Monday, 31 May 2021

Fractional reserve banks create money / liquidity?


Douglas Diamond, Philip Dybvig and Raghuram Rajan have claimed over the years that while fractional reserve banking gives rise to bank fragility and bank failures (not to mention bank crises like the 2007/8 one which lead to tens of millions losing their jobs worldwide) there is at least the compensating advantage that fractional reserve creates money / liquidity. See abstract of their NBER working paper No 7430.

Unfortunately there’s a flaw in that argument which is that governments and central banks can create any amount of money any time simply by pressing buttons on computer keyboards and all without the above attendant risk of bank crises and tens of millions being thrown out of work! Indeed a system where government and central bank are pretty much the only money creators is what full reserve banking consists of. Thus it’s a bit debatable as to whether money / liquidity creation by fractional reserve really counts as a merit in fractional reserve.

Isn't that a bit like arguing that while the injuries that result from drunk driving involve serious costs, drunk driving does at least have the merit of keeping medics employed?

To repeat, the above three authors are not any old three authors. Rajan is former governor of India’s central bank and those three have been cited well over two thousand times in the literature. (For confirmation of that two thousand figure, see top centre right of this version of an article of theirs entitled “Bank runs, deposit insurance and liquidity”.

Of course, that is not to say that under full reserve there would be a total absence of “boom and bust”. But certainly the highly risky “borrow short and lend long” policy which is the basis of fractional reserve greatly exacerbates booms and busts. (Incidentally “borrow short and lend long” is often referred to in economics as “maturity transformation”, but I’ll stick with the former phrase here.)

But there is another weakness in the idea that money creation is a saving grace of fractional reserve, which is as follows. It is actually quite unnecessary to deliberately or officially adopt full reserve banking if the extent of borrow short and lend long is curbed. That is, the benefits of full reserve will appear AUTOMATICALLY by simple reason of the latter irresponsible aspect of fractional reserve being curbed or banned. Reasons are as follows.

Regardless of what bank system is in operation, people and firms will try to obtain the mix of assets they want, liquid and illiquid. E.g. if people do not have the stock of money they want, they will save so as to acquire that stock. That will cause Keynsian “paradox of thrift” unemployment, thus central bank and government will have to create and spend extra base money into the economy (incidentally, exactly what central banks and governments have done big time in recent years).

Conversely, if people and firms think they have excess liquidity, they’ll try to spend away that excess (e.g. on larger houses) and that will tend to induce government and central bank to withdraw money / liquidity from the private sector so as to curb the demand results from the latter “spend away”.

Ergo, if borrow short and lend long is curbed or banned, there will ultimately be no effect on the private sector’s stock of money / liquidity. Thus the claim by the above three authors that money creation is merit of fractional reserve banking is a bit of a myth: if the latter money creation characteristic were nowhere near as effective as it actually is, that wouldn’t make a scrap of difference, because governments and central banks would automatically be forced to step in the do more of their own money creation – and all without the attendant risk of bank crises and tens of millions being thrown out of work!

Indeed, we have actually made significant moves in the direction of full reserve over the last decade, for the following reasons.

First, the US mutual fund industry has in effect switched to full reserve: that is, funds which invest in anything other than US govt debt are now barred from telling saver /  depositors that their money is safe, i.e. that they won’t “break the buck”.

Second, governments and central banks have, as mentioned above, been forced over the last decade to greatly expand the stock of base money in the hands of the private sector.

Third, Central Bank Digital Currency is being activity considered by several central banks and the Chinese central bank has actually put CBDC into effect on a limited or trial basis. Now if central banks offer totally safe accounts to everyone, the question then arises as to why taxpayers should have to stand behind accounts at PRIVATE banks. Well there isn't much point! And that arrangement, i.e. CBDC plus abandoning taxpayer funded support for private banks equals full reserve banking. 


