Sunday, 31 May 2015

House prices.

Brainless lefties will like the above cartoon. The truth is that the explanation for high house prices is more nuanced.

High house prices in the UK are largely down to artificial restrictions on the amount of land available for house building. For evidence of that, witness the fact that the value of land with permission to build is about a HUNDRED TIMES that of agricultural land. Put another way, about a THIRD of the cost of houses in the UK is accounted for by the cost of the land on which those houses stand.

In short, high house prices are not caused by “free market capitalism”: they’re caused by what might be called the opposite. That is, artificial interferences in the free market.

Of course I’m not suggesting a complete “free for all”: i.e. allowing anyone to build a house absolutely anywhere. But there’s absolutely no reason that the TOTAL AMOUNT of land available for building purposes can’t be substantially increased, which would bring the price of houses down by approaching a third. 

Mind, there is a sense in which the cartoon is correct: the main opponents of releasing land for building are clearly not people living in small apartments in cities. The opponents are what might be called the "capitalist class": NIMBYS with houses in the country.

Saturday, 30 May 2015

The justification for helicopter drops.

Simon Wren-Lewis (Oxford economics prof) argues here and here that a justification for funding fiscal stimulus via money creation rather than borrowing is that governments have a fetish about rising national debts. Thus an alternative way of funding fiscal stimulus is desirable. (Incidentally Keynes pointed out in the 1930s that stimulus can be funded either via new money or via borrowing, see 5th para here)

Well there’s a problem with SW-L’s argument namely that one then ends up with TWO BODIES doing fiscal stimulus: the treasury and the central bank. That’s not much different to a car with two steering wheels: not a brilliant arrangement.

So is there a better justification for helicoptering? The answer is “yes”. As I’ve been pointing out for a few years now, standard “borrow and spend” fiscal stimulus is defective in that the object of the exercise is STIMULUS, but the effect of BORROWING is the opposite. That is, the simple fact of government borrowing, i.e. withdrawing cash from the private sector is DEFLATIONARY.
So conventional “borrow and spend” fiscal stimulus a bit like the fire brigade throwing petrol on a fire before squirting water on it. Or if you like, it’s analogous throwing dirt over your car before washing it.

One apparent problem with money funded fiscal stimulus comes if and when the process needs to be reversed: there might seem to be a problem in that the state then doesn’t have an asset to sell if and when it needs to WITHDRAW money from the private sector at a later date. Well the state DOESN’T NEED an asset to sell! It can simply wade into the market and offer to borrow billions at above the going rate of interest, and send the bill for the interest to the taxpayer.

Existing legislation in some countries may not allow the central bank to do that, but there’s no good reason it SHOULDN’T.

Another reason why “print and spend” might be difficult to reverse is that it’s easy enough to print money and spend it on goodies for the population: if you’re a politician, that’s bound to make you popular. However doing the opposite, namely raising taxes makes you UNPOPULAR.

On the other hand reversing “borrow and spend” isn't all plain sailing. The latter consists of borrowing off the wealthy and spending on the population as a whole, while giving bonds to the wealthy. Well reversing THAT (i.e. taking cash off the less well-off and returning it to the rich) won’t win you votes EITHER.

Political versus economic decisions.

Another apparent problem with money funded fiscal stimulus (or “sovereign money” funded stimulus as Positive Money calls it) is that it might seem that the central bank then determines the size and nature of that stimulus: that is, it might seem that essentially POLITICAL decisions are then in the hands of unelected central bank economists.

In fact there’s no need for technocrats to take essentially political decisions. That is, it’s perfectly feasible to have some central bank committee of economists (or indeed any other similar committee) determine the SIZE of a stimulus package, while clearly POLITICAL DECISIONS like what proportion of GDP is allocated to public spending and how that is split between education, health and the usual public spending items is left to politicians and the electorate.

The latter point is enlarged on here and in other Positive Money literature, if you want that explained in more detail.

Indeed, the ULTIMATE say in the size of any stimulus package is ALREADY in the hands of the central bank – at least in the UK and US in that those CBs have ultimate responsibility for inflation. That is, the Fed and the BoE, if the think that conventional fiscal stimulus is excessive, can negate that with interest rate hikes.

The latter points about the distinction between the SIZE of a stimulus package and its NATURE OR MAKE UP seems to be beyond the comprehension of a number of vociferous individuals, e.g. Neil Wilson, as I explained here. Also Anne Pettifor doesn’t understand the point. However, for most people with a bit of common sense those points are easy enough to understand.

Thursday, 28 May 2015

Bank regulation shambles.

Nice to see current attempts at bank regulation descend to a shambles or something like that. The first piece of evidence is this article by Anat Admati.

The second piece of evidence to back that “shambles” description is some research by the Richmond Fed. There’s a summary of their research here and a longer article here. (h/t John Cochrane).

Basically the Fed research points out that over the last fifteen years, far from government having ceased to subsidise and stand behind private banks, that taxpayer funded support has INCREASED.

Seems bank regulators and politicians are complete suckers: you’re a bankster and you want taxpayers to underwrite your nefarious activities? No problem. There’s bound to be some sucker in the British House of Commons or in Congress who’ll fall for some story about economic growth being enhanced if your nefarious activities are subsidised or backed by taxpayers.

A paragraph in a Wall Street Journal article summarised the situation nicely. It said “The Dodd-Frank Act was then sold as a way to prevent such bank rescues. “There will be no more tax-funded bailouts—period,” said President Obama as he signed it on July 21, 2010. Five years later the Richmond Fed’s research suggests that he should have said, “If you like your taxpayer safety net, you can keep it.””

The reason the current bank regulation shambles gives me great pleasure is that there is a vastly simpler and more effective set of rules for government banks, which first makes it near impossible for banks to fail, and second, involves no sort of taxpayer funded backing or subsidy for banks. It’s called “full reserve banking”. And the basic rules are desperately simple, and as follows (in green italics).

The bank industry is split in two. One half consists of entities, bank subsidiaries, etc which LEND. Those entities are funded just by shares. The second half consists of entities which accept deposits. They can only lodge that money in a totally safe manner: i.e. lodge the money at the central bank, and perhaps also invest in short term government debt.

And that’s it!

Indeed that rule is currently being imposed on money market mutual funds in the US, and far as I know the sky hasn’t fallen in in the US (floods in Oklahoma apart).

Wednesday, 27 May 2015

Financial Times thinks we have free speech.

The second paragraph of yesterday’s leading article starts “One of the canards of British political discourse is that no one dares talk frankly about immigration”.

Well first, that’s what is known as a “straw man” argument: that is, attributing an obviously absurd argument to someone, then demolishing the argument, and claiming you’ve demolished or dented your opponent’s case. That is, the idea that “no one” in the whole of the UK dares say what they think on immigration is obviously absurd.

The more important question is whether there a SIGNIFICANT PROPORTION of the population don’t dare say what they think. And indeed it would seem from this survey that about a third of the population don’t think they are free to say what they think on immigration for fear of prosecution or losing their jobs.

And indeed they are right: people HAVE BEEN sacked from their jobs for being members of anti-immigration organisations. Plus the law on “inciting racial hatred” is extremely vague, and doubtless deliberately so. That is, you never quite know what statement about other races or about immigration might land you in trouble. So the best thing to do, especially if you’ve got a well paid job and/or a family to feed is to keep quiet. And the politically correct opponents of free speech only have to prosecute VERY FEW people in order to get the desired result, namely suppressing free speech in general.

The same principle applies to another lot who want to suppress free speech, namely Muslims who want to ban cartoons about Islam: they only need to slit the throat of about one cartoonist every two or three years, and two hundred other cartoonists take note. If the latter cartoonists have a family to support, they might as well play safe and not publish cartoons about Islam.

Hitler and Stalin suppressed free speech and boasted about it. The politically correct and Muslims suppress free speech and then claim they haven’t done so. I’m not sure which is the more odious.

Tuesday, 26 May 2015

Muddled thinking from Richard Murphy on banks.

His first suggestion is a transacton tax on banks, to quote: “This tax is designed and intended to reduce the volume of speculative trading by banks.”

