Lawrence Summers attempts to criticise MMT – try not to die of laughter.

 
 

That’s in an article of his entitled “The Left's Embrace of Modern Monetary Theory is a Recipe for Disaster.” He sets out three objections to MMT. The first reads thus:

“First, it holds out the prospect that somehow by printing money, the government can finance its deficits at zero cost. In fact, in today’s economy, the government pays interest on any new money it creates, which takes the form of its reserves held by banks at the Federal Reserve. Yes, there is outstanding currency in circulation, but because that can always be deposited in a bank, its quantity is not controlled by the government. Even money-financed deficits cause the government to incur debt.”

Well the first flaw in that argument is that if stimulus is needed and the country is engaged in “printing money” (to use Summers’s phrase) the likelihood is that the central bank (CB) will be cutting interest rates, including interest on reserves, at the same time. And that will tend to nullify the interest bill to which Summers refers. As an illustration, if the CB pays one percent less by way of interest on reserves while the result of “money printing” is to raise the quantity of money by one percent, then (lo and behold) there’s no effect on the cost of maintaining the stock of reserves!

Moreover, many if not most MMTers support the “permanent zero interest rate” idea: the idea that ideally government should pay no interest or virtually no interest on its liabilities. In other words the ideal amount of money for a central bank to issue is whatever minimises unemployment while not exceeding the inflation target, and at the same time as paying no interest on that money (in the form of reserves or government debt) – a policy also advocated by Milton Friedman.
 
Thus the solution advocated by MMT, and indeed by most mainstream economists where interest on state liabilities is anywhere above zero and there is excess unemployment is to cut interest rates. In contrast, Summer’s solution would seem to be to leave interest rates unchanged and incur more debt. Bizarre.

 

Inflation.

Summers’s second objection is that excess money printing can lead to excess inflation. Well you don’t say! Every ten year old worked that out!

MMTers have made it abundantly clear that the amount of money printing they advocate (to repeat) is whatever minimises unemployment while not leading to excess inflation.

 

Exchange rates.

Summers’s third objection is that it might lead to a collapse in the exchange rate. He says “Third, modern monetary theorists typically reason in terms of a closed economy. But a policy of relying on central bank finance of government deficits, as suggested by modern monetary theorists, would likely result in a collapsing exchange rate.”

Well it’s certainly true that a rise in demand leads to a deterioration in the exchange rate all else equal. Reason is that a part of consumers’ demand for consumer goods, and businesses’ demand for raw materials and machinery is met via imports.

But why would a rise in demand of say 5%, or whatever amount is needed to deal with a typical recession lead to a collapse in the exchange rate? Moreover, if a country is not going to escape a recession via MMT policies, then it is going to raise demand to the full employment level via more conventional methods. And that will draw in imports to exactly the same extent as do MMT policies.

Another weakness in Summers’ “collapse theory” is that recessions are normally a World wide phenomenon. At least that was true of the 1930s recession and the more recent recessions stemming from the 2007/8 bank crisis and Covid. Now if a given country raises demand (either via MMT policies or conventional policies), and its main trading partners do likewise, then there’ll be little effect on the first country’s exchange rate!!

And finally, and on the subject of recessions, who was responsible for the 2007/8 bank crisis, and the subsequent recessions? Well Lawrence Summers was advocating laxer bank regulations just prior to that crisis, so he was without doubt one of the guilty men.
 
He does tend to put his foot in it, doesn’t he?  

Does the IMF now understand MMT? Seems it does.

 

 

According to an article in the Financial Times by Chris Giles entitled "Global economy: the week that austerity was officially buried", the IMF now says government debt does not matter, except in as far as it causes excess inflation, which is what MMT has been saying for years.

Moreover, it seems that Carmen Reinhart, the prize idiot and chief economist at the World Bank now accepts this view (having campaigned long and hard in the wake of the 2007/8 bank crisis to have the size of government debts severely constrained).

