Friday, 17 March 2017

Random Charts XV.

Pink text on charts are my own additions.

Tuesday, 14 March 2017

Stupid Wall Street Journal article by Tim Congden and Steve Hanke.

The article makes the assumption, which I've seen a hundred times before, that the deflationary effects of reduced lending resulting from more bank capital cannot be made good by bog standard stimulus. (Article title: "More bank capital could kill the economy.")

Put another way, the fall in the money supply which results from raising bank capital to which the authors rightly refer, can perfectly well be made good by simply having the central bank print more money and having government spend it (and/or cut taxes). As Keynes pointed out in the early 1930s, any government which issues its own currency can escape a recession, i.e. boost demand and raise GDP, simply by printing money and spending it. Obviously the AMOUNT OF printing cannot be excessive, else inflation ensues. But the right dose cures a recession without causing excess inflation.

The net effect of the above is of course a reduction in lending based activity (i.e. a reduction in debt) and a corresponding increase in non-lending based activity. So where is the big problem there?

It is widely accepted that debt is now excessive. Also the assets and liabilities of the UK bank industry have expanded TEN FOLD relative to GDP since the 1960s, and what have we got for that alleged benefit? Better economic growth? Nope: growth in the 1960s was very respectable. As for the 2007/8 bank crisis – that benefited everyone big time, didn’t it!!

As Adair Turner put it, much of what banks do is “socially useless”.

Conclusion: contrary to the claims of Tim Congden and Steve Hanke, a rise in bank capital with a corresponding decline in the overall size of the bank industry and decline in debts would probably do no harm at all.


P.S. (a few hours later).    John Cochrane tears a strip off the above article.

Thursday, 9 March 2017

A bit more NAIRU basher bashing.

One of the poor criticisms made of NAIRU is that it cannot be estimated accurately, thus it is allegedly of little practical use.

Well the answer to that is that, far as I can see, the original proponents of NAIRU never said it can be estimated with much precision!

At least one of the first papers to propose NAIRU was Franco Modigliani and Lucas Papademos’s Brookings paper “Targets for Monetary Policy in the Coming Year.” (1975). The authors certainly do not suggest NAIRU can be estimated accurately. For example they suggest it is “somewhat over 5.5%”. They also admit that NAIRU varies over time depending on sundry factors like terms of trade (p.142).

And another sentence reads,  “The shading of an area on either side of NIRU indicates both uncertainty about the exact location of NIRU and the implausibility that any single unemployment rate separates accelerating and slowing inflation”.

Having said that, strikes me the above authors are too optimistic as to the accuracy with which NAIRU can be estimated. E.g. my guess is that there’s a 90% chance it’s between 3% and 7% of the UK. The above authors seem to think they can estimate it more accurately than that. But that’s a technicality: the important point is that NAIRU advocates have never suggested for example that NAIRU is definitely 5% rather than 5.1%.

Indeed, I’d have thought it was obvious to anyone with a grain of common sense (and that excludes half the economics profession) that NAIRU cannot be estimated accurately.

NAIRU is a bit like the statement “good looking people have more sexual partners than ugly people”. Anyone with a grain of common sense knows the statement is true, even though “good looks” cannot be defined or measured accurately. Plus anyone with common sense knows that the above statement is a very poor guide as to exactly how many sexual partners a good looking person will have in the next five years.

But if you were to announce that good looking people have more sexual partners than ugly people, you'd then find yourself being lectured to about the fact that good looks cannot be accurately measured, thus the “good looks / sexual partner” theory must be nonsense.

Roger Farmer.

Roger Farmer is an academic and NAIRU basher, and author of a Bank of England article entitled “The Natural Rate Hypothesis: an idea Past its Sell-by Date.” He tells us that “Defenders of the Natural Rate Hypothesis might choose to respond to these empirical findings by arguing that the natural rate of unemployment is time varying.  But I am unaware of any theory which provides us, in advance, with an explanation of how the natural rate of unemployment varies over time.  In the absence of such a theory the NRH has no predictive content.  A theory like this, which cannot be falsified by any set of observations, is closer to religion than science.”

