Peoples’ QE nutters.

Along with others, I’ve been trying to explain to supporters of PQE a VERY VERY simple flaw in the idea. Unfortunately, they’re extremely dense and just don’t get it.

Incidentally Peoples’ QE is an idea which is currently all the rage in the UK and it consists of having government print money and spend it on infrastructure, or spend nearly all of it on infrastructure. The idea is all the rage with Labour Luvvies, champagne socialists and windbags of all political persuasions.

I’ll explain the flaw in as simple language as I can.

First, printing and spending money is stimulatory. I’ll repeat that. Printing and spending money is stimulatory. (And if take too far, it obviously leads to inflation).

But in some years, little or no stimulus is needed. I’ll repeat that. In some years, little or no stimulus is needed. Got that?

Ergo . . . . . wait for it . . . . .if stimulus money is concentrated in one particular area – infrastructure or whatever – the result will be unacceptably large gyrations in the amount spent on those areas.

I’ll repeat that. The result will be unacceptably large gyrations in the amount spent on those areas. To illustrate, the result could be that contractors start to build a road, and then have to stop when the road is half complete. Barmy.
 
 I’ll repeat that: B-A-R-M-Y.

The above, please note is not, repeat not, repeat not, repeat not to criticise either of the two basic elements in PQE: that is, first, more infrastructure spending and second, implementing stimulus via “print and spend” rather than in other ways. Indeed Keynes in 1933 said that print and spend was a perfectly acceptable form of stimulus.

I.e. what’s wrong with PQE is the COMBINATION of two perfectly good ideas where there is no particular reason to combine them. Worse still: they are not actually natural bed-fellows.

As Oxford economics prof Simon Wren-Lewis put it, “Putting the two ideas together right now is misconceived, and is in danger of discrediting two potentially good ideas.”

By George: someone’s got it – EZ countries might be none too happy with fiscal union.

A thousand members of the chattering classes have been telling us for the last few years that what the Eurozone needs is fiscal union. As I pointed out some time ago, fiscal union would involve very much the same problems as the EZ suffers at the moment.

For example core countries under fiscal union might be none too happy at donating vast sums to less well off / more profligate countries. I also predicted that sooner or later, someone would tumble to that point.

Well it seems someone has indeed tumbled to it. See this Brussels Times article.

Further explanations as to how and exactly why the chattering classes are talking thru their rear ends will hopefully appear here in due course…:-)


(I learned about that Brussels Times article thanks to a tweet by Simon Wren-Lewis)

Charging banks for deposit insurance.

George Osborne's latest stroke of genius is to have banks pay for deposit insurance via increased profits tax on banks: that is, banks pay a higher rate of corporation tax than non-bank corporations.

Now normally with insurance policies, you pay an annual premium every year, REGARDLESS of whether you make a profit or not, and quite right. For example, the insurance firms that insure bank buildings against fire do not abstain from collecting premiums just because banks haven’t made a profit recently.
 
Indeed, in the case of deposit insurance and so on in the case of banks it’s PRECISELY banks which make losses which are the biggest risks. Thus if anything, they ought to pay larger premiums.

But of course that would tend to drive weaker banks to the wall more quickly, and if there’s one thing Britain’s elite doesn’t want, it’s any disturbance of the status quo. Wall paper must under no circumstances be removed where cracks have been papered over.

In fact it shouldn’t be difficult to close down a bank and have a stronger bank take over the assets and liabilities of the failed bank. In the US, small banks fail at the rate of at least one a month. The FDIC moves in, closes it down, and has some other bank take over assets and liabilities. No problem.

As Walter Bagehot put it: “…any aid to a present bad bank is the surest mode of preventing the establishment of a future good bank.”

Debt deflation.

Carmen Reinhart claims that when prices fall at 1 or 2% a year, that means debts rise in real value at the same rate, which in turn is a significant problem for debtors. I suggest, on the contrary, that that’s a complete non-problem, particularly given that interest rates are now at record lows.

Is a rise or fall in the stock market of 1 or 2% a year any sort of big deal for investor / savers? Nope. It’s a complete irrelevance. Even the recent 10% fall and subsequent recovery of the stock market all within a week was a complete irrelevance for those intending to hold their investments for several years.

Reinhart also suggests that the above 1 to 2% fall in prices is a big problem for Greece. Well in the total scheme of things, that 1 or 2% is a complete irrelevance. For example when the Troika took over Greece’s debt to private banks, those banks took a haircut of about 50%. As astute readers will notice, 50 is a much bigger number than 1 or 2.

And finally, the serious shortfall in demand in Greece is almost entirely down to the DELIBERATE Eurozone policy of imposing that shortfall in demand on countries that are too far in debt. 

Conclusion: the 1 to 2% rise in debts in real terms is near irrelevant.

