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…”.

Friday, 26 October 2018

Monetary policy is nonsense.

Let’s start by illustrating the reasons for thinking monetary policy is nonsense by reference to a simple barter economy that introduces money for the first time.

In practice when money is introduced for the first time it has normally been some sort of ruler or king who does it, and with a view to making tax collection easier. That is, rulers have announced what the form of money shall be (e.g. metal coins of some sort), plus they announce that taxes must be paid using that form of money. That creates a demand for the “king’s money”, which gives it value.

The fiat money issued by 21st century governments and their central banks comes to essentially the same thing, and I’ll jump a few centuries and assume that form of money is in operation. (Money issued by private banks will be considered briefly at the end of this article).

The more money people have, the more they are likely to spend, so clearly the amount of money distributed or issued in an economy that introduces money for the first time needs to be enough to induce the population to spend at a rate that brings full employment, but no so much that excess inflation ensues.

Another possibility is for government to issue too much money and then contain the resultant excess demand and excess inflation by borrowing back some of that money at interest. But that’s a clearly nonsensical policy: what’s the point of implementing stimulus in the form of issuing or spending money into the economy and then negating some of that stimulus? Deliberately doing that is pointless, though of course there may be occasions when government issues too much money by mistake and with a view to reining in demand, it temporarily raises interest rates.  (Incidentally, the word government is used here to refer to government and its central banks, assuming it’s a central bank that issues the country’s basic form of money (base money)).

In practice what happens in the real world is that interest rate raising “mistakes” of the sort mentioned above for the most part take the form of politicians (i.e. governments) borrowing too much because that is what politicians are always tempted to do, as pointed out by David Hume almost three hundred years ago: a phenomenon which Prof Simon Wren-Lewis calls “deficit bias”. The net effect is that mortgagors and other borrowers have to pay an artificially high rate of interest for years on end just to enable monetary policy to be used. To put it politely, it is not obvious why that’s a strategy that maximises output per hour of the workforce.

To summarise so far, the optimum rate of interest (i.e. the rate that government pays to borrow back its own money) is zero. That is, such borrowing should not happen ideally, and if there is no such borrowing, then there are no bonds for government to buy back with a view to cutting interest rates.

The claim that the optimum rate of interest is zero is not of course to say that the optimum rate for other borrowers, e.g. mortgagors, should be zero. The rate for mortgages and similar will always be significantly above zero.

The claim that the optimum rate of interest is zero is not original. Milton Friedman advocated that idea as did Warren Mosler. But as far as I know they did not actually claim monetary policy is nonsense, though clearly what they were saying was close to saying it is nonsense. (For Friedman, see his para starting “Under the proposal…”.)

Astute readers will have noticed that while simply creating new money and spending it into the economy is possible (and is indeed advocated by various groups like Positive Money), in practice nowadays, new money is introduced by a more indirect method. That is, governments borrow $X, spend it and give $X worth of bonds to lenders. Then the central bank creates new money and buys back  whatever proportion of those new bonds it thinks is appropriate. Indeed, while QE was in operation, almost all those new bonds were being bought back.

But clearly it does not make much difference whether bonds are issued first and then bought back a few weeks later, or whether new money is created first with government borrowing that money back a few weeks later and issuing bonds to lenders.

Borrowing to fund infrastructure.

A possible objection to the above argument is that far from  government borrowing making no sense, such borrowing can be justified if it funds public investments like infrastructure. Indeed, the UK Labour Party’s new “fiscal rule” is the latest of a long line of instances of that idea being invoked.

In fact the latter “infrastructure” argument is weak in the extreme.

One weakness is that education is one huge investment, but for some strange reason no one ever claims that publically funded education should be paid for via borrowing. At least state education for kids up to about eighteen in most countries is funded basically via tax rather than borrowing. Thus advocates of the “public investment justifies borrowing” idea have clearly not got their act together.

But even if there are particularly good arguments for funding public investments via borrowing, there is another problem for the “pro borrowing” brigade as follows.

Interest rate cuts (and indeed QE) are effected by having the central bank create new money and buy back bonds. But that clashes with the idea that there are particularly good reasons for funding public investments via borrowing. That is, if relevant bonds are bought back  by the central bank, then relevant investments will then have been funded not by borrowing but by money printing!

In short, the whole idea that public investments should be funded via borrowing is in a mess at the moment.

Apart from the latter public investment excuse for government borrowing, there are a host of other alleged reasons for such borrowing. They are all as hopeless as the above “investment” reason as I show in section two here. (Title of that article is “The arguments for a permanent zero interest rate.”)

