Thursday, 16 November 2017

Former governor of Spain’s central bank is impressed by Positive Money and full reserve banking.

 At least that’s the basic thrust of this video clip which lasts about three minutes.


I have just three minor quibbles. First the former governor seems to suggest that modern technology has made it possible for full reserve to work and for everyone to have an account at the central bank – (apologies to him if I’ve got him wrong there).

In fact, full reserve (as indeed the former governor himself points out) is an idea that has been going for decades. E.g. , as he says, the idea was advocated by Milton Friedman.

Thus unless Milton Friedman and other like minded economists were clueless on the practicalities of full reserve, modern technology is clearly not needed in order for full reserve to work: computers and the internet were essentially non-existent when full reserve was first suggested by the Chicago school in the 1930s, or indeed when Friedman advocated the idea in the 1940s, 50s and 60s.

A second quibble is that Positive Money published an article some time ago claiming their preferred bank system was not the same as full reserve. I’ve never been able to work out what the important difference is between PM’s preferred system and full reserve. I.e. I think PM is splitting hairs there.

A final quibble is that the former governor refers to PM as a “left of centre” organisation.  That’s not true in the sense that the arguments for full reserve are entirely technical: they should appeal (or not) to those on the right as well as the left. Indeed, Friedman was not exactly noted for being a leftie.!!

Wednesday, 15 November 2017

Do let’s force mortgagors to pay more interest so as to enable monetary policy to work better.

Many economists at the moment seem to want to raise interest rates back to their “normal” level, and in some cases, they want to do that simply to enable central banks to cut interest rates come a recession. I.e. they want mortgagors to be forced to pay more interest just to enable monetary policy to impart stimulus, when in fact fiscal policy can perfectly well impart stimulus.

There’s an example of this sort of thinking in a tweet by Simon Wren-Lewis where he says “I would add a fiscal policy that sees its primary goal as avoiding interest rates hitting their lower bound….”

So what’s the problem with the “lower bound”? Milton Friedman and Warren Mosler advocated a permanent zero rate. I.e. they argued that government should pay no interest to anyone: it should simply issue whatever amount of non-interest yielding base money is needed to keep the economy at capacity.

A case could be made for artificially high interest rates and hence interest rate cuts working better when needed if it can be shown that interest rate cuts work much more predictably and/or quickly that fiscal stimulus. But there’s little evidence for that, far as I know.

So the conclusion is that the policy set out by Positive Money, the New Economics Foundation and Prof Richard Werner, namely that the state should simply print base money and spend it into the economy (and/or cut taxes) when stimulus is needed, while interest rates are left to their own devices, is the best one.

That policy is certainly supported by a significant proportion of MMTers, though I’m not sure that’s “official MMT policy”, if there is such a thing.

Note that the above “print and spend and/or cut taxes” is not what might be called “pure fiscal policy”: in that new money is created, there’s a bit of monetary policy there. So a better description of the latter Positive Money / MMT policy might be “monetary and fiscal policy joined at the hip”.

Also, the latter print and spend policy is not to rule out interest rate rises in an emergency. I.e. if there was a serious outbreak of irrational exuberance, having the central bank wade into the market and offer to borrow at above the going rate might be a useful tool. However, I suggest that “print and spend” should always be the objective.

Saturday, 11 November 2017

Subversive ideas on money and banking for children.

With a view to leading the country's youth astray, I've done a short Powerpoint presentation on money and banking for children - (3 minute read). It can be downloaded from here . There's just six slides: reproduced below.

How to download.

I’m not the slightest bit computer literate, and the only way I can see of downloading is as follows. There has to be a quicker way, and I’d be grateful for guidance on that. Anyway my “slow” way is thus.

Having got to the site linked to above, click on "help" (top centre). In "search the menus", enter "download". Then choose the format you require (e.g. pdf, pptx, etc). Then retrieve the file from the download  file on your computer.

Friday, 10 November 2017

Goldman Sachs claims to be concerned about the poor. I can't stop laughing.

This is better than "doing God's work".

That’s in an article they published entitled “Who Pays for Bank Regulation?”.

Their basic argument seems to  be that the cost of bank regulation has to be born by SOMEONE, but the wealthy and large bank customers can go elsewhere for loans, whereas less well off households can’t. As they put it, “…we find in general that low-income consumers and small businesses – which generally have fewer or less effective alternatives to bank credit – have paid the largest price for increased bank regulation.”

The flaw in that argument is that while higher bank capital ratios do clearly have a deflationary effect, that is easily countered by standard stimulatory measures – which in effect put more base money into the hands of every household and business. Thus while higher bank capital ratios no doubt make life more difficult for less well off households who want to borrow heavily, less well off households who currently borrow relatively little will be better off: they’ll find themselves in possession of more money, which will mean they don’t need to borrow so much, and in some cases, don’t need to borrow at all.

Of course it’s difficult to prove that those two effects exactly cancel out, but if the widespread belief that there’s too much debt is valid, then higher bank capital ratios will on  balance bring benefits: there’ll be less borrowing and less debt.

Tuesday, 7 November 2017

Random charts - 45.

The first two charts are from this "Billyblog" article.

Text in pink on the charts below was added by me.

Friday, 3 November 2017

Francis Coppola tries to defend private money printing.

That’s in two recent articles of hers. One is on her blog (1) and the second at Forbes (2).  Those two articles are very similar.

The first problem with her articles is that she confines herself to criticizing an “anti private money” article by Zoe Williams in the Guardian (3). But Zoe Williams is just a bog standard broadsheet newspaper journalist: someone without specialist knowledge of banking, though Williams obviously mugged up the subject quite well in preparing her article.

