Monday, 30 May 2016

Our bank system is subsidised in three ways.

The existing bank system (sometimes called “fractional reserve banking”) is subsidised in three ways, as follows.

1. Unlike private insurance companies which do not provide a 100% guarantee that claims will be met (because those companies can go bust), STATE backed (i.e. taxpayer backed) deposit insurance CAN provide a 100% sure guarantee because almost any amount of money can be grabbed off taxpayers to back the guarantee. Alternatively, the state can get its central bank to print  near limitless amounts of money to rescue banks and depositors: exactly what happened in the recent crisis. That’s a subsidy – never mind the fact that loans to banks in trouble were made at near zero rates of interest, rather than Walter Bagehot’s “penalty” rate.

2. A popular argument for deposit insurance is that it means more deposits & thus more lending and investment and hence, allegedly, more growth. But exactly the same argument applies to ALL OTHER forms of loan: e.g. bonds issued by corporations (bank and non-bank corporations, and indeed cities – you name it). Thus deposit insurance constitutes preferential treatment for (i.e. a subsidy of) a PARTICULAR form of lending: lending done via bank deposits.

3.  Any expansion in the fractional reserve bank system (i.e. increased loans made by such banks) boosts demand. Assuming the economy is at capacity, that extra demand is not allowable because it would cause excess inflation, thus the state has to compensate by imposing some sort of deflationary measure. The latter invariably amounts to confiscating financial assets from the private sector. To take a simple example, one form of deflationary measure is to increase taxes and “unprint” the money collected (i.e. a negative helicopter drop). That confiscation amounts to a subsidy of fractional reserve banking funded by the “confiscatees”.

Friday, 27 May 2016

Horrors: Trump says something un-PC.

He said that female employees getting pregnant is a genuine cost for employers. Well fair enough: it is! And for that reason, employers (if we just consider the economics rather than social considerations) are justified in paying a woman of child bearing age less than a man with the same qualifications, experience, etc.

So what’s the best solution to that problem? Well as already intimated, the solution that maximises GDP is to let employers pay market price for different types of labor – after all, it‘s widely accepted in economics that GDP is maximised where prices are set at free market prices, unless there are obvious reasons for not doing so (as is the case with for example alcoholic drinks).

Having done that, and if we think it wrong for there to be any sort of difference in pay for men and women, we can implement some sort of subsidy for all female employees, perhaps paid for by a tax on all male employees. Indeed that principle is already in effect in that we let employers pay relatively little to unskilled and inexperienced employees, with those employees’ pay sometimes being made up by the state via various forms of “in work” benefits, negative income tax, and the like.

Thursday, 26 May 2016

Why do we subsidise private banks?

Opponents of the TBTF subsidy have missed an elephant in the room: i.e. there’s another large subsidy that private banks enjoy, as follows.

Private banks print and lend out money, as the opening sentence of this Bank of England article explains. But printing and lending out money is inflationary, if the economy is already at capacity (i.e. full employment). So how do governments control that inflation? Well they impose some sort of deflationary measure, like increased taxes, so as to counteract the inflation. But that amounts to a subsidy for private money printers, paid for by taxpayers: in much the same way as the profits made by backstreet counterfeiters are paid for by taxpayer / citizens.

A hypothetical economy.

Let’s illustrate that process by considering a barter economy which converts to a money economy.

A barter economy considering that switch can use publicly created money or privately created money. Now privately created money is inherently expensive: private banks have to check up on the credit worthiness of anyone they supply money to. But that expense is not needed where the state simply prints money and spends it into the economy in whatever amounts are needed to bring full employment. So publicly created money is clearly the best choice.

And having done that, no doubt interest rates would settle down to some sort of genuine or optimum free market rate.

But having set up a publicly created money system, private banks in our hypothetical economy would be gagging to get in on the money printing process, just as they do in the real world. Should that be allowed? Well our hypothetical economy COULD ALLOW THAT. And the reason why that would be profitable for private banks is that they can undercut the going rate of interest. Reason is that unlike a normal saver who abstains from consumption and saves and then lends out money, private banks do not need to save: they just print and lend! Nice work if you can get it!

Huber and Robertson.

Joseph Huber and James Robertson described the latter process in their work “Creating New Money”. As they put it, “Allowing banks to create new money out of nothing enables them to cream off a special profit. They lend the money to their customers at the full rate of interest, without having to pay any interest on it themselves. So their profit on this part of their business is not, say, 9% credit-interest less 4% debit-interest = 5% normal profit; it is 9% credit-interest less 0% debit-interest = 9% profit = 5% normal profit plus 4% additional special profit. This additional special profit is hidden from bank customers and the public, partly because most people do not know how the system works, and partly because bank balance sheets do not show that some of their loan funding comes from money the banks have created for the purpose and some from already existing money which they have had to borrow at interest.”

Now assuming our hypothetical economy is at capacity, government would have to counteract the inflationary effect of that private money printing, e.g. by raising taxes (i.e. robbing various households and firms) so as to enable private money printing. In short, the private sector in general, or parts of it, would be subsidising private money printing.

Put that the other way round, if we stopped private banks printing money (which is what is involved in full reserve banking), the effect of that would be deflationary, which would mean government would have to compensate with some sort of stimulus, like printing more public money (i.e base money) and spending it into the economy. I.e. if in the real world private banks are barred from printing money, then sundry households and firms who were robbed in order to make private money printing get their money back.

