Monday, 29 March 2021

Sir Humphrey Appleby loves Mariana Mazzucato.


Mariana Mazzucato is a big cheeze at the University College London Institute for Innovation and Public Purpose. The latter organisation spews out a never ending torrent of waffle aimed of course at keeping people at the UCL IIPP employed at the taxpayers’ expense.

Their latest bit of waffle is an article published by Project Syndicate entitled “Building Back Worse” (authored by Mariana Mazzucato and others). It’s difficult to know which sentence or paragraph is the most meaningless, but I particularly like this one: “And no government can achieve a goal as complex as carbon-neutrality without mechanisms for eliciting and coordinating the participation of business, academia, and civil society.”

So business and academia have to be “coordinated”, presumably by some sort of Whitehall based coordination committee (which would be music to the ears of Sir Humphrey Appleby)? Personally I can’t see what would be wrong with business getting on with installing wind turbines, with “academia” doing whatever research it thinks best, even if totally unrelated to, i.e. not coordinated with the current generation of wind turbines.

In other words “academia” MIGHT think that research money is best spent improving existing wind turbines. But they might think research money would be better spent on wind powered merchant ships or generating power from the tidal flows.  

And why do the efforts of “civil society” need to the “coordinated” with what academia or business is doing? Darned if I know. I mean if civil society in the form of think tanks or other pressure groups want to promote Bill Gates’s idea of spreading chalk dust into the upper atmosphere so as to cut global warming, presumably Mazzucato & Co would want to see some sort of Whitehall committee telling think tanks etc to stop because that activity is not “coordinated” with existing renewable energy projects.

My reaction to the latter prohibition, if I was working for a think tank, would be to tell the relevant Whitehall committee and Mariana Mazzucato to get lost.

And why does the “participation of civil society” need to be “elicited” by some sort of “mechanism” (i.e. Whitehall committee consisting of Humphrey Appleby and friends)? Civil society actually has a nasty habit of deciding for itself what it wants to promote, often to the annoyance of politicians and senior civil servants, like Sir Humphrey Appleby.

But at least Mariana Mazzucato’s ideas would involve the creation of numerous Whitehall committees: music to the ears of Sir Humphrey Appleby.


Friday, 26 March 2021

Any bank capital ratio below 100% is a subsidy of private banks.


Where bank capital ratios are on the low side, depositors’ money is at risk, thus government (aka taxpayers) have to stand behind private banks and rescue them (or maybe just rescue depositors) when things go wrong. That, ipso facto, is a subsidy of private banks and/or depositors.

Most economists concede that subsidies of commercial activities are not justified unless there is a very good justification for a subsidy, though unfortunately most economists are too indifferent to the above unjustified subsidy to bother doing anything much about it. Incidentally, depositors at a bank which also lends out money are not just simple innocent depositors: they are into commerce since the get a cut of the interest paid by borrowers.

In contrast, where capital ratios are much higher, e.g. well above the 25% or so level advocated by Anat Admati, the risk for depositors falls to a very low level, thus according to the conventional wisdom, it is not necessary to raise capital ratios any further.

Unfortunately the latter point is flawed, and for the following reasons.

Take the hypothetical scenario where bank capital ratios are 100%. That comes to the same thing as so called “100% reserves” or “full reserve banking”. In that scenario, bank loans are funded JUST BY banks, bank subsidiaries or accounts which are funded 100% by equity. Meanwhile deposits are in accounts which are 100% backed by base money at the central bank.

Now suppose a bit of stimulus is needed. There are two ways of doing that: one is to simply create and spend more base money into the economy and let people and firms devote whatever proportion of that new money they like to borrowing and lending. And the second is to artificially cut interest rates so as to bring about more stimulus by encouraging more lending.

But wait: which of those two options is nearer to a genuine free market and thus more likely to maximise GDP or output per hour? Well it’s pretty obviously not the option that involves anything ARTIFICIAL like an artificial cut in interest rates! The free market option is the one that puts more spending power into everyone’s pockets and leaves people and firms to decide for themselves how much of that new money is devoted to more lending and borrowing.
One way of cutting interest rates would be for the central bank to use the new money it has created just to lend to private banks at below the going rate of interest. Well that’s pretty obviously a subsidy of banks!

