Roger Bootle tries to criticise MMT.

That’s in a Telegraph article published yesterday (29th April 2019) entitled “The taboo that should only be broken in extreme circumstances.”

His first criticism is that Modern Monetary Theory (MMT) is not “modern”. Presumably he is trying to suggest that there is nothing new in MMT, though he doesn’t expand on that point, so it’s not entirely clear what his “not modern” point is supposed to be.

At any rate, that “not modern” criticism has some validity in that MMT has been accused of being little more than Keynes writ large: i.e. it can be argued that MMT is little more than Keynes’s point that the solution to inadequate demand is for the state (i.e. government and central bank) to print money and spend it (and/or cut taxes) or borrow money and spend it.

My answer to that is that a significant proportion of the economics profession are so clueless that they do not even understand Keynes, thus MMTers have been right over the last ten years to lambast the various economists who don’t get that simple basic point made by Keynes. (For some examples of economists who don’t understand Keynes, see the previous article on this blog, entitled “What MMT is up against.”)


National debt.

Bootle’s next criticism is that given the large amount of national debt left over from dealing with the recent recession, any further stimulus needed to deal with another down turn will push interest on the debt to excessive levels. As he puts it, “There are serious worries that, with the debt so high, governments will not be able to respond to a future economic downturn by relaxing fiscal policy again.”

Well the answer to that is that interest on the debt will not rise unless the state issues EXCESSIVE amounts of base money and/or debt: that is, amounts that are in excess of what is needed to deal with inadequate demand.

To illustrate the reason for that, let’s take the simple case of where interest on the debt is zero, i.e. the only state liability is zero interest yielding base money. (That scenario is not wildly unrealistic, incidentally: both of the co-founders of MMT, Warren Mosler and Bill Mitchell have advocated that scenario, and Milton Friedman advocated the same.)

In the latter scenario, recessions can be dealt with via Keynes’s “print and spend” solution. That works first because the fact of spending more on say health and education employs more medics and teachers, and second, the increased money supply induces households to spend more. And for those on the political right who would prefer tax cuts to more public spending, cutting taxes has a similar effect: it increases household’s stock of money.

That solution to inadequate demand does not require any rise in interest on “the debt”: that is, there is no reason to offer anyone who holds base money interest for holding that money.

However, if the state were to print and spend an EXCESSIVE amount of money, then clearly the inflationary effect of that would need to be countered, and one option there would be to offer “money holders” some interest so as to dissuade them from trying to spend away their excess stock of money. So called “money” is then turned into so called “debt” because debt is simply a fancy name given to a chunk of state issued money on which interest is paid.

And as MMTers and Martin Wolf pointed out, state issued money (base money) and so called debt are virtually the same thing if one is talking about relatively short term debt and relatively low rates of interest. (Re Wolf, see para starting “The purchases of…” here.)

In short, as long as “print and spend” or “borrow and spend” are having a genuine recession beating effect, there is no need to raise interest rates. Ergo Bootle’s claim that further bouts of print and spend will automatically raise interest rates does not hold water, as long as that print and spend is not more than is required to do what’s required of it, i.e. deal with deficient demand.


Quantitative Easing.

Next, Bootle makes the popular complaint that QE has boosted asset prices and caused “significant distortions in the economy”, as he puts it.

In fact QE is simply a move towards the set up advocated by the founders of MMT and Milton Friedman mentioned above: a set up where there is no government debt, or if you like, where interest on the debt is zero. That is, QE simply takes chunks of debt and turns them into cash.

Now assuming MMTers and Friedman are correct to claim that GDP is maximised where there is no government debt, then moving towards that set up does not constitute “distortion”. Quite the reverse: it constitutes a move AWAY FROM a distorted set to towards a less distorted set up.

Obviously the political left objects to the boost in asset prices that results from QE, and that’s a not unreasonable objection. But that can be dealt with via increased taxes on the rich.


Helicopter drops.

Next, in the second half of his article, Bootle says that MMT advocates “print and spend”: see his para starting “This is where MMT comes in” and subsequent paras.

Well there can’t be any objection to that claim of Bootle’s: as pointed out above, MMT does (like Keynes) advocate print and spend.

Bootle then objects to print and spend on the grounds that it might lead to hyperinflation, but he admits that in a serious downturn, government and its central bank need to get together and do some QE.

But fiscal stimulus plus QE comes to the same as print and spend! (I.e. government borrows £X, spends it back into the private sector and gives £X of government bonds to lenders, then the central bank prints £X and buys back the bonds. That all nets out to “government and central bank print £X and spend it (and/or cut taxes)”).

So who exactly decides when print and spend is needed? Well that all depends on the relative powers of the finance minister and central bank governor. If the latter is all powerful, then why not just have a rule that says something like “money printing will be allowed at the discretion of the central bank”.

In contrast, in the case of non-independent central banks (e.g. the Bank of England prior to 1997), the finance minister is all powerful. But that did not (contrary to Bootle’s suggestions) lead to hyperinflation in the decades between WWII and 1997. Admittedly the UK suffered excess inflation in the 1970s, but then so too did most other advanced countries.

Alternatively, if the central bank has some sort of genuine independence, then why not just go for an MMT print and spend system where some sort of central bank committee has the final say on whether print and spend will be allowed and how many dollars worth shall be allowed?

Indeed, the latter sort of set up is advocated by Positive Money, though PM do not actually say the committee needs to be a central bank committee: that is, PM argues that any sort of independent committee of economists would do.

Plus Ben Bernanke recently gave an approving nod in the direction of the latter sort of central bank committee which would determine the amount of print and spend allowed every year. Plus Adair Turner (former head of the UK’s Financial Services Authority) gave a similar approving nod. See here, and see para starting “A possible arrangement….” here.

Perhaps Bootle does not realize that in tangling with MMT, he is also tangling with Bernanke and Turner.

What MMT is up against.

Modern Monetary Theory (MMT) has been criticised for being nothing more than Keynes writ large. That’s a criticism with some validity.

