Tuesday, 29 September 2015

Sombreros are racist.

Sombreros have been banned at the University of East Anglia on the grounds that they are racist. Quite right.

Moreover all forms of national dress are racist: kilts, sporrans, lederhosen, turbans, burkas and so on. They are all henceforth banned. The only form of dress permitted are Chairman Chairperson Mau jackets. And the only colour permitted is blue.

Also please note that men’s ties are sexist, since they clearly represent a phallus. They are also banned henceforth.

Also all words in the English language shall henceforth be deemed to be racist unless the high priests of political correctness have deemed them non-racist.

You can obtain a list of permitted words from:

Ms Deranged Nutter,
Barking Mad Department,
The Grauniad,
Diversity House,
Loony Left St,

Monday, 28 September 2015

Amazing discovery by Ann Pettifor.

The amazing discovery is that apparently we don’t need to save in order to make investments. Isn't that great? The UK can spend £30bn on the proposed HS2 rail project, plus the country can have oodles of new hospitals, motorways, houses etc, and according to Ann Pettifor no one needs to save or sacrifice consumption in order to do all that. I.e. no one needs to consume less beer, fuel for the car, etc.

Instant riches!!! Why Ann Pettifor hasn’t got a Nobel Prize for this discovery, I’ve no idea. Or rather I do have an idea: it’s all hogwash.

Her article (about 1,600 words and entitled "Savings and the Alchemy of Credit") comes in glossy brochure format, compete with lots of pictures of Ann Pettifor – one of them occupying the whole of one side of an A4 sheet (or whatever size the brochure is).

No doubt that’s partly vanity and self-promotion, but it’s actually a smart move on her part. Reason is that 90% of the human race are too dumb to read small print and get to grips with the ideas therein: but the above 90% do react positively to a human face (in the same way as babies do).

Pettifor’s basic argument.

Anyway, her basic argument is that commercial banks can simply create money out of thin air and lend it out to those wanting to invest (which is true). Thus apparently no one needs to save in order to fund investments. Indeed she could have gone further and pointed out that central banks and governments can do the same (as made clear by Keynes in the early 1930s). That is, government can just print money and spend it. In fact “print and spend” is what the latest fad, peoples’ QE consists of.

Now if the economy is NOT AT capacity, there’s no harm in the latter sort of money creation. I.e. it’s true that banks (central or commercial) can create money which is then spent. And CONSUMPTION can stay constant, while the investing is done by using the previously idle economic resources: under-employed labour, underemployed machinery, etc. So no one has to save in order to bring about investment.

However, if the economy IS AT CAPACITY, then there’s absolutely no way of enjoying that extra spending without causing excess inflation. That is, if the economy is at capacity, every extra £X pounds of investment requires £X of saving, if excess inflation is to be avoided. Or put another way, an extra £X of investment means £X less consumption. (The only exception to that is borrowing from abroad, but getting indebted to other countries isn't a brilliant idea.)

However, Pettifor unfortunately doesn’t get the latter “capacity” point. Thus her “too good to be true” Ponzi scheme doesn’t work.

If the economy is NOT at capacity.

Moreover, even if the economy IS NOT AT capacity, it is dodgy to say that investments can be made without any corresponding saving or sacrifice of consumption. Reason is that the stimulus or money printing used to get the economy up to capacity and do the investment could as an alternative be spent on consumption.

In that sense, investment cannot be done without saving or sacrificing consumption. Or to put it in economics jargon, the “opportunity cost” of the investment is the consumption forgone.

Incidentally, it could be argued that AP might have changed her mind since producing the glossy brochure work dealt with here, particularly since it was published in 2011. However, that does not seem to be the case to judge from this very recent tweet of hers.

Do commercial banks get us out of recessions?

Another weakness in Pettifor’s argument is thus. It is perfectly true (to repeat) that if the economy is not at capacity, the fact of commercial banks lending a lot more will help cure the recession and enable some “investment without saving”.

However, there is a big flaw in that idea, namely that commercial banks just DON’T LEND out “a lot more” in a recession. Far from it: they tend to cut lending in a recession. They exacerbate recessions, or to use the jargon, banks act in a “pro-cyclical” manner.

It would seem from the experience of the 1800s that economies do eventually escape recessions of their own accord . However what actually gets us out of recessions nowadays is the counter recessionary measures taken by governments and central banks. As to commercial banks, if the economy expands by X% as a result of government implemented stimulus, then commercial banks will follow suit and lend VERY ROUGHLY X% more, which of course helps.  However, commercial bank lending is very erratic.

Thus if you’re interested in reducing unemployment and escaping recessions, then you need to concentrate on what central banks and governments do, which is exactly what about 95% of economists do concentrate on.

Coming up in a day or two.

The final item in this glossy brochure production which is asking to have the piss taken out of it is the box on the last page entitled "Action points".

It contains a number of very worthy sounding objectives, e.g. that banks should not lend for speculation. Well, nice idea. But the trouble is where exactly do you draw the line between speculative and non-speculative activity? Even buying a house is speculative: its value might rise or fall. Starting a small business is certainly speculative.

Also apparently lending should be "wise". Great idea! Why did no one think of that before?

And loans should go into "economically productive investments". Who’d er thunk it?

I’ll consider the latter weighty questions in a day or two.

Sunday, 27 September 2015

Dimwit pro-immigration arguments.

This article published by Business Insider is the umpteenth to put the argument that immigrants increase GDP, ergo immigration is beneficial.

Like many idiot articles, this Business Insider article is backed by the deluded Jonathan Portes, head of the National Institute of Economic and Social Research.

As to the GDP point, it’s stark staring obvious that when immigrants move into a country, that country’s GDP will rise (unless every single immigrant refuses to work and just sits around doing nothing).

In contrast, the important question is: what’s the effect on GDP per head?

Seems the distinction between GDP and GDP per head is too difficult for half the elite.

The second moron argument put the Business Insider article is the idea that young immigrants help deal with the ageing population problem. I dealt with that argument here.

P.S. I’ve just decided to write to the NIESR and apply for a job. My letter is below. 

Dear Sirs,

I’d like to apply for a job with the NIESR. My qualifications are, first, that I’m thick as two planks. Second I have no interest in economic or social matters. Third, I know nothing about economics. Fourth, I’m not interested in real work: I just want to sponge off the taxpayer.

Hope to have a positive response from you soon.

Yours etc.

Thursday, 24 September 2015

What does Jonathan Portes know about immigration?

Jonathan Portes is the director of the UK’s National Institute of Economic and Social Research. His first claim in this recent Huffington article (his second para) is that without immigration, Europe faces a declining population, which is supposedly a problem.

My answer to that is that given the damage the human race is doing to the environment, a steady decline in World population for the next fifty years would be positively beneficial! Maybe Portes hasn’t heard of global warming or the greenhouse effect.

Portes also trotts out the old myth that immigrants can help with our aging population. The flaw in that argument is that (surprise surprise) immigrants themselves eventually grow old. Thus immigration is NOT A LONG TERM solution to the aging problem. I dealt with that point in more detail here.

