Friday, 31 July 2020

Does Bill Mitchell advocate Workfare?

Bill Mitchell (co founder of MMT) said in an article recently: “Compare that with the Job Guarantee that I have consistently advocated over my career, which could not be conceived of being a more elaborate form of Workfare.”

Er – not true actually. In 2013 he said: “The existing unemployment benefits scheme could be maintained alongside the JG program, depending on the government’s preference and conception of mutual responsibility. My personal preference is to abandon the unemployment benefits scheme and free the associated administrative infrastructure for JG operations.”

Well the latter arrangement equals Workfare according to most peoples’ understanding of the word! I.e. it amounts to “Do this job, else you get no pay.”  Not, incidentally, that I’m strongly opposed to Workfare: JG can come in a relatively harsh form amounting to Workfare, or it can be more generous and relaxed. My personal preference, if there’s to be a JG system, is something half way in between.

My point is simply that people should not advocate X,Y or Z and then claim they’ve never advocated X,Y or Z.

Thursday, 30 July 2020

Neanderthal economics from the “Economics Observatory”.

In case you’re under the illusion that so called “professional” economists have learned to distinguish between micro and macro-economics in the case of household budgets (micro) and government budgets (macro), then prepare to be disappointed: a significant proportion haven’t.

As Simon Wren-Lewis said in the title of a recent article, “macro media is alive and well”. (“Macromedia” is Wren-Lewis’s term for the widespread belief among newspaper and other media economics commentators that household budgets can be compared to government budgets.)

A recent Economics Observatory article completely fails to understand the above macro/micro distinction. The title of the article is “What are the fiscal consequences of the UK response to coronavirus?”

Towards the end of the article and in reference to the expanded government debt, there is a section entitled “How Will We Pay For It?” That title is of course likely to arouse the suspicious of MMTers (not to mention Wren-Lewis) if not give them a fit of apoplexy, because the title seems to imply that government debt can be likened to the debt of a household or firm. Moreover, the article comes to no firm conclusion as to when the debt should be repaid!

So you might wonder what the point of the article was. Well there’s a hint at the bottom of the article where it says the Economics Observatory is funded by public money via the Economic and Social Research Council. Translated: the Economics Observatory is given lots of lovely free money, so to justify that, they have to churn out some sort of article from time to time.

But let’s run thru the “how will we pay” section – I’ve actually run through the basic ideas here a dozen times before on this blog, but when it comes to getting ideas across, you’re pretty much wasting your time with logic or reason: constant repetition is what does the trick.

This section gets off to a bad start when it says “For the most part, this borrowing will be financed by an increase in the issuance of gilts by the Debt Management Office. Government debt already stands at its highest level in over 50 years and will rise further over the coming year.”

Well that’s debatable, to put it mildly, given that almost all the increase in the debt over the last five years or so has been bought back by the Bank of England as part of QE. The net result is that that tranche of so called debt is a debt owed by one branch of the state to another. As several people have pointed out (including me in a letter in the Financial Times), if the relevant debt certificates (Gilts in the case of the UK) were simply torn up and thrown on a fire, the economic effect would be zero.

There is however the potential problem that having done a major QE operation (or thrown lots of Gilts on the fire), there is an expanded stock of base money out there in the hands of the private sector, and that is potentially inflationary. Plus if it does turn out to be inflationary, it will be necessary to cut the deficit and/or run a surplus so as to cut that stock. As the Economics Observatory article puts it, we may need “some combination of future taxes, future spending cuts….”.

The article cites two or three different ideas as to how much “repayment” needs to be done and when. For example it says “In a survey of 30 UK economists by the Centre for Macroeconomics, the majority of respondents believe that there is no need to announce plans to redress the surge in debt until the pandemic subsides.”

And for a second view, the article says “Muscatelli (2020) and some others favour spreading these costs across several generations, by issuing debt with very long maturity dates (50 or 100 years), or even debt that never matures (perpetual debt).”

Well there’s a simple flaw in all that, which is thus.

Private sector spending is unpredictable but is pretty obviously related, if only in a tenuous way, to various factors, e.g. household and business confidence. Another factor is (gasps of amazement) how much money people have.

So if the above mentioned increased stock of money in private sector hands does in fact prove to be inflationary, then tax increases would be justified. But if not, then they wouldn’t! In fact any such tax increases would simply result in a totally unnecessary increase in unemployment!

So the conclusion is . . . . . wait for it . . . . . roll of drums . . . . that the deficit (or surplus) simply need to be whatever keeps unemployment as low as is consistent with acceptable inflation. Or as Keynes put it “Look after unemployment, and the budget looks after itself”.

Unfortunately that point made by Keynes, which has been fully grasped by MMTers and Wren-Lewis seems to be beyond the comprehension of  the Economics Observatory.


P.S. It's good to see there's a letter in the Financial Times today from several signatories calling for various economists to stop obsessing about government balancing the books (which government hasn't  done, incidentally for about 300 years).

Note: there’s something odd about the above link to the FT. If you’re confronted with a paywall, try copying and pasting the URL below to the address bar on your device and see if that works.

Thursday, 23 July 2020

OMG: Jagjit Chadha of the NIESR writes another article.

Jagjit Chadha, director of the National Institute of Economic and Social Research has unfortunately written another article. It’s entitled “Should Modern Monetary Theory inform economic policy in the crisis?”