But the flaw in that criticism is that much of the economics establishment and many orthodox economists are so abysmally ignorant that they don’t even understand Keynes. Thus MMTers are right to re-present Keynes in a simplified form that hopefully even the latter ignormuses can understand.

A classic example of the latter ignorance is a recent article in The Times by David Smith, economics editor of the Sunday Times. (Article title: “This might be as good as it gets for the budget deficit.”)

The basic message of the article is: deficits and national debts are bad. Of course the latter ultra-simple message is disguised with a snow-storm of long words, long sentences, pseudo technical jargon and statistics. But that’s the basic message.

Well of course the flaw in that idea is that, as Keynes explained, deficits are in fact beneficial if unemployment is higher than it should be. However, David Smith does not so much as mention that point.

In short, the idea that any reduction in the debt and/or deficit is automatically desirable is nonsense.


Olivier Blanchard. 

Another leading member of the ignorant economics establishment is Olivier Blanchard, former chief economist at the IMF, an organisation which promoted a limit to stimulus (i.e. promoted austerity) at the height of the recent recession. (See also the second sentence here.)

However Blanchard seems to have recently tumbled to the point (which MMTers having been making for years and which Keynes was making almost a century ago) that deficits are beneficial.

Not only does Blanchard seem to have tumbled to the point that deficits are beneficial given inadequate demand, but has also tumbled to the point that they are especially beneficial given low rates of interest on government debt.

Well MMT has been advocating a permanent zero rate of interest on government debt for about twenty years. So on that basis, MMT is about twenty years ahead of the IMF.


Kenneth Rogoff.

Another prime example of a simpleton in high places is Kenneth Rogoff, who for some bizarre reason is a professor of economics at Harvard.

He clearly thinks governments can be treated in the same way as households: that is, he thinks that government debt is like a household debt in that the process of paying off the debt is painful, or involves real costs. The latter “real cost” point certainly applies to households when paying down their debts. But that “cost” point certainly cannot be applied directly to countries as a whole, in particular countries which issue their own currency.

Rogoff (like David Smith) uses pseudo technical jargon to hide his ignorance: in fact Rogoff has invented a fancy new phrase to describe the allegedly painful process of paying down national debts. He calls the process “financial repression”. If you Google the phrase, you’ll find numerous articles by Rogoff which weep and wail about the horrors of “financial repression”.

I’ve explained the flaw in the financial repression idea a dozen times on this blog over the years, e.g. here. (Article title: “Kenneth Rogoff’s “financial repression”.)

Two idiots from Harvard express views on MMT.

Chris Giles recently had an article in the Financial Times entitled “The Fiscal Turn: America learns to love deficits.” Giles quotes two of the World’s leading economic illiterates on the subject of MMT towards the end of the article, Kenneth Rogoff and Lawrence Summers. So I’ll run through the relevant paragraphs just for a laugh.

Incidentally (and speaking as an MMT supporter) I describe Rogoff and Summers as “idiots” among other reasons because in the case of Rogoff, he was advocating austerity or limits to stimulus at the height of the recent recession, while Summers was advocating a relaxation of bank regulations just before the 2008 bank crisis.

Anyway, Giles starts his consideration of MMT with the following paragraph (quotes from Giles’s article are in green italics).

“At the extreme end of the rethink is so-called Modern Monetary Theory, which argues that policymakers in countries that print their own currency can take on as much debt as is necessary to keep the economy purring away at full employment. These arguments, propounded by the likes of Prof Kelton, an adviser to Mr Sanders’s presidential 2016 and 2020 campaigns, go beyond standard Keynesian orthodoxy, which advocates deficit spending during recessions and when monetary policy has lost its power to stimulate spending.”

Well now running whatever deficit is needed to maintain full employment is hardly “extreme”, is it? Far from going “beyond standard Keynsian orthodoxy”, running whatever deficit is needed to ensure full employment was what Keynes advocated far as I’m aware.

I suggest that what’s actually happened over the last twenty or thirty years is that many economists (e.g. Rogoff and Summers) have retreated from Keynes’s ideas towards the sort of Neanderthal pre-Keynsian ideas that dominated in the 1920s and earlier: that is, the idea that governments can be viewed like households which have to balance their budgets.

That sort of Neanderthal thinking is still very much in evidence: for example the UK’s former finance minister, George Osborne made a fool of himself over and over a few years ago by announcing deficit and debt reduction targets year after year, only to discover he couldn’t meet those targets.

Chris Giles next para reads: “Instead, MMT advocates say that in normal times governments do not need to counter every spending decision with either higher tax or an expenditure cut elsewhere. Inflation, if it becomes a menace, can be offset by higher taxes to counter excess government-created liquidity.”

Well there’s a very good reason for the latter idea, as follows. It is reasonable to assume that over the very long term, that the national debt as a proportion of GDP will remain constant. In fact the debt/GDP ratio for the UK in 2012 was about the same as three hundred years earlier in 1712, i.e. around 50%.

However, inflation is constantly eroding the REAL VALUE of the debt. Thus to keep that ratio constant it is necessary to run a constant deficit (amounting to roughly 2%) of GDP.

The latter point will be a mile above the heads of Rogoff and Summers. But I haven’t actually seen the point made by any other so called “professional economists”. Thus you have to wonder how many other economists are all that much better than Rogoff and Summers.

Chris Giles’s next two paras read, “Those advocating budgetary prudence have by no means thrown in the towel. In a recent lecture to central bankers in Washington, Kenneth Rogoff of Harvard University questioned the assumption that interest rates and inflation would stay low for a long time, making public debt much less expensive and a MMT policy almost free to finance.

“It is probably true — you can have much more debt — interest rates are low. But in MMT, the debt is all very, very short term, so [the debt] is cheap, but it’s risky,” he said. “It’s very cheap until it’s not.”

