The confidence trick which has enabled banks to fool everyone.

 

Banks perform two quite different functions: first, the storage and transfer and money, and second, granting loans. The first is absolutely essential for the smooth running of any economy. In contrast, there is no particular merit in granting loans, i.e. having one person or entity in debt to another, (though there is of course nothing inherently WRONG with borrowing, lending and debt). Put another way, there is no obvious reason why taxpayers should rescue lenders who have made silly loans any more than taxpayers should have to rescue restaurateurs who make a hash of running restaurants.

 
However, banks have fooled everyone, politicians in particular, with an absolutely brilliant confidence trick, which is to persuade them that money storage and transfer on the one hand, and the granting of loans absolutely have to  be performed by the same organisation: known as a “bank”. That means that when a bank makes a series of silly loans, banks can force politicians to come to their rescue with billions of dollars of taxpayers’ money.  

 

Mr Spiv the banker meets up with bank regulators.

 

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“Hello guys. I’ve got a great plan to boost the economy. It’s like this. I borrow short and lend long, which is what banks always do, and which is risky. But you, i.e. the taxpayer, provide me with “deposit insurance” so that those I borrow from are guaranteed not to lose out, plus you provide me with billion dollar bail outs when needed. That turns deposits in to a 100% pukka form of money, which increases the money supply, which in turn provides stimulus.”

“We’re not falling for that, wise guy. I mean if government and central bank want to provide stimulus they can do that any time in a variety of ways, e.g. by simply having the central bank create money and do a helicopter drop, or give the money to government to spend. A third option is to have the central bank create money and buy up government debt (known as QE).

Plus private banks provide stimulus (i.e. create money and lend it out like there’s no tomorrow) in a boom, which is exactly when stimulus is not needed. Plus come a recession, the call in loans, i.e. destroy money, which again is exactly what is not needed. Money creation by private banks is a pain in the a*rse.

 

 

 Well in that case I’ll tell politicians the economy will be hit unless I’m allowed to print money, and they’re bound to fall for that sob story, especially when I stuff their back pockets with wads of $100 bills so as to “make them see sense”.

 

 

 

 

 

 

“Well as bank regulators we can’t argue with that. That’s just what we’d do if we were bankers. As Paul Voker, former Fed chairman put it, “You know, just about whatever anyone proposes, no matter what it is, the banks will come out and claim that it will restrict credit and harm the economy…It’s all bullshit.””

Positive Money is ten years old.

 

This article published by PM to mark its tenth birthday is fair enough for the most part. The title of the article is: “It’s our 10 year anniversary”.  

My qualification for passing judgement on the article is that I have supported PM both financially and with my time almost since the day it started. E.g. I have personally paid for and manned numerous stalls set up over the years at various locations, including the Durham Miners’ Gala. Plus I’ve been to dozens of PM meetings in the North East of England.

The article is correct to say that one of the main objectives of PM since its foundation was to draw attention to the under-appreciated fact that private banks create money. I.e. PM were drawing attention to that fact well before the Bank of England published its famous article in 2014 making the same point.

In fact in 2014 we North East PM supporters had a meeting in a pub where I bought a bottle of champagne and we drank to the fact that the BoE was catching up with us!!

That however is not to say that the BEST economics text books were unaware that private banks create money. But PM were certainly right to draw attention to the fact that there was a lack of appreciation of the fact that private banks create money.

My only real gripe with the above recently published PM article is the claim or suggestion that those now running PM are still interested in bank and monetary reform. In particular, the article claims “We also launched The Money Question, a new home for debate and discussion about our money and banking system, and how to change it for the better.”

The reality is that PM is dropping bank and monetary reform as fast as it decently can, and instead is turning into a movement to push for dealing with global warming and a variety of SOCIAL issues.

Also, I’m not taken in by this passage in the article: “As the leading organisation to emerge from the financial crash, we felt a responsibility to ensure integrity in our work, and became a values-led organisation, rather than a technocratic one.”  That’s their excuse for turning to social and global warming matters etc.

Plus “responsibility to ensure integrity in our work” is a fatuous and ludicrously vague excuse for changing the basic objectives of an organisation.

Moreover, getting the “technicalities” right potentially brings just as much “value” (to use the word in two senses) as dealing with the more obviously “value related” stuff, like social issues.

Also I suspect the real reason the people now running PM are turning away from matters technical is that they just don’t have the brain or knowledge to get to grips with the technical stuff: unlike PM’s founder, Ben Dyson, who was very much up to speed on matters technical.

