More nonsense from Mariana Mazzucato & Co.

 

That's in an article by her and co authors published by the Boston Review and entitled “Industrial Policy's Come Back”.

This article simply repeats a message she has made at least TWENTY TIMES before and I'm getting tired of it.

She and co-authors say in connection with Regan / Thatcher “neoliberal market fundamentalism” that “Under this regime, modern capitalist markets have proven themselves unable to create an even distribution of wealth and income, ecological sustainability, affordable shelter and health care..”.

Well no one ever said Regan / Thatcher style “fundamentalism” or free markets WOULD DEAL with inequality or “ecological sustainability”!!! Economics text books have always made it clear that there are some things the market does not deal well with, if at all: e.g. “externalities” like pollution, and inequality. Certainly in the UK, spending on social security did not plummet when Thatcher came to power: i.e. she was perfectly well aware that the market would not deal with poverty. (Incidentally, be nice if those who teach economics in universities got to grips with introductory economics text books, wouldn't it!!)

Ergo what is needed to deal with the latter problems is a social security system, anti pollution laws and measures like subsidies for wind & solar power etc. But we've been doing all that for YEARS and in some cases DECADES!! and no thanks to Mazzucato.

While one COULD CLASSIFY subsidies for wind and solar power as a FORM OF industrial policy, that on it's own is not what is normally meant by “industrial policy”. The phrase “industrial policy” (and this is the way in which the authors use the phrase in he second half of the article) means something like “a move towards a Soviet style central planning system” or an “industrial strategy” as the authors call it.

So while the authors claim the above points which have long been made in economics text books are an argument for an industrial stratety (in the latter broad sense) they are actually nothing of the sort.
 

Oooh. Gosh. Let's stimulate demand.

Next, the authors say “Any industrial strategy should therefore aim to stimulate demand...”. Well who ever said government and central bank SHOULD NOT stimulate demand when necessary? Why do Mazzucato & Co think governments and central banks have created and spent billions if not trillions into their economies since the GFC?

Doh!!

Next, the authors claim “We need a different approach to policy making: a mission-oriented framework that focuses government action on solving fundamental challenges rather than waiting for the solution to trickle down through competitive market forces.”

Now what ACTUAL EVIDENCE is there that a “mission-oriented framework” (whatever that is) would do better than competititve market forces? The authors offer no evidence!

This article is just a series of important sounding pseudo technical words and phrases which boil down to nothing.

Anyway, the authors then give four instances of “mission oriented frameworks” or if you like, for reasons for industrial policy. The first is that the state “should play an active role in creating and shaping markets in the direction of well-defined missions, using the full arsenal of policy instruments at its disposal—including public investment, regulation, demand-stimulating procurement, macroeconomic policy, and education and skills training.”

Well that's a bit like saying that in deciding what to do next week, you should have “well defined missions”. If that isn't as good as meaningless I don't know what is.

Anyway, the only actual EXAMPLE of the latter “market shaping” approach given is Germany's policies on combating climate change. But we already know (to repeat) that that's a problem that needs to be addressed and urgently!! We've all known that for YEARS!! Plus that (to repeat) is not any sort of new idea in that (to repeat) the economics text books have explained for DECADES, that the market does not deal well with externalities like excess CO2 emissions.

Looks like there is nothing in Mazzucato & Co's article that is original or new. It's just hot air, waffle and important sounding words of phrases, and I can't be bothered with any more of it.

But the authors should be congratulated in one respect: a torrent of waffle and important sounding pseudo technical words and phrases will fool a large majority of the public and perhaps about half of academia plus editors of publications like the Boston Review. If you can churn out hot air, waffle and important sounding phrases and a litany of false logic, you'll go far.

Strange ideas on NAIRU from Roger Farmer.

 

Farmer claims in this NIESR publication entitled “Coordinating monetary, fiscal and financial policy” that “There is no NAIRU” and that NAIRU “is a religion, not a science”. MMTers incidentally often claim likewise.

His main reason for that claim seems to be that “Because the NAIRU and r-star are unobservable and time-varying, the dominant paradigm is irrefutable.” Presumably “dominant paridigm” refers to NAIRU. (Academics always like using six syllables where two will do because that makes them look important.)

Well there's an obvious flaw in that argument, which is at we human beings use HUNDREDS of concepts every day which are “unobservable and time-varying”. Love is not “observable”, at least in the sense that it cannot be actually measured, which I assume is what Farmer means here. Clearly every romantic novel should be burned as they are all talking nonsense.

