Monday, 18 June 2018
The recent Vollgeld referendum in Switzerland lead to a number of so called professional economists opining on the subject and doing little more than displaying their ignorance. Here is a selection of some of the not too clever material.
Lars Syll (for whom I normally have plenty of respect) claimed that Vollgeld would result in “debt deflation”. In fact as the advocates of Vollgeld / Sovereign Money make clear, under Vollgeld, central bank and government implement whatever amount of stimulus they think is needed to keep the economy at capacity / full employment, much as they do under the existing system.
Next, there was Jeremy Warner (for whom I have very little respect). For some of his nonsense, see this "Ralphonomics" article.
Next there was David Beckworth. To judge by the material under his heading “The knowledge problem” he is clearly under the illusion that under Vollgeld, lending decisions are taken by central banks. Had he bother studying the subject he would have discovered that under Vollgeld, lending decisions are actually taken by commercial banks or other private sector lending organisations, just as they are now.
Confirmation that Beckworth really does labour under the above illusion comes where he says “With such large balance sheets and the sole power to determine who gets money, central bankers would find…”. In fact, under Vollgeld, the central bank and government simply create new money where needed (as suggested by Milton Friedman in his 1948 American Economic Review paper), and spend that money into the economy. It is then up to tens of millions of firms and households to compete for that money just as they compete for money under the existing system.
But top prize for complete gibberish must go to Richard Murphy.
First, he claims Vollgeld “puts inflation at the core of economic policy”. Well it already is at the “core”: central banks decide how much stimulus to implement depending on what the inflation outlook is!!!
Second, he claims that money which is not debt based is not money. That’s BS. Gold, cowrie shells and other commodity based currencies have nothing to do with debt. Those holding British “sovereign” gold coins between 100 and 200 years ago owed nothing to anyone, and no one owed them anything.
Third, he says there is a “very real danger is that a central bank would underestimate the amount of money needed in an economy because their perpetual concern would be the risk of inflation meaning that they would always are on the side of caution.” Well that problem arises under the existing system: sometimes central banks and governments pitch demand too low. Indeed they were doing that BIG TIME during the recent crisis!!!!! What planet has Murphy been living on for the last ten years???
Fourth he says “Give central bankers control of the money supply, and you can forget democratic control of the economy for evermore.” What – so the electorate cannot vote to have government collect more in tax and spend more on health, education etc (or simply print money and spend on health and education)? BS again.
Fifth, he says “since central bankers would also then control the ability of the government create money to spend on its own programs guarantee that this would also mean perpetual austerity, and enforced government balanced-budget, with all the crushing implications that this has the public services.”
Had Murphaloon actually read Positive Money’s proposals (and the proposals of other V/SM advocates) he’d have discovered that under a PM system, the central bank creates whatever amount of money per year it thinks is needed to keep the economy at capacity and give us the 2% inflation target, with government then spending that money (and/or cutting taxes). In fact Ben Bernanke gave his blessing to that idea: see para starting “A possible arrangement…" here.
Sunday, 17 June 2018
The reasons for the above are quite simple and are as follows.
It would be perfectly feasible to have an economy where the only form of money was state issued money, e.g. Fed issued dollars in the US. And issuing enough of that money to induce the population to spend at a rate that brought full employment, while not exacerbating inflation too much would not be difficult: at least it would be no more difficult than gauging the right amount of stimulus under the existing system.
However, the reality is that private banks are allowed to issue money as well. But if private banks started doing that in an economy which was already in the latter full employment position, the result would be an excessive money supply: excess inflation would ensue (as indeed is explained by George Selgin - not that I’m suggesting he would agree with the basic thrust of this “Ralphonomics” article). Thus government would have to impose some sort of demand reducing or “deflationary” measure to counteract the latter excess inflation: like raising taxes and confiscating a portion of the population’s stock of money.
Thus if you’re in debt to a bank, remember that is partly because banksters have hoodwinked politicians into driving you into debt so that your bank can make money from lending to you.
Friday, 15 June 2018
Richard Murphy keeps flipping between saying the state (i.e. governments plus their central banks) can create money and saying they can’t. Today in this short article he is in “can” mode….:-)
That’s good to see because most of us tumbled some time ago to the fact that the state can in fact create money at will (base money to be exact).
