Friday, 22 August 2014

Milton Friedman mocked “secular stagnation” 75 years ago.

Further to my foul mouthing of secular stagnation a week ago, I’ve just stumbled across an beautiful passage by Friedman in 1948. I say “beautiful” first because he criticises what he calls secular stagnation, a phrase he uses in much the same sense as it’s used nowadays.
Second, the same passage is very much Modern Monetary Theory compliant: indeed you could even say it summarises MMT.
The passage is just before the conclusion of his paper “A Monetary and Fiscal Framework for Economic Stability”. It reads as follows.
“I do not put much credence in the doctrine of secular stagnation or economic maturity that is now so widely held. But let us assume for the sake of argument that this doctrine is correct, that there has been such a sharp secular decline in the demand for capital that, at the minimum rate of interest technically feasible, the volume of investment at a full-employment level of income would be very much less than the volume of savings that would be forthcoming at this level of income and at the current price level. The result would simply be that the ' equilibrium position would involve a recurrent deficit sufficient to provide the hoards being demanded by savers. Of course, this would not really be a long-run equilibrium position, since the gradual increase in the quantity of money would increase the aggregate real value of the community's stock of money and thereby of assets, and this would tend to increase the fraction of any given level of real income consumed. As a result, there would tend to be a gradual rise in prices and the level of money income and a gradual reduction in the deficit.”
The second half of that quote, translated into MMT parlance would go something like: “Given inadequate demand, create and spend fiat (and/or cut taxes). That will result in the build-up of private sector net financial assets which will ultimately result in less of a deficit being required”.

Wednesday, 20 August 2014

What will Rogoff make of Germany’s 0% bonds?

Kenneth Rogoff, Carmen Reinhart and a variety of other ignoramuses (most of them at Harvard) have spent years warning about the alleged perils of excessive national debts. But what is “debt”?
Well it’s simply a liability of the state, or a debt owed by the state to the private sector on which interest is normally paid. But then base money is exactly the same thing, i.e. a liability of the state, except that no interest is paid on it.
So the lower the rate of interest on debt, the more do “debt” and base money become the same thing. Put another way, the more it becomes a nonsense to distinguish between the two. And that’s all very much a statement of the obvious for advocates of Modern Monetary Theory (MMT).
But now Germany has issued 0% bonds. Which will have Rogoff and Reinhart completely baffled. A 0% bond is essentially base money and not debt. Indeed, if Germany carries on this way, it’s debt will disappear. And that will have R&R baffled.
I’ve no doubt they’ll be scratching their tiny heads over this right now, plus I predict they’ll publish an article in a month or two which will  consist of nothing more than an illustration of the fact that they’re stumbling and fumbling their way towards an MMT view of the world. Or perhaps they’re so utterly hopeless that they’ll never get there. We’ll see.

Sunday, 17 August 2014

Positive Money is all at sea.

Yes but an equal amount is owed by banks to depositors and bondholders. So on balance banks are not creditors. On balance the population does not owe them anything. In contrast, the REAL DEBT is owed by those who borrow from banks to those who deposit money in banks or who lend to banks.
All quite simple.

Friday, 15 August 2014

OMG: Krugman believes in “secular stagnation”.

Or at least he seems to judge by this article of his, entitled “Secular stagnation: the book”.
Let’s get one thing straight: secular stagnation is bunk, drivel, claptrap, nonsense on stilts and hogwash all rolled into one. It’s simply a phrase that has become fashionable of late, and the brainless will always latch on to a fashionable or important sounding phrase.
That’s why the phrase “Weapons of mass destruction” was such a brilliant phrase for getting us into the Iraq war. It’s an important sounding phrase. Put that another way, as the old saying goes: “control the language and you control what people think”.
Anyway, secular stagnation, in Krugmans’ own words is “the claim that underlying changes in the economy, such as slowing growth in the working-age population, have made episodes like the past five years in Europe and the US, and the last 20 years in Japan, likely to happen often. That is, we will often find ourselves facing persistent shortfalls of demand, which can’t be overcome even with near-zero interest rates.”
That idea is pure, 100% proof bullshit. If demand is still deficient when base rates are zero, there is nothing, REPEAT NOTHING, to stop the state simply printing money and spending it on public sector stuff (education, infrastructure, the military, or whatever). That creates jobs and useful services are provided, and useful stuff is produced. And for those who don’t want a bigger public sector, there is the alternative of simply cutting taxes and leaving public spending constant. That leaves spending money in peoples’ pockets, so more PRIVATE SECTOR stuff gets produced.
Advocates of Modern Monetary Theory have been pointing that out for years to little avail. And Positive Money makes the same point.
Unfortunately the above very simple point is beyond the comprehension of most of the World’s leading so called “professional” economists.
And Krugman in his article invites readers to download a book on the subject of Secular Stagnation published by VoxEU. Sorry: I can’t be bothered.
Of course whenever the phrase “print” and “money” appear in the same sentence, hoards of Neanderthals appear from the woodwork making the statement of the blindingly obvious, namely that printing too much money leads to excess inflation.
Those same Neanderthals were saying that when money was printed in large quantities as part of the QE operation. They’ve been proved spectacularly wrong.
Nuff said.