Fiscal policy.

Having argued that monetary policy is nonsense, that does not necessarily mean that traditional fiscal policy is vastly better. That’s fiscal policy as in “government borrows $X, spends the money and gives $X of bonds to lenders”.

The obvious anomaly with that ploy is that while the latter spending is stimulatory, the borrowing element is “anti-stimulatory”. It’s a bit silly doing something anti-stimulatory (i.e. deflationary) when the object of the exercise is stimulus!

On that basis, the best form of stimulus is simply to have the state (government and central bank) create new money and spend it (and/or cut taxes).

Commercial bank issued money.

Having based the above argument on the assumption that the only form of money is central bank money (base money), obviously it is relevant to say something about the fact that in reality in 21st century economies the majority of money is issued by commercial banks.

In fact that does not make much difference to the argument. Reason is that all commercial banks do is to lever up base money: i.e. whatever size economy we’re talking about, it is normal for commercial banks to create roughly ten times as much money as central banks. So, to illustrate, the statement made near the outset above that if too much base money is issued, the result  will be excess inflation still holds: that is, commercial banks may well lever up the latter new money, making the latter inflation even worse. Though notice that they will not necessarily do that: there has been a vast and unprecedented increase in the stock of base money over the last five years or so as a result of QE, but there has certainly not been a pro rate increase in the stock of commercial bank money.

Monday, 22 October 2018

I’m giving Labour’s new “fiscal rule” seven out of ten.

It’s certainly better than the lies and nonsense we got from George Osborne when he was UK finance minister.

The rule is that government income must equal government spending over a five year period, but with two exceptions. The first is that government can borrow to make investments, and second, spending can exceed income by even more when interest rates decline to zero (because in that circumstance the only alternative way of boosting the economy is to cut interest rates to below zero and there are well known problems there).

The main problem with the new fiscal rule has to do with investment. The idea that investment justifies borrowing may sound sensible, but in fact no household or firm abides by that rule. Reason is that the idea is nonsense: e.g. if a taxi driver wants a new taxi and happens to have enough cash to pay for it, perhaps because he’s been saving up,  he won’t borrow: he’ll just pay cash. Quite right. I.e. what justifies borrowing is a shortage of cash. But governments are never short of cash in that they can grab limitless amounts of cash from taxpayers (and print a limited amount of money every year).

Plus education is one huge investment (in the future of our children), but no one ever suggests funding the entire education budget via borrowing. Thus the whole “investment justifies borrowing” idea is nonsense, or at least advocates of the idea have a lot of work to do before they’ve got their house in order.

In fact if the latter questionable idea about borrowing for investment was removed from Labour’s fiscal rule, then the rule would amount to something very similar to the permanent zero interest rate idea advocated by Milton Friedman and Warren Mosler. Reasons are as follows.

A balanced budget is bound to have a deflationary effect (that’s deflation in the “demand reducing” sense). Reason is that if the stock of base money and government debt is not constantly topped up via a deficit, then the real value of that stock will decline relative to GDP because inflation constantly eats away at the value of that stock. And when the private sector has what it thinks is an inadequate stock of base money and government debt, it will tend to try to save so as to acquire its desired stock. The effect of saving is deflationary.

Thus under Labour’s fiscal rule minus the “borrow for investment” element, interest rates will tend to bump along just above zero and actually hit zero from time to time. Clearly that is similar to the above mentioned permanent zero interest rate scenario.


Sunday, 21 October 2018

Prof Morgan Ricks's less than brilliant grasp of full reserve banking.

Morgan Ricks (Associate Professor of Law at the Vanderbilt University Law School) published an article in 2016 criticising Adam Levitin’s full reserve banking proposals.  The title of Ricks’s article is “Safety First? The Deceptive Allure of Full Reserve Banking”.

Ricks’s main criticism of full reserve is in his Part II, and he starts by pointing out (correctly) that if money issued by commercial / private banks is banned, government and central bank will have to make up for that by issuing more central bank created money (i.e. base money).

Ricks suggests that can be done by having the central bank create base money and buy up government debt, and certainly that’s one  way of doing it. But Ricks then gets worried about what happens if there is not enough government debt: he says that government will have to implement fiscal stimulus so as to create such debt. That is, government will have to borrow $X, spend it, and give $X worth of government bonds to lenders. Then the central bank can create more base money and buy up some or all of those bonds.

