Thursday, 26 September 2019

Positive Money vindicated.

I’m delighted to see Chris Giles (economics editor at the Financial Times) advocate the idea, which has been advocated by Positive Money for about ten years, namely that the central bank (or some other committee of economists) should decide the SIZE OF the deficit, while politicians retain control of strictly political matters, like what proportion of GDP is allocated to public spending, and how that is split between education, health, law enforcement, etc. Article title: “Britain needs a new fiscal and monetary framework”.

Ben Bernanke actually gave an approving nod to that sort of idea a year or so ago.

Only trouble is that Chris Giles claims the idea as his own. Cheek!

Reminds me of the phrase “first they ignore you, then they laugh at you, then they fight you, then you win”.  There really needs to be a fifth item added to that phrase: “then they claim your idea as their own”!

Sunday, 22 September 2019

Is MMT too monetarist?

Frances Coppola claimed recently on Twitter that Warren Mosler (founder of Modern Monetary Theory) is too monetarist. I beg to differ: i.e. I think the extent to which MMT accepts monetarism is about right. Reasons are as follows.

MMTers certainly tend to claim that given inadequate demand, the private sector’s attempts to save money must be higher than usual, thus the solution is to create more money (base money in particular) and spend it into the private sector. And clearly that claim is not a million miles from the monetarist claim that GDP varies with the size of the stock of money (base money in particular), and the even more extreme version of monetarism, namely that the best way of controlling demand is simply to control the size of the stock of money.

First, there is nothing basically wrong with monetarism (on the dictionary definition of the word, i.e. the idea that GDP tends to vary with the size of the stock of money, base money in particular). To illustrate, when people win a lottery, or come by some other windfall, their weekly spending rises. Ergo if the central bank were to print tons of new money and distribute wads of it to everyone, total spending, i.e. aggregate demand would rise, and assuming the economy had spare capacity, GDP would rise. Alternatively, if there was no spare capacity, the only effect would be to raise inflation.

However, clearly monetarism can be taken too far: e.g. the idea that demand can be accurately controlled simply by adjusting the money supply is over-simple. But MMTers do not advocate the latter over-simple idea.

What they do argue (speaking as a self-appointed spokesman for MMT, ho ho) is that come a recession, the best solution is for the state (i.e. government and central bank) to create money and spend it, and/or cut taxes. Keynes advocated much the same. And that will have two effects.

First there is what might be called a fiscal effect: e.g. if the extra spending comes in the form of extra spending on education, then an immediate effect will be more jobs for teachers.

A second and more delayed effect is that the stock of money (base money in particular) rises, which will itself also raise demand.

Thus it can be said that not even extreme monetarists are extreme monetarists – in the sense that there is an inevitable fiscal element involved in feeding more money into the private sector.

Who controls the printing press.

Of course there is an obvious problem with creating money and spending it, namely that if POLITICIANS are in control of the money printing press, they may well be tempted to engineer pre-election booms. 

But the solution to that little problem was set out by Positive Money several years ago: have some sort of independent committee of economists, perhaps based at the central bank, decide the SIZE OF the deficit, while politicians retain control of strictly political matters, like what proportion of GDP goes to public spending, and how that is split between education, health, infrastructure, etc. Ben Bernanke incidentally gave an approving nod to that sort of system.


Another point in favour of the MMT stance here is that while MMTers do not claim adjusting the stock of money should the SOLE method of adjusting demand, their claim that inadequate demand proves there’s an inadequate stock of money is nevertheless true by definition – at least in the following sense.

If the private sector is spending an inadequate amount, that ipso facto means they are trying to save too much, or trying to save an amount that results in Keynes’s “paradox of thrift” unemployment. Put another way, if people are saving too much, those people must in their own estimation, have an inadequate stock of liquid savings (in the form of base money – or government debt, which as MMTers have often pointed out, is pretty much the same thing as base money). Ergo the claim by MMT, Keynes and others namely that given unemployment, there must be an inadequate stock of savings is true by definition.  And that is an argument in favour of at least a partial acceptance of monetarism.

Conclusion: the extent to which MMT accepts monetarism is about right.

Wednesday, 18 September 2019

A less than brilliantly clever article by Grace Blakeley.

This New Statesman article by Grace Blakeley isn't too clever. (Article title: "The next recession won't be like...") She argues that we’re doomed because given that interest rates are near or at zero, central banks won’t be able to cut interest rates come the next recession, plus she claims the automatic stabilisers won’t do the trick. And that’s it basically. Only slight problem is that she’s left out DISCRETIONARY fiscal stimulus. That is, the latter stabilisers are what might be called “non discretionary” i.e. they happen automatically. But in contrast, any government (particularly the government of a country which issues its own currency) is free to implement as much fiscal stimulus as it likes over and above the latter automatic fiscal stimulus. Indeed, that’s exactly what most governments did in the last recession.

But I’m not being desperately clever in making the latter point: I’m simply repeating what Keynes said almost a hundred years ago. You’d think Blakeley, who got a degree at Oxford in politics, philosophy and economics would have heard of Keynes and understood his basic message.

It could perhaps be argued that Blakeley is implicitly ruling out Keynsian fiscal stimulus in that she very briefly refers to the allegedly excessive levels of “total global debt”, which in her own mind presumably includes national debts, though she is not clear on that. That’s where she says,  “The global economy is facing a debt overhang (around $246trn) many times larger than that which preceded the financial crisis. Total global debt is three times the size of global GDP…” Well there are two answers to that.

