Thursday, 20 July 2017

Only an economist would claim that printing excessive amounts of money has no effect.

Izabella Kaminska in a recent Financial Times article claimed that stimulus cannot be implemented by having central banks print money with governments spending it (and/or cutting taxes) because central bank issued money must be backed by real assets. Title of the article is “Central bank digital currencies: the asset-side limitation.”

That argument is nonsense, and for the following reasons.

There are numerous examples, stretching back over two thousand years, of kings, rulers, governments etc declaring that the form of money they’ve decided to issue shall be the basic form of money in the relevant country. And that simple declaration works. In particular, it works if the state declares that its form of money is legal tender and that taxes must be paid in that form of money – or else. Or else you go to prison, have your property confiscated, or whatever.

The threat of prison or some other punishment is ample inducement for everyone to acquire a stock of government money so as to be able to pay taxes. That in turn gives that money value.

In contrast, assets owned by the ruler / government are irrelevant (though doubtless most rulers do own a substantial stock of assets). Having the military and legal power to collect taxes is what really matters.

Moreover, that reliance on tax collecting powers is very much in evidence at the time of writing in 2017. That is, the main asset of most central banks is government bonds. But why do the latter mere bits of paper have any value? It’s to a significant extent because everyone knows that the governments which issue those bonds can help themselves to near limitless amounts of money anytime by simply robbing taxpayers. Whether government actually owns substantial assets is near irrelevant.

With a view to bolstering her case, Kaminska cites a Vox article which makes similar claims about the futility of helicopter drops. Title of the article is “Helicopter money: The illusion of a free lunch.” And it’s written by two Bank of International Settlements individuals, plus one from the Bank of Thailand.

The first flaw in this article is the claim that helicopter money is never withdrawn from the private sector. The authors say, “The central bank credibly commits never to withdraw the increase in reserves.”

The authors do not actually quote any advocate of helicoptering to back that idea, and I’m not surprised, because the “never withdraw” element is not an essential ingredient in helicoptering.

It is true that the type of helicoptering advocated by Milton Friedman involved “no withdrawal”. That’s in his 1948 American Economic Review paper “A Monetary and Fiscal Framework…”. On the other hand it is more usual for advocates of helicoptering to argue that in most years a deficit is needed, while a surplus (i.e. “withdrawal”) will occasionally be needed given a serious outbreak of Greenspan’s irrational exuberance (i.e. excess demand).

Ricardian equivalence.

The Vox authors’ claim that there must be a promise not to withdraw is pretty obviously based on Ricardian equivalence, an idea which has long been popular with academic economists, despite it being obviously unrealistic.

Ricardian equivalence is the idea that consumers are forward looking and behave totally rationally. As far as helicopter drops are concerned, this means consumers will not increase their spending if they think government will in future withdraw that money, because consumers will allegedly need their increased stock of money to pay the taxes that make possible the withdrawal.

However, the idea that the average household thinks in that manner is just a joke.  As Joseph Stiglitz put it, "Ricardian equivalence is taught in every graduate school in the country. It is also sheer nonsense."

In other words households behave much as you would expect: if they find they have more money in their bank accounts, they’ll spend a significant proportion of it. And indeed the empirical evidence supports that: for example the Bush tax cuts resulted in extra household spending by those whose taxes were cut.

The Vox authors then argue that helicoptering is likely to result in permanent zero interest rates. Specifically they say, “Either helicopter money results in interest rates permanently at zero – an unpalatable outcome to most, including those that advocate monetary financing – or else it is equivalent to either debt or to tax-financed government deficits, in which case it would not yield the desired additional expansionary effects.”

Well the first problem with that idea is that helicoptering will not result in permanent zero rates if the actual amount of helicoptering is relatively low. To take an extreme example, if the Fed did just one dollar’s worth of helicoptering, the effect would pretty obviously be negligible. Same goes for a million dollars worth.

However, if the amount of helicoptering was such that zero interest yielding base money replaced all government debt permanently, then that would of course constitute a permanent zero rate policy. But what’s so “unpalatable” about that?

A permanent zero rate was not regarded as “unpalatable” to Milton Friedman and Warren Mosler (founder of Modern Monetary Theory). Those two individuals specifically argued for permanent zero rates.