Do let’s “jump start” the economy.

Next, Portes quotes Thomas Piketty, as saying immigration is an "opportunity for Europeans to jump-start the continent's economy."

Gosh. Whoopee. Very important sounding phrase that: “jump-start”. It’s the sort of phrase used by the clueless (e.g. politicians) when trying to advocate X or Y while unable to think of any very specific or intelligent reasons for advocating X or Y.

Immigrants increase the number employed. Yer don’t say!

Third, Portes argues that immigration is beneficial because “it has resulted in a substantial increase in overall employment and hence GDP..”.

Well of course immigration increases “overall employment” (unless every single immigrant does no work and lives on benefits, and not even the BNP or UKIP make that absurd claim).

For the benefit of cerebrally challenged academics, I’ll illustrate that point. If a country accepts one thousand immigrants, the effect is absolutely bound to be an increase in “overall employment” even in the extreme case where only ten of that thousand is willing to work: employment would rise by about ten.

Ergo . . . . wait for it . . . . the fact that immigration increases “overall employment” is not a brilliant argument for immigration. In fact it’s a crass argument.

Economic benefits.

Next, Portes refers to the fact that immigration IN GENERAL to the UK has brought economic benefits in that immigrants’ pay is a bit more than natives, which means they pay more tax than natives. But the basic purpose of the article, to judge by the first two paras was to  argue that the CURRENT and unprecedented flow of migrants (who are mainly from Africa and the Middle East) confers economic benefits on Europe.

But the big problem there is that migrants from those areas are the LEAST skilled and productive. (The most productive immigrants to the UK are from other mainly white / English speaking countries: Canada, Ireland, the US, Australia, etc. The second most productive are from continental Europe.)

In short, there is a sleight of hand there. To put it figuratively, Portes is arguing that because immigrants from the US working in the City of London earn a million a year, that therefor illiterate unskilled people from Africa or the Middle East will also be a bonanza for the UK economy.

And finally, even if immigration does bring a small increase in output per head, what proportion of the population wants the nearest bit of countryside to where they live covered in concrete and houses in exchange for a small increase in output per head? There’s strong opposition to ANY further development of green fields around Durham City, where I live.

What do I say by way of conclusion? The director of the NIESR ought to give us QUALITY stuff. To put it politely, Portes’s ideas on immigration fall a long way short of “quality stuff”.

Wednesday, 23 September 2015

Will Richard “Murphaloon” Murphy tell us what PQE consists of?

I ask because it is entirely unclear from the small print on his site exactly what “Peoples’ QE” does consist of.

Of course the small print and the details are of no interest to the chattering classes. And the amount of chattering surrounding PQE is deafening. But for the small proportion of the population able to sus the difference between details which stand inspection and details which don’t, there’s a problem with PQE, as follows.

I always thought (as did others) that PQE consists of having the state print money and spend it on infrastructure, or at least mainly on infrastructure (and perhaps also housing). Incidentally that CAN BE DONE via the proposed National Investment Bank, or not. That’s just a technical detail, or at least a separate issue.

However, Richard Murphy in the comments after this article of his recently DENIED that PQE would be concentrated on infrastructure and similar. That is, in answer to the point that CONCENTRATING new money on a specific area like infrastructure is problematic, he said:  “The work proposed has always been broadly based”.

So is PQE money concentrated on infrastructure (plus housing), or is it “broadly based”? Any chance of clarification on that point, or is Murphy too busy wagging his tongue to bother about inconsistencies like the above?

Why PQE money shouldn’t be concentrated on infrastructure.

The reasons why that concentration point is important are as follows.

First, while some infrastructure projects are “shovel ready”, a significant proportion take a year or two to get going, and more like ten years in the case of the HS2 rail project. So if you’re looking for a QUICK way of creating jobs in response to a recession, infrastructure should not be top of your list.

Second, printing and spending money is STIMULATORY (and if it’s taken too far, it’s inflationary). But in some years little or no stimulus is needed. Thus if stimulus spending is concentrated on any one area, like infrastructure, then the total spent on that area will gyrate far too much. To illustrate, it’s perfectly possible to start building a bridge or road, and then stop half way thru the project because no stimulus is needed in the year in question. But that sort of rapid change in spending is absurd.

Third, the skills needed for a large and sudden increase in infrastructure and house building just aren’t available, at least not at the drop of a hat.

If spending is broad based.

If in fact PQE money really is “broad based”, then PQE is not a very original idea. First, Keynes in 1933 proposed printing money and spending it in response to recessions. And more recently, advocates of Modern Monetary Theory (MMT), Positive Money and the New Economics Foundation have proposed “print and spend” as a solution to recessions.

And finally we’ve actually implemented “print and spend” on a big scale over the last three years or so in that we’ve implemented standard fiscal stimulus and followed that with QE, all of which nets out to “print and spend”. (Standard fiscal stimulus equals “government borrows £X, spends £X and gives £X of bonds to lenders. QE equals “the state prints £X and buys back the bonds”).


If Richard Murphy (affectionately known as “Murphaloon” by Tim Worstall) wants to stick to concentrating PQE money on infrastructure then he’s talking nonsense.

Alternatively, if he’s saying PQE spending should be “broad based”, then all I can say to the Murphaloon is “welcome to the world of MMT, Positive Money and the NEF.

Tuesday, 22 September 2015

Does QE make the rich richer?

The popular answer is “yes”. However there’s a problem with that answer as follows.

QE (i.e. having the state print money and buy government debt) clearly tends to boost asset prices, since those in receipt of that freshly printed money will tend to spend it on purchasing other assets.

However, government debt would not exist if government had not first borrowed. That raises the obvious question as to whether it makes any sense to consider QE in isolation. Arguably to do so is a bit like talking about a human being with no lungs, heart or brain: such a “human being” just ain’t a functioning human being in the normal sense of the phrase.

The fact of government borrowing actually makes the rich poorer because it reduces spending on other assets. All QE does is to reverse that “impoverishment” effect.

So all in all, the enrichment of the rich caused by QE is nothing to shout about. I suggest a more important point here (one that I’ve been drawing attention to for years) is this. “Borrow and spend” is a daft method of imparting stimulus in that the borrow part of that exercise has a deflationary or impoverishing effect.

Put another way, if you’re trying to effect stimulus, what’s the point of doing something, part of which has an anti-stimulatory effect? You might as well throw dirt over your car before washing it.

Emotional masterbators love Greece.

Everyone likes weeping and wailing about economic and social problems. Everyone likes having a grievance to nurse. And social / economic problems enable sociologists and economists to witter on about and publish stuff about “neoliberalism” and whatever else is flavour of the month. But suggest a solution to those problems, and eyes glaze over.

Just for example, and on the emotional front there’s several thousand words from Bill Mitchell here (complete with pictures)  about the decrepit state of Porto, Portugal’s second city.

And there’s more thousands of tear jerking words on Greece’s fishing industry, complete with videos, in the Wall Street Journal.

