Krugman says excess deficits will raise interest rates. “Progressives” object.

Krugman recently wrote a short article making the entirely reasonable point that large deficits are OK in a recession, but that come the recovery, one needs to be more careful with deficits.
 
That produced a storm of protest from people, who can loosely be called “progressive”, e.g. here, here, here, and here.

One of the objections to Krugman’s article was that in saying a large deficit would crowd out private investment, Krugman invoked the loanable funds idea.

Well, not so fast. The fact of saying that an excessively large deficit will crowd out private investment does not prove one is invoking the loanable funds idea. One could equally well be invoking Scott Sumner’s “monetary offset” idea: the idea that when a central bank spots what it thinks is an excessively large deficit, it will raise interest rates so as to counter that excess. And that rise in interest rates will of course crowd out some private investment.

Incidentally, Sumner is far from the first person to tumble to the point that an independent central bank on spotting what it thinks is an excessive deficit will raise interest rates to compensate. But Sumner is a keen advocate of the idea, so I thought I’d give him a mention.

So my conclusion, at least as regards the charge that Krugman invoked the loanable funds idea is: case not proven.

Godfrey Bloom’s crackpot ideas on banking.

Godfrey Bloom, former UK Independence Party Member of the European Parliament, exhorts us to read his allegedly insightful book on banking in the tweet below.

See my aide memoire on the Magic of Banking https://t.co/Xy8hZcQabE everyone & await my new book on money
40 years in the city, I'm the man https://t.co/AwZ1qg4BWe

— Godfrey Bloom (@goddersbloom) October 30, 2016

Godfrey Bloom also has a habit of assuring us that he is “always right” or words to that effect. So clearly we all have much to learn from him (ho ho). E.g.:

This is my whole point
Oxford academics are consistently wrong.
The BBC must start using people who are consistently right.
People like me. https://t.co/JRfCBXgzz1

— Godfrey Bloom (@goddersbloom) January 11, 2017

Anyway, I thought I’d have a look at his book which is entitled “The Magic of Banking”.

I do like Bloom’s politically incorrect views and tweets. His political nous is way superior to that of self-styled “political commentators” who write for broadsheet newspapers.  However, his ideas on banks are not well thought out.

First, he is obsessed by inflation. For example on p.2 there is a chart (see below) showing a one year period during the worst of the German inflation in the early 1920s. (Actually p.2 is part of the foreword and is written by someone else, but that chart couldn’t possibly have been inserted without Bloom’s approval).



 

Now that’s a bit like having a picture of the Titanic sinking at the start of a book on ships designed to persuade readers that ships are not safe. I shouldn’t need to point this out, but shipbuilders, ship owners, etc are well aware of the dangers of crashing ships into rocks, icebergs and so on. That’s why they spend large amounts on navigation aids, and on training ship captains, navigators etc. It is also why rocks are marked by buoys and so on (gasps of amazement).

Likewise in the case in banks and economics generally, we’re all aware of the dangers of excessive inflation. That’s why most governments have an inflation target of around 2% (more gasps of amazement).


Basic maths.

Bloom also seems to have a problem with basic maths. That is, on p.14 there is another chart showing the exponential increase in the money supply between 1960 and 2010 with the heading “How can this continue?” Well the answer is that given ANY level of continuous year after year inflation (2% or whatever) there will be an exponential increase in the money supply and an exponential fall in the value of money.

As to how that can continue, the answer is “very easily”. As Bloom rightly points out, dollars are now worth a less than tenth of what they were worth before WWI. But what of it? We just have very roughly ten times more dollars, and dollars continue to perform the function they have always performed, namely obviating the inefficiency of barter.

A hundred years from now, dollars will be worth a tenth or less of what they are worth now, but what of it? The problem eludes me.

Certainly money is no use as a form of LONG TERM saving. But that’s not its main function. Its main function is to avoid the inefficiencies of barter, which it does very well.

Apart from the above flawed points on inflation, Bloom’s work is not too bad up to p.17, but then serious mistakes appear on that page. He claims that bank bailouts at the height of the recent crisis cost taxpayers “trillions”. As he puts it:

“Trillions of dollars, pounds and Euro’s just put on account for future generations to somehow pay off. Such is the enormity of the debts and the cost of servicing them that it is inconceivable they can be repaid.”

Well first, the “trillions” figure is a mile out. EXACT figures for the bailout are hard to come by, and presumably because the revolving door brigade wants to obfuscate and muddy the whole question as to exactly what the bail out cost. However, far as I can see, the maximum amount the Fed loaned out at any one time was around one trillion dollars, while the AVERAGE amount loaned out over the 18 months of the worst of the crisis was around $600bn. That’s according to the chart in an article by Mick West entitled “Debunked: The Fed “gave away” $16 trillion…”

Moreover, all of that one trillion was paid back, so in that sense there was no cost for the taxpayer. However, there WAS a cost for the country as a whole in that there was a gross mis-allocation of resources. That is, instead of lending money to private banks at Walter Bagehot’s famous “penalty rate”, the actual rate was near zero. I.e. the loans were sweetheart loans.

