Thursday, 24 January 2019
Normally I agree with Krugman, but his article entitled “MMT, Again” in the New York Times isn't up to much. Incidentally that article was published some time ago, in 2011, so why bother with it now? Well one reason is that the article was cited as some sort of authority in a Zero Hedge article published very recently (entitled “The Disturbing Rise Of Modern Monetary Theory (MMT)”).
Anyway, Krugman’s argument is a joke. He claims that if government plans to have public spending make up a particular percentage of GDP (Krugman choses 27% as an example), but taxes only amount to 17%, then according to MMTers (so Krugman claims) government and central bank can simply print and spend money to make up the difference, rather than borrow.
Well that is what’s known as a “straw man argument”: i.e. attributing an absurd idea to someone else, demolishing it, and then claiming you’re smarter than the someone else.
The reality is that MMTers have actually cottoned onto the very obvious fact that simply funding public spending via money printing can lead to excess inflation (gasps of amazement). Thus, MMT (just like Keynes) advocates enough stimulus (in the form of “print and spend”) to reduce unemployment as far as possible without inflation rising above the 2% target.
If the best criticism that a leading economist and economics Nobel laureate can put against MMT is a straw man argument, then speaking as an MMT supporter, I am much encouraged….:-)
However, to repeat, I normally agree with Krugman. Ironically he once said that while there are a selection of economists for whom he has plenty of respect, in the case of each of them he said he occasionally sees each of them going right off the rails. The above straw man point was an unusual instance of Krugman going off the rails.
Monday, 21 January 2019
I gave a talk on Modern Monetary Theory at a meeting of the above group yesterday (in the North East of England). This post is simply to enable anyone who wants to discuss matters dealt with there in more detail to do so (in the comments below). If no one wants to discuss any points further, I’ll remove this post in a week or so.
P.S. Number of searches for "Modern Monetary Theory" done over the last five years:
Saturday, 19 January 2019
It has become fashionable recently to claim banks are not intermediaries, i.e. apparently they don’t collect savings from savers and lend on those savings to borrowers. E.g. see here, here, and here.
If that’s the case, one has to wonder why banks have dished out billions over the last fifty or hundred years to depositors and bond-holders by way of interest: the object of the exercise is to attract money from depositors and bond holders isn't it? But if banks do not need that money before making loans, why dish out those billions?
It could perhaps be argued in the case of depositors that the object of the exercise is to grab customers with a view to then selling those customers the other services, like supplying credit cards, mortgages, administering current accounts (“checking accounts” in US parlance). I.e. the interest paid on some current accounts is perhaps a loss leader.
But that argument is doubtful. Supermarkets go in for the loss leader trick, but the actual loss leader items change from one year to the next and from supermarket to supermarket. That is, in one year supermarket A may offer cut price baked beans, while supermarket B offers cut price fruit. Then next year A will try “buy one get one free” for some items, while B will try cut price beer.
In contrast, while some banks have paid no interest on instant access accounts in recent years because of the fall in interest rates over the last twenty years or so, they INVARIABLE pay interest on one or two month term accounts. That makes it look like the latter interest is not just some sort of cheap trick designed to pull in new customers.
Plus in the case of bond-holders, the loss leader idea is as good as irrelevant. That is banks do not sell bonds with a view to turning bond-holders into purchasers of other products.
The reality is that a bank cannot simply lend out millions willy nilly without somehow or other having money FLOWING IN, otherwise the bank will run short of reserves and will have to go cap in hand to other banks or the central bank with a view to borrowing reserves.
But that’s not to say a bank has to have exactly $X dollars flowing in for every $X flowing out in the form of loans. I.e. banks do have some leeway. That is, to a limited extent, they can lend money without having any corresponding amount of money flowing into their coffers. But if a bank goes too far in that direction, that means, to repeat, it will have to borrow reserves, something banks do almost every day. But amounts borrowed that way are small compared to their total assets or liabilities.
So I suggest that rather than claim banks are not intermediaries, it would be more accurate to say that basically they are intermediaries, but that they have limited scope for acting in what might be called a “non intermediary” fashion
Friday, 18 January 2019
Those who place money with a bank with a view to the bank lending on their money so as to earn them interest are protected by taxpayer backed deposit insurance, which is nice for them. But if people who want to lend out their money via banks are protected against loss gratis the taxpayer, why shouldn’t those who place their money with other investment intermediaries (e.g. unit trusts, mutual funds, private pension schemes, etc) enjoy the same privileges (where that’s what investors want)?
Unless other investment intermediaries enjoy the same luxury, deposit insurance is a form of discrimination in favour of, i.e. a subsidy of banks.