You’d think the WSJ of all newspapers would concentrate on the TECHNICALITIES of Greece’s problems. But the WSJ like any successful newspaper knows what sells copy: emotion. Relatively few people are interested in logic.

Well I hate to interrupt the orgy of emotional masterbation, but I’ve got a simple solution for Greece. It’s to let Greece deal with its external deficit and debts by having it impose import tariffs.

There is absolutely no question but that in principle or in theory tariffs would enable Greece to return to more or less full employment. Extra demand normally sucks in imports and worsens a country’s external debts, but that wouldn’t happen given import tariffs.

As distinct from “in principle”, there the practicalities of tariffs. I’m not an expert on that. But most European countries had import tariffs prior to joining the EU. Thus I don’t see anything impractical about them.

Plus if you regard Grexit as problematic there’s much to be said for tariffs: they would enable Greece to reap the benefits of Grexit (i.e. devaluation) without leaving the EZ.

Objections to tariffs.

One obvious objection to tariffs that they’re not in keeping with one of the basic ideas of the EU, namely free trade. My answer is “so what?” Which do you prefer: a temporary change in the rules governing imports to Greece, or second, continued disastrous levels of unemployment?

Another not bad objection to the above tariff idea is that ultimately Greece has to get its costs down, and doing that requires a period of deficient demand and relatively high unemployment. Well my answer to that is that (as Simon Wren-Lewis suggested), while getting costs down does require SOME UNEMPLOYMENT, it probably does not require the DRACONIAN levels of unemployment that currently afflict Greece.

I actually suggested the tariff idea here, and Heiner Flassbeck suggested the same. However there’s not been a glimmer of interest.

I can only apologies for attempting to remove grievances which people derive pleasure from nursing. And having made that apology, I expect the mass ranks of emotional masterbators to apologise for pretending to be concerned about problems which bring misery, when in fact they’re mainly out for emotional kicks. (Not that there's much chance of the latter apology actually being made).

Monday, 21 September 2015

An odd argument by Andrew Haldane.

Haldane (chief economist at the Bank of England) put the following argument in a speech a few days ago.

Interest rates have been declining steadily for the last thirty years or so.

That means interest rates are now so close to zero that central banks have little room for manoeuvre when they want to impart stimulus. That is, CBs can’t cut interest rates much because they are already close to the so called “Zero Lower Bound”.

Haldane has two possible solutions, the first of which (his p.6) is to raise the target rate of inflation from 2% to 4%. That allegedly means CBs have an extra 2% of wriggle room: i.e. they can implement negative REAL interest rates more easily.

Now there’s a whapping great elephant in the room there, namely: how do you get to that 4% rate of inflation given that cutting interest rates is unlikely to do the trick? Well the answer has to be fiscal policy: i.e. government borrows £X, spends £X and gives £X of bonds to lenders. The CB may then do some QE and buy back some or all of those bonds.

Now if that fiscal stimulus works, what then is the point of the extra 2% inflation? Fiscal stimulus has solved the problem that interest rate cuts are unable to solve.

That being the case, why not just abandon the whole 4% inflation target idea and rely (or rely largely) on fiscal policy when stimulus is needed?

There could be an excuse for the 4% inflation target if interest rate adjustments were a much quicker or more sensitive way of adjusting demand than fiscal stimulus. But I know of no evidence to that effect: the evidence I’ve seen suggests that monetary and fiscal stimulus work at about the same speed.

And finally a warning: I haven’t been thru Haldane’s article with a toothcomb. If you want something more accurate than my above summary, read Haldane’s speech.

Sunday, 20 September 2015

Watch the UK’s finance minister struggle with the idea that government debt is a private sector asset.

George Osborne is the UK’s finance minister. Like most people in high places, his knowledge of the subject on which he is supposed to be an expert leaves much to be desired, to put it politely.

The above video clip starts with a question (lasting a minute or two) from Lord Turnbull (fellow with grey hair), followed by Osborne's answer.

Marvel as Osborne struggles with the idea that government debt (held by private sector entities) is a private sector asset.

Marvel as he confuses the debt of monetarily sovereign countries (i.e countries that issue their own currencies) with those of non monetarily sovereign countries (e.g. EZ countries).

Marvel as he tries to argue that a debt/GDP ratio for the UK of 100% would be a problem. (It was 250% just after WWII and that does not appear to have been a problem).

Marvel as he tries to argue that a high debt/GDP ratio is a bar to implementing stimulus. If you’re interested on a few details on the latter point, see the section entitled "High debt...." below.

Of course it would be naive to assume that Osborne is speaking the truth - after all, he's a politician. As Lord Turnbull suggests, Osborne's debt fetish is quite probably a huge charade: that is, it's a cover for cutting the size of the state. 

High debt does not prevent stimulus.

Say a country like the UK already has a fairly high debt/GDP ratio and as a result, the interest on that debt is rising. And the country needs to do stimulus. The daft thing to do would be to borrow and spend: why borrow when interest rates are high? Much better is to “print and spend” (as suggested by Keynes).

Would that be inflationary? Not as long as the amount of printing was enough to give the country full employment without going so far as to cause excess demand and hence excess inflation.

And if those dreaded (but largely incompetent) bond vigilantes think printing will result in excess inflation, then let them think that. All they can do is mark down the market price of UK debt. That in  turn raises the interest that has to be paid on new debt, as suggested just above, but (to repeat) why incur new debt when interest rates are high?

(H/t to Richard Murphy)

Is the Bank of England independent?

The conventional answer is “yes”. But that’s challenged by Richard Murphy (who is an economic advisor to Jeremy Corbyn, the new leader of the UK’s Labour Party).

He claims that BoE independence is a sham for two reasons. First, part of the relevant legislation says the finance minister can override BoE decisions in extreme situations. Second Murphy says the BoE didn’t start QE off its own bat a few years ago: rather it was on orders from the UK finance minister that QE started.

I’ll argue below that Murphy is actually wrong there. However the argument is a bit complicated. Here goes.

What does “independence” mean?

First, no CB is truly independent in the dictionary sense of the word and for the simple reason that ultimate power always rests with politicians. Politicians in any country can take direct control of their CB anytime, sacking the existing CB governor if necessary.

What the word “independent” in relation to CBs means is something like this. The CB has for the time being the power to use interest rate adjustments and other elements of monetary policy to determine stimulus, and if necessary override any stimulus decisions by the treasury or politicians. Plus the CB has responsibility for meeting the inflation target.

Indeed, market monetarists, Scott Sumner in particular, are forever make much of the fact that independent CBs can and do override stimulus decisions taken by treasuries: market monetarists call that “monetary offset”.

Murphy’s arguments.

Murphy’s first reason for claiming that the BoE does not have independence appears in his article entitled “Why the Bank of England’s independence is just a charade”. He points to section 19.1 of the Bank of England Act 1998 which says “The Treasury, after consultation with the Governor of the Bank, may by order give the Bank directions with respect to monetary policy if they are satisfied that the directions are required in the public interest and by extreme economic circumstances.”

