Sunday, 25 September 2016

The new Money Market Mutual Fund rules.

A recent Brookings Institution article by Robert Pozen entitled “US money market reforms: the gain isn't worth the pain…” criticises the new rules for MMMFs.

First some background. MMMFs are institutions which seem to be more popular in the US than elsewhere, and they accept deposits and invest only in relatively safe bonds: bonds issued by blue chip corporations, cities, the US government etc. Before the crisis which started in 2007/8 MMMFs promised depositors they’d return $X to depositors for every $X deposited. And that is very much the promise that ordinary banks make to depositors.

Now there’s a glaring anomaly in that promise, or perhaps “fraud” would be a better word: the promise effectively means saying depositors’ money is totally safe. But the mere fact that the money is loaned out means the money is quite clearly NOT totally safe. As Adam Levitin (professor of banking law) put it in the first sentence of the abstract of his paper “Safe Banking”, “Banking is based on two fundamentally irreconcilable functions: safekeeping of deposits and relending of deposits. Safekeeping is meant to be a risk-free function, but using deposits to fund loans inevitably poses risk to deposits, thereby undermining the safekeeping function.”

In short, the basic promise made by MMMFs prior to the new rules was a “have your cake and eat it” promise: you allegedly get the advantage of total safety, while reaping the advantage of taking a risk. That’s just plain, simple fraud. It’s a Ponzi scheme, sort of.

Now if you remove that “too good to be true” offer, then clearly interest rates will rise, which is basically what Pozen complains about. But what he doesn’t mention is that whenever interest rates change, the losses by one lot of people are exactly matched by gains for another lot. E.g. when interest rates rise, the above mentioned cities and corporations pay more interest, but against that, savers (pensioners in particular) will gain. So on the face of it, it’s a wash: there is no overall gain or loss. Well not quite.

It all depends on what the OPTIMUM rate of interest is, and I suggest the optimum rate is the rate that prevails in a free market: in particular, what might be called an “honest free market”. That’s a market where “have your cake and eat it” and “too good to be true” promises are outlawed.


Another problem with the “too good to be true” offer made by banks and MMMFs is that it encourages runs in times of trouble.

That is, as long as everything seems to be OK, depositors can have their cake and eat it: they’re guaranteed their money back at the same time as undertaking the risk involved in lending. But as soon as trouble looms, well you might as well get out before the bank closes its doors, or the MMMF announces it has to break the buck.

Those sort of runs are disruptive: the 2007/8 crisis was to a significant extent a run on shadow banks.

In contrast, if depositors’ stakes in an MMMF vary with the value of the underlying assets / loans, then as soon as it looks like those assets have fallen in value by Y%, the value of the latter stakes fall by about Y% as well. So there’s no point in running.

When BP made a nasty mess in the Gulf a few years ago, it was immediately obvious BP would have to pay billions by way of fines and compensation to fishermen and others adversely affected. But there wasn’t a run on BP shares because the shares were marked down before anyone had a chance to run, apart maybe from a few insiders actually working near the relevant BP rig in the Gulf who had information about the disaster an hour or two before others.

Friday, 23 September 2016

The OECD is a waste of space.

Catherine Mann of the OECD describes her comfortable life-style in Paris and tells us that “fiscal austerity has been very damaging to individual countries”. Er yes. Some of us (e.g. MMTers) have been saying that for years.

Problem is that at the height of the crisis, the OECD (along with sundry other incompetents at the top of the economics profession) were advocating consolidation / austerity. For confirmation of that, see this Guardian article “The OECD’s deficit fetishism..”.

So my question to Catherine Mann is: “Wouldn’t you be better employed sweeping the streets?”

Or as Bill Mitchell put it in reference to the OECD:

“Now its policy positions leads to the destruction of jobs, the degradation of working conditions for those who keep their jobs, and the reduction in living standards and the rise in poverty. In that sense, it has gone from being a highly progressive and important institution in rebuilding economies to an incompetent bastion of neo-liberalism.

