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
Tuesday, 21 May 2019
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
Tuesday, 14 May 2019
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
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
Wednesday, 8 May 2019
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
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.
Sunday, 5 May 2019
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). https://www.imf.org/en/Publications/Policy-Papers/Issues/2018/06/15/pp041118assessing-fiscal-space
2. Boosting Fiscal Space : The Roles of GDP-Linked Debt and Longer Maturities
3. IMF Fiscal Monitor: Capitalizing on Good Times, April 2018
Saturday, 4 May 2019
That’s in a letter from the 60 to the Financial Times published a few months ago. The letter is entitled “BoE itself must now take action on climate change.”
Now I’m all for dealing with global warming, but this isn't a good way to do it.
First, the letter argues that the BoE should take account of the climate change risks inherent to some of the bonds the BoE buys. Well the first problem with that idea is that bond buying by central banks, i.e. QE, was seen from the outset as being a temporary measure, and presumably that is what it will turn out to be. That hardly makes it a brilliant idea for combating climate change.
Among the reasons for it being a temporary measure is that it is not the job of central banks, or of government in general, to take commercial risks.
Next, the letter suggests that insurance companies (whose bonds central banks have bought) have not taken climate change risks into account to a sufficient extent. Well the answer to that is that climate change, assuming the climate change experts are right, is coming relatively slowly. For example we all know that sea levels are rising: but not at meter per year! The rise is more like a millimeter a year. Plus (surprise surprise) insurance companies are well aware of the flooding risks that involves and have already denied insurance for thousands of houses because of that.
Then in the penultimate paragraph, the letter claims “The BoE’s collateral framework and asset purchases are extremely powerful and reverberate throughout the rest of the financial sector..”
Well frankly I doubt it. That is, on the above assumption that QE will turn out to be temporary, the ultimate risk in relation to bonds remains with the private sector: that is, shifting the risk to the public sector, which is what happens when a central bank buys bonds, is only a temporary shift. To that extent, the fact of a central bank temporarily buying bonds issued by corporation X will have little effect on the price of those bonds in the long run, and thus equally little effect on the costs of funding that corporation.
Wednesday, 1 May 2019
At the end of a Financial Times article entitled “What you need to know about MMT”, Davies says the following - I’ve put his words in green italics.
“These arguments imply that investors should distinguish sharply between two states of the world in which the ideas of MMT might be implemented.
When economies are stuck at the zero lower bound, like Japan and the eurozone today, MMT could persuade governments and central banks to be less worried about debt constraints when considering expansionary fiscal policy, financed by money creation. Within limits and bolstered by institutional reforms to maintain confidence, this might restore healthy levels of demand more quickly.
However, when an economy is operating normally, and especially when it is close to full employment, MMT should not be used to justify money financed deficit increases, such as those to finance the Green New Deal. In fact, the results could be highly inflationary and financially destabilising. These are the conditions that apply in the US and UK today."
Well, (and this has nothing to do with MMT) it’s a bit hard to see why there should be any “sharp distinction” between where an economy is “operating normally” and where it is in recession. That is, it is nothing more than a common sense observation that there are all degrees of recession, from serious 1930s type recessions to the situation where an economy is operating just a little below capacity.
I look forward to enjoying more incompetent attempts by supposedly authoritative economics commentators to criticise MMT....:-)