Thursday, 27 August 2020

Nonsense from Marco Gross and Christoph Siebenbrunner on CBDC.

I’m referring to an article in the Financial Times by the above two entitled “On CBDCs and sorcerers.”  CBDC, by the way, is short for “Central Bank Digital Currency”, an idea being actively considered by several central banks right now.

CBDC would give any citizen, and presumably any firm, the right to open an account with their central bank, unlike the present set up, where only relatively large commercial banks have accounts with the central bank.

Gross is an economist at the IMF, and Siebenbrunner is a post graduate student at Oxford.  

The conclusion of Gross and Siebenbrunner’s article is that various “adverse” and “unintended consequences” might stem from introducing CBDC.

Well the first obvious flaw in that idea is that citizens of the UK (and doubtless some other countries) can in effect already open an account with their central bank / government in that they can open an account at their country’s state run savings bank. In the case of the UK, that’s “National Savings and Investments”.

UK citizens have been able to do that for decades, and no “adverse” or “unintended” consequences have arisen far as I know.

NSI invests just in UK government debt, thus it is very much a state entity, rather than a state owned bank doing much the same as existing commercial banks, e.g. granting mortgages to all and sundry.

But Gross and Siebenbrunner do not so much as mention NSI which makes me wonder whether they are aware that NSI exists, and if they are, whether they realise that accounts at NSI pretty much equal CBDC accounts.

Of course NSI doesn’t offer all the facilities of a normal bank account: e.g. cheque books and credit and debit cards are not offered. But customers can withdraw money in about 24 hours by phone and transfer it to their commercial bank accounts.

So if CBDC was introduced, perhaps by having NSI offer the normal facilities offered by commercial banks, absent, let’s say the possibility of getting a loan, would there be a mass “unintended” rush to CBDC accounts?

Well the simple answer to that, apparently unbeknown to Gross and Siebenbrunner, that the attractiveness of CBDC accounts can easily be adjusted so as to prevent any sort of mad rush.

For example, the rate of interest earned on current or checking accounts could initially be set at zero. And indeed that makes some sense in that advocates of Modern Monetary Theory advocate a zero rate of interest on state liabilities (if you can call base money a state liability, which of course is debatable).

That contrasts with normal commercial bank accounts where, while customers currently get almost no interest, the cost of running their accounts is at least defrayed to some extent by interest earned by their bank.
And a further option, if the plan is to move to full blown full reserve banking, would be to not withdraw government guarantees on existing commercial bank accounts (e.g. deposit insurance) in the first instance.

The attractiveness of CBDC accounts could then be gradually increased, relative to existing accounts at commercial banks, with any undesirable consequences being dealt with as they arise.

Wednesday, 26 August 2020

The volleys fired by Charles Goodhart at full reserve banking just bounce off.


The “volleys” dealt with below consist of a very long comment by Goodhart on an article by Patrizio Laina here. Goodhart is a former member of the Bank of England's Monetary Policy Committee and professor at the London School of Economics.

Patrizio Laina’s article is in “Economic Thought” 2015, Vol 4 No 2.

1. Goodharts first error is his suggestion that because arguments for full reserve have been appeared on and off for a long time, that therefor those arguments can be described as a “hardy weed”. If Goodhart needs to resort to pejorative remarks to support his case, that rather indicates a weakness of his case.

Moreover, the claim that an idea is invalid simply because it is an old idea is just glorified false logic.  The idea that two plus two makes four is a very old idea.

2. He says “. If the risky banks, making the loans to the private sector, can issue short-dated liabilities, (even if they cannot issue demand deposits) whether wholesale or retail, say with a tenor of about seven days, then absolutely nothing has been done to make financial stability greater, rather the reverse. The risky banks would still make loans by writing up both sides of the balance sheet, with the exception that the liability side would initially be in the form of a seven day time-deposit rather than a demand deposit.”

Well who ever said that under full reserve banks WOULD BE allowed to fund their loans via term deposits of seven days? No one that I know of. Under full reserve, deposits in their current form, whether instant access, seven day or one month, are plain simple not allowed.

That is, commercial banks are not allowed to fund loans via deposits which are described by banks as being totally safe. And that is what a traditional deposit is: money placed with a bank which the bank promises to return to the depositor.

