Commentaries (some of them cheeky or provocative) on economic topics by Ralph Musgrave. This site is dedicated to Abba Lerner. I disagree with several claims made by Lerner, and made by his intellectual descendants, that is advocates of Modern Monetary Theory (MMT). But I regard MMT on balance as being a breath of fresh air for economics.
Saturday, 25 August 2018
Physics prof at my local university writes about MMT.
Having supported MMT for about ten years and living two miles from Durham City centre (UK), I’m pleased to see a Durham University academic writing about MMT (Charles Adams). The title of his article is "Fiscal policy is a matter of life and death", published by Progressive Pulse.
I agree with the basic argument in his article, i.e. that balanced budgets are a nonsense. I also have a couple of quibbles, as follows.
First, Prof Adams claims “All money is created in the form of debt…”. That’s actually debatable. Certainly money created by commercial banks is a form of debt. In contrast, is central bank money a form of debt? Certainly £10 notes say “I promise to pay the bearer the sum of £10”, and that is signed by the Bank of England chief cashier. But that promise is just there as a nice bit of history: you won’t actually get £10 of gold from the BoE for your £10 note.
It can be argued that BoE money is debt in the sense that it can be used to cancel out another debt: a debt owed by taxpayers to government. But what about those who pay no tax, e.g. people living just on the state pension? Far as I can see there is no definitive answer to the question, is central bank money a debt?
For what it’s worth, the founder of MMT, Warren Mosler suggested central bank money is not a debt when he said that such money is like points in a tennis match: they’re assets as viewed by the players, but are not a liability as viewed by the umpire (i.e. the central bank).
Next, Prof Adams says “The finance sector prefers private debtors to government debt because it can extract a higher rent (a higher interest rate).” A problem with that claim is that the extra interest yielded by private debt simply reflects the higher risk. At least that’s the case in a perfectly functioning market. Thus in theory lenders will be indifferent as between public debt and private debt. Certainly the finance sector (i.e. banks, insurance companies and pension providers) are willing to hold very large amounts of public debt.
Finally, I’m not sure about Prof Adams’s claim (penultimate para) that if extra money (or more broadly “stimulus”) comes from more public debt, government can spend that on health and education, whereas if stimulus comes from a build-up in private debt, that increased spending on education & health is necessarily foregone. Strikes me that if stimulus does come from the latter source, there’d be nothing to stop government spending more on health and education by raising taxes.
I suggest the standard MMT view, at least certainly my view and that of several MMTers and indeed Keynes, is that the deficit simply needs to be whatever brings full employment. That’s why Keynes said “look after the unemployed, and the budget will look after itself”. To illustrate, it could be that in any particular year, enough stimulus comes from private debt build-up that government does not need to run a deficit at all. (Steve Keen has done a lot of work on the relationship between debt build-up, and aggregate demand).
Alternatively, in some years the private sector will be paying off debts, in which case the government deficit will need to be much larger than normal.
And finally, Charles Adams is nowhere near the first physicist to get interested in economics: several physics academics have. Physics and economics seem to go together. Certainly physics was the subject I was best at at school, though the teachers there would probably have used the phrase “least bad at” rather than “best at"….:-)
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"Certainly money created by commercial banks is a form of debt."
ReplyDeleteI argue that derivatives are separate from debt instruments, and are a Net Financial Asset. Both the BIS and IMF classify derivatives separately from debt instruments.
A Mortgage-Backed Security bundles 100 mortgages and creates an instrument worth more than the sum of the underlying real assets. The work in bundling and tranching the mortgages is converted to a markup and is separate from the mortgage debt.
Banks thus create Net Financial Assets which circulate as money, and which the Fed backstops with public money creation as necessary. Note that the NFA were privately created first, then later, if needed, central banks create money to backstop them.
That's an interesting point. Clearly commercial banks (or indeed any business) can create net financial assets, where the business does something genuinely useful. However I'm not sure about your claim that an MBS is a form of money. I realize there is no sharp dividing line between money and non-money and hence that almost anything can be counted as money. But the text book definition of money is anything WIDELY ACCEPTED in payment for goods and services. My guess is that about 99% of shops and other businesses would not accept an MBS in payment for goods, thus an MBS does not count as money.
