Is the Chinese Economy a Giant Ponzi Scheme?

There has been quite of lot of justified concern among economics pundits about the Chinese economy with some, like Will Hutton,  likening the problems there to a Ponzi scheme. A Ponzi scheme operates rather like a chain letter where the  earlier entrants into a savings scheme are paid directly from the contributions of later entrants. It is a simple fraud.  It has to break down sooner or later. Whatever the shortcomings of Chinese economic regulation may be we don’t have the evidence to accuse the authorities there of allowing these schemes.

The China situation is better described as one of debt-deflation. Money is created  and then spent in the private sector when banks make loans. This spending stimulates the market: shares and asset prices prices rise, growth spurts, but the newly created money dwindles in the economy as it is spent and respent with the Govt taking its tax cut on every transaction. But the debts remain and accumulate – slowing down the economy. So more bank lending is needed to keep it going and the same thing happens again. Steve Keen has shown that everything looks OK providing the rate of bank lending is accelerating. But as it can’t do that forever, the effect of the bank lending starts to have a net negative effect and then we can have a slump if the level of private sector debt becomes too high.

The immediate fix is for government to  spend, large amounts of cash usually called liquidity, to keep the economy going. Mosler’s Law states that this should always be possible but any crash or   slump is still very disruptive.  A better solution in the longer term is to rely on monetary policy (ie the variation of interest rates and the ease of bank lending) only to a very limited extent in the regulation of the economy.

 

Corbyn’s Calling us Home

I don’t often re-blog. But I’ll make an exception for this!

Turning the Tide

‘Jeremy Corbyn might represent our views, but if we want Labour to return to power he isn’t the right man.’

This was the tweet that broke the camel’s back. After reading it I was faced with two options – either write an article on why it wound me up, or scream long and hard into a cushion – I opted for the former. So here goes.

The argument against the potential electoral success of Jeremy Corbyn as labour leader can often be summed up in three words, ‘Remember Michael Foot.’ So let us remember Foot.

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After Michael Foot’s election as leader in November 1980, Labour enjoyed significant poll leads of between 9 and 15%. Understandably, the departure of Roy Jenkins et. al. in March 1981, knocked public confidence in the party, and poll leads dropped to a four or five point average – but labour kept a steady lead, under…

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“Look after the unemployment, and the budget will look after itself ” (Keynes 1933). Is he still right?


(This article was first published in Liberal Democratic Voice)

Keynes was undeniably a genius of his time, but he wasn’t infallible. We should not just assume that he was always correct. As with all prolific writers we can cherry-pick quotations to suit our own political purposes. If we want to argue for more government spending, we can use this:

“For the proposition that supply creates its own demand, I shall substitute the proposition that expenditure creates its own income.”

(Collected Writings of John Maynard Keynes, Volume XXIX, pp 80-81)

Keynes meant that the mere supply of a commodity is not enough to ensure the sale of that commodity, but money from all government spending inevitably ends up in someone’s pocket. This is a statement of the obvious, maybe, but he evidently felt it needed making anyway. On the other hand, if we are suspicious of what sounds like “magic money tree” economics, as many scathingly describe any deviation from their understanding of ‘sound money’, we can find this quotation:

“By a continuing process of inflation, governments can confiscate, secretly and unobserved, an important part of the wealth of their citizens.”

(Economic Consequences of the Peace, Chapter VI, pp. 235-236)

Rather than play these games we might look at how economics has progressed since his time and interpret his comments in the light of the now available evidence. This Huffington post article makes a good a case, in support of Keynes’s opinion, that a healthy economy will help minimise the government’s budget deficit.

One possible counter argument, from those of a more right wing disposition, would be that it is unclear which is cause and which is effect. Does a healthy economy with low levels of unemployment, and underemployment, naturally produce a small budget deficit or is it the other way around? If we force the budget to balance, by draconian measures, will unemployment fall too? A quick glance at the figures for Greece is enough to eliminate that possibility. It has a relatively modest budget deficit of 3.5% but an unemployment rate of over 25% with no tangible sign that any fall is imminent.

To give an answer to the question posed in the title, we can say “usually yes”, but we must acknowledge there are several, sometimes conflicting, factors involved. It is possible to conceive of a healthy economy with low levels of unemployment at the same time as the government’s budget deficit possibly being a little on what some may consider to be the high side.

To understand why, we need to look at the sectoral balances. To start with, imagine that everyone who issued or used the pound sterling as a currency was separated into either the government or the non-government sector. The assets of the non-government sector have to equal the liabilities, or debts, of the government sector. If money is paid as tax to government the assets of the non-government sector fall exactly as the government debts fall too. We can then divide up the non government sector into domestic and international. So in one year, and using the terminology of internal deficit for the Government’s deficit:

Internal Deficit = Savings of Domestic Sector + External Deficit.

