Random charts - 44.

Large text in pink on the charts was added by me.

We can’t print and spend money willy-nilly when inflation is at the 2% target.

Quite why it’s necessary to make the above point is a mystery. I’d have thought it was obvious.

One recent attempt to claim we can in fact print and spend like there’s no tomorrow was penned by an anaesthetist and physicist both of whom live within 20 miles of me. Tim Worstall and Richard Murphy respond to their article. The net result is a bit of a car crash. The article itself is fundamentally flawed. Murphy’s response is pure chaos. Worstall’s is much clearer, though I’m not sure about one of his points. Anyway, I’ll wade through this to see what can be salvaged.

The authors of the anaesthetist / physicist article are David Laws and Charles Adams respectively (L&A). (Title of their article: "Is a World-leading NHS healthcare NHS an affordable option."

First, a number of physicists have opined on economics, and some of them have a very good grasp of the subject. For example there is William Hummel, so I don’t automatically reject material written by physicists on economics.

L&A do have some grasp of economics. Unfortunately they seem to think we can just print money willy nilly and spend it on the National Health Service (NHS) – e.g. see their final para.  Well as Keynes explained, the way out of a recession is to have the state print or borrow money and spend it in whatever amounts are needed to end the recession. So what L&A say is true during a recession.

Unfortunately that “free lunch” is not available once the economy has recovered, that is, once inflation has hit the 2% target. And inflation in the UK is currently more like 3%. So no free lunch!!!

The only possible escape from that dilemma would arise if inflation is cost push rather than demand pull: indeed that situation obtained, at least according to the Bank of England, during the first two or three years after the 2007 crisis. Subsequent events proved the BoE right. So congratulations to the BoE for that.

As for L&A, they don’t even consider the “cost push / demand pull” question, thus their claim that we can print money willy nilly and produce a Rolls Royce NHS as if by magic is nonsense.


The multiplier.

L&A’s next mistake is to attach importance to the multiplier (their second last para). Certainly that’s in line with standard economics text books, which also attach importance to the multiplier. However, as I explained here, the multiplier is one big irrelevance.



The dual circuit.

Next, L&A have some strange ideas on what might be called the “monetary dual circuit”. That’s (roughly speaking) the fact that there are two sorts of money: central bank issued money and private bank issued money.

They say “…the commercial bank circuit serves private needs while the government circuit serves collective needs. The bank circuit exists to serve individuals and ‘capitalism’, while the government circuit exists to deliver on democratically controlled promises.”

Actually we could perfectly well have a system where the only form of money is central bank created money. Indeed a system of precisely that sort has long been advocated by several Nobel laureate economists including Milton Friedman. That system is also currently supported by Positive Money, and New Economics Foundation, Laurence Kotlikoff and others.

Incidentally if you’re  wondering why I am responding to L&A here rather than in the comments after their article, one reason is that  L&A seem to be unwilling to publish comments which disagree with their ideas. Certainly a suspiciously large proportion of the comments positively drool over L&A’s article. This “suppression of dissenting voices” is common in academia nowadays. Anyone who thinks academia is a bastion of free speech nowadays is very naïve.  I dealt with this problem here.

So if you want to know where students get their anti free speech tendencies from, it looks like they get it to some extent from the elders and betters, i.e. their teachers – of course I use the phrase “elders and betters” advisedly.


Tim Worstall’s response.

Tim Worstall’s response to L&A is roughly speaking the same as mine, namely (and to repeat) that it’s perfectly possible to print money and spend it in a recession so as to bring about more NHS (or anything else). Or at least TW says “It is possible to get all Kenyesian about this and say when in recession we can boost output of all things – and maybe there’s some truth to that.”

Well is TW supporting Keynes or not? It isn't entirely clear is it? If he wants to challenge the basic point made by Keynes, namely that the way out of a recession is to “print and spend” then TW needs to spell out his reasons in detail.

So if TW is supporting Keynes, then I agree with TW. If he isn't, I want to see detailed reasons.


Richard Murphy.