Murphy concludes from that that: “…that is precisely why the Bank of England has always done what the Treasury wants.”

Well that’s just nonsense: the Treasury (aka the finance minister) might well want interest rates cut before election time and purely with a view to winning votes. But there’s no way an independent central bank would do what the finance minister wanted.

In fact that section 19.1 is really just a restatement of the basic political point made above, namely that politicians have the ultimate power to withdraw or override CB independence (CBI) any time. However, actually invoking 19.1 would be a big step for a finance minister or Treasury to take: it would mean a diminution of CBI as defined above. And FREQUENT use of 19.1 would mean the end of CBI.

Moreover it would be difficult to abandon CBI in that way while still pretending that CBI existed. That is, I doubt the “charade” to which Murphy refers is actually possible. Put another way, if CBI were actually withdrawn, it would be difficult to hide the fact, thus any attempt by the finance minister to claim it HADN’T BEEN WITHDRAWN (perhaps with a view to blaming the CB for excess inflation) would just make the minister look idiotic.

Diminution / abandonment of CBI is also a big step to take because it is likely to result in the CB governor asking in a very loud and clear voice what exactly his or her job description now is. That is, the CB governor might say something like: “When first taking this job I was given responsibility for hitting an inflation target and give various tools to do that, but now the treasury seems to have taken over that job. That is breach of contract. So I’m resigning with a view to finding a job that involves real responsibility and power.” As it happens, the former governor of the BoE very nearly did resign when Gordon Brown gave the BoE more independence in 1997.

Let’s summarise so far. Politicians can withdraw independence from CBs any time. But if they do so to any great extent (e.g. by invoking the above section 19.1 too often) then CBI ceases. But in the UK, the existing treasury minister has not done that. So the conclusion is, contrary to Murphy’s suggestions, that the BoE still enjoys independence. QED.

Murphy’s second argument.

His second reason for claiming that BoE independence is a charade is based on a letter from George Osborne to the BoE saying that the BoE can go ahead with £200bn of QE. Murphy concludes: “The fiction of Bank of England independence is blown apart by this letter.”

No it’s not. All that Osborne is doing there is granting new powers to the BoE.

Remember that the QE implemented in the recent crisis was a very novel departure from previous CB practice. That politicians should have a say in granting that new power is not surprising.

And far from REDUCING the powers and independence of the BoE, giving the BoE new powers is arguably an INCREASE in BoE independence.

Saturday, 19 September 2015

Prof Cohen's meaningless phrase generator.

You’ve got the job of writing a report for a government department or similar. You’re desperate to fill up pages with meaningless waffle. What do you do? This is where the meaningless phrase generator created by Prof Phil Cohen of the University of East London comes in. Just take one item from the first column below, followed by one from the second and third and you immediately have an important sounding but completely meaningless phrase. For example: “Practical sustainable regeneration”. Who can quarrel with that? Or “Diverse strategic involvement” – how can anyone manage without that?

You can generate over SEVEN HUNDRED meaningless phrases using Cohen’s meaningless phrase generator. Good luck.




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Friday, 18 September 2015

Now we Brits can’t even do snobbery better than other countries.


Hat tip to The Economist.

Regulate the asset or liability side of banks’ balance sheets?

Warren Mosler (who runs a bank) said in this article that, “The hard lesson of banking history is that the liability side of banking is not the place for market discipline. Therefore, with banks funded without limit by government insured deposits and loans from the central bank, discipline is entirely on the asset side.”

Well assuming vast amounts of taxpayers' money may have to be spent rescuing private banks (in Warren’s words “with banks funded without limit by government…”) then clearly we have to impose rules as to what banks can do with the money at their disposal, and with a view to limiting the amount of taxpayer money that may be lost.

But that begs a big question, namely why should taxpayers stand behind banks or “money lenders” at all? The state doesn’t stand behind restaurants or garages, and quite right.

Now the obvious answer to that might seem to be that banks are essential for the economy to function, ergo the state must stand behind them. Well OK: one of the main activities of banks, namely the safe storage of deposits and transfer of money from one person or firm to another cannot be allowed to fail. That’s so to speak one of the essential bits of the economy’s “plumbing”.

As to the other main activity, money lending, there’s no earthly reason why a large money lender cannot be allowed to fail, just as long as none of the above “safe deposit” money is lost. That is, as long as those who lose their money are shareholders or bondholders, why should we care?

In any case, it’s highly unlikely that a money lender loses ALL the money it has loaned out. Far more likely is that loans turn out to be worth less than 100cents in the dollar: i.e. that borrowers can only repay say 90cents for every dollar borrowed.


Next, if the asset side of banks’ balance sheets is regulated, the rules turn out to be horrendously complicated. For a start, just look at the rules proposed by Warren himself in his article.

But that’s nothing. Dodd-Frank consists of a good ten thousand pages, and even that has turned out, at least according to some, to be a mess. As Prof John Cochrane put it, “In recent months the realization has sunk in across the country that the 2010 Dodd-Frank financial-reform legislation is a colossal mess.”

Or as Richard Fisher, president of the Dallas Fed put it,

“We contend that Dodd–Frank has not done enough to corral TBTF banks and that, on balance, the act has made things worse, not better.”

Innovation and taking risks.

Returning for a moment to the above point that letting money lenders go bust doesn’t matter, another problem with regulating them with a view to ensuring they DON’T go bust is that that cuts down, by definition, on the amount of risky lending. But it’s precisely risky loans that can turn out to be winners. That is, many attempts at technological advances fail and those concerned lose money. But some of them turn out to be winners. Thus if we regulate the asset side of bank balance sheets, that inevitably reduces funding for potential winners.

And if I want to make risky loans VIA A BANK, then again, there is no reason for taxpayers to get involved.


Warren is right to say that ASSUMING taxpayers’ money is put at risk in order to save banks, then government must interfere with the way banks are run. But that involves horrendously complicated legislation which is of doubtful effectiveness. Plus it hinders the taking of perfectly legitimate risks.

A far simpler solution is to separate out two functions performed by banks. First there is the storage and transfer of money which bank customers want to be totally safe. That should be tightly regulated. As to the lending of money, that can be left to the free market. If those concerned make a killing, good for them. If they go bust, there’s no reason for anyone else to be concerned.

If you lend to a corporation buy buying its bonds on the stock exchange, taxpayers don’t stand behind you. So why should taxpayers stand behind you when the money you’ve put in a bank is loaned on  to a corporation with a view to earning you some interest?

Thursday, 17 September 2015

“The Week” article on Peoples’ QE.

PQE is normally taken to be the idea that we print money and spend it on infrastructure, or mainly on infrastructure. (Though the extent to which the money is concentrated on infrastructure is unclear: the architect of PQE, Richard Murphy suggested recently on his blog that the money be spent on a relatively wide variety of items)

Compared to some of the wind and hot air exuded about PQE recently, this article in The Week by Ryan Cooper is concise and it gets several points about PQE right.

