OMG: Corbyn backs “peoples’ QE”.

Jeremy Corbyn, who looks increasingly likely to be the next leader of the Labour Party in the UK, backs the latest fad, namely “peoples’ QE”. The idea is nonsense.

“Peoples’ QE” consists of having the central bank print money (as per conventional QE), but instead of spending the money buying government debt, the money is spent on public investments like infrastructure. The idea is rubbish and for the following reason.

Printing and spending money is stimulatory. Second, the AMOUNT OF stimulus needed varies hugely from one year to the next: indeed, given an outbreak of irrational exuberance, the amount needed will be little or nothing. Hence if infrastructure spending is tied to money printing, the amount spent on infrastructure will gyrate far too much. You can’t start building a motorway and suddenly stop in year X because little or no stimulus is needed in that year.

In short, it may well be that we need more infrastructure investment, but that should be funded basically from the usual sources, namely tax and government borrowing. As to stimulus, printing and spending (and/or cutting taxes) is a perfectly good way of imparting stimulus (indeed, I think it’s the best way). But that additional spending should be spread as widely as possible precisely so as to avoid the above sort of “stop start” motorway building fiasco.

And that’s about the tenth time I’ve made that point. But sure as night follows day, there’ll be an eleventh and twelfth time. I won’t give up repeatedly demolishing popular myths till I die. And the headstone has already been ordered. It reads “Here lies Ralph Musgrave. He achieved little apart from demolishing a few popular economic myths.”

Lefties adopt far right policies – shock.

In the good old days, i.e. about 12 months ago, it used to be mainly those wicked “far right” parties that advocated exit from the Eurozone and/or European Union.

That made far right parties, in the eyes of many lefties, a bunch of Little Englander, xenophobic, racist, neo-fascist, neo-Nazi, neo anything else you care to mention, ne’er do wells.

But now it’s all change. What with the damage that the Eurozone is allegedly doing to Greece, lefties are now throwing fire and brimstone at the EZ/EU. It’s truly hilarious.

Any chance of apologies being offered for the “xenophobe” etc accusations? No, thought not. (Incidentally I said “allegedly” there because the alternative explanation is that Greece shot ITSELF in the foot, rather than that SOMEONE ELSE shot Greece in the foot.)


Multiculturalism.

But it’s not only in connection with Europe that lefties are doing a volte face. They’re also doing a bit of a volte face on the subject of multiculturalism.

This article appeared in the comment is censored comment is free section of the Guardian entitled “Why Iraq should consider separate Sunni and Shia regions”.  Strewth!  Right thinking lefties (forgive the pun) have had it drilled into them since before they finished breast feeding that MIXING different religious groups, i.e. MULTICULTURALISM brings amazing benefits. Now apparently it’s a good idea to SEPARATE such groups. What’s going on?

As the article puts it, “Regionalising Iraq into different ethno-sectarian regions has been proposed in the past. It can no longer be dismissed.” I’m socked (ho ho).

Of course the high priests of political correctness who write for the Guardian might claim that multiculturalism is worth a try for the amazing benefits it brings and if it doesn’t work, one can do a “separation” is suggested above for Iraq. Well just imagine splitting the UK into Muslim and non-Muslim autonomous regions: the idea is absurd. 

As for the amazing benefits of multiculturalism, I’m bowled over by them. They include female genital mutilation, forced marriages, electoral fraud, bombs on trains and busses, killing the authors and cartoonists you don’t like (Hitler did that), abducting school girls and selling them into slavery, destroying centuries old cultural ikons like statues of Buddah. I could go on. The “cultural enrichment” there is a wonder to behold.

Silly me: I’m not much impressed by the alleged advantages of multiculturalism. Clearly I’ve missed something.

Of course it’s been obvious for a long time that the awe in which lefties hold multiculturalism is contrived. Reason for that is when Tibet expresses a desire to retain its culture, identity, traditions etc, lefties go all dewy eyed. But if some white Brit expresses the desire to do the same thing in connection with the UK, lefties foam at the mouth and jump up and down with contrived righteous indignation.

I.e. the left’s desire for mulitculturalism is actually a desire to destroy European civilisation and replace it with Islam or whatever. That’s because destroying your own civilisation, i.e. vandalism, is regarded as cool in leftie circles.

As the historian Arnold Toynbee put it, “Civilisations are not destroyed: they commit suicide.”

Varoufakis has another questionable idea.

I dealt with one of Varoufakis’s debatable ideas here. He has had another: set out in this Financial Times article. The idea is as follows.

Greece has suffered from inadequate aggregate demand. Demand could be increased if what might be called “self extinguishing” pairs of debts could be extinguished more quickly. The example he gives is as follows.

“Suppose, for example, Company A is owed €1m by the state and owes €30,000 to an employee plus another €500,000 to Company B, which provided it with goods and services. The employee and Company B also owe, respectively, €10,000 and €200,000 in taxes to the state. In this case the proposed system would allow for the immediate cancellation of at least €210,000 in arrears. Suddenly, an economy like Greece’s would acquire important degrees of freedom within the existing European Monetary Union.”

That would certainly ameliorate what Varoufakis refers to as “the chronic liquidity shortage of a financially stressed public sector and its impact on the long-suffering private sector.”  In short, it would lead to increased aggregate demand.

Problem is that any extra demand in Greece sucks in too many imports, which results in Greece being further in debt. Ergo an increase in demand just isn't acceptable till internal devaluation has put right the balance of payments or “external deficit” problem.

Of course there’s alternative to internal devaluation and the austerity needed to bring it about, and that’s Grexit combined with normal or regular devaluation.

Richard Koo slips up on Greece.

Half the world is now being wise after the event on the subject of Greece. Trouble is that even hindsight hasn’t brought 100% pure wisdom in some cases. This article by Richard Koo is a case in point. (h/t to Wonkmonk).

He claims in his 2nd and 3rd paragraph that:

“With its income falling to such low levels, the Greek private sector has been forced to dis-save for years i.e., living off the past savings, making it impossible for the country to pay back foreign creditors.

The drop in the nation’s real output is on a par with that experienced by the US during the Great Depression from 1929 to 1933.”

