Tuesday, 30 July 2013

Cost of the crisis.

Dallas Fed paper estimates the cost.
“We conservatively estimate that 40 to 90 percent of one year's output ($6 trillion to $14 trillion, the equivalent of $50,000 to $120,000 for every U.S. household) was foregone due to the 2007-09 recession.”
H/t to Mike Norman.

Monday, 29 July 2013

Full reserve, Positive Money style, would have ameliorated the Euro shambles.

To a large extent, the Euro shambles was caused by silly loans made by Euro banks as Mark Blyth points out. Where a bank makes silly loans under fractional reserve, a bank run tends to ensue. In contrast, under full reserve, there is not much point in bank creditors running.
To be exact, full reserve necessarily involves forcing depositors to choose between having their money lodged in a near 100% safe fashion, and in contrast, having their money loaned on by their bank, in which case the depositor carries the risk (or much of the risk), rather than taxpayers carrying the risk. That “forced choice” is explicitly advocated by Positive Money and others.
The latter “forced choice” can actually be imposed on banks without necessarily adopting full reserve lock stock and barrel. For example John Cochrane advocated “forced choice” in the Wall Street Journal recently without mentioning full reserve.
Thus it’s the forced choice that would actually have ameliorated the Euro shambles rather than full reserve as such. As to exactly why full reserve (which involves “forced choice”) would have ameliorated the Euro shambles, reasons are set out in an article by me on the Positive Money site.

Sunday, 28 July 2013

Mario Draghi’s murky past.

I do like this paragraph from Ann Pettifor’s blog.
Mario Draghi (now governor of the European Central Bank) used to be director-general of the Italian Treasury, and according to Ann….
“There, according to an investigation by the Financial Times, he worked with private investment banks to arrange derivative contracts designed to disguise the scale of Italy’s debt from EU authorities – to ease Italy’s entry into the Eurozone.  Draghi moved from the Italian Treasury to Goldman Sachs in 2002 – 2005, and from there it was one easy step to the governorship of the Bank of Italy in 2006. There he supervised and allowed Banca Monte dei Paschi di Siena SpA to mask losses 367 million-euros, which later required a taxpayer-funded bailout. This experience qualified him for the role of governor of the European Central Bank in 2011.”

Saturday, 27 July 2013

Bridges to nowhere.

I knew Japan built bridges to nowhere, but I didn’t know it was so many. Light blue columns are infrastructure needed. Dark blue is actual amount spent on infrastructure. Compare the right hand pair of columns (Japan) to the other pairs.

Friday, 26 July 2013

Mike Norman on the irrelevance of the deficit and debt.

Incidental note:

You might think there is a contradiction between Mike’s claim that the debt doesn’t matter, and the jaundiced view of national debts expressed by David Hume in the right hand column of this blog. The two are actually compatible, and for the following reasons.
David Hume is concerned with where a government aims to raise money for public spending AS A SUBSTITUTE for taxation. In that case there is no effect on demand (or at least influencing demand is not the object  of the exercise). And it is very questionable as to whether governments should ever do this – certainly in the case of current spending. Moreover, even the popular and “common sense” view that governments should borrow to fund capital spending is very debatable. See here.
In contrast, to borrowing as a substitute for tax, there is expanding both borrowing and spending. That is widely regarded as raising demand (especially if interest rates are held constant or reduced). I’m not saying I think that’s the best way to raise demand, but certainly that’s a different kettle of fish to what concerned David Hume.

Raised inflation expectations raises demand?

A popular view is that if a central bank raises inflation expectations, demand will rise because significant amounts of money will be spent before it loses its value.
But there is a problem, pointed out by George Selgin, namely that it’s not just BUYERS who notice the increased forthcoming inflation: it’s SELLERS AS WELL!!!! So if for the sake of argument, and plucking numbers out of thin air, inflation induces buyers to up their spending by X% as from tomorrow, and sellers are induced to raise their prices by X% as from tomorrow, all you get is more inflation and no increased real demand.
Tee hee.
But there’s worse to come.
Suppose households or the private sector generally aims to maintain a given level of money savings in REAL TERMS (a not unreasonable assumption). Or more generally, and putting it in MMT parlance, suppose the private sector aims for a given level of “net financial assets”, again in real terms.
In that case, far as I can see, raising inflation expectations would induce the private sector to SAVE MORE rather than SPEND MORE. 

Conclusion: . . . quite apart from the inherent costs of more inflation, raising inflation expectations with a view to raising demand has serious potential pitfalls. It’s not worth trying.