Sunday, 19 November 2017

Francis Coppola’s “money from thin air” argument.

 Her "thin air" argument appears in the initial paragraphs of an article of hers entitled “Money Creation in a Post Crisis World”.

Her argument is that the money created by commercial banks is not “created from thin air” because the money is backed by a debt. That is a flawed argument for the following reasons.

When a bank grants a loan, it credits the account of the borrower and in doing so “creates money”. But not unreasonably, the bank will want that money back at some stage, and to represent that obligation to repay, the bank debits another account with the borrower’s name on it. That’s the debt owed by the borrower to the bank.

But both book-keeping entries are just that: book-keeping entries. That is, both obligations arise out of thin air. Why does the fact that they are equal and opposite obligations created out of thin air make them “non-thin-air” rather than “thin air”? Darned if I know.

Next, there is no question but that governments and central banks create money out of thin air (as Francis herself points out – para starting “But in fact…”).  Thus there is nothing inherently wrong with creating money out of thin air. What MAY BE wrong in the case of private banks creating money out of thin air is that they reap an unjustified profit from doing so. And in fact I argue (as have others) that there is indeed such an unjustified profit there in a paper entitled “Taxpayers subsidize private money creation.”

Thus the “thin-airness” of money is irrelevant: the important point is the possible unjustified profit.


Donations to charity.

Next, there is nothing to stop a commercial bank crediting someone’s account WITHOUT there being any corresponding debt owed to the bank. That would be a gift by the bank to the account holder. Indeed, some banks may actually do that, for all I know, when they make gifts to a charity which happens to have an account at the relevant bank.

In that case, the book keeping entries would be: “credit charity Y” and debit “gifts to charities” account, which in turn will be debited to the profit and loss account at the end of the year.

Of course gifts to charities by banks are a small proportion of banks’ turnover. “Gifts” to politicians and political parties with a view to getting bank favorable legislation passed are doubtless more common, though even those will be a small proportion of banks’ turnover. But the important point here is that contrary to Francis’s claim, a debt owed to a bank is not needed in order for the bank to create money “out of thin air”.

Unproductive loans.

Next Francis Coppola criticises the claim by Zoe Williams in the Guardian that too much is loaned to allegedly unproductive sectors of the economy like mortgages, with not enough going to SMEs. I fully agree with Francis there. The fact is that the proportion of SMEs which fail to repay loans is double the equivalent proportion for mortgagors. I.e. there just aren’t all that number of viable potential loans to SMEs out there.

It is also a mistake by Zoe Williams to claim that mortgages which fund the purchase of existing houses are less productive than mortgages which fund to construction of new houses. Basic reason is that the purchase existing houses pushes up the price of houses, which in turn induces builders to build more houses. I go into that in more detail in an article entitled “Borrowing to BUILD houses is no more productive…”.

Positive Money and debt.

Next, Francis says “Those who propose "sovereign money" to replace money creation through bank lending appear to be driven by an irrational, though perhaps understandable, fear of debt. And they also, to my mind, place far too much faith in central planners, as this comment from Zoe Williams shows.”

The comment by Zoe Williams is thus:

“The nature of centrally created money should itself be opened up for debate, whose starting point is: if we agree that commercially created money is skewing the economy, can we then agree that it should be created by a public authority, even if we don’t yet know what that authority would look like.”

Re “Those who propose “sovereign money””, that’s a reference to Positive Money which (far as I know) is the only organisation to use the phrase “Sovereign Money”, though it’s not the only organisation to advocate full reserve banking (a system under which private money creation is banned).

Re Francis’s reference to “irrational fear of debt”, I agree that about 95% of those who write on the subject of debt are motivated by the negative emotional overtones of the word debt rather than by reason or logic. Indeed that phenomenon is even worse in Germany, where the word debt (schuld) also means “guilt”. Yup: I’m afraid about 95% of the human race are motivated by emotion rather than reason.

Central planners.

Also in the above passage quoted from Francis’s article, she refers to “placing far too much faith” in mysterious “central planners” who would decide on the amount of money to periodically create in a “central bank money only” system (i.e. full reserve banking).

Well I have news: money created by the state and spent into the economy is simply a way of imparting STIMULUS, something a committee of “central planners” already does.!!! Those “central planners” are more popularly referred to in the case of the UK as the “Bank of England Monetary Policy Committee” and the "Treasury". Plus the latter to bodies actually effect stimulus in much the same way as Positive Money proposes.

Now what happens if the Treasury and BoE agree that stimulus is needed? Well the Treasury borrows and spends more, and the BoE (with a view to making sure that extra borrowing does not raise interest rates) will very likely print money and buy back some of that debt. And what d’yer know? The net effect of that is: “the state prints money and spends it into the economy”. Indeed, over the last few years, the BoE has bought back virtually ALL the debt incurred by the Treausury via QE.

Hey presto: the existing system is little more than a roundabout way of doing what Positive Money (and others) propose.

But there is absolutely no “central planning” there: at least there is no central planning in the old Communist / Eastern Europe sense of the phrase: that is, some central organisation deciding whether to expand a steel plant or supermarket in Vladivostok or Manchester.

Put another way, under both the existing system and Positive Money’s proposed system the only job the people “at the center” do is to implement stimulus as required.

Conclusion: both Francis and Zoe William’s references to “central planners” are flawed.

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”.