Positive Money : A Fallacy Built on a Little Known Truth. (Part 4)

The proponents of a theory called Positive Money often get their knickers in something of a twist over the ways the banks , as they see it, create money. As the well known economist Minsky said “Anyone can create money. The problem is getting it accepted”.

If I ( or a bank or anyone else)  issue a loan in $ ( or £ ) I’m creating assets for someone denominated in $. But I also have a liability in $ which I have to be able to guarantee by providing $ on demand. Or lose my credibility. So am I (or the bank or anyone else) really creating $ ? In a way yes.

If I (or a bank or anyone else) issue a loan in ounces of gold, I’m creating assets for someone denominated in ounces of gold. But I also have a liability in ounces of gold which I have to be able to guarantee by providing ounces of gold on demand. Or lose my credibility.So am I (or the bank or anyone else) really creating ounces of gold ? In a way yes.

But we wouldn’t have discovered the secret of alchemy any more than we’d discovered a way to create dollars in the way Positive Money suggest is possible!

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.

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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We can’t legislate to change the value of PI nor to reduce the deficit.

The question of the deficit is regularly popping up again and again in the news. Yes the government’s deficit not our jobs deficit! Even Jeremy Corbyn hasn’t quite got it right with his calls for deficit reduction but at least his heart is in the right place. He’s been called a deficit denier. I’m not sure what that means exactly- but he should probably take it as a compliment.

Labour and the Tories weren’t much different in May on the question of the deficit. Arguably Labour was even worse. Labour’s  promise to “cut the deficit every year” ignored economic reality. The difference between what the Government spends and what it gets back in taxes is simply what is saved in the economy by the users of the currency. ie the pound sterling. That saving could be you and I putting some money into National Savings certificates or it could be the Chinese or Germans not wanting to spend all the currency they earned selling us stuff.

That saving is the source of government deficit and debt. The savers end up owning government debt by choice in other words. It’s the same story in all other countries too. All the world’s National Debts total to something like $60 trillion, or the equivalent in different currencies. We don’t owe that to Mars! We owe it to all those who have chosen to save in different currencies.

Since when has it ever been possible for any UK government to tell you or I or the Chinese that we shouldn’t save our money in pounds?

Anyone who thinks that is economically illiterate. Crazy even. These kind of pledges makes no sense whatsoever. They are on a par with wanting to legally redefine the value of PI to be some more convenient and rational number, 3.2,  as some tried to do in Indiana 1897.

Wiser counsel  prevailed at the time and that law was never passed.  Sometimes we do have to be deniers. If PI = 3.14159265359… we do have to deny that it is really 3.2 . Just as we have to deny the possibility that any sovereign currency issuing government has direct control over its budget deficit.

Corbynomics or Leslienomics?

The leadership debate in the British Labour Party seems finally to have swung around to a discussion on economic theory. The Labour Shadow chancellor Chris Leslie has recently weighed into the discussion with a claim that:

Jeremy Corbyn’s anti-austerity agenda will harm the poor

Really? What planet is Chris Leslie living on? Back on Earth the empirical evidence from around the place is that harm to the poor occurs from the application  of austerity economics rather than sensible economics.

The Labour right’s economic mumbo jumbo means that they are forcing Labour Party members who may not be of the left themselves to ally themselves with the  left. Many may not want to leave NATO, or want to nationalise all the leading industrial companies, or want to live in a society which is over-controlled by government. The do, though, want sensible macro-economic polices and they, albeit in slightly imperfect form,  aren’t on offer from anyone except the left.

The Labour Right needs to get a grip.

They could start by looking at the nature of deficit spending by government. This is one way of getting more money into the economy. Generally to reflate it. Taxation is one way of removing money. This has a deflationary effect. But, they aren’t the only ways. There is export inward spending by overseas customers which is reflationary. And, spending on imports by home consumers which removes money from the economy and so is deflationary. Then there is saving which is deflationary and de-saving, or private  borrowing, which is reflationary. Too much deflation leads to recession. Too much reflation leads to inflation.