Well I have no big objections to a transaction tax, but the idea that that will greatly reduce socially useless speculation while NOT REDUCING legitimate transactions (which is presumably the object of the exercise) is questionable. If I can make £1,000 a day by speculating and government imposes a 10% tax, that means I make a miserable £900 a day. Am I going to stop speculating? Get at socially worthwhile job like nursing, teaching or sweeping the streets? Unlikely.

And how do you distinguish between perfectly legitimate transactions, like buying stock exchange quoted shares, an activity which is inherently speculative, and on the other hand “anti-social” speculation? It’s near impossible.

His third idea is that “Ring fencing is no longer enough. The banking activity that underpins our economy has to be split from that which is engaged in speculation.” Well that’s pretty much the basic idea behind ring fencing, as is made clear in the Vickers report, the source of the “ring fence” idea!

Plus there’s a big problem with the idea that speculative or “investment” banks should be allowed to fail: it’s widely accepted that letting Lehmans fail did a lot of harm and possibly more harm than good. Vickers didn’t face up to that problem, nor does Richard Murphy.

His fourth idea is to “Bar banks who have undertaken criminal acts from state contracts.” Er… given the widespread criminality amongst bankers, you’d need to bar almost EVERY bank  far as I can see.

I suggest Richard Murphy goes back to the drawing board.

Sunday, 24 May 2015

HSBC’s economically illiterate chief economist.

Not content with helping people avoid tax, fiddling Libor, manipulating foreign exchange markets and helping crash the world economy, one of the big mouthed idiots at the top of HSBC is now expressing views on economics. You might as well listen to a chimpanzee on the subject.

Stephen King, HSBC’s chief economist thinks governments have run out of options for imparting stimulus because interest rates are near zero. His views there are much the same as Lawrence Summers’s “secular stagnation” idea.

As I’ve pointed out before, if you read the small print, it’s not really clear that Summers’s SS idea consists of anything remotely coherent. But if HE IS saying anything, it’s the above idea that governments are near out of options.

Anyway, the flaw in the above King/Summers nonsense is that even if interest rates are at zero, there is absolutly nothing to stop the state simply printing money and spending it on the usual public sector items: health, education, etc. Or if a right wing governemnt is in power, it can use the extra money to cut taxes, which will increase consumer spending. The latter is not as PREDICTABLE a method of creating jobs as public spending. But never mind: if a right wing party is elected to power, it  is fully entitled to do what it was elected to do.

The Stephen King message, i.e. “There’s no money – we’re knackered” is unfortunately shared by many others. It’s complete nonsense.

P.S. To be more accurate, the chimpanzee – I mean Stephen King – does seem to be aware of the above “print and spend” option. According to the Telegraph article, he thinks “The last resort may have to be "helicopter money", a radically different form of QE that injects money directly into the veins of economy by funding government spending.”

Now there’s a teensy problem there as follows. Over the last three years or so we’ve had government borrow money and spend it with bonds being given to creditors, and with the central bank then printing money and buying back those bonds (QE). Now that all comes to the same thing as “print and spend”. So unbeknown to the chimpanzee – I mean Stephen King – his dreaded helicopter option has ALREADY BEEN IMPLEMENTED, and big time.

This is the end of civilisation as we know it.


OMG: Niall Ferguson opens his mouth again.

Niall Ferguson has a talent: concentrating so many flawed arguments into each paragraph that it takes a large amount of time to rebut it all. Dean Baker and Simon Wren-Lewis have dealt with some of Ferguson's material.

I’ll deal with just two of Ferguson’s points.

First, he argues that since inflation in the UK was above the 2% target for the first half of the recent recession, the UK should not have applied the level of stimulus that it did. Well the answer to that is that (amazing as this might seem) the Bank of England did actually notice that inflation was above target. After all, one of the main jobs of the BoE is to keep inflation near the target.

However, the BoE thought that much of that inflation was cost push, to which extent there wouldn’t have been much to gain inflation-wise from holding back on stimulus. And as it’s turned out, the BoE was right: that is, DESPITE applying a fair amount of stimulus when inflation was above target, inflation in the event actually declined. Indeed, for the first time in about fifty years, inflation is actually NEGATIVE in the UK at the time of writing.

The debt in 2040.

Second, Ferguson claims that if current and/or recent increases in the debt were to continue, by 2040 we’d have a debt to GDP ratio of five (which is way above the current Japanese “two” or 200% ratio).

Well the flaw in that argument is so elementary that it’s EXTREMELY BORING for me to have to set it out. Apologies to readers who are bored stiff by the next paragraph or two, but it’s not my fault.

The answer to Ferguson’s above boring deficit/debt point is that deficits and hence debt growth have been high in recent years and as a result of attempts to deal with the recession. And obviously if those deficits were to continue, then the debt would be very large by 2040.

However, it is a fact of history (and Ferguson claims to be a historian so he should know this) that recessions do not last for ever: regular as clockwork economies return to normal, and moreover experience booms or bouts of “irrational exuberance” from time to time (at which point SURPLUSES rather than deficits become appropriate). 

Thus Ferguson’s assumption that the deficit will continue at anywhere near its present or recent rate is nonsense.

Would a 500% debt:GDP ratio matter?

And not only that, but would it really matter if the debt:GDP ratio DID RISE to 500%? Well the answer to that will be second nature to advoctes of Modern Monetary Theory, but way beyond the comprehension of Naill Fergson (and indeed others at Harvard, e.g. Kenneth Rogoff).

The answer is that there isn't much difference between base money and national debt at low rates of interest as recently pointed out by Martin Wolf in the Financial Times*. And if the private sector is determined at accumulate state liabilities (base money and debt) even at low rates of interest, there is not much that the state can do about it.

If the state DOES NOT supply the private sector with the state liabilities that the private sector wants, the private sector will simply try to save (save money that is), and as Keynes pointed out, saving money instead of spending it tends to raise unemployment. Keynes called that the “paradox of thrift”.

But long before 2040, it could go the other way, that is, the private sector’s desire to save could decline: i.e. the private sector might try to spend away its stock of national debt and base money. In that case demand and inflation might easily become excessive, in which case it would make sense for the relevant government and central bank to run a surplus, i.e. grab money off the private sector and “unprint” it (and/or cut public spending).

At the extreme, the national debt might decline to some record low figure, like 30% of GDP. We just don’t know. And it really doesn’t matter whether the debt is 30% or 300% of GDP as long as interest on the debt is kept down. Personlly I’m happy with any old rate of interest as long as its NEGATIVE in real terms, i.e. negative after adjusting for inflation. That way the relevant country profits from it’s creditors! What’s not to like about that?


* As Wolf 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…”

Thursday, 21 May 2015

Leading economists back Positive Money and MMT, sort of.

Positive Money and MMT have featured prominently on this site of mine for years. So it’s good to see three leading economists in The Guardian backing an idea that PM and MMT have have backed for an equally long time if not longer. That’s the idea that in a recession, the state should simply create new base money and spend it and/or cut taxes (or as some MMTers put it, “create fiat” and spend it).

The three economists are Mark Blyth, Eric Lonergan and Simon Wren-Lewis. (Incidentally, I am NOT an official spokesman for PM.)

The need for “create and spend”, as the article makes clear, is especially urgent given that what with monetary policy having arguably run out of steam, some new form of stimulus may be needed. However, in saying that, the authors diverge from PM thinking in that PM advocates that “create and spend” is the best form of stimulus even where monetary policy has NOT RUN OUT of steam.

That is, in their submission to Vickers (authored jointly with Prof Richard Werner and the New Economics Foundation), PM criticised interest rate adjustments, and righly so. My own main beef with interest rate adjustments is that they are DISTORTIONARY. To illustrate, when interest rates are cut, lending and borrowing based activity expands, whereas non-lending based activity does not. That makes as much sense as imparting stimulus by boosting just car manufacturing, restaurants and garages, with everything else from hospitals to hotels being ignored. There is also plenty of evidence that interest rate adjustments do not actually work too well.

A second “divergence” from PM policy comes in this passage in the Guardain article: “Parliament needs to equip the Bank with the infrastructure to administer payments, and determine in advance the recipients. An equal payment to all households is likely to be the least controversial rule.”

