Tuesday, 15 October 2019
Olivier Blanchard, former chief economist at the IMF and Takeshi Tashiro argue that the deficit should be held to a level such that were it to stay at that level, and all else remained constant, the debt would not continue to grow ad infinitum. That’s in their article entitled “Rethinking Fiscal Policy in Japan” (published by PIIE).
While the word “sustainable” is ultra-fashionable nowadays, the deficit does not actually need to be sustainable in the latter sense.
To illustrate, suppose demand collapses (say because of a collapse of consumer or business confidence), and a deficit bigger than can be sustained long term would solve the problem, do we take it that that deficit should NOT BE implemented: i.e. the unemployed should be left to rot??
I think not. MMT (Mosler’s law in particular) says that the deficit should be WHATEVER deals with unemployment. Keynes said much the same.
Mosler’s law, which used to appear in yellow at the top of Warren Mosler’s site, states: “There is no financial crisis so deep that a sufficiently large tax cut or spending increase cannot deal with it.” (Warren Mosler founded MMT).
Plus the fact that that deficit cannot be sustained long term does not matter, because national debt (as MMTers keep explaining) is a private sector financial asset, and the bigger that asset, the higher will private sector spending be, all else equal.
Ergo, a deficit which is larger than can be sustained long term just isn't going to continue for ever because “Private Sector Net Financial Assets” (an MMT phrase) will eventually rise to a level where demand rises to a point where little or no deficit is needed.
The above is part of a long standing form of schizophrenia that the IMF has had in relation to deficits. That is, it knows that deficits are needed so as to deal with recessions, at the same time as knowing that the resulting national debts cannot be allowed to grow too large. But it does not seem to be able to work out the optimum compromise between those two. E.g. see here and here.
Thursday, 10 October 2019
A popular objection to full reserve is that would result in less lending and in the bank industry contracting, ergo, so the argument goes, economic growth is hit.
The flaw in that argument, as I explained in this series of tweets, is that the bank industry is as big as it is partly because of the subsidies and various forms of preferential treatment it receives, one of those being the right it is given to print / create money from thin air and lend it out at interest. Thus the argument that removing that “right to print” (and full reserve involves removing that right) would cut growth or GDP is nonsense. In fact ALL SUBSIDIES, unless there is a very good reason for them, REDUCE GDP!! Thus removing an unjustified subsidy or form of preferential treatment enjoyed by the bank industry (or any other industry), far from reducing GDP, ought to raise it.
And what do you know? Within about six hours of that series of tweets of mine, Vitor Constancio, former vice president of the ECB, did a tweet which fell for precisely the above flawed argument.
To be exact, he said "Narrow banking or similar approaches do not guarantee the amount of credit to finance investment and economic growth." (“Narrow banking” is just another name for full reserve.) Of course I can’t be 100% sure he has fallen for the above flawed argument, but it very much looks like he has.
A further weakness in his argument, is that much if not most investment is not funded via bank loans: it’s funded via equity or retained earnings. Plus large corporations do not as a rule use banks for loans: they go direct to money markets.
Wednesday, 2 October 2019
Grey’s variation is set out in this Progressive Pulse article which is not actually written by Grey. The title of the article is “Rohan Grey’s ‘Banking Under Digital Fiat Currency’ Proposal.”
However, Grey gives his blessing to the article in this tweet, so presumably the article is a fair description of Grey’s proposal. I would normally go to the original source of the idea, i.e. Grey’s own article, but that seems to be behind a pay-wall.
The first problem with Grey’s proposal is that it involves the central bank in giving commercial banks the base money they need to make loans in exchange for the mortgages granted by commercial banks. So do central banks do detailed checks on millions of mortgages before dishing out money, or what? This sounds like a bureaucratic nightmare.
Second, central banks are not supposed to be into commerce.
Third, the system gives an artificial preference to banks vis a vis other entities (e.g. non-bank firms and households), and I think we've all had enough of preferential treatment and subsidies for banks. To illustrate, take an economy in stable equilibrium. Banks then spot new and viable lending opportunities. If the CB supplies them with the necessary base money, demand rises, ergo taxes must be raised (or demand reduced some other way, like cutting public spending) So essentially taxpayers fund the new loans, which doesn’t make sense.
