Monthly Archives: December 2013

Neo-liberal thinking!

How many basic errors can you pick up in this posting?
http://johnredwoodsdiary.com/2013/12/21/rebalancing-the-economy-2/

To be fair to Mr Redwood, he does allow some reasoned criticism of his postings , but he didn’t allow this one past!

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@Mr Redwood,

 “the same rules apply to a government as to a company or person” 

But they don’t! Not governments like the UK , Australia, USA, Japan etc who are in control of their own currencies. Companies and people are users of a currency. We have to get money before we can spend it. Governments are issuers of a currency. They have to issue the currency before anyone can spend it. Where else can we get it from? Any government which issues its own currency has to be in debt. If it isn’t, it means it hasn’t issued anything.

Governments like Greece are also users of a currency. Thay have exactly the problems you describe.

Governments which issue their own currency have to get it right. They should issue not too much. This causes inflation. They need to issue not too little either. This causes deflation or depression. People lose their jobs.

One mistake often made by sovereign currency governments is to try to peg their currencies to another currency- as with the examples you give (Argentina, 60′s and 70′s Labour governments) . They had to borrow at high interest
rates to try, usually unsuccessfully, to maintain that peg. They are losing a key advantage in having their own currency.

Mrs Thatcher’s government was originally much smarter and allowed the pound to fall close to parity with the US$ in the early 80′s. Life went on pretty much as normal and hardly anyone remembers this now. They haven’t forgotten the events of Black Wednesday though! That was again caused by the UK government trying and failing to maintain a peg with the DM. Big mistake!

The ‘unsustainable burden for future taxpayers’ argument is odd. Future taxpayers will consume the products of their future economy. They won’t be able to send anything back in time to us, and we won’t be able to leave them
anything much to consume directly. If at some future time the Chinese decide to spend some of their accumulated money, that will be good. If they decide to order lots of Rolls Royce jet engines, for example, politicians will
try to take credit for the order. It will be hailed as a good thing and of course it will be.

What we can leave future taxpayers is a successful and well functioning economy.

PS: and a clean and safe environment.

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Is there really a “skills shortage”?

Whenever the question of skills, and unemployment, is discussed within the mainstream, the problem is usually described in these kind of terms:

“In a survey of 1,200 businesses with more than 50 employees, over half want to take on more staff , but businesses are frustrated by a lack of skilled labour in the UK ……..”

http://www.britishchambers.org.uk

Of course, there is always a lack or shortage of those with exceptional skills. For example there aren’t many who can play football with the same level of skill as Lionel Messi. The England cricket team could well benefit from someone who can bowl a ball as fast as Mitchell Johnson. The clear fact that they haven’t would suggest that there is indeed a skills shortage. There would be an immediate job for anyone who had the right skills and abilities in that regard. That’s for sure!

It is a strange argument, though, from those who subscribe to a neo-liberal economic school of thought. In their textbooks there is always a lack, or shortage of nearly everything. According to the neo-liberals, it is a shortage of anything desirable which causes it to have a price. That argument is obviously true to a large extent. Their view of the economic world isn’t totally incorrect. They do manage to get some things right! There are many good golfers for example. But, its is only those who are exceptional that would expect to be paid for their services. The better they are the more they are paid.   There’s a shortage of housing, too. If there were a greater shortage, rents would be even higher. We all understand that.

I would expect that the British Chamber of Commerce aren’t that concerned about the shortage of fast bowlers. They would probably say there was a shortage of engineers. Or a shortage of qualified electricians, or a shortage of IT professionals , or whatever. OK so what? There would be a shortage of milk in my refrigerator if I weren’t prepared to pay the market price.

So what’s behind all this ‘skills shortage’ nonsense? It’s simply a blame shifting exercise. Instead of unemployment being the fault of government and the large corporations, the blame is directed at those without work.  The message is : All outcomes are determined by individuals. If you don’t have a job then don’t blame the system. It’s all your fault! If you were capable of regularly hooking those 95mph deliveries to the boundary you’d have no trouble at all finding work!

This is not to say that education and the development of workplace skills is not important. A skilled workforce is always going to be more productive than an less skilled one . But any workforce,  and it is just not possible for them to have no skills at all, has to be more productive than an unemployed workforce. Nearly everyone is capable of doing something and that should be the starting point in any sensible discussion of  skill development.

Who controls the economy?

Economic control is to some extent decided  by the democratic process – but nowhere near to the extent that most voters would think.  Naturally, those who have the most money have the most influence.  If they decide to spend big time then the government needs to increase taxes to slow down the economy and prevent inflation. These are levied largely on those who have much less. If the very wealthy decide to acquire a mountain of cash, then the government needs to run high budget deficits to keep the economy moving.

That may be acceptable if the extent of inequality was close to what most citizens would consider reasonable.

But, is it?

This is the extent of the inequality, and the perceived inequality,  in America and it’s probably not much different elsewhere.

Can commercial banks create money out of thin air? (2)

Since my first posting on this topic it has occurred to me that each bank behaves exactly like a government with a fixed rate currency to support. That was the situation with most countries up until the 1970’s when national currencies were fixed against the US$. In the UK I remember the rates were around  $2.40 to £1.00 in the final days of a fixed exchange rate.

The UK government could print, or create, as many £ as it liked but it had to have a sufficiently good financial base to support that rate. If the reserves dropped too low then the currency speculators would take positions against the pound bringing it under downward pressure.

How does that work with a bank? Well for a start we know that the neo-classical multiplier  doesn’t fit the observable facts so we can forget all reference to that theory. There are those who claim that banks can create their own money without limit. That seems to be going much too far in the opposite direction. If they could really do that they could grow without limit, and never ever fail or fall into bankruptcy.

What could be a better theory? If I look in my bank account I can see, say $2000. but are they really dinky-di Australian dollars?  Sure I can put my card into the ATM and out do pop the genuine article. But what about the rest? I would argue these Commonwealth Bank IOUs  are actually Commonwealth Bank Australian dollars – which can be considered a sub-currency. The Commonwealth Bank can create, in theory, as many of these as they like, by keystoke. However they can’t overdo it. They can’t create CBA_A$ without limit. They do have to maintain the confidence of the market that they are have enough reserves to maintain their peg to the Australian dollar. So, the more they lend, the more reserves (or capital base) they need to do this.

Of course it’s the same story with all the other Australian banks. There are ANZ_A$ , Westpac_A$ etc. Providing all these banks are in good financial shape,  there is no effective difference between their IOUs or sub-currencies and and the Reserve Bank of Australia issued currency. But if any of these banks ever fell into difficulty that link could be broken and some deposit holders could find they lose part of their savings.

This theory is consistent with the observation that QE doesn’t work in the way intended. Once the bank has decided what reserves it needs it doesn’t make any difference whether they are in bonds or cash. It won’t change the bank’s lending practice.

I haven’t seen anyone else make this observation so it is possible there is a flaw in the theory. Any comments either for or against are welcome.

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The previous posting on this subject generated quite a bit of heat. The line I’m advocating didn’t go down well with those who were of the opinion that commercial bank lending goes much further.   That is a pity because I would say they, like the proponents of MMT, are motivated to have a better functioning economy, and do advocate full reserve banking as a key policy towards this end.

I’m not sure that FRB is necessary but, if it is, then it should only be done with a a full understanding of the issues involved. Goodwill isn’t enough.  Changing things and hoping for the best isn’t ever going to work. The basic theory needs to be right.
I’d make the same argument to people like Russell Brandt who argue for revolutionary change. OK, so we have a revolution, and then what?