You might be tempted to answer that by saying that the latter amounts to helicoptering and helicoptering is not the only possible form of stimulus. Actually traditional fiscal and monetary stimulus comes to much the same as helicoptering. That is, traditional fiscal stimulus consists of “government borrows and spends”. While monetary stimulus consists of “central bank prints money and buys back the bonds that government has issued to the private sector”. That all nets out to “the state prints money and spends it into the economy”.

Banks pay interest to depositors.

You might also be tempted to claim that private banks do in fact pay interest to depositors in respect of the money they print and lend out because the money they print is inevitably deposited at some bank, where the depositor earns some interest. Or at the very least, the cost of running instant access accounts is cross subsidised by interest that a bank earns when it lends out the money in those accounts.

The answer to that is that private banks do indeed pay interest to depositors (if only in the form of charging less than they might otherwise charge for instant access accounts). But that’s simply an example of a well-known phenomenon, namely that when a new line of business opens up, firms which INITIALLY enter the business make substantial profits, while over time, competitive forces cut those profits to something nearer a standard return on capital. I.e. Huber and Robertson’s above example is an over-simplified illustration.

But the question remains: should private banks even be making a standard return on capital out of “printing money and lending it out”? I suggest not, because that business is subsidised for reasons set out above.

Wednesday, 25 May 2016

So helicopter money isn't a free lunch?

This is an interesting article. That’s “interesting” in the Sir Humphrey Appleby sense of the word, i.e. something like “this may be a novel idea, prime minister, but I’m not overly impressed, to put it politely”.  The article is by Claudio Borrio of the Bank of International Settlements and two co-authors (one also from the BIS).

The basic argument is that helicoptering involves the central bank in printing and spending base money into the private sector, which of course causes the reserves of commercial banks to rise. And since central banks control interest rates by keeping commercial banks short of reserves, the ability to control interest rates is then lost, which apparently is a near disaster.

As the abstract puts it, helicoptering  “…would require giving up on interest rate policy forever.” Or – and making the same point  - “The central bank can of course implement a permanent injection of non-interest bearing reserves and accept a zero interest rate forever....”

The alternative, so the article claims, is for the central bank to impose  “a non-interest bearing compulsory reserve requirement equivalent to the amount of the monetary expansion (so that excess reserves remain unchanged – scheme 1), but then this is equivalent to tax-financing – someone in the private sector must bear the cost.”

Well certainly helicoptering drives interest rates to zero (unless banks’ reserve requirements are raised). But a permanent zero rate, while it is unconventional is not a bad idea. Milton Friedman and Warren Mosler advocated the idea. And here is another work which advocates abandoning interest rate adjustments.

As for the “alternative” mentioned just above, i.e. higher reserve requirements, that is not the same as “tax financing” UNTILL the state decides to impose extra reserve requirements on commercial banks. Meanwhile, helicoptering is stimulatory.  Let’s run thru this.

Under tax financed public spending, the state grabs $X off the private sector and spends it back into the private sector, and perhaps also into sundry government spending departments: education, law enforcement, etc. As a result, what might be called “spenders” end up with no extra cash. Thus there may be a slight stimulatory effect (e.g. because the rich, who tend to pay more tax, do not cut their monthly spending when taxes rise as much as the poor). But the stimulatory effect, if it exists, is limited.

The alternative, namely helicoptering, involves the state simply printing $X and spending it. In that case, spenders end up with $X more: a totally different kettle of fish. If you’re a spender (e.g. a household, firm or state school) and you find you have loads of cash to spare, you’re more likely to spend than if you DON’T HAVE cash to spare!

So there is no question but that helicoptering is stimulatory.

Having done that, the state (i.e. government and central bank) may decide to rein in some of the stimulus, and it can do that by raising bank’s reserve requirements. But that doesn’t mean that helicoptering has not been effective in the mean time. Also, raising reserve requirements is perhaps equivalent to tax in the very broad sense that both raising reserve requirements and tax are deflationary. But what of it? Some stimulus is applied (via helicoptering) and then a year or two down the line, government reins in that stimulus. That would be nowhere near the first time that’s happened.

I.e. helicoptering is a form of stimulus, which like all forms of stimulus, can be, subsequently reined in.

No one argues that there is something wrong with an interest rate cut because it is subsequently reversed.

The BIS authors are right in a sense: helicoptering is not without problems. But then interest rate adjustments have problems as well. Personally I'm on the side of the above "Mosler" lot: i.e. I favor abandoning interest rate adjustments, expect in emergencies and relying on helicoptering.

Monday, 23 May 2016

Milton Friedman was sort of right. Lefties in floods of tears.

Lefties, or a least a significant portion of the political left, do treasure their pet hate figures: that’s people they love to hate. And Milton Friedman certainly comes into that category. Plus dangling the word “monetarism” in front of a leftie is even more dangerous than dangling a red rag in front of a bull.

So what exactly was wrong with monetarism? Well don’t bother asking a leftie. Lefties will tell you that monetarism is responsible for half the problems of the world, including AIDS and numerous other diseases, global warming, airliner crashes and much else besides.

This all reminds me of a passage from William Hazlitt: “Defoe says that there were a hundred thousand country fellows in his time ready to fight to the death against popery, without knowing whether popery was a man or a horse.”

In fact Friedman’s monetarism had various elements. One element was simply the idea that the quantity of money (base money in particular) influences demand and hence inflation. And that idea is a bit hard to deny: I mean when someone’s stock of money rises, e.g. when they win a lottery, their weekly spending rises (surprise surprise). And at the macroeconomic level, when the Robert Mugabe’s of this world print far too much money, hyper-inflation ensues (something that is doubtless intuitively obvious to the average ten year old).