PS (1st June 2021).   I’ve just noticed that the above three authors do actually give brief consideration to full reserve banking (aka narrow banking), i.e. a system where the state is the only issuer of state backed money (unlike fractional reserve, where money issued by commercial banks is also state backed (via deposit insurance and/or bank bailouts)). Thus I’ll do an article here asap dealing with their objections to narrow banking.

But I’ll deal briefly with just four of their objections right now. Diamond and Rajan say in their NBER Working Paper 7430 that “Our model suggests that such legislation (i.e. narrow bank legislation) would kill bank liquidity creation, and result in less credit being available to borrowers.)

Well first, it’s pretty obvious that narrow banking “kills bank liquidity creation”! That’s the whole point of narrow banking! I.e. it is precisely that liquidity creation (as explained above) that brings bank fragility and bank crises, thus we are better off without that form of liquidity creation assuming there is an alternative and less dangerous form of liquidity creation, which (as explained above) there is.

Second, if narrow banking did result in “less credit being available to borrowers” what of it – as long as demand remains high enough to bring full employment? Numerous economists and others claim there is too much debt, thus if an economy is less reliant on debt based economic activity and more reliant on non debt based activity, it is far from clear what would be wrong with that.

Third, Diamond and Dybvig in their 1986 paper “Banking Theory, Deposit Insurance, and Bank Regulation” claim that “…it will be impossible to control the institutions that will enter in the vacuum left when banks can no longer create liquidity.”

Well that’s a bit like saying it’s a waste of time passing laws against bank robbery because “it will be impossible to control” the new assortment of bank robbers who replace bank robbers put out of business by anti bank robber legislation.

In other words, legislation aimed at stopping all large and medium size banks engaging in the fraudulent “borrow short and lend long” activity would be easy to implement. Mutual funds in the US are already barred from that activity. Of course a few small banks and similar institutions might try to evade the rules, but it makes not a blind scrap of difference what rules are in place, there will always be some naughty individuals who try to evade the rules.

Fourth, Diamond and Dybvig describe narrow banking as a "a dangerous proposal". Well now that's a bit of a joke given that the existing (fractional reserve) bank system caused a major crisis in 2007/8 which resulted in tends of millons worldwide being thrown out of work and a ten year long recession!

To summarise, the above three author’s objections to narrow / full reserve / 100% reserve banking look about as feeble as the objection which former governor of the Bank of England, Mervyn King raised, namely that banks would object to their activities being restricted, which (as I point out here) is a bit like saying anti bank robbing legislation is undesirable because bank robbers would object to it.

P.S. 8th June 2021.    Two further fundamental weaknesses in the idea that fractional reserve creates liquidity are as follows. But first, let’s be clear on the definition of the word liquidity.

The Oxford Dictionary of Economics starts its definition of liquidity with, “The property of assets, of being easily turned into money rapidly and at a fairly predictable price.”

Now where one of the above mentioned full reserve mutual funds takes money from saver / investors and lends the money out or invests it, the stakes that those saver / investors have in the firms to which the mutual fund has loaned money are far more liquid that were a saver / investor lends on a peer to peer basis. I.e. if you buy into a mutual fund – any mutual fund – there’s a good chance you’ll be able to turn your investment back into about the same amount of cash that you originally put into the fund. And that constitutes a “fairly predictable price”. Ergo the claim that fractional reserve banking creates liquidity is rather diminished by the fact that full reserve also creates liquidity.

But another weakness in the idea that fractional reserve creates liquidity is as follows. Fractional and full reserve are essentially just two ends of a spectrum: that is, where an entity that lends out money has a high capital ratio, it is ipso facto towards the fractional reserve end of the spectrum. And where it has a low capital ratio, it is towards the full reserve end of the spectrum.

Now as one moves from the full reserve to the fractional reserve end, stakes that depositors have in the entity become more “predicable in price”, while shareholders’ stakes become less so: indeed, shareholders can easily be wiped out given a high ratio. And that raises a rather big question: does moving from the full to fractional end of the spectrum actually create any liquidity at all? Certainly the liquidity creating effect is less spectacular that fractional reserve bank enthusiasts claim.

