Adair Turner’s flawed objections to full reserve banking.

Turner is former head of the UK’s Financial Services Authority and he recently published a book, “Between Debt and the Devil”. Geoff Tily (economist for the trade union movement in the UK) described Turner’s book as “conservative” which is a fair description, except that Turner is quite daring in the final (5th section) of the book where he tentatively advocates deficits funded by new base money.
 
That idea is not new (Keynes advocated it in the early 1930s), but by the standards of today’s ultra conservative central bankers, it’s daring / original.

In chapter 12 Turner sets out his reservations about full reserve banking. His three reservations are not too clever, to put it politely. I’ll run thru them sentence by sentence and paragraph by paragraph. I’ve put his words in green italics. The first paragraph of his first reservation reads:

“However there are three reasons for caution. The first and most fundamental is that there may be some positive benefits to private rather than public creation of purchasing power. Wicksell's confidence that private credit creation would be optimal provided central banks set interest rates appropriately turned out to be se¬riously misplaced. But it could still be true that not only debt contracts but also banks can play a useful role in mobilizing capital investment that would not otherwise occur. Maturity transforming banks enable long ¬term investments to be funded with short-term savings: that might seem like an illusion, a sort of confidence trick, but it may be a useful one. Inevitably it creates instability risks, but some instability may be the inevitable and reasonable price to pay to gain the benefits of investment mobilization and thus economic growth.”

First, let’s take his claim that “Maturity transforming banks enable long ¬term investments to be funded with short-term savings..”.

The reality is that we do not need “maturity transforming banks” in order to “enable long ¬term investments to be funded with short-term savings..”.

When savers buy into stock exchange shares or a unit trust (“mutual fund” in the US), they are free to sell their holding a week after buying it. I.e. that system enables “long term investments to be funded with short-term savings”.

Of course the stock exchange and unit trusts are not for everyone, plus in the latter scenario, savers are not GUARANTEED to get all their money back: they may make a loss (or they may make a profit). So maturity transforming (MT) banks seem to solve that problem: they seem offer something almost too good to be true for those who want to play safe. Indeed, as Turner puts it: “that might seem like an illusion, a sort of confidence trick, but it may be a useful one”.

Now when something seems too good to be true, it normally is, and indeed there is a catch in the above magic “something for nothing” MT. I’ve put more than one article on this blog in the past demolishing the basic idea behind MT, but I’ll run thru the arguments again.

The big attraction of MT is that it seems to enable us to fund investments with less saving. That is, where MT is banned, savers can fund investments only with term accounts or similar rather than with instant access accounts. So assuming a switch from a “MT allowed” to a “MT banned” scenario, and assuming people need some minimum stock of instant access money for day to day transactions, saving to fund loans or investments can only be achieved, on the face of it, by their going out to work, sweating their guts out and saving up more money which goes into term accounts.

Well the first flaw in the latter idea is that it’s just not compatible with the laws of physics, never mind the laws of economics. To illustrate, with a simple example from a Medieval village, if a farmer wants save in the form of building up a stock of potatoes to see him thru the Winter, he’ll have to go thru the painful process of producing more potatoes than he consumes during the Summer. Same goes for the entire village.

Now there is just no way that fiddling around with money or book-keeping entries gets round that brute physical fact, that is, extra potatoes cannot be produced by fiddling with book-keeping entries. In particular, changing the law relating to what type of bank account can fund investments can’t make any difference to the latter brute physical fact of life.

Returning to 2017 banking practice, if MT were banned, it would mean that (shock horror) loans and investments could no longer be funded via instant access accounts. So as suggested above, it might seem that people would have to save more so as to enable them to fund the amount of loans and investments that they wanted to. But saving is deflationary: that is, as Keynes pointed out in his famous “paradox of thrift” point, saved money is money not spent. And less spending raises unemployment.

But the reaction of any rational government to the latter unemployment would be to combat it with stimulus: e.g. by simply creating new money and running a deficit. The exact form the deficit took wouldn’t matter: let’s say it takes the form of tax cuts. So lo and behold everyone finds, as if by magic, that their take home pay has risen: there’s no need for them to work extra hours to come by the money they want to invest with a view to earning interest. That is, government in effect simply prints money and dishes it out to everyone.  Of course the latter helicopter drop type of stimulus is not the only possible way of implementing stimulus: for example there is standard fiscal stimulus combined with QE, a combination that has been popular over the last few years. But that comes to the same thing as a helicopter drop.

In short, banning MT has no effect on the ease with which savers can fund loans and investments and earn interest.

In contrast to the conventional story about MT set out in economics text books which is plain incompatible with the above mentioned brute physical reality, the latter “free extra money” story is entirely compatible with the above brute physical reality.

In short, Turner is talking nonsense when he says “but some instability may be the inevitable and reasonable price to pay to gain the benefits of investment mobilization..”. The reality is that “investment mobilization” can be achieved with none of the instability that comes from engaging in “too good to be true” tricks, so popular with banksters and the naïve authors of economics text books.

Turner continues…

“Moreover, any risks of private credit creation need to be balanced against the risks that would arise if we instead relied entirely, as the Chi¬cago Plan proposed, on fiat money creation to increase nominal demand. For if we allow governments to run money financed fiscal deficits, there is a danger that they will do so in excess or will allocate the spending power inefficiently for short-term political advantage.”

A danger governments will do so in excess? I.e. a danger they will implement too much stimulus? Well is that danger entirely absent from the existing system, or something? The very idea is a joke.

Certainly in the case of a non-independent central bank (e.g. the Bank of England prior to Gordon Brown giving it independence), politicians were free to give the economy an irresponsibly large amount of stimulus “for short term political advantage”. The evidence is that politicians do actually fall for that temptation TO SOME EXTENT, but that normally they don’t abuse that power too much. (The obvious exceptions being the Weimar period in Germany and Robert Mugabe.)

In fact Turner is insulting the intelligence of full reserve advocates if he thinks they have not thought of the possible need to keep politicians away from the printing press. If Turner had really got to grips with Positive Money’s literature he would have found that PM (and indeed other advocates of full reserve) advocate that decisions on the size of stimulus packages should be taken by some sort of committee of economists, which could perfectly well the be existing Monetary Policy Committee at the BoE. In short, systems for keeping politicians away from printing presses under full reserve can be almost identical to the equivalent systems under existing arrangements.

