Tuesday, 30 December 2014

Quack cures for Eurozone austerity.

I have big reservations about a popular alleged cure for austerity in the EZ periphery. The alleged cure is STIMULUS.

Now do proponents of that cure think no one has thought of that?

The exact form of that stimulus needn’t concern us here: it can be conventional QE or what is sometimes called “QE for the people”. That’s printing new money and handing a dollop of money to every citizen. Another alternative is to have periphery governments borrow and spend more (and/or cut taxes). But that raises government debts.

The IMPORTANT point is that austerity is not being imposed on the EZ periphery just for fun, or because core countries are sadists. The central problem is that the periphery has become uncompetitive relative to the core. Ergo some way of cutting periphery costs must be found, and a period austerity or deficient demand will solve that problem (eventually).

Of course the latter “cure” involves serious costs, economic and social, but given the existence of the Euro, can you think of anything better?

Where each country has its own currency, lack of competitiveness doesn’t matter so much: uncompetitive countries can devalue. In a common currency area, they can’t. That’s the problem.

Another solution, or at least partial solution would be more EZ wide stimulus including more stimulus in core countries (aka Germany). That could easily mean more inflation in Germany. But arguably adjustments in relative competitiveness are less painful if brought about by inflation in competitive countries as opposed to deflation in uncompetitive ones.

On the other hand you can’t blame Germans for being sceptical: in the view of many Germans, any stimulus in Greece will simply result in Greeks doing what they’ve done before, namely put in for unwarranted pay increases, which makes them less competitive, which defeats the object of the exercise.


Fiscal union.

Another popular quack cure or at least questionable cure is fiscal union. You’ve probably seen it claimed a dozen times that the basic EZ problem is that the EZ has adopted monetary union without fiscal union.

Certainly fiscal union MIGHT help: it would involve hand outs by core countries to periphery countries in the same way as wealthier parts of the UK hand out assistance to less well-off areas of the UK. But there’s a limit to the generosity of wealthier parts of the UK or EZ. So fiscal union is no panacea.

If Germans don’t feel like being ultra-generous towards Greece under existing arrangements, presumably they’re not going to be ultra-generous given fiscal union.



Stimulus just isn't a cure for austerity in the Eurozone periphery: at least, if it’s going to be implemented, it first requires Germans to accept the possibility of higher inflation, and Germans are unlikely to do that.

Monday, 29 December 2014

Mervyn King and the crisis.

I gather that King (former governor of the Bank of England) said this morning “We have not yet got to the heart of what went wrong.”  That was on the BBC’s Today programme.  Well that’s cause for optimism!
I’ve actually noted before that Mervyn King is a bit of an academic dreamer who DOES PRODUCE occasional flashes of insight into banking problems: indeed Positive Money quotes two or three passages of his. But he isn't one to “effing solve this effing problem by this time yesterday”.

Of course no one can go around effing and blinding while governor of the Bank of England. But it would be nice if he was a bit more decisive.

Sunday, 21 December 2014

Print your own money.

This is in the Kansas City Fed office. I'm not sure exactly what's going on, but looks like you can print your own notes with a choice of currencies, amounts, patterns etc. This is all perfectly legal, as long as your DIY notes don't look too much like the country's central bank issued notes.

It's a good educational tool: it illustrates Hyman Minsky's point that "Anyone can create money: the problem is getting it accepted". I.e. if you printed your own dollar bills using the above Fed printing machine, your chance of getting them accepted in local shops would be effectively zero. In contrast, J.P.Morgan, Citibank, Lloyds, Barclays etc can in effect print money (though not in the form of physical notes). Having printed money (in book-keeping or digital form) those banks can then lend out their "notes". Those banks promise to swap their "notes" for central bank notes. But as long as those "privately issued notes" are lent to responsible borrowers, not too many people will demand the latter swap. Nice work for private banks.

Picture taken by Stephanie Kelton (I think).

Wednesday, 17 December 2014

(S – I) = (G – T) + (X – M)?

Frances Coppola describes the above as her “favourite equation”. I think the equation has problems. Re the letters / symbols:
S = Private sector saving.
I= Private sector investment.
G= Government spending.
T=Government income, i.e. tax.
X =Exports.

One problem with the equation is that there is no sharp dividing line between “I” (investment) and current spending. To illustrate, if I buy something that will last a year, is that an “investment”? Or does it have to last two years, three years or what?

And if the dividing line is one year, that implies that if I buy something that will last 360 days that’s not an investment, so (S-I) remains unchanged, whereas if I buy something that will last 370 days, then (S-I) is reduced by the amount of the “investment”. That is clearly a nonsense.

Worse still, if someone buys bonds in some domestic (i.e. not foreign) corporation, that counts as an “investment” as per normal use of the English language, but the flow of money there remains entirely within the domestic private sector, so there’s no change to G-T or X-M. Yet if that purchase of bonds counts as an investment, then S –I changes. A self-contradiction.

