Tuesday, 18 April 2017
I agree with Steve Keen and Mike Shedlock (“Mish” for short) about 90% of the time. But they’ve slipped up on the subject of bank reserves, unless I’ve missed something. I’ll use the word “bank” to refer to commercial banks (as distinct from central banks)
Mish challenges the conventional wisdom on interest on reserves (IOR), which is that IOR is an incentive for banks not to lend. The conventional wisdom is that if a bank gets say 5% on its reserves, and given that lending $X means the bank loses about $X of reserves, it won’t lend unless it gets at least 5% after expenses from the potential borrower.
Mish challenges that by pointing out that the decision by an individual bank (or indeed the bank industry as a whole) to lend more has no effect on the industry’s stock of reserves. He concludes from that that interest on reserves does not provide banks with an incentive not to lend.
Well it’s true that the decision by a bank or the bank industry as a whole to lend more has no effect on the industry’s stock of reserves. However, the flaw in the latter “Mish” argument is that “incentives” as seen by an INDIVIDUAL bank are not the same as “incentives” as seen by the commercial bank system as a whole. That is, if an individual bank (to repeat and over-simplify a bit) gets say 5% on its reserves, it has no incentive to lend unless it gets MORE THAN 5% from the potential borrower after expenses.
The fact that IF IT DID LEND, there would be no effect on the TOTAL AMOUNT the bank industry gets by way of interest on reserves is irrelevant because banks just don’t collude when it comes to the decision by an INDIVIDUAL bank to lend – they couldn’t collude if they tried. To illustrate…
Suppose that bank A is contemplating a loan of $Y to a customer, and suppose that in the event of the loan taking place, relevant monies will be deposited at bank B. It is plain impossible for both banks to get together and work out the effect on their combined incomes as a result of making that loan: reason is that each bank will be making thousands of loans per day. Moreover, in the latter example, relevant monies will not necessarily be deposited at just one bank (i.e. bank B): chances are they’ll be deposited at several banks. And worse still: relevant monies will not stay at recipient banks for long. Those monies will be re-spent and deposited at yet another set of banks.
Thus the idea that banks can somehow collude with a view to working out the effect on their total income as a result of one bank making a loan is wholly, completely and totally unrealistic.
Thursday, 13 April 2017
Wednesday, 12 April 2017
Do Job Guarantee enthusiasts want the entire workforce raking leaves rather than doing something useful?
Reason I ask is that it’s not entirely clear where JG enthusiasts stand on this one. For example Pavlina Tcherneva is one of the more vociferous advocates of JG, but in the opening paragraphs of an article of hers (Levy Economics Institute Policy Note 2012/2) she criticises conventional stimulus and sings the praises of JG type employment.
So how far does she want to take that point: abolish all forms of conventional employment, and instead have the entire workforce raking leaves, planting trees and doing the other assortment of jobs normally given as examples of what JG / make work scheme employees can do?
Strikes me as pretty obvious that the optimum policy here is to boost demand as far as possible, and get as much of the workforce as possible into conventional types of employment (public and private), and then use JG to deal with the remaining and unemployed members of the workforce. But there is no hint in her article of the latter idea.
More evidence of the dim view she takes of conventional forms of employment comes in this tweet of hers where she castigates dangerous car factories. Well the solution to that is proper and properly enforced health and safety laws, not closing down every car factory in the country and putting redundant employees onto raking leaves and planting trees.
Amazing that it is even necessary to explain this, isn't it?
Factories that produce cars and other items produce what people actually want and are prepared to pay for (shock horror). JG work is inevitably less productive because if a given JG job really was more productive than the less productive regular jobs, market forces would bring the former into existence and dispense with the latter, all else equal, i.e. assuming a constant level of aggregate employment.
Moreover, it’s not as if there is a total absence of injury and death on JG projects: a significant proportion of the JG scheme which operated in the 1930s, namely the WPA, involved constructing buildings, roads, bridges and so on. That sort of work is inevitably quite dangerous.
In contrast to today’s deluded JG advocates who will get precisely nowhere under the current Republican administration, the JG ideas I was advocating about 20 years ago have actually been put into effect, albeit in a small way. One idea I advocated was that JG type work should be with EXISTING employers rather than on specially set up projects, as per WPA. Second I advocated that there should be no preference for public sector employers as compared to private sector employers (or vice-versa).