Turner’s point there is well and truly in check mate. Next Turner says:

“One of this book's messages is that we must not assume private credit creation is perfect nor treat fiat money creation as taboo, but neither should we iconize fiat money and demonize private credit. We face a choice of dangers, and the best policy is unlikely to lie at either extreme.”

Well that’s so vague it was hardly worth printing. As for the later “dangers”, I’ve hopefully dealt with those in the paragraphs above and below.

 
Turner's second basic objection to full reserve.

That starts as follows.

“Second, we must certainly be clear that 100% reserve banking will not be sufficient to solve the problem of excessive private credit creation.”

True: it’s not a 100% perfect solution, but nor is the existing bank system, even after the alleged improvements brought about by Vickers, Dodd-Frank and so on. But interest rates are higher under full reserve, as the Vickers commission suggested, so that at least does something for curbing “excess credit creation”.

Next, Turner says:

 “A modern economy needs some private debt contracts both to support the mobilization of capital investment and to lubricate the exchange of existing real estate between and within generations. Proponents of 100% reserve banking argue that they can be provided outside the banking system, in ways that do not involve new money and purchasing power creation. But near-money equivalents and new credit and purchasing power can be created outside banks. If promissory notes are believed to be low risk, they can be used as a money equivalent; and as Chapter 6 describes, the development of shadow banking illustrates the remark¬able ability of innovative financial systems to replicate banklike maturity transformation and thus the creation of near-money equivalents outside the formal banking system. The challenge of constraining credit and money creation would not be wholly resolved by requiring the formal banking sector to hold 100% reserves.”

Well Turner has some sort of point there, but for the large majority of day to day transactions, buying houses or cars, or small and medium size firms setting trade debts, there is only one form of money: what might be called bog standard high street bank money. I.e. when paying for a house or car or doing the weekly shopping at the supermarket, or when a restaurant settles up with the firms that supply it with food, £10 notes are accepted as money, as are cheques drawn on Barclays or Lloyds bank. “Promisory notes” just don’t get a look in.


Turners third objection.

This is essentially that two individuals, Jaromir Benes and Michael Kumhof, advocate a massive debt jubilee as part of the process of introducing full reserve, and that such a debt jubilee is highly questionable. Well Turner is right there, only I’d put it more strongly: something like Benes and Kumhof are clueless. That is B&K seem to be under the illusion that implementing full reserve cannot be done without a massive debt jubilee. I pointed to that mistake by B&K long ago on this blog.

No other advocates of full reserve want to do that, as Turner presumably knows, since he is clearly acquainted with those “other advocates”: i.e. Milton Friedman, Lawrence Kotlikoff, Positive Money and so on.

Put another way, debt jubilees may well have merits, but the pros and cons of debt jubilees are entirely separate from arguments for and against full reserve. In short, Turner’s third objection to full reserve falls flat on its face, as do his first two objections.

Two more NAIRU bashers try their luck with varying degrees of intellectual dishonesty.

One is Lars Syll whose points I answered in the comments after the article. The second is Eric Lonergan.

It’s now about 24 hours since EL's article appeared. He seems to have found time to publish one complimentary comment after his article, plus he has found time to re-tweet a couple of complimentary tweets, but strangely, has not found time to publish two critical comments I left yesterday. I’m sure there is a good explanation for this and that he is not tilting the playing field in his favour (ho ho).

Incidentally one of my comments criticised EL’s article, while the second criticised the above mentioned complimentary comment (made by “Ramanan” - details below).

As I noted a few days ago, it looks like NAIRU bashers don’t like being criticised.

Of course EL may eventually get round to publishing critical comments. But to a significant extent that knobbles the critical comments: people are understandably more interested in current ongoing debates that debates that are days or weeks old.

Anyway, details of EL’s article and my responses are thus.

He devotes a rather large number of words to setting out an economy which is a fair enough depiction of the real world: imperfect competition and so on. He then says.

“What happens in the economy that I am describing when unemployment falls to extremely low levels is relatively unpredictable, but not particularly harmful nor requiring any policy response. I am happy to let the system sort it out. Labour shortages may take time to be addressed – there may be a need for more training, there may be a need for more migration, there may be need for firms to substitute capital for labour. I don’t mind – the market system can sort that out, and smart policy-makers can facilitate it with micro-policies.”


My answer that was thus (in green italics).

“Re more training and education, people already spend about a quarter of their lives in education and training. Clearly if everyone stayed in education / training till they were 30 or 40, that would lower NAIRU. I doubt it would make economic sense.

Moreover, as Eric rightly points out, skill shortages take time to deal with. But by the time people have finished relevant “training” (one year, two years on average?) an entirely new set of skill shortages will have arisen. We do not live in a static world. So training is not a panacea: it certainly does not dent the basic NAIRU concept.

Re immigration, obviously allowing immigration as compared to a total ban on immigration will lower NAIRU. But the above mentioned problem is still there. Dealing with shortages takes time, and by the time one set of skill shortages have been addressed by immigration, another set will have arisen.

Re replacing labour with capital, employers ALREADY invest what they think is the cost minimising amount of capital equipment. Thus more capital investment would RAISE costs, not cut them. I.e. far from alleviating inflation, it would exacerbate the problem.

NAIRU survives Eric’s criticisms far as I’m concerned."


Ramanan’s comment.

Ramanan, as you’ll see if you look at EL’s site, claims that the NAIRU idea might dissuade governments from boosting demand by enough to get near the 2% target, hence NAIRU causes an unnecessary amount of unemployment.

Well the simple and glaring flaw in that argument (as I spelled out in my comment) is that inflation, at least in the UK, has averaged significantly above 2% over the last 70 years or so!

The fact that monetary policy increases inequality is not an argument against monetary policy.

The above is a popular myth which Positive Money seems to have fallen for. See their tweet below. Indeed the myth can be put in more general terms: the fact that ANY policy or policy change increases inequality is not an argument against that policy or policy change.

