Monday, 20 February 2017

Random charts XIV

The pink text that appears on some charts below has been added by me. It’s there to give more details about relevant charts.



























Sunday, 19 February 2017

The Fed’s odd ideas on NAIRU.


I’ve just suggested to the Fed that they make some changes to one of their charts. Reasons are thus.

As a result of a discussion in the comments after this article about NAIRU on Mike Norman’s site, I came across this Fed chart which purports to show how NAIRU has changed over time. Strikes me the chart is misleading because it implies NAIRU can be estimated with the same accuracy as some other items that appear on Fed charts, like inflation, the money supply, numbers unemployed and so on.

So I suggested they put a “health warning” on the chart that basically makes the latter point, i.e. that the chart simply shows the Fed’s best guess as to what NAIRU is, and that the guess could easily be about 20 to 40% out.

Also, the Fed’s definition of NAIRU is very odd (see left hand side just under the chart). It goes thus. “The natural rate of unemployment (NAIRU) is the rate of unemployment arising from all sources except fluctuations in aggregate demand.”

That is a hundred miles from conventional definitions.





Friday, 17 February 2017

Ann Pettifor’s bizarre ideas on banking.


Ann Pettifor has just published a book “The Production of Money”.

To help launch the book she did a talk at the LSE recently which contained a fair amount of nonsense, and which I reviewed recently here and here. Now for the book.

I’ll concentrate on chapter 6, which deals with bank and monetary reform, since that is what interests me. However, there are a couple of passages from earlier in the book which are a laugh and are as follows.

Under the heading “The good news: savings are not needed for investments” (Ch 2) the first sentence reads “The miracle of a developed monetary economy is this: savings are not necessary to fund purchases or investment.”

Well that’s good news. So if the country wants £10bn of new infrastructure or housing there is no need for anyone to cut back on cars, booze, holidays etc? As Pettifor rightly says this is indeed a “miracle” (ho ho).

And under the heading “The value of a sound banking system” she says that thanks to private banks, “…there need never be insufficient money to tackle, for example, energy insecurity and climate change. There need never be a shortage of money to solve the great scourges of humanity: poverty, disease and inequality..”.

What – so private banks are great philanthropic organisations devoted to cutting inequality and curing disease. Well silly me: I thought it was mainly the social security system (nothing to do with private banks) that dealt with inequality. And my silliness goes even further: I always thought that in the UK it was primarily the National Health Service that dealt with “disease”. But clearly I’m wrong: apparently it’s those criminal bankers on Wall Street and the City of London who we have to thank. This is just hilarious.


Chapter 6.

On p.95 she says, “Monetary reform campaigners advocate adoption of a particular variety of ‘neoclassical economics’ that proved backward looking in the 1930s and disastrous in the 1970s and 1980s.”

Well it’s hard to define “neoclassical economics” in one sentence.  Look up various explanations of the term in the internet if you’re interested. But roughly speaking it consists of a belief in free markets. But monetary reformers advocate a much bigger role for money creation by the state (as indeed Pettifor herself explains) and a suppression of what private banks, left to their own devices, would do in a totally free market. So Pettifor is out by a hundred and eighty degrees there!

Moreover Takahashi Korekiyo, Japan’s finance minister in the early 1930s used sovereign money type stimulus very successfully to help get Japan out of the 1930s recession. What’s “backward looking” about that?

 

The campaign’s aims.

Under the above heading, Pettifor then explains (correctly) that one of the basic objective of what she calls “monetary reformers” is to ban private money creation and instead have just the state issue money. There are (unfortunately) several names for state or central bank issued money. Economists normally refer to “base money”. I’ll use the phrase “sovereign money” since Pettifor uses that phrase (as does Positive Money).

One of the first objections she makes to banning privately created money is to argue that the creation of and distribution of, and/or spending of sovereign money has no effect on demand!

So if the UK government printed and dished out £10,000 worth of £10 notes to every household in the country there’d be no effect? You really have to be barking mad to believe that. Indeed there is plenty of empirical evidence supporting the idea that given a windfall in the form of dollops of sovereign money (e.g. in the form of tax cuts) or in any other form, people spend a significant proportion of that money fairly quickly (see endnote for two bits of evidence).

But that’s not to say that controlling the quantity of money should be the ONLY WAY of controlling demand, or that it’s a very precise method of doing so. However monetary reformers do not (contrary to the claims of Pettifor) say that controlling the quantity of money SHOULD BE the only way of controlling demand.

As Adair Turner (a supporter of monetary reform) explained in a very good talk in Dublin a year ago, which I reviewed here, the INITIAL effect of the state creating new money and spending it (and/or cutting taxes) is a FISCAL EFFECT. E.g. if new money is spent on schools, the immediate effect is that more teachers are employed, and more is spent on school books and so on.

Thus if there were NO MONETARY EFFECT AT ALL, monetary reformers’ preferred method of controlling demand would still work!


What did Keynes mean?

Having criticised Pettifor’s claim that printing and spending extra sovereign money has no effect, it should be said that she quotes a passage from Keynes which seems to support her case. I’ll actually deal with that quote at the end below because she repeats the quote at the end of her Chapter 6.