We have to consider all money flows. Germany, being a net exporter, has inward money flows from trade and so a balanced or even a surplus budget is required over the trade cycle. The UK is a net importer so requires a deficit -on average over the trade cycle.

So, if the Labour Right wish to reduce the government’s budget deficit, they need to understand what they are doing and understand the nature of those money flows. They need to understand the need to move trade into balance too -probably with the help of a significant £ devaluation. Otherwise they will just end up incompetently crashing the economy and having 20% plus unemployment.

How to win and lose elections. (2)

There’s been a lot of navel gazing in British Labour circles recently about what went wrong last week and what needs to be done to prevent a re-occurrence next time. Presumably in about five years time. The arguments are pretty much along the same lines as the last time that Labour suffered an unexpected election defeat. Naturally, those on the right want to move more to the right. Those on the left want to move more to the left. Those in the middle think a new personality might do the trick.

Who’s right? Let’s just stand back and look at the numbers. According to my calculations the Tories received about 24% support from the electorate in the 7th May 2015 UK elections. Labour about 20% support. That’s including those who didn’t vote. So to win government, next time, Labour need to get at least another 5%. If they are positive, and were prepared to really go for it, they could aim for another 10%. If they achieved that they’d be back big-time.

So what’s the best way to do that? Let’s leave the politics out of it as much as possible and just think in pragmatic terms. Do they try to persuade nearly half, or a quarter if we allow for the same reduction in the Tory vote, of those who voted Tory this time to switch sides? I could be wrong, but I don’t think that’s ever going to work. I know a good few Tories and I can’t think of a single one who would ever vote Labour, even if the Labour Party were offering the most Tory of policies and had a picture of Maggie Thatcher on the front cover of their next manifesto. Of course, if the party did that they would jeopardise their own core vote. That’s never a good idea.

I’d say the same would be true in the USA too. Both the Democrats and Republicans would expect only limited success if either moved towards the other politically. Probably it wouldn’t be enough to make a real difference. It could well be counterproductive and would naturally give more justification to those who were disillusioned with the lack of political choices that were on offer. They’d choose to do other things, rather than becoming involved in the election and would be less likely to make the effort to vote. This argument probably wouldn’t apply to Australia which has compulsory voting – the Aussies are quite unusual in that respect.

Alternatively, Labour could aim for the 56% who didn’t vote for either them or the Tories. This, again, would include those who didn’t vote at all. Labour wouldn’t persuade them all, that’s for sure. But, they’d just need to sway 1 in every 5 and they’d be home and dry.

This is an implied conclusion which, I have to acknowledge, will be more appealing to the left than the right. But, I’d argue it’s the reality too. The left would argue that by being true to their historic principles, and offering a message of hope rather than despair to working people they would have a better chance of winning. They’d argue the need to have a distinctive message which wouldn’t allow anyone on the doorstep to say “but you’re all the same”.

I’d add that the party, as a whole, needs to make a start on the explanation of how the economy really works which is not at all how most people think it works. Once more people have that understanding it will become apparent what the real choices are from both a left and a right perspective.

Why not give control of the fiscal deficit to the Bank of England?

In a democratic society, I would argue that decisions regarding interest rates, both long and short term, should be made by the elected government. They used to be. However, for nearly 20 years, short term rates in the UK have been set by the BoE. The level of short term interest rates is important and it can be adjusted to stimulate a slowing economy or slow an overstimulated economy. But there are other adjustments that can be made too.

Just as a pilot has all the control levers at his disposal when he’s flying a plane (if he, or she, does hand over to the co-pilot it would be all the controls not just one) then all the controls need to be either in the hands of government or the hands of the central bank.

But just who has the controls when it comes to controversial policy decisions like QE? Does an  independent Bank of England decide, all on its own, to buy up £375 billion of government securities from the private financial sector? I don’t think so!

