Tuesday, 31 March 2020

Enhanced anti-virus face mask.


Official advice, e.g. from the World Health Organisation, is that face masks are a waste of time.

I’m not surprised: why would a virus be stopped just because it has to pass thru a bit of fabric? Obviously it might land on the fabric, but that won’t do it any harm, plus it might get dislodged and travel onwards into your mouth next time you breath in.

Morover, I suspect the seal around the edge of those masks you see people wearing is not too good.

In contrast, if the mask is soaked in soapy water, that will tend to kill Corona virus. Hence my home made enhanced mask pictured above which I’ll wear next time I have to go to a shop for groceries.

It’s made of 10mm thick foam rubber. If pulled tightly over the mouth, that ought to form a good seal round the edges.

Soaking it in soapy water obviously increases the resistance to air passing thru the foam rubber. If the rubber is completely saturated, the resistance is far too much. But the degree of resistance is easily controlled by squeezing some or most of the water out before putting it on.

Obviously it would tend to dry out and thus become useless after a while, but the actual degree of drying when I’ve worn it in a centrally heated room for five minutes seems to be negligible according to the moisture detector device pictured below. Plus anyone wanting to wear something like this for an extended period could easily carry a hand held device for spraying water on the mask from time to time to keep it moist.

The set up in the picture protects the mouth, but not the nose, so I need to take care to breath in only thru my mouth while in the shop. A “mouth and nose” protecting model ought to be feasible.

Clearly it’s desirable to maximise the AREA of foam rubber thru which air has to pass. That’s what the grooves in the rubber are for. The “groove side” of the mask faces my mouth, while the other side is not grooved and faces the outside world. The grooves help draw air in from AROUND the mouth rather than just the area of an open mouth: roughly 40mm x 30mm.

I’ll wear a standard white face mask over this contraption so as not to look too eccentric!
If you want to try this, it’s entirely at your own risk. I have no medical qualifications or other relevant qualifications in this area. This “soapy water mask” idea is certainly not guaranteed to give you total protection, but it might improve your chances. Plus soap (and similar substances like washing up liquid) give off various odours and chemicals and I have no idea what undesirable side effects might arise from breathing those in for an extended period.
If any undesirable side effects seem to arise from this idea, or if I come across any suggestions that there might be such side effects, I’ll put a note to that effect right here as soon as I can.

Stop press (4pm 31st Mar 2020).    Latest enhancement: two foam rubber plugs to go up my nose. Soaking them in soapy water, squeezing out most of the water and leaving them up my nose for 5 minutes does not seem to irritate my nose - if you're interested....:-)


Stop press (1st April). There's a guide as to the best materials for DIY masks at this site.

Friday, 27 March 2020

There’s no need for government to bail out corporations.


The stock response to any problem from the political left, is for “government to do something”, and the problems for corporations due to the Corona outbreak has elicited the above knee jerk response from Eric Lonergan and Mark Blyth in this IPPR publication, and from Ann Pettifor here.

Titles of the two works are respectively "Beyond Bailouts" and "The Macroeconomic Imperative of Nationalisation."

The first weakness in the above two publications is that none of the authors are aware of the perfectly workable free market response to the current crisis. To argue that a government lead response would be better than the free market’s is one thing, but to be totally unaware of the free market’s response indicates incompetence. So seems I better explain the free market’s response, which is thus.

One solution is for firms in difficulties to simply refuse to pay creditors, and then go along to creditors and politely inform them that creditors can of course push debtors into bankruptcy, but it’s very debatable as to whether that’s creditor’s best option, particularly given that debtor firms will in most cases be good bets in the long run.

Put another way, if creditors do push debtors into bankruptcy, are they really going to get all that many pence in the pound compared to what they’ll get if they allow debtors a period of grace?

And what do you know? Banks are actually adopting the latter common sense approach!

Plus the UK pub chain Weatherspoons has actually adopted the latter “tell creditors to get stuffed” strategy.

Plus the above sentiments of mine seem to be supported by David Andolfatto of the St Louis Fed in a Twitter thread on 25th March.

Moreover, even if creditors do push a corporation into bankruptcy, those corporations do not cease to exist, as seems to be implied by the above three authors. What happens is that, assuming relevant businesses look like being viable in the long term, then someone will make a bid for the business (at a knock-down or bargain basement price of course). Existing shareholders and bond holders are wiped out. Then when things recover, the new owners find themselves in possession of a valuable business for which they paid a bargain basement price.

Hey presto: those with cash to spare (Warren Buffet or whoever) make themselves a few million or billion! Problem solved.