However there’s just one fly in the ointment. He says “Quite simply quantitative easing is creating new bank deposits. As modern monetary theory suggests, money advanced creates what are, in effect, new savings, even if in this case they are reserves held by banks with the Bank of England.”
Well those two sentences are not entirely clear, but I’m 90% certain he’s saying that QE creates “new savings”. Well no it doesn’t: QE involves the central bank printing money and buying £X of government debt off the private sector. Thus the private sector loses approximately £X worth of government issued bonds and gains £X of cash. Where are the “new savings” there?
Of course it could be argued that those bonds now in the hands of the central bank are a form of savings. But quite honestly, is a debt owed by one arm of the state to another arm a form of saving? If I declare that my right hand pocket owes my left hand pocket one million, am I better off to the tune of one million? I think not.
Moreover having supported Modern Monetary Theory for the last ten years, and having read several hundred articles written by other MMTers, it’s news to me that MMTers adhere to Murphy’s strange idea that QE creates “new savings”.
Thursday, 14 June 2018
The Modigliani Miller theory (MM) states that the costs of funding a corporation are not influenced by the exact way that funding is done: specifically, the claim is that changing the proportion of funding done via equity as opposed to debt will not influence the cost of funding.
That makes MM of importance when it comes to deciding what the best capital ratio is for banks. For example if MM is 100% valid, that means the cost of funding banks is not raised when capital ratios are raised. And if the latter is the correct conclusion then that supports two lots of people: first there are those who want to raise bank capital ratios purely so as to avoid bank crises in the future. Martin Wolf and Anat Admati claim the ratio of equity to debt needs to be about 25:75 for that purpose. The second lot are those who want to raise the ratio to 100% as part of implementing Vollgeld / full reserve banking – although some versions of Vollgeld (e.g. Positive Money’s) do not involve that very high capital ratio.
However there are objections to MM, and one of the most popular objections, if not the most popular, is that equity and debt are not taxed in the same way, thus MM does not work out in practice as per theory.
My answer to that has always been that tax is an entirely artificial imposition which should thus be ignored. I’ve recently realized that’s not quite right: i.e. on further reflection, strikes me the correct answer to the latter tax objection to MM is along the lines of: “if someone implements a tax which discriminates against equity, then the best solution is to remove that distortion, but as long as that is not done, some weight should still be given to MM.” Reasons are as follows.
Assuming MM is 100% valid, then capital ratios might as well be raised to 100% (or to the Wolf/Admati 25% level). That makes bank failures are near impossible. However, given a tax which discriminates against equity, then raising bank capital ratios that far will impose costs on banks, which means a smaller bank sector than is optimum. So what to do?
Well it’s likely that diminishing returns are relevant here: e.g. the benefits of raising the capital ratio from say 3% to 6% will be significant, while the benefits of raising them from 93% to 96% are pretty negligible. Thus given a tax which discriminates against equity, it will be worthwhile abstaining from raising bank capital ratios as far as would be the case where that discrimination does not exist, while at the same time, still going for a finite increase in capital ratios.
For example, cutting capital ratios from 100% to 50% does involve a cut in GDP in that there’s an increased risk of bank failures, but that increased risk is very small. In contrast, cutting the ratio from 100% to 50% does much to cut bank costs, and thus bring about a bank sector which is near it’s optimum size or “GDP maximizing” size.
But of course working out the optimum position on the latter scale is near impossible, and that explains much of the argument over bank regulation.
But much the simplest and best solution is to remove the artificial discrimination against equity. Then (assuming MM has no other defects) we can fire ahead and raise bank capital ratios to the Wolf/Admati 25%, or even higher if the case for Vollgeld is successfully proven.
Tuesday, 12 June 2018
Sunday, 10 June 2018
The Swiss vote today on whether to ban private banks from printing / creating money. A system where that ban in place is referred to in the German speaking world as “Vollgeld”, though such a system has several other names. I’ll stick to “Vollgeld” in the paragraphs below. I’ve explained a dozen times before why such a ban is desirable, but in celebration of this vote I’ll explain again.
First, it is often said that “money is a creature of the state”: that is (as is pretty obvious) there has to be general agreement in a country as to what the country’s basic form of money is – at least it’s much better if that agreement is in place. For example in the US, the basic form of money is Fed issued dollars. But of course any number of other items have performed the function of money throughout history: gold, cowrie shells (used in several countries), cattle, sticks, stones, you name it.
