Scott Sumner’s strange ideas on MMT.

 
A recent article by Scott Sumner attempts to criticise MMT. All the article actually does is to show that he doesn’t have much idea as to what MMT is all about. (Title of the article is “Why Money Matters”.)

The article deals at length with just one point, namely the effect of swapping dollars for government issued bonds. (Where the central bank creates money and buys up bonds, that swap equals QE, of course). Plus the article claims MMT’s ideas on swapping bonds for cash are defective.

Now there’s just one glaring flaw in that, which is that MMTers advocate a more or less permanent zero interest rate (on government bonds and government liabilities generally). Incidentally Milton Friedman advocated the same.

Now in that sort of permanent zero interest rate scenario there’d scarcely be any government issued bonds! What’s the point in locking up your money for a year or several years if there is no reward for doing so? Absolutely none!

Indeed Milton Friedman is quite explicit about that: that is, he said he didn’t see the point of government borrowing, except in emergencies. (See his para starting “Under the proposal….” here.)

So even if Scott Sumner’s criticisms are valid, he is dealing with a matter which is near irrelevant for MMTers. That’s not much a body blow for MMT!

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Postscript (4th Dec 2020).   Then in the final three paras of his article he says "the public’s attempt to get rid of excess cash balances will drive up the price of a wide range of assets, leading to more total spending," And apparently "All of this is ignored by MMTers."

So I left about five links in the comments to articles by MMTers which very specifically refer to the stimulatory effects of extra cash balances."  Then Sumner accuses me of confusing stocks with flows when in fact those links refer very specifically to stocks!!

Frankly it's difficult to know how to descrbe Scott Sumner's grasp of MMT without resorting to three letter words.

Varoufakis’s questionable ideas on CBDC.

 

The questionable ideas are in an article of his entitled “Why the Bank of England should give everyone a free account”.

His first claim is that “In times of trouble, such as the current pandemic, the Bank of England could lift all boats at once by crediting your account directly…”. Well I suggest the decision as to who gets stimulus money is very much a POLITICAL decision (as Positive Money has argued since its foundation) and not a decision for central banks.

Second, why should everyone be entitled to a FREE account at the central bank, or any other bank, come to that? Making something free at the point of delivery is OK where there are overriding social considerations at stake. For example making basic education free (and indeed compulsory) for kids is widely accepted as a good idea because being able to read, write and do basic maths is a gift which no child should go without. Likewise, there are good arguments for making basic health-care free at the point of delivery, which explains why basic health-care is available for free in many countries.

But is a bank account a basic human right? Given that anyone can do their basic financial transactions (purchase of food, paying the rent etc) using PHYSICAL cash (£10 notes, $100 bills etc) why is a bank account a basic essential? Maybe at some point a majority of shops will refuse to take physical money and will insist on payment via debit or credit cards. But we are not at that point yet.

Robert Peston’s barmy ideas on government debt.

 

Robert Peston published an article on 25th November 2020 entitled “Spending Review: How the UK's Covid-19 debts may turn out very expensive.” The article is complete nonsense, which raises the question as to how he ever came to be the BBC’s business editor or ITV’s political editor.

Dozens if not hundreds of other people on social media and elsewhere have taken the p*ss out of this article. Anyway, my “p*ss taking” efforts, for what they are worth, are as follows.
 
His first nonsensical claim is that the large government debt accumulated as a result of Covid “…represents by implication the fastest transfer of wealth and power to China and Asia in our lifetimes.” Well that might be true if China had bought up large amounts of that debt. Unfortunately the reality is that Chinese holdings of US Treasuries have remained roughly constant for the last ten years: i.e. since long before Covid.


 

The UK’s debt/GDP ratio.

Next, he points to the fact that the UK’s debt/GDP ratio will rise to above 100% which apparently is a problem because “Outside of world wars, this is a uniquely large and fast rise in public sector debt.”

Now hang on. The ratio for the UK rose to well over DOUBLE that 100% figure in 1945.But the years after 1945 were “outside of world wars”!!!!

