Random charts - 44.

Large text in pink on the charts was added by me.

We can’t print and spend money willy-nilly when inflation is at the 2% target.

Quite why it’s necessary to make the above point is a mystery. I’d have thought it was obvious.

One recent attempt to claim we can in fact print and spend like there’s no tomorrow was penned by an anaesthetist and physicist both of whom live within 20 miles of me. Tim Worstall and Richard Murphy respond to their article. The net result is a bit of a car crash. The article itself is fundamentally flawed. Murphy’s response is pure chaos. Worstall’s is much clearer, though I’m not sure about one of his points. Anyway, I’ll wade through this to see what can be salvaged.

The authors of the anaesthetist / physicist article are David Laws and Charles Adams respectively (L&A). (Title of their article: "Is a World-leading NHS healthcare NHS an affordable option."

First, a number of physicists have opined on economics, and some of them have a very good grasp of the subject. For example there is William Hummel, so I don’t automatically reject material written by physicists on economics.

L&A do have some grasp of economics. Unfortunately they seem to think we can just print money willy nilly and spend it on the National Health Service (NHS) – e.g. see their final para.  Well as Keynes explained, the way out of a recession is to have the state print or borrow money and spend it in whatever amounts are needed to end the recession. So what L&A say is true during a recession.

Unfortunately that “free lunch” is not available once the economy has recovered, that is, once inflation has hit the 2% target. And inflation in the UK is currently more like 3%. So no free lunch!!!

The only possible escape from that dilemma would arise if inflation is cost push rather than demand pull: indeed that situation obtained, at least according to the Bank of England, during the first two or three years after the 2007 crisis. Subsequent events proved the BoE right. So congratulations to the BoE for that.

As for L&A, they don’t even consider the “cost push / demand pull” question, thus their claim that we can print money willy nilly and produce a Rolls Royce NHS as if by magic is nonsense.


The multiplier.

L&A’s next mistake is to attach importance to the multiplier (their second last para). Certainly that’s in line with standard economics text books, which also attach importance to the multiplier. However, as I explained here, the multiplier is one big irrelevance.



The dual circuit.

Next, L&A have some strange ideas on what might be called the “monetary dual circuit”. That’s (roughly speaking) the fact that there are two sorts of money: central bank issued money and private bank issued money.

They say “…the commercial bank circuit serves private needs while the government circuit serves collective needs. The bank circuit exists to serve individuals and ‘capitalism’, while the government circuit exists to deliver on democratically controlled promises.”

Actually we could perfectly well have a system where the only form of money is central bank created money. Indeed a system of precisely that sort has long been advocated by several Nobel laureate economists including Milton Friedman. That system is also currently supported by Positive Money, and New Economics Foundation, Laurence Kotlikoff and others.

Incidentally if you’re  wondering why I am responding to L&A here rather than in the comments after their article, one reason is that  L&A seem to be unwilling to publish comments which disagree with their ideas. Certainly a suspiciously large proportion of the comments positively drool over L&A’s article. This “suppression of dissenting voices” is common in academia nowadays. Anyone who thinks academia is a bastion of free speech nowadays is very naïve.  I dealt with this problem here.

So if you want to know where students get their anti free speech tendencies from, it looks like they get it to some extent from the elders and betters, i.e. their teachers – of course I use the phrase “elders and betters” advisedly.


Tim Worstall’s response.

Tim Worstall’s response to L&A is roughly speaking the same as mine, namely (and to repeat) that it’s perfectly possible to print money and spend it in a recession so as to bring about more NHS (or anything else). Or at least TW says “It is possible to get all Kenyesian about this and say when in recession we can boost output of all things – and maybe there’s some truth to that.”

Well is TW supporting Keynes or not? It isn't entirely clear is it? If he wants to challenge the basic point made by Keynes, namely that the way out of a recession is to “print and spend” then TW needs to spell out his reasons in detail.

So if TW is supporting Keynes, then I agree with TW. If he isn't, I want to see detailed reasons.


Richard Murphy.

Murphy’s response to L&A and TW is shambollic. It is long, complicated and I haven’t got time for it. Murphy claims one minute that we can print and spend like there’s no tomorrow, while a para or two later, he concedes that option is not available once the economy is at or near capacity, as explained above.

Interest rate adjustments do not make sense.

Assume an economy needs stimulus. One way to implement it is for the state to run a deficit funded by new base money (as suggested by Keynes in the early 1930s). There is of course more than one way of doing that: more public spending is one, and tax cuts are another. For the purposes of the argument here is doesn’t make any difference which of those two is chosen.

A second way to implement stimulus is to cut interest rates. But there’s a problem or two there, as follows.

Assuming a fall in interest rates is the free market’s only or main way of dealing with recessions, and assuming there is some artificial obstruction to such a fall, then it would make sense for the authorities to try to overcome that obstruction by employing artificial means to get interest rates down.

Unfortunately, neither of the latter two conditions hold. As to obstructions to a fall in interest rates, I’m darned if  I know what they are. Indeed interest rates seem to have fallen all of their own accord over the last twenty years or so.

As to ways of dealing with recessions, interest rate cuts are not the only way. There is another free market “recession ending” mechanism. That’s the Pigou effect: the fact that in a recession in a totally free market, wages and prices would fall, which would raise the real value of the monetary base, which would raise spending. Moreover, there is a very obvious obstruction to that mechanism, namely the “wages are sticky downwards” phenomenon to which Keynes referred.