There’s nothing new in MMT?

 

Summary.    A popular criticism of MMT is that it contains nothing new: in particular that it is Keynes writ large. That criticism has some validity. But there’s a catch in that criticism, as follows. MMT was to a large extent introduced to counter the naïve pre-Keynsian “government books must balance / the size of the deficit and debt must be limited” nonsense. And that nonsense never seems to lose its appeal, even amount so called “professional” economists. 

So what were those who make the latter “nothing new” criticism doing over the last ten or twenty years to counter the latter nonsense? Well rather a large proportion were saying nothing much. Thus their “nothing new” criticism is much like someone who sees the fire brigade putting out a house fire by spraying water on it, and then reacts with the snide response, “there’s nothing new in using water to extinguish fires”.  I.e. the criticism (both of MMT and the fire brigade) ignores the fact that MMT and the fire brigade performed a useful task.  

Moreover, the silence of some of those who make the “nothing new” criticism when support from them would have helped silence the “books must balance” lot raises the question as to what the REAL views of the “nothing new” lot really are: had the “books must balance” lot won the argument and MMT had lost, how many of the “nothing new” lot would now be running around claiming that they knew all along that the books must balance and that there’s nothing new in the idea that the books must balance?

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A popular criticism of MMT is that there’s nothing new in it. For example George Selgin makes that criticism in an article published last year and entitled “The Modern New Deal That's Too Good to be True”. As Selgin puts it, "MMT often boils down to nothing more than an especially naïve sort of Keynesianism…”. 

But there are plenty of other economists who make the same criticism, e.g. Thomas Palley. 

Well the first weakness in the latter criticism is that, ironically, the criticism itself is “nothing new”. For example I’ve backed MMT for around ten years and admitted a year before Selgin’s above criticism that MMT is arguably just Keynes writ large. 

But a more serious weakness in the “Selgin / Palley nothing new” criticism is as follows – and be warned: this cannot be explained in less than two or three hundred words.

Opinions on the deficit and debt can be divided into two camps. First, there is the above mentioned “Keynes / MMT” view. That view rejects the orthodox idea, backed for example by George Osborne, the UK’s former finance minister, namely that government books must balance, at least in the medium term if not in the short term. 

Two other well known supporters of that view are Kenneth Rogoff and Carmen Reinhart. In particular Rogoff famously claimed that a debt / GDP ratio of more than 90% would stunt growth, though Rogoff’s argument is now widely regarded as flawed. 

In addition to Rogoff and Reinhart, the IMF and OECD while they did not adopt quite as strident a “pro-austerity / anti deficit” stance as Rogoff and Reinhart, have certainly wavered between claiming deficits were needed to deal with the aftermath of the 2008 bank crisis and warning that excessive deficits and debts were harmful. (For IMF and OECD articles on that subject, you could do worse than search articles by Bill Mitchell (co-founder of MMT) on the subject of the IMF and OECD.)


Second camp. 

The second camp is what might be called the “Keynes / MMT” view, which is that the size of the deficit and debt do not matter except in as far as they cause excess demand and excess inflation. And that’s not to suggest that Keynes in person and MMTers are the only ones to claim the sized of the deficit and debt do not matter: i.e. the phrase “Keynes / MMT” is just a phrase used here to describe a body of opinion. 

Now for the big weakness in the points made by the “Selgin / Palley / nothing new” brigade. The weakness is as follows.

If it’s so obvious that there’s nothing new in MMT and that the Keynes / MMT view is correct, where were the Selgins and Palleys of this World when Rogoff, Reinhart & Co were strutting their anti-Keynsian stuff between five and ten years ago: stuff to the effect that governments books must balance and/or that the deficit and debt cannot grow too large, and so on? The answer is: nowhere to be seen half the time!

That is, it was MMTers between five and ten years ago who were drawing attention to the pro-austerity nonsense coming from Rogoff, Reinhart, the IMF, OECD. In contrast, Selgin (far as I can see) was saying nothing. 

The pro austerity “books must balance” idea is still popular.

But it’s actually worse than that. That is, the “pro austerity Rogoff Reinhart” brigade have not actually gone away. For example the UK’s “Institute for Fiscal Studies” is still famous for claiming the books must balance. Plus in the last few days an article appeared in the Financial Times claiming that the current UK finance minister veers towards to the “books must balance” view.  Plus the UK’s former prime minister, David Cameron has piped up on this subject recently, which is a bit of a joke: the idea that David Cameron has any idea what he’s talking about in this connection is just hilarious. 