His first mistake comes in his third paragraph where he said “The central idea of MMT is that government expenditure can be directly funded by the issuance of fiat money, or what is now more generally defined as ‘central bank money’…”.

Well fiat money is not necessarily central bank money. Fiat money, as the Oxford Dictionary of Economics says, is anything of no intrinsic value which comes to be accepted as money. For example banknotes issued by private banks are form of fiat money. Certainly the latter dictionary says nothing about fiat money necessarily being state or central bank issued. But that’s a minor mistake. More important are the following mistakes.

“Critical differences”.

Next, Chadha lists a number of what he calls “critical differences between the orthodox programme and MMT.” Now I shouldn’t need to explain this, but to set out the difference between two things involves explaining, for example in the case of sail powered ships and steam powered ships that sail powered ships are driven by sails, whereas steam engine powered ships are powered by steam engines.

Unfortunately Chadha does no set out anything can be described as a difference. To illustrate, his second alleged “difference” is set out in two paragraphs as follows (which I’ve put in green italics).

“Second, central bank money is not issued by the central bank to provide resources or tokens to the state. When the policy rate (Bank Rate in the UK) is above the ELB, the central bank, having decided on the appropriate level of Bank Rate to meet its inflation target, supplies currency and reserves elastically to the banking system. The banking system economises on its demand for central bank money, as those assets do not offer a good rate of return relative to lending, but will wish to meet any demand for the conversion of bank deposits into cash and for the settlement of payments (see Goodhart, 1989).

In fact, central banks typically stress that the system as a whole can always access however much central bank money it requires to meet its needs. The price of that access is Bank Rate, which, away from the ELB, is set according to a well-understood set of procedures.”

Well did you notice an explanation as to what the “difference” between one thing and another was there? I didn’t! But quite apart from that, those two paragraphs are nonsense anyway.

Let’s take the first half of his first para. He claims there that under conventional policies, central banks only issue central banks money with a view to influencing interest rates.

Well that was true prior to the 2007/8 bank crisis. But that all became totally irrelevant when central banks embarked on QE. Under QE, government borrows $X and gives $X worth of bonds to lenders, while the central bank creates new money and buys back those bonds. That all nets out (contrary to Chadha’s suggestions) to: “the central bank provides resources or tokens to the state.”

In short, what Chadha THINKS is something unique to MMT, i.e. having the central bank create money with government spending it, is actually not unique to MMT at all!

The fourth “difference”.

This is contained in these two paras, again in green:

“Fourth, the fiscal authority starts from the premise of meeting its present value budget constraint, which means that plans are formulated ex ante so that the present value of tax revenues meets the present value of expenditures plus the value of the existing stock of public debt.

In practice, this means that in response to any increase in government expenditure, tax revenues increases are either implemented now or deferred. In the case of deferral, the government must sell its debt to the (non-bank) private sector or sell it abroad, in order to tap the pool of private and foreign savings.”

Well certainly it’s true to say that where government spending exceeds tax, the difference is initially made good by borrowing, as Chadha says. But Chadha evidently has not caught up with the fact that over the last five years or so, central banks have created new money out of thin air and bought back nearly all of that debt!

That means that the government machine as a whole (i.e. including the central bank) has not “tapped the pool of private and foreign savings” at all!

Chadha clearly doesn’t have the faintest idea what’s going on. How he ever came to be director of the NEISR is a mystery.

Saturday, 18 July 2020

Positive Money’s flawed “Money We Trust” report.

“Money We Trust” is a work or report produced by Positive Money about so called “Central Bank Digital Currency” (CBDC) which is a name for the type of money that would arise if central banks made accounts at central banks available to everyone, something that several central banks have been actively considering recently. This work is long: a bit over 20,000 words, thus I’ve only had time for one “read-thru”.

Unfortunately the work contains a number of obvious errors, as follows. 

First (p.8) it claims one of the advantages of CBDC as being: “Increasing financial stability by providing a risk-free alternative to bank deposits.”

That idea is flawed because governments already guarantee deposits at private / commercial banks via deposit insurance and bail outs for banks in trouble. Of course in the event of a complete ban on private banks creating money (along the lines  of full reserve banking / Sovereign Money) then there’d be a definite need for CBDC or similar. But this Positive Money report (unlike much of PM literature produced since PM was founded) does not advocate full reserve banking. That is, it deals with the possibility of having CBDC run alongside traditional accounts at private / commercial / high street banks (henceforth “commercial banks”).  (See also para at the bottom of p.18 which starts “A carefully designed….”.)

Tool kits and helicopter money.

Next (p.8) the report goes along with an alleged merit of CBDC put by Ben Dyson, namely “Increasing the toolkit available for monetary policy by making policies such as helicopter money or ‘QE for people’ easier to implement and potentially overcoming the ‘zero lower bound’ of conventional monetary policy.” See also p.27.

It isn't clear exactly why CBDC would help “QE for the people”, which presumably means a cash handout to everyone. The problem is that not everyone would have a CBDC account, just as not everyone currently has an account at a commercial bank. handouts for everyone is very difficult to implement. A better way (and it’s no coincidence that this is how QE has actually been implemented in recent years) is simply to use the extra cash to spend more on whatever the government of the day thinks merits priority: health, education, more generous state pensions and unemployment benefit, defence, tax cuts, you name it.