Incidentally the “natural rate” is an idea very close to NAIRU and which preceded NAIRU.

I suggest that is what is really close to religion is the obviously false idea that labour shortages have no effect on inflation. To illustrate, are we seriously supposed to believe that given an unemployment rate of say 1%, shortages of particular skills would not arise and employers would not be tempted to bid up the salaries of those with those skills? And are we seriously supposed to believe that given low unemployment and a general scarcity of skills, trade unions are not tempted to put in for bigger wage increases?

Far from NAIRU being a religion, the religious fanatics are the people who seem to believe (at least implicitly) in the later obviously nonsensical stuff about skill shortages.

To assume NAIRU = X is perfectly legitimate.

Another point which seems to be too subtle for NAIRU bashers is this. The fact that human beings cannot accurately estimate some variable like NAIRU does not mean it is illogical or unacceptable to assume the variable does in fact have some specific and very precise value. Astronomers, for all I know, may not be able to estimate the amount of iron that makes up the Moon to an accuracy of better than plus or minus 10%. However, it is indisputable that the amount of iron in and on the Moon has a very specific and precise value. The only thing that ever changes that amount is the odd meteorite hitting the Moon, thus given an infinite amount of knowledge about the Moon, the amount of iron in and on the Moon could be stated to an accuracy of plus or minus about 0.0000001%.

Likewise it is perfectly legitimate to give NAIRU some precise value, like X or Y, and then write equations that aim to describe the economy, or get involved in discussions which assume NAIRU has some precise value.

Wednesday, 8 March 2017

Should the Bank of England control fiscal stimulus?

Simon Wren-Lewis says yes – see the 3rd para of his article entitled “Budget Day Nonsense”. However he only seems to advocate that for when interest rates are low.

Now why not implement that policy even when interest rates are high? Positive Money, the New Economics Foundation and Richard Werner advocated the latter policy in their joint submission to Vickers. The answer SW-L would give, I’m pretty sure, is that when interest rates are high, the state can control aggregate demand by adjusting interest rates. I prefer the phrase “interfere with interest rates”.

Reason I say “interfere” is that the traditional way of raising rates is to have the central bank sell government debt with a view to rendering commercial banks short of reserves. But that is an ENTIRELY ARTIFICIAL interference with the free market: reason is that money the state borrows or appears to borrow as part of that exercise is not actually used for anything: it isn't invested in infrastructure for example. I.e. the sole purpose is to raise interest rates.

And presumably GDP is maximised where interest rates are at their free market level: i.e. where the state DOES NOT interfere with interest rates.

You could of course argue that fiscal stimulus is also an artificial interference. My answer is that it is not because money financed fiscal stimulus simply amounts to implementing the mechanism that the free market, if it was allowed to operate, would implement in a recession.

That is, in a totally free market and given a recession, prices and wages would fall, which would increase the real value of base money (and indeed the real value of government debt, which as Martin Wolf and Warren Mosler pointed out is pretty much the same thing as base money). And that increase in the real value of private sector paper assets would stimulate spending, which would cure the recession. 

But of course employees (understandably) put up extreme resistance to having their wages cut (even where as a result of falling prices they suffer no loss of real income). So the free market’s cure for recessions does not work.

However, an equally good cure is for the state to artificially boost the supply of the above paper assets, as I seem to remember Keynes pointed out, though I can’t remember where.


P.S. (9th March, 2016). Re the final paragraph just above, Keynes points out in Ch 19 of his General Theory that a decline in money wages comes to the same thing in various respects as a rise in the money supply. However, he does not seem to understand the crucial importance of what Pigou called "real balances". To quote from Wikipedia's article entitled "Pigou effect" (for what that's worth), "Real wealth was defined by Arthur Cecil Pigou as the sum of the money supply and government bonds divided by the price level. He argued that Keynes' General Theory was deficient in not specifying a link from "real balances" to current consumption and that the inclusion of such a "wealth effect" would make the economy more 'self correcting' to drops in aggregate demand than Keynes predicted."