Of course the workload on bankruptcy lawyers and accountants will be horrendous, thus the PACE at which bankruptcy can be organised will be much slower than usual. But the idea that government led rescues would be the solution to that problem is just pie in the sky: governments have enough to do just at the moment. Plus where does government get those who are skilled at valuing the assets of firms in trouble? Those skilled people are already fully employed trying to weigh the pros and cons of bankruptcies!

Monday, 23 March 2020

Ideas for protection against the virus.

The virus can allegedly enter your body via the eyes, though there seems to be some debate about this. Anyway, as a cheap precaution, if you’re forced to go to work on a crowded bus or train, wear one of these cheap eye protectors obtainable from most builders merchants, DIY stores or Screwfix. They cost next to nothing: between £2 and £10.
Not guaranteed to keep you safe of course, but they might reduce the chance of being infected. 

 A much more expensive and possibly better form of protection: one of these full face protectors with a battery powered air supply: £269 from Screwfix. Obviously you’d need to rig up some way of filtering the air thru some sort of cloth soaked in soapy water. Viruses would tend to get caught and killed by the soapy water.

Plus there’s the problem that the cloth would dry out fairly quickly, which would render it useless. So you’d need a fairly large volume of filter to slow down the rate of drying, or some sort of replaceable cartridge containing fresh and damp filtering clot. Solving those two problems would a DIY enthusiast’s idea of heaven.!

Plus there are a variety of other face or "mouth and nose" masks with replaceable filters available from Screwfix. It might be possible to do the "soapy water" trick with those. Though note that soaking a filter with soapy water increases the resistance to air flowing thru the filter, so you'd probably need some sort of DIY way of artificially increasing the size / diameter of the filters.

Please note: I have no qualifications whatever in medicine. If you try any of the above ideas, that’s entirely at your own risk. Plus DIY adjustments to face masks etc would obviously invalidate the manufacturer's warrenty.

Sunday, 22 March 2020

Professional economist says helicopter drops don’t work. Dear oh dear.


The “economist” is Kevin Dowd, who actually teaches part time at the my local university, two miles from where I live. In this article, entitled “Against Helicopter Money”, he says “The success or otherwise of helicopter money operations depends, therefore, on their purpose. If their purpose is to stimulate output, they would likely only have some short‐term success.”

Well perhaps I can explain why helicopter drops actually do work, and not just in the “short term”  - something that the average intelligent fifteen year old has probably worked out.

First, peoples’ weekly spending tends to vary (gasps of amazement) with how much money they have in the bank. Just to clarify, when people win a lottery (more gasps of amazement) their weekly spending tends to rise, as indeed the empirical evidence shows. So the INITIAL effect of a heli drop is pretty obvious.

Next, a heli drop puts more central bank issued money, i.e. “base money”, into the hands of households, and to repeat, households will tend to spend that money. But it’s important to note that when households spend that money, the money does not disappear: that is, if one household spends that money it simply ends up in the pocket of another household. In fact it is impossible for the private sector to dispose of base money! The only way to make the stuff disappear is for the state (i.e. government and central bank) to raise taxes and confiscate some of that money from the private sector, and then extinguish the money.

That is unlike private bank issued money. That money disappears whenever the non-bank private sector repays debts to banks. Thus in contrast to base money, the private non-bank sector CAN CHOOSE to dispose of private bank issued money. 

To summarise so far, a heli drop results in a PERMANENT rise in the private sector’s stock of money, and that will result in a PERMANENT rise in demand, all else equal, as everyone tries desperately to dispose of what they regard as their excess stock of money. That effect is sometimes called the “hot potato” effect.

And just in case anyone wants to raise the objection that base money (physical cash apart) is held only by private banks, not households or the non-bank private sector generally, the answer to that is that a household EFFECTIVELY has ownership and control of a tranche of base money even though they have no direct access to it. To illustrate, if the state credits everyone’s bank account with £X, private banks will immediately deposit that money at the central bank, while of course crediting the accounts that everyone has at private banks. So in EFFECT, household do actually have ownership and control over a tranche of base money: it’s just that private banks act as intermediaries between households and the central bank which actually stores the money.

Having said that, there is actually a sense in which Kevin Dowd is right, which is that inflation gradually whittles away the real value of the nation’s stock of base money. Thus if a heli drop is done in year one, and no more base money is created in years two, three, four etc, then gradually the stock would decline in real terms to its pre-drop value. However, that does not seem to be what Dowd had in mind.

Friday, 20 March 2020

Simon Wren-Lewis agrees with MMT to some extent.

Summary.   In the opening paragraph of a recent article, SW-L (pictured above) says “…fiscal rules should never involve targets for the debt/GDP ratio..”. MMTers will all agree with that. He also says “…public investment should not be part of a fiscal rule…”. That’s not a point that MMTers have made much of, but it’s a good point all the same. He also says “…fiscal rules should never involve targets for . . . . debt interest . . . “. That rather clashes with the MMT “permanent zero rate of interest” idea. I’m sticking to my “MMT guns” there, and argue below that MMT is right there and SW-L is wrong.

