Credit guidance nonsense

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Summary.          Credit guidance is the idea (promoted by Positive Money and others) that government should induce banks to lend less to various sectors of the economy which are allegedly unproductive, e.g. property based loans like mortgages, and more to sectors which are allegedly productive, like SMEs and green investments. The first problem there is that banks already lend to SMEs up to the point where the marginal or least viable SME borrower is only just worthwhile. Thus quite how further SME loans can be described as “productive” is a mystery. Second, as regards green investments, there’s nothing wrong with promoting economic activity which cuts CO2 emissions, but the bias towards investment at the expense of more labour intensive forms of activity does not make sense particularly since advocates of credit guidance say they want to maximise job creation. Third if loans for mortgages are constrained, that will cut the number of houses built, which a strange objective, given the housing shortage. Fourth, increased lending for house purchases is largely just a series of book-keeping entries: i.e. it does not involve the consumption of real resources. To that extent, there are no real resources there that can be re-allocated for example to green investments.

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Positive Money (PoMo) have recently put much effort into advocating the idea that the Bank of England should do more so called “credit guidance”: in particular, induce private banks to lend more to allegedly “productive” borrowers, e.g. small and medium size firms (SMEs), and less to allegedly unproductive loans, e.g. property related loans, like mortgages.

To quote the relevant PoMo article (I’ve put the quote in green italics):

“For too long the UK economy has been held back by the majority of bank lending going towards property and financial markets rather than the productive investment in the real economy desperately needed to level up regions and boost incomes.

Now more than ever we need concrete action to guide lending towards productive investment to support a sustainable recovery and a fair green transition. Policymakers should look to introduce modern forms of so-called ‘credit guidance’, which were effective in steering lending towards more productive ends for much of the twentieth century.”

Unfortunately there are four big problems there.

First, commercial banks (henceforth just “banks”) are only too happy to lend to ABSOLUTELY ANY borrower who seems credit worthy and viable. It makes no difference whether the borrower is an SME or someone wanting a mortgage or any other sort of borrower. Thus banks WILL ALREADY be lending to SMEs up to the point where the marginal or least viable SME borrower is only just viable, in the view of banks.

Moreover, banks are not even constrained in their lending activities nowadays by a shortage of reserves: unlike prior to the 2007/8 bank crisis. Banks are now AWASH with reserves.

And they’re not constrained by lack of capital either: if banks spot an increase in the number of genuinely viable SME borrowers, or any other type of viable borrower, they’ll have no difficulty acquiring extra capital so as to help fund relevant loans.

So to summarise, PoMo and others want banks to make extra loans to borrowers who appear not be viable. But in that case, how can those borrowers be described as “productive”? It’s all nonsense!

Moreover, if extra loans are to be given to unviable SMEs, banks will want a subsidy for doing that. But PoMo and other authors cited in the above PoMo article don’t seem to be aware of that. Certainly they don’t tell us where any subsidy comes from.

 

The second problem: matters green.

The idea that banks should be induced to lend to fund investments which cut CO2 emissions sounds wonderful. Environmentally concerned folk with a poor grasp of economics will love that.

Global warming is arguably the most important problem the human race has ever faced, and certainly that problem needs to be solved. But introducing any sort of assistance for loans which fund green investments rather than assistance for non investment type costs (e.g. labour) needed by green projects does not make sense. Moreover, the latter concentration on capital equipment clashes with the claim by PoMo that job creation is an important element of their proposals.  

Put another way, taxes on CO2 emitting activities or materials, like petrol or diesel make sense. And subsidies for generating electricity from wind and solar make sense. But a bias towards capital intensivity where those activities are concerned does not make sense.  
 

The third problem: less house building.  

The above PoMo article (and the works cited in it) make much of the fact that a large proportion of lending is property based (e.g. mortgages). And that, so the argument goes, means there is loads of money currently devoted to property purchase which COULD BE diverted to allegedly “productive” SMEs and so on.

Well apart from the above mentioned “marginal” problem, there’s another problem there, as follows. What induces house builders to build more houses is (unsurprisingly) house price increases. In fact there’s plenty of evidence that housebuilders are brutally commercial in that respect, i.e. they often obtain land with planning permission but do not build on it immediately. Instead, they wait till house prices in relevant areas have risen to the point where they can be sure that the millions spent erecting a new estate bring them a profit. Can you blame them?

