Wednesday, 22 September 2021

Interest rates have been artificially high for centuries.


David Hume in his essay “Of Money” (written almost three hundred years ago) said “It is very tempting to a minister to employ such an expedient, as enables him to make a great figure during his administration, without overburdening the people with taxes, or exciting any immediate clamors against himself. The practice, therefore, of contracting debt, will almost infallibly be abused in every government. It would scarcely be more imprudent to give a prodigal son a credit in every banker’s shop in London, than to empower a statesman to draw bills, in this manner, upon posterity.”

In other words politicians are always tempted to pay for public spending via borrowing rather than taxes because voters are keenly aware of tax increases, but tend not to attribute any rise in interest rates that might derive from more government borrowing to government or politicians.

Simon Wren-Lewis (former Oxford economics prof) refers to this phenomenon as the “deficit bias”.

Of course the rise in interest rates attributable to government borrowing couldn't be described as “artificial” if that borrowing made sense. For example, it's possible that government borrowing which was confined to funding public sector CAPITAL spending might make sense, though even that is debatable.

One reason for doubting the validity of the “borrow for capital spending” idea is that when any private sector entity, e.g. household or firm, wants to make a capital investment, e.g. buy a new car, and happens to have enough cash to pay for the investment, it won't, quite righly, borrow. Why pay interest when you don't need to?

In other words, the REASON for borrowing to fund capital spending is SHORTAGE OF CASH. But governments are never short of cash in the sense that there is no limit to the amount of cash they can grab off taxpayers, never mind that in most years there is scope for simply printing more money. In short, the “borrow to fund capital spending” idea looks flimsy.

But in any case, the reality is that governments just don't borrow purely for capital spending: they borrow to fund CURRENT spending as well.

So to summarise, a significant proportion of government borrowing, if not most of it, is not justified. Ergo government borrowing results in a artificially high interest rates and has done so for a very long time. Of course the low rates of interest we've seen over the last ten years or so since the GFC and the onset of Covid are an exception, but this article is concerned about the very long term: the last three hundred years or so.

Monday, 20 September 2021

Robert Skidelsky's strange ideas on QE.

He penned an article recently entitled “Where has all the money gone?” and makes the bizarre claim in his first para that “ question is almost never discussed: Why have central banks’ massive doses of bond purchases in Europe and the United States since 2009 had so little effect on the general price level?”

Well I've seen that question discussed at least once a week for the ten years or so since QE started! How about you? And if you and/or Skidelsky HAVEN'T seen that question discussed, then I don't know what planet you and he live on...:-) I discussed that question on this blog just over ten years ago!

Google “QE” and “asset swap” (which is all that QE amounts to) and you'll find about SEVEN THOUSAND articles and similar making that point.

Second, Skidelsky (like most allegedly “professional” economists) appears to be unaware that far from it necessarily being desirable to reverse QE, there's a good case for continuing it till the ENTIRE GOVERNMENT DEBT is QE'd. Reason is that, as Milton Friedman and MMTers claim, the best rate of interest on government liabilities is zero percent. If that's correct, then the entire stock of government debt might as well be turned into zero interest yielding cash!!

Next, Skikelsky tackles the question as to EXACTLY WHY QE has not boosted demand all that much. Well I suggest the answer to that has been obvious for a long time to anyone who has got past the first chapter of an economics text book. It's that QE consists of the central bank creating new money and buying up bonds, mainly government bonds, thus that process involves giving savers a slightly different asset to the asset they currently hold! That process is hardly likely to result in a splurge of consumer spending and for the blindingly obvious reason that savings are by definition assets which the owner has no intention of spending. Doh!!

But that's too simple for Skidelsky. Instead he invokes an arcane reason put by Keynes namely that that during recessions money flows to what Keynes called “financial circulation” rather than “industrial circulation”. As Skidelsky puts it, “During a sharp economic downturn, he (Keynes) argued, money is not necessarily hoarded, but flows from “industrial” to “financial” circulation. Money in industrial circulation supports the normal processes of producing output, but in financial circulation it is used for “the business of holding and exchanging existing titles to wealth, including stock exchange and money market transactions.”

But wait..... That idea of Keynes's has NOTHING specifically to do with QE!! It's simply what might be called a “general all purpose” idea as to what happens in recessions!!

