Thursday, 3 September 2015

Bill Mitchell argues for no national debt.

There is much to be said for a “zero national debt” policy, which Bill Mitchell argues for here. Milton Friedman advocated the same in 1948.

See Friedman’s para starting "Under the proposal..." here.

Bill, in his first paragraph and in reference to a recent meeting in London, says “Surprisingly there were some arguments by audience members that governments should continue to issue debt, largely, as I understand them, to provide a safe haven for workers to save for the future. So the idea is that we maintain the elaborate machinery that is associated with the public debt issuance just to provide a risk free asset that workers can use to park their hard-earned savings in. It is a strange argument given the massive opportunity costs associated with debt issuance. A far simpler solution is to exploit the currency-issuing capacity of the government to guarantee a publicly-owned National Saving Fund. No debt would be required.”

As regards Bill’s reference to “opportunity costs” I suggest that can be put in plainer English - something like: why should one lot of people have to pay tax to fund interest on government debt, just to enable another lot to earn interest on their savings?

A National Savings Fund?

Re Bill’s claim that peoples’ desire to save can be catered for via what he calls a “National Savings Fund”, that NSF is presumably owned and run by government, so that comes to much the same thing as government debt. 

There are however SOME DIFFERENCES between national debt and NSF, as pointed out by Neil Wilson in the comments after Bill’s article. For example those allowed to save via the NSF would doubtless be limited to citizens of the relevant country. However, if the argument for more national debt is invalidated by the argument that it’s wrong to pay interest just because loads of people WANT interest on their savings, then so too is the argument for an NSF.

Generational considerations.

One popular argument for government debt is that if public investments like infrastructure are funded by debt that spreads the cost across the generations that benefit from the investment: that is future generations allegedly have to pay interest and eventually repay the debt. The flaw in that argument is that it involves time travel. That is, it just isn't possible to consume real resources (e.g. steel and concrete) in 2050 so as to build a bridge in 2015.

Put another way, having a future generation repay a debt simply involves one lot of people paying money to another lot (the debt holders). That’s just a load of paper pushing: it has nothing to do with real costs or real resources.

Nick Rowe has tried to argue against the latter point with his so called “overlapping generations” idea. I demolished that idea (least I think I did) here. But be warned: the arguments for and against Nick's overlapping generations idea are complicated.

Debt may reduce volatility.

A possible argument for government debt, but only debt that pays a very low rate of interest is this. If the private sector has a large stock of base money and it goes into a fit of irrational exuberance, it may spend too much of that money at once, which could cause excess inflation. In contrast, debt is more difficult to spend: try buying a car using UK government Gilts, or US Treasuries.

David Hume on government debt.

And finally I’ll let David Hume, writing about 250 years ago, have the last word. As he put it:

“It is very tempting to a minister to employ such an expedient, as enables him to make a great figure during his administration, without overburdening the people with taxes, or exciting any immediate clamours against himself. The practice, therefore, of contracting debt will almost infallibly be abused, in every government. It would scarcely be more imprudent to give a prodigal son a credit in every banker's shop in London, than to impower a statesman to draw bills, in this manner, upon posterity.”

Tuesday, 1 September 2015

Either banks are subsidised, or they have 100% capital ratios.

If government so much as hints it will rescue banks in trouble, that’s a subsidy of banks. And subsidies misallocate resources, i.e. reduce GDP. Alternatively, if government completely washes its hands off banks, then all of those who fund banks become shareholders, even if they’re called depositors or bondholders. That’s shareholder as in “someone who at worst stands to lose everything”. Cyprus anyone? And that system equals full reserve banking.

A plausible escape from that check mate position for conventional banking might seem to be to retain depositors in the conventional sense, and cover the risk with FDIC type insurance and multi trillion dollar loans from central banks for larger banks (which of course will be at Bagehot’s penalty rates rather than sweetheart rates – ha ha). 

Unfortunately that escape is blocked. Leave aside the probability that loans will be at sweetheart rates rather than Bagehot’s penalty rates,  insurance involves moral hazard, i.e. the temptation to take excess risk, keep the profit when that works, and send the bill to the insurer when it doesn’t. And that’s a very real cost. To a significant extent that phenomenon was behind the credit crunch. And the credit crunch involved ASTRONOMIC costs in terms of lost GDP. Ergo “self insurance”, which is what shareholders do, is cheaper than FDIC type insurance. 

So… conventional banking is in check mate. To put it more bluntly, conventional banking is B.S.


Monday, 31 August 2015

Nonsense from Boom Finance on money and debt.