Well that would certainly be ONE WAY of implementing “create and spend”, and that’s nowhere near the first time that’s been advocated. But why go to all the bother of setting up an entirely new system for disbursing new money when we already have such systems in place: existing public spending programs, plus there are sundry taxes that could be cut. There’s VAT, income tax, payroll taxes – the list goes on and on and on.

Moreover, the above “distribute to households” system suffers the same defect as interest rate adjustments: it’s distortionary. That is, there is a HUGE CHUNCK of the economy which is NOT DEPENDENT on households’ tendency to spend: the existing public sector – health, education and so on.

If stimulus is to be politically neutral, the public sector should have it’s share of stimulus, shouldn’t it?

Wednesday, 20 May 2015

The Economist’s ideas on why debts are so high.

The Economist claims there are two reasons why we’re “addicted to debt” (to quote the title of their article). First, one of the main forms of debt, i.e. mortgages, involves tax perks. Second, The Economist claims that people over-estimate the safety of debt.

Doubtless those are valid reasons, but there is a third reason, namely that we subsidise the commercial banks that create much of the debt: there’s the small matter of that $13 trillion of public money was used to rescue banks in the recent crisis in the US. (Yes that’s trillion, not billion.)

Of course that’s not to say that private banks got a subsidy worth thirteen trillion. But certainly some of that public money was loaned to private banks at a near zero rate of interest.

It’s impossible to say what a REALISTIC rate would be. No doubt that varies from bank to bank. But as a rough guide, Warren Buffet loaned five billion to Goldman Sachs during the crisis at 10%.

Now if you can borrow a few billion (or perhaps trillion) at 0% when the realistic rate is 10%, well that’s one hell of a subsidy, isn't it?

As for any idea that the dozy corrupt incompetents in high places and their bankster / criminal friends have any intention of ceasing to rob taxpayers with a view to subsidising banks, well that’s just pie in the sky. One of my local radio stations, Smooth Radio, has an advert at least once a day saying quite explicitly that bank deposits in the UK are backed by UK taxpayers. I assume the same goes for other regions in the UK.

Perhaps a more accurate summary of the situation would be thus. Politicians are near 100% clueless when it comes to banking and banksters know it. Banksters only have mutter something about economic growth being hit if bank lending declines, and politicians fall for it every time. Thus banksters have no trouble at all in wheedling billions of dollars and pounds of free money out of politicians every year.

Tuesday, 19 May 2015

Maturity transformation is an example of the fallacy of composition error.

Maturity transformation is one of the basic activities of commercial banks: it consists of “borrow short and lend long”. That is, commercial banks accept money from depositors (and bondholders and shareholders) and lend to mortgagors, businesses, etc. The “maturity” of deposits is short: i.e. the money is available on demand or at short notice. In contrast, mortgages last for years if not decades. That is, the “maturity” there is LONG. Thus banks according to the conventional wisdom and according to the text books perform a valuable service: they “transform” short maturity into long maturity, i.e. banks enable those who are only prepared to lose access to their money for relatively short periods to nevertheless gain some of the benefits (i.e. the relatively high interest rates) that come from lending out money for LONG periods.

The fallacy of composition error is where some policy benefits INDIVIDUAL households or firms, with the conclusion being drawn from that that similar benefits must also be conferred on ALL OR MOST households and firms, or on the economy as a whole.

To illustrate the fallacy of composition flaw in maturity transformation, let’s take a simple hypothetical economy, as follows.


A hypothetical economy.

Everyone has stock of base money (in physical form or at an account at the CB) to the tune of £X per person. That amount of money induces the population to spend at a rate that brings full employment. In addition, supply and demand for loans is such that each person in half the population lends £Z to each person in the other half.

Loans by one person to another involve the creditor losing access to their £Z for duration of loan, unless they can find someone else willing to take on the loan, i.e. act as creditor.

A commercial bank sets up in business.

A commercial bank then sets up in business and makes an amazing offer to everyone. The bank says to potential lenders, “instead of lending DIRECT to those who want to borrow, why not deposit your money with us, and we’ll do the lending. Plus we’ll guarantee you instant access to your money instead of your waiting for the above mentioned replacement creditor to appear. Plus you’ll continue to get interest.” That bank also takes over the job of creditor in respect of EXISTING loans.

The bank of course knows that it’s highly unlikely that all depositors or even a significant proportion of them will want to withdraw all their money on the same day, so this amazing wheeze thought up by the commercial bank works.

There is however a problem, which is that lenders’ stock of instant access money has risen: and that means that aggregate demand rises. Indeed on the very reasonable assumption that people keep their stock of instant access money to a minimum and try to spend away any excess stock, then lender’s EXCESS STOCK of instant access money will be £Z per person. So the central bank will have to raise taxes and withdraw base money from the economy (to the tune of £Z per lender). And there’s no question but that peoples’ stock of money is related to their weekly spending: what do people do when they win a lottery?

The fallacy of composition.

So what has the commercial bank achieved? It hasn’t improved the population’s liquidity one iota: that is, the amount of instant access money has not increased.

To summarise, when the commercial bank is first set up, each lender thinks they’re getting a bargain: their stock of instant access money rises, and the only downside is that the bank takes a cut. However, in the aggregate there’s no increase in instant access money after government has taxed away the excess instant access money. And that’s where the fallacy of composition lies.

Other benefits of commercial banks.

Another benefit that commercial banks confer is EFFICIENCY (e.g. they have staff with legal qualifications who specialise in drawing up agreements with mortgagors.) And that’s doubtless more efficient than     INDIVIDUAL lenders and borrowers getting together and trying to cobble together legally binding contracts, or hiring a lawyer on a one off basis for each mortgage or other loan arranged.

That increased efficiency probably compensates for the above mentioned cut that banks take. But the fact remains that increased stock of instant access money brought about by the commercial bank’s maturity transformation system is a mirage: it’s a fallacy of composition.


Of course the above is an over simplified version of the real world. But introducing the complexities of the real world won’t change the basic outcome, far as I can see. For example, people’s weekly spending is no doubt related their TOTAL NET ASSETS as well as being related to one particular form of asset: instant access money.

Thus when government raises taxes in the above scenario so as to cut demand, as well as confiscating instant access money, lenders’ net assets are ipso facto also confiscated. Ergo the demand reducing effect is more powerful than might at first seem, ergo government will not tax away quite as much money as suggested above. Ergo lenders end up with more instant access money than suggested above. Ergo they’ll try to find some other asset to invest their excess instant access money in. But purchasing the latter asset is likely to increase demand, so that’s not allowable (on the above assumption that the economy is already at capacity).

This is complicated!!!

Saturday, 16 May 2015

Abolish cash so as to make negative interest rates easier?

One flaw in the “let’s abolish cash” argument is thus.

One motive for doing so is to make the imposition of negative interest rates easier, which in turn makes it easier to impart stimulus in a recession. I.e. the argument is that if zero interest rates don’t solve the problem, then negative rates might.

One problem with that idea is that interest rate adjustments are an inherently illogical way of imparting stimulus. That is, if there’s a recession, there is no prima facie reason to assume it’s caused by lack of investment or borrowing based activity, rather than a drop in demand for ice cream, cars, condoms, you name it. Ergo the logical response to a recession is simply to raise ALL FORMS of demand -  unless there’s VERY SPECIFIC evidence that lack of investment spending is the culprit. And even there, a drop in borrowing and debts does not necessarily prove that potential borrowers have got it wrong: there may be good reasons for reducing investment, borrowing and debts.

And having raised demand GENERALLY, employers (public and private sector) are quite capable of working out for themselves how much of their increased cash flow should be devoted to more borrowing and investment - no need for nanny state to tell them.

A second flaw in negative interest rates is that they can, at least in theory, result in negative output.

So the conclusion is: “down with negative interest rates” - although that could be interpreted the wrong way...:-)

Thursday, 14 May 2015

Inane drivel from Neil Wilson on full reserve banking.

Neil Wilson has a good grasp of some areas of economics: in particular Modern Monetary Theory.

