Thursday, 30 April 2020
Adam Tooze got a degree in economics at Cambridge and is now a history prof at Columbia University. His recent article in the Guardian arguing that a high post Corvid debt is not an excuse for austerity has gained general approval, and rightly so. (Article title: “Should we be scared of the Coronavirus debt mountain.”)
However he rather goes off the rails towards the end of the article on a few technical points. Details on that are in the paragraphs below.
His third and fourth last paras are as follows (which I’ve put in green italics).
“There is one mechanism through which we can ensure we truly owe the debts to ourselves. That mechanism is the central bank. Its principal job is to manage public debt – and at a moment of crisis central banks do what they must. They buy government debts or, in what amounts to the same thing, they open overdraft accounts for the government.
That has two effects that, acting together, have the potential to negate debt as a political issue. Central bank intervention lowers the interest rate. If interest rates are held down, debt service need not be an onerous burden. At the same time, the central bank purchases remove government IOUs from private portfolios and put them on the balance sheet of the central bank. There, they are literally claims by the public upon itself."
Contrary to Tooze’s suggestions, the fact of the central bank buying government debt has little effect on the extent to which “we owe the debt to ourselves”, and for the following reasons.
Where such debt is not bought by the central bank, that debt is a debt owed by the state (by which I mean government and central bank combined) to those who hold such debt: i.e. when that debt matures, government has to pay debt holders back with cash, with most of that cash being raised in the normal way, that is, grabbed the money from taxpayers. Though of course, government can (and normally does) roll over the debt, i.e. pay debt holders back with money raised from new debt holders (who to a significant extent will be the same lot of people).
But government or central bank can create limitless amounts of the latter cash (aka “base money”) either via pressing buttons on computer keyboards or by producing physical cash ($100 bills etc). Government, in the form of the Treasury, actually got into the money printing business in the UK during WWI.
Thus the stuff which is normally referred to as “government debt” (Gilts in the UK and Treasuries in the US) is only a debt in that the latter cash is also a debt. And indeed it is a debt to some extent: that is, anyone in possession of base money can get government to supply them with something of real value: goods or services offered by government, e.g. surplus public land or old military equipment which has been put up for sale.
Alternatively, the holder of the cash might use it to buy something from another private sector entity, with that entity choosing to demand real goods or services from government.
Thus having the central bank buyback government debt, contrary to Toose's suggestions, has no effect on the extent to which we "owe the debt to ourselves". Nor does it reduce the extent to which "government IOUs" are in "private portfolios".
Incidentally, the latter points are very much in line with the point long made by MMTers, namely that there is not much difference between government debt and zero interest yielding base money.
Next, Tooze says “Central bank intervention lowers the interest rate”. Well the answer to that is that interest rates are already at record lows: only slightly above zero. So that point is of limited relevance.
Debt as a political issue.
Then he says that buying back the debt tends to “negate debt as a political issue” by which he means, to judge by the associated link, that while there may be a need to cut the debt, there would be no need to cut the stock of base money, if debt is swapped for base money (which is what the buy-back consists of).
Well that idea is flawed and for a reason already alluded to above, namely that there is little difference between debt and and base money. Indeed, in the World’s financial centers, short term government debt is accepted in lieu of money.
To expand on that, the reason the debt may need to be cut is that (as MMTers have explained) the debt is a private sector asset, or a “Private Sector Net Financial Asset” to use MMT phraseology. But so too is base money! And an excessive stock of either of those two in private sector hands will obviously tend to encourage spending by the private sector, which may go too far and stoke inflation.
Then in his second last para, Tooze says “….modest inflation would help us by taking a bite out of the real value of the debt.”
Well there’s a slight problem there, namely that if the state’s creditors (i.e. those who buy government debt) get the impression that the state will let inflation eat away at the real value of the debt to an excessive extent when the debt gets a bit high (or indeed when it’s not particularly high) then those creditors are going to charge a relatively high rate for lending to government.
Indeed, the 1970s inflationary episode resulted in rates remaining on the high side for most of the 1980s: relevant creditors had no intention of being robbed TWICE.
In short, excess inflation would not be a brilliant idea post Corvid any more than it’s a brilliant idea any other time.
To summarise, Tooze makes several mistakes.
High debt is no excuse for austerity.