Unfortunately though, Chris Giles falls for the popular delusion that low interest rates are “crucial” if a government is to implement stimulus. He says “The crucial factor supporting this outlook for most advanced economies is borrowing costs; the IMF expects the cost of servicing government debt will stay well below the growth rate it expects these countries to achieve. This would allow cheaper borrowing to largely offset the weaker growth and lower tax revenues that the fund predicts will result from the crisis.”

The very obvious and simple flaw in the latter argument is that governments and central banks do not need to borrow in order to implement stimulus: they can simply print money!!  Indeed that’s exactly what they’ve been doing, and big time, over the last five years or so via QE. Do we take it that Chris Giles doesn’t know about QE?.....:-)

The latter point can actually be put another way, which is that given relatively high interest rates and a need for stimulus, one obvious option is to cut interest rates, and that’s done by having the central bank create money and buy up government debt, though simply creating money and spending it on the usual public spending items or cutting taxes would have a similar effect.
 

Steve Keen writes another article on debt jubilees.

 

The article is on the “Brave New Europe” site and is entitled “Steve Keen – Spain’s Economic woes….”. 

In his last para he says he’d like to see debts cut by around 100% of GDP by having government print and dish out that amount to debtors. However the amount of money printing he advocates is actually DOUBLE that, as he makes clear in his article entitled “Manifesto” published in 2012.

The reason for the latter “doubling” is the eminently reasonable point that if we’re going to hand out £Xmillion to debtors, that is unfair to creditors: i.e. creditors need to be given an equal amount.

But there’s an obvious problem here: this would be an amount of money printing that would make Robert Mugabe look almost responsible. By way of comparison, and taking US figures, government debt has risen by an amount equal to roughly 75% of GDP over the last ten years, of which a significant proportion has been  QE’d, i.e. turned into cash. See this Fed site.   

However the portion not turned into cash amounts to something very similar to cash: it is essentially cash deposited with government. So let’s say the amount “printed” to deal with the bank crisis and Covid is 75% of GDP.

But Steve Keen’s printing operation comes to 200% of GDP: over twice as much. But worse still, the above mentioned 75% was printed so as to deal with two very serious deflationary events, the bank crisis and Covid. In contrast, Steve Keen’s printing operation, while it addresses an alleged problem, does not address a DEFLATIONARY problem. In other words Steven Keen would presumably want to go ahead with his printing operation even where the economy is at capacity and cannot handle any extra demand. Thus the inflationary consequences do not bear thinking about.

Incidentally, there is a discrepancy between the latter 75% figure and the equivalent figure which I gave in an article on this blog a month ago, namely 15%. Reason is that the latter 15% figure referred just to the amount of actual new CASH created, i.e base money. As suggested above, it is probably more realistic to count government debt as a form of money as well, and in that case the figure rises to roughly 75%. But then government debt is not "immediately spendable" as is cash, though it the debt is relatively short term, say a year or two it could be classified as "spendable fairly quickly". Thus it is difficult to pin down exactly what the percentage should be.

However that does not matter too much for the purposes of this argument: whatever number one chooses between 15 and 75, the basic point remains that Steve Keen is proposing a truely massive money printing exercise here.

Another weakness in Steve Keen’s idea is that household debt service costs as a proportion of household income is currently at a 40 year low, at least in the US. Thus while there are doubtless specific groups badly hit by Covid, the AVERAGE US household does not have a serious debt problem right now.

Having said all that, I’m not suggesting the amount of private debt is optimum. The freedom that private banks have to create and lend out money like there’s no tomorrow during a boom under the existing fractional reserve bank system is clearly a nonsense. Adopting full reserve banking would reduce that problem.
 

Interest in Positive Money’s material has fallen dramatically.

I took a sample of 22 PoMo articles from this year and 22 from 2016. I then counted the number of responses to those articles – i.e comments after the articles. Comments in 2020 are running at about a QUARTER the number per article that there were in 2016.

That result does not derive from the fact that a significant number of comments come in six months or a year or two after articles appear: i.e. about 95% of comments come in within a week or so of an article appearing. Thus this would seem to be a genuine loss of interest.