Loans create deposits.

Next, Pettifor accuses Henry Simons and Irving Fisher (two economists who were active mainly in the 1920s and 30s) of being unaware of the fact that loans create deposits. As she puts it (p.100), “Second, Simons and Fisher assumed that banks singlehandedly created their own funds. In this view, there is no room for borrowers…”.

Well if Simons and Fisher were that pig ignorant on the basics of money and banks I doubt they’d ever have achieved the fame they did.  In fact after five minutes of rummaging around on the internet I found two quotes from Fisher which clearly indicate he was well aware that loans create deposits. In his book “100% Money and the Public Debt” he says “The essence of the 100% plan is to make money independent of loans; that is, to divorce the process of creating and destroying money from the business of banking.”

Well that pretty obviously implies that in Fisher’s view, under the existing system, money IS DEPENDENT on loans, doesn’t it? And again, Fisher says, “Thus our national circulating medium is now at the mercy of loan transactions of banks.”

No doubt I could spend another five or ten minutes digging up further quotes.


Usurious rates.

Next, under the heading “Usurious rates” Pettifor accuses monetary reformers of being indifferent to interest rates and not being concerned about the high rates paid by some borrowers.

Well there’s a very good reason for leaving interest rates (i.e. the price of borrowed money) to market forces. It’s the same as the reason why leaving the price of steel, brass bolts and ten million other products to market forces is not a bad idea (unless it can be specifically shown that the market gets something badly wrong). The reason is that, as explained in the economics text books, there are good reasons for thinking GDP is maximised where prices are set by the market.

Pettifor then points to current low central bank base rates and claims that other rates are “very high”.  High compared to what? She doesn’t explain.

Mortgages account for a substantial proportion of all loans, and the rate for 15 year mortgages in the UK is now around 3% as compared to about 8% in the early 1990s. (See the chart half way down here.) On that basis, the rate of interest on mortgages is currently “low” rather than “high”.

Moreover, if Pettifor has some magic way of slashing the rate paid by those with mortgages and by other borrowers (apart from letting private banks print and lend out counterfeit money, which is effectively what they do) then I’m sure we’re all ears. Unfortunately she is silent on that point, apart from making the decidedly uninspiring claim that “the system” should be “reformed and managed to keep interest rates across the spectrum of lending low” (p.105).

The reality, of course, is that running a bank does involve costs, like bad debts, staff salaries, purchasing computers and other equipment. Thus if banks are to be commercially viable, they have to charge more to borrowers then they themselves pay to depositors, shareholders, etc. Of course some banks make big profits. But then some make losses: e.g. Northern Rock. And last time I looked, J.P.Morgan’s return on capital, was pathetic.


Private deficits.

Next, the first sentence under the heading “Private deficits cannot finance economic activity” reads, “The system of fractional reserve banking so enamoured of monetary reformers, implies that bankers would only be allowed to lend the savings or deposits lodged in their vaults by savers or depositors.”

Fractional reserve enamoured of monetary reformers? What on Earth is Pettifor on about? The existing or “fractional reserve” bank  system is exactly what monetary reformers oppose!!!!!!!

Later, under the same heading, she says, “However, the principle of full-reserve banking would prevail on the whole with very little certainty as to whether members of the Money Creation Committee (MCC) would be willing to “create new money” for the banking system.

Well quite right: why should the MCC have any special regard for those poor downtrodden criminal organisations commonly known as “banks”? Indeed, why should it have any special regard for any particular industry?

The job of the MCC under full reserve banking is to make sure the ECONOMY AS A WHOLE has enough money to give us full employment. Whether there is an expansion or contraction in bank activity (lending and borrowing) over a particular year or decade is unimportant.

Moreover, UK bank assets and liabilities have expanded TEN FOLD relative to GDP since the 1970s. How much of that extra activity is of any real use?  Adair Turner made a good point when he said that a significant proportion of bank activity is “socially useless”.

Pettifor then says, “The Independent Commission on Banking (ICB) argued that this (i.e. full reserve banking) would undoubtedly increase rates of interest on loans, but would also curtail the lending capacity of the UK banking system. It would result in unprecedented contraction of economic activity – employment, investment and spending – to levels of existing, and invariably scarce, savings….”.

Well it’s blindingly obvious that ALL ELSE EQUAL full reserve would “contract economic activity”. Full reserve restricts what banks can do, relative to what they are allowed to do under the existing system (sometimes called “fractional reserve”). All else equal, a contraction of the illegal drugs industry or the prostitution industry would contract economic activity. Is that an argument against tighter regulation of the drug trade or prostitution?

However other things are not equal (gasps of amazement). That is, the tightening up on bank activities that takes place under full reserve is compensated for by creating and printing whatever amount of sovereign money is needed to keep the economy at capacity.  In short, there is less lending and borrowing based activity (i.e. debts decline) while there is a rise in non-borrowing based activity.


The crucial question.

Thus the CRUCIAL QUESTION, which seems to be beyond the grasp of Pettifor and the ICB, is this: what’s the optimum or GDP maximising mix of borrowing based and non-borrowing based activity?  Or put another way, what rate of interest gives us that optimum?

