Scott Sumner’s strange ideas on MMT.

 
A recent article by Scott Sumner attempts to criticise MMT. All the article actually does is to show that he doesn’t have much idea as to what MMT is all about. (Title of the article is “Why Money Matters”.)

The article deals at length with just one point, namely the effect of swapping dollars for government issued bonds. (Where the central bank creates money and buys up bonds, that swap equals QE, of course). Plus the article claims MMT’s ideas on swapping bonds for cash are defective.

Now there’s just one glaring flaw in that, which is that MMTers advocate a more or less permanent zero interest rate (on government bonds and government liabilities generally). Incidentally Milton Friedman advocated the same.

Now in that sort of permanent zero interest rate scenario there’d scarcely be any government issued bonds! What’s the point in locking up your money for a year or several years if there is no reward for doing so? Absolutely none!

Indeed Milton Friedman is quite explicit about that: that is, he said he didn’t see the point of government borrowing, except in emergencies. (See his para starting “Under the proposal….” here.)

So even if Scott Sumner’s criticisms are valid, he is dealing with a matter which is near irrelevant for MMTers. That’s not much a body blow for MMT!

_________________

Postscript (4th Dec 2020).   Then in the final three paras of his article he says "the public’s attempt to get rid of excess cash balances will drive up the price of a wide range of assets, leading to more total spending," And apparently "All of this is ignored by MMTers."

So I left about five links in the comments to articles by MMTers which very specifically refer to the stimulatory effects of extra cash balances."  Then Sumner accuses me of confusing stocks with flows when in fact those links refer very specifically to stocks!!

Frankly it's difficult to know how to descrbe Scott Sumner's grasp of MMT without resorting to three letter words.

Varoufakis’s questionable ideas on CBDC.

 

The questionable ideas are in an article of his entitled “Why the Bank of England should give everyone a free account”.

His first claim is that “In times of trouble, such as the current pandemic, the Bank of England could lift all boats at once by crediting your account directly…”. Well I suggest the decision as to who gets stimulus money is very much a POLITICAL decision (as Positive Money has argued since its foundation) and not a decision for central banks.

Second, why should everyone be entitled to a FREE account at the central bank, or any other bank, come to that? Making something free at the point of delivery is OK where there are overriding social considerations at stake. For example making basic education free (and indeed compulsory) for kids is widely accepted as a good idea because being able to read, write and do basic maths is a gift which no child should go without. Likewise, there are good arguments for making basic health-care free at the point of delivery, which explains why basic health-care is available for free in many countries.

But is a bank account a basic human right? Given that anyone can do their basic financial transactions (purchase of food, paying the rent etc) using PHYSICAL cash (£10 notes, $100 bills etc) why is a bank account a basic essential? Maybe at some point a majority of shops will refuse to take physical money and will insist on payment via debit or credit cards. But we are not at that point yet.

Robert Peston’s barmy ideas on government debt.

 

Robert Peston published an article on 25th November 2020 entitled “Spending Review: How the UK's Covid-19 debts may turn out very expensive.” The article is complete nonsense, which raises the question as to how he ever came to be the BBC’s business editor or ITV’s political editor.

Dozens if not hundreds of other people on social media and elsewhere have taken the p*ss out of this article. Anyway, my “p*ss taking” efforts, for what they are worth, are as follows.
 
His first nonsensical claim is that the large government debt accumulated as a result of Covid “…represents by implication the fastest transfer of wealth and power to China and Asia in our lifetimes.” Well that might be true if China had bought up large amounts of that debt. Unfortunately the reality is that Chinese holdings of US Treasuries have remained roughly constant for the last ten years: i.e. since long before Covid.


 

The UK’s debt/GDP ratio.

Next, he points to the fact that the UK’s debt/GDP ratio will rise to above 100% which apparently is a problem because “Outside of world wars, this is a uniquely large and fast rise in public sector debt.”

Now hang on. The ratio for the UK rose to well over DOUBLE that 100% figure in 1945.But the years after 1945 were “outside of world wars”!!!!

Of course that high debt was CAUSED BY WWII, but that record debt fell only very slowly in the decades after 1945: falling  to  about 50% a full fifty years later: in 1995.

Now what’s the big difference between a high debt during peace time which was originally caused by a war and in contrast, which was caused by a virus?  Unfortunately (you’ll be amazed to learn) Peston doesn’t explain what the big difference is.

