Richard Murphy thinks he’s spotted a flaw in MMT.

 
That’s in his article entitled “Why can’t we have hypothecated savings, provided by the government?”

Richard Murphy basically supports MMT, but he disagrees with the MMT claim that government borrowing is pointless. Incidentally Milton supported the “no government borrowing” idea (though of course MMT was not up and running in Friedman’s day).  

Richard Murphy lists three reasons for his claim, though as shown below, he actually gives four. His first reason is that since government should keep interest rates “as low as possible”, government “needs to influence markets to achieve that goal”.
 
Well the flaw in that argument is that if government switches from a pure MMT policy of “borrow nothing” to “borrow something”, that inevitably RAISES interest rates. And that conflicts with his aim of keeping interest rates “as low as possible”!!

Murphy’s second and third reason.

His second reason is even more bizarre. His argument is that saving by households inevitably happens.

So?

He doesn’t explain exactly WHY the fact of individual people and households saving means its desirable for government to borrow, so it’s a bit difficult to deal with his “reasoning” there: the “reasoning” doesn’t exist!

And his third reason is that lending to government can result in what he calls “social investment”. Well it’s obviously true that it can. But it’s false logic to claim (as he is presumably trying to) that if there is NO GOVERNMENT BORROWING, that therefor “social investment” is somehow constrained. I.e. the reality is that if government obtains 100% of its money from tax and freshly printed money, rather than from borrowing, it can allocate whatever proportion of that money to investment that it likes.

He also tries, with a view to boosting the apparent attractions of “social investments” to rubbish alternative forms of saving. That is he claims that money put into “shares or second-hand properties” amounts to boosting “speculative bubbles”.

Well there’s no denying that stock exchange bubbles and house price bubbles DO OCCUR. But it’s going way too far to suggest that ALL MONEY put into those assets is wasted for that reason. A large majority of houses that families buy are “second –hand properties”. Are those families doing something wrong?
 

The fourth reason.

His fourth reason (para starting “What I mean…”) is that there is a natural desire to save by households, ergo government should provide an interest yielding form of saving for those people. The answer to that idea is as follows.

The free market, left to its own devices, will provide a large volume and range of types of saving: e.g. the above mentioned shares and houses. And unless there is an obvious reason for thinking the market has got it wrong, that total amount of saving opportunities is presumably the optimum amount.

But that is not to argue that government should provide NO FORM OF SAVING WHATEVER for households and the private sector in general. That is, every economy (other than very primitive economies, e.g. in unexplored parts of the Amazon jungle) needs a form of money. And nowadays that money takes the form of FIAT money, rather than gold coins etc. Plus that form of fiat money is necessarily issued by some form of central / communal / government organisation. Fed issued US dollars are an example.

In short, the basic purpose of government  / central bank issued fiat money is to enable firms, households etc to do business, e.g. do their weekly purchase of groceries. That’s the “transaction motive” for wanting money mentioned in economics text books.  But that form of money cannot help but be a form of saving, though there is no obvious reason to pay interest to holders of that money: indeed it would be perfectly reasonable to ACTUALLY CHARGE them for the costs involved in issuing that money and running the accounts of households which have a stock of that form of money.

Moreover, governments are ACTUALLY FORCED to issue more of that money than is needed for the above “do business” reason. That is, if firms and households decide to keep a stock of that money OVER AND ABOVE what they need for the “do business” reason, governments are forced to provide firms and households with that money. That pretty much equals the “precautionary motive” for wanting money mentioned in the text books.  If government  DOES NOT provide “precautionary money”, firms and households will try to SAVE in order to accumulate their desired holding of it, and the result will be excess unemployment (Keynes’s “paradox of thrift” unemployment).

To summarise, government HAS TO provide a form of saving for the private sector in the form of zero interest yielding state issued money. But if (as per Richard Murphy) savers are induced to engage in MORE THAN that form of saving via a positive rate of interest being offered for that form of saving, then the bill for that largess is necessarily paid by NON SAVERS. I.e. to a significant extent that amounts to robbing the poor to subsidise the rich: not a clever policy.

Conclusion.

I’m not claiming to have said the last word on this subject: in fact I think it’s a difficult and complicated area. But one thing is certain: Richard Murphy’s above arguments are poor in the extreme. He needs to go back to the drawing board.

Thomas Picketty makes a couple of mistakes.

That’s in his article entitled “What to do with Covid debt?”

His first para claims that the large amount of money printed to deal with Covid will eventually have to be withdrawn and in particular that it’s the rich who should bear most of that burden. As he puts it, “Sooner or later, the wealthiest will have to be called upon.”

