Saturday, 30 October 2021

Whoopee: CUSP publishes long inconclusive article on MMT, the debt and deficit.


CUSP (Centre for the Understanding of Sustainable Prosperity) describes itself at the start of the article as “an internationally leading research organisation funded by the UK’s Economic and Social Research Council (ESRC)”. Well, they WOULD give a flattering description of themselves, wouldn't they? The authors are Tim Jackson and Andrew Jackson.

I'm amazed to see Andrew Jackson, who co-authored what is sometimes called “Positive Money's Bible” (the book “Modernising Money”), which was a brilliant bit of work, if rather long, now authoring this boring article by CUSP.

The article – tediously long at 4,500 words - does get some things right. E.g. it draws attention to the incompetence of the IMF on the subject of debts and deficits. To be exact, the authors say, “The International Monetary Fund (IMF) initially appeared to support Reinhart and Rogoff, suggesting in 2013 that the most ‘critical fiscal policy requirements’ are a ‘persistent but gradual consolidation and, for the United States and Japan, the design and implementation of comprehensive medium-term deficit-reduction plans’.”

Unfortunately the conclusion of the CUSP article is so vague and inclusive, that it's not clear what the point of the article is. The conclusion reads...

“Our principal call here is for a greater degree of flexibility in the use of both monetary and fiscal policy and for better coordination between them. That flexibility should extend not only to the appropriate allocation of the respective targets of price stability and debt sustainability, but also to the precise mandates of the institutions involved in delivering those targets and the mechanisms through which they are achieved.”

The REAL OBJECTIVE of this CUSP article should be obvious: it's to make it look like the highly qualified bores associated with CUSP are doing something, which justifies their salaries.

As for the article's “call for greater flexibility”,that clashes with the call for “precise mandates of the institutions involved in delivering those targets and the mechanisms through which they are achieved.”

If the “mandates” are “precise”, that implies less flexibility than would otherwise be the case.

But not to worry: MMT has set out the “mandates” over and over, and I have added to that numerous times on this blog.

The first basic principle is that, as MMT says, the size of the deficit and debt are irrelevant: the only important consideration is minimising unemployment in as far as that is compatible with keeping to the inflation target. Second, there two obvious problems with the latter policy. The CUSP authors rightly draw attention to one, but appear to be oblivious of the second.

The first is: what happens, given a large debt, if interest rates rise? Government does not really want to had out large sums by way of interest payments to the cash rich. Plus any such interest payments will increase the deficit for reasons that have nothing to do with the JUSTIFIED reason for increasing it, namely dealing with excess unemployment.

Well there's a simple solution to that problem, namely to simply refuse to roll over debt at the new higher interest rate as it becomes due for rollover. I.e. just print money, hand it to previous debt holders and tell them to go away.

Of course that would result in the private sector holding too much cash, which would probably cause excess demand. But that's easily dealt with via higher tax, particularly on the wealthy.

The second problem, which is very similar to the first, is this. The need for a larger than usual deficit probably arises from, or at least is contributed to by an increased desire by the private sector to hoard cash rather than spend it.

But what happens if that desire reverses itself? Well, we're back with the situation where the private sector has an excess stock of cash, and the solution is the same: rob the private sector of that stock via extra tax!

Problems solved!!!!!!

As MMT has claimed for a long time, the best rate of interest on government debt is zero. Doubtless it can't be held at EXACTLY zero all the time. But at least, given the latter “solutions”, it can be held NEAR ZERO for much of the time.

Saturday, 9 October 2021

 Crowding out: a slight mistake by Stephanie Kelton and Bill Mitchell.

One of MMT's main objections to the conventional wisdom involves so called “crowding out”: that's the idea that if government spends more, it will have to borrow more, which will raise interest rates, which in turn will cut private sector investment, i.e. “crowd out” the latter investment. Alternatively government will have to raise taxes, which will crowd out a broader range of spending by the private sector.

The response by leading MMTers like Kelton and Mitchell to that is that more government spending will not necessitate a rise in interest rates or increased taxes if the economy has spare capacity, i.e. where we are not at full employment. In other words in the latter scenario, the extra government spending can go ahead, and the only net effect will be reduced unemployment, an obviously desirable outcome.