Well as Pettifor rightly says, under full reserve, interest rates are left to market forces. And as already pointed out, unless there is what economists call “market failure” (i.e. unless it can be shown that supply and demand are not working properly) then the normal assumption in economics is that GDP is maximised where market forces prevail.

Thus the conclusion is that far from GDP contracting under full reserve, as suggested by Pettifor (and the ICB), it would actually expand.


First time buyers.

One obvious and na├»ve criticism of the argument just above is that is that higher interest rates would hit less well off first time house buyers and other low income house buyers. Well the answer to that is “Pareto”. For the benefit of non-economists (and Ann Pettifor) I’ll explain.

Pareto was an Italian philosopher and economist who made the following point. To simplify at bit, he said the important objective in economics is to maximise GDP (within environmental constraints of course). But if any specific groups are adversely affected by the attempt to maximise GDP, they can always be compensated by taxing those who GAIN from the process, and giving the proceeds to the former group. As a result, everyone is better off.

In fact we actually already have a host of measures for helping those who are less well off housing wise. Thus any interest rate rises stemming from full reserve would probably not even require the implementation of any new measures: i.e. it would simply be a case of enhancing existing measures.


Should or can money be debt free?

Under the above heading, Pettifor rightly points out that Positive Money makes much of the difference between private bank created money, which can correctly be described as “debt encumbered” and central bank created money can be described as “debt free”. Other advocates of full reserve tend not to make so much of that “debt” distinction.

The question as to whether sovereign money really is debt free has been extensively debated in the literature. What is clear is that while sovereign money can be said to be a debt owed by the state to individuals holding that money, at the same time the state has the right to confiscate any amount of that money that it chooses from holders of that money via taxation. So it’s a strange sort of debt, isn't it?

It’s like me getting a mortgage from my bank, but at the same time having the right to raid the bank and grab wads of £10 notes with a view to paying off the mortgage! In that scenario, the so called debt I owe to the bank is clearly not a debt in the normal sense of the word debt.

And not only that, but the only thing the state undertakes to give its creditors when it’s time to “pay its debts” is sovereign money, which the state can print in any quantity it likes whenever it likes.  Again, that’s a bit like me being able to pay off my mortgage with £10 notes printed on my desktop printer.

To summarise, there is certainly a difference in the extent to which privately created money and sovereign money really are debts. To that extent, Positive Money is right. But on the other the other hand THE EXACT EXTENT to which sovereign money is debt free is very debatable and semantic.


Gift economies?

But Pettifor’s take on all this is plain bizarre. She says, “There is no such thing as debt-free money, or if there is, it is very likely something quite different – a grant or a gift. Now there is no real reason why society should not aspire to building a gift-based economy.”

Well what’s all this about a “gift based economy”? None of the advocates or sympathisers with full reserve (Milton Friedman, Lawrence Kotlikoff, Merton Miller, etc) are aware that any sort of “gift based economy” is involved as a result of full reserve. Far as they’re concerned, industry and commerce carry on much as before: on a COMMERCIAL basis, not on any sort of altruistic  or “gift” basis.

If Pettifor wants to get her bizarre “gift” idea across, she needs to do vastly more explaining that appears in her book far as I can see, though admittedly I haven’t read every page. However, when the Kindle version comes out I’ll do a quick spot of word searching for “gift” to see if she does indeed provide a decent explanation, and if she does, I’ll humbly withdraw the above criticism. 


The ‘People’s QE’ proposals weaken democratic authority.

Under the above heading, Pettifor then claims that having a committee of economists (e.g. at the central bank) determine how much money is created “weakens democratic authority”: that is, if such a committee not only decides how much money to create, BUT ALSO decides HOW it is spent (a job for democratically elected politicians) then clearly she has a point. “Democratic authority” is indeed “weakened”.

But that is not a mistake Positive Money makes! Though there may well be others who make that mistake.

If Ann Pettifor had actually read and understood PM’s proposals she’d discover that there is a 100% clear distinction between the decision as to how much money to create (done by a committee of economists) and in contrast, strictly political decisions, like what proportion of GDP is allocated to public spending, and how that is split between health, education and so on: those decisions being taken by democratically elected politicians. 

Indeed, it is not just Positive Money who make that distinction. The joint submission to the ICB made by PM, the New Economics Foundation and Prof Richard Werner makes the latter distinction as well. (The title of that work is “Towards a twenty-first century century banking and monetary system”)

I know for a fact that the latter point has been explained to Pettifor in comments after her various articles.  Presumably she is too arrogant or stupid to absorb said explanations.


Donald Trump and helicopter money…

Under the above heading, Pettifor claims a weakness of full reserve is that it involves inflation targeting. Complete nonsense!

If the money creation committee, or indeed the economics profession as a whole decide to target the unemployment rate or thought that astrology should be used to determine the amount of money created or stimulus in general, there’d be nothing to stop the money creation committee going for astrology (or tea leaf reading or crystal ball gazing or anything else you care to mention).