Simon Wren-Lewis (former economics prof at Oxford) makes the above points in an article entitled “Fiscal rules: a primer for the budget.”

The reason for thinking the debt/GDP ratio should never be a target is simply that attaining full employment (while keeping to the inflation target) is a vastly more important target. That’s first because minimising unemployment means maximising GDP, or maximising output per hour for the workforce as a whole. Second, there are undesirable social effects of excess unemployment.

As for the popular idea that interest on the debt will rise too much if a much larger than usual debt/GDP ratio is needed to minimise unemployment, why on Earth would government pay an elevated rate of interest on the debt? If creditors want a higher rate of interest on the debt, government should just tell them to shove off. That leaves creditors with what they regard as an excess stock of low interest yielding debt, and if that’s their view, then they’ll tend to try to spend away that excess (either on other investments or on current consumption) both of which tend to raise demand, which is precisely the object of the exercise!!

As for SW-L’s point that investment spending should not be part of the deficit, that’s correct and for the simple reason that it just isn't practical to switch on billions of dollars worth of investment projects, like infrastructure projects, come a recession, and then bring them to a grinding halt come the recovery. Indeed, that’s just an example of a more general point, namely that deficit spending should never be concentrated too much on any one area, else we get bad value for money from such spending.

A permanent zero rate of interest?

The basic argument behind the MMT permanent zero rate of interest idea is that government debt is simply base money which sundry private sector actors have loaned to government at interest. But why should people who want to hoard an excess stock of money be paid any interest for doing so, particularly as that interest is funded by taxes raised on the population in general, which includes the less well off?

Milton Friedman advocated a more or less permanent zero rate regime (i.e. a “no government borrowing” regime), though he thought government borrowing COULD BE justified in an emergency, like war time. (See under his heading “The Proposal”.)

That seems reasonable. I’d just add that another possible “emergency” is a serious outbreak of irrational exuberance, leading to excess demand. In those circumstances, having government withdraw base money from the private sector by offering attractive rates of interest on the money borrowed is clearly a useful tool to have in reserve. So a “more or less permanent zero rate” is better than a “permanent zero rate”.

So what are SW-L’s reasons for letting interest on the debt rise significantly above zero? Well they strike me as vague and complicated. In contrast the basic logic behind the MMT “more or less permanent zero rate” idea is beautifully simple and clear: to repeat, it is simply that there is no good reason to reward money hoarders with interest funded by taxes on the less well off.

A possible reason for having interest on the debt relatively high (i.e. permanently having the less well-off fund interest paid to money hoarders) is that adjusting the rate of interest may be a quicker way of adjusting demand than fiscal adjustments. Unfortunately the evidence does not support that: there is a Bank of England study which claims interest rate adjustments take a year to have their full effect.

Plus Jason Furman argues in a recent Wall Street Journal article that fiscal stimulus works relatively quickly.

The only reservation there, is that politicians can spend months quarrelling over the size of tax cuts/increases or the size of public spending cuts/increases. Well the solution to that problem is simple, and has been advocated by Positive Money for years: it’s to have some committee of economists decide the size of the deficit, while politicians retain the right to take strictly political decisions, like what proportion of GDP is allocated to public spending. That committee could perfectly well be the central bank committees which currently decide on interest rate changes at central banks. Moreover, Ben Bernanke gave a thumbs up to that sort of system recently.

E.g. the latter committee might decide that more stimulus in the form of an extra $Xbn with of deficit was needed in the next year. The committee would inform government of that decision, and hopefully government would then raise public spending by $Xbn, or cut taxes by $Xbn or some combination of the two.

Maybe government should have the right to ignore that advice from the above committee, on the grounds that in a democracy power should ultimately rest with democratically elected politicians. But any government failing to implement the advice of those experts would probably pay a penalty at the next election, especially if excess unemployment was the result of ignoring the advice. Any government which ignored the advice of medical experts in the current Corona Virus outbreak would pay a very heavy price at the next election. Plus possibly they’d have to deal with widespread riots.

Friday, 13 March 2020

Alberto Alesina: one of Harvard University’s pro-austerity crazies.


Harvard is a hot bed of pro-austerity so called “economists”: Kenneth Rogoff, Carmen Reinhart and Alberto Alesina etc, who have campaigned for the size of stimulus packages during the recent recession to be cut or limited.

Alesina has long been regarded as a laughing stock in Modern Monetary Theory circles, e.g. see this 2010 article by Bill Mitchell entitled “The deficit terrorists have found a new hero.”