As I have noted in the past, if there were any areas that governments can cut spending with little harm then it is in the support they give to the IMF and the OECD. I would withdraw all funding to these agencies and let them die in their own hubris and incompetence.”

Thursday, 22 September 2016

Apparently inflation is now a fundamental economic objective. Mad or what?

Many economists – those people who allegedly know all about economics – currently seem to argue that raising inflation is an end in itself. This Bloomberg article is a typical example.

The first paragraph reads “Japan’s central bank has long been battling an ailment that now afflicts much of the developed world: unduly low inflation, which tends to go together with lackluster economic growth. If it wants to succeed in its efforts, it may have to aim to overshoot its inflation goal.”

Well the “tends to go together with” point is true in that given a rise in demand we tend to get a rise in numbers employed (desirable) and a rise in inflation (not at all desirable in itself).

However the consensus is that inflation of up to about 2% is a price worth paying for getting numbers employed as high as possible. (I’ll assume no Job Guarantee so as to keep things simple).

The author (an economics prof) then says “The lack of success might stem from an inadequately ambitious strategy. One key to achieving higher inflation is convincing people and companies that prices will start rising faster.”

Now hang on. If employers raise their prices and unions raise wage demands SIMPLY BECAUSE they think inflation will rise, that does not of itself raise demand. So we get the DISADVANTAGE of inflation (i.e. inflation itself, so to speak) without the attendant advantage, i.e. increased numbers employed!

A possible escape from that nonsense is to argue that given higher inflation, households and firms will try to spend away their stock of money since no one wants to be in possession of an asset that is declining in value, and that “spending away” will raise demand (sometimes known as the “hot potato effect”). But the author of the article says nothing about that.

Moreover, it’s equally possible that people react to a decline in the value of money by trying to save and stock up on MORE of the stuff because they’re aiming to have some given stock of money in REAL TERMS.

So which of the two latter effects predominates? That question is crucial. If the second effect predominates then the entire “artificially raised inflation gets us out of recessions” argument collapses.

So does the author cite any evidence on the latter crucial question? Nope!

Wednesday, 21 September 2016

Does Michael Saunders of the Bank of England think QE doesn’t increase inequalities?

It rather looks like it according to an FT article entitled “BoE must be ‘constantly on alert’”. Let’s run thru this very slowly.

QE consists of the central bank printing money and buying assets, mainly government debt. Now if a new buyer with a very deep pocket enters a market, prices of items on sale in that market have a tendency to rise. Or have I missed something?

And assets (houses, shares, government debt, you name it) tends to be held by the rich: not those living on social security. Ergo QE increases inequality. Or have I missed something?

Indeed, the BoE’s own research supports the idea that QE increases inequality.

Not that I object to that inequality effect too much because when we’ve QEd the ENTIRE national debt, we’ll then be in what Milton Friedman and Warren Mosler considered the optimum position: having no government borrowing at all.

This is a classic case of “Pareto optimality trumps everything else”. That is, if a change raises GDP (which it does according to Friedman and Mosler), then any increased inequality can be countered by redistributing money from winners to losers. Net result: everyone is better off, or at least they can be, depending on exactly how the redistribution is done.

Tuesday, 20 September 2016

What’s the optimum debt / GDP ratio, and what’s the optimum interest to pay on that debt?

This article deals with the differences between Modern Monetary Theory and what Simon Wren-Lewis (Oxford economics prof) calls the “consensus assignment” (which more or less equals the conventional wisdom).

I argue below that if the best of MMT and the best of SW-L’s ideas are combined, one ends with the ideal system, and that involves two important elements. First it results in a national debt that pays the optimum rate of interest: zero or near zero. Second, it results in the optimum debt / GDP ratio. But since the interest on that debt is zero or near zero, that so called debt isn't really debt at all: it’s more like money (base money to be exact).

Martin Wolf pointed to the similarities between “low interest national debt” and money. And Milton Friedman supported the “zero interest” idea. Moreover, at a near zero interest rate, government is by definition not influencing or interfering with the free market rate of interest. I.e. a genuine free market rate of interest is obtained under the above “ideal” system, and that presumably maximises GDP.