Those two ideas are in fact inherent to the only JG type scheme up and running in the UK, i.e. the Work Programme.
For my latest ideas on this subject, which have not changed substantially from 20 years ago, see my recent paper in the journal below. This is an exercise in tidying up and bringing things up to date.
Sunday, 9 April 2017
Saturday, 8 April 2017
A recent World Economic Forum publication claims everyone in any given country would have to “contribute” something if that country’s national debt was to be paid off. Er – no they wouldn’t because (to over-simplify a bit) for every dollar of so called debt, there is someone with a dollar of a financial asset called “government bond” or similar. (“Treasury” in the case of the US or “Gilt” in the case of the UK for example).
Thus in the simple case of where a country’s national debt is held entirely by residents of the relevant country, the national debt could be wiped out by for example by simply having government announce it no longer owed anything to anyone. Debt holders would lose $X, while others would be relieved of the obligation to repay $X to debt holders, thus the average “contribution” per citizen would be zero.
A more subtle and less dramatic way of doing the same thing would be some sort of tax on debt holders combined with tax cuts and/or increased social security payments for the less well off. But the end result would be the same: a zero net “contribution” per citizen.
Of course in the real world, most countries’ debts are to some extent held by foreigners. But that makes little difference if the amount of country A’s debt held by citizens of country B is balanced by the amount of country B’s debt held by country A.
And so far as the World as a whole goes, the same applies as in the above example of where all of a country’s debt is held by natives of that country: that is, debts and financial assets in the form of government bonds net to nothing for the World as a whole.
In contrast to the above sort of “net to nothing” scenarios, a country can of course be left in debt to other countries after all the above “netting off” has been done. Such a country clearly has a problem, maybe a serious problem, maybe not: depends on the size of the debt.
This is all reminiscent of the nonsense spouted by Kenneth Rogoff, Carmen Reinhart and other economists at Harvard luniversity. According to Rogoff, what he calls “financial repression” has to be endured for a country to pay off its national debt. And “financial repression” according to Rogoff is bad, bad, bad and horrible.
In fact, as MMTers have pointed out ad nausiam, a country which issues its own currency has total and complete control of the rate of interest it pays on its debt. Thus it can perfectly well organise things so that the REAL or “inflation adjusted” rate of interest on its debt is zero or even negative. In the latter scenario, national debt is not any sort of burden: in fact in that scenario, if anything, it’s the debtor who rips off the creditor rather than vice-versa.
But that does not mean it’s a good idea to let debts rise for ever (relative to GDP). The time to cut the debt is when the economy has a fit of Alan Greenspan’s “exuberance” and inflation looks like getting uppity. In that scenario, taxes can be raised and some of the debt can be paid off. But note that that DOES NOT constitute any sort of Rogoff type “standard of living reducing repression”: the object of the exercise is simply to control inflation – there is no effect on GDP or average incomes.
Indeed, given that excess inflation imposes various real costs on the country, a rise in tax (given excess inflation) far from being any sort of “repression” equals an all-round benefit for the country.
Kenneth Rogoff’s “financial repression” is pure, unadulterated bullshit.
And the final important point to understand about national debts (as pointed out over and over by MMTers) is that national debts are self limiting. That is, debt (to repeat) is a financial asset as viewed by the private sector, and the more such assets the private sector holds, the more it will spend, all else equal. If someone gave the average household a million dollars worth of debt, what would the average household do? It wouldn’t just sit on it! Doubtless it would save or “sit on” some of it. But at the same time it would try to sell and spend away a significant proportion.
Sunday, 2 April 2017
The Modigliani Miller (MM) theory is defined by Wikipedia as the idea that “the value of a firm is unaffected by how that firm is financed”. So as regards bank capital ratios, MM says that changing the capital ratio has no effect on the cost of funding a bank and hence no effect on the cost of loans it offers or on total profits. And that is clearly good news for those who want to raise bank capital ratios.
By the same token it is not good news for the pro-bankster “let’s get back to business as usual” brigade. Thus the latter brigade devotes considerable efforts to criticizing MM. Unfortunately some of their efforts are not too clever, to put it politely.