Sunday, 30 May 2021

BBC says Biden’s spending spree will be paid for by borrowing . . . no tax . . . oh who cares.



BBC1 TV news on the evening of 29th May said Biden’s spending spree would necessitate a large amount of extra borrowing. But a few minutes later in the same report they said it would be paid for via extra tax. So which is it?

Well if you’re a reporter for a TV channel or newspaper it really doesn’t matter: the important thing if you’re going to ensure you get paid is just to spew out lots of meaningful sounding words. If the words are BS, that doesn’t really matter.

So will the spending spree be paid for by tax or borrowing or good old money printing? Well paying for it all via tax (plus money printing as appropriate) would be make sense. As for paying for most of it via borrowing, that would push up interest rates to an excessive extent, so that’s not a brilliant idea.

In short, there are a range of options here, and we do not yet know exactly which option will be chosen – or forced on the US government.  

Thursday, 27 May 2021

How come depositors ever managed to get interest on instant access accounts?


Interest is a reward earned by a borrower for performing two functions. One is to abstain from spending a sum of money so that the borrower can spend that money. The second is accepting the risk that the borrower may not repay the loan.

Now where people deposit money at a bank under fractional reserve, they do not abstain from spending any money: the bank lends out depositors’ money while telling depositors their money is still available to said depositors, and indeed it is still available.

Now at this point, some readers may object by citing the currently fashionable idea that banks create money rather than intermediate between lenders and borrowers.

Well the reality is that a bank cannot simply create and lend out money willy nilly without money coming in from depositors, bond holders and shareholders: why else have bank over the decades dished out billions by way of interest and dividends to the latter three funders so as to attract their money? If a bank WERE TO “lend willy nilly”, it would run short of reserves: not a good position to be in for any length of time.

Moreover, as the second sentence of a Bank of England article entitled “Money creation in the modern economy” says, banks BOTH create money and intermediate between lenders and borrowers.

To summarise so far, depositors manage to have their money loaned out WITHOUT abstaining from the freedom to spend such money.



As regards risk, depositors do not endure any sort of risk because the relevant risk is carried by the deposit insurance system.

So the big question is this: how come depositors with instant access accounts ever managed to earn interest? There is clearly something fishy here.

And as to the idea that instant access accounts currently pay almost no interest, that’s not actually true: interest earned by banks helps defray the cost of administering instant access accounts. Thus those with such accounts, even in today’s low interest rate environment in effect get interest.


David Hume.

What I think explains the latter “fishy smell” is a point made by David Hume over two hundred years ago in his essay “Of Money” when he said “It is very tempting to a minister to employ such an expedient, as enables him to make a great figure during his administration, without overburdening the people with taxes, or exciting any immediate clamours against himself. The practice, therefore, of contracting debt will almost infallibly be abused, in every government.”

In short, politicians are always tempted to pay for public spending via borrowing rather than via tax. Of course it might be argued that public sector INVESTMENTS should be funded by borrowing. But that’s not what happens at the moment. I.e. at the moment government borrowing funds a large amount of CURRENT spending. And that’s a gift to lenders, i.e. the cash rich: it results in a general and artificial rise in interest rates. And that in turn means those borrowing from banks have to pay an artificially high rate of interest – or at least for most of the time since David Hume’s day (and possibly long before that) they have had to.

And if you don’t think David Hume’s point explains why depositors with instant access accounts have for decades managed to earn interest, I’m always happy to listen to alternative explanations for the above “fishy smell”.

Friday, 21 May 2021

Who should create safe money: central banks or commercial banks?



Governments render a proportion of commercial bank created money safe via deposit insurance and bank bail outs. In contrast, much private / commercially created money is not safe: e.g. deposits over the limit covered by deposit insurance (€100k in the Eurozone) and Bitcoin type money.  But whence the assumption that that safe money should come in the form of commercial bank money rather than central bank created money (often called “base money”)?

