Saturday, 10 April 2021

Stephanie Kelton’s flawed ideas on improving the unemployment / inflation trade off.


I’ve supported MMT for about ten years and thus agree with much of SK’s material. However her ideas in the second half of a recent New York Times article on how to minimise the inflationary effect of Biden’s stimulus plan are poor. The title of the article is “Biden Can Go Bigger and Not ‘Pay for It’ the Old Way.”

She starts this section by saying, “These mostly nontax inflation offsets could include industrial policies, like much more aggressively increasing our domestic manufacturing capacity by steering investment back to U.S. shores….”.

Well the first problem there is that Biden’s stimulus plan is very much into infrastructure, while US plants owned in other countries make a huge range of different items. Thus even if the relevant machinery was moved back to the US, it would not for the most part help with meeting demand for infrastructure related items.

Plus in as far as US firms are NOT CONCERNED with infrastructure related stuff, they manufacture in other countries because they regard that as being CHEAPER than manufacturing in the US. Forcing those firms to manufacture in a more expensive way won’t do much to ameliorate inflation, which is what SK aims to do.

Another of her less than brilliant ideas is that “The Biden team could also consider loosening its legal-immigration policies, so that even once America nears full employment there would still be an adequate labor pool to meet the increased demand for workers.”

Well that’s just a repeat of the age old fallacy that imported labour deals with labour shortages: a fallacy the UK fell for when it imported a large amount of labour from the West Indies just after WWII. The flaw in that argument is that (gasps of amazement), immigrants purchase food, housing, electricity and all the consumer items that natives purchase: i.e. immigrants ADD TO demand just as much as they add to aggregate supply.

At least the latter point is certainly as far as labour IN GENERAL goes. In contrast, the inflation / unemployment trade off can certainly be improved by importing SPECIFIC TYPES of skilled labour that are in short supply (and indeed by exporting specific types of labour that are in surplus). But simply importing a more or less random selection of different types of labour is of no help whatever when it comes to dealing with labour shortages.

Indeed, it’s worse than that. Most of the labour currently trying to get into the US is from central and south America is relatively unskilled, and certainly the labour imported to the UK just after WWII was relatively unskilled.

And finally, if her “industrial policies” do in fact bring benefits, shouldn't they be a PERMANENT FEATURE, rather than just some sort of temporary measure to help Biden’s stimulus, which seems to be the objective of said “industrial policies”?

Friday, 9 April 2021

Whoopeee: the IMF is back in schizophrenic mode..!!



For about the last ten years, the IMF, OECD and others have been utterly schizophrenic on the subject of government debts. Like every economic illiterate, they have been worried about the degree to which debts have been rising. On the other hand they don’t want to advocate big tax rises so as to cut debts because that would cause too much austerity.

So what have the IMF etc done? Well they’ve published any number of articles making the near useless claim that countries should implement enough stimulus to keep unemployment down, at the same time as aiming to cut stimulus and raise taxes with a view to cutting the debt. They might as well have told everyone to stand on their heads and stand on their feet at the same time. But never mind: doubtless the pay at the IMF is good, and I’m sure they have generous early retirement arrangements and good pensions for IMF staff, as long as said staff write enough nonsense.

Anyway, seems the IMF is back in full schizophrenic mode, if a recent article in the Telegraph by Ambrose Evans-Pritchard is any guide. The Title of his article is “Ballooning global debts need to be restructured before it is too late.”

Evans-Pritchard’s third para reads: “On the one hand, the IMF hints at austerity. It urges governments to head off the risk of runaway debt spirals before it is too late. On the other, it calls for more stimulus to prevent an economic relapse once the sugar rush from reopening has faded."

So what’s the solution to this allegedly horrendous debt problem? Well the answer in a nutshell is “Step forward MMT”. That is, as MMTers have been trying to explain for years, and as I’ve explained many times on this blog, the government of a country which issues its own currency has complete control over the rate of interest it pays on its debt, but it CANNOT control the SIZE OF the debt at a given rate of interest. That is, if the private sector goes into savings mode and decides it wants to hold more debt at let’s say a 1% rate of interest, government and its central bank will just have to run a deficit and let the private sector have what it wants. If government and central bank don’t do that, then the private sector will try save with a view to acquiring that extra debt, and as Keynes pointed out in his “paradox of thrift” point, saving up money raises unemployment, all else equal.

I.e. the debt will come down if and when the private sector goes into what might be called “spendthrift” mode and decides it wants to hold LESS debt.

Wednesday, 7 April 2021

One Fed chairman and one vice Chairman support Positive Money.


To be more accurate, one former chairman and one former vice chairman support a particular aspect of the idea put by Ben Dyson (founder of Positive Money) namely that the central bank should decide the SIZE OF the deficit, while politicians continue to be responsible for strictly political decisions, including the NATURE OF the deficit, e.g. whether it takes the form of more public spending or more tax cuts.

The chairman is Ben Bernanke. See para starting “A possible arrangement….” in his Fortune article “Here’s How Ben Bernanke’s Helicopter Money Plan Might Work.”

The former vice chairman is Stanley Fischer.  See article by him and co-authors: “Dealing with the next downturn” published by “The European Money and Finance Forum”.