I suggest cause and effect are being confused there. Greek “income” (if you can call it that) has only been the size it has been over the last decade because of ever increasing debts owed to private banks and more lately to the Troika. That flow of easily available loans has now been cut off, which means that many Greek household incomes have fallen.

But a fall in income caused by a creditor’s decision to be less generous  is not an explanation for “making it impossible for the country to pay back foreign creditors”. Quite the reverse: had the creditor continued to lend like there’s no tomorrow, then paying back the creditor would have been EVEN MORE difficult.

The idea that “income” enables an entity to pay off it’s debts sounds reasonable: for example an increase in a household’s income helps it to pay off its debts. However, there’s a flaw there.

It’s true that income deriving from OUTSIDE the household enables the household to pay off its debt. However, income earned by one member of the household off another member of the household DOES NOT.

Same goes for a country, e.g. Greece. Greece owes money to entities OUTSIDE Greece: mainly the Troika. And the type of income that enables Greece to pay off those debts is income earned from EXPORTS: i.e. earned from OUTSIDE Greece.

But there’s no reason to think that Greece’s export earnings will have been influenced by the lack of cash in the hands of the average Greek citizen or the above mentioned fall in Greek incomes. The main factors influencing Greek exports are first the competitiveness of those exports (which will have improved a bit given the cut in Greek wages over the last few years), and second, the general state of the world economy, particularly in countries to which Greece exports. As regards that second factor, one would expect exports to have dropped when the 2007/8 crisis hit and to have improved somewhat since then. And indeed that’s pretty much what happened. See here. Change the "start year" to about 2000 at the top left of the bar chart to get a better picture of the last decade or so.

Having said that, there is one particular form of income earned by one Greek off another that helps repay Greek debts, and that is import substitution. The latter will have been assisted by recent falls in Greek wages, but those wages have not fallen DRAMATICALLY (in terms of Euros) relative to other Euro countries. So we can expect a finite amount of import substitution to have taken place, but not much.

A nice bit of research on Greece.

This paper on Greece is quality stuff. Clearly a lot of research has gone into it and the paper is easy to understand (not that I’ve read the whole thing). Plus there are pleny to charts, and tables with facts and figures.

However I don’t agree with part of the authors’ conclusion, namely that, “The rise in (relative) unit labour costs did not lead to the higher current account  deficits in the Eurozone periphery. International competitiveness is not about wage costs, but  about technology and innovation. Given a country’s technological capabilities as reflected by  its productive structure, export growth and import growth are overwhelmingly determined,  not by unit labour costs…”.

The idea that QUALITY is much more important than PRICE, in the case of manufactures may well be true. However, a significant proportion of Greek exports are not high tech: namely tourism.

Plus a significant proportion of potential import substitution isn't high tech either, namely food production.

That point can be nicely illustrated by reference to islands off the West coast of Scotland. No doubt there are numerous such islands where the only form of employment is tourism or agriculture. Now assuming any of those islands declared independence from the UK and became independent countries, would they be able to pay their way? Of course they would!

They might, for the sake of argument, continue to use the pound Sterling, in which case precious little would change. The same holiday makers would turn up in Summer time. And as long as farmers on those islands didn’t raise the price of their produce, they could continue as if nothing much had happened.

Of course if Greece were to rely JUST on tourism for its foreign exchange earnings, vastly fewer Greeks would be able to buy Mercedes cars. I.e. there’d be a big cut in Greek living standards. But devaluation (normal devaluation or internal devaluation) ALWAYS involves a standard of living hit for the relevant country. That point is explained in the economics text books.

Conclusion: a sufficiently large devaluation would get Euros flowing INTO Greece rather than OUT OF Greece. And that would solve Greece’s debt problem sooner or later.

Debt and deficit talk has now become Kafkaesque.

Thanks in part to the efforts of MMTers, anyone with a brain know knows that there is no great urgency to reduce the national debt or deficit (DD). Even the dimwits at the IMF have now tumbled to this point – see this Brookings Institution article. (For more on dimwittery at the IMF, see here.)

However, it is de rigueur to weep and wail about the debt and deficit. Even Jeremy Corbyn, the left wing UK politician knows it’s important to put on the appearance of a Very Serious Person when talking about the DD. And as a left winger, he’s the last person that really ought to take the DD seriously.

This is getting a bit like the situation that used to exist in the USSR where everyone went around telling lies they knew no one actually believed. The extreme case of that scenario was nicely described by a Russian, I forget where, who described the situation in university lecture theaters, particularly when it came to lectures to do with politics, history, sociology and the like.

He put it something like this. “Lecturers know they’re lying. Students know the lecturer is lying. The lecturers know that students know they are lying. Students know that lecturers know that students know lecturers are lying. And if you have any imagination, you’ll be able to construct ever longer sentences based on that series.”

Strange ideas from Brad DeLong on the EZ.

Brad DeLong claims the Eurozone is repeating the mistakes of the 1930s. Wrong. The big mistake in the 1930s was failure to implement Keynsian deficits. Decent size deficits only came with WWII, and of course unemployment then plummeted. In contrast, the big problem in the EZ is that when a country loses competitiveness, it can only regain that competitiveness via internal devaluation, and that involves years of austerity. (Indeed, De Long pretty much makes that point himself.)

That apart, there is no evidence of deficient demand in the EZ in that Germany has hit the EZ inflation target over the last ten years. Inflation has fallen in Germany in the last 12 months, so if that’s not due to temporary factors, then a bit more EZ wide deficit would be in order. But that won’t solve the basic problem in Greece.

The UK’s new tax on banks does not make sense.

The UK introduced a so called “bank levy” on banks  two or three years ago presumably to make banks pay for the damage they did to the World economy. The levy was related to the size of banks’ assets.

This is being replaced by a tax on profits: that is, banks will pay a higher rate of tax than other corporations.

That does not actually make sense, and for the following reasons.

The only logical reason for such a tax is as a form of insurance premium to pay for state generosity to banks during a crisis: e.g. lender of last resort loans at sweetheart rates of interest, and (in the case of the UK), deposit insurance which at the moment is funded by taxpayers.

However, the costs that a failing bank imposes on the country as a whole have nothing to do with the profit they make. Indeed, if anything, the loss making banks are the biggest risk: they are clearly more likely to go running to the taxpayer for bailout than a profitable bank.

