Wednesday, 10 July 2019

Durham Miners’ Gala – 2019.

I’m setting up a stall at the Durham Miners’ Gala on Saturday 13th July and handing out the article below on an A4 sheet – minus the last section of the article which argues that money created by commercial banks is counterfeit money. The hard copy version refers readers to this internet version. That “counterfeit” point is included in this internet version, i.e. in the paragraphs below.

Image of the leaflet:

The article….

The large majority of money in circulation is created by or “printed” by private banks, like Lloyds and Barclays, not our central bank (the Bank of England). Same goes in most other countries.

A small proportion is created by the BoE (e.g. £10 notes, coins etc), but most of the money supply, in particular those numbers you see on your bank statement (if you’re in credit) originate with private banks. So how do private banks do it? They do it as follows.

When anyone applies for a loan from a private bank, the bank does not need to get the money from anywhere: it can simply open an account for the borrower and credit thousands to the account. That money comes from thin air! At least a proportion of it does.

And if you don’t believe that, see the opening sentences of an article published by the BoE entitled “Money Creation in the Modern Economy” by Michael McLeay and co-authors.

Several organisations around the World are campaigning against private money creation, e.g. Positive Money in the UK and “Vollgeld Initiative” in Switzerland. Plus several Nobel economists have argued against private money, e.g. James Tobin and Maurice Allais.

The arguments against private money, i.e. the arguments for nationalising the money creation process (which is not the same as nationalising banks) do not have much to do with the traditional left of centre call for nationalising much of the economy: that is, the arguments are technical rather than political, which is why a number of Tory politicians are sympathetic to abolishing private money (not that 95% of politicians know much about this subject). Indeed, the fact that the arguments are technical is a plus, in that if it was just the left wing of the Labour Party advocating a ban on private money, most Tories would automatically oppose the idea.


The arguments against private money.

Some aspects of the arguments against private money are a bit complicated, but if you’re up for it, read on.

First, private banks are so unreliable that they have to be backed by government (i.e. taxpayers). Governments do that via deposit insurance and multi billion pound bail outs for banks in trouble. In short so called “private money” is in a sense not actually private money at all in that it has to be backed by governments.

Put another way, governments create money in two quite separate ways: first, their central banks create money (and for example spend that money buying up government debt as under QE), and second, as just mentioned, governments create money in that they stand behind private banks which lend money.

But what’s the point in having two different ways of doing the same thing? That’s duplication of effort! There’s an onus on supporters of the existing bank system to justify that duplication of effort, something they have not done.

Economic cycles.

Second, private banks increase the amount of money they create and lend out exactly when we do not want them to: i.e. during a boom. Then come the crash, they again do exactly what is not in the country’s  interests: they cut their lending.

Central banks in contrast, do the opposite: they create money and for example implement QE during recessions, and cut down on their money creation during booms.

Private money exacerbates debts.

Third, private money results in a lower than optimum level of interest which in turn results in a higher than optimum level of borrowing and debt. Reason for that can be illustrated by the following simple hypothetical scenario.

Take a hypothetical economy adopting money for the first time. Assume everyone agrees on what the basic form of money shall be: maybe gold coins or maybe paper money like £10 notes and coins made of relatively worthless metal.

The more the amount of money issued, the more people will tend to spend, and as the stock of money rises, some point will come at which the amount of spending is enough to bring full employment.

Also in that scenario, people and firms will lend to each other, sometimes direct person to person and sometimes via banks. Now there is no obvious reason why in that scenario, the resulting rate of interest would not be some sort of genuine free market rate.

But suppose private banks are then allowed to create and lend out their own home made money. As Prof Joseph Huber explains in his work “Creating New Money” (p.31), creating that money costs banks nothing, thus they are able to lend at below the genuine free market rate! The result is excessive borrowing and debt!

Private money is counterfeit money.

A fourth argument against private bank money is that such money is basically counterfeit money. Certainly the Nobel economist Maurice Allais argued that private money is counterfeit money. (See opening sentences of Ronnie Phillip’s article “Credit Markets and Narrow Banking”.) And David Hume, the Scottish economist / philosopher writing 300 years ago said the same.

So were they right? Well I’ll argue in the paragraphs below that private money is at the very least very near to being counterfeit. Here goes.

The Concise Oxford Dictionary defines “counterfeit” as “made in exact imitation of something valuable with the intention to deceive or defraud”.
As to “made in exact imitation”, when you get a loan for £X from a bank, the bank lets you believe that what it has supplied you with are pounds in just the same sense as genuine Bank of England issued pounds. Actually the bank supplies you with nothing of the sort: it supplies you with a promise by the bank to pay £X to whoever.

Put another way, BoE pounds are a liability (at least in a sense) of the BoE, while private bank created pounds are a liability of a private bank. Not the same thing! So there is definitely “imitation” going on there.

As to the word “deceive” in the above dictionary definition, the latter failure to make clear the difference between BoE pounds and private bank pounds is clearly a form of deception.

As to “defraud”, it is necessary to distinguish between private banks as genuine private banks and private banks as part of government. (As mentioned above, so called “private” banks are backed by government, and are thus arguably part of the government machine – indeed, Martin Wolf, chief economics commentator at the Financial Times once referred to bankers as “just highly paid civil servants”)

Where a private bank is acts as a genuine private institution, it is into fraud in a totally blatant way – a situation that obtained before the days of deposit insurance. Reason is that such a bank promises depositors they’ll get one pound back for every pound deposited. But at the same time, the bank lends out money in a less than totally safe manner, with the result that (as everyone knows) banks go bust from time to time (when those loans go wrong).

Thus the promise by such banks to depositors that depositors’ money is safe is plain simple fraud!!

In contrast, where private banks are backed by government via deposit insurance, bailouts etc, the question arises as to why banks enjoy the luxury of taxpayer funded protection, but institutions which perform a very similar function to banks do not, (those institutions being unit trusts, mutual funds, private pension schemes and so on).

To illustrate, there are unit trusts (“mutual funds” in American parlance) which accept deposits and lend to a variety of relatively large borrowers: i.e. those unit trusts buy bonds issued by corporations, cities, local authorities, etc.  But those unit trusts are denied the sort of support that banks get! Indeed, those unit trusts are specifically prohibited from promising depositors they’ll get all their money back!

In short, private banks have over the decades and centuries pulled a huge amount of wool over politicians’ eyes: that is, banks have managed to get themselves into a highly privileged position: they are effectively “defrauding” the country at large.

The conclusion is that private banks are either into counterfeiting pure and simple, or they are into activities which are as near counterfeiting as makes no difference.