However Tooze is quite right to say (to repeat) that a relatively high debt is no excuse for austerity (in the sense of deficient aggregate demand). The reason why a high debt is often SEEN AS a reason for austerity is the entirely fallacious idea that government budgets (macro-economics) can be compared to the budget of a MICRO-ECONOMIC entity like a household or firm.
That is, a household can obviously cut its debts by spending less while maintaining its income. Unfortunately if government does that, aggregate demand declines, which is not what’s wanted (unless demand and inflation are excessive). So how can the debt be cut WITHOUT affecting demand?
Well that’s a little problem to which I have long suspected rather a large number of economists (Tooze included) do not have the solution. The solution is as follows.
First, note that the debt can only be excessive if it leads to an excessively high rate of interest being paid on the debt. (And in the view of many MMTers, me included, “excessively high” means anything much above zero. Milton Friedman thought likewise)
So the solution is first to raise taxes and “unprint” the money collected at about the same rate as Gilts or Treasuries mature, while not rolling over that debt. That way government debt declines. And that of course has a demand reducing effect, as mentioned above.
But that is easily countered by cutting interest rates, which of course has the opposite effect: i.e. it has a stimulatory effect.
So, assuming things can be so arranged that the latter two effects cancel each other out, there is no net effect on demand. Hay presto: no austerity. Of course, getting the above two effects to exactly cancel each other out is not easy in practice, but certainly the latter “cancel out” strategy is the right one to go for.
I actually got the impression best part of ten years ago that most economists didn’t understand the above “unprint” point, so I wrote a paper explaining it, entitled “Consolidation causes little austerity”.
Monday, 27 April 2020
Hair cutting for those who (like me) are self-isolating might seem to be a problem. Well it isn't if you employ the Ralph Musgrave Heath Robinson Boris Johnson system, which is as follows.
Basically just get a bit of waste pipe – the sort used to drain sinks and baths. You’re bound to find some lying around somewhere, e.g. in a skip.
Attach the pipe to your vacuum cleaner hose (on the left in the picture). Cut a slit in the pipe which is just big enough to take the pair of scissors you’re going to use to cut your hair. When the end of the pipe not attached to the vacuum cleaner is placed against your head, your hair is drawn up the pipe and between the blades of a pair of scissors.
The "scissor hole" needs to be a distance from the end of the pipe which is equal to the length of hair you want left on your head (about 50mm in my case).
Cut some notches in the end of the pipe which goes against your head so that when the pipe is place against your head, plenty of air is draw in to force your hair up and into the gap between the scissor blades.
Then with the vacuum cleaner on, move the pipe back and forth over your head with one hand, while your other hand opens and closes the scissor blades. Bits of hair cut off are of course drawn into the vacuum cleaner bag. Obviously, having done that, you'll need to go round the back and sides with scissors or a barber's electric trimmer to tidy up a bit.
If the diameter of the waste pipe is EXACTLY the same as the vacuum cleaner hose, you may be able to find a so called “straight connector” (designed to connect two bits of waste pipe) to connect the two. If you can’t find a connector, then cut a length of waste pipe about 50mm long lengthways (as in the pictures) and force that over both the vacuum cleaner hose and the bit of pipe which the scissors enter – see pictures below.
Then push the “up against your head” bit of pipe hard up against the vacuum hose end – see picture just below.
If the waste pipe is SLIGHTLY bigger than the vacuum hose end, you may be able to force it over the vacuum hose end. If it won’t go, try cutting some lengthways slits in the waste pipe. Alternatively put the first 40mm or so of waste pipe into boiling water for about 20 seconds. That will soften it, and enable it to be forced over the vacuum hose end. After leaving to cool, you will find the now expanded bit of waste pipe WILL RETAIN its new diameter, so when using it a second and third time, there will be no need to put it in boiling water again.
I found the above system works a treat. I doubt I’ll ever go to a barber again. Think of the time and money saved.
BTW: use a new vacuum bag, not a used/dirty one because that will cut the strain on the vacuum cleaner motor and cut electricity consumption. Plus if there’s an inner bag in the vacuum bag, remove it, or at least part of it: there’s no fine dust to collect, so two bags are superfluous.
Warning: this is all at your own risk. I’ve no idea what the potential hazards are. You may get sucked up into the vacuum cleaner bag and meet your demise there.