Greek GDP collapse.

The recent collapse in Greek GDP is mild compared to some episodes of GDP collapse over the last century. Greece is at the bottom of the chart below.

H/t to Coppola Comment.

Bank capital is not expensive.

Bank capital SEEMS TO BE expensive because bank shareholders demand a higher return than bondholders or depositors.  The flaw in that idea was pointed out by Franco Modigliani and Merton Miller, and they got Nobel Prizes for that (amongst other things).

The flaw in the idea that bank capital is expensive is very simple and as follows.

If a bank’s capital ratio is doubled, the risk per shareholder is halved, thus the amount that each shareholder will charge (per dollar of shares) for bearing risk will also halve. Thus the cost of an ADDITIONAL dollar of capital is no more than the cost of an additional dollar of debt.

The Modigliani Miller theory HAS BEEN criticised, but the criticisms don’t amount to much, far as I can see. In particular, the most popular criticism according to this recent article by James Kwak is the idea that in the REAL WORLD, debt is cheaper than capital because “companies can deduct interest payments on debt from their taxable income, but they can’t deduct dividends paid to shareholders” to quote Kwak.
 
I also pointed out about a year ago that that “tax” point seems to be the most popular criticism of MM. (see top of p.25).

The flaw in that criticism is that tax is an entirely artificial imposition on banks, or indeed any corporation. That is, tax, while it is obviously a cost as viewed by the entity that pays the tax, is not a real cost from the point of view of the country as a whole.

To illustrate, if red cars were taxed more heavily than blue cars, would that mean that the REAL COST of red cars was higher than that of blue cars? Obviously not. Thus that would not be a reason for the country as a whole to give any sort of preference to blue cars.

By the same token, the above point about tax and banks is not a reason to give any sort of preference to bank debt as compared to bank capital.

The creation and lodging of money by commercial banks can’t be done without taxpayer funded subsidies.

Summary. 

The creation of money by commercial banks and the lodging of money at commercial banks cannot be done in a manner that is safe enough for most depositors without state backing: i.e. taxpayer funded subsidies. Subsidies do not make economic sense. Ergo the creation of money by commercial banks and the lodging of money which is supposed to be totally safe at commercial banks do not make economic sense.

There is no reason banks shouldn’t act as intermediaries between lenders and borrowers, but deposits (that is money which people want to be totally safe) should be lodged with the state. There is also no reason private banks cannot act as agents for the state there: i.e. accept deposits and pass relevant monies on the state, or central bank. 

___________

Commercial banks both create money and lodge money for depositors. For more details on money creation by commercial banks see this Bank of England publication, the opening sentences in particular.

Money is a liability of a bank. And, it’s a liability which is fixed in value (inflation apart). That’s  in contrast to shares, houses, second hand cars etc , all of which can fluctuate substantially in value.

Incidentally and in objection to the above claim that money is a liability of a bank,  it can be argued that base money is not really a liability a CENTRAL bank. There’s something in that objection, but that point is peripheral to the central argument here. So I’ll give a not entirely adequate answer to that objection and point out that base money appears on the liability side of central banks’ balance sheets).

Anyway, returning to COMMERCIAL banks (henceforth just “banks”), the above “fixed in value liability” of banks is a farce in that if the bank goes bust, it may not be able to meet the liability: that is, it may not be able to repay depositors in full, or may not be able to repay them at all. Think Cyprus. Or as Prof Adam Levitin put in in the first sentence of the abstract of a paper of his, “Banking is based on two fundamentally irreconcilable functions: safekeeping of deposits and re-lending of deposits.”

So to solve that problem we have government or “the state” stand behind banks. But that equals a subsidy of banks and it is widely accepted in economics that subsidies do not make sense, unless there is a very good social reason for the subsidy, as is probably the case for example with education for kids.

So it would seem that the creation of money by banks and the lodging of money by depositors at banks does not make economic sense.


Is  FDIC an escape from that argument?

The only possible escape from that conclusion is thus. Deposits can possibly be made safe by some sort of FDIC type self-funding insurance system. And as long as that is genuinely self-funding, then no subsidy is involved.

And as to preventing a collapse of the entire bank system, that can be done via lender of last resort (LLR). As long as LLR loans are at Walter Bagehot’s “penalty rates”, then that presumably does not amount to a subsidy.

Unfortunately, the latter “FDIC / LLR” argument has numerous problems, as follows.

1. While LLR loans, as just stated, are supposed to be at penalty rates, in practice they aren’t. Exactly what constitutes penalty rates is debatable of course. But as a rough guide, Warren Buffet loaned £5bn to Goldman Sachs at 10% at the height of the crisis. That was a loan between two private sector entities, so presumably 10% was a realistic market price. In contrast, the $13tr or so loaned by the Fed was at nowhere near that rate.

As for deposit insurance, in the UK, that is funded by taxpayers, not by commercial banks.

All in all, the idea that state backing for commercial banks will ever be on a strictly commercial basis is very debatable. Come a crisis and in the heat of the moment, the temptation is to throw near limitless amounts of public money at the problem and at sweetheart rates of interest. And where the AMOUNT involved ($13tr) is about three quarters of US GDP, we are talking a HUGE subsidy.

2. Why should money lenders (aka banks) be saved with public money when they’re in difficulty and not butchers, bakers and candlestick makers?

One apparent answer to that is that if commercial banks collapse, the consequences are more serious than if some other industry suffers a serious setback.

Well that’s actually a circular argument, in the following sense. Banks collapse precisely because they are funded by or lodge deposits. That is, if a bank are funded wholly or largely by equity, it’s near impossible for them to collapse.

That circular argument is a bit like saying that the solution to defective scaffolding round a building is lots of mattresses around the building so that if anyone falls off, they won’t be injured. A much better solution is decent scaffolding including guard-rails which ensure that no one falls off!

3. Having banks funded wholly or largely by equity will not raise the cost of funding banks as compared to funding them wholly or largely via debt (e.g. deposits) and for the following reasons.

Lender / investors demand a return for two reasons. First there’s the fact that they abstain from consuming a chunck of wealth, and instead, let the borrower or “investee” use that wealth. And it’s reasonable to demand a reward for that service.