DeleteRe your point that the Fed backstops MBSs (and indeed other commercial bank created assets), that again does not actually make those assets a form of money, seems to me (if that was what you were saying). Plus of course there is the wider question as to whether public money ought to backstop assets of questionable value produced by private banks. But as long as bankers continue to make “generous” contributions to politicians’ election expenses, no doubt that practice will continue….:-)
"the text book definition of money is anything WIDELY ACCEPTED in payment for goods and services."
DeleteMBS traders know the Fed will accept MBS as collateral for loans. Create an MBS and sell it to another trader and the debt is off your books: you get paid for bundling and tranching other people's debt. You sell other people's mortgage debt and get a premium.
The MBS circulate as money, being widely accepted as money, in financial circles. Anytime someone wants to convert an MBS to cash, they can, because other finance firms know that ultimately the Fed will give them cash. Most often they don't need to go through the Fed because private dealers will give them cash or created dollar deposits for the MBS.
"that again does not actually make those assets a form of money"
They trade as if they were equivalent to money in financial circles. They get converted to cash or dollar deposits on demand. The cash does not have to be taken from anyone else; the Fed or a Eurodollar dealer can create new dollar deposits to pay for them.
"there is the wider question as to whether public money ought to backstop assets of questionable value"
Yes, but if they don't the fear is that ATMs will stop working.
"as long as bankers continue to make “generous” contributions to politicians’ election expenses,"
I'm saying most of those contributions come from private sector Net Financial Asset creation ...
I realize banks have suckered politicians and governments into the position where “ATMs may stop working absent taxpayer support for private banks”. But it doesn’t need to be that way. Under full reserve banking, when a bank makes silly loans, there is no threat to those with a stock of totally safe / ATM money (i.e. base money). As to those who want their money loaned on, why should taxpayers rescue them? Taxpayers don’t rescue those who lend in the form of buying corporate bonds or the sovereign debt of other countries.
Delete'“ATMs may stop working absent taxpayer support for private banks”'
DeleteTaxpayer money was not used by the Fed to make asset purchases or provide the unlimited currency swap facility to the ECB, the Bank of England, the Swiss National Bank, the Bank of Japan, and others in 2008 and after.
TARP was political theatre, and was repaid. The Fed's created money was at least 5 times greater than TARP and needed no taxpayer money.
The lesson from 2008 should be that the Fed has unlimited liquidity, proven against market testing. The lesson should be: the dollar gets stronger the more dollars are created.
After understanding that lesson, we can fund a basic income entirely o the Fed's balance sheet at no taxpayer cost.
I think the problem is that the retail banks run our payments system as well as making the loans and that is the problem. Plus many of those retail banks had also invested in mortgages based securities pre 2008. There just is not enough time to sort it all out in a panic,bank by bank. So they hose everything down with taxpayers money and central bank created money(on the quiet). Property lending was very much the cause here,if we cut that risky lending, the shadow/investment banks cannot make derivatives out of them, leveraging more risk onto already risky loans. Cut this out at the root,(property lending) and you have a good start.Same happened in Japan and Sweden in the 90's but we took no heed of that either.
ReplyDeleteAs to shadow banks and derivatives you still have to keep a watch on that,but let us not let them get away with the property lending the way they do it. Retail banks need pegging down initially and full reserve will do that. After that who cares whether Goldman Sachs survives or not,let them swing,as long as I get my salary paid to my bank account and can pay my bills,we shouldn''t need to bail out an entire financial sector in order to have a secure payments system.
"many of those retail banks had also invested in mortgages based securities pre 2008."
DeleteThe Case-Shiller index of housing prices is back above 2007 levels. They're doing it again now, but presumably they fixed tge insurance piece which broke in 2008. The Fed proved it can be "insurer of last resort" though, so even if (when) the banks screw up again, the Fed knows how to fix it without needing any taxpayer money ...
Yes this is bad,whatever happened to moral hazard.
Delete