The latter idea, namely that the stock of base money is of relevance is shared (shock horror) by numerous economists and groups of economists, e.g. advocates of Modern Monetary Theory.

Government incompetence.

A second element of Friedman’s monetarism was the idea that governments are so incompetent that they might as well have no discretion at all when it comes to stimulus. Instead, said Friedman, we should just have a fixed and small annual increase in the money supply.

Well there’s a wealth evidence from the recent crisis that governments are indeed incompetent. George Osborne, the UK’s finance minister, came to power with the promise to cut the national debt. In practice he DOUBLED it!! How’s that for a cock up?

Governments failed to regulate banks properly ten years ago, which cause the crisis. They then spent far longer recovering from the crisis than we spent fighting World War II. How do you rate that for a cock up?

Simon Wren-Lewis (Oxford professor of economics) has written numerous articles detailing government’s incompetence during the crisis, e.g. here.

All in all, Milton Friedman’s claim that governments are incompetent isn't far out. Hence his claim that due to that incompetence, governments should have no discretion when it comes to stimulus is not 100% wrong either.

Conclusion: his ideas on monetarism were doubtless not 100% right, but they certainly weren’t 100% wrong either.

Saturday, 21 May 2016

Malcolm Sawyer’s flawed criticisms of full reserve banking.

As an advocate of full reserve banking, I’m always interested in criticisms of the idea. So far I haven’t come across any I can’t deal with, and Sawyer’s criticisms come into that category, that is, they are easily disposed of.

The first two sentences of the abstract read as follows.

“The idea of full reserve banking (under various names) has been adopted by parts of the green and ecological movements (e.g. Green Party of England and Wales). The paper argues that full reserve banking (FRB) would represent a ‘green monetarism’”.

Well there’s a bit of a problem there, which is that full reserve banking has been advocated for a good two centuries and normally with no mention of matters green. For example David Hume, writing over 200 years ago advocated the idea, as did Abraham Lincoln, as did Milton Friedman in the 1960s. None of those individuals were much concerned with matters green or ecological.

That is, full reserve banking and the idea that we should be more environmentally responsible are two quite separate ideas, though obviously, as is the case with any pair ideas, those two ideas CAN BE merged. But Sawyer doesn't actually deal with the COMBINATION of full reserve and green policies: that is, he deals just with full reserve. Thus references to matters green and ecological are irrelevant.

Next, the first sentence of the main text starts, “There have been a number of similar proposals under headings of full reserve banking, positive money, sovereign money and 100 per cent reserve banking…”.

Now hang on: I’ve never heard of a “proposal” called “positive money”. In contrast, there’s an ORGANISATION called Positive Money (with capital letters), which advocates full reserve banking or similar.

You might argue that the above “green” and “capital letter” criticisms are minor criticisms. Perhaps they are: but that number of mistakes that early in a paper does not give me confidence that the rest of the paper will be worth reading.

Anyway, to continue, the rest of the first page describes full reserve banking, in an accurate manner. So no complaints there. As Sawyer says, the existing system is an endogenous money system: we let private banks issue money as they see fit. In contrast, full reserve is an EXOGENOUS system: only the state creates or prints money.

However, things go wrong again at the top of p.2 where Sawyer says, “Under this exogenous money situation, a mismatch between the amount of money which the central bank creates and the amount of money which the public is willing to hold. This leads to a situation of either ‘excess money’ (more money issued than people willing to hold) or ‘deficient money’ (less than people wish to hold for transactions purposes), though the usual emphasis has been on the ‘excess money’ case.”

The above first sentence doesn’t have a verb. But never mind: I make the odd typo myself. More important, are the IDEAS there.

Sawyer is of course quite right to say that there may be a mismatch between the amount of money a central bank (CB) issues and the amount the amount the “public is willing to hold”, and that if the CB issues too much, excess inflation might ensue. But then exactly the same problem applies to every alternative method of implementing stimulus: whether it’s interest rate adjustments, QE, or budget deficits, it’s common for CBs and governments to get it wrong!

What Sawyer should have explained, and in detail, is exactly why regulating demand via the above “print and spend” policy is more difficult that via interest rate adjustments, QE, etc etc. However, he doesn’t explain.

Instead of explaining that point, Sawyer then (half way down p.2) claims that full reserve “shares many similarities with the ill-fated proposals of Friedman and others for the achievement of a specified growth rate of the stock of money..”.

Now the big problem with that claim is that full reserve no more “shares similarities” with Friedman’s monetarism than do EXISTING policies. You may have noticed that over the last five years or so, CBs have organised a massive and totally unprecedented increase the the stock of base money, and they’ve done it via QE.

Moreover, the full reserve system advocated by Positive Money, the New Economics Foundation and Prof Richard Werner (which Sawyer cites) does not rely just on the money supply effect. That is, given inadequate demand, the work linked to just above argues that the state should print money and spend it (and/or cut taxes). In other words there is a clear fiscal element there as well.

Indeed, the beauty of that system is that it doesn’t matter whether the stimulatory effect comes primarily from the latter fiscal element or the monetary effect. I’m prepared to bet my house there’d be some sort of effect. As to whether the effect comes via the monetary or fiscal channel, I couldn’t care less. Why should that matter?