 

What if interest rates rise?

Next, Peston sets out a lot of complicated stuff about “gearing” and government bonds which contains several mistakes, most of which I’ll ignore. For example, he says “The point is that interest rates will have to increase at some point.” He doesn’t explain why. The reality is that if demand stays relatively muted, then there’s no earthly reason to raise interest rates!

But shortly after that, he gets nearer the truth when he says interest rates COULD RISE. To be exact, he says “…..a modest rise in activity could lead to inflationary pressures…”.  Notice the word “could”. If (and that’s a big “if”) inflationary pressures did get uppity, some sort of countervailing deflationary measure would be needed. That could be tax increases or it could be an interest rate increase (as I’ve explained at least ten times on this blog over the years).

But neither of those measures (tax increases or an interest rate rise) would constitute a cost for the population as a whole (as I explained here almost ten years ago). I’ve explained at least ten times on this blog over the years – forgive the repetition). Reason is that the sole purpose of the tax increase or interest rate rise (as indeed Peston very much implies himself) would be to hold demand down to the “full employment” or “economy at capacity” level.

So if no standard of living sacrifice for the UK population is required in order to cut the debt in what sense is there a “cost” there for the UK population? Peston doesn’t explain.

 

Politics.

That however is not to say there are absolutely no conceivable problems involved in cutting the debt. The point is that there are no strictly ECONOMIC OR TECHNICAL problems. In contrast, there is a possible POLITICAL problem: the problem is that, as explained above, cutting the debt involves a rise in tax or a rise in interest rates (which to repeat, do not cause a significant decline in real living standards). But that is not necessarily how the population would see it.

That is, there could be big political objections, even riots in response to significant tax rises, even where those tax rises have no effect on living standards.

So what’s the best thing to do about the latter possible political problem? Well I suggest the best solution is very definitely NOT TO implement DEFICIENT demand NOW so as to ameliorate a problem which may or may not arise in a few years time. I suggest the best solution is to minimise unemployment right now, and then deal with any possible political problems that arise if an when they arise.

Plus, excess unemployment NOW is just as likely to cause riots as tax  rises in a few years time.

Is this the crucial flaw in fractional reserve banking?

 

 

In a “base money only” system, i.e. under full reserve banking, people and firms would lend to each other, sometimes on a peer to peer basis, and sometimes via banks. And under that system there is no obvious reason why the rate of interest established would not be some sort of genuine free market, or “GDP maximising” rate: after all in such a market there’d be millions of borrowers and hundreds of lenders all competing for business, just as in the real world right now. I.e. in that scenario, it is difficult to set up monopolies or cartels to rig the market.

Note that under that system, banks would lend only base money. That is, letting private banks create their own home made money would not be allowed.

However, if commercial banks are allowed to create their own home made money (as under fractional reserve banking), they can lend at BELOW the above rate because they do not to attract deposits to cover 100% of the monies they lend out: they can simply print some of it, at no cost to themselves. (Joseph Huber alludes to this process on p.31 of his work “Creating New Money”). That obviously increases the total amount of lending and debts.
 
That might seem beneficial. Or at least the increased lending might seem beneficial. Only trouble is that, as just intimated, debts rise as well, and there’s an army of do-gooders who witter on about the allegedly excessive amount of debt we as a society have. So to that extent, the latter increased amount of lending and debt is not quite the boon it might seem.

But that’s not the basic point I wish to dwell on here, particularly since I have somewhat jaundiced views about the latter do-gooders.

The more important point is that it’s a widely accepted default assumption in economics that the free market price for anything is the GDP maximising price for reasons given in the economics text books: i.e. it is up to those who want to claim a particular market is flawed to prove their case. Ergo the default assumption must be that money printing by private banks is not beneficial: it will not maximise GDP.

Of course it can well be argued that given the disastrous environmental effects of more GDP, raising GDP should not be an objective. But the answer to that is simply to replace “maximise GDP” with “maximise output per hour”. That is, there clearly isn't any harm to the environment in raising output per hour by X% if the average number of hours worked per person per week is CUT BY X%.

Indeed, there are campaigns aimed at cutting the working week to four days, and partially on the grounds that while total number of hours worked declines, productivity increases more or less compensate for that.

   

Ignorant drivel from Iain Macwhirter on MMT.

 

 

That’s in an article of his entitled “How governments learned to stop worrying and love debt.”