One reason for thinking base money is preferable is that commercial banks actually use their freedom to create money in a highly irresponsible way, that is to create and lend out money in a boom, just when stimulus is not needed, and then come a recession, they do the reverse, i.e. reduce or cease lending, or even call in loans: again, exactly what is not needed. That is, commercial banks act in a pro cyclical manner. And that means central banks have to create or destroy money (via QE, interest rate changes etc) that counter that erratic money creation / destruction by commercial banks. So why don't we just abandon commercial bank safe money and have base money as the only form of safe money?

Of course, the fact of banning commercial bank created safe money does not mean an end to commercial banks' pro cyclical behavior as they are still free to create unsafe money. But the latter ban would at least cut down somewhat on pro cyclical behavior. Moreover, safe money is more powerful stuff per dollar than non-safe money: in fact banks don't even trust each others "home made" money - they always settle up with each other using base money.

A second reason for thinking base money is preferable is that having taxpayers back commercial bank created money via deposit insurance and bail outs is a subsidy of commercial banks or at the very least, it makes commercial bank money marginally more attractive, and subsidies are not justified, i. e. they do not maximise GDP unless there are very good social reasons for such subsidies.

But the social aspect of rendering commercial bank money safe can perfectly well catered for via base money. That is, the process of making a given amount of money per person safe (e.g. the €100k in the Eurozone) is clearly socially motivated, rather than motivated by economics: if there was a good economic reason for making ALL MONEY safe, then governments would do that. Indeed, the latter social provision is fully justified: everyone has a right to a very safe method of storing some minimum amount of money. That is a basic human right.

To summarise so far, the arguments for having safe money in the form of commercial bank money look weak.

A possible argument for having safe money in the form of commercial bank money is that that gives commercial banks greater flexibility than in the base money option (where commercial banks, would have to first borrow money before being able to lend it out.)

Unfortunately that’s a poor argument. First, commercial banks do not have complete freedom to create and lend out money willy nilly: they are constrained by capital requirements and reserve requirements, though those constraints vary from one jurisdiction to another.

Second, as is the case at the moment, a commercial bank with a sudden need for more reserves (aka base money) is always free to borrow it from other banks.

Third, it might seem that where commercial banks are free to create and lend out money rather than borrow money before lending it out, that that means they can avoid paying higher interest rates for that money. Unfortunately that argument is questionable (though it is an argument put by Joseph Huber and James Robertson on p.31 of their work “Creating New Money”).

Obviously IN THE FIRST INSTANCE, when a bank creates and lends out money it doesn’t need to pay interest to obtain that money. Unfortunately as soon as that loaned out money is spent, it ends up on sundry bank accounts, and those account holders will want extra interest for holding that money rather than trying to spend it away. Thus the latter “first instance” is very short lived.

Put another way, as soon as that money ends up in “sundry bank accounts” it will tend to be spent away (the “hot potato” effect) which will cause excess demand, which will induce the central bank to raise interest rates. The net result is that it is very debatable as to whether commercial banks’ freedom to create the money they lend out from thin air actually benefits those banks.

Incidentally, I have in the past cited the above Huber & Robertson point with approval: i.e. think I actually made a mistake there.



The conclusion is that advocates of full reserve banking are right: that is, depositors should have the choice of two types of account. First a totally safe account, which is backed 100% by reserves / base money at the central bank. Second, riskier accounts which have the advantage that depositors’ money is loaned out, which earns interest for depositors, but all relevant risks are carried by depositors.

Indeed, those who want their bank to lend out their money are into exactly the same business as those who want their stockbroker or a mutual fund (“unit trust” in the UK) to lend out or invest their money: they are into COMMERCE. And it is not the job of governments to support commerce, absent very clear social reasons for doing so.