Sunday, 26 April 2020
Governments are handing out large amounts to the swollen ranks of the unemployed and to businesses large and small right now. Unsurprisingly there’s been some agonising about whether that will cause excess inflation and excess national debt in a few months’ or a year’s time: e.g. see this article by Olivier Blanchard (former chief economist at the IMF), and this by Dean Baker. (Title of Baker's article: "Debt and deficits with the Coronavirus", and Blanchard's article: "Whaterver it takes....".)
So what’s the answer to the latter “agonising” question? Well I suggest it’s more or less as per what I said in the right hand column of this blog on 16th April, which is as follows.
First there is the question as to whether the effect of Corvid related layoffs has raised aggregate demand (AD) relative to aggregate supply (AS). Well I suggest that if a group of people are told they can’t go out to work and continue making and selling stuff, then AD and AS decline by the same amount, roughly speaking. To illustrate, if someone is told they must stop making and selling £X of goods a week, then AS obviously falls by £X a week, plus the £X a week that that person would have spent on consumer goods will also decline by £X a week.
But that’s not the end of the story of course: as a result of that person’s unemployment, government will give that person £Y a week by way of unemployment benefit and perhaps other benefits. Ergo the deficit rises by £Y a week in respect of that person, while obviously £Y (or thereabouts) must be multiplied by the total number of people layed off to arrive at the total deficit, plus amounts handed to businesses must be added in, of course.
If that extra government spending (net of government income from tax etc) comes from plain old money printing, which certainly seems to be the case in the UK at the moment, then clearly there’ll be a sharp rise in the national debt or the stock of base money. As MMTers have long tried to explain, the debt and base money are essentially the same thing, the only difference being that debt is money that has been locked up for a period of time, and on which interest is normally paid. Plus MMTers sometimes refer to the sum of base money and national debt is “Private Sector Net Financial Assets” (PSNFA).
Now it’s a pretty safe bet that peoples’ weekly spending varies approximately with the size of their stock of money, or more generally with the size of their stock of “debt plus money” i.e. PSNFA. Certainly it is true to say that all else equal, the most reasonable assumption here (which could of course be wrong) is that the increase in PSNFA will result in excess demand and excess inflation in a year or so’s time, when things get back to normal, or at least something nearer normal than we are experiencing at the moment.
So the conclusion is that the most reasonable thing governments should do (which in eighteen months or so could turn out to be the wrong thing to have done) is to start raising taxes to pay for the large handouts currently being given to the unemployed, businesses, etc. Certainly I don’t see the basis for the claim by Gita Gopinath (IMF chief economist) that we should plan for extra stimulus when the Corvid crisis subsides. (Title of her article: "IMF Urges Post-Pandemic Stimulus....".
Sunday, 12 April 2020
I’ve been rummaging thru some articles published by the above august institute. One of them is entitled “Whatever the weather: future-proof budget rules.” To describe the grasp the authors have of economics as “Neanderthal” seems about right.
They advocate a specific or fixed target for the national debt. As advocates of Modern Monetary Theory and more recently Simon Wren-Lews have explained, there should never be specific targets for the debt or deficit. That is, the central and only central objective should be to minimise unemployment in as far as that is consistent with acceptable inflation.
That will mean relatively large deficits, and hence a rising debt in some years, and occasionally it will mean a “negative deficit” (i.e. a surplus) in other years.
Another article is entitled “How extremist groups are responding to Corvid-19”.
The article is curiously quiet about the religious extemist known as “the Pope” who claims the virus is the result of global warming, or the leading Rabbi who claimed it’s God’s punishment for gay pride parades. That’s doubtless because Tony Blair himself is a devout Christian.
Also, you’ll be amazed to learn there is no mention of the well known extremist, Tony Blair, who helped kill a million Arabs in Iraq for no good reason.
A third article goes into details on the truly awful Islamic revolutionary movement in Iran. So has dim-wit Blair who thought it would be a good idea to Islamise the UK twenty years ago finally seen the light?
Friday, 10 April 2020
1. If government and central bank dish out freshly created money to households and/or firms in trouble, that will result (all else equal) in a bloated stock of base money (aka “government debt”) in a year or so’s time, which will have to be reined in via tax increases, and/or interest rates will have to be artificially raised. (As MMT has explained, base money and government debt are pretty much the same thing.)