I suggest the equation is better written as S=(G-T)+(X-M), where all symbols refer simply to movements of cash. E.g. S is simply “domestic private sector” savings or accumulations of cash. Also, (X-M) is not “trade balance” as is often suggested: it’s movements of cash in payment for exports and imports (not quite the same thing).


P.S. (1st Jan 2015). If you think I’ve got my knickers in a twist over this, you’d be right. But getting all the definitions (of S,I,G,T etc) right is not easy: JKH devotes 17,000 words to the above simple equation. I’ll try to sort it out in about one hundredth that number of words. Here goes.

As JKH rightly points out, “(S – I) is the saving delivered from outside the private sector; (I) corresponds to saving delivered from within it.” Thus as far as sectoral balances go, “I” is irrelevant: it’s a movement of assets WITHIN a particular sector – the domestic private sector. So in that case, the equation might as well be written S=(G-T)+(X-M), where S is defined as something like “net accumulation of assets by the domestic private sector from the government  and foreign sectors during some given period”.


Tuesday, 16 December 2014

A deficit should never increase the debt.

Alternative title: The popular idea that public investments should be expanded while interst rates are low is invalid.
Summary (in purple).
The purpose of a deficit is, or should be to impart stimulus, and deficits do that by, amongst other things, increasing private sector paper assets – specifically base money. That increased stock of liquid assets induces the private sector to spend.
The AMOUNT of deficit needed is whatever overcomes the private sector’s desire to save or hoard base money – i.e. saving money causes excess unemployment, as Keynes pointed out. But base money on which interest is paid equals government debt, as pointed out recently by Martin Wolf, and the higher the interest offered, the more will be saved.
But what’s the point of that interest when the only effect is to induce more saving? It’s completely, totally, 100% pointless: the only net effects are to burden the taxpayers who fund the interest, and benefit the rich (those who hoard base money). Ergo a deficit should and will cause the stock of base money (aka bank reserves) to rise, but there is no excuse whatever for it causing a rise in the debt.
The only possible exception to the above rule comes in as far as a deficit funds infrastructure or other public investments: that’s an old idea sometimes called the “golden rule”. That rule was recently endorsed by Ed Balls. In fact that public investment so called exception is almost irrelevant. Thus the above rule that a deficit should never increase the debt is near watertight.

The purpose of a deficit is to make up for inadequate private sector spending: that is, if private sector spending is not enough to keep the economy working at capacity, demand needs to be increased by having government spend more than it collects in tax.
But the only possible explanation for inadequate private sector spending is a desire by the private sector not to spend! (Forgive the statement of the obvious). That is, the explanation must be a desire by the private sector to save money rather than spend it. Indeed, the latter point is simply a re-statement of Keynes’s “paradox of thrift”: that’s the idea that while thrift is in a sense desirable, hoarding money does have an undesirable side effect, namely that it reduces demand (assuming the saved money is not loaned out and spent).
Now of course the amount the private sector wants to save / hoard is influenced by interest rates: the higher the rate of interest, the more people will save. But normally central banks do not offer interest on money lodged with them: i.e. they don’t pay interest on reserves, and quite right.
Indeed, if interest IS OFFERED on base money, then that base money in effect  becomes government debt. Or as Martin Wolf put it, “Central-bank money can also be thought of as non-interest-bearing, irredeemable government debt. But 10-year Japanese Government Bonds yield less than 0.5 per cent. So the difference between the two forms of government “debt” is tiny…”
Indeed, paying interest on base money / government debt is totally and completely pointless, at least where the purpose of that base money is to impart stimulus. The only net effects are, 1, to place an extra burden on taxpayers who fund the interest payments, 2, subsidise the rich (those who hoard base money), and 3, increase the total amount of base money that has to be issued.
Incidentally, it should of course be said that deficits don’t cause increased demand JUST because private sector paper assets are increased. There also the fact that where government spends more (e.g. on health and education) that will increase employment in schools and hospitals. Alternatively, to the extent that government effects the deficit via tax cuts, then increased household after-tax incomes will increase household spending.

A possible exception to the above rule that a deficit should never increase the debt comes with public investments, like infrastructure.
It is widely believed that government investments should be funded by government borrowing rather than by tax. In fact that point is debatable. Kersten Kellerman (1) argued in a paper in the European Journal of Political Economy that public investments should be funded by tax, not public debt.
However, it doesn’t matter for the purposes of the argument here whether public investment is funded by tax or borrowing. Assume they’re funded by tax if you like. Alternatively, assume they’re funded via borrowing, with the rate of interest paid being the same as would be paid to a private contractor who provided the relevant assets / investments.
Note that if those investments ARE FUNDED by debt, the total size of that debt will remain pretty well fixed because the total amount or value of public investments relative to GDP does not vary much from year to year, or even from decade to decade. And since stimulus is all about VARIATIONS in the amount of debt / base money, public sector investments won’t have much to do with stimulus.