But according to Ricks there is a problem there, namely that money creation is then dependent on politicians agreeing on how to implement fiscal stimulus: e.g. should the stimulus come in the form of more public spending or tax cuts, and if it’s the former, should the extra spending involve more education, health care or what? And as Ricks rightly says, politicians (particularly in the US) often spending months if not years arguing over those sort of details before actually implementing the stimulus.

As Ricks says, “In this world, fiscal expansion must precede monetary expansion. Monetary stimulus therefore becomes contingent upon the resolution of contentious political questions. Who gets a tax cut? What additional expenditures should the government undertake?”

Well luckily the advocates of full reserve tumbled to the existence of the latter “Ricks problem” years before Ricks’s article, plus the advocates of full reserve thought of answers which are as follows.

The first answer is that fiscal adjustments do not necessarily have to be delayed for months while politicians argue about them: in the UK, the finance minister has powers to adjust taxes at the flick of a switch and the UK finance minister did precisely that during the recent crisis: he adjusted the sales tax VAT twice.

And that is moderately democratic in that the finance minister is democratically elected. But in addition, there is nothing to stop other politicians (the House of Commons in the case of the UK) subsequently making adjustments to “finance minister instigated” fiscal adjustments.

Another possibility is to have some sort of committee of economists decide how much stimulus is needed in the next year or so. Indeed such committees already exist: for example there is the Bank of England Monetary Policy Committee, which currently decides whether to adjust interest rates, though it could easily be given the additional task of deciding how big the deficit should be over the next year or so.

As to exactly what form that deficit takes (e.g. tax cuts or more public spending), politicians could be given a relatively SHORT TIME to decide on their preferences there, and absent a decision, the above committee could be given powers to simply raise public spending AND cut taxes in about equal measure (where a country already devotes about 50% of GDP to public spending). That would not be wildly undemocratic.

But of course, there’d be nothing (as in the case of the above mentioned UK finance minister instigated fiscal adjustments) to stop politicians in general making subsequent changes to for example the mix of public and private spending as a proportion of GDP.

Moreover, there’d be nothing to stop politicians, if they have their wits about them, deciding PRIOR to any fiscal stimulus, what form that stimulus should take. The above delay of about a month would then not be necessary. At least there’d be nothing to stop politicians deciding ROUGHLY what their preferences are, even if they don’t decide every detail.

The latter sort of system, where a committee of economists decides on the size of deficits, while politicians decide on the exact nature of the deficit was set out several years ago by Positive Money and co-authors. Plus Ben Bernanke claimed more recently that such a system would not be difficult to arrange – see Bernanke’s para starting “A possible arrangement….” In this Fortune article entitled “Here's How Ben Bernanke's "Helicopter Money" Plan Might Work.”

Incidentally the above mentioned “government creates debt and the central bank then buys back that debt” process is a bit cumbersome, and indeed Positive Money’s proposals involve short circuiting that process: that is, under the PM system, the central bank simply creates what it thinks is the right amount of money and politicians spend that. Under that system of course, politicians do not gain direct access to the printing press, which is an important consideration for many people.



It would be nice if Morgan Ricks had read more of the literature before putting pen to paper.

Saturday, 20 October 2018

Random charts - 64.

Headings in large pink text were inserted by me.

Monday, 15 October 2018

Taxes don’t fund public spending?

MMT has suddenly become much more popular and widely recognised in the last three months or so. The recent converts and some of the old timers keep banging on about the MMT claim that taxes don’t fund public spending: rather, governments simply print / create money and spend it, then they collect whatever amount of tax is needed to control the resulting inflation.

The truth is that that is just ONE WAY of looking at it. Another equally valid way of looking at it, is the more traditional way, namely that governments aim to have taxes fund public spending, and they then ideally run whatever deficit is needed to maximise numbers employed without bring excess inflation. Indeed the latter way of looking at is the way Keynes “looked at it” for what that’s worth, the MMT can almost be defined as Keynes writ large.

However, the above first way of looking at it is certainly a useful mental exercise: it’s a particularly useful exercise for the more clueless members of the economics profession. That’s the members of the profession who suffer from “debt-phobia” and “deficit-phobia”, or “mediamacro” as Simon Wren-Lewis calls it.

In short, I don’t think the above first “taxes don’t fund public spending” is a big insight. At least it’s not an insight of the same importance as the demolition of “fiscal space” idea (popular in IMF circles) which various MMTers have set out. E.g. see this “Billyblog” article, and one of my articles on the subject.