However this article of his on full reserve banking (FR) is trash. His attempt to summarise the basics of FR is straight out of la-la land. That’s in contrast to other critics of FR who at least have some idea what FR consists of. For example this article criticising FR by Brian Romanchuk summarises the basics of FR correctly. (That’s under his heading “The Proposals” at the start of his article). In fact I can’t flaw Brian Romanchuk’s summary.


Uri Geller and magic.

The first three hundred or so words of Neil Wilson’s article consist of accusing advocates of full reserve (FR) of trickery and magic. There are links to magician sites, references to Uri Geller and so on. That’s a bizarre way of starting an article which is supposed to be serious economics.

If Neil Wilson is trying to say that some advocates of FR engage in propaganda rather than logic, that’s certainly true. Indeed Positive Money (which advocates FR) is quite clearly a CAMPAIGNING organisation as well as publishing material which is completely serious. But the same goes for most areas of economics: part propaganda and part logic.

Incidentally, and re Positive Money, I’ll refer to “PM & Co” below. That’s a reference to the three authors of a submission to the Vickers commission: Positive Money, Prof Richard Werner and the New Economics Foundation.

The basics of FR.

Anyway Neil Wilson’s attempt to summarise FR appears under his heading “The Fundamentals”. He starts “Sovereign money stimulates the economy by increasing the price of and therefore reduces the level of bank lending and then replaces that in the economy by increased government spending or tax cuts. And that’s it.”

(Incidentally “Sovereign money” is just an alternative name for FR.)

Well if you actually read the works of FR advocates (Milton Friedman, Laurence Kotlikoff, John Cochrane, Positive Money, John Kay, etc) nowhere will you see the idea advanced that the basic objective is to raise the cost of borrowing and make up for that with more government spending. It MAY WELL BE that FR does raise the cost of borrowing, but that’s a side effect.

Anyway, to continue with the Neil Wilson effort, the next paragraph reads. “The basic theory is that increasing the price of bank lending automatically selects the correct projects to receive bank lending.”

Well first, as just mentioned, it is very definitely not the “basic” objective of FR to raise interest rates. Indeed Neil Wilson doesn’t cite any passages from advocates of FR to back up the idea that raising interest rates is a basic objective of FR. And that’s for the very good reason that such passages don’t exist: at least I read hundreds of thousands of words by numerous advocates of Sovereign money / FR and don’t recollect any such passages.

As for the idea that low interest rates don’t “select the correct projects to receive bank lending” whereas higher interest rates do, I absolutely agree that that’s a barmy idea. If that WERE a central ingredient in FR, I’d have nothing to do with FR. However (and to repeat) the above “high interest rate” idea is simply a figment of Neil Wilson’s imagination. It’s straight out of la-la land.

In fact this la-la land stuff from Neil Wilson makes his accusations to the effect that advocates of FR are engaged in magic and hocus pocus look decidedly odd: the words “pot”, “kettle” and “black” spring to mind.

The “undemocratic” committee.

Given that Neil Wilson clearly hasn’t the faintest idea what he’s talking about, I’m not going to waste time going right thru every sentence of his article. However, I WILL DEAL WITH just one further mistake he makes, first because it’s actually a mistake made by SEVERAL opponents of FR (including Anne Pettifor and Bill Mitchell). Second, Neil Wilson himself seems to think it’s an important point or “myth”. He introduces this alleged myth with the words, “The final myth is by far the most pernicious and the most disturbing.”
I’ve actually tried to explain the flaw in this alleged myth to Neil Wilson several times, but he clearly doesn’t have the brain to grasp it. Maybe Anne Pettifor and Bill Mitchell don’t either – I’m not sure. It’s a point that I’d have thought the average fifteen year old could understand. Anyway the “pernicious myth” is as follows.

Under a sovereign money system (i.e. under FR as advocated by SOME, but not others), stimulus takes the form of the state simply creating new base money and spending it, and/or cutting taxes. And clearly if that’s how stimulus is done, then SOMEONE or some committee or whatever has to decide how much stimulus is required from time to time.

And PM & Co’s answer to the latter question is that some sort of committee of economists (much like the Bank of England Monetary Policy Committee) should do the deciding. That committee is called the “Money Creation Committee” by PM & Co – I’ll call that the MCC.

Now it’s that committee that causes the Wilson / Pettifor lot to go ballistic. They claim that involves having important economic decisions put into the hands of a selection of people who are not democratically elected, and that consequently that means the end of civilisation as we know it.

Well that objection from Wilson, Pettifor, Mitchell & Co is pure unmitigated nonsense and for the following five reasons.

1. Others also advocate “print and spend”.

Most MMTers advocate EXACTLY THE SAME form of stimulus as PM & Co: i.e. “create new money and spend it”. It’s just that most of them KEEP QUIET about who actually decides on the size of stimulus package. (And note that Neil Wilson and Bill Mitchell are MMTers)

Plus Keynes approved of “create and spend”.

So to that extent, the only difference between PM & Co and most members of the Wilson / Pettifor / Mitchell brigade is that PM ARE HONEST!!!!  To repeat, PM & Co are totally clear on WHO DECIDES on stimulus, whereas most members of the Wilson / Pettifor brigade skate over the issue.

2. “Undemocratic” committees already decide stimulus.

Over the last few years and reaction to the recession we’ve actually ADOPTED a “create money and spend it” policy. That’s because we’ve implemented fiscal stimulus and followed that by QE, and that comes to the same thing as “create and spend”.

And who exactly decides in the size of that stimulus package? Well – shock horror – it’s one of those horrendous “undemocratic” committees: in the case of the UK, the Bank of England Monetary Policy Committee!!!

Looks like various members of the Wilson / Pettifor / Mitchell brigade have no idea what’s going on at the moment – never mind what might take place under full reserve banking.

And make no mistake: “undemocratic” central bank committees have the whip hand when it comes to determining the size of stimulus packages, not democratically elected politicians. That’s because (in the case of the UK at least) government has EXPLICITLY given the BoE responsibility for inflation. That means that politicians have given the BoE powers to override any fiscal stimulus that politicians might implement.

As to the US, much the same applies. Indeed market monetarists are always referring to what they call “monetary offset”: that’s the idea (just set out above) that if politicians implement stimulus, or too much stimulus, then the central bank may easily “offset” it.

But here’s the really strange thing. Despite the fact that stimulus is ALREADY DECIDED by “undemocratic” committees like central bank interest rate committees, VERY FEW objections to that fact have ever been raised by the Wilson / Pettifor brigade. In short, it’s blindingly obvious that their blather about “undemocratic” committees derives from their scratching around for any old bit of mud to throw at FR, rather than any sort of thoughtful analysis of FR.

3. The printing press.

There is a VERY GOOD REASON for giving “undemocratic” committees considerable powers: it’s that most of us do not want to see politicians having exclusive control of the printing press. I.e. about 90% of the population and 90% of economists (I’d guess) just don’t agree with the ultra-democratic ideas put by Wilson, Mitchell and Pettifor (assuming those “ideas” amount to anything coherent, which I don’t think they do).

4. Dispose of “undemocratic” committees?

Having said there are good reasons for “undemocratic”committees, that’s not to say we COULDN’T have a system where stimulus is ENTIRELY I the hands of politicians. FR is entirely consistent with doing that. I.e. (and the Wilson / Pettifor brigade will be in tears about this), undemocratic committees ARE NOT, repeat ARE NOT an essential ingredient in FR.

5. “Undemocratic” committees leave POLITICAL decisions to politicians.

As PM & Co have explained till they’re blue in the face, the fact that the MCC has the power to determine the TOTAL SIZE of a stimulus package DOES NOT, REPEAT NOT, REPEAT NOT, REPEAT NOT mean the MCC has powers over obviously POLITICAL decisions like what proportion of GDP is allocated to public spending, and how that spending is split between the usual public spending items like health, education, defence and so on.

Reason for that is, the MCC decides on the DIFFERENCE BETWEEN government income and expenditure (i.e. the size of the deficit). And that’s it. It does NOT, REPEAT NOT decide on obviously political matters. Indeed, in that respect, the MCC is very much like the existing BoE MPC (in the case of the UK).

Since members of the Wilson / Pettifor / Mitchell brigade seem to have extreme difficulty in understanding that point, I’ll repeat it red.