Well the flaw in that argument is Rogoff’s assumption that a country is FORCED to pay higher rates of interest when interest rates rise. As MMTers keep pointing out, the truth is that a country which issues its own currency can pay any rate of interest on its debt that it likes. I’ll explain.

Suppose interest rates do rise, what’s the problem? All a country has to do is to print money and pay off “low interest yielding debt” as it matures and then tell would be creditors who want that debt rolled over to go away: in short, do some QE.

Of course that QE might cause excess demand and inflation, but that’s easily dealt with by raising taxes (or cutting public spending) and “unprinting” the money that flows into government / central bank coffers as a result of that QE. Non-problem solved.


Voodoo economics.

Next, Giles quotes Summers as saying MMT is “voodoo economics”. Well OK if insults are the order of day, I can do that too: Summers is mentally retarded, low IQ, pig ignorant, economically illiterate, big mouthed jerk.

Moving on…

Chris Giles then quotes John Llewellyn, a former chief economist of the OECD.

Now it’s a bit of a mystery as to why the OECD should be regarded as any sort of an authority on anything to do with economics given that the OECD (like the IMF and Rogoff) were advocating austerity (aka “fiscal consolidation”) at the height of the recent recession.

Chris Giles’s paragraph on Llewellyn actually reads, “John Llewellyn, a former chief economist of the OECD, says MMT activists were “often near-messianic in tone, while somewhat vague in exposition”. He adds: “MMT is appropriate only in exceptional situations, where economies are far from full employment, deflationary pressures are in evidence, and interest rates are at the zero bound.”

So what’s that supposed to mean?

One interpretation of what Llewellyn is saying is that he is saying much the same as Chris Giles’s odd interpretation of Keynes mentioned at the outset above, namely that we should only have deficits during bad recessions. As explained above, that idea is nonsense.


Conclusion.

The conclusion is that if you think MMT is defective, you should have a look at some of the senior members of the economics profession: they make George Bush and Tony Blair’s invasion of Iraq designed to find weapons of mass destruction which didn’t exist look almost logical by comparison.

Or put another way, if advocates of MMT were all chimpanzees, they could probably do better than Rogoff, Summers and so on.

Simon Wren-Lewis employs the ever popular “anyone who disagrees with me is a fascist” argument.

That’s in this article of his entitled “When people warning about incipient fascism….”. Wren-Lewis is incidentally a former economics professor at Oxford.

His first sentence is a joke. It reads “I’m old enough to remember left wing demonstrations in the UK when ‘fascist!’ was a standard chant.” Now wait a moment. Anyone who hasn’t been asleep 24/7 for the last few years must surely have noticed that “fascist” is chanted incessantly by lefties nowadays (along with the other three words they know: “racist”, “Nazi” and “xenophobe”).

Then in the rest of his first para, Wren-Lewis claims Donald Trump is quasi-fascist as apparently are large number of Europeans.

Well I’m no big fan of Trump, but the alternative was Hilary Clingfilm who was a bit of a war-mongerer (i.e. a fascist). So who were the American people supposed to vote for? (According to Chambers dictionary, “militarism” is one of the elements of fascism.)

As for Europeans turning fascist, well that’s true of Hungary. On the other hand it’s clear that Europeans are getting tired of the fascism inherent in a particular religion which I better not name just to make sure I am not arrested for wrong-think.

Oh but wait a moment: isn't arresting people with the “wrong” views a characteristic of fascism?....:-)

As to the religion I’m referring to, it’s the one that goes in for female genital mutilation and wife thumping, both of which are fascist activities far as any civilised person is concerned. But there’s a very long list of other fascist activities indulged in by members of the religion concerned, like the belief that anyone leaving the religion should be killed, threatening or killing authors and cartoonists, massacring people in churches, homophobia, etc. I could go on.  (The belief that anyone leaving the faith should be killed is adhered to by roughly half of all members of the “religion which can’t be named”.)

But according to Wren-Lewis, Islamophobia is a form of fascism. Well I suggest any half civilized person would recognise that the above appalling aspects of the religion that cannot be named actually indicate that it’s supporters of that religion who are the fascists, not its opponents.

Anyway, I’d like to offer my heartfelt condolences to Wren-Lewis and like-minded folk on their abysmal failure to stop Europeans engaging in wrong-think despite W-L & Co employment all the tricks used by Hitler and Mussolini (like arresting and censoring those with the “wrong” thoughts).

Coincidentally, I was banned from Facebook for a week a couple of days ago for citing Islamophobic views. But they weren’t views expressed by Europe’s “far right”: they were the views of a Buddhist!

Even more delicious was the fact that I was banned on exactly the same day as the Sri Lanka authorities announced they thought the recent atrocities there were the work of Muslims.

But I’m sure the Sri Lanka authorities are wrong in their Islamophobic views: it must have been Martians or the man on the Moon who was responsible.

And finally, as evidence of the appalling extent of wrong-think among Europeans, see the chart below.

Should we abolish household debts?

Summary.

The above book isn't too clever. It consists mainly of emotive weeping and wailing about the allegedly horrific effects of debt.

The title of the book is misleading: the book does not actually advocate the abolition of debts, i.e. it does not advocate a debt jubilee. Instead it advocates replacing a significant proportion of existing debts with zero interest loans. As for who pays for that largesse, savers and commercial banks pay, which (unbeknown to the author) would ruin most banks.

As for the author’s claim that debtors are worse off now that ten years ago, the author does not take into account the fact that the fall in interest rates (by a factor of about three) is much more than the rise in debts in real terms. Thus mortgagors (who account for about three quarters of household debt) far from being worse off now than they were 20 years ago, as claimed by the author, are now in a significant number of cases better off!!

However, the criticisms of the book set out here are not to suggest that nothing needs to be done about inequalities, which are a significant cause of debt among the less well off. But those inequalities are best dealt with via higher taxes on the rich, a better social security system and so on.

____________

Introduction.

