Positive Money stall at an event on the banks of the river Tyne.

Warren Mosler and Matthew Forstater said “the natural rate of interest is zero”.

Their point (at least as I see it – they might not agree with my interpretation of their thinking) is that it makes no sense for the state to issue so much money that it then has to pay interest to “money holders” (i.e. the private sector) to induce it not to spend some of that money, and with a view to curbing inflation. I.e. why not just issue less money and pay no interest to anyone? I agree with that.

Having said that, there’s a slight complexity here, namely that the state acts in at least two capacities: 1, issuer of money, and 2, investor in infrastructure. And there are some arguments (pretty feeble ones) for funding infrastructure via interest yielding bonds. (Milton Friedman and Warren Mosler opposed ANY SORT of government borrowing, and quite right, I think).

But if it is accepted that infrastructure is funded via borrowing rather than via tax and money printing, there’s a glaring self contradiction there as follows. The conventional economic wisdom is that when stimulus is needed, demand should be increased by cutting interest rates, and that’s done by having the central bank print money and buy back the above bonds. But that amounts to funding infrastructure (after the event so to speak) via money printing, which contradicts the above idea that infrastructure should be funded by borrowing!

In short, the conventional economic wisdom is in a muddle on the subject of borrowing to fund infrastructure. So let’s so to speak leave advocates of the conventional wisdom to wallow in the mess they’ve made for themselves, and return to Mosler and Forstater’s basic point, as I see it, which is:

The state as money issuer should issue enough money to bring full employment, but not so much that the state needs to borrow some of it back and hence artificially raise interest rates. That’s not to say that interest rate adjustments should NEVER be used: they’re a useful tool to have in reserve. But the AIM should always be Mosler and Forstater’s zero rate.

If you understand this, you’re smarter than Harvard economics professors.

Two Harvard economics professors have spent the years since the 2008 crisis claiming that stimulus brings a serious problem, namely rising government debt. That’s Kenneth Rogoff and Carmen Reinhart (though there are other equally clueless economists at Harvard).

To access their works, just Google their names and “government debt”.

The first flaw in the idea that more stimulus (i.e. more deficit) means more debt is that (as Keynes said), deficits can be funded via borrowed money, OR PRINTED MONEY. Thus there’s no need for extra debt at all! Of course the AMOUNT printed can’t be so much as to cause excess inflation, but if it’s just right, it will cure the recession while not causing excess inflation. Indeed, the effect of QE is to fund the deficit via printed money, which makes you wonder whether Rogoff and Reinhart (R&R) have heard of QE, or if they have, whether they know what it consists of.

Another ploy of R&R’s is to use emotionally loaded phrases to back their arguments (since they are evidently short of “logic loaded phrases”). For example they refer the “debt overhang” instead of the more accurate phrases “national debt” or “government debt”. Well clearly something which is “overhanging” and about to drop on your head is a threat. I’m worried stiff (ho ho).

Another emotionally charged phrase they use is “financial repression”. Financial repression is their name for the collection of measures which may need to be used to reduce excessive government debt, like raised taxes or excess inflation which cuts the real value of the debt and robs creditors. Well clearly any form of “repression” must be horrible, disastrous, nasty, harmful, cruel, bad – add synonyms to taste. I’m in emotional turmoil as a result of “financial repression” (ho ho again).

Incidentally, when searching for R&R articles, the latter two emotionally charged phrases can help.

However, credit where credit is due, their “financial repression” point does contain a small element of truth, not that that basically gets their argument anywhere. So let’s examine so called financial repression.


The basic flaw in financial repression.

The basic flaw is thus. Government debt (and the considerable quantities of base money now sloshing around as a result of QE) are ASSETS as viewed by the private sector. More particularly they are liquid assets: i.e. they are easily swapped for consumer goodies and other items. And if the private sector has what it thinks is an excessive stock of those assets, it will try to spend away those liquid assets, as a result of which demand and inflation will become excessive. So in that circumstance, government has to impose some sort of deflationary measure, like raising taxes and confiscating some of that money / liquid asset.

However, the sole purpose of that extra tax is to keep demand down  to a level where the economy can meet that demand. I.e. the purpose is NOT TO cut GDP: the purpose (and hopefully the actual effect) is simply to prevent excess inflation. Now excess inflation actually REDUCES living standards, thus ironically, the effect of the above extra tax (if excess inflation has already started) is to RAISE living standards, not to cut them. At the very least the effect of the extra tax is to prevent a fall in GDP. But you won’t find anything about that “prevent a fall” point in R&R’s works.

 It’s beginning to look like we can take the phrase “financial repression” with a big pinch of salt.

R&R’s mistake there is to confuse microeconomics with macroeconomics. Paying off debts, as we all know is a painful process. Or at least it is in the case of microeconomic entities like a household: that is, the household has to earn money and far from spending that money on consumer goodies, it has to repay money to relevant creditors. In contrast, macroeconomics does not work the same way as microeconomics: one gets bizarre results like the above mentioned phenomenon of raised taxes actually INCREASING living standards.

Incidentally, the above “prevent a fall in GDP” point applies in a closed economy, but not open economies (as more astute readers may have noticed). Open economies are considered below.


Some complexities.

Having set out the basic flaw in financial repression, the real world involves a few complexities not mentioned above. So let’s consider them. But as you’ll see, those complexities do not basically dent the latter conclusion, namely that “financial repression” is largely a mirage.

First, having said above that demand becomes excessive because the private sector has an excessive stock of money / liquid assets, another possible effect of that excess stock is that holders of those assets demand a higher rate of interest for holding the assets which could be in part down to creditors losing confidence in a government’s ability or willingness to repay the debt. Creditors may demand a higher rate of interest for that reason.

Well that’s not a problem for a country which issues its own currency: it can very easily cut interest rates. And that’s done by having the central bank print money and buy back the debt (and/or abstain from rolling over debt as it matures).

Of course printing money and buying up government debt (QE effectively) is likely to be stimulatory and/or inflationary (though precious little inflation stemmed from QE over the last few years). But if the latter “print and buy” policy DOES PROVE INFLATIONARY, that can be remedied very easily by raising taxes. And as explained above, the purpose of those taxes is simply to supress inflation: thus those extra taxes as such do not cut living standards.


Open economies.