Second, lender / investors run the risk that the borrower / investee will not repay the loan. And it is reasonable to demand compensation for running that risk.

In the case of depositors who are guaranteed total safety by the state or by an FDIC type system, depositors just perform the “abstain from consumption” service, while the risk of default is carried by taxpayers or the FDIC type system.

In contrast, those with shares in a bank insure themselves. That is, the return they demand includes something in respect of the risk they run.

Now assuming both of the above types of insurers pitch the insurance premium at the right level, then both types of insurer will charge the same rate!


Underestimating the risk.

Moreover, if shareholders understimate the risk and a bank runs into difficulty, there is no subsidy: that is, shareholders take a hair cut regardless of whether they get the insurance premium right or not.

In contrast, if an FDIC type insurer underestimates the risks, the long suffering taxpayer comes to the rescue! And that constitutes a subsidy.

4. If you get someone else to insure you, there is always a temptation to cheat the insurer. That is, there is a temptation to run excessive risks in the knowledge that if the risk does not pay off, the insurer will foot the bill. (10% of car and house insurance claims in the UK involve an element of fraud)

5. Contrary to popular perception, Walter Bagehot did not approve of LLR. In the last chapter of his book “Lombard Street”, he expressed disapproval of it, but said he thought it was so ingrained in the system that it would be too difficult to remove.

 6. A possible objection to having banks funded wholly or largely by shareholders is that when it transpires that bank assets (i.e. loans) are worth considerably less than book value, there will be a significant reduction in lending.

Well the answer to that is: “good thing too”. That is, if any business has over extended itself, that is over estimated the amount it can sell, then a reduction in the size of the industry is exactly what is needed.

In contrast, the whole thrust of LLR and deposit insurance is to get banks back to where they were prior to the credit crunch or bank induced downturn.  For example, with deposit insurance, if one bank lends out depositors’ money and loses the whole lot, no matter: the insurance system reimburses depositors, who then deposit their money at some other bank, which is a temptation for the latter bank to lend that money out.

7. As the former governor of the Bank of England, Mervyn King put it:

“..we saw in 1987 and again in the early 2000s, that a sharp fall in equity values did not cause the same damage as did the banking crisis. Equity markets provide a natural safety valve, and when they suffer sharp falls, economic policy can respond. But when the banking system failed in September 2008, not even massive injections of both liquidity and capital by the state could prevent a devastating collapse of confidence and output around the world.”

In short, a system where banks are funded by equity is more resilient than where they are funded by debt (e.g. deposits).

To paraphrase Mervyn King, under the existing bank system (aka fractional reserve), bank failures can lead to chaos despite the protection allegedly offered by the two backups, LLR and deposit insurance.

However, that “Mervyn King” argument is possibly flawed. That is, it could be argued that the length of the recession that followed the crunch in 2007/8 was primarily down to inadequate fiscal stimulus. In other words, given the right amount of stimulus, it’s arguable that there’s not much difference between the speed of recovery after a crunch where banks are funded mainly by equity, and one where they are funded mainly by debt.

However, I’ve included that Mervyn King point for what it is worth.

8. Once it’s accepted that there should be no state support for private money lenders, those who fund those lenders in effect become shareholders: that’s “shareholder” as in “someone who at worst stands to lose everything”. That is, such a lender can claim to accept deposits, however such deposits in the absence of state backing for banks are clearly more in the nature of shares.

Thus once all forms of state backing for money lenders is removed, those banks then ipso facto have a 100% capital ratio in the broadest sense of the word “capital”,  i.e. banks no longer create or lodge money.

Clueless lefties and the EU.

Lefties spend so much time basking in what they see as their moral superiority over the rest of humanity that they don’t bother thinking about economics. The result is that they end up doing little more than aping the economic illiteracy of the political right: e.g. equating government budgets with household budgets, and wittering on about the need to reduce the budget deficit.

Bill Mitchell goes into much more detail on that point in his series “When you’ve got friends like this..”.

Another example of sloppy leftie thinking has appeared in reaction to the Greek problem: lefties completely fail to get the distinction between the EU and the EZ. For example George Monbiot in The Guardian says “I accept the principle of sharing sovereignty over issues of common concern. I do not accept the idea of the rich nations combining to crush the democratic will of the poorer nations, as they are seeking to do to Greece.”

Well first, Greece is not particularly poor: it’s in the top 25% of countries on the GDP/head scale. Second, the idea that Greeks or anyone else should be able to exercise a “democratic right” to help themselves to near limitless amounts of other peoples’ money is sheer nonsense. That is, if Monbiot believes in democracy, what about the “democratic right” of North Europeans to a say in how much of their money is donated to Greeks?

Of course I should have said “loaned to” rather than “donated to” there. But the idea that Greeks are likely to repay debts is a joke if their performance in that regard over the last 200 years is any guide.

In fact the objections to further gifts / loans to Greece come PRECISELY FROM democratic forces in the rest of the EZ: e.g. objections from German and other voters to giving yet more money to Greece.


You’re a racist if you don’t support the EU.

Ten or fifteen years ago, if you didn’t support the EU, you’d might easily have been described by some pompous leftie as a xenophobe, racist or similar. As Wolfgang Munchau put it, “Twenty years ago, I would not have hesitated to characterise a eurosceptic as a xenophobe, or worse…”.

But now it’s all change. Apparently the EU is a “neoliberal” construct. Neoliberal is the latest fashionable word with lefties. It’s almost compulsory to use the word in every sentence. But expect the word to disappear without trace in a couple of years just like other bits of fashionable leftie phraseology like “celebrating diversity”, “multiculturalism” and so on.

The above tendency of the political left to throw insults around rather than THINK extends to immigration. That is, a hundred Guardian articles over recent years have described those with doubts about the alleged wonders of mass immigration as “racists”, “xenophobes” “neo-Nazis” and God knows what else.

If you want to describe someone as a xenophobe, then fine: produce some evidence. But I’ve never ever seen any actual evidence produced.


Other leftie windbags.

Apart from Monbiot, there are other leftie windbags who haven’t got the distinction between the EU and EZ. That is, they claim that the harsh treatment of Greece is a characteristic of the EU. It’s not. It derives from the inherent characteristics of common currencies, i.e. the EZ. E.g. see here, here and here.