Let's see how this transpires. Follow along now with the @PositiveMoneyUK team #QE URL: https://t.co/0Q0KZTxFbt pic.twitter.com/DHi7zOlIVk

— Positive Money LVRPL (@PosiMoney_LVRPL) September 15, 2016

Reason is that (as explained by the Italian economist and philosopher, Pareto) the only really important question is whether a policy increases GDP (within environment constraints of course). If it does, and specific groups are adversely affected, that’s not a problem. All you have to do is tax those who benefit from the change, and pass the proceeds on to the losers, as Pareto explained. As a result it is possible to arrange for everyone to be better off. Nothing wrong with that, is there?

In the particular case of QE, which Pos Money particularly objects to, there is actually an argument for taking QE much further: that is, there is an argument for turning the entire national debt into base money. Milton Friedman and Warren Mosler argued for that policy.

If Friedman and Mosler are right, and GDP is actually increased by that move, then the fact that QE increases inequalities is irrelevant for the above reasons.

Having said that, I still support Pos Money because I think they are right on a very fundamental issue: the full versus fractional reserve banking argument.

The Financial Times fake newspaper.

The recent flurry of concern by the elite, in the form of politicians and editors of respectable broadsheet newspapers, about so called “fake news” is backfiring on them big time. Reason is of course, that as anyone with half a brain has known for years, politicians and journalists are among the worst liars and promoters of “fake news” on the face of planet Earth, and always have been.

Oh hang on: did I say “concern” above?  Should have said “fake concern”.  Sorry about that.

My prize for fake news in today’s FT goes to Philip Stephens who, as is normal with the ignoramuses who write for broadsheet newspapers, accuses the so called “far right” of xenophobia (hatred of foreigners).

Now the problem with the accusation “xenophobia”, as I explain in more detail here, is that those concerned about immigration do not necessarily “hate” foreigners: it is perfectly possible they are concerned simply to see their country’s culture, identity and way of life preserved, rather than have the latter smothered by some alien and indeed pretty obviously backward culture like Islam. Indeed, in my experience that is indeed what motivates those concerned about immigration.

Thus anyone with manners would abstain from the “xenophobia” accusation unless the accusation can be backed by decent evidence.  However, out of the hundreds of instances where the accusation has been made, I have never, so much as once, seen the beginnings of an attempt to provide evidence.

Anyway, since Philip Stephens, like other broadsheet journalists apparently thinks it’s clever to kick other people in the balls, I thought I’d respond by making some unfounded accusations against Philip Stephens in the comments after the article: or to put it more bluntly, kick him in the balls.

Surprise, surprise: the comment was censored!

Lefties and respectable centre ground folk like censorship because on a level playing field they'd get decimated.

Academics and free speech.

Yesterday I made what might seem an outrageous suggestion, namely that “…academics are none too keen on free speech.” See 3rd para here.

Well what d’yer know? About 24 hours later, i.e. today, I put a comment after this article by Bill Mitchell (Australian economics prof) and he cuts out the final two sentences and a link  –  deliberately.

So were the two sentences outrageously sexist, racist or offensive? Nope. All they did basically was to refer to a paper jointly authored by the New Economics Foundation, Positive Money and Prof Richard Werner: their joint submission to the UK's Independent Commission on Banking.

I know very well why Bill cut those sentences: he doesn’t see eye to eye with Positive Money. Well fair enough: economists are always disagreeing with each other. That’s part of the attraction of the subject.

But that’s not much of an excuse for cutting bits out of comments after an article you’ve written. Assuming you allow comments after an article, the point of doing so is to invite critical comments as well as complimentary ones.

Anyway, if you’re interested in the missing couple of sentences and link, here they are (in green italics):

See the paper jointly authored by Positive Money, the New Economics Foundation and Prof Richard Werner (link below). So either Frank has made a blunder or Bill is quoting him out of context.

http://b.3cdn.net/nefoundation/3a4f0c195967cb202b_p2m6beqpy.pdf

Having said some academics are not keen in free speech, obviously that’s only a tendency. Simon Wren-Lewis publishes comments that make offensive comments about SW-L. I admire that. Plus (and at a more subtle level) his motives are probably not entirely altruistic: insults normally make the insulter look stupid, not the insultee.

And finally please note I don’t practice what I preach. I often make insulting remarks. I’m probably cutting my nose to spite my face.

Don’t be taken in by this NAIRU bashing site of Lars Syll’s.

It’s here.

It might seem from the comments that the NAIRU bashers are winning the argument. That’s in part because (speaking as a NAIRU supporter) it looks to me like pro-NAIRU comments are being supressed.  Certainly half of mine are not being published.

But no big surprises there: academics are none too keen on free speech. Or maybe it’s a technical problem. Anyway…

The first, and not too clever comment (by “antireifier”) reads       “Totally agree. Central banks claim that they have buried NAIRU but I do not believe them.” The answer I would give to that if I was able to publish it is thus.

That’s nonsense: the biggest central bank in the World, the Fed, has a chart which shows their NAIRU estimate over the years. See:

https://fred.stlouisfed.org/series/NROU

And I’m not suggesting the latter chart is a good one. There is much wrong with it, and I’ve told the Fed as much.

Next, there’s a NAIRU basher by the name of “Jerry Brown” who says:

“Ralph, if you want to believe in a number that is not quantifiable then go right ahead. That’s fairly harmless. Just don’t advocate policy based on this belief. That can do real harm.” Again, my answer to that if I was allowed to publish it is thus.

The claim that NAIRU is not quantifiable is ridiculous: it most definitely is quantifiable. It’s just that it cannot be quantified with a huge amount of accuracy. I.e. it pretty obviously lies somewhere in the 3% to 8% unemployed range.

And the point is ridiculous for a second reason. Governments just HAVE TO make a stab at guessing NAIRU because they just HAVE TO take the decision as to whether more stimulus is a good idea or not. Thus to say that NAIRU cannot be quantified is just pissing into the wind.

If you’re sailing a ship towards an area where you know there are rocks, but you do not have an accurate idea where the rocks are, that is not a reason to abstain from making the best educated guess you can as to where the rocks are!!!

Unfortunately the latter point will be way too subtle for NAIRU bashers.

Random charts XIV

The pink text that appears on some charts below has been added by me. It’s there to give more details about relevant charts.

The Fed’s odd ideas on NAIRU.

I’ve just suggested to the Fed that they make some changes to one of their charts. Reasons are thus.

As a result of a discussion in the comments after this article about NAIRU on Mike Norman’s site, I came across this Fed chart which purports to show how NAIRU has changed over time. Strikes me the chart is misleading because it implies NAIRU can be estimated with the same accuracy as some other items that appear on Fed charts, like inflation, the money supply, numbers unemployed and so on.