The next three or four pages of Sawyer’s paper are then devoted to attacking monetarism. Well as far as I’m concerned that’s a waste of ink and paper. To repeat, full reserve (at least as advocated by the latter three authors) does not absolutely depend on the idea that the quantity of money is of crucial importance. Though frankly it would be a bit strange if the quantity of base money had NO EFFECT. Robert Mugabe demonstrated very convincingly that if a country prints ludicrously excessive amounts of money, hyperinflation is the result: a point which I imagine is obvious to the average ten year old, even ten year olds who have never picked up a book on economics.

Then on p.10-11 Sawyer explains, correctly, that under full reserve (at least as set out by the above three authors), the deficit is not known in advance. That’s because the CB doesn’t know in advance how much stimulus the economy will need in six months or a years time. And apparently that’s undesirable because it's “Not a recipe for the good management of public expenditure”.

Well the problem with that argument is that NO government or CB knows what’s going to happen in six months time or a year’s time or two year’s time. Thus it doesn’t matter much exactly what system you have for implementing stimulus: one thing’s for sure, and that’s that governments and CBs are often forced to make unforseen changes in spending, interest rates and so on.

You might as well criticise interest rate adjustments because they aren’t a “recipe” for easy forward planning for those thinking of borrowing with a view to making investments, e.g. those contemplating buying a house with the assistance of a mortgage.

Well that’s it. I’m not minded to read any more of this work by Sawyer. He hasn’t thought full reserve through in any detail.

But that is not to suggest I think all his output is poor quality. I liked this work of his which criticised “employer of last resort” or “job guarantee” as it is sometimes called.

Friday, 20 May 2016

A flaw in deposit insurance.

If you lend direct to corporations A,B,C… there’s no government run insurance for you. But if you lend to a bank, i.e. make a deposit at a bank, and the bank lends to A,B,C… then you’re automatically insured.

That makes no sense because there is no inherent merit in lending to A,B,C… via some third party like a bank as compared to lending direct. That’s not to say there is anything WRONG with “indirect lending”, whether done via a bank, a mutual fund or whatever. The point is that, to repeat, there is no special merit in indirect lending.

Ergo if government should EITHER abandon deposit insurance, OR offer insurance for all those with bonds in non-bank corporations. After all, the main argument for deposit insurance seems to be that that form of insurance increases bank deposits which in turn increases bank loans and thus allegedly boosts economic growth. And that argument applies in exactly the same way to bonds in a non-bank corporation or firm.

Moreover, the big attraction of being insured by GOVERNMENT rather than by some private sector insurer is that governments can grab almost limitless amounts of money off taxpayers to bail out the depositors of failed banks. That right to grab taxpayers’ money is not a free market phenomenon.

Thus the answer to the question “Should government insure ALL  lenders” is “probably not”.

Moreover, politicians have a long record of being complete suckers when confronted by bankers: that is, bankers only have to produce sob stories about economic growth being hit if the deposit insurance premium is too high, and politicians fall for it every time. Or as Paul Volker put it, “You know, just about whatever anyone proposes, no matter what it is, the banks will come out and claim that it will restrict credit and harm the economy…It’s all bullshit.”

And just to illustrate the size of the above “sucker” problem, UK banks and their depositors enjoyed the luxury of deposit insurance between WWII and a few years ago all at no charge at all: i.e. the insurance was provided by UK taxpayers for free!

As to what people would do if lending entities DIDN’T accept deposits, that’s easy: totally safe deposits could be made at entities where relevant monies are kept in a totally safe fashion, like the various state run savings banks (e.g. National Savings and Investments in the UK). And as to how LENDING entities would be funded, they’d be funded just by equity.

And that split of the bank industry into two halves, lending and deposit taking has been advocated for decades, e.g. by Irving Fisher in the 1930s and Milton Friedman in the 1960s.

Tuesday, 17 May 2016

Oliver Blanchard and the IMF spout nonsense about Japan’s debt.

Blanchard and other IMF folk have been predicting Armageddon for Japan and its rising debt to GDP ratio for a long time. But Armageddon never comes. Some details of Blanchard’s latest and ridiculous ideas on Japan’s debt are in this article by Ambrose Evans-Pritchard. (Incidentally not even Evans-Pritchard seems to get the sheer scale of Blanchard’s ignorance)

This passage sums up Blanchard’s ideas, and according to Evans-Pritchard they are Blanchard’s own words.

“To our surprise, Japanese retirees have been willing to hold government debt at zero rates, but the marginal investor will soon not be a Japanese retiree…If and when US hedge funds become the marginal Japanese debt, they are going to ask for a substantial spread…”.

And that, according to Blanchard will lead to Japan facing a horrendous bill for interest on it’s debt.

Now let’s think about that. Unfortunately we need to start with some very basic economics, as follows.

Governments run deficits and in consequence face rising debts for TWO REASONS. First, there’s the ever present temptation for politicians to fund government spending via borrowing rather then tax, as David Hume pointed out over 200 years ago. Raising taxes loses votes at election time.

But it’s important to note that in that scenario, demand for loans comes from the DEBTOR or would be debtor. And that’s likely to lead to a relatively high rate of interest. Moreover, the higher the debt, the more doubtful lenders become about the relevant government’s ability or intention to ever repay the debt, in which case they demand an even higher rate of interest.


The second and quite different reason for running a deficit is so as to provide stimulus. That is, if the private sector is spending too little, demand will be too low and unemployment too high. Thus government or “the state” has to spend more than it collects in tax: e.g. the state can simply print money and spend it, or it can “print debt”. Put another way, as Keynes pointed out in the 1930s, in a recession, government can spend more by either printing money and spending it (and/or cutting taxes) or by borrowing money and spending it (and/or cutting taxes).