Incidentally and finally, if you are tempted to wonder whether private banks unbacked by government would not be risky for depositors, that’s a legitimate concern. The answer is what’s know as “full reserve banking”. That’s a system where banks obey much the same regulations as mutual funds now have to obey in the US: that is, where a depositor wants a specific sum to be totally safe, the relevant bank must invest the money in nothing more risky than bonds issued by a limited number of relatively responsible governments, perhaps just the bonds issued by the government where the bank is located. That way, depositors’ money is safe, but they earn little interest

In contrast, where a bank lends to any borrower who is more risky than a government (e.g. mortgages) those supplying the bank with relevant funds must be prepared to take a hit if the loans go bad. At least that involves consistent or similar treatment for banks and other financial institutions which perform much the same function as banks.

Saturday, 6 July 2019

An illogical, self-contradictory aspect of our bank system.

As Edmund Burke said, “Custom reconciles us to everything”. In plain English, it doesn’t matter how raving bonkers some aspect of our economic, social or political system is: as long as that aspect is customary, a large majority of the population will accept it. Cannibalism is accepted in societies where cannibalism is accepted, if you’ll excuse the tautology.

Anyway, and moving on to banks, money market mutual funds (MMMFs) are banks of a sort: like banks, they accept deposits and make loans. During the recent recession, one of America’s MMMFs failed: the “Reserve Primary Fund”. 

Anyone could have predicted that an MMMF would fail at some point and for the following very simple reason. Those funds accept deposits and lend on the money to relatively safe borrowers: i.e. they buy bonds issued by blue chip corporations, cities, etc. But (again, as anyone can tell you) there is no such thing as a totally reliable borrower. That means that at some stage, an organisation lending to those borrowers is absolutely bound to fail.

The reaction of the US authorities was the correct one: they barred MMMFs which lend to anyone more risky than a limited number of sovereign governments from promising depositors that those depositors are guaranteed to get $X back for every $X deposited.

But banks lend to a variety of borrowers who are nowhere near as reliable as blue chip corporations and cities. But banks are allowed to promise borrowers their money is totally safe!!

Raving bonkers, or what?

Of course banks can be made totally safe by having them insured by governments, and indeed that is done via deposit insurance and multi-billion dollar bail outs for banks in trouble.

But by the same token, flouting helth and safety regulations or drinking excess alcohol can be made a relatively safe  in that government insurance could be provided for those flouting those regulations or drinking too much alcohol. That is not a good argument for flouting those regulations or drinking too much alcohol. 


Another excuse for letting banks promise depositors their money is safe, when it quite obviously isn't (but for deposit insurance etc) is that the effect is stimulatory. I.e. such insurance encourages banks to do more business, lend more etc (i.e. create more debt).

Well one answer to that is the central banks (and governments) can provide any amount of stimulus anytime by creating and spending money into the economy. Moreover, that form of stimulus involves no sort of risk of bank failures, followed by ten year long recessions. Lending by commercial banks certainly serves a purpose, but there is no reason for artificially encouraging it, and hence artificially inflating the total amount of debt.

Second, the above “stimulus” argument applies to MMMFs just as much as it does to banks. That is, promising those who deposit at less than totally safe MMMFs that their money is totally safe would encourage people to deposit at those institutions, which in turn would make it easier for blue chip corporations, cities, etc to borrow! Think of the economic benefits (I don’t think).

But why not take it a stage further and have government organised insurance against loss for those investing on the stock exchange or government organised and taxpayer backed insurance for ships? Think of the economic benefits….:-)

Curiously, most of those who complain about excessive amounts of debt also back the existing bank system which, as explained above, results in an artificially high level of indebtedness.

Cannibalism or the existing bank system seem wholly logical and reasonable once you’re used to them.

In contrast to the existing bank system, there is full reserve banking. Under full reserve, the above mentioned rules that now apply to MMMFs (unless banksters have managed to get the new MMMF rules rolled back) are applied in a wholly consistent manner. That is, no organisation is allowed to accept deposits (i.e. promise those placing money with such organisations that their money is totally safe) if such money is not in fact totally safe.

Sunday, 30 June 2019

Mark Carney opposes QE for the people because he thinks it would result in the Bank of England having negative equity….:-)

I got the above information from Frances Coppola’s new book “The Case for People’s Quantitative Easing”, p.92. There is nothing wrong with Coppola’s demolition of Carney’s claim that I can see. Indeed, there’s not much wrong with the book as a whole: it’s an excellent piece of work.

But it really is bizarre for the governor of a central bank to make the above claim. So I thought I’d add some criticisms of Carney’s claim to those made by Coppola (or maybe I’m just repeating her criticisms using my own words).

Anyway, the first flaw in Carney’s claim is that a currency issuer almost by definition has negative equity, or put another way, the fact of issuing currency decreases the equity of the issuer. For example, there is nothing to stop me writing out IOUs on the back of envelopes and trying to use those bits of paper to purchase goods and services. Assuming I don’t purchase assets with some sort of permanent value, like land or a house, i.e. assuming I use the envelopes to fund current consumption, then every £ worth of envelope reduces my equity by a £.

Indeed, the latter “envelope” scenario is not totally unrealistic in that large firms and rich individuals a century or more ago regularly paid for items they wanted to purchase with so called “bills of exchange” which were basically just IOUs.

Now is the above reduction in equity a problem? Well it’s only a problem if the suspicion arises that I am not ultimately able to pay my debts or meet my liabilities. But governments and their central banks can grab any amount of money anytime off taxpayers. Thus they ought to have no problems meeting their liabilities!

Moreover, no one ever worries about whether government as a whole (including the central bank) has negative or positive equity: that is, no one ever worries about whether total government assets (roads, land, buildings etc) exceed total government debt. Reason is as above: government never has a problem paying its debts because it can simply grab money off the private sector whenever it wants!!

Another weakness in Carney’s argument is that if we go for QE for the people (aka “overt money creation”), and assuming it’s government rather than the central bank itself that spends the “overt money”, then the central bank would presumably get some sort of receipt or bond from government in exchange for money supplied. And that receipt / bond equals an asset as viewed by the central bank.

In that case, the central bank’s equity does not decline, though the equity of government as a whole would decline in that the money was spent on current consumption as opposed to capital investments.

Sunday, 23 June 2019

OMG: “fiscal space” rears its ugly head again.

The IMF has for years backed the “fiscal space” idea: the idea that government should not borrow too much in good times, the idea being that abstaining from such borrowing leaves room to borrow when a recession hits.That idea has an obvious appeal. Unfortunately the idea makes no sense at all. I’ve demolished that idea before on this blog, e.g. here. 

Unfortunately the fiscal space idea continues to rear its ugly head: e.g. in this recent Vox article by two Lund University people. (Article title: "Fiscal Policy is No Free Lunch....")

Specifically, they say, “…governments should stabilise the debt-ratio in normal times at a level that allows for ample borrowing and spending if and only if the economy suffers from a major crisis”.

That idea is based on the argument that the larger the debt the higher the rate of interest that creditors will charge for holding debt, all else equal (which is a truism). Thus it would seem that if the debt is on the high side and a recession hits, government will have to pay over the odds to borrow money so as to implement stimulus.

The flaw in that argument is as follows.