Commercial banks can’t be “undermined”?

Setting up a CBDC system would obviously attract deposits away from existing commercial banks and the report devotes much effort to considering how to avoid treading on the toes of existing commercial banks too much. For example at the bottom of p.18 it says “A carefully designed and implemented CBDC would likely become a new anchor of trust, allowing complex monetary systems to continue operating effectively in the face of increased demand for digital payments. However, in order to achieve that, CBDC must not inadvertently undermine the structures that allow for private monetary instruments - most importantly bank deposits - in order to maintain trust in all parts of the monetary system.”

And again on p.46, the report refers to the “critical risk” allegedly involved when the share of deposits held by commercial banks falls too far.

Unfortunately there is a glaring clash between that idea and one of the basic ideas advocated by Positive Money since its foundation, namely full reserve / Sovereign Money, which involves a total abolition of traditional bank deposits. The report completely fails to deal with that clash: indeed neither the phrase “Sovereign Money” nor “full reserve” appear in the report.

Moreover the above idea that CBDC increases “trust” is rather contradicted by p.24 which claims that too large a movement of depositors to CBDC would impair “trust in the overall payments system”.

There’d be a flight to CBDC?

Next, the report claims there might be a flight of depositors from commercial banks to CBDC. E.g. the report says (p.19) “The implementation of a CDBC will pose some risks to financial stability, which need to be effectively mitigated. In the previous section, it was concluded that CBDC would compete for market share with cash and bank deposits in the provision of both the store-of-value and medium-of-exchange functions. When it comes to the facilitation-of-trust function, a CBDC - just like cash - would have the upper hand due to its issuance by the central bank, and therefore if it were to compete rather than complement private monetary instruments, it could rapidly erode trust in bank deposits or significantly decrease their market share, generating new risks for the monetary system.” (See also p.20).

Well the problem with that idea is that already pointed out, governments already stand behind commercial bank deposits, thus those depositors would have no particular reason to flee to CBDC.

Moreover, an advantage of commercial bank deposits (from depositors’ point of view) is that interest is earned on them. Or if they don’t pay interest, then certainly interest earned by private banks from lending out money helps defray the cost of running those bank accounts.

Of course that inherent advantage of commercial bank accounts can be countered by having government (i.e. taxpayers) pay interest on CBDC accounts. But that raises the question as to whether taxpayer should pay interest to the relatively well off simply for hoarding money. Milton Friedman and most advocates of MMT argue/d that normally no interest should be paid on government liabilities. (That point is considered in more detail below).

Our existing CBDC system: NSI.

Another reason for doubting there’d be a major flight to CBDC accounts is that in the UK and doubtless some other countries, a form of CBDC already exists: in the form of accounts at the government run savings bank, National Savings and Investments in the UK. Of course NSI does not offer the same flexibility as commercial bank accounts, e.g. NSI does not offer debit cards. Nevertheless, depositors at NSI can withdraw money at 24 hours notice. Thus if depositors at commercial banks were remotely concerned about the safety of their accounts, they’d hold the bulk of their money at NSI, while doing transfers between NSI and their commercial bank accounts when the balance at the latter was larger or smaller than they wanted.

The report does not mention NSI.


The report devotes much attention to the allegedly harmful effect of disintermediation. For example (p.19) the report says  “Our analysis concludes that if central banks can control the overall market share of CBDC, they can effectively mitigate the risk of excessive bank disintermediation.” See also p.27.

The report does not define the word disintermediation, but online definitions are very much in line with common sense, i.e.  the word is defined there as cutting the amount of intermediation: “cutting out the middle-man” as Wikipedia puts it.

So in the case of banks, disintermediatio is taken here to mean lenders lending direct to borrowers rather than lending via a bank and/or a net reduction in the amount of lending and borrowing via banks without any corresponding increase in non-intermediated lending.

Now the problem with the idea that a significant movement of depositors from commercial banks to CBDC would result in harmful levels of disintermediation is that that idea looks odd when considered alongside the policy which Positive Money has advocated since its foundation, namely a very large scale movement of depositors to CBDC: to be exact, a total ban on deposits at commercial banks, with all deposits moving to CBDC which is what happens under full reserve / Sovereign Money.

The reason that not much disintermediation occurs under full reserve is that in the absence of being able to fund themselves to a large extent via deposits, banks can perfectly well fund themselves via equity and bonds, just like every other corporation.

Of course the latter could turn out to be a more expensive method of funding, which would lead to higher rates of interest for mortgagors and other borrowers, but any idea that would be a big problem is very questionable and for several reasons as follows. (The report actually refers to a possible rise in interest rates on p.44, passage starting “Another problem…”).

First, interest rates are currently at a record low. To illustrate, mortgagors in the 1990s were paying almost three times the rate of interest they do nowadays. The sky did not fall in in the 1990s.

Second, low interest rates are not an unmixed blessing: it is mainly low interest rates that have caused the huge rise in the real price of houses over the last twenty years or so.

Third, the report claims excessive disintermediation might harm “financial stability” (p.22, passage starting “If the introduction of CBDC…”)

Well clearly a sudden and disorganisted introduction of CBDC could lead to instability. But if that change is done in an organised manner, there is no reason for instability: in particular if banks have time to cut their liabilities at the same rate as their assets, there wouldn’t be a problem.