 

He claims MMTers think “Governments can run big deficits indefinitely so long as the debts aren’t called in.” Complete BS. MMTers are well aware that inflation poses a limit (gasps of amazement) to the size and duration of deficits.

 

In similar vein he claims MMTers “say that an independent Scotland shouldn’t bother about debt either, so long as it has control of its currency, because it can just print Scottish pounds to pay for it.” Yet more bollocks.

 

But then Macwhirter contradicts himself when he says MMT “contains an important kernel of truth: that government spending, given low inflation, does not need to be directly financed by tax revenue.”

 

Quite. Put another way the basic MMT claim is that the size of the deficit and the debt do not matter as long as the effect is not excess inflation.

 

So what was all the stuff a few paragraphs above about MMTers being totally unconcerned about inflation?

 

Macwhirter’s article is self-contradictory BS.

 

Afterthought: how do I get a job writing for some respectable newspaper or think tank? Ah yes: I think I’ve got it. Talk BS..!!!!!

 

 

 

Bank of England discussion paper entitled “Central Bank Digital Currency”.

 

The above paper invites comments. So I sent one, as follows.

P.7  The first “key point” says that the only way for the public to hold BoE issued money is in the form of physical cash. That is debatable in that in the UK, any member of the public can open an account at National Savings and Investments whose only assets are base money and government debt. Thus arguably those accounts at the NSI come to the same thing as holding base money in digital form.

The latter point rather detracts from the claim made on p.37, para starting “But CBDC could also introduce risks for financial stability”, namely that the introduction of CBDC or a loss of confidence in commercial banks could lead to a run on commercial banks. That is, depositors at commercial banks have been free for decades to “run to” NSI, but have not done so. In particular, they did not run during the 2007/8 bank crisis.

Plus I would argue that any run from commercial banks is a flaw in those commercial banks, not a flaw in CBDC. My reason for saying that is that one of the main activities, if not THE main activity of commercial banks is basically fraudulent. That is, those banks, 1, accept deposits, 2, grant loans, and 3, promise depositors their money is safe, which it cannot possibly be because loaned out money is NEVER safe.

Indeed if any organisation other than a bank indulges in the latter “three point” activity (e.g. pension funds, unit trusts, mutual funds etc) those other organisations are liable to be prosecuted.

So why are banks allowed to engage in an activity which is fraudulent when done by anyone else? Well I suggest the absolutely VAST AMOUNTS of money spent by the finance sector (about £100million a year) buttering up politicians might have something to do with it.


In other words runs just wouldn’t occur in a full reserve system where (shock horror) banks are not allowed to engage in the latter fraud, as explained by Prof John Cochrane.

Mary Mellor says UBI should be funded out of new publically created money.

 

 

In a "Brave New Europe" article entitled “UBI: Public Money for a Public Purpose”, Mary Mellor argues that UBI (Universal Basic Income) should be funded out of new publically created money (henceforth “base money”), rather than out of tax on the rich.

In fact she goes much further than that. She says “….basic income and other democratically identified public and social initiatives should be funded by new public money which should then be retrieved by taxation.”

Well assuming the gap between issuing the new public money and retrieving it via tax is relatively short, then that comes to the same thing as the more traditional way of funding public spending, namely collecting the tax first and then spending the relevant money. To take the extreme case, what’s the difference between government collecting £X in tax and spending it a week later, and on the other hand, spending that money first, and then retrieving it via tax a week later? No difference!

Bankers have got politicians and economists suckered.

 

 A central bank can create and distribute whatever amount of money an economy needs. Plus that form of money is TOTALLY safe. But those running PRIVATE banks have convinced politicians and economists that the bulk of the money supply should be issued by those PRIVATE banks and should come about as a result of those banks making loans: that type of money is created when private banks grant loans. That means that in order to ensure the safety of households’ stock of money, politicians have to devote billions of pounds taxpayers’ money to bailing out money lenders, when those money lenders c*ck it  up. 

The naivety of politicians and economists, and sheer brass nerve of money lenders are jaw dropping.
 

 

Richard Murphy makes a video.

This video made by Richard Murphy earlier this year is OK except that near the start he claims that because Bank of England £10 notes say that the bank “promises to pay the bearer the sum of £10” that therefor such notes really are a promise to pay.

 

Now there’s a slight problem there, namely what exactly is the BoE promising to pay? The reality is that if you turn up at the BoE and ask them make good on their promise, you’ll be told to shove off.