However, there is an effect on living standards where FOREIGNERS withdraw money from the relevant county as a result of the fall in interest rates: the country’s currency falls in value on foreign exchange markets, and that depresses living standards. On the other hand there will have been an equal and opposite effect when those foreigners first purchased debt. So in a sense, that’s a wash.


The next complexity: politics.

It was claimed above that raising taxes is easy. It should however be said that raising taxes can be POLITICALLY difficult. I.e. raising taxes is no problem from the strictly technical and economic point of view, but the politics can be tricky.

The solution there is to let the elevated interest rates run for a few more years than is strictly desirable and raise taxes more slowly. That is not ideal: it is not a “GDP maximising” strategy, but it’s the least bad real world solution to the problem.


Why let government debt rise at all?

Having admitted that an elevated stock of government debt and/or base money can cause significant problems, it might be tempting to claim a solution is not to let that stock rise at all, which is more or less what R&R propose. Well the answer to that is that if we do NOTHING about recessions then excess unemployment and inadequate GDP will just linger for God knows how long: two decades instead of five years?

Conclusion: the optimum or GDP maximising policy is to always to aim to let the private sector have a stock of state liabilities (government debt and base money) which induces the private sector to spend at a rate that results in the economy running at capacity. Or as Keynes put it, “Look after unemployment and the budget will look after itself”.

Random charts IV

The rise of derivatives:

I wondered why world trade had fallen. Perhaps this is it:

UK inflation:

To implement fractional reserve banking it’s first necessary to rob people of their existing stock of money.

Summary.        Assume a full reserve bank system: that’s a system where the only form of money is government issued money. If private banks are then allowed to print money (which is what fractional reserve consists of), interest rates fall and borrowing, lending and debts rise. For every dollar of new borrowing (aka debt) there’s a dollar of new money (private bank created money). That new money will be inflationary unless government implements some sort of compensatory deflationary measure like raising taxes and robbing the private sector of its existing stock of government created money.

To put that the other way round, switching from a fractional reserve system to full reserve (i.e. doing the switch in the opposite direction) reduces lending and borrowing, which is deflationary. But the solution is easy: have the state print money and spend it into the private sector. I.e. private sector, so to speak, gets back the above money that was robbed from it.

Which of the two systems, full and fractional reserve, most closely resembles a genuine free market and is thus most likely to maximise GDP? The answer is full reserve because under full reserve, borrowers have to pay the full cost of borrowing: they are not subsidised by private money printing.

_____________

Assume a full reserve banking system: that’s a system or economy where the only form of money is state issued money. It’s also a system under which those who want their money loaned out bear the risks involved – which is actually perfectly normal in simple economies. E.g. if Robinson Crusoe lends a fishing rod to someone in a desert island economy and the borrower loses the rod and cannot recompense Crusoe, the reality would probably be that Crusoe would bear the loss rather than the loss being born by the economy as a whole (which would be the equivalent an FDIC type deposit insurance system).

Also, under full reserve, the fact that lenders bear risks means that if they lend via a bank, then those lenders are effectively shareholders in the bank rather than depositors.

 
Fractional reserve is then allowed.

If fractional reserve banking is then allowed, that means there is private bank created money as well as the central bank created money, and in the case of private banks, they LEND out that money rather than, as is the case with central banks and governments, simply spend the money into the private sector.

Fractional reserve bankers get their scheme off the ground by making depositors a “too good to be true” offer, which is: 1, you deposit $X with us, we lend some of that out so that you get interest, and 2, we guarantee you’ll get your money back (maybe instantly or maybe, in exchange for more interest, after a delay). That offer is too good to be true because lending money is risky and that flatly contradicts the promise by banks to depositor that they’ll get their money back.

The net effect of introducing fractional reserve is a big increase in loans and hence deposits, and private banks can easily make those extra loans because they haven’t had to pay for the new money they’re lending out: they just print it! So the net effect is that loans and hence deposits rise and interest rates fall. But that fall in interest rates means people will want to hold FEWER, not more deposits. So they’ll try to spend away their increased stock of deposits. In short, inflation ensues, unless government takes some sort of deflationary counter measure, like raising taxes and robbing the citizenry of part of its stock of base money.

George Selgin actually set out the latter scenario (switching from full reserve to fractional reserve) in an article entitled “Is Fractional-Reserve Banking Inflationary” published by “Capitalism Magazine”. Start at his third paragraph if you like. As he explains, the effect is inflationary, at least for a while. To be exact, he says inflation reduces the real value of base money to the point at which the amount left is only just enough to enable private banks to settle up with each other.

He assumes that no “deflationary counter measure” is taken, which means that inflation rips, and the citizenry are robbed via inflation rather than via extra tax. But the effect is the same. (Incidentally that is not to suggest Selgin would agree with the basic thrust of this article: it’s just that as it happens he made the same point as is  made here about the switch from full to fractional reserve being inflationary)

 
Details.

Having said that the switch from full to fractional reserve is inflationary, there are actually several details in that narrative that are missing above. So let’s now fill in some of the details (which Selgin also missed out).

I’ll take it stage by stage, starting with a full reserve scenario. So having assumed full reserve, let’s assume private banks are allowed to go for fractional reserve. The first thing that happens before any new loans are made is that those shareholder / depositors find things have changed a bit. That is, instead of being shareholder / depositors, they are now bog standard depositors: i.e. instead of carrying any risk themselves, they pay deposit insurance. But if those shareholder / depositors and the new insurer both gauge the risks correctly, they’ll charge the same for covering the risks. Ergo the charge made by banks to relevant borrowers remains unchanged.

As to depositors who previously sought total safety at the central bank, they can now enjoy total safety plus instant or more or less instant access to their money at the same time as having their money loaned on and hence being able to earn interest (a contradiction in terms of course).

In short, “shareholder / depositors” and “want total safety depositors” are now merged into the same group or category. But they then share the interest coming from borrowers, so there is less interest per depositor. That’s not a problem for the former “want total safety depositors” because SOME INTEREST is better than none. So that’s an incentive for that type of saver to save more, i.e. accumulate more deposits. On the other hand former “shareholder / depositors” lose out, thus they will “dis-save”: i.e. try to spend away some of their money.

Absent some sort of detailed survey into the attitudes of depositors, it is difficult to say which of those two effects predominate. However I’ll make the bold assumption that the two effects more or less cancel out, or at least that any net effect there is dwarfed by the next effects to which we now turn.

 
Next: banks lend more.