Moreover, it’s a bit strange to say that inflation targeting is a weakness in full reserve when inflation targeting is used under the existing system! I.e. if inflation targeting is a weakness in full reserve, then by the same token, it is a weakness in the existing system!


The Keynes quote.

As mentioned above, Pettifor does quote a passage from Keynes which seems to support her idea that the creation and spending of sovereign money is useless.

The passage is actually from a letter from Keynes to Roosevelt in 1933, and it is as follows.

“The other set of fallacies, of which I fear the influence , arises out of a crude economic doctrine commonly known as the Quantity Theory of Money. Rising output and rising incomes will suffer a set-back sooner or later if the quantity of money is rigidly fixed. Some people seem to infer from this that output and income can be raised by increasing the quantity of money. But this is like trying to get fat by buying a large belt. In the US today your belt is plenty big enough for your belly. It is a most misleading thing to stress the quantity of money, which is only a limiting factor, rather than the volume of expenditure, which is the operative factor”.

Now there is a big problem for Pettifor with that quote, namely that earlier in the letter (para 5), Keynes advocates amongt other things, public money creation! He actually says “public authority must be called in aid to create additional current incomes through the expenditure of borrowed or printed money.”

So is Keynes contradicting himself? Well it’s not entirely clear: he could certainly have worded his letter much better. The best explanation I can think of is that there is certainly one type of money, the expansion of which will not have any effect, and that’s commercial bank created money – very different stuff to CENTRAL bank created money. (The latter is a net asset as viewed by the private sector. The former is not.)

That is, commercial bank created money (i.e. the type of money which results from a commercial bank extending a loan) RESULTS FROM a desire to do business: it is not the CAUSE OF extra business or extra sales.

To illustrate, if someone gets a loan for £X to buy new car, the bank credits £X to the account of the borrower, and hey presto, £X of new money comes into existence. But it’s not the simple fact of creating that money that boosts car sales, or more generally, economic activity as a whole: it’s the fact of SPENDING the money that does the trick (as Keynes rightly says).

To summarise, it is clearly nonsense to claim that increasing the private sector’s stock of sovereign money (e.g. £10 notes) has no effect. Give anyone a wheelbarrow full of £10 notes, and they’re liable to spend some of it. In contrast, if a commercial bank were to grant millions of pounds worth of loans to a selection of people who had no desire for a bank loan, there’d be no effect on the real economy.  The latter “borrowers” would simply contact their bank and tell it to stop being silly.

I assume that’s the explanation for Keynes’s apparent self-contradiction.


Conclusion.

It would seem from Chapter 6 of Pettifor’s book that she has an exceptionally poor grasp of money and banking. Her book will do far more harm than good. However, she is a good public speaker, and that fools 90% of the plebs and the sheeple, as an successful politician will confirm.

___________



Endnote:


Two of the studies which confirm that when households receive windfalls, they spend a significant proportion fairly quickly:


1. “Did the 2008 Tax Rebates Stimulate Spending?”. NBER.
http://www.nber.org/digest/mar09/w14753.html

2. “Allocation of Windfall Income: A Case Study of a Retroactive Pay Increase to University Employees.” Margaret Rucker. Journal of Consumer Affairs.
 http://onlinelibrary.wiley.com/doi/10.1111/j.1745-6606.1984.tb00322.x/abstract


Wednesday, 15 February 2017

Adair Turner, Positive Money and MMT: great minds think alike.


This is a precis of a talk by Adair Turner in Dublin in April 2016, together with some comments by me (in green italics). Numbers below refer to the approximate times (in minutes after the start) where relevant points are made. Turner’s talk lasts 55 minutes, whereas this article is a 5 minute read.

Needless to say, I offer no guarantee that my summary is fair or accurate: if you want a totally accurate depiction of Turner’s ideas, listen to or read his own material.

______________


* First, Turner says something about the structure of the talk. The talk says a bit about why we are in the mess we are in, then the main part of the talk is devoted the ideas in part five of his recently published book “Between Debt and the Devil”, those ideas being an answer to the question: how do we organise stimulus better? And his answer is budget deficits funded by freshly created base money. (0-3.00)

* Bank lending in the advanced economies to the non-finance sector since the 1950s and 60s has expanded from around 60% of GDP to around 150%, and most of that lending has gone to real estate: essentially boosting the price of land. Plus that fact increases the effect of a well known feedback mechanism: banks lend to fund the purchase of land…that boosts the price of land, which makes land a better form of collateral….which increases the ability of land owners to borrow more, etc. (3-7).

* The debt created by the latter phenomenon, once created does not go away come a recession: it simply moves around, sometimes crossing national borders.(7-13.30)

* The conventional response to recessions is interest rate cuts, and if they don’t do the trick, QE and zero interest rates. But the two latter do not work very well, which has lead some people in high places to conclude that central banks and governments are out of ammunition. (13.30 – 19.30).

* In fact the authorities are never ever out of ammunition: they can simply print money, i.e. go for deficits funded by freshly created base money. And the latter idea has been advocated for decades by for example Milton Friedman, Bernanke and Henry Simons (in the 1930s). Plus the idea was successfully put into effect by the Japanese finance minister, Takahashi in the early 1930s, and very much earlier (as pointed out by Adam Smith) by one English colony on the North American continent, namely Pennsylvania.