To be even more accurate, Fischer & Co advocate the latter “fiscal / monetary coordination” policy only where interest rates are so low that there is little more that further interest rate cuts can do. In contrast, Dyson advocated that policy on a PERMANENT basis, with interest rates being determined by market forces: i.e. stimulus under a Dyson system would be implemented ONLY via the latter “coordination” system. But still, the Fischer proposal is support of a sort of the Dyson idea.

For more details on the Dyson proposal, see the book “Modernising Money” by Ben Dyson and Andrew Jackson, or for a shorter summary of their proposals, see a submission to the UK’s “Vickers Commission” by Dyson and co-authors (p.10 onwards).


Market forces.

A flaw in the Dyson proposal is that governments nowadays are such HUGE borrowers, that it is arguably a bit meaningless to refer to market forces which allegedly set interest rates unless one also states what government policy on borrowing should be: i.e. government borrowing policy itself influences interest rates.

My answer to that little conundrum is “step forward Modern Monetary Theory with its claim that interest on government debt should ideally be set permanently at zero”. One reason for the permanent or near permanent zero idea (at least as far as I’m concerned) is that any sort of positive return on government debt essentially equals rewarding money hoarders for hoarding money, with a variety of less well-off taxpayers footing the bill for that reward.

Thus if one accepts the permanent zero idea, then Dyson & Co’s idea about market forces becomes irrelevant, and stimulus is implemented just by creating new money and spending it (and/or cutting taxes): which is what Fischer, Bernanke, Dyson and MMT all advocate, though they all have their own variations on that theme.  

Monday, 29 March 2021

Sir Humphrey Appleby loves Mariana Mazzucato.


Mariana Mazzucato is a big cheeze at the University College London Institute for Innovation and Public Purpose. The latter organisation spews out a never ending torrent of waffle aimed of course at keeping people at the UCL IIPP employed at the taxpayers’ expense.

Their latest bit of waffle is an article published by Project Syndicate entitled “Building Back Worse” (authored by Mariana Mazzucato and others). It’s difficult to know which sentence or paragraph is the most meaningless, but I particularly like this one: “And no government can achieve a goal as complex as carbon-neutrality without mechanisms for eliciting and coordinating the participation of business, academia, and civil society.”

So business and academia have to be “coordinated”, presumably by some sort of Whitehall based coordination committee (which would be music to the ears of Sir Humphrey Appleby)? Personally I can’t see what would be wrong with business getting on with installing wind turbines, with “academia” doing whatever research it thinks best, even if totally unrelated to, i.e. not coordinated with the current generation of wind turbines.

In other words “academia” MIGHT think that research money is best spent improving existing wind turbines. But they might think research money would be better spent on wind powered merchant ships or generating power from the tidal flows.  

And why do the efforts of “civil society” need to the “coordinated” with what academia or business is doing? Darned if I know. I mean if civil society in the form of think tanks or other pressure groups want to promote Bill Gates’s idea of spreading chalk dust into the upper atmosphere so as to cut global warming, presumably Mazzucato & Co would want to see some sort of Whitehall committee telling think tanks etc to stop because that activity is not “coordinated” with existing renewable energy projects.

My reaction to the latter prohibition, if I was working for a think tank, would be to tell the relevant Whitehall committee and Mariana Mazzucato to get lost.

And why does the “participation of civil society” need to be “elicited” by some sort of “mechanism” (i.e. Whitehall committee consisting of Humphrey Appleby and friends)? Civil society actually has a nasty habit of deciding for itself what it wants to promote, often to the annoyance of politicians and senior civil servants, like Sir Humphrey Appleby.

But at least Mariana Mazzucato’s ideas would involve the creation of numerous Whitehall committees: music to the ears of Sir Humphrey Appleby.


Friday, 26 March 2021

Any bank capital ratio below 100% is a subsidy of private banks.


Where bank capital ratios are on the low side, depositors’ money is at risk, thus government (aka taxpayers) have to stand behind private banks and rescue them (or maybe just rescue depositors) when things go wrong. That, ipso facto, is a subsidy of private banks and/or depositors.

Most economists concede that subsidies of commercial activities are not justified unless there is a very good justification for a subsidy, though unfortunately most economists are too indifferent to the above unjustified subsidy to bother doing anything much about it. Incidentally, depositors at a bank which also lends out money are not just simple innocent depositors: they are into commerce since the get a cut of the interest paid by borrowers.

In contrast, where capital ratios are much higher, e.g. well above the 25% or so level advocated by Anat Admati, the risk for depositors falls to a very low level, thus according to the conventional wisdom, it is not necessary to raise capital ratios any further.

Unfortunately the latter point is flawed, and for the following reasons.

Take the hypothetical scenario where bank capital ratios are 100%. That comes to the same thing as so called “100% reserves” or “full reserve banking”. In that scenario, bank loans are funded JUST BY banks, bank subsidiaries or accounts which are funded 100% by equity. Meanwhile deposits are in accounts which are 100% backed by base money at the central bank.