The fact that the MCC has the power to determine the TOTAL SIZE of a stimulus package DOES NOT, REPEAT NOT, REPEAT NOT, REPEAT NOT mean the MCC has powers over obviously POLITICAL decisions like what proportion of GDP is allocated to public spending, and how that spending is split between for example health, education, defence and so on.

Hope I’ve got that very simple point across. But I’ve got my doubts.

Wednesday, 13 May 2015

Another economist who can’t recognise a bank subsidy when it stares her in the face.

I drew attention yesterday to an economist (Bill Mitchell) who doesn’t seem to be able to recognise a bank subsidy when it stares him in the face. Another instance of the same failure is this Forbes article by Frances Coppola where she admits that the loans made by central banks to commercial banks during the recent crisis were at an artificially low rate, but doesn’t seem to think there’s anything wrong there.

I shouldn’t have to explain this, but it’s widely accepted in economics that subsidies do not make economic sense: that is, they result in a misallocation of resources. Even most of those who have never studied economics understand that.

The only exception (which again, is very widely understood) comes with subsidies for which there is a clear social justification, as for example in the case of education for kids.

Most of those who ponder the improvements that need to be made to bank regulation recognise that there is something fundamentally wrong with taxpayer funded subsidies or guarantees for private banks. As the UK’s Vickers commission put it, “The risks inevitably associated with banking have to sit somewhere, and it should not be with taxpayers.”

Tuesday, 12 May 2015

Would a Sovereign money system be flexible enough?

Positive Money have just published the above work. It aims to deal with a criticism made of PM’s full reserve banking system, namely that the system would not be flexible enough: in particular commercial banks would allegedly have a severely reduced freedom to lend to any viable borrower they spot under PM’s system, a criticism made for example by Anne Pettifor.

My first quibble with the above PM work is that the authors have missed a trick: that is, their case is stronger than they think, and for the following reasons.

A major flaw in the above “Pettifor” argument is that the commercial bank system does not in fact have TOTAL freedom to expand total amounts loaned under the EXISTING SYSTEM (as made clear in this Bank of England publication). Indeed, I’ll argue in the section just below that they have no more freedom under the existing system than under a PM system.

Assume the economy is at capacity.

Let’s take two possible scenarios, first that the economy is at capacity or “full employment” and second that it is not. And we’ll deal with the first scenario first.

Where an economy is at capacity, and commercial banks want to create extra money out of thin air and lend it out, the effect, when that extra money is spent will be inflationary. That in turn means the central bank will raise interest rates or take other steps to constrain demand. Net effect, roughly speaking, is no extra lending!!!

So at full employment, the commercial bank system just DOESN’T HAVE complete freedom to lend more. Of course, given an increased desire to borrow and lend in the private sector, and assuming the central bank raises interest rates to counter the inflationary effect of that, there’d still be SOME increase in lending. Reason is that increased interest rates would cause increased SAVINGS, and as Keynes rightly pointed out, saving money has a deflationary effect. So to the extent that more saving takes place, then more lending can take place.

To that extent, the claim by the Pettifor's of this world that the commercial bank system has total freedom to make extra loans as soon as they spot more lenders who are viable is wide of the mark.

Lending under PM’s system.

Now let’s consider what would happen under PM’s system. In the submission to Vickers made by PM, Prof Richard Werner and the New Economics Foundation, that authors positively CRITICISED deliberate interest rate adjustments by the central bank as a means of controlling demand, and I agree with those criticisms.

Plus I assume PM’s policy there hasn’t changed (though I could be wrong). I.e. I assume their policy is: “leave interest rates to market forces”, a policy I agree with.

So…. under a PM regime and given an increased desire to borrow, interest rates would rise. And the overall effect of that would be much like the scenario set out above, where when the commercial bank system spots a series of new and viable lending opportunities: it fires ahead, but the central bank raises interest rates to choke off excess demand, though lending DOES STILL rise a finite amount.

So what’s the big difference for the commercial bank system as between the existing set up and a PM set up? Not much, far as I can see. I.e. as far as the much vaunted “flexibility” goes, there’s not much difference.

The economy is not at capacity.

Having dealt with the “at capacity” scenario, let’s now consider an economy which is NOT AT capacity. In that scenario there is of course  no harm in commercial banks lending more. But there is a big problem there, namely that commercial banks just DON’T LEND MORE when the economy is in recession! Or to put it more accurately, commercial banks act in a pro-cyclical manner, not an anti-cyclical manner. So the “extra lending” that allegedly takes place in a recession is a figment of Pettifor & Co’s imagination.

What DOES GET economies out of recession is extra government spending, which in turn encourages more commercial bank lending. (Incidentally I’m assuming that the market forces which get economies out of a recession – Say’s law, the Pigou effect, etc – are ineffective. That’s not ENTIRELY correct: I think they do work TO SOME EXTENT. But I agree with Keynes who said that those market forces were not effective enough, and that in a recession, government implemented stimulus is needed.)

To summarise so far, the alleged weakness in a PM / Werner / NEF system, namely that it reduces commercial banks’ freedom to lend, i.e. reduces “flexibility” is very questionable, if not totally untrue.

Loans which increase GDP.

My second quibble with the above PM publication is the idea that in granting loans, banks should give preference to loans which increase GDP as compared to those which don’t.

One argument sometimes put in support of that argument (though I don’t think it appears in the PM publication) is that loans for small and medium size enterprises (SMEs) result in REAL output, whereas loans to enable people to buy EXISTING assets like houses do not result in extra output (apart from a few days work for bank staff, lawyers, and furniture movers).

The answer to that is that loans to SMEs fail about twice as often as loans for property purchase. Thus it is far from clear just how productive SMEs are.

Loans for existing versus new houses.

Anyway, returning to the GDP idea, I actually explained the flaw in that idea a few weeks ago here. But I’ll reiterate it, and with particular reference to housing.

The GDP idea is essentially as set out just above.  That is, if someone gets a loan to have a house built, there is a substantial effect on GDP: bricklayers, carpenters, plumbers etc are employed. In contrast, if someone gets a loan to buy a house which ALREADY EXISTS, there is LITTLE EFFECT on GDP (apart from a few days work for bank staff, lawyers, surveyors etc). Ergo we should favor “GDP increasing loans”.

The flaw in the idea is that it assumes there is some sort of fixed or limited amount of money that is available for stimulus purposes, and thus we better make best use of that money if we’re to maximise GDP.

In fact there is NO LIMIT to the potential amount of stimulus money. That is, government and central bank could if they wanted, print and spend a trillion trillion trillion trillion dollars or pounds any time they want. Alternatively and as part of the latter mega bout of stimulus, government could just stop collecting tax. Households would find they had large piles of cash and would run out and buy new houses, existing houses, holiday homes, new cars, you name it, and of course inflation would go thru the roof.

Thus, and as often pointed out by MMTers, there is only one constraint on stimulus, namely inflation.

Now if there’s an increase in demand for loans to buy EXISTING houses, there is little increased demand, i.e. very little extra employment is created, thus there is little effect on inflation! Thus, assuming the economy is not at capacity and that extra loans are granted to people wanting to buy existing houses, and little extra employment is created as a result, that just isn't a problem:  FURTHER stimulus can easily be applied so as to GET THE ECONOMY up to capacity.

In short, there is no problem in allowing extra loans to fund the purchase of existing houses, if that’s what the population wants.

House prices and inflation.

An obvious objection to the latter argument is that if there’s an increased demand for “existing house loans”, that will bump up the price of houses, which itself is inflationary. Well that’s true, but assuming market forces are working properly, then an increase in the price of houses means that house building becomes more profitable, which means more houses are built, which in turn means that the price of houses will eventually revert to the level where the price of houses equals the cost of erecting them (plus a normal level of profit for house builders).

Of course in the UK and maybe elsewhere, market forces are not allowed to operate properly: that is, it is very difficult to get permission to use farmland to construct houses on. The result is that is that land now accounts for about a third of the cost of a house in the UK.

But to repeat, assuming a reasonably free market, an increased demand for loans to buy existing houses WILL NOT result in the price of houses rising in the long term.