Fourth, another reason for thinking a significant amount of disintermediation would do no harm is that as pointed out by Mervyn King in his “Bagehot to Basle” speech, the assets and liabilities of UK banks expanded a massive ten fold relative to GDP between around 1970 and 2000. Quite what we’ve gained from that, apart from catastrophic bank failures of the sort that happened in 2007/8 is a mystery. Thus a big reduction in bank activity (in the form of “disintermediation”) would not necessarily do any harm.

Moreover, there’s an endless list of worthies who keep going on about excessive debts. But who creates most of those debts? It’s banks!

And even more absurd is the fact that a significant number of those worthies who oppose any reduction in the activity of banks also complain about the amount of debt (most of which, as mentioned above, is gratis banks). Lib Dem politician Vince Cable was famous for indulging in that self contradiction.

Fifth, as the more clued up readers of this article will by now have gathered, this all leads to the crucial question as to what the optimum or GDP maximising amount of intermediation is. (Alternatively, if you don’t like the idea of maximising GDP for environmental reasons, then let’s say “output per hour maximising” – in the hope that people use their increased output to work fewer hours.)

Well it is widely accepted that banks under the existing fractional reserve system are recipients of various subsidies and privileges, which means at least on the face of it that the banking industry is currently larger than its optimum size. (I actually spell out in more detail the subsidies / privileges which I think are the crucial ones in this article of mine. But the important point here, to repeat, is that banks under the existing system are subsidised and hence are too large, which in turn means a bit of disintermediation would actually be BENEFICIAL).

Interest on CBDC accounts.

The report deals with this on p.31.  Clearly the number of people opting for CBDC accounts can be manipulated by adjusting the interest paid to CBDC depositors. But as already mentioned, there is a problem there, namely that Milton Friedman and most MMTers claim interest on government liabilities is not justified, except in emergencies. Certainly prior to the 2007/8 crisis it was not normal for central banks to pay interest on the only form of CBDC that then existed, that is reserves held by commercial banks at central banks (if we ignore the NSI).

It could of course be argued that paying interest on CBDC deposits encourages people to save with a view to holding  more of those deposits, which in turn cuts demand, which in turn enables government to spend more: specifically create new money and spend it into the private sector, which enables the above depositors to acquire their desired stock of CBDC money.

But the problem with that argument is that most public spending is of a current rather than capital nature. And it makes no sense to borrow to fund current spending, rather than fund that spending out of tax. There is doubtless not much difference between those two options during the actual year in which the spending takes place. But suppose government borrows $X in year 1 so as to fund $X of current spending. Government will then be faced with having to pay interest on that sum till the end of time, which means that after twenty or thirty years, funding that particular tranche of spending will end up costing taxpayers vastly more than had the expenditure been funded via tax.


The report claims in its concluding section that CBDC would help ensure the “benefits of future monetary stimulus are more equitably shared than those of the past”. Unfortunately no reasons are given for that idea. The reality is that a highly unequal society would be perfectly compatible with CBDC as would an egalitarian society. Though against that, if there is a particular need for as many people as possible to have some sort of bank account, that would probably be easier to arrange under CBDC (and in particular under what might be called “extreme CBDC, i.e. full reserve banking) in that CBDC accounts could be made free of bank charges. That would mean taxpayers in general were subsidising those who in the absence of free CBDC accounts would not be able to afford CBDC accounts or normal bank accounts.

Wednesday, 15 July 2020

The IFS and NIESR’s questionable grasp of macro.


The people at the UK's Institute of Fiscal Studies are doubtless good bean counters as the name of the organisation implies, but they are widely regarded as having a poor grasp of macroeconomics, e.g. see here and here. The same criticism is not normally levelled at the National Institute of Economic and Social Research, but if this webinar is any guide, certainly one of the directors of the NIESR, Jagjit Chadha does not have a good grasp of macro. (Title of the webinar: "Covid-19: deficits, debt and fiscal strategy.") 

The webinar is on the subject of government debt and deficits, and the IFS and NIESR participants in the webinar devote themselves to worrying about a series of problems in that connection, apparently unaware that MMT has solved those problems (or if you want to claim MMT is Keynes writ large, then let’s say “apparently totally unaware of the fact that Keynes solved those problems.”)

Note that I am not saying MMT and/or Keynes are definitely right: I am simply saying that the IFS and NIESR people involved here seem to be TOTALLY UNAWARE of what MMT / Keynes have to say on the subject of government debt and deficits.

Garry Young (of the NIESR) speaks first. He says (around 9.20) that households are lending to government at the moment!!! So apparently government gets the money it gives to households for unemployment benefit, the furlough scheme etc by borrowing from households!

Well that’s a new one on me.

Next comes Carl Emmerson of the IFS who mentions (around 26.20 and 28.00) the “burden” of interest on government debt. Now there’s a teensy flaw in that idea which is that almost all of the increased amount of debt incurred over the last five years or so has been bought back by the Bank of England. So the alleged “burden” just consists of one arm of government (the Treasury) paying interest to the BoE, who in turn return it to the Treasury in that BoE profits at the end of each year are remitted to the Treasury!!

And if by any chance less than 100% of the debt incurred over the last five years has been bought back by the BoE, it could perfectly well be bought back, if the BoE so decided. Thus the above mentioned “burden” is a myth. (Incidentally, and in contrast, Jagjit Chadha who is the final speaker DOES show a chart which shows the amount of debt bought back by the BoE).