Well, like most people, I’ve no objection to the rich paying relatively high rates of tax, but actually the above stock of money will only need to be withdrawn if the private sector’s new found stock of money (base money to be exact) proves inflationary. If not, there’s not need to withdraw it!

Indeed, the latter point is entirely in line with one of the main claims of MMT, namely that the size of the debt doesn’t matter, as long as it doesn’t cause excess inflation or an excess rise in interest rates.

And it’s quite possible there’ll be no need to withdraw if the West moves in what might be called a “Japanese direction”. That is the Japanese public debt to GDP ratio is more than DOUBLE that of the US and UK as of 2020, but that does not seem to be a problem.

Incidentally, you may have noticed that I’ve treated base money and govt debt as the same thing and that is not unrealistic: there is no sharp dividing line between short term government debt which pays a near zero rate of interest and base money (aka reserves) on which the central bank pays a near zero rate of interest. When the latter “short term” is say one month, then there’s almost no difference.

 

The second mistake.

Then Piketty says in his last para that, “It was by resorting to exceptional levies on the better-off that the large public debts of the post-war period were extinguished and that the social and productive pact of the following decades was rebuilt. Let’s bet that the same will be true in the future.”

Well that certainly wasn’t the case in the UK. That is, the UK’s public debt to GDP ratio declined from around 250% of GDP in 1945 to around 50% in the 1990s entirely thanks to a combination of real economic growth and inflation eating away at the real value of the debt.

George Selgin is keen as ever to promote private money printing.

He has long argued for private banks to be allowed to create/print money and has also campaigned against letting central banks create money.

His latest effort in this direction is an article entitled “Ground proposals for “Helicopter Money””, published by the Cato Institute. 

His central objection to central bank issued helicopter money in that article is that “…having supplied it, the Fed has no easy means for taking it back.” And thus that  “By making an irreversible addition to the money stock, the Fed credibly commits itself to accept a higher equilibrium inflation rate.”

Well the first flaw in that idea is that the Fed still has a way of combating inflation: raise interest rates. I.e. the Fed can still sell government debt into the market and thus mop up surplus money and raise interest rates. However, what it CAN’T DO is to cut down on the private sectors TOTAL STOCK of paper assets in the form of government liabilities. I.e. it cannot cut down on the SUM OF the private sector’s stock of government debt AND base money (aka reserves). And that’s important because frankly there isn't a bit difference between base money and government debt.

In other words it’s perfectly true, given how responsibilities are currently allotted as between central banks and governments that the Fed can’t do that. But helicoptering involves a VERY DIFFERENT set up which thus requires a different allocation of responsibilities which COULD ENABLE the Fed to “take back”.

Indeed, a system that does in fact enable central banks to “take back” was set out ten years ago by Positive Money, New Economics Foundation and Prof Richard Werner (p.10-11). Plus Bernanke gave his blessing to that sort of PoMo/NEF system.  It really is time Selgin got up to speed on this. 

Under the latter “PoMo/NEF” system, the central bank is allowed to specify how much new money is created (or withdrawn) each year, while POLITICIANS decide exactly what form any extra spending or extra taxes take.

Note that the latter PoMo/NEF system does not strictly speaking advocate helicoptering, if by the latter one means having a central bank create and dish out money to whoever it thinks fit: rather, it involves (to repeat) letting POLITICIANS decide who gets the money.

But that is absolutely correct: the decision as to WHO GETS a windfall is clearly a POLITICAL decision, i.e. not one that a central bank ought to take.

Stephen King of the HSBC unfortunately writes an article about MMT.

 

It’s in the Financial Times and is entitled “MMT: The case against Modern Monetary Theory.” King is a senior economic adviser at HSBC.

Well first off, the title is sloppy, isn't it? I mean titles of articles are supposed to short and snappy. So what’s the phrase “Modern Monetary Theory” AND the acronym “MMT” doing there? “The case against” followed either by “MMT” or “Modern Monetary Theory” would be better. But never mind: that’s a minor criticism.

King’s first substantial point against MMT is that it involves giving the keys to the printing press to politicians. As he puts it “Giving elected representatives the keys to the printing press is the equivalent of giving a gambling addict the keys to the casino.”

Well actually MMT does not SPECIFICALLY say that it’s POLITICIANS who should control the press. In fact MMTers are largely silent on exactly who should have the keys, which (as I’ve been pointing out for years) is a weakness in MMT.

Much the best answer to the latter question is the one given by Ben Dyson (founder of Positive Money) – an answer which Ben Bernanke has supported as has Richard Werner and the New Economics Foundation (p.10-11 here). And that’s to have some sort of independent committee of economists decide the AMOUNT of new money to create and spend, while POLITICIANS (quite rightly) retain the right to decide what the money is spent on, or whether the new money should be used to cut taxes.    

