Steve Keen’s debt jubilee.

 

The main explanation for support of the debt jubilee is the negative emotional overtones of the word “debt”: bit like the way in which Germans have an aversion to debt largely because the word debt in German (schuld) also means “guilt”.

In contrast to emotion, Steve Keen in the second chapter of a forthcoming book of his does actually provide some REASONS for a debt jubilee, the main one being that variations in the amount of private sector debt cause gyrations in aggregate demand: i.e. they tend to exacerbate booms and busts. Thus his solution for the latter problem is a more stringent control of the amount of private sector debt.

However, the latter gyrations in demand could easily be dealt with if governments and central banks got their act together and implemented the right amount of stimulus at the right time. And that, at least in theory, is a vastly simpler solution to the problem than trying to control how much mortgage each household is allowed and how much every firm is allowed to borrow.

The reason governments and central banks failed to implement the right amount of stimulus at the right time in the aftermath of the 2007/8 bank crisis was that they were overly influenced by a large number of economic illiterates in high places who advocated limits to the amount of stimulus. The latter illiterates / idiots included a clutch of economists at Harvard: Kenneth Rogoff, Carmen Reinhart and Alberto Alesina. Plus the IMF and OECD had no idea whether they were coming or going on this issue: Google IMF, OECD and “Billyblog” for a selection of articles by Bill Mitchell on IMF and OECD incompetence.
 

Conclusion.

Implementing the right amount of stimulus at the right time strikes me as a much simpler solution to the problem than trying to control the amount of debt incurred by households and firms.

Pro austerity article by Ruchir Sharma in the Financial Times.

The article is entitled “Dear Joe Biden, deficits still matter”, and it’s a nice example of the fact that very often no knowledge of economics is needed to demolish articles by pseudo sophisticates in broadsheet newspapers – so called “professional economists” in particular. All you need is grasp of logic and some common sense.

Sharma’s first mistake is to argue (4th para) that because stimulatory measures in recent years have increased inequality, therefor increased inequality is necessarily a feature of stimulus. False logic: clearly QE (given that it poured money into the pockets of those holding government debt, i.e. the rich) increases inequality. But stimulus could equally well be implemented by boosting social security payments and thus benefitting the LESS WELL OFF.

Put another way, there is, fantastic as this it seem, a well known alternative to featherbedding Wall Street. It’s an alternative which every bricklayer, plumber and street sweeper is well aware of, though whether the pseudo sophisticates who write of the Financial Times are aware of it is more doubtful: it’s to help Main Street!  Doh!

Sharma’s next illogical claim is that “Average voters are justifiably befuddled by the claim that governments can borrow without limit or any consequences.” So because the “average voter” (who hasn’t got past Chapter one of an introductory economics text book) thinks something ergo some weight should be given to the average voter’s views?  Perhaps Sharma also thinks we should consult the “average voter” on which Covid vaccine is best.

Of course there is an apparent clash between my above claim that common sense is sometimes all you need to demolish arguments by “professional economists” and the latter claim that specialist knowledge is sometimes needed. Well the answer to that apparent clash lies with the word “sometimes”: that is, sometimes common sense alone will do, and sometimes it won’t.

 

Productivity.

Next, Sharma claims (para starting “The incoming administration….”) that rising government debt “drags productivity lower”. Really? Where’s the evidence? Sharma doesn’t provide any!  

Next, he claims that an OECD study shows that a significant proportion of stimulus money has supported zombie firms and that that has held back economic growth (para starting “But recent studies…..”). Unfortunately that OECD study says nothing in its abstract, nor in the introduction in the main text, nor in the conclusion about the latter "stimulus supports zombies" point. .

But on the subject of zombie firms it’s pretty stark staring obvious that any form of demand, whether government / central bank implemented stimulus or plain simple household spending will support a number of zombie and non-zombie firms. The crucial question is whether stimulus spending has a bigger “zombie supporting” effect than more normal forms of demand like household spending. Well given that a significant proportion of stimulus is designed to boost household spending, it’s not immediately obvious why there should be any difference there!

Of course there are SPECIFIC TYPES of stimulus spending that CAN have a “pro zombie” bias. One example is the furlough schemes several countries have implemented in reaction to Covid. The latter schemes will tend to preserve EXISTING types of employment rather than encourage the new forms of employment which are likely to arise post Covid: e.g. more working from home and more online shopping. But that does not mean that stimulus spending is INHERENTLY pro zombie.


Conclusion.

Given that the Financial Times did a big “mea culpa” about a week before Sharma’s article admitting that the “limit the deficit and debt” policy it had pushed since the 2007/8 bank crisis was wrong, you’d think the FT would take a bit more care to avoid publishing articles by “limit the deficit and debt” enthusiasts who obviously haven’t a clue.

So there’s nothing new in MMT?