Friday, 12 October 2018

The Greek tragedy would not have happened under full reserve banking.

Under full reserve, anyone wanting interest from their bank, i.e. anyone who wants their bank to lend on their money, is deemed (quite correctly) to be a money lender. That is, they are into commerce. And there is a widely accepted principle that while entering into commerce is thoroughly laudable, it is not the job of taxpayers to come to the rescue of commercial ventures which fail.

That principle is adhered to under full reserve, in contrast to the existing bank system which basks in the delusion that money which has been loaned on is totally safe.

Moreover, under most versions of full reserve (certainly under Laurence Kotlikoff’s), depositors can CHOOSE what sort of borrowers get their money: that is, depositors have a choice between for example funding mortgagors with plenty of equity in their houses, or NINJA mortgages, or loans to Greece (which has a long history of not repaying debts) so as to enable Greece to buy German built submarines, and so on.

Under full reserve, precious few depositors would have chosen to lend to Greece (or Argentina, come to that). In contrast, under the existing system, Euro banks assume the ECB will come to their rescue however silly their loans. So why not lend like there’s no tomorrow?

Of course the above “full reserve treatment” for Greece would probably not have meant Greece escaping austerity entirely. But at least austerity in a relatively mild form would have kicked in earlier, and remained relatively mild, which in turn might have meant that by now (2018) the whole Greek mess might have been solved.

Wednesday, 10 October 2018

Nonsense from the IMF.

Their latest barmy idea is that government can be compared to a household in that they claim the ratio of government assets to government liabilities are important. The reality is demand for government liabilities would probably exist even if government had no assets at all.

Conversely, it is perfectly conceivable that despite a government having trillions worth of assets, there is relatively little demand for its liabilities. And if in that situation the relevant government tried to issue liabilities to match its assets, the private sector would just try to spend away those liabilities (i.e. base money and government debt): the result would be excess inflation.

The IMPORTANT consideration is what rate of interest government pays on its liabilities: if it has issued far more liabilities than the private sector wants to hold, government will have to INDUCE the private sector to hold those liabilities by offering a high rate of interest: not a good idea.

In contrast, if the rate of interest is about equal to the rate of inflation, as is the case with the UK at present, then in real terms, government is paying no interest at all on its liabilities. Personally I’d recommend always aiming to keep the rate of interest below the rate of inflation: that way the relevant government makes a profit at the expense of its creditors.

A very similar objective is a permanent zero rate of interest as recommended by Milton Friedman and the two co-founders of MMT, namely Warren Mosler and Bill Mitchell. For more on the permanent zero interest idea and for links to relevant works of those three authors, see my “Open Thesis” paper entitled “The arguments for a permanent zero interest rate.”

Monday, 8 October 2018

The deluded advocates of the Job Guarantee.

It has become fashionable among advocates of the Job Guarantee (JG) in the last year or two to argue that the wage for JG should be well above the existing minimum wage. In fact various Levy Institute works have argued that the JG wage should be DOUBLE the existing minimum wage.

Well now, there can’t possibly be any objections in principle to raising the minimum wage - maybe even doubling it. The pros and cons of that are obvious. The pros include better pay for the less well off, while the obvious potential con is less work for those lacking skills, experience and so on. Thus a decision on the minimum wage simply requires research into where the best compromise between the various pros and cons lies.

But what is completely barmy is advocating a JG wage well above the existing minimum wage while not advocating a rise in the minimum wage itself, or at least not raising the minimum wage for non-JG employers to the JG level.

The currently fashionable answer to the latter point in JG circles is that the existence of a generous JG wage will force other employers to compete, and raise their minimum wages to about the same level. Well that’s a bit like saying that the minimum wage for employers with more than twenty employees should be raised in the expectation that those with FEWER THAN twenty employees will be forced to compete! Why not just raise the minimum wage for ALL EMPLOYERS?? Be a darned sight simpler wouldn’t it?

Or how about raising the minimum wage for all those working INDOORS in offices and factories in the hope that employers will be forced to raise the minimum wage for those working OUTDOORS? Equally barmy, don’t you reckon?

Another problem with the above barmy idea is that a higher wage for JG work than for other employers will draw employees away from regular work and into JG work which is inherently less productive than regular work, and that clearly has a GDP reducing effect – not that I’m saying the OVERALL effect of JG is necessarily to reduce GDP.