Murphy’s response to L&A and TW is shambollic. It is long, complicated and I haven’t got time for it. Murphy claims one minute that we can print and spend like there’s no tomorrow, while a para or two later, he concedes that option is not available once the economy is at or near capacity, as explained above.

Interest rate adjustments do not make sense.

Assume an economy needs stimulus. One way to implement it is for the state to run a deficit funded by new base money (as suggested by Keynes in the early 1930s). There is of course more than one way of doing that: more public spending is one, and tax cuts are another. For the purposes of the argument here is doesn’t make any difference which of those two is chosen.

A second way to implement stimulus is to cut interest rates. But there’s a problem or two there, as follows.

Assuming a fall in interest rates is the free market’s only or main way of dealing with recessions, and assuming there is some artificial obstruction to such a fall, then it would make sense for the authorities to try to overcome that obstruction by employing artificial means to get interest rates down.

Unfortunately, neither of the latter two conditions hold. As to obstructions to a fall in interest rates, I’m darned if  I know what they are. Indeed interest rates seem to have fallen all of their own accord over the last twenty years or so.

As to ways of dealing with recessions, interest rate cuts are not the only way. There is another free market “recession ending” mechanism. That’s the Pigou effect: the fact that in a recession in a totally free market, wages and prices would fall, which would raise the real value of the monetary base, which would raise spending. Moreover, there is a very obvious obstruction to that mechanism, namely the “wages are sticky downwards” phenomenon to which Keynes referred.

That suggests that running a deficit funded by new money is better than fiddling with interest rates: instead of the value of the base rising because of a rise in the value of each unit of the base (dollars, pounds, etc), the number of units rises. But the effect is the same (as Keynes himself pointed out, or so Lars Syll told me).


A zero government debt scenario.

Another problem with fiddling with interest rates is this.

Milton Friedman and Warren Mosler argued that governments should borrow nothing at all. Assuming F&M are right (and I certainly do not strongly disagree with them), then how do you cut interest rates? Cutting rates is normally done by having the central bank sell government debt. But if there’s no government debt (as per F&M’s prescription), then rates cannot be cut!!!

Alternatively, if it does actually make sense for government to borrow (and let’s say government debt needs to be X% of GDP), and if debt is then bought back by the central bank so as to cut rates, then the debt will no longer be at it’s optimum or GDP maximising level

Provisional conclusion: interest rate adjustments are in check mate.

The only possible escape from check mate might be available in the form of the claim that interest rates work more quickly than fiscal adjustments. Unfortunately there’s not much evidence to support that idea. According to the Bank of England, interest rate adjustments take a year to have their full effect. Plus if government decides, for example, to spend more on health and education, the effect comes as quickly as new teachers, nurses, etc can be interviewed and allocated to jobs. That ought to be possible in less than a year.

Plus in the recent recession, the UK government implemented two fiscal adjustments at the flick of a switch: it first cut VAT and raised it again two or three years later.

Is base money a liability of the state?

Eric Lonergan recently devoted about 4,000 words to considering whether base money is a liability of the state without coming to any clear simple conclusions far as I can see. (Title of his article: “MMT part III – conclusion, and a conversation with Ben Bernanke”).

Here is a simple clear answer in just thirty words.

The state has the power to grab any amount of base money off the private sector via tax whenever it wants, ergo base money is not a liability of the state.

If you want me to expand on the latter point, here are another hundred words or so.

If you lend me £X and we sign an agreement covering that loan, stipulating rates of interest, and so on, but I have the power to break into your house, and confiscate your copy of the agreement, and then tell you to whistle for your money, then that £X liability  of mine is a bit of a strange liability. In fact it’s not a liability at all.

Or as Warren Mosler, founder of MMT, put it, base money is like points awarded by an umpire in a tennis match: they are an asset of the players, but not a liability of the umpire.

Hope that’s sorted that out….:-)

Random charts - 43.

Text in pink on the charts below was added by me.

Money issued by private banks is counterfeit money.

I’ve just published an article on the Medium site which shows that money issued by private / commercial banks is counterfeit money, as suggested by the economics Nobel laureate, Maurice Allais. Here is the abstract.



