Thursday, 26 February 2015

Lawrence Summers’s “secular stagnation” is complete nonsense.

Summary.    Secular stagnation is the idea that even at zero interest rates, it’s possible an economy does not achieve full employment. Ergo negative interest rates are needed, but implementing the latter is difficult. Ergo it’s conceivable there is no escape from excess unemployment.

The truth is that as Keynes pointed out and as MMTers keep repeating, it doesn’t matter how reluctant businesses are to invest or how reluctant households are to spend, if the state simply increases and carries on increasing the amount of money spent and fed into household pockets, the point must eventually come where households react by  spending enough to bring full employment. And until household spending rises far enough, there is no theoretical limit to the latter public spending.

As leading MMTer Warren Mosler put it in his “Mosler’s law” which appears at the top of his blog: “There is no financial crisis so deep that a sufficiently large tax cut or increase in public spending cannot deal with it.”


Summers first proposed his secular stagnation idea in a speech at an IMF conference in 2013. Mostly it’s incoherent nonsense far as I can see, but if Summers is saying anything at all, I go along with the summary of his speech set out by Gavyn Davies in the Financial Times. As Davies puts it in his 2nd and 3rd paragraphs, the theory is that demand can decline to such an extent that even a zero interest rate won’t solve the problem, thus a NEGATIVE rate is needed, and allegedly because cutting interest rates “has been the only means available to boost demand”.

Now the first flaw there is that cutting interest rates is most certainly not the “only means available to boost demand”. That is, if a zero rate doesn’t bring full employment, the state can simply print money and spend it, and/or cut taxes. The effect of that is to boost household cash balances, and (if the increased public spending option is taken) to increase employment in all the usual public sector areas: education, health, infrastructure repair, law and order, defence and so on.

And if the latter policy is implemented in robust enough form and for long enough, then household cash balances must at some point induce households to spend enough to bring full employment.

Indeed, the latter is exactly what we’ve done over the last three years or so. That is we’ve implemented fiscal stimulus (i.e. have government borrow and spend (and/or cut taxes)), then we’ve had central banks print money and buy government bonds: that’s called “Quantitative Easing”. And that comes to the same thing as having government and central bank, i.e. “the state”, print money and spend it and/or cut taxes.

Perhaps Summers hasn’t heard of QE. Or if he has, it seems he doesn’t understand the basic central bank book keeping entries involved when central banks do QE.

Two years later: 2015.

Having briefly sumarized Summers’s ideas as of 2013, we’re now in 2015 and he seems to have learned nothing in the meantime. In this speech given a few days and entitled “Reflections on Secular Stagnation” he says:

“Go back to basic Keynesian economics, and imagine that the point where the IS curve coincides with full employment involves a nominal interest rate that is lower than the attainable nominal interest rate. In that case, the creation, the printing of more money will be unavailing in generating economic growth.”

What on Earth is he talking about? Robert Mugabe didn’t find the “IS curve” any problem when he was printing and churning out ludicrously large amounts of money. It would be nice if Harvard economists had the same grasp of this subject as Robert Mugabe, wouldn’t it? (As I pointed out here some time ago).

And later in his speech of a few days ago he says:

“Secular stagnation is the phenomenon that the equilibrium level that savings are chronically in excess of investment, at reasonable interest rates.”

Well obviously it’s possible there is a decline in the amount that firms want to invest, and obviously its also possible there is a rise in the desire by households to save – in particular save MONEY rather than save in the sense of acquiring bigger houses, newer cars, etc. But the solution is easy: GIVE PEOPLE MORE MONEY!

Of course if the latter process goes too far, then excess inflation ensues. But until that point is reached or looks as though it’s about to be reached, there’s nothing wrong with simply printing money and expanding public spending and/or cutting taxes.

Tuesday, 24 February 2015

Alexander Apostolides’s amazingly clever article on banking.

This article by AA seems to have impressed sundry people in the Twittersphere, e.g. see here and here, but not me (e.g. see my critical comment after the article). Anyway, with a view to resolving this, I’ll run through the article in detail.