A second way of cutting interest rates would be to relax the 100% capital ratio requirement, i.e. move towards fractional reserve banking rather than full reserve. But fractional reserve is a system in which private banks can create money, and as Joseph Huber and James Robertson said in the work “Creating New Money” (p.31), the right to create / print money is  a subsidy for the money printer. If I was allowed to turn out £10 notes on my desktop printer, that would be a subsidy of little old me!

The conclusion is that it makes no difference whether bank capital ratios are above or below some sort of supposedly safe level, like the 25% advocated by Anat Admati. That is, regardless of whether they are above or below that level, any capital ratio below 100% involves a subsidy of private banks.


The conventional idea that if bank capital ratios are raised to the point where there is an absolutely minimal chance of a bank failing, that capital ratios are then high enough does not stand inspection: the reality is that ANY RATIO below 100% involves a subsidy of banks and should thus not be permitted. 


P.S. (next day, i.e. 27th Mar 2021).   Forget to say that banks are also subsidised or get preferential treatment in the following sense. One of the main activities of banks is lending. But they are nowhere near the only lenders: for example mutual funds, unit trusts and pension funds lend when they buy corporate bonds. Plus millions of firms lend when they allow customers an extended period before payment for goods is demanded. But there’s no government funded guarantee for those who put money into the latter lenders which ensures they are immune from making a loss, and there are no bailouts for those lenders.

Thursday, 25 March 2021

The existing bank system is fraudulent.


A bank under the existing system is a special type of lender which unlike other lenders, promises those who fund it (i.e. depositors) that they cannot possibly lose money. If any other lender does that (e.g. a pension fund, mutual fund or unit trust), those responsible are prosecuted, and for the obvious reason that loaned out money is never totally safe. Ergo the money of those who fund those lenders cannot be totally safe either.

So why do banks get away with it? Well there’s two reasons. First, a large majority of economists don’t understand the above relatively simple point. Maybe that’s understandable in the case of economists who have not studied banks. But it’s inexcusable in the case of those who have.

Second, banks devote a huge amount of effort to hoodwinking and brainwashing politicians into supporting the existing bank system, and that’s easily done: the average politician has a hundred things to think about other than banks.

Wednesday, 24 March 2021

An accounting model of the UK Exchequer.

The above is the title of a recently published work which sets out in detail the book-keeping entries etc involved at the UK Treasury, Bank of England and commercial banks when the UK government engages in tax collection, public spending, borrowing and money creation. Plus there’s a 45 minute youtube summary by one of the authors.

The work is the length of an average book and congratulations to the authors for all their hard work. The complexity is mind blowing and I have nowhere near got to grips with it, and probably never will. So . . . “errors and omissions expected” in the paragraphs below. This work supports the idea that governments and their central banks are not constrained by anything much (apart from inflation) when it comes to creating and spending extra money in a recession.
The conventional view (which I’ve always gone along with) is that when government wants to borrow and spend more, it first borrows and then spends the money borrowed. And an independent central bank (CB) can then react to that in whatever way it sees fit. E.g. if the CB thinks the extra borrowing will raise interest rates too much it can cut them, e.g. by creating new money and buying up government debt. Alternatively if it thinks the extra spending will be too inflationary, it can raise interest rates, e.g. by selling government debt into the market. (Incidentally I’m using the phrase “independent central bank” simply to refer to a CB which is free to adjust interest rates: clearly there are ways in which so called indepent central banks are not independent.)

However, far as I can see from the above work, that is not actually what happens. Rather, when parliament decides to spend money over and above what it collects in tax, the Bank of England will automatically create the money needed, which will then be spent. But the BoE will demand collateral from the Treasury in the form of government debt, i.e. Gilts.

After that, the Boe is free to adjust interest rates up or down as described above. Thus what the above work says (end of section five) is that the extra spending may take place BEFORE the “government central bank machine” borrows or extracts extra money from the private sector.

On the other hand, far as I can see, that’s not NECESSARILY what happens. That is, it’s presumably possible that the BoE gets wind of extra government spending (not funded via tax), and if the BoE thinks inflation is getting uppity, it may immediately sell government debt into market to mop up money and impose a countervailing / anti inflationary effect.