Plus that latter apparent loss of interest does not derive from PoMo now publishing far more articles – which could possibly explain the reduced number of responses per article. Quite the reverse: far as I can see, the number of articles published in the first half of 2016 was 79, while the number published in the first half of 2020 was scarcely half that number, i.e. 44.

I don’t find this surprising since PoMo has rather lost interest in the purpose for which it was originally founded: bank and monetary reform. Although a few token articles on the latter subjects do still appear.

Some of their output now consists of very banal quotes on Instagram (see below), or woke stuff which goes on about the trans-atlantic slave trade that existed around two hundred years ago (a crime that cannot now be rectified) while ignoring the thirty million or so slaves which exist in the world right now (a crime which could potentially be addressed).

But that’s just standard wokeness: criticising crimes committed by whites, while ignoring crimes of the same magnitude committed by people with brown skin. Indeed, unless you’re a fully paid up member of the low IQ woke community, you’ll doubtless have noticed that the latter “discrimination on the basis of colour” is a form of racism, which is exactly what the woke community claim to deplore.

Can’t say I blame those who have lost interest.

Below is a sample of the banale stuff PoMo have put on Instagram recently.

 Well if his "goal" was to DESTROY jobs, I doubt he'd say so....:-)

 

Microbe???  Virus actually.  There is a difference.  Plus the word "derail" is hopelessly vague. Very roughly 10% of the workforce have been forced to stop working and as a result GDP is roughly 10% below what it would have been without the virus. Call that "derail" if you like. But equally one could say "not too bad in the circumstances". 

Does that actualy mean anything?

I'm puzzled as to how it would be possible, even if one wanted to, to "place the bureden of closing the wealth gap entirely on the black community"? Raise taxes on blacks and dish out the money collected to blacks perhaps?....:-)

 

Not true. Absent enough money creation by private banks, a central bank can create and feed any amount of money into the economy. Indeed central banks have been doing just that via QE in recent years, not that I'm suggesting QE is a particularly good way of doing it.  BTW: that's not meant as a criticism of Graeber. The point is that the people at PoMo do not seem to be too good at picking out sentences from the work of others which srtand on their own two feet - which if you like constitute decent aphorisms.

 

Well that's better than nothing, but it will have next to no effect on the funding costs of polluting industries, thus the idea is essentially a waste of time.

Tribune, the left wing publication publishes pro-austerity article.

As Bill Mitchell (co-founder of MMT) pointed out ten years ago, the political left is so incompetent that its economic policies often amount to little more than aping the economic policies of the political right.

Roll forward nearly ten years and nothing much has changed, at least if this article by James Meadway in Tribune is any guide. Title of the article is “Against MMT”.

Essentially Meadway apes George Osborne’s never ending but futile promises to balance the budget: not a clever policy. (George Osborne is a former UK finance minister and Meadway is a former economic adviser to the head of the Labour Party.)

Specifically Meadway says “Labour has adopted a strict set of rules for how a future government will manage its finances. The ‘Fiscal Credibility Rule’ says, first, that Labour will commit to removing the deficit on day-to-day government spending at the end of a five-year period.” And “Labour will commit to seeing the level of government debt relative to the size of the economy lower at the end of five years than at the start.”

I’ve explained the reasons why that is a recipe for austerity several times over the years on this blog, but I’ll run thru it again. Here goes.

Government debt is a safe asset as viewed by the private sector, which holds that debt. And a not unreasonable assumption is that the amount of that debt that the private sector will want to hold will remain more or less constant over the very long term.

Of course there will be significant rises and falls in the debt/GDP ratio: over the last three hundred years the ratio rose substantially after the Napoleonic wars and after the two World wars in the 1900s. But the average ratio in the 1700s, 1800s and 1900s was very roughly 75%. It never fell below around 25% or went above say 300%.

Let’s start with the clearly over simple, but no totally unreasonable assumption that nothing dramatic, like a World war, pandemic or a big rise or fall in consumer confidence is taking place. In that case it might seem that since the debt/GDP ratio needs to stay constant, a balanced budget is suitable.