Instead, those wanting to fund a bank or bank department which lends out money are told loud and clear that they may not get their money back in exactly the same way as those placing money with stockbrokers, pension funds or unit trusts or mutual funds are given the same loud and clear message. That puts banks on a level playing field with respect to those other lenders, and quite right too. I.e. there is no excuse for preferential treatment for an entity just because it calls itself a “bank”.

Plus if there is a clearly stated risk that so called depositors may not get all or any of their money back, those so called deposits are no longer deposits: they are equity.

3. Next Goodhart says “For obvious reasons, such funding would be considerably more expensive than that facing banks at present.” The implication there clearly being that some sort of overall hit for the economy results from that interest rate rise.

Well that’s a popular criticism of full reserve, but as I’ve been pointing out for several years, there’s simple flaw in that argument, as follows.

If a rise in the price of something (the price of borrowed money or anything else) stems from removing an unjustified subsidy of that item, then far from cutting GDP, the effect will be to increase GDP. And there is widespread agreement that banks are subsidised.

As to exactly which subsidies are removed under full reserve, there is the taxpayer backed deposit insurance enjoyed by banks and the multi billion dollar bail outs which are available when banks mess things up, luxuries not available to the other lenders mentioned above. Plus there is the point that it is widely accepted that it is not the job of taxpayers to stand behind any kind of commerce, absent very good social reasons for doing so. And depositing money at a bank with a view to getting interest is every bit as commercial as depositing money at a stockbroker with the same end in view. Neither of those activities should be protected by taxpayers in any shape or form.

As for any deflationary effect stemming from the reduced amount of lending that might take place under full reserve, that is easily countered via more stimulus. And stimulus dollars, as Milton Friedman said, cost nothing in real terms to produce.

The net result would be less lending and debt based economic activity, and more non debt based activity.

Goodhart ends his objections to the higher interest rates that would probably obtain under full reserve by saying “I doubt whether a narrow banking system would prove attractive in practice to the majority of bank clients.”

Well I’m sure it wouldn’t. Removing the implicit subsidy that coal mines currently get in that they are not charged for the enormous environment damage they do would doubtless not “prove attractive” to coal mine owners.

And finally, given the dramatic fall in interest rates over the last thirty years and the very respectable growth that obtained in the 1990s despite rates being much higher than today, it is far from clear that a rise in rates would be harmful. Low rates are not an unmixed blessing: among other things they have helped the dramatic rise in the price of houses in real terms over the last thirty years.

4. Next, Goodhart says “If we really wanted to get banks back to their original safer form, we should do this by a reform of property lending, with such lending undertaken on the basis of long-dated liabilities, such as covered bonds and equity.”

Well now, that’s what full reserve is!!  It consists of funding loans via equity. Of course Goodhart’s latter suggestion does not EXACTLY equal full reserve, but nevertheless it is strange for an opponent of full reserve to sing the praises of the fundamental characteristic of full reserve!

5. Goodhart’s next mistake is where he says “. But one of the problems with most of the narrow banking (FRB) proposals, is that they make the provision of monetary base far too inelastic.”

Well “provision of monetary base” is ENTIRELY the province of the central bank (CB), both under the existing system and full reserve. CBs can boost or rein in monetary base in whatever quantity they want whenever they want. For example they have implemented an astronomic and unprecedented increase in the base under QE over the last five years. There’d be nothing to stop central banks doing the same under full reserve.

Plus there’d be nothing in principle under full reserve to stop CBs doing helicopter drops, though I’d prefer it if their largesse was distributed in a way approved of by democratically elected politicians: e.g. if politicians want the largesse to go to pensioners and the unemployed, then that’s where it should go.

6. Next, Goodhart says “. I have tried to argue that forcing all credit provision to be done on the basis of long-term liabilities would not be in the best interests of most of society, and, if so, they will get around such government regulations.”

So is he saying that where banks attempt to get round regulations that’s because of bank’s saintly desire to do what’s “in the best interests of most of society”? If so, perhaps Goodhart can explain why US banks have had to pay a total of around $250billion in fines and out of court settlements over the last ten years for “in the best interests of most of society” activities like money laundering.

7. Goodhart’s final argument, before his Appendix (passage starting “Financial intermediation is probably…”) is that modern technology is bringing about substantial changes in the way banks work, thus “the attempt to constrain the core of the financial system into the proposed division of narrow banks and risky lenders will not work in any case.”

