US Council on Foreign Relations versus Positive Money.

An article published by the CFR argues for helicopter drops and to have them actually carried out by central banks. An alternative, advocated by Positive Money and others, is to have the state create helicopter money, but have GOVERNMENT disburse it via the normal public spending programs, or via tax cuts or whatever combination of the two the government of the day wants. (The ACTUAL AMOUNT of heli money under PM’s system would be decided by a committee of independent economists, which PM calls the “Money Creation Committee”).

So which is better: the CFR proposal or PM’s? The answer is PM’s and for the following reasons.

Having the central bank dole out money to households is POLITICAL in that it boosts private spending and not public spending. Now if GDP is already being split say 50:50 as between public and private spending, it’s a reasonable assumption that the electorate and government of the day will want any ADDITIONAL spending split in that ratio. And under PM’s system, the government of the day has the option of  doing that.

Also, in the event of inflation rearing it’s ugly head and it being necessary to withdraw heli money, how is the central bank going to do that? Does it set up a tax system that runs alongside the existing tax system? The cost of that duplication of effort makes the mind boggle.

Come to that, even having the central bank DISBURSE heli money involves a bit of duplication of effort in that government ALREADY dishes out money to households in various ways, depending on the country involved: state pensions, unemployment benefits, etc.

Conclusion: game set and match to PM and it’s Money Creation Committee.

Bill Gross of PIMCO joins the monetary loons.

He’s fallen for the myth, pushed amongst others by Paul Grignon, namely that in order to pay interest on loans, people have to borrow an ever increasing amount of money. See his second sentence.

I dealt with that bit of nonsense in section 3.4 of this paper.

Yawn yawn.

(h/t to Mike Norman)

Withdraw your money from Scotland.

The Scottish National Party (SNP) thinks that in the event of independence it has a right to not honour its share of UK national debt if the rest of the UK (rUK) does not allow Scotland into a common currency area.

In fact rUK has a perfect right to bar Scotland from a common currency area. The reason is “Greece”, to put it bluntly. That is, in the Eurozone the combination of a common currency with a lack of political union, in particular a lack of fiscal union, is proving a DISASTER.

If Scottish nationalists are going to play the above “not honour our debts trick”, what other tricks might they try? My advice, if Scotland votes for independence is reduce any financial exposure to the place. Your money is not entirely safe. Lloyds Bank may get out.

Of course one contributory and emotional reason for the SNP’s desire to be in a close monetary union with rUK is that SNP politicians will be able to continue with what gives them their big emotional thrill each day: complaining about “Westminster”. I.e. if they had GENUINE independence from rUK, in particular no common currency, they’d no longer able to complain about Westminster: they’d be crying their eyes out.

Though on second thoughts, if they aren’t allowed into a common currency are, they’ll blame that on “Westminster”. Looks like we’re in for a few more decades of having to listen to SNP politicians whinging and whining about “Westminster”.

New bank rules make short selling more difficult - shock horror.

Front page story in today’s Financial Times is that banks are complaining that new funding rules for banks proposed by the Basel Committee on Banking Supervision will make it more expensive for banks to engage in short selling and similar dodgy practices.

Well boo hoo. I’m devastated.

The basic and socially useful purpose of banks is to supply people with mortgages and lend to business. If the new rules make short selling more difficult, I don’t give a monkey’s whatsit. I don’t give a toss. Let me put that in plainer English: I don’t give a f*ck.

John Cochrane advocates full reserve banking, sort of.

John Cochrane (economics prof in Chicago) more or less advocates full reserve banking (FR). In line with Milton Friedman, James Tobin, Laurence Kotlikoff and other advocates of FR he advocates that institutions that advertise their deposit accepting facilities as being totally safe should invest depositors’ money only in base money or short term government debt.

As to entities / banks which lend to mortgagors, businesses etc Cochrane suggests a 30% capital ratio rather than the 100% ratio favoured by Friedman, Tobin etc. Certainly the REALLY BIG improvement in bank safety comes from upping the ratio from the ridiculous pre-crisis 3% to 30%, while relatively little improvement is gained from taking that right up to 100%. However there are some good arguments for the 100% ratio, which are briefly as follows.

1. The 100% ratio costs nothing because of Modigliani Miller.

2. As long as there is ANY SORT of bank subsidy or guarantee offered by government (deposit insurance, lender of last resort at favourable rates of interest, etc) then private banks are being subsidised, and subsidies misallocate resources and reduce GDP.