The normal rule in free markets is that resources go to whoever bids the most for them. And a bunch of corporations who bid nothing for loads of lovely money are pretty obviously not the most commercially viable corporations or borrowers in the country. I.e Main Street would have paid good money for some of that freshly printed central bank money.


That horrendous national debt.

Also on p.17, Bloom falls for the popular myth that the national debt is out of control, and we’re on the verge of bankruptcy. Bloom is clearly unaware that the debt in the UK as a proportion of GDP is nowhere near where it was just after WWII or in the middle of the 1800s.

Think I’ve had enough of this nonsense. I can’t be bothered reading any further.

Blatant Republican lies on the deficit support Positive Money’s ideas.

Republicans spent the last eight years or so crying wolf about the deficit (pretty obviously so as to knobble Obama). Then, before the new Republican president, Trump, is even sworn in, Republicans (Trump in particular) say the deficit for some strange reason no longer matters.

Put another way, Republicans are more than happy to shaft the unemployed if that helps them in turn to shaft Democrats. And this is nowhere near the first time this blatant dishonesty in relation to the deficit has happened: regular as clockwork over the last fifty years, when Republicans come to power, the deficit (which they claim to disapprove of) goes thru the roof.

This all supports the idea put by Positive Money, the New Economics Foundation and Richard Werner that decisions on the SIZE OF the deficit should not be in the hands of politicians. I.e. decisions on the size of a stimulus package should not be in the hands of politicians.

In contrast, it’s fair enough for obviously political decisions, like what % of GDP is allocated to public spending to remain with politicians.

Foul mouthed academic economists claim Brexiteers hate foreigners.

It’s normal practice for the brainless lefties who write for the Guardian to accuse those who want less immigration of hating foreigners (xenophobia).  Indeed, that accusation has appeared in The Guardian (and indeed other supposedly “intelligent” broadsheet newspapers) about a thousand times, without so much as the beginnings of an attempt to substantiate the accusation.

In fact the accusation is VERY DIFFICULT to prove since it has hard to prove MOTIVE, though the latter point will be way beyond the comprehension of the aforesaid brainless lefties. How do you prove someone wants less immigration because (1) they hate or fear foreigners rather than (2) because they want to preserve their country’s traditions, way of life, identity, etc? It’s near impossible!

Moreover, the idea that for example members of the UKIP hate foreigners is a bit hard to square with the fact that UKIP members go abroad for their holidays like every one else, and mix with those ghastly foreigners.

And what’s that Nigel Farage doing making friends with Donald Trump? Doesn’t Nigel Farage realize Trump is a foreigner…:-) The Guardian really needs to fill us in on that one.

And one more nail in the “nasty leftie” claim that opponents of immigration hate foreigners is that when Tibetans say they want to preserve their country’s culture, identity and so on, lefties go all dewy eyed. But that’s just the millionth example of lefties having one set of rules for people with white skin and a different set for those with brown skin. And unless you’re as dim as a Guardian journalist, you’ll have noticed that that preferential treatment for brown skinned people is a form of racism.

Anyway…academics. I’ve just discovered that a group of academic economists were into this dimwit “hate foreigners” nonsense in the run up to the Brexit vote. That’s in an article entitled “Immigration brings both benefits and costs…” published by “Critical Macro Finance”. The article starts:

“If UK voters decide to leave the European Union, it will be for one reason above all. From the outset, nationalism bordering on xenophobia…”. 

Of course to be strictly accurate, the authors don’t actually accuse anyone of xenophobia: they accuse them of “nationalism bordering on xenophobia”. But that’s just weasel words, far as I’m concerned. Moreover, the authors accuse Brexiteers of being motivated PRIMARILY by “nationalism bordering on xenophobia”. Thus the authors are clearly pulling out every stop to give the impression that Brexiteers hate or fear foreigners without actually saying so.

Don’t think I’ll bother to acquaint myself with any more of the amazing insights published by “Critical Macro Finance”

The latest on Steve Keen’s bizarre debt jubilee idea.

I last commented on this idea around two months ago here.

But just recently another article has appeared on this subject, entitled “Steve Keen: rebel economist with a cause” published by ‘Financial Review’.

This latest article contains a LITTLE extra information on the all important DETAILS on how this jubilee will work. The information is not nearly enough, but I’ll comment on it anyway.

To recap, Keen’s basic idea is that government prints loads of money and gives it to debtors on condition they use it to pay down their debts. But Keen recognises that that involves a big windfall for debtors and nothing for creditors. So he proposes putting that right by printing even more money and giving that to creditors.

There is of course a glaring flaw in all this, namely that (to put it figuratively) simply printing tons of $100 bills and giving them to everyone is inflationary (assuming the economy is already at capacity). I’ll come back to that point later.

But as already intimated, the Financial Review article does at least contain a few more details on how this debt jubilee might work. To quote:

“Keen believes there needs to be a reset of private debt levels via a "people's quantitative easing" – effectively, a government bailout of households – to something more in the order of 50-100 per cent of GDP, from around 120 per cent now.”