The article is 650 words in length, and the first 450 simply make the point (scarcely believable this) that the bubonic plague in Europe and the Turkish invasion of Cyprus in 1974 were traumatic events for Europe and Cyprus respectively, and that such events can be turning points for countries concerned.  Well I bet you didn’t know that…:-) I could add that the Norman invasion of Britain in 1066 was a similar turning point, and I could point to other turning points, but I don’t want to bore you to death.

Now in view of the above 650 / 450 numbers, astute readers will notice that that only leaves 200 words in which to say something about banking. Given that banking is a complicated subject, the chance of anything original being said in 200 words is slim. But let’s give AA the benefit of the doubt and examine the 200 words.

The paragraph after the above stuff on the bubonic plague says “The bail-in of 2013 is another such juncture. In March 2013, the unprecedented step of punishing depositors for the mistakes of bankers and their regulators will permanently alter the economic infrastructure of the island.”

Well OK. But deploring the bail in of ordinary depositors is easy. Wooley minded lefties will approve of that.  But unfortunately that leaves unanswered the question as to exactly WHO SHOULD be bailed in: i.e. who should pay for bank failures? AA doesn’t tell us.

You could argue that the latter sentence of his suggests that “bankers and their regulators” should foot the bill for bank failures. Unfortunately “bankers and regulators” just don’t have access to the ENORMOUS SUMS needed to bail out large banks. So AA’s weeping and wailing on behalf of depositors isn't much use.

Moreover (and I very much doubt AA knows this) one proposed solution to the question as to how to deal with our obviously dysfunctional banking system ACTUALLY INVOLVES bailing in a particular type of depositor. That proposal is part and parcel of full reserve banking. But that’s far too complex a point to deal with here.

Vested interests.

Anyway, then comes the final section of AA’s article which is entitled “Vested resistance to change” and consists of 140 words. AA basically makes the point that vested interests stand in the way of bank reform. Well I never! Is there anyone who hasn’t worked that out?

And AA’s final paragraph reads “Like the peasants in the day of the Black Death, society at large should not tolerate efforts of interest groups to stop the root-and-branch reform of the institutions that led Cyprus to this crisis.” Well everyone will drink to that: just another statement of the obvious.

And the real irony there is that several people, who claim to be left of centre and “radical” (to use the fashionable word) favor patching up the existing banking system rather than implementing root and branch reforms. But as Bill Mitchell has pointed out ad nausiam, the political left worldwide is incapable to doing anything much more than aping the economic illiteracy of the political right. I.e. lefties are far from innocent when it comes to backing vested interests.

But as regards banking, the CRUCIAL question, the $64k question is: exactly what should “reforms” consist of? Dodd-Frank & Co in the US have got bogged down in horrendous complexity in trying to answer that question.  AA doesn’t tell us or even make any suggestions (apart from his dislike of depositors being bailed in).


Alexander Apostolides’s article doesn’t amount to much.

Monetary offset is a joke.

One of the central ideas, if not THE CENTRAL idea of Market Monetarism is so called “monetary offset”. Scott Sumner is one of the World’s leading proponents of monetary offset, if not THE leading proponent. He explains the idea in an article entitled “Why the Fiscal Multiplier is Roughly Zero”.

Monetary offset according to Sumner is the idea that fiscal stimulus is very ineffective (as the title of his article implies) and THE REASON apparently is that if the fiscal authorities implement too much stimulus, the monetary authorities (i.e. the central bank) will “adopt a more contractionary monetary policy in order to prevent inflation from exceeding their 2 percent target.”

Now anyone with a grasp of economics ought to be able to spot the flaw in that idea. Incidentally I’ve put the relevant passage from Sumner’s article below under the heading “Sumner’s own words” and in italics. And of course readers wanting an even more detailed look at his ideas are free to read his whole article.

Anyway, for the benefit of readers who haven’t spotted the flaw, I’ll spell it out, and in fact the flaw can be illustrated very nicely by reference to a car, as follows.

Suppose one person has control of the accelerator (fiscal policy), and someone else controls the brakes (monetary policy), obviously one of the things the “brake controller” will do is to apply the brakes if the “accelerator controller” has stepped on the gas too much and the car is exceeding the speed limit.