Thus I suggest we can just leave it to the market to sort out how many brand new houses as distinct from existing houses are bought. If the economy is not at capacity or “full employment” and there is a big increase in demand for loans to buy EXISTING houses, that’s unlikely to raise demand by enough to have much impact on unemployment. But who cares? The solution is to carry on incresing stimulus till the economy IS AT capacity.

Incidentally the above PM idea on new versus existing houses is part of a more general point, namely that where PM advocates the same ideas (essentially full reserve banking) as Irving Fisher, Milton Friedman, John Cochrane and others who advocate full reserve, PM is obviously on solid ground. In contrast, where PM advocates ideas that are unique to PM and not shared by others (e.g. the latter three individuals), then clearly PM is on thin ice.

Conclusion: there is no case for any sort of bias in favor of loans which allegedly boost GDP by more than other loans.



P.S. (14th May 2015). “KK” in the comments below makes a good point, namely that lending was rising rapidly just prior to the crunch and that was a time when the economy was more or less at capacity. And that conflicts with my above theory that lending is constrained at full employment (aka “capacity”).

My answer to that is that prior to the crunch, house prices were rising rapidly, and that rise would have required additional lending if houses were to be bought and sold at the same rate as in earlier years. (In fact they were probably being bought and sold FASTER than in earlier years, which would have AMPLIFIED the effect).

Plus a large majority of lending is for property purchase, plus a large majority OF THAT is for the purchase of EXISTING property / houses, not new property or houses.

However, as Positive Money keep reminding us, loans which fund the purchase of EXISTING assets have little effect on demand or GDP. Thus I should have said in the above article that my theory about lending being constrained at full employment applies to what Positive Money would call “GDP increasing loans”, rather than to loans aimed at funding the purchase of EXISTING houses.

Monday, 11 May 2015

Abolish lender of last resort?


If the above Financial Times story is any guide, the Fed’s lending powers may be REDUCED.

Rather than just “limit” the Fed’s freedom to act as lender of last resort, how about examining the whole question as to whether lender of last resort is justified? After all, lender of last resort normally amounts to a subsidy of banks, and subsidies do not make economic sense.

Of course lender of last resort loans are SUPPOSED to be made at penalty rates and in exchange for first class collateral. But any idea that those conditions were actually imposed during the recent crisis is a joke. In short, lender of last resort as currently constituted is a subsidy of banks.

Contrary to popular perception, Walter Bagehot did not approve of lender of last resort. In the last chapter of his book “Lombard Street” he said he disaproved of it, but thought it was too entrenched a part of the system to dispose of.

But if lender of last resort IS DISPOSED OF, some other way has to found to make banks failure proof. And that’s not difficult: just insist on a HUGE increase in their capital ratios. That way, when a bank does badly, its shareholders take a hit, not the taxpayer.

That “shareholders take the hit” principle applies to every non-bank corporation. Why not to banks?

As to how high capital ratios should go, Martin Wolf (chief economics correspondent at the Financial Times) favors something like 30%. Personally and as an advocate of full reserve banking I favor 100%, one reason being as follows.

Removal of subsidies equals 100% capital ratio.

If all taxpayer subsidies and guarantees for banks are removed, which they  should be, then depositors and bond holders ipso facto pretty much become preference shareholders.

To be more accurate they become shareholders as in “someone who at worse stands to lose everything”. But they don’t become shareholders in that the value of their stake in a bank is not formally reduced to below book value till after insolvency is officially declared.

However, assuming the value of that stake is strictly related to the value of the bank’s assets (which is a slight over-simplification, but not TOO MUCH of an over-simplification) then those depositors and bond-holders won’t lose out by being classified as preference shareholders. That is, if a bank does badly and after ordinary shareholders are wiped out, the value of the bank’s remaining assets are such that after insolvency proceedings are complete, depositors and bond-holders get X% of the book value of their stakes, then in the event of their being classified as preference shareholders, then the value of those shares would ALSO BE X% of book value. But, and it’s a big but: in the preference share scenario the bank is not closed down.

Now what’s the point of closing down a bank when there’s a way of NOT CLOSING IT DOWN that seems to do no harm to ANYONE? Depositors and bond-holders (re-classified as preference shareholders) don’t lose out. There’s no reason for the bank’s assets to be sold off in a hurry, and selling anything QUICKLY may mean that only a fire-sale price is obtained for those assets.

A legitimate question in reaction the latter argument is: "Why not by the same token ban bonds in non-bank corporations". My answer to that is that non-bank corporations are not as critical as banks. That is, if some non-bank corporation wants to lever up too much and it goes bust as a result, that won't result in a credit crunch followed by seven years of excess unemployment. Banks are a very different kettle of fish.


Best option is to abolish all taxpayer funded support for banks and have banks funded just by shareholders, not depositors or bond-holders.

As for accepting and transferring money which depositors want to be 100% safe, that can be done by something like state run savings banks, though numerous variations on that theme have been suggested, none of which I object to in principle. One, which used to be promoted by William Hummel is to let every citizen have an account at the central bank (though Hummel has changed his mind on that far as I can see). The UK’s National Savings and Investments bank actually serves the same purpose.

Sunday, 10 May 2015

Charles Goodhart moves towards full reserve banking.

This article by Charles Goodhart and Enrico Perotti is a big step towards full reserve banking. (Hat tip to Frances Coppla for highlighting the article).

Under full reserve anyone wanting their money loaned on by a bank or any similar entity, i.e. anyone who wants a significant return on their savings must accept the risks inevitably involved in doing that, rather than expecting the taxpayer to carry the risk, as obtains at the moment. In contrast, if they want total safety, they lodge their money with government, which means they get little or no interest.

Moreover, those who want the former option have a choice as to what their money is put into (mortgages, small business or whatever).

And what Goodhart and Perotti (GP) want in the case of mortgages is “much   greater maturity matching and no insured deposit funding.” Well that’s straight out of the full reserve book. Positive Money who advocate full reserve suggest funding mortgages and other investments partially by equity and partially by long term deposits. And long term deposits gives the “greater maturity matching” that GP want.

In contrast, under Laurence Kotlikoff and Milton Friedman’s  version of full reserve, the funding is done just via equity. But certainly “insured deposits” do not fund mortgages or other investments under ANY version of full reserve.

Well now, given the VERY LARGE proportion of total lending that funds mortgages, Goodhart and Perotti have gone a long way towards full reserve. So I have a question for them: “Why not go the whole way?”

In other words where someone wants their money put not into mortgages, but into small business loans, solar energy, wind farms, whiskey distilleries, you name it, why not apply the same principle?

Saturday, 9 May 2015

The Australian house price bubble.

According to a Financial Times article day before yesterday by Jamie Smyth, Australia has a problem. Title of the article is “Australia house price boom poses policy-making dilemma”.

The alleged dilemma is that house prices there are rising fast, which means an interest rate rise would be appropriate. But government wants to cut interest rates so as to impart stimulus. Oooh la la. What do do?

Well as the Nobel laureate economist Jan Tinbergen pointed out, it’s not too clever using one policy instrument to influence two or more policy objectives. You’re guaranteed at some point to get the above sort of dilemma.

In short, if fiscal policy (maybe plus QE) is used to boost demand, and interest rate rises are used to control asset price bubbles the problem is ameliorated.

Fiscal stimulus plus QE equals “print money and spend it, and/or cut taxes”. That puts more money into private sector pockets. But if anyone wants to use their new found wealth to pay interest on a loan to buy a house, they’ll find that relatively poor value for money (assuming interest rates are raised) compared to spending the money on consumption items (clothes, holidays, laptops etc).

That does not solve PART of the problem, namely foreigners buying houses in the relevant country with funds raised OUTSIDE that country. But it does cut demand for houses coming from citizens of the country with funds borrowed from other citizens.

Do asset price bubbles matter?

Of course we’re better off without asset price bubbles, but do they really matter? One of the biggest causes for concern is the possibility of a series of banks collapsing as a result of bubbles deflating, followed by years of recession and excess unemployment. Indeed that was one of the main causes the the banking crises around seven years ago.

But there’s a very simple solution to that: raise bank capital to the level where a big decline in asset prices doesn’t cause banks to go insolvent. Indeed that policy is part and parcel of full reserve banking: most versions of full reserve involve a 100% capital ratio which means that bank insolvency is almost impossible.