Well the simple answer to that is that modern technology is forcing substantial changes to the EXISTING banks system as well!!  A classic example is that credit and debit cards are making the old laws on legal tender very dated. That is, according to those laws, a creditor cannot refuse central bank issued money (e.g. £10 notes) in settlement of a debt or in payment for something. But debit and credit cards are now so widely used that some shops are refusing to take physical cash. To my knowledge, none have been prosecuted for doing that.

Put another way, there is no obvious reason a full reserve system cannot cope with changes in technology any more than the existing “fractional reserve” system cannot cope with those changes. 


Given that Charles Goodhart does not seem to have much of a grasp of this subject, I won’t bother with his appendix. Hopefully I’ve demonstrated that his views can be taken with a pinch of salt.

Tuesday, 25 August 2020

Financial Repression Revisited.


This is one of the better articles published recently by Project Syndicate. It’s entitled “Financial Repression Revisited” and is by Anne Krueger (former World Bank chief economist).

Her basic point is as follows. First, she says the large debt arising from Covid should not be a problem in that if it turns out to be necessary to pay down that debt, that can always (at least in theory) be done by raising taxes. But, as she rightly says, raising taxes can be politically difficult, in which case government and/or central bank will then have to find some other way of imposing some sort of deflationary effect.

The alternative she suggests is artificially high interest rates, but that, as she rightly says would be distortionary: it would lead to a loss of GDP (even at full employment). My answer to that is that interest rates in the 1990s were far higher than they are now, and that did not seem to dent growth all that much, so I doubt the economic hit would be all that much.

She should perhaps have taken the argument a little further and asked the question: what do we do about the latter problem? Well my answer is that there’s not a lot we can do.

I certainly wouldn’t recommend holding back on the deficit and debt build up and thus imposing more unemployment NOW just so as to ease a problem with might not actually appear at all in a year or two, and which, if it  does appear, might not be all that serious .



Monday, 24 August 2020

An argument for CBDC and full reserve banking.

“CBDC” stands for “Central Bank Digital Currency”, i.e. the idea that anyone should be able to hold central bank issued money in an account at the central bank, much as they can already hold central bank issued money (base money), in the form of $100 bills £10 notes etc.

The argument is as follows.

1. Given that all money nowadays is fiat money, i.e. it does not come on the form of for example a rare metal like gold, every country absolutely has to have some sort of communal agreement as to what the country’s basic form of money shall be and what government controlled entity or department shall issue that money. In practice it’s the central bank which does that job.

2. Base money has to be distributed somehow to the private sector, and that is done for the most part by having the central bank create base money with government spending it on the usual public spending items: education, law enforcement etc. (Or to be more accurate, base money is fed into the private sector via: “private sector buys govt bonds, 2, govt spends the money  back into the private sector, and 3, CB creates money and buys back govt bonds in whatever quantity is needed to keep interest rates at the the level the CB thinks is desirable.” But that all nets out to the same as “the state creates money and spends it into the private sector”.)

3. While much of that money ends up in the hands of individual people, small firms etc, who deposit base money at their commercial banks, it is only commercial banks which actually have accounts at the central bank where they hold base money. I.e. individual people, small firms etc are not under conventional arrangements allowed to have accounts at the central bank.

4. But that raises a question, namely: why should the privilege of having an account at the central bank be restricted (to put it bluntly) to Wall Street bankster / crooks who have had to pay a total of around $250bn in  fines and out of court settlements over the last ten years? I.e. why shouldn’t ordinary citizens be allowed accounts at the CB? There’s no reason why not!

5. But having implemented “accounts for all” at the CB, the question then arises as to why taxpayers should stand behind the accounts that citizens, small firms etc have at COMMERCIAL BANKS. After all, if citizen can obtain near total safety for their money by placing it at the CB, what’s the point of duplication of effort in the form of having taxpayers safeguard those who fund money lenders (aka commercial banks)?

6. Well there isn't much point, is there? But assuming we then abandon taxpayer funded protection for those with accounts at commercial banks, we have then arrived at full reserve banking!

That’s a system where those who want total safety for their money place it with the central bank, where they get little or no interest, while those who want to enter COMMERCE and have their money loaned out place it with private / commercial banks. But if those banks go belly up, there's no taxpayer funded bail-out.