As intimated above, fractional reserve enables private banks to lend more, something which is easy for them to do because they don’t have to pay anything for the new money they’re lending out – they just create it out of thin air, or “print” it. I.e. private banks can cut interest rates and lend more.

That extra lending initiates another effect of the switch, namely that given that borrowers do not borrow other than to spend the money borrowed, an increase in lending means an increase in spending (i.e. an increase in aggregate demand). However, that effect is temporary, because once the additional loans have all been spent, the “extra spending” effect comes to a halt.

Clearly that would be an important point to consider given a real world switch from full to fractional reserve (or vice versa). However, given that the effect is temporary, I’ll ignore it for the sake of brevity.

 
The switch causes excess deposits.

As explained above, switching to fractional reserve means more loans and hence more deposits (given that “loans create deposits” as the saying goes).

Borrowers will be happy with that: lower interest rates enable borrowers to borrow more. But depositors won’t be happy: interest rates have fallen and to make matters worse, the result of private banks increased lending is increased deposits.

Depositors will thus almost certainly have more deposits than they want, thus they’ll try to spend away the excess. Hence the inflation to which Selgin refers.

As already explained, government could just let inflation rip, which is the scenario that Selgin assumes. That means savers or “money holders” are robbed.

An alternative is for government to impose some sort of deflationary counter measure, like raising taxes, i.e. robbing the citizenry of part of its stock of money.

Another possible deflationary measure is for government or “the state” to raise interest rates, and it can do that by wading into the market and offering to borrow at above the going rate of interest, and as regards interest, well the state can just send the bill to the taxpayer.

Also note that the purpose of that borrowing is NOT TO invest in infrastructure or anything like that: the sole purpose is to discourage spending by the private sector. In effect, that’s just another form of robbery or confiscation.

 
So which is best: full or fractional reserve?

My answer to that is: “whichever is nearer to a genuine free market”.

But there is a slight problem there namely that money is not and never has been a purely free market phenomenon: that is, there has to be some sort of nation-wide agreement as to what form the nation’s money shall take:  gold coins, cowrie shells or whatever. And indeed, the historical evidence supports that: that is, in numerous civilisations, money was introduced by a ruler, king etc, not by market forces. Thus there is an inevitable element of “government monopoly” about money.

Nevertheless, there are other characteristics of free markets that different bank or monetary systems might or might not have.

In particular, a genuine free market is one in which customers normally pay the full cost of the goods and services they purchase.

A bank system where banks obtain some of the money they lend out simply by printing the stuff is not a market in which customers are paying that full cost.

There is certainly a case for printing and distributing more money from time to time (via helicopter drops or similar), but there is no reason for any sector of the economy to have preferential access to that new money.

A genuine free market is also one in which fraudulent or dubious promises are not allowed: like the basic promise that fractional reserve banks make: “deposit your money with us, and we’ll lend it on while guaranteeing your money is totally safe”.

And finally, given a perfectly functioning free market, recessions are cured essentially by helicopter drops, i.e. distributing money to a wide selection of people and institutions, not just banks. That is, in a perfectly functioning free market and given a recession, wages and prices fall, which increases the real value of base money, which in turn induces those with a stock of money to spend more – a phenomenon know as the Pigou effect.

All in all, full reserve banking shares important characteristics with free markets.

Guardian article trotts out the old multiplier myth.

The article is by Stephen Koukoulas who according to article is “a Research Fellow at Per Capita, a progressive think tank.” Gosh. He’s “progressive” is he? That’ll impress the rather large proportion of Guardian readers who are cuckolds. (Article title is: "Economic growth more likely...")
 
And it’s not just me who thinks that self-styled “progressives” are often not all that bright: Bill Mitchell (left of centre Australian economics prof) has made that point over and over.
 
Anyway, the “multiplier” is simply the idea, widely accepted in  economics, that the ULTIMATE effect on GDP of different types of spending varies widely. And the particular instance of that phenomenon that Koukoulas deals with is the different effect on GDP of donating money to the rich as compared to donating it to the poor.

As Koukoulas rightly points out, the poor spend a larger proportion of any increase in income than the rich, thus the ultimate effect on GDP of giving $X to the poor is larger than the effect of giving $X to the rich. Thus it seems that we get better value for money from giving money to the poor.

Unfortunately that argument does not stand inspection and for reasons set out below. I’ve actually set out the flaws in the multiplier before on this blog, but to get any point across one normally has to repeat it ad nausiam, so here goes – for the umpteenth time.

First, to attack the multiplier IS NOT to attack equality enhancing measures Koukoulas refers to. I.e. if it can be shown that higher taxes on the rich and more generous benefits or lower taxes for the poor brings big social benefits, no one can object to that.

But that’s quite separate from the strictly economic claim, namely that there’s a case for giving preference to high multiplier types of spending because the ultimate effect on GDP is higher per dollar of expenditure.

The basic flaw in the latter idea is that stimulus dollars cost nothing in real terms. To illustrate, if stimulus consists of helicopter drops (i.e. literally printing $100 bills and giving a bundle of those bills to every household in the country), the real cost of doing that is minute compared to the face value of those dollars.

As Milton Friedman put it, "It need cost society essentially nothing in real resources to provide the individual with the current services of an additional dollar in cash balances."

Of course stimulus does not normally consist of overt helicopter drops, but conventional stimulus actually comes to almost the same thing. Indeed, conventional fiscal stimulus (government borrows $X, spends $X and gives $X of bonds to borrowers) followed by the central bank printing money and buying back some of those bonds so as to keep interest rates stable or even reduce them, comes to EXACTLY the same thing as a helicopter drop (assuming that by “helicopter drop” one means dropping money onto government departments, state schools, etc as well as households).

Thus given a number of different ways of getting the economy up to capacity, A, B, C etc, the only important point (as far as economic rather than social considerations are concerned) is the effect on GDP. The number of stimulus dollars needed to effect A, B, C etc is irrelevant. I.e. the multiplier is irrelevant.

The amazingly nonsensical “sticky price channel”.

It’s quite widely recognized that a significant proportion of the economics profession are not interested in reality: rather, they’re interested in erecting complex theories and models with a view to keeping themselves employed at the taxpayer’s expense. But when it comes to a blatant disregard for reality, the “sticky price channel”, which I stumbled across recently takes some beating.

A guide to the sticky price channel is set out under the heading “The Sticky Price Channel” in a recent CEPR article by Carlos Garriga and Finn Kydland. The article title is “Keeping Policy Rates Persistently Low…”.