And for another example there is “power” in the sense of the power of the Roman Empire or the US military machine in 2021. How exactly do you measure those? You can't, at least not with anything remotely like accuracy that is normally implied when the word measurement is used in physics, astronomy etc.

Incidentally, while on the subject of physics, there are sub-atomic particles whose existence was inferred before they were actually “observed”. Obviously physicists need to pay attention to Farmer and the NIESR (ho ho).

Clearly all books on the history of the Roman Empire and indeed all other books which refer to the “power” of some country or empire should be re-written.

I could cite a hundred other examples of commonly used ideas and concepts which are not “observable”, but hopefully you've got the point.

The moral is that if you're looking for nonsense on stilts, then something written by a leading economist published by a respectable, taxpayer funded organisation like the NIESR might be a good place to look.

The futility of interest on government debt – and other anomalies

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Paying interest on reserves and government debt really is a genius idea. It amounts to rewarding those who hoard cash by paying them interest. That interest has to be paid for somehow: in effect it's paid for by taxes on the section of the population which DOES NOT have cash to hoard. At least that's true assuming the economy is at capacity and the interest cannot be funded simply by printing money. And if THERE IS scope for money printing, then donating that money to money hoarders is not number one priority for about 99% of the population, I'd guess.

It might seem tempting to claim that interest on reserves is paid to banks, not depositors. The answer to that is that ANY INCREASED INCOME enjoyed by banks inevitably trickles down to bank shareholders, depositors, those who borrow from banks and anyone who has anything to do with banks. i.e. that increased income absolutely must end up on SOMEONE'S pocket, including the pockets of depositors. And the fact is that cuts in bank costs over the decades and centuries (e.g. thanks to computers) have not benefited JUST shareholders: proof of that lies in the fact that the return on capital that banks manage has always been comparable to that obtained in other industries, over the medium and long term.

And the idea that government liabilities should pay no interest is not some sort of new crank idea: Milton Friedman (and MMTers) claim/ed there should be a zero rate on government debt. Like Milton Friedman, I wouldn't TOTALLY RULE OUT interest rate hikes in emergencies.  But the above daft aspect of interest on government liabilities (subsidising the rich) does support the claim by Friedman and MMTers that the best rate of interest on state liabilities is zero. (For Friedman, see his para starting “Under the proposal..” in his 1948 AER paper.)

Of course it might be argued that interest on government debt would be justified where relevant sums fund public INVESTMENTS like infrastructure. But government debt in most countries just isn't limited to funding those investments. So that point is irrelevant for the moment.

 

That strange deposit insurance limit.

Another anomaly here is as follows. Most countries limit the amount per person deposited at banks which is covered by deposit insurance (€100,000 in the EU and £85,000 in the UK). But in the UK, and maybe other countries, you can deposit up to £2million at the state run savings bank National Savings and Investments. And your money will be totally safe because NSI invests only in base money (i.e. reserves) and government debt.

Moreover, even if institutions like NSI didn't exist, anyone is free to buy as much government debt as they like. Of course if you buy debt which still has several years to run before maturity it's possible to lose money. But if you buy SHORT TERM debt, it's near impossible to lose out.

The above anomaly is not easy for governments to resolve: to resolve it, i.e. ensure that no one holds more than a limited amount of government liability, they'd have to check up on how much each person has in state run savings banks AND how much government debt they hold DIRECTLY. And to add to the complexity, they'd need to check up on how much each person had in mutual funds which specialise in holding government debt.

But at least a near permanent zero rate of interest on government liabilities would HELP cut down on all the above anomalies.

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P.S. 16th Sept 2021. I'm please to see Warren Mosler (founder of MMT) agrees with the point made in the above first paragraph. Warren has actually made the above point about money put into government debt amounting to placing money in a term account at a bank called "government": he's made the point several times in his books and articles far as I remember.

Whoopee: Bank of England has a new and sub-standard chief economist, Huw Pill.

 

 If you want an example of beautifully crafted English which boils down to saying nothing much, (one of the main skills possessed by those, like Sir Humphrey Appleby, at the top of the British establishment), I recommend Huw Pill's chapter (Ch3) in this NIESR publication. It's entitled “Renewing our monetary vows.” 