Note (added 26th Sept 2016). This article has been re-produced on the Seeking Alpha site.

Simon Wren-Lewis (SW-L) has taken an interest in Modern Monetary Theory (MMT) recently. He is agrees with some MMT claims, but says there is nothing new in MMT, and in particular that MMT offers nothing that the so called “consensus assignment” doesn’t offer.

The consensus assignment is the idea that in normal times, i.e. when interest rates are significantly above zero, interest rate adjustments should be used to adjust demand, while fiscal policy (i.e. having government borrow and spend more) should be used to control the debt. Plus fiscal policy as a demand increasing tool comes into its own at the zero bound. See endnote No2 below for some passages from SW-L’s writings which confirm the latter description of his “consensus assignment”.

Incidentally the so called “consensus” amongst mainstream economists is far from perfect (which is why they’re always arguing with each other!). Likewise, there is far from complete unanimity amongst MMTers. However, in both cases there is SOME SORT OF consensus.

What’s the optimum amount of debt?

In fact there’s an important omission from the consensus assignment: SW-L simply refers to stabilising the debt and to ensuring it does not rise excessively. But he doesn’t tell us at what the optimum debt / GDP ratio is. Or at least far as I can see he doesn’t – I haven’t read everything he has written.

A second omission is the question as to what the optimum rate of interest is. I.e. SW-L simply goes along with the conventional wisdom that because interest rates have been significantly positive for several decades, that must represent some sort of optimum.

So what are MMTers’ answers to those two questions?

The optimum amount of debt.

As Warren Mosler (a leading MMTer) has made clear, there is no big difference between base money and national debt – certainly not at low interest rates. As Warren has put it, national debt can perfectly well be regarded as a term account at a bank called “government”.

Plus Martin Wolf (chief economics commentator at the Financial Times) made the same point about the close similarity between base money and national debt (1). As he put it “Central-bank money can also be thought of as non-interest-bearing, irredeemable government debt. But 10-year Japanese government bonds yield less than 0.5 per cent. So the difference between the two forms of government “debt” is tiny…”.

In fact MMTers sometimes lump national debt and base money together and refer to them collectively as “Private Sector Net Financial Assets”. So what’s the optimum amount of PSNFA?

Well the more PSNFA the private sector has, the more it is likely to spend, all else equal, in just the same way as when a household wins a lottery or gets a tax rebate, its spending tends to rise. So the optimum amount of PSNFA is whatever induces the private sector to spend at a rate that keeps the economy as near capacity, i.e. full employment as is feasible while keeping inflation under control.

That was easy enough, wasn’t it?

Interest on the debt.

Now for the second question, i.e. what’s the optimum rate of interest to be paid on the debt? Well there’s a fundamental question here: why pay interest on it at all?

There is certainly an argument for having the state issue a finite volume of liabilities in the form of money (base money to be exact). The US government / central bank issues dollars and other countries do likewise. Dollars enable people and firms to do business with each other.

But why have the state issue a volume of liabilities which are so large that people and firms then have to be paid interest to stock those dollars and with a view to discouraging people and firms from spending those dollars? That doesn’t make sense. Indeed Milton Friedman  and Warren Mosler argued for a ban on government paying interest. (Re Friedman, see here (2), and re Mosler see 2nd last paragraph here (3), plus here (4).

Friedman and Mosler were right: my only slight reservation is that I wouldn’t rule out an artificial rise in interest rates if an emergency dose of deflation is required. Indeed, Friedman said something similar: he suggested government borrowing is only justified in war-time.

Moreover, there is certainly no excuse for government failing to collect enough tax to cover CURRENT spending (as opposed to capital spending). If government DOES borrow because of failure to collect enough tax for current spending, that will result in an entirely ARTIFICIAL rise in interest rates. That is, a zero rate gives us the genuine free market rate. (Incidentally that’s not to say that zero is the free market rate of interest for everyone: obviously the rate paid in connection with mortgages, corporate bonds etc will be above zero. The point is that at zero, the state is not artificially boosting the rate of interest.)