In contrast, under PM’s system, if banks want more funds to lend, they have to attract funds from depositors. That raises interest rates, which means the people who OUGHT to fund loans, i.e. savers, actually fund the extra loans. That ought to give a genuine free market rate of interest, which ought to maximise GDP / output per hour.
Tuesday, 1 October 2019
Positive Money’s odd claim that full reserve banking is different from their “Sovereign Money” proposal.
PM make that claim in an article entitled “Sovereign Money and full reserve banking proposals aren’t one and the same.” Author of the article is Frank van Lerven.
The crucial passages of the article, which I’ve put in green italics are as follows.
Sovereign Money proposals are often mentioned alongside FRB proposals. And they do indeed have a same goal; that is to stop banks creating money in the process of making loans (or buying assets). However, the method is different – and there happens to be a number of other goals and benefits of implementing a Sovereign Money system.
In the case of FRB it is done by forcing banks to hold reserves against their deposits. As the Bundesbank correctly notes, this doesn’t necessarily stop banks creating money – that is, it is quite possible for there to be money creation by the banking sector with 100% reserves.
Now wait a moment. According to Milton Friedman, one of the most heavy-weight advocates of full reserve, money creation by private banks IS PROHIBITED under full reserve. He refers in this paper to “A reform of the monetary and banking system to eliminate both the private creation or destruction of money…”. (Title of his paper is “A Monetary and Fiscal Framework for Economic Stability”.)
On the subject of why full reserve allegedly does not stop private banks creating money, Van Lerven continues…
Simply put, banks create money and look for the reserves later. Central banks always accommodate private banks’ demand for reserves. So even in an FRB system, private banks could create new money through the process of lending, and then get the required reserves from the central bank.
Well under the EXISTING bank system banks may “create money” and get supplied with reserves later, but that would not happen under full reserve! What would happen under full reserve is as follows.
First, banks are informed that they are not supposed to create money: i.e. if they wish to grant loans, they must first obtain the necessary base money needed to make the loan, and that money must be VOLUNTARILY placed by relevant depositors in accounts specifically advertised as being for those who want their money loaned out or invested (which PM calls “investment accounts”). Plus holders of those accounts buy into what are in effect unit trusts / mutual funds, where the value of their stake in such funds can rise or fall dependent on the performance of the relevant loans or investments.
However, it is of course possible a miscreant bank or two would disobey the latter rule, and simply fire ahead and try to create and lend out money. But such a bank and the private bank system as a whole would then face a problem, namely that a proportion of the recipients of that new money would want it put into safe accounts (accounts which are supposed to be backed by reserves at the central bank). So relevant banks would need to come up with reserves.
But they wouldn’t get anywhere asking the central bank for reserves because the reaction of the central bank would be (on the simplifying assumption that no stimulus was needed): “The amount of base money in circulation is just fine, thankyou very much. We have no intention of supplying you with reserves. You’ll just have to rein in your activities and thus reduce your need for reserves. But to get you out of difficulties for a while, we’ll supply you with reserves, but at Bagehot’s “penalty rate” of interest. That will concentrate your mind no end, and get you do what we want you to do, i.e. rein in your activities.”
There may be some small differences between full reserve and Positive Money’s “Sovereign Money”, but essentially they’re the same thing. Indeed, every advocate of full reserve promotes a different variation on the basic full reserve theme. But they all have some basics in common, and Positive Money’s “Sovereign Money” shares those basics.
Thursday, 26 September 2019
I’m delighted to see Chris Giles (economics editor at the Financial Times) advocate the idea, which has been advocated by Positive Money for about ten years, namely that the central bank (or some other committee of economists) should decide the SIZE OF the deficit, while politicians retain control of strictly political matters, like what proportion of GDP is allocated to public spending, and how that is split between education, health, law enforcement, etc. Article title: “Britain needs a new fiscal and monetary framework”.
Ben Bernanke actually gave an approving nod to that sort of idea a year or so ago.
Only trouble is that Chris Giles claims the idea as his own. Cheek!