As for exactly WHY JG work is less productive than regular work, that’s quite simple. Reason is that employers, both private and public create the most productive jobs first, i.e. they abstain from turning potential jobs in to real jobs if they think those potential jobs are insufficiently productive. In contrast, if some sort of employment subsidy is available, JG or any other type of employment subsidy, then employers will bring some of those relatively unproductive jobs into being.


Another point is that it’s not very politically astute to advocate a new system, JG or any other new system, in its most expensive form: that is guaranteed to turn off finance ministers and politicians who are always desperate to avoid more government spending, given that there are a near infinite number of worthy projects that can potentially absorb billions upon billions of taxpayers’ money.

Put another way, why not advocate the new system, at least initially, in a relatively cheap or paired down form? That will be more acceptable to politicians. Plus there is such a thing as diminishing returns: that is (as the introductory economics text books explain), the INITIAL tranche of any new product normally brings big benefits, while as output of the new product increases, the benefits of yet more of the product gradually decline as output increases. Or to put in economics jargon, marginal product declines as output rises. And that phenomenon is almost bound to apply to JG.

So if you want to impress politicians with the benefits of a new product or system, keep it small scale to start with.

And finally, anything new is bound to have teething problems (in as far as JG is a new idea, which it isn't really). That means that if you go for small scale initially, the mistakes will be small. In contrast, if  you go for big scale, any mistakes will be catastrophes, which will make your new idea a laughing stock for the next decade.

Friday, 5 October 2018

Private Eye helps counter financial fraud.

Private Eye is an  excellent guide to what's really going on in the world: much better than those deluded respectable broadsheet newspapers like the Guardian or Telegraph. I'm pleased to see Private Eye is doing its bit to fight financial fraud in its latest issue. See below.

Thursday, 4 October 2018

A conundrum relating to full reserve banking.

One of the basic flaws in the existing bank system is that commercial banks (i.e. money lenders) can to a significant extent simply print the money they lend out: i.e. create it via book-keeping entries out of thin air. If you’re a money lender, clearly that’s preferable to having to actually EARN the money you lend out or borrow it at the going rate of interest.

That constitutes a subsidy of commercial banks: indeed the French Nobel laureate economist, Maurice Allais, and David Hume (writing almost 300 years ago) argued that the above activity essentially amounts to counterfeiting. Re Allais, see opening sentences here.

On the other hand it could be argued that no matter how dodgy a bank is, there is nothing wrong with government run deposit insurance which pays for itself, as does the US deposit insurance system, the FDIC. After all: if an activity pays for itself, if it’s commercially viable, what’s wrong with it?

And when the liabilities of a commercial bank (i.e. deposits at a bank) are backed by state run deposit insurance, those deposits are then “as good as gold”: i.e. they are as good as $100 bills or £10 notes.

So what’s wrong with that “commercially viable” deposit insurance? Well I suggest what’s wrong is as follows.

There is no sharp dividing line between money and non-money. For example, what’s the difference between $X of bonds which  someone holds in a reputable non-bank corporation and which mature in a week’s time, and $X which they have in a term account at a bank and which matures in a week’s time? Almost do difference at all!

Thus there are an infinite number of shades of grey between money and non-money, with the purest form of money being anything which is absolutely guaranteed not to lose value (inflation apart) and which is available to the “money holder” relatively quickly.

Thus the simple fact of upgrading a form of money from relatively dodgy money to “fully backed by taxpayers” money, which is what deposit insurance does, is itself a form of money creation. And whoever creates money is subsidised by the community at large, whether it’s a traditional backstreet counterfeiter turning out fake $100 bills or a respectable commercial bank creating money from thin air.

Ergo, deposit insurance is not quite what it seems: it is not a bog standard commercial activity which is entirely justified because it pays for itself. Part of the reason it pays for itself is that it is a surreptitious form of counterfeiting, or to put it in more polite language, it involves upgrading a not entirely secure form of money to something better. And that ipso fact is a form of money creation.

Friday, 28 September 2018

Poor criticisms of The Narrow Bank by Cecchetti & Schoenholtz.

Given that the Fed is now offering interest on reserves, there is clearly scope for a bank, or perhaps specific types of accounts at existing banks, which simply accept deposits and place the money at the Fed, where such money will earn interest. Indeed, Jamie McAndrews, a former employee of the Fed has tried to set up the former: the name of his proposed new bank is “The Narrow Bank”.