Turner might also have mentioned Keynes. Indeed it is a measure of the ignorance of those in high places in the present century that an idea which is 80 years old (Simons, Keynes and Takahashi) is apparently new to said people in high places! Incidentally, Turner actually mentions Takahashi and Pennsylvania in a later part of the talk, but I mentioned them here because of their relevance. (19.30 – 32.30).

* Forward guidance and negative interest rates are defective tools. (32.30 – 34.00).

* The effect of money financed deficits is made more complicated by fractional reserve banks. In Friedman’s exposition of money financed deficits he simply assumed such banks did not exist.

Indeed Friedman positively argued against the existence of such banks, i.e. he argued for full reserve banking or “100% reserves” as he called it.

* Fractional reserve banks tend to amplify the effect of a money financed deficit, but that can be controlled, if need be, by raising the reserve requirements of commercial banks. (34.00 – 38.00).

* The obvious problem with money printing, namely that if politicians get near the printing press problems may arise,  can be controlled by having some sort of independent committee of economists, e.g. a central bank committee, decide how much money to print each month or year. (38.00 – 44.00).

Positive Money, the New Economics Foundation and Prof Richard Werner advocated that idea in their 2011 submission to the UK’s Independent Commission on Banking.

 
Also, the evidence seems to be that where politicians DO HAVE access to the printing press (i.e. where central banks are not independent) politicians do not abuse that power too badly, though Weimar and Mugabe are the obvious exceptions to that rule.

*The situation in Japan has become a joke, though there shouldn’t be any serious consequences from the joke. The joke is that the Japanese government keeps pretending (much like the UK government in recent years) that it will dispose of the deficit and turn that into a balanced budget or a surplus. However the reality is that it never will. What will happen is that Japanese debt will effectively be monetised.  (44.00 – 49.00).

In contrast, the situation in the EU is much more serious. Japan is racially and culturally homogeneous, whereas the EU faces large immigration flows from a culturally different areas. Plus money financed deficits are much easier to implement in the Japanese situation than in the EU where there are several different countries, liable to squabble with each other over who gets how much of the new money. (44.00 – end).

Monday, 13 February 2017

Hilarious. A comment of mine in the Financial Times was deleted because it “insulted” the relevant journalist.



The article concerned was about immigration and was entitled “Endless exodus: 3,000 years of fearing and depending on refugees.”






The article, as is normal with articles on immigration in broadsheet newspapers, accused all and sundry of “xenophobia”. Indeed the latter word appeared in bold type as part of a sub-heading at the top of the article.

Now there’s a big problem with accusing anyone of xenophobia (hatred or fear of foreigners) which is thus.

There are several possible motives for wanting immigration reduced. E.g. first, there is concern about overcrowding and inflated house prices. Second, there is the desire to see one’s own country’s culture, identity, way of life etc not overrun by another culture or group of people.

Items one and two just above do not necessarily involve “hatred” or “fear” of foreigners. Indeed, of the many members of so called “far right” parties I’ve met, I’ve never met any who clearly hate or fear foreigners: but they certainly DO WANT Muslims for example to stay where they are – in the Middle East etc, rather than come to Europe.

Indeed, it now seems that A LARGE MAJORITY of Europeans with a view on the matter now want a complete ban on Muslim migration to Europe, according to a recent survey by Chatham House (see their chart reproduced below - scroll half way down on their site). And that according to the numpties who write for broadsheet newspapers presumably means a majority of Europeans are “xenophobes”. (To be more exact, if you strip out the “don’t knows” from the chart below, those who want a ban on Muslim migration outnumber those who don’t by about two to one.)





So….if you’re going to make the nasty accusation against a group of people, namely that they “hate” or “fear” foreigners, there’s an onus on you to produce some very good evidence to back the accusation, isn't there? I wouldn’t accuse a broadsheet journalist of being a murderer or pedophile without some very good evidence. Would you?

But far from bothering with “evidence”, there have been literally HUNDREDS of articles in broadsheet newspapers over the last decade or more accusing various people of xenophobia without so much as the beginnings of an attempt to substantiate the charge. Indeed I have never ever seen an article which makes the slightest effort to prove the “xenophobia” charge. The conclusion is that the journalists who write for broadsheet newspapers are a bunch of

NASTY LITTLE IGNORANT THICK HEADED SHITS.

Now when dealing with nasty little ignorant thick headed shits or bullies, there’s it’s often a good idea to kick them in the balls as hard as they kick everyone else in the balls. Violence is probably all they understand.


Tibet.

But there’s another  hypocrisy which broadsheet journalists are guilty of as follows.

Tibetans are keen to preserve their culture, identity and way of life. But far from deploring that, broadsheet journalists and lefties in general go all dewey eyed about the wonders of Tibetans preserving their culture.

And that’s just the thousandth example of racism perpetrated by sanctimonous self-styled “anti-racists”: if you’ve got brown skin it’s OK to try to preserve your culture, but if you’ve got white skin it’s not.