I’ve been blocked on Twitter.

I’ve been blocked on Twitter by two people, Frances Coppola and Richard Murphy. But those two individuals are now quarreling with each other. See here and here.

What delight.  Looks like the “blockages” had a lot to do with those two individuals’ thin skins. 

However, I must confess that my language is not exactly 100% diplomatic 100% of the time. But I’m hardly unique in that regard.

Bill Mitchell argues for no national debt.

There is much to be said for a “zero national debt” policy, which Bill Mitchell argues for here. Milton Friedman advocated the same in 1948.

See Friedman’s para starting "Under the proposal..." here.

Bill, in his first paragraph and in reference to a recent meeting in London, says “Surprisingly there were some arguments by audience members that governments should continue to issue debt, largely, as I understand them, to provide a safe haven for workers to save for the future. So the idea is that we maintain the elaborate machinery that is associated with the public debt issuance just to provide a risk free asset that workers can use to park their hard-earned savings in. It is a strange argument given the massive opportunity costs associated with debt issuance. A far simpler solution is to exploit the currency-issuing capacity of the government to guarantee a publicly-owned National Saving Fund. No debt would be required.”

As regards Bill’s reference to “opportunity costs” I suggest that can be put in plainer English - something like: why should one lot of people have to pay tax to fund interest on government debt, just to enable another lot to earn interest on their savings?


A National Savings Fund?
 
Re Bill’s claim that peoples’ desire to save can be catered for via what he calls a “National Savings Fund”, that NSF is presumably owned and run by government, so that comes to much the same thing as government debt. 

There are however SOME DIFFERENCES between national debt and NSF, as pointed out by Neil Wilson in the comments after Bill’s article. For example those allowed to save via the NSF would doubtless be limited to citizens of the relevant country. However, if the argument for more national debt is invalidated by the argument that it’s wrong to pay interest just because loads of people WANT interest on their savings, then so too is the argument for an NSF.


Generational considerations.
 
One popular argument for government debt is that if public investments like infrastructure are funded by debt that spreads the cost across the generations that benefit from the investment: that is future generations allegedly have to pay interest and eventually repay the debt. The flaw in that argument is that it involves time travel. That is, it just isn't possible to consume real resources (e.g. steel and concrete) in 2050 so as to build a bridge in 2015.

Put another way, having a future generation repay a debt simply involves one lot of people paying money to another lot (the debt holders). That’s just a load of paper pushing: it has nothing to do with real costs or real resources.

Nick Rowe has tried to argue against the latter point with his so called “overlapping generations” idea. I demolished that idea (least I think I did) here. But be warned: the arguments for and against Nick's overlapping generations idea are complicated.


Debt may reduce volatility.
 
A possible argument for government debt, but only debt that pays a very low rate of interest is this. If the private sector has a large stock of base money and it goes into a fit of irrational exuberance, it may spend too much of that money at once, which could cause excess inflation. In contrast, debt is more difficult to spend: try buying a car using UK government Gilts, or US Treasuries.


David Hume on government debt.
 
And finally I’ll let David Hume, writing about 250 years ago, have the last word. As he put it:

“It is very tempting to a minister to employ such an expedient, as enables him to make a great figure during his administration, without overburdening the people with taxes, or exciting any immediate clamours against himself. The practice, therefore, of contracting debt will almost infallibly be abused, in every government. It would scarcely be more imprudent to give a prodigal son a credit in every banker's shop in London, than to impower a statesman to draw bills, in this manner, upon posterity.”

Either banks are subsidised, or they have 100% capital ratios.

If government so much as hints it will rescue banks in trouble, that’s a subsidy of banks. And subsidies misallocate resources, i.e. reduce GDP. Alternatively, if government completely washes its hands off banks, then all of those who fund banks become shareholders, even if they’re called depositors or bondholders. That’s shareholder as in “someone who at worst stands to lose everything”. Cyprus anyone? And that system equals full reserve banking.

A plausible escape from that check mate position for conventional banking might seem to be to retain depositors in the conventional sense, and cover the risk with FDIC type insurance and multi trillion dollar loans from central banks for larger banks (which of course will be at Bagehot’s penalty rates rather than sweetheart rates – ha ha). 

Unfortunately that escape is blocked. Leave aside the probability that loans will be at sweetheart rates rather than Bagehot’s penalty rates,  insurance involves moral hazard, i.e. the temptation to take excess risk, keep the profit when that works, and send the bill to the insurer when it doesn’t. And that’s a very real cost. To a significant extent that phenomenon was behind the credit crunch. And the credit crunch involved ASTRONOMIC costs in terms of lost GDP. Ergo “self insurance”, which is what shareholders do, is cheaper than FDIC type insurance. 

So… conventional banking is in check mate. To put it more bluntly, conventional banking is B.S.

QED.