But Skidelsky's article then goes from bad to worse. He says “But the antidote is staring us in the face. First, governments must abandon the fiction that central banks create money independently from government. Second, they must themselves spend the money created at their behest. For example, governments should not hoard the furlough funds that are set to be withdrawn as economic activity picks up, but instead use them to create public-sector jobs.”

Re the “fiction that central banks create money independently from government”, central banks actually do that when they create new money and do QE in the form of buying up COMMERCIAL as opposed to government bonds!!

Of course it is true (as Skidelsky has himself pointed out elsewhere) that the large majority of bonds “QE'd” have been GOVERNMENT bonds. But it is wholly untrue to say central banks can't create money independently of government.

Next in the above quote comes Skidelsky's claim that when governments cut a particular form of spending (furlough spending in this case), that the relevant money is likely to be hoarded by government. Well that's not true.

Governments, as far as they can, first decide whether to go for a deficit and also decide how large that deficit should be, or they may decide that a “no deficit” scenario is best for the time being, i.e. they may decide to “balance the books” for a while.

Whichever of those options government goes for, it will then try to stick to that option (surprise surprise). And that means that if a particular form of spending is cut (e.g. furlough) government will AUTOMATICALLY raise some other form of spending or cut taxes. If it doesn't, it won't ipso facto stick to its own deficit target!!!

Conclusion. Skidelsky's claim that recessions should be solved mainly by FISCAL means is certainly correct, or to be more accurate, I'd suggest (along with most MMTers) that ABOVE the zero bound the first resort should be to cut interest rates, with fiscal means then being employed at or near the zero bound. But most of the rest of Skidelsky's article, shall we say, leaves room for improvement.

Sunday, 19 September 2021

Good news: Richard Murphy says the recent £10bn tax increase is not needed!

Normally I agree with Richard Murphy, but he rather went off the rails in this recent article where he claimed that since the UK govt has had to borrow and spend £26bn less than was forecast in March, that therefore the recently announced £10bn tax increase to fund more spending on social care is not needed. Article title: “The government has borrowed £26bn less....”.

Spotted the flaw in that argument? If not, it's as follows.

The fact that govt has had to print and spend £26bn less than expected (which is what “borrow and spend” actually means given that the Bank of England simply prints money and buys back govt debt as Murphy rightly says) means the economy has performed better than expected. i.e. govt thinks the amount of stimulus needed to keep the economy as near capacity as possible is £26bn less than expected. Indeed, given the shortages appearing left, right and centre (in the US and Europe IN ADDITION to the UK), it looks like Sunak's “£26bn less” strategy is not unreasonable.

But that comes to the same thing as saying the UK finance minister thinks (rightly or wrongly) that had that £26bn been printed spent, the result would have been excess inflation. Same goes for printing and spending £10bn without covering that with £10bn of extra tax.

Note: the question as to whether the economy REALLY IS near capacity and thus the latter excess inflation would transpire is an important question, but it's WHOLLY IRRELEVANT to this £26bn/£10bn argument. Murphy assumes government is CORRECT to cut stimulus by £26bn, which is a fair enough assumption to make for the sake of argument.
I.e. his claim is that £26bn less is needed for stimulus, ergo there is £26bn, £10bn or whatever of lovely free money just waiting to be printed and spent. False logic.

Thursday, 16 September 2021

More nonsense from Mariana Mazzucato & Co.


That's in an article by her and co authors published by the Boston Review and entitled “Industrial Policy's Come Back”.

This article simply repeats a message she has made at least TWENTY TIMES before and I'm getting tired of it.

She and co-authors say in connection with Regan / Thatcher “neoliberal market fundamentalism” that “Under this regime, modern capitalist markets have proven themselves unable to create an even distribution of wealth and income, ecological sustainability, affordable shelter and health care..”.

Well no one ever said Regan / Thatcher style “fundamentalism” or free markets WOULD DEAL with inequality or “ecological sustainability”!!! Economics text books have always made it clear that there are some things the market does not deal well with, if at all: e.g. “externalities” like pollution, and inequality. Certainly in the UK, spending on social security did not plummet when Thatcher came to power: i.e. she was perfectly well aware that the market would not deal with poverty. (Incidentally, be nice if those who teach economics in universities got to grips with introductory economics text books, wouldn't it!!)

Ergo what is needed to deal with the latter problems is a social security system, anti pollution laws and measures like subsidies for wind & solar power etc. But we've been doing all that for YEARS and in some cases DECADES!! and no thanks to Mazzucato.