Put another way there is absolutely no reason for countries in the EU which have their own currencies (e.g. the UK, Denmark and Sweden) to undergo the sort of excess deflation being imposed on Greece. A country with its own currency can devalue overnight. In contrast, the equivalent for a country in a common currency area is INTERNAL DEVALUATION. And that’s a long painful process.

Great minds discuss ideas.

According to the guidelines for those submitting articles to the Financial Times, it’s necessary to include some sort of human interest element. See passage starting “Even if your subject…” here.


Of course the main purpose of newspapers is to give readers an adrenalin rush and confirm their prejudices. The so called “news” is only there to make it look like the newspaper and its readers are seriously interested in news. Or perhaps I’m being over cynical.

Anyway, you’d think the Financial Times could rise above that sort of thing. So with a view to getting something in the FT, I’m cobbling together an article with loads of stuff about what “people” have been doing on some soap: Neighbours, Coronation Street etc.

In contrast, there won’t be much in it by way of IDEAS.

Keep an eye out if you’re an FT reader….:-)

TTIP is OK.

One of the main elements of TTIP is to enable corporations to sue governments where governments implement legislation that causes a loss of business for corporations.  Compensating corporations for what might be called “windfall” losses of that sort seems fair enough, on the following three conditions.

First, governments should be able to sue corporations where the opposite effect occurs. That is, governments should be able to sue corporations where the latter enjoy windfall GAINS from changes to government inspired legislation.

In fact wherever a corporation suffers a windfall loss, there pretty well HAS TO BE an equal and opposite set of windfall gains. Reason is that if corporation X and Y suffer a decline in sales of $Z as a result of new legislation, then consumers will almost certainly transfer about $Z of spending to other products, assuming total consumer spending stays approximately constant, which is a not unreasonable assumption.

In fact why should government get involved in this process at all? That is, why not cut out the middleman, and just let corporations X and Y sue the corporations that gain from a change in legislation?


Banks should be charged for recessions.

Second, banks or the finance industry in general should be charged for the loss of GDP resulting from recessions and credit crunches sparked off by irresponsible bank lending. The sum involved there would come to several trillion dollars, which would bankrupt every bank in the US several times over.

That should knock some sense into them!

But seriously, the effect would be that banks would have to greatly increase the charges for their services, which would vastly reduce the overall size of the bank industry.  Adair Turner (former head of the UK’s Financial Services Authority) said that much of what banks do is “socially useless”. So if Turner is correct, then a big reduction in the size of the bank industry would do no harm at all.


The cost of education.

Third, corporations are currently supplied free of charge with an educated and skilled workforce: much of the cost of that education and training being born by the state.

There is no excuse for that: corporations should be charged for use of that capital investment.

If a corporation wants to the use of a $100k piece of equipment, it has to pay, and quite right. So if a corporation wants the use of someone who has skills that cost $100k to impart to the individual concerned, why shouldn’t the corporation pay?


Conclusion.

So on those three conditions, TTIP is fine by me. Moreover, that “TTIP on three conditions” arrangement has a further benefit: it would create millions of jobs for lawyers.

In the 1970s, unemployment in Greece was 2%!

Anyone know what Greece wants to be in the Euro for? Darned if I know. Drachma plus 2% unemployment doesn't seem to bad to me - or perhaps I've missed something....:-)

The chart shows unemployment  in Greece. It’s my own creation, so errors are far from impossible. The source for the figures is here.

The vertical axis shows the average unemployment percent for successive 5 year periods,  with the first year of each 5 year period shown on the horizontal axis. The last period is actually a 4 year period.

Greeks, lefties and Muslims constantly seek victimhood.

The spectre of Eurozone (EZ) countries allegedly ganging up on poor little Greece has been a huge emotional thrill for lefties. It has enabled lefties to play the role of heroic saviors of downtrodden Greece.

In fact lefties are so keen to be seen as saviors that they’d probably pay you good money (on the quiet) to trample on people so that they can be seen to come to the rescue of the downtrodden.

In the case of Greece, clearly a high price has been demanded by the EZ in exchange for lending yet more money to Greece. But then if you lend to someone who has a reputation for dishonesty, what else do you do? Greeks are the world’s experts at cheating the tax authorities. Plus they cheated their way into the EZ in the first place. “Beware of Greeks…” as the saying goes.

But there’s a very simple way for Greece to avoid the high price involved in borrowing yet more money: it’s Grexit, i.e. reverting to the Drachma.

And would reverting to the Drachma be a big problem? Well I don’t remember any horror stories about life in Greece last time Greece used the Drachma rather than the Euro, i.e. prior to 2001.

And are there big problems involved in a small country having it’s own currency? Not that I know of. Sweden, Switzerland,  the UK, Denmark and Bulgaria all have their own currencies. Bill Mitchell (Australian economics prof) doesn’t think that Grexit involves insuperable  problems. See here and here.

As for Bulgaria, you probably haven’t even heard of its currency: it’s called the “Lev”. And the Lev is in fact becoming popular in Greece. The moral is that people will use just about anything as money as long as the relevant form of money is not run in a totally incompetent manner.


Grexit means responsibility.

But of course the big problem with reverting to the Drachma for Greeks is that running your own currency involves a measure of RESPONSIBILITY, and Greeks hate responsibility. Cheating is their real skill.

I’ve actually pointed out to a number of lefties who have been advertising their saintly concern for Greece on Twitter that Greece has an easy alternative, i.e. the Drachma. But those lefties couldn’t be less interested.

As I said, the main objective for lefties is to be SEEN AS saints and saviors. Whether they actually do any good for those they claim to save is sometimes of little interest to them.

Apart from the adrenalin rush that comes from being seen to be downtrodden, the Greeks have another motive for staying in the Euro, as follows.

If you have your own currency, you definitely have to pay your way in the World. In contrast, if a country joins the EZ, it still IN THEORY has to pay its own way: the EZ is certainly not a charity. However, once in the EZ, there’s a good chance you’ll be able to borrow large amounts, second, fritter way that money, the third, then plead poverty and renage on your debts.