First, as Keynes explained, there is no need to incur any extra national debt at all in order to fund fiscal stimulus: as he said, a country which issues its own currency can simply create new money and spend it, and/or cut taxes.

Second, the tired old argument that we can’t do too much fiscal stimulus because of the increased national debt that involves was PRECISELY the argument used by George Osborne, David Cameron and other Tories to limit stimulus (i.e. impose austerity  - in the “inadequate demand” sense of the word) in the last recession.

Though in fairness to the Tories, many if not most economics commentators employed the same crass argument, as Simon Wren-Lewis has pointed out over and over.

So if Grace Blakeley IS EMPLOYING the latter argument, then Blakeley, the left wing firebrand is agreeing with Tory pro-austerity arguments.

Now that’s a giggle.

Monday, 9 September 2019

Crass Project Syndicate article by Roger Farmer.

First, he claims the coexistence of low unemployment and low inflation disproves the conventional idea that the two are inversely related. (Article title: Central Banking's Bankrupt Narrative.)

No it doesn’t and for the simple reason that advocates of the latter relationship never said it stays constant thru time: i.e. the inflation / unemployment relationship can deteriorate OR IMPROVE – indeed, it would be surprising if it did stay absolutely constant thru time. Doh!

Second, he claims that if an interest rate hike were accompanied by his own bizarre idea that governments should hand out money to those who invest in the stock market, the net effect might not be the normal “higher interest rates damp demand” relationship. Well you don’t say!!

Apart from the dubious morality of handing taxpayers’ money to the rich, if an interest rate hike is accompanied by fiscal stimulus of any sort, it’s pretty stark staring obvious that the NET EFFECT can be stimulatory!!

Monday, 2 September 2019

To cut interest rates, they first have to be artificially raised, which involves the poor subsidising the rich – mad or what?

Why exactly do governments borrow? Well it’s not for the same reason as most private sector entities (households or firms) borrow, i.e. to make investments. While there are many who argued that government should borrow only to invest, that idea has not actually been put into practice.

The sad reality is that governments the world over borrow for a much more devious reason. The reason is that politicians are always tempted to ingratiate themselves with voters by increasing public spending and to ingratiate themselves even more by abstaining from raising taxes. That results in a need to borrow to cover the difference between money flowing into government coffers and the amount flowing out.

Simon Wren-Lewis (former economics prof at Oxford) calls that the “deficit bias”. And David Hume, writing three hundred years ago pointed to the same phenomenon. As Hume put it, “It is very tempting to a minister to employ such an expedient, as enables him to make a great figure during his administration, without overburdening the people with taxes, or exciting any immediate clamours against himself. The practice, therefore, of contracting debt will almost infallibly be abused, in every government.”

To summarise, the process that gives rise to government debt is for the most part as follows. First, politicians collect an inadequate amount of tax, i.e. they spend, or at least find themselves planning to spend more than will come in from tax each year. That in turn means the private sector (households and employers) are in possession of too much money (base money to be exact), and that would be inflationary if something were not done about it. So governments offer attractive rates of interest to those with cash to spare with a view to inducing those concerned to lock up their cash for a period of time, rather than spend the cash and thus cause excess inflation. And that whole process results in an entirely artificial rise in interest rates.

Worse still, it is not even clear that if public borrowing was limited to funding investments, that that would justify such borrowing. The reasons are obvious to every taxi driver: that is, if a taxi driver wants a new taxi and happens to have enough cash to buy one, the taxi driver won’t borrow money to buy the taxi!! Why pay interest to anyone when you don’t need to? In short, what justifies borrowing is a shortage of cash, not the fact of making an investment.

And as for large corporations, their investments are nowhere near all funded via borrowing: some of the funds come from shareholders and some from retained earnings.

But governments are never short of cash in that there is no limit to how much cash they can grab off taxpayers plus governments along with their central banks can simply print a certain amount of cash most years.

The latter point about the debatable reasoning behind “borrow to invest” simply reinforces the point that governments’ motives for borrowing are thoroughly murky, and probably unjustified.

To summarise so far, any rate of interest paid by governments on their debt is an entirely or largely artificial contrivance, and the same goes for interest paid by central banks on money deposited with them (i.e. interest on “reserves”).

But if a government does borrow, how is the interest funded? Well it’s funded out of general taxation, while the interest is paid (as already pointed out) to those excess amounts of cash. So in short, any rate of interest above zero involves robbing the poor to subsidize the rich!

Mad or what?

This simply reinforces the point made by advocates of Modern Monetary Theory (and Milton Friedman) namely that the best rate of interest is zero: i.e. that governments should not borrow, except perhaps in emergencies.

As for exactly WHERE advocates of MMT make the latter point, Warren Mosler, founder of MMT, made the point in the two works listed at the end below.


The above argument to the effect that any rate of interest above zero is unjustified (except in emergencies) leads to the inevitable and and somewhat disturbing conclusion that interest rate adjustments are not a justifiable way of regulating aggregate demand: that is, demand should be regulated simply by adjusting the amount of new money created and spent by governments and their central banks. 



1. Huffington article by Warren Mosler entitled “Proposals for the Banking System”, 2nd last paragraph.

2. Paper entitled “The Natural Rate of Interest is Zero” (co-authored by Matthew Forstater.)