Sumner’s conclusion from the latter is that the accelerator (fiscal policy) is near useless, because if too much of it is applied, the brake controller will slow down the car. Well hopefully most readers will by now have seen the flaw in the argument.

The flaw of course is that an accelerators is a good way of controlling a car’s speed. There’s nothing inherently wrong with accelerators. And the fact that drivers sometimes to too fast and need to apply the brakes is not an argument against accelerators.

Moreover, the idea that if inflation looks like getting excessive, that the central bank will apply the brakes is not exactly an original idea. Everyone including the average taxi driver knows central banks do that. I.e. there is no need whatever or a gradiouse new theory called “monetary offset”.

Monetary offset is nothing more than a verbal sleight of hand. It’s for people who don’t like fiscal policy, but can’t find any serious flaws in fiscal policy.

Sumner’s own words.

“Why has the effect of fiscal stimulus been so meager in recent years? After all, interest rates in the United States have been close to zero since the end of 2008. The most likely explanation is monetary offset, a concept built into modern central bank policy but poorly understood. We can visualize monetary offset with the Keynesian aggregate supply and demand diagram used in introductory economics textbooks. If fiscal stimulus works, it’s by shifting the aggregate demand (AD) curve to the right. This tends to raise both prices and output as the economy moves from point A to point B, although in the very long run, only prices are affected. Now let’s assume that the central bank is targeting inflation at 2 percent. If fiscal stimulus shifts the AD curve to the right, then prices will tend to rise. The central bank then must adopt a more contractionary monetary policy in order to prevent inflation from exceeding their 2 percent target. The contractionary monetary policy shifts AD back to the left, offsetting the effect of the fiscal stimulus. This is called monetary offset.”

Monday, 23 February 2015

Do central banks need assets?

Simon Wren-Lewis addresses the question as to why central banks don’t care for helicoptering. That’s the idea that central banks should simply create new money and distribute it to every household, or give the money to government with a view to government spending it on the usual public spending items: roads, education, etc. (or alternatively using the money to cut taxes).

As he puts it, “One reason why it is taboo among central banks is that they want an asset that they can later sell when the economy recovers.” I beg to differ.

If a central bank has NO ASSETS to sell, there’d be nothing to stop it wading into the market and offering to borrow at a rate just above the going rate for near risk free loans. That would have the desired deflationary effect.

Of course the latter “wading” is doubtless illegal under existing legislation in various countries. But that doesn’t matter: the law can easily be changed.

As to where a central bank would get the money from to pay the interest, obviously if the central bank just printed the money that would partially or wholly defeat the object of the exercise. That is, the effect of that printing would be stimulatory.

However, central banks normally make a profit every year and they remit that profit to the treasury. (Much of that profit comes from seigniorage) So if the central bank just debited that interest to its profit and loss account, then the treasury would get less at the end of the year, thus public spending on other items (roads, education, etc) would decline. The effect of that would DEFINITELY be deflationary: the desired effect.

And if the profits from seigniorage and so on weren’t enough to fund the above interest, then the central bank would just have to go along to the treasury (i.e. politicians) and say something like: “In order to implement the deflationary effect that we think is desirable, we’re going to need $X off you so as to fund interest on the money we’re borrowing”. And if politicians said “no”, then the central bank governor’s justifiable response would be: “OK then, I’ve told you what in my professional capacity I think needs to be done. If you don’t want to do it and inflation goes thru the roof, I’ll let the world know who’s to blame. And if you sack me as a result, I don’t care. I’d prefer a job where my professional expertise is appreciated even if it pays half as much.”

Greek roofs and steel rods.

I was at a Positive Money meeting over the weekend and someone told me that on a trip to Greece he noticed half the houses in several areas looked fine except that they had steel reinforcement bars sticking out of the roofs. Those are the so called “rebars” used to reinforce concrete.

He was informed that the innocent explanation for this is that householders are planning to build an additional storey for their children. But apparently the real explanation is that in Greece, one doesn’t pay property tax on a house which isn't complete. And if there are rebars sticking out of the house then obviously the house isn't  - er – “complete”.