One of the most popular criticisms of MM (in fact THE most popular, far as I can see) is the idea that the tax treatment of dividends is different from the tax treatment of interest, ergo MM does not work out in the real world as per theory. That different tax treatment seems to be relevant for the big “bank capital ratio” argument, since banks are funded in part by dividend earners (holders of bank capital) and in contrast, depositors and bond holders (who earn interest, not dividends).
Astute readers will have spotted the flaw in the latter “tax” argument. But for the benefit of those who have not, the flaw is that tax is an ENTIRELY ARTIFICIAL imposition on corporations: it has nothing to do with the validity or otherwise of MM.
To illustrate, suppose my great new seminal theory states that the cost of making blue cars is the same as the cost of making red cars. Then suppose government imposes a much heavier tax on red cars than blue cars. Would that prove there was something wrong with my “red and blue car” theory? Clearly not.
But the highly qualified academics who cite the above tax point against MM would presumably claim that, by the same token, there was something wrong with the “red and blue car” theory. How dumb can you get?
Just to expand on that, if the red cars were taxed more heavily than blue cars, then on the face of it (i.e. from the point of view of car buyers) red cars would be more expensive than blue cars. But of course from the point of view of the country as a whole, there is no difference between the cost of red and blue cars.
To illustrate, if people switched from blue to red cars, that would mean consumers would be worse off. But it would mean more income for government, which means government could for example cut income tax. Thus consumer / tax payers would be back where they started.
And of course when it comes to bank capital ratios, the important consideration is costs for the country as a whole, not costs for bank customers.
If government has introduced a distortionary tax regime, the best solution is to get rid of the distortion. The distortion is not a brilliant argument for protecting or boosting forms of economic activity that benefit from the distortion.
If you want a list of the so called “professional” economists who cite that tax argument against higher bank capital ratios, i.e. economists who apparently do not understand the latter “red and blue car” point, here they are. At least these are the ones I’ve come across. Doubtless there are several more.
Note that for one of the economists below, the tax criticism of MM is the only one cited, so it’s presumably the only one the relevant author can think of. And for another, only two criticisms are cited, one of which is the tax criticism. So all in all, the tax argument is an important one for the critics of MM.
Birchler, U. & Jackson, P. (2012). ‘The Future of Bank Capital.’
Elliot, D.J. (2013). ‘Higher Bank Capital Requirements Would Come at a Price’. Brookings Institution.
Independent Commission on Banking Final Report, section 3.45.
Kashyap, A.K., Stein, J.C. & Hanson, S. (2010). ‘An Analysis of the Impact of “Substantially Heightened” CapitalRequirements on Large Financial Institutions’. (The tax point is the only criticism cited by Kashyap & Co).
Miles, D., Yang J., and Marcheggiano G. (2011). ‘Optimal Bank Capital’. Bank of England External MPC Unit Discussion paper No.31. Note: the version of this paper referred to here is the April 2011 version, not the January 2011 version.
Ratnovski, L. (2013). ‘How much Capital Should Banks Have?’ Voxeu. (The tax point was one of two criticisms of MM cited by Ratnovski).
Saturday, 1 April 2017
Simon Wren-Lewis claims the economics profession was pretty much innocent of promoting austerity during the recent recession. He claims surveys of economists opinions on the subject would show a large majority favoured stimulus rather than austerity.
I agree that gauging the exact extent to which the economics profession was guilty / innocent of promoting austerity during the recent recession is difficult. Surveys of the type he suggests would help. But what also needs to be taken into account is the clout of relevant economists. And the fact is that powerful voices in the profession were calling for austerity (politely known as “consolidation”).
One powerful voice was the OECD. Another was the IMF.
For more on the IMF and OECD’s enthusiasm for consolidation / austerity, Google “consolidation” “IMF” “OECD” “billyblog”.
As for Rogoff and Reinhart, the two Harvard economists who argued loud and clear for holding back on stimulus, my impression is that they were making huge efforts to promote their pro-austerity views to judge by the amount they had published on the subject.