In particular this criticism of PQE is spot on:

“Corbyn's plan has a big disadvantage, however: There's no reason to think that infrastructure needs will match particularly well with economic downturns. Big projects usually take at least a year to plan, approve, and get started, while recessions can gather to full force over a few months.”

However, the article is wrong to argue that because infrastructure spending can’t suddenly be increased come a recession that therefor it’s necessarily better to simply print money and dish it out to households. There are three flaws in that argument as follows.

1. The fact that infrastructure spending can’t suddenly be increased is not a reason to assume other types of government spending can’t be increased fairly quickly. E.g. assuming there is a good availability of relevant sills, advertising for and hiring extra bureaucrats is something that can be done within six weeks at a rough guess. Ditto teachers and nurses. And a recession by definition is a situation where there tends to be a good availability of most (but not all) skills.

Also, as distinct from CAPITAL items like infrastructure, there’s nothing to stop government spending more on CURRENT consumption items (in addition to the above labour).

2. The decision as to whether to boost PUBLIC or PRIVATE spending is a  POLITICAL decision. Central banks should not take that decision. It’s appropriate for CBs to decide on the TOTAL AMOUNT of a stimulus package (whether it takes the form of printing money or not). CBs have committees of well qualified economists to do that job, so that “total amount” decision is a suitable one for CBs to take. (Not that they always get that decision right).

And what d’yer know? That split between political and “total amount” decisions is what’s involved in the system advocated by Positive Money and the New Economics Foundation. See p.10-12 here. (Note that while that work advocates full reserve banking, the decision as to whether to implement full reserve is actually SEPARATE from the above “political / total amount” split of responsibilities.

3. Simply dishing out money to households involves relying JUST ON a monetary effect. That is, there’s no fiscal effect. By that I mean that if government hires more bureaucrats, the simple fact of hiring those people creates jobs and that’s the fiscal effect. In contrast, a result of hiring them is that those bureaucrats then find more money in their bank accounts and are likely to spend some of it  - that’s a monetary effect.

And there is a fair amount of disagreement amongst economists as to which is the more powerful effect. So: it’s possible the monetary effect is relatively feeble, in which case relying on it would be unproductive. In short, when it comes to dealing with recessions, there’s much to be said for COMBINING the monetary and fiscal effect: i.e. print money and hire bureaucrats for example. That way, if either the monetary or the fiscal effect is relatively feeble, it doesn’t matter.

Frances Coppola now an MMTer?

Two passages in this article of hers on government debt are very MMT compliant. First:

“Thus, buying a government bond is exactly the same as placing money in a government-insured time deposit account in a bank. We should really regard government bonds as certificates of deposit. They are simply money, in another form.”

Incidentally Martin Wolf made very much that point where he said:

“Central-bank money can also be thought of as non-interest-bearing, irredeemable government debt. But 10-year Japanese Government Bonds yield less than 0.5 per cent. So the difference between the two forms of government “debt” is tiny…”.

Another point which MMTers keep making is that the state should issue enough government debt and base money to satisfy what MMTers often call the private sector’s “savings desires”.

And to give credit where credit is due, the latter point amounts to much the same as Keynes’s point about the paradox of thrift: i.e. that increase saving (in the form of storing up money) raises unemployment. Thus the state absolutely has to satisfy the private sector’s desire to save - save money that is.

As Frances Coppola puts it:

•  Running a sustained absolute surplus robs the private sector of its savings
•  Paying off government debt deprives the private sector of a safe store of value.

The only thing slightly wrong with the latter two sentences is that it assumes savings have to come in the form of “debt” rather than base money (which normally pays no interest).

MMTers get that right when they refer to “Private Sector Net Financial Assets” (PSNFA), which is the sum of government debt and base money. 

As to whether PSNFA should be made up primarily of zero interest yielding base money or primarily of interest yielding money / debt, that’s a separate question. Milton Friedman and Warren Mosler proposed a “zero debt” regime.


Stop press: Simon Wren-Lewis puts in a good word for MMT.


Wednesday, 16 September 2015

If banks don't have 100% capital ratios, they are subsidised.

My latest magnum opus – 6,000 words. It's available here. The basic argument, is very simple, and is briefly as follows.

Bank subsidies are only necessary because of an inherently risky element in the existing bank system: the lending on of depositors’ (supposedly safe) money, and any activity that needs subsidising reduces GDP, unless there is a very good social justification for the subsidy.

Or as Prof Adam Levitin put it, “Banking is based on two fundamentally irreconcilable functions: safekeeping of deposits and relending of deposits.”

Ergo the bank system that maximises GDP is one where the lending on of supposedly safe money is banned. That is, money which savers want to be totally safe should be lodged in a genuinely safe manner, e.g. with the state. As to loans, they should be funded by equity.

That “GDP maximising” system is called “full reserve” banking.

What about FDIC type insurance?

It might seem that the lending on of depositors’ money can be done in unsubsidised form with the help of some sort of self-funding FDIC insurance system and/or a lender of last resort facility. However, where a money lender is funded just by equity, shareholders actually insure themselves. So which is better: FDIC type insurance or shareholder “self insurance”?

Well in theory if they both gauge the premium right, there won’t be any difference. However there is a big problem with FDIC type insurance (and indeed support for banks via lender of last resort (LLR)).

It’s that FDIC/LLR type insurance is inherently expensive because of the moral hazard involved: the temptation to take excessive risks, keep the profits when that works, and send the bill to the insurer when it doesn’t. That moral hazard largely explained the crunch, and the costs of that were horrific.

Conclusion: the existing bank system is in check mate – full reserve maximises GDP, while the existing / conventional bank system does not.

Tuesday, 15 September 2015

Come back “loanable funds” – all is forgiven.

It has become fashionable recently to criticise the idea that banks intermediate between lenders and borrowers – an idea sometimes referred to as “loanable funds”. That’s the idea that a bank cannot lend money unless it first obtains money from savers (i.e. depositors, bondholders or shareholders).

Instead, so the recently fashionable story goes, when a bank spots a viable borrower, the bank allegedly simply credits the account of the borrower with money produced from thin air. And the borrower then spends the money, which means other entities RECEIVE the money, and deposit most of it at other banks. Hence the popular phrase “loans precede deposits”.

I’ll argue below that it’s all a bit more complicated than that.

A hypothetical economy.

Let’s start with a very simple economy: one where there is no economic growth and no inflation. Let’s also assume that everything else is constant and in equilibrium, e.g. the average age of the population remains constant, educational standards remain constant, etc.

More importantly there is equilibrium as regards the total amount borrowed / loaned.

Now let’s consider first, an INDIVIDUAL bank, and then the bank system AS A WHOLE.

If an individual bank spots loads more viable potential borrowers, the bank cannot simply create new money from thin air and lend it out willy nilly: if it did, it would run out of reserves. Of course to deal with that problem such a bank can always borrow reserves from other banks, but no bank wants to go too far into debt with other banks for too long. So sooner or later, the above “individual” bank must obtain money from savers (i.e. depositors, bondholders or shareholders).

The bank system as a whole.