The fact that a family has been living in the house for years is apparently irrelevant. There’s more about this tax dodge here.

Friday, 20 February 2015

Why do masochistic Greeks want to be in the Euro?

As everyone knows, poor downtrodden Greece has suffered horribly as a result of being in the Euro. Greece has been trampled on by wicked bullying Germany and it’s all a crying shame. Unemployment has rocketed in Greece, poverty is widespread, and so on.

But at the same time Greece is absolutely DETERMINED to stay in the Euro and continue to take punishment. Now that’s bizarre behavior isn't it? Why doesn’t Greece quit the Euro if the Euro regime is indeed so awful, and switch to the Drachma? Of course there’d be initial and costly disruption involved in the switch, but that change would pay off in the long run if indeed the Euro is so dreadful.

Indeed, another closely related question, is why was Greece so keen to join the Euro in the first place? After all, several small countries in Europe with populations similar in size to Greece have done very nicely since WWII and continue to do nicely while organising their OWN currencies: Switzerland, Denmark, Sweden, etc.

Well the answer is that organising your own currency requires a fair bit of responsibility, and Greeks, as Greeks themselves know perfectly well just aren’t responsible or honest. To illustrate:

1. Greece has spent 90 of the last 190 years in financial crisis. See here.

2. The amount of income declared by Greek lawyers is (hilariously) equal to their mortgage repayments. I.e. those lawyers claim to spending nothing on food, transport, clothes etc. Now you believe that, don’t you? (Ho ho).

3. There’s more on Greek corruption here.

4. There’s the old saying “Beware of Greeks bearing gifts”.

5. Greece had to fiddle its books in order to get into the Eurozone in the first place.

So the reason why the Greeks don’t want to leave the Euro is that, as they themselves suspect (probably quite rightly) they’d be no better off.

The Eurozone, rightly or wrongly, is a system in which each country has to pay its own way. Indeed almost every country in the world OUTSIDE Europe has to pay its own way. And any country that can’t get its act together and pay its own way is in trouble. Thus Greece’s troubles are not the fault of the Eurozone: if Greece was OUTSIDE the Eurozone, it would almost certainly still be in trouble.

Wednesday, 18 February 2015

EZ periphery reform.

There’s been much excitement about the chart below, which seems to indicate that Greece has done lots of reform. E.g. see here and here. Yet Greece and other PIGS still have problems. And that allegedly proves, at least according to some, that all those demands for reform are nonsense, so austerity in the periphery should be abandoned immediately.


Well, not so quick. First, the above chart doesn’t actually tell us HOW MUCH reform Greece and others have done. That is, could be that the amount of reform done by Greece is small, and the amount done by other countries is almost negligible. Indeed, if there’s been a big cut in tax evasion in Greece in recent years, that’s news to me.


The basic problem is that PIGS are uncompetitive relative to Germany etc. That is, PIG costs (in terms of Euros) are too high.

Now the word “reform” normally refers to sorting out problems like Greece’s notoriously inefficient tax collection system and its bloated and inefficient bureaucracy. And dealing with those problems would certainly help. However, no one ever suggested far as I know that “reforms” will TOTALLY solve the problem. That is, it’s widely accepted that internal devaluation in at least some PIG countries is needed as well.

That is, when a country with its own currency becomes uncompetitive, it can deal with that via conventional devaluation. But in a common currency area, that’s not possible, so internal devaluation is the only option. And unfortunately internal devaluation requires years of excess unemployment, i.e. “austerity”. Possibly the AMOUNT OF austerity could be reduced a bit, as suggested by Simon Wren-Lewis. But there’s no getting away from years of austerity.

Of course that’s daft. But that’s common currencies for you.

P.S. (Same day)

There’s more of the above sort of delusional thinking here by Dean Baker (who I nearly always agree with). He seems to think that all we need is stimulus in the periphery and everything will be fine. He doesn’t mention, and is thus presumably unaware of the fact that stimulus will suck imports into periphery countries which pushes them further into debt. Of course if Dean Baker is offering to lend his life savings to Greece, I’d have a SMALL amount of sympathy with his views. But he’s not.