In contrast to current spending there is capital spending (on infrastructure etc). I’ve dealt with that under “Querie No Z” below. But briefly, and contrary to popular perception, the excuses for borrowing to fund capital spending are about as feeble as the excuses for borrowing to fund current spending, so I'm assuming in this article (as per Milton Friedman) that there are scarcely any good reasons for government borrowing.

Another possible excuse for using interest rate adjustments to control demand is that lags might be shorter than in the case of fiscal adjustments. But that’s not the case, far as I can see.

Is the Mosler “zero rate” idea generally accepted by MMTers?

Having suggested just above that MMTers as a group tend to advocate the Mosler zero rate idea, it’s possible that is not correct. Certainly SW-L suggests MMTers are happy to see interest rates rise significantly ABOVE zero – see SW-L’s first paragraph here.

At any rate, if SW-L is right there, then I agree with that criticism of MMT: i.e. I think the rate should always be kept as near zero as possible.

Rising interest rates.

Of course whenever anyone mentions a rise in the debt, people raise concerns about the extra interest that will have to be paid on that debt. Well the simple answer to that is that if there is excess unemployment caused by the private sector not having the stock of PSNFA that it wants (aka caused by Keynes’s “paradox of thrift”), then the private sector will be willing to hold more PSNFA at a zero or near zero rate of interest!!

Another potential problem is that creditors may lose faith in a government and start demanding a higher rate of interest. Well the answer to that is simple: put the whole process into reverse – i.e. print money and pay off debt as it matures. And as to any excessive inflationary effect that has, deal with that by raising taxes.

Indeed we’ve been doing just that, i.e. printing money and buying back government debt on an astronomic scale over the last two years or so and under the guise of QE. And as you may have also noticed, QE does not have a huge effect, inflation wise. Indeed, that feeble effect confirms that above point that debt and base money are much the same thing. I.e. QE is a bit like the Fed offering everyone two $50 bills for each of their $100 bills.

How to raise PSNFA?

Having answered the question as to what the optimum amount of debt / PSNFA is, there is a subsidiary question, namely how to GET TO that optimum level. One option is helicopter drops. Another is a more conventional route, namely conventional fiscal stimulus combined with a bit of buying back government debt so as to keep interest rates down, and/or combined with QE.

Personally I prefer the latter conventional route, as do most MMTers I think. Reason is that REVERSING helicopter drops may be politically difficult, should the need arise, and the government spending that gradually raises PSNFA itself has an employment raising effect. I.e. relying to some extent on the latter “conventional” fiscal policy makes it possible to get the economy up to capacity even where PSNFA is not yet at its optimum level, and that’s helpful.

Interest rate adjustments are defective.

In that the above advocated idea about interest on the debt remaining at or near zero is achieved, that rules out interest rate adjustments. But that’s at conflicts with the conventional wisdom, namely that interest rate adjustments are a perfectly good way of adjusting demand. So are interest rate adjustments really that defective? Well yes: they are.

There is absolutely no reason to assume that because demand is deficient, that lack of borrowing, lending and investment is the problem any more than the problem is a lack of demand for cars, ice-cream, whiskey, education or anything else!

Put another way, if there’s a lack of demand, the solution (surprise, surprise) is simply to increase demand from the public and/or private sectors. As to interest rates, they can be left to market forces.


MMT answers two questions which the consensus assignment doesn’t. First, what is optimum amount of national debt / PSNFA? The answer is: whatever amount keeps the economy at capacity / full employment without exacerbating inflation too much.

Second, what is the optimum rate of interest on national debt / PSNFA? The answer is there is little reason to pay anyone anything just because they want to keep a hoard of dollars / PSNFA / “state liabilities”. So the optimum rate is zero (which is not to totally rule out raising interest rates if the economy needs a large and quick dose of deflation).

To clarify the difference between MMT and the conventional assignment, suppose we had full employment and interest was well above zero, the conventional assignment says we’re back to the normality that prevailed between WWII and ten years ago, so nothing needs to be done. MMT (or at least my suggested compromise between MMT and SW-L) says that any positive rate of interest is not optimum, and that in the latter scenario, interest rates should be cut with any consequent inflation being dealt with by cutting the private sector’s stock of PSNFA  - e.g. by raising taxes.