The only reason I read the book was that Steve Keen and Ann Pettifor are giving it a “book launch” on 2nd May. I’m mystified as to why. Though part of the explanation is probably that Steve Keen has long favoured debt jubilees, though it’s doubtful, far as I can see, whether he understands the basic flaw in debt jubilees.

I set out the basic flaw and dealt with Keen’s failure to understand the flaw here. See also here.

Montgomerie’s book basically consists of a lot of weeping, wailing over the allegedly excessive level of household debt, plus it sets out a scheme for cutting interest on that debt. The weeping and wailing will of course be an emotional thrill for the large proportion of the population who are influenced by emotion rather than logic.

And there is certainly a huge amount of mileage to be got out of the emotional overtones of the word “debt”: the Tories won the last two general elections in the UK to a significant extent by repeating ad nausiam that Labour’s allegedly profligate spending in the past and it’s plans for more spending in the future would increase “the debt” (i.e. the national debt). Republicans in the US played the same wholly dishonest trick.

Also the book contains a number of new terms like “financial melancholia” (a term introduced on pages 1-2) which are unnecessary given that standard economics already has suitable words and phrases.


Are household debts excessive?

The author tries to substantiate her claim that debts are excessive in Ch1, page 29-30 where she says “In both the United States and the United Kingdom, the total stock of household debt grew as a proportion of GDP from 69% and 62% respectively, in 2000 . . . . to 79% in the United States and 86% in the United Kingdom.” (The latter figures are for 2014).

What she fails to mention in connection with the latter “horrendous” increase in household debts (about a 20% increase) is that there was a huge fall in the rate of interest paid by the typical mortgagor between 2000 and 2014: the rate paid on a typical variable rate mortgage in the UK fell from 8% to 2.5% between those two years, according to this source. (Mortgages account for about three quarters of household debt in both countries.)

Of course the rise in house prices in real terms between the above two dates can’t be ignored: a rise in house prices makes life for mortgagors and house buyers in general more difficult.  In the UK, the price of the average house rose from £136,00 to 210,000 between those two year according to this source. So to summarise, interest rates fell to a third of their previous level, while house prices have nowhere near even doubled. That means that mortgagors on interest only mortgages (or relatively long term mortgages) have done very nicely. And most mortgages in the South East of England are interest only.

Of course that’s not to say that mortgagors are taking no risks at all: it’s always possible there’s a steep rise in interest rates. But basically mortgagors have “played safe”: that is, their reaction to the collapse of interest rates to a third their earlier level has certainly not been to run out and borrow three times as much or anywhere near that much.

Thus far from mortgagors being in more trouble now than in 2,000 as claimed by Montgomerie, it’s arguably the other way round: they were in a more precarious position in 2000 than now. And note that the big potential problem with a mortgage lies with interest rates, not the capital sum: if I borrow a trillion with the interest on the debt fixed over the long term at a zero rate of interest, where’s the problem for me?


Repaying debts is deflationary?

As for why debt and its repayment should be a problem, one reason given by Montgomerie is thus. “Currently most households keep up their debt repayments. However, by doing so they are robbing the economy of its vitality by regularly remitting a growing proportion of their present day income to repay debts that have fuelled past economic activity: these payments are thousands of pinpricks that bleed the economy….”

Well it’s certainly true that borrowing and spending is stimulatory, while the opposite, i.e. repaying debts is “anti-stimulatory”, i.e. deflationary. However, the total amount of new lending every year is approximately equal to the total amount debt repayment, thus on balance there is little stimulatory or deflationary effect in an average year.

To be more accurate, the total amount of lending over the last twenty years or so has actually exceeded the total amount of debt repayment, as Montgomerie rightly points out, thus the net effect of the “borrow and repay” process as a whole has been stimulatory!!

And finally, even if total repayments did exceed total new loans for a few years, the deflationary effect could easily be countered via standard government / central bank stimulatory measures.

As for interest on debt, that does not “bleed” the economy, any more than paying for beer, cabbages or smart phones bleeds the economy. That is, interest payments to banks simply fund the salaries of bank staff and pays for the vast number of other expenses involved in running a bank, like maintaining bank offices. Plus some of the money funds interest paid to depositors and bond holders and dividends for bank share-holders and so on. In short, interest payments to banks are simply part of the non stop circular flow of money that an economy consists of, just like paying for cabbages funds the income of farmers and supermarket checkout staff. None of those payments “bleed the economy”.

So all in all, Montgomerie’s ideas about the deflationary effects of debt repayment are not too clever.


How interest on debts is to be cut.

Montgomerie’s introduces her system on her p.45. It’s not entirely clear to me how her system works, and that’s not because I’m stupid: if you skim thru the thousand or so articles on this blog over the last ten years you’ll see that I have no difficulty understanding what economists are saying about 95% of the time. Rather the explanation is that Montgomerie’s explanation is not at all clear. So don’t take my description of her system as necessarily being totally accurate: you’ll have to read the book yourself if you want a better idea.

Anyway, her p.45 says:

“My modest proposal is to create a household debt cancellation fund that starts with half of the declared value of cash outlays and the full value of credit guarantees offered to the financial sector ten years ago: approximately £500bn in cash and £2 trillion in guarantees and $8 trillion in guarantees in the USD. Taking half the amount of bailout required for the financial sector and applying it as bailout of the household sector will I argue generate more uplift in the economy than the 2008 bailout in a shorter period; and crucially it will begin to unwind the Anglo-American economies’ dependence on debt to generate growth. Next a comprehensive package of household-level debt cancellations that targets key loci of indebtedness must be developed in ensure maximum benefit to households, and by extension to the economy and to society.”

Well now, if your jaw hasn’t dropped, it should have: the “household debt cancellation fund” for the UK totals a sum that approaches UK GDP!!! That’s the above mentioned £500bn in cash and £2tr in guarantees.

As for “modest”, I wouldn’t call refinancing debts of an amount approaching UK GDP modest. But never mind.


LTROs.