Thus the effect of constraining loans to house buyers would be less house construction: not a brilliant idea, given the housing shortage.
 

Fourth: book-keeping.

Much of the increased lending that accompanies house price increases does not involve the consumption of real resources. To illustrate, if saver / lenders increase their willingness to lend at lowish rates of interest (which is what has happened over the last twenty years or so), and/or if borrowers increase their willingness to borrow more money to buy more expensive houses, the initial effect (ironically) is not that a significant number of people move into larger or better houses.

Reason is that the stock of houses in the short term is fixed. Thus all that happens is that debts in the form of mortgagers rise, and that increased debt must of course be owed to someone: it’s owed to saver / lenders who find their stock of money has risen. But that’s all nothing more than a glorified series of book-keeping entries.

In contrast to the latter INITIAL effect, there is of course another effect (alluded to above) namely that the increased price of houses induces builders to erect more houses. That DOES INVOLVE the consumption of real resources.
 
So to summarise, and contrary to the claims of credit guidance advocates, a million Euros or dollars less lending to mortgagors does not mean there is then a million Euros or dollars that can be spent on green projects or loaned to SMEs to enable them buy new machinery.  

Mervyn King’s poor criticisms of MMT.

 
In this Spectator article, he tries to criticise MMT. Article title: "The Ideological Bankruptcy of Modern Monetary Theory."

His second paragraph contains the revelation that while there’s something to be said for money printing a la MMT, money printing is not a new idea and we need to be careful with money printing.

Well I think the average ten year old knows that money printing is not a new idea, plus the average ten year old knows there are dangers associated with money printing. That’s why MMTers have repeated till they are blue in the face that inflation places a limit to the amount that can be printed. Evidently Mervy King is not aware of the latter point.

Next, King trotts out the fiendishly clever play on words which hundreds of others have trotted out, namely that Modern Monetary Theory is neither modern, nor monetary, nor a theory.

There again, and as regards "modern", MMTers are streets ahead of Mervy King: they have always made it clear that their ideas owe a lot to economists from long ago: in particular Abba Lerner and Keynes.

Next, comes this para (which I’ve put in green italics):

“It is not monetary because the relevant questions concern fiscal policy: how should governments finance their deficits and what are the limits to those deficits? If deficits can always be financed by the printing of money by a compliant central bank, then we are in a world of ‘fiscal dominance’, to use the modern jargon. Inflation is then determined by government spending decisions. It was precisely to convince financial markets of the opposite that led to the independence of the Bank of England.”

Well now if it’s so fantastically important that a central bank be independent, how come the UK managed OK in the years PRIOR to when the BoE was made independent (in 1997)? I’m not saying I OPPOSE central bank independence. I actually BACK the idea. My point is simply that the difference between an independent and non independent bank is not Earth shattering.
 
However, the above quoted para from King’s article does contain a valid criticism of MMT, and it’s one that I’ve highlighted myself over the years. It’s that while there’s nothing wrong with MMT theory, MMTers have not thought through the practicalities. In particular, as King says, MMT seems to assume that politicians control the amount of money that is created and spent, and in view of Mugabe, the Weimar republic etc, that may not be desperately clever.
 
So, is there a way of implementing MMT while keeping politicians away from the printing press? Well yes there is. As pointed out by Positive Money and Ben Bernanke, it would be perfectly feasible to have the central bank (or some other independent committee of economists) decide how much money to print each year, while politicians retain the right to decide the NATURE of deficit spending, e.g. whether it goes towards education, health, tax cuts, etc etc.

But Mervyn King is evidently not aware of the latter Positive Money / Bernanke point, so he’s clearly is not up to speed on this subject.

Fractional reserve banking is as clever as legalising drunk driving and making it compulsory to insure against resulting injuries.

 
 

 

Prior to the introduction of deposit insurance, our bank system (fractional reserve banking) was essentially fraudulent. Reason is that banks told depositors or at least suggested to them that their money was safe, while at the same time, granting loans. Those two activities are plain incompatible because if a bank makes enough silly loans, and banks do just that far too frequently, then they are not able to repay depositors their money.

Anyway, governments eventually decided to do something about that. But instead of simply banning the above practice, they decided, if anything, to encourage it by introducing deposit insurance (in the early 1930s in the US, for example). That is, banks could continue to engage in the above fraud, but depositors were shielded against loss when the fraud resulted in disaster.