The paragraph that claims to explain the sticky price channel runs as follows. (Incidentally I’m not promising that this para is an accurate description of the sticky price channel, but having Googled the phrase “sticky price channel”, this para seems to have got the idea roughly right, far as I can see.)

“The sticky price channel is the central mechanism of monetary policy transmission in the modern macro literature. A number of texts (e.g. Woodford 2003, Galí 2015) describe this channel in detail.1 The key element of this channel is the so-called ‘New-Keynesian Phillips curve’. According to this relationship, aggregate output depends negatively on the expected change in the inflation rate. If today’s inflation is high relative to tomorrow’s expected inflation – that is, the expected change in inflation is negative – aggregate output is relatively high today. The microeconomic foundations for this relationship are driven by the costly adjustment of prices at the firm level. Consider a firm that faces a cost of adjusting its price. When the aggregate price level increases, and thus inflation increases, the firm finds itself with a higher demand, as its products look relatively cheap. If the increase in the aggregate price level is expected to only be temporary, the firm does not find it profitable to incur the adjustment cost of changing its price. Instead, it increases output to satisfy the higher demand. In equilibrium, all firms facing price adjustment costs behave this way and, as a result, aggregate output increases. However, when the increase in inflation is expected to be highly persistent, the cost of changing the price is worth paying and the firm adjusts its price, rather than output. In equilibrium, all firms behave this way and, as a result, aggregate output does not change. The sticky price channel is thus most potent when changes in policy rates, and thus inflation, are only temporary.”

Now if you didn’t fall about laughing at that, here’s why you should have.

First, why would any government implement monetary stimulus (or indeed fiscal stimulus) given a significant amount of inflation? It wouldn’t!! Put another way, when inflation rises above the 2% target, governments and central banks normally turn off the stimulus tap.


Raising prices is costly?

Second, the idea that raising prices is costly is a joke. A supermarket chain can raise all its prices nowadays by pressing a key on a computer keyboard. The cost of doing that is negligible compared to what supermarkets spend on wages, purchasing food to sell and so on.

And in the case of small businesses which are not quite so computerised as supermarkets – e.g. small hotels and restaurants – where they want to adjust prices, they’d have to re-print menus etc. Well shock horror! That’s not going to ruin any hotel or restaurant.

And if there are any small hotels or restaurants out there who don’t know how to set up a desktop printer, I’m happy to offer instructions.

And this ere “sticky price theory” is according to the above paragraph “…the central mechanism of monetary policy transmission in the modern macro literature...”. If that’s the case, most macro-economists should check in with their shrink.


Why expand sales when they’re not profitable?

A third problem is this passage:

“Consider a firm that faces a cost of adjusting its price. When the aggregate price level increases, and thus inflation increases, the firm finds itself with a higher demand, as its products look relatively cheap. If the increase in the aggregate price level is expected to only be temporary, the firm does not find it profitable to incur the adjustment cost of changing its price. Instead, it increases output to satisfy the higher demand.”

Now hang on. Let’s make the not unreasonable and simplifying assumption that the typical firm is making a standard return on capital or a “normal profit” as economists sometimes call that, at the start of the above mentioned inflationary period.

Once that inflation has started, and given that the firm does not raise its prices pro rata, it will then be making a LESS THAN normal profit, or even a loss. Now what’s the point in bothering with extra sales if they’re not profitable? None!

Indeed, why bother selling ANYTHING? Strictly speaking it could make sense for the owner of a business in that situation to simply close down the business temporarily and go on a fishing holiday, till profitability returns.

In practice, nine times out of ten, businesses obviously don’t do that when faced with making low or zero profits for a while because they risk losing regular customers. So what they often do is to keep supplying regular customers, while telling new customers their demands just cannot be met.

Indeed there’s a second reason for ignoring those new customers. It’s a reasonable bet that the new customers have simply been attracted by the artificially low prices the firm is demanding. I.e. when things return to normal, those new customers may vanish. To that extent it makes sense (unless the firm is desperate to buy market share) to politely tell the new customers their orders cannot be met.


A fallacy of composition.

A fourth error in the sticky price theory is in the sentence that follows on from the latter quote. The sentence reads “In equilibrium, all firms facing price adjustment costs behave this way and, as a result, aggregate output increases.”

Now hang on: inflation by definition is a situation where a significant proportion of the country’s firms are increasing their prices!!! I.e. you can’t assume inflation and then in the next breath assume firms are not increasing prices!

To be more accurate, there is no sharp dividing line between what might be called a micro and a macro scenario. We’ve dealt above with the purely micro scenario: i.e. situation where an individual firm faces generally rising prices while it keeps its own prices constant.

At the other extreme there is what might be called a “pure macro scenario”. That’s where inflation is running at X%pa because EVERY firm is raising its prices by X%pa.  In that scenario it’s clearly a nonsense to suggest that the typical firm will expand sales and output because its prices have risen less than the general increase in prices.


Conclusion.

The whole “sticky price channel” looks to me like a train wreck, or something so near a train wreck that it can be ignored.


So what is the “central mechanism of monetary policy transmission”?

And finally, having ridiculed one alleged “central mechanism of monetary policy transmission”, there is perhaps an onus on me to set out what I think the real “central mechanisms” are. So here goes. But be warned: they’re very boring, simple and straightforward, which is perhaps why some economists don’t like them. To repeat, what many economists want is complexity because complexity keeps them employed. Anyway, I propose the “mechanisms” are as follows.

First, there is interest rate cuts. The result of those cuts is to encourage more borrowing and when money is borrowed and spent demand rises. That’s simple enough.

Second, there is QE. That consists of the central bank printing money and buying sundry safe assets. That leaves the private sector with an excess stock of cash, which induces the private sector to spend in one way or another. That raises demand. That’s also simple enough.

Third, there is helicoptering, which is a mixture of monetary and fiscal policy. Helicoptering consists of having the state print money and spend it and/or give it away to households. When a household finds it has more cash, it tends to spend some of it (gasps of amazement). That increases demand.

Alternatively, if the new money is directed towards public spending, than that extra spending also increases demand. (Incidentally, helicoptering is more common than many people think: that is, when government implements standard fiscal stimulus (government borrows $X, spends it and gives $X of bonds to lenders) and then then central bank prints money and buys back some of those bonds (which the CB is quite likely to do at least to some extent) then to the extent the latter “buy back” takes place, that whole exercise equals helicoptering.