Greeks have been cheating their creditors for a good two hundred years. They obviously have a keen nose for sucker creditors. And you’ve almost got to admire the Greeks for that: if some twit creditors want to lend you loads of money without doing due diligence, why not rip them off? You’ve nothing to lose!

And if you can then plead poverty and rip them off some more, even better!


Greek and German wage increases.

Another reason for not feeling sorry for the Greeks is the in the decade after joining the EZ, Greeks awarded themselves wage increases totalling  53% in terms of Euros. In contrast, Germans awarded themselves 16%. That’s according to this OECD source.

Now why am I supposed to feel sorry for a bunch of people who award themselves a big pay increase and fund that by borrowing up to the hilt? An individual person or entire country can do that if they want, but the price will be a period of cold turkey.

But that’s not to say Germans are 100% innocent. Inflation in that decade in Germany was around 1.5% which is below the 2% target: that’s a bit too spartan and hair-shirt. But the Germans only missed the target by 0.5%, and that’s not a crime against humanity.


Democracy has been destroyed?

A final tear jerking and heart rending problem that lefties are in floods of tears about is that what they call “democracy” has been downgraded in Greece. That is, the people of Greece now have less of a say in their own future.

Well if by “democracy” you mean the right to vote yourself piles of other peoples’ money, I’d favour withdrawing democracy from Greeks altogether.

Moreover, lefties don’t seem to have realised or are pretending not to realise that joining  the EU or EZ or any similar organisation inevitably means a loss of sovereignty. Indeed, there are constant complaints in the UK (where I live) about the loss of British sovereignty to Brussels.

If lefties haven’t noticed those complaints, they must be blind, deaf or extremely stupid.

25 LSE economists opine on Greece.

Bit of a slip up in this letter signed by twenty five London School of Economics economists about Greece.

They argue amongst other things that relaxing fiscal austerity in Greece will expand GDP, which in turn will expand Greek government income, which in turn will help it repay its debts. In fact (and assuming Greece stays in the EZ, which is what the authors argue for) fiscal stimulus will just suck in imports, which puts Greece FURTHER in debt.

The LSE authors’ also argue for what they call “structural improvements” which consists amongst other things of “anti-corruption, tax compliance, and institutional reform of product and labour markets”.

The latter reforms (in contrast to straight fiscal stimulus) WOULD improve the efficiency of the Greek economy as a whole, and in particular the efficiency of Greek exporters and “import substituters”. And that in turn would improve Greece’s balance of payments, which would help it repay debts.

As to whether those forms of increased efficiency will match up to what is needed to facilitate a repayment of debts, unfortunately I doubt it. My hunch is that Grexit plus devaluation is the least bad solution.

_______

 

P.S. (14th July, 2015) My suspicions in the last para above seem to be confirmed in this IMF work.

Durham Miners Gala.

Went to the Gala yesterday to publicise full reserve banking.  Brilliant brass bands there. "Gresford", the miners hymn was played a couple of times. It's beautiful. It  was composed by  Robert Saint (who was a coal miner) to commemorate a disaster at the Gresford mine in 1934. There’s a YouTube recording of it (not in very salubrious surroundings).

However, there's no substitute for being within meters of an actual live performance. In particular the lowest notes are right at the bottom of the human audible range: makes your lungs vibrate...:-)

Does Mark Blyth understand austerity?

Blyth is the author of a book on austerity (cover pictured above). He currently teaches at Brown University, Providence, Rhode Island. But seems his grasp of austerity leaves something to be desired to judge by this article of his.

His first mistake is the claim that improving the competitiveness of less successful countries in the Eurozone is zero sum game. That’s in the following passage (quoted in full, in italics).

“European reforms take the more subtle cover of simply asking everyone to become “more competitive” — and who could be against that? Until one remembers that being competitive against each other’s main trading partners in the same currency union generates a “moving average” problem of continental proportions.

It is statistically absurd to all become more competitive. It’s like everyone trying to be above average. It sounds like a good idea until we think about the intelligence of the children in a classroom. By definition, someone has to be the “not bright” one, even in a class of geniuses.”

Actually improving the competitiveness of less successful countries serves a very useful purpose (which is not to suggest the Euro is on balance necessarily a good idea). The useful purpose is thus.

Incidentally some readers may find the following explanation boring and elementary. All I can say is sorry – but apparently it is necessary to spell out some very basic economics.

Anyway… if an EZ country loses a significant amount of competitiveness, it ends up with an external deficit and runs into debt, assuming constant aggregate demand within the relevant country. Clearly that’s not sustainable.

A solution is to cut demand. But that raises unemployment or if you like brings “austerity”, which is not ideal either. However, that austerity does have a merit: it tends to result in prices and wages in relevant countries falling, which ultimately should mean they become more competitive, hence demand can be raised again, and full employment restored. That’s sometimes called “internal devaluation”.

Now that’s not, as Blyth claims, a “zero sum” outcome is it? That is, internal devaluation, for all its faults, solves the external deficit and debt problem.

Incidentally, that’s not to say that devaluation, regular devaluation or internal devaluation necessarily works too well in Greece. To judge by the third and last chart in this Bruegel article, Greece seems to be an oddball. But with other countries, it should work.

As to EZ core countries like Germany, i.e. the countries that never lost competitiveness, they can maintain full employment throughout the above internal devaluation process.


Austerity per se is wrong.

As to any idea that my above rebuttal of Blyth’s argument is flawed because austerity per se is wrong, that doesn’t stand inspection: peridic bouts of austerity for various countries is an INHERENT characteristic of common currency areas. And if you think that that proves common currency areas should be disposed of, you might be jumping out of the frying pan into the fire: that is, there is plenty of argument about whether Grexit really would benefit Greece, and more generally about whether the Euro is a good or bad idea.


German reunification.

Next, Blyth claims that the unification of East and West Germany gave West German firms a plentiful supply of cheap labour which enabled those firms to keep costs down, whereas other EZ countries did not enjoy that advantage, thus austerity won’t solve the problem of excessive Germany competitiveness. Well the flaw in that argument is that other Western countries over the last twenty years or so, both in and outside Europe have taken advantage of globalisation to much the same extent as former West Germany: that is they have out-sourced production to less developed countries.