So to repeat, one of the important points made by this work is confirmation that the UK government and the Bank of England are not constrained (other than by inflation) when it comes to creating and spending more money. However, the exact way in which that “create and spend” process takes place are not quite as per the conventional wisdom. And finally, once again: errors and omissions expected.

Tuesday, 23 March 2021

Economists discuss “new” idea unaware that it is 2,000 years old…:-)



The two economists are David Beckworth and Dan Awrey, and their “discussion” is entitled “Dan Awrey on Unbundling Banking, Payments and Money” published by Mercatus.

To be more accurate, Awrey is actually a law professor at Cornell who has launched forth on the  subject of banking, money etc, and therein probably lies the problem. That is, and to illustrate, if the roles were reversed and a professor of economics launched forth on some legal issue, the hypothetical professor would be skating in thin ice.

I’ve actually pointed out the mistake that Awrey (and now Beckworth) make on this blog about a month ago. But A & B clearly haven’t got the message, so run through this again, concentrating on the more recent Mercatus publication.  

The three roles of banks that need unbundling.

Awrey begins his explanation as to exactly what the different roles of banks  that need unbundling under the title “Three Roles Banks Play in our Lives”. Unfortunately he only mentions TWO roles under that heading. At any rate, taking that section and the heading of the article, it’s pretty obvious that the three roles to be unbundled are lending, money creation and payments.

Now the latter unbundling is exactly what full reserve banking consists of (also called “Sovereign money”, “100% reserves” and “narrow banking”). That is, under the existing (fractional reserve) system, a bank creates money when it lends: that is, it credits the account of the borrower with $X, while telling depositors their money is still there and is safe. Ergo the money supply rises by $X.
In contast, under FULL RESERVE, a bank is not allowed to do that. If it wants to lend, it has to persuade a depositor to buy into a fund which lends, and the stake the depositor has in that fund is in the nature of equity, not money. I.e. the stake holder can lose money. Ergo there is no rise in the money supply.

As to how the money supply is actually increased under full reserve, that is done by government and central bank when the latter two think stimulus is in order. So under full reserve, lending and money creation are “unbundled”.

Now full reserve, i.e. the idea that banks should not be allowed to accept deposits at the same time as lending is a good 2,000 years old and arguably 3,000 years old according to an article by David Fuller, published by the Cobden Centre and entitled “100% Banking and Its Advocates: A Brief History.”

Of course banks two or three thousand years ago were arguably very different creatures to banks nowadays. But as Fuller shows, banks in some shape or form have been in existence constantly over the last three thousand years, and have constantly evolved, with full reserve certainly being discussed, if not actually implemented at some stages.

As for more recent advocates of full reserve who refer to “unbundling” or “separating” different bank functions, there are any number. For example this work from about ten years ago says “We believe that the banking sector would be more stable and robust under a full reserve banking model where the transaction function of banking, the payments system, is separate from the lending function.”   

Or for another example, Irving Fisher in the 1930s advocated unbundling money creation and lending when he said, “We could leave the banks free, or at any rate far freer than they are now, to lend money as they pleased, provided we no longer allow them to manufacture the money which they lend” (His booklet, “100% Money and the Public Debt”).

But Dan Awrey and David Beckworth appear to be totally unaware of the history of the full reserve idea. Given that their Mercatus publication is about 8,000 words, you’d think just one sentence mentioning the history of the full reserve idea would be in order.

To be strictly accurate, A & B do mention “The Narrow Bank”, which was a recent attempt in the US to set up a bank whose assets consisted just of reserves at the Fed. That’s what might be called “half” of a full blown full reserve / narrow banking system. But the other half, i.e. forcing those who want their money loaned out to bear relevant risks is not included in the latter “The Narrow Bank” proposal, so I don’t count that as a full blown narrow banking / full reserve system.

Sunday, 21 March 2021

A pro austerity article by William Allen published by the NIESR.


The article is entitled “Monetary Policy and Government Debt Management During the Coronavirus Pandemic”. (NIESR is short for National Instute of Economic and Social Research).