Friday, 21 August 2020

This cartoon is no joke: it's the truth.




As Simon Wren-Lewis (former Oxford economics prof) explains in this recent article, a significant proportion of the economics profession is still convinced that government budgets can be compared to household budgets. (Article title: “The reality behind fiscal scare stories…”)

In particular, there is a widespread belief that government debt incurred to provide stimulus during the Covid recession will have to be paid back and that that “pay back” process will involve pain in the same sort of way as a household has to cut back on consumption and save up money if it’s to repay debts that it incurs.

Moreover, there is a very good reason for featuring Harvard in the above cartoon rather than any other university, as the cognoscenti will be well aware: it’s that some of the biggest ignoramuses on the subject of government and household budgets teach at Harvard or used to until quite recently: Kenneth Rogoff, Carmen Reinhart, etc.

Thursday, 20 August 2020

Mervyn King’s ridiculous objections to full reserve banking.


 Mervyn King (former governor of the Bank of England) is quite sympathetic to full reserve (aka “narrow banking”) but he does list some objections – in Chapter 7 of his book “The End of Alchemy.”

His first objection or “disadvantage” (as he calls it) of full reserve is that  “….it would eliminate the implicit subsidy to banking that results from the ‘too important to fail’ nature of most banks. Banks will lobby hard against such a reform.”

Absolutely hilarious!  You might as well claim the fact that murderers or counterfeiters would lobby hard against harsher punishment for murder or counterfeiting is a reason not to impose a harsher punishment on murderers and counterfeiters!

As for the idea that we’re supposed to have any sort of sympathy for a bunch of bankster / criminals who object to losing a subsidy they’ve enjoyed up to now, have you ever heard anything so ridiculous?

OMG: we can’t have any “disruption”.

The second “disadvantage” he lists is that “….the transition from where we are today to complete separation of narrow and wide banks could be disruptive, forcing a costly reorganisation of the structure and balance sheet of existing institutions.”

Well the simple answer to that tired old objection to full reserve (as I pointed out several years ago in my book on full reserve) is that if a change is beneficial, the fact that the change involves significant initial costs is irrelevant because once the change is made, the benefits will continue to flow for decades if not centuries.

The change in the UK from a privatised health care system to the National Health Service just after WWII no doubt involved some “disruption”. Does that mean the NHS was not worthwhile?

Moreover, it is not at all clear that a switch to full reserve would actually involve any great disruption: Milton Friedman claimed the switch would be simple and easy. As he put it in chapter 3 of his book “A Program for Monetary Stability”, “There is no technical problem of achieving a transition from our present system to 100% reserves easily, fairly speedily, and without serious repercussions on financial or economic markets.”

Plus the US mutual fund industry switched to full reserve a few years ago. I didn’t notice the sky falling in when that happened, did you?

Next comes King’s third “disadvantage” (which I've put in green) which is that, “..the complete separation of banks into two extreme types – narrow and wide – denies the chance to exploit potential economic benefits from allowing financial intermediaries to explore and develop different ways of linking savers, with a preference for safety and liquidity, and borrowers, with a desire to borrow flexibly and over a long period.”

Complete nonsense!

Under full reserve, there’d be nothing to stop a bank setting up a department or fund which offered long term loans, while those buying into the fund were offered the possibility of withdrawing their money instantaneously or at sort notice.

Notice that I said “possibility” there: I did not say anything like “binding promise” that depositors would have guaranteed instant access to their money.

The distinction there is crucial: the basic reason why fractional reserve banks have failed regular as clockwork over the last two thousand years, is that they make that guarantee of instant access, and then find that they cannot come up with enough ready cash quickly enough, particularly where they’ve made a series of silly loans. (For some information on banking in Ancient Greece and Rome, see this article, entitled “The Problem of Fractional Reserve Banking, Part 1”, by Pater Tenebrarum.)

Financial intermediation would be more expensive?

Next, Mervyn King says   “Constraining financial intermediation would mean that the cost of financing investment in plant and equipment, houses and other real assets would be higher.”

Well clearly the removal of a subsidy currently enjoyed by banks, which as King says, is part and parcel of introducing full reserve, would mean higher rates of interest for borrowers. But the flaw in his argument there is that, as is widely accepted in economics, the GDP maximising price for anything is the free market price, i.e. the price that obtains in the absence of subsidies. At least, it is widely accepted that the free market price is the GDP maximising price, absent any obvious social reasons for going for some sort of non free market price.