He has a new book out, pictured above, in which the blunders and nonsense come thick and fast right from the first paragraph of Chapter 1. So I’ll start right there: at the beginning of chapter 1.

The first paragraph reads, “The term “austerity” indicates a policy of sizeable reduction of government deficits and stabilization of government debt achieved by means of spending cuts or tax increases, or both. This book examines the costs of austerity in terms of lost output, what types of austerity policies can achieve the stated goals at the lowest costs, and the electoral effects for governments implementing these policies.”

Well certainly for the simpletons who think government debt is comparable to a household’s debt, it doubtless seems that a country, like a household, has to sacrifice its standard of living in order to pay down its debt. The reality however is that governments / countries are not like households. That is, government debt (at least in the simple case of a closed economy, i.e. an economy which has no dealings with the rest of the world) is simply a debt owed by one portion of the population to another portion (owed to those who hold government debt).

Thus, and taking a rather extreme illustration, government debt could be wiped out tomorrow simply by passing a law saying the debt has been wiped out. There is no obvious reason why that would involve any significant “lost output” to quote Alesina.

As opposed to the latter extreme example, a less extreme way of cutting the debt is for government to simply refuse to roll over debt that reaches maturity: that is, debt holders could be paid off, and be told to get lost if they wanted new debt to replace the matured debt. That amounts to QE, and while it might seem that strategy might be inflationary, QE does not seem to have had much of an inflationary effect. But if it did, there is an easy remedy: raise taxes and do nothing with the money collected. That could, certainly in principle, damp down demand to the level that is consistent with full employment while avoiding excess inflation: i.e. there is no “lost output” involved there.

Open economies.

In contrast to the latter hypothetical closed economy, real world governments let foreigners buy their debt, and the latter “QE” method of cutting the debt would induce some of those investors to place their money elsewhere in the World, which would depress the value of the currency of the country concerned on forex markets. And that in turn would cut living standards in the relevant country for a while. But note that that is only a TEMPORARY or one off effect. Sooner or later living standards would revert to their previous level.

Balanced budgets.

Alesina’s second paragraph reads, “If governments followed adequate fiscal policies most of the time, we would almost never need austerity. Economic theory and good practice  suggest that a government should run deficits during recessions—when  tax revenues are low and government spending is high as a result of  the working of fiscal stabilizers such as unemployment subsidies—and  during periods of temporarily high spending needs, say because of a natural calamity or a war. These deficits should be balanced by surpluses during booms and when spending needs are low. In addition, forward looking governments might want to accumulate funds for “rainy days” to be used when spending needs are temporarily and exceptionally high.  If governments followed these prescriptions, austerity would never be needed.”

Spotted the blunders in that para? If not the first one lies in the suggestion that government should balance its budget over the long term. The flaw in that idea is as follows.

The private sector wants a stock of government debt and base money, but the inflation target is 2%, which means that the REAL VALUE of that stock, assuming the inflation target is hit more or less, will fall at about 2%pa. It therefor needs topping up most years, and the only way of topping it up is a deficit! That is, there is no source of base money (which may or may not be loaned back to government, thus creating government debt) other than government (and its central bank).

And if that topping up via a deficit does not take place, then the real value of the central bank notes which most people have in their wallets would eventually decline to the value of about one slice of bread: not much use for doing the weekly shopping! Plus commercial banks also use base money to settle up with each other, so they’d be up shit creek without a paddle just like the latter hypothetical “shopper”.

And what was that bit about “funds” in Alesina’s second paragraph supposed to mean? (“In addition, forward looking governments might want to accumulate funds for “rainy days” to be used when spending needs are temporarily and exceptionally high.”)

Did governments need to “accumulate funds” to deal with the bank crisis which began in 2007/8? Nope: when the Fed wanted to lend a trillion to commercial banks to help them thru the crisis, neither the Fed nor the US government needed a “fund”: what happened was the Fed just created a trillion by pressing buttons on computer keyboards!

If you’re starting to get the impression that Alesina is clueless, that’s my impression, and the impression of Bill Mitchell and others.

Alesina’s fourth para.

The first half of his fourth para runs as follows.

“The second reason why austerity may be needed is that sometimes  exceptionally large amounts of government spending (for example,  because of a war or a major disaster), perhaps even larger than  anticipated, create so much debt that it cannot be reduced simply with  economic growth. In some cases countries have grown out of debt, but this is not always possible. In the immediate aftermath of the Second World War growth and inflation were high enough to reduce the debt accumulated during the war years. But in recent decades this has not generally been the case. In fact, high debt itself is sometimes an impediment to growth, for instance because of the high taxes needed to finance the interest payments on the debt.”