Unfortunately, though, that did not deal with all the fallout from the above mentioned “disaster”: i.e. banks going bust. That is, deposit insurance, while it protected depositors from loss, did not stop banks going bust.

So in 2007/8 for example we had a major bank crisis, as a result of which various banks faced going bust, though of course the majority were saved thanks to taxpayer funded largesse. But even that taxpayer funded largesse did not prevent the bank crisis causing a ten year long recession and tens of millions worldwide losing their jobs, and hundreds of thousands losing their homes.

In other words, to repeat, deposit insurance does not deal with all the fallout from bank crises.
 
The alternative to deposit insurance would have been to ban the above mentioned fraud. And doing that would have involved forcing banks to abstain from putting depositors’ money at any risk whatever: in other words banks would have been forced to keep money which depositors wanted to be totally safe in a totally safe manner (shock horror). That is banks would have been banned from lending out depositors’ money, or even from having the same entity or bank subsidiary engage in both accepting deposits and making loans.

As for loans, banks would have been forced to fund those via equity, not deposits. And what d’yer know? That’s what full reserve banking consists of.

So deposit insurance has distinct similarities to legalising drunk driving while making up for that sloppy attitude by forcing all car  drivers to be insured for medical expenses and loss of earnings if they crash their cars while under the influence of alcohol. That is, that insurance deals with SOME OF the problems of drunk driving, but it does not cover all the fallout from that anti-social activity.

And just to repeat, deposit insurance deals with SOME OF the consequences of the above fraud, but it does not deal with all the fallout from that activity.

In particular, bank failures under full reserve banking are plain impossible: as for safe money, that’s safe. And as to banks which lend, or the subsidiaries of banks which lend, they’re funded via equity, thus if they make silly loans, all that happens is that the value of that equity falls. The bank or subsidiary does not go bust.
 

Of course that is not to argue that full reserve puts an end to all booms and busts. But it does remove or at least ameliorate one cause of boom and bust.

And as for any idea that any cut in lending and indebtedness caused by full reserve is a problem, that is hard to reconcile with never ending complaints we get from a long list of worthies to the effect that there is too much private sector debt.

Plus the fact that more lending increases GDP all else equal DOES NOT prove that more lending is desirable. One reason is that increasing GDP, i.e. imparting stimulus when unemployment is higher than it need be, can very easily be done WITHOUT any specific attempt to increase lending and debt. For example a helicopter drop basically just increases consumer spending, though doubtless a finite amount of extra lending will accompany that.

Moreover, the conventional assumption in economics is that externalities should not be allowed. And a bank system which imposes ten year long recessions on an economy is clearly a system which is guilty of imposing an externality. 

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P.S. (14th Dec). I’ve just realised there’s a bit of a mistake / omission from the above article, as follows. Supporters of the existing / fractional reserve bank system would argue in response to the above points that bank problems NOT DEALT WITH by deposit insurance are dealt with via bank regulation, e.g. imposing minimum capital requirements.

My answer to that is that the latter idea is fine in theory, but the problem is that bankers always find it easy to get their way with politicians and roll back bank regulations. Witness the claim by Sir John Vickers (chairman of the main UK government inquiry into banks in the wake of the 2007/8 bank crisis) that bank regulations are still not adequate.

And it’s not just POLITICIANS who do banksters’ bidding: Mervyn King, former governor of the Bank of England, appears to be just as willing to do banksters’ bidding. In Ch7 of his book “The End of Alchemy” he argues against full reserve banking on the grounds that “banks would lobby hard against such a reform”. Perhaps he also thinks theft should be legalised because thieves are not too keen on anti-theft legislation.

Conclusion: in practice, it is very debatable as to whether bank regulation actually solves the problem, though clearly there is more to this argument than appears in the above article and this “P.S.”.


 

 

An absurdity at the heart of interest rate adjustments.

 

Assuming negative interest rates are ruled out, clearly interest on government debt and/or interest on reserves has to be ABOVE zero if interest rate cuts are to be used to impart stimulus. But why ARE interest rates on government debt and reserves ever above zero?

Well the reason is that the authorities are trying to damp down demand: i.e. people can be induced to hold a larger stock of cash than they would normally do if they are offered interest on cash which is locked away for a while (e.g. locked away in the form of interest yielding government debt).  