Again, what are the Selgins and Palleys doing about the latter “books must balance” nonsense? Nothing!
 

This raises a question.

And that all raises an obvious question, namely why have the Selgins and Palleys of this World being making a song and dance over the last two years or so about MMT containing nothing new? Well I think I know the reason, which is as follows. Or to be more accurate, there are perhaps two or three reasons. 

MMT, although it was first proposed by Warren Mosler about thirty years ago, only really burst out into the open so to speak in the last year or so. That “bursting” was much assisted by, if not wholly caused by MMT being endorse by US congresswoman, Alexandria Ocasio-Cortez around a year ago. Moreover, about half the supporters of MMT over the years have not been academic economists: they have been amateurs like me. Plus there’s Warren Mosler himself, whose career has consisted mainly of running a small bank and trading (very successfully) on Wall Street.

Now it would hardly be surprising if academic economists like Selgin, Palley, Rogoff etc rather feel their noses have been put out of joint when a bunch of amateurs take the world of economics by storm and look like having a much bigger influence on economics than said academics could ever have hoped for. A proportion of those academics have got it in for MMT, I suggest. That is, they’ll be scratching around for any old bit of mud to throw at it. 

However, academics have only themselves to blame for this “disaster”. That is, academic economists (like academics in some other subjects) spend their time getting papers and books published which add nothing to the sum total of human knowledge: those papers are designed purely to further the career of said academics. As Adam Smith put it “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.” 

Put another way, economics has become a rotten door waiting to be pushed in. MMT did the pushing, or at least some of the pushing.


Another question.  

Another question raised by the above points is this. If the Rogoffs and Reinharts had won the argument, what would the reaction of the Selgins and Palleys have been? I suggest they might well have been writing articles proclaiming that “we knew all along” that the deficit and debt cannot grow too large and that the books must balance in the medium term.

To summarise, while MMT ideas may not be entirely original, at least MMT did a good job of broadcasting from the rooftops what needed to be done, which is more than can be said for the Selgins, Palleys, Rogoffs, Reinharts and rest of the “books must balance” lot.     

Two mistakes by MMT bigwigs.

One mistake was made by Warren Mosler and interestingly this mistake probably explains his strange belief that interest rate cuts do not boost demand. He claims in an article entitled “There is no right time for the Fed to raise rates” that “For every dollar borrowed there is a dollar saved…”.

Well thanks in part to the efforts of Positive Money since its foundation, and this more recent Bank of England article, it is now more widely appreciated that in order for private banks to lend more, they do not actually need to get money from anywhere. Put another way, the private bank system can create money out of thin air. Or put a third way, it is untrue to say that “for every dollar borrowed there is a dollar saved”.


The second mistake.

The second mistake is in this Financial Times article by three MMT bigwigs, Scott Fullwiler, Rohan Grey, and Nathan Tankus.

The para starting “Regardless of which policy…” argues that the more “we regulate big business for public purpose” the easier it is to deal with “bottlenecks” in the economy in general: an utterly bizarre argument.

The article was written in early 2019, but since then I haven’t noticed the authors expanding on their amazing new “regulating for public purpose reduces bottlenecks” theory. That’s because the theory is nonsense: I imagine the authors are hoping everyone has forgotten about the theory.

Sustainability BS.

 
Congratulations to Brian Romanchuk for taking the p*ss out of the word “sustainable”. The title of his article is “Fiscal Sustainability And The Fiscal Folk Theorem”.

You can always spot the brain dead by their parrot like repetition of fashionable words and phrases. There are numerous such words and phrases, e.g.: “Sieg Heil”, “Allahu Akbar”, “Black Lives Matter”, “Strong and stable”, and of course “sustainable”.  

Granted there are some forms of sustainability that are clearly desirable. For example mankind's economic activities must be environmentally sustainable: i.e. not lead to excessive global warming.

But the word sustainable is often used in circumstances where the “sustainable” concept is irrelevant. A classic example is the fiscal sustainability, as explained by Brian Romanchuk.

The fact that a fiscal deficit is not sustainable in the long run is not, repeat not an argument against running such a deficit for a limited period. By way of analogy, an accelerating car is not a sustainable system because the car will at some point reach its maximum possible speed, or the maximum legal speed on the stretch of road it happens to be on. That is not an argument for making car accelerator pedals illegal! I.e. it is useful to be able to accelerate a car from zero to fifty miles an hour, as you may possibly have discovered with your own car…:-)

Steve Keen pipes up on the debt jubilee again.

