The flaw in Ed Balls’s deficit conjuring trick.

The UK Labour Party’s finance spokesman, Ed Balls, has a great idea for cutting the deficit: have government borrow to fund public investment, and don’t count that borrowing / expenditure as part of the deficit.

And on the face of it, that’s perfectly sensible: after all, borrowing to fund investment is what every other firm does. Plus it’s what every other household does when “investing” in a house to live in. However, there’s a catch as follows.

Where any entity borrows to fund investment, normal practice is to repay the debt as relevant assets depreciate, or when the asset is  worn out and is scrapped. Indeed, if the debt CAN’T be repaid as the asset depreciates, that’s good evidence that the investment is not viable.

Thus if government is to fund investment via borrowing, then it can’t borrow an amount equal to each year’s NEW investment: it can only borrow an amount equal to “new investment less depreciation on existing investments”. And assuming total investment by government expands at the same rate as GDP, that means the NET ANNUAL INCREASE in government investment is piddling: between 1% and 2%.

The great Balls conjuring trick collapses like a house of cards.

Borrowing versus tax.

Next: does it greatly matter whether government funds investment from borrowing or from tax? Personally I don’t think so. Milton Friedman and Warren Mosler advocate/d that government should borrow NOTHING. I.e. they argue/d that the only liability the state should issue should be base money.

However, given that there are two ways of funding public investments, i.e. borrowing and tax, presumably one must be better than the other. Personally I can’t work out which. At least I can’t work out which would be better in a closed economy. Inspiring ideas on that topic will be welcome.

Total amounts borrowed and invested.

Incidentally, I recently had a look at the total figures for borrowing by the UK government and total investments or assets held by government. The two totals are VERY ROUGHLY the same: certainly one total isn’t double the other.

So what does that prove? That there’s no good reason to cut the debt? I don’t think so: suppose those dreaded bond vigilantes and/or foreign holders of UK debt lose faith in the UK and start demanding an extortionate rate of interest? Do we pay them? I suggest not.

I suggest we pay down the debt. Or put another way, I suggest we, 1, pay off some or all creditors, 2, stick two fingers up at them, 3, tell them to go away and tell them we’ll fund UK based public investments out of our own resources, thankyou very much.

Lending clubs = full reserve banking.

Lending clubs seem to be doing well in the US. Far as I can see, they are fully compatible with the principles of full reserve banking. Under both regimes, saver /  lenders carry any loss stemming from the loans they have chosen to make, rather than taxpayers carrying some or all of the loss. (That's in stark contrast to the sub-human scum running large Wall St banks who have recently been trying to get taxpayers and ordinary depositors to stand behind their derivative bets.)

 

The only difference between lending clubs and full reserve is that under full reserve, at least as advocated by Laurence Kotlikoff, Positive Money and others, saver / lenders choose what CLASS OF borrower to lend to (e.g. safe mortgagors, NINJA mortgagors, businesses, etc), whereas with lending clubs, saver / lenders choose which INDIVIDUAL borrowers to lend to.

To be more accurate, under full reserve banking, the bank industry is split in two: a totally safe half with lodges money only at the central bank and perhaps also invests in short term government debt, and second, a lending half. Lending clubs (to repeat) comply with the rules of governing the lending half as proposed by Kotlikoff, PM, etc. But obviously they don’t supply the above “totally safe” method of lodging money. However, that totally safe facility is already in existence in some countries sort of (in the form of National Savings and Investments in the UK). NSI does not provide quite the flexibility (e.g. issuing cheque books and debit cards) that is needed, but NSI gets close – money can be withdrawn from NSI within about 24 hours via telephone I believe.

China mollycoddles its banksters.

So given a need for stimulus, a “communist” country hands money to banksters rather than the people. Don’t you just love it? 

According to the WSJ article, the Chinese government wants to "help its banks lend out money to reinvigorate slowing growth". Now whence the assumption that growth will come or ought to come exclusively or mainly via lending rather than via non-lending based activity? There's absolutely no reason for that assumption.
 

Moreover, if the state simply puts spending power into consumers’ pockets and consumers and businesses think the best way of allocating those additional resources is to engage in more borrowing and lending, that’s what they’ll do. To be more specific, businesses will tend to invest more in areas of the economy where sales rise particularly sharply as a result of that stimulus. A bank rarely goes wrong extending loans to a business with a decent cash flow.

In short, the job of the state is ensure adequate demand. As to the PROPORTION of that demand allocated to borrowing / investment / advertising you name it, widget producers do not need advice or inducements handed out by central bank staff or economically illiterate politicians.