If interest on the debt is on the high side, that means there is plenty of scope for using interest rate cuts to impart stimulus! Indeed, the latter policy, i.e. using interest rate cuts to impart stimulus when rates are significantly above zero, is the central idea behind the UK Labour Party’s so called “fiscal rule”: at least according to Simon Wren-Lewis. (Title of SW-L’s article is “Is Labour’s Fiscal Rule Neoliberal.”) See in particular SW-L’s para starting “It is now received wisdom…”.

Also, if the authorities do want to go for fiscal stimulus rather than interest rate cuts, the mere fact that aggregate demand is lower than it should be is (by definition) proof that the private sector is in “money hoarding” mode rather than “spendthrift” mode. I.e. the private sector is not spending enough to bring about full employment.

In that scenario, i.e. given that the private sector is willing to hoard money or government debt, the private sector is not going to demand much of an increase in interest rates or indeed any increase at all for holding more debt!


Incidentally, government debt and money (base money in particular) are virtually the same thing (as pointed out by Martin Wolf, Warren Mosler and others): the only difference is that base money normally pays no interest, whereas government debt is simply base money which yields interest.

Wednesday, 19 June 2019

Simon Wren-Lewis has thoughts on the Job Guarantee.

That’s in an article entitled “Some thoughts about the Job Guarantee”. It was published in 2017, but I only just stumbled across it, so thought I’d say a few words about it.

It’s good to see he gets the point that too generous pay and conditions for JG work will result in what he calls the “lock in” effect: i.e. JG people will be induced to stay in their JG jobs rather than seek regular work. The same cannot be said for a significant proportion of JG advocates, who refuse to recognise the lock-in effect.

At worst, the lock-in effect could result in JG actually reducing GDP: i.e. if the main effect of JG is to induce people to move away from regular jobs to relatively unproductive JG jobs, then the net effect could be a cut in GDP. (The reason for thinking JG jobs are relatively unproductive, is that they are by definition jobs which would not take place but for the JG employment subsidy.)

My only quibble with Wren-Lewis’s article is that in his opening paragraphs, he doesn’t get the history of the basic JG idea quite right. He starts: “The idea of the state stepping in during a recession to offer some group of the unemployed a job was selectively adopted by the UK Labour government in 2009: see here by Paul Gregg. Richard Layard has proposed it for the long term unemployed.”

Actually there was a very large JG type scheme in the US in the 1930s (the so called “WPA”) and Pericles had JG scheme up and running in Ancient Athens 2,600 years ago.

Monday, 17 June 2019

Can’t think? Don’t worry: you’re probably suited to running a “think tank”…:-)

People who are under-represented in economics, i.e. women and ethnic minorities, have been getting upset recently about the latter fact and have been demanding more representation for those two groups in economics.

Speaking as a white male, I’m all for women and ethnic minorities having more say in economics if they’re really up to the job. Indeed I would never dream of questioning some womens’ competence in economics, e.g. Frances Coppola, Caroline Sissoko or Islabella Kaminska.  Though obviously I sometimes disagree with those individuals on specific points.

But “pluralism for the sake of it” looks like getting out of hand. A nice example is the head of a London based economics think tank who is black and female. Advocates of diversity and pluralism will have been thrilled to pieces at her appointment. Only trouble is that she does not actually seem to have any interest in economics: at least when Googling her name I couldn’t find one single article by her, and she does about one Tweet a week. I.e. her output is approximately one thousandth that of Frances Coppola’s.

I’m not going to actually name her or the think tank concerned, in case I get sued, but you’ll be able to find it easy enough.

This supports the point I made in this blog some time ago, namely that the evidence seems to be that women tend not to be as interested in economics as men.

It could of course be argued that the head of an organisation is mainly concerned with administration rather than producing ideas. Well that idea won’t wash, at least not with me. Mervyn King, former governor of the Bank of England clearly had an interest in and wrote about unorthodox ideas in economics while playing the role of respectable, conservative and orthodox head of a central bank. Same goes for Ben Bernanke.

Saturday, 15 June 2019

Does Bill Mitchell back Workfare or not?

In this article, he clearly backs Workfare: he says,

“The existing unemployment benefits scheme could be maintained alongside the JG program, depending on the government’s preference and conception of mutual responsibility.

My personal preference is to abandon the unemployment benefits scheme and free the associated administrative infrastructure for JG operations.

The concept of mutual obligation from the workers’ side would become straightforward because the receipt of income by the unemployed worker would be conditional on taking a JG job.”

But in this article he says,

“Further, the MMT Job Guarantee also has nothing in common with so-called ‘workfare’ or ‘work-for-the-dole’ programs that neoliberal-inspired governments have introduced…”

The reality is that any level of “persuasion” or “coercion” can be used on a JG scheme. Personally I have no objection to a finite amount of persuasion: a relatively generous amount of unemployment benefit for the first two months of unemployment, followed by a cut in benefits unless those concerned take a JG job would be OK by me.

Thursday, 13 June 2019

A fundamental flaw in interest rate adjustments.

Summary. The main way central banks cut interest rates is to print money and buy up government debt / bonds. But it can well be argued that government borrowing makes no sense, and thus that there should be no government borrowing. In that case central banks can’t cut interest rates!


Warren Mosler1 and Bill Mitchell2 (the two co-founders of MMT) have argued that government borrowing makes no sense. Milton Friedman3 argued likewise.Plus I argued4 likewise.

Well now, if the above four individuals are right, then central banks will not be able to cut interest rates because the main way CBs cut rates is to print money and buy up government debt!

Of course CBs are able to buy corporate debt. But in the case of QE (at least in the UK, where I live) only a minute proportion of the total debt bought up was corporate as opposed to government debt, and quite right. Reason is that if a CB buys up corporate debt it is taking a commercial risk, and it’s not really to job of CBs to do that.

As distinct from interest rate cuts, there are interest rate increases. An absence of government debt does not stop a CB raising rates: it can wade into the market and offer to borrow at above the going rate, and then not do anything with the money borrowed. CBs in some countries may not actually be allowed to do that at present, but there’s no good reason they shouldn’t.

And that set up, i.e. where a CB can raise rates but can’t cut them does make some sense in that it’s compatible with Friedman’s ideas: Friedman claimed that governments should not borrow except in emergencies. The emergency that Friedman had in mind was war. But another possible emergency is a big outbreak of irrational exuberance which needs to be damped down via various deflationary measures. Tax increases or public spending cuts are one option, but if they proved insufficient, then the latter sort of interest rate increased implemented by a CB might be in order.

So why do governments borrow?

If, as suggested above, there are no good arguments for government borrowing, it is legitimate to ask why such borrowing takes place. The answer is: “political expediency”.

That is, politicians always prefer to fund public spending via borrowing rather than via tax because voters are painfully well aware of tax increases, whereas they tend not to attribute interest rate increases to government borrowing.

David Hume, writing about three hundred years ago, was well aware of the latter point. As he 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 clamours 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.” That’s in his essay “Of Public Credit”.