And that similarity between former West Germany and other developed countries shows up in the inflation rate of Germany and other countries. That is while Germany’s averge rate of inflation over the last ten or fifteen years has been on the low side (a bit below the 2% target) it has not been not MILES below inflation in several other developed countries.

Moreover, that cheap labour available from former East Germany and indeed the rest of Eastern Europe in no way stopped the Germans implementing a bit more stimulus over the last ten or fifteen years so as to cut their unemployment a bit and raise inflation to the 2% target. I.e. Germans should have gone SOME WAY towards being Greeks, but obviously not a long way in that direction.

Thus Blyth’s points about cheap East European labour does not stand inspection.

Emigration could be the only solution for Greece.

Both this Bruegel article and this Pieria article claim that because responsiveness of Greek exports to a cut in Greek wages is low, that therefor Grexit and re-introducing the Drachma won’t solve Greece’s problems. The problem is illustrated in the chart below (taken from the Bruegel article).

The first problem with that argument is that if traditional devaluation won't work, then internal devaluation (the remedy being tried at the moment) won't work either.

But in fact devaluation (traditional or internal) WOULD solve the problem: it would lead to a fall in Greek living standards such that Greeks would be encouraged to quit the country and find jobs elsewhere in the World.

Of course that’s not an ideal solution, but it’s actually been part of the solution to Greek unemployment for a century in that there’s a large Greek diaspora in the US and elsewhere. Emigration has been a significant part of the solution to high unemployment in Ireland at various stages in its history. And unlike the Greeks, the Irish have done that without threatening to bring the European Union or Eurozone down with them. You’ve got to admire them.

Economists have long recognised that devaluation does not necessarily work. That is, the best use for a particular bit of land may be to turn it into a sparsely populated area that does just agriculture.

The latter is a bit of an exaggeration of course: that is, Athens isn't going to disappear in the next ten years. But significant emigration from Greece could be the least bad option.

Guess which EZ country awarded itself big pay increases 2000-2010?

Pay increases in that decade were as follows.

I just took those six countries. So it’s just possible another EZ country awarded itself bigger pay increases then the Greeks. But certainly the two countries with the biggest pay increases in the above sample, Greece and Ireland were two of the countries in trouble over the last five years or so.

Figures are from this OECD source. Figures are from the “current prices” rather than “constant prices” rows. Greece actually joined the EZ in 2001 rather than 2000. However, the pay increase there between those two years was nothing dramatic, so that won’t have rendered the above “inter-country” comparison invalid.

Awarding yourself a big pay increase is OK if you have your own currency and can devalue it. But if you’re in a common currency area and do that, then you’re up shit creek without a paddle, unless you’ve achieved productivity or efficiency improvements which justify the pay increases.

Possibly Germany could be criticised for adopting too much of a deflationary / hair shirt approach. That point has SOME VALIDITY in that inflation in Germany in that decade averaged about 1.5% which is a bit below the 2% target. In contrast, Greece allowed inflation to run at about 3.3% in that decade. So Greece is mainly to blame there.

Bank of England slips up.

Can you spot the mistake in this tweet by the Bank of England?

97% of broad money takes the form of bank deposits – which are created by commercial banks http://t.co/W22Eeahikd pic.twitter.com/aYtEs7PHPB

— Bank of England (@bankofengland) March 12, 2014

It's plain impossible to capture the complexities of money creation in a 140 character tweet, so I'm being pedantic in criticising the BoE. But tweeters are not actually limited to 140 characters: you can always type more on a word processing system, then do a screen shot of what you've typed, and attach that to your tweet. I do that at least once a day.

Anyway, the above tweet suggests that 97% of bank deposits are created by commercial banks. Normally that 97% figure is about right. But since the advent of QE, vast amounts of money have been created by central banks and given to all and sundry in exchange for various privately held assets, mainly government debt. In fact far as I can see about 20% of money in the US takes that form at the moment. Thus the 97% figure is way out just at the moment.

So when someone sells $X of government debt to the central bank, they deposit that new money at their commercial bank, where their account is of course credited. And the money is then deposited by the commercial bank at the central bank (where the commercial bank's account is credited).

So that money is not "created by" commercial banks: it's created by the central bank.

Varoufakis’s questionable “surplus recycling mechanism”.

Keynes realised that countries which run persistent surpluses can do harm: they suck up too much of the World’s money which necessarily means other countries have less money, which in turn means the latter countries spend less, which tends to cut demand and raise unemployment. That’s just one example of what Keynes called the “paradox of thrift”.

Same applies in the Eurozone: Germany and some other core countries run persistent surpluses which necessarily means other countries both in the Eurozone and elsewhere must run external deficits.
However, the idea that countries that are persistently in surplus necessarily do harm (an idea that Varoufakis seems to back) is crucially dependent on the assumption that the total amount of money is limited, or at least not flexible enough to counteract the latter unemployment raising effect.

However, as MMTers, Positive Money and others have long pointed out, there is no limit to the amount of money that a government and its central bank can create and spend into its economy. That means that if some group wants to hoard money (and one large group of that sort at the moment happens to be corporations) that shouldn’t be a problem: the central bank just needs to create and spend enough to counteract the deflationary effect of that hoarding. That point applies as much to the ECB in Europe, as it does to the World as a whole and its banker, the US.

Of course, the idea that the US is the World’s banker is not 100% accurate: the World actually has several central banks, with the US Fed being the biggest. That is, the Swiss Franc, the Euro, Pound Sterling and other currencies all act to some degree as international currencies.

To summarise, if central banks and their governments just create and spend enough to keep inflation near 2% (or whatever the target is), then we can forget about surplus recycling, which in any case would be a bureaucratic and politically fraught process. And where inflation exceeds the target, it will be necessary to run the occasional SURPLUS as opposed to a deficit.

_______

P.S. (28th July 2015): There is more on Varoufakis's questionable ideas here.

What about import tariffs for Greece?

The central problem with a common currency is that when a country loses competitiveness, it has to solve that problem by cutting costs. I.e it has to undergo a period of deficient demand or “austerity” in order to get its costs down. That is not ideal, to put it mildly.

An alternative is for a country to have its own currency, which means that given a loss of competitiveness, it can devalue its currency. That means that, at least in theory, full employment can be maintained while competitiveness is restored.