Well the first odd point in that passage is that he is now admitting that inflation does in fact whittle away the real value of the debt! Why didn’t he take that into account in his second para? Moreover, and contrary to Alesina’s suggestions, it is quite untrue to say that inflation has been near non-existent in the larger developed countries over the last ten years. It’s actually been a bit under 2% as compared to the 4% or so (in the US) for the ten years after WWII: not a HUGE difference (contrary to Alesina’s suggestion). 

High debt impedes growth?

As regards Alesina’s claim that high debt impedes growth at the end of the latter passage, there’s a slight problem with that claim, namely that the REAL or inflation adjusted rate of interest on the debts of most large countries has been very close to zero!

Plus even if the real rate was substantially positive, why would that impede growth? The rate of growth is determined mainly by technological developments (ignoring, for the sake of simplicy, the effect of net immigration, if there is any). It is entirely unclear why the fact that one section of the population is making significant payments to another (holders of government) debt has any effect on technological development.

Moreover, interest rates in the larger developed countries in the 1990s were WAY HIGHER than they are. E.g. mortgagors in the UK typically paid THREE TIMES the rate of interest they do at the time of writing. But curiously growth was much better in the 1990s that it’s been for the last few years, which makes a mockery of Alestina’s claim that high interest rates damage growth.


To judge by the first few paragraphs of his new book, it looks like Alesina is every bit as incompetent as he was ten years ago, thus I can’t be bothered with anymore of his nonsense.

As for why incompetents manage to keep their jobs at universities, the reason is that economics, like one or two other professions, is for middle class boys and girls who have no interest whatever in calling each other out when they spot incompetence. Why rock the boat when you and your colleagues are making nice living ripping off taxpayers and fee paying students? And why bring your own profession into disrepute by revealing that it contains incompetents? It’s not in your interests, is it?

Saturday, 7 March 2020

Ann Pettifor claim’s she’s found a flaw in MMT.

Summary.      Ann Pettifor claims MMTers ignore the fact that after a period of larger than normal deficits, the recovery often becomes self-sustaining, which in turn means more tax dollars flowing into government coffers, which in turn cuts the deficit. In fact MMTers are aware of the latter point, thus MMTers and Ann Pettifor actually agree on that issue.


Ann Pettifor makes that above point in this article of hers entitled “‘Deficit Financing’ or Deficit-Reduction Financing?”.

She points out (rightly) that advocates of Modern Monetary Theory are keen on sectoral balances, in particular the point that every dollar of public sector deficit must be matched by a dollar increase in the private sector’s surplus. But she then says that clashes with her own research which shows that an increase in the government / public sector deficit, far from leading to a rise in the national debt, can actually CUT IT, because the latter initial deficit boosts economic activity, which in turn raises tax revenues flowing into government coffers a year or two later.

Well actually MMTers in my experience are well aware of the latter possible delayed and counter-intuitive effect of a rise in the deficit. Put another way, the latter “government deficit equals private sector surplus” point made by MMTers is simply the INITIAL effect. Delayed effects a year or two later are another matter.

Indeed Ann Pettifor quotes at length from an article by Bill Mitchell (co-founder of MMT) which makes the above “public deficit equals private sector surplus” point, and Bill in turn quotes with approval several passages from a Guardian article by Paul Segal which very much hints at the latter delayed effect. Title of Mitchell’s article is “Deficits are our saving”, and the title of Segal’s is “The national debt is money the government owes us”.

 Segal says, “And when the economy starts to recover, the deficit will decline in any case, as investment and tax receipts rise. Household saving will also decline with time from its current high rate: saving rose because we became so indebted during the boom years, running down our savings and buying goods on credit. Having built up so much debt we now want to pay some of it off. But once we have paid off enough of that debt, our saving rate can decline and private spending pick up, further helping reduce the deficit.”

Certainly Bill Mitchell does not CRITICISE that point of Segal’s.

As to EXACTLY WHY the above counter-intuitive effect is likely to occur, neither Mitchell nor Segal spell that out (though I’m sure Mitchell does somewhere in EXTREMELY LARGE amount of stuff he has written over the last ten years or so. The explanation is actually as follows.

The INITIAL effect of a deficit, assuming the extra public spending goes on say education, is that more teachers are hired. But that has an additional or delayed effect which is that the bank balances of teachers rises, as do the bank balances of the shop keepers and shopkeepers’ employees where teachers spend their new found wealth. Now what do people do when they see their bank balances are larger than normal? They’re quite likely to spend a bit more (all else equal). Hey presto, after a few months or a year or two of a larger than normal deficits, the recovery becomes self sustaining! More tax dollars flow into government coffers, just as Ann Pettifor claims.

Conclusion.  There is actually no clash between Ann Pettifor’s views and the views of MMTers in this area.

Thursday, 5 March 2020

MMT in six hundred words.