R&R are essentially a pair of simpletons who have fallen for the understandable mistake made by the general public and by some newspaper economics commentators (who should know better), that national debts are just like other debts and have to be paid back by “future generations”.
The reality (as MMTers keep pointing out) is that a country which issues its own currency can pay any rate of interest it likes on its debt: if it wants to reduce it, it just has to print money and buy back debt, then raise taxes so as to deal with any excess inflationary effect of the latter printing.
For more detail on the latter point, Google "national debt ralphonomics", though there is plenty of equally good material produced by other MMTers.
Friday, 31 March 2017
Wednesday, 29 March 2017
We’d never have worked that out for ourselves, would we, children? Plus of course the people of Greece and youths in Spain will be splitting their sides at the above – er – “insight”.
The orange paragraph on page 12 of the above taxpayer funded report contains more gems. (Other paragraphs and pages contain yet more gems, but I’ll concentrate on that one paragraph otherwise I’ll be here all week).
Apparently Europe needs “sustainable development”. Well you can guarantee the word “sustainable” will appear on every page of this sort of report.
Europe apparently also needs “balanced economic growth and prosperity”. Prosperity? Personally I’m in favor of poverty and starvation, but there you go.
We also need “social progress”. Well there again, I personally favor letting pensioners starve to death and sending children down coal mines, and I know of many who agree with me. So obviously there’s not much I have in common with the no doubt highly paid authors of this report.
Plus p.12 tells we need “scientific and technical advance”. Never in the world.! You learn something every day, don’t you?
Sunday, 26 March 2017
My Concise Oxford Dictionary (2004 edition) defines counterfeit as “made in exact imitation of something valuable with the intention to deceive or defraud.” The money created or “printed” by private banks clearly fits the above definition: the only question is just how close is the “fit”?
When obtaining a loan from a private bank, the borrower is told they have been loaned X dollars, pounds, etc. But those so called dollars etc are most definitely not the real thing. What the private bank lends out is not the country’s official central bank (CB) issued currency: it is certainly not legal tender. The proof of that is that when the borrower offers to pay someone for something using the so called money that the bank has loaned out, the potential payee is fully and legally entitled to refuse payment on the grounds that what is offered in payment is not legal tender.
Thus it is beyond dispute that there is a finite amount of “deception” there. What private banks ACTUALLY lend to borrowers is not dollars, but a promise by the bank to pay dollars. And that promise to pay itself is in effect a form of money which is quite widely accepted as money. But, to repeat, potential payees are entitled to turn it down, and sometimes do.
As to “made in exact imitation of something valuable”, well that’s a close fit as well!
It could be argued against the above “counterfeit accusation” that the accusation is very semantic or legalistic and hence that the accusation amounts to nothing if the counterfeiting doesn’t actually do any harm. That is a perfectly fair point. Thus the rest of this article is devoted to showing that the above counterfeiting does actually do harm.
Cheating the population at large.
The basic problem with traditional backstreet counterfeiters who turn out imitation $100 bills or imitation £10 notes is that they actually rob the general population. The reason is intuitively obvious even to those who have never read an introductory economics text book. But just to spell it out, the reason is as follows.
Assuming the economy is at capacity or “full employment” and a significant number of imitation $100 bills are produced and spent, that will raise demand. That additional demand will cause excess inflation given the above “at capacity” assumption. Thus the state has to take some sort of deflationary counter measure, like raising taxes and confiscating some of the private sector’s stock of base money. To illustrate, in a hypothetical economy where the only form of money was dollar bills and coins, for every counterfeit $100 bill that went into circulation, the state would have to confiscate one genuine $100 bill from the population. (BTW: “base money” is a common name for the above mentioned “official CB issued money”)
Now you’ll be horrified to learn that very much the same point applies to loans granted by private banks and for the following reasons.
Assuming, again, that the economy is at capacity, and private banks grant extra loans, the relevant money will be spent, which will raise demand. That will be inflationary, thus the state will have to take some sort of deflationary counter measure, like (is this starting to sound familiar?) raising taxes and confiscating some of the private sector’s stock of base money.
In short, assuming the economy is at capacity, when a private bank grants mortgage to Joe Bloggs, the bank and Joe Bloggs obtain a valuable real asset, which has been effectively stolen from the general population. The “counterfeit” charge is shaping up, wouldn’t you say?