But demand inevitably varies in some way with the private sector’s stock of cash (aka base money). Thus in order to get interest on state liabilities (government debt / reserves) anything above zero, it is  first necessary for government to issue too large a stock of debt / reserves!

Now what exactly is the point of creating and spending such a large amount of cash / reserves into the economy that it is then necessary to bribe holders of that cash not to spend it by offering them interest on their pile of cash? Or to put it more brutally, what is the point of creating and spending so much cash / base money that it becomes necessary to spend taxpayers’ money bribing the rich (i.e. holders of that money) into not spending it?

Or to put it even more brutally, if you want to impart stimulus by cutting interest rates, it is first necessary to spend taxpayers’ money bribing the rich to hoard money.
 
And that, folks, is part of the logic behind the MMT “permanent zero rate of interest” idea – at least I think it is.  

Cartoon.

 

The Resolution Foundation falls for the nonsensical “fiscal space” idea.

 
 

 

The Resolution Foundation is a UK economics think tank, and the their ideas on “fiscal space” are set out in recently published work entitled “Unhealthy Finances”, which at about 70,000 words is about the length of an average book.

I demolished the whole fiscal space idea in an MPRA article about ten years ago, and another MMTer, Bill Mitchell, took the idea apart in an article entitled “The ‘Fiscal Space’ Charade” in 2015.  

Plus I explained the flaw in an article on this blog in 2012.

Anyway, there’s nothing like repetition for getting ideas across. So I’ll briefly explain the flaw in the fiscal space idea yet again in the paragraphs below.

Fiscal space is the idea that if a country’s debt/GDP ratio is on the high side, relative to where it’s been in recent decades, it will have to pay a relatively high rate of interest on that debt and/or if it wishes to implement more stimulus, it will have to borrow yet more and pay an even higher rate of interest on its debt, thus in that situation, it does not allegedly have “space” for implementing stimulus.

And if you want an alternative definition, the IMF definition is set out near the start of the above mentioned article by Bill Mitchell.

The first and very obvious flaw in that FS idea is that any country which issues its own currency does not need to borrow in order to fund stimulus: it can fund stimulus by simply printing money, which in effect is what most of the World’s larger countries have done over the last five years or so. You have to wonder what planet Resolution Foundation authors live on.

The second flaw in the fiscal space idea is the assumption that because the debt has been at let’s say 50% of GDP for the last two decades, that therefor it is not sustainable for it to remain at 100% for the next one or two decades. That assumption is particularly questionable given that the Japanese debt/GDP ratio is around 250% with few obvious problems, and given that the UK ratio was at a similar level just after WWII.

Moreover, it is plain impossible to predict where we will be in three or five years’ time. For example it could be that in five years’ time, the big increase in the desire to save that happened over the last twenty years or so goes into reverse. That is, the private sector could go into “spendthrift mode”, or if you like, Alan Greenspan irrational exuberance mode. In that case it would certainly be desirable to raise taxes so as to rein in the additional demand that stemmed from the latter exuberance, and hence cut the debt, as suggested by the Resolution Foundation.  

But equally, it could be that the private sector’s desire to save CONTINUES to increase, and we become another Japan.  In that case government HAS ABSOLUTELY NO OPTION but to meet those “savings desires” (to use an MMT phrase). If government DOES NOT supply the private sector with the savings it desires, the private sector will try to save so as to acquire those savings, and Keynesian “paradox of thrift” unemployment will ensue. In that case (unless government wants to see unemployment rise to unnecessarily high levels) government and central bank will just have to let the debt (and/or the stock of base money) rise even further.

The moral is: “play it by ear”. In other words the basic MMT idea is quite right: that’s the idea that the deficit (or surplus) simply need to be whatever results in unemployment being as low as is consistent with hitting the inflation target while keeping interest on the debt at or near zero.  In contrast, all attempts to PREDICT (a la Resolution Foundation) what tax rises will be needed in three or five years’ time are futile.

Scott Sumner’s strange ideas on MMT.

 
A recent article by Scott Sumner attempts to criticise MMT. All the article actually does is to show that he doesn’t have much idea as to what MMT is all about. (Title of the article is “Why Money Matters”.)