Simon Wren-Lewis5 is clearly aware of that phenomenon: he calls it the “deficit bias”.

What’s the GDP maximising rate of interest?

Having argued that the GDP maximising rate of interest is obtained where the state (government and CB) issue a liability (zero interest yielding base money) but do not pay interest on any of that money, there is actually another point which supports that argument, which is thus.

When governments borrow rather than simply print money and spend it, essentially what they’re doing is saying to themselves, “let’s print and spend, though in order to damp down the inflation that might result from that printing, we’ll borrow back some of the money we printed.”

Now issuing enough base money go give us full employment without exacerbating inflation too much clearly makes sense: it maximises GDP. But to print too much money, and then deal with the inflationary consequences by borrowing some of it back is an obvious nonsense. That is clearly not a strategy which will maximise GDP: reason is that it results in interest rates being artificially high.


The entire conventional wisdom on government borrowing is nonsense, or at least that’s what I’m claiming!



1. See 2nd last paragraph of Mosler’s Huffington article, “Proposals for the banking system.”

2. See Mitchell’s article “There’s no need to issue public debt”.

3.  See Friedman’s article:   “A Monetary and Fiscal Framework for Economic Stability”, American Economic Review. See his para starting “Under the proposal….”.

4. Musgrave. See article entitled “The Arguments for a Permanent Zero Interest Rate.”

5. Wren-Lewis. See his article entitled: “Budget deficits, fiscal councils and authoritarian regimes”

Tuesday, 11 June 2019

Should central banks be socially concerned? – continued.

On 5th June I criticised on this blog a letter (organised by Positive Money) from ninety academics in The Guardian which argued for the Bank of England to do more about climate change and other social issues like inequality.

So it was nice to see an article in the Financial Times the next day (6th June) also criticising the Guardian letter. The article was by Tony Yates (former economics prof in Birmingham, UK and former BoE economist).

Yates’s article was followed by an FT article by Positive Money people defending their Guardian letter. I’ll run thru the Yates and PM article in the paragraphs below, dealing with some but certainly not all the points in those articles. 

Yates’s first point is that “Climate change mitigation is to be tackled by a combination of legislation, taxes and subsidies, imposed by an elected central government.” That comes to much the same as my point on 5th June that GOVERNMENT has far more powers to raise the cost of fossil fuels via subsidies (and/or subsidise renewable forms of energy) than central banks.

Positive Money’s response to that is straight out of la-la land, far as I can see. They say “Some of the most important levers which would allow us to address the challenges of our age sit outside the government’s control. For example, the UK will only be able to reach net zero emissions by 2050 by dramatically stemming the flow of finance towards fossil fuels.”

So how is the BoE supposed to “stem that flow”? To illustrate, if a heavy fossil fuel user wants to issue shares or bonds to fund its activities, the BoE has no powers to prevent that. Of course the BoE could clamp down on bank lending to heavy fossil fuel users, but if heavy fossil fuel users’ access to banks is restricted, that isn't much of a problem for them because, as just intimated, heavy fossil fuel users can issue shares or bonds instead.

Financial Stability.

Yates next point (in his next para) is that financial stability risks emanating from climate change (which the Guardian letter makes much of) are small compared to other financial risks (trade wars, Brexit, etc). I didn’t make that point on 5th June, though I have made the point in earlier articles on this blog.


Yates next point (his next para) is that asking the BoE to do something about climate change is to politicise the BoE. I.e. it would be OK to try to persuade government to get the BoE to do something about climate change, but it’s definitely not OK to try to get the BoE to act independently of government in that regard. I also made that point on 5th June.


Next, Yates deals with the claim in the Guardian letter that monetary policy can influence inequality, thus the BoE should pay more attention to the equality changing effects of its policies. (Perhaps the most popularly cited instance of that is the way that QE has allegedly boosted asset prices, and thus made the rich richer.) Yates answers that by pointing out that inequality in the UK over the last ten years or so has been little different to the 1990s.

Plus I particularly like this para of Yates’s: “Monetary and financial policies probably have consequences for lots of things: the crime rate; public physical and mental health. But we don’t task the Governor with those responsibilities. We have the Department for Health and the Home Office.”

Do Positive Money and the 90 academics understand Pareto Efficiency?

The latter “ignore the side effects” idea is very much what so called “Pareto Efficiency” is all about. PE, to quote the first sentence of a Wikipedia article on the subject reads: “Pareto efficiency or Pareto optimality is a state of allocation of resources from which it is impossible to reallocate so as to make any one individual or preference criterion better off without making at least one individual or preference criterion worse off.”

Essentially that boils down to saying that if GDP or output per head can be improved by some measure, then the fact that that improvement makes a particular set of people worse off is irrelevant, because those worse off individuals can always be compensated out of tax taken from those who have benefited, with the net result that everyone is better off.

E.g. if a central bank thinks an interest rate adjustment will cut unemployment, the CB should go for it. Any inequality increasing effects can easily be dealt with via the existing tax and social security system.

The alternative is for CB committees to get involved in liaising with any number of worthy committees concerned about equality. The bureaucracy there doesn’t bear thinking about. 

Thursday, 6 June 2019

Stalwart leftie manages to make George Osborne look progressive by comparison.

A significant proportion of lefties spend so much time admiring what they believe to be their moral superiority to the political right that they forget to actually think. The result is that they advocate nonsense policies.

A classic example is the recent article in Tribune (a long established UK left wing periodical) by James Meadway criticising MMT. His third last paragraph claims, “If Labour wishes to make permanent changes — including permanent increases in public funding for public services — we must establish clear lines of tax funding for day-to-day spending, and set out a path for future deficits to follow.”

Well if you remember, that “path for future deficits to follow” was very much the policy adopted by George Osborne, the UK Tory Party finance minister. To be exact, the farcical Osborne “we’re going to cut the deficit” story was briefly as follows.

George Osborne 2010:
“We will eliminate the deficit by 2015.
Tory Manifesto, 2015, p.9:
“We will eliminate the deficit by b2017.”
Osborne Budget speech, 8th July 2014:
“We will eliminate the deficit by 2020.”
Tory manifesto, 2017, p.64:
“We will eliminate the deficit by 2025.”

If James Meadway’s “path” is anything like Osborne’s, then Meadway’s “path” is a joke.

What’s wrong with the latter “path” is that it’s plain impossible to predict what future deficits (or surpluses) need to be. A recession could hit in two years’ time, in which case a larger than normal deficit will be needed. Alternatively, an outbreak of irrational exuberance in two years’ time is possible, in which case it could be desirable for government to rein in excess demand by running a surplus.

As Keynes argued in the 1930s and as MMT has argued more recently, the deficit simply needs to be whatever minimises unemployment without exacerbating inflation too much. Whether that’s a large and all-time record size deficit, or no deficit at all is totally immaterial.