So let’s assume a hypothetical country wants to abandon barter and switch to a money based economy. An important question then arises, namely: what’s the best amount of money to issue? Well that’s easy: the more money people have, the more they will tend to spend, thus the optimum amount to issue is whatever results in enough spending to bring full employment, but no so much as to result in excess inflation.
Some readers will spot that I’ve assumed money can be created at will so as to issue that above optimum quantity. That’s the case with Bank of England pounds, Fed dollars, etc, but things are more difficult in that regard in a cowrie shell or gold based system. But never mind: so as to keep things relevant for the 21st century, let’s assume there is a central bank like the Fed which can issue whatever it thinks is the optimum amount of money.
Having done that, people will borrow from and lend to each other. And they’ll do that direct person to person. Plus organisations that specialise in intermediating between borrowers and lenders will be set up, i.e. commercial banks. People will deposit money at commercial banks among other reasons for safe keeping, and second with a view to the bank lending on that money at interest.
Now is there any reason why the rate of interest that results from that system would not be some sort of genuine free market rate? Not that I can see.
Commercial banks start to create money.
Next, let’s assume that commercial banks make the amazing discovery (which London “goldsmith bankers” actually made in the 1600s) namely that they do not actually need to acquire $X worth of deposits before lending out $X: they can simply issue or lend out “promises to pay” central bank money (or “promises to pay gold” in the case of those goldsmith bankers). Indeed that’s what commercial banks actually do nowadays: lend out promises to pay.
But notice that prior to that discovery, commercial banks had to pay interest to depositors in respect of every dollar loaned out, whereas under the “lend out promises” system there is no need to pay interest to anyone! Magic! Obviously banks are better off lending out home made money rather than money which they can only acquire by paying interest to someone. In fact banks will be able to cut interest rates and lend more.
Now is that an example of “if it sounds too good to be true, it probably is”? Well the answer is “yes” and for the following reasons.
The fact of commercial banks making extra loans increases demand: it’s stimulatory. But it was assumed above that enough central bank money had been issued to keep the economy at capacity / full employment. Thus government will have to impose some sort of deflationary measure to counter that excess demand: like raising taxes and confiscating central bank money from the population.
In short, banks, when they initiate to the above “lend out promises” do not create wealth out of thin air: the riches they have created for themselves and those they lend to have effectively been stolen from the general population. Plus the rate of interest is not at the above mentioned free market rate: it’s an artificially low rate. And as is widely agreed in economics, GDP is maximised where the price of everything is at its free market rate (including the price of borrowed money) except where there are good social reasons for thinking the price should be above or below the free market rate.
The above “stolen from the general population” explains why the Nobel laureate economist Maurice Allais claimed that what banks do is essentially counterfeiting: that is, for every fake $100 bill turned out by a traditional backstreet counterfeiter, government has to confiscate $100 from the general population so as to keep demand under control. I.e. the production of “promises to pay” has the same effect as creating fake $100 bills.
A possible objection to the above claim that the extra lending caused by “promises to pay” is inflationary is that while the initial effect of the extra lending will clearly be inflationary, that effect will die down once the “initially loaned” money has been spent. However, there is unfortunately another effect: the recipients of that new money will find themselves in possession of more money than they want (or the amount that brought about the above mentioned “full employment without excess inflation” scenario). They will therefor try to spend away that excess, which amounts to a permanent increase in demand.
As for the new borrowers / debtors, if they borrow $Y, spending that money obviously has an inflationary effect (as mentioned above), but then they gradually repay that $Y and they’ll have to cut their purchases of goods and services to do that, which amounts to an anti-inflationary effect. Over the long term the amount of new loans made per year roughly equals the amount of loan repayment (ignoring interest), the borrowers do not on balance add to or subtract from aggregate demand. Net effect: an increase in demand, which (as mentioned above) has to be negated, e.g. by extra taxes.
Friday, 8 June 2018
Jo Michell is an economics prof at the University of the West of England. I have plenty of respect for him.
He has recently produced three fairly short videos about Vollgeld / Sovereign Money (V/SM). They’re each about 10 minutes. If you go to the latter link, note that the FIRST video is the 3rd one shown at the link: a bit confusing, but never mind. Also, underneath each video there is a transcript.