As regards the bank system as a whole, if that system tries to lend more, that would increase aggregate demand, and assuming the economy is already at capacity, that extra demand just isn't possible unless there is some compensating CUT IN DEMAND brought about, for example, by increased savings. If there were no increased saving, the extra lending would result in excess demand and thus excess inflation.

Absent that increased saving, the central bank would clamp down on that attempt to lend more by raising interest rates: the object of the exercise being to ensure there is no extra lending.

To summarise so far, in the above simple economy, loanable funds is a valid idea

Growth and inflation.

In contrast, the appearance of growth and inflation makes a big difference. On the not unreasonable assumption that loans will expand (in real terms) at the same pace as the economy expands, then extra loans WILL BE NEEDED. In that case, banks can indeed create money from thin air and lend it out.

Moreover, inflation eats away at the real value of existing loans, thus if total loans are to remain constant in real terms relative to GDP, they would need to grow by enough every year to compensate for inflation. E.g. if inflation was 2%, then to compensate for that, loans would need to expand in terms of dollars, pounds etc at 2%pa.

To summarise, if growth was 2% and inflation was also 2%, then loans would need to grow at 4%pa in terms of dollars.


On the simplifying assumption that loans remain constant relative to GDP, then:

1. To the extent that an economy enjoys no growth and no inflation, loanable funds is a valid idea.

2. To the extent that there is growth in real terms and inflation, it will be necessary for banks to do their “money creation” or “loans create deposits” trick.

3. Of course there has been a dramatic increase in debt over the last twenty years or so, thus the above 4% figure will be an underestimate. But over the longer term, e.g. since WWII or over the last century, that 4% won’t be too far out: I doubt the real figure will be as much as 10%.

So the conclusion is that while banks do indeed create and lend out money, they certainly cannot do so willy nilly. That is, to a very significant extent, they have to abide by the loanable funds idea.

Sunday, 13 September 2015

Delusional Richard Murphy claims Krugman is a fan of his!

Richard Murphy is an accountant from East Anglia in the UK who at the moment seems to be the main economic advisor to Jeremy Corbyn, the new leader of the Labour Party. Tim Worstall has been taking the p*ss out of Murphy for a long time, but Murphy’s latest delusion of grandeur is that Krugman has adopted Murphy’s so called “Peoples’ QE”.

That claim is actually a very simple sleight of hand: but simple sleights of hand fool 90% of the people 90% of the time, so you can’t blame Murphy for trying it. Reasons are thus.

PQE as advocated by Murphy for the last year or so has consisted of the idea that we should have government print money and spend it on infrastructure and/or green stuff, like wind farms. If you want to confirm that, Google “Peoples’ QE”: you’ll find plenty of articles where PQE is understood by the author to consist of just that, i.e. printing money and spending it exclusively or primarily on infrastructure and/or green stuff.

Now as I’ve explained ad nausiam, there’s nothing wrong with the “print and spend” element of PQE. Indeed Keynes advocated that in the early 1930s, as did Milton Friedman about fifteen years later. What’s wrong with PQE (for the umpteenth time) is as follows.

“Print and spend” is a form of STIMULUS. But in some years, little or no stimulus is needed. Thus if P&S money is concentrated on any one area, like infrastructure, there will be a BIG CONTRACTION in that form of spending in years when little or no stimulus is needed.

Now starting to build a road for example, and then bringing the project to a halt before completion just because little stimulus for the economy as a whole is needed, does not make very much sense.

Conclusion so far: stimulus spending should be fairly widely distributed. As for infrastructure, it may well be that we need more of that, but that should be funded in the normal way, i.e. mainly via tax and/or government borrowing (with a bit of stimulus money thrown in if it happens to be a year when stimulus is called for).
Put another way, what’s wrong with PQE (as Simon Wren-Lewis pointed out on his blog) is trying to combine two policies which in themselves are perfectly acceptable, but which (contrary to the claims of Richard Murph) are not actually natural bedfellows.

Now it seems from the comments after this article of Murphy’s that he has very recently been converted to the latter “widely distributed” point. That is, he seems to have cut the “infrastructure” bit out of PQE (though it’s far from 100% clear what he is saying).

If you’re interested, search for this phrase of Murphy’s: “The work proposed has always been broadly based”.


Far from adopting PQE (along with its nonsensical infrastructure element), all Krugman is doing is saying that “print and spend on goods and services” (as advocated half a century ago by Keynes and Milton Friedman) is not a bad idea.

Saturday, 12 September 2015

Who owns money deposited at banks?

Bit of a minor semantic argument this, but Positive Money claimed yesterday that banks “own” the money that their customers deposit. And Richard Werner claimed likewise.

My counter argument was to ask where the law is that allows banks to refuse to return depositors’ money or refuse to honor cheques even when there is money in relevant accounts.

I’m claiming that banks only BORROW money from depositors, and they have approximately the same rights over that money as anyone who borrows anything from anyone else. For example, assuming the money goes into an instant access account, the bank has a very definite obligation to return the money to the depositor on demand, or honor a cheque drawn on the bank by the customer assuming there are funds in the depositor’s account.

Richard Werner answered by saying there are laws (unspecified) which mean the bank does not actually have an obligation to return the money on demand, but admits that the bank’s reputation would be trashed if it failed to return money on demand.

So I’m resting my case. Ownership means having total and complete control over something. But, banks (whatever the law may say) are in fact under an obligation to return money to depositors on demand and to honor cheques. And if you are IN POSSESSION of X while being under an obligation to return X to whoever you got X from on demand, then you do not have total and complete control of X. Ergo banks BORROW money from depositors. Banks to not “own” the money deposited with them. 

And now having stuck my neck out, I shall wait to see if it gets chopped off..:-)

Friday, 11 September 2015

Krugman is catching up with Positive Money and the NEF.

Krugman suggests that printing money and spending it on “stuff” is better than traditional QE, i.e. spending it on buying government debt or other assets held by the private sector. As he puts it:

“What’s remarkable about this record of dubious achievement is that there actually is a surefire way to fight deflation: When you print money, don’t use it to buy assets; use it to buy stuff. That is, run budget deficits paid for with the printing press.”

Just to be accurate (and perhaps pedantic) there’s no reason to confine spending to “stuff”: that is, where SERVICES rather than GOODS seem good value for money, there’s no reason not to buy services. Indeed, the total spent on services in the US is about 50% more than what’s spent on goods, so if services are left out that significantly restricts the amount that can be spent.

Anyway, printing and spending on goods and services is what Positive Money and the New Economics Foundation have long advocated.

Next, Krugman misses out the question as to whether to boost PRIVATE spending or PUBLIC sector spending. That decision, as PM&NEF rightly point out is a POLITICAL decision and should be left to politicians.

That point is a big problem in the US because when it comes to spending decisions, members of Congress spend about a year squabbling before coming to a decision. But that won’t be a problem in several other countries.

Next, Krugman makes the common assumption that “print and spend” should be confined to when the central bank’s freedom to effect more stimulus is limited by low or zero interest rates. That assumption is debatable and is disputed by PM&NEF.