2. It’s possible the latter new money could stoke inflation BEFORE the year is out, though given the lack of anything to spend money on because so many retail outlets have closed and airlines are grounded, it’s a doubtful that new money will stoke inflation in the next year or so.
3. Rather than go for the latter sudden rise in taxes and/or interest rates in a year’s time, it’s preferable, as far as possible, to raise taxes NOW. In effect that means the better off pay for the expanded unemployment benefit bill NOW.
4. Also, and again, so as to avoid the latter spike in taxes and/or interest rates in a year’s time, it is desirable to minimise the above handouts in as far as that’s compatible with everyone having at least the basic essentials. I.e. handouts for firms are not a good idea because the free market has perfectly good solutions for that problem: basically debtor firms go bust and get taken over by those with cash to spare, and/or creditors do a bit of debt forgiveness and/or grant longer periods over which to repay debts.
Wednesday, 8 April 2020
Summary. Much of Selgin & White’s work “In Defense of Fiduciary Media…”, published in 2005, is a thoughtful consideration of the much disputed question as to whether our existing or “fractional reserve” bank system is fraudulent. One argument they put against the fraud charge is that fraud only takes place where someone loses money for unacceptable reasons. Actually there is such a thing as a fraudulent offer: that is, it is possible a system or organisation to be fraudulent because of the fraudulent offers it makes, even if no one actually loses money.
Selgion and White (henceforth "the authors") also argue against full reserve banking, as they usually do. However, it is argued below that full reserve is actually compatible with Selgin & White’s views.
The basic “fraud accusation” made against fractional reserve is as follows. Fractional reserve banks accept depositors’ money and lend on that money, but then claim depositors’ money is totally safe. That is, banks promise depositors that assuming a depositor does not ask a bank to transfer some of the depositor’s money to a third party, the depositor will get $X back from the bank for every $X deposited (possibly plus interest and possibly less bank charges). But that promise is clearly fraudulent because much of that money is loaned on by the bank, and loaned out money is never totally safe. Indeed, any promise of that nature is classed as fraud when done by financial institutions other than banks (e.g. pension funds, mutual funds, unit trusts etc). Ergo the reality is that it is fraud when done by a bank: it is only legal because governments have given banks an entirely artificial form of privilege, namely excusing them from the “fraud charge”.
Incidentally and re the idea that banks are not intermediaries, but rather entities which create the money they lend from thin air, I deal with that point here. Plus a Bank of England article makes much the same points in that connection that I do: the point being that while commercial banks do create money, they also act as intermediaries. (Title of the two latter works are respectively, "Our bank system is fraudulent and risky" and "Money Creation in the Modern Economy")
One debatable claim by the authors, is as follows.
In the first para under the heading “Rebutting the charge of fraud” (p.86), the authors invoke a definition of fraud which does not stand inspection. The definition is “failure to fulfil a voluntarily agreed upon transfer of property”.
Well I suggest that whether or not a failure to transfer property takes place or not has no bearing on whether the offer made by banks to depositors is fraudulent or not.
To illustrate, if I offer to take money off you and put the money on a horse and I tell you you’re guaranteed to win money or at least get your money back, that is a fraudulent offer, and for the obvious reason that any horse can perform badly on a particular day! Whether you actually give me money, and whether you actually do or don’t get your money back has no bearing on whether the original offer was fraudulent.
Indeed, I consulted a lawyer friend of mine on this, and he confirmed that the common sense view here correct: that is, a dishonest or fraudulent offer is itself fraud regardless of whether anyone loses money as a result of the offer.
Fractional and 100 percent reserve accounts.
Then in the next paragraph, the authors argue that banks only act in a fraudulent way if they claim to operate 100 percent reserve accounts when in fact they are operating fractional reserve accounts. As they put it, “…it is fraudulent for a bank to hold fractional reserves if and only if the bank misrepresents itself as holding 100 percent reserves, or if the contract expressly calls for the holding of 100 percent reserves.' If a bank does not represent or expressly oblige itself to hold 100 percent reserves, then fractional reserves do not violate the contractual agreement between the bank and its customer…”. (The authors make much the same point near the bottom of their p.88).