The term "real wealth" there is not a good one, since obviously there are forms of real wealth other than bank balances etc (e.g. cars, houses, etc). I.e. that sentence from Wiki could be better phrased, e.g. as: "What the private sector perceives as its sock of real wealth includes the sum of the money supply and government bonds." But even that is not quite right because base money is a NET ASSET as seen by the private sector, whereas private bank created money is not. I'll leave it to the reader to formulate EXACTLY the right phraseology to replace Wiki phraseology, if the reader wants to do that.

Note that MMTers get all the above stuff SPOT ON. That is, MMTers for example get the distinction between base money (i.e. central bank created money) and private bank created money.  

Monday, 6 March 2017

The latest bit of fashionable economics jargon: “R-Star”.

This tweet asks a pertinent question.

The so called “r-star” rate of interest, at least according to Gavyn Davies writing in the Financial Times, “is the real short term interest rate that would pertain when the economy is at equilibrium, meaning that unemployment is at the natural rate and inflation is at the 2 per cent target. This might be described as the rate the Fed should adopt under “normal” conditions..”.

So, to repeat the question put in the above tweet, what’s the value of this mysterious r-star rate? Well the quick answer is that there is no specific value or rate of interest that is compatible with full employment and acceptable inflation (NAIRU if you like). Reasons are as follows.

As MMTers have long pointed out, government debt and base money are assets as viewed by the private sector. MMTers sometimes refer to that pair of assets collectively as “Private Sector Net Financial Assets” (PSNFA). And the private sector will clearly try to spend away some of those assets if it thinks it has an excessive stock of them. Conversely, it will try to save if it thinks it has an insufficient stock: Keynes’s “paradox of thrift” unemployment being the result.

Thus if there is an excessive stock, government will either have to confiscate the excess via tax, or it will have to dissuade the private sector from spending away the excess stock by offering whatever interest on the stock induces the private sector NOT TO spend away the excess.

Thus there are an infinite number of rates of interest that are compatible with full employment and an acceptable rate of inflation. For example, we can have a highish stock of PSNFA combined with a highish rate of interest, or a lower stock combined with a lower rate of interest. So that’s dealt with the vexed “R-star” argument.

What’s the optimum stock of PSNFA?

But that of course raises an obvious question, namely what’s the optimum or GDP maximising stock of PSNFA? Well Milton Friedman and Warren Mosler’s answer is: “no government debt and as to base money, we need whatever quantity keeps the economy at capacity”.

But the latter idea assumes government should fund infrastructure and other investments out of tax rather than borrowing. Is that right? Well there certainly are arguments for that “don’t borrow even to fund infrastructure” policy. They are as follows.

1. Investment does not justify borrowing. For example if a taxi driver wants a new taxi and happens to have enough cash to hand, why borrow? There’s no point.

2. The “infrastructure investment justifies government borrowing brigade do not seem to have noticed that education is one HUGE investment. That is, money spent teaching kids to read and write this year will continue to pay dividends in 50 years’ time: much longer than some physical investments last. But no one argues the entire education budget should be funded via borrowing. That’s a clear inconsistency.

3. It could be argued that if government offers to borrow at X% and some people are willing to lend at that rate, plus others are willing to pay taxes to fund that interest, then everyone gets what they want: everyone is a winner. On the other hand that’s not quite a genuine free market arm’s length transaction is it? Each individual tax payer / interest payer does not have a clear choice as to exactly how much he or she borrows and at what rate of interest.

Moreover, potential lenders and borrowers are free to get together and strike deals even where there is no government borrowing at all. So there is no real need for the latter “lending / borrowing via government” arrangement.

So my provisional conclusion is that Friedman and Mosler are right, but I’m not 100% certain!!