Admittedly there seems to be a problem with zero rates, which is that it makes interest rate cuts in the event of a recession difficult. There is of course the option of negative rates, but the latter are widely regarded as problematic.

However, dealing with recessions and excess inflation via interest rate adjustments is decidedly illogical and for the following reason. Given a recession (i.e. inadequate demand), whence the assumption that the recession must to down to inadequate borrowing, lending and investment and hence that interest rate cuts are called for? The recession may equally well be caused by a decline in one of the other constituents of aggregate demand, e.g. a fall in general consumer confidence or exports.

Moreover, the basic purpose of the economy is to produce what people want (both the items they normally purchase out of disposable income and the stuff they vote to have government supply to them in the form of public spending). Thus given inadequate production, the obvious or logical solution is to give household more of the stuff that enables them to buy goods and serves, and that stuff is called “money”. And the other obvious solution is to increase public spending. Both those two can be done via helicoptering.

To summarise, contrary to suggestions by Kaminska and the Vox authors, printing money and handing it out or spending it does actually have an effect (gasps of amazement). The initial effect is a rise in demand, and if too much printing is done (e.g. a la Robert Mugabe) the effect is excess inflation (more gasps of amazement). Moreover, if helicoptering goes far enough it can result in permanent zero interest rates but there is nothing obviously wrong with that.

Monday, 17 July 2017

Random charts 29.

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

Sunday, 9 July 2017

Positive Money at Durham Miners' Gala.

First picture taken during the speeches by Jeremy Corbyn and other speakers: crowds listening are in the background.

Numbers listening according to my estimate was between 5,000 and 15,000.

Second picture taken earlier in the day from the other direction, i.e. from where the crowds were during speeches. 

Tuesday, 4 July 2017

Richard Murphy, the national debt and MMT.

Richard Murphy recently wrote an article entitled “Why we need more national debt”. It’s a good article. My main complaint is that few of his ideas are original, but he should be congratulated for repeating them, because they need repeating. I’ll summarise the article below and list a few of the people who have expressed the same ideas before.

His first two large paragraphs (starting “First some facts..”), say there is no essential difference between national debt and money (base money to be exact). Warren Mosler (founder of MMT) made that point a good ten years ago. And I’ve repeated the point ad nausiam on this blog over the years. Plus Martin Wolf (chief economics commentator at the Financial Times) made that point a couple of years ago.

MMTers sometimes refer to the sum of debt and base as “Private Sector Net Financial Assets” (PSNFA). I’ll use that phrase below.

Murphy then makes five numbered points. The first is that inflation whittles away the value of PSNFA, thus on the not unreasonable assumption that the value of PSNFA needs to be maintained (especially relative to GDP), then the stock needs to be topped up. And that can only be done via a deficit.

I’ve been making that point for YEARS. Richard Murphy is one of the very few people on planet Earth I’ve come across who gets that point as well. Simon Wren-Lewis (Oxford economics prof) is another. And I do spend several hours a day reading what economists are saying. Though obviously I can’t cover everything. So congratulations to Richard Murphy for that.


His second claim is that pension funds need safe assets to invest in, and PSNFA fulfills that role. Actually if pension funds do not have assets to invest in, they can always go for the “pay as you go” option. That’s how most state pension systems work: i.e. there are no pension fund investments because today’s fund contributors pay for today’s pensions.

But to the extent that pension funds don’t want to or can’t do that, their demand for PSNFA is clearly part of the overall demand for PSNFA.

His third point is that demand for safe assets (to over-simplify a bit) also comes from non-bank firms: clearly also true.

His fourth point is that if the nominal rate of interest on government debt is low enough and inflation is high enough, then the REAL rate of interest is negative: i.e. the creditor subsidizes the borrower (government). Again, that’s a point I’ve made at least a dozen times on this blog.

His fifth point is that interest on the debt is not a huge problem in that it gets recycled into the economy: e.g. interest is paid to pension funds. Well that’s pretty obvious, but that point fails to address an elephant in the room, namely the question as to what the OPTIMUM rate of interest on the debt is. As MMTers often point out, a country which issues its own currency can pay any rate of interest it likes on its debt.