Indeed, mortgagors in the UK in the 1990s paid almost three times the rate of interest they do nowadays. I don’t remember that being a disaster – do you?

Among other things, the main effect of lower interest rates is to raise house prices, thus roughly speaking, the effect of higher interest rates on house affordability is around zero!

In short, low interest rates are very definitely not an unmixed blessing. First, they result in higher house prices. And second, they result in more borrowing and debt.

Aggregate demand.

Mervyn King’s next objection to full reserve is that it does not deal with fluctuations in aggregate demand. Well no one ever said it would!!!  Doh!!

King makes that point in this passage (also in green): “Ending alchemy does not in itself eliminate large fluctuations in spending and production. In a world of radical uncertainty, where it is possible that households and businesses will make significant ‘mistakes’ about the future profitability of investment, there is always a risk of unexpected sharp changes in total spending."

Moreover, the existing bank system, fractional reserve, does not deal with “sharp changes in total spending” either! So it is complete and utter nonsense to claim that the inability of full reserve to deal with those “sharp changes” is any sort of weakness in full reserve.

And if any readers think the existing fractional reserve system does in fact deal with “sharp” reductions in spending, perhaps they could explain why governments and central banks the World over have found it necessary to create and spend astronomic and unprecedented amounts of money in reaction, first to the 2007/8 bank crisis, and second, in reaction to the Covid crisis.

Asset prices.

Next comes a paragraph which starts (also in green) “Ensuring that money creation is restored to government through the requirement for narrow banks to back all deposits with government securities does stop the possibility that runs on the banking and shadow banking sectors will transmit shocks at rapid speed right across the financial sector, as happened to such devastating effect in 2008. But the risk from unexpected events is then focused on the prices of assets held directly by households and businesses and on the solvency of wide banks. It would be possible for governments to stand back and allow the prices of real assets and claims on those assets, including the prices of the bonds and equity of wide banks, to take the hit.”

Now wait a moment. We’re in the middle of an absolute whapper of an “unexpected event” right now: the Covid crisis. And governments and central banks have responded to that by doing money creation a la full reserve: i.e. having the central bank create money,  government spending it.

But where is the “hit” for asset prices?  It’s nowhere to be seen!!!

The stock market, while it did suffer a temporary dip when the Covid crisis first appeared, is now back to where it was. As for house prices, doubtless Covid has hit the house market, but actually prices in the UK are slightly up on a year ago.


To say that Mervyn King hasn’t the faintest idea whether he’s coming or going would be too kind: he’s quite obviously clueless, like most of the elite, bumbling Boris Johnson in particular. 



P.S. 22nd August 2020.   I should have mentioned another flaw in Mervy King’s claim that it’s desirable to link  “…savers, with a preference for safety and liquidity, and borrowers, with a desire to borrow flexibly and over a long period.” The flaw is thus.

If one lot of investors in a corporation make their investment more liquid, that inevitably means the investment held by the remaining investors in the corporation become LESS liquid or at least less money-like. To illustrate, if a corporation is funded entirely by equity, and say 30% of shares are turned into bonds, that simply means that as confidence in the corporation or in the stock market generally ebbs and flows, the gyrations in the price of the remaining shares will become more volatile. I.e. those shares will become less money-like.

And if that does not entirely negate the “liquidity increasing” of the former lot of investors, there’s another point, which renders the entire “liquidity increasing” exercise pointless, which is as follows.

If an investment made by a bunch of people or institutions is in relatively ILLIQUID form, say in the form of equity, and that is then turned into a more liquid form, then that investment becomes more money-like. Thus in effect, the money supply rises – at least on a relatively broad definition of the word money.

But there’s a problem there, namely that the larger the money supply, the higher will aggregate demand be all else equal. Thus assuming demand is as high as it can go without sparking off excess inflation, the effect of the above people and institutions expanding their stock of money is that government and central bank will just take some sort of countervailing measure like  - er – running a lower budget deficit or even running a surplus and confiscating an amount of money from the private sector approximately equal to the above mentioned INCREASE in the stock of money.
The conclusion is that while it is hard to see why any group of investors should be actually prevented from trying to make their investments more liquid, no great social purpose is served by that activity, i.e. there are no advantages for the economy as a whole. Thus when it comes to re-designing the bank system, and contrary to Mervyn King’s suggestions, no weight need be attached to the desire by some investors to make their investments more liquid.