Then Carl Emmerson asks, “…to what extent should we consider tax rises because for example we want to push borrowing back towards its pre-crisis path..”.  But he doesn’t answer the question!!!  Well MMT has an answer: raise taxes if the economy is overheating and inflation is excessive. If not, don’t. And Keynes said much the same. As he put it: “Look after unemployment and the budget will look after itself.”

Put another way, the idea that there is some magic optimum amount of debt and that, if necessary, unemployment should be raised (when it doesn’t need to be because inflation is well under control) in order to cut the debt to the latter magic level is pure nonsense.

Jajit starts at 30.00.  He says first that what’s happening is ”worrying”, but doesn’t say exactly what the “worry” is.

Well never mind: I can read Chadha’s mind, as no doubt can most MMTers. Chadha has been mesmerised (as have many others) by the negative emotional overtones of the word “debt”. If the phrase “government debt” was changed to something like “national savings”, the debt fetishists like Chadha, Kenneth Rogoff etc would immediately stop “worrying”.

Chadha than asks to what extent should we share “risks” with “future generations”. Unfortunately he doesn’t say what these risks are.

Next (around 32.20) he trotts out the well worn nonsense about a high level of debt reducing our capacity to respond to future shocks. The reason that’s not true is as follows.

If the debt is high AND that has cause interest on the debt to rise, then stimulus can be implemented by cutting interest rates or doing some QE, i.e. buying back debt! Easy. And if interest on the debt is low or at zero, then stimulus can be implemented by simply having government and central bank create money and spend it (or do the same thing a round about way, i.e. have government borrow and spend money, with the central bank creating new money and buying back the freshly created debt).

Next, Chadha says (around 40.20) that if markets demand a high rate of interest for holding debt there’s a problem. No there isn't! The solution is . . . wait for it . . . don’t borrow!!  Print money instead!! As Keynes said, the way out of a recession is to spend more, using either borrowed or printed money.

Chadha ends by saying we don’t have much idea what will happen to the debt over the next ten years or so. So what’s the problem there? He doesn’t say.

If there’s a big increase in consumer and business confidence with a resultant big increase in demand and too much inflation, then government can rein that in via extra tax (or public spending cuts). And if the opposite happens, then government and central bank can implement more stimulus. And they will not, repeat not, repeat not necessarily have to borrow more to do that, as hopefully made clear above.

A different article by Jagjit Chadha.

The above nonsense from Chadha does not seem to his having had an off day when doing that webinar: he spouts yet more nonsense in an article entitled “Commentary: Monetary Policy in Troubled Times.”

There is so much nonsense, statements of the blitheringly obvious and self contradiction in the aritcle that it would take all day to deal with it all, so I’ll concentrate on just one sample paragraph, which runs as follows.

“Monetary  financing,  though,  is  the  direct  purchase  of  debt  by  the  central  bank.  It  bypasses  the  transmission  mechanism  in  the  real  economy  and  simply  hands  unfunded resource allocation or tokens (money) to the Treasury, which compete with private sector allocations. There may be no intention of raising tax to meet these overdrafts. And the bonds are held permanently by the central bank with an increase in its balance sheet. If the private sector thought that these tokens were claims on real  resources  then  they  would  have  some  stimulatory  effect on the economy (see Buiter, 2014). Indeed if one took  the  view  that  households  would  always  demand  central  bank  money,  were  it  issued  in  ever  larger  quantities,  and  placed  a  positive  value  on  it  related  to  the  claims  on  output,  then  it  could  always  be  relied  on  to  boost  output,  even  in  a  helicopter  drop.  But  the  prospects  for  a  stable  demand  for  central  bank  money  in the presence of a large or repeated deployment of this tool  seem  to  be  strictly  limited.  And the magnitude  of  any stimulatory effect seems unlikely to be much larger than a more standard form of debt issuance with QE."

First, consider his claim that “the direct purchase of debt by the central bank”…  “simply hands  unfunded resource allocation or tokens (money) to the Treasury..”.

Well that’s not true. When a CB purchases government debt, relevant DEBT HOLDERS (mainly private sector entities like pension funds, banks, insurance companies) hand over their Gilts (in the case of the UK) to the CB, and get cash in return. So it’s those private sector entities not the Treasury that get extra cash or “tokens” as Chadha calls them!

People won’t use a cash windfall to buy stuff?

Next, Chadha says “If the private sector thought that these tokens were claims on real resources then  they  would  have  some  stimulatory  effect.” Whaaat? So the recipients of that newly created cash cannot use it to purchase real estate, shares, houses, apartment blocks etc etc? That’ll be news to thousands of individuals, pension funds, etc etc who have used their pile of cash to purchase real estate, shares, houses and apartment blocks!!!!

Next come these two sentences of Chadha’s: “Indeed if one took  the  view  that  households  would  always  demand  central  bank  money,  were  it  issued  in  ever  larger  quantities,  and  placed  a  positive  value  on  it  related  to  the  claims  on  output,  then  it  could  always  be  relied  on  to  boost  output,  even  in  a  helicopter  drop.  But  the  prospects  for  a  stable  demand  for  central  bank  money  in the presence of a large or repeated deployment of this tool  seem  to  be  strictly  limited.”