     

One of the main ideas behind MMT, if not the main idea, is the claim that the size of the deficit and debt do not matter: that is, much the most important aim should be to minimise unemployment in as far as that is consistent with not exceeding the inflation target by too much. As to the deficit and debt needed to attain that minimum possible amount of unemployment, that is relatively unimportant

 

However, there are those who claim there is nothing new in MMT and that the above “D&D don’t matter” idea has always been an inherent part of standard economics. Simon Wren-Lewis (former Oxford economics prof) is one of those. Unfortunately that is not entirely consistent with a 2014 publication of SW-L’s which says the following.

 

“So what does macroeconomic theory tell us is the optimal level of government debt? Policy makers are desperate for guidance on this (such that what evidence there is gets too much attention e.g. R&Rs 90%), but most macroeconomists offer very little help.” (Incidentally, “R&R” refers to Kenneth Rogoff and Carmen Reinhart, two Harvard economists who over the last ten years have been about the two most vociferous and influential advocates of austerity: i.e. keeping the debt and deficit down even if that means excess unemployment.)

 

Plus in an article entitled “Is government debt a burden for future generations?” published in 2011 SW-L says “My own view is that it makes sense for governments to have a long run target for debt…”. That is hardly consistent with his more recent and more MMT compliant claims that the size of the D&D doesn't matter.

 

In contrast to the above lack of any clear ideas on what the optimum amount of debt is, MMT is crystal clear and advocates the following.

 

1. The deficit, to repeat, should be whatever cuts unemployment to the minimum that is consistent with hitting the inflation target.

 

2. That in turn will mean that the stock of base money and debt (the sum of those two sometimes being referred to by MMTers as “Private Sector Net Financial Assets”) will vary, but the exact size of the stock is unimportant: to repeat, the all important objective is minimising unemployment.

 

3. As to the proportion of PSNFA made of debt versus zero interest yielding base money, and the rate of interest paid on the debt, that is what MMTers call a “policy variable”: in other words government and central bank between them can arrange any rate of interest on the debt they want. To illustrate, paying no interest on the debt at all, which effectively means there is no debt, is easily arranged, at least in principle: just arrange for there to be a stock of PSNFA which is sufficient to induce the private sector to spend at a rate that brings full employment, but not so much that PSNFA holders think they have an excess stock, and try to spend away that excess stock thus causing excess demand and inflation, which in turn would require damping down via an interest rate hike (i.e. having government pay interest on PSNFA).

 

The reason it is reasonable to assume demand varies with the size of the stock of PSNFA is simply that PSNFA is a euphemism for “state created money”: with some of that money being instant access and normally yielding little or no interest, and some of it being locked up in the form of loans to government, and yielding a higher rate of interest. And households’ weekly spending clearly varies with the size of their stock of money.

 

Also you should not fall for the trap of thinking that digital state created money (i.e. state created money other than in the form of £10 notes, $100 bills etc), i.e. bank reserves, is not available to households: reason is that most state created money (aka base money) is matched by someone’s or some firm’s deposit at a commercial bank. To illustrate, if someone sells $X of government debt as part of the QE process, they’ll get a cheque from the central bank for $X which they deposit at their commercial bank, and the latter passes the cheque on to the central bank and demands that the latter credits the commercial bank’s account in the books of the central bank with $X.

 

To recap and summarise, one of the basic MMT claims is that the stock of PSNFA should not be so large that PSNFA holders have to be offered interest on some of their stock of PSNFA with a view to inducing them to abstain from trying to spend away what they see as their excess stock of PSNFA. Incidentally Milton Friedman also supported the latter “zero debt” or “zero interest on the debt” idea, with the exception that he thought offering interest on the debt would be a good tool to have in reserve for emergencies – an idea which seems very reasonable.

 

 

 

 

Like it or not, we’re moving towards full reserve banking.

 

 

There are three reasons for thinking we're moving towards full reserve. First, Central Bank Digital Currency looks like it’s now near inevitable. China is to trial CB DC in a few cities in the near future: see article entitled “Major Chinese cities plan large-scale tests of digital currency in 2021” in the Global Times.  

Second, one of the few half decent justifications for deposit insurance and hence for fractional reserve banking is that provides people with a totally safe form of money. But once CBDC is in place, there is then no need for safe money to be provided by private/commercial banks.

Third, and thanks to QE, there has been a vast expansion in the amount of central bank created money (base money) in circulation in Western countries, and under full reserve, base money is the only form of money. In fact according to this Fed chart, Fed issued money now exceeds the amount of privately created money in circulation.

This will all be a big disappointment to the opponents of full reserve, e.g. Ann Pettifor and Charles Goodhart. .


 

Finance Watch

 

 An article published by “Finance Watch” claims the additional public money due to flow into the coffers of private banks so as to shield them against the effects of Covid is not justified. Well if OTHER firms and corporations are to receive public money to shield them from the effects of Covid, it’s hard to see why banks should not “join in the fun”, so to speak.