The abstract consists of just one sentence which reads, “This paper describes how the large budget deficits of 2020 in the US and UK . . . were financed . . . and how their ability to resist a post-coronavirus surge in inflation has been compromised."
The paper’s explanation as to why inflation could not be damped down is far from convincing. For a start, a large amount of damping could be achieved simply by reversing one of the the processes via which stimulus was implemented: QE. Allen does not mention that.

By way of trying to bolster his claim that containing inflation might be difficult, William Allen raises the prospect of governments putting pressure on, or overruling central banks (his 3rd last para). Well that’s a problem which has always existed, for example Donald Trump put pressure on the Fed. Allen does not explain why that should be more of a problem post Covid than at any other time.

Also central banks can raise interest rates. I’ve never known an instance of a central bank not being able to raise interest rates by as much as it wants, though I’m always happy to be corrected on that. But even if a CB can’t raise rates as much as it wants, there’s another way of damping down inflation, namely to raise taxes.

And Allen's final mistake comes in his last sentence which reads "If coronavirus reief programmes are not to be financed by the inflation tax, then they will have to be financed by other taxes."

Really? If people in the US and UK continue to move in what might be called a “Japanese direction”, i.e. continue to expand the amount of government liability (government debt and base money) which they are willing to hold at low or zero rates of interest, then what on Earth is the point of raising taxes and confiscating those assets from the private sector? If that was done, the private sector would then regard itself has having an inadequate stock of safe and liquid assets. It would then try to save in order to acquire its desired stock, and the result would be Keynsian “paradox of thrift” unemployment.

In short, Allen advocates enduring excess unemployment right now in order to ameliorate a problem which might or might not arise in two or three years time.

Close down the NIESR?

Maybe the NIESR used to be a worthwhile organisation, but nowadays I find it yawn provoking. Jagjit Chadha, head of the NIESR regularly puts stuff on social media which very few people respond to. Few people appear to be interested in his material.

Tuesday, 16 March 2021

Michael Hudson weeps and wails about household debt.

Household Debt Service Payments as a Percent of Disposable Personal Income, 1980-2020:

A large majority of the population are susceptable to emotional appeals and pretty much indifferent to facts or reality. And that certainly applies to the numerous articles advocating a debt jubilee: i.e. you only need to spin stories about impoverished households being up to their eyes in debt, and most people will back your debt jubilee proposals. After all, the word “debt” itself is an emotionally charged word.

A recent article by Michael Hudson and others falls into the latter “emotional” category. It’s entitled “It Is Time to Remove the Debt Barrier to Economic Growth.”

The second paragraph claims “….the indebtedness of the population means there is little discretionary income with which to drive the economy.” Now there’s just one teensy problem there, which is that one person’s spending must be someone else’s income. In the case of interest payments, interest payments by debtors must equal interest receipts by creditors (plus payments to staff at banks and similar which organise loans).

It could of course be argued that total household spending by less well-off households is more sensitive to changes in their monthly outgoings than that of better off households, and hence that a rise in interest payments will cause a decline in aggregate demand. But Hudson & Co do not actually say that!

Moreover, if demand DOES FALL for the latter reason, there is no reason government and central bank can’t boost demand via the usual fiscal and/or monetary measures (e.g. Biden type stimulus cheques).

But in any case, the latter points are irrelevant because household debt service costs as a proportion of household income is at a record 40 year low as shown in the above chart..!!! But the later chart sets out a FACT, which as I said above is not something that is of much interest to many people.



Sunday, 14 March 2021

My comments on the UK’s Law Commission consultation document on hate crime.


The Law Commission is a body composed mainly of lawyers which recommends changes in the law to the UK government. At least that’s my very brief description. Clearly for a more authoritative description you need to look at the LC’s web site.

The comments I submitted to the LC on their consultation document on hate crime are below.



1. The LC’s refusal to examine the basic rationale of the hate crime concept is the equivalent of the Navy having a review of aircraft carriers without re-examining the basic rationale of aircraft carriers.