For Keynes to be right on the question of unemployment and the internal deficit it should follow that everyone will save less when unemployment is low. This is a reasonable assumption but there could be exceptions. Everyone is more likely to borrow too, essentially the same as de-saving, when the economy is buoyant and there is confidence that money doesn’t have to be stored for those rainy days ahead. The effect on the external deficit is harder to predict. If the UK reflated its economy, when everyone else was in recession, we could well see that, even as unemployment fell, the external deficit, and so the internal deficit, could increase due to a local upturn sucking in more imports. Exporters could also switch their production to local markets. In that sense, and if we interpret “look after itself” to mean “fall”, Keynes could possibly be wrong! The important thing is that governments should understand these relatively simple relationships to make informed policy choices. The internal and external deficits may not be such a problem as we might be led to believe, if international investors see the UK as a safe place to park their surplus cash. The number one priority for any government, at least in peacetime, should be to ensure the health of the economy, both to offer jobs and business opportunities for all citizens and at the same time maintain the confidence of our external investors.

Ironically, if the UK lost that confidence, no-one would want to lend us any money. The pound would fall. Imports and exports would have to balance. We’d all end up somewhat poorer and we couldn’t then afford to save so much. The internal deficit would have to fall too and maybe even turn into a surplus. But, we have to ask ourselves: “Is this what we really want?”

We need to balance the Budget over the Business cycle as Keynes suggested, right?

(This article first appeared in Liberal Democrat Voice)

Firstly, we do need to ask if Keynes did suggest that. There are arguments either way on this point.  Keynes’ view unfolded and developed starting in the bleak 1920’s in Britain. There was no “roaring twenties” for the UK economy as the government deflated the economy to try to fit the Pound back on to its pre war Gold  Standard. Keynes then did argue that governments should run deficits if private spending declined and reduce those deficits when future growth was strong enough. This has been interpreted by many that his intent was that the budget was to be more or less balanced over the business cycle. If anyone is keen to research into his thinking they might like to start with his 1924 publication “A Tract on Monetary Reform”.

A better approach might be to try to understand why Keynes should made a break from tradition and start to advocate that budgets should at times be unbalanced. If we consider an economy which is neither a net exporter nor a net importer and in which everyone spends what they earn within the economy, Government spending and taxation must balance. This is true regardless of the level of taxation imposed (providing it is finite) and so regardless of the level of inflation within the economy. It has to, according to the principle of sectoral balances originally developed in the 60’s and 70’s by the late Prof Wynne Godley at Cambridge University.

If the participants of the economy don’t spend all they earn, ie when private spending declines,  we can have a tendency to recession. Keynesian economists would point out that prices and wages tend to be “sticky” and so don’t respond quickly to changing circumstances as more classically minded economists suggest they should. Therefore, Keynes was quite right to suggest that the Government should spend  more, or tax less,  to prevent recession from occurring. The government needs to borrow money from the savers and spend it on their behalf. Later, when the savers withdraw their money from the bank, or empty their piggy banks, and spend it, the Government needs to run a surplus in its budget to prevent the economy from overheating and inflation occurring. So the budget does indeed end up balanced over the cycle. It ends up being an approximately symmetrical pattern when expressed graphically.

This relatively simple model may have been adequate for the UK economy in the 1920s. However in recent times the extent of saving and desaving hasn’t been symmetrical over the business cycle. When times are good people may borrow and spend more but equally they may put more aside for their retirement. So if the spending/saving/borrowing pattern of the population isn’t symmetric over the business cycle, neither can we  expect the government to run a balanced budget over the business cycle. Instead of imports and exports balancing,  our economy has something like an annual  5% of GDP deficit in its current account. Our trading partners seem happy to supply more real things to us than we supply to them. They take our IOUs in the form of treasury bonds or gilts to make up the difference. In effect they are like a big net saver within the economy. As Keynes pointed out,  if people are saving more, and that includes our trading partners, the Government has to be spending more or taxing less.

The ‘balanced budget over the cycle’ is really just a special case which does not apply to our own 21st century economy. If we try to force the Government budget into balance, at the same time ignoring the trading position and the willingness or otherwise of the economy’s participants to net save then we are courting economic disaster. The budget will not balance, no matter how hard we try, and we will end up like a dog chasing its own tail as the economy spirals ever deeper into recession.

The Job Guarantee. Problems from a Left Perspective.

There’s no doubt that a JG program along the lines we might imagine it to be, and along the lines advocated by the leading names of MMT: Warren Mosler, Bill Mitchell and  others would be highly desirable.

We could have an economy run to ensure almost full employment except for a  JG rate of about 2%. Then maybe there would be another 2% who were in receipt of unemployment pay due to their being temporarily between jobs. We could allow a reasonable period of time for that to occur -say about 3 months. The JG could have a part to play in young people’s apprenticeship schemes too. There could be some relaxation in the principle of “public purpose” if job training was combined with education. The JG could pay a living wage meaning that the wage was more than just enough to stay alive but it was enough to enjoy life too.