Reminds me of the phrase “first they ignore you, then they laugh at you, then they fight you, then you win”. There really needs to be a fifth item added to that phrase: “then they claim your idea as their own”!
Sunday, 22 September 2019
Frances Coppola claimed recently on Twitter that Warren Mosler (founder of Modern Monetary Theory) is too monetarist. I beg to differ: i.e. I think the extent to which MMT accepts monetarism is about right. Reasons are as follows.
MMTers certainly tend to claim that given inadequate demand, the private sector’s attempts to save money must be higher than usual, thus the solution is to create more money (base money in particular) and spend it into the private sector. And clearly that claim is not a million miles from the monetarist claim that GDP varies with the size of the stock of money (base money in particular), and the even more extreme version of monetarism, namely that the best way of controlling demand is simply to control the size of the stock of money.
First, there is nothing basically wrong with monetarism (on the dictionary definition of the word, i.e. the idea that GDP tends to vary with the size of the stock of money, base money in particular). To illustrate, when people win a lottery, or come by some other windfall, their weekly spending rises. Ergo if the central bank were to print tons of new money and distribute wads of it to everyone, total spending, i.e. aggregate demand would rise, and assuming the economy had spare capacity, GDP would rise. Alternatively, if there was no spare capacity, the only effect would be to raise inflation.
However, clearly monetarism can be taken too far: e.g. the idea that demand can be accurately controlled simply by adjusting the money supply is over-simple. But MMTers do not advocate the latter over-simple idea.
What they do argue (speaking as a self-appointed spokesman for MMT, ho ho) is that come a recession, the best solution is for the state (i.e. government and central bank) to create money and spend it, and/or cut taxes. Keynes advocated much the same. And that will have two effects.
First there is what might be called a fiscal effect: e.g. if the extra spending comes in the form of extra spending on education, then an immediate effect will be more jobs for teachers.
A second and more delayed effect is that the stock of money (base money in particular) rises, which will itself also raise demand.
Thus it can be said that not even extreme monetarists are extreme monetarists – in the sense that there is an inevitable fiscal element involved in feeding more money into the private sector.
Who controls the printing press.
Of course there is an obvious problem with creating money and spending it, namely that if POLITICIANS are in control of the money printing press, they may well be tempted to engineer pre-election booms.
But the solution to that little problem was set out by Positive Money several years ago: have some sort of independent committee of economists, perhaps based at the central bank, decide the SIZE OF the deficit, while politicians retain control of strictly political matters, like what proportion of GDP goes to public spending, and how that is split between education, health, infrastructure, etc. Ben Bernanke incidentally gave an approving nod to that sort of system.
Another point in favour of the MMT stance here is that while MMTers do not claim adjusting the stock of money should the SOLE method of adjusting demand, their claim that inadequate demand proves there’s an inadequate stock of money is nevertheless true by definition – at least in the following sense.
If the private sector is spending an inadequate amount, that ipso facto means they are trying to save too much, or trying to save an amount that results in Keynes’s “paradox of thrift” unemployment. Put another way, if people are saving too much, those people must in their own estimation, have an inadequate stock of liquid savings (in the form of base money – or government debt, which as MMTers have often pointed out, is pretty much the same thing as base money). Ergo the claim by MMT, Keynes and others namely that given unemployment, there must be an inadequate stock of savings is true by definition. And that is an argument in favour of at least a partial acceptance of monetarism.
Conclusion: the extent to which MMT accepts monetarism is about right.
Wednesday, 18 September 2019
This New Statesman article by Grace Blakeley isn't too clever. (Article title: "The next recession won't be like...") She argues that we’re doomed because given that interest rates are near or at zero, central banks won’t be able to cut interest rates come the next recession, plus she claims the automatic stabilisers won’t do the trick. And that’s it basically. Only slight problem is that she’s left out DISCRETIONARY fiscal stimulus. That is, the latter stabilisers are what might be called “non discretionary” i.e. they happen automatically. But in contrast, any government (particularly the government of a country which issues its own currency) is free to implement as much fiscal stimulus as it likes over and above the latter automatic fiscal stimulus. Indeed, that’s exactly what most governments did in the last recession.