But note that in that case, demand for the debt comes from the CREDITOR, not the debtor. That is, the explanation for households not spending enough is that they're SAVING too much, or at least they’re saving more than expected. Keynes referred to that phenomenon as the “paradox of thrift”.  And in that sort of “demand for debt coming from the creditor” scenario, interest will tend to LOW: exactly what we see in Japan!

In effect, the creditor (i.e. Japanese households) are saying “Please, please, we want you, the government to be in debt to us – that is we want a bigger stock of paper assets in the form of cash or government debt”. Clearly that’s what might be called a “debt seller’s market”.

In that scenario, government can say “OK, here’s some government securities, and we’re paying an utterly miserable rate of interest: about equal to inflation, which makes the interest bill for us (in REAL or inflation adjusted terms) around zero.”

Japanese households might not like that, but it’s the best offer they’ll get. At least they get what they’re basically after, namely a stock of government securities.

The allegedly horrendous Blanchard scenario.

Now what happens if households CEASE demanding a bigger stock of government debt / securities? In other words, what happens when households, instead of SAVING a significant part of their income, decide to SPEND it all instead? Well in that case the BASIC problem, namely inadequate demand disappears. So there’s no need for (or at least a reduced need for) a deficit and an ever expanding debt!

Thus (and contrary to Blanchard’s claims) there’d be no need for the Japanese government to borrow from the “high interest charging US hedge funds”!

So, Blanchard’s argument lies in ruins. It’s basically a load of nonsense.

But what’s worse is that Blanchard has had a senior position at the IMF for years, and “Blanchard type thinking” has pervaded the IMF for years. That is, at the height of the crisis, the IMF (and indeed to OECD) were advocating debt consolidation, i.e. austerity, rather than advocating what was needed, namely stimulus. For more on that see various articles by Bill Mitchell on that subject, e.g. this one.

Saturday, 14 May 2016

Does Steve Keen’s debt jubilee add up?

As I understand it (and perhaps I don’t) his jubilee consists of having a helicopter drop, with the condition that debtors use their windfall to repay some of their debt. Now there’s a big problem there, namely the sheer size of the average mortgage, which in the UK is £85,000, compared to the likely size of a helicopter drop.

To illustrate (and plucking numbers out of thin air) assume half the country are debtors and half are creditors. Also assume that stimulus to the tune of a helicopter drop worth £2,000 per person is need (though bear in mind that in some years, very little stimulus is needed).

£2,000 is a BIG helicopter drop: £40 per week per person lasting for a year.

That means creditors get £2,000 plus the £2,000 that comes from debtors. Meanwhile debtors get nothing (or to be accurate, they get £2,000 but have to hand it over to creditors, plus debtor’s debt declines by £2,000).

That means £80 a week extra for creditors (to spend or save as they wish) and no extra spending money for debtors. I’d imagine riots would ensue.

Plus £2,000 is less than a fortieth of the £85,000. I.e. it doesn’t scratch the surface of Keen’s allegedly horrendous debt problem.

Incidentally the above points arose out of a discussion involving me and other Positive Money supporters in the North East of England.


P.S. (17th May 2016) .Mike Shedlock criticised Keen’s debt jubilee idea in 2012. Apologies: I didn’t realize Keen started advocating the idea that long ago.

Friday, 13 May 2016

Prof Joerg Bibow goes off the rails.

He claims in this letter to the Financial Times that

“As long as central banks take their price stability mandate seriously and buy government bonds in the open market when their mandate requires, governments can focus on spending and not worry about helicopters. The fact that today’s elected governments renege on their responsibilities and ruin our grandchildren’s economic possibilities is regrettable. But it does not mean that unelected central bankers should mail out cheques (money drops) to taxpayers instead.”

First, and re “buy government bonds”, that’s QE (assuming we’re at the ZLB). And in case Prof Bibow hadn’t gathered, QE doesn’t have a huge effect (apart from boosting asset prices and making the rich richer).

Second, he’s suggesting that if there’s excess unemployment, homes are being re-possessed, beggars line the streets, and soup kitchens are overflowing with customers, we sit around saying “that’s regrettable”. That is irresponsible nonsense.

The purpose of an economy is to produce what people want. If not enough is being produced to keep the workforce fully employed, the solution is to give people more of that which enables them to buy more of what they want. That stuff, perhaps unbeknown to Prof Bibau, is called “money”.

The proportion of GDP taken by the public sector.

There is however one not bad criticism that can be made of helicoptering. It’s that there’s an element of a POLITICS in showering money on households: it increases the PROPORTION of GDP going to the private, as opposed to the public sector.

That semi political decision taken by the central bank is possibly justifiable on the grounds that cutting excess unemployment takes precedence over the relatively unimportant point that government’s preferred mix of public and private sector has been upset a bit.

Certainly if we were to have a referendum on that point, there’s no question which way the vote would go. That is, suppose we asked voters the following question. “If the central bank thinks unemployment is excessive, and that it can be reduced by giving households more money, even though that results in the private sector being somewhat larger relative to the public sector than politicians want, would you want to have that extra money to spend (or save, if you so wished)?”

There’s no question as to which way the vote would go. Thus helicoptering is,or could, given a referendum, be entirely democratic.