So I suggested they put a “health warning” on the chart that basically makes the latter point, i.e. that the chart simply shows the Fed’s best guess as to what NAIRU is, and that the guess could easily be about 20 to 40% out.

Also, the Fed’s definition of NAIRU is very odd (see left hand side just under the chart). It goes thus. “The natural rate of unemployment (NAIRU) is the rate of unemployment arising from all sources except fluctuations in aggregate demand.”

That is a hundred miles from conventional definitions.

Ann Pettifor’s bizarre ideas on banking.

Ann Pettifor has just published a book “The Production of Money”.

To help launch the book she did a talk at the LSE recently which contained a fair amount of nonsense, and which I reviewed recently here and here. Now for the book.

I’ll concentrate on chapter 6, which deals with bank and monetary reform, since that is what interests me. However, there are a couple of passages from earlier in the book which are a laugh and are as follows.

Under the heading “The good news: savings are not needed for investments” (Ch 2) the first sentence reads “The miracle of a developed monetary economy is this: savings are not necessary to fund purchases or investment.”

Well that’s good news. So if the country wants £10bn of new infrastructure or housing there is no need for anyone to cut back on cars, booze, holidays etc? As Pettifor rightly says this is indeed a “miracle” (ho ho).

And under the heading “The value of a sound banking system” she says that thanks to private banks, “…there need never be insufficient money to tackle, for example, energy insecurity and climate change. There need never be a shortage of money to solve the great scourges of humanity: poverty, disease and inequality..”.

What – so private banks are great philanthropic organisations devoted to cutting inequality and curing disease. Well silly me: I thought it was mainly the social security system (nothing to do with private banks) that dealt with inequality. And my silliness goes even further: I always thought that in the UK it was primarily the National Health Service that dealt with “disease”. But clearly I’m wrong: apparently it’s those criminal bankers on Wall Street and the City of London who we have to thank. This is just hilarious.


Chapter 6.

On p.95 she says, “Monetary reform campaigners advocate adoption of a particular variety of ‘neoclassical economics’ that proved backward looking in the 1930s and disastrous in the 1970s and 1980s.”

Well it’s hard to define “neoclassical economics” in one sentence.  Look up various explanations of the term in the internet if you’re interested. But roughly speaking it consists of a belief in free markets. But monetary reformers advocate a much bigger role for money creation by the state (as indeed Pettifor herself explains) and a suppression of what private banks, left to their own devices, would do in a totally free market. So Pettifor is out by a hundred and eighty degrees there!

Moreover Takahashi Korekiyo, Japan’s finance minister in the early 1930s used sovereign money type stimulus very successfully to help get Japan out of the 1930s recession. What’s “backward looking” about that?

 
The campaign’s aims.

Under the above heading, Pettifor then explains (correctly) that one of the basic objective of what she calls “monetary reformers” is to ban private money creation and instead have just the state issue money. There are (unfortunately) several names for state or central bank issued money. Economists normally refer to “base money”. I’ll use the phrase “sovereign money” since Pettifor uses that phrase (as does Positive Money).

One of the first objections she makes to banning privately created money is to argue that the creation of and distribution of, and/or spending of sovereign money has no effect on demand!

So if the UK government printed and dished out £10,000 worth of £10 notes to every household in the country there’d be no effect? You really have to be barking mad to believe that. Indeed there is plenty of empirical evidence supporting the idea that given a windfall in the form of dollops of sovereign money (e.g. in the form of tax cuts) or in any other form, people spend a significant proportion of that money fairly quickly (see endnote for two bits of evidence).

But that’s not to say that controlling the quantity of money should be the ONLY WAY of controlling demand, or that it’s a very precise method of doing so. However monetary reformers do not (contrary to the claims of Pettifor) say that controlling the quantity of money SHOULD BE the only way of controlling demand.

As Adair Turner (a supporter of monetary reform) explained in a very good talk in Dublin a year ago, which I reviewed here, the INITIAL effect of the state creating new money and spending it (and/or cutting taxes) is a FISCAL EFFECT. E.g. if new money is spent on schools, the immediate effect is that more teachers are employed, and more is spent on school books and so on.

Thus if there were NO MONETARY EFFECT AT ALL, monetary reformers’ preferred method of controlling demand would still work!


What did Keynes mean?

Having criticised Pettifor’s claim that printing and spending extra sovereign money has no effect, it should be said that she quotes a passage from Keynes which seems to support her case. I’ll actually deal with that quote at the end below because she repeats the quote at the end of her Chapter 6.


Loans create deposits.

Next, Pettifor accuses Henry Simons and Irving Fisher (two economists who were active mainly in the 1920s and 30s) of being unaware of the fact that loans create deposits. As she puts it (p.100), “Second, Simons and Fisher assumed that banks singlehandedly created their own funds. In this view, there is no room for borrowers…”.

Well if Simons and Fisher were that pig ignorant on the basics of money and banks I doubt they’d ever have achieved the fame they did.  In fact after five minutes of rummaging around on the internet I found two quotes from Fisher which clearly indicate he was well aware that loans create deposits. In his book “100% Money and the Public Debt” he says “The essence of the 100% plan is to make money independent of loans; that is, to divorce the process of creating and destroying money from the business of banking.”

Well that pretty obviously implies that in Fisher’s view, under the existing system, money IS DEPENDENT on loans, doesn’t it? And again, Fisher says, “Thus our national circulating medium is now at the mercy of loan transactions of banks.”

No doubt I could spend another five or ten minutes digging up further quotes.


Usurious rates.

Next, under the heading “Usurious rates” Pettifor accuses monetary reformers of being indifferent to interest rates and not being concerned about the high rates paid by some borrowers.

Well there’s a very good reason for leaving interest rates (i.e. the price of borrowed money) to market forces. It’s the same as the reason why leaving the price of steel, brass bolts and ten million other products to market forces is not a bad idea (unless it can be specifically shown that the market gets something badly wrong). The reason is that, as explained in the economics text books, there are good reasons for thinking GDP is maximised where prices are set by the market.

Pettifor then points to current low central bank base rates and claims that other rates are “very high”.  High compared to what? She doesn’t explain.