Steve Keen, has long supported debt jubilees, e.g. see this 2012 article of his. But he has recently piped up on the subject again. (Titles of the two articles are respectively, “Manifesto” (published by “Steve Keen’s Debtwatch”) and “We need a private debt jubilee”.

Note that dealing with debt jubilees in the latter more recent publication does not actually start till quite late in the discussion: around 50 minutes.  

I actually looked at his debt jubilee ideas a few years ago here, and explained that his jubilee involved printing hitherto unheard of quantities of money: several HUNDRED percent of GDP, or so I claimed. The paragraphs below deal in a bit more detail with the absolutely vast money printing exercise he has in mind (wittingly or unwittingly). The latter phrase “several hundred percent” is probably over doing it, but “much more than 100%” won’t be far out: indeed, the cash hand out proposed by Keen seems to be around 200% of GDP for reasons given below.

In contrast to the above mentioned 200%, the amount of central bank created money printed so as to deal with BOTH the 2007/8 bank crisis AND the Covid crisis is a mere 15% of so of GDP. If you think the latter may ultimately prove inflationary, then you ain’t seen nothing.

As to where the latter 15% figure comes from, this Fed chart shows the stock of base money rising from 0.8 trillion in 2008 to 3.8 trillion in 2020. That’s a rise of 3 trillion. Taking US GDP as 20 trillion, that means the amount of cash (aka base money) created and distributed was 15% of GDP.

The latter “15%/200%” comparison is of course only a VERY ROUGH guide to the total effective stimulus that results from sundry stimulatory measures over the last ten years and from Keen’s jubilee proposal. But the disparity between those two number should at least make supporters of the Keen proposal do much more thinking then they seem to have done to date.

Keen does not actually specify how much money printing he has mind: bit of an omission given that he attaches importance to maths, equations, charts etc. As Michael Reddell (who spent most of his career at New Zealand’s central bank) said of Keen and debt jubilees, “…..I have had difficulty finding anything online that sets out in very specific terms exactly what he has in mind.”

 

So how much printing, exactly?

In the above mentioned 2012 work Steve Keen says “Most of this debt should never have been created..”. It’s not entirely clear what “this debt” refers to, but presumably it’s the increase in debt that he refers to in the preceding charts which show for example Australia’s private debt rising from around 25% of GDP in the 1950s and 60s to around 150% in 2010.
 
The difference between 25% and 150% is 125%. But let’s call that 100% to keep things simple.

Then in the 2020 work / discussion he says  “Norway, Denmark, the Netherlands, the UK, America as well, because you're still carrying a debt level of 1.5 times GDP versus a minimum level before this whole crisis began of a bad rap in the 1940s, pardon me, of about 40% of GDP. We're all carrying about three or four times as much private debt as we should.”

Well now 150% less 40% comes to roughly the same: i.e. about 100% of GDP.

So it’s reasonable to assume he proposes printing enough to dispose of an amount of debt equal to GDP. But remember that he also proposes printing an additional and equal amount to be given to non-debtors so as to make sure they are treated fairly. So that’s roughly 200% of GDP all together!

 

The inflationary consequences.

He does propose some ways of stopping that astronomic increase in the money supply sparking off instant hyperinflation: e.g. he proposes that those in receipt of some of it are encouraged to buy corporate shares rather than spend the money immediately, with that additional funding for corporations being used to pay down corporate debt .  

Well there’s a couple of problems there, as follows.

First, presumably those in possession of those shares can sell them at some stage (otherwise they’re essentially worthless). So what would you do if you were aged forty or fifty and were give half a million dollars worth of shares which you could sell in ten years time? I’d make plans to retire ten years early!

The result would be a huge reduction in aggregate supply, which again, would be inflationary, assuming constant aggregate demand.  Or if demand was cut pari passu, then GDP would decline dramatically.

Unfortunately neither Steve Keen nor Edward Harrison (who discusses jubilees with Keen in the 2020 publication) seem to be aware of the latter problem.

Second and re the “paying down corporate debt” idea, all that does is to shift the newly created money into the pockets of those who have their corporate bonds confiscated with cash being given to them in return. I.e. “paying down corporate debt” idea does not reduce the total and astronomic amounts of new cash shovelled into the pockets of households and the private sector in general.

Conclusion: I’m not impressed. Or in the words of Queen Victoria, “We are not amused”.