Friday, 22 March 2019

Drivel, hogwash and nonsense from Bloomberg on MMT.

With MMT having suddenly become flavour of the month, thanks to Occasio-Cortez’s semi-endorsement of it, every other journalist has overnight become an expert on the subject, despite clearly knowing nothing about it in many cases. Not that that will damage the careers of journalists all that much: after all, the job of a journalist is fill up newspaper column inches with hot air, waffle and clap-trap. For some bizarre reason, newpaper readers pay good money to read this nonsense.

At any rate, the Bloomberg article claims that controlling monopolies and “businesses’ excessive pricing powers” is an important element of MMT’s preferred way of controlling inflation. Well that’s news to me! (Article title: “A beginner’s guide to MMT”).

I’ve backed MMT for about ten years and have read at least a thousand articles and blog posts by MMTers. I don’t remember much stress being put on the monopoly question or “businesses’ pricing powers”, important as those questions are.

As to where the Bloomberg authors get that idea about monopolies and pricing powers from, they are commendably honest there: they got it from a Financial Times article on MMT which itself was not representative of MMT thinking.

This is a classic example of what goes on in the newspaper / periodical industry: one journalist publishes some nonsense, then a more journalists, rather than do any worthwhile research, just repeat what they’ve read by the latter first journalist.

Moreover, it’s pretty obvious that we need to do as much as is feasible to control monopolies and cartels whether we have an MMT regime in place or not. Thus there is a distinct lack of logic in the claim that the control of monopolies and cartels has anything specifically to do with MMT.

Sunday, 10 March 2019

Pathetic criticisms of full reserve by Messers Bentata, Giménez Roche and Janson.

In 2017, Pierre Bentata, Gabriel Roche and Nathalie Janson  (BRJ) authored a paper entitled “Full reserve banking reform proposals: The wrong answer to the relevant question of the control of the money supply.”

The paper is a litany of mistakes and errors, which I will run through.  On page 3, the paper deals (ironically) with an alleged weakness in the EXISTING system. The authors claim that when commercial banks (henceforth just “banks”) lend more, they require more reserves. As the paper puts it, “This increase implies a need for more narrow money as liquidity reserves to cover liquidity leaks from the interbank clearing system. Central banks, independent or not, hardly refuse to provide these reserves against the banks’ government debt holdings precisely because their mandate involve safeguarding banking solvability and sustaining economic growth. This generates a moral hazard situation where deficit-prone governments increasingly issue debt knowing that banks will buy it to back the refinancing of their reserves, which allow in their turn to accommodate a growing demand for credit by increasing the broad money supply.”

There are two errors there.  First, banks cannot just “buy back” government debt if banks are short of reserves (aka base money) because central banks will only accept base money in payment for government debt: i.e. banks cannot use their own home made money to buy back government debt. Governments and central banks just won’t accept the stuff.

Second, central banks do not just supply banks with reserves willy nilly, as BRJ suggest. Central banks DO MAKE reserves available to banks which are short of reserves, BUT AT A PRICE. And it is precisely that price that damps down lending and borrowing when such damping is needed. I.e., and contrary to BRJ’s claims that central banks can “hardly refuse to provide these reserves”, the price charged by central banks for supplying reserves in effect amounts to refusing to supply extra reserves.

The paper then claims (p.4) that full reserve (FR) claims to solve the latter problem by stripping “banks of their broad money creation abilities”. That’s in the para starting “To eliminate both…”.

Well actually, while FR does propose the latter “strip”, it’s not for the outlandish reason dealt with a couple of paras above, namely anything to do with banks  alleged ability to buy back government debt willy nilly.

Cantillon effects.

Next, the paper claims (p.4) that large Cantillon effects would accompany the introduction of FR. As BRJ put it, “First, the transition mechanisms to shift the banking system from the fractional to the full reserve systems would result in massive Cantillon effects (i.e., real purchasing power redistribution), which could result in large intersectoral movements of resources in the economy.”