Mortgages account for a substantial proportion of all loans, and the rate for 15 year mortgages in the UK is now around 3% as compared to about 8% in the early 1990s. (See the chart half way down here.) On that basis, the rate of interest on mortgages is currently “low” rather than “high”.

Moreover, if Pettifor has some magic way of slashing the rate paid by those with mortgages and by other borrowers (apart from letting private banks print and lend out counterfeit money, which is effectively what they do) then I’m sure we’re all ears. Unfortunately she is silent on that point, apart from making the decidedly uninspiring claim that “the system” should be “reformed and managed to keep interest rates across the spectrum of lending low” (p.105).

The reality, of course, is that running a bank does involve costs, like bad debts, staff salaries, purchasing computers and other equipment. Thus if banks are to be commercially viable, they have to charge more to borrowers then they themselves pay to depositors, shareholders, etc. Of course some banks make big profits. But then some make losses: e.g. Northern Rock. And last time I looked, J.P.Morgan’s return on capital, was pathetic.


Private deficits.

Next, the first sentence under the heading “Private deficits cannot finance economic activity” reads, “The system of fractional reserve banking so enamoured of monetary reformers, implies that bankers would only be allowed to lend the savings or deposits lodged in their vaults by savers or depositors.”

Fractional reserve enamoured of monetary reformers? What on Earth is Pettifor on about? The existing or “fractional reserve” bank  system is exactly what monetary reformers oppose!!!!!!!

Later, under the same heading, she says, “However, the principle of full-reserve banking would prevail on the whole with very little certainty as to whether members of the Money Creation Committee (MCC) would be willing to “create new money” for the banking system.

Well quite right: why should the MCC have any special regard for those poor downtrodden criminal organisations commonly known as “banks”? Indeed, why should it have any special regard for any particular industry?

The job of the MCC under full reserve banking is to make sure the ECONOMY AS A WHOLE has enough money to give us full employment. Whether there is an expansion or contraction in bank activity (lending and borrowing) over a particular year or decade is unimportant.

Moreover, UK bank assets and liabilities have expanded TEN FOLD relative to GDP since the 1970s. How much of that extra activity is of any real use?  Adair Turner made a good point when he said that a significant proportion of bank activity is “socially useless”.

Pettifor then says, “The Independent Commission on Banking (ICB) argued that this (i.e. full reserve banking) would undoubtedly increase rates of interest on loans, but would also curtail the lending capacity of the UK banking system. It would result in unprecedented contraction of economic activity – employment, investment and spending – to levels of existing, and invariably scarce, savings….”.

Well it’s blindingly obvious that ALL ELSE EQUAL full reserve would “contract economic activity”. Full reserve restricts what banks can do, relative to what they are allowed to do under the existing system (sometimes called “fractional reserve”). All else equal, a contraction of the illegal drugs industry or the prostitution industry would contract economic activity. Is that an argument against tighter regulation of the drug trade or prostitution?

However other things are not equal (gasps of amazement). That is, the tightening up on bank activities that takes place under full reserve is compensated for by creating and printing whatever amount of sovereign money is needed to keep the economy at capacity.  In short, there is less lending and borrowing based activity (i.e. debts decline) while there is a rise in non-borrowing based activity.


The crucial question.

Thus the CRUCIAL QUESTION, which seems to be beyond the grasp of Pettifor and the ICB, is this: what’s the optimum or GDP maximising mix of borrowing based and non-borrowing based activity?  Or put another way, what rate of interest gives us that optimum?

Well as Pettifor rightly says, under full reserve, interest rates are left to market forces. And as already pointed out, unless there is what economists call “market failure” (i.e. unless it can be shown that supply and demand are not working properly) then the normal assumption in economics is that GDP is maximised where market forces prevail.

Thus the conclusion is that far from GDP contracting under full reserve, as suggested by Pettifor (and the ICB), it would actually expand.


First time buyers.

One obvious and naïve criticism of the argument just above is that is that higher interest rates would hit less well off first time house buyers and other low income house buyers. Well the answer to that is “Pareto”. For the benefit of non-economists (and Ann Pettifor) I’ll explain.

Pareto was an Italian philosopher and economist who made the following point. To simplify at bit, he said the important objective in economics is to maximise GDP (within environmental constraints of course). But if any specific groups are adversely affected by the attempt to maximise GDP, they can always be compensated by taxing those who GAIN from the process, and giving the proceeds to the former group. As a result, everyone is better off.

In fact we actually already have a host of measures for helping those who are less well off housing wise. Thus any interest rate rises stemming from full reserve would probably not even require the implementation of any new measures: i.e. it would simply be a case of enhancing existing measures.


Should or can money be debt free?

Under the above heading, Pettifor rightly points out that Positive Money makes much of the difference between private bank created money, which can correctly be described as “debt encumbered” and central bank created money can be described as “debt free”. Other advocates of full reserve tend not to make so much of that “debt” distinction.

The question as to whether sovereign money really is debt free has been extensively debated in the literature. What is clear is that while sovereign money can be said to be a debt owed by the state to individuals holding that money, at the same time the state has the right to confiscate any amount of that money that it chooses from holders of that money via taxation. So it’s a strange sort of debt, isn't it?

It’s like me getting a mortgage from my bank, but at the same time having the right to raid the bank and grab wads of £10 notes with a view to paying off the mortgage! In that scenario, the so called debt I owe to the bank is clearly not a debt in the normal sense of the word debt.

And not only that, but the only thing the state undertakes to give its creditors when it’s time to “pay its debts” is sovereign money, which the state can print in any quantity it likes whenever it likes.  Again, that’s a bit like me being able to pay off my mortgage with £10 notes printed on my desktop printer.

To summarise, there is certainly a difference in the extent to which privately created money and sovereign money really are debts. To that extent, Positive Money is right. But on the other the other hand THE EXACT EXTENT to which sovereign money is debt free is very debatable and semantic.


Gift economies?

But Pettifor’s take on all this is plain bizarre. She says, “There is no such thing as debt-free money, or if there is, it is very likely something quite different – a grant or a gift. Now there is no real reason why society should not aspire to building a gift-based economy.”

