Zero bound nonsense.

Kenneth Rogoff suggests negative interest rates would be desirable in some circumstances. Negative interest is crazy: it makes it profitable to engage in negative output. E.g. I borrow at minus 10%, buy something that declines in value at 5% a year in real terms and then sell a year later at a profit. Raving bonkers. Lunatic.

Only professional economists could think up a way of bringing about negative output, i.e. wealth destruction.

However it should be said in defence of the enormously stupid Kenneth Rogoff that there are plenty of other enormously stupid people in the economics profession, particularly at Harvard where Rogoff is based.

Lagarde says new bank regulations not good enough.

I’m sure she’s right. But the big question is whether the IMF has to competence to demolish the arguments put by banks in favour of retaining the status quo: i.e. making virtually no improvements to bank regulation. On past performance, I doubt it.

(H/t to Vincent Richardson).

38 specious arguments against full reserve banking.

Since Martin Wolf expressed sympathy with full reserve banking a few weeks ago, I’ve been much amused at the sheer number of specious arguments put against the idea. Plus a number of such arguments pre-date Wolf’s article of course, e.g. those put by the Vickers commission. 

So I’ve assembled 38 of these motley arguments (plus 4 motley arguments FOR full reserve) and put them all together in one paper, and demolished them all. Or at least I tried to.

Simon Wren-Lewis likes Positive Money?

Simon Wren-Lewis (Oxford economics prof) argues for cooperation between central banks and fiscal authorities, which is very much Positive Money policy. Or to be more accurate, PM argues for fiscal and monetary policy to be merged – joined at the hip.

So Wren-Lewis kind of supports Positive Money policy, though he doesn't actually mention PM. 

It’s certainly illogical to have two separate bodies taking decisions on stimulus: that’s the central bank and second, fiscal authorities. As to exactly who the “fiscal authorities” are, the answer to that is not entirely clear cut and it varies from country to country. The “authority” consists to some extent of politicians, to some extent a country's finance minister, and some countries have the equivalent of the UK’s “Office for Budgetary Responsibility”.

I back the MMT permanent zero interest rate policy.

With economies recovering from the crisis, the robots who make up much of the economics profession are calling for or contemplating a rise in interest rates. E.g. see here. Their basic reason being that central banks have always aimed for a positive rate, ergo they always should. Likewise ancient Egyptians doubtless also arged that Kings and Queens have always been buried in million ton pyramids, therefor they always should be. Similar robotic behavior is found in all cultures of course.

A permanent zero rate was advocated by Warren Mosler – see 2^nd last paragraph here. I assume other MMTers think likewise, though I might be wrong there.

Anyway the actual arguments for a permanent zero rate are as follows.

Household spending is related to how large a stock of money households have: e.g. when people win a lottery their weekly spending rises (revelation of the century that, wasn’t it?). Or to be more accurate, aggregate spending is related to what MMTers call “Private Sector Net Financial Assets” (PSNFA). And the latter is made up of base money plus national debt.

Those two, base money and national debt are actually very similar: at least they merge into each other. That is, there is no effective difference between short term debt that pays a near zero rate of interest and base money.

Commercial bank created money, in contrast, is not a “net asset” because for every dollar of such money there is an equal and opposite debt. That is commercial bank created money nets to nothing.

To summarise so far, spending is positively related to PSNFA. Thus one way of regulating demand would be to regulate the amount of PSNFA.

But another possibility would be to have too large a stock of PSNFA while inducing the private sector not to spend it to the extent that they otherwise would by having government pay interest to PSNFA holders in exchange for lending to government, or “lodging PSNFA” with government to put it another way.

But what’s the point of that? I.e. what’s the point of so to speak distributing Monopoly money to the population and then  inducing them not to spend it by having them lend it back to government? That is totally insane.

That is not to say that interest rate hikes should never be used to damp down demand (especially in emergencies). But certainly, the long term objective should always be a zero rate.

But even the latter use of interest rates in an emergency is debatable in that the evidence seems to be that interest rate adjustments have little effect. See here and here. But of course pyramid builders, economists and other robots don’t like empirical evidence that contradicts their long held beliefs.