Stephen Cecchetti and Kermit Schoenholtz, in an article entitled “Pitfalls of a Reserves-Only Narrow Bank” published by “Money and Banking” don’t like the idea and claim “we worry that they (narrow banks) would shrink the supply of credit to the private sector and aggravate financial instability during periods of banking stress.”

Well a narrow certainly would “shrink the supply of credit”. But one obvious reason for thinking that might not be a problem is that banks are subsidized, e.g. via the too big to fail subsidy, thus the amount of credit will at the moment be above the optimum or “GDP maximising” level.

Aggregate demand.

Next, one apparent problem with “shrinking the supply of credit” is the fall in aggregate demand that would result. But what’s to stop standard stimulatory measures being used to reinstate demand to its previous level? Absolutely nothing! 

The net result would be less loan-based economic activity plus less debt and more non-loan-based activity. Given the incessant complaints we hear about excessive debts, it’s far from clear what the big problem is there.

As for the idea that “standard stimulatory measures” can involve a deficit funded by government debt and hence that total debts might not decline, the answer to that is that deficits do not need to be funded via debt. As Keynes pointed out in the early 1930s, deficits can be funded via new base money. Indeed, that’s exactly what numerous countries have done over the last five years or so in the guise of QE. That is, governments have borrowed $X and spent that money, while the central bank has created $X of new money and bought back relevant bonds. That nets out to “the state creates $X and spends it (and/or cuts taxes)”.

Incidentally the UK’s Independent Commission on Banking made exactly the same mistake, that is, it assumed the existing amount of borrowing is optimum or sacrosanct and hence that we can’t possibly go for an economy which is less based on debt. (See the ICB’s sections 3.20 - 24)

Another bank subsidy.

Another bank subsidy or “artificial form of preference for banks” is as follows. Most governments (i.e. taxpayers) stand behind banks in that they provide deposit insurance for banks: that is, those who deposit money at banks with a view to banks then lending on their money so as to earn interest are protected against loss by taxpayers. In contrast, there are those who lend to corporations by buying corporate bonds, sometimes by buying into mutual funds (“unit trusts” in the UK) which specialise in corporate bonds. But those lenders enjoy no form of taxpayer backed guarantee against loss!

That is a blatant inconsistency, for which there is no conceivable justification. Moreover, taxpayer backed guarantees for those who lend via banks flouts a widely accepted principle, namely that it is not the job of taxpayers or governments to come to the rescue of private commercial ventures which go wrong.

The reason deposit insurance is needed is that banks make a wholly fraudulent promise to depositors, namely that depositors’ money is totally safe when such money has been loaned on. Clearly that money is not safe.

The latter fraud and inconsistencies could be disposed of if there were two basic types of bank account. First, totally safe accounts where relevant monies are simply deposited at the central bank, and second, accounts where relevant monies are loaned on, but (in line with the latter principle that it is not the job of taxpayers to stand behind commercial activity), those doing the lending are on their own: i.e. there is no taxpayer backed support for them if things go wrong.

The latter arrangement is basically what full reserve banking consists of. (I consider the latter fraud and inconsistencies in more detail in a “Medium” article entitled “The Basic Flaw in our Bank System is Simple”. 

Bank stress.

The second point made in the above quoted passage from Cecchetti & Schoenholtz’s article was that The Narrow Bank would “aggravate financial instability during periods of banking stress.”

So why exactly do banks have “periods of stress”? Well it all goes back to the above mentioned fraudulent promise that banks make to depositors. That is, banks specialise in “borrow short and lend long” . E.g. in that they borrow from depositors, while promising depositors their funds will be instantly available despite the fact that such funds have been loaned out and are quite clearly not available, banks are into fraud.

The standard excuse given for the latter trickery is that it creates liquidity / money. That is, what economists call “maturity transformation” creates liquidity / money. But there is absolutely no need to run the risk of bank runs and crashing the world economy just to create money because central banks can create any amount of money at zero cost and at zero risk whenever they want. Indeed, they’ve created astronomic and record amounts over the last five years in the form of QE.

I go into the latter point in more detail in the above mentioned “Medium” article.

Segregated balance accounts.

Segregated balance accounts (SBAs) is a name for the “specific types of accounts at existing banks” mentioned in the opening sentence above. That is, while it is clearly possible for accounts at a central bank to be available to anyone (an idea several central banks are actively considering), an alternative is for existing commercial banks to do most of the administrative work: i.e. they could make special “central bank” accounts available to customers, and remit sums deposited, net of withdrawals, to the central bank at the end of each working day.

