Nominal GDP targeting.

Prof David Beckworth claims the Fed should attempt nominal GDP targeting (NGDP targeting). I’m sympathetic, but I don’t like the tool he advocates for actually effecting this policy. He advocates a monetary base (MB) increase to boost demand: any old MB increase it seems.

We have recently had an astronomic and unprecedented MB increase (thanks to QE) and the effect has been unspectacular, apart from boosting asset prices. And the latter in itself is totally useless.

In contrast, channelling extra MB into the pockets of households rather than into the pockets of banksters DOES have an effect: all the evidence is that a significant proportion of wage increases or windfalls enjoyed by households is actually SPENT, which is what we want, if we want stimulus. For the evidence, see here, here, here and here.

And apart from that strict economic point, there is a moral or philosophical point which backs the latter economic point. It’s a point made by Thomas Edison, which briefly is that new money should be the property of the people. The full quote is thus.

“If our nation can issue a dollar bond, it can issue a dollar bill. The element that makes the bond good makes the bill good... If the Government issues bonds, the brokers will sell them. The bonds will be negotiable; they will be considered as gilt edged paper. Why? Because the government is behind them, but who is behind the Government? The people. Therefore it is the people who constitute the basis of Government credit. Why then cannot the people have the benefit of their own gilt-edged credit by receiving non-interest bearing currency… instead of the bankers receiving the benefit of the people’s credit in interest-bearing bonds?” (Hat tip to Beowulf for that quote – it comes from NY Times, Dec. 6, 1921)

The above policy (having extra monetary base go straight to households) involves getting Congress to mesh fiscal policy with the Fed’s monetary policy, which is easily done in principle. And that “meshing” does not require a merging of the two bodies. That is the Fed can still be responsible for the economy’s overall deflationary / stimulatory stance, while Congress can decide on exactly where money is spent and how much money comes from which form of taxation. And same goes for any other central bank and parliament.

And finally this will all ring loud bells in the brains of Modern Monetary Theory (MMT) advocates. MMT favours having the government / central bank machine go for straightforward extra net spending in a recession. With no extra borrowing to cover the extra spending, and with the extra money very definitely not going into the pockets of banksters.

MMT just steamrollers everything in front of it!

Borrow to pay interest: it can make sense given significant inflation.

With inflation and interest rates probably on the rise in the UK over the next year, we can expect the usual long queue of yawn provoking commentators telling us that this makes life more difficult for borrowers. The reality is that when interest rates and inflation rise by the same amount, the cash flow position for borrowers would not be affected one iota if they got to grips with inflation accounting. I’ll explain.

A loan involves two elements: first paying interest, and second, gradually repaying the capital sum. Let’s assume, 1, a £100k loan, 2, that interest is 5%, 3, repayment of capital is 5% a year, and, 4, that inflation is zero.

Total payments in the first year will be 10% of the sum borrowed.

Now let’s assume inflation of 15% with the REAL rate of interest the same, i.e. 5%, which makes the APPARENT rate of interest 20%. In this scenario, how would a borrower and lender with their heads screwed on (i.e. acquainted with inflation accounting) go about arranging matters so that the outcome IN REAL TERMS was the same as in the zero inflation scenario?

At the end of the first year, the outstanding loan needs to be £95k in real terms (i.e. in terms of prices as they were 12 months earlier). But wait a moment: £95k adjusted for 12 month’s worth of inflation is £95k x 120% = £114k. In other words the borrower needs to borrow an extra £19k just to make sure the value of the capital sum borrowed declines at a nice steady rate IN REAL TERMS.

To summarise, given a significant rate of inflation, if borrower and lender do their inflation accounting properly, the amount borrowed in nominal terms will initially RISE: counter intuitive.

Alternatively the borrower can make their own arrangements and get a second mortgage or loan with a view to borrowing the above extra £19k.

During the high inflation episode around 1970, lenders and yawn provoking commentators in the UK totally failed to get to grips with this point. If inflation becomes serious again, they will probably fail again. The above point is a mile above their pretty little heads.

Obama the imbecile versus the Chinese.

We should never lose sight of the sheer stupidity of our rulers (and/or those that advise them). I’m referring to Obama’s three great ideas for creating jobs.

The first idea was that since corporations had large cash piles, they should invest them so as to create jobs. Just one problem: there is no point in investing in new plant, factories, office blocks, etc unless the demand is there for the relevant products. I.e. put the demand in place, and employers will automatically invest in capital equipment, and they’ll do it without the sort of moron advice they get from politicians.

The second idea was that the U.S. should export more. Problem here is that every other country is trying to do likewise. Just in case Obama and his advisors haven’t noticed, China is trying every trick in the book to maximise its exports, including currency manipulation.

Rationalising international trade would be a good idea. But the simplistic idea “let’s export more” is plain daft.