Alternatively, if Meadway’s “path” consists of some ideas or principles which can be used to determine the size of the deficit rather than trying to predict the actual size of the deficit in pounds or dollars, he doesn’t explain what those principles are. But never mind: all is not lost! The Labour Party did actually publish a set of principles for determining the deficit quite recently: that’s the Labour Party’s new so called “fiscal rule” (1). But Meadway seems to be unaware of that document.

The basic principle behind Labour’s fiscal rule is that interest rate cuts should be used to impart stimulus when interest rates are significantly above zero, while fiscal stimulus should be used when interest rates are at or near zero.

And what do you know? That’s not a hundred miles or anywhere near a hundred miles from MMT! To be exact, the founder of MMT, Warren Mosler, advocated a permanent zero interest rate policy (2). In other words under Labour’s new fiscal rule, interest rates bump along just above zero, while according to Mosler, interest rates should be kept permanently at zero.

Having said that, the first two sentences of Labour’s fiscal rule do rather contradict the small print: that is the first two sentences claim there should be a target for debt and deficit reduction. However it’s pretty obvious that those two sentences were inserted to placate the economically illiterate electorate and economically illiterate newspaper economics commentators who are under the illusion that national debts are like household debts in that they need to be repaid at some point.

Certainly Simon Wren-Lewis, who authored Labour’s fiscal rule, said he had nothing to do with those first two sentences. 


1. “Labour’s fiscal rule is progressive” by Simon Wren-Lewis.
2. “The Natural Rate of Interest is Zero”, Journal of Economic Issues.

Wednesday, 5 June 2019

Dozens of academics sign a letter to the Guardian. This should be entertaining.

When dozens of academics sign a letter to the Guardian, there’s a good chance the letter contains a fair amount of nonsense. And so it is with this letter published yesterday. Title of othe letter is "Next Bank of England governor must serve the whole of society."
Their first point is thus.

“First, environmental breakdown is the biggest threat facing the planet. The next governor must build on Mark Carney’s legacy, and go even further to act on the Bank’s warnings by accelerating the transition of finance away from risky fossil fuels.”

Well now for the woolly minded that seems to make sense. After all environmental breakdown is a serious issue, plus the Bank of England is a powerful organisation, thus it must follow that there’s much that the BoE can do about environmental breakdown, surely?

Well no actually. That’s false logic.

The most the BoE can do is implement some sort of bias against industries which are into fossil fuel consumption when it comes to QE: i.e. buying corporate bonds. But there are several problems there.

1. QE has only been in operation for a small proportion of the time since WWII, and has always been viewed as a temporary measure.

2. The actual number of corporate bonds bought by the BoE relative to the number of UK government bonds bought as part of QE has been minute. The equivalent proportion for the Fed was A BIT higher, but not much higher.

3.  The fact of the BoE buying the bonds of corporations A & B while not buying those of X & Y does not  have a significant effect on the costs of funding those corporations. At a wild guess, having the BoE buy the bonds of corporation Z might cut the costs of funding the corporation by about one percent.

4. The latter ridiculously small change in the cost of funding  corporations is near irrelevant to the powers that government has when it comes to discouraging fossil fuel consumption or subsidising solar and wind power. That is, there is in principle absolutely no limit to the size of tax that government can place on fossil fuels or the size of the subsidy it can offer for renewable forms of energy.

5. The decision to favour non fossil fuel consuming industries is very much a political decision, and that is not a decision for a central bank. Thus the authors of the Guardian letter really ought to be pestering politicians to instruct the BoE to implement an "anti fossil  fuel" policy: they should not be trying to get the BoE do implement that policy without reference to politicians.


The next point in the letter is thus.

“Second, rising inequality, fuelled to a significant extent by monetary policy, has contributed to a crisis of trust in our institutions. The next governor must be open and honest about the trade-offs the Bank is forced to make, and take a critical view of how its policies impact on wider society.”

Well presumably that’s a reference to the fact that QE has boosted asset prices, which in turn has obviously benefited “asset owners” i.e. the well-off. But there is a problem there, which is that it can well be argued that the entire government  debt should be QE’d!!!

To be more exact, Milton Friedman and the two co-founders of MMT (Warren Mosler and Bill Mitchell) have argued for a “zero government borrowing” regime. Obviously an initial effect of that is to boost asset prices, but that effect can always be nullified by extra tax on the well-off and/or more social security and similar for the less well-off.

Indeed, that’s a nice example of so called “Pareto efficiency” (an idea thought up by the Italian economist Vilfredo Pareto). Basically a policy is Pareto efficient if it increases GDP (or output per hour), and nothing else matters. In particular, if one group of people are made worse off by a policy, that doesn’t matter, because tax  and or the social security system can be used to ensure that that group is not adversely affected.

At least that’s my definition of Pareto efficiency. If you want to be sure you have a grasp of the idea, obviously you’d be advised to look at a few dictionaries of economics and text books.

Bank lending.

The letter’s third point is thus.

“Third, the UK economy is increasingly unbalanced and skewed towards asset price inflation. Banks pour money into bidding up the value of pre-existing assets, with only £1 in every £10 they lend supporting non-financial firms. The next governor must seriously consider introducing measures to guide credit away from speculation towards productive activities.”

Well the claim that “Banks pour money into bidding up the value of pre-existing assets..” is presumably a reference to the fact that a large proportion  of bank lending goes to mortgages applied for by people who are buying EXISTING houses rather than NEW houses.

Well my answer to that is: “What else are banks supposed to do?”

Firstly it is perfectly reasonable for a bank to demand security or “collateral” when granting a loan. Or do you seriously want the bank which holds your money to lend to drunks lying in the gutter who have no assets? If so, you’re asking for your money to be flushed down the drain pretty quickly.

To be more realistic, do you really want your bank to engage in so called “NINJA” mortgages? NINJA stands for “No Income, No Job or Assets”. It was exactly the latter sort of lending that helped give us the 2007/8 bank crisis.

Second, as you may or may not have noticed, houses normally last a hundred years or more. That inevitably means that a large majority of those buying a home, buy an EXISTING house, rather than one that has just been built.

Financial markets.

The final sentence of the letter reads, "We need a governor genuinely committed to serving the whole of society, not just financial markets". Well actually one of the main decisions taken by central banks every month is deciding whether to implement more (or less) stimulus in the form of interest rate adjustments, QE or whatever. And the purpose of that is always to minimise unemployment without exacerbating inflation too much.

Well now minimising unemployment is very much a form of "serving the whole of society, not just financial markets" isn't it?

Tuesday, 4 June 2019

Silly article published by the Adam Smith Institute on MMT.

The article is entitled “Stop trying to use monetary policy for your ideological whims” and is by Joakim Book. I left a less than flattering comment after the article as follows.

Joakim Book’s article is nonsense, like many other recent articles on MMT. MMT does not advocate, to quote Joakim Book’s first paragraph, that “worrying about the deficit or government spending is unnecessary”: that is MMTers have repeated till they are blue in the face that inflation puts a limit to the size of the deficit.