A better argument against giving public money to employers and corporations is perhaps that normal bankruptcy procedures cope perfectly well with Covid type disasters: firms go bust, shareholders and possibly also bondholders are wiped out, but the ASSETS of relevant firms do not of course vanish into thin air. Assuming those assets look like being a good bet in the long term, then someone will buy them up at a bargain basement price and put them to good use once the Covid problem is cracked. And there are plenty of corporations and people out there with piles of cash: after all, the enormous amounts of cash created and spent by governments and central banks so as to deal with Covid, must be out there somewhere. E.g. Apple has $192bn!!!!!

Moreover, there is a distinct downside to trying to preserve every firm and corporation in its present form, namely that patterns of employment post Covid may be very different: e.g. more people working from home. Thus there is much to be said for letting firms which cannot make it thru Covid just wither, while keeping demand as high as possible. New firms and forms of economic activity will then make use of that demand.

Unfortunately the above points about the possible merits of bog standard bankruptcy proceedings does not seem to have occurred to Finance Watch.

A simple argument for full reserve banking.

 

This is my latest paper. The abstract is as follows.

Deposit insurance is beneficial in that it ensures everyone has a safe method of storing and transferring money. That is a basic human right. Unfortunately deposit insurance also supports a commercial activity, namely depositing money at a bank with a view to the bank earning interest for the depositor, which a bank can only do by in effect lending out depositors’ money. That is just as commercial as depositing money with a stockbroker, mutual fund or unit trust with a view to interest or some other form of return being earned. And it is not the job of government to support commercial activities. 

As for the idea that banks create the money they lend out, rather than intermediate, that is dealt with in the opening paragraphs below. 

Preventing deposit insurance assisting the above commercial activity while retaining a form of totally safe deposits is easily done by splitting deposits into two types: first, those where the depositor simply wants money stored safely, with that money being lodged at the central bank where it earns no interest, and second, those where the depositor wants to be into commerce. Interest is earned on the latter deposits, but depositors carry the risk involved which essentially turns those deposits into equity.  And that is precisely what full reserve banking consists of.

The Financial Times still doesn’t fully understand deficits, austerity etc.

 

It’s good to see the FT admitting they were wrong to advocate austerity in the aftermath of the 2007/8 bank crisis (like many newspaper economics commentators, as pointed out by Simon Wren-Lewis). That’s in a recent FT article entitled “A Fiscal Policy for all Seasons”.

Unfortunately, the FT still hasn’t totally got to grips with this subject. In particular they say their new more relaxed attitude to deficits  “….is not a reason to abandon the goal of fiscal sustainability. Governments can, usually, simply roll over their debt stock at reasonable interest rates. There is, however, an ever-present risk that the market will move against governments and the cost of borrowing will rise to such an extent that the choice will be between a painful default or vicious austerity.”

The reality is that if bond holders do demand a higher rate of interest, that is no reason for austerity, as I’ve been trying to explain for about ten years, e.g. here. Reasons (for the umpteenth time) are as follows.

First, if those holding government bonds do demand a higher rate of interest, there is very little initial effect on the amount of interest a government has to pay because the rate of interest payable on a large majority of those bonds is fixed at the date they are first issued. That is particularly true of UK government debt where the average time between the date of issue and date of maturity is about ten years.

But as regards bonds which mature in the very near future, a rise in the interest rate demanded by potential bond holders is on the face of it a problem for government: government seems to be faced with the choice of rolling over the debt and paying the higher rate or raising taxes so as to obtain the money to simply pay off debt holders and tell those seeking new bonds which yield a higher rate to go away. And certainly doing the latter would involve the “austerity” to which the FT refers.

In fact there is a third option, which the FT and the majority of economics commentators are completely unaware, and that is to create new money, pay off the old bond holders and then see what happens. Possibly the resulting increase in the money supply would not be inflationary: the vast amounts of money created so as to implement QE do not seem to have been inflationary.

But if excess inflation did rear its ugly head, there is a very simple solution, which involves no austerity, and that is to raise taxes and “unprint” or destroy the money collected. The effect of that would not, repeat not, repeat not, repeat not be austerity, i.e. deficient demand. Reason is that the sole purpose of the latter “tax and unprint” exercise would be to cut demand to the maximum level consistent with hitting the inflation target.

So assuming aggregate demand was for the sake of simplicity at that maximum level before the unprint started and at the same level after the unprint, then (hey presto and roll of drums) there’d be no effect on real household incomes!!!

At least that would certainly be the case where all government debt is domestically owned. In fact, while a majority is domestically owned, a significant proportion is foreign owned, and if those foreign or internationally mobile investors took their new found pile of cash out of the country, the relevant country’s currency would fall on foreign exchange markets, which would mean a cut in real household incomes.

However, if bond holders start demanding a higher rate of interest on the bonds issued by government X, chances are they’ll demand a higher rate on the bonds of other governments!! So taking their money out of country X probably won’t do them any good.

The only circumstance where it would pay internationally mobile investors to quit country X would be where X started to behave in a seriously irresponsible way relative to other countries.

So the conclusion is that as long as a government doesn’t do anything which is clearly more stupid than what other governments are doing, a rise in the rate of interest demanded by those holding its debt need not cause austerity.