How to put fractional reserve banking into check mate.

In three easy moves! Here’s how…
First, the phrase “fractional reserve” is a bit of a misnomer, so I’ll use the phrase “existing bank system” instead.
Commercial banks under the existing system have assets on one side of their balance sheet which can fall in value (when silly loans are made). Plus they have liabilities that are very largely FIXED IN VALUE. That’s amounts owed to depositors and bondholders. And that’s just asking for trouble. I.e. when the assets fall in value, the bank/s concerned are technically or actually insolvent. And there’s no disputing the fact that thru history banks have failed regular as clockwork.

Solution No.1: bank subsidies.
One solution to that problem is to have the state stand behind commercial banks, which states / governments actually do, and big time. Witness the TRILLIONS of dollars of public money recently used to rescue banks. But that amounts to a subsidy of banks and subsidies misallocate resources. I.e. unless there is some very good social reason for a subsidy, the subsidy will reduce GDP.

Solution No.2: strict bank regulation.
Strict regulation could take the form of stopping banks engaging in anything the least bit risky. But that flies in the face of the fact that if risky ventures had been banned over the last two centuries, the industrial revolution would never have taken place. I.e. many of the most worthwhile advances are INITIALLY very risky.

Solution No.3: upping bank capital requirements.
Banks could be forced to hold much more capital. Indeed Anad Atmati and the chief economics commentator at the Financial Times, Martin Wolf advocate capital ratios of about 25%. And 50% wasn’t uncommon in the 1800s, all of which is in stark contrast the currently prevailing 3% - 6%. But then the 3% - 6% is the consequence of the corrupt banker / politician nexus. Though the word “nexus” isn't quite right: the word “cesspit” as used by Martin Wolf in the title of his above article is more appropriate.
But there is what might be called a “logical self-contradiction” in the “high capital ratio” idea, as follows.
If a 25% or so capital ratio makes banks totally and completely safe, and if government is sure that that ACTUALLY DOES make banks safe or failure proof, then government will be able to remove all bank subsidies (i.e. TBTF, deposit guarantees and lender of last resort etc). But if banks are totally safe, then there is no difference between shareholders on the one hand and on the other hand, depositors and bond holders. That is, none of those three latter run any risk. (They will incidentally thus all demand the same return on sums deposited at or invested in the bank.)
But that amounts to FULL RESERVE BANKING!!!! That is, under full reserve (at least as advocated by Positive Money, Milton Friedman, Laurence Kotlikoff, etc), there is only one type of funder for, or creditor of lending entities / banks. And that is shareholders (or people who are effectively shareholders, even if they aren’t actually called shareholders).

Solution No.4: Just abandon bank subsidies.
In that case depositors and bondholders become risk takers, i.e. shareholders. But that’s full reserve banking! One could of course get round that by abolishing TBTF and lender of last resort while supporting depositors via some sort of self-funding FDIC insurance system. But in that case the appropriate insurance premium would equal the difference in risk run by depositors and shareholders. Plus that premium would inevitably be passed on to depositors. So that little wheeze gets depositors nowhere, plus it doesn’t cut the cost of funding banks.

So the conclusion is that there are only two possibilities, and as follows. First banks can be less than totally safe, in which case they need subsidising. But that misallocates resources and reduces GDP, so that option does not make sense. Second there is full reserve banking.
Check mate.