Incidentally, the NIESR at the moment seem to be the World's experts at churning out content free, sleep inducing hot air. It's an organisation which specialises in consuming taxpayers' money, not so as to promulgate knowledge or ideas on economics, but rather to do what a significant proportion of academics do: publishing content free waffle so as to further their careers.

Anyway, QE is one of the main topics of Pill's above mentioned chapter, if not THE MAIN topic, and his conclusion (his last para) is that “defensible limits” on “central bank financing of government deficits” are needed. But what makes him think that a central bank which has an inflation targeting mandate would let CB financing of govt deficits get excessive? Given too much inflation, any such CB would do one or more of several things: e.g. 1, stop any more QE, 2, put QE into reverse, 3, raise interest rates which comes to much the same as reversing QE: i.e. a central bank which aims to raise interest rates will (inter alia) sell govt debt into the market. 

So why the need for “defensible limits”?

Pill's point is a bit like saying we need “defensible limits” to the amount of water the fire brigade pour on burning houses, else the excessive amount of water poured on the house would do more harm than good. The answer to that is that every fire-fighter knows (as indeed does every ten year old) that once a fire is obviously out, no more water needs to be poured on it.


 

Richard Murphy is not up to speed on banking.

 

Abstract. The main nonsensical claims made by Richard Murphy in his article are first that Positive Money wants a ban on all further increases in the money supply. Second he claims that neither Positive Money nor the Bank of England are aware the loans by commercial banks create money. Third, he objects to the fact that nothing is done with reserves at the BoE, i.e. he objects to the fact that those reserves are not for example loaned out by the BoE.

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This article of his contains blunder after blunder.  It’s entitled “Positive Money and the Bank of England are completely wrong….”.  Apologies for the length of this article, but the sheer number of blunders will take time to address.

In reference to Bank of England proposals on Central Bank Digital Currency (CBDC) he says in his second para: “Quite staggeringly they (Positive Money) are using this proposal to demand the end to the right of private banks to create money, and as I note below the Bank of England will not want to take on that role.” 

Actually the Positive Money article to which Murphy links in his 3rd para does not “demand” an end to privately created money (although PM do advocate such a ban). The PM article simply refers to the claim by a senior BoE official, Andy Haldane, that CBDC may herald the end of private money issuance, which is a fair enough point.

Next, Murphy seems totally unaware of the fact that PM is nowhere near the only lot to advocate the latter ban. That ban has been or is supported by a good sixty economists (including a clutch of Nobels). There's a list of those sixty here. The proposal to ban privately created money goes by various names: “full reserve banking”, “100% reserves”, “narrow banking”, etc.

Having said that numerous economists and groups advocate banning privately issued money, I should qualify that by saying the objective is actually to ban “privately issued and state backed” money (backed via deposit insurance, bank bail outs, etc). In contrast, there is privately issued money which is NOT state backed and which is thus clearly not entirely safe: e.g. Bitcoin. Indeed, there are any number of not entirely safe forms of privately issued money. At a stretch, you can use a bottle of whiskey as money, or at least you can try. Banning ALL FORMS of obviously dodgy money would be near impossible. But as long as everyone knows the risks (which in the case of Bitcoin they do), I don't see the much harm in those strange privately issued forms of money, though things are moving fast in this area and need watching.
 

PM advocates a ban on all new money?

Next, there's Murphy's claim that “ what Positive Money are proposing is that we crash the economy by denying it access to any new money.” Total nonsense. Under full reserve, as proposed by PM and dozens of others, the economy is not denied access to new money. The proposal is (to repeat) that the only form of totally safe money should be state issued money (which can be increased annually, as clearly explained by PM, by whatever amount government and central bank think appropriate.) There is no plan to ban all increases in the supply of money!!

Next, Murphy says “That is to say that we already have a digital currency in the UK. Your bank account is already part of a wholly digital currency system. So, there is no obvious need for a CBDC unless it does something better than your existing bank account or existing money can do.”

Well as anyone who has been more than half awake for the last year or so knows, the Chinese have actually implemented CBDC on a small trial basis. Plus central banks the World over are actively considering the idea. For example the Bank of England's latest proposals are here.


Plus Martin Wolf, chief economics commentor at the Financial Times says the Bank of England needs to get a move on with this. But no doubt Murphy thinks he knows better.