Deficit “unsustainability” clap-trap.

It would be nice if one of the World’s leading finance and economics publications, the FT, knew something about deficits. Apparently it doesn’t.

First there is this FT 2^nd leader article which says in reference to Japan that “Mr Abe’s strategy began with a huge fiscal stimulus followed by a massive dose of quantitative easing. This appeared to jolt Japan out of its deflationary torpor.” Yes quite: deficits bring stimulus. And that makes sense where an economy has excessive spare capacity.

But then the article says “The country needs to put its public finances on a sounder footing. Years of deflation and government borrowing mean that public debt is now approaching an extraordinary 250 per cent of gross domestic product.”

Well there’s an obvious problem there: stimulus is needed, but (so claims the FT) there’s a problem with the resultant high debt. So what’s the FT’s solution?

They haven’t got one!!! So what’s the point of the article, other than to fill up newspaper columns with hot air and waffle? Anyway, I’ve set out the solution below, but first, let’s consider another FT article, because it raises the same alleged problem.The article says:

“But analysts wonder how long the status quo can hold. Many argue that the surplus of household financial assets available to absorb new bonds will dry up within the next five to ten years, meaning that overseas investors – who tend to take a dim view of Japan’s creditworthiness – will hold a casting vote on long-term bond yields.”

There is so much nonsense in that one sentence that it will take me some time to deal with it. But here goes.

First, given that about 95% of Japanese debt is held by the Japanese themselves, it’s going to take a HUGE REDUCTION in those holdings before FOREIGN holders become dominant.

Second, it is PRECISELY THE FACT that the Japanese themselves want to hold large volumes of state liabilities (debt and monetary base) that explains why the Japanese government has to issue so many of those liabilities. I.e. if the Japanese private sector decides to hold fewer bonds/liabilities, that solves the problem: the allegedly excessive volume of bonds issued by the Japanese government!

Third, let’s consider the “disaster” scenario referred to above, namely where foreigners are the main purchasers of bonds.

With a view to explaining the nonsense here, let’s go right back to the original or basic purpose in government issuing liabilities. Governments run deficits (i.e. “print” and issue base money / bonds) because the private sector won’t spend enough to bring full employment unless the private sector’s desire to save that money or bonds is satiated.

But there’s very little point in ACTUALLY PAYING the private sector to hold those liabilities, and in fact Japan currently pays less than 1% on what it borrows. And taking that even further, Milton Friedman and Warren Mosler argued that government should issue NO INTEREST YIELDING liabilities at all: it should issue no bonds – i.e. it should issue just cash or base money, and I agree with them. But that’s an incidental point.

Thus if, in the case of Japan, foreign holders of Japanese government bonds demand a higher rate for holding those bonds, the best course of action for the Japanese  government is to simply stick two fingers up at those foreign creditors and repay them, but refuse to roll over the debt.

Of course that could easily mean increased demand. But that solves the problem! That is, the big alleged problem in Japan is how to raise demand (a problem which anyone who has read an introductory economics text book ought to be able to solve).

Alternatively, demand might rise TOO FAR and bring excess inflation. In that case, the Japanese government would need to raise taxes and unprint the money collected. Note that those increased taxes WOULD NOT reduce GDP as long as the inflationary effect of the bond buy back (i.e. QE) equalled the DEFLATIONARY effect of the tax increases.

The only very small fly in the ointment there is that given less scope for getting yield on Japanese assets, international investors would tend to quit the Yen and invest their money elsewhere in the world, and that would depress the Yen relative to other currencies all else equal, which in turn would mean a standard of living hit for the Japanese.

But to repeat, the proportion of Japanese debt held by non Japanese entities is very small, so that’s not a big problem. Moreover, incurring a debt to entities OUTSIDE a particular country inevitably means a temporary rise in living standards for the country concerned, and paying it back inevitably means a temporary decline in living standards. Likewise if you incur debt to your credit card supplier that gives you a temporary boost in you standard of living. And when you abstain from consumption with a view to saving up money and paying back the debt, that involves you in a standard of living hit.

It’s pathetic that I need to spell out this elementary stuff, isn't it?

Wells Fargo bans staff from investing in peer-to-peer.

I’m a bit late in the day stumbling across this report from last January. But never mind.

I particularly like the fact that according to the FT, the Wells Fargo “ethics administrator” has enforced the ban. The words “ethics” and “bank” in the same sentence? Dear oh dear.

Next the untermensch who run large banks will be telling us that the ban is their way of doing “God’s work”.

(H/t to Susan Holden, Positive Money supporter.)