Wednesday, 19 August 2020

It’s all go at the Positive Money “Money Question” site.

Positive Money was founded about ten years ago to push for monetary reform: in particular to push for what they call “Sovereign Money” (aka full reserve banking).

However, matters relating to monetary reform have now been hived off to a special section of their site called “The Money Question”. But this special section does next to nothing, far as I can see: the most recent article there was eighteen months ago!!

Plus there’s been nothing on monetary reform on their main blog site for four months (and possibly much longer). Instead, PM seems to have turned into an all-purpose left of centre, BLM supporting, CO2 emission cutting organisation.

Of course there’s nothing wrong with dealing with global warming: I’m all for that. My point is that if those running PM had any brain and a shred of honesty, they’d explain loud and clear exactly what’s going on.

As regards brain, I honestly don’t think those currently running PM have the brain to understand the ins and outs of monetary reform. Plus it is dishonest to have taken money off people (me included) five or ten years ago on the basis that the organisation would promote monetary reform, and then change the basic objectives of the organisation.

Can I have my money back please?


P.S. (22nd Aug 2020).     I made a slight mistake above when I said the Money Question site had published nothing for eighteen months. They’ve actually published a positively dazzling TWO articles this year. See here.
But my basic point still stands, namely that the Money Question site is now in a state of near total somnambulance.

Sunday, 16 August 2020

David Smith’s incompetent criticisms of MMT in the Sunday Times.


David Smith is economics editor of the Sunday Times. His recent article entitled “Worried about debt? Not in a world running on MMT” is largely nonsense. But then if you seriously expect competence or proficiency from a journalist, then you’re a bit naïve.

As the Ipsos Mori poll illustrated above shows, journalists are about the least trusted profession in the country. (Sorry about the names of different professions being possibly too small to read on the above illustration, but if you go to the latter "Ipsos Mori poll" link and scroll down, you'll be able to see more clearly.)

Smith does actually get one point half right, which is early on in the article. He criticises Stephanie Kelton (leading MMTer) for saying governments borrow “to offer people a different kind of government money, one that pays a bit of interest”. Well governments certainly don’t offer interest out of the kindness of their hearts, as Kelton seems to suggest.

But a few paras later Kelton says (in the book of hers to which Smith refers) that governments pay interest so as to “support interest rates”. Well that’s a bit nearer the mark, if by that one means that government having spent a billion which is not covered by tax and which looks likely to cause excess inflation will then have to impose some sort of deflationary measure, and raising interest rates is one way of doing that. (Though of course it’s actually the central bank which raises rates rather than government.)

But that’s not the same as saying governments raise rates “to offer people a different kind of government money, one that pays a bit of interest”. So it’s fair to say that both Kelton and Smith need to re-think their ideas or phraseology on that point.


Is MMT monetary or fiscal?

Next, Smith says “MMT is misnamed because it is not monetary at all but almost entirely fiscal.” Wrong: it’s both. It is certainly monetary in that MMT advocates that where stimulus is needed, the state should simply create new money and spend it. That means the private sector’s stock of central bank issued money will rise. What’s that if it’s not monetary?

However, according to Smith, Kelton says on that point that “MMT requires us to demote monetary policy and elevate fiscal policy as the primary tool for macroeconomic stabilization.” That’s debatable. As I just said, MMT is part monetary and part fiscal. It’s not really on to claim it’s more one than the other without giving some detailed reasons.


Rogoff and Summers.

Smith then cites Ken Rogoff and Larry Summers in support of his argument. Well that’s a joke, as I’ve explained a dozen times on this blog and as have other MMTers on their blogs. Rogoff has long claimed that a debt / GDP ratio of more than 90% is some sort of disaster despite the UK having a ratio of almost three times that much just after WWII. Plus Rogoff’s calculations in that regard have since been shown to be mistaken. As for Summers, he was promoting more lax bank regulation just before the 2007/8 bank crisis.

Re Summers’s claim that MMT equals “the ability of the government to spend more without imposing any burden on anyone”, that’s nonsense. MMT says that, yes, you can do that given excess unemployment, but not if inflation looks like getting out of hand.