Para 3.14 says, “It is also important to emphasise that our terms of reference for this review do not ask us to question the notion of more severe punishment for hate crimes or determine if it is principled. We simply intend to outline some of the main arguments that have been offered to justify more severe punishment in this context.”

So the terms of reference, which were decided by the Law Commission (LC) itself in consultation with the Department for Digital, Culture, Media & Sport, prevent the LC from examining the basic rational for the hate crime concept. That is the equivalent of the Navy having a major investigation into aircraft carriers without considering the basic rationale for aircraft carriers, which is clearly absurd.

“All silencing of discussion is an assumption of infallibility” – John Stewart Mill.

Moreover, the excuse given in the consultation paper for that omission, namely that there was not much call for the above basic rationale to be reconsidered in soundings prior to publication of the consultation paper is a poor argument. The lack of desire to question an idea certainly shows that the idea is part of the conventional wisdom. However the claim that because an idea is part of the conventional wisdom, that therefore the idea is probably valid has been shown to be flawed over and over throughout history. The idea that the Earth is flat used to be part of the conventional wisdom.

And finally, the above refusal to set out the justification for the basic hate crime concept is wholly inconsistent with para 3.10, which says, quite rightly, that “It is widely accepted that any punishment of wrongdoers by the state must be justified.”

2. The possible reasons for the rationale for the hate crime concept given by the LC are poor.

Despite the above claim that the basic rationale for the hate crime concept should not be re-examined, the LC does in fact devote considerable space to setting out what some of the basic justifications for the concept might be in Chapter 3. Ironically that exercise actually underlines the need for a reconsideration because the quality of reasons proffered for the hate crime concept are poor.

For example the first possible justification for the basic hate crime concept given in Ch3 is Barbara Perry’s. Her definition of hate crime includes the idea that it’s all about “subordination” of minority groups.  In addition to the flaw highlighted by Chakraborti and Garland (two critics of Perry’s cited in Ch3), Perry’s definition implies that threatening or abusive behaviour by for example non-Muslims in the UK towards Muslims (who are a minority) may constitute a hate crime, whereas the same behaviour by Muslim towards a non-Muslim would not constitute a hate crime because Muslims are a minority.

To illustrate, suppose someone hits a Muslim on the head while saying “All Muslims are idiots”. That might well be classed as a hate crime.  But if a Muslim hits a non-Muslim on the head and says “All Infidels are idiots”, that is NOT A HATE CRIME, according to Perry logic because Muslims are a minority. I conclude that Perry logic does not make sense.

3. Hatred as such is so inconsequential that the law should not bother with it.
Para 3.11 is flawed. It reads as follows.

Four key arguments have been associated with punishing hate crimes more severely than differently motivated crimes:

(1) Hate crime causes additional harm, namely to primary victims, but also to groups who share the targeted characteristic and to society more widely.
(2) Hate crime constitutes greater intrinsic wrongdoing.
(3) Hate crime offenders are more culpable than those who commit equivalent offences which are not hate crimes.
(4) More severe punishment sends out a message, denouncing the hatred as wrong.

Items 2 and 3 NECESSARILY follow from 1 and are thus superfluous.

Re item 4, it is extremely debatable as to whether hatred of some religions because of some of their unsavoury aspects is necessarily wrong. To hate Islam because of  female genital mutilation, beheadings, desecration of Buddhist and Christian statues, wife beating, suicide bombs, other terrorist attacks, Halal animal cruelty, mistreatment of apostates and forcing women to wear Burkhas (as in Iran), imprisonment of blasphemers (i.e. those who deny the existence of God) is ENTIRELY UNDERSTANDABLE and is not necessarily “wrong”.

As distinct from the latter hate, actual violence towards a racial or religious group is a different matter of course: the law should definitely intervene where violence takes place.

4. The extent of emotional distress caused by criticising a religion is not a reason to ban such criticism.

Paras 3.16 to 3.20.

Paras 3.16 to 3.20 try to advance the argument that the hate crime concept is justified because some groups, e.g. religious groups, suffer more of an emotional reaction to hate crime than other groups.