Or, and taking a slightly different scenario, suppose interest rates were significantly positive and demand was excessive. The conventional assignment would say “raise interest rates”. In contrast, MMT (or the “compromise”) would advocate that fiscal measures be used to impose deflation: e.g. a rise in taxes and/or cut in public spending, while efforts to cut interest to near zero should continue.

Endnote No 1 -  infrastructure borrowing.

There are a number of queries that can be raised in relation to the above arguments which I’ll now deal with.

Re the above advocated zero or near zero rate of interest, it might seem there is a good reason for government to borrow and pay the full normal rate of interest, namely borrowing to fund infrastructure and other investments. That is sometimes referred to as the “Golden Rule” (5). In fact the arguments for borrowing for infrastructure are feeble, as I demonstrated here (6). Milton Friedman (3) also argued for zero borrowing. Thus I’ve made the implicit and not unreasonable assumption in this “Ralphonomics” article that there is no borrowing to fund infrastructure etc (i.e. that infrastructure is funded via tax).

 However, if any chance the case for borrowing to fund infrastructure can be made to stick, my answer to that is that the above “MMT versus conventional assignment” is concerned with government AS ISSUER OF THE NATION’S CURRENCY. It is not concerned with government as investor in infrastructure.

So if the argument for borrowing for infrastructure can be made to stick, the answer is to have special “infrastructure bonds” or similar, and have them issued on the same conditions as a private provider of such bonds would offer (and that includes a realistic chance of bond holders losing their money, as occurred with the original investors in the Anglo-French channel tunnel.)

In contrast, there would be a separate type of bond issued by “government as issuer of the nation’s currency”. The aim in respect of those bonds should always be to keep interest on them as near zero as possible.

Endnote No2 - SW-L and the conventional assignment.

SW-L says here (7), “Demand management should be exclusively assigned to monetary policy, operated by central banks pursuing inflation targets, and fiscal policy should focus on avoiding deficit bias.”  (By “deficit bias” he means the ever present temptation for politicians to incur too much debt)

And here (8) he says in the abstract, “the consensus assignment, where monetary policy controls demand and inflation and fiscal policy controls government debt.”

And again (9): “What I call the ‘consensus assignment’ in modern macroeconomics is that monetary policy keeps output stable at a level that leaves inflation at target over the medium term, and fiscal policy stabilises the ratio of government debt to GDP.”

Incidentally, if you look at the above SW-L articles you may see some comments by me. Don’t expect those comments to be entirely consistent with this “Ralphonomics” article. This article is as much about me trying to sort out my own ideas as it is an unsolicited attempt by me to sort out SW-L’s ideas!

Endnote No 3 – is the above article council of perfection?

It could be argued that the above article (and indeed SW-L’s “consensus assignment”) are counsel of perfection in that (at least in the US) fiscal policy is not determined in anything remotely resembling the above rational manner: it is the outcome of a bunch of squabbling school children who know next to nothing about economics. Those children are commonly known as “politicians”. Or as former US defence secretary Robert Gates put it, US politicians are more concerned with “scoring ideological points than with saving the country”.

My answer is that that’s a particular US problem at the moment. In contrast, if the above “SW-L / MMT” compromise system makes sense, it should be possible to explain it to politicians in Europe and get them to go along with it.


1. Martin Wolf. “Warnings from Japan for the Eurozone”. Financial Times.
2. Milton Friedman  “A Monetary and Fiscal Framework for Economic Stability”. American Economic Review.
3. Warren Mosler.  “Proposals for the banking system”. Huffington Post.
4. Warren Mosler & Matthew Forstater. “The natural rate of interest is zero”.
5. Kersten Kellerman. “Allocative Inefficiency of Debt Financing of Public Investment  - an Ignored Aspect of “The Golden Rule of Public Sector Borrowing”. University of Fribourg.
6. Ralph Musgrave. “Government borrowing is near pointless”.
7. Simon Wren-Lewis. “The strong case against independent banks”. Mainly Macro.
8. Simon Wren-Lewis. “Monetary and Fiscal Policy Interaction: The Current Consensus Assignment in the Light of Recent Developments”. Mainly Macro.
9. Simon Wren-Lewis. “Fiscal rules and MMT”. Mainly Macro.
10. “Gates slams Congress for managerial cowardice.” Published by

Sunday, 18 September 2016

Bitcoin is a rival central bank – sort of.