Sunday, 5 March 2017

A switch to full reserve banking could be less disruptive than is commonly thought.

Most advocates of full reserve (certainly Milton Friedman and Lawrence Kotlikoff) assume that switching to full reserve (FR) from the existing bank system involves splitting the bank industry in two. One half has totally safe accounts, and money in that half is simply lodged at the central bank, where it would be as safe as is possible in this world. (Though Friedman actually claimed some “safe” money could be put into short term government debt as well.)

The second half consists of mutual funds (“unit trusts” in UK parlance) where as is normal with mutual funds, investors stand to make a loss as well as possibly making a profit. Positive Money’s system is slightly different, but certainly under PM’s system, depositors who chose to have their money loaned out stand to make a loss if the worst comes to the worst.

But there is a problem with that “stand to make a loss characteristic” as pointed out by the UK’s Independent Commission on Banking, sections 3.20 & 21). It’s that the possibility of loss would be a turn off for many depositors, thus total amounts available for lending out would decline, which would raise interest rates.

Up till now I myself have gone along with all of the above. However, there is actually a flaw or at least possible flaw in the above arguments which means it is actually perfectly possible to protect the above depositors via deposit insurance, and that takes the wind out of the sales of the later Independent Commission on Banking objection. The flaw is thus.

The basic objective of FR is to prevent private banks printing or “creating” money. And the way banks “print”, as this Bank of England article explains, is to fund loans at least to some extent by simply opening accounts for borrowers and crediting those accounts with money produced from thin air (though commercial banks actually fund loans to a significant extent with depositors’ and shareholders’ money as well). And certainly one way to blocking that private money creation is to insist that all loans are funded via equity or something similar, like stakes in mutual funds. A stake in a mutual fund is certainly not money, so if loans are funded just via those stakes, then no money creation takes place when loans are made. As to Positive Money’s system, the fact of possibly making a loss means that relevant depositors are in effect holders of stakes in a mutual fund.

However, there is actually a second and entirely separate way of blocking private money creation which is set out in Andrew Jackson and Ben Dyson’s book “Modernising Money” (section 6.7). Incidentally Dyson founded Positive Money.

Now assuming that second “blocker” works, there is no need for the first! That is it ought to be possible (to repeat) to provide depositors who want their money loaned out with complete safety via deposit insurance. That of course means that relevant deposits are no longer stakes in a mutual fund: they become much nearer money, which might seem to defeat the object of the exercise, namely blocking private money creation. But if the above mentioned second blocker is in place, that’s not a problem!

The second blocker.

In brief, the “second blocker” consists of having commercial bank computer systems tied in with the central bank’s computers in such a way that any “creating money from thin air” carried out by a commercial bank would immediately show up.

It could be claimed in objection that commercial banks are free market capitalistic institutions and that it would be unacceptable to have central banks constantly keeping such close scrutiny of what commercial banks do. However those tempted to make that objection need to bear in mind that several major banks would have collapsed during the recent crises had they not been bailed out by central banks. Thus central and commercial banks are already intertwined.

Second, they need to bear in mind that bankers are simply “highly paid civil servants” to quote Martin Wolf.

And third, if the law states that private banks can no longer print money, then the authorities are entitled to implement whatever close scrutiny of private banks is needed to ensure they are not in fact printing / creating money. If the authorities need to occasional random checks on backstreet printers to make sure they are not turning out imitation $100 bills, so be it.

As to exactly how the “second blocker” would work, I’ve copied the section of Modernising Money that sets that out. That makes up the rest of this article and relevant paragraphs are in green. Incidentally note that the authors refer to safe accounts as “transaction accounts”. Plus note that the authors’ method of splitting the bank industry in two is a bit different from Friedman’s and Kotlikoff’s. That is F&K’s preferred method is to have entirely separate institutions making up the two halves of the industry. In contrast, Modernising Money envisages two types of account housed under the same roof: so called “investment” accounts and “transaction” accounts.

Section 6.7 of Modernising Money.