Random charts III.

Australian residential dwelling stock value to GDP ratio 1880-2016.

Private nonfinancial debt as % of GDP.

Contributions to EU budget.

Fed remittances to the Treasury.

Gender gap in PhDs.

GDP losses due to pollution.
 

England: population of the North as % of total population.

The effect of QE.

Which countries host the most refugees?

Which nationalities consider religion important?

Merge monetary and fiscal policy?

Positive Money says the two should be merged.

.@franboait from @PositiveMoneyUK on @guardian: The artificial divide between fiscal & monetary policy has to go. https://t.co/wQNfyjZhPC

— Tune Revsgaard (@Revsgaard) October 12, 2016

Here’s why that’s a good idea (which is not to suggest Pos Money would agree with all the points below).

1. Fiscal stimulus on its own has flaws.

Fiscal stimulus on its own equals “government borrows $X and spends $X (and/or cuts taxes)”. Problem with that is that borrowing AS SUCH is deflationary. Now what’s the point of doing something deflationary when the object of the exercise is the opposite, i.e. stimulus?

Put another way, what’s the point of the state borrowing money when it can print the stuff?

And for the benefit of the Pavlov dogs who chant “inflation” whenever the words “print” and “money” appear in the same sentence, as long as the AMOUNT of money printed and spent is not excessive, i.e. as long as it’s enough to raise numbers employed, but not so much as to cause inflation, then (roll of drums) there won’t be any excess inflation.

Of course if (and it’s a big if) it makes sense to borrow so as to fund infrastructure and in that stimulus consists of more infrastructure spending, then it would make sense to borrow to fund that infrastructure via borrowing. However, rapid changes to infrastructure spending are just not feasible: first, most infrastructure projects are not shovel ready. And second, it doesn’t make sense to abandon a bridge building project when its half complete just because a recession comes to an end. Ergo infrastructure spending is not particularly suited to dealing with recessions.

As to whether it makes sense for governments to borrow to fund infrastructure, Milton Friedman and Warren Mosler thought not.

2. Some merging of monetary and fiscal stimulus is needed ANYWAY.

The extra borrowing involved in traditional fiscal stimulus probably raises interest rates which is the last thing needed when stimulus is required. Thus the central bank has to print money and buy back some of the newly issued government debt so as to keep interest rates down: i.e. at least a FINITE amount of monetary stimulus has to accompany fiscal stimulus.

3. The flaws in monetary policy on its own.

There’s a glaring flaw in implementing monetary stimulus (at least in the form of interest rate cuts) on its own: it’s that there is no reason whatever to assume a recession is caused by inadequate borrowing, lending and investment any more than there’s reason to assume it’s caused by inadequate spending on education or ice-cream.

It’s certainly true that given a recession, interest rates will probably fall, but what’s the reason for thinking interest rates will not fall of their own accord, given a recession? There’s nothing much to stop them: to illustrate, there’s been a substantial fall in interest rates over the last twenty years or so which has quite clearly NOT BEEN caused by central banks.

As for the other possible element in monetary policy, QE, much  the same goes. QE is designed to increase investment spending in riskier assets. But there are zero reasons to assume a recession is caused by inadequate investment spending.

Moreover, not even the fact that investment spending has fallen prior to a recession is proof that inadequate investment spending is the problem: that fall may have taken place for perfectly good reasons.

4. Merging monetary and fiscal is compatible with the basic purpose of the economy.

The basic purpose of the economy is to produce what people want: both what they normally buy out of their disposable income and what they want by way of publically provided goods and services which people vote for at election time. That being the case, the logical solution to a recession is to give people more of the stuff that enables them to buy stuff out of disposable income, i.e. money.

Thus one element in curing a recession should be boosting household bank balances: perhaps via tax cuts or via increased social security payments. As to publically produced goods, more should be spent on those as well, though the exact ratio of increased PRIVATE vis a vis PUBLIC spending is clearly a political choice.

Increasing those two forms of spending by simply printing new money and spending it amounts to a combination of fiscal and monetary policy.

5. Lags.

There might be an argument for concentrating on monetary policy if the lags there were shorter than in the case of fiscal policy, but that doesn’t seem to be the case.

6. Investment spending rises ANYWAY.

Those with a fetish about investment might like to know there’s nothing a bank manager likes more than a business with plenty of customers coming thru the door. I.e. raise demand generally, and increased investment will probably follow. But if businesses decide more investment is not needed on a big scale to meet the extra demand, there is no reason to think that’s any sort of problem.

7. A “merge” is close to the free market’s cure for recessions.

The above GENERAL rise in demand is what would happen in a perfectly functioning free market given a recession. That is, given a recession, wages and prices would fall, which in turn would increase the REAL value of money (base money particular). That effect is known as the Pigou effect. It would also increase the real value of the national debt, which as Martin Wolf pointed out more or less amounts to money.

In short, in a free market spending by those in possession of base money and national debt would rise which is a FAIRLY widespread rise in demand as distinct from the relatively NARROW rise in demand that takes place when interest rates are cut with a view to raising investment spending.

8. Reversibility.

Some thought must be given to whether any form of stimulus is reversible, and it might seem that reversing helicopter drops is politically difficult as it means tax increases. However, interest rate rises hit most of those with mortgages, so that’s not politically popular either. Also the UK raised the VAT sales tax a few years ago and there wasn’t even a whiff of riots.

Also, in that raising interest rates is politically easier than raising taxes, then after some helicoptering, it would always possible to assist the reversal by a temporary rise in interest rates.

9. Deciding the size of a stimulus package is a decision for experts.

Re the charge against fiscal stimulus that it depends on a collection of squabbling children sometimes known as “politicians”, Positive Money and co-authors thought of that one long ago. See here. The solution is to have ECONOMISTS, not politicians decide on the TOTAL SIZE of a stimulus package, while strictly POLITICAL decisions like what % of GDP is allocated to the public sector and how that is allocated as between education, infrastructure etc are left in the hands of politicians: easily done.

In other words converting to a system where monetary and fiscal policy are merged requires a significant re-arrangement and the responsibilities of governments and central banks, but that’s not a big problem in principle. The problem is explaining the new system to all and sundry.

Incidentally, that re-arrangement largely disposes of another criticism of fiscal policy namely that fiscal changes take a long time where they are dependent on the whim of politicians.

Random charts II.

Net worth of US households in blue. GDP in red.