Incidentally the fiendishly intellectual and well read blogger who goes by the name “Lord Keynes” recently highlighted the “Tibet hypocrisy”, and well done Lord Keynes, though frankly he’s a bit slow off the mark: members of the British National Party were pointing to the Tibet hypocrisy fifteen years ago.


My Financial Times comment.

Anyway, the comment of mine in the FT which was deleted more or less summed up the above points. Strangely, the comment was left in place for about 48 hours before being deleted, so most of those likely to read it would have read it. To that extent, I’m not too concerned about the deletion. Anyway, the comment, which certainly was laced with insults, was as follows.

“Good to see the foul mouthed Mark Mazower repeat the charge (in bold type at the top of the above article) namely that those who oppose mass immigration suffer from “xenophobia” (fear or hatred of foreigners). As is normal with the retards who write for broadsheet newspapers, he makes no attempt whatever to justify the charge. After all, opposition to mass migration could simply be down to a desire to preserve one’s own country’s culture, way of life, identity etc, rather than hatred of foreigners. Indeed, when Tibetans try to preserve THEIR culture and way of lift, the aforesaid retards go all dewey eyed (though I don’t expect said retards to have the brain to see the irony there).

Anyway, since the above mentioned retards seem to think unsubstantiated insults are clever, I wish to announce that all journalists writing for the FT and other broadsheet newspapers on immigration are foul mouthed, mentally retarded pedophiles. As for substantiating that insult, I just can’t be bothered. Anyway, I assume said retards will be impressed by my latter insult.”


Saturday, 11 February 2017

More nonsense from Ann Pettifor.


I’ve just stumbled across more nonsense in AP’s talk the other day at the LSE. I should really have included this new material in a post I did a few days ago on this subject. But no harm done: as I said in that post, this is only a provisional look at her ideas. I’ll do a proper review when I get a copy of her book.

Anyway, the new passage I just stumbled across is as follows. (It starts at around 38.30 in this audio.)

“The sovereign money movement propose that we should abolish debt, strip banks of their powers to create currency in the words of Mary Mellor,  the sociologist,  and return to a debt free, gift base economy. This would effectively nationalise the money supply which would be expanded or contracted by a committee at the top of the world or a central bank,  so that new public money could be issued by new public money authorities, free of debt to meet public needs. Interest rates would be left to the will of the market.

I worry at the authoritarian implications of transferring such economic power to unaccountable bureaucrats at the central bank. But for the purposes of this discussion, debt free money is an oxymoron. There is no such thing a debt free money. Or if there is, it is very likely something quite different: a grant or a gift. Now there is no reason why society should not aspire to building a gift based economy, one in which everyone relies on others for what Mary Mellor calls “provisioning”: for clean air, works of art, or a smart phone. But today while we still enjoy the remnants of a gift bearing culture.  We have failed to build an entirely gift based economy.”


Let’s take that sentence by sentence.

“The sovereign money movement propose that we should abolish debt, strip banks of their powers to create currency in the words of Mary Mellor,  the sociologist,  and return to a debt free, gift base economy.”

“Abolish debt”??  God knows where AP gets that idea from. If she actually read Mary Mellor’s works or those of Positive Money (both advocates of a sovereign money system) AP would find that under such a system businesses and household carry on very much as they do now. Far from “abolishing debt”,  people would continue to get mortgages, though what advocates of sovereign money DO CLAIM is that under their system, debts would decline SOMEWHAT.

AP might also like to ponder the fact that at least four Nobel laureate economists advocate a sovereign money system, including Maurice Allais and Milton Friedman. And another economist what advocates sovereign money is Lawrence Kotlikoff.  Nowhere in the works of the latter will AP find anything about “abolishing debt” or converting to a “gift based” economy.

Incidentally, I do get the sense that Mary Mellor, who is fairly left wing, does actually want to implement a gift based economy (whatever that is).  However other advocates of sovereign money certainly do not, and even Mary Mellor keeps that aspiration well separate from sovereign money.

Next, let’s take this sentence: “I worry at the authoritarian implications of transferring such economic power to unaccountable bureaucrats at the central bank.”

Seems AP doesn’t understand how the EXISTING system works because very much the same powers are exercised by “unaccountable bureaucrats” in the shape of the Bank of England Monetary Policy Committee (shock horror).

To illustrate, the independent BoE has created VAST amounts of money over the last few years as a result of QE. As it happens, the BoE did consult with the then UK finance minister Alistair Darling before implementing QE. However, given that the BoE is nominally independent, I doubt there was anything FORCING them to consult. Moreover, far as I know other central banks did not consult before implementing QE.

Secondly, that dreadful “unaccountable” Monetary Policy Committee actually controls how much money private banks create as a result of the MPC’s control of interest rates. In short, the total amount of power wielded by “unaccountable bureaucrats” under our existing system is not much different to the amount they would wield under sovereign money. Certainly the MPC does not consult politicians when adjusting interest rates.

Next, AP says “There is no such thing a debt free money. Or if there is, it is very likely something quite different: a grant or a gift.”