And the third idea was that the U.S. can create jobs by exploiting its technological superiority. Obama proposed this idea at the carefully choreographed press conference just before Xmas 2010. Unlike Clinton, Obama seems to have a problem doing live interviews with journalists.

The problem with this “advanced technology” idea is that the Chinese are rapidly catching up with U.S. technology. As the entire world knows (apart from Obama and his advisors), the Chinese are producing stealth fighters.

And not only that, but the bulk of jobs even in advanced economies are pretty mundane: driving trucks, laying bricks, serving in restaurants and so on. Being technologically advanced is nice, but it does not have a huge effect on employment levels. That is, a technologically backward country can perfectly well achieve decent employment levels, if it organises its labour market efficiently.

Faced with this bunch of economic illiterates, the Chinese ought to come out on top in the current negotiations even if they were blindfolded, drunk, and had both hands tied behind their backs.

Afterthought dated 20th Jan 2011. For more imbecility in Washington DC, this time by Alan Greenspan, see here and here.

And for more on the stupidity of Obama’s export idea, see here.


Afterthought (25th Jan 2011). Would you credit it? A few days after setting out the above three imbecile economic policies, Obama comes up with a fourth: “competitiveness”.

As Robert Reich and others point out, the term is meaningless.

3rd Feb. For more on the irrelevance of the "innovation" idea, see here.

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Randall Wray, the state’s money and price control by government.

While I basically support Modern Monetary Theory (MMT), I don’t agree with the idea put by some MMTers, namely that government’s control of money enables governments to control prices.

One advocate of this idea is Randall Wray (Prof. of Economics at the University of Missouri-Kansas City). See here.

The argument put by advocates of this price control idea is along the following lines.1. In a country where government issues its own currency, the private sector must acquire this money, the state’s money, in order to pay taxes. 2.The private sector can only do this by supplying the state with goods and services. 3. The fact that the state is a monopoly issuer of currency means the state can determine the price of goods or services supplied to the state. 4. This can be of assistance in controlling inflation.

There is of course an obvious and flippant answer to the above argument, namely “try telling that to any bureaucrat responsible for procurement”. They’ll fall off their chairs laughing. But the real flaw in this price control argument is thus.

This price control idea is certainly valid in a non-democratic or dictatorial regime. Indeed, advocates of the idea often illustrate their arguments by reference dictatorial regimes or slave economies.* Unfortunately the implication that this idea translates directly to democracies just doesn’t stand inspection.

Obviously a dictator can determine what constitutes money in their economy, plus the dictator can determine the price at which goods and services are supplied to the dictator.

Incidentally, this power to control prices is INDEPENDENT of the fact that the dictator decides to issue a currency. That is, in a small country dictatorship which used say the US dollar, the dictator would still be able to control prices (e.g. by threatening to shoot anyone buying or selling goods at other than stipulated prices). But this is not the scenario we are concerned with here.

The price control argument, to reiterate, is that the private sector MUST supply government with goods and services in order to acquire the state’s money, which (in turn) the private sector needs to pay taxes. But in the real world, as distinct from the “price control” theoretical world, employers have a range of customers other than government to choose from. If government does not offer the market price for goods and serves, the relevant firms just won’t supply government with said goods and services. What happens then?

What happens is that the private sector runs short of state’s money. The effect of that is deflationary. Unemployment rises, and government just has to do something about it: it increases the private sector’s supply of state’s money!

There are different ways government can do this. A currently popular one is quantitative easing. Second, there is the standard MMT solution to unemployment, namely have government increase its net spending. A third possibility is to cut interest rates – and this is effected by government buying its own bonds: which increases the private sector’s stock of state’s money! The whole price control argument collapses!

Moreover, it is arguable that the latter flaw in the price control idea applies even in dictatorships. That is, it is not even in the interests of a dictatorship or semi-dictatorship to have high unemployment levels. The latter involves a lower GDP than would otherwise obtain. Why would any dictator want a lower than achievable GDP?

Outbreak of mass hypocrisy amongst Britain’s elite.

On 5th Jan, the British establishment’s favourite newspaper, The Times ran a story out of the blue about Muslim / Pakistani gangs who were allegedly grooming and raping vulnerable white girls.* The story covered the whole of The Times’s front page plus four pages inside.

The main front page story the next day was on the same subject. Plus there were several related stories during the subsequent week.

And the story, according to The Times was a “revelation”. The first word of the headline was “Revealed”. Plus according to the first paragraph The Times was “exposing” something.

But there is just one problem. This story is old hat. In 2001, Nick Griffin, head of the British National Party drew attention to this grooming problem and was put on trial by the establishment for “inciting racial hatred” or similar. Plus a few years later, on television, Channel 4 ran a programme on the same subject.