Milton Friedman and Warren Mosler advocated a zero rate. I.e. the said in effect that PSNFA should consist entirely of base money. I think that’s right, or at least nearly right. Possibly a very low rate of interest should be paid (something between zero and the rate of inflation, as rather suggested by Murphy). A merit of that is the debt, i.e. bonds, are not as liquid as cash. Thus in the event of the private sector going mad and trying to spend the whole stock of PSNFA at once and causing hyperinflation, the inflation would be muted somewhat.

Murphy’s final point is to criticize the idea that the debt needs to be repaid. Correct: in practice the debt (as a proportion of GDP) normally gets whittled away by a combination of inflation and rising real GDP. Also a point I’ve made over and over on this blog.


A final criticism is that Murphy’s article could be taken to be suggesting a LARGE rise in the debt (or to be more accurate, in PSNFA). Given that (as pointed out by Warren Mosler) the interest on the debt tends to rise with a rise in the size of the debt itself, and given that interest on the debt is currently within the bounds suggested by Murphy himself (i.e. between zero and the rate of inflation),  it is not obvious why we need a HUGE increase in the debt.

A GRADUAL rise to take account of inflation and real growth is fine by me, but there is no argument for a LARGE rise.

To summarize, I’m awarding nine out of ten to Richard Murphy, though none of his points are original. MMTers like me have been making the above points for a long time. In short, if you’re a member of the 1% of the population interested in original ideas, keep  an eye on what MMTers are saying and on this blog – untill I become so old and confused that I can’t think, which may be quite soon…:-)

Monday, 3 July 2017

Random charts. 28.

Text in pink on these charts was added by me.

Wednesday, 28 June 2017

Has Richard Murphy taken leave of his economic senses?

In an article by Richard Murphy entitled “Has Carney taken leave of his economic senses?” Murphy claims that Carney, governor of the Bank of England is wrong to say that interest rates should be raised given a significant rise in business investment spending.

Murphy says “What Carney is saying is that if business tries to improve UK productivity, or if it tries to increase employment, or if it tries to deliver growth then he will snub it out.”

Well first off, a rise in interest rates WOULD NOT entirely “snub out” that extra investment. The reason is simple and is as follows.

Assuming the economy is currently as near capacity as is feasible without excess inflation kicking in (i.e. NAIRU, which is where Carney seems to think it is, rightly or wrongly), then an £X increase in spending caused by extra investment needs to be countered. But there is no reason that “countering” (i.e. cut in spending) needs to be CONCENTRATED on business investment, and indeed it wouldn’t be in the event of an interest rate increase. That is, a rise in interest rates hits ALL FORMS of capital spending, including the sale of household “capital” items like fridge freezers, cars and TVs.

Thus a rise in interest rates would not entirely negate the above original rise in business investment.

Abandon the inflation target?

Next, Murphy suggests we should dispose of the 2% inflation target. He needs to explain whether that means abandoning all attempts to control inflation or whether it means raising the target to 3% or 4%. The former would be regarded as ridiculous by 99% of economists, while the second is widely seen as a possibility, while being contentious: not something we should do at the drop of a hat.

Let’s rob creditors!

Finally, Murphy says in relation to sticking to the 2% inflation target “And remember, the greatest beneficiary of this policy are the best off because low inflation preserves the real value of the debts the wealthiest are owed by the very many who owe them.”

Well the flaw in that argument was nicely illustrated in the 1970s and 80s. That is, it’s true that the sudden rise in inflation in the 70s hit creditors. But creditors are not completely stupid: they reacted (towards the end of the 70s and 80s) by demanding a higher return for lending out money. In fact the 1980s saw the highest real interest rates for at least half a century, presumably because creditors with memories of having been stung in the 70s, continued to demand high NOMINAL returns on their money despite the fall in inflation in the 80s.

A repetition of that period of high real interest rates lasting several years would of course not benefit the group that Murphy wants to benefit, namely borrowers.

And finally, borrowers are not all paupers: some people borrow a million or two to help them buy five million pound houses. 

Tuesday, 27 June 2017

Random charts. 27.

Text in pink on these charts was added by me.