Incidentally Huber & Robertson also argue for full reserve; i.e. I am saying they are right but for not quite the right reason.

Saturday, 15 May 2021

The unjustified privileges that banks enjoy.


People who deposit money at a bank and think they’re entitled to interest are in effect asking their bank to lend out their money, which means they’re into exactly the same activity as those who deposit money at a stock broker, mutual fund, unit trust etc with the same end in view: earning interest or a return. I.e. they are into commerce. Why do those depositors think they’re entitled to taxpayer funded protection against loss (thanks to deposit insurance, bank bail outs etc) when those who deposit money at mutual funds, unit trusts etc are not entitled to such protection? There’s no good reason for that inconsistency. Plus, it is widely accepted that it is not the job of taxpayers to support commerce absent very good social reasons.

Moreover, that inconsistency results in a non level playing field as between banks, stock brokers, mutual funds, pension funds and so on.

It would clearly make sense for depositors who want interest on their money to be treated exactly the same way as those who want interest on their money but place their money at one of the other above mentioned institutions: that is, those wanting a bank to earn interest for them should have to carry loses when losses are made just like they do at the other above mentioned institutions.

As for depositors who simply want to store and transfer money safely (and that’s a basic human right) they are not entitled to interest. And what do you know: that system where there are two types of bank account, risky interest earning accounts and safe non interest earning accounts, which are 100% backed by reserves at the central bank, is essentially what full reserve banking consists of.

Of course the less economically literate politicians and economists object to the latter idea on the grounds that there then appears to be a large amount of money sitting in safe accounts doing nothing. The effect, so they claim, is a cut in lending, a cut in demand and a rise in unemployment. (See section 2.1 of my book “Full Reserve Banking” for some of the economists who have been fooled by the latter “rise in unemployment” sort of argument.)

The first flaw in that idea is that the money sitting in bank accounts is not a form of real wealth in the same way as houses, cars etc are a form of wealth: money in bank accounts nowadays consists of nothing more than numbers. Thus there is no stock of real wealth there which is not being used.

Moreover, the latter numbers, which is all that bank accounts consist of, can be added to at any time, and at zero real cost. That is, a central bank can create and hand out billions to all and sundry simply by pressing buttons on computer keyboards any time. Indeed, central banks have done just that and on an unprecedented scale over the last five years or so, among other things so as to fund QE. The net effect of that money creation and rise in demand is to cut unemployment.

In contrast, when the gold standard was up and running, it might have been possible to argue that money (i.e. gold) sitting in bank vaults doing nothing was a waste of real resources. But those days have long gone.

In short, if full reserve does in fact have an initial unemployment raising effect when it is first introduced, that is easily dealt with by creating more central bank money and spending that into the economy just like we’ve done in recent years. The net result would be a fall in loan based economic activity and a rise in the amount of “non loan based” economic activity. And given the never ending weeping and wailing we get from the great and the good about excessive debts (i.e. an excessive amount of lending), it’s a bit hard to see what’s wrong with that outcome.

Indeed, the do gooders who complain about the reduced amount of lending under full reserve are often exactly the same people who complain about excessive debts.

The optimum amount of lending.   

Indeed, the latter paragraphs give rise to a fundamental question, namely: is an optimum or GDP maximising amount of lending and debt likely to occur under full reserve or under the existing bank system, fractional reserve?

Well a system where banks are granted special privileges compared to the treatment given to the other above mentioned and similar organisations (mutual funds etc) is clearly not a GDP maximising set up. It is widely accepted in economics (and this is no more than common sense) that GDP is maximised where there is fair competition  between different firms: i.e. where car manufacturers compete on a level playing field basis, with the same going for chemical firms and every other type of firm and corporation.

Monday, 10 May 2021

Taxpayers support the very characteristic of banks which leads to bank crises and mass unemployment.

Economists tend to be enamoured of the benefits of one of the basic functions of private banks, namely “borrow short and lend long” or “maturity transformation” (MT) as it’s sometimes known. The alleged benefit is that it creates liquidity / money, which is stimulatory.