What people thought about balancing the budget in 1936.

The relationship between chocolate consumption and Nobel laureates per million of the population.

Private debt relative to GDP.

Views on diversity.

Stock of houses in the UK since WWII.

Inherited wealth.

Youngsters not in work, education or training.

Crude oil: what each country produces.

Participation rate for US men and women.

The economic illiteracy of Pete Peterson.

Just for a laugh, let’s run through this article by Pete Peterson, the billionaire founder of the Peterson Institute: the organization that hands out wads of cash to academics with a view to buying academic credibility. The article title is “America can’t afford Greek complacency”

If you know anything about economics, you’ll have spotted a flaw in the article already: comparing the US, a country which issues its own currency, to Greece, which doesn’t.

Peterson doesn’t EXPLICITLY say Greece and the US face exactly the same problems. But the mention of Greece is clearly there for a purpose: to fool the gullible into thinking that the horrendous problems of Greece could be replicated in the US.

Peterson then suggests there are few similarities between Greece and the US. Oh yes? So what was the purpose of the title of his article “America can’t afford Greek complacency”.

Anyway, with a view to showing there are few similarities between Greece and the US, he says, “There are countless differences between the circumstances of the U.S. and Greece.” So exactly which Greek problems might be replicated in the US? Well Peterson is vague on that one, probably because he does not know the answer to the latter question.

But there is SOME SORT OF indication as to where the problems lie in this paragraph:

 “Without question, the United States remains on a fiscal path that is unsustainable and dangerous by any international standard. Last month's non-partisan Congressional Budget Office analysis projects that by 2040, federal debt will climb to more than 100% of gross domestic product based on current laws, and would reach 175% of GDP under less optimistic assumptions. Debt at that level, CBO warns, would significantly harm our economy, reduce incomes and increase the chances of a fiscal crisis.”

Well first, the fact that something is “unsustainable” proves precisely and exactly nothing. An accelerating car is not a “sustainable” system: reason is that the car cannot go on accelerating for ever. First, it will reach the legal speed limit, at which point the driver ought to take his foot off the gas. Second, there’s a physical upper limit to the speed of any car. So is the “unsustainability” of an accelerating car anything to worry about? No!

And in fact something very similar to the latter self-limiting characteristic of the speed of a car applies to the national debt. That is, national or government debt is an asset as viewed by those holding the debt, i.e. the private sector. And the larger the private sector’s paper assets (as pointed out over and over by MMTers) the more the private sector will spend, for the same reason as the larger the lottery prize a household wins, the more it will spend.

Thus at some point, a rising national debt will induce extra spending to the extent that no further increase in the debt is needed in order to induce more spending.


Long term planning.

Next, Peterson says “Nonetheless, there are important lessons to be learned about the benefits of long-term planning and maintaining fiscal health and flexibility.” What – it’s an idea to “plan” the deficit in advance, is it? Out by 180 degrees!!

The basic point of a deficit is to make good a shortfall in demand coming from the private sector (or in the case of a SURPLUS, to tone down EXCESS demand coming from the private sector). But no one has much of an idea what excess or deficiency in demand the private sector will be responsible for in two, four or six years’ time.

For example the difference between exports and imports has an effect on demand. No one knows what exports or imports will be doing in four years’ time. And then there’s Alan Greenspan’s “irrational exuberance”. That tends to increase demand. But no one knows whether there’ll be an outbreak of irrational exuberance in a few years’ time or not.

In short, the idea that the deficit should be planned several years in advance is a contradiction in terms. It’s a bit like saying a good way of putting out a house fire is to pour 100% proof alcohol on the fire.


Interest on the debt.

In the next passage, Peterson worries about interest on the debt. He evidently doesn’t understand the point which MMTers make over and over, namely that a country which issues its own currency can pay any rate of interest on its debt that it likes. In fact it can turn large chunks of the debt into “zero interest debt” simply by printing money and buying back the debt. Indeed we’ve been doing that, and on an unprecedented and astronomic scale over the last five years under the guise of QE. Perhaps Pete Peterson hasn’t heard of QE.

And as for the idea that the money printing involved in QE results in inflation, where exactly is the inflation stemming from QE?


Projections.

As for the “projections” to which Peterson refers, how about using this chart for the purposes of anticipating where the deficit will be in two years’ time. Rather looks like it will have shrunk to zero, not of course that I’m claiming the chart is a brilliantly reliable guide.

As for Peterson’s predictions as to where the deficit will be in 2040, well that’s straight out of cloud cuckoo land.

And finally, for a humorous take down of Peterson type thinking, see here.

Are interest rates artificially low?

Summary.    Contrary to popular perception, rates are not artificially low because of central banks’ low interest rate policies of recent years. The reality is that rates were artificially BOOSTED by central banks in the years prior to the crisis. On the other hand there are other factors which interfere with the free market rate of interest and the net effect of all those factors is near impossible to determine. The other factors are fractional reserve banking, which artificially reduces the rate, and government borrowing which artificially raises interest rates in all probability.

___________

When a big change occurs, it’s normal to assume there must be something odd or artificial about the new order, i.e. that the old order represented the NATURAL state of affairs. Thus people tend to assume there must be something ARTIFICIAL about the low interest rates of recent years. I.e. it’s commonly assumed, that the free market rate of interest must be above its current level.

Prof Stephanie Kelton (a leading MMTer) hinted at the flaw in that idea in these tweets recently.

Yellen was asked about Trump's accusation that the Fed is keeping rates "artificially low" in order to influence the election.

— Stephanie Kelton (@StephanieKelton) September 22, 2016

So, if anything, the Fed keeps rates "artificially" *high* just about all the time.

— Stephanie Kelton (@StephanieKelton) September 22, 2016

So in what scenario would a genuine free market rate of interest obtain? Let’s answer that by starting with the simplest possible economy, and then add the complexities of the real world. (Incidentally I’m not suggesting Kelton would necessarily agree with the paragraphs below)

Assume the following:

1. A barter economy where the people democratically vote to create a form of money with a view to circumventing the inefficiencies of barter.

2. The new form of money will be issued by a newly formed “central bank” (CB).

3. Initially the only form of money is CB issued money (i.e. base money). That is, money creation by private banks is not allowed: in fact there ARE NO private banks – everyone just has an account at the CB (an innovation that CBs are actively considering right now, as it happens). As to whether the base money takes the form of some rare metal like gold or comes in fiat form doesn’t matter.