In contrast, Coppola does not mention the numerous leading economists including at least four Nobel laureates have argued for a ban on privately issued money. I.e. Coppola is attacking a soft target. Or maybe she didn’t actually know that several leading economists back a ban on private money.

Anyway, I’ll run through the Forbes article.

First, Coppola criticizes Zoe Williams for saying that money created by private banks is “spirited from thin air”. The flaw in that idea, according to Coppola, is that private banks create money when they lend, ergo such money is backed by a loan, which apparently means it is not “spirited”.

Well that’s a strange argument, isn't it? When a private bank grants a loan, it simply adds numbers to the account of the borrower. That constitutes “spiriting from thin air” in my books.  Also the bank debits its loan ledger. That loan to the borrower is an asset as viewed by the bank. But that loan is also “spirited from thin air”. The fact that a second bit of “spiriting” takes place at the same time as the first does not stop the first being “spiriting”, seems to me.  The whole exercise simply consists of entering numbers in accounts, i.e. “spiriting”.

In contrast, in the case of a commodity based money system, say gold coins, a bank would not lend gold coins unless it actually had gold coins in stock. That gold coin scenario most certainly does NOT constitute “spiriting from thin air”.

Likewise, under full reserve banking, the only form of money is central bank created money (base money). In that scenario it’s the central bank that does the spiriting, not private banks.

Excess inflation and excess debt.

Next, Coppola criticises Williams for saying that private banks can stoke inflation via their money creation activities, whereas according to Coppola it is just governments and central banks that can stoke hyper-inflation.

Well seems to me that Williams gets that point about right. In reference to central bank / government money creation, Williams says:

This does not mean that creation is risk-free: any government could create too much and spawn hyper-inflation. Any commercial bank could create too much and generate over-indebtedness in the private economy, which is what has happened.”

Controlling aggregate demand.

Next, Coppola says, “Williams calls for a “public authority” to create money. But, given how difficult it is to estimate the present and future productive capacity of the economy, I find it hard to see how a public authority can be a better creator of purchasing power than banks. Flawed though it is, money creation through bank lending at least responds to demand.”

Well if it’s “difficult to estimate the future productive capacity of the economy”, why do we have “public authorities”, i.e. the Treasury and central bank determine how much stimulus is appropriate (fiscal and monetary stimulus respectively)?

Moreover, under the existing system, the latter two public authorities actually expand the money supply (Coppola will be shocked to learn) when implementing stimulus. That is, the Treasury borrows and spends more, and/or the central bank prints money and buys back government debt so as to make sure interest rates don’t rise, or they may take that further and implement an interest rate cut. And the latter enables commercial banks to create and lend out more money. In short, money creation is very much under the control of “public authorities” under the existing system. So the differences between the existing system and OVERT money creation by public authorities is less than Coppola seems to think.

Next, let’s consider Coppola’s phrase “money creation through bank lending at least responds to demand.” Presumably she is not advocating that when anyone wants a loan, a private bank should automatically create money and dish it out without looking at the credit-worthiness of the borrower.

I.e. the basic question here is this. Given an increased desire to borrow, should private banks automatically accommodate that demand, as Coppola seems to suggest? Well there’s a big problem there namely that it is PRECISELY the erratic nature of the desire to borrow, and private banks’ freedom to accommodate that desire that is behind the boom bust cycle.

That is, private banks create and lend out money like there’s no tomorrow in a boom, exactly what’s not needed. Then come the bust, they clamp down on loans and call in loans: again, exactly what we do not need. In short, the behaviour of private banks is “pro-cyclical” to use the jargon.

To summarise, money creation under the existing system is very much under the control of “public authorities”, thus full control of money creation as under full reserve banking would not be a big change.

In fact the only remaining question here is whether money should come only in the form of state issued money, or whether that should in addition be levered up by private banks. Well turns out there is a good reason to prefer the former option, a reason which has to do with the basic purpose of economic activity.

The purpose of the economy is to produce what people want, both in the form of the items they purchase out of disposable income, and the items they vote at election time to have delivered to them via public spending. Thus given inadequate demand, the obvious remedy is to increase both household spending e.g. via tax cuts and increase public spending, with private banks competing for those new funds on equal terms with other businesses as occurs under full reserve, rather than private banks being given the special privilege of being able to boost the above money supply increase by printing more of their own DIY money.

The latter is a subsidy of private banks, and it is widely accepted in economics that subsidies are not justified, unless there is a clear social reason for them.



1. “Money Creation in a Post Crisis World.”
2. Article title: “How Bank Lending Really Creates Money, And Why The Magic Money Tree Is Not Cost Free”.
3. “How the actual money tree works”.

Thursday, 2 November 2017

No rate rise without a pay rise, says Positive Money.

Nice catchy phrase, but is there any substance behind it? The quick answer is “not much”.

The most relevant article on the above topic published by Positive Money seems to be this one entitled (unsurprisingly), “No rate rise without a pay rise”. And what will bring about a pay rise apparently is a “robust programme of government spending”.

Well the obvious problem there is that the Bank of England’s judgement is that the economy is at capacity, or put another way that any further increase in demand (e.g. in the form of more government spending) will be inflationary, which would raise “pay” in terms of pounds, but would probably not raise pay in real terms, and might even reduce real pay because of the costs of excess inflation.

A much better argument against an interest rate rise was produced a few days ago by Simon Wren-Lewis who claimed that inflation is currently to a significant extent cost push, and thus that a rise in demand, or at least leaving interest rates and demand at present levels, will not be inflationary.