King’s next blunder comes in his next sentence where he suggests (truly hilarious this) that MMT claims tax collection should cease. That is, King says “Those governments without access to tax revenues can instead “debase the coinage”.

If King wants to make totally lunatic claims like that, you’d think he’d provide some sort of source for the claim.

King’s final blunder comes in his last paragraph where he makes the tired old claim that there will be a bill to pay for the current money printing spree and that the bill will come in the form of “….higher taxes, more austerity, rising inflation or eventual default.”

Now the flaw in that argument (again, as I’ve been pointing out for years on this blog) is that higher taxes may well be required, but that does not, repeat not, repeat not, repeat not equate to any sort of burden on households or the private sector generally.

Now to the uninitiated, (e.g. ignoramuses like Stephen King), that might sound a strange claim. But it’s all quite simple in fact.

As King (and indeed others) have rightly said, the current money printing spree may well have to be reined in at some point, so as to prevent the excess inflation that might result from that excess money supply. But note that the SOLE PURPOSE of those tax increases is to hold demand down to the level that minimises unemployment while keeping inflation on target (NAIRU if you like).  

I.e. those tax increases do not actually cut GDP or household incomes, or involve any of the “austerity” to which King refers. And that might seem a surprising result. Indeed, in that those tax increases prevent seriously excessive inflation, it’s quite possible that those tax increases ACTUALLY RAISE living standards.

Unfortunately that point will be a mile above the head of Stephen King and numerous other twits at the top of the economics profession.   

 

Lawrence Summers attempts to criticise MMT – try not to die of laughter.

 
 

That’s in an article of his entitled “The Left's Embrace of Modern Monetary Theory is a Recipe for Disaster.” He sets out three objections to MMT. The first reads thus:

“First, it holds out the prospect that somehow by printing money, the government can finance its deficits at zero cost. In fact, in today’s economy, the government pays interest on any new money it creates, which takes the form of its reserves held by banks at the Federal Reserve. Yes, there is outstanding currency in circulation, but because that can always be deposited in a bank, its quantity is not controlled by the government. Even money-financed deficits cause the government to incur debt.”

Well the first flaw in that argument is that if stimulus is needed and the country is engaged in “printing money” (to use Summers’s phrase) the likelihood is that the central bank (CB) will be cutting interest rates, including interest on reserves, at the same time. And that will tend to nullify the interest bill to which Summers refers. As an illustration, if the CB pays one percent less by way of interest on reserves while the result of “money printing” is to raise the quantity of money by one percent, then (lo and behold) there’s no effect on the cost of maintaining the stock of reserves!

Moreover, many if not most MMTers support the “permanent zero interest rate” idea: the idea that ideally government should pay no interest or virtually no interest on its liabilities. In other words the ideal amount of money for a central bank to issue is whatever minimises unemployment while not exceeding the inflation target, and at the same time as paying no interest on that money (in the form of reserves or government debt) – a policy also advocated by Milton Friedman.
 
Thus the solution advocated by MMT, and indeed by most mainstream economists where interest on state liabilities is anywhere above zero and there is excess unemployment is to cut interest rates. In contrast, Summer’s solution would seem to be to leave interest rates unchanged and incur more debt. Bizarre.

 

Inflation.

Summers’s second objection is that excess money printing can lead to excess inflation. Well you don’t say! Every ten year old worked that out!

MMTers have made it abundantly clear that the amount of money printing they advocate (to repeat) is whatever minimises unemployment while not leading to excess inflation.

 

Exchange rates.

Summers’s third objection is that it might lead to a collapse in the exchange rate. He says “Third, modern monetary theorists typically reason in terms of a closed economy. But a policy of relying on central bank finance of government deficits, as suggested by modern monetary theorists, would likely result in a collapsing exchange rate.”

Well it’s certainly true that a rise in demand leads to a deterioration in the exchange rate all else equal. Reason is that a part of consumers’ demand for consumer goods, and businesses’ demand for raw materials and machinery is met via imports.

But why would a rise in demand of say 5%, or whatever amount is needed to deal with a typical recession lead to a collapse in the exchange rate? Moreover, if a country is not going to escape a recession via MMT policies, then it is going to raise demand to the full employment level via more conventional methods. And that will draw in imports to exactly the same extent as do MMT policies.