Of course that high debt was CAUSED BY WWII, but that record debt fell only very slowly in the decades after 1945: falling  to  about 50% a full fifty years later: in 1995.

Now what’s the big difference between a high debt during peace time which was originally caused by a war and in contrast, which was caused by a virus?  Unfortunately (you’ll be amazed to learn) Peston doesn’t explain what the big difference is.

 

What if interest rates rise?

Next, Peston sets out a lot of complicated stuff about “gearing” and government bonds which contains several mistakes, most of which I’ll ignore. For example, he says “The point is that interest rates will have to increase at some point.” He doesn’t explain why. The reality is that if demand stays relatively muted, then there’s no earthly reason to raise interest rates!

But shortly after that, he gets nearer the truth when he says interest rates COULD RISE. To be exact, he says “…..a modest rise in activity could lead to inflationary pressures…”.  Notice the word “could”. If (and that’s a big “if”) inflationary pressures did get uppity, some sort of countervailing deflationary measure would be needed. That could be tax increases or it could be an interest rate increase (as I’ve explained at least ten times on this blog over the years).

But neither of those measures (tax increases or an interest rate rise) would constitute a cost for the population as a whole (as I explained here almost ten years ago). I’ve explained at least ten times on this blog over the years – forgive the repetition). Reason is that the sole purpose of the tax increase or interest rate rise (as indeed Peston very much implies himself) would be to hold demand down to the “full employment” or “economy at capacity” level.

So if no standard of living sacrifice for the UK population is required in order to cut the debt in what sense is there a “cost” there for the UK population? Peston doesn’t explain.

 

Politics.

That however is not to say there are absolutely no conceivable problems involved in cutting the debt. The point is that there are no strictly ECONOMIC OR TECHNICAL problems. In contrast, there is a possible POLITICAL problem: the problem is that, as explained above, cutting the debt involves a rise in tax or a rise in interest rates (which to repeat, do not cause a significant decline in real living standards). But that is not necessarily how the population would see it.

That is, there could be big political objections, even riots in response to significant tax rises, even where those tax rises have no effect on living standards.

So what’s the best thing to do about the latter possible political problem? Well I suggest the best solution is very definitely NOT TO implement DEFICIENT demand NOW so as to ameliorate a problem which may or may not arise in a few years time. I suggest the best solution is to minimise unemployment right now, and then deal with any possible political problems that arise if an when they arise.

Plus, excess unemployment NOW is just as likely to cause riots as tax  rises in a few years time.

Is this the crucial flaw in fractional reserve banking?

 

 

In a “base money only” system, i.e. under full reserve banking, people and firms would lend to each other, sometimes on a peer to peer basis, and sometimes via banks. And under that system there is no obvious reason why the rate of interest established would not be some sort of genuine free market, or “GDP maximising” rate: after all in such a market there’d be millions of borrowers and hundreds of lenders all competing for business, just as in the real world right now. I.e. in that scenario, it is difficult to set up monopolies or cartels to rig the market.

Note that under that system, banks would lend only base money. That is, letting private banks create their own home made money would not be allowed.

However, if commercial banks are allowed to create their own home made money (as under fractional reserve banking), they can lend at BELOW the above rate because they do not to attract deposits to cover 100% of the monies they lend out: they can simply print some of it, at no cost to themselves. (Joseph Huber alludes to this process on p.31 of his work “Creating New Money”). That obviously increases the total amount of lending and debts.
 
That might seem beneficial. Or at least the increased lending might seem beneficial. Only trouble is that, as just intimated, debts rise as well, and there’s an army of do-gooders who witter on about the allegedly excessive amount of debt we as a society have. So to that extent, the latter increased amount of lending and debt is not quite the boon it might seem.

But that’s not the basic point I wish to dwell on here, particularly since I have somewhat jaundiced views about the latter do-gooders.

The more important point is that it’s a widely accepted default assumption in economics that the free market price for anything is the GDP maximising price for reasons given in the economics text books: i.e. it is up to those who want to claim a particular market is flawed to prove their case. Ergo the default assumption must be that money printing by private banks is not beneficial: it will not maximise GDP.