But I’m not being desperately clever in making the latter point: I’m simply repeating what Keynes said almost a hundred years ago. You’d think Blakeley, who got a degree at Oxford in politics, philosophy and economics would have heard of Keynes and understood his basic message.
It could perhaps be argued that Blakeley is implicitly ruling out Keynsian fiscal stimulus in that she very briefly refers to the allegedly excessive levels of “total global debt”, which in her own mind presumably includes national debts, though she is not clear on that. That’s where she says, “The global economy is facing a debt overhang (around $246trn) many times larger than that which preceded the financial crisis. Total global debt is three times the size of global GDP…” Well there are two answers to that.
First, as Keynes explained, there is no need to incur any extra national debt at all in order to fund fiscal stimulus: as he said, a country which issues its own currency can simply create new money and spend it, and/or cut taxes.
Second, the tired old argument that we can’t do too much fiscal stimulus because of the increased national debt that involves was PRECISELY the argument used by George Osborne, David Cameron and other Tories to limit stimulus (i.e. impose austerity - in the “inadequate demand” sense of the word) in the last recession.
Though in fairness to the Tories, many if not most economics commentators employed the same crass argument, as Simon Wren-Lewis has pointed out over and over.
So if Grace Blakeley IS EMPLOYING the latter argument, then Blakeley, the left wing firebrand is agreeing with Tory pro-austerity arguments.
Now that’s a giggle.
Monday, 9 September 2019
First, he claims the coexistence of low unemployment and low inflation disproves the conventional idea that the two are inversely related. (Article title: Central Banking's Bankrupt Narrative.)
No it doesn’t and for the simple reason that advocates of the latter relationship never said it stays constant thru time: i.e. the inflation / unemployment relationship can deteriorate OR IMPROVE – indeed, it would be surprising if it did stay absolutely constant thru time. Doh!
Second, he claims that if an interest rate hike were accompanied by his own bizarre idea that governments should hand out money to those who invest in the stock market, the net effect might not be the normal “higher interest rates damp demand” relationship. Well you don’t say!!
Apart from the dubious morality of handing taxpayers’ money to the rich, if an interest rate hike is accompanied by fiscal stimulus of any sort, it’s pretty stark staring obvious that the NET EFFECT can be stimulatory!!
Monday, 2 September 2019
To cut interest rates, they first have to be artificially raised, which involves the poor subsidising the rich – mad or what?
Why exactly do governments borrow? Well it’s not for the same reason as most private sector entities (households or firms) borrow, i.e. to make investments. While there are many who argued that government should borrow only to invest, that idea has not actually been put into practice.
The sad reality is that governments the world over borrow for a much more devious reason. The reason is that politicians are always tempted to ingratiate themselves with voters by increasing public spending and to ingratiate themselves even more by abstaining from raising taxes. That results in a need to borrow to cover the difference between money flowing into government coffers and the amount flowing out.
Simon Wren-Lewis (former economics prof at Oxford) calls that the “deficit bias”. And David Hume, writing three hundred years ago pointed to the same phenomenon. 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 clamours against himself. The practice, therefore, of contracting debt will almost infallibly be abused, in every government.”
To summarise, the process that gives rise to government debt is for the most part as follows. First, politicians collect an inadequate amount of tax, i.e. they spend, or at least find themselves planning to spend more than will come in from tax each year. That in turn means the private sector (households and employers) are in possession of too much money (base money to be exact), and that would be inflationary if something were not done about it. So governments offer attractive rates of interest to those with cash to spare with a view to inducing those concerned to lock up their cash for a period of time, rather than spend the cash and thus cause excess inflation. And that whole process results in an entirely artificial rise in interest rates.
Worse still, it is not even clear that if public borrowing was limited to funding investments, that that would justify such borrowing. The reasons are obvious to every taxi driver: that is, if a taxi driver wants a new taxi and happens to have enough cash to buy one, the taxi driver won’t borrow money to buy the taxi!! Why pay interest to anyone when you don’t need to? In short, what justifies borrowing is a shortage of cash, not the fact of making an investment.
And as for large corporations, their investments are nowhere near all funded via borrowing: some of the funds come from shareholders and some from retained earnings.
