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.

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