Wolf's reason (if I've got him right) is that numerous private operaters are forging ahead with CBDC like bank accounts: so called “stablecoins”. Thus central banks need to get a move on and set up their own stablecoin type accounts (i.e. CBDC) for those who want that. Plus central banks need to get a move on with regulating stablecoins, which is one of the main issues addressed in the latter BoE work.

Moreover, the brute fact of the matter is that people and money are moving into stablecoins in large amounts. If that's what the customer wants, then who is Murphy to deny them what they want?

Next, Murphy says “Then let me as clear as it is possible to be: no one, anywhere, has yet found any evidence that a so called digital currency of any form can do that.” (He's referring to CBDC “doing better” than existing bank accounts.

The answer to that is that the above mentioned Bank of England discussion paper cites at least a dozen ways in which CBDC might (at least in the eyes of some account holders) be better than existing bank accounts.

 

Seven arguments against CBDC.

Next, Murphy lists a number of reasons why he thinks CBDC would actually make people worse off.

The first is that he doubts BoE CBDC accounts would offer overdrafts. Well what of it? Some people don't want overdrafts. I haven't had one for twenty years!!

Plus the UK's government run savings bank, National Savings and Investments does not offer overdrafts. But millions of people have accounts there!! If that's what people want, why shouldn't the “consumer be sovereign”? Why not let people have what they want?

Murphy's second reason is that BoE CBDC will not offer credit cards. That's really the same as his point No.1 just above, and my answer is the same.

Murphy's third reason is just more of the same: he says BoE CBDC will not suit those with “chaotic financial affairs”. Well probably not: in other words BoE CBDC will probably not give overdrafts to those who cannot organise their affairs. But that's not a brilliant reason for denying the bulk of the population whose affairs ARE ORGANISED the type of bank account they want.

Murphy's fourth point is yet more of the same. This is getting tedious. He points out yet again that BoE CBDC won't offer overdrafts.

His fifth point is that what BoE CBDC offers essentially is a savings account on which customers can draw the digital equivalent of a cheque, making those accounts a form of current account (“checking account” in US parlance).

Well true. But that's what a significant proportion of the population want!! That's why billions have been deposited at National Savings and Investments.

In his sixth point, Murphy says “Nor is anyone discussing what the Bank of England might do with the funds deposited with it. That is the most massive going flaw in their whole paper - and in Positive Money's response to it.”

That point nicely illustrates Murphy's non grasp of how banks, commercial and central, work. The quickest answer to his “do with the funds” point is that central banks AT THE MOMENT do not do anything with the funds deposited with them. That is, reserves (i.e. base money) held by private / commercial banks are AT THE MOMENT deposited at the central bank - where (Murphy will be horrified to learn) those funds do not do anything – apart from earning interest for commercial banks. But the latter point is not of great relevance here.

 

Why central bank created money does nothing.

The actual reason central banks do not “do anything” with reserves, i.e. state created money, lodged at central banks is that central banks and governments have decided that central banks should play a SOCIAL role in the form of trying to create the optimum amount of a country's basic form of money, i.e. base money / central bank created money. And they have deliberately decided to abstain (rightly or wrongly) from COMMERCE, i.e. lending out money to mortgagors, corporations etc except in that they can play a social role by buying corporate bonds with a view to enhancing QE and raising demand.

I.e. obtaining a stock of that basic form of money and levering it up into a larger amount of money is a job governments wish to leave basically to COMMERCIAL banks. 

 

The BoE doesn't know private banks create money??

In his seventh point, Murphy puts his foot right in it when he says “neither Positive Money or the Bank of England (based on some of their comments on their website in this proposal) seem to be aware that savings are not what creates the UK money supply. The UK’s money supply is created by lending.”


Er – actually one of the main points in a BoE article “Money creation in the modern economy” published a few years ago was PRECISLY that commercial banks create money when they lend (a point that Positive Money had been making for YEARS beforehand.) Indeed Keynes made that point in 1920s/30s in his book “Treatise on Money” as did Josiah Stamp, governor of the BoE in the 1920s. Plus David Hume made the point 300 years earlier.
 

Even more hilarious is that that BoE paper has been cited three hundred and seventy times. See here. In short, the entire World seems to be aware of that BoE paper apart from Murphy.

What's wrong with “debt based” money?

 
 

 When a private / commercial bank grants a loan, it credits the account of the borrower with the bank's home made money, and at the same time, the borrower is in debt to the bank in that the borrower must repay the debt at some stage. The borrower of course then spends that money, so that money ends up with a variety of other people and firms. It would therefore seem that someone has to go into debt in order for people to have a stock of money.
 