One reason is that it’s hard to see the logic in adjusting JUST ONE form of spending when there is a GENERAL lack of spending / demand. That is, an interest rate change affects just households and firms with variable rate loans and not those with fixed rate loans or no loans at all.

That makes as much sense as doing helicopter drops, but only on households where at least one person is bald, or one person is a Buddhist, or is a football fan.

Wednesday, 9 September 2015

Bailing in bonds is messy.

The Financial Times Lexicon says:

“Bail-in regimes have unnerved bondholders because they are not traditional bankruptcies, which have strict rules and a court-supervised process that mean creditors are ranked in order of repayment precedence, and those in each group must be treated equally. Bondholders and many bank executives warn that such moves could have negative consequences for the wider economy.”

So how about this for a simpler and clearer alternative.

When a bank is unable to repay bondholders on maturity of their bonds, the bank must cease granting loans. That means there will be a net inflow of money to the bank because loans will continue to be repaid while no money flows out in the form of new loans. The bank will repay bondholders as and when it can from that inflow of funds.

If it becomes clear that loans yet to be repaid will not be enough to repay bondholders in full, the bank must be wound up.

The Overton Window and so called extremism.

Phil Burton-Cartledge, the sociologist, makes the point that the BBC is incapable of any sort of rational analysis of unusual / odd / original / extremist views. That is, the BBC is biased towards the centre-ground: as Phil points out, rather than analyse the views of the far left or far right, the BBC does what Phil calls “hatchet jobs” on them.

What Phil’s article fails to mention, is that that phenomenon has been going on since the world began. That is, the Overton Window has existed ever since the world began. 

The Overton Window is a name given to the fact that in every society, only a very limited range of views are acceptable. And the reaction of respectable centre ground folk to anything outside that narrow range is to shout, scream, stamp their feet, arrest or insult anyone expressing unusual views and so on. Of course the screaming and stamping of feet, insults and so on are expressed in polite pseudo-sophisticated language in articles in respectable newspapers and similar arenas, but screaming and stamping of feet are what those articles boil down to.

A classic example is the hundreds of articles in the left of centre press that have appeared over the last five or ten years which label anyone wanting a significant reduction in immigration as “racist” or “xenophobe”. Those two insults / criticisms are fine of they’re substantiated. But they never are.

And wanting a reduction in immigration is not even right outside the Overton Window: it’s only outside the political left’s Overton Window. 

So in fairness to the BBC, they are nowhere near the first bunch people to suffer from the Overton Window syndrome.

If you’d suggested in Ancient Egypt that building pyramids was a waste of time, you’d have been strung up from the nearest lamp-post or the Egyptian equivalent of a lamp-post, whatever that was. And if you’d suggested in ancient Rome that there was something wrong with having lions eat Christians, you’d have been in big trouble.

Actually there WAS a priest who campaigned in ancient Rome against the “lions eating Christians” carry on: he had his head chopped off for his troubles.

Monday, 7 September 2015

Deluded peoples’ quantitative easing.

The world’s leading authority on peoples’ QE, or should I say “Deluded Peoples’ QE” (DPQE), has now descended to near incoherence. I’m referring of course to Richard Murphy. 

In the comments after this blog post of his, he claims that DPQE, far from ever having been aimed almost exclusively at infrastructure, always aimed to direct money at a wide variety of types of spending. (If you’re interested, search for the phrase “The work proposed has always been broadly based”.)

Well that’s news to me and numerous others. If you do quick bit of Googling you’ll find numerous articles by leading economists under the impression that the deluded people advocating DPQE have always advertised it as being aimed primarily or exclusively at infrastructure. 

DPQE can fund a million homes for migrants?

The other bit of amazing news from the high priest of DPQE is that DPQE can fund a million homes for the flood of immigrants / refugees currently entering Europe.

 What – build a million homes just like that?

There’s just one teensy problem there which is that the UK is ALREADY SHORT of construction skills at the CURRENT rate of house building which is in the low hundred thousands a year. (150,000 in 2014 according to this source.)

Of course additional bricklayers, site supervisors etc can be trained, but that takes years (about ten years if you want a decent building site supervisor with several years’ experience). And of course relevant skills can be imported. But we already have freedom of movement in Europe, as Murphy presumably knows – or perhaps he doesn’t. And the UK’s shortage of construction skills exists DESPITE that freedom of movement. So you won’t get a huge additional number of skilled people from that quarter.

I’m all for increasing the number of houses we build. There’s no big problem in doing that. But it’s plain impossible to quadruple the rate of construction in two or three years.  

BBC trotts out the old nonsense about immigrants solving the dependency problem.

See here.

I'm sick the back teeth (as are others) of pointing out that young immigrants are not a long term solution to the dependency problem. (That’s the fact that the population is aging, thus the pensioner to “people of working age” ratio is rising.) Reason is stark staring obvious: young immigrants themselves eventually grow old.

And anyone who doesn't understand that needs to take an IQ enhancing pill.

In fact several studies have been done into exactly what happens if a country relies on young immigrants to keep it’s dependency ratio constant: the result is a catastrophic rise in the population – something like the population doubling every thirty years or so.

Moreover, with the spread of 21st century medical knowledge, drugs etc to less developed countries, those countries will also have a dependency problem in about twenty years time.

And to add insult to injury, it’s very questionable as to how serious the dependency problem really is. That is, increases in output per head comfortably exceed the rate at which the dependency ratio is deteriorating. Thus while that deterioration obviously means a decline in living standards ALL ELSE EQUAL, the reality is that “all else” is not “equal”. 

That is, the deteriorating dependency ratio hinders the rise in living standards A BIT. But it does not stymie it anywhere near totally and completely.

Sunday, 6 September 2015

Peoples’ QE nutters.

Along with others, I’ve been trying to explain to supporters of PQE a VERY VERY simple flaw in the idea. Unfortunately, they’re extremely dense and just don’t get it.

Incidentally Peoples’ QE is an idea which is currently all the rage in the UK and it consists of having government print money and spend it on infrastructure, or spend nearly all of it on infrastructure. The idea is all the rage with Labour Luvvies, champagne socialists and windbags of all political persuasions.

I’ll explain the flaw in as simple language as I can.

First, printing and spending money is stimulatory. I’ll repeat that. Printing and spending money is stimulatory. (And if take too far, it obviously leads to inflation).

But in some years, little or no stimulus is needed. I’ll repeat that. In some years, little or no stimulus is needed. Got that?

Ergo . . . . . wait for it . . . . .if stimulus money is concentrated in one particular area – infrastructure or whatever – the result will be unacceptably large gyrations in the amount spent on those areas.

I’ll repeat that. The result will be unacceptably large gyrations in the amount spent on those areas. To illustrate, the result could be that contractors start to build a road, and then have to stop when the road is half complete. Barmy.

 I’ll repeat that: B-A-R-M-Y.