Expand investment in a recession?
A possible objection to the latter point about raising public investments in a recession is the popular idea that it’s positively DESIRABLE to expand public sector investments in a recession. Unfortunately there is a shortgage of “shovel ready” schemes.
Worse still, even if some of such schemes CAN BE started quickly, it can take several years, even DECADES to complete such schemes: by which time the next recession will probably have come and gone, which makes those investments a very inappropriate way of dealing with recessions.
In short, it’s CURRENT spending, not CAPITAL spending that needs to be boosted in a recession.

Raise public investments while interest rates are low?
Let’s assume that public investments are funded by borrowing rather than by tax. I suggested above that interest should be paid on the relevant public debt, but that interest should not be paid on base money. Now an obvious problem there is that holders of base money will buy public debt in large amounts: why get zero interest on money you’ve placed with government when you can get interest?
That in turn tends to depress the rate of interest on the debt: indeed many governments can currently borrow at ultra-low rates. However, that low rate on public debt only exists because government stands behind the debt, and governments are EXTREMELY credit worthy compared to private corporations in that governments can grab any amount of money from taxpayers even if the investments made by government are a disaster.
In short, the low rates of interest at which government can borrow stem largely from the coercive powers of government. Those powers are not a realistic basis for making decisions about which investments are viable or whether the total amount of public investment should be expanded.
And a final reason for ignoring low interest rates when it comes to funding public investments is that adjusting interest rates is not a good way of adjusting demand for reasons set out here.


1. “Debt financing of public investment: On a popular
misinterpretation of “the golden rule of public sector borrowing””. European Journal of Political Economy.

Sunday, 14 December 2014

The flaw in Ed Balls’s deficit conjuring trick.

The UK Labour Party’s finance spokesman, Ed Balls, has a great idea for cutting the deficit: have government borrow to fund public investment, and don’t count that borrowing / expenditure as part of the deficit.
And on the face of it, that’s perfectly sensible: after all, borrowing to fund investment is what every other firm does. Plus it’s what every other household does when “investing” in a house to live in. However, there’s a catch as follows.
Where any entity borrows to fund investment, normal practice is to repay the debt as relevant assets depreciate, or when the asset is  worn out and is scrapped. Indeed, if the debt CAN’T be repaid as the asset depreciates, that’s good evidence that the investment is not viable.
Thus if government is to fund investment via borrowing, then it can’t borrow an amount equal to each year’s NEW investment: it can only borrow an amount equal to “new investment less depreciation on existing investments”. And assuming total investment by government expands at the same rate as GDP, that means the NET ANNUAL INCREASE in government investment is piddling: between 1% and 2%.
The great Balls conjuring trick collapses like a house of cards.

Borrowing versus tax.
Next: does it greatly matter whether government funds investment from borrowing or from tax? Personally I don’t think so. Milton Friedman and Warren Mosler advocate/d that government should borrow NOTHING. I.e. they argue/d that the only liability the state should issue should be base money.
However, given that there are two ways of funding public investments, i.e. borrowing and tax, presumably one must be better than the other. Personally I can’t work out which. At least I can’t work out which would be better in a closed economy. Inspiring ideas on that topic will be welcome.

Total amounts borrowed and invested.
Incidentally, I recently had a look at the total figures for borrowing by the UK government and total investments or assets held by government. The two totals are VERY ROUGHLY the same: certainly one total isn’t double the other.
So what does that prove? That there’s no good reason to cut the debt? I don’t think so: suppose those dreaded bond vigilantes and/or foreign holders of UK debt lose faith in the UK and start demanding an extortionate rate of interest? Do we pay them? I suggest not.
I suggest we pay down the debt. Or put another way, I suggest we, 1, pay off some or all creditors, 2, stick two fingers up at them, 3, tell them to go away and tell them we’ll fund UK based public investments out of our own resources, thankyou very much.

Saturday, 13 December 2014

Lending clubs = full reserve banking.

Lending clubs seem to be doing well in the US. Far as I can see, they are fully compatible with the principles of full reserve banking. Under both regimes, saver /  lenders carry any loss stemming from the loans they have chosen to make, rather than taxpayers carrying some or all of the loss. (That's in stark contrast to the sub-human scum running large Wall St banks who have recently been trying to get taxpayers and ordinary depositors to stand behind their derivative bets.)

The only difference between lending clubs and full reserve is that under full reserve, at least as advocated by Laurence Kotlikoff, Positive Money and others, saver / lenders choose what CLASS OF borrower to lend to (e.g. safe mortgagors, NINJA mortgagors, businesses, etc), whereas with lending clubs, saver / lenders choose which INDIVIDUAL borrowers to lend to.
To be more accurate, under full reserve banking, the bank industry is split in two: a totally safe half with lodges money only at the central bank and perhaps also invests in short term government debt, and second, a lending half. Lending clubs (to repeat) comply with the rules of governing the lending half as proposed by Kotlikoff, PM, etc. But obviously they don’t supply the above “totally safe” method of lodging money. However, that totally safe facility is already in existence in some countries sort of (in the form of National Savings and Investments in the UK). NSI does not provide quite the flexibility (e.g. issuing cheque books and debit cards) that is needed, but NSI gets close – money can be withdrawn from NSI within about 24 hours via telephone I believe.