What MMT however DOES CLAIM, which is a bit different to the conventional wisdom, is that the size of the deficit and debt PER SE are irrelevant. I.e. MMT says (much as Keynes said) that the deficit should simply be whatever brings full employment without excess inflation. That’s in stark contrast to the ludicrous George Osborne policy on deficits which consisted of repeatedly promising to abolish the deficit in about three years’ time, only to find he COULDN’T reduce it: a policy being copied by the Labour Party incidentally.

In contrast to the above technical point about deficits, MMTers (like Keynes) do tend to be left of centre and do advocate a number of types of public spending increase, like the Green New Deal, which Joachim Book mentions. However it’s not just left of centre people who claim something needs to be done about climate change: plenty of right of centre people think likewise. Indeed, a large majority of scientists agree that we need to do something, and fast.

Joakim Book then displays his ignorance of this whole subject even more starkly when he claims that Positive Money’s  “agenda has always been more narrowly focused on advocating for “a fair, democratic and sustainable economy” – predominantly through the use of monetary reform along MMT lines.”

Well the big problem there is that MMTers do not have much to say on the subject of “monetary reform”!!!! Joakim Book might as well have accused the Archbishop of Canterbury of having strong views on the design of Formula One racing cars!!!

It’s true that Warren Mosler (founder of MMT) does have views on bank reform. But that’s hardly surprising given that he runs a bank. But apart from about one article by Mosler on that subject, MMTers are pretty well silent on “monetary reform”.

Monday, 27 May 2019

The senior economists who didn’t know government can print money.

On February 14, 2010, the Sunday Times published a letter by twenty of the World’s leading economists, which is reproduced below under the heading “The Letter”. 

Essentially the letter claims there is a problem with stimulus (of the sort used to combat the recession which started with the 2007/2008 bank crisis). The alleged problem is that governments must borrow in order to obtain the money for stimulus and that there is a limit to the amount of borrowing that governments can do before creditors get worried about the debtor government’s intention or ability to repay the debt. Those creditors, so the letter claims, are likely to demand higher rates of interest as the debt grows.

Well it’s certainly reasonable to be concerned about a micro-economic entity’s intention or ability to repay a debt as the debt expands. A micro-economic entity is for example a household or small/medium size firm.

However, government is a macro-economic entity, and it is always dangerous to extrapolate from the micro-economic to the macro-economics.

In particular, the idea that stimulus has to be funded via borrowing in a country which issues its own currency is plain simple delusional clap-trap: as Keynes explained in the early 1930s, a country which issues its own currency can escape a recession simply by printing money and spending it (and/or cutting taxes).

It beggars belief that twenty of the world’s leading economists are unaware of the latter point, but it seems that they are  – or at least that they were at the time of writing the letter. Certainly the letter says nothing about money printing or money creation.

Central banks.

Incidentally, and in reference to the above idea that government can print money, it should be said that normally it is actually central banks which do the money printing. However central banks are little more than an arm of government: an arm which has varying degrees of independence depending on the country concerned. Thus a central bank is a government department to all intents and purposes.

Moreover there is absolutely no reason why the job of money printing cannot be given to some other government department. And in fact the UK Treasury engaged in some money printing at the start of WWI: it printed so called “Bradbury” pound notes.

Is money printing a panacea?

Of course any of those twenty economists could answer Keynes’s money printing point by claiming that resorting to money printing could lead to a loss of confidence in the country concerned in much the same way as increased borrowing might lead to a loss of confidence.

To be exact, and in connection with the latter point, the twenty economists claim “…there is a risk that a loss of confidence in the UK’s economic policy framework will contribute to higher long-term interest rates and/or currency instability, which could undermine the recovery.”

Well as regards higher long term interest rates, those would not kick in the day after the relevant government announced its intention to implement money printing: reason is that the rate of interest paid on a large majority of debt issued by governments around the world is fixed at the time that debt is issued. Put another way, if creditors were indeed to demand higher rates, and succeeded in getting them, that would only apply to debt which matured and became due for roll-over. And that point is particularly relevant for the UK (where I live): UK debt has an average time to maturity at least double that of the US.

Plus this “twenty deluded economists” affair is very much a UK affair  in that the Sunday Times is a UK newspaper, and most of the signatories to the letter were British.

But suppose creditors do in fact demand higher rates of interest: in the case of a government which issues its own currency, there is no Earthly reason for the relevant government to actually pay those higher rates: the alternative is simply to print money, pay off the creditors, and tell them to go away. Indeed that was pretty much what several governments did a few years after the letter, and in the form of QE. And contrary to the warnings issued by yet more idiot economists, hyperinflation did not ensue.

So that’s dealt with the letter’s “higher long-term interest rates” point mentioned a couple of paragraphs above.

Currency instability.

The other claim in the letter was that “currency instability” could result from excessive national debts, so had it been put to the twenty economists that money printing is an alternative to debt they might have claimed that currency instability would result from money printing just as much as from allegedly excessive national debts.

And to bolster their argument, the twenty economists might have cited Robert Mugabe, who like several national leaders in earlier decades and centuries, resorted to the printing press with excess inflation being the result.

Well the simple answer that is that money printing will only cause excess inflation if the demand that results from that money printing is excessive: i.e. if aggregate demand reaches a level such that the country’s employers cannot meet that demand.

Thus it is certainly not true that money printing automatically results in excess inflation, as was demonstrated (to repeat) by QE a few years after the letter.

As to the “currency  instability” which the twenty economists were concerned about, there again, they could claim that money printing might result in just as much currency instability.

Well first, while it’s possible that foreign exchange traders might take a dim view of a government which announces it intends printing money and those traders might mark the currency down relative to other currencies,  it’s a bit hard to see why “currency instability”, i.e. a currency gyrating up and down, would result.

As for the currency being marked down, that is not really a big deal: currencies regularly rise and fall by 5% or so. Plus when Japan (one of the first countries to go for QE after 2,000) announced its intention to implement QE in early 2001, there was no obvious effect on the Yen/Dollar exchange rate. To be exact, the Yen dropped about 5% over the next year, but then strengthened about 10% over the next two years.

Plus the whole purpose of creating new money and spending it is to raise demand, and an entirely predictable result of a rise in demand, all else equal, is a finite deterioration in a country’s balance of payments and a consequent fall in the value of its currency relative to other currencies, which in turn ought to rectify the latter balance of payments problem.

The incompetent twenty.

And note that those signing the letter included many individuals right at the top of the economics profession. For example Sir John Vickers was one of the signatories. He chaired the so called “Vickers report” which was the main official UK government response to the 2007/8 bank crisis. That doesn’t induce me to have much faith in Sir John’s ideas on bank reform. (For a guide to some of the mistakes made by the Vickers commission, Google “ralphonomics” and “Vickers”.)

Another signatory was Olivier Blanchard who at the time was the IMF’s chief economist. But as I’ve explained in earlier articles on this blog, the IMF is clueless. And Bill Mitchell (who like me supports MMT) regards the IMF as being so incompetent that we’d all be better off it was closed down. 