QE is no big deal. That’s not a common view, I’ll agree, but from a scientific perspective, there seems to be no reason why the issue of government , or the BoE if you prefer, IOUs in the form of cash should be any more or less inflationary to the economic system than the issue of IOUs in the form of gilts (treasury bonds). If it is necessary to buy back gilts from the private sector to control longer term interest rates then that’s what needs to happen.

So why not give control of the fiscal deficit to the BoE too? The BoE could calculate the best combination of fiscal and monetary policy, including whatever level of QE is needed, and tell the government what it needs to do. Arguably the government could decide to raise income tax a bit here or reduce VAT a bit there , etc, but it would not have complete control of fiscal policy as it now does.

This is not my favoured option BTW. But, if the pilot is going to hand over the (macroeconomic) controls to his or her co-pilot it should be all the controls and not just one.

European lemmings!

I hope Martyn Turner doesn’t mind my addition of a second cartoon pic to his excellent first one!

Edit: These look more like pigs than lemmings. Gadarene swine maybe?

MMTers: Does Adair Turner have a point?

Answer to the question in this post: No he doesn’t have a point! The electorate are quite capable, as they did in the 60’s, of understanding that if monetary and fiscal policy errs too much one way we’ll end up with too much inflation. Too much the other and we’ll end up in recession.
That’s the way things were until the late 70’s. The oil shocks did produce too much inflation but it wasn’t demand led. There was a need for corrective action, but that inflation was used by the ruling class to banish Keynes completely. When -all that was needed was some modification.

alittleecon

There’s quite an interesting interview with Lord Adair Turner published here. This bit in particular caught my eye:

“I think the crucial thing, the crucial question you need to answer when you accept that we can do fiat money creation is how to discipline and I’m going to address this subject in a lecture in Germany in February, because some of my very senior German friends have said to me, “Adair, you’re absolutely technically right that this is possible”, but, without quite putting it this way, they say, “we mustn’t tell the people!” Because if the people know, and if the backbenches of Parliament as well as the small elite technocrats know that this is possible, people want to do it – not to the extent of 2% of GDP or not just when we’re in a crisis – they’ll want to do it to the extent of 10%…

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On BBC tv NEWSNIGHT

Well worth following this blog! Good Luck Yanis Varoufakis!

Yanis Varoufakis

As a fan of the BBC, I must say I was appalled by the depths of inaccuracy in the reporting underpinning this interview (not to mention the presenter’s considerable rudeness). Still, and despite the cold wind on that balcony, it was fun!

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The economics of a budget surplus: Something to think about before making rash promises

This Article was first published  in Labourlist:

http://labourlist.org/2014/03/the-economics-of-a-budget-surplus-something-to-think-about-before-making-rash-promises/

Left of centre political parties are nearly always faced with the charge, levelled by their right of centre opponents, of fiscal profligacy. Accusations are made that the more socially minded parties cannot be trusted with a nation’s finances.  They will tend to spend too much ‘taxpayers’ money’ on what they consider to be worthy causes. This supposed tendency is often disingenuously linked to the size of the government budget deficit, which in turn is equally disingenuously linked to the size of government itself.  Left unanswered this charge will cost votes. So how should they best respond to the very predictable attacks along these lines which will be only too familiar to Labour Party strategists?

The Australian Labor Party answered this question during the 2010 Australian Federal election campaign by promising, as Julia Gillard put it at the time, “the budget will be in surplus by 2013 if I’m re-elected. No ifs and no buts.” Her deputy Wayne Swan chipped in with “We have nailed our colours to the mast.” You can find lots more similar quotes from both. It didn’t turn out too well. It wasn’t his colours which ended up being nailed to the mast.