The article deals at length with just one point, namely the effect of swapping dollars for government issued bonds. (Where the central bank creates money and buys up bonds, that swap equals QE, of course). Plus the article claims MMT’s ideas on swapping bonds for cash are defective.

Now there’s just one glaring flaw in that, which is that MMTers advocate a more or less permanent zero interest rate (on government bonds and government liabilities generally). Incidentally Milton Friedman advocated the same.

Now in that sort of permanent zero interest rate scenario there’d scarcely be any government issued bonds! What’s the point in locking up your money for a year or several years if there is no reward for doing so? Absolutely none!

Indeed Milton Friedman is quite explicit about that: that is, he said he didn’t see the point of government borrowing, except in emergencies. (See his para starting “Under the proposal….” here.)

So even if Scott Sumner’s criticisms are valid, he is dealing with a matter which is near irrelevant for MMTers. That’s not much a body blow for MMT!

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Postscript (4th Dec 2020).   Then in the final three paras of his article he says "the public’s attempt to get rid of excess cash balances will drive up the price of a wide range of assets, leading to more total spending," And apparently "All of this is ignored by MMTers."

So I left about five links in the comments to articles by MMTers which very specifically refer to the stimulatory effects of extra cash balances."  Then Sumner accuses me of confusing stocks with flows when in fact those links refer very specifically to stocks!!

Frankly it's difficult to know how to descrbe Scott Sumner's grasp of MMT without resorting to three letter words.

Varoufakis’s questionable ideas on CBDC.

 

The questionable ideas are in an article of his entitled “Why the Bank of England should give everyone a free account”.

His first claim is that “In times of trouble, such as the current pandemic, the Bank of England could lift all boats at once by crediting your account directly…”. Well I suggest the decision as to who gets stimulus money is very much a POLITICAL decision (as Positive Money has argued since its foundation) and not a decision for central banks.

Second, why should everyone be entitled to a FREE account at the central bank, or any other bank, come to that? Making something free at the point of delivery is OK where there are overriding social considerations at stake. For example making basic education free (and indeed compulsory) for kids is widely accepted as a good idea because being able to read, write and do basic maths is a gift which no child should go without. Likewise, there are good arguments for making basic health-care free at the point of delivery, which explains why basic health-care is available for free in many countries.

But is a bank account a basic human right? Given that anyone can do their basic financial transactions (purchase of food, paying the rent etc) using PHYSICAL cash (£10 notes, $100 bills etc) why is a bank account a basic essential? Maybe at some point a majority of shops will refuse to take physical money and will insist on payment via debit or credit cards. But we are not at that point yet.

Robert Peston’s barmy ideas on government debt.

 

Robert Peston published an article on 25th November 2020 entitled “Spending Review: How the UK's Covid-19 debts may turn out very expensive.” The article is complete nonsense, which raises the question as to how he ever came to be the BBC’s business editor or ITV’s political editor.

Dozens if not hundreds of other people on social media and elsewhere have taken the p*ss out of this article. Anyway, my “p*ss taking” efforts, for what they are worth, are as follows.
 
His first nonsensical claim is that the large government debt accumulated as a result of Covid “…represents by implication the fastest transfer of wealth and power to China and Asia in our lifetimes.” Well that might be true if China had bought up large amounts of that debt. Unfortunately the reality is that Chinese holdings of US Treasuries have remained roughly constant for the last ten years: i.e. since long before Covid.


 

The UK’s debt/GDP ratio.

Next, he points to the fact that the UK’s debt/GDP ratio will rise to above 100% which apparently is a problem because “Outside of world wars, this is a uniquely large and fast rise in public sector debt.”

Now hang on. The ratio for the UK rose to well over DOUBLE that 100% figure in 1945.But the years after 1945 were “outside of world wars”!!!!

Of course that high debt was CAUSED BY WWII, but that record debt fell only very slowly in the decades after 1945: falling  to  about 50% a full fifty years later: in 1995.

Now what’s the big difference between a high debt during peace time which was originally caused by a war and in contrast, which was caused by a virus?  Unfortunately (you’ll be amazed to learn) Peston doesn’t explain what the big difference is.

 

What if interest rates rise?

Next, Peston sets out a lot of complicated stuff about “gearing” and government bonds which contains several mistakes, most of which I’ll ignore. For example, he says “The point is that interest rates will have to increase at some point.” He doesn’t explain why. The reality is that if demand stays relatively muted, then there’s no earthly reason to raise interest rates!