That suggests that running a deficit funded by new money is better than fiddling with interest rates: instead of the value of the base rising because of a rise in the value of each unit of the base (dollars, pounds, etc), the number of units rises. But the effect is the same (as Keynes himself pointed out, or so Lars Syll told me).


A zero government debt scenario.

Another problem with fiddling with interest rates is this.

Milton Friedman and Warren Mosler argued that governments should borrow nothing at all. Assuming F&M are right (and I certainly do not strongly disagree with them), then how do you cut interest rates? Cutting rates is normally done by having the central bank sell government debt. But if there’s no government debt (as per F&M’s prescription), then rates cannot be cut!!!

Alternatively, if it does actually make sense for government to borrow (and let’s say government debt needs to be X% of GDP), and if debt is then bought back by the central bank so as to cut rates, then the debt will no longer be at it’s optimum or GDP maximising level

Provisional conclusion: interest rate adjustments are in check mate.

The only possible escape from check mate might be available in the form of the claim that interest rates work more quickly than fiscal adjustments. Unfortunately there’s not much evidence to support that idea. According to the Bank of England, interest rate adjustments take a year to have their full effect. Plus if government decides, for example, to spend more on health and education, the effect comes as quickly as new teachers, nurses, etc can be interviewed and allocated to jobs. That ought to be possible in less than a year.

Plus in the recent recession, the UK government implemented two fiscal adjustments at the flick of a switch: it first cut VAT and raised it again two or three years later.

Is base money a liability of the state?

Eric Lonergan recently devoted about 4,000 words to considering whether base money is a liability of the state without coming to any clear simple conclusions far as I can see. (Title of his article: “MMT part III – conclusion, and a conversation with Ben Bernanke”).

Here is a simple clear answer in just thirty words.

The state has the power to grab any amount of base money off the private sector via tax whenever it wants, ergo base money is not a liability of the state.

If you want me to expand on the latter point, here are another hundred words or so.

If you lend me £X and we sign an agreement covering that loan, stipulating rates of interest, and so on, but I have the power to break into your house, and confiscate your copy of the agreement, and then tell you to whistle for your money, then that £X liability  of mine is a bit of a strange liability. In fact it’s not a liability at all.

Or as Warren Mosler, founder of MMT, put it, base money is like points awarded by an umpire in a tennis match: they are an asset of the players, but not a liability of the umpire.

Hope that’s sorted that out….:-)

Random charts - 43.

Text in pink on the charts below was added by me.

Money issued by private banks is counterfeit money.

I’ve just published an article on the Medium site which shows that money issued by private / commercial banks is counterfeit money, as suggested by the economics Nobel laureate, Maurice Allais. Here is the abstract.



The word counterfeit according to dictionaries refers to producing an imitation of something valuable with an intention to defraud. Dollars issued by private banks are certainly imitations of Fed issued dollars. Plus where privately created money is introduced to an economy which has just base money, base money has to be confiscated from households so as to counterbalance the inflationary effect of the new privately created money. I.e. households are defrauded to make room for privately issued money. Ergo the money created by private banks is counterfeit money.

Another flaw in privately created money is that creating it costs almost nothing just as it costs the Fed almost nothing to create dollars. In contrast, under a “base money only” system, private banks have to borrow or earn every dollar they lend out, thus those banks compete on equal terms with other businesses. Thus allowing private money results in the profits of seigniorage subsidizing bank loans, which results in artificially low rate of interest and artificially high levels of debt. That does not maximise GDP.

A third flaw in a private money is thus. Those who deposit money at private banks with a view to earning interest are in effect money lenders: they have entered commerce. But they are guaranteed against loss by taxpayers and it is not normally the job of taxpayers to stand behind commercial ventures. On the other hand everyone is entitled to a totally safe bank account. That conflict is resolved by full reserve banking (a system which bans privately issued money) because under full reserve, zero interest yielding bank accounts are totally safe, while interest earning ones are not.

Racist tweet by Positive Money.

Positive Money claim that top jobs at the Bank of England should reflect the racial mix of the country of a whole and moreover that there should be more women in top BoE jobs.

Shouldn't the Bank of England’s leadership should reflect the whole of society @PhilipHammondUK ? #wherearethewomen https://t.co/nJuKPboSBU

— Positive Money (@PositiveMoneyUK) October 21, 2017

I suggest there is just one criterion for choosing people for a job, and one only: ability to do the job. Moreover, it could be that white males excel at economics related jobs (in that the performance of central banks or economists in general can be described as “excellent”, which of course is debatable.)

About 95% of the letters to the Financial Times are from men rather than women, which is prima facie evidence that women are just not all that interested in economics.

Moreover, while corruption in white countries is bad enough, corruption in Africa and Arab countries is even worse, which is prima facie evidence that blacks and Arabs are more corrupt than whites, and we do not want corruption at the top of central banks, or any more corruption than there already is at central banks.

Also, some psychologists claim blacks and Arabs have lower IQs than whites: see image just below.

Moreover, the IQ distribution of males and females is not the same: there are more genius IQ and idiot IQ males than in the female section of the population. Thus assuming top jobs at central banks go to top IQ individuals, you'd expect to see more males there than females.

Speaking as a white male, I have no objection at all to people from the Indian sub-continent being over-represented when it comes to running convenience stores. I have no objection to women being over-represented in some professions, e.g. medicine: at least around ten years ago 60% of trainee doctors were female. As for law, about 67% of trainees are female in the UK.

To repeat, there should be just one criterion for choosing people for jobs: ability to do the job.