Unfortunately as Douglas Diamond and Raghuram Rajan say in the abstract of a paper of theirs, and in reference to that liquidity / money creation, “We show the bank has to have a fragile capital structure, subject to bank runs, in order to perform these functions.” (NBER Working Paper No. 7430).

Douglas Diamond has been cite thousands of times in economics literature: yes that’s thousands, not hundreds. So he’s presumably some sort of authority on the subject.

Even more ridiculous is the fact that central banks can and do create money / liquidity on a large scale and without the latter risks.

In other words, and to put it more bluntly, MT is the basic explanation for the hundreds of bank failures that have taken place thru history, and the explanation for the 2007/8 bank crisis.

Or to put it even more bluntly, we incur the risk of tens of millions being thrown out of work, tens of thousands being thrown out of their homes and ten year long recessions just to enable private banks to perform a function in a very risky manner which can perfectly well be performed, and is already being performed by central banks without any of the latter risks.

The words stark, raving and bonkers spring to mind.

But (and this may be hard to believe) that’s not the end of the absurdities of our existing banking set up. Another absurdity is that the need for the latter central bank money creation derives to a significant extent from the chaotic nature of private bank money creation: that is, private banks tend to create and lend out more money in a boom: just when extra stimulus is not needed. Then come a recession, they do the opposite, i.e. call in loans and destroy money / liquidity:  again, exactly what is not needed. I.e. private banks act in a “pro cyclical” manner. Thus central banks have to act in a counter cyclical manner so as to deal with the latter chaos.

I’m not objecting here to private money creation where the relevant risks are openly declared. E.g. if I pay someone for something with an IOU scribbled on the back of an envelope (a very poor form of money, of course) the risks are obvious to the person concerned. Moreover, that form of money is unlikely to ever become all that popular because of its obvious drawbacks.

It’s state support for “MT dodgy money” which is wrong – and states (aka taxpayers) do in fact support “MT dodgy money” via deposit insurance and bank bail outs.

Put another way, states create money in two quite different ways. First there is bog standard base money creation by central banks (e.g. to enable them to do QE). Second, they create money in that they support private money creation. And that is a clear case of duplication of effort.

I’m looking forward to hearing a justification for that duplication of effort from supporters of the existing bank system. But I don’t seriously expect to hear anything intelligent or coherent.

There is a more detailed version of the above article (about four times the length). If it seems to take a long time to down load, don't be put off: it takes about 30 seconds with my PC and internet connection.

Sunday, 9 May 2021

Artificial interest rate adjustments do not make sense.




Abstract.  There is no evidence that recessions are caused by a failure of interest rates to fall, thus dealing with recessions via artificial cuts in interest rates makes as much sense as dealing with the failure of a car to accelerate properly because of a faulty carburettor by strapping a jet engine onto the roof of the car, rather than by fixing the carburettor.


 It is widely accepted in economics that interest rate cuts are a good way of dealing with recessions, and conversely that an interest rate hike is a good way of damping down excess demand and inflation.

Only slight problem there is that those interest rate adjustments (engineered by central banks) are entirely ARTIFICIAL, and it is widely accepted in economics that while changes to the price of anything brought about by market forces are normally justified, artificial adjustments are not.

Worse still, there is no evidence that recessions are caused by market failure in the sense of interest rates failing to fall, come a recession. Put another way, the market in loans is very much a free market: there are tens of thousands of potential borrowers out there and hundreds of banks and similar, all offering loans. That’s the sort of set up where it is difficult to set up monopolies and cartels: i.e. it’s a set up where the free market works.

To summarise, to implement an artificial cut in interest rates so as to deal with a recession, when the cause of the recession is quite clearly not a failure of interest rates to fall is like dealing with the failure of a car to accelerate properly due to a faulty carburettor by strapping a jet engine to the roof of the car rather than deal with the faulty carburettor.