So now it seems that Keen is contemplating a more modest jubilee. For example, on the basis of the latter percentages,  debt as a percentage of GDP might decline from an existing 120% to 100%. That’s far more modest than wiping out all mortgages, as originally proposed. However, that doesn’t actually stop the whole idea being nonsense, and for the following reasons.

Suppose half the country are debtors (mortgagors) and half are creditors. Also assume the aim is to cut the debt of the average debtor by $X. Also assume the economy is already at capacity.

So….government prints $X per debtor and dishes $X out to each debtor, who in turn passes the money on to a creditor. Plus government prints yet more money and gives $X to each creditor.

The end result is that both debtors’ and creditors’s net assets rise by $X, so they’ll go on a spending spree! Enter hyperinflation, stage left. What to do?

Well government can of course nullify the latter “inflationary effect stemming from increased household net assets” by increasing taxes on every household to the tune of $X.

But wait a moment…..that puts us back where we started! The whole exercise is a farce!


Better bank regulation.

In the Financial Review article, Keen also advocates tighter bank regulation, e.g. in the form of limiting loans to some multiple of the rental value of a property. That would be an ALTERNATIVE to a jubilee, presumably.

Well my first problem with that is that bank lending in Keen’s native Australia (the country he is primarily concerned with) is already fairly tightly regulated compared to elsewhere (though admittedly I’m not the world’s expert on that).

Second, there is a much simpler solution, which is to abolish fractional reserve banking and replace it with full reserve. Under the latter, anyone making a silly loan bears the full cost of any disaster that ensues, rather than taxpayers bearing the cost. I.e. under full reserve, there is no need to regulate lenders at all (which regulation is arguably pretty ineffective anyway). That is, lenders can do what they want, just like people can by whichever shares they want on the stock market. If those shares turn out to be worthless, there is no taxpayer funded rescue, and quite right. Same should apply to people who make silly loans.

The latter is a very simplified descripton of how full reserve would work. But I’ve set out more detailed descriptions elsewhere.

Of course that still leaves a problem to which Keen rightly alludes, namely that given a collapse in house prices and lending, there is a big deflationary effect. But the latter problem is easily dealt with via standard stimulatory measures (e.g. interest rate cuts, government budget deficits, etc).

“Money, the Unauthorised Biography”, by Felix Martin, supports full reserve banking.

Having spent about ten years, a lot of time and money pushing the case for full reserve, I’m pleased to see the above book, which was the Financial Times economics book of the year in 2013, also supports the idea.

However, arguing the case for full reserve is not the central objective of the book: as the title implies, the book is a history of money, and it goes right back to the beginning. I.e. it covers ancient Mesopotomia, ancient China, Greece, Rome, etc. It then moves on to Europe in the Middle Ages and on up to the present day. 

It’s only near the end that the author, having considered the numerous problems associated with money, concludes that the best system is full reserve – quoting in particular (far as I remember) Milton Friedman, Irving Fisher and Lawrence Kotlikoff.
The book is brilliant: it combines readability with scholarship. For example there are about 200 items in the bibliography / references section. The book (at about 120,000 words) is also (at a guess) a bit longer than the average book.




Ancient Rome’s credit crunch.

If you want a taste of the author’s style before buying, here is a short passage describing Rome’s credit crunch.

“In such an extensively monetised economy, it is hardly surprising that the Romans were also well acquainted with another familiar feature of modern finance: the credit crisis. Occasionally, the simi¬larities with the modern age are nothing short of eerie. In AD 33, the Emperor Tiberius' financial officials were persuaded that the recent boom in private lending had become excessive. It was decided that regulation must be tightened in order to extinguish this irrational exuberance. After a brief review of the statutes, it was dis· covered that none other than the father of the dynasty, Julius Caesar, had in his wisdom instituted a law many decades before specifying strict limits on how much of their patrimony wealthy aristocrats could farm out in loans. He had, in other words, introduced a rigorous capital adequacy requirement for lenders. The law was clear enough: but not for the first time in history, industrious lenders had proved remarkably skilled at circumventing it. Their ingenious evasions, the historian Tacitus reported, 'though continually put down by new regulations, still, through strange artifices, reappeared.
 
Now the emperor decreed the game was up: the letter of the old dictator's law would be enforced. The consequences were chaotic. As soon as the first ruling was made, it was realised with some embarrassment that most of the Senate was in breach of it. All the familiar features of a modern banking crisis followed. There was a mad scramble to call in loans in order to comply. Seeing the danger, the authorities attempted to soften the edict by relaxing its terms and announcing a generous transitional period. But the measure came too late. The property market collapsed as mortgaged land was fire-sold to fund repayments. Mass bankruptcy threatened to engulf the financial system. With Rome in the grip of a credit crunch, the emperor was forced to implement a massive bailout. The Imperial treasury refinanced the overextended lenders with a 100-million sesterces program of three-year, interest-free loans against security of deliberately overvalued real estate. To the Senate's relief, it all ended happily: credit was thus restored, and gradually private lending resumed."

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Update: This article also appears on the Seeking Alpha site.

 

Random charts X.

On the first chart, the red arrow and sarcastic text in blue are my own additions.