But governments are never short of cash in that there is no limit to how much cash they can grab off taxpayers plus governments along with their central banks can simply print a certain amount of cash most years.
The latter point about the debatable reasoning behind “borrow to invest” simply reinforces the point that governments’ motives for borrowing are thoroughly murky, and probably unjustified.
To summarise so far, any rate of interest paid by governments on their debt is an entirely or largely artificial contrivance, and the same goes for interest paid by central banks on money deposited with them (i.e. interest on “reserves”).
But if a government does borrow, how is the interest funded? Well it’s funded out of general taxation, while the interest is paid (as already pointed out) to those excess amounts of cash. So in short, any rate of interest above zero involves robbing the poor to subsidize the rich!
Mad or what?
This simply reinforces the point made by advocates of Modern Monetary Theory (and Milton Friedman) namely that the best rate of interest is zero: i.e. that governments should not borrow, except perhaps in emergencies.
As for exactly WHERE advocates of MMT make the latter point, Warren Mosler, founder of MMT, made the point in the two works listed at the end below.
The above argument to the effect that any rate of interest above zero is unjustified (except in emergencies) leads to the inevitable and and somewhat disturbing conclusion that interest rate adjustments are not a justifiable way of regulating aggregate demand: that is, demand should be regulated simply by adjusting the amount of new money created and spent by governments and their central banks.
1. Huffington article by Warren Mosler entitled “Proposals for the Banking System”, 2nd last paragraph.
2. Paper entitled “The Natural Rate of Interest is Zero” (co-authored by Matthew Forstater.)
Wednesday, 24 July 2019
If you’re looking for incompetence in high places, nothing quite beats the “fiscal space” idea, much favoured by the IMF, OECD and similar organisations. Google “IMF” and “fiscal space” and you’ll find twenty or thirty IMF articles on the subject and an equal number by the OECD, UN, WHO, World Bank, etc.
I actually had a go at demolishing the fiscal space idea several years ago in a short article here. (Title of article: “Fiscal space is hogwash.”) But the IMF continues to spew out articles about fiscal space. So it’s time for another article on this subject. This present article is a bit longer and more detailed. (Incidentally, for another article which mocks the fiscal space idea, see this article by Bill Mitchell entitled “The ‘fiscal space’ charade – IMF becomes Moody’s advertising agency.”)
Fiscal space is the idea that in order to implement stimulus, governments have to borrow and spend, and that allegedly raises the rate of interest government has to pay on its debt, which in turn places a limit on the amount of stimulus. Thus fiscal space, so the story goes, is the amount of stimulus that can be implemented before serious problems kick in in the form of increased interest rates etc.
This IMF work for example defines fiscal space thus: “Fiscal space is a multi-dimensional concept reflecting whether a government can raise spending or lower taxes without endangering market access and debt sustainability.”
There’s no need to borrow!
One big flaw in the whole fiscal space idea is that governments and their central banks do not need to borrow in order to impart stimulus! As Keynes pointed out in the early 1930s, governments and their central banks can simply print money and spend it in order to impart stimulus. Indeed, that’s exactly what several large countries have done over the last five years or so via QE! (At least that certainly applies to countries which issue their own currencies, or to groups of countries which issue a common currency, like the Eurozone. Individual countries within in the Eurozone which do not have their own currency are entirely different, of course.)
Let's expand a bit on exactly what QE is. In reaction to the recent recession, governments have borrowed and spent more than usual (say $X) while central banks have printed around $X of money and bought back that debt. That nets out to the same as “government and its central bank print and spend $X”. Indeed, governments do not even need central banks in order to print and spend: the UK Treasury printed or “created” money at the start of World War I.
Of course advocates of the fiscal space idea might answer that by claiming that the sight of a government (with or without the help of its central bank) going for “print and spend” might induce government’s creditors to doubt the responsibility of such a government and thus demand extra interest on its debt. (Though I know of no instances of the IMF or other advocates of fiscal space being bright enough to actually make the latter objection.)