Interest rate cuts.
The latter is of course a serious charge, but it could be argued in defence of private money creation that private banks in practice only lend more when the CB cuts interest rates. And the objective behind interest rate cuts is entirely laudable: the objective being to raise demand where demand is inadequate. Thus, so it might be argued, private money creation is justified.
Well the first problem there is that private banks do not lend more ONLY when CBs cut interest rates. That is, private bank lending varies even given constant CB rates. For example it is obvious from what went on in the 1800s when governments and CBs did little to control demand that booms and asset price bubbles, assisted by irresponsible lending by private banks, can take off all of their own accord. Unfortunately not much has changed since those days.
But even if lending by private banks is closely related to official CB interest rates, the whole idea that demand should be controlled by artificial adjustments to CB interest rates is badly flawed and for the following reasons.
1. Given a recession, there is absolutely no prima facie reason to assume the problem is inadequate borrowing and investment, rather than a deficiency in one of the other constituents of aggregate demand, like consumer spending or exports.
2. The basic purpose of the economy is to produce what people want: both the items they normally purchase out of disposable income, and the items supplied by government (e.g. education for kids). Ergo given a recession, the logical cure is to expand household incomes (e.g. via tax cuts) and raise public spending. (The revolving door brigade will of course be horrified at the suggestion that given a recession, Main Street should be given more spending power rather than Wall Street. The answer to that is that there is no better evidence that something is desirable than the fact that the revolving door brigade don’t like it)
3. Given a recession, there is no reason to suppose interest rates won’t fall of their own accord: witness the fact that interest rates have fallen dramatically over the last 25 years or so. Government interference in the free market is entirely justified where it can be shown that the free market is not functioning properly. Unfortunately, there have been next to no attempts by the economics profession to confirm that given a recession, interest rates will not fall to the extent that they would in a perfect market.
4. In contrast to the latter fall in interest rates, a properly functioning free market would actually implement the above mentioned increase in consumer spending, plus there is a VERY OBVIOUS and well known obstruction to that mechanism, as follows.
In a perfect market, and given a recession, wages and prices would fall, which would increase the real value of the monetary base, which in turn would increase household liquid assets, which would increase consumer spending. In effect, one of the free market’s cures for a recession is a helicopter drop. That mechanism is normally referred to as the “Pigou effect” after the economist, Arthur Pigou.
Unfortunately that mechanism is stymied in the real world because, as Keynes put it, “wages are sticky downwards”. I.e. wage cuts tend to result in strikes, if not political revolutions. But not to worry: if the real value of the monetary base cannot be increased by increasing the real value of each dollar of base money, an equally good alternative is to increase the value of the stock of base money by having the CB print more dollars and distribute them, e.g. via tax cuts or extra public spending.
To summarise, it is blindingly obvious that what is missing in a recession is “dollars for households and government spending departments”. In contrast, it is not at all obvious that interest rate cuts are a logical solution.
Ergo the potential justification for private money creation mentioned several paragraphs above, namely that that activity is “entirely laudable” if it results from CB interest rate cuts is now in tatters.
Ergo the initial charge against private money printing made above, namely that it amounts to counterfeiting seems pretty solid.
In other words it looks like the Scottish philosopher / economist David Hume had a point when he said in 1742 that private bank created money is counterfeit money (para II.III.4) The French Nobel laureate economist Maurice Allais said the same.
Saturday, 25 March 2017
Miguel Navascués has worked as an economist at Spain’s central bank for 30 years. He has just published an article entitled “The Huge Fallacy Of The Modern Monetary Theory…”. (Incidentally, it was Mike Norman’s MMT site that alerted me to Navascués’s article)
My confidence in Navascués’s professional competence was badly dented very shortly after starting to read the article when I came across this sentence: "It’s difficult to imagine that money issued by a private entity would be as universally well accepted as fiduciary money today."
Er - actually the majority of money in circulation is issued / printed by private banks, not central banks as the opening sentences of this Bank of England article explains. Indeed 97% is the percentage often quoted as the proportion of money which is privately issued, though that percentage has actually been significantly reduced since the start of QE.