That “promise to pay” sentence on BoE notes is actually just a left over from the days when banks (including the BoE) really did have to make good on their promise: they had to supply anyone who wanted it with real gold in exchange for those paper “promises to pay”. But those days are long gone.

So in what sense are BoE notes a promise to pay? Well you could say they are a promise to pay in the sense that they are a totally vacuous promise to pay, but presumably that’s not what Richard Murphy has in mind.

As to what he DOES HAVE IN MIND, hopefully all will be revealed at some stage.

John Weeks’s flawed criticisms of MMT.

 

Hot on the heels of Richard Murphy’s expulsion from the Progressive Economy Forum for backing MMT, I thought I’d see what PEF have against MMT. The answer seems to be not a vast amount. Though there is an article by John Weeks entitled “Fiscal Deficit and Public Debt too Large?”.

In the article, Weeks criticises MMT, though he doesn’t actually refer to it by name, which is odd.

But it’s pretty obvious he’s referring to MMT to judge by this passage: “This question begins with the recent arguments that if governments have control of national currencies — sometimes called sovereign currencies — they can fund their expenditures through money creation.  This view derives from the argument that taxes do not directly fund spending.” Now if that’s not a reference to MMT, I don’t know what is. He really ought to have clarified things there. But never mind. Moving on…..

His basic criticism is the not entirely invalid point that MMT is fine for large countries, but not so good for small ones. However, his article does have weaknesses. 

He says, “funding expenditure via money creation…. the ability to do so requires that the currency be safe from speculation against the exchange rate.  That requires either that the national currency serve as an international medium of exchange (reserve currency) or that the government possesses substantial foreign exchange reserves.”

Well the first flaw in that argument is that the fact of a currency being an “international medium of exchange” will not necessarily protect it from speculative attacks if speculators think the relevant government is incompetent or has got something wrong. The UK pound is an “international medium of exchange” but that didn’t stop speculators forcing it out of the European Exchange Rate Mechanism in 1992.

Conversely, it does not make sense from speculators’ point of view to attack a currency simply because it is not an international medium of exchange, as long as the relevant government (unlike the UK government in 1992) isn't doing anything silly.

 

A virus strikes.

So let’s take a not unrealistic scenario: say economies Worldwide are hit by a virus which we’ll call “Covid-19”. That would mean that every country would need to implement some stimulus. Now as long as a small country whose currency is not an international medium of exchange implements stimulus via money printing, and makes it clear it has no intention of letting its “printing to GDP” ratio exceed that of other countries, why would speculators attack the relevant currency? Darned if I know, particularly if the country concerned has a record of behaving in a prudent manner.  

Or take another not unrealistic scenario as follows. Citizens in the latter small country go into savings mode: the opposite of “irrational exuberance” if you like. The effect of that would be that the value of its currency on forex markets would drift upwards because of the reduced demand for imports, plus unemployment would rise to an unnecessarily large extent.

If the government and central bank of the country had their wits about them, they’d implement enough stimulus to return employment to its previous level. And if they did that via money printing, and again made it clear they intended doing no more printing than was needed to bring their economy back to full employment, then the value of their currency on forex markets would simply return to its previous level, all else equal. Again: no good reason for speculators to attack.

In short, I suggest that a small country whose currency is not an internationally accepted medium of exchange would be able to use MMT as long as it behaves responsibly.

 

Low interest rates.

Another argument put by Weeks is the thoroughly feeble idea that existing low rates of interest are not “sustainable” because “If interest rates remained permanently low, that would require a substantial restructuring of pension funds and private portfolios in general.” Well actually that’s one huge non-problem and for the following reasons.

The money that funds interest payments to savers does not come from thin air: it comes, in the case of interest on government debt, from taxpayers. But taxpayers and “people saving for pensions” are the same lot of people! Thus if interest rates fall, taxpayers pay less tax, so they can allocate the relevant increased income (net of tax) to saving a bit more for their pension. Problem solved!

As to interest on PRIVATE sector bonds, much the same applies. To illustrate, if a corporation can fund itself more cheaply because of a fall in interest it needs to pay on its bonds, that leaves money in the pockets of those buying its products and/or it means more money for its shareholders, which they can devote to saving more for their pension!

 

Conclusion.

I’m not bowled over by John Weeks’s criticisms of MMT.

 

 

 

Positive Money goes all woke.