While one COULD CLASSIFY subsidies for wind and solar power as a FORM OF industrial policy, that on it's own is not what is normally meant by “industrial policy”. The phrase “industrial policy” (and this is the way in which the authors use the phrase in he second half of the article) means something like “a move towards a Soviet style central planning system” or an “industrial strategy” as the authors call it.

So while the authors claim the above points which have long been made in economics text books are an argument for an industrial stratety (in the latter broad sense) they are actually nothing of the sort.

Oooh. Gosh. Let's stimulate demand.

Next, the authors say “Any industrial strategy should therefore aim to stimulate demand...”. Well who ever said government and central bank SHOULD NOT stimulate demand when necessary? Why do Mazzucato & Co think governments and central banks have created and spent billions if not trillions into their economies since the GFC?


Next, the authors claim “We need a different approach to policy making: a mission-oriented framework that focuses government action on solving fundamental challenges rather than waiting for the solution to trickle down through competitive market forces.”

Now what ACTUAL EVIDENCE is there that a “mission-oriented framework” (whatever that is) would do better than competititve market forces? The authors offer no evidence!

This article is just a series of important sounding pseudo technical words and phrases which boil down to nothing.

Anyway, the authors then give four instances of “mission oriented frameworks” or if you like, for reasons for industrial policy. The first is that the state “should play an active role in creating and shaping markets in the direction of well-defined missions, using the full arsenal of policy instruments at its disposal—including public investment, regulation, demand-stimulating procurement, macroeconomic policy, and education and skills training.”

Well that's a bit like saying that in deciding what to do next week, you should have “well defined missions”. If that isn't as good as meaningless I don't know what is.

Anyway, the only actual EXAMPLE of the latter “market shaping” approach given is Germany's policies on combating climate change. But we already know (to repeat) that that's a problem that needs to be addressed and urgently!! We've all known that for YEARS!! Plus that (to repeat) is not any sort of new idea in that (to repeat) the economics text books have explained for DECADES, that the market does not deal well with externalities like excess CO2 emissions.

Looks like there is nothing in Mazzucato & Co's article that is original or new. It's just hot air, waffle and important sounding words of phrases, and I can't be bothered with any more of it.

But the authors should be congratulated in one respect: a torrent of waffle and important sounding pseudo technical words and phrases will fool a large majority of the public and perhaps about half of academia plus editors of publications like the Boston Review. If you can churn out hot air, waffle and important sounding phrases and a litany of false logic, you'll go far.

Tuesday, 14 September 2021

Strange ideas on NAIRU from Roger Farmer.


Farmer claims in this NIESR publication entitled “Coordinating monetary, fiscal and financial policy” that “There is no NAIRU” and that NAIRU “is a religion, not a science”. MMTers incidentally often claim likewise.

His main reason for that claim seems to be that “Because the NAIRU and r-star are unobservable and time-varying, the dominant paradigm is irrefutable.” Presumably “dominant paridigm” refers to NAIRU. (Academics always like using six syllables where two will do because that makes them look important.)

Well there's an obvious flaw in that argument, which is at we human beings use HUNDREDS of concepts every day which are “unobservable and time-varying”. Love is not “observable”, at least in the sense that it cannot be actually measured, which I assume is what Farmer means here. Clearly every romantic novel should be burned as they are all talking nonsense.

And for another example there is “power” in the sense of the power of the Roman Empire or the US military machine in 2021. How exactly do you measure those? You can't, at least not with anything remotely like accuracy that is normally implied when the word measurement is used in physics, astronomy etc.

Incidentally, while on the subject of physics, there are sub-atomic particles whose existence was inferred before they were actually “observed”. Obviously physicists need to pay attention to Farmer and the NIESR (ho ho).

Clearly all books on the history of the Roman Empire and indeed all other books which refer to the “power” of some country or empire should be re-written.

I could cite a hundred other examples of commonly used ideas and concepts which are not “observable”, but hopefully you've got the point.

The moral is that if you're looking for nonsense on stilts, then something written by a leading economist published by a respectable, taxpayer funded organisation like the NIESR might be a good place to look.

Sunday, 12 September 2021

The futility of interest on government debt – and other anomalies


Paying interest on reserves and government debt really is a genius idea. It amounts to rewarding those who hoard cash by paying them interest. That interest has to be paid for somehow: in effect it's paid for by taxes on the section of the population which DOES NOT have cash to hoard. At least that's true assuming the economy is at capacity and the interest cannot be funded simply by printing money. And if THERE IS scope for money printing, then donating that money to money hoarders is not number one priority for about 99% of the population, I'd guess.