One point where I agree with Michell (which does not actually feature in these videos far as I can see) is that in the past he has criticized Positive Money (which supports V/SM) for getting environmental matters mixed up with the V/SM question. I agree with Michell there, as do some of the PM supporters in my area.
Of course being concerned about the environment is very much flavour of the month, thus to boost your cause in the eyes of less intelligent self-styled “progressives”, it’s important to put on a display of being concerned about the environment. Certainly the environment is an important matter, but actually proving there is a connection between the V/SM question and environmental matters is a separate issue, and I think Michell is right to accuse PM of having failed to prove the connection.
The first video.
I have no quarrels with the first video. It’s a good introduction to the subject, except to say that videos are not a good forum for dealing with technical issues like V/SM where the exact words and language used are very important. Put another way, I can spot a number of errors which are of the “slip of the tongue” type. But I’m concerned about FUNDAMENTAL errors rather than nit picking.
I have no quarrels with the second video either. In this video (among other things) Michell takes issue with the claim by PM that the existing bank system sucks money out of the real economy. PM’s argument is that since commercial banks create a debt whenever they create money and charge interest on that money, everyone has to pay interest just for the privilege of being able to get hold of money.
I actually criticized that PM claim a few months ago on this blog. My basic point is that when simply creating money, commercial banks do charge for ADMINISTRATION COSTS (which is certainly a flaw in having those banks create money), but they do not, strictly speaking charge interest. However, clearly they do charge interest for loans. But then they’d do that under a V/SM system. (Bit convoluted that: you may need to read the latter article to get the point.)
The third video.
The third video is where the serious errors are. First, Michell claims that V/SM is close to Milton Friedman’s monetarism, a claim also made by Ann Pettifor. In fact there is a big difference between the two.
Friedman advocated the same unvarying increase in the money supply each year, because he though (not unreasonably perhaps) that central banks and governments were so incompetent that they should have no discretion in this area.
In contrast, V/SM claims that central banks and governments should have much the same discretion as they do at present when it comes to deciding how much stimulus to impart.
Another weakness in the latter “similar to Friedman” idea is that the form of stimulus we have implemented over the last 5 years or so actually comes to the same thing as stimulus V/SM style. That is governments have borrowed, spent the relevant money and given bonds to lenders. Then under the guise of QE, central banks have printed money and bought back those bonds. That all nets out to “government and central bank print money and spend it, and/or cut taxes”, which is what V/SM proposes. But strangely we’ve heard to “similar to Friedman” complaints about that.
Moreover, in the early 1930s, Keynes advocated “print and spend”. I do not recollect any complaints to the effect that Keynes was a Friedman style monetarist.
However, Michell’s most important error comes in this sentence:
“Because the sovereign money proposal to strip the banks of the power to lend to bring money creation decisions into the hands of the government feels to me like a policy that kind of restricts growth of credit…”
Well V/SM just doesn’t “strip” commercial banks of the power to lend. They can lend as much as they like, or as much as they think is warranted by the availability of credit-worthy borrowers. The big difference between the existing system and V/SM is that under the latter, loans must be funded via equity or relatively long term deposits which can be bailed in if a bank fails.
Michell does not seem to understand that BASIC element of V/SM.
Also the phrase “feels to me like a policy that kind of restricts growth of credit” is sloppy. But that’s what happens when you try to deal with difficult technical subjects in video interviews.
Milton Friedman and Lawrence Kotlikoff advocated that under V/SM loans should be funded just by equity, whereas PM goes for the mix of equity and long term deposits.
And finally, re the latter “restricts growth of credit” V/SM certainly could result in interest rates rising somewhat: those supplying equity could be argued to run a bigger risk than depositors, though if banks are charged the full cost of deposit insurance which they certainly should be, it is not clear that the TOTAL cost of supplying equity to a bank is much different to cost of supplying deposits.
Moreover, interest rates are currently at a record low, thus a rise in interest rates would do little harm. Indeed, all the world and his wife is complaining about the excessive levels of lending, borrowing and debt that stem from low interest rates.
Plus in the 1980s, mortgagors in the UK were paying almost three times the rate of interest that they do nowadays. I do not remember the sky falling in in the 80s, nor do I remember the streets being lined with homeless folk who could not afford mortgages.
As for any deflationary effect of the latter possible rise in interest rates, that is easily countered with a dose of “print and spend”.