MMT just reinvents the wheel?

Next, Smith quotes Julian Jessop as saying “MMT is simply a repackaging of some old ideas to appeal to a new audience. There really is no such thing as a free lunch – even from a magic money tree.” Well first, MMT is very much Keynes “repackaged” in that Keynes famously said “Look after unemployment and the budget looks after itself”. That’s MMT in a nutshell. So yes: it is fair enough to say that MMT is re-presenting Keynes.

However MMT has been quite right to do that because it is quite clear that many leading economists forgot what Keynes said, or never understood Keynes in the first place. That is, Rogoff (along with two or three other Harvard economists) have been screaming the message for the last ten years that the size of the debt as such is important.

MMT’s answer is that the size of the debt as such is irrelevant: the only important question is whether the deficit and debt are causing excess inflation. Ergo MMT has been right to say what it has been saying.

Moreover, Keynes is near incomprehensible: try reading his most famous book, his “General Theory” if you don’t believe that. In contrast, MMT is much more clear on what its central message is, though clearly the David Smiths and Rogoffs and Summers of this world do not understand it. 


Will MMT be adopted?

Next, Smith says (referring to MMT): “There is, however, little chance of it being adopted as real-world policy.” Well that’s a joke: given the unprecedented deficit and rising debt as a result of Covid, MMT has to all intents and purposes been adopted lock stock and barrel, as several people apart from me have pointed out. For example there’s a recent Bloomberg article entitled “Like It or Not, a Modern Monetary Theory Experiment Is Underway”. 


The Congressional Budget Office.

Then in his final couple of paragraphs, Smith says MMTers claim that it’s the Congressional Budget Office that should estimate the likely amount of inflation and hence determine the size of the deficit. But that idea is flawed, according to Smith, given the record of the CBO in predicting inflation, which according to Smith, is poor.

Well actually MMTers do not specify exactly who should take the decision as to how large the deficit should be: and arguably that’s a deficiency in MMT.

But the real flaw in Smith’s argument there is that one could perfectly well have the central bank try to forecast inflation, and hence what a suitable amount of stimulus would be for the next six months or so. Indeed, that’s the position at the moment in that independent central banks can overrule what they see as excessive or deficient deficits via interest rate hikes or cuts!

I.e. under the latter set up, the extent of disasters resulting from excess or deficient stimulus under MMT would be no worse and not better than they currently are! Indeed, Positive Money and co-authors advocated a system where the central bank decided the size of the deficit in their submission to the UK’s Vicker’s commission.

Put another way, the decision as to exactly who decides on the amount of stimulus is entirely independent of whether MMT or the existing conventional set up is the best.

John Quiggin’s flawed ideas on the Job Guarantee.

He claims here in his opening paragraph that more public services (via JG or via other means) results in more employment. Well an obvious problem with that idea is that there’s been a massive increase in public spending relative to GDP over the last century, yet there’s been no fall in unemployment as a result. (Title of his article: “Why a Job Guarantee will require higher taxation.”)

The reason is simple: unemployment is minimised where labour market efficiency is maximised: by labour market efficiency, I mean the efficiency with which the unemployed can be matched with vacancies, which in turn depends on factors like how well training is matched to skills required and how quickly the price of different types of labour changes in line with supply and demand for different skills.

I.e. if JG works, it’s nothing to do with the fact that the work is public sector type:  it’s because it makes labour for which there is temporarily no demand available to employers for free. But that being the case, there is no reason for JG to be confined to the public sector: private sector would do the trick. Indeed it would do it particularly well, given that the private sector is better at employing unskilled labour than the public sector. Moreover, there’s evidence from Switzerland that private sector JG results in a better post JG employment record for those concerned than public sector JG.

I expanded on that point in this paper several years ago. But then few people bother reading the literature before opining on whatever subject you care to mention.


Monday, 3 August 2020

Thirty two supporters of full reserve banking.

Works where each person supports full reserve are given below, plus in most cases, pictures of them.  The list is in alphabetical order of family name (surname). Please see notes at the end for more details about this list.

William Barnett.  Economics prof, Loyola University, New Orleans.

Jaromir Benes.     Project manager at the IMF.

Ole Bjerg.      Copenhagen Business  School.