The word counterfeit according to dictionaries refers to producing an imitation of something valuable with an intention to defraud. Dollars issued by private banks are certainly imitations of Fed issued dollars. Plus where privately created money is introduced to an economy which has just base money, base money has to be confiscated from households so as to counterbalance the inflationary effect of the new privately created money. I.e. households are defrauded to make room for privately issued money. Ergo the money created by private banks is counterfeit money.

Another flaw in privately created money is that creating it costs almost nothing just as it costs the Fed almost nothing to create dollars. In contrast, under a “base money only” system, private banks have to borrow or earn every dollar they lend out, thus those banks compete on equal terms with other businesses. Thus allowing private money results in the profits of seigniorage subsidizing bank loans, which results in artificially low rate of interest and artificially high levels of debt. That does not maximise GDP.

A third flaw in a private money is thus. Those who deposit money at private banks with a view to earning interest are in effect money lenders: they have entered commerce. But they are guaranteed against loss by taxpayers and it is not normally the job of taxpayers to stand behind commercial ventures. On the other hand everyone is entitled to a totally safe bank account. That conflict is resolved by full reserve banking (a system which bans privately issued money) because under full reserve, zero interest yielding bank accounts are totally safe, while interest earning ones are not.

Racist tweet by Positive Money.

Positive Money claim that top jobs at the Bank of England should reflect the racial mix of the country of a whole and moreover that there should be more women in top BoE jobs.

Shouldn't the Bank of England’s leadership should reflect the whole of society @PhilipHammondUK ? #wherearethewomen https://t.co/nJuKPboSBU

— Positive Money (@PositiveMoneyUK) October 21, 2017

I suggest there is just one criterion for choosing people for a job, and one only: ability to do the job. Moreover, it could be that white males excel at economics related jobs (in that the performance of central banks or economists in general can be described as “excellent”, which of course is debatable.)

About 95% of the letters to the Financial Times are from men rather than women, which is prima facie evidence that women are just not all that interested in economics.

Moreover, while corruption in white countries is bad enough, corruption in Africa and Arab countries is even worse, which is prima facie evidence that blacks and Arabs are more corrupt than whites, and we do not want corruption at the top of central banks, or any more corruption than there already is at central banks.

Also, some psychologists claim blacks and Arabs have lower IQs than whites: see image just below.

Moreover, the IQ distribution of males and females is not the same: there are more genius IQ and idiot IQ males than in the female section of the population. Thus assuming top jobs at central banks go to top IQ individuals, you'd expect to see more males there than females.

Speaking as a white male, I have no objection at all to people from the Indian sub-continent being over-represented when it comes to running convenience stores. I have no objection to women being over-represented in some professions, e.g. medicine: at least around ten years ago 60% of trainee doctors were female. As for law, about 67% of trainees are female in the UK.

To repeat, there should be just one criterion for choosing people for jobs: ability to do the job.

“Progressive” objections to QE are nonsense.

Most self-styled “progressives” are wittering on about interest rate cuts and QE causing asset price increases, and thus increasing inequality: inequality in capital rather than income, that is.

But the same people are complaining about the effect of the forthcoming or probably forthcoming interest rate INCREASES.!! Those increases will of course hit those who are heavily in debt and will benefit the cash rich.

So what do “progressives” want? Darned if I know.

Progressives will however be pleased to know that there is a solution at hand: it was advocated by (shock horror) the very person who progressives most like to hate, i.e. Milton Friedman.

He (along with Warren Mosler – founder of MMT) advocated that there should be no government debt.  That is, Friedman and Mosler advocated that the only state liability should be base money, which yields no interest.  And that Friedman/Mosler set up amounts to a permanent zero rate of interest.

I’m inclined to agree with that F/M system, though (like Friedman) I wouldn’t rule out interest rate rises in an emergency.

But to get to that ideal situation, if that’s what it is, it would be necessary for central banks to print even more money and buy back even more government debt.

Oh no: that means asset prices rise even further! Progressives at this stage will be ringing up their shrinks for an appointment.

To summarise, progressive objections to interest rate cuts and QE are a bit of a nonsense because progressives also object to interest rate increases.