So what is the cause of recessions?

Well it’s pretty obvious: it’s a failure to spend, or if you like, inadequate aggregate demand, maybe caused by lack of consumer or business confidence. Ergo the solution is  . . . . wait for it . . . . more spending: public spending and or private sector spending. And that can be brought about by a larger deficit, i.e. by fiscal measures rather than interest rate adjustments.

Of course, supporters of interest rate adjustments claim that fiscal changes cannot be brought about quickly. Well the first answer to that is that interest rate changes do not have their full effect for a year according to a Bank of England study. Secondly, the UK implemented two changes to the VAT sales tax very quickly in the wake of the 2007/8 bank crisis.

And how difficult would it be for the UK government to tell every hospital, doctors’ surgery, school, university and local authority in the country that they can up their spending by X% over the next 12 months, and that a cheque will be in the post? I mean would it really take a genius to do that?

Saturday, 8 May 2021

Getting simple ideas across is a herculean task, as MMTers have discovered.


Getting simple ideas into the head of even relatively intelligent folk is like getting through a thick concrete wall with a jack hammer. A classic example is the never ending claims that MMT would result in excessive deficits and excess inflation. A recent example of that claim appears in an Adam Smith Institute article written by Tim Worstall, who I actually have plenty of respect for. But like I said, getting simple ideas across, is a herculean task. (Article title: “It Would Appear that Larry Summers was Right”).

The answer to the above “excessive deficit” claim is (pretty obviously) that it all depends on who is in charge of the printing press (as I pointed out in a comment after the article). And MMTers do not do themselves any favours by being thoroughly vague on that question.

Anyway, if POLITICIANS are in charge of the printing press, then the dangers are obvious. On the other hand if the size of the deficit is decided by some sort of independent committee of economists (maybe at the central bank and maybe not) then the dangers are much less.

And incidentally, the fact that such a committee decides the SIZE OF the deficit does not, repeat not, repeat not mean the NATURE OF the deficit needs to be decided by such a committee: i.e. questions like whether more tax or more public spending are needed is clearly  a POLITICAL question: i.e. it’s a question which should always remain with politicians. Same goes for the decison as to what extra public spending goes on: education, health, etc.

The latter method of separating responsibility for the SIZE of a deficit and the NATURE of a deficit is a truly BRILLIANT and simple idea. Unfortunately (to repeat) getting it into the heads of even the relatively intelligent is a herculean task: I’ve found it necessary to make that “separation” point at least a hundred times in sundry articles. Moreover, a significant proportion of academia has no respect for original and simple ideas: what many academics really like is the opposite: complicated and irrelevant ideas, because that’s what keeps them employed.

Far as I know, credit for the latter original and simple idea must go the Ben Dyson (founder of Positive Money), Josh Ryan-Collins and a few others.  

Another example of a supposedly intelligent individual who appears to be incapable of understanding the above “separation” point is AnnPettifor. In contrast, one former chairman of the Fed and one former vice chairman have obviously grasped the idea (Ben Bernanke and Stanley Fisher).



Wednesday, 5 May 2021

Yawn provoking waffle from the NIESR on fiscal policy.


The UK’s National Institute of Economic and Social Research has just published a very long report on fiscal policy. It’s entitled “Designing a New Fiscal Framework” and it’s around 40,000 words.

If Sir Humphrey Appleby deliberately tried to produce pages of meaningful sounding but essentially meaningless waffle, he couldn’t have done better. The contrast to the simple, clear ideas on fiscal policy advocated by MMT is stark, as I’ll show below.

The NIESR’S basic idea if it can be summarised in a sentence is that existing government committees should do more work in relation to fiscal policy and more committees should be set up: music to the ears of Sir Humphrey. To be exact the NIESR’S main conclusions or suggestions come in the form of five so called “building blocks” which are set out in bold and read as follows (p.20 onwards). If you feel yourself nodding off after the first or second, feel free to skip nos 3,4 and 5.