This section explains how banks will normally make loans (including via overdrafts) under the reformed system. For the purpose of the demonstration, we will consider an example where one customer's investment of £1,000 is funding an equal loan to another individual customer. In reality, the amounts loaned may be smaller than the investment and spread across multiple customers, or alternatively, multiple investments may fund one larger loan. There does not need to be any direct link between individual savers and borrowers.

Under these proposals, in order for a bank to make a loan it must have funds on hand. Initially this requires a customer, John, who wants to make an investment using some of the funds currently in his Transaction Account. He first needs to open an Investment Account at the bank and 'fund' it with a transfer from his Transaction Account. John sees the balance of his Transaction Account fall by £1,000, and sees the balance of his new Investment Account increase by £1,000. However, in reality the money from his Transaction Account has actually moved to Regal Bank's Investment Pool at the Bank of England. The Bank of England's balance sheet has now changed (see fig 6.1O). On Regal Bank's balance sheet, the funds are transferred from John's Transaction Account to the bank's Investment Pool, and the bank creates a new liability of £1,000, which is John's new Investment Account (see fig 6.11).

The money in Regal Bank's Investment Pool is then used to make a loan to a borrower, David. David signs a contract with the bank confirming that he will repay £1,000 plus interest. This legally enforceable contract represents an asset for the bank, and is recorded on the balance sheet as such. Simultaneously, money is moved from Regal Bank's Investment Pool at the Bank of England to the Customer Funds Account administered by Regal Bank, and Regal Bank increases the value of David's Transaction Account (see fig 6.12).

The balance sheet still balances, with the Investment Account liability to John offset by the loan asset made to David. Throughout the process, electronic money in the accounts at the Bank of England has moved from the Customer Funds Account to the Investment Pool, and back to the Customer Funds Account. Ownership of the money has moved from John to David.

In summary, any money 'placed in' an Investment Account by a customer will actually be immediately transferred from that customer's Transaction Account (at the Bank of England) to the bank's 'Investment Pool' account (at the Bank of England). At this point, the money will belong to the bank, rather than the Investment Account holder, and the bank will note that it owes the Investment Account holder the amount of money that the account holder invested (i.e. the Investment Account will be recorded as a liability on the bank's balance sheet). When this money is then lent, the money will be transferred from its Investment Pool (at the Bank of England) to the borrower's Transaction Account (at the Bank of England). At no point did any money leave the Bank of England's balance sheet, and no additional deposits were created anywhere in the system. This ensures that the act of lending does not increase the level of purchasing power in the economy, as it does in the current system.

Tuesday, 28 February 2017

Adair Turner’s flawed objections to full reserve banking.

Turner is former head of the UK’s Financial Services Authority and he recently published a book, “Between Debt and the Devil”. Geoff Tily (economist for the trade union movement in the UK) described Turner’s book as “conservative” which is a fair description, except that Turner is quite daring in the final (5th section) of the book where he tentatively advocates deficits funded by new base money.

That idea is not new (Keynes advocated it in the early 1930s), but by the standards of today’s ultra conservative central bankers, it’s daring / original.

In chapter 12 Turner sets out his reservations about full reserve banking. His three reservations are not too clever, to put it politely. I’ll run thru them sentence by sentence and paragraph by paragraph. I’ve put his words in green italics. The first paragraph of his first reservation reads:

“However there are three reasons for caution. The first and most fundamental is that there may be some positive benefits to private rather than public creation of purchasing power. Wicksell's confidence that private credit creation would be optimal provided central banks set interest rates appropriately turned out to be se¬riously misplaced. But it could still be true that not only debt contracts but also banks can play a useful role in mobilizing capital investment that would not otherwise occur. Maturity transforming banks enable long ¬term investments to be funded with short-term savings: that might seem like an illusion, a sort of confidence trick, but it may be a useful one. Inevitably it creates instability risks, but some instability may be the inevitable and reasonable price to pay to gain the benefits of investment mobilization and thus economic growth.”

