, it is not unreasonable to assume that the free market, left to its own devices, will result in a more or less genuine free market rate of interest in that there are millions of lenders and borrowers out there and hundreds of intermediaries between them. I.e. the market in loans looks very much like a genuine free market.

There are of course some exceptions to that: for example the way in which banks bribe politicians into passing bank-friendly legislation is an exception. But that’s a separate issue with its own solution or potential solution: e.g.  better control of political donations.

Thus the crucial question in relation to interest rates is whether the state (by which I mean government and central bank) is interfering with the above free market rate.

Well I can think of one very significant way in which that interference does take place: it’s the fact that governments borrow astronomic amounts and without any very good reasons. And that will clearly tend to raise interest rates. Indeed, Warren Mosler goes along with that idea: he advocates zero government borrowing. See his second last para in this Huffington article entitled “Proposals for the banking system.”

I actually set out detailed reasons for thinking that the excuses given for government borrowing are nonsense in the second section of a paper entitled “The arguments for a permanent zero interest rate”.

 

 The state should issue money – base money.

Quite apart from the borrowing issue, one job which the state should certainly do is to issue the country’s basic form of money (Fed issued dollars in the US) in sufficient quantities to keep the economy at capacity, but not in such quantities that excess inflation ensues.

Indeed that function of the state applies even in, for example, a simple economy switching from barter to money for the first time: that is, in any such economy there has to be some sort of central authority that issues the nation’s basic form of money. And in practice throughout history, that function has been performed by kings, rulers and similar.

But it is clearly nonsensical for the latter sort of authority to issue so much money that excess demand and inflation ensues, with the result that the authority then has to impose some sort of deflationary measure like borrowing back some of its own money at interest. That just results in an artificially high rate of interest.

And that is what happens big time in 21st century economies: the state borrows back large amounts of its own money.

Plus don’t be fooled by the fact that the conventional 21st century arrangement is for governments to borrow first, with central banks then creating new money as required and buying back some of that debt. That is just one way of juggling the ratio of the stock of base money relative to the stock of government debt. It would be perfectly easy, as just intimated, to do the money creation first, with government or “the state” then borrowing back some of its own  money as required. Those two arrangements amount to the same thing.


Raising interest rates in emergencies.

Having argued for a zero or near zero rate of interest, it is legitimate to ask which of those two is preferable. Well since there are no good arguments for the state borrowing back its own money, I suggest the answer is “zero except in emergencies”. In other words the objective should always be zero, though clearly if an exceptionally large clamp down on demand is required, then a temporary rise above zero might be justified.

Indeed Milton Friedman advocated much the same, except that the emergency he had in mind was war. I.e. he advocated a zero government borrowing regime, though he thought  government borrowing would be justified to fund a war. See his paragraph starting “Under the proposal…”.