Well what’s all this about a “gift based economy”? None of the advocates or sympathisers with full reserve (Milton Friedman, Lawrence Kotlikoff, Merton Miller, etc) are aware that any sort of “gift based economy” is involved as a result of full reserve. Far as they’re concerned, industry and commerce carry on much as before: on a COMMERCIAL basis, not on any sort of altruistic  or “gift” basis.

If Pettifor wants to get her bizarre “gift” idea across, she needs to do vastly more explaining that appears in her book far as I can see, though admittedly I haven’t read every page. However, when the Kindle version comes out I’ll do a quick spot of word searching for “gift” to see if she does indeed provide a decent explanation, and if she does, I’ll humbly withdraw the above criticism. 


The ‘People’s QE’ proposals weaken democratic authority.

Under the above heading, Pettifor then claims that having a committee of economists (e.g. at the central bank) determine how much money is created “weakens democratic authority”: that is, if such a committee not only decides how much money to create, BUT ALSO decides HOW it is spent (a job for democratically elected politicians) then clearly she has a point. “Democratic authority” is indeed “weakened”.

But that is not a mistake Positive Money makes! Though there may well be others who make that mistake.

If Ann Pettifor had actually read and understood PM’s proposals she’d discover that there is a 100% clear distinction between the decision as to how much money to create (done by a committee of economists) and in contrast, strictly political decisions, like what proportion of GDP is allocated to public spending, and how that is split between health, education and so on: those decisions being taken by democratically elected politicians. 

Indeed, it is not just Positive Money who make that distinction. The joint submission to the ICB made by PM, the New Economics Foundation and Prof Richard Werner makes the latter distinction as well. (The title of that work is “Towards a twenty-first century century banking and monetary system”)

I know for a fact that the latter point has been explained to Pettifor in comments after her various articles.  Presumably she is too arrogant or stupid to absorb said explanations.


Donald Trump and helicopter money…

Under the above heading, Pettifor claims a weakness of full reserve is that it involves inflation targeting. Complete nonsense!

If the money creation committee, or indeed the economics profession as a whole decide to target the unemployment rate or thought that astrology should be used to determine the amount of money created or stimulus in general, there’d be nothing to stop the money creation committee going for astrology (or tea leaf reading or crystal ball gazing or anything else you care to mention).

Moreover, it’s a bit strange to say that inflation targeting is a weakness in full reserve when inflation targeting is used under the existing system! I.e. if inflation targeting is a weakness in full reserve, then by the same token, it is a weakness in the existing system!


The Keynes quote.

As mentioned above, Pettifor does quote a passage from Keynes which seems to support her idea that the creation and spending of sovereign money is useless.

The passage is actually from a letter from Keynes to Roosevelt in 1933, and it is as follows.

“The other set of fallacies, of which I fear the influence , arises out of a crude economic doctrine commonly known as the Quantity Theory of Money. Rising output and rising incomes will suffer a set-back sooner or later if the quantity of money is rigidly fixed. Some people seem to infer from this that output and income can be raised by increasing the quantity of money. But this is like trying to get fat by buying a large belt. In the US today your belt is plenty big enough for your belly. It is a most misleading thing to stress the quantity of money, which is only a limiting factor, rather than the volume of expenditure, which is the operative factor”.

Now there is a big problem for Pettifor with that quote, namely that earlier in the letter (para 5), Keynes advocates amongt other things, public money creation! He actually says “public authority must be called in aid to create additional current incomes through the expenditure of borrowed or printed money.”

So is Keynes contradicting himself? Well it’s not entirely clear: he could certainly have worded his letter much better. The best explanation I can think of is that there is certainly one type of money, the expansion of which will not have any effect, and that’s commercial bank created money – very different stuff to CENTRAL bank created money. (The latter is a net asset as viewed by the private sector. The former is not.)

That is, commercial bank created money (i.e. the type of money which results from a commercial bank extending a loan) RESULTS FROM a desire to do business: it is not the CAUSE OF extra business or extra sales.

To illustrate, if someone gets a loan for £X to buy new car, the bank credits £X to the account of the borrower, and hey presto, £X of new money comes into existence. But it’s not the simple fact of creating that money that boosts car sales, or more generally, economic activity as a whole: it’s the fact of SPENDING the money that does the trick (as Keynes rightly says).

To summarise, it is clearly nonsense to claim that increasing the private sector’s stock of sovereign money (e.g. £10 notes) has no effect. Give anyone a wheelbarrow full of £10 notes, and they’re liable to spend some of it. In contrast, if a commercial bank were to grant millions of pounds worth of loans to a selection of people who had no desire for a bank loan, there’d be no effect on the real economy.  The latter “borrowers” would simply contact their bank and tell it to stop being silly.

I assume that’s the explanation for Keynes’s apparent self-contradiction.


Conclusion.

It would seem from Chapter 6 of Pettifor’s book that she has an exceptionally poor grasp of money and banking. Her book will do far more harm than good. However, she is a good public speaker, and that fools 90% of the plebs and the sheeple, as an successful politician will confirm.

___________

Endnote:

Two of the studies which confirm that when households receive windfalls, they spend a significant proportion fairly quickly:

1. “Did the 2008 Tax Rebates Stimulate Spending?”. NBER.
http://www.nber.org/digest/mar09/w14753.html

2. “Allocation of Windfall Income: A Case Study of a Retroactive Pay Increase to University Employees.” Margaret Rucker. Journal of Consumer Affairs.
 http://onlinelibrary.wiley.com/doi/10.1111/j.1745-6606.1984.tb00322.x/abstract

Adair Turner, Positive Money and MMT: great minds think alike.

This is a precis of a talk by Adair Turner in Dublin in April 2016, together with some comments by me (in green italics). Numbers below refer to the approximate times (in minutes after the start) where relevant points are made. Turner’s talk lasts 55 minutes, whereas this article is a 5 minute read.

Needless to say, I offer no guarantee that my summary is fair or accurate: if you want a totally accurate depiction of Turner’s ideas, listen to or read his own material.

______________

* First, Turner says something about the structure of the talk. The talk says a bit about why we are in the mess we are in, then the main part of the talk is devoted the ideas in part five of his recently published book “Between Debt and the Devil”, those ideas being an answer to the question: how do we organise stimulus better? And his answer is budget deficits funded by freshly created base money. (0-3.00)

* Bank lending in the advanced economies to the non-finance sector since the 1950s and 60s has expanded from around 60% of GDP to around 150%, and most of that lending has gone to real estate: essentially boosting the price of land. Plus that fact increases the effect of a well known feedback mechanism: banks lend to fund the purchase of land…that boosts the price of land, which makes land a better form of collateral….which increases the ability of land owners to borrow more, etc. (3-7).