You might think that the police would investigate these grooming and rape allegations made by Channel 4. But far from it: Channel 4 found itself on the receiving end of a storm of abuse from the establishment for inciting racial hatred etc etc. Channel 4 was not taken to court, but they did have to pull a further planned programmed on the same subject entitled “Edge of the City”.

Fast forward to 2011. The Times draws attention to the problem (and in some style) and the reaction from the establishment is total silence. Now why would this be? Possibly it is that Rupert Murdoch is too powerful to be challenged. Or possibly, the establishment is admitting that it was wrong all along. Probably a bit of both.

When the pompous and the sanctimonious are in the wrong, they can never bring themselves to admit it. What they do is go GRADULALLY change their views, and hope no one notices. Well, sorry, but we’ve noticed.

* Article title: “Revealed: conspiracy of silence on UK sex gangs”. It’s available here.


Afterthough (same day): The above claim that there was “total silence” in response to The Times “revelation” is not quite right. Jack Straw, who was a senior member of Tony Blair’s government at the time of the above mentioned Nick Griffin trial and the Channel 4 fiasco, actually expressed AGREEMENT with the thrust of The Times articles. The hypocrisy is even more delightful than suggested above. You couldn’t make it up!

Afterthough (30th Jan 2011). For more on this, see video clip by Pat Condell.

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Devaluing the currency of a country in the Eurozone.

There is a long and thoughtful article by Krugman on Europe here. He deals with the two main problems: debt and lack of competitiveness amongst PIGS.

Towards the end of the article he sets out four solutions, as follows.

1. “Toughing it out”. That is, continue with protracted deflation in PIG countries. (That addresses just the competitiveness problem.) This actually amounts to devaluing the currency of the relevant country, but it’s a slow painful process the way it is currently being done.

2. “Debt restructuring”. That is, debt restructuring while staying in the EZ. (That addresses just the debt problem.)

3. “Full Argentina”. That is, repudiate debts and withdraw from the Euro in the same way as Argentina withdrew from the Peso - dollar peg. (That addresses both the competitiveness and debt problem.)

4. “Revived Europeanism”. This involves Europe becoming more of a genuine social and political union – something like the US.

An example of revived Europeanism is the E-Bond idea. But that won’t happen: it involves Germany and other responsible countries subsidising PIGS or at least apparently subsidising PIGS. If in doubt, mention E-bonds or any other form of permanent subsidy for PIGS to German taxpayers: you’ll get a stiff (and understandable) response.

So barring withdrawal from the Euro, there is only one solution to lack of competitiveness: “Toughing it out”. But as pointed out above, this is a slow painful process. So can the process be speeded up?

There are HUGE gains to be had from speeding up the process. Indeed if the process becomes essentially the same as what I’ll call a GENUINE DEVALUATION (that is devaluation in the case of a country that issues its own currency) the whole process is virtually painless. For example the pound sterling was devalued relative to the US dollar in 2008 by around 25%. Scarcely anyone in the UK noticed. There were a few grumbles about the increased cost of holidays in Florida, and that was about it. There were certainly no riots as per Greece.

Well, here is an idea for speeding up the process. First, raise direct taxes like income tax and reduce sales taxes, like VAT. As in the case of a genuine devaluation, this does not make it any more difficult for citizens of the relevant country to purchase products in the relevant country where those products have little or no import content. Also, as in the case of a genuine devaluation, it’s easier for foreigners to buy products made in the devaluing country.

An alternative and/or supplementary measure to cutting VAT would be to cut the employers’ contribution to a payroll tax (National Insurance contributions in the UK).

And that might just about do the job. To illustrate, VAT in the UK is currently 20%. If that were reduced to zero and income tax were raised, that would constitute a 20% devaluation.

An obvious weakness in this idea is that it cannot be used repeatedly, otherwise one ends up with a negative rate of VAT. But if it were implemented and followed by a wage freeze lasting several years (in nominal terms) plus a freeze on social security benefits, etc., then the idea would work.

Moreover, there is in a sense not much use criticising this idea. This is that, as Krugman rightly points out, the only solution to lack of competitiveness is “toughing it out” or some variation thereon. So for those who don’t like the above VAT idea, here is a question: what better alternative is there?

Britain: the World’s champion money launderer.

Two good articles about off shore tax havens controlled by Britain - see here and here.

Looks like about 6-7% of the US national debt is funded by what are euphemistically called “Carribean Banking Centers”. See here and scroll to bottom.

I got that 6-7% by dividing the 3.2 by 49 – figures at the bottom of this site.

But that 6-7% is very much a shot in the dark. First, is a “Carribean Banking Center” the same as a “tax haven”? Second, what proportion of tax havens worldwide are Carribean? What proportion are British? Also, the above figures apply only to the proportion of US national debt that is “held by the public”: that is, it excludes the portion held by US government institutions. (But then the latter is not “real debt”, is it?)

Anyway, there is nothing like digging dirt, even if the digging is less than entirely accurate.