Her scheme is, so she claims, funded by a “Long Term Refinancing Operation” (LTRO). That is, existing debts, or at least a sizeable proportion of them, are cancelled, which in turn means relevant savers, investors and banks are robbed of a trillion or two. But the latter robbery is made good by having the state lend savers and banks a trillion or two of freshly created money at a zero or near zero rate of interest, which in turn is loaned to debtors at a zero rate of interest.

Now there’s an obvious nag there, which is that under the existing system banks make a living by charging borrowers more than the rate they pay depositors, bond-holders etc. And that’s for a very good reason, namely that (to repeat) there are significant costs involved in doing what banks do, i.e. accept deposits, lend money, and so on: e.g. the cost of bad debts, the cost of paying bank employees and so on.

Montgomerie however seems to be unaware of these costs. At least on her p.86, she says that the dramatic fall in the rate of interest paid by banks to obtain funds gives “banks and other financial institutions considerable room to make profit by exploiting the preferential rate of interest offered by the central bank and the market rate they charge for loans especially the very high rates that retail credit offers households.”

Well firstly, the fall in the rate of interest paid by banks to obtain funds has not translated directly into increased profits for banks because (to repeat) there was a dramatic fall in the rate of interest charged by banks to mortgagors over the same period. Thus roughly speaking, the fall in rates paid to and paid by banks will have had little effect on bank profits.

Second, and as regards the “preferential rate of interest offered by the central bank”, Montgomerie is referring to the relatively small amount of money offered by the Bank of England to commercial banks at an artificially low rate of interest recently with a view to boosting lending by commercial banks. That actual amount was around £100bn if memory serves, which is small compared for example to the £2.5trillion of debt re-financing that Montgomerie proposes. It is also small compared to total UK  bank assets or liabilities.

Moreover, two blacks don’t make a white, as the saying goes. That is, Montgomerie is right to disapprove of the loans made by central banks to commercial banks at sweetheart rates of interest. That is, if stimulus is needed, it should be channelled into the economy via Main St not Wall St. But the fact that sweetheart loans were offered to commercial banks by central banks is not an excuse for central banks to offer sweetheart loans to anyone else.

If the state is going to create money and dish it out, it should be dished out to a very wide range of actors and entities. I.e. as Keynes said in the early 1930s, the cure for a recession is to simply have the state create or borrow money and spend it. That spending should not be concentrated on just one or two lucky recipients: banks, mortgagors or whoever. The money is best distributed as far as possible over the economy as a whole. 

Also, and as regards Montgomerie’s claim that it is specifically “Anglo-American” economies that are hooked on household debt, that is not true: household debt to GDP ratios in the US and UK are very much in line with other advanced countries. See here.


Saving not needed to fund mortgages?

On her p.58 Montgomerie tries to rebut the idea that savers are hurt when debts are wiped out or debtors are relieved of the need to pay interest on their debt. She says, “This argument against debt cancellation claims that savers and pensioners are the biggest losers when debts are cancelled or borrowers default. This is a clever sleight of hand. Banks are not intermediaries which means they do not require savings in order to lend.” So Montgomerie seems to saying that when banks expand their loans by £Y there is no additional £Y of savings to match that.

Well it’s perfectly true that when a bank lends, it can produce the relevant money from thin air and lend that to borrowers. Unfortunately that does not mean that no saving takes place to match that borrowing. Reason is that when borrowers spend the money they’ve borrowed, that money inevitably ends up in the bank accounts of others. I.e. for every £X of extra loans, there is an extra £X of deposits or “savings”.

In short, and as common sense suggests, for every £X borrowed from a bank, there is £X saved by someone somewhere. Indeed, bank balance sheets would not balance if their assets (i.e. loans) were not matched by liabilities (i.e. sums owed to depositors, bond holders etc).


Conclusion.

To summarise, I’ve dealt mainly with the first half of the book. That’s enough for now. There are plenty more flaws in the second half which I may deal with at a later date if Montgomerie’s idea looks like becoming popular.

Joseph Huber tries to criticise MMT.

That’s in an article entitled “Modern Monetary Theory revisited – still the same false promise.”

On reading the article I came across so many errors in the first quarter or so, that I came to the conclusion that Huber does not have much of a clue about MMT, and gave up reading any further. The errors in the first quarter are as follows.

In his first paragraph, Huber says, “MMTers tend to speak of” their ideas “as if it were all their own invention”. Actually MMTers have repeated over and over that they owe a bid debt Abba Lerner (a contemporary of Keynes’s). Plus (speaking as someone who has supported MMT for about ten years) I’m happy to admit that MMT is very much Keyes writ large.

Then in his third paragraph Huber says MMTers do not “see any need for monetary and banking reform.” Well it’s certainly true that MMTers do not concentrate to any big extent on bank reform, but that is not a brilliant criticism of MMT: the fact that a group of people who specialise in one set of ideas do not consider another set is not a good criticism of their ideas on the first set. The fact that a group of biologists concentrate on vertebrate animals and ignore invertebrates is not a brilliant criticism of their ideas on vertebrates.

Moreover it is not entirely true to say that MMTers have ignored bank reform: it would be pretty amazing if Warren Mosler, who founded MMT and runs a bank, had nothing to say on the subject. He actually published an article in Huffington on the subject. (Article title: "Proposals for the banking system.")

In addition, there has been plenty of debate in the comments section of Mike Norman’s MMT blog on the merits of full reserve banking, which is the system that Huber wants.


Central and commercial bank created money.

The next bizarre claim by Huber is where he says “Equally, they (MMTers) were confronted with the question why – if what we have is supposed to be a sovereign currency system – there is that strange ban on the government to create money….”. So who are these MMTers who claim we have a Sovereign Money system (aka full reserve banking). Huber doesn’t tell us who they are and quotes no relevant works by MMTers.

In fact there are articles by Bill Mitchell (co-founder of MMT) which are perfectly clear the existence of commercial bank created money. E.g. see Mitchell’s article “Deficit spending 101 – Part 3.” (Mitchell actually refers to central and commercial bank  money respectively as “vertical” and “horizontal” money.)