Boom Finance and Economics makes a bizarre claim about debt and money. They claim that the existing form of money comes in the form of debt (correct) and that there is not enough debt to enable us to expand the money supply sufficiently (incorrect). Scroll down a bit on the right hand column where they say:

“Our aged monetary system where almost all new money is created as debt in bank loans is saturated and unable to respond effectively. In essence, the advanced economies have simply run out of sufficient borrowers to continue to adequately expand the money supply.”

So how much debt is there in total? Well in the UK, SME trade debts alone come to three times GDP. Then there’s big firm trade debts to add to that – another two times GDP? Then there’s household debts – very roughly equal to GDP. Plus there’s national debt – also very roughly equal to GDP.

Grand total: VERY ROUGHLY five, six or seven times GDP.
In contrast, the amount of money households need  will be VERY ROUGHLY  enough to tide them over from one monthly pay cheque to the next: i.e. very roughly one tenth of GDP. Double that to cater for the money needed by employers.

So…. total amount of debt is VERY ROUGHLY thirty times the amount of debt.

There are mistakes and there are mistakes. But being out by a factor of about thirty is pushing it!!!!!!!


P.S. (an hour after the above went online). Moreover, the popular claim that “without debt there’d be no money” is not actually true. That is, if all players in the economy were simply after some form of money, but didn’t want to go into any sort of long term debt, the existing bank system could easily do that. Reasons are here. (But that's not to suggest that I back privately created money. I back full reserve banking, a system under which only the state creates money.)


Sunday, 30 August 2015

Banks don’t take deposits says Prof Richard Werner.



Prof Werner (who I normally agree with) makes the bizarre claim in this video that the money which people deposit in banks is not owned by those depositors (around 51.30).

Let’s think about that. If I deposit £X in a bank, and assuming the money goes into an instant access account (or “checking” account, to use US parlance), then I am entitled to demand that £X back at any time (e.g. via an ATM). And if the bank doesn’t meet my demands, I can sue the bank.

Now I’d guess that about 99% of the population understand that to mean that the depositor “owns” the £X. And the word “own” like every other word in the English language means what most people understand it to mean. So in exactly what sense is the £X put into a bank not “owned” by the depositor? I’m baffled.

Put another way, the depositor has COMPLETE AND TOTAL CONTROL over the £X. And “complete and total control” equals “ownership” as the word “ownership”  is understood by 99% of the population.

Werner then claims that the deposit is not a deposit, but that it’s a “loan” to the bank. Well, yes it is indeed a loan. But lending something and owning it are not mutually exclusive:  if I lend someone my car, I remain the owner of the car don’t I? Why I’m even having to discuss this stuff is a mystery.

Another point is that if my £X goes into a TERM ACCOUNT rather than a current / checking account (i.e. if I give up any right of access to the money for a month or two), then that’s more in the nature of a loan. But that’s what might be called a “shade of grey” point. The fact that one type of deposit is more “loanish” than another isn't important.

Banks don’t lend money?

Next, Werner makes another bizarre claim, namely that “banks don’t lend money” (around 52.40). Well let’s think about that.

Money is defined in economics dictionaries as something like “anything widely accepted in payment for goods and services”. Now if I get a loan for £Y from a bank, I can then use that £Y to buy goods and services without any great problems. So… the bank has supplied me with money! Doh!

Moreover, I’ll have to repay the £Y at some stage.  When person A supplies you with item B which you have to return to A at some stage then person A has loaned item B to you – as 99% of the population understand the word “loan”.

Saturday, 29 August 2015

Stop press: the latest on PQE from the Murphmeister.

Richard Murphy is the brains behind peoples’ QE, though it’s debatable as to how appropriate the word “brains” is. (Incidentally peoples’ QE is the idea that the state should print money and spend it on infrastructure.)

Anyway, the latest pronouncement from the high priest of PQE is that PQE is appropriate for Britain because the Murphmeister (as Tim Worstall calls Murphy) has decided the Britain needs more investment, whereas PQE is not appropriate for China because China has an excess amount of investment. I smell confusion of issues.

He says that printing money and spending it on a general increase in demand is not appropriate because: “…if we were to do it almost all the benefit would flow to China via a short term spending spree with no long term benefit to the UK at all.”

Well you wouldn’t think it, but Murphy is an accountant. And as every clued up accountant knows, when there’s an increase in demand for anything, that induces a proportion of relevant producers to invest more! Put another way, when applying to a bank for a loan to make an investment, there’s nothing that induces the bank to make the loan like the sight of hoards of customers coming thru the front door.