Now suppose a bit of stimulus is needed. There are two ways of doing that: one is to simply create and spend more base money into the economy and let people and firms devote whatever proportion of that new money they like to borrowing and lending. And the second is to artificially cut interest rates so as to bring about more stimulus by encouraging more lending.

But wait: which of those two options is nearer to a genuine free market and thus more likely to maximise GDP or output per hour? Well it’s pretty obviously not the option that involves anything ARTIFICIAL like an artificial cut in interest rates! The free market option is the one that puts more spending power into everyone’s pockets and leaves people and firms to decide for themselves how much of that new money is devoted to more lending and borrowing.
One way of cutting interest rates would be for the central bank to use the new money it has created just to lend to private banks at below the going rate of interest. Well that’s pretty obviously a subsidy of banks!

A second way of cutting interest rates would be to relax the 100% capital ratio requirement, i.e. move towards fractional reserve banking rather than full reserve. But fractional reserve is a system in which private banks can create money, and as Joseph Huber and James Robertson said in the work “Creating New Money” (p.31), the right to create / print money is  a subsidy for the money printer. If I was allowed to turn out £10 notes on my desktop printer, that would be a subsidy of little old me!

The conclusion is that it makes no difference whether bank capital ratios are above or below some sort of supposedly safe level, like the 25% advocated by Anat Admati. That is, regardless of whether they are above or below that level, any capital ratio below 100% involves a subsidy of private banks.


The conventional idea that if bank capital ratios are raised to the point where there is an absolutely minimal chance of a bank failing, that capital ratios are then high enough does not stand inspection: the reality is that ANY RATIO below 100% involves a subsidy of banks and should thus not be permitted. 


P.S. (next day, i.e. 27th Mar 2021).   Forget to say that banks are also subsidised or get preferential treatment in the following sense. One of the main activities of banks is lending. But they are nowhere near the only lenders: for example mutual funds, unit trusts and pension funds lend when they buy corporate bonds. Plus millions of firms lend when they allow customers an extended period before payment for goods is demanded. But there’s no government funded guarantee for those who put money into the latter lenders which ensures they are immune from making a loss, and there are no bailouts for those lenders.

Thursday, 25 March 2021

The existing bank system is fraudulent.


A bank under the existing system is a special type of lender which unlike other lenders, promises those who fund it (i.e. depositors) that they cannot possibly lose money. If any other lender does that (e.g. a pension fund, mutual fund or unit trust), those responsible are prosecuted, and for the obvious reason that loaned out money is never totally safe. Ergo the money of those who fund those lenders cannot be totally safe either.

So why do banks get away with it? Well there’s two reasons. First, a large majority of economists don’t understand the above relatively simple point. Maybe that’s understandable in the case of economists who have not studied banks. But it’s inexcusable in the case of those who have.

Second, banks devote a huge amount of effort to hoodwinking and brainwashing politicians into supporting the existing bank system, and that’s easily done: the average politician has a hundred things to think about other than banks.

Wednesday, 24 March 2021

An accounting model of the UK Exchequer.

The above is the title of a recently published work which sets out in detail the book-keeping entries etc involved at the UK Treasury, Bank of England and commercial banks when the UK government engages in tax collection, public spending, borrowing and money creation. Plus there’s a 45 minute youtube summary by one of the authors.

The work is the length of an average book and congratulations to the authors for all their hard work. The complexity is mind blowing and I have nowhere near got to grips with it, and probably never will. So . . . “errors and omissions expected” in the paragraphs below. This work supports the idea that governments and their central banks are not constrained by anything much (apart from inflation) when it comes to creating and spending extra money in a recession.
The conventional view (which I’ve always gone along with) is that when government wants to borrow and spend more, it first borrows and then spends the money borrowed. And an independent central bank (CB) can then react to that in whatever way it sees fit. E.g. if the CB thinks the extra borrowing will raise interest rates too much it can cut them, e.g. by creating new money and buying up government debt. Alternatively if it thinks the extra spending will be too inflationary, it can raise interest rates, e.g. by selling government debt into the market. (Incidentally I’m using the phrase “independent central bank” simply to refer to a CB which is free to adjust interest rates: clearly there are ways in which so called indepent central banks are not independent.)

However, far as I can see from the above work, that is not actually what happens. Rather, when parliament decides to spend money over and above what it collects in tax, the Bank of England will automatically create the money needed, which will then be spent. But the BoE will demand collateral from the Treasury in the form of government debt, i.e. Gilts.

After that, the Boe is free to adjust interest rates up or down as described above. Thus what the above work says (end of section five) is that the extra spending may take place BEFORE the “government central bank machine” borrows or extracts extra money from the private sector.

On the other hand, far as I can see, that’s not NECESSARILY what happens. That is, it’s presumably possible that the BoE gets wind of extra government spending (not funded via tax), and if the BoE thinks inflation is getting uppity, it may immediately sell government debt into market to mop up money and impose a countervailing / anti inflationary effect.

So to repeat, one of the important points made by this work is confirmation that the UK government and the Bank of England are not constrained (other than by inflation) when it comes to creating and spending more money. However, the exact way in which that “create and spend” process takes place are not quite as per the conventional wisdom. And finally, once again: errors and omissions expected.