Well now that all hinges on exactly what one means by “strictly limited”. Chadha might possibly be right to suggest that if every family in the country that didn’t already have a nice middle class home and two cars was given enough money to purchase the latter goodies, then in the event of dishing out EVEN MORE money to those people, a significant proportion would react along the lines of: “No thanks. I don’t need any more worldly wealth. A middle class home and two cars is all I need”.

But even that’s clearly not true: that is, the fact is that when people with comfortable middle class lifestyles win several million in a lottery, there’s a strong tendency for them to go on a spending spree: purchasing cruises, holiday homes and so on (surprise surprise).

But the important point here is that there is no need for everyone, or even a small proportion of the population to splash out on cruises and holiday homes in order to attain the desired objective, namely a five or ten percent rise in aggregate demand: i.e. enough to bring about full employment. All that is needed is enough increased spending by the “non middle class” to get them part of the way to a middle class lifestyle.

The idea implicitly put by Chadha that the non middle class will not be interested in that small improvement in their circumstances if they’re given the cash to let them make that improvement is plain ridiculous.

To illustrate with some VERY ROUGH numbers pulled out of thin air, assume a third of the population are “comfortable middle class”. Also assume that the remaining two thirds are on half the income of the latter middle class. What percentage increase in the non middle class’s spending (disposable and non-disposable) is needed to give a ten percent rise in aggregate demand? The answer is 20%. Do the maths yourself if you don’t believe it.

So Chadha is saying that the non middle class given enough cash to enable them to enjoy somewhere around a 20% rise in living standards would not spend the cash or even a significant proportion of it: clearly a ridiculous claim.

And even if a proportion of the recipients of freshly issued cash DID decide to use the cash to work fewer hours rather than consume more, what of it? Those “hours not worked” would constitute VOLUNTARY unemployment, and that’s not a problem. I.e. if someone decides to work 30 hours a week rather than 40, they have an absolute right to do so. It’s INVOLUNTARY unemployment that governments and central banks should be concerned about not VOLUNTARY unemployment.

Monday, 13 July 2020

Remove bank subsidies, and the existing fractional reserve system automatically becomes a full reserve bank system.

For several centuries prior to the mid 1900s, when deposit insurance was introduced, one of the basic activities of banks was to accept deposits, lend out money while promising depositors their money was safe, which it quite clearly was not. Reason was that if any bank made enough silly loans it was then unable to repay depositors’ money. Indeed, banks failed regularly. Thus the latter promise or suggestion was plain simple fraud.

That fraudulent activity of banks was remedied to some extent in the mid 1900s when taxpayer backed deposit insurance was introduced. That deposit insurance could be said to have changed a form of fraud into a form of legalised fraud.

Unfortunately deposit insurance was essentially a form of jumping out of the frying pan into the fire because banks are not the only form of lender. That is, if taxpayers stand behind banks via deposit insurance and multi-billion dollar bail outs, the question arises as to why those other lenders should not enjoy the same privileges.

Those other lenders are numerous. First there are peer to peer lenders, and an important type of peer to peer lender comes in the form of the friends and relatives of those running small and medium size enterprises (SMEs) who lend to the latter businesses. Indeed, the total amount loaned that way rivals the amount loaned by banks to SMEs.

Second, there are what might be called “trade credit lenders”: firms which allow other firms to which they have supplied goods and services an extended period before payment is demanded. There again, the total amount loaned rivals bank lending.

Third, there are institutions and individuals who buy bonds issued by corporations, cities and so on, i.e. who lend to the latter borrowers.

To summarise, featherbedding banks via deposit insurance and multi-billion dollar bail outs, while other lenders don’t enjoy those privileges results in a non-level playing field as between banks and other lenders which doesn’t make sense.

Now the latter non-level playing field could be remedied by extending the privileges enjoyed by banks to other lenders. But that flouts a principle, widely accepted in economics, and indeed which is no more than common sense, namely that it is not the job of governments to subsidise activities which are quite clearly commercial in nature.

So we’re forced to conclude that all forms of support for all lenders, banks included, should be abandoned. But that leaves the problem that if state support for banks is withdrawn, then people and indeed firms no longer have a totally safe method of storing and transferring money. And clearly having a totally safe method of storing and transferring money is a basic human right. As for firms, maybe they don’t have that basic right, but certainly a totally safe form of money is something that millions of firms would be happy to pay for.

Well actually a totally safe form of money has long been available in many countries: state run savings banks, like National Savings and Investments in the UK. NSI is not quite as convenient as a conventional bank (e.g. it does not offer debit cards) but there is no reason it couldn’t be made as convenient.

So the solution to the mess that the bank system has been for centuries would seem to be to abandon all forms of support and featherbedding for banks, while governments provide a totally safe form of money for those who want that.

And what do you know?

A system exactly like that has been advocated by numerous leading economists, including a few Nobels for well over a century! The relevant system is called “full reserve banking”, “100% reserves”, “narrow banking” and “Sovereign Money”. I’ll use the term “full reserve”. (See this article for a list of some of the latter economists.)

Under full reserve, those who want to expose themselves to risk by placing money with an entity which also lends out money can do so. The advantage is that they earn interest, but since they’re into commerce, they have to accept relevant risks.

In contrast, those who want extreme safety place their money with the state, though those state backed accounts could actually be administered by commercial banks, as explained on p.7 here. However, relevant depositors get no interest, and indeed must pay for all costs involved in providing that service.

