Tag Archives: Government

Nationalism, Governments and Currency.

The political left has always been suspicious of nationalism. Certainly it is easy to think of examples where nationalism has been taken to extremes with disastrous results. However we do, like it or not, all have to recognise we live in nation states. We might consider ourselves citizens of the world, or citizens of Europe or whatever, but that has to go along with being a citizen of a particular country too.

The traditional model is that we have a country, a government and a currency to go with it which is essentially an IOU of that government. So, for example, we have a country called Vietnam with its own government which issues a currency called the Dong. A neighbouring country, Cambodia, has its own separate government and uses the Riel. You might want to remember these names if you are into pub quizzes!

The people of Cambodia and Vietnam could, if they chose to, unite into a single country, have  a single government and a unified currency. That could make sense, but it would be entirely up to them to decide to do that. What would make much less sense is for them to try to share a currency without unifying their countries. The power of being able to control a currency is very considerable but not easily shareable. If we write our own IOUs as a settlement of a debt we want those IOUs to be unique. We don’t want anyone else writing them out on our behalf. So if Vietnam and Cambodia were to try sharing a currency it probably would not work at all well. There would soon be a dispute over how many IOUs each could create and the two countries would revert to separate currencies very quickly.

This is a similar pattern the world over. Canada has a different dollar from the USA. Australia has a different dollar from New Zealand and so on. There are seemingly some exceptions. Ecuador uses the US dollar. But it cannot create any US dollars of its own. Only the USA can do that, and as many as it likes to stimulate its own economy when needed. That puts Ecuador at a big disadvantage. I would recommend them to introduce their own currency! There is a similar situation in Puerto Rico which also uses the US dollar. But Puerto Rico is not considered part of the USA. If that were to change it would make much more sense for them to use the US dollar. Puerto Rico citizens would become American citizens and pay taxes to the US Federal Govt and receive the benefits of spending by the Federal Government. There would probably be more spending than taxation just as there is in other less affluent US States.  Then they would be truly sharing a currency and not just using someone else’s.

So one way we can define our own feelings of nationalism is by asking ourselves who we would like to share a currency, and a government, with. At present we, in the UK, share a currency, which we call the pound, between the countries of England, Scotland, Wales and Northern Ireland.  Other parts of the world, like Gibraltar and the Channel Islands use the pound but do not share the pound and so are not part of the United Kingdom. If Scotland were to become independent it could not share the pound, it could only use the pound. I am not sure if those Scottish nationalists who argue for a shared currency really appreciate the difference or the potential difficulty.

The big exception in the eurozone. We’ll look at that, and the problems it has, next.

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?

Goodbye to £5 and £10 notes?

The  Bank of England’s chief economist Andy Haldane’s speech. caused some raised  eyebrows recently. It sounds like he knows we’re in for some tough economic times ahead. Things are so desperate that it  might require the abolition of cash in the economy!  People will be forced to hold money in banks and see its value dwindle.

As Andy Haldane has put it “A more radical proposal still would be to remove the ZLB (zero lower bound) constraint entirely by abolishing paper currency.”

We could perhaps begrudgingly say Andy Haldane has shown political and economic courage in saying this. If we are being charitable we could credit Mr Haldane for highlighting the intellectual bankruptcy of most mainstream modern economic thinking. If we wished to be less charitable we’d have to say the idea of abolishing cash is about as stupid as it gets!

I hope it is the former and that cash won’t be abolished. But this isn’t the first time we’ve heard this silly argument argument from monetarist economists and in particular from Kenneth Rogoff. See  here  and  here. That they feel the need to make it shows they still haven’t really grasped that interest rates can’t have the controlling  effect they think they have on the wider economy.

When intelligent men like Rogoff and Haldane have silly ideas, political ideology is usually to blame. The main argument for banning cash, other than to hinder criminals and tax-dodgers, which is no stronger an argument now than it has ever been, is to facilitate sharply negative interest rates. But if we want to stimulate the economy, as we do right now, there’s an obvious and much easier alternative: ie loosen fiscal policy. Increase government spending and reduce levels of taxation.

The only reason to suggest something as outlandish as banning printed currency is that you believe this alternative to be impossible. Or, rather impossible according to one’s own political ideology.

Monetarism all sounds fine – superficially. When times are good interest rates are increased to slow the economy down. When times are bad they are lowered to stimulate lending and get it moving again. There’s no need for government to be involved at all. They can concentrate on balancing the books like any good business should.

Except that every stimulus leads to the build up of private debt in the economy. This build up slows down economic activity, and so we later have to have another reduction in interest rates. Then another and yet another after that . If we get it all wrong then there can even be a giant crash in the economy when those who’ve taken on too much private debt go bust and cause their creditors to go bust too.

So, eventually we arrive at the situation, as we have now, where interest rates in much of the western world  are close to zero and they need to go negative according to the theory to stimulate the economy again. Economists with more intelligence are saying “Whoa! There must be something wrong with the theory”. Others with less insight are saying “But this is just the special case of the zero lower bound” and those with no insight at all, or are stupefied by their own political ideology, are ploughing on regardless and calling for the abolition of cash!

Leaving aside the argument that many of us quite like the convenience of using cash, it’s much quicker than messing about with credit cards at the petrol station for example, it is a genuinely bad idea to go down the road of negative interest rates which will lead to an ever increasing build up of private debt in the economy.