Now what sort of capital ratio would induce governments to make it clear that NO SORT OF backing for commercial banks is available? 30%? 50%?

Say it’s 50%. But there’s a catch: in that scenario if anything DID GO seriously wrong with a bank, then depositors and bondholders might be in for a hair cut. That is, they’d be shareholders of a sort. So why not just cut all the shilly-shally and make it 100%?

3. 100% is a nice simple number: it’s a clear line in the sand. Anything less than 100%, and you can bet that over the years bankster-liars will bribe and cajole politicians and regulators into cutting the percentage down to 3% or so. Roll on the next crisis.

MMT for beginners.

At least this is my version of MMT. Hopefully other MMTers will agree.

1. Private sector spending varies with the stock of what MMTers call “Private Sector Net Financial Assets” (PSNFA): that’s the stock of base money plus national debt.

I.e. in plain English, the more money (or near money, which is what government debt is) that people hold, the more they tend to spend.

2. If aggregate spending, i.e. aggregate demand is inadequate, the state should spend more (and/or cut taxes). I.e. the state should “net spend”. The state can do that (as pointed out by Keynes) either by spending borrowed money or by spending freshly created money.

4. Borrowing money when you can print the stuff is pointless. Only a lunatic would do that. Ergo the government should simply print money and spend it (and/or cut taxes) when AD is insufficient. Certainly Warren Mosler (leading MMTer)  advocated that government should borrow nothing, as did Milton Friedman in a 1948 paper. Personally I agree with them.

5. Most so called “professional” economists are lunatics.

6. The reason Keynes emphasised borrowing rather than printing money so as to fund government spending was that he was a clever man who was surrounded by people who, relatively speaking, were Neanderthals. That’s “Neanderthal” as in “go ballistic whenever the words “print” and “money” appear in the same sentence”.

7. Where the state creates new money and spends it, the effect comes via two channels. First, the fact of spending (e.g. on roads, education or whatever) employs more people (on repairing / building roads, in schools, etc). Second, the increased stock of base money / PSNFA in private hands increases private sector spending.

8. If the state funds the extra spending via borrowing, the net effect per dollar spent is significantly reduced, which is an additional reason for thinking that borrowing money when you can print the stuff is a sign of lunacy.

9. If the state prints and spends too much, the private sector will end up with an excess stock of base money, and excess AD and excess inflation will ensue. The best cure for that is to cut down on the amount of money printing, or even reverse it: e.g. raise taxes and "unprint" the money collected. But an additional possible tool is for the state to borrow back some of that money.  Borrowing (to repeat) is pointless. Though in emergencies, that borrowing is probably justified so as to damp down AD. However, the long term aim should be zero government borrowing.

10. One of the many defects in the latter borrowing is that the interest is funded by ordinary taxpayers and ends up in the pockets of those with an excess stock of money, the rich. And that’s a third reason for thinking that government borrowing is lunacy (except as stated above as an emergency measure for damping down AD).

11. A state which issues its own money (e.g. the US, Japan, UK, etc) can pay any rate of interest it likes on its debt. If the existing rate is a bit on the high side, all such a state has to do is print money and buy back the debt (or cease rolling it over). That equals QE. As to any excess stimulatory or inflationary effect that has, that can be negated by increased taxes or reduced government spending. However, the NET EFFECT on AD is zero (assuming the latter “negating” effect exactly equals the stimulatory effect). Thus there needn’t be any effect on numbers employed or GDP from the latter “interest reducing” exercise (at least in the case of a closed economy).

In the case of an OPEN economy, i.e. where some government debt is in the hands of foreigners, the latter debt reduction exercise will obviously result in funds being withdrawn from the country in question, which will reduce the value of its currency on forex markets, which will hit living standards in the country in question.

12. The above is all way beyond the comprehension of most so called “professional” economists, but it should be within the grasp of the average intelligent fifteen year old. Certainly there isn't a cat in Hell’s chance of Rogoff or Reinhart ever understanding the above.

13. Forget all about “monetary policy”, “fiscal policy”, “fiscal consolidation” etc. That’s all boll*cks.

14. David Hume spelled out the REAL REASON for government borrowing over 200 years go: as he pointed out, borrowing enables incumbent politicians to ingratiate themselves with voters. That is (as pointed out above) cutting government debt in an open economy involves a finite but temporary standard of living hit.  Conversely, increased borrowing temporarily increases living standards, and thus the number of votes that incumbent politicians get.