Another signatory was Kenneth Rogoff, a Harvard economist. Again, I have previously dealt with his incompetence.

The economics profession is a gentlemans’ club.

So why does this incompetence persist? Well I suggest Adam Smith gave the answer long ago when he said “People of the same trade seldom meet together, even for merriment and diversion, but the conversation ends in a conspiracy against the public, or in some contrivance to raise prices.”

In other words if economist A spots incompetence by economist B, A will normally not make too much of a song and dance about it: that would bring the profession as a whole into disrepute, which is not in the interests of A.

Why revisit a letter written in 2010?

For the benefit of any readers wondering what the point is of digging up a letter in a newspaper almost ten years later, the first reason is that of course economic history is always interesting. But more particularly some of the signatories of the letter have been trying to claim recently that they never opposed stimulus or money printing in any shape or form.

But that’s just an example of a well-known and predictable phenomenon: first they criticise you, then they question you, then they copy you. If I were in their shoes, I’d probably do the same, cad and rotter that I am!

The Letter.

"It is now clear that the UK economy entered the recession with a large structural budget deficit. As a result the UK’s budget deficit is now the largest in our peacetime history and among the largest in the developed world.

"In these circumstances a credible medium-term fiscal consolidation plan would make a sustainable recovery more likely.

"In the absence of a credible plan, there is a risk that a loss of confidence in the UK’s economic policy framework will contribute to higher long-term interest rates and/or currency instability, which could undermine the recovery.

"In order to minimise this risk and support a sustainable recovery, the next government should set out a detailed plan to reduce the structural budget deficit more quickly than set out in the 2009 pre-budget report.

"The exact timing of measures should be sensitive to developments in the economy, particularly the fragility of the recovery. However, in order to be credible, the government’s goal should be to eliminate the structural current budget deficit over the course of a parliament, and there is a compelling case, all else being equal, for the first measures beginning to take effect in the 2010-11 fiscal year.

"The bulk of this fiscal consolidation should be borne by reductions in government spending, but that process should be mindful of its impact on society’s more vulnerable groups. Tax increases should be broad-based and minimise damaging increases in marginal tax rates on employment and investment.

"In order to restore trust in the fiscal framework, the government should also introduce more independence into the generation of fiscal forecasts and the scrutiny of the government’s performance against its stated fiscal goals.

"Tim Besley, Sir Howard Davies, Charles Goodhart, Albert Marcet, Christopher Pissarides and Danny Quah, London School of Economics;
Meghnad Desai and Andrew Turnbull, House of Lords;
Orazio Attanasio and Costas Meghir, University College London;
Sir John Vickers, Oxford University;
John Muellbauer, Nuffield College, Oxford;
David Newbery and Hashem Pesaran, Cambridge University;
Ken Rogoff, Harvard University;
Thomas Sargent, New York University;
Anne Sibert, Birkbeck College, University of London;
Michael Wickens, University of York and Cardiff Business School;
Roger Bootle, Capital Economics;
Bridget Rosewell, GLA and Volterra Consulting

Tuesday, 21 May 2019

George Soros’s Institute for New Economic Thinking – or is it “Old Economic Thinking”?

Frances Coppola sets out a nice description here of a conference organised by the so called “Institute for New Economic Thinking” which according to her, consisted mainly of old duffers setting out OLD ideas rather than new ideas. (Article title: “Beyond Disappointment”.)

So how come?

Well my explanation is that INET was set up by George Soros with a seriously large amount of money: $50million to be exact. And that sort of money is guaranteed to attract those who are skilled at attracting grant money from government departments, the Rowntree Foundation and so on. I mean if you are short of something to do, plus you could do with embellishing your CV with “gave keynote speech at the INET conference at XYZ” or something like that, plus you wouldn’t say no to an expenses paid trip to XYZ, then it’s obvious what you need to do.

In contrast, those who actually do have novel ideas but who aren’t so skilled at the “grant money attracting” business don’t stand a chance.

But if you don’t like my explanation for what’s going on, here is a slightly different, but equally cynical explanation. (Article title: “George Soros’ INET: A conspiracy theory assessment”, by Norbert Haering.)


P.S.  I am grateful to "Rethinking Economics" for reminding me (via Twitter) about that Coppola article.

Friday, 17 May 2019

Random charts - 70.

Headings in large pink text were added by me.

Tuesday, 14 May 2019

The UK school building heated entirely by solar.


That’s the extension to the St George’s School, Wallasey, Cheshire, designed in 1959.

The south wall of the building is nothing but glass, and the floors and walls of the building are made of very thick masonry and concrete which absorbs heat on sunny days and releases it on cold days.

Obviously the lighting and heat emitted by children in the building contribute to heating the building.

A book on solar heating, “Your Solar Energy Home” by D.Howell says (p.12), “When architect A.E.Morgan designed the building, higher authority insisted he include a boiler. Imagine what a delicious day it was for Mr Morgan when after four years occupancy and not a day of use from the boiler, he was allowed to remove it.”

Monday, 13 May 2019

Article in the Frankfurter Allgemeine by Dirk Ehnts on MMT.

The article title is “Die Lösung liegt in höheren Staatsausgaben.”

I only read part of the article (the part highlighted by Lars Syll). So I won’t pass judgement on the article as a whole. But there’s a mistake in it, as follows.

Incidentally, I don’t speak German very well: I just used on of those instant online translation services to translate the article into English.

Anyway, the paragraph starting “Solange Geld auf dem…” claims deficits (i.e. private sector surpluses) are needed because people want to save for retirement and businesses want a positive cash flow. The flaw in that idea is as follows.

In the simple case of where the number of pensioners is constant as a proportion of the population and there is zero economic growth and zero inflation, clearly it is true that people want to save cash plus government debt/bonds among other things for their retirement. But they run down that stock of assets during retirement: i.e. money and other assets flow from pensioners to younger people who themselves are saving for retirement. So in that scenario, there is no need for a government deficit.

As for businesses, it is reasonable to assume they want a stock of cash, but again, in the above “zero growth and zero inflation” scenario, there is no reason for that desired stock to expand every year.

I suggest the actual reason for more or less non-stop deficits is that the private sector (including those saving for pensions and businesses) want a more or less constant stock of cash and government debt. (The sum of those two is sometimes referred to by MMTers as “Private Sector Net Financial Assets” (PSNFA)).

However, inflation constantly eats away at the real value of that  stock. Ergo the stock has to be constantly replenished, and that can only be done via a deficit.

Thus (and reverting to pensioners) pensioners’ desire to save does explain the need for deficits, but it’s not the desire to save as such which is the explanation. It’s the “inflation eating away at the real value of PSNFA” which is the explanation.

Indeed, on the subject of PSNFA, note that when I referred to “cash” above, I should really have said “base money” (i.e. state issued money as opposed to commercial bank issued money). Reason for that is that base money is a net asset far as the private sector is concerned (i.e. it is PSNFA), whereas commercial bank issued cash is not: that is, for every dollar of commercial bank created cash, there is a dollar of debt owed to a commercial bank, thus commercial bank issued money nets to nothing.