Mainstream (ie Neo -Classical and Monetarist in outlook) economists didn’t spot the onset of the GFC because they didn’t  know where to look for the warning signals. The role of private debt in leading to booms and busts was denied. Expanding the “money supply” was the only standard remedy for stimulating economic activity and the risk of creating asset bubbles was largely ignored with disastrous consequences.

I may come back to the question of private debt in the economy later but for now I’ll just reference Prof Steve Keen’s excellent blog on the perils of debt deflation.

The world owes $57 trillion. Who the F*** to? Mars? Jupiter? #2

{Note: I am making a start towards getting everything written down in some sort of logical order. So apologies if I’m not saying anything new !}

It’s high time for some clear thinking on the subject of debt.

Take a look at any financial newspaper, any mainstream TV business program, most economics and political websites and the subject of debt looms large in most, if not all, discussions. We are constantly told how that debt is a huge problem for us all. We might know from our personal experience just how bad it is to be in so much debt that we can’t afford to repay the interest, let alone the capital repayments to reduce the loan itself.

The take-home message everyone is given is that the world is in deep financial trouble and that if we don’t knuckle down and fix the debt problem, the debt problem will fix us. It seems we are due to fall over the edge of that fiscal cliff in the very near future if we don’t get our act together.

Certainly the world does face future problems of resource depletion and possible climate change. But these are quite different from the problems we see regularly reported in the mainstream press. In America, the concern is that their National Debt is now over $17 trillion

Image There is story after story in the US media about how this isn’t sustainable. How its just not realistic to keep borrowing from China and Japan. In the UK the situation looks bad too!

Image

Lets take a look at just how much of a surplus the Chinese and Japanese have managed to build up over the past few years.

Image

This looks odd.  but it looks like Japan is broke too! What about China? Surely they must be in the black!

Image   No. They don’t look to be doing too well at all. This is not what we were told. What about all those exports? So what about the world as whole? Surely that must net to zero. The creditors and the debtors must be equal.

World

No, it obviously doesn’t. So just what’s going on? All the wonder economies are in debt too. Germany is in debt ($3 trillion) Singapore is in debt ($400 billion) Do we owe all this money to the extra-terrestrials?

There is no need for anyone to worry, at least in my opinion, that we have to keep our extra galactic creditors happy. They are not going to send in the bailiffs and repossess our planet. If I am ever proved wrong about that, they will not be at all interested by the digits in our computers , or the printed pieces of paper we call money. It will the resources of our planet which might interest them and I would expect they, unlike many of us Earthlings, would be smart enough to appreciate the difference between money and resources.

They should also be smart enough to know that all money is created by crediting and debiting accounts, and that money functions as a unit of account, medium of exchange, store of value, and record of debt. Every debt has a corresponding credit denominated in the unit of account of that jurisdiction, so that all debt as someone’s liability is someone else’s asset, which nets to zero. Since money is not only someone’s debt (a payable) but also someone else’s credit (a receivable), it is just as true to say that the world owns over 57 trillion in financial assets, expressed in USD, as it is to say that the world owes 57 trillion in financial liabilities.

If there were no credit-debt relationships, that is, if all financial liabilities were extinguished, then there would be no money, and exchange of goods and services would be reduced to barter. (Acknowledgements to Mike Norman).

Do politicians not understand all this themselves?  Don’t they understand that all governments have to be in debt? That would be stupidity. Or do they understand all this very well but just like to scare us all with these huge numbers? Do they deliberately lie to the very people who pay their salaries? At least under their own understanding of economics they do 🙂    That would be criminality! Which is worse?

To understand why this is the case, that debts are just another way of expressing assets,  we need to start right at the beginning and take a look at what money is and why it has a value.

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!

………………………………………………………………………………….

@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.

Three Sector Balances Haven’t Gone Unnoticed by the Economic Mainstream

MMT incorporates the concept and emphasises the importance of the sector financial balances model of aggregate demand. It is a simple concept. The public sector, the private sector and foreign sector surpluses/deficits net to zero in any measured time period.

It causes neo-liberal types some problems. They probably do not like the idea of a public sector deficit being a necessary condition for a private sector surplus. They would like to pretend that the public account and private sector can be in strong surplus simultaneously. That’s impossible except for those countries who export much more than they import. So I wouldn’t expect to see three sector graphs offered up for public consumption by the mainstream media any time soon.

They are pretty good indicators of how the share market might perform though so naturally they can’t be totally ignored!

http://business.financialpost.com/2012/12/11/goldmans-top-economist-explains-his-big-call-for-the-u-s-economy/

For what it’s worth I would agree that its a good time to buy shares. Watch that black line (the private sector) in the first graph. When it bottoms out, it will be a good time to sell!

If previous experience is anything to go by, the indicators will be completely misinterpreted for popular consumption. The reduced future public sector deficit will be hailed as a great success by various western  governments.  There won’t be any mention that this will mean the private sector will be overstretched. There won’t be any warnings of the next slump to come. The experts will be telling investors not to panic and prophesising soft landings etc.  You’ll know what I mean. You’ve heard it all before!

PS If anyone does really well from this advice I’m not too proud to accept tokens of appreciation!