It might seem tempting to claim that interest on reserves is paid to banks, not depositors. The answer to that is that ANY INCREASED INCOME enjoyed by banks inevitably trickles down to bank shareholders, depositors, those who borrow from banks and anyone who has anything to do with banks. i.e. that increased income absolutely must end up on SOMEONE'S pocket, including the pockets of depositors. And the fact is that cuts in bank costs over the decades and centuries (e.g. thanks to computers) have not benefited JUST shareholders: proof of that lies in the fact that the return on capital that banks manage has always been comparable to that obtained in other industries, over the medium and long term.

And the idea that government liabilities should pay no interest is not some sort of new crank idea: Milton Friedman (and MMTers) claim/ed there should be a zero rate on government debt. Like Milton Friedman, I wouldn't TOTALLY RULE OUT interest rate hikes in emergencies.  But the above daft aspect of interest on government liabilities (subsidising the rich) does support the claim by Friedman and MMTers that the best rate of interest on state liabilities is zero. (For Friedman, see his para starting “Under the proposal..” in his 1948 AER paper.)

Of course it might be argued that interest on government debt would be justified where relevant sums fund public INVESTMENTS like infrastructure. But government debt in most countries just isn't limited to funding those investments. So that point is irrelevant for the moment.


That strange deposit insurance limit.

Another anomaly here is as follows. Most countries limit the amount per person deposited at banks which is covered by deposit insurance (€100,000 in the EU and £85,000 in the UK). But in the UK, and maybe other countries, you can deposit up to £2million at the state run savings bank National Savings and Investments. And your money will be totally safe because NSI invests only in base money (i.e. reserves) and government debt.

Moreover, even if institutions like NSI didn't exist, anyone is free to buy as much government debt as they like. Of course if you buy debt which still has several years to run before maturity it's possible to lose money. But if you buy SHORT TERM debt, it's near impossible to lose out.

The above anomaly is not easy for governments to resolve: to resolve it, i.e. ensure that no one holds more than a limited amount of government liability, they'd have to check up on how much each person has in state run savings banks AND how much government debt they hold DIRECTLY. And to add to the complexity, they'd need to check up on how much each person had in mutual funds which specialise in holding government debt.

But at least a near permanent zero rate of interest on government liabilities would HELP cut down on all the above anomalies.


P.S. 16th Sept 2021. I'm please to see Warren Mosler (founder of MMT) agrees with the point made in the above first paragraph. Warren has actually made the above point about money put into government debt amounting to placing money in a term account at a bank called "government": he's made the point several times in his books and articles far as I remember.

Saturday, 4 September 2021

Whoopee: Bank of England has a new and sub-standard chief economist, Huw Pill.


 If you want an example of beautifully crafted English which boils down to saying nothing much, (one of the main skills possessed by those, like Sir Humphrey Appleby, at the top of the British establishment), I recommend Huw Pill's chapter (Ch3) in this NIESR publication. It's entitled “Renewing our monetary vows.” 

Incidentally, the NIESR at the moment seem to be the World's experts at churning out content free, sleep inducing hot air. It's an organisation which specialises in consuming taxpayers' money, not so as to promulgate knowledge or ideas on economics, but rather to do what a significant proportion of academics do: publishing content free waffle so as to further their careers.

Anyway, QE is one of the main topics of Pill's above mentioned chapter, if not THE MAIN topic, and his conclusion (his last para) is that “defensible limits” on “central bank financing of government deficits” are needed. But what makes him think that a central bank which has an inflation targeting mandate would let CB financing of govt deficits get excessive? Given too much inflation, any such CB would do one or more of several things: e.g. 1, stop any more QE, 2, put QE into reverse, 3, raise interest rates which comes to much the same as reversing QE: i.e. a central bank which aims to raise interest rates will (inter alia) sell govt debt into the market. 

So why the need for “defensible limits”?

Pill's point is a bit like saying we need “defensible limits” to the amount of water the fire brigade pour on burning houses, else the excessive amount of water poured on the house would do more harm than good. The answer to that is that every fire-fighter knows (as indeed does every ten year old) that once a fire is obviously out, no more water needs to be poured on it.