Scott Fulwiller produced a paper which I gather Stephanie Kelton recommended to Larry Summers as an introduction to MMT. The title of the paper is "The Debt Ratio and Sustainable Macroeconomic Policy." Only trouble is that the paper is about 30,000 words.

Here’s my (perhaps cheeky) 600 word introduction.

1. Base money (i.e. state / central bank issued money) is a net asset as viewed by the non –bank private sector, and indeed as viewed by the private sector as a whole. It is also a very liquid asset: that is, it is most certainly a form of money. That’s as distinct from commercial bank issued money which is very definitely not a net asset for the non-bank private sector private sector: reason is that for every dollar of such money, there is a dollar of debt owed by non-bank entities to banks.

2. The typical household’s weekly spending varies with its stock of money: to illustrate, it’s pretty obvious that where a household comes by a thousand dollar windfall, e.g. a lottery win, the household’s weekly spending is likely to rise.

3. Ergo, to escape a recession, all the state needs to do is to create and spend more base money into the private sector, as indeed recommended by Keynes in the early 1930s. That works for two reasons, first the mere fact of spending that money will raise employment, e.g. spending more on schools causes more teachers to be employed. Second, there is the delayed effect of that spending raising households’ stock of money.

4. Note that while the conventional wisdom has it that only commercial banks can get their hands on base money (ignoring central bank issued paper money, e.g. $100 bills), that bit of conventional wisdom is not entirely correct. That is, when the state creates and spends more on the above mentioned schools for example, money flows into the bank accounts of teachers (and others), who deposit the money at their commercial banks,  and relevant commercial banks deposit that money at the central bank. Thus IN EFFECT teachers (and indeed butchers, bakers and candle stick makers) all possess or have control over sums of money lodged at the central bank (with relevant commercial banks acting as go-betweens between households and the central bank.

5. The arguments for government borrowing are far from clear. Milton Friedman and Warren Mosler (founder of MMT) advocated a “zero government borrowing” regime. While having the central bank (or Treasury) raise interest rates in an emergency, i.e. so as to cool down given a bout of irrational exuberance is clearly a useful tool to have in reserve, there is basically no point in the state (i.e. central bank and government) spending so much base money into the private sector, that the state then has to borrow some of that money back so as to cool things down.

Therein lies the logic of the MMT “permanent zero interest rate” idea: that is, the aim should be for the state to spend just enough base money into the private sector to bring about full employment without excess inflation, but no so much that the state has to borrow some of that money back at interest so as to cool things down. Apart from anything else, the latter borrowing involves collecting tax off the population as a whole, including the less well off, so as to fund interest paid to those who hoard money.

Monday, 2 March 2020

George Selgin’s book: “The Menace of Fiscal QE”.


Summary.   This book (or “essay” as Selgin calls it, since it’s shorter than the average book) basically argues against fiscal – monetary coordination (FMC), i.e. having the central bank create money with government spending it (and/or cutting taxes). Selgin’s reason is the inflationary danger.

Unfortunately, as is widely recognised nowadays with interest rates being at record lows, central banks may be right out of ammunition come another recession, in which case some sort of unconventional measure like FMC will just have to be used. But Selgin says very little on how that might work. So to that extent his work is not a useful contribution to the debate.

He does however refer briefly to a “coordinating method” advocated here, which is not set out in much detail but which seems to be roughly similar to the method Positive Money has advocated for about ten years, and which Ben Bernanke advocated a couple of years ago. But Selgin dismisses that method: he claims it still poses inflationary dangers.


There have been increased calls in recent years, as Selgin explains in detail, for direct central bank funding of various government programmes: i.e. calls for central banks to simply create money and to have government spend it.  For example there’s “People’s QE”, “Green QE” and advocates of Modern Monetary Theory tend to argue for that type of “print and spend” system, though in the case of MMT, the forms of spending envisaged are normally not limited to matters “green” or limited to anything else.

Selgin’s recently published book / essay, argues against this development because of the apparent inflationary risks: that is, he argues basically that once everyone, especially politicians, get the idea that the central bank can simply create / print money to fund popular vote winning types of public spending, there’s a danger that the printing presses will then go into over-drive with disastrous inflationary consequences.

The first problem with that argument is that in some countries, politicians have had effective control over central banks (what might be called “non independent” central banks) without disastrous inflationary consequences. The Bank of England was an example up to 1997 when it was given nominal independence. I.e. since WWII and up to 1997 UK politicians controlled the printing press. But for most of that time, inflation in the UK was not excessive. (Although having said that, I do favour independent rather than non-independent central banks.)

Second, given that central banks may be right out of ammunition come another recession, it’s pretty obvious that some sort of unconventional measure will be needed, e.g. FMC. But Selgin has little to say on how that might work. 