Moreover, the argument put for the existing bank system and deposit insurance by the UK’s Independent Commission on Banking (sections 3.20 – 3.24) namely that deposit insurance encourages lending and investment applies equally to other investment intermediaries.
On the other hand, the availability of a totally safe method of storing and transferring money is a basic human right, so it’s fair enough to have taxpayers stand behind THAT system. So what to do?
Well I suggest there is a very simple and widely accepted principle that helps sort this out: it’s the widely accepted principle that it is not the job of governments or taxpayers to stand behind COMMERCIAL ventures or transactions (as I argue here).
Depositing money with an investment intermediary with a view to earning interest is clearly a COMMERCIAL transaction, and should therefor not be protected by taxpayers / governments.
In contrast, the simple act of storing money and transferring it is not necessarily commercial in nature. But even where it is commercial in nature, the country’s money storage and transfer system cannot possibly be allowed to collapse. Thus there is a case for taxpayer / government insurance of that system.
And what d’yer know? That’s exactly what full reserve banking achieves. That is, under full reserve, those who want their money to be loaned out so as to earn interest are not protected, while those who simply want money STORED without earning interest are protected.
And as for any deflationary effect of the cut in lending that full reserve would bring, that’s easily countered by standard stimulatory measures, e.g. the suggestion made by Keynes in the early 1930s, namely that in a recession, government should simply create new money and spend it (and/or cut taxes). The net effect would be less lending and thus less debt, and given that the great and the good and every windbag in the country keeps going on about the excessive amount of private debt, what’s the problem?
Sunday, 6 January 2019
Richard Murphy and Colin Hines propose a “National Investment Bank” in the Guardian which issues “Green Bonds” which the Bank of England then “QEs”: i.e. the BoE prints money and buys up those bonds.
The trouble there is that having government or any nationalised institution (like a National Investment Bank or government itself) issue bonds with the BoE then buying back those bonds is that that all nets out to “government prints money and spends it” (sometimes known as “overt money creation” – OMC). So why not do the latter and not bother with the investment bank or green bonds?
In contrast, I can see the point of green bonds which are not QEd: people with money to spare might be prepared to do a bit for the environment by lending to green projects at a rate of interest below the going rate on bog standard government debt.
Friday, 4 January 2019
Several centuries ago, bankers thought up a trick, namely to accept deposits from customers and lend on relevant money, while telling depositors their money was 100% safe.
That of course is fraudulent: reason is that loaned out money is never totally safe. And indeed that fraud becomes blatantly obvious when the inevitable happens: banks fail, or the entire bank system looks like failing.
But the latter fraud brings bankers great riches, and as long as you’re rich, the establishment will see you as respectable. You can earn your millions from drug dealing, extortion, or a chain of brothels. It really doesn’t matter: long as you’ve got loads of dosh, the establishment (i.e. politicians, bank regulators, academic economists, the British royal family, the Church of England, etc) will see you as respectable. For example the going price for a seat in the UK House of Lords is about a million pounds.
So instead of clamping down on the above fraud, the establishment comes to the rescue of commercial banks and assists in the above fraud. That is, commercial banks are rescued, plus they are protected via deposit insurance, the “too big to fail” subsidy, and so on.
“Generous” donations by bankers to politicians’ “election expenses” assist politicians to see sense in connection with the above matters.
Net result: bankers laugh all the way to the bank, if you’ll excuse the pun.
Monday, 31 December 2018
The German economist Heiner Flassbeck highlights the fact that human beings are largely incapable of distinguishing between two senses of the same word: in particular, in his native German language, the word for debt is the same as the word for guilt. That means Germans tend to think that debtors are all guilty: totally illogical of course.
Much the same goes for the word “austerity” which has two quite separate meanings: first, inadequate demand, and second, inadequate public spending (even assuming demand is adequate). About 99% of English speakers who use the word fail to clarify in what sense they are using it. But that doesn’t really matter for them. After all, they’re not really interested in solving austerity related problems (in any sense of the word). Normally the motive for wielding the word is to do some so called “virtue signalling”.
In view of the above failure to understand or use words properly, it’s a wonder is that human beings can talk at all…:-)
Incidentally Heiner Flassbeck and yours truly published (quite separately) a possible solution for Greece and similar countries a year or two ago. That’s to let Greece impose import tariffs. See here.
However, there’s been little interest in that idea, and for reasons alluded to above, namely that Greece is a godsend for virtue signallers. In contrast, if you suggest an actual solution for the Greek problem which requires a concentration span of more than five seconds to get to grips with, then virtue signallers’ eyes glaze over.
And that’s the end of this thoroughly cynical article.