The Cantillon effect is basically the idea that given a money supply increase, those who get hold of the newly created money can profit at the expense of the rest of the community. That is certainly a possibility, and in fact the Cantillon effect comes in two basic forms.

First, it is always possible that a money supply increase causes a GENERAL rise in prices (as opposed to a rise in the price of a limited set of commodities). But (amazing as this might seem) the advocates of FR do not propose increasing the money supply by so much that hyperinflation, or anything approaching hyperinflation is the result. They propose limiting the amount of money created by enough to  ensure that inflation stays close to the existing inflation target: 2% or thereabouts.

A second way the Cantillon effect can work is that the newly created money is concentrated on the purchase of relatively few products, which clearly means that the firms supplying those products do very nicely – possibly at the expense of the rest of the community.

However, EXACTLY THE SAME problem can arise under the existing system. That is, if government and/or central bank decide to implement stimulus, and that stimulus is concentrated on relatively few products or sectors of the economy, then clearly the problem mentioned in the above paragraph can arise, namely those specific sectors may profit at the expense of the rest of the community.

In short, the latter “profit” problem is a potential problem under the existing bank system just as much as under FR. Thus the conclusion is that the Cantillon criticism made by BRJ is nonsense.

Predicting how much stimulus is needed.

Next, BRJ claim “…it is impossible to know in advance what the money supply should be, as lags and aggregation problems would still plague monetary authorities in the new system. The resulting discrepancies between money supply and demand could entail lingering and cumulative distortions in the economy.”

Well again, exactly the same problem applies under the existing system! That is, governments and central banks have big problems in knowing EXACTLY how much stimulus to apply: to illustrate, while unemployment in the US is at a fifty year low, there are those (e.g. the leading MMTer Stephanie Kelgon) who claim it could go significantly lower without inflationary consequences.

Next, BRJ say “….the independence of the monetary authority would be doubtful since its money creation is intimately linked to government policies.” Again, exactly the same problem applies under the existing system: that is, while some central banks are supposedly independent, the reality is that politicians are always putting pressure on central banks to do those politician’s bidding (normally to cut interest rates) rather than have central bankers go by their own judgement. Indeed, Donald Trump is putting pressure on the Fed at the time of writing.

Moreover, prior to 1997 when the Bank of England was given independence, the BoE was controlled by the UK Treasury, i.e. the UK finance minister. To put it bluntly, the UK finance minister had access to the printing press. That however did result in rampant inflation between WWII and 1997.

Plus, while my preference is independent rather than non-independent central banks, Bill Mitchell produced evidence that there is no relationship between central bank independence and inflation. Scroll down to the chart in his article entitled “Central bank independence – another faux agenda.”


I’ve had enough of this paper by by Messers Bentata, Giménez Roche and Janson. It’s clearly nonsense on stilts. I can’t be bothered with any more of it.

Friday, 8 March 2019

Grace Blakeley trotts out the “fiscal space” canard.

Grace Blakeley is the New Statesman’s economics commentator and the NS recently published a long article by her entitled “The next crash: why the world is unprepared for the economic dangers ahead.” As the title suggests, the article is a story of doom and gloom, which of course has the big advantage from the point of view of the NS that gloom helps sell copy. “Good news is not news” as they say in the newspaper industry.

To back up her gloomy prognostications, she cites the “fiscal space” canard (a canard much loved in that hotbed of economic illiteracy, the IMF). As she puts it, "national debt levels have significantly risen, reducing the space for fiscal stimulus."

She is evidently unaware of Mosler’s law (that’s Warren Mosler): “There is no financial crisis so deep that a sufficiently large tax cut or spending increase cannot deal with it.”

Mosler’s law is of course just a re-statement of the point made by Keynes in the early 1930s, namely that a way out of recession is for the state to simply print money and spend it, and/or cut taxes. But unfortunately that point needs repeating over and over, because the Blakeleys and IMFs of this world still don’t understand the point apparently.

I demolished the fiscal space idea here, and Bill Mitchell demolished it here.

Note that Mosler, Mitchell and Musgrave (that’s me) are all MMTers....:-)

Thursday, 7 March 2019

Random charts - 68.