But for those who still don’t like any disturbance whatever of the above public / private ratio, there’s a solution – or a solution of a sort. That’s for the central bank to dish out a proportion of the money to government departments and other public bodies with the instruction to the effect: “Hi folks. It’s OK by us if you use this money to increase your expenditure over the next six months or year. Seems politicians are too busy fiddling their expense sheets to bother spending enough to mop up excess unemployment. So why not just get on with it, and spend a bit more?”

Noah Smith thinks printing money and buying back the debt might be inflationary.

The first problem with that argument is that we been doing that and big time in the guise of QE over the last four years or so. And where’s the hyperinflation? Indeed, even moderate inflation is nowhere to be seen!!

His main argument, which is in his last two paragraphs, is that people might lose faith in the currency and dump it in exchange for other assets. Well that all assumes people fall for the above obviously fallacious Noah Smith argument that printing money and buying back debt is inflationary.

I suggest about 90% of those with significant sums at their disposal will have noticed that QE has had precisely zero effect on inflation, and thus that a bit more QE will have equally little effect.

Another of Smith’s arguments is that if people think that other people are about to dump money in exchange for other assets, that could turn into a self-fulfilling prophecy. Well that could happen at any time: it could happen even if QE had never been implemented.

And finally, Smith seems to be unaware of the following. Government debt is virtually the same thing as money, as various economists have pointed out over the years (e.g. David Hume 200 years ago, Warren Mosler, and Martin Wolf). I.e. government debt is a promise by government to pay you a sum of money at some point in the future.

Now if people think that money is going to lose its value, they'll think the same of government debt, so they’ll dump that as well!!! To that extent, it makes little difference whether government or “the state’s” liabilities consist mainly of government debt or mainly of base money.

Thursday, 12 May 2016

So political correctness is just a Western disease.

"Takfiri" is a branch of Islam, BTW.

What’s Ann Pettifor on about?

In 2015 she signed a letter to the Financial Times (along with others) supporting QE for the people – i.e. printing money and spending it on a selection of public sector items: infrastructure etc.

But here she says she has a “fundamental” objection to the above print and spend policy. Bit of a self-contradiction there. She says her objection to “print and spend” is that it involves technocrats deciding “nominal demand”.

Complete nonsense! We could perfectly well have a system under which politicians have access to the printing press and determine nominal demand. In effect that system was in operation in the UK prior to when Gordon Brown gave the Bank of England independence.

A second flaw in her argument is that central bank technocrats ALREADY HAVE the final say on a stimulus package (or “nominal demand”) because, at least in the UK, they have SPECIFICALLY been given the power to negate any fiscal stimulus with interest rate rises (if they think the resulting inflation would be excessive).

That incidentally is one of the main points that Scott Sumner makes over and over again, and he calls it “monetary offset”.

At least that’s certainly the case with an INDEPENDENT central bank, which is what we have in the UK. Presumably Ann Pettifor is unaware of that very basic characteristic of the existing set up in the UK. Certainly I’ve never know her object to that power of nominally independent central banks, plus after Googling for five minutes, I can’t find an article of hers which objects to BoE independence. (Incidentally I said “nominally” there because ULTIMATE power always rests with politicians: politicians if they really want, always have the power to metaphorically bash down the front door of a so called “independent” central bank and forcefully replace the head of the bank.)

Wednesday, 11 May 2016

The IMF opens its mouth on demographics, unfortunately.

The IMF (along with the OECD) covered itself in glory at the height of the crisis by advocating austerity in the middle of the crisis.

The latest bit of nonsense from the IMF is that tired old idea that immigrants help alleviate the ageing population problem: in particular that refugees from the Middle East can solve the ageing problem in Germany. The flaw in that idea has been set out over and over. But I wouldn’t expect the IMF to know anything about that.

For the umpteenth time, the flaws in that idea are as follows.

1. Muslims are far and away the least productive section of the population in Europe, and a significant proportion of refugees from the Middle East (or economic migrants posing as refugees?) are Muslims. As for the significant proportion of those “refugees” who are from Pakistan (and who are thus quite clearly economic migrants), they’re almost exclusively Muslim. (In the UK, the proportion of Muslims going out to work is around 45% as compared to about 65% for Jews.)

2. Immigrants (revelation of the century this) are human beings, and eventually grow old. What then? Import even more migrants?

3. As will be obvious to anyone who is not totally innumerate (and relatively few lefties ARE numerate) the latter fact means that using immigration to deal with the ageing problem to any great extent results in an exponential increase in the population. The latter exponential problem has actually been studied in some detail and the results are dramatic: turns out that if immigration alone is used to deal with the alleged ageing problem, the population approximately doubles every thirty years.

4. The ageing problem is not actually all that serious. Obviously an increased number of old people ALL ELSE EQUAL means an increased burden on the young. On the other hand that effect is moderated by economic growth. (See “Is there a Demographic Time-Bomb?” in “The Future of the Welfare State”, 2006, editor: Bent Grieve. Incidentally yours truly authored a chapter in that book.)

Tuesday, 10 May 2016

Those disgusting little fascist shits in Brussels.

If this doesn’t make you vote Brexit, nothing will. It’s to do with TTIP.

First, credit where credit is due. We, the plebs, ARE ALLOWED to see the latest draft of the TTIP agreement. But that’s about all we’re allowed to do.

When being ushered into the room in Brussels where the agreement can be seen, you can’t take your mobile in as well because you are not allowed to take copies or photos of any part of the agreement.

You ARE ALLOWED to make written notes. But if those notes turn out to be word for word copies of any part of the agreement, further viewing of the agreement by any representative of the people will apparently be barred.