That point has actually been extensively debated by economists in recent years. The consensus is that money created by private banks is indeed “debt based”. Or put it another way, for every $ of money created by a private bank, there is a $ of debt. Or to use a popular phrase, privately created money “nets to nothing”. MMTers often make that point.

As to central bank created money, obviously that is OSTENSIBLY a debt owed by CBs to the holder of such money. Indeed UK £10 notes actually say the Bank of England will “pay the bearer on demand the sum of £10”. But that phrase is just a historical anachronism. I go into this issue in a bit more detail here.

And finally as regards AP’s claim that sovereign money (i.e. base money) necessarily involves a grant or a gift is pure nonsense. There is precisely nothing to stop the state creating fresh “state created money” (aka sovereign money) and spending that on hospitals, schools, defence, roads or whatever.  In that case, the money is not a gift in the sense that the private sector gets the latter goodies for free. The private sector has to engage in a huge amount of blood, sweat and tears in order to bring hospitals, schools and new roads into existence. Plus the main contractors responsible for creating those investments sub-contract various jobs to sub-contractors and pay them cash. I.e. commerce carries on as before. There is nothing resembling a “gift economy” there.

Moreover, fiscal stimulus followed by QE (what we’d done big time in recent years) equals “create sovereign money and spend it”. That is, as a result of the crisis, governments have borrowed $X, spent $X and given $X of bonds to lenders. Governments (or rather their central banks) have then printed fresh sovereign / base money and bought back those bonds. That all nets out to “government prints new sovereign money and spends it”.

Far as I know, neither the US nor the UK have suddenly turned into “gift” or “semi-gift” economies because of QE etc.

Thursday, 9 February 2017

Ann Pettifor says central banks don’t create money!!


To her credit, Ann Pettifor HAS GRASPED the point made by Keynes and which every MMTer understands, namely that deficits do not matter in a recession. She sets out that point in her book “The Economic Consequences of Mr Osborne”.  However, her grasp of other aspects of money is defective, to put it politely, if the talk she gave at the London School of Economics last night is any guide. The talk was entitled “The production of money: how to break the power of bankers”.

I’ll run thru one short passage of hers below, but note that this is a very rough and preliminary look at her ideas:  she has just published a book on this subject with the same title as yesterday’s talk, and the book will presumably set out her ideas in more detail. So I’ll review that in due course.

Anyway, well into the talk she says “So while all money is credit, and all credit is money, it is also the case that all money is debt, just as all obligations are simultaneously claims.” (That's at 35 minutes into this audio version of the talk.)

Er, excuse me, but trade credit is not money.

Trade credit is a debt owed by one non-bank firm to another, and the total amount is ASTRONOMIC: almost three times GDP in the UK.

Now there is no way you can use one of those debts to purchase your groceries or buy a car or a house. Thus trade credit is not money. AP continues…

“Now many of my friends in the monetary reform movement, especially those in the sovereign money movement, believe that debt and the power of the private bank system to create credit is a very bad thing. And indeed so it can be. If debts are allowed to expand beyond the capacity of debtors to repay, or even of the economy as a whole to repay, they become a burden round the necks of borrowers and countries.

But while banks have power over borrowers, and use inducements to flog loans, it is important to remember that it takes two to tango in this relationship.

Credit cannot be created till a borrower applies for a loan. There is always a counterparty when a bank or a shadow bank creates money, credit or debt. Private commercial banks cannot create credit or money out of thin air unless there are borrowers. Private banks cannot expand the money supply unless borrowers apply for a loan. In this sense it is the world’s borrowers, students, shopkeepers and governments who determine the creation of money, and whose borrowing expands or contracts the money supply. It is not as orthodox economists argue central banks that create the money supply.

While they are responsible for the issue of the currency, for minting and printing, and monitoring the value of the currency and using the bank rate as a tool, central bankers do not print the money supply. No, commercial banks working with their borrowers print the bulk of the nation’s money supply. As I said 95% in Britain and 99% in the US.”


So it’s not just “my friends in the monetary reform movement” who claim central banks create money: it’s now “orthodox economists” as well! Members of the monetary reform movement like Positive Money will be relieved to hear that! Or rather they won’t because they’re already aware of the point!

Next , it’s a bit of a self-contradiction to say “It is not as orthodox economists argue central banks that create the money supply” and then shortly thereafter say “commercial banks working with their borrowers print the bulk of the nation’s money supply.” Where does the rest, i.e. the “non bulk” money (to coin a phrase) come from? It comes from central banks!

Indeed, where does the money come from to fund the thousands of billions of dollars worth of QE that has been implemented in recent years? It comes from central banks!!

Moreover, Ann Pettifor’s “99% in the US” figure is way out, at least as far as the last few years are concerned. According to the Fed, the amount of base money (i.e. central bank created money) in the US has stood at around $4,000bn for the last couple of years. See chart below.





In contrast, the total money supply has stood at around $12,000bn. See chart below.




So central bank created money as a proportion of the total money supply in the US for the last few years would seem to be nearer 20% than Ann Pettifor’s 1%. Incidentally those figures are just a rough guide: there are several different ways of measuring the money supply. The total money supply chart above is M2 which is a popular measure.