As to the inequality increasing effect of QE, that’s a once and for all effect. Moreover, that effect can perfectly well be negated by increased taxes on the better off. Thus the important question (way above the heads of most progressives this) is: what set up maximises GDP or what set up is Pareto optimum?

If in fact the Friedman/Mosler “no debt” set up is the one that maximises GDP, then that’s the one to go for. Why not maximise GDP?  As to resulting inequalities, as Vilfredo Pareto explained, those can be dealt with via redistribution, i.e. taxes on the better off.

More fiscal space nonsense.

Christina and David Romer have a new paper published by NBER – working paper 23931 – which claims, to judge by the abstract, that stimulus is more effective given fiscal space and monetary space (i.e. a low national debt to GDP ratio).

The actual reason for this would seem to be that the authorities implement more fiscal and monetary stimulus when there is “space”. As the second last sentence of the abstract puts it, “We find that monetary and fiscal policy are used more aggressively when policy space is ample.”

Quite. So “space” itself is irrelevant: what’s really important is economists’ BELIEF in the importance of space.

Likewise if I believe I get more benefit from jogging when there’s a full moon, then I’ll probably do more jogging when there’s a full moon. And lo and behold, as a result, I will actually derive more benefit from jogging when there’s a full moon. But of course that does not prove that a full Moon is the direct cause of jogging conferring extra benefit: the benefit is an INDIRECT one, which relies entirely on my beliefs!

Thus the Romer paper in no way tempts me to moderate my claim expressed in earlier articles on this blog that “fiscal space” is one huge nonsense: a sentiment shared by Bill Mitchell, unless I’ve got him wrong. (Title of Bill's article: "The ‘fiscal space’ charade – IMF becomes Moody’s advertising agency.")

But never mind. “Fiscal space” keeps the numpties, charlatans and time wasters at the IMF employed, as Bill eloquently explains.

Is Ed Balls talking balls?

Ed Balls would seem to be well qualified when it comes to economics. He used to be lead economics writer for the Financial Times and studied economics at Oxford and Harvard.

Unfortunately, like many people at the top of the economics profession, he doesn’t understand the basic book-keeping entries done by treasuries and central banks.

Reason I say that is that he claimed recently that Positive Money’s proposals are out of the same mold as monetarism – a claim also made by Ann Pettifor. That claim can only come from people who don’t understand the latter basic book-keeping entries, for reasons I’ll set out below.

I’ve been thru this before on this blog, but unfortunately getting simple points across normally requires repeating those points ad nausiam, so here goes.

Positive Money (PM) and others claim that the best way of implementing stimulus is simply to have the state print money and spend it, and/or cut taxes. And the effect of that (as is hopefully obvious) is to increase the money supply, or more accurately to increase the private sector’s stock of central bank created money (base money).

The Balls and Pettifors of this world then jump to the conclusion that PM & Co are advocating monetarism Milton Friedman style.

Well the first flaw there is that a money supply increase also occurs under conventional forms stimulus. That is, one conventional form of stimulus is fiscal stimulus, which consists of government borrowing more and spending what it has borrowed (or cut taxes). But that extra borrowing is likely to raise interest rates, and assuming the extra borrowing takes place because stimulus really is needed rather than because politicians are being plain irresponsible, then the central bank won’t allow an increase in interest rates. It will therefor print money and buy back some of that government debt.

Indeed, assuming stimulus really is needed, the central bank is likely to go further and actually cut interest rates. So it will print even more money and buy back even more government debt!

Now as you may have noticed, this all involves a money supply increase in much the same way as PM policy involves a money supply increase.

And not only that, but given low interest rates of the sort we have had over the last five years or so, the central bank may go even further and buy back almost every single dollar of extra debt that arises from fiscal stimulus! I.e. the central bank may go for QE. The money supply increase is even bigger!

But for some strange reason, the Balls and Pettifors of this world do not accuse governments which implement interest rate cuts or QE of adopting Friedman style monetarism, which rather makes it look like Balls and Pettifors are scratching around for any old jibe to throw at PM.


Friedman’s monetarism.

