Monday, 28 July 2014
He should pay more attention to me and Positive Money.
Stefan trotts out the old argument that inflation targetting is problematic in that when interest rates are cut so as to cut unemployment, the interest rate cut can spark off asset price bubbles. As he puts it:
“This illustrates the problem with strict consumer price inflation targeting. When positive supply schocks pushes down prices, central banks are compelled to respond by pursuing monetary policy that creates unsound levels of debt and asset prices.”
Wrong. The problem is not with “inflation targeting”. The problem is with using interest rate adjustments to influence demand.
So the solution is . . . . don’t use interest rate adjustments to control demand. Instead simply create and spend more base money money, net of any changes to tax, when stimulus is needed, a policy advocated by Positive Money, the New Economics Foundation and Prof.Richard Werner.
Plus as I pointed out here, there is a long list of problems and defects in using interest rate adjustments to influence demand apart from the one mentioned above.
Sunday, 27 July 2014
It’s hardly surprising politicians haven’t a clue about the debt or deficit given the advice they get from the CRS. Rebecca M. Nelson authored some defective advice for Congress: entitled “Sovereign Debt in Advanced Economies.
The first mistake is in the first paragraph which claims “Even if economic growth reverses some of these trends, such as by boosting tax receipts and reducing spending on government programs, aging populations in advanced economies are expected to strain government debt levels in coming years.”
The idea that increasing a particular form of spending will result in increased debt is of course nonsense: government can perfectly well fund increased spending from tax: a point that the average ten year old can probably work out. But it gets worse.
In the section entitled “Policy Options”, Nelson lists five ways of reducing the debt, most of them involving significant problems. She misses out a method of reducing the debt which involves no problems at all (of which more below). Her five solutions are thus.
1. Fiscal consolidation. That, as she rightly points out involves raising taxes or cutting public spending. I.e. it involves austerity.
2. Debt restructuring. As Nelson rightly points out, that can involve extending the period of the debt or cutting the rate of interest. Both of those involve breach of contract: i.e. they involve robbing lenders.
3. Inflation. Well that hardly brings benefits for the country as a whole. Plus it involves, again, robbing lenders: in particular if inflation is SUDDENLY AND DRAMATICALLY increased specifically so as to rob lenders or debt holders.
4. Growth. That is certainly the least harmful.
5. Financial repression. According to the author, the latter “generally refers to the use of government policies to induce or force domestic investors to buy government bonds at artificially low interest rates…”.
Essentially that’s just a tax, and if government wants to increase taxes why not increase the more normal types of tax, like sales tax? There’s no need for the convoluted process involved in forcing people to buy debt which pays an artificially low rate of interest.
The problem free solution.
As I’ve pointed out time again on this blog, this is to print money and buy back debt (i.e. implement QE). And as to any inflationary consequences, that can be dealt with by increased taxes. Assuming the stimulatory effect of the QE equals the anti-stimulatory effect of the tax, then GDP remains the same: i.e. no austerity is involved.
However, the inflationary effect of QE does not seem to be DRAMATIC, to judge by the QE that has taken place over the last two or three years, thus the amount of increased tax would probably be equally small.
By the way, I normally need a few cups of coffee in order to get my brain sufficiently active to write a post on this blog. But I wrote the above in 20 minutes on one of my “caffeine free dozing around all day doing nothing” days.
Saturday, 26 July 2014
Congratulations to Alan Greenspan for highlighting the point that asset price crashes are not much of a problem where those funding or owning the assets are equity holders rather than creditors whose stake in the asset is fixed in dollar terms. See paragraph starting “All bubbles expand…”.
Former governor of the Bank of England, Mervyn King actually made the same point in his “Bagehot to Basel” speech. See paragraph starting "At the heart...".
Now under full reserve banking, loans are funded just by shareholders, not depositors, bond holders, etc. That is, the liability side of a lender / bank’s balance sheet can vary in value. That makes insolvency virtually impossible.
So bye bye credit crunches. What more do you want?
Ann Pettifor has been getting all worked up lately about the rather obvious fact that when base rates rise, so too will rates for mortgages, which will be a problem for a proportion of mortgagors. See images below for some examples of her near hysteria.
Now that rather contradicts the disdain with which she regards Positive Money. Reason is that PM, along with the New Economics Foundation, Prof Richard Werner and others, advocate a system under which interest rate adjustments ARE NOT used to adjust demand: rather, what’s varied is the amount of new base money that the authorities create and spend (net of any tax increases or cuts government chooses to make).
Thus under that system, interest rate gyrations ought to be LESS PRONOUNCED, all else equal, than under the existing system: something that Ann Pettifor would presumably welcome.
Perhaps she'd like to re-consider her disdain for Positive Money.
Friday, 25 July 2014
David Beckworth has what he thinks is a great new idea, namely and to quote (his words are in blue):
That the Fed and Treasury “sign an agreement that should a liquidity trap emerge anyhow [say due to central bank incompetence] and knock NGDP off its targeted path, they would then quickly work together to implement a helicopter drop. The Fed would provide the funding and the Treasury Department would provide the logistical support to deliver the funds to households.”
Wow: combining fiscal and monetary policy – exactly what Positive Money advocates. But it gets better:
Simon Wren-Lewis and Jonathan Portes agree with David Beckworth.
However, there are two differences between Beckworth / Wren / Portes (BWP) and Positive Money. One is that BWP advocate the combining monetary and fiscal policy ONLY when interest rates are near zero. Wren-Lewis’s reason, as I understand it, is that PURE monetary policy is better for adjusting demand when rates are well above zero. Frankly I’m baffled. I set out a string of reasons here for thinking that interest rate adjustments are a poor way of influencing demand. Plus Positive Money and co-authors set out further reasons here.
Second, BWP want their “fiscal plus monetary at the zero bound” policy to take the form ONLY of feeding money into private sector pockets so as to boost private sector spending. My answer to that is: what about the public sector?
If the electorate has voted to split GDP in some specific ratio (which is actually what the electorate does at election time) it is not very democratic to then boost JUST ONE SECTOR when stimulus is needed.
So to summarise, and to be thoroughly patronising, it’s good to see some of the world’s leading economists stumbling their way in the direction of the policies advocated by lil old Positive Money. If the above economists could just drop the above two erroneous elements in their proposals, then they’d have adopted PM policy lock stock and barrel.
Incidentally, and this is hilarious, Positive Money is often accused of being “undemocratic” in that PM advocates that a committee of economists decide what stimulus should be implemented from time to time. E.g. see the attacks on PM policy in the comments after this article by Frances Coppla. The latter attacks are of course nonsense in that it’s perfectly normal for “undemocratic” committees (e.g. the Bank of England Monetary Policy Committee in the UK) to determine stimulus, or have a big say in stimulus. Thus the allegedly undemocratic nature of the committee that would determine stimulus under PM’s system is just as much a characteristic of committees like the BoE MPC. Ergo, if PM’s committee IS undemocratic, that’s not a reason to criticise PM’s system.
At any rate, if it’s “undemocratic” that the latter numpy critics of PM want, I suggest they re-direct their fire towards the Beckworth / Wren-Lewis / Portes lot: the latter are clearly much more undemocratic than PM.