Of course it can well be argued that given the disastrous environmental effects of more GDP, raising GDP should not be an objective. But the answer to that is simply to replace “maximise GDP” with “maximise output per hour”. That is, there clearly isn't any harm to the environment in raising output per hour by X% if the average number of hours worked per person per week is CUT BY X%.

Indeed, there are campaigns aimed at cutting the working week to four days, and partially on the grounds that while total number of hours worked declines, productivity increases more or less compensate for that.

   

Ignorant drivel from Iain Macwhirter on MMT.

 

 

That’s in an article of his entitled “How governments learned to stop worrying and love debt.”

 

He claims MMTers think “Governments can run big deficits indefinitely so long as the debts aren’t called in.” Complete BS. MMTers are well aware that inflation poses a limit (gasps of amazement) to the size and duration of deficits.

 

In similar vein he claims MMTers “say that an independent Scotland shouldn’t bother about debt either, so long as it has control of its currency, because it can just print Scottish pounds to pay for it.” Yet more bollocks.

 

But then Macwhirter contradicts himself when he says MMT “contains an important kernel of truth: that government spending, given low inflation, does not need to be directly financed by tax revenue.”

 

Quite. Put another way the basic MMT claim is that the size of the deficit and the debt do not matter as long as the effect is not excess inflation.

 

So what was all the stuff a few paragraphs above about MMTers being totally unconcerned about inflation?

 

Macwhirter’s article is self-contradictory BS.

 

Afterthought: how do I get a job writing for some respectable newspaper or think tank? Ah yes: I think I’ve got it. Talk BS..!!!!!

 

 

 

Bank of England discussion paper entitled “Central Bank Digital Currency”.

 

The above paper invites comments. So I sent one, as follows.

P.7  The first “key point” says that the only way for the public to hold BoE issued money is in the form of physical cash. That is debatable in that in the UK, any member of the public can open an account at National Savings and Investments whose only assets are base money and government debt. Thus arguably those accounts at the NSI come to the same thing as holding base money in digital form.

The latter point rather detracts from the claim made on p.37, para starting “But CBDC could also introduce risks for financial stability”, namely that the introduction of CBDC or a loss of confidence in commercial banks could lead to a run on commercial banks. That is, depositors at commercial banks have been free for decades to “run to” NSI, but have not done so. In particular, they did not run during the 2007/8 bank crisis.

Plus I would argue that any run from commercial banks is a flaw in those commercial banks, not a flaw in CBDC. My reason for saying that is that one of the main activities, if not THE main activity of commercial banks is basically fraudulent. That is, those banks, 1, accept deposits, 2, grant loans, and 3, promise depositors their money is safe, which it cannot possibly be because loaned out money is NEVER safe.

Indeed if any organisation other than a bank indulges in the latter “three point” activity (e.g. pension funds, unit trusts, mutual funds etc) those other organisations are liable to be prosecuted.

So why are banks allowed to engage in an activity which is fraudulent when done by anyone else? Well I suggest the absolutely VAST AMOUNTS of money spent by the finance sector (about £100million a year) buttering up politicians might have something to do with it.


In other words runs just wouldn’t occur in a full reserve system where (shock horror) banks are not allowed to engage in the latter fraud, as explained by Prof John Cochrane.

Mary Mellor says UBI should be funded out of new publically created money.

 

 

In a "Brave New Europe" article entitled “UBI: Public Money for a Public Purpose”, Mary Mellor argues that UBI (Universal Basic Income) should be funded out of new publically created money (henceforth “base money”), rather than out of tax on the rich.

In fact she goes much further than that. She says “….basic income and other democratically identified public and social initiatives should be funded by new public money which should then be retrieved by taxation.”

Well assuming the gap between issuing the new public money and retrieving it via tax is relatively short, then that comes to the same thing as the more traditional way of funding public spending, namely collecting the tax first and then spending the relevant money. To take the extreme case, what’s the difference between government collecting £X in tax and spending it a week later, and on the other hand, spending that money first, and then retrieving it via tax a week later? No difference!