First, let’s take his claim that “Maturity transforming banks enable long ¬term investments to be funded with short-term savings..”.

The reality is that we do not need “maturity transforming banks” in order to “enable long ¬term investments to be funded with short-term savings..”.

When savers buy into stock exchange shares or a unit trust (“mutual fund” in the US), they are free to sell their holding a week after buying it. I.e. that system enables “long term investments to be funded with short-term savings”.

Of course the stock exchange and unit trusts are not for everyone, plus in the latter scenario, savers are not GUARANTEED to get all their money back: they may make a loss (or they may make a profit). So maturity transforming (MT) banks seem to solve that problem: they seem offer something almost too good to be true for those who want to play safe. Indeed, as Turner puts it: “that might seem like an illusion, a sort of confidence trick, but it may be a useful one”.

Now when something seems too good to be true, it normally is, and indeed there is a catch in the above magic “something for nothing” MT. I’ve put more than one article on this blog in the past demolishing the basic idea behind MT, but I’ll run thru the arguments again.

The big attraction of MT is that it seems to enable us to fund investments with less saving. That is, where MT is banned, savers can fund investments only with term accounts or similar rather than with instant access accounts. So assuming a switch from a “MT allowed” to a “MT banned” scenario, and assuming people need some minimum stock of instant access money for day to day transactions, saving to fund loans or investments can only be achieved, on the face of it, by their going out to work, sweating their guts out and saving up more money which goes into term accounts.

Well the first flaw in the latter idea is that it’s just not compatible with the laws of physics, never mind the laws of economics. To illustrate, with a simple example from a Medieval village, if a farmer wants save in the form of building up a stock of potatoes to see him thru the Winter, he’ll have to go thru the painful process of producing more potatoes than he consumes during the Summer. Same goes for the entire village.

Now there is just no way that fiddling around with money or book-keeping entries gets round that brute physical fact, that is, extra potatoes cannot be produced by fiddling with book-keeping entries. In particular, changing the law relating to what type of bank account can fund investments can’t make any difference to the latter brute physical fact of life.

Returning to 2017 banking practice, if MT were banned, it would mean that (shock horror) loans and investments could no longer be funded via instant access accounts. So as suggested above, it might seem that people would have to save more so as to enable them to fund the amount of loans and investments that they wanted to. But saving is deflationary: that is, as Keynes pointed out in his famous “paradox of thrift” point, saved money is money not spent. And less spending raises unemployment.

But the reaction of any rational government to the latter unemployment would be to combat it with stimulus: e.g. by simply creating new money and running a deficit. The exact form the deficit took wouldn’t matter: let’s say it takes the form of tax cuts. So lo and behold everyone finds, as if by magic, that their take home pay has risen: there’s no need for them to work extra hours to come by the money they want to invest with a view to earning interest. That is, government in effect simply prints money and dishes it out to everyone.  Of course the latter helicopter drop type of stimulus is not the only possible way of implementing stimulus: for example there is standard fiscal stimulus combined with QE, a combination that has been popular over the last few years. But that comes to the same thing as a helicopter drop.

In short, banning MT has no effect on the ease with which savers can fund loans and investments and earn interest.

In contrast to the conventional story about MT set out in economics text books which is plain incompatible with the above mentioned brute physical reality, the latter “free extra money” story is entirely compatible with the above brute physical reality.

In short, Turner is talking nonsense when he says “but some instability may be the inevitable and reasonable price to pay to gain the benefits of investment mobilization..”. The reality is that “investment mobilization” can be achieved with none of the instability that comes from engaging in “too good to be true” tricks, so popular with banksters and the na├»ve authors of economics text books.

Turner continues…

“Moreover, any risks of private credit creation need to be balanced against the risks that would arise if we instead relied entirely, as the Chi¬cago Plan proposed, on fiat money creation to increase nominal demand. For if we allow governments to run money financed fiscal deficits, there is a danger that they will do so in excess or will allocate the spending power inefficiently for short-term political advantage.”