Incidentally, I’ve been pointing to that “inflation explains deficits” point for several years now. I’ve never seen any other economist grasp or appreciate the point.

Sunday, 12 May 2019

Random charts - 69.

Headings in pink were inserted by me.

Wednesday, 8 May 2019

Should central banks target unemployment?

A problem with much of the political left is that they are keener on virtue signalling than thinking up policies that actually benefit those they claim to be concerned about, i.e. less well off. For politicians (left or right of centre) that virtue signalling does of course make electoral sense: it wins votes.

But it’s disappointing to see a non-politician getting involved in the latter nonsense. Ann Pettifor in this article claims that central banks should target unemployment as well as central banks’ traditional target, i.e. inflation. John McDonnell, the Labour Party finance spokesman advocates the same.

Well “targetting unemployment” sounds very caring and saintly, but what does it actually mean? After all, central banks already target unemployment in that they target inflation. That is, inflation and unemployment are inversely related, thus the inflation target, which consists of keeping inflation down to 2% actually amounts to targeting unemployment: that is, it consists of minimising unemployment in as far as that is consistent with acceptable inflation.

Moreover, if say inflation was at 2% and unemployment was above target, what’s the Bank of England supposed to do? Abandon the inflation target? Neither Ann Pettifor nor John McDonnell tell us.

McDonnell actually went even further down the “daft targets for central banks” road when he suggested the BoE should target productivity! Well I ask you: what’s the BoE supposed to do if productivity increases are below target? I’m all ears, but I don’t seriously expect to hear anything inspiring from McDonnell.

Tuesday, 7 May 2019

Hilarious hypocrisy at The Guardian.

Sri Lanka is expelling 200 Muslim clerics, which you’d think is a pretty big story, given that “Islamophobia” is allegedly the crime of the century. So you’d expect the UK’s most heroically anti-Islamophobia paper, The Guardian, to devote considerable space to this story. But not a bit of it: they are totally silent, just as I predicted they’d be a few days ago on Facebook. Google something like “Guardian, Sri Lanka, Muslim, cleric, expel”. You won’t find anything. Possibly they’ve devoted a square inch to the story at the bottom of  an inside page, but certainly I found nothing when Googling. 

Given that the Guardian claims to be ultra-concerned about “Islamophobia”, why would this be? Well the average tabloid reader has doubtless worked it out. But leftards, sociologists and similar forms of low-life will be baffled, so I’ll explain.

The people of Sri Lanka have brown faces, and according to the Neanderthals who write for the Guardian, people with brown faces are beyond reproach, while people with white faces are guilty until proven innocent (which as you may have noticed, unless you’re as thick as a Guardian journalist, is pure racism). So this “expel Muslim clerics” story doesn’t fit the leftie narrative does it? That is, people with brown faces are behaving in a grotesquely “Islamophobic” manner, which is a huge problem for the above mentioned Neanderthals.

So what do they do? Sweep the whole thing under that carpet, that’s what they do.

Hilarious, innit?

Sunday, 5 May 2019

Grotesque incompetence at the IMF.

The IMF is still obsessed with the absurd “fiscal space” concept. I’ve explained the flaws in the idea before on this blog (starting in 2012) but I’ll run through it again and I’ll concentrate in particular on this article published in 2018 by IMF authors. Article title: “Economic Preparedness: The Need for Fiscal Space.”

Note that this IMF article is not any sort of “one off”: that is, IMF authors turn out articles on astrology  - sorry I mean “fiscal space”  - regular as clockwork. Three more articles from 2018 alone are listed at the end below.

The “Economic Preparedness” article does have a warning to the effect that the article “does not necessarily represent the views of the IMF….”.  However it’s clear from the numerous articles published over the years by the IMF on fiscal space that the article does in fact represent the views of the IMF.

Anyway, the first two sentences read, “When a government looks to temporarily increase spending or reduce taxes, it needs to gauge whether it will be able to fund the resulting budget gap without risking an unfavorable reaction from financial markets or undermining the longer-term health of public finances. The more confident it can feel about this, the more fiscal space it has.”

In other words, the big question according to the IMF that faces a country wanting to run a deficit is: can the country borrow the necessary money without pushing up the rate of interest it pays on its government debt too far? Or as the article itself says later on, the degree of fiscal space is determined by, among other things, the “ease of borrowing”.  Or as the article says in the penultimate paragraph, “ease of access to markets” is important.

Well now, that idea flatly contradicts the point made by Keynes in the early 1930s, namely that in a recession, a country which issues its own currency should borrow or print more money and spend it. That is, “access to markets” is not needed at all, since the latter sort of country always has the “print” option!!!

Indeed, the print option is exactly what several large economies have gone for, and big time, during the recent recession. That is, they have borrowed large amounts, spent the sums borrowed, and then almost immediately had their central banks print money and buy back relevant government bonds (i.e. those countries have implemented QE) That nets out to the above Keynsian “print and spend” policy.

You really have to wonder whether the IMF has actually heard of QE, don’t you?

Of course, the print option is only available to countries which issue their own currencies. That is, that option is not available to individual countries in the Eurozone (though the option is available to the Eurozone as a whole).

As for any idea that  “markets” might lose confidence in the debt of a country that implements the latter “print and spend” policy, markets have no reason to lose confidence as long as print and spend is not taken so far that it causes excess inflation. After all, what bond holders are mainly concerned about is any possible loss in the real  value of their bonds caused by excess inflation.  And that responsible attitude to inflation is exactly the attitude adopted by the larger developed economies since the recession that started in 2008.  That is, the large economies that have implemented print and spend have actually kept inflation well under control.

Of course the above paragraphs are not intended to suggest there is no relationship at all between the amount of government borrowing and interest rates. That is, if a government issues more debt than the private sector is willing to hold at X%, then government will have to pay a higher rate. But if interest on the debt is significantly above zero, then there is no need to “access markets” so as to impart stimulus: that is, the relevant country can cut interest rates (by printing money and buying back government debt).

Indeed the latter is very much what the UK Labour Party’s new so called “fiscal rule” consists of: that is the rule is basically that if interest on the debt is significantly above zero, then interest rate cuts should be used to provide stimulus, and if interest on the debt is near zero, then fiscal stimulus (i.e. “borrow and spend”) should be used.

And the latter rule is not a hundred miles from the MMT idea that interest on the debt should be kept permanently at or near zero. 


The conclusion is that the IMF hasn’t the faintest idea whether it’s coming or going. It is totally and utterly incompetent. It is economically illiterate. 


Other IMF “fiscal space” articles from 2018.

1.  IMF Board Takes Stock of Work on Fiscal Space (published 2018).

2. Boosting Fiscal Space : The Roles of GDP-Linked Debt and Longer Maturities

3.  IMF Fiscal Monitor: Capitalizing on Good Times, April 2018