Another weakness in Summers’ “collapse theory” is that recessions are normally a World wide phenomenon. At least that was true of the 1930s recession and the more recent recessions stemming from the 2007/8 bank crisis and Covid. Now if a given country raises demand (either via MMT policies or conventional policies), and its main trading partners do likewise, then there’ll be little effect on the first country’s exchange rate!!

And finally, and on the subject of recessions, who was responsible for the 2007/8 bank crisis, and the subsequent recessions? Well Lawrence Summers was advocating laxer bank regulations just prior to that crisis, so he was without doubt one of the guilty men.
 
He does tend to put his foot in it, doesn’t he?  

Does the IMF now understand MMT? Seems it does.

 

 

According to an article in the Financial Times by Chris Giles entitled "Global economy: the week that austerity was officially buried", the IMF now says government debt does not matter, except in as far as it causes excess inflation, which is what MMT has been saying for years.

Moreover, it seems that Carmen Reinhart, the prize idiot and chief economist at the World Bank now accepts this view (having campaigned long and hard in the wake of the 2007/8 bank crisis to have the size of government debts severely constrained).

Unfortunately though, Chris Giles falls for the popular delusion that low interest rates are “crucial” if a government is to implement stimulus. He says “The crucial factor supporting this outlook for most advanced economies is borrowing costs; the IMF expects the cost of servicing government debt will stay well below the growth rate it expects these countries to achieve. This would allow cheaper borrowing to largely offset the weaker growth and lower tax revenues that the fund predicts will result from the crisis.”

The very obvious and simple flaw in the latter argument is that governments and central banks do not need to borrow in order to implement stimulus: they can simply print money!!  Indeed that’s exactly what they’ve been doing, and big time, over the last five years or so via QE. Do we take it that Chris Giles doesn’t know about QE?.....:-)

The latter point can actually be put another way, which is that given relatively high interest rates and a need for stimulus, one obvious option is to cut interest rates, and that’s done by having the central bank create money and buy up government debt, though simply creating money and spending it on the usual public spending items or cutting taxes would have a similar effect.
 

Steve Keen writes another article on debt jubilees.

 

The article is on the “Brave New Europe” site and is entitled “Steve Keen – Spain’s Economic woes….”. 

In his last para he says he’d like to see debts cut by around 100% of GDP by having government print and dish out that amount to debtors. However the amount of money printing he advocates is actually DOUBLE that, as he makes clear in his article entitled “Manifesto” published in 2012.

The reason for the latter “doubling” is the eminently reasonable point that if we’re going to hand out £Xmillion to debtors, that is unfair to creditors: i.e. creditors need to be given an equal amount.

But there’s an obvious problem here: this would be an amount of money printing that would make Robert Mugabe look almost responsible. By way of comparison, and taking US figures, government debt has risen by an amount equal to roughly 75% of GDP over the last ten years, of which a significant proportion has been  QE’d, i.e. turned into cash. See this Fed site.   

However the portion not turned into cash amounts to something very similar to cash: it is essentially cash deposited with government. So let’s say the amount “printed” to deal with the bank crisis and Covid is 75% of GDP.

But Steve Keen’s printing operation comes to 200% of GDP: over twice as much. But worse still, the above mentioned 75% was printed so as to deal with two very serious deflationary events, the bank crisis and Covid. In contrast, Steve Keen’s printing operation, while it addresses an alleged problem, does not address a DEFLATIONARY problem. In other words Steven Keen would presumably want to go ahead with his printing operation even where the economy is at capacity and cannot handle any extra demand. Thus the inflationary consequences do not bear thinking about.

Incidentally, there is a discrepancy between the latter 75% figure and the equivalent figure which I gave in an article on this blog a month ago, namely 15%. Reason is that the latter 15% figure referred just to the amount of actual new CASH created, i.e base money. As suggested above, it is probably more realistic to count government debt as a form of money as well, and in that case the figure rises to roughly 75%. But then government debt is not "immediately spendable" as is cash, though it the debt is relatively short term, say a year or two it could be classified as "spendable fairly quickly". Thus it is difficult to pin down exactly what the percentage should be.

However that does not matter too much for the purposes of this argument: whatever number one chooses between 15 and 75, the basic point remains that Steve Keen is proposing a truely massive money printing exercise here.

Another weakness in Steve Keen’s idea is that household debt service costs as a proportion of household income is currently at a 40 year low, at least in the US. Thus while there are doubtless specific groups badly hit by Covid, the AVERAGE US household does not have a serious debt problem right now.

Having said all that, I’m not suggesting the amount of private debt is optimum. The freedom that private banks have to create and lend out money like there’s no tomorrow during a boom under the existing fractional reserve bank system is clearly a nonsense. Adopting full reserve banking would reduce that problem.