Larger pink text below was added by me.

Wednesday, 6 March 2019

The incompetent Kenneth Rogoff on MMT.

Rogoff penned an article published by Project Syndicate recently criticising Modern Monetary Theory. The article is nonsense from start to finish. I’ll run through it, which won’t take long because it’s a short article.

First, Rogoff cites Jerome Powell (Fed chairman) as saying the US debt:GDP ratio is already high which allegedly means that there are dangers in using the Fed to fund more public spending. Well one problem there is that the equivalent ratio in the UK in 1945 was over double the current US ratio: around 250% compared to the current US ratio of around 100%. The UK 250% did not prove any sort of a problem: that debt gradually declined to about 50% in the 1990s.

Moreover, the argument that something is large (or small) compared to what it used to be, and thus that we shouldn’t allow that new size is a feeble argument. Buildings are at least twenty times as high as they were two hundred years ago. Is that a problem?

Next Rogoff says “The US is lucky that it can issue debt in dollars, but the printing press is not a panacea.” So who said money printing WAS A panacea? Rogoff doesn’t say.

Next, Rogoff says “If investors become more reluctant to hold a country’s debt, they probably will not be too thrilled about holding its currency either. If that country tries to dump a lot of it on the market, inflation will result.”

So excess money printing leads to excess inflation? You don’t say! Every mentally retarded ten year old knows that. Plus MMT does not (amazing as this might seem) advocate LIMITLESS amounts of money printing: it advocates just enough to bring full employment without excess inflation. That’s it.

Next, Rogoff points to the fact that at the moment, the World is happy to absorb more US government debt at remarkably low rates of interest. He then says “That said, it would be folly to assume that current favorable conditions will last forever, or to ignore the real risks faced by countries with high and rising debt. These include potentially more difficult risk-return tradeoffs in using fiscal policy to fight a financial crisis, respond to a large-scale natural disaster or pandemic, or mobilize for a physical conflict or cyberwar. As a great deal of empirical evidence has shown, nothing weighs on a country’s long-term trend growth like being financially hamstrung in a crisis.”

OK, so what is a country supposed to do given excess unemployment: abstain from fiscal stimulus and leave a million unemployed to rot just because there are risks (as there always have been) associated with fiscal stimulus? (Note: I am not saying there actually is excess unemployment in the US right now. The US economy may well be very near capacity. I am just assuming for the sake of argument that there is excess unemployment.)

Rogoff’s masterly solution to the latter “risks” is a longer term structure for US debt. (Bonds issued by the US government only last about three years compared to more like ten years for the UK)

Well frankly that has little to do with the arguments for and against MMT. There are a whole string of pros and cons associated with long and short term government bonds, with official UK views clearly differing from US views.

Then in his penultimate paragraph, Rogoff criticises QE. Well what’s that got to do with MMT? Practically nothing.

In short, if this Project Syndicate article of Rogoff’s is any guide, he doesn’t have the faintest idea what MMT consists of, and in as far as he does have a grasp, he totally fails to land  any punches on it. 

Given that Rogoff was advocating a limit to stimulus at the height of the recent recession (i.e. advocating austerity) it’s a wonder anyone  still listens to him.

As Laurie MacFarlane of the New Economics Foundation said in a tweet, it’s a bit of a puzzle why Rogoff is still employed as an economics professor at Harvard.

Monday, 4 March 2019

Ambrose Evans-Pritchard tries to criticise MMT.

That’s in this article in the Telegraph entitled “Drink deep from the fountain of debt at your peril, my American friends.”

His article is actually aimed against the new and relatively relaxed attitude to rising government debt, an attitude which of course MMT supports under specific circumstances. Thus while MMT gets several mentions in the article, the article is not aimed SPECIFICALLY at MMT. Anyway….

First he seems to suggest MMT favours printing near limitless amounts of money and spending it on various goodies. That’s where he says "Everything can be paid for on the never-never: a Green New Deal, "Medicare for All", free university, and higher pensions backed by helicopter money fom the US Fedral Reserve when needed.”