Speaking as someone who has written a book advocating a sovereign money system and who has read about a thousand articles by MMTers over the last ten years, I think I’d have come across any MMTers who claim we actually have a sovereign money system at present. I know of no such claims!


No difference between endogenous and exogenous money?

Next Huber produces a novel idea, which got me thinking. That’s in his para starting, “The distinction between endogenous bankmoney and exogenous central-bank money . . . .  is arbitrary and overstated.”

He argues that exogenous money (aka central bank created money)  and endogenous money (aka commercial bank money) are the same in that each is produced in response to demand. Well that’s an interesting idea, but when it comes to exo and endo money, MMTers simply go along with the conventional wisdom, so if as per Huber’s claim there is in fact little distinction between the two forms of money, that is not a criticism specific to MMT.

But returning to his claim that there is little distinction between the two forms of money, it is true that in a very broad sense of the phrase, they are both produced “in response to demand”. But the motives for meeting that demand are very different.

In the case of commercial banks, the producers of endo money, they are motivated by profit: that is, they lend to any viable looking borrower who asks for a loan. In contrast, when a central bank  issues exo money, it is motivated by what it sees as the needs of the country as a whole, and not profit.

Moreover, when a commercial bank supplies £X to a borrower, the latter is in debt to the bank: the borrower is expected to pay that money back at some stage. In contrast, if the state (i.e. central bank and government) created extra money and spent some of it employing me to decorate a government office, I would not be in debt to government or central bank to the tune of whatever they’d paid me.

It has been argued that central bank issued money (exo money) involves a debt in that government can demand that money back via increased taxes. But that’s a questionable argument: it does not invalidate my above point that when government pays me £X to decorate their office, I might at the same time owe them less than or more than £X in tax, but I most certainly do not owe them £X simply because they have supplied me with £X.

So I suggest the conventional distinction made between exo and endo money is in fact valid, contrary to Huber’s claims.


GDP increasing money creation.

Next (para starting “Most Postkeynsians…”) Huber criticises MMT for paying no attention to the distinction between money created for GDP increasing purposes and in contrast, for the finance sector, much of which, according to Huber, does not increase GDP.

Well the answer to that is that there are some apparently non-GDP increasing types of money creation (e.g. a loan to buy an existing house as opposed to a new house) which actually do increase GDP, as I explained here. (Article title: “Borrowing to build a house is no more productive….”)

However, that’s not to say there are no murky, clever-clever transactions done in financial centres like the City of London which are very suspect and non-productive. Adair Turner was doubtless right to say that much of what the City of London does is “socially useless”.

However, the fact that MMT ignores the latter “socially useless” problem is not actually a weakness in MMT. Reason is that it is perfectly reasonable to assume that if the economy is not at capacity, and the state creates and spends more money, that some of the extra activity will be socially useful and some will be useless.

Ergo one of MMT’s basic claims (also spelled out by Keynes) namely that creating and spending money (and/ or cutting taxes) is at least to some extent useful in a recession, is perfectly valid.


Only Huber (apparently) understands the difference between money and credit.

Next, in his para starting “Present day means of payment….”, Huber claims that not only MMTers, but also neoclassical and Postkeynsian economists do not understand the difference between money and credit.

Well I think just about every economist, MMTer or not, has tumbled to the fact that trade credit, i.e. a debt owed by one non-bank firm to another, is not a form of money.


Conclusion.

I’ve only got about a quarter of the way thru Huber’s article. It is clearly riddled with errors. So I can’t be bothered with any more of it.

The flaw in deposit insurance.

Suppose person X lends money to person Y, or hires out something else to Y like a car or house. If Y fails to repay the item borrowed, is there any obligation on taxpayers to reimburse X?

Well the answer is  clearly “no”. And why is the answer “no”? Well it’s because of a widely accepted principle that it is not to job of taxpayers to stand behind commercial transactions or reimburse those engaged in commerce if they make a loss.

Next, suppose person X lends money to person Y via a bank. That is, X deposits money at a bank with a view to earning interest (i.e. having their money loaned on by the bank), and the same happens: that is Y fails to repay the money. Plus let’s assume enough other borrowers fail to repay loans that the bank goes bust.

The same principle applies doesn’t it? That is, where X places money at a bank with a view to the bank lending the money on, X and the bank are into commerce just as much as where X hired out money (or anything else) direct to Y. In fact X is into commerce there just as much as if X placed money with a stock broker or mutual fund that invested in shares or corporate bonds.


Banks actually are intermediaries.

At this point, some readers may be tempted to object on the grounds that commercial banks are allegedly not intermediaries: that is, a commercial bank does not need a deposit from X before lending to Y.

Well, first that doesn’t in any way weaken the above point that when a bank lends money it is into commerce and is thus not entitled to taxpayer funded support if anything goes wrong with its money lending activities.

Second, while it is true that a commercial bank does have some freedom to create money out of thin air and lend it out, it cannot do that willy nilly. If a bank does engage in the latter “willy nilly” strategy, it will run out of reserves That is, the indisputable fact is that banks have to attract about as much money from depositors, bond holders etc as they lend out. Thus banks are to a large extent intermediaries.

To summarize so far, it would seem that government organised deposit insurance does not make sense in that it involves taxpayers standing behind commercial transactions.

However, it could possibly be argued that deposit insurance makes sense if it’s run on commercial lines. Well the first problem there is that it is debatable as to whether a GOVERNMENT run deposit insurance scheme (whether it’s deposit insurance or any other type of insurance) is a genuinely commercial operation: reason is that governments have access to almost infinitely large amounts of money if things go wrong. First, governments can grap near limitless amounts of money off taxpayers, and second, governments (along with their central banks) can print limitless money. And if that money printing leads to excess inflation who cares? If a government faced with large losses by banks prints excessive amounts of money to save those banks and causes excess inflation, at least government has made good on its promise to rescue banks!