The fact that some groups suffer more of an emotional reaction is not necessarily the fault of the perpetrator of the alleged hate crime. For example Christians and Christian priests have not raised strong objections to cartoons which poke fun at Christianity for decades now. In contrast, Muslims are famous for exhibiting EXTREME emotional and violent reactions to cartoons which poke fun at Islam. That is not the fault of anyone who composes or publishes those cartoons, particularly in Western countries, where the right to poke fun at religion is now well established.

Moreover, it is the height of arrogance and cheek to migrate to another country and then object to part of its culture, e.g. a long established tradition of poking fun at religion. That form of cheek clearly often causes an “emotional” reaction and the occasional resort to “violence” by members of the indigenous community.

If it is wrong for members of an indigenous or native community to cause “emotional” or “violent” reactions among members of an immigrant religious community, then an equal amount of wrong or harm is perpetrated when the cause/effect relationship runs the other way.

In fact as already intimated just above, it is arguable that members of an immigrant community have LESS RIGHT to cause emotional or violent reactions among indigenous people than where cause and effect run the other way, and for the simple reason that it is a widely held principle accepted pretty much World-wide that there is an obligation on immigrants to abide by the laws and customs of the country they migrate to. After all, immigrants first or second generation are always free to leave the country they have migrated to and return to a country immersed in the culture they claim to be superior to that of the country they have recently arrived in.

As for the actual REASON why first or second generation immigrants are not prosecuted for causing “emotional” or “violent” reactions among indigenous populations, that’s plain as a pike-staff to anyone with any political insight: the latter sort of prosecution does not “fit the narrative” put by the political left and the politically correct.  

5. The views of just one person are not statistically significant.

Para 3.24 cites the views of just ONE PERSON (a Muslim). One is not a statistically significant number.

6. The frequent use of the word “might”.

3.96   (Concluding paragraph of Ch 3). This claims that “we have outlined the main rationales for hate crime and hate speech laws…”.

Well that rather conflicts with the above mentioned claim by the LC that they do not intend setting out the basic rational for the hate crime concept.

Next, far from having “outlined the main rationales for hate crime…”, Chapter 3 is actually little more than conjecture: witness the fact that the chapter contains the word “might” about twenty times (in the main text, never mind the voluminous footnotes). In other words there is nothing that resembles a clear, unambiguous argument leading to an indisputable conclusion or anything near an indisputable conclusion to the effect that the basic hate crime concept is valid.  Instead, all readers are given is a large number of POSSIBILITIES, as is implied by the frequent use of the word “might”.

7. Stirring up hate.

18.197 This reads, “We provisionally propose that where intent to stir up hatred cannot be proven, it should be necessary for the prosecution to prove that:
(1) the defendant’s words or behaviour were threatening or abusive;
(2) the defendant’s words or behaviour were likely to stir up hatred;
(3) the defendant knew or ought to have known that their words or behaviour were threatening or abusive; and
(4) the defendant knew or ought to have known that their words or behaviour were likely to stir up hatred.


First, it is not clear whether the prosecution would need to prove all four of those misdemeanours, or just one.

Second to prosecute someone simply because their words are “likely to stir up hate” (as in sections 2 and 4 just above)  is absurd and for the simple reason that some people (as mentioned above) are so sensitive to any slight that absolutely any disagreement with them may “stir up hate”. For example the simple claim that there is no God, widely accepted as a perfectly reasonable statement in most countries, is likely to “stir up hate” among the religious, particularly Muslims.

Also the word “threatening” is also far too vague. For example someone might “threaten” to organise a demonstration against the Labour or Tory Party. Is that “threat” wrong? Clearly not. In other words if the LC intends the word threaten to refer for example to “threaten to engage in physical violence” then the LC should say so.

8. The length of the LC consultation document.

Finally, the LC consultation document is EXTREMELY LONG: around 150,000 words according to my back of the envelope calculations. Like about 99.99% of the UK population I have not had time to look at more than a very small proportion of this document. But what I have looked at appears to riddled with flaws and false logic. It would not be unreasonable to conclude that the ENTIRE document is about equally badly flawed.  

Tuesday, 9 March 2021

George Selgin supports full reserve banking, perhaps inadvertently.