And as to the idea that very high capital ratios would increase bank funding costs, that’s not true assuming the Modigliani Miller theory is correct. And even if there is a slight increase in bank funding costs, that will in part be down to the removal of bank subsidies. Bank subsidies are INHERENT to the existing bank system.

That is, Too Big to Fail subsidies have not gone away, plus in some countries (e.g. the UK) all deposits are guaranteed gratis the taxpayer. In contrast in the US, small banks are protected by the self-funding FDIC, but big banks effectively rely on taxpayers. So the rise in bank funding costs attributable to the above removal of subsidies is wholly justified – though of course banksters will do their best to persuade politicians that that rise in bank funding costs is UNDESIRABLE. The “persuasion” is of course often enhanced by wads of cash in brown envelopes – or perhaps I should use a more polite phrase like “contributions to election expenses”.

Incidentally, the above “fiscal stimulus followed by QE” (aka “print money and spend it or cut taxes”) policy is part of the version of full reserve system advocated by Positive Money, Prof Richard Werner and the New Economics Foundation. The latter “print” policy is also approved of in Modern Monetary Theory circles.

Funds raised outside Australia.

Assuming the main problem with bubbles is the resulting possible bank collapses, then funds raised outside Australia are not a big problem for Australia. Of course any collapses will impinge on Australia to a finite extent. But basically if some bank OUTSIDE Australia goes bust, then Aussies can go down to the nearest bar, drink a few beers and have a laugh about it.

Friday, 8 May 2015

Censorship in academia.

Prof Bill Mitchell recently published a pair of articles here and here on the subject of full reserve banking as advocated by Positive Money and a recent report to the Icelandic prime minister. But this phrase in the professor’s article is a joke: “I will delete comments that provide links to Positive Money sites.”

Whaaat? You engage in a debate with an organisation, and just to make it clear the debate is – er -  “open and impartial” you refuse to entertain references or links to articles published by that organisation? LOL. I have advice for opponents of free speech: if you want to engage in censorship, make it a bit more subtle than THAT!!!!

Universities and the academics who work there are supposed to be in favor of free speech, impartial enquiry and so on. As anyone with half a brain knows, they are anything but. If it’s free speech you want, get a job on a construction site, not at a university.

Having said that, Bill Mitchell does know a lot about Modern Monetary Theory (MMT) and has done a great job demolishing the arguments for austerity over the last five years or so. Plus in the comments after the above two articles he DID PUBLISH a very large number of comments, not all of them supporting his views. Many of the comments were from me.

But he does mean what he says about censoring comments with links to Positive Money: the last comment I left there DID INCLUDE a link to a PM article. Lo and behold it was censored. Plus another comment from me with several criticisms of his articles was censored.

Also it is right to be very suspicious of even the smallest constraint on free speech. The reason was nicely set out by Noam Chomsky when he said, “The smart way to keep people passive and obedient is to strictly limit the spectrum of acceptable opinion, but allow very lively debate within that spectrum….”.

I’m happy with banning comments by people who are SERIOUSLY stupid, ignorant, rude and engage in that behavior in a REPETITIVE manner. But I’m suspicious of anything else.

The Positive Money article.

Anyway, if you’re interested in the comment of mine that contained a link (shock horror) to a Positive Money article, here it is. You’ll be able to judge for yourself whether my comment was “seriously stupid, ignorant or rude”.  But first the background.

My comment was in response to a commentator called “Iconoclast” who made two points. The first was a very common and flawed criticism of PM ideas namely that they involve important economic decisions being taken by a committee of economists who are not democratically elected.

The second was an expression of sympathy with Prof Mitchell’s claim to have been sent lots of impolite emails by Positive Money supporters suggesting that Mitchell abandon MMT and adopt PM’s ideas. (Incidentally I’m very suspicious of that claim by Mitchell about having been sent loads of impolite emails. Reason is that anyone can contact ME via my site and people occasionally do. But I haven’t had a single impolite email in years. Granted my site probably doesn’t have anywhere near the same number of views or hits as Bill Mitchell’s. But that “zero impolite emails in years” figure does make me suspicious.)

Anyway… Iconoclast’s actual words were (I’ve put them in green italics):

“Bill Mitchell says “I do not support frameworks where key economic decisions are handed to an essentially unaccountable body which then constrain the Parliament we elect to be our agents.” I agree with you Bill.

BTW, I can’t believe the rudeness of people who bombard Bill’s email, business or personal. If one does not know Bill personally or professionally, anything one has to say in MMT or economic debate can be posted in this blog. I myself have posted items which Bill has disagreed with (as well as items he has agreed with or simply not commented on). But to bombard him with unsolicited emails (especially insulting ones) is simply a very poor reflection on the sender.”

My censored comment that responded to Iconoclast’s remarks was thus (also in green italics):


Anyone who objects to PM proposals because they allegedly involve handing economic decisions “to an essentially unaccountable body which then constrain the Parliament we elect to be our agents” has no grip on reality. And it’s not just Bill Mitchell who has no grip on reality in that connection: Neil Wilson, Anne Pettifor and others suffer from the same delusion.

The REALITY is that almost identical “unaccountable and undemocratic” committees ALREADY HAVE a dominant say on stimulus, namely those central bank committees that decide on interest rate adjustments, QE, and so on.

Re the emails that Bill claims to have been bombarded with, that’s a straw man argument: there are nutters in ANY MOVEMENT. More to the point would have been if Bill had looked at the OFFICIAL Positive Money attitude to MMT. A flavor of that attitude can be found in this recent article published by PM.

That article cannot possibly be described as “rude”. Moreover, it actually points to ideas that PM and MMT have in common! Indeed I myself have been pointing out for a long time that PM and MMTers have in common the idea that in a recession, the state should simply create and spend extra base money (and/or cut taxes).”

The state is “financially constrained”?

A further reason Prof Mitchell may not have published the above comment of mine is that it actually reveals another clanger dropped by him, as follows.

Under his heading “The Sovereign Money Proposal – flawed paradigm underpinnings.” he claims that the PM / Iceland brigade are unaware of the fact that a state which issues its own currency is not “financially constrained”, as Mitchell puts it. I.e. a country that issues its own currency can if it chooses, simply print money and spend it (and/or cut taxes) with a view to implementing stimulus).

Of course the idea that PM is unaware of that “freedom to print” is pure nonsense given that (as I point out in my comment) one of the central ideas pushed by PM is that the state CAN AND SHOULD in a recession simply print extra base money and spend it, and/or cut taxes.

To end on a positive note, and to repeat, Bill Mitchell has done a great job demolishing the arguments for “consolidation” and austerity. However, on banking he is not so clued up, and should allow total freedom of speech to those who disagree with him.

Islamic State and the politically correct.

I do like this Financial Times letter from Julia Reddy the grandiosely entitled “Senior Legal Officer for Equality and Citizenship” at the equally grandiosely entitled “Open Society Justice Initiative” - based in New York. Her letter starts: “The attraction of Islamist movements is prompting appropriate soul-searching in “western” societies: how could those who have the opportunity to enjoy the fruits of capitalism and liberal democracy forsake these for a life of violence and hardship?”

Whaaaat? The fact that hundreds of Muslims from the West go to the Middle East to engage in murder, torture, the desecration of historical cultural ikons and various other forms of barbarism and depravity means that Westerners should “search our souls”? Absolutely hilarious. But then all forms of political correctness are hilarious.

The people who should be “searching their souls” (forgive the statement of the blindingly obvious) are the people who engage in the above barbarism. Also members of the movement that nurtured those barbarians should be “searching their souls” – that movement of course being Islam. Even better would be if they just went back to the chaotic Muslim countries they came from and stayed there permanently.

And before some twit jumps to the conclusion that I’m suggesting Westerners are anywhere near totally innocent of barbarism, I’m not. For example I blame Hitler and his Nazi pals for the gassing of millions of Jews. And I blame Brits for the barbaric behaviour towards those backing independence in Kenya a few decades ago.

But perhaps I’m wrong. In line with the PC policy of blaming the victims of crime rather than the criminals, perhaps I ought to blame Jews for being gassed by Hitler. I’ll have to have a serious think about that (ho ho).