As late as 2012 Julia Gillard was claiming to be ‘on track’ but in the end Wayne Swan had to acknowledge ‘it’s unlikely there will be a surplus’ and there wasn’t.  So, even though in many respects the record of the ALP was highly commendable, delivering an economic performance which was better than seemed possible in the aftermath of the 2008 GFC, the economic credentials of the ALP were shredded. The party slumped to a heavy and humiliating defeat in the subsequent 2013 elections. There were of course other factors, such as in-fighting between leading members of the government, but nevertheless the ALP had loudly proclaimed their ability to deliver a surplus. It was far from a minor policy in their 2010 manifesto. Perhaps even worse than the loss of the 2013 election is the long term loss of economic credibility. Their political opponents will remind the Australian electorate of the fiasco at every possible occasion for the foreseeable future.

In reality, the ALP did not come close to ‘achieving’ any surplus, which was just as well. If they had, they would have crashed the Australian economy. It can only be assumed they were unaware of the difficulty of making good their promise. So, what is involved in running a budget or internal surplus? These are, of course, possible. Germany, which has at least as big a government as the UK, proportionately as well as absolutely, and spends at least as much on social programs, runs a balanced budget continuously, sometimes slightly positive other times slightly negative, seemingly without  problem.

Unlike Germany, the UK has been a net importer since the early 80’s when the Thatcher government shifted emphasis away from manufacturing industry. The USA, too, runs a similar style of economy. Imports have to be paid for and these payments drain money from their economies. This is ‘retrieved’ by the sale of the Treasury securities on the international market and recycled back into their economies by government budget deficit spending.

So, whereas the UK runs both an internal deficit of around 6% of GDP and an external (trade or more correctly a current account) deficit of around 3.5%, Germany has an internal balance but an external surplus of 7%. This, incidentally, is considered by many to be excessive and has led to accusations of ‘mercantilism’ and being tantamount to exporting their unemployment to the poorer countries of the Eurozone.  The Germans have a money-go-round which goes in the opposite direction to the UK’s and they have to tax some of those export revenues away to prevent inflation in the domestic market. They would be unable to run a budget deficit of any size even though the interest payments to fund it would be almost zero and maybe even less! German bonds often have negative interest rates. Currently the Germans are prodigious savers, which accounts for the large difference between their external and internal deficits. Their surpluses end up on deposit at their central bank, which then buys securities from the net importers to complete the monetary cycle, enabling the citizens of those countries to carry on buying Audi and BMW motor cars!  A Government budget balance cannot be considered in isolation in any country.

The Government balance is defined as the difference between tax receipts and spending. This leads politicians to think they can easily control it. However, if spending is reduced or taxes are raised in an attempt to reduce the difference, economic activity will also fall, which in turn leads to reduced taxation receipts and increased demands for welfare payments. The gap ends up being much the same as it would have been had spending and taxes been left alone. The Troika are the latest to discover this the hard way in Greece. Their action in bleeding the economy is little short of a collective punishment on the Greek population.

Many economists would argue that imports are a net benefit whereas exports are a net cost. Most economists would argue that a trade deficit of around the 3-4% level is quite sustainable, that there was no need to worry and it shouldn’t make any difference to unemployment levels. They would say a public deficit equated to a private surplus. They would argue that not all countries can be net exporters and that the UK and the USA are offering a useful service by being the world’s banker and should take a free ride when it is offered. That is all true. For my own part, I’m not happy taking a free ride and wonder why developing countries enthusiastically swap real goods and services for what are just the IOUs of the wealthy western world. Will they ever be redeemable for anything close to the value to the goods supplied?  It could be that sooner or later these countries will take the view they’ve been had!  We probably should make preparations before they come to that conclusion.

If the ALP chose a poor option, what would be a better one for the British Labour Party?  It has to start by having a sensible discussion with the electorate on the type of economy they want including an explanation of what is possible. An internal surplus with a substantial external deficit wouldn’t be at all possible except for a very brief time before the economy went into deep recession. Do they want a Thatcherite debt finance based economy, selling government securities to the world; or, do they want to move, in a sensible timescale, maybe a period of a decade or so, towards an economy based on the principle of as close to full employment as possible, selling real goods and services, allowing Britain to contribute its fair share towards world prosperity, and keeping a better balance of both the internal and external deficits?