So what did Friedman’s monetarism actually consist of? Well I’m not the world’s authority on that but certainly Friedman in his 1948 American Economic Review paper “A Monetary and Fiscal Framework for Economic Stability” argued that stimulus should take the form of the same annual increase in the stock of base money, and that should be effected by the state spending more than it received in taxes. I.e. he argued against discretionary stimulus.

So to summarise, the form of stimulus advocated by PM & Co comes to much the same as conventional stimulus, but with the difference that under PM’s system, monetary and fiscal policy are joined at the hip: they are merged. But in both cases, a money supply increase derives from stimulus. Thus the “PM equals monetarism” jibe is nonsense.

As to Friedman’s monetarism, that also involves an increase in the money supply, but it’s the same increase each year.

Thus while PM policy has similarities to monetarism, the similarities are no more than the similarities between monetarism and conventional economic policy, all of which makes a bit of nonsense of the claim that PM policy is flawed because it has similarities to monetarism.

I.e. all three of the above options (PM, conventional stimulus and Friedman’s monetarism) involve a money supply increase. What actually differentiates Friedman’s monetarism from PM and conventional stimulus is that the latter two involve discretion while Friedman advocated no discretion.

And finally, I am not saying the Balls and Pettifor should be totally ignored. I particularly like Ed Balls: he has a sense of humour. And Pettifor’s work “The Economic Consequences of Mr Osborne” is quality stuff.

Random charts - 42.

Text in pink on the charts below was added by me.

Has Bernanke been boozing?

Bernanke is pushing a bizarre idea that has being doing the rounds for some time, namely that given zero or near zero interest rates, central banks should “target” a higher rate of inflation, which apparently means inflation will increase, which in turn means interest rates can be increased.

Well now in the universe I live in, things don’t happen unless something causes them to happen. E.g. excess demand causes inflation to rise. And driving with excess alcohol in one’s blood stream tends to cause road accidents. And being stung by a wasp causes people to say “ouch”.  You get my drift.

But in the Alice in Wonderland  universe inhabited by so called “professional” economists, things happen just because someone “targets” those things. For example if it’s my aim or “target” to be $10,000 richer, a pallet load of dollar bills will appear as if by magic in the middle of my living room apparently.

And it’s not just me who thinks economists living in Cloud Cuckoo land. Lars Syll said the other day that “Mainstream neoclassical economics has since long given up on the real world and contents itself with proving things about thought up worlds.”

Or as the Cambridge economist Ha Joon Chang put it “Unfortunately a lot of my academic colleagues not only do not work on the real world, but are not even interested in the real world.”

Taxpayer backed support for banks and depositors is absurd.

A bank is an entity at which you deposit money. The entity then invests or lends on your money so as to earn interest for you. Plus the entity makes the absurd promise that your money is totally safe: you’re guaranteed to get $X back for every $X you put it.

That promise is absurd because money which is loaned on or invested is never totally safe.

Indeed, if you deposit money at an entity which does exactly the same job as the one set out above, but it does not have the word “bank” over its front door, then the entity is SPECIFICALLY FORBIDDEN from making the above promise. Examples of those other entities include stock–brokers, unit trusts (“mutual funds” in the US), etc.

So what’s the big significance in ordering the letters B,A,N and K from a sign manufacturer and putting them over your front door, as opposed to putting the letters U,N,I,T, T, R,U,S and T over your front door?  Darned if I know.

Does it make a difference exactly how the letters are attached to the wall or what colour they are? I look forward to enlightenment on that point....:-)

That’s not to say there should NEVER be any sort of taxpayer backed support for those with bank accounts: everyone is entitled to a totally safe bank account. But they are most definitely NOT ENTITLED to let their money be loaned on or invested and then go running to taxpayers for help if the loan or investment does not pay off.

Ergo it’s justifiable to have taxpayer funded support for bank accounts where money really is totally safe: i.e. where it is NOT loaned on or invested (e.g. where the relevant money is simply lodged at the central bank). But there is no excuse for such support for investors and money lenders.

Random charts - 41.

Text in pink in the charts below was added by me.