Cecchetti & Schoenholtz say in relation to SBAs that “SBAs are unlikely to be attractive unless reserves are remunerated at a meaningful rate”.  Well the whole point is that the Fed ACTUALLY IS “remunerating in a meaningful way” at the moment! I.e. is paying interest on reserves.

Of course if a central bank pays NO INTEREST on reserves, then SBAs or accounts for all comers actually at the central bank will be less attractive because anyone can get a taxpayer backed account at a normal commercial bank which pays interest.

Thus the really central and crucial question here is whether taxpayers ought to be standing behind an activity which is quite clearly of a private and commercial nature. I say that that should not be happening. So if the latter taxpayer backed insurance for that commercial activity was withdrawn, there would then be a definite demand for accounts for everyone at the central bank, whether in SBA form or not.


P.S. "The Narrow Bank", far as I can see, actually aims just for relatively large depositors, not the typical household. But that doesn't make much difference to the above theoretical points.

Wednesday, 19 September 2018

Krugman’s not too clever criticism of MMT.

Krugman claimed in 2011 that if government ran a deficit of 6% of GDP when the economy was at capacity, then government might “lose access to the bond market”. Well the economy is either at, or pretty much at capacity right now, and there’s a 5% deficit. Any sign of losing access to the bond market? Nope.

I got that info thanks to Stephanie Kelton:

Moreover, MMTers do not advocate big deficits when the economy is at capacity. The latter policy is clearly daft. Thus if bond markets take a dim view of a government, like Trump’s, which is behaving in a daft manner, and charge that government extra interest, that says nothing about MMT.

And finally there is no such thing (as implied just above) as “losing access to the bond markets”. If a government behaves irresponsibly, lenders will charge more for lending to such a government. But as long as the interest rate is sufficiently attractive, they will nevertheless lend. Robert Mugabe, Argentina, Greece etc can always borrow – at a price.

Monday, 17 September 2018

J.T.Harvey claims private money creation means borrowers don’t need to wait for loans.

Harvey is professor of Economics at Texas Christian University. In this Forbes article entitled “Four Lessons (not) Learned from the Financial Crisis”, his first lesson is that we should bail out debtors not creditors (i.e. banks). So the US should have let half of US banks go under during the crisis? I think that would have been too disruptive.

Certainly it’s important to let one or two go under in a crisis “pour encourager les autres” as the French say: i.e. as a lesson to other banks thinking of taking excessive risks. But letting half the bank system collapse would have been going too far.

Next, he claims an advantage of letting private banks create and lend out money is that borrowers don’t “need to wait for people to save up their money before it can be borrowed…” Wrong.

If private banks were barred from creating money, clearly the initial effect would be to cut demand. But that’s easily countered by having government and central bank create and spend extra base money into the economy.  Savers would allocate some of that extra money to saving in various forms: mutual funds, organisations which make small and large loans etc. Net result: there’d always a pot of money available to borrowers, just as under the existing system.

However, a saving grace of Harvey's article is that he debunks the idea that deficits are invariably a problem. That’s not to say they are NEVER a problem: running a large deficit when the economy is at or near capacity is plain irresponsible, which is what Trump is doing right now. But deficits in a recession are not a problem.

Tuesday, 11 September 2018

What are “normal” interest rates?

You can hardly have failed to have noticed the large amount of talk recently about returning to the sort of interest rates that prevailed prior to the 2007/8 crisis. Those rates are often described as “normal”.

In fact there are good reasons for thinking those rates were actually ABNORMAL and that the current very low rates are normal, or put another way, that the current low rates are the GDP maximising rates. Reasons for thinking that are as follows.

First, as David Hume pointed out nearly 300 years ago, politicians are always tempted to fund public spending via borrowing rather than via tax because voters notice tax increases and blame politicians for them, whereas voters tend not to blame politicians for the interest rate increases that stem from government borrowing. 

As Hume put it, “It is very tempting to a minister to employ such an expedient, as enables him to make a great figure during his administration, without overburdening the people with taxes, or exciting any immediate clamors against himself. The practice, therefore, of contracting debt, will almost infallibly be abused in every government. It would scarcely be more imprudent to give a prodigal son a credit in every banker’s shop in London, than to empower a statesman to draw bills, in this manner, upon posterity.” 

Simon Wren-Lewis (former Oxford economics prof) refers to that phenomenon as the “deficit bias”. Government borrowing which takes place for the latter reason obviously has the effect of artificially raising interest rates.