Anyway, one answer to that is that as long as the amount printed is enough to cut unemployment to the minimum feasible level without causing excess inflation, money printing is a perfectly responsible course of action. Indeed, the latter form of responsibility is exactly what the larger developed countries have displayed in recent years: that is, they have printed larger than normal amounts of money so as to implement QE, and lo and behold, the amount printed has been enough to take unemployment down to record lows without exacerbating inflation. But those governments have not printed completely ludicrous “Robert Mugabe” amounts of money and given us hyperinflation.
You really have to wonder whether the IMF has ever heard of QE or whether it is aware of the relevance of QE to this debate. Indeed the above mentioned IMF work from which the IMF definition of fiscal space was quoted is around thirty thousand words in length (longer than many books), but QE is not mentioned so much as once!
Can IMF ignorance be excused?
In defence of the IMF, it could perhaps be argued that prior to QE, the IMF did not have the experience of QE to confirm that money printing when done responsibly is no problem. Unfortunately that excuse won’t wash.
First, as pointed out above, Keynes explained in the 1930s that money printing was a perfectly viable way out of recessions. Second, since QE, IMF enthusiasm for fiscal space and the number of articles they turn out per year on the subject has continued unabated. In short the IMF and similar international organisations which enthuse about fiscal space do not seem to have learned much from QE.
A second flaw in the fiscal space idea, which is actually very close to the above one, is that as soon as interest on government debt rises significantly above zero, stimulus can then be imparted by cutting interest rates: and that’s done by among other things, having the central bank print money and buy back government debt.
Indeed there’s little difference between QE and cutting interest rates: that is, QE consists of printing money and buying back debt when interest rates are at or near zero, whereas conventional interest rate cutting consists mainly of printing money and buying back government debt when interest rates are significantly above zero.
In fact Simon Wren-Lewis (former Oxford economics prof) specifically advocates using interest rate cuts when rates are above zero, and fiscal stimulus when rates are at or near zero.
To summarize so far, fiscal space looks like one big irrelevance.
Does “borrow and spend” have particular merits?
It could perhaps be argued that fiscal space would be relevant if “borrow and spend” was a much better way of imparting stimulus than interest rate cuts or QE. Unfortunately though, there’s a monster flaw at the heart of “borrow and spend” as follows.
Clearly the effect of extra public spending (or tax cuts) is to stimulate demand. But the effect of borrowing, considered in isolation, is the opposite. That is, if government or central bank borrow $Y and just sit on the money, that CUTS demand. Now if you’re aiming to raise demand, it’s a bit of a nonsense to do something that has the opposite of the desired effect! That’s like throwing dirt over your car before washing it!
To summarize, Keynes was right to say in the 1930s that the way out of a recession is for government to borrow or print money and spend it (and/ or cut taxes), but the print option clearly makes more sense than the borrow option.
As the German economist Claude Hillinger put it in 2010, “An aspect of the crisis discussions that has irritated me the most is the implicit, or explicit claim that there is no alternative to governmental borrowing to finance the deficits incurred for stabilization purposes. It baffles me how such nonsense can be so universally accepted. Of course, there is a much better alternative: to finance the deficits with fresh money.”
Is “unprinting” money difficult?
Another possible argument against “print and spend”, and hence an argument in favour of fiscal space, is that if stimulus is imparted by “borrow and spend”, then when stimulus needs to be reversed, government bonds can be sold to mop up any excess supply of money in private hands.
Well the answer to that is that stimulus can always be reversed simply by raising taxes and/or cutting public spending. But if that’s politically difficult, government or central bank can simply wade into the market and offer to borrow at above the going rate of interest.
Central banks in some countries may not be allowed by law to do that at the moment, but there’s no good reason to stop them: i.e. the law can be changed.
The moral (to be cynical) is that if you can produce an important technical sounding phrase, like “fiscal space”, “secular stagnation” or “austerity”, your fortune is made: everyone likes to sound technical and important, so all and sundry will repeat your important sounding phrase for years to come. The fact that the important sounding phrase is in some cases no more than emperor’s clothes won’t worry anyone.
Wednesday, 10 July 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 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.
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
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
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
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
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
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
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
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.
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
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
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.
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.
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
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
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.
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.
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!
"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