There are of course a large number of objections that have been raised to full reserve, some of them extremely silly. I dealt with about forty of those objections in section two of my book “The Solution is Full Reserve / 100% Reserve Banking”.

And the final big advantage of full reserve, is that bank failures are impossible. Re the latter risky accounts, relevant banks cannot fail because it’s depositor / investors who carry relevant risks. And as for safe accounts, those cannot fail either, because the entity holding relevant monies does not also lend out money.


Earlier and other versions of the above article.

I put a copy of the above article on the Researchgate site on 12th July 2020, though with a slightly different title.

There is an extended version of the above article here (3,000 words as opposed to the above article, which is about 800 words), also at the Researchgate site.  That 3,000 word version has also been published in the “Advances in Social Sciences Research Journal”.

Monday, 6 July 2020

Banks intermediate between lenders and borrowers.

It has become fashionable recently to claim that commercial banks do not intermediate between lenders and borrowers, but rather that banks create the money they lend out from thin air. Actually banks do both: i.e. they certainly create money, but once that money is created, it then circulates between one person and another, one firm and another and between one bank and another and indeed between lenders and borrowers.

Moreover, and ironically, a paper that the above mentioned dedicated followers of fashion often quote, namely a Bank of England paper entitled “Money Creation in the Modern Economy” actually supports the above “create AND intermediate” point. At least the second sentence of the paper reads “…..banks do not act simply as intermediaries…”. I.e. the authors are saying banks DO ACT as intermediaries, but that’s not all they do. Quite right.

One way of demonstrating the way in which banks act as intermediaries is as follows.

Suppose a bank finds its deposits have risen by £X million over the last six months, plus suppose the bank thinks those deposits look like being a PERMANENT addition to the bank’s deposits. What’s the bank going to do?

Well it’s pretty much forced to lend out an extra £X million or thereabouts, because if the bank wants to expand it’s market share, or at least maintain its market share, it must pay interest to those new depositors, especially if a significant proportion of those deposits are in term accounts. And where will it get the money to pay that interest? From lending out around an extra £X million or thereabouts!

Ergo . . . roll of drums . . . .  banks in effect lend on depositors’ money.

Sunday, 5 July 2020

A poor criticism of MMT by David Glasner.

In a recent article in his “Uneasy Money” blog, Glasner says (I’ve put his words in green italics):

“For example, MMT posits that increases in taxes are deflationary and reductions in taxes are inflationary, because an increase in taxes implies a net drain of purchasing power from the private sector to the government sector and a reduction in taxes implies an injection of purchasing power.[2] According to the MMT, the price level reflects the relationship between total spending and total available productive resources, At given current prices, some level of total spending would just suffice to ensure that all available resources are fully employed. If total spending exceeds that amount, the excess spending must cause prices to rise to absorb the extra spending.

This na├»ve theory of inflation captures a basic intuition about the effect of increasing the rate of spending, but it is not a complete theory of inflation, because the level of spending depends not only on how much the government spends and how much tax revenue it collects; it also depends on, among other things, whether the public is trying to add to, or to reduce, the quantity of cash balances being held.”

Well if Glasner was a better acquainted with MMT literature he’d have noticed MMTers referring again and again to what they call “savings desires”: that is the attempt / desire to accumulate money.

So MMTers are perfectly well aware of the importance of “whether the public is trying to add to, or to reduce, the quantity of cash balances being held”.

Saturday, 4 July 2020

Supporters of full reserve banking.

  This list of supporters of full reserve banking, i.e. opponents of private banks creating their own money, is simply an extended version of a similar list I set out on this blog in October last year.

That is, the first ten people (down to Maurice Allais) are reproduced from the latter article, while the remaining three people are additions.

Josiah Stamp, director of the Bank of England in the 1920s: 

"The modern banking system manufactures money out of nothing. The process is perhaps the most astounding sleight of hand that was ever invented...".

Irving Fisher, professor of political economy at Yale in the early 1900s: 

"We could leave the banks free . . . to lend money as they pleased provided we no longer allow them to manufacture the money which they lend."

(Fisher's book, "100% Money and the Public Debt", p.15)

Josiah Stamp: "If you want to continue to be slaves of the banks and pay the cost of your own slavery, then let bankers continue to create money...".

Martin Wolf, chief economics commentator at the Financial Times:

See his Financial Times article entitled "Strip private banks of their power to create money."

As for why a system has not been set up where private banks are barred from money creation, Milton Friedman's explanation was:

"The vested political interests opposing it are too strong, and the citizens who would benefit, both as taxpayers and as participants in economic activity, are too unaware of its benefits and too disorganised to have any influence."

(Friedman's book, "A Program for Monetary Stability" Ch.3.)

James Tobin (Nobel economist):

“Deposit insurance is a delegation to private enterprises of the government's sovereign right to coin money.”


Tobin opposed the right of private banks to create money, and his above point was that absent deposit insurance, liabilities issued by private banks are essentially in the nature of shares: those liabilities can lose much or all their value. But once an insurer with an infinitely deep pocket insures the liabilities (i.e. government), those liabilities effectively become money, since (like dollar bills or £10 notes) they cannot lose value (inflation apart).  The above quote is from his work “The Case for Preserving Regulatory Distinctions”.

Felix Martin: see his book "Money the Unauthorised Biography", last chapter in particular. 