George Selgin (GS) has been one of the more heavyweight and vociferous opponents of full reserve (aka 100% reserves) over the last ten years or so. But he now seems to support the the idea in a recent Tweet. The tweet (which you may need to scroll down to see) reads “I favor @DanAwrey's suggestion that FinTech payment service providers (not to be confused w/ Pass-Through Investment Intermediaries) be exempt from most bank regulatory requirements, provided they back customer deposits 100% w/ Fed Master Account balances.”

The above “Dan Awrey suggestion” is actually one which I dealt with on this blog recently: see here.

I probably wouldn’t have bothered commenting on GS’s above tweet had that been the ONLY instance of his backing full reserve. But it’s not the first time he has backed it – deliberately or inadvertently I’m not sure.

The REASON the above tweet amounts to support for full reserve is as follows.

First, full reserve consists of making totally safe bank accounts available to everyone, where those accounts are safe because either they are actually offered by the central bank and are run by the central bank. So called “Central Bank Digital Currency” is an example of that arrangement: an arrangement which looks like becoming a reality in China quite soon.

An alternative is to have commercial banks offer those sort of accounts, but ensure that for every dollar in such accounts, the commercial bank concerned has a dollar deposited at the central bank. Ben Dyson, founder of Positive Money advocated the latter option in his book “Modernising Money” and in later publications. 

Now an account at a fintech backed “100% with Fed Master Account balances” to quote GS’s tweet comes to exactly the same thing as the latter Dyson suggestion.

As for “available to everyone”, given that almost everyone has a smart phone, PC or similar, nowadays, then those fintech accounts are to all intents and purposes “available to everyone”.

Another important element of full reserve banking is that once anyone who wants a totally safe account of the above sort has one, there is then no point in having government (i.e. taxpayers) back accounts at private banks. And indeed GS has long advocated what he calls “free banking”: that’s a system where banks enjoy no state support and do anything they like as long as they obey the laws that other corporations have to obey, like the law of contract.

However, it could be argued that not everyone has a smart phone or PC, thus what GS is advocating is not EXACTLY the same as full reserve. But it's certainly very near.  


Monday, 8 March 2021

An amusing video by Richard Murphy.


In his video entitled “Why we should be paying the nurses much more than 1%” he claims (about 1 minute 45 seconds in) that government thinks the NHS “does not add value” to the economy because it does “not sell anything”: i.e. government just assumes that the output of the NHS equals the cost of running the NHS.
Well assuming that by “government” he means the present Tory government as distinct from a government run by some other party, the problem there is that the Labour Party ever since the Labour Party was founded has employed exactly the same method of valuing the output of the NHS for the purposes of calculating the NHS contribution to GDP (and same goes for the rest of the public sector). Indeed, it’s a bit hard to see what other criterion CAN BE USED to measure the output of the public sector, defective as the latter measure is. And in fact every other government in the world does the same.

Moreover, very much the same problem applies where something IS SOLD. The reason in two words is “consumer surplus”. That is because you pay £X for something (which in turn will mean the costs of producing will likely be quite near £X), that does not mean the item concerned is worth £X to you because it’s quite possible that had the price been £(X+Y) you would still have bought it, in which case the item is worth £(X+Y) to you. Thus arguably we ought to count the item, when it comes to computing GDP as being worth £(X+Y). (Economists refer to that £Y as “consumer surplus”).  


The multiplier.

Second, Richard Murphy about half way thru the video trotts out an old canard about the multiplier (about half way thru - about 4 minutes 20 seconds). The multiplier is the increase in GDP derived from one dollar extra deficit, and that increase in GDP can be much more than one dollar or less than one dollar. The multiplier will be high if money spent on something tends to be spent quickly and it ends up in the pockets of people or firms which in turn spend the money quickly, passing the money on to others who spend the money quickly, etc etc.

Now a flaw in that idea (as I’ve pointed out a dozen times on this blog) is that stimulus money costs nothing in real terms to create (as Milton Friedman pointed out). Thus if government wants to expand output of something where the multiplier is LOW, that’s not a problem in that government and central bank simply have to print more money (which to repeat, costs next to nothing to print / create).

Of course stimulus appears to be more complicated than simply printing money, but that’s what it boils down to half the time.