A second problem with the idea that deposit insurance is OK if it is run on commercial lines, is that if government is going to have a Rolls Royce totally fail safe form of insurance for banks, that constitutes an artificial preference for or privilege for banks, in that there are a thousand other types of commercial activity, ranging from restaurants to garages and coal mines to aluminium smelters some of whom might like the idea of being insured against losses by a Rolls Royce insurer with an infinitely deep pocket.

To summarise, it looks like the arguments for deposit insurance do not stack up (as argued by the Nobel laureate economist James Tobin in his work “The Case for Preserving Regulatory Distinctions”).

However, that is not to argue that people are not entitled to a totally safe way of storing and transferring money. Clearly they are entitled to that. The point is that once they seek to have their money loaned out, i.e. as soon as they want interest, they are into commerce. They have crossed the Rubicon.

In short, the best system is where anyone who wants a totally safe method of storing money is provided with that option, provided their money is not loaned out. And that do you know? That’s full reserve banking: what James Tobin, Milton Friedman and some other Nobel laureate economists have long argued for.

 
Lending out “safe money” imparts stimulus?

A popular argument against the latter conclusion is that allowing “safe money” to be loaned out would be stimulatory, plus it allegedly cuts interest rates and encourages investment. Or put the other way round, the argument is that a ban on lending out safe money would raise interest rates and damage the economy (an argument put by the UK’s Vickers Commission, sections 3.20 – 3.24). Well the answer to that is that if stimulus is needed, that can be implemented at no real cost. 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." 

Thus there is absolutely no need to subsidise banks or give them any sort of artificial preference to enable stimulus to be imparted.

Debt jubilees are caught between a rock and a hard place.

The “rock and hard place” conundrum that faces the whole debt jubilee idea is as follows.

If a law is passed saying that a selection of debts no longer exist, then relevant saver / creditors are robbed. To illustrate with a simple example, if the debts owed to a particular bank are wiped out, i.e. declared to be null and void, then the shareholders, bond holders and depositors at the relevant bank are wiped out. Or to be more exact, the stakes that the latter three groups of people had at the bank become worthless, assuming for the sake of simplicity that the bank has no other assets.

An alternative is to wipe out a selection of debts and reimburse saver / creditors with money freshly created by government / central bank. But assuming the economy is already at capacity, that cash injection into the private sector will be inflationary.

To be more exact, debtors who find they no longer have to dish out interest every month will have cash to spare, plus their net assets will have risen, so they’ll go on a spending spree. And as to saver / creditors, they will now be too liquid: that is, cash will now make up a larger proportion of their net assets than previously. So they too will go on a spending spree: they’ll tend to buy up assets like a larger house or stock exchange quoted shares.

The conclusion so far is that the whole debt jubilee idea is a non-starter. However, that is clearly not to say we should not be concerned about inequalities. That is, it is possible that some of the less well-off incur excessive debts because the latter inequalities are excessive.

But the solution to that is to deal with the above inequalities via the usual mechanisms: relatively high taxes on the rich and social security, minimum wage laws etc for the less well off.

Having done that, if some of the less well-off incur excessive debts, that’s entirely their fault. Same goes for the well-off.

Conclusion: there is no place for debt jubilees. 

________________

 

P.S. (22nd April, 2019)

 
Another big problem with debt jubilees is that they are unfair on those who have not incurred debt. To illustrate, take two people on the same income one of whom decides to buy a house on a mortgage totalling £X, with the other renting. The £X mortgage is then wiped out via a jubilee. That means the mortgagor makes a £X profit, while the renter gains nothing. 
 

Mariana Mazzucato’s “mission-oriented” clap trap.

Mariana Mazzucato (economics prof at University College London) advocates what she calls “mission oriented” projects (like President Kennedy’s moon shot) since the latter can allegedly bring greater benefits in the form of technological progress etc than conventional methods of research. That’s in her book “The Value of Everything”.

Now any normal person (never mind a university professor) when trying to show that X is better than Y would try at least in a rough and ready way to estimate the costs and benefits of X and Y and try to show that the cost/benefit ratio for X is better than for Y. After all, we’re living in the 21st century, not the 13th century: we do try to measure things nowadays. But MM says absolutely nothing about the total costs of the moon shot, nor does she try to estimate the total benefits of technological spin offs from it.

She does exude a lot of impressive and flowery language in connection with the alleged benefits of moon shots and similar “missions”. But there is no actual measurement or even an attempt at measurement.

But it gets worse: she seems to claim that as long as something amounts to a “mission” it just has to be better value for money that boring old stuff like infrastructure improvement. That’s in this passage which I’ve put in green.

“The epigraph opening this chapter, in which Keynes argues the need for governments to think big – to do what is not being done – shows that he believed that government needs to be bold, with a sense of mission, not merely to replicate the private sector but to achieve something fundamentally different from it. It is wrong to interpret him as believing that what is needed from policy is to simply fix what the private sector does not do, or does badly, or at best invest ‘counter-cyclically’ (i.e. increase investments during the downside of the business cycle). After the Great Depression, he claimed that even paying men simply to dig ditches and fill them up again could revive the economy – but his work inspired Roosevelt to be more ambitious than just advocating what today would be called ‘shovel-ready projects’ (easy infrastructure). The New Deal included creative activities under the Works Progress Administration, the Civilian Conservation Corps and the National Youth Administration. Equally, it is not enough to create money in the economy through quantitative easing; what is needed is the creation of new opportunities for investment and growth – infrastructure and finance must be embedded within the greater systemic plans for change. President John F. Kennedy, who hoped to send the first US astronaut to the moon, used bold language when talking about the need for government to be mission-oriented. In a 1962 speech to Rice University he said:

“We choose to go to the moon in this decade and do the other things, not because they are easy, but because they are hard, because that goal will serve to organize and measure the best of our energies and skills, because that challenge is one that we are willing to accept, one we are unwilling to postpone, and one which we intend to win, and the others, too.””