But it follows from the above that if the economy IS IN FACT at full employment, then extra public spending WILL CROWD OUT private sector spending (investment spending or other spending). But strange to relate neither Kelton nor Mitchell actually mention that!!

At least I can't find anything to that effect in Kelton's book “The Deficit Myth” nor in Bill Mitchell's articles. But of course it's always possible Kelton or Mitchell do actually that point and it's just that I failed to find it! But certainly a good 99% of their material on crowding out is devoted to debunking the above mentioned conventional wisdom, rather than admitting that the crowding out idea is valid where the economy is at capacity.

My above “crowding out is sometimes needed” point may be IMPLICIT in Kelton and Mitchell's arguments in that they say deficits are limited by inflation, i.e. if government were to spend more when the economy is at capacity WITHOUT raising interest rates or taxes, the effect would be excess inflation. Still, they really ought to have made that point EXPLICITELY in the passages of their works which deal with crowding out.

If you don't make everything 100% clear, your opponents will get the wrong end of the stick or jump on it and claim they've spotted a flaw in MMT, as Ann Pettifor does in relation to the above crowding out point and MMT. See just under her heading “Mainstream economic theory and deficit financing” in her article entitled “‘Deficit Financing’ or Deficit-Reduction Financing?”

Thursday, 7 October 2021

Waffle and hot air from Grace Blakeley on central banks.

That's a recent article of hers in Tribune entitled “Democratise Central Banks.”

“Democratise” is of course a favourite word with think-tank wonks and other PC air-heads. It sounds soooo loving and caring doesn't it? But normally those using the word have no idea EXACTLY WHAT form their “democratisation” should take. And Blakeley is equally vague on that point.

But presumably she means putting CB decisions into the hands of democratically elected politicians. But therein lies a HUGE problem, which is that one of the main purposes of CB independence (as indeed she herself rightly says) is to keep politicians AWAY FROM the printing press!!! Blakeley totally fails, in fact doesn't even TRY to square that circle.

But never mind: if you aim to be an economics commentator, spewing out lots of meaningful sounding words which don't actually mean anything won't harm your career.

The natural rate of interest.

Next, she claims one of the main objectives of central bank is to get CB interest rates to keep close to the “natural rate of interest”. As she puts it, “ The idea behind central bank independence is that there exists a natural long-term rate of interest—the rate at which supply and demand for money are in equilibrium, prices are stable, and full employment is maintained—and the job of central bankers is to ensure that short-term interest rates in the real economy hover around this natural interest rate.”

Well Google something like “central banks” and “objectives” and you'll find no references to “the natural rate of interest”, though obviously if you read an entire book on the subject, doubtless you'll find references to “the natural rate of interest”.

But in the next para, she says “there is no natural’ long-term rate of interest.”

Well, seems central banks are making an almighty c*ck up there. Or is it Grace Blakely that has no idea what she's talking about? I think I know the answer to that.

Then in the same passage, she says “When central banks started to buy long-dated government bonds, they revealed their intention to influence long-term interest rates, turning the long-term rate into a policy variable rather than a macroeconomic constant. “ Well quite: as MMTers have repeated till they are blue in the face, the rate of interest (certainly on government liabilities) is a “policy variable”.

Next in the three or four paras starting “In other words, quantitative easing has proven that the decisions central banks make about monetary policy are political choices”. Well clearly there are important political implications involved in QE, e.g. (as she says) the rise in asset prices, and hence rise in inequality it causes. But what else are Cbs supposed to do given near zero rates of interest and failure of “democratically elected governments” to implement enough fiscal stimulus? She doesn't tell us.

Instead, her conclusion, as mentioned above, is the fatuous claim that CBs need to be “democratised”.



Looking for a job as an economics commentator? Well all you need do (especially if you're female and have a pretty face) is spew out meaningful sounding, but essentially meaning less hot air: especially when it comes to impressing the editors of left wing publications like Tribune. As Frances Coppola said about Blakeley, “If you don’t understand banks, you shouldn’t write about them.”

Saturday, 2 October 2021

Economists overlook the obvious flaw in maturity transformation.