4. As to lending and borrowing, that takes place direct person to person (or person to firm etc) rather than via commercial banks.

5. There is no government borrowing.

Now what’s the optimum amount of money to issue? Well the larger each person’s stock of money, the more they’ll tend to spend all else equal. So as the stock of money rises, demand rises. And it will rise to the point where inflation becomes excessive. So the optimum amount of money to issue is the amount that induces the population to spend at a rate that maximises employment while keeping inflation at acceptable levels (NAIRU if you like).

As to the rate of interest, obviously that will settle down to some genuine free market level as long as the CB does not deliberately interfere with it – or in the words of Kelton, as long as the CB does not offer interest on reserves (IOR). (Reserves are not held by INDIVIDUAL PEOPLE in the real world of course, but in our hypothetical economy, since individual people have accounts at the CB, that money amounts to reserves.)

Notice that demand is regulated in our economy by a mix of fiscal and monetary means: i.e. given inadequate demand, government just creates more base money and spends it into the economy (and/or cuts taxes). That spending falls into the “fiscal” category, while the resulting rise in the stock of money falls into the “monetary” category. That is, demand is not regulated by adjusting interest rates.


How about interest rate adjustments?

But suppose it was decided that adjusting interest rates was a good idea, how would government and CB do it? Well the only way of artificially cutting rates would be for the CB to offer cut price loans to all and sundry. But that would involve the CB engaging in COMMERCE, i.e. that would involve exposing the CB to the possibility of losing money. And that in all probability wouldn’t be acceptable in the hypothetical economy just as it is regarded with suspicion in the real world.

So an alternative would be for government to spend an EXCESSIVE amount of money into the economy, and then, with a view to damping down demand, artificially raise interest rates by offering interest on reserves. Alternatively government could borrow by issuing bonds. But that would quite clearly result in an artificially high rate of interest.

Having issued that excess stock of money, the CB is then in a position to adjust interest rates by for example altering interest on reserves.

And that, lo and behold, is what happens in the real world, as intimated in Stephanie Kelton’s tweets.

To summarise, if demand is going to be adjusted by altering interest rates, interest rates have to be maintained at an above free market level – at least in our simple hypothetical economy. So the next question is: does that also apply to the real world once we’ve added the complexities of the real world?


Government borrows.

With a view to making our economy more realistic, let’s now assume that government borrows so as to fund infrastructure investments etc rather than to artificially raise interest rates.

Does that infrastructure borrowing artificially raise rates? Well it’s hard to say because it’s not clear whether government ought to borrow for that purpose or not.

Certainly the conventional wisdom is that the latter borrowing is justified. On the other hand Milton Friedman advocated a zero government borrowing regime as does Warren Mosler. I also set out several of the flaws in the latter conventional idea here.

(For Friedman, see his American Economic Review paper "A monetary and fiscal framework…”, para starting “Under the proposal…”. For Mosler, see his Huffington article “Proposals for the banking system”, 2nd last paragraph.)

At any rate, if infrastructure borrowing is NOT JUSTIFIED then by definition, the effect of government borrowing will be to artificially raise interest rates.

Alternatively, if such borrow IS JUSTIFIED, then the effect of government borrowing will be to artificially raise interest rates.


Fractional reserve banking.

Having said that in the hypothetical economy private banks are not allowed, what happens if they ARE allowed? Well fractional reserve banking tends to reduce interest rates and for reasons set out by Joseph Huber in his work “Creating New Money”. See passage starting “Allowing banks to create new money…”


Conclusion.

In order to use interest rates to adjust demand, interest rates first have to be artificially raised, which is a flaw in the whole interest rate adjusting idea. However there are other factors which interfere or may interfere with the rate of interest, in particular fractional reserve banking and government borrowing. As to what the overall or net effect of all those factors is, well that’s hard to say.

What’s the right amount of government debt?

According to Chris Giles writing in the Financial Times a few days ago, “Economics cannot tell you what the right level of government debt is..”. Well Modern Monetary Theory (MMT) can. I’ll explain.
 
MMT (and indeed Positive Money) advocate that in a recession, government should simply create new money and spend it, and/or cut taxes. And it should carry on doing that until the recession has ended.

One reason that policy will eventually cure a recession is that a deficit increases the so called “national debt”, and that debt is an ASSET as viewed by the private sector (which holds the debt). And the more paper assets of that sort that the private sector holds, the more it will spend. Thus (roll of drums) the “right level of government debt” is the level that induces the private sector to spend at a rate that brings full employment (aka brings the end of a recession). And that right level is brought about by the latter policy - or to be more accurate, under the latter policy, the debt will always be moving towards the right level.

As to what rate of interest government ought to pay on that debt, that (as MMTers keep pointing out) is entirely under the control of government – at least it is in a country which issues its own currency. At the extreme, government can perfectly well print money and buy back the entire debt, in which case government would be paying zero interest on the so called “debt”. In fact the debt would turn into cash. Indeed we’ve been doing pretty much just that for the last five years under the guise of QE. And as for the idea that that money printing causes inflation, well, where’s the inflation that QE was supposed to cause when it was first mooted? Nowhere to be seen.

And a zero debt regime is not such a daft idea: Milton Friedman and Warren Mosler advocated the idea. An alternative is an ultra-low interest rate debt (e.g. the 0.5% or so that they have in Japan). The merit of that is that it’s not so easy for the private sector to spend bonds as it is to spend cash, thus the chance of a sudden spike in spending with a consequent rise in inflation is reduced.

Having said that QE has not caused inflation so far, that’s not to say a large scale and continuous QE program it MIGHT NOT do so. But if that happens, there are a number of deflationary countermeasures government can take. 1, raise taxes. 2, cut public spending. 3, raise interest rates.

As regards raising interest rates, it would not be possible to do that via conventional means, i.e. keeping commercial banks short of reserves (aka base money). Reason is there’d be too much base money (i.e. reserves) sloshing around. However, the central bank can always pay interest on reserves, or raise banks’ minimum reserve ratio (while paying no interest on such reserves). The latter strategy seems to be much more common in China than in the West.

Base money is not a liability of the state or the central bank.

Central bank (CB) created money, or “base money” as it is often called appears as a liability on CB balance sheets. But is that money really a liability?