1 The Chancellor should set out a structured timetable for fiscal events and deliver a Budget speech focused on the state of the economy and on the government’s socioeconomic objectives that is more extensively debated and scrutinised by Parliament and by a fiscal council.

2 The OBR, or a separate fiscal council, should publish pre-fiscal event reports with key issues to which the Budget and the Autumn Statement should respond.

3. Given the uncertainty regarding the economic cycles, the Chancellor should provide more guidance as to how fiscal policy would respond if certain risks materialised and the OBR should produce economic forecasts and scenarios to inform government thinking about fundamental fiscal choices in different states of the world.

4. HM Treasury should create a new body of independent experts for ex ante advice and ex post evaluation of the key fiscal choices.

5. Fiscal strategy has to be joined up across the UK and all its constituent parts, with particular attention paid to distributional effects, productivity, well-being and ecological sustainability.

As distinct from the parts of this report written by NIESR staff and in particular by Jagjit Chadhar director of the NIESR, there are several chapters written by outsiders (e.g. Alistair Darling, former UK finance minister). Those chapters are about specific aspects of fiscal policy, and I am not passing comment on those here: though some of them seem interesting.



In contrast, the basic principles underlying fiscal and monetary policy as advocated by MMT (or at least my interpretation of them) are as follows. But be warned, this actually contains some INTERESTING ideas. You may die of shock if you’re of a Humphrey Appleby disposition.

1. The deficit needs to be whatever keeps employment as high as is possible without causing inflation to exceed the inflation target.

2. The size of the debt / stock of base money that results from deficits does not matter: all that matters, to repeat, is ensuring that unemployment is as low as is consistent with acceptable inflation.

3. As MMTers have explained over and over, a country which issues its own currency has complete control over the rate of interest it pays on its debt.

4. As to whether the deficit should accumulate as zero interest yielding base money or base money which yields interest (e.g. government debt), there is basically no point in paying interest on base money or in having a national debt, as pointed out by Milton Friedman. Thought that’s not to rule out interest rate hikes in  emergencies (as also pointed out by Milton Friedman).

An obvious possible exception to the latter policy of aiming for zero interest on base money and the debt occurs where such debt funds public investments. However, the government debt in the UK is not specifically allocated to funding public investment at the moment, so for the UK (and indeed some other countries) that point is of no relevance at the moment.  

5. One reason for aiming for a zero rate of interest on the debt is that such interest simply rewards money hoarders, with those interest payments being funded by taxpayers in general, including the less well off.

6. There is not much difference between the latter MMT policy and the policy advocated by Simon Wren-Lewis (former Oxford economics prof). The main difference is that he advocates having the rate of interest on the debt hover between zero and just above zero.

Tuesday, 4 May 2021



This is Jack Dorsey, founder of Twitter. Jack Dorsey backs wife beating, female genital mutilation, killing authors and cartoonists, mistreating apostates, abducting school children in Nigeria, trashing Buddha statues, Halal animal cruelty, hate preachers, beheading etc etc.

Or to be more accurate, if you criticise Islam for the above barbaric practices on Twitter, you’re likely to be banned. I got a one week ban for making the incontrovertibly true statement that Muslims were responsible for 9/11, and have now been banned permanently. Of course the latter depraved "pro barbarity" views are hardly unusual in woke circles.

Perhaps even more hilarious / depraved (take your pick) is that the super intelligent algorithm that Facebook uses to weed out images that involve nudity and sex is incapable of distinguishing between people who have relatively few clothes on and people who are actually in the nude and engaged in sex.

I got a one week ban for a cartoon which showed four men dressed just in bathing trunks and quite clearly not engaged in sex. And Russian Television got a ban for showing scantily clad and emaciated Jews in Nazi concentration camps on the grounds that the image contravened FB’s “community standards” on nudity and sex.

The very idea that starving people in concentration camps had the energy for sex is depraved.