Which is possibly why Russia and some other countries have banned Bitcoin.

Central banks (CBs) issue a form of money which has value for various reasons. One is that taxes must be paid using that type of money. That creates a demand for that type of money. Also that type of money is legal tender.

Bitcoin is similar to central banks as of a century or more ago in that base money in those days consisted of gold, which of course has to be dug up out of the ground. I.e. work has to be done to come by that base money. Likewise those wishing to come by entirely new Bitcoins have to do work. (Incidentally I’m not an expert on Bitcoin, so I may get something wrong here.)

Not only is Bitcoin similar to CBs for the above gold standard reasons, but it is also similar to today’s “non gold standard” CBs in that SOME OF the new base money obtained by the private sector is obtained via work: i.e. the government / central bank machine creates and pays that money to firms which do work for government (build roads, schools, warships, etc).

So is there any merit in having two CBs running side by side: your national CB and Bitcoin? Well as far as one of the main merits of Bitcoin goes, the low costs of blockchain, that’s something CBs can easily copy. And some of them are activity considering doing so right now. So the low cost point is not a reason to let Bitcoin continue.

Second, there’s the attraction that Bitcoin has for criminals. That’s clearly not a merit.

Third, there is a vital function that traditional CBs perform which Bitcoin type CBs will never perform, far as I can see, which is thus.

Given a recession, CBs and governments increase what MMTers call “Private Sector Net Financial Assets”, which induces the private sector to spend more. (PSNFA equals government debt and base money). One way of doing that is traditional fiscal stimulus: government borrows $X and spends it back into the private sector, plus it gives $X of bonds to those it has borrowed from. Hey presto: PSNFA rises by $X.

Alternatively, the CB and government can simply do helicopter drops to the extent of $X. There again, PSNFA rises by $X.

But suppose there’s a recession, and there’s a Bitcoin type CB up and running. Would the latter PSNFA solution work? Well it probably would – at least to a limited extent. That is, any unemployed person with a knowledge of Bitcoin could do work and dig up Bitcoin metaphorical gold as a way of making a living.

Unfortunately only about 1% of the population have the requisite knowledge. Moreover, Bitcoin mining consumes significant amounts of energy, and given global warming, that’s the last thing we need to do.

In contrast, a traditional CB can create money to the tune of a hundred times the value of all the Bitcoins in existence by simply clicking a computer mouse while consuming about a thousandth of a kilowatt hour.

Conclusion: there’s no contest. The Russians are right to ban Bitcoin. However we owe a debt to those who set up Bitcoin for showing us how blockchain can be made to work. 

Saturday, 17 September 2016

You have to wonder whether advocates of JG know what’s going on.

Many advocates of the so called “Job Guarantee” spend their time discussing what the ideal JG scheme might look like. (JG is roughly speaking what might be called “make work”: i.e. relatively simple and low paid jobs created by government for the unemployed pending the appearance for them of regular jobs).

Some of these advocates seem to know nothing about JG schemes that are currently up and running. Nor do they seem to know much about the large number of JG schemes that have existed in the past. E.g. see here.

There’s actually a JG scheme which was set up in the UK about ten years ago, called the “Work Programme” which incorporates some of the main characteristics of the JG scheme I advocated twenty five years ago (1991). E.g. there’s the idea that both public sector and private sector employers should be involved.

I’m far from happy with every aspect of the Work Program. Nevertheless it’s nice to see one’s ideas being put into practice, even if those who actually implemented the Work Programme didn’t actually pay any attention to my 1991 work.