Thus the suggestion that a general increase in demand does not lead to more investment is plain nonsense.

That “more demand leads to more investment” point certainly applies to the PRIVATE sector. But it should also apply automatically to the PUBLIC sector, assuming those who do investment appraisal in the public sector know what they’re doing.

Moreover, while obtaining the funds for investment from printed money rather than money obtained by borrowing (or tax) may have some effect on the amount invested by the PUBLIC sector, the decision  to implement one option or the other probably has NO EFFECT AT ALL on investment in the PRIVATE sector.

Do we need more public sector investment?

And where is the overwhelming clear evidence that we need loads more public sector investment? There’s a huge amount of debate over whether the proposed £30bn HS2 rail project in the UK is worthwhile. As to roads, the traffic flows pretty freely on 90% of roads 90% of the time in the UK. Of course that’s not the case in rush hours. But then if you build so much road that traffic flows freely in rush hours, then there’s over-capacity at other times.

As for the channel tunnel, the original investors have lost nearly all their money.

One of the biggest investment items in any country is housing. In the UK there’s certainly a shortage of housing, but the reasons for that shortage are complex and much disputed. One of the favorite explanations is local government refusal to allow building on agricultural land brought about by pressure put on local governments by people living in agricultural areas who don’t want loads of new houses in their area.

Thus it’s not clear that funding state owned houses by “print and spend” rather than “borrow and spend” or via tax would make any difference.

Satyajit Das spouts nonsense in the Sydney Morning Herald.

In this article in the Sydney Morning Herald he claims we face a monster problem which (to quote) is as follows: “Citizens demanded and governments allowed the build-up of retirement and healthcare entitlements as well as public services to win or maintain office. The commitments were rarely fully funded by taxes or other provisions.”

Well I have terrible news for him: in the UK and several other European countries the state pension isn't “funded” AT ALL. Never mind not “fully funded”: to repeat, several state pension schemes are not funded AT ALL.  And worse still, nor is the state health care system. That is, both schemes are what’s called “pay as you go”. I.e., this year’s pensions and healthcare costs are paid out of this years tax.

Also both systems in the UK are supposed to be funded out of a payroll tax called "National Insurance". But no one is too bothered about whether NI fully covers the cost of the NHS and the state pension. That is, if part of the cost of the UK's National Health Service and state pension comes from other taxes, who cares? Why does that matter? So there are two senses in which those two systems are "unfunded" or not fully funded. Horrors.

But that system basically works. Of course there are constant arguments over how generous the state pension should be and how much we should spend on the NHS. But basically, to repeat, the system works.

Moreover, the NHS is clearly more efficient than the US largely private health care system.

Even more ridiculous is the claim by Satyajit Das that: “The 2008 global financial crisis was a warning of the unstable nature of these arrangements.” (“These arrangements” being not fully funded health and pension systems).

So the financial crises in the UK was caused by the unfunded NHS and state pension system? My guess is that about 99% of the population will tell you the crisis was down to irresponsible behavior by banks and that the crisis had precisely nothing to do with the NHS or the unfunded (shock horror) state pension scheme. And my guess is that 99% of the population are right.

Friday, 28 August 2015

Those dreaded debts, public and private.

Ann Pettifor writing in The Independent claims that the fact that total private and public debts in China are 250% of GDP is a problem.

The first problem there is that UK public debt (never mind private debt) just after WWII was also 250% of GDP, but that didn’t cause any obvious problems in the 1950s or 60s, during which period, that debt gradually declined. (Compare that with the fact that in the US and UK half the population are having a nervous breakdown over the fact that public debt is approaching 100% of GDP, and you’ll realise you’re living in a mad-house, if you didn’t already know that)

But there’s worse to come. In fact you may need to tighten your seat belt. According to this source, UK SME trade debts are nearly three times GDP. So if we add to that the trade debts of LARGE enterprises, then presumably the total will be five or six times GDP.

Then there’s UK household debts which like several other countries are roughly equal to GDP. And UK government debt which is approaching 100% of GDP, as mentioned above.

So we can be pretty sure that total UK debts are up to the 600% level. However, I’ll be sleeping soundly.

My main objection to those debts is the role played by banks in organising them, i.e. intermediating between borrowers and lenders, and the fact that banks are subsidised.

If government (i.e. taxpayers) are IN NO WAY ON THE HOOK for debts, then all and sundry can lend as much to each other as they like. And if some of them make silly choices and go bust as a result, I couldn’t care less, cynical old me.