Of course the effect of QE sticks out a mile in the above first chart.

But the really significant thing about the above first chart is that it demonstrates the validity of what “monetary reformers” and the “sovereign money” lot have been saying for years, which is that substantially increasing the proportion of the money supply that is central bank created is easily done, and increasing the proportion to nearer 100% would be equally easy.

Indeed, as Milton Friedman, one the several economics Nobel laureates who advocate the abolition of privately created money put it, “There is no technical problem in achieving a transition from our present system to 100% reserves easily, fairly speedily and without any serious repercussions on financial or economic markets.” 


Tuesday, 7 February 2017

Barter economies can teach us something about the free market rate of interest.


This is a shortened version of a paper I just put online.

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Summary of this shortened version (!)

When goods are loaned by one person to another in a barter economy it is physically impossible for the goods to be simultaneously available to both lender and borrower. Plus there is no obvious reason why interest rates should not be at a genuine free market level.

Same goes for money based economies where only state issued money is allowed (i.e. where private banks are not allowed to create / print money). That is, money cannot be simultaneously available to borrower and lender, plus again, there is no obvious reason why interest rates would not be at their genuine free market (i.e. GDP maximising) level.

In contrast, in an economy where privately issued money is allowed, private banks create money by performing a trick which is too good to be true: money is available to two different people at the same time.

To muscle in on the money creation business, private banks have to offer loans at below the free market rate of interest (assisted by the above trick). That is easy for them to do because money creation is basically costless (both for central and private banks).That forces interest rates down to below their free market (i.e. GDP maximising) level. Also the volume of debts rises to above its free market / GDP maximising level. Conclusion: the system that maximises GDP is a “state money only” system.

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Some anthropologists claim that the standard version of barter economies as set out in economics text books never actually existed. But even if those anthropologists are right, the questionable text book type barter economy still has something to teach us about interest rates.

Interest is sometimes charged in barter economies: for example in a desert island barter economy one person lending a fishing rod to another might ask for a few fish is a reward for the loan. Those fish probably equal interest (though the rod owner might just aim for enough fish to compensate for wear and tear on the rod while it is loaned out). Alternatively, the lender might require no “fish interest” just as in money based economies loans are sometimes granted at a zero rate of interest (e.g. between family members).

Next, while interest rates are doubtless calculated in a more haphazard way in barter economies than money based economies, there is no obvious reason to think interest rates would not, at least in principle, be at their free market level. That is, there is no reason to think interest rates would be artificially high or low. And that’s important because it is generally accepted in economics that GDP is maximised where prices are at free market levels, unless there is good reason to think otherwise, i.e. unless there is what economists call “market failure”.

And since there is no obvious reason to suspect market failure when it comes to loans made in barter economies, the conclusion is that a genuine free market rate of interest will obtain in those economies, and that that will maximise GDP, given that we are considering a barter rather than a money based economy

Note also that in barter economies, lenders lose access to whatever they have loaned (e.g. fishing rods) as long as the borrower has possession of the loaned item.


Money based economies.

As to money based economies, the money based economy that most closely resembles a barter economy is one where there is only state issued money (base money). That is, private banks are not allowed to create money. The reason stems from the way private banks (henceforth just “banks”) create money, which is thus. Where $X is deposited at a bank and the bank lends that money on while telling the depositors they still have access to their money, then the borrowers have access to $X as do the depositors! $X has been turned into $2X. Magic! But that conflicts with what happens in a barter economy, namely that where something is loaned out, the lender no longer has the use of it.

In a state money only system, as with barter economies, there is no obvious reason why interest rates would not settle down to some sort of genuine free market level: i.e. there is no obvious reason why interest rates would be artificially high or low.

The fact that lenders lose access to their money while it is loaned out  might seem a problem in that it might seem people wanting their money loaned out would have to tie up their money for decades on end where that money was loaned to mortgagors. In fact for every person who had let their money be loaned out and then wanted it back, chances are that fairly soon, someone else would want their money loaned out. Thus the latter can replace the former, and while those wanting their money loaned out would certainly not be guaranteed instant access to their money, they would not, at the other extreme, not have to wait years for it.

Also, a system where depositors cannot have access to their money as long as it is loaned out is a system where there is no maturity transformation. And that might seem to be a problem, given that maturity transformation is generally seen by economists to be beneficial. In fact maturity transformation is a load of nonsense, as I explained in this article. (Article title: "The Fatal Flaw in Maturity Transformation....").


Privately created money.

In order to muscle in on the money creation business, private banks have to make loans at below the rate of interest that prevails in a state money only system, the free market rate. But doesn’t making a loan, or indeed making and selling anything else at below the market price involves making a loss? So how do private banks do it?

Well it’s easy: creating the above mentioned extra $X costs private banks nothing essentially! All they do is open accounts for borrowers and credit $X to those accounts. The money comes from thin air.

As Joseph Huber put it in his publication “Creating New Money”, “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.”

As a result, interest rates fall to below their free market rate (which will result in GDP not being maximised), plus the total amount of lending and debt will rise to above its free market level.