* The debt created by the latter phenomenon, once created does not go away come a recession: it simply moves around, sometimes crossing national borders.(7-13.30)

* The conventional response to recessions is interest rate cuts, and if they don’t do the trick, QE and zero interest rates. But the two latter do not work very well, which has lead some people in high places to conclude that central banks and governments are out of ammunition. (13.30 – 19.30).

* In fact the authorities are never ever out of ammunition: they can simply print money, i.e. go for deficits funded by freshly created base money. And the latter idea has been advocated for decades by for example Milton Friedman, Bernanke and Henry Simons (in the 1930s). Plus the idea was successfully put into effect by the Japanese finance minister, Takahashi in the early 1930s, and very much earlier (as pointed out by Adam Smith) by one English colony on the North American continent, namely Pennsylvania.

Turner might also have mentioned Keynes. Indeed it is a measure of the ignorance of those in high places in the present century that an idea which is 80 years old (Simons, Keynes and Takahashi) is apparently new to said people in high places! Incidentally, Turner actually mentions Takahashi and Pennsylvania in a later part of the talk, but I mentioned them here because of their relevance. (19.30 – 32.30).

* Forward guidance and negative interest rates are defective tools. (32.30 – 34.00).

* The effect of money financed deficits is made more complicated by fractional reserve banks. In Friedman’s exposition of money financed deficits he simply assumed such banks did not exist.

Indeed Friedman positively argued against the existence of such banks, i.e. he argued for full reserve banking or “100% reserves” as he called it.

* Fractional reserve banks tend to amplify the effect of a money financed deficit, but that can be controlled, if need be, by raising the reserve requirements of commercial banks. (34.00 – 38.00).

* The obvious problem with money printing, namely that if politicians get near the printing press problems may arise,  can be controlled by having some sort of independent committee of economists, e.g. a central bank committee, decide how much money to print each month or year. (38.00 – 44.00).

Positive Money, the New Economics Foundation and Prof Richard Werner advocated that idea in their 2011 submission to the UK’s Independent Commission on Banking.
 
Also, the evidence seems to be that where politicians DO HAVE access to the printing press (i.e. where central banks are not independent) politicians do not abuse that power too badly, though Weimar and Mugabe are the obvious exceptions to that rule.

*The situation in Japan has become a joke, though there shouldn’t be any serious consequences from the joke. The joke is that the Japanese government keeps pretending (much like the UK government in recent years) that it will dispose of the deficit and turn that into a balanced budget or a surplus. However the reality is that it never will. What will happen is that Japanese debt will effectively be monetised.  (44.00 – 49.00).

In contrast, the situation in the EU is much more serious. Japan is racially and culturally homogeneous, whereas the EU faces large immigration flows from a culturally different areas. Plus money financed deficits are much easier to implement in the Japanese situation than in the EU where there are several different countries, liable to squabble with each other over who gets how much of the new money. (44.00 – end).

Hilarious. A comment of mine in the Financial Times was deleted because it “insulted” the relevant journalist.

The article concerned was about immigration and was entitled “Endless exodus: 3,000 years of fearing and depending on refugees.”

The article, as is normal with articles on immigration in broadsheet newspapers, accused all and sundry of “xenophobia”. Indeed the latter word appeared in bold type as part of a sub-heading at the top of the article.

Now there’s a big problem with accusing anyone of xenophobia (hatred or fear of foreigners) which is thus.

There are several possible motives for wanting immigration reduced. E.g. first, there is concern about overcrowding and inflated house prices. Second, there is the desire to see one’s own country’s culture, identity, way of life etc not overrun by another culture or group of people.

Items one and two just above do not necessarily involve “hatred” or “fear” of foreigners. Indeed, of the many members of so called “far right” parties I’ve met, I’ve never met any who clearly hate or fear foreigners: but they certainly DO WANT Muslims for example to stay where they are – in the Middle East etc, rather than come to Europe.

Indeed, it now seems that A LARGE MAJORITY of Europeans with a view on the matter now want a complete ban on Muslim migration to Europe, according to a recent survey by Chatham House (see their chart reproduced below - scroll half way down on their site). And that according to the numpties who write for broadsheet newspapers presumably means a majority of Europeans are “xenophobes”. (To be more exact, if you strip out the “don’t knows” from the chart below, those who want a ban on Muslim migration outnumber those who don’t by about two to one.)

So….if you’re going to make the nasty accusation against a group of people, namely that they “hate” or “fear” foreigners, there’s an onus on you to produce some very good evidence to back the accusation, isn't there? I wouldn’t accuse a broadsheet journalist of being a murderer or pedophile without some very good evidence. Would you?

But far from bothering with “evidence”, there have been literally HUNDREDS of articles in broadsheet newspapers over the last decade or more accusing various people of xenophobia without so much as the beginnings of an attempt to substantiate the charge. Indeed I have never ever seen an article which makes the slightest effort to prove the “xenophobia” charge. The conclusion is that the journalists who write for broadsheet newspapers are a bunch of

NASTY LITTLE IGNORANT THICK HEADED SHITS.

Now when dealing with nasty little ignorant thick headed shits or bullies, there’s it’s often a good idea to kick them in the balls as hard as they kick everyone else in the balls. Violence is probably all they understand.


Tibet.

But there’s another  hypocrisy which broadsheet journalists are guilty of as follows.

Tibetans are keen to preserve their culture, identity and way of life. But far from deploring that, broadsheet journalists and lefties in general go all dewey eyed about the wonders of Tibetans preserving their culture.

And that’s just the thousandth example of racism perpetrated by sanctimonous self-styled “anti-racists”: if you’ve got brown skin it’s OK to try to preserve your culture, but if you’ve got white skin it’s not.

Incidentally the fiendishly intellectual and well read blogger who goes by the name “Lord Keynes” recently highlighted the “Tibet hypocrisy”, and well done Lord Keynes, though frankly he’s a bit slow off the mark: members of the British National Party were pointing to the Tibet hypocrisy fifteen years ago.


My Financial Times comment.