Indeed, the concluding chapter is so short (just over a hundred words) that I’ve reproduced it in full below just to demonstrate Selgin’s lack of concern as to how FMC might work.

But first some points on his terminology. His phrase “fiscal quantitative easing” is synonymous with FMC. Second, what he calls the “corridor system” is that system that existed before the very large increase in bank reserves that came about as a result of the 2007/8 crisis: that is, central banks influenced interest rates by keeping commercial banks short of reserves, and varying the extent to which they were short. That’s in contrast to what he calls the “floor system” which is the system in existence at the time of writing, i.e. a system that involves banks have a very large stock of reserves.

The concluding chapter runs thus.

The Fed’s post-crisis operating framework exposes it to pressure to resort to “fiscal” quantitative easing, aimed not at combating recession but at financing government programs. Should the Fed be unable to resist such pressure, or should Congress pass legislation compelling it to undertake fiscal QE, the consequences are likely to prove harmful to both the general public and the Fed itself. And although Congress might take steps to guard against such future abuse of the Fed’s quantitative easing powers, that solution is both less likely and less appealing than the alternative: which is for the Fed itself to rule out the possibility of fiscal QE by switching from its present “floor” operating framework to a symmetric corridor system.

And that’s it!

A possible coordination system.

Having said that Selgin has little to say on how coordination might work, he does refer to a system set out in a very brief and vague fashion in this article (which I dealt with yesterday on this blog).

The passage in that article which according to Selgin sets out a coordination system (which is called a “standing emergency fiscal facility” (SEFF)) runs as follows.

 “Our proposal is for an unusual coordination of fiscal and monetary policy that is limited to an unusual situation—a liquidity trap—with a predefined exit point and an explicit inflation objective. Quasi-fiscal credit easing, such as central bank purchases of private assets, could be operated by the SEFF rather than the central bank alone to separate monetary and fiscal decisions.”

But in the next paragraph, Selgin says “…what is to keep it (i.e. government) from abusing the SEFF? What guarantee is there, in other words, that the SEFF will itself remain entirely under the Fed’s control?”

Well perhaps I can answer that question with another question: what is to stop any government putting pressure, even extreme pressure on a central bank? The answer is “basically nothing”!

After all, government controls the Army, Navy, Airforce and the Police, and when push comes to shove you can’t argue with that lot. And in fact in various counties ever since central banks were first set up, politicians have tried to put pressure on central banks. Donald Trump is certainly not innocent on that count.

All we can do is agree on a set of rules on exactly how the monetary system, interest rates, the deficit and so on are to be organised and try to keep to those rules. Politicians may well trample on those rules, but in a country where there is respect for the rule of law, separation of powers and so on, any politician doing that runs the risk of unpopularity and losing the next election.

Positive Money.

Anyway, having criticised Selgin for his silence on how FMC might work, it is perhaps incumbent on me to be more positive and say how I think it should work. Well the answer is simple: I can’t improve on the system advocated by Ben Dyson (founder of Positive Money) and Andrew Jackson in their book “Modernising Money”, a system which Ben Bernanke recently said he approved of (though Bernanke didn’t specifically mention Dyson & Jackson or Positive Money).

Under the D&J system, the central bank controls not just interest rates, but also the size of the budget deficit. To be accurate, D&J say that it does not absolutely have to be the central bank which wields that control: they say it could by any independent committee of economists, but to keep things simple, let’s assume the central bank does that job.

So under that system, where interest rates had declined to near zero, and more stimulus was needed, the central bank would automatically start to think about expanding the deficit (funded by new money if the central bank thought that appropriate).

Note that the D&J system is entirely consistent with Simon Wren-Lewis’s claim, namely that when interest rates are significantly above zero, interest rate cuts should be used to impart stimulus, whereas when rates are at or near zero, fiscal stimulus should kick in.

D&J’s ideas are also consistent with the claim made by many MMTers (e.g. me) that we should have a permanent zero interest rate, i.e. that there should be no government borrowing.

A couple of obvious, but actually flawed objections can be raised to the D&J system, as follows.

1. It could be argued that D&J were arguing for full reserve banking and that their system is therefore not suitable for a conventional banking set up (fractional reserve). Well the answer to that is that the full versus fractional reserve argument is actually entirely separate from the “FMC versus no FMC” argument. I.e. the DJ system (minus full reserve) would be perfectly feasible.

2. It might be said in criticism of D&J that politicians have a right to have a say in how much stimulus we have in any given year and that the D&J system is therefore undemocratic. Well the simple answer to that is that politicians lost their say in how much stimulus there is long ago where central banks became independent!

That is, politicians can implement as much fiscal stimulus as they like, but if an independent central bank doesn’t like that, it will negate that fiscal stimulus with an interest rate hike!