That idea is promoted in this Positive Money article for example.

Only problem with that idea is that the total amount of debt that the population wants to incur vastly exceeds the amount of money it needs for day to day transactions. Thus money is in effect a free by-product of lending and debt. 

In contrast, if no one in the country, or at least very few wanted to incur debt, then debt based money would certainly be inferior to “non debt based” money, i.e. base money (central bank issued money). But that's not what obtains in the real world.  

To illustrate with some figures, the average mortgage in the UK is just under £140,000 and there are around 11 million mortgages and 30 million households. Average household income is around £30,000 pa, i.e. £2500 a month. So the average household needs a minimum of about £2,500 to tide it over from one salary cheque to the next. Say £4,000 for comfort.
 

So total amount of money needed for day to day transactions and a bit for rainy days is 30million x £4,000 equals £120bn. In contrast, the total amount of mortgage debt is 11million x £140,000 equals £1.54tr. So the total of all mortgages is a bit over ten times the amount of money needed.

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P.S. 3rd Sept 2021.  I omitted the REASON debt based money would be inferior to base money where there was very little desire to incur debt in the above paragraphs. Reason is that (assuming the stock of money people want for day to day purchases is the same) then the only way they'd be able to acquire that money would be to borrow it from a commercial bank. But that involves those banks in checking up on the credit worthiness of borrowers, getting security / collateral off them as necesssary, and those are very real costs. In contrast, if the relevant economy relies just on base money, there are no such costs. As Milton Friedman put it (using rather convoluted language), "It need cost society essentially nothing in real resources to provide the individual with the current services of an additional dollar in cash balances."  .

Regulating stablecoins – the rules of full reserve banking proved right yet again.

 


This is an odd article by Frances Coppola on regulating stablecoins. The title of the article is “Regulating stablecoins for what they are.”

She claims in her second para that “....a stablecoin regulated like a bank or a money market fund (MMF) would not be able to do its job.” But in her last para, she says “….regulators should concentrate on ensuring that stablecoins . . . have 100% reserves and/or are licensed banks.” Slight inconsistency there, I think.

Another inconsistency is that in the past she has opposed 100% reserves / full reserve, e.g. in this article of hers. And while that article was published several years ago, far as I know she has not retracted any of it.

Martin Wolf also has an article on this subject in the Financial Times entitled “Time to embrace...”. The article doesn't seem to be behind a paywall.

His concluding sentence is virtually the same, word for word as Frances Coppola's.

I agree with both conclusions. Or to be more accurate, I'd advocate applying the basic rule of full reserve banking (aka “100% reserves”) to stablecoins, banks and MMFs (Money Market Mutual funds). That basic rule is that any bank or bank like entity including MMFs and stablecoins where it claims that investor / depositors' money is safe must back all deposits with reserves (though possibly short term government debt should be allowed as “backing” as well). And as for entities where there is less than 100% backing, they should be allowed to do anything they like, as long as they do not break the laws that other corporations and firms have to obey. Plus they must make it clear, if it's not already obvious to everyone, that depositor / investors face risks. i.e. if anything goes wrong with the entity and depositor / investors lose out, there is no government rescue available for them.

Indeed, MMFs in the US were made to obey the latter basic rule in the aftermath of the 2008 bank crisis.

And the beauty of the latter rule is that it complies with a principle widely accepted in science, namely that science awards top marks to simple rules that explain a lot, e.g. Einstein's theory of relatively or Newton's laws of motion. In contrast, science is skeptical of complicated laws which do not explain very much.

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P.S. 8th Sept 2021.    Another reason for imposing the rules of full reserve on stablecoins, i.e. insisting they are 100% backed by central bank reserves is thus. As I explain in more detail in MPRA paper No.108488, having a stablecoin backed by something more risky than central bank reserves has superficial attractions. Indeed that's an idea that the Bank of England toys with in its recent discussion paper on CBDC and stablecoins. One attraction is that stablecoins (or any entity that resembles a bank or mutual fund) backed by more risky assets is then into money creation, which is stimulatory. But absent that stimulus, it is the easiest thing in the World to implement stimulus simply by having the central bank create money instead, and spend it into the economy (and/or cut taxes). Ergo the the above mentioned risks are entirely pointless!