But shortly after that, he gets nearer the truth when he says interest rates COULD RISE. To be exact, he says “…..a modest rise in activity could lead to inflationary pressures…”.  Notice the word “could”. If (and that’s a big “if”) inflationary pressures did get uppity, some sort of countervailing deflationary measure would be needed. That could be tax increases or it could be an interest rate increase (as I’ve explained at least ten times on this blog over the years).

But neither of those measures (tax increases or an interest rate rise) would constitute a cost for the population as a whole (as I explained here almost ten years ago). I’ve explained at least ten times on this blog over the years – forgive the repetition). Reason is that the sole purpose of the tax increase or interest rate rise (as indeed Peston very much implies himself) would be to hold demand down to the “full employment” or “economy at capacity” level.

So if no standard of living sacrifice for the UK population is required in order to cut the debt in what sense is there a “cost” there for the UK population? Peston doesn’t explain.

 

Politics.

That however is not to say there are absolutely no conceivable problems involved in cutting the debt. The point is that there are no strictly ECONOMIC OR TECHNICAL problems. In contrast, there is a possible POLITICAL problem: the problem is that, as explained above, cutting the debt involves a rise in tax or a rise in interest rates (which to repeat, do not cause a significant decline in real living standards). But that is not necessarily how the population would see it.

That is, there could be big political objections, even riots in response to significant tax rises, even where those tax rises have no effect on living standards.

So what’s the best thing to do about the latter possible political problem? Well I suggest the best solution is very definitely NOT TO implement DEFICIENT demand NOW so as to ameliorate a problem which may or may not arise in a few years time. I suggest the best solution is to minimise unemployment right now, and then deal with any possible political problems that arise if an when they arise.

Plus, excess unemployment NOW is just as likely to cause riots as tax  rises in a few years time.

Is this the crucial flaw in fractional reserve banking?

 

 

In a “base money only” system, i.e. under full reserve banking, people and firms would lend to each other, sometimes on a peer to peer basis, and sometimes via banks. And under that system there is no obvious reason why the rate of interest established would not be some sort of genuine free market, or “GDP maximising” rate: after all in such a market there’d be millions of borrowers and hundreds of lenders all competing for business, just as in the real world right now. I.e. in that scenario, it is difficult to set up monopolies or cartels to rig the market.

Note that under that system, banks would lend only base money. That is, letting private banks create their own home made money would not be allowed.

However, if commercial banks are allowed to create their own home made money (as under fractional reserve banking), they can lend at BELOW the above rate because they do not to attract deposits to cover 100% of the monies they lend out: they can simply print some of it, at no cost to themselves. (Joseph Huber alludes to this process on p.31 of his work “Creating New Money”). That obviously increases the total amount of lending and debts.
 
That might seem beneficial. Or at least the increased lending might seem beneficial. Only trouble is that, as just intimated, debts rise as well, and there’s an army of do-gooders who witter on about the allegedly excessive amount of debt we as a society have. So to that extent, the latter increased amount of lending and debt is not quite the boon it might seem.

But that’s not the basic point I wish to dwell on here, particularly since I have somewhat jaundiced views about the latter do-gooders.

The more important point is that it’s a widely accepted default assumption in economics that the free market price for anything is the GDP maximising price for reasons given in the economics text books: i.e. it is up to those who want to claim a particular market is flawed to prove their case. Ergo the default assumption must be that money printing by private banks is not beneficial: it will not maximise GDP.

Of course it can well be argued that given the disastrous environmental effects of more GDP, raising GDP should not be an objective. But the answer to that is simply to replace “maximise GDP” with “maximise output per hour”. That is, there clearly isn't any harm to the environment in raising output per hour by X% if the average number of hours worked per person per week is CUT BY X%.

Indeed, there are campaigns aimed at cutting the working week to four days, and partially on the grounds that while total number of hours worked declines, productivity increases more or less compensate for that.

   

Ignorant drivel from Iain Macwhirter on MMT.

 

 

That’s in an article of his entitled “How governments learned to stop worrying and love debt.”

 

He claims MMTers think “Governments can run big deficits indefinitely so long as the debts aren’t called in.” Complete BS. MMTers are well aware that inflation poses a limit (gasps of amazement) to the size and duration of deficits.