I can’t be totally sure what Mazzucato means by “creative activities” above. She doesn’t elaborate. But presumably she’s referring to the fact that under the Work Progress Administration hundreds of people were employed paint pictures and do other forms of artistic work.

So there you have it. Instead of filling potholes in roads and repairing or renewing bridges, Mazzucato would spend tens of billions sending people to Mars and having unemployed artists paint pictures.

Is there an enormous demand for more pictures to adorn the walls of supermarkets, offices and public buildings etc near where you live? Can’t say there’s much demand in my neighbourhood. As for expeditions to the Moon and Mars, well I’d rather see the money (and we’re talking tens of billions) spent on infrastructure improvements.

How to cut UK carbon dioxide emissions by nine million tonnes a year.

 

 The UK dumps nine million tonnes of wood in landfill sites a year according to this source. That wood eventually rots down and the carbon in the wood is converted by microbes to carbon dioxide. But that’s carbon dioxide which is produced to no effect: that is, the wood could be used to heat buildings or generate electricity. Ergo if the wood was used for the latter purposes rather than being left to rot, millions of tonnes of coal and oil currently used to generate electricity would no longer be needed.  So the net amount of carbon dioxide produced by the UK would decline by roughly nine million tonnes. 

Of course given that wood consists of hydro-carbons, a significant proportion of wood consists of hydrogen rather than carbon. But that doesn’t make much difference in that that hydrogen could be used to generate electricity rather than just letting microbes mess around with it. 

Obviously the above is a very crude calculation. It is over-optimistic in that….

1. Some of the wood dumped in landfill has a significant water content. By the time that was dried prior to burning, that would cut the above 9 million to a smaller figure.

2. Transporting the wood to electricity generating plants results in carbon dioxide emissions.

But against that, the above “don’t let wood just rot” policy could be extended to woodlands: i.e. why not make it illegal to let trees and branches above a certain diameter just lie on the ground rotting away?

Of course rotting wood in woodlands does return some minerals to the soil and those minerals would be lost under the above “don’t let wood just rot” policy. But against that, the ash that results from burning wood contains some of those minerals, so that could be returned to woodlands. 

____________

 

P.S. I’m not an expert on this, but wood which is buried in landfill presumably is somewhat starved of oxygen, which means it won’t produce much carbon dioxide when rotting. I.e. aerobic bacteria presumably don’t thrive under-ground. On the other hand there are anaeorobic bacteria, and they presumably produce methane when rotting the wood. Methane of course is an even worse global warming gas then carbon dioxide.

But to repeat, I’m not an expert on this. The above article is just a kite flying exercise. 
 

Stephanie Kelton demolishes some of the more simple minded ideas about deficits and debts.

Stephanie Kelton demolishes some of the more popular and simple minded objections to deficits and rising national debts.

 

On the other hand I’m not entirely happy with her claim (about 30 minutes in) that we do not need to worry too much about where the money will come from to pay for a better social security system, more infrastructure spending etc. If taxes do not need to rise to pay for extra public spending, why do countries with high levels of public spending relative to GDP, also have high levels of tax relative to GDP?

(Hat tip to Lars Syll).

Open Democracy: the organisation which claims to back “free thinking” but hates free speech.

An article just published by Open Democracy entitled “Banking for the many” claims "A new retail bank should be established to provide a full range of retail banking services in every community..". 

Well if small bank branches in every village and suburb were profitable, existing banks would already be providing that service. But it's not, so they don't. Ergo the small branches proposed in the above article would need to be subsidised.

Plus given the ever increasing amount of bank business done online, and at ATMs the above proposal sounds to me like a return to the nineteenth century.

I tried to make the latter point in a comment after the article, but was told I’ve been banned from making comments there. Would be nice if they’d told me exactly WHY I’ve been banned, but evidently that’s too much trouble for them. My guess is that Open Democracy is scared of free speech: they don’t like being contradicted.

Free banking is virtually the same as full reserve banking.

The phrase “free banking” is used here as per this Wikipedia definition, which starts “Free banking is a monetary arrangement where banks are free to issue their own paper currency (banknotes) while also subject to no special regulations beyond those applicable to most enterprises.”

Also, under free banking, commercial banks do not need to hold any minimum amount of reserves, nor is there any deposit insurance.

But under that arrangement, anyone is free to stock up on central bank issued notes (e.g. $100 bills or £10 notes) – unless we’re talking about very strict versions of free banking where central banks are almost non-existent. Plus, under free banking, people are free to store money at government run savings banks (if there are any). E.g. in the UK there is “National Savings and Investments”.

But the latter two forms of saving – storing central bank notes and putting money into a government run savings bank  - amount to virtually the same thing as the so called “safe accounts” that are offered under full reserve banking!!

As to the investment accounts offered under full reserve, the normal procedure there is to have depositors who want their money loaned out by their bank buy into a mutual fund (“unit trust” in UK parlance). And the value of stakes in those funds varies with the value of the underlying assets, just as in any normal mutual fund / unit trust.

In contrast, under free banking, banks can promise depositors they’ll get their money back despite risks having been taken with that money: i.e. that money is loaned on. So the stakes that depositors have in a “free banking bank” is more in the nature of a bond rather than a share. That is, in the case of shares, the price of the share varies day by day and hour by hour. In contrast, in the case of bonds, the value is fixed in that assuming the relevant bank (or non-bank corporation) does not go bust, those investing in bonds ultimately get $X back for every $X they initially put in. 

But as just intimated, those “bond holders” know perfectly well that the value of their “bonds” can collapse to nothing. So to that extent, those bonds are not all that much different to shares or the stakes that depositors would have in mutual funds under full reserve. Indeed, in the US in the 1920s and early 30s prior to the introduction of deposit insurance, about a third of all deposits went up in smoke according to Irving Fisher. 

So all in all, what’s the difference between full reserve banking and free banking? Not much!!!!