 

This is the third instalment of a series of articles of theirs on the transatlantic slave trade of two to three hundred years ago.

Now why are they going on about that slavery episode – a crime which now cannot be rectified – while ignoring the 30 million or so slaves in the World right now, a crime which COULD potentially be rectified or at least ameliorated? Well you’d need to be politically naïve not to be able work that out.

Reason is that it’s fashionable in PC leftie circles to trash your own country, culture and race. So for white wokes, criticising whites for imposing slavery on various people, while ignoring the slavery imposed by people with brown faces is just the ticket. Plus for “people of colour”, the latter tendency of wokes to bash “people of whiteness” is a God-send: it enables them to engage in a bit of blatantly racist white bashing.

Moreover the article tries to claim that debts owed by developing countries to former colonial countries are an extension of that colonialism. Well there’s a slight problem there, namely that an increasing number of developing countries are heavily in debt to China, which is not a former colonial power. Thus if other developing countries had not incurred debts for silly reasons to former colonial countries, to what extend would they have gone running to China for loads of lovely money to fritter away?

That’s not a question that the author of the Positive Money article addresses: after all, it doesn’t fit the woke PC narrative does it?

Covid shows that MMT is in the E=MC2 league.

 

Science attaches importance to ideas and equations in proportion to their simplicity and how much they explain. For example Einstein’s theory explains stuff about the orbit and planets round the Sun, plus stuff about why time runs slower for clocks on satellites orbiting the Earth than for clocks which are stationary on the surface of the Earth, and stuff about the behaviour of atoms and similar elementary particles. That’s some achievement.

Likewise, the basic rules of MMT do not need changing or adjusting or adding to in anyway so as to deal with Covid.

That is, the basic rule is that the deficit should be the maximum that is compatible with minimising unemployment while not exceeding the inflation target and not resulting in an excessive rise in interest rates.

Of course Covid has proved a bonanza for windbags with allegedly original ideas as to how to deal with Covid. But arguable that’s all a waste of time.

For example, take furloughing. That has the obvious benefit that it preserves jobs and helps some firms avoid bankruptcy. On the other hand there’s much to be said for abandoning furlough and simply sticking to the basic MMT rule set out just above.

A problem with furlough is that it tends to preserve the economy in aspic. That is, there are some big changes coming our way like an express train: first there is Brexit. Second there is global warming. And third there are quite possibly some PERMANENT changes to work practices stemming from Covid: i.e. more people working from home even if the virus is totally defeated.

That being the case, there is much to be said for letting firms which can’t make it thru Covid unassisted go the wall. After all the assets of such firms won’t vanish into thin air, nor will the skills possessed by those working for them. And that lack of assistance releases assets, skilled labour etc which can be used by firms engaged in the above mentioned new forms of employment.  

As for the UK’s “Eat out to help out” scheme, which was supposed to encourage people to go out to restaurants when Covid had allegedly been beaten in the middle of 2020, what that scheme actually did was to increase social mixing, which helped exacerbate the virus problem.

The BBC’s Dharshini David tries to enlighten us on how to pay for the debt caused by Covid.

That’s in this presentation by her for the BBC. 

She trotts out the usual nonsense that comes from people who think government debt can be treated the same way as a household debt. I.e. she falls for the popular myth that government debt has to be repaid in the same way as a household debt is repaid.

The first flaw in that argument (as I’ve explained a dozen times on this blog) is that government debt does not necessarily need to be repaid in the normal sense of the phrase “repay a debt”. For example the UK’s debt/GDP ratio fell from around 250% in 1945 to around 50% in 1995 without any debt repayment at all!!!

What happened was that inflation eat away at the real value of the debt, plus there was real economic growth. Hey presto: the debt/GDP ratio fell.

But of course it’s possible the post Covid debt gives rise to a need to pay an excessive amount by way of interest on that debt, or (given that the debt is an ASSET as viewed by the private sector), spending and demand get excessive.

That problem can of course be cured by raised taxes or public spending cuts. But that does not, repeat not cut living standards. All it does is to keep demand down to the level that is compatible with minimising unemployment while hitting the inflation target.

But the latter is not the message you get from Dharshini David. The message you get is that we need to raise taxes and hand over money to some mysterious creditor in the same way as a household, after it has taken out a mortgage, repays the bank it got the mortgage from. And that repayment process clearly DOES CUT the household’s standard of living relative to a scenario where it got an interest only mortgage and made no repayment of capital.