Anyway, the comment of mine in the FT which was deleted more or less summed up the above points. Strangely, the comment was left in place for about 48 hours before being deleted, so most of those likely to read it would have read it. To that extent, I’m not too concerned about the deletion. Anyway, the comment, which certainly was laced with insults, was as follows.

“Good to see the foul mouthed Mark Mazower repeat the charge (in bold type at the top of the above article) namely that those who oppose mass immigration suffer from “xenophobia” (fear or hatred of foreigners). As is normal with the retards who write for broadsheet newspapers, he makes no attempt whatever to justify the charge. After all, opposition to mass migration could simply be down to a desire to preserve one’s own country’s culture, way of life, identity etc, rather than hatred of foreigners. Indeed, when Tibetans try to preserve THEIR culture and way of lift, the aforesaid retards go all dewey eyed (though I don’t expect said retards to have the brain to see the irony there).

Anyway, since the above mentioned retards seem to think unsubstantiated insults are clever, I wish to announce that all journalists writing for the FT and other broadsheet newspapers on immigration are foul mouthed, mentally retarded pedophiles. As for substantiating that insult, I just can’t be bothered. Anyway, I assume said retards will be impressed by my latter insult.”

More nonsense from Ann Pettifor.

I’ve just stumbled across more nonsense in AP’s talk the other day at the LSE. I should really have included this new material in a post I did a few days ago on this subject. But no harm done: as I said in that post, this is only a provisional look at her ideas. I’ll do a proper review when I get a copy of her book.

Anyway, the new passage I just stumbled across is as follows. (It starts at around 38.30 in this audio.)

“The sovereign money movement propose that we should abolish debt, strip banks of their powers to create currency in the words of Mary Mellor,  the sociologist,  and return to a debt free, gift base economy. This would effectively nationalise the money supply which would be expanded or contracted by a committee at the top of the world or a central bank,  so that new public money could be issued by new public money authorities, free of debt to meet public needs. Interest rates would be left to the will of the market.

I worry at the authoritarian implications of transferring such economic power to unaccountable bureaucrats at the central bank. But for the purposes of this discussion, debt free money is an oxymoron. There is no such thing a debt free money. Or if there is, it is very likely something quite different: a grant or a gift. Now there is no reason why society should not aspire to building a gift based economy, one in which everyone relies on others for what Mary Mellor calls “provisioning”: for clean air, works of art, or a smart phone. But today while we still enjoy the remnants of a gift bearing culture.  We have failed to build an entirely gift based economy.”

Let’s take that sentence by sentence.

“The sovereign money movement propose that we should abolish debt, strip banks of their powers to create currency in the words of Mary Mellor,  the sociologist,  and return to a debt free, gift base economy.”

“Abolish debt”??  God knows where AP gets that idea from. If she actually read Mary Mellor’s works or those of Positive Money (both advocates of a sovereign money system) AP would find that under such a system businesses and household carry on very much as they do now. Far from “abolishing debt”,  people would continue to get mortgages, though what advocates of sovereign money DO CLAIM is that under their system, debts would decline SOMEWHAT.

AP might also like to ponder the fact that at least four Nobel laureate economists advocate a sovereign money system, including Maurice Allais and Milton Friedman. And another economist what advocates sovereign money is Lawrence Kotlikoff.  Nowhere in the works of the latter will AP find anything about “abolishing debt” or converting to a “gift based” economy.

Incidentally, I do get the sense that Mary Mellor, who is fairly left wing, does actually want to implement a gift based economy (whatever that is).  However other advocates of sovereign money certainly do not, and even Mary Mellor keeps that aspiration well separate from sovereign money.

Next, let’s take this sentence: “I worry at the authoritarian implications of transferring such economic power to unaccountable bureaucrats at the central bank.”

Seems AP doesn’t understand how the EXISTING system works because very much the same powers are exercised by “unaccountable bureaucrats” in the shape of the Bank of England Monetary Policy Committee (shock horror).

To illustrate, the independent BoE has created VAST amounts of money over the last few years as a result of QE. As it happens, the BoE did consult with the then UK finance minister Alistair Darling before implementing QE. However, given that the BoE is nominally independent, I doubt there was anything FORCING them to consult. Moreover, far as I know other central banks did not consult before implementing QE.

Secondly, that dreadful “unaccountable” Monetary Policy Committee actually controls how much money private banks create as a result of the MPC’s control of interest rates. In short, the total amount of power wielded by “unaccountable bureaucrats” under our existing system is not much different to the amount they would wield under sovereign money. Certainly the MPC does not consult politicians when adjusting interest rates.

Next, AP says “There is no such thing a debt free money. Or if there is, it is very likely something quite different: a grant or a gift.”

That point has actually been extensively debated by economists in recent years. The consensus is that money created by private banks is indeed “debt based”. Or put it another way, for every $ of money created by a private bank, there is a $ of debt. Or to use a popular phrase, privately created money “nets to nothing”. MMTers often make that point.

As to central bank created money, obviously that is OSTENSIBLY a debt owed by CBs to the holder of such money. Indeed UK £10 notes actually say the Bank of England will “pay the bearer on demand the sum of £10”. But that phrase is just a historical anachronism. I go into this issue in a bit more detail here.

And finally as regards AP’s claim that sovereign money (i.e. base money) necessarily involves a grant or a gift is pure nonsense. There is precisely nothing to stop the state creating fresh “state created money” (aka sovereign money) and spending that on hospitals, schools, defence, roads or whatever.  In that case, the money is not a gift in the sense that the private sector gets the latter goodies for free. The private sector has to engage in a huge amount of blood, sweat and tears in order to bring hospitals, schools and new roads into existence. Plus the main contractors responsible for creating those investments sub-contract various jobs to sub-contractors and pay them cash. I.e. commerce carries on as before. There is nothing resembling a “gift economy” there.

Moreover, fiscal stimulus followed by QE (what we’d done big time in recent years) equals “create sovereign money and spend it”. That is, as a result of the crisis, governments have borrowed $X, spent $X and given $X of bonds to lenders. Governments (or rather their central banks) have then printed fresh sovereign / base money and bought back those bonds. That all nets out to “government prints new sovereign money and spends it”.

Far as I know, neither the US nor the UK have suddenly turned into “gift” or “semi-gift” economies because of QE etc.

Random charts XIII.