Next, there is this passage (which I’ve put in green italics):
"Another “revolutionary” aspect of the MMT is that instead of the state issuing debt, this will be substituted by the simple flow of money between the Central Bank and the state. The state should not issue debt which becomes a fictitious burden, since its monetarisation would end that. The state has an account in the Central Bank, with a zero interest rate, which it can use to deposit money or take out funds and be in credit or in debt.
This is incredibly bold. Responsable citizens would always prefer the state to issue debt, for transparency reasons. Even if it’s just to watch the trend in the yield curve for different maturities and how it is accepted by creditors. One thing is for the state to have a liquid account with the Central Bank with a zero interest rate, and quite another that it is not transparent and takes money when and whenever it wants."
Now the idea that MMTers advocate that government should be able to “take money when and whenever it wants” is just absurd. MMTers make it perfectly clear that they are aware of the fact that excessive spending (i.e. excessive aggregate demand) leads to excessive inflation. The average ten year old has worked that one out.
Having said that, MMTers are actually a bit vague on EXACTLY what controls should be in place to keep demand as high as is feasible without causing excess inflation. In fact this work by Positive Money, the New Economics Foundation and Prof Richard Werner is much better in that regard. Incidentally the latter PM/NEF work advocates full reserve banking, but don’t be put off by that: the system those three authors advocate for controlling demand is equally suitable under the existing bank system (sometimes called “fractional reserve” banking).
Next, the first para of the above quote from Navascués’s article actually contains a self-contradiction, as follows. As he says, MMTers want to abolish or monetise the national debt (as did Milton Friedman, incidentally). And that is not difficult to do: it simply involves continuing to QE the debt until it’s all gone. As for any inflationary effect of doing that, that is easily dealt with by cutting the deficit or even running a surplus.
At least the latter procedure is “easy” so far as economics goes: in contrast, and as far as politics goes, it might not be so easy. That is the “QE the entire debt” might have to be done over a ten year period so as to avoid excessive tax increases or public spending cuts. But there is no question but that the entire national debt can be abolished / monetised.
The rate of interest the private sector demands for holding state liabilities varies inversely with the size or total stock of those liabilities. For example, if the state wants the private sector to hold an excessive stock, the private sector will do that, but will demand a highish rate of interest for doing so. And what MMTers (and Milton Friedman) want/ed to do was cut the total liabilities to the point where the interest paid is zero: the the only liability is base money.
But having done that, it is then illogical or self-contradictory to say, as Navascués does, that “Responsable citizens would always prefer the state to issue debt, for transparency reasons. Even if it’s just to watch the trend in the yield curve for different maturities and how it is accepted by creditors.”
The whole point of monetising the debt is that there is no interest paid: the “yield curve” vanishes!
The external sector.
Next, Navascués says:
In the first place, there are not just two economic sectors. Apart from the ones mentioned, there is an external sector and whether it is a creditor or debtor is very important for the economy. If the external sector holds our country’s debt, the size of this can influence our creditors’ confidence depending on how we play the “simple” game of putting in and taking out money from the Central Bank to give to the private sector.
Good heavens! So some of the US national debt is held by China and Japan? My guess is the average street sweeper knows that.
But that does not alter my above points about QEing the entire debt. As purchasers of US national debt, the Chinese are investors in the great US of A, just as are USA based pension funds and the like. The Chinese will be influenced by the rate of interest paid on the debt just like pension funds.
There is of course the point that if any given country QEs it’s entire debt, as prescribed above, that will induce internationally mobile investors (like the Chinese) to seek better returns somewhere else in the world. In contrast, investors who are much more conservative and confine their investments to their own country will be likely to re-invest in the same country if the sell national debt.
So any country which QEs its entire debt will suffer more of a standard of living hit from those “mobile” investors re-allocating their investments than from the above “conservative” lot. But frankly most big investors nowadays are fairly international. For example the average UK based unit trust (“mutual fund” in US parlance) thinks nothing of switching investments from inside the UK to outside the UK or vice-versa. To that extent, Navascués’s “foreign sector” point does not materially affect the argument.
And that’s about as much as I’m prepared to read of Navascués’s article. He is clearly not desperately competent, and I do not have time for that sort of individual.