I almost prefer Nazi Germany or Stalin’s Russia to this sort of thing. More details here: 

Thursday, 5 May 2016

Private banks are counterfeiters.

A counterfeiter is someone who produces a form of currency which is such a close imitation of the official national currency that it’s widely accepted in lieu of the real thing. Thus it goes into circulation, and displaces the real thing. Plus the counterfeiter profits from the process.

Here’s why private banks are counterfeiters on that definition of the word.

It is now widely accepted that “loans create deposits” to quote a popular phrase. Or as the opening sentence of this Bank of England article put it, “This article explains how the majority of money in the modern economy is created by commercial banks making loans.”

Put another way, the private bank system when granting loans, DOES NOT NEED to obtain money from anywhere: it can simply credit the account of borrowers with money produced from thin air (much like a traditional backstreet counterfeiter produces money from nowhere using paper and ink).

Now people and firms do not borrow money just to sit on it: they borrow so as to SPEND it. And that extra spending will be stimulatory / inflationary.   But assuming the economy is already at capacity, the extra demand stemming from that new money has to be negated in some way, else inflation rises too much. And governments do that “negation” by imposing deflation in some way, e.g. by confiscating money from the population at large: by raising taxes and/or cutting public spending. An alternative deflationary measure is to INDUCE the private sector to give up immediate access to some of it’s “official national” money by raising interest rates.

So there is at the very least a close similarity between traditional counterfeiters and private banks. That is, for every £X produced by traditional counterfeiters, the state has to withdraw about £X from the private sector in order to keep inflation under control.

Likewise with banks: for every £X printed and loaned out by banks, the state has to confiscate official money from the private sector to compensate.


As for the PROFIT that private banks make from creating and putting their home made money into circulation, that comes about in a slightly different way as compared to traditional counterfeiters.

Traditional counterfeiters print money and spend it. In contrast, private banks print money and LEND it. But that doesn’t alter the fact that private banks PROFIT from their money creation activities (and remember that PROFIT was one of the elements in the definition of “counterfeiter” at the start above).

Imagine the going rate of interest for a mortgage is 5% and you can simply print money and lend it out at 5%, that would be nice little earner, wouldn’t it?

Banks have to PAY to attract funds.

There is however a slight reservation to be made about the latter point. This reservation doesn’t DESTROY the point. But for the sake of accuracy, the reservation is as follows.

It was stated above that when granting a loan, a bank “can simply credit the account of borrowers with money produced from thin air..”. Notice the word “can”. That is a private bank does not NECESSARILY obtain much or all of the money for a loan from thin air: i.e. to some extent, banks obtain funds from depositors, bond-holders and so on.

Now in that a bank is engaged in the latter activity, it’s doing what most people THINK banks do: attracting deposits and lending on those deposits. Obviously no counterfeiting is involved there.

Put another way, possible counterfeiting is involved only in that banks print NEW MONEY. But the indisputable fact is that the money supply expands year after year. Thus there is no question but that a significant amount of “printing” and thus possible counterfeiting takes place every year.

Borrowers share in the profits.

A further point that complicates the issue, but doesn’t destroy the point that private banks are engaged in counterfeiting, is that it’s not just banks that benefit from counterfeiting: borrowers do as well, and for the following reasons.

If a bank is going to print and lend out money, clearly it has to undercut the going rate of interest. Now in that banks lend out HOME MADE money, that undercutting is easily done: after all, it costs a bank virtually nothing to come by that money. But that artificially low rate of interest benefits borrowers of course.

So another distinction between traditional backstreet counterfeiters and private banks is that the former keep the profit for themselves, whereas banks share the profit with borrowers.

I.e. the agreement between banks and borrowers is to a significant extent along the following lines.

Bank to potential mortgagor: “Ere mate. I’ve got a sack-full of freshly printed £50 notes. You want several thousand for your mortgage. How’s about I lend you the sack-full? I’ll charge you less than the going rate of interest. You’re happy. I’m happy. Everyone’s happy.”

So: are private banks counterfeiters?

The answer is a definite “yes”. That is, what private banks do fits the description of counterfeiting set out at the start. To reiterate, that was as follows (word for word).

A counterfeiter is someone who produces a form of currency which is such a close imitation of the real thing that it’s widely accepted in lieu of the real thing. Thus it goes into circulation, and displaces the real thing. Plus the counterfeiter profits from the process.

P.S. (8th May, 2016). For what it’s worth, David Hume writing in 1742 referred to private bank created money as “counterfeit” money.

Wednesday, 4 May 2016

The Pigou effect.

Lars Syll backs the idea advocated by Keynes namely that falling wages and prices in a recession do not raise aggregate demand. Not quite right actually. Falling prices increase the REAL VALUE of money (and the national debt). I.e. those falling prices increase the value of private sector paper assets, which ought to induce the private sector to spend more, and hence alleviate unemployment.

That’s known as the “Pigou effect”, after the economist Arthur Pigou.

But against that, there's the "debt deflation" effect. That's the fact that falling prices increases the real value of debts. And since debtors presumably tend to be poor, and since their weekly spending is presumably more sensitive to their net worth than is the case with the better off, the overall effect of the debt deflation effect is probably deflationary. And that effect might or might not wipe out the Pigou effect. Hard to say.

Anyway, that's all very theoretical stuff: i.e. it's not of much relevance to the real world. That is, it's not realistic to rely on the Pigou effect to get us out of recessions.

Bernanke agrees with Positive Money, the NEF and Richard Werner.