Laurence Kotlikoff, economics prof in Boston, USA. See his book "The Economic Consequences of the Vickers Commission". (Free online)

Joseph Huber, chair of economic and environmental sociology at Martin Luther University of Halle-Wittenberg, Germany. 

See his book "Sovereign Money Beyond Reserve Banking".

This review of the book says "The concluding part of this book is dedicated to . . . advocating a move towards the sovereign monetary prerogatives of issuing the entire stock of official money and benefitting from the gain thereof (seigniorage). The author argues that these functions should be made the sole responsibility of independent and impartial central banks with full control over the stock of money (not the uses of money).....". 

Maurice Allais (Nobel economist). 

Ronnie Phillips's paper "Credit Markets and Narrow Banking" (Levy Economics Institute working paper No.77), starts, "Maurice Allais's view, share by others, that the credit created by fractional reserve banking is the equivalent of counterfeiting has led to recommendations for reform of the financial system to separate the depository and lending functions of banks."

 John Cochrane. Economics prof in Chicago. In his paper “Towards a run-free financial system”, Cochrane says “demand deposits, fixed-value money-market funds, or overnight debt must be backed entirely by short-term Treasuries.”

David Ricardo (1772 – 1823). See his "Plan for the Establishment of a National Bank" half way down here.

Ricardo suggests a committee of “commissioners” very similar to Positive Money’s committee of economists (independent from politicians). Plus Ricardo refers to banning money creation by what he calls “county banks”) – i.e. banks other than the Bank of England.

Giovanni Dolfin - died July 1361.  Fifty seventh Dodge of Venice. See article by Edward Fuller entitled "100% Banking and its Advocates: a Brief History" published by the Cobden Centre for more details on Dolfin and others from that era, and indeed much earlier: going back to Ancient Rome and Greece. 

David Hume (1711-1776). See the article by Edward Fuller mentioned just above for details on Hume.

Wednesday, 1 July 2020

The incompetent Roger Bootle in the Telegraph tries to criticise Stephanie Kelton’s new book.

Simon Wren-Lewis (former Oxford economics prof) has long had a low regard for newspaper economics commentators: indeed he has his own special term for the nonsense they spout, namely “macromedia”. Google SWL and “macromedia” and you’ll find dozens of his articles on that subject.

Coincidentally I also did an article on this blog a few days about the sheer idiocy of  journalists.

It’s actually very easy to get away with nonsense if you’re a journalist: all you have to do is put your stuff in nicely worded English, with a few technical terms thrown in to impress the gullible, and the relevant newspaper editor will probably OK it,  among other things because the editor knows newspaper readers will lap up any old nonsense.

Bootle’s article in the Telegraph starts by claiming that MMT’s idea that deficits and government debts don’t matter is “dangerous”. But he then says “Yet there are some places where the book seems simply to be reasserting the precepts of Keynesian economics for the benefit of an audience that has never comprehended them before. These Keynesian nuggets are propositions with which I wholeheartedly agree.”

Well yes: MMT (as I’ve pointed out a thousand times) is largely Keynes writ large. Moreover, Keynes argued that the deficit should be as big as needs to be to deal with excess unemployment, which is what MMT says. So do we take it that Bootle has changed his mind in the space of a few sentences and is now claiming that MMT is no longer “dangerous”? Unfortunately it’s far from clear exactly what Bootle is trying to say.

But never mind: he manages to fill up column inches and get his salary at the end of the month, which is all that matters from his point of view.

Next,there are two paras by Bootle as follows:

“At one point, she says that “increasing the deficit doesn’t make future generations poorer and reducing deficits won’t make them any richer”. That is a message I have repeatedly conveyed in this column. The interest paid on government bonds doesn’t disappear into a black hole. It is received by the bondholders.

Mind you, this doesn’t mean that there aren’t potential problems for future generations as a result of fiscal largesse because, unless governments resort to inflation, other things equal, higher debt means higher interest payments that have to be financed somehow or other. In the end, they are financed out of reduced spending or increased taxation. Taxes distort and depress incentives and hence economic growth. So having a setup that implies more taxes in future is hardly to be recommended.”

So is Bootle saying large deficits matter or not? He both praises deficits and warns about deficits in the latter two paras. He is entirely unclear, presumably because he has no idea whether he’s coming or going.

Actually, and as regards his point that the stimulatory effect of a large deficit may at some time in the future have to be reined in via tax increases, well of course that’s possible! Business and consumer confidence constantly ebbs and flows, not to mention to problems brought by Covid-19, all of which means governments and central banks have to counteract those gyrations, sometimes by implementing much larger than normal deficits. But if Bootle wants the amount of stimulus THIS year to be inadequate because that stimulus may have to be reined back in two or three years time, then he is simply asking for excess unemployment THIS YEAR!!!


Given Bootle’s obvious incompetence, I can’t be bothered reading any more of his article. Indeed, it’s entirely possible he isn't all that he isn't as incompetent as I just suggested: that is, he may well know that he can very easily churn out nonsense, and no one will notice. When he gets home on an evening it wouldn’t surprise me if, while he sips is gin and tonic, he has a good chuckle to himself over the idiocy of a newspaper that actually pays him to write the above nonsense.

In stark contrast to the Bootles of this world, there are the intellectually honest Keltons, who even if they make a few mistakes, are at least genuinely concerned to make the world a better place.