A danger governments will do so in excess? I.e. a danger they will implement too much stimulus? Well is that danger entirely absent from the existing system, or something? The very idea is a joke.

Certainly in the case of a non-independent central bank (e.g. the Bank of England prior to Gordon Brown giving it independence), politicians were free to give the economy an irresponsibly large amount of stimulus “for short term political advantage”. The evidence is that politicians do actually fall for that temptation TO SOME EXTENT, but that normally they don’t abuse that power too much. (The obvious exceptions being the Weimar period in Germany and Robert Mugabe.)

In fact Turner is insulting the intelligence of full reserve advocates if he thinks they have not thought of the possible need to keep politicians away from the printing press. If Turner had really got to grips with Positive Money’s literature he would have found that PM (and indeed other advocates of full reserve) advocate that decisions on the size of stimulus packages should be taken by some sort of committee of economists, which could perfectly well the be existing Monetary Policy Committee at the BoE. In short, systems for keeping politicians away from printing presses under full reserve can be almost identical to the equivalent systems under existing arrangements.

Turner’s point there is well and truly in check mate. Next Turner says:

“One of this book's messages is that we must not assume private credit creation is perfect nor treat fiat money creation as taboo, but neither should we iconize fiat money and demonize private credit. We face a choice of dangers, and the best policy is unlikely to lie at either extreme.”

Well that’s so vague it was hardly worth printing. As for the later “dangers”, I’ve hopefully dealt with those in the paragraphs above and below.


Turner's second basic objection to full reserve.

That starts as follows.

“Second, we must certainly be clear that 100% reserve banking will not be sufficient to solve the problem of excessive private credit creation.”

True: it’s not a 100% perfect solution, but nor is the existing bank system, even after the alleged improvements brought about by Vickers, Dodd-Frank and so on. But interest rates are higher under full reserve, as the Vickers commission suggested, so that at least does something for curbing “excess credit creation”.

Next, Turner says:

 “A modern economy needs some private debt contracts both to support the mobilization of capital investment and to lubricate the exchange of existing real estate between and within generations. Proponents of 100% reserve banking argue that they can be provided outside the banking system, in ways that do not involve new money and purchasing power creation. But near-money equivalents and new credit and purchasing power can be created outside banks. If promissory notes are believed to be low risk, they can be used as a money equivalent; and as Chapter 6 describes, the development of shadow banking illustrates the remark¬able ability of innovative financial systems to replicate banklike maturity transformation and thus the creation of near-money equivalents outside the formal banking system. The challenge of constraining credit and money creation would not be wholly resolved by requiring the formal banking sector to hold 100% reserves.”

Well Turner has some sort of point there, but for the large majority of day to day transactions, buying houses or cars, or small and medium size firms setting trade debts, there is only one form of money: what might be called bog standard high street bank money. I.e. when paying for a house or car or doing the weekly shopping at the supermarket, or when a restaurant settles up with the firms that supply it with food, £10 notes are accepted as money, as are cheques drawn on Barclays or Lloyds bank. “Promisory notes” just don’t get a look in.

Turners third objection.

This is essentially that two individuals, Jaromir Benes and Michael Kumhof, advocate a massive debt jubilee as part of the process of introducing full reserve, and that such a debt jubilee is highly questionable. Well Turner is right there, only I’d put it more strongly: something like Benes and Kumhof are clueless. That is B&K seem to be under the illusion that implementing full reserve cannot be done without a massive debt jubilee. I pointed to that mistake by B&K long ago on this blog.

No other advocates of full reserve want to do that, as Turner presumably knows, since he is clearly acquainted with those “other advocates”: i.e. Milton Friedman, Lawrence Kotlikoff, Positive Money and so on.

Put another way, debt jubilees may well have merits, but the pros and cons of debt jubilees are entirely separate from arguments for and against full reserve. In short, Turner’s third objection to full reserve falls flat on its face, as do his first two objections.