Well the simple answer to that is that about 90% of depositors don’t have any idea what the phrases “100 percent reserve” or “fractional reserve” mean! Thus the authors’ “100 percent / fractional reserve” point is plain irrelevant.
The reality is that most depositors are persuaded by banks that depositors’ money is totally safe, and the second undeniable reality is that that money just isn't totally safe: witness the fact that taxpayers had to come to the rescue of sundry banks during the bank crisis that started in 2007/8!
I.e. fractional reserve is only safe because governments back the fraud / risky practice that is fractional reserve with near limitless amounts of taxpayers’ money.
Interference with free markets.
Next, in the para starting “But whether the informed…” (p.88), the authors argue that a ban on fractional reserve would amount to an unjustified interference with the right of banks and depositors to come to mutually acceptable agreements.
That’s a good point: i.e. it is hard to see why depositors should not have fractional reserve accounts, as long as relevant banks make it abundantly clear that depositors’ money can go up in smoke any time. After all, people are free to place their money with mutual funds, private pension schemes etc and the latter sort of entities have to make it very clear that depositor / investors can lose as well as make money in the process.
Indeed, the authors say “The remaining normative debate boils down to the question of whether a warning sticker really is needed to avoid misleading customers . . . . . and, if so, to the question of how explicit the sticker must be.”
Well the authors do not answer the latter question, but never mind: I have an answer. The answer is that if banks offering fractional reserve accounts had to publish the the sort of “health warning” or “sticker” that mutual funds etc are required to publish and with equal frequency, then banks would be competing on a level playing field with respect to those other financial institutions. In other words that “level playing field” requirement would dispose of the current reality, namely that banks are artificially privileged in that they DO NOT need to make it clear that depositors that risks are involved in fractional reserve banking.
But we have now arrived at full reserve banking!
Astute readers will by now have realised that we have arrived, ironically, at the sort of set up advocated by proponents of full reserve banking, e.g. Positive Money and Lawrence Kotlikoff. That’s a set up where depositors have a choice of two types of account: first, totally safe accounts, where money is simply held in a totally safe manner and not loaned on and thus little or no interest is earned. Second, there are risky accounts (“investment accounts” as Positive Money calls them) where interest is earned. (Title of Kotlikoff's work: "The Economic Consequences of the Vickers Commission")
The only element that might seem to be missing from the set up we have arrived at is the latter “totally safe” accounts. Well actually totally safe accounts are in fact available!
As the authors make clear, full reserve accounts are already available in that people can store central bank notes (e.g. $100 bills) in safe deposit boxes (top of p.97).
Safe deposit boxes are relatively expensive, thus they are not an option for many people. However several governments operate state run savings banks where depositors’ money is invested just in government debt (“National Savings and Investments” in the UK).
That is clearly a much cheaper way of organising totally safe accounts, and indeed in the case of UK’s NSI, far from depositors necessarily being charged for holding such accounts, they actually get interest (depending on the type of account).
And as for countries which do not have state run savings banks, those who want their money to be stored in a totally safe way can always buy government debt, with short term debt being more appropriate here than long term debt, though of course that’s not an option for small savers.
Of course the latter interest paid by NSI rather clashes with the above mentioned “little or no interest” that people with safe accounts are supposed to get. Well the answer to that is that if government choses to pay interest to those depositing money with government, then more fool government: personally I agree with the idea backed by many advocates of Modern Monetary Theory (and Milton Friedman) namely that governments should normally pay no interest on money deposited with government.
To summarise, it seems that while the authors have criticised full reserve banking in numerous publications, their views are actually very much compatible with full reserve – bar one remaining problem, as follows.
Banning private money creation.
Most advocates of full reserve want to ban money creation by private / commercial banks. So does the above “set up” result in such a ban?
Well not in the sense that under the above set up people would be free to buy as much “fractional reserve money” as they wanted. But that money is not as genuine a form of money as base money in that fractional reserve money can suddenly lose value, if it turns out the issuer of the money has made silly loans. Thus that so-called money is not really money.
Another way in which organisations offering fractional reserve money might seem to be free to issue as much of the stuff as they wanted, in the way they can under the existing system, is for them to simply issue home made money to any borrower who looks viable.