The above, please note is not, repeat not, repeat not, repeat not to criticise either of the two basic elements in PQE: that is, first, more infrastructure spending and second, implementing stimulus via “print and spend” rather than in other ways. Indeed Keynes in 1933 said that print and spend was a perfectly acceptable form of stimulus.

I.e. what’s wrong with PQE is the COMBINATION of two perfectly good ideas where there is no particular reason to combine them. Worse still: they are not actually natural bed-fellows.

As Oxford economics prof Simon Wren-Lewis put it, “Putting the two ideas together right now is misconceived, and is in danger of discrediting two potentially good ideas.”

Saturday, 5 September 2015

By George: someone’s got it – EZ countries might be none too happy with fiscal union.

A thousand members of the chattering classes have been telling us for the last few years that what the Eurozone needs is fiscal union. As I pointed out some time ago, fiscal union would involve very much the same problems as the EZ suffers at the moment.

For example core countries under fiscal union might be none too happy at donating vast sums to less well off / more profligate countries. I also predicted that sooner or later, someone would tumble to that point.

Well it seems someone has indeed tumbled to it. See this Brussels Times article.

Further explanations as to how and exactly why the chattering classes are talking thru their rear ends will hopefully appear here in due course…:-)

(I learned about that Brussels Times article thanks to a tweet by Simon Wren-Lewis)

Charging banks for deposit insurance.

George Osborne's latest stroke of genius is to have banks pay for deposit insurance via increased profits tax on banks: that is, banks pay a higher rate of corporation tax than non-bank corporations.

Now normally with insurance policies, you pay an annual premium every year, REGARDLESS of whether you make a profit or not, and quite right. For example, the insurance firms that insure bank buildings against fire do not abstain from collecting premiums just because banks haven’t made a profit recently.

Indeed, in the case of deposit insurance and so on in the case of banks it’s PRECISELY banks which make losses which are the biggest risks. Thus if anything, they ought to pay larger premiums.

But of course that would tend to drive weaker banks to the wall more quickly, and if there’s one thing Britain’s elite doesn’t want, it’s any disturbance of the status quo. Wall paper must under no circumstances be removed where cracks have been papered over.

In fact it shouldn’t be difficult to close down a bank and have a stronger bank take over the assets and liabilities of the failed bank. In the US, small banks fail at the rate of at least one a month. The FDIC moves in, closes it down, and has some other bank take over assets and liabilities. No problem.

As Walter Bagehot put it: “…any aid to a present bad bank is the surest mode of preventing the establishment of a future good bank.”

Friday, 4 September 2015

Debt deflation.

Carmen Reinhart claims that when prices fall at 1 or 2% a year, that means debts rise in real value at the same rate, which in turn is a significant problem for debtors. I suggest, on the contrary, that that’s a complete non-problem, particularly given that interest rates are now at record lows.

Is a rise or fall in the stock market of 1 or 2% a year any sort of big deal for investor / savers? Nope. It’s a complete irrelevance. Even the recent 10% fall and subsequent recovery of the stock market all within a week was a complete irrelevance for those intending to hold their investments for several years.

Reinhart also suggests that the above 1 to 2% fall in prices is a big problem for Greece. Well in the total scheme of things, that 1 or 2% is a complete irrelevance. For example when the Troika took over Greece’s debt to private banks, those banks took a haircut of about 50%. As astute readers will notice, 50 is a much bigger number than 1 or 2.

And finally, the serious shortfall in demand in Greece is almost entirely down to the DELIBERATE Eurozone policy of imposing that shortfall in demand on countries that are too far in debt. 

Conclusion: the 1 to 2% rise in debts in real terms is near irrelevant.

I’ve been blocked on Twitter.

I’ve been blocked on Twitter by two people, Frances Coppola and Richard Murphy. But those two individuals are now quarreling with each other. See here and here.

What delight.  Looks like the “blockages” had a lot to do with those two individuals’ thin skins. 

However, I must confess that my language is not exactly 100% diplomatic 100% of the time. But I’m hardly unique in that regard.

Thursday, 3 September 2015

Bill Mitchell argues for no national debt.

There is much to be said for a “zero national debt” policy, which Bill Mitchell argues for here. Milton Friedman advocated the same in 1948.

See Friedman’s para starting "Under the proposal..." here.

Bill, in his first paragraph and in reference to a recent meeting in London, says “Surprisingly there were some arguments by audience members that governments should continue to issue debt, largely, as I understand them, to provide a safe haven for workers to save for the future. So the idea is that we maintain the elaborate machinery that is associated with the public debt issuance just to provide a risk free asset that workers can use to park their hard-earned savings in. It is a strange argument given the massive opportunity costs associated with debt issuance. A far simpler solution is to exploit the currency-issuing capacity of the government to guarantee a publicly-owned National Saving Fund. No debt would be required.”

As regards Bill’s reference to “opportunity costs” I suggest that can be put in plainer English - something like: why should one lot of people have to pay tax to fund interest on government debt, just to enable another lot to earn interest on their savings?

A National Savings Fund?

Re Bill’s claim that peoples’ desire to save can be catered for via what he calls a “National Savings Fund”, that NSF is presumably owned and run by government, so that comes to much the same thing as government debt. 

There are however SOME DIFFERENCES between national debt and NSF, as pointed out by Neil Wilson in the comments after Bill’s article. For example those allowed to save via the NSF would doubtless be limited to citizens of the relevant country. However, if the argument for more national debt is invalidated by the argument that it’s wrong to pay interest just because loads of people WANT interest on their savings, then so too is the argument for an NSF.

Generational considerations.

One popular argument for government debt is that if public investments like infrastructure are funded by debt that spreads the cost across the generations that benefit from the investment: that is future generations allegedly have to pay interest and eventually repay the debt. The flaw in that argument is that it involves time travel. That is, it just isn't possible to consume real resources (e.g. steel and concrete) in 2050 so as to build a bridge in 2015.

Put another way, having a future generation repay a debt simply involves one lot of people paying money to another lot (the debt holders). That’s just a load of paper pushing: it has nothing to do with real costs or real resources.

Nick Rowe has tried to argue against the latter point with his so called “overlapping generations” idea. I demolished that idea (least I think I did) here. But be warned: the arguments for and against Nick's overlapping generations idea are complicated.

Debt may reduce volatility.

A possible argument for government debt, but only debt that pays a very low rate of interest is this. If the private sector has a large stock of base money and it goes into a fit of irrational exuberance, it may spend too much of that money at once, which could cause excess inflation. In contrast, debt is more difficult to spend: try buying a car using UK government Gilts, or US Treasuries.

David Hume on government debt.

And finally I’ll let David Hume, writing about 250 years ago, have the last word. As he put it:

“It is very tempting to a minister to employ such an expedient, as enables him to make a great figure during his administration, without overburdening the people with taxes, or exciting any immediate clamours against himself. The practice, therefore, of contracting debt will almost infallibly be abused, in every government. It would scarcely be more imprudent to give a prodigal son a credit in every banker's shop in London, than to impower a statesman to draw bills, in this manner, upon posterity.”