That’s not an entirely free lunch: that is, the price of imports rises which hits living standards in the relevant country. But what’s wrong with importing less food and growing more of it yourself? What’s wrong with importing fewer foreign cars, and making more of them yourself? Not much.

A third alternative, is to implement import tariffs. That has the same effect as having your own currency and devaluing. So the advantage for Greece would be that it could revert to full employment. It would grow more of its own food: and note that Greece does import an awful lot of its food. See this article entitled “Why does Greece import so much food?”

Of course tariff reduction and abolition is one of the basic purposes of the European Union. But desperate times call for desperate measures, as the saying goes.

Allowing a country in a Greek type situation to impose import tariffs would be a sort of “last chance saloon”: a final chance to get their house in order before being forced out of the Eurozone.


And that's not  to suggest that having your own currency and devaluing, or import tariffs would necessarily solve the problem. It's widely appreciated that the elasticity of supply and demand for a country's exports and imports can be such that devaluation does not work. And in that case the country is done for, or at least "semi-done for". I.e. the only solution is for a proportion of the country's citizens to quit the country and get jobs elsewhere. And in fact that's to some extent been the solution adopted by Greece for a century or so: there is large Greek diaspora in the US and elsewhere.

But the import tariffs are worth a try aren't they? Why is no one discussing import tariffs? Darned if I know.

________

P.S. (9th July, 2015).  Having suggested just above that no one is "discussing import teriffs", I've just been told by James Schipper that there's an article by Heiner Flassbeck discussing tariffs (published the day after my above post). The article is in German, and my German isn't brilliant, so I can't personally vouch for what James says. But I've no reason to doubt him.

 

If Greece runs out of Euros, Greeks will just create their own money.

According to this Telegraph article, “Businesses in Thessaloniki and other parts of the country are already creating parallel private currencies to keep trade alive and alleviate an acute shortage of liquidity.” That’s not the first time that’s happened.

In Ireland there have been two bank strikes since WWII during which the country ran short of official money. (That was prior to Ireland joining the Euro). What people did was to use cheques and endorse them and pass them from hand to hand.

Same thing happened in the initial stages of the Arab Spring two or three years ago. That is, banks closed, so people started creating and exchanging their own IOUs.

And at one stage in the 1800s there was a shortage of government issued coins in Britain. So British metal bashers turned out their own coins!

Of course that sort of unofficial money is nowhere near as efficient as money created by central banks or large commercial banks. In fact it is so inefficient that that sort of unofficial money possibly does not count as money. But it’s better than nothing. 

________

P.S. (7th July 2015). There's a bit more about the Irish bank strikes in this Financial Times letter.

Greeks are expert beggars.

I read somewhere that if you try begging or busking in some of the smarter parts of London, you’re likely to be moved on by some heavies. And those heavies are not employed by the police or any other law enforcement agency: they are employed by cartels which have carved out the more lucrative busking locations between themselves. I.e. busking and begging can be profitable particularly in wealthy areas.

The song and dance made by Greeks about their alleged poverty has got most of the Western world fooled. But the song and dance doesn’t quite wash.

According to this source, Greek GDP per head (in real, i.e. inflation adjusted terms) while it has clearly fallen significantly over the last five years or so, has still not fallen to the level that pertained in the 1990s. So why wasn’t everyone screaming blue murder about Greek poverty then? Reason is that doing so wasn’t flavour of the month at that time. Fashion trumps logic every time.

Moreover, Greece is in the top 25% of countries on the GDP per head scale. Why is Greece getting ten times as much sympathy as the 75% of countries which are below Greece on that scale?

In short, Greeks have worked out that rather than earn your keep, it can be much more profitable to locate yourself in a rich area and then broadcast sob stories about your allged poverty relative to others in that area, just like those buskers in London.

In the case of Greece, the begging does not of course take the form of straight demands for cash: that’s too crude and too obviously a form of begging. Much better to “borrow”, second blow the money, and third blame everyone but yourself when you can’t repay the money.

_________

 

P.S. For a Financial Times article along roughly similar lines to the above, see here.

EU moves towards full reserve banking.

 
It’s good to see the European Union trying to force member states to stop subsidising banks. That’s according to this Reuters article. Given half a chance, bankster / criminals will always try to offer local politicians large wads of cash in brown envelopes in exchange for bank friendly legislation, including the bail out of banks with taxpayers’ money.

This must stop.

Those depositing money in banks should have to face reality. If they want to have their money loaned on to mortgagors, businesses, Greece etc then those depositors should carry the risk, not taxpayers. I.e. if the relevant bank goes belly up, then depositors, bondholders etc can get stuffed, far as I’m concerned. And it’s good to see the EU agrees with that.

Alternatively, if depositors want a chunk of their money to be totally safe, then they’re entitled to that safety. In the UK depositors can already obtain total safety by depositing money with National Savings and Investments. However, there’d be nothing to stop every high street bank I the UK offering totally safe accounts where relevant monies are simply lodged with the Bank of England.

_________

P.S. Having done a bit more digging, it looks like the EU will not bail in depositors with up to €100k. So to that extent, the EU proposals are not a move towards full reserve. However, in that sums above €100k will be bailed in and in that bank bondholders will be bailed in, the EU proposals do constitute a move towards full reserve.

Simon Wren-Lewis on Greece.

Simon Wren-Lewis (Oxford economics prof) claims that more demand inside Greece will enable the Greek government to collect more tax and thus repay creditors. (Para starting “From a macroeconomic viewpoint…”) Nope. More demand inside Greece would suck in imports which would make Greece even more indebted to other countries or to banks and non-bank entities in other countries.

The extra demand would of course enable the Greek government to collect more tax off the Greek private sector as SW-L says, but that’s just a re-arrangement of wealth or money WITHIN Greece. And the Greek government can do that anytime simply by raising taxes and/or cutting public spending.

But that’s not to dispute SW-L’s other points, e.g. he argues (and has done so for some time) that a relatively long period of mild austerity is better than a shorter period of extreme austerity. That point might be valid. The logic there is that the basic purpose of austerity (internal devaluation) might take place at much the same speed under the two scenarios. But of course the latter ploy requires patience by Greece’s creditors, and those creditors are rapidly running out of patience.

Growth better outside the Eurozone.

From an article in the Independent.