In contrast to the latter clearly unjustified reason for public borrowing, there are a host of ostensibly better reasons for such borrowing. Unfortunately even those reasons on closer inspection turn out to be feeble if not wholly invalid, for reasons I set out in section 2 of a recent paper.

This all lends support to the idea put by Milton Friedman in 1948, namely that government should borrow NOTHING. Warren Mosler (founder of Modern Monetary Theory) advocated the same “zero public borrowing” regime, as did Bill Mitchell (Australian economics prof.)

Re Friedman see his para starting “Under the proposal…” here.

Re Mosler, see his 2nd last para here. As to Bill Mitchell, see here.

As distinct to the above point that the current near zero interest rates are the norm or the GDP maximising rates, there is the related question as to whether governments and central banks ought to adjust interest rates so as to adjust demand. As I argue in the above mentioned recent paper, there is actually a good reason for thinking that interest rates should only rarely be adjusted, if at all.

The reason for thinking that is that in a perfectly functioning free market, the failure of interest rates to fall is not the cause of recessions lasting longer than we would like. The actual market failure that causes recessions to endure is the failure of wages and prices to fall, which in turn would increase the real value of the stock of money (base money in particular), which in turn would encourage spending. That’s known as the “Pigou effect”. The reason wages and prices do not fall significantly is of course Keynes’s “wages are sticky downwards” phenomenon: the fact that, particularly in heavily unionised sectors of the economy, it is very difficult to cut wages.

I deal with the Pigou effect in the 3rd section of the above mentioned paper.

Thursday, 6 September 2018

Random charts - 63.

Large pink text on charts below was added by me.

Wednesday, 29 August 2018

The IMF has a grasp of macro-economics???

Simon Wren-Lewis (former Oxford economics prof) claims in this recent article (1) that the IMF is on balance quite enlightened when it comes to economics. That’s not entirely consistent with this passage of his: “The IMF itself wavered on austerity. At first (before 2010) it encouraged coordinated fiscal stimulus. As the Eurozone crisis began to unfold it changed its mind, and advocated austerity. But this did not last that long.”

My translation of that is “when the comes to austerity, the IMF doesn’t know whether it’s coming or going”. Or maybe that’s over-cynical.

Certainly anyone or any organisation which thinks there is anything at all to be said for austerity (in the sense of pitching aggregate demand lower than is consistent with keeping inflation under control) is basically clueless.

That certainly ties up with Bill Mitchell’s view of the IMF (2), namely that the IMF is so hopeless, it should be closed down. (Mitchell is an Australian economics prof.)

Fiscal space.

Another piece of evidence that the IMF (along with the OECD) do not have much of a grip on macro-economics is that both organisations have long supported the nonsensical “fiscal space” idea. Bill Mitchell pours cold water on the "fiscal space" idea here (3) for example, and I demolished it here (4), here (5), and here (6).
Given that both Bill Mitchell and I are MMTers, the obvious conclusion is that if the IMF and OECD were replaced with a committee of MMTers, millions of people worldwide who have remained unemployed for years on end over the last ten years would had jobs. Millions would not have been kicked out of their homes because of inability to make mortgage interest payments and many a suicide would have been avoided.

Having said that, I’m well aware of the weaknesses of MMT. For example it is often said there’s nothing new in MMT. That’s true in that MMT is just Keynes writ large. However Keynes (or at least his main work, the “General Theory of Employment Interest and Money” is ridiculously complicated). I.e. what MMT has done is to take Keynes and simplify it.

Plus it’s clear that the IMFs and OECDs of this world do not understand Keynes. That is, they don’t get the point that the solution to recessions is easy: just have the state create more money and spend it (and/or cut taxes). So MMT has done a good job in simplifying Keynes: maybe the little dears at the IMF and OECD will then understand it.

In contrast to the above “non-original” idea that the solution to recessions is easy, there’s another idea advocated by several MMTers which is definitely more original: that’s the “permanent zero interest rate” idea.


Titles of articles referred to:

1. The IMF as a transmission mechanism for academic knowledge.
2. IMF still away with the pixies.
3. The ‘fiscal space’ charade – IMF becomes Moody’s advertising agency.
4. More fiscal space nonsense.
5. "Fiscal space" is hogwash.
6. Ghosh – IMF authors define “fiscal space”.

Stop press. (30th Aug 2018). The fiscal space brigade have unfortunately and coincidentally piped up again in the last 48 hours.

Bill Mitchell, quite rightly, tries to get them to shut up for the umpteenth time….:-)