Well it certainly isn't a liability just because it says so on Bank of England £10 notes: those notes say that the BoE “promises to pay the bearer on demand the sum of £10” – presumably in gold. Well you’ll get sweet nothing, and certainly no gold, if you turn up at the BoE demanding “payment” of £10 in respect of your £10 note. So to that extent, base money most certainly is not a liability of the BoE.

Against that, the argument has been made that base money is a liability of the CB in that when government demands $X off you by way of tax, you can pay by using some of that base money. And that, so the argument goes, is a case of one liability cancelling out an equal and opposite one.

Well the first problem there is that tax is not a debt owed to a CB: as just intimated, it’s owed go GOVERNMENT. But let’s get round that one by assuming CBs are an arm of the state, thus when settling a tax debt of $X, a liability of the state (i.e. base money) is being used to cancel out an equal and opposite liability.

Now there’s something very fishy about that argument, namely that the alleged “liability” characteristic of base money does not come into being UNTIL the tax liability comes into being. To illustrate, if you have a stock of base money and you owe no tax and never will do (perhaps because you’re on a relatively low income), then in what sense is your stock of base money a liability of the state? Absolutely none whatever!

Put another way, if entity Y has a $Z liability (in the normal sense of the word liability), it very definitely owes $Z right now or at some point in the future: it’s not a case of the liability POSSIBLY arising at some point in the future. If I “might” or “might possibly” owe someone $Z at some point in the future, that just isn't a liability. I might get caught exceeding the speed limit in my car next week, and then owe the authorities some money by way of a fine. But right now, I just don’t have a “speed limit violation” liability.

Let’s illustrate that point another way. Suppose I give you a bag of gold coins as a Christmas present. Are those gold coins any sort of liability of mine? Of course not!

Now let’s suppose that for some reason in the future you become indebted to me. You can if you so choose, use some of those gold coins to pay me. And if I accept them, then that wipes out your debt to me. Or you can choose to pay in some other way.

But the point is those gold coins are in no way any sort of liability of mine.

Exactly the same applies to base money: that money is just one way of settling a tax liability, but it’s not the only way. Certainly in the UK, the tax authorities will accept other methods of payment: in fact they’ll accept almost anything – jewellery, land, a house, and indeed, gold coins.

And the fact that the tax authorities subsequently sell the latter jewellery etc for base money is completely irrelevant: the important point is that the tax liability is extinguished at the point where the jewellery etc is handed over to the tax authorities.

If those working for the tax authorities subsequently misappropriate the jewellery and wear it in the office every day, that’s nothing to do with the original owner of the jewellery.

Conclusion: base money is not a liability of the state.

Dear brainless Tories, right wing journalists, etc.

You may have noticed (unless you’re TOTALLY brainless) that the whole deficit and debt reduction idea, first promoted by George Osborne when he came to power, has now become a farce. Osborne himself initially said he intended running a surplus in just a few years. He then realised that was impossible and pushed the eventual date of the surplus into the future by about five years. And now the new UK finance minister, Phillip Hammond, has abandoned the idea altogether.

So if you voted Tory on the basis of Tory promises about “good house-keeping”, “balancing the budget”, “living within our means” etc, then you’ve been had, good and proper. Even more galling for you is the fact that I, along with thousands of others saw what was happening and knew you were being had. We tried to warn you, but you wouldn’t listen.

This is almost as big a joke as David Cameron’s promise seven or so years ago to cut immigration to the tens of thousands. If you believed that, you were had there as well. But rather than rub too much salt into the wound, I want to be more constructive: point you to a group of people who have known for decades that having ANY SPECIFIC TARGET for the budget deficit (or surplus) is nonsense.

That group of people are advocates of “Modern Monetary Theory”. Their ideas are actually very similar to Keynes’s ideas. The basics of MMT are as follows.

1. Given excess unemployment, the state should spend more than it receives in tax. That extra spending will employ more people. Alternatively, and instead of spending more, the state can run a deficit by cutting tax. The decision as to what mix of those two options to go for is of course POLITICAL.

2. Contrary to popular belief, a deficit does not necessarily increase the national debt. That is, instead of funding a deficit via borrowing, it can be funded simply by printing money, as indeed Keynes pointed out. Personally I prefer the “print” option (reasons are below).

3. Assuming the borrow option is chosen, does that mean the debt might reach far too high a level? The answer is “no”, and the reason is that deficits and debts are self-limiting. That’s because national debt is an ASSET as viewed by those holding it (i.e households, private banks, insurance companies, etc). And the more of that stock of paper assets that the private sector holds, the more it will spend, all else equal. Thus as the debt increases a point must come where no more deficit and debt is needed.

4. If the “print” option is chosen, might that not cause inflation? Well no, and for the simple reason that inflation only arises when the economy is near capacity: i.e. when unemployment is about as low as it can go. I.e. if inflation does rear its ugly head, that’s a sign that the basic problem being addressed has been solved!

5. What happens if the borrow option is chosen and interest rates rise? Well first, there no IMMEDIATE effect on interest paid by government, and for the simple reason that interest on government debt / bonds are fixed when those bonds are first issued. I.e. the possibility of paying more interest only arises as those bonds mature.

But there is no obligation on government whatever to renew those bonds when they mature! That is, government can simply print money, pay off those whose bonds have matured, and tell creditors to go away. And if you think that will necessarily be inflationary, consider the fact that we’ve been printing money and paying off bond holders on an astronomic and unprecedented scale over the last five years under the guise of QE. But inflation is nowhere to be seen!

But that’s not to say inflation is not a POSSIBILITY. If inflation does get uppity, that’s easily dealt with, and by several different measures: i) raise interest rates, ii) raise banks’ minimum reserve requirements (something that China adjusts much more frequently than Western countries) and iii), raise taxes and/or cut public spending. (Incidentally, given the much larger stock of base money as a result of adopting the print option, the traditional method of raising interest rates would not work (keeping banks short of base money). But that problem is easily solved.)

6. In short, the deficit is very much like the accelerator on a car. If the car meets some headwind and slows down, that can be countered by stepping on the gas (increasing the deficit).

And as for the idea that it’s a good idea to have a PLAN for how big the deficit should be in a few years’ time, that’s nonsense because no one knows what headwinds, or tailwinds will hit the economy even two years down the road.

7. As for the choice between the borrow and print option, it’s frankly a bit difficult to see the point of borrowing because borrowing as such has a deflationary effect: the opposite of the intended effect. Indeed one leading MMTer (Warren Mosler) advocates zero government borrowing. Milton Friedman advocated the same.