Well the reality is that MMTers have said over and over that inflation places a constraint on the amount of money printing. Indeed, and ironically, Evans-Pritchard himself actually refers to the fact that MMTers are aware of the inflation constraint!

That is, later in the article he says, "They accept that there can be an inflation constraint on deficit spending, but neglect the risk that foreign funding can dry up in a world of open capital flows. Nobel economist Paul Krugman - usually a deficit dove - says the MMT brigade fail to grapple with the problem of "snowballing debt", when interest rates rise above the trend growth rate of the economy. "As debt gets every higher people will demand ever increasing returns on holding it." he wrote.”

As for Krugman’s latter criticism of MMT, that’s no better than Evans-Pritchard’s. To illustrate, if interest on the debt is 1% and growth is zero, what of it? The fact that interest on the debt is larger than growth does not bring about a “snowball” effect. All that happens is that year after year, taxpayers have to pay for interest on the debt. Big deal. That situation is perfectly “sustainable” to use the fashionable phraseology.


I forgot to include a response to Krugman’s above claim about “As debt gets ever higher people will demand ever increasing returns on holding it” when I put the above article online earlier today.

Anyway, the answer to the latter “high return” point is that there is an all important distinction between where increased debt is used for legitimate reasons (e.g. to bring the economy up to capacity) and in contrast, where the economy is already at capacity, but politicians are incurring more debt simply to ingratiate themselves with voters.

Politicians are always tempted to fund public spending via debt rather than taxes because voters tend to be more aware of tax increases than  any rise in interest rates that might be caused by more public borrowing. David Hume, writing 300 years ago was aware of that temptation: see 5th para of his essay “Of Public Credit”. Nowadays economists sometimes refer to that temptation as the “deficit bias”.

To illustrate the legitimate use of debt, let’s assume interest on the debt is 1%.  If there is excess unemployment in that scenario, that simply means the private sector is doing too much saving (i.e. stocking up on 1% government bonds) rather than spending (which would create jobs).

The solution, as Keynes explained, is for the state to spend more (net of tax), and that can be funded by issuing more “1% debt” or simply by printing money (which equals 0% debt). There is no reason why those who clearly want more “1% debt” should demand 2%. As already indicated, debt holders are hoarding 1% debt: i.e. if offered more of the stuff, they’ll grab more of it. So in that scenario, Krugman’s point doesn’t work.

In contrast, if the economy is already at capacity, and government borrows and spends more, one effect will be excess inflation (because the economy is at capacity). In that scenario, government or central bank will have to implement some sort of deflationary measure to counter the excess inflation, like raising interest on the debt.  Among other effects, raised interest on the debt will tend to  dissuade debt holders from trying to spend away what they regard as an excess stock of debt.  


Thursday, 21 February 2019

You can't build a bridge in 2019 using steel produced in 2029.

It's very unusual for Simon Wren-Lewis to make a mistake, which is why I have followed his blog for several years. Plus I am going to nominate him for a gong (whether he likes it or not).

However in his para starting "The argument that..." he falls for the popular myth that if something is funded via debt, future generations have to pay, in that they have to repay the debt. That idea doesn't just break the laws of economics: it breaks the laws of physics. To illustrate, if a bridge is built in 2019, the blood sweat and tears needed to build the bridge and the steel and concrete used in its construction absolutely have to be sacrified in 2019 or earlier. That is, it is not physically possible to build a bridge in 2019 using steel produced in 2029. Doing the latter involves time travel.

The only exception to the above comes where something is funded with money loaned by a foreign country (as pointed out by Richard Musgrave (no relation) in the American Economic Review in 1939. But since every country faces the same problem as to how to fund green forms of energy production, the above “foreign country” point is of little relevance.

Also Nick Rowe claims to have a complicated method of avoiding the above “physical impossibility” point. I’ve never been much impressed by that, and for reasons explained in articles on this blog a year or two ago. To find them, Google something like “Ralphonomics” “Nick Rowe” “time travel”.