There is, however, an argument in favour of attaching some importance to the multiplier, which is that where a form of public spending has a high multiplier, the rise in the debt and/or stock of base money will be lower for a given effect on employment than is the case with a low multiplier. And given that raising taxes so as to counteract the inflationary effect of an excess stock of base money at some point in the future may be necessary, and given that that may prove politically difficult, then clearly that’s an argument for skewing things in favour of high multiplier forms of spending.

But exactly how much importance should be attached to the latter point is near impossible to say with any certainty. In short, Richard Murphy’s point about the multiplier is more complicated than he seems to think.

Friday, 5 March 2021

Fractional reserve banking causes excessive debts.


There is a widely accepted view that the existing, i.e. “fractional reserve” bank system, is partially responsible for the amount of debt owed by households and other entities in the private sector. Indeed, the latter “excessive debt” charge is one of the basic points made by advocates of full reserve banking, the alternative to fractional reserve.

For a list of about sixty economists who oppose fractional reserve and back full reserve, see here.

While I basically agree with the above sixty economists, there is a glitch in the argument they often put which could do with being rectified, as follows.

It is often claimed that the right that private banks have under fractional reserve to print money amounts to a subsidy of those banks, which in turn leads to an unjustified expansion in the whole lending and debt creation process. For an example of that sort of claim, see the second half of p.31 of “Creating New Money” by Joseph Huber and James Robertson.

In addition, critics of fractional reserve often argue that there is something much worse involved in fractional reserve than the latter subsidy: fraud. That is, a fractional reserve bank is one which (among other things) accepts deposits, 2, grants loands, and 3, tells depositors that their money is safe, which it quite clearly cannot be: reason is that when a bank makes enough silly loans (and banks have done that regular as clockwork for at least five hundred years), the relevant bank CANNOT repay depositors their money.

However, if a bank were to engage in the latter “accept deposists and lend” activity and tell depositors that the bank will do its best to ensure depositors’ money is safe, while not ACTUALLY PROMISING to be able to repay depositors their money, that would be an entirely open and honest free market transaction. Ergo there is, at least in a sense, nothing wrong with money creation by private banks: i.e. there is nothing wrong  with letting banks create the latter sort of INSECURE money.

The problem  comes however, when governments get involved. That is, when depositors lose money, there’s an outcry and demands are made that government should do something, which of course they do in the form of implementing taxpayer backed deposit insurance and multi-billion dollar bail outs for banks.

And that is a subsidy – for several reasons. First being insured by an insurer with  an infinitely deep pocket, i.e. the right to grab limitless amounts of money off taxpayers, is a subsidy. Second, multi billion dollar bail outs are clearly a subsidy.

Third, banks are actually just one type of lender: there are also for example pension funds and mutual funds which lend to corporations when the former funds buy corporate bonds. There’s no multi-billion dollar bail outs for those funds when things go wrong. Thus deposit insurance and bailouts amount to preferential treatment for one type of lender, and that ipso facto is a subsidy of the latter lender.

So to summarise, the subsidy of banks that occurs under fractional reserve does not lie in the fact of private banks being allowed to create / print money as long as that money creation is confined to the above mentioned relatively INSECURE form of money.

The subsidy occurs when government gets involved and tries to turn that insecure form of money into near totally secure money, backed by the right, where necessary, to extort money from taxpayers. And I'm pretty sure that point was missed in the above "Creating New Money" work.

So is central bank created money also subsidised?

And from that it might be deduced that, by approximately the same token, a subsidy is involved when the state creates money in a slightly different way: i.e. has its central bank create money (so called “base money”) with that money being spent into the economy. Certainly George Selgin seems  to make the latter claim.

Well the answer to that is that creating and spending money in the latter way does not NECESSARILY  involve preferential treatment for any given sector of the economy. Of course government and its central bank CAN CHOOSE to use new central bank money to favour a particular sector, but that form of money does not OF ITS NATURE involve a subsidy of any  one sector in the same way as fractional reserve banking plus bank bail outs involves a subsidy of private banks.

For an example of using new central bank money to favour a particular set of people, perhaps the most obvious and large scale recent example is QE, which has raised asset prices and which has been a boon for the rich.