In a recent article, Bernanke proposes the idea that when it comes to helicopter money, the central bank should determine the AMOUNT of new money to be created and spent, while democratically elected politicians decide exactly how that money is spent – or whether the spending takes the form of tax cuts.

That split of responsibilities is central to this 2011 work by Positive Money, the New Economics Foundation and Prof Richard Werner.

In fact, as the PM/NEF work points out, the committee which determines the above amount does not necessarily need to be a central bank committee: any committee of independent economists would do.

Incidentally I am grateful to Simon Wren-Lewis for highlighting that Bernanke article.

And finally, the relevant paragraph in Bernanke’s article runs as follows.

So, how could the legislature and the central bank play their appropriate roles in managing a joint monetary-fiscal operation, without endangering central bank independence or falling down a slippery slope of unconstrained monetary finance of fiscal spending or tax cuts? A possible arrangement, set up in advance, might work as follows: Ask Congress to create, by statute, a special Treasury account at the Fed, and to give the Fed (specifically, the Federal Open Market Committee) the sole authority to “fill” the account, perhaps up to some prespecified limit. At almost all times, the account would be empty; the Fed would use its authority to add funds to the account only when the FOMC assessed that an MFFP of specified size was needed to achieve the Fed’s employment and inflation goals. [11] Should the Fed act, under this proposal, the next step would be for the Congress and the Administration—through the usual, but possibly expedited, legislative process—to determine how to spend the funds (for example, on a tax rebate or on public works). Importantly, the Congress and Administration would have the option to leave the funds unspent. If the funds were not used within a specified time, the Fed would be empowered to withdraw them.


P.S. (same day). Under the above system, Nick Rowe seems to think it would be difficult to tell whether government had actually spend the additional money allotted to it. Can’t see the problem myself.

First, government is hardly likely NOT TO SPEND it is it? I mean extra government spending (and/or tax cuts) makes politicians popular. Why on Earth WOULDN’T they spend it?

Second, all you have to do to see if total government spending at the end of the year or quarter is more than the previously planned total.

Monday, 2 May 2016

Tired of the Labour Party’s “I’m less anti-semitic than thou” contest?

Then maybe the latest episode in the left’s never ending and totally hypocritical “I’m less fascist than thou” contest might interest you.

I say “never ending” because the word fascist is one of those words that lefties repeat over and over, like demented parrots. And they’ve been doing that for a very long time: George Orwell (who died in 1950) said that the word had become meaningless because of over-use.

Anyway, the above mentioned “latest episode” is thus. Ann Pettifor came out with a bog standard bit of leftie nonsense on the subject of fascism. The offending and hilarious sentence in her article is:

“Hence the rise of right-wing and fascist parties in for example, France, Hungary and Greece. Right-wing populism - a reaction to, and movement against market fundamentalism - now poses a real threat to European democracy..”.

Gosh, so Europe’s “far right” parties are fascist are they? Let’s think about that.

One element of fascism as per my Chambers dictionary is “militarism”. Now who sent the British military to Iraq and took part in the slaughter of a million Muslims for no good reason? Er…um…that would be the Labour Party (assisted by the Tories).

In contrast, the UK’s “far right” parties, the British National Party and UKIP, opposed that war from day one.

So unless you’re as brain dead as the average leftie journalist, you ought to be able to work out who the real fascists are – at least as far as “militarism” goes.

There is of course the additional point that killing a million Muslims for no good reason is about a million times as racist as anything the allegedly “far right” BNP or UKIP have done. (And if you don’t like a “million”, I’ll reduce that by an order of magnitude of one or three, and make it “ten thousand times as racist” or even “a hundred times as racist”: whatever tickles your fancy.)

And just in case you’re in any doubt as to whether killing a million Muslims is racist, the ultimate racist crime is KILLING a member of another race for no good reason. Compared to that, insulting them, or not allowing them to migrate to your country is a very minor offence, if indeed it’s an offence at all. So again, unless you’re a leftie journalist (i.e. brain dead), you should be able to work out who the real big time racists are.


Another nonsensical element in the above nonsense strewn sentences of Ann Pettifor’s is that she accuses the political right of “populism” while also criticising it of not being in favour of democracy. Now hang on. Democracy consists of letting ordinary people have a say in how the country is run. And populism? Well you could pretty much define that in the same way: trying to attract votes from ordinary people (as opposed to attracting votes from pseudo intellectual, pseudo sophisticated prats).

Political violence.

Another element of fascism is political violence: e.g. barging your way into other political parties’ meetings and breaking them up – one of Hitler’s favourite tactics in the 1930s (not that communists were exactly innocent on that score).

Now what d’yer know? According to Europol about 90% of acts of political violence are perpetrated by LEFT WING political groups, rather than RIGHT WING political groups. So there again, lefties win hands down when it comes to fascism.


Another fascist tactic used by the political left (and indeed the political centre ground) is arresting your political opponents – a tactic used, of course, by Stalin and Hitler.

And what do you know? Marine Le Pen has been threatened with arrest for saying what every Tom, Dick and Harry is currently saying about Muslims. And Nick Griffin of the BNP was arrested and put on trial ten years ago for speaking the truth about Asian / Muslim grooming in the UK.


All in all, when it comes to fascism, the political left really ought to keep its big mouth shut. As Oxford’s former professor of government, Max Beloff said, there’s something “dangerously fascist” about New Labour. And two of the most violent and extreme fascists to appear in the last hundred years came from the political left: Hitler and Stalin.