However, there is a problem there for those “issuers” as followers. A proportion of the recipients of that new money will inevitably want their money to be in the above mentioned totally safe form: i.e. to take the form of base money. But it’s the central bank which determines the total stock of base money. Thus any of the above issuers which issue an excessive amount of home made money would find themselves short of base money (aka “reserves”). And possibly Selgin and White might not be too happy about that.
However, I suggest S&W need to bear in mind that central banks actually restrict the amount of home made money that commercial banks issue even under the existing system. To illustrate, if there’s an outbreak of Alan Greenspan’s “irrational exuberance”, and commercial banks create and lend out freshly minted home made money like there’s no tomorrow, the result will be an excessive rise in demand, as a result of which the central bank is likely to raise interest rates so as to rein in the amount of money that commercial banks create and lend out.
Assuming those who want fractional reserve accounts are warned of the dangers in the same way as those who buy into mutual funds or private pension schemes are warned, then given that most countries already have totally safe accounts like those offered by the UK’s National Savings and Investments, the resulting set up would amount to the sort of full reserve system advocated by Positive Money, Lawrence Kotlikoff and others. And that system is not as incompatible with the views of Selgin and White as perhaps Selgin and White think.
Thursday, 2 April 2020
I dealt with about forty mistakes made by supporters of the existing bank system here. But the blunders just keep coming.
A new one I just stumbled across was made by Tim Worstall (who I actually agree with much of the time). He claims in this article that fractional reserve banking is indeed fraudulent, but that it’s what he calls a “useful fraud”. (Title of his article: “There’s An Obvious Answer To Fractional Reserve Banking…”)
His first claim is that fractional reserve gives us so called “maturity transformation”, which indeed it does: that is, and to put it in plain English, it makes various assets more liquid, i.e. more like money.
Well the answer to that is that if maturity transformation (i.e. fractional reserve) was abolished, the initial effect would, as TW implies, be deflationary (in the sense of reducing demand). But that problem is of course easily dealt with by having government and central bank create and spend more money into the economy.
Moreover, government and central bank do not need to engage in any sort of fraud to do that.
Plus, government / central bank created money does not run any sort of risk of bank failures. As Messers Douglas and Rajan put it in the abstract of this paper of theirs, in order for banks to perform their basic function under the existing system, they have to have “a fragile capital structure, subject to bank runs…” – which is hardly glowing praise for the existing system. (Title of their paper: "Liquidity risk, liquidity creation and financial fragility....")
In view of the latter point, I’d describe the existing system as “raving bonkers”, but perhaps other words would be more appropriate.
Funding thirty year mortgages.
Second, TW makes the absurd claim that under full reserve (the alternative to fractional reserve) depositors would have to deposit money for thirty years if people are to be able to get thirty year mortgages.
Well that’s not consistent with the fact that a fair amount of industrial investment is funded via shares, i.e. equity, and shareholders can sell out any time, but the investments they fund can easily last thirty years, and sometimes longer.
Of course the latter bit of magic relies on not too many shareholders all wanting to sell out at once. But about 99% of the time, there is no mad rush for the exit, or put another way, the number of potential shareholders wanting in is normally matched approximately by the number wanting out.
Indeed had TW actually studied the works of those who promote full reserve, in particular Positive Money and Lawrence Kotlikoff, he’d have discovered that under full reserve, mortgages are funded in much the same way as the latter industrial investments. Thus TW’s “30 year” criticism is not valid.
Wednesday, 1 April 2020
I’m a pensioner and have medical problems apart from age, so I’m a sitting duck for Corona. The UK government is proving free food handouts for people like me to save us going to shops and risking infection there. The first batch arrived today. I’m impressed, given the speed with which this was done.
The “week’s supply” consists of 4kg potatoes, 2kg carrots, 0.5kg cooked rice, 1kg Rice Krispies, 1 tin corned beef, 5 apples, 5 tangerines, 1kg spagetti. 10 tea bags, 10 sachets instant coffee, half a liter of milk, 10 biscits, 850 kg peas, 850 kg fruit cocktail, 200 g tinned tuna, soap, 850kg tomato sauce, 1 loaf bread, 4 400g tins tomatoe soup and 2 400g tins baked beans.
A few items obviously missing there: e.g. vitamin C, jam, margarine or butter, but perhaps they’ll come next week.