Walter Block. Economics prof, Loyola University, New Orliens.

Frank Breitenbach. Vice President of KfW IPEX-Bank GmbH.
Search for the phrase "Frank Breitenbach,  an advocate of Vollgeld" here:

Adrian Byrne.  Degree in economics.  “Let’s have a public inquiry on money!”

John Cochrane.  Economics prof, Hoover Institution, Stanford, California.

See his abstract in  “Toward a Run-Free Financial System.”

Herman Daly.  Former economics prof, University of Maryland.

Christian Etzrodt.  Economist / sociologist who now teaches in Osaka, Japan.

Christian Gomez. Former economics prof, University of Brittany.

Tony Greenham.  Co-author of the book,

Jorg Guido Hulsmann. Economics prof, University of Angers. Author of

Frank Hollenbeck.  Former economist at the US State Department.

David Howden. Assistant economics prof, University of St.Louis.

Jesus Huerta de Soto.  Professor of Political Economy
King Juan Carlos University of Madrid, Spain.

Kevin James. Economist at the UK Financial Conduct Authority.

Mark Joob. Professor at the West Hungarian University, Faculty of Economics and Researcher at the Institute for Business Ethics, University of St. Gallen, Switzerland.

Sovereign Money will strengthen Democracy and Private Property.”

John Kay. Former Financial Times economics commentator.   

Matthew Klein.  Economics commentator for Bloomberg and Barrons.  

The Best Way to Save Banking is to Kill it”. (Published by Bloomberg).

J.P. Koning.  Economics blogger who got his degree at McGill.

Kroll, Matthais. University of Nottingham.

Patrizio Laina.  Economist for Finnish Trade Unions.

Adam Levitin. Georgetown University.

Ken MacIntyre. Edinburgh University. He has degrees in political science and “social and political theory”.

The Money Goes Around and Around”

Rob Macquarie.  London School of Economics.

Switzerland’s Vollgeld Initiative: the monetary system at the ballot box

Miguel Ordonez. Former governor of the Spanish central bank. 

Ronnie Phillips. Former economics prof, University of Chicago.

James Robertson.  Former director of the “Inter-Bank Research Organisation.

Kenneth Spong. Federal Reserve Bank of Kansas City.

Narrow Banks: An Alternative Approach to Banking Reform”.

Adair Turner.  Former head of the UK’s Financial Services Authority, now a senior fellow at the Institute for New Economic Thinking.

Turner does not SPECIFICALLY ADVOCATE full reserve, but certainly expresses sympathy towards the idea in the introduction to:

Kaoru Yamaguchi. Japan Futures Research Centre.

On the Liquidation of Government Debtunder A Debt-Free Money System.


I set out a list of full reserve banking supporters on this blog a few months ago. That list concentrated mainly on supporters from decades if not centuries ago, several of whom have passed away.

This second list  concentrates mainly on a younger lot, though it includes a few older people who are now retired and who were not included in the above mentioned list I did a few months ago.

Nearly all the people above have degrees, and nearly all of those are economics degrees.

Full reserve banking unfortunately has several names: “narrow banking”, “100% reserve banking” and “Sovereign Money”.

This list will be nowhere complete: i.e. there are numerous people with decent economics qualifications who pretty obviously back full reserve, but who do not seem to have actually published anything to that effect. Those people have been omitted from the list.

Please note I have done my best to get all details right above, but I cannot GUARANTEE everything is totally accurate.

Only one work by each person has been listed. Some people have written more than one work supporting full reserve.


P.S. (8th August 2020).  Here's another sixteen supporters: i.e. the above "32" should really be 48.  An indication is given in respect of each where their papers can be found.

Philippe Mastronardi. See various articles by him on the Vollgeld and Monetative sites. 

George Pennacchi                                                                

Arthur E.Wilmarth

Hugo Rodríguez Mendizábal

Alessandro Roselli

Jacek Pera

John Quiggin  See: “The end of quasi-guarantees and the case for a narrow banking model of prudential regulation: Submission to Senate Economics Committee Inquiry into the Bank Funding Guarantees.”

Paul De Grauwe

Peter Flaschel, Florian Hartmann and Christian Proano.

Oz Shy and Rune Stenbacka                                               

S. Manjesh Roy.

Christopher Phelan.

Varadarajan Chari.