As for reasons Muslims turn to barbarism, Julia Reddy claims, “individuals turn to extremism when their path to enjoying the life of their co-citizens is blocked by institutionalised discrimination”. Well there’s been plenty of discrimination against homosexuals, women and other groups in the West over the last couple of centuries. What THEY did was not to turn the sort of barbarity practiced by Muslims: the former groups managed to get much of the discrimination against them removed by normal peaceful and legal means.

Moreover there’s a very strong tendency for Islamo terrorists to be from comfortable middle class backgrounds: a socio economic group that have clearly not suffered from a huge amount of discrimination. See here and here.

And here’s another thought. The “discrimination” suffered by non-Muslims in the Muslim part of Nigeria and in parts of the Middle East is vastly worse than anything suffered by homosexuals, women and so on in the West in years gone by. “Discrimination” in the latter two Muslim areas can easily mean being killed or having your religious buildings blown up or having your children abducted and sold into slavery or starved to death. So according to PC / Julia Reddy logic, non-Muslims in those areas are entitled to acquire AK47s and mow down any Muslim they come across. Hope I got that right.

So to summarise, the solution to “discrimination” advocated by the politically correct and Muslims is for everyone to machine gun everyone else. Hope I got right (as well).

Political correctness is a polite, genteel form of depravity. Or perhaps the politically correct just need psychiatric treatment. It’s got to be one of those two.

Thursday, 7 May 2015

What if just one country implements full reserve banking?

A common objection to full reserve (FR) is that if just one country implements it, that is likely to raise the cost of borrowing in that country which means that unless one has draconian capital controls, borrowers in that country will seek loans from foreign banks.

The answer is as follows. The REASON that full reserve may increase borrowing costs is that under FR all taxpayer funded bank subsidies and guarantees are very definitely removed. That’s distinct from the situation at the time of writing where the authorities make NOISES about the desirability of removing bank subsidies but fail in practice to do so. A classic example is the UK, where government currently actually ADVERTISES the fact that depositors are protected gratis the taxpayer.

Put another way, if just one country implements FR, then in effect all other countries would have subsidised banks, while banks in the country with FR would not be subsidised. So would the latter country lose out? Well the answer was given recently by Tim Worstall in a Forbes article, when he explained a point that has been obvious to more clued up economists for a long time. That’s that if some other country wants to supply you with subsidised goods and services, far from being discouraged, they should arguably be ENCOURAGED.

Some other country wants to make and send you cars at half the cost of making them? Fine: tell them to go a stage further and make that a QUARTER the cost of manufacturing the cars. In fact you could persuade them to go even further and tell them to just GIVE YOU the cars for free!

Seriously though, if I was in charge of the UK economy and implemented FR, and other countries wanted to supply the UK with banking services at a subsidised rate, I wouldn’t be too bothered. I would actually point out to them that subsidies do not result in an optimum allocation of World resources and that it might be an idea if they re-thought their policy of subsidising banks or any other industry. But I wouldn’t lose nights of sleep over it.

Monday, 4 May 2015

What’s the optimum amount of national debt?

The combination of national debt and monetary base is often referred to by MMTers as “Private Sector Net Financial Assets”. The more PSNFA, the higher will private sector spending be (essentially the point made by Andrea Terzi recently). And ideally it needs to be at a level that gives us full employment. So that tells us in principle what the optimum amount of PSNFA is. But it doesn’t tell us what the optimum SPLIT as between debt and base is.

One disadvantage of base is that it can be spent, thus a large base means the private sector might suddenly go mad and try to spend away a large portion of the base, which would be inflationary. I.e. a large base would exacerbate any “irrational exuberance”. (Incidentally, debt is also a TYPE OF money: its actually used in the world’s financial centres in lieu of money. But you can hardly go shopping at the supermarket with it, or use it to buy a car.)

But the larger the debt, the higher the interest charged by debt holders. So (roll of drums) the optimum amount of debt is the amount that produces a small positive rate of interest on the debt.

I suggest that should be something between zero and the rate of inflation: that means a NEGATIVE real rate (inflation adjusted rate). And that in turn means governments so called “creditors” have to pay for the privilege of lending to government. In particular, foreigners have to pay for the privilege of lending to us.

Having said that the base might exacerbate irrational exuberance, it’s possible that’s not true. In that case the optimum (as suggested by Milton Friedman and Warren Mosler) is no debt at all. I.e. PSNFA should be made up entirely of base.

Saturday, 2 May 2015

Andrea Terzi applies Keynsian / MMT thinking to EZ: a mistake.

Terzi makes the point at this INET conference that aggregate demand is related to whether the private sector has the savings it thinks it needs (that’s money savings as distinct from savings in the form of physical assets like houses or cars).

In saying that he simply repeats what Keynes said and what MMTers have been saying for years, i.e. that saving money causes recessions, thus the private sector must be supplied with the money savings it thinks it needs. (Terzi does incidentally admit his debt to Keynes.)

Problem though is that that’s not the basic problem in the Eurozone. The main problem in the EZ is the DISPARITY in performance as between the core and periphery – most notably the difference in competitiveness as between Germany and Greece. Put another way, there’s scarcely any problem in Germany and the rest of the core if unemployment figures are any guide.

That’s not to say the EZ might not benefit from a BIT MORE stimulus in the core. My guess is that it WOULD BENEFIT. But the MAIN problem is in the periphery, Greece in particular.

Relevant screen shots in chronological order are below. His maths is translated into English in red font under each equation.

Friday, 1 May 2015

Private money printers cannot survive without taxpayer backing, so let’s ban them.

Commercial banks create or “print” money when they grant loans, as the opening sentences of this Bank of England publication explain.

However, there is no excuse for taxpayer funded subsidies or backing for private banks. But if all such backing is removed, then bank funders (especially depositors and bond holders) by definition become shareholders. At least they become shareholders as in “someone who at worst stands to lose everything”.

Of course depositors and bond holders (henceforth “debt holders”) are not EXACTLY the same as shareholders. But that’s not too important. The IMPORTANT point is that exposure to risk as a result of withdrawing taxpayer support for banks means that debt holders will demand a similar return on their stakes in banks to the return demanded by shareholders.

To be more accurate, those debt holders will demand a return approximately equal to the return demanded by PREFERENCE shareholders. The EXACT definition of a preference share varies from corporation to corporation, but roughly speaking, a preference shareholder is one who does not take a hair cut till ordinary shareholders have been wiped out. And exactly the same applies to the above debt holders: they don’t take a hair cut till after ordinary shareholders have been wiped out.

In short, there is no difference between funding a bank JUST VIA equity, and funding a bank partially via equity and partially via so called debt – which is perhaps more accurately described as preference shares.

So far, privately created and publicly created money are running neck and neck. However there  MAJOR flaws with privately printed money. The first is that large chunks of it can vanish in a puff of smoke when a bank goes bust. Indeed in the 1930s (before the days of deposit insurance) around six billion dollars of households’ savings or “money” was wiped out in the US. And I’ve no idea what six billion is in today’s money, but it’s certainly “lots”: maybe a trillion.

Apart from the blatant injustice there, there is also the fact that bank runs, credit crunches and so on are VERY DAMAGING. We’re only just recovering from one such episode stemming from about seven years ago.

The cost of privately and publicly printed money.

A second drawback of privately created money is that it costs more to create than publicaly created money (aka base money). Reason is that before granting a loan, a private bank normally has to check up on the value of collateral offered by the borrower, and the cost of doing that in the case of the single biggest form of borrowing, i.e. mortgages, is several hundred pounds per mortgage.

A tempting objection to the above point is that if privately created money is inherently expensive, why does it manage to compete with base money? The answer is that money creation, i.e. seigniorage, is profitable, and if the profits from seigniorage more than cover the cost of checking up on the value of collateral, then private money creators are onto a good thing.

Deposit insurance.

Another possible objection to the above arguments is that the problem of privately created money vanishing in a puff of smoke is easily dealt with via deposit insurance. The answer to that is that deposit insurance does not make sense, and for reasons I set out here.


Private money printers are just a nuisance. Money creation should be the sole preserve of the state.