 

In similar vein he claims MMTers “say that an independent Scotland shouldn’t bother about debt either, so long as it has control of its currency, because it can just print Scottish pounds to pay for it.” Yet more bollocks.

 

But then Macwhirter contradicts himself when he says MMT “contains an important kernel of truth: that government spending, given low inflation, does not need to be directly financed by tax revenue.”

 

Quite. Put another way the basic MMT claim is that the size of the deficit and the debt do not matter as long as the effect is not excess inflation.

 

So what was all the stuff a few paragraphs above about MMTers being totally unconcerned about inflation?

 

Macwhirter’s article is self-contradictory BS.

 

Afterthought: how do I get a job writing for some respectable newspaper or think tank? Ah yes: I think I’ve got it. Talk BS..!!!!!

 

 

 

Bank of England discussion paper entitled “Central Bank Digital Currency”.

 

The above paper invites comments. So I sent one, as follows.

P.7  The first “key point” says that the only way for the public to hold BoE issued money is in the form of physical cash. That is debatable in that in the UK, any member of the public can open an account at National Savings and Investments whose only assets are base money and government debt. Thus arguably those accounts at the NSI come to the same thing as holding base money in digital form.

The latter point rather detracts from the claim made on p.37, para starting “But CBDC could also introduce risks for financial stability”, namely that the introduction of CBDC or a loss of confidence in commercial banks could lead to a run on commercial banks. That is, depositors at commercial banks have been free for decades to “run to” NSI, but have not done so. In particular, they did not run during the 2007/8 bank crisis.

Plus I would argue that any run from commercial banks is a flaw in those commercial banks, not a flaw in CBDC. My reason for saying that is that one of the main activities, if not THE main activity of commercial banks is basically fraudulent. That is, those banks, 1, accept deposits, 2, grant loans, and 3, promise depositors their money is safe, which it cannot possibly be because loaned out money is NEVER safe.

Indeed if any organisation other than a bank indulges in the latter “three point” activity (e.g. pension funds, unit trusts, mutual funds etc) those other organisations are liable to be prosecuted.

So why are banks allowed to engage in an activity which is fraudulent when done by anyone else? Well I suggest the absolutely VAST AMOUNTS of money spent by the finance sector (about £100million a year) buttering up politicians might have something to do with it.


In other words runs just wouldn’t occur in a full reserve system where (shock horror) banks are not allowed to engage in the latter fraud, as explained by Prof John Cochrane.

Mary Mellor says UBI should be funded out of new publically created money.

 

 

In a "Brave New Europe" article entitled “UBI: Public Money for a Public Purpose”, Mary Mellor argues that UBI (Universal Basic Income) should be funded out of new publically created money (henceforth “base money”), rather than out of tax on the rich.

In fact she goes much further than that. She says “….basic income and other democratically identified public and social initiatives should be funded by new public money which should then be retrieved by taxation.”

Well assuming the gap between issuing the new public money and retrieving it via tax is relatively short, then that comes to the same thing as the more traditional way of funding public spending, namely collecting the tax first and then spending the relevant money. To take the extreme case, what’s the difference between government collecting £X in tax and spending it a week later, and on the other hand, spending that money first, and then retrieving it via tax a week later? No difference!

Bankers have got politicians and economists suckered.

 

 A central bank can create and distribute whatever amount of money an economy needs. Plus that form of money is TOTALLY safe. But those running PRIVATE banks have convinced politicians and economists that the bulk of the money supply should be issued by those PRIVATE banks and should come about as a result of those banks making loans: that type of money is created when private banks grant loans. That means that in order to ensure the safety of households’ stock of money, politicians have to devote billions of pounds taxpayers’ money to bailing out money lenders, when those money lenders c*ck it  up. 

The naivety of politicians and economists, and sheer brass nerve of money lenders are jaw dropping.
 

 

Richard Murphy makes a video.

This video made by Richard Murphy earlier this year is OK except that near the start he claims that because Bank of England £10 notes say that the bank “promises to pay the bearer the sum of £10” that therefor such notes really are a promise to pay.

 

Now there’s a slight problem there, namely what exactly is the BoE promising to pay? The reality is that if you turn up at the BoE and ask them make good on their promise, you’ll be told to shove off.