Short abstract.    Maturity transformation has the alleged advantage that it enables money / liquidity creation by private banks. It also has a big drawback, namely that's it leads to bank fragility, and hence to bank failures and disasters like the 2008 bank crisis. But central banks and governments can create any amount of money anytime. So why court disasters like the 2008 bank crisis. i.e. why not ban maturity transformation and just have central banks and governments do the money creation?

Longer abstract.   The “borrow short and lend long” practice that banks engage in (aka maturity transformation (MT)) has an alleged advantage namely that it enables money / liquidity creation by private banks (thus it's the basis of fractional reserve banking). The big DISADVANTAGE is that it renders banks vulnerable: it largely explains bank failures and was a big contributor to the 2008 bank crisis, which cost about thirty million people their jobs worldwide. So economists, regulators and politicians devote tens of thousands of hours and millions of dollars trying to work out the best compromise between the latter advantage and disadvantage.

Now the obvious point they overlook here is that governments and CENTRAL BANKS can very easily create and spend into the economy whatever amount of money is needed to bring about full employment, and all WITHOUT the latter risk! Indeed, governments and central banks have been doing just that on an unprecedented scale since the latter crisis. So why do we expose ourselves to the latter risk? There's no point. At least I've read more about banks, MT etc than 99.99% of the population, and don't remember seeing the latter obvious point being made.

Of course the above arguments against MT is not a comprehensive argument against MT. The purpose of this article was just to point out an example of failure to see the obvious.


Overlooking the obvious is a well-known human failing, but it’s worse with economists because they spend a fair amount of time trying to impress everyone with their amazingly sophisticated and complicated solutions to sundry problems – which almost ipso facto means overlooking the obvious.

Second, when anyone produces a simple solution to an economics problem, that tends to get rejected because it’s embarrassing to have to admit that the profession overlooked a simple solution for an extended period.

Anyway, moving on to maturity transformation (MT), MT is a phrase often used to describe what banks do, namely “borrow short and lend long”. While an alleged merit of MT is that it creates money/liquidity, a claim made here for example. In contrast, the big problem with MT is that it renders banks vulnerable. (as pointed out by Messers Diamond and Rajan in the abstract of their NBER working paper 7430.

To illustrate MT, the typical retail bank accepts deposits which are essentially short term loans to a bank, and lends to mortgagors and others.

The former loans / deposits are short term because the loan can be withdrawn by the lender / depositor instantaneously (or after two or three months in the case of a term account) . In contrast, mortgages typically last several years. And that makes banks vulnerable: if depositors withdraw their depositors faster than the bank can turn its loans and investments into cash, the bank is bust.

But there's a blindingly obvious way to create liquidity / money WITHOUT the above risk of bank failures and recessions which result in 30 million losing their jobs: have the government and central bank (“the state”) create money and spend it into the economy! Economists apparently haven't noticed that very obvious point.

Incidentally, some readers may be wondering whether the above conflation of “money” and “liquidity” is justified.

Well the third edition of the Oxford Dictionary of Economics starts its definition of liquidity thus.

“The property of assets of being easily turned into money rapidly and at a fairly predictable price....short dated securities such as Treasury bills are the main asset of this form.”

Indeed Treasury bills and government debt generally are actually used as money in the World's financial centres! Thus whether a very liquid asset is officially classified as money is near irrelevant: the reality is that it is actually likely to be used as money.

Of course the initial recipents of the new money under a “have the state” do the money creation would be a bit different to where private banks do the job. But the differences are less than might seem: where the state does the job, those who receive the money are free to lend it out, or use the extra money to pay interest on additional loans. So lending and borrowing, via banks and in other ways, do in fact rise where the state creates extra money.

Second, to the extent that “the state” system puts more money into the hands of a wide cross section of the population, its hard to see what's wrong with that.

Third, any democratically elected government has the right to concentrate a particular bout of stimulus on SPECIFIC items, say health and education. But what of it? Does any great harm come from that?

In that barring or curtailing the amount of money creation done by private banks DOES cut the amount of money creation by private banks, less private bank related activity there means less debt. In view of the moaning and groaning we get from the great and good about the allegedly excessive amount of debt, no great harm is done there either!