But that’s not the case because inflation in a typical year eats away at the real value of the debt, ergo in a typical year the debt will need to be topped up, and that can only be done via a deficit! So if the debt is to stay constant at say 75% of GDP and inflation is at the 2% target, then the deficit needs to be 75% times 2% which equals 1.5% of GDP. Plus assuming growth of say 1% in real terms, that would mean another .75% is needed to take account of growth, making 2.25% in all.

Meadway makes no mention of the latter “inflation and growth” points.

But as intimated above, the above “debt will stay at a constant 75% of GDP” assumption is over simple. So what happens if the private sector has a bout of lack of confidence and decides to cut spending and save instead? Well as Keynes explained in his “paradox of thrift” point, the result is excess unemployment. Ergo the deficit would need to be larger than the above 2.25%.

And given a pandemic or war, it would need to be even bigger. But of course things could go the other way: i.e. there might be an outbreak of “irrational exuberance” in the private sector and no pandemic or war, in which case a surplus rather than a deficit would be suitable.

All in all, having a balanced budget or deficit reduction as an objective is nonsense if a government is aiming to minimise unemployment in as far as that is consistent with hitting the inflation target. Indeed in a typical year that is simply a recipe for austerity in the form of excess unemployment.

In short, MMT is right and Meadway is wrong. That is, the deficit and debt, as advocated by MMT, need to be whatever minimises unemployment while hitting the inflation target and keeping the rate of interest on government debt near or at zero.

The confidence trick which has enabled banks to fool everyone.

 

Banks perform two quite different functions: first, the storage and transfer and money, and second, granting loans. The first is absolutely essential for the smooth running of any economy. In contrast, there is no particular merit in granting loans, i.e. having one person or entity in debt to another, (though there is of course nothing inherently WRONG with borrowing, lending and debt). Put another way, there is no obvious reason why taxpayers should rescue lenders who have made silly loans any more than taxpayers should have to rescue restaurateurs who make a hash of running restaurants.

 
However, banks have fooled everyone, politicians in particular, with an absolutely brilliant confidence trick, which is to persuade them that money storage and transfer on the one hand, and the granting of loans absolutely have to  be performed by the same organisation: known as a “bank”. That means that when a bank makes a series of silly loans, banks can force politicians to come to their rescue with billions of dollars of taxpayers’ money.  

 

Mr Spiv the banker meets up with bank regulators.

 

____________________________________________

“Hello guys. I’ve got a great plan to boost the economy. It’s like this. I borrow short and lend long, which is what banks always do, and which is risky. But you, i.e. the taxpayer, provide me with “deposit insurance” so that those I borrow from are guaranteed not to lose out, plus you provide me with billion dollar bail outs when needed. That turns deposits in to a 100% pukka form of money, which increases the money supply, which in turn provides stimulus.”

“We’re not falling for that, wise guy. I mean if government and central bank want to provide stimulus they can do that any time in a variety of ways, e.g. by simply having the central bank create money and do a helicopter drop, or give the money to government to spend. A third option is to have the central bank create money and buy up government debt (known as QE).

Plus private banks provide stimulus (i.e. create money and lend it out like there’s no tomorrow) in a boom, which is exactly when stimulus is not needed. Plus come a recession, the call in loans, i.e. destroy money, which again is exactly what is not needed. Money creation by private banks is a pain in the a*rse.

 

 

 Well in that case I’ll tell politicians the economy will be hit unless I’m allowed to print money, and they’re bound to fall for that sob story, especially when I stuff their back pockets with wads of $100 bills so as to “make them see sense”.

 

 

 

 

 

 

“Well as bank regulators we can’t argue with that. That’s just what we’d do if we were bankers. As Paul Voker, former Fed chairman put it, “You know, just about whatever anyone proposes, no matter what it is, the banks will come out and claim that it will restrict credit and harm the economy…It’s all bullshit.””