That “promise to pay” sentence on BoE notes is actually just a left over from the days when banks (including the BoE) really did have to make good on their promise: they had to supply anyone who wanted it with real gold in exchange for those paper “promises to pay”. But those days are long gone.

So in what sense are BoE notes a promise to pay? Well you could say they are a promise to pay in the sense that they are a totally vacuous promise to pay, but presumably that’s not what Richard Murphy has in mind.

As to what he DOES HAVE IN MIND, hopefully all will be revealed at some stage.

John Weeks’s flawed criticisms of MMT.

 

Hot on the heels of Richard Murphy’s expulsion from the Progressive Economy Forum for backing MMT, I thought I’d see what PEF have against MMT. The answer seems to be not a vast amount. Though there is an article by John Weeks entitled “Fiscal Deficit and Public Debt too Large?”.

In the article, Weeks criticises MMT, though he doesn’t actually refer to it by name, which is odd.

But it’s pretty obvious he’s referring to MMT to judge by this passage: “This question begins with the recent arguments that if governments have control of national currencies — sometimes called sovereign currencies — they can fund their expenditures through money creation.  This view derives from the argument that taxes do not directly fund spending.” Now if that’s not a reference to MMT, I don’t know what is. He really ought to have clarified things there. But never mind. Moving on…..

His basic criticism is the not entirely invalid point that MMT is fine for large countries, but not so good for small ones. However, his article does have weaknesses. 

He says, “funding expenditure via money creation…. the ability to do so requires that the currency be safe from speculation against the exchange rate.  That requires either that the national currency serve as an international medium of exchange (reserve currency) or that the government possesses substantial foreign exchange reserves.”

Well the first flaw in that argument is that the fact of a currency being an “international medium of exchange” will not necessarily protect it from speculative attacks if speculators think the relevant government is incompetent or has got something wrong. The UK pound is an “international medium of exchange” but that didn’t stop speculators forcing it out of the European Exchange Rate Mechanism in 1992.

Conversely, it does not make sense from speculators’ point of view to attack a currency simply because it is not an international medium of exchange, as long as the relevant government (unlike the UK government in 1992) isn't doing anything silly.

 

A virus strikes.

So let’s take a not unrealistic scenario: say economies Worldwide are hit by a virus which we’ll call “Covid-19”. That would mean that every country would need to implement some stimulus. Now as long as a small country whose currency is not an international medium of exchange implements stimulus via money printing, and makes it clear it has no intention of letting its “printing to GDP” ratio exceed that of other countries, why would speculators attack the relevant currency? Darned if I know, particularly if the country concerned has a record of behaving in a prudent manner.  

Or take another not unrealistic scenario as follows. Citizens in the latter small country go into savings mode: the opposite of “irrational exuberance” if you like. The effect of that would be that the value of its currency on forex markets would drift upwards because of the reduced demand for imports, plus unemployment would rise to an unnecessarily large extent.

If the government and central bank of the country had their wits about them, they’d implement enough stimulus to return employment to its previous level. And if they did that via money printing, and again made it clear they intended doing no more printing than was needed to bring their economy back to full employment, then the value of their currency on forex markets would simply return to its previous level, all else equal. Again: no good reason for speculators to attack.

In short, I suggest that a small country whose currency is not an internationally accepted medium of exchange would be able to use MMT as long as it behaves responsibly.

 

Low interest rates.

Another argument put by Weeks is the thoroughly feeble idea that existing low rates of interest are not “sustainable” because “If interest rates remained permanently low, that would require a substantial restructuring of pension funds and private portfolios in general.” Well actually that’s one huge non-problem and for the following reasons.

The money that funds interest payments to savers does not come from thin air: it comes, in the case of interest on government debt, from taxpayers. But taxpayers and “people saving for pensions” are the same lot of people! Thus if interest rates fall, taxpayers pay less tax, so they can allocate the relevant increased income (net of tax) to saving a bit more for their pension. Problem solved!

As to interest on PRIVATE sector bonds, much the same applies. To illustrate, if a corporation can fund itself more cheaply because of a fall in interest it needs to pay on its bonds, that leaves money in the pockets of those buying its products and/or it means more money for its shareholders, which they can devote to saving more for their pension!

 

Conclusion.

I’m not bowled over by John Weeks’s criticisms of MMT.