The problem, for me, and I suspect others on the left, is that we fear it won’t turn out quite like that. There’s no guarantee, or even likelihood,  that the JG will end poverty. It would depend on the wage the JG pays relative to the cost of living in the locality. If you’re living in London and depending on the rental property market you’d need an income much higher than anything I’ve seen proposed for the JG to be above any reasonable definition of the poverty line.

Incidentally, this posting was prompted by a discussion between Neil Wilson and others (including myself) on his very good blog:

http://www.3spoken.co.uk/2015/11/job-guarantee-jobs-for-people.html

“Very good” doesn’t mean we always agree, BTW,  as this exchange shows.

PM: “We don’t want to get into the situation, for example, where we’re threatening young mothers with loss of benefits for not taking up the JG or getting into disputes with the mentally ill as to their capability for work.”

NW: “I’m afraid that isn’t your choice. That is the choice of the society you live in and how they perceive those individuals”.

Which is a fair enough comment of course, but if it looks, from a left perspective that there are too many devils-in-the-JG-detail for comfort why would the left want to aggressively pursue the concept of a JG? Why not just leave it ” to the society (we) live in ” to come around to the idea ? That’s not likely to happen for a very long time, though. Either the JG is pushed by the left or it just won’t happen at all. Another problem, again at least for me, is the language used to promote the idea of a JG and it being a “buffer stock”. We are real people. Yes we want to work and make a contribution but we don’t want to be a “buffer stock” in the same way as we can have a buffer stock of bales of wool or kilos of butter.

While MMT and concepts like the JG are useful they only go so far. MMT doesn’t say anything about how wealth and incomes should be shared out. If we don’t address that question, and keep on addressing it then we’ll end up with just as much poverty in the future even though society as a whole could well be richer.

There could well be very much higher rates of JG work as the not-so-innocent fraudsters in Government deliberately shift essential work into the JG sector. The JG would be a very powerful weapon and used in the hands of the fraudsters to reduce wages. We could, for example, have a JG now in parts of the EU which paid say €7 ph or whatever was just slightly higher than social benefits. So in Greece we’d have 25% on a JG instead of 25% unemployed.

There’s no way any of us with a leftist perspective would support that. If anyone is contributing to society by working, the old principle of Labour’s Clause 4 applies: “To secure for the workers by hand or by brain the full fruits of their industry and the most equitable distribution thereof that may be possible etc..”

Having a JG, even on a so-called living wage, doesn’t change that one bit!

The UK Autumn Budget Statement – More Neoliberal Nonsense!

The Autumn statement would not be so bad if it was economically coherent, with the spending and taxing plans agreeable, or otherwise, according to one’s political opinion. However, it does not make any sense. Not only does it not “add up”, it is inconsistent with all the principles of arithmetic.

The right wing Tory MP John Redwood makes the point :

“In total the new estimates show us paying an extra £105 billion in tax over the five years”

George Osborne says:

” we will reach a surplus of £10.1 billion in 2019/20″

Note: it’s not just “about £10 billion” its  “£10.1 billion”. We’ve all got to admire just how precise George and his Treasury economists can be about these five year forecasts! As if !

There’s no chance of this happening with the UK running a ~ £90 billion deficit in its external deficit due to trade and other international payments.  It would mean that the UK economy would have to find ~ £100 billion every year to pay the import bill and also provide the government with its £10 billion surplus.

This, presumably, is close enough to John Redwood’s ” extra £105 billion in tax”?

George Osborne says that  “Britain will be out of the red and into the black” which is completely untrue. These figures mean the British economy will be in the red to the extent of ~£100 billion to pay for the Govt being ~£10 billion in the black,  and Britain’s overseas trading partners being ~£90 billion in the black.

It can’t possibly happen that way,  unless somehow the trade deficit can be turned into a trade surplus, and that aspect is totally ignored in George Osborne’s grand plan. The UK economy could not sustain a net loss of £100 billion even for one year – never mind on an annual basis. George Osborne will only send the economy into a downward spiral trying to achieve the impossible. An economy in a depressed state will also deliver depressed levels of taxation revenue.

In a couple of years time, the excuse for the plan failing , as it inevitably will , is likely to be that even though the Government has kept spending under control, taxation revenues will have not come in as expected. This will be attributed to: Problems in the eurozone, problems with world trade, problems with loss of revenue from North Sea oil, a new war in the Middle East maybe?

In other words, the same kind of ‘excuses’ as were put forward after the last similar plan failed, in the years following the Tory win in 2010, except the Govt could blame the Lib Dems then! If the Government cared to look for a reason, rather than an excuse, they would explain that their deficit has to be the sum of what everyone else saves. They don’t have direct control of that.

There’s a saying , usually incorrectly attributed to Einstein, about doing the same thing over and over but expecting different results, being a sign of madness.  Are the Tories mad, though, or just plain bad?