Sunday, 1 March 2020

European Money and Finance Forum article tries to solve a problem solved long ago by Positive Money.

Summary. The EMFF article advocates a way of organising monetary / fiscal coordination which is actually pretty close to the method advocated by Ben Dyson, founder of Positive Money, about ten years ago.


The article is entitled “Dealing with the Next Downturn”.

My only reason for looking at this article is that George Selgin, while he recently wrote a book arguing against monetary / fiscal coordination (i.e. having the central bank create money with government spending it) nevertheless concedes that such coordination might have merits, and he recommended this article as a way forward with “coordination”.  Unfortunately, if you’re looking for something worthwhile on such coordination, this “Dealing with the Next Downturn” article is not recommended, for reasons set out below.

First, it’s important to note that this article is by four Black Rock people, thus this is probably a case of a financial institution (i.e. Black Rock) trying to buy academic credibility. But never mind, let’s run thru the article to see what it says.

According to the first paragraph of the summary, the purpose of the article (as suggested above) is to examine monetary fiscal coordination in view of the fact that central banks are near out of ammunition and thus may well have to resort to unconventional measures like monetary fiscal coordination come another recession.

The article starts (under the heading “An Unusual Staring Point”) with the bizarre but widely accepted idea that 2% inflation is some sort of end in itself. The reality is that 2% inflation is not any sort of fundamental objective: the fundamental objective is to minimise unemployment as far as is consistent with acceptable inflation, with 2% having been chosen (for no particularly brilliant reasons) as being the maximum acceptable amount of inflation. (To be clear, I’ve no big quarrel with the 2% figure, but it is nevertheless a bit arbitrary: 3% or 1.5% would do equally well I’d guess.)

The next section entitled “Eroding policy space” says nothing of interest, though there’s a large and impossible to miss reference to Black Rock (plus a similar reference in the next section) thus drawing attention to Black Rock is clearly one of the main objectives of the article.

As to the latter “next section” (entitled “Conventional Fiscal Policy”), this section trotts out another popular myth, namely that fiscal stimulus is  all very well, but the additional borrowing involved is likely to raise interest rates.

Well the first answer to that was given by Keynes nearly a hundred years ago, namely that there is no need to borrow to fund fiscal stimulus: that is, come a recession, governments and their central banks can impart stimulus by simply creating new money and spending it (and/or cutting taxes). So congratulations to the Black Rock authors for being about a hundred years behind the times on that one.

Indeed, it’s a bit odd in an article devoted to considering the possibility of having the central bank create money with government spending it, to ignore the possibility that the central bank can create money with government spending it!

Ricardian equivalence.

Then in the para starting “Record debt levels…”, the authors trott out another popular myth: that is they claim that if government and central bank print or borrow loads of money, households will think that money will need to be paid back and will thus cut their weekly spending so as to be able to afford the extra taxes raised to enable that “pay back”.

Well the idea that the average household keeps an eye on government debt and the implications for future adjustments for tax is straight out of la-la land. As Joseph Stiglitz put it, “Ricardian equivalence is taught in every graduate school in the country. It is also sheer nonsense.”

But never mind: the evidence is piling up that the purpose of this article is to churn out words with a view to the authors being paid loads of bucks by Black Rock and for Black Rock, as mentioned above, to buy academic respectability.


Then in the para starting “That highlights..”, the authors worry about the inflationary effects of creating money and spending it into the economy. Well if creating money and spending it (and/or cutting taxes) raises employment and inflation, then doing the reverse (i.e. raising taxes and WITHDRAWING money from the economy) ought to do the reverse! Can’t see the problem!

Then the authors do in a very vague way set out some sort of coordination system. They say "Our proposal is for an unusual coordination of fiscal and monetary policy that is limited to an unusual situation – a liquidity trap – with a pre-defined exit point and an explicit inflation objective. Quasi-fiscal credit easing, such as central bank purchases of private assets...".

Well now Positive Money (or perhaps I should say Ben Dyson, founder of Positive Money) set a very simple and clear “policy framework”. It’s to have the central bank determine both interest rate adjustments and the size of the deficit, while politicians continue to take strictly political decisions, like what percentage of GDP is allocated to public spending.

For a quick summary of the Positive Money system, see under the heading “Bank of England would choose…” (p.10-12) here.

Note that while that work authored by Positive Money and others advocates full reserve banking, the full versus fractional reserve argument is actually quite separate from the coordination debate. That is, it would be perfectly feasible to switch to a system where the central bank determines both interest rates and the size of the deficit in the US, UK or anywhere else within the next month or two, and without switching to full reserve.


The EMFF authors seem to be fumbling their way in a vague sort of way towards a system set out in much more detail around ten years ago by Ben Dyson and Andrew Jackson in their book Modernising Money.