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.

 

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!

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.

Never mind the deficit just vote for the recovery!

It’s difficult to know who to back in next month’s UK elections. Europe is a major issue which the most normally sensible parties, or at least the parties who the public normally consider to be the more sensible,  have largely chosen to ignore  in the run up. The events in the eurozone are highly significant, in particular the Greek crisis,  yet those in the most pro-EU parties don’t want to talk about them at all.

There’s next to nothing about it on Labour’s main website, Labourlist, for example.

Funny that!  Those who believe in a united Europe, as many of our more ardent EU advocates clearly do, should feel as strongly about unemployed young people in Spain or poverty in Greece as about hardship in the UK.  Yet, if they ever remember to make a critical comment, it is not because they wish to change anything. The just expired Parliament has seen a complete absence of Labour opposition to any new laws or powers for the EU.

If the UK today had 50% youth unemployment as the south of Euroland currently suffers, Labour would never let us all hear the end of it – and rightly so. If the UK had Greek levels of unemployment, and a Greek cost of living crisis which has depressed average real incomes by almost a quarter since 2007, again we would not hear the end of it, as Labour would rightly think it completely unacceptable. So why is it that these people who believe in pan European solidarity have nothing to say about the scandal of poverty and joblessness in large chunks of Euroland? Why are they not insisting on new policies for the EU?

The situation is far from ideal but it’s probably best to vote for the party who you feel will produce the best recovery. The recovery, when it happens, will fix all deficit problems. Firstly a healthy economy will mean increased taxation revenue. Secondly, if the economy is healthy no-one is going to worry about debts and deficit anyway. The US$ is surging at present as investors buy up $ securities. Are they worried about a $17 trillion (or is it $18 trillion by now?) debt?

I don’t think so. There are those in the USA who can’t make head nor tail of it all and are pushing for a balanced budget. I can’t see them getting anywhere but heaven help us all if they do!

Balancing the Budget !

As election time draws near in the UK , and the US presidential election campaigns start to get underway across the Atlantic,  we’ll no doubt hear a lot about this topic shortly, if we haven’t already.  Apologies if you’ve heard this all before but the political and economic mainstream still don’t grasp it. Political parties will accuse their opponents of making “unfunded promises”, and of having “black holes” in their budgets etc . Nations’ finances will be likened to a household.

Except that Sovereign Governments, like the USA and UK are issuers of currency. They aren’t at all like a household. If a household has a deficit of say £10k pa then, generally speaking, spending cuts of £5k coupled with an extra £5k of earnings will fix the problem. How many times do we see see the same logic applied to countries too? It never works. It can’t work. Governments afterwards wonder why. It isn’t difficult to understand:

Money coming into the Private Domestic Sector , which is essentially what we all think of as “the economy” can only be from two sources. Government spending directly into it (Gsp) , and payments from overseas for exported goods and services. How can anyone possibly think that reducing Gsp isn’t going to affect Taxes paid? Every £ or $ collected in tax originally comes from Govt spending.

The ability of the economy to deliver taxes to the government has to be directly related to its income. Reducing its income will  make us all poorer and reduce our ability to deliver those taxes.  Spending cuts won’t do anything like as much towards reducing that deficit as is usually supposed.

How much simpler could it be?

And yet if the “balanced budget” cretins get their way what will happen?  The government will makes cuts, tax revenue will fall and the deficit will end up not much different to what it was previously. The cretins will then argue they didn’t make enough cuts and that they’ll need to make more on the second round. And so it will go on, with increased levels of unemployment and business failures at every stage.

We just can’t let this happen. It’s madness.  Instead of forcing the budget to “balance”, we should should look at balancing all the money flows to maximise our economic potential.

Germans don’t understand how currency unions need to function.

The economic clash between Greece and Germany is invariably portrayed as a clash of cultures. The majority of Germans resent what they see, and are assured by those who should know better, as a bailing out, at their expense, of those in the southern peripheral European countries who appear to be unable to manage their economic affairs as well as they can.

      

That seems a perfectly commonsensical point of view but raw ‘common sense’, as always, in economics cannot be relied upon to be the best guide. Our common sense is invariably derived from our own micro-economic experience. The principle that it is better to be in surplus than deficit, for example, works fine for us as individuals in the micro world, but taking a wider view, that commonsensical notion is inconsistent with the basic accounting principle that for every asset there has to be a debt. For every surplus there has to be a deficit. Not everyone can be in surplus and not everyone can be in deficit.

So we need to correct our ‘commonsense’. Physicists, like Angela Merkel who therefore can have no excuse,  are used to doing exactly that. They know that their commonsense viewpoints of the world will only take them so far. It fails completely after that. Anyone who has studied Maxwell’s equations, Quantum Mechanics or Einstein’s Relativity knows that these subjects can make your brain hurt! After a while, we have to come to the conclusion that it is better to try to understand via the mathematics of it all rather than understand completely.

It is nowhere near as bad in economics,  but still just a little lateral thought is required. The easiest way to understand what needs to happen in the single currency eurozone, is to make a comparison with what already does happen in a successful currency union.

Let’s take a look at how it all works in the USA. The United States has, as we all know,  a common currency but also  a Federal Government to conduct macroeconomic policy, and transfer surpluses from the wealthy parts of the US to the poorer parts. It transfers surpluses. It does not arrange loans, except perhaps for special projects. If it did, the wealthier parts of the USA would end up as massive creditors. The poorer parts would end up as massive debtors. There would be clashes between New Jersey, the wealthiest state, and Mississippi the poorest.  I had to look this up , by the way. I suspected that Mississippi might be the poorest but I had no idea which was the wealthiest. I had thought maybe California. That’s as it should be. It should not be like it is in the Eurozone where the wealthy states never tire of letting everyone else know who is paying the bills.

So, imagine New Jersey  providing big loans to an impoverished Mississippi, dictating that it implement  privatisation of public assets at knock down prices and drastic cuts to state spending, pensions, its education service etc to be able to repay those loans.  The Mississipians and the New Jerseyites would be saying exactly the same things about each other as the Germans and Greeks are saying now!

So, just as any transfer of funds between New Jersey and Mississippi has to be just that, ie a transfer and not a loan,  so too it needs to be between Germany and Greece in the Eurozone.

The German taxpayers may well not like that idea. It certainly would not have been properly explained to them just what they were letting themselves in for when the Euro was created. No politician in any of the Eurozone countries would have dared make that explanation! It would have been career suicide. There were economists around who did their best to explain it all but they weren’t listened too.

It is too late for that now, but the reality of what has been created, in their name now needs to be recognised and understood by all. Some rethinking is in order. That has to start with the Germans,  then the Dutch and then everyone else too. The sooner the better.

Greece hasn’t got a debt problem. It has a lack of growth problem!

At something like 175% of annual GDP it is easy to think that Greek public debt is out of control. But, let’s look at it another way. If Greek GDP had stayed the same as 2008 levels instead of falling by 30%, and also assuming current levels of debt, the ratio of debt to GDP would now be 175 x 0.7 = 122.5% Which might still be a little on the high side, for a non sovereign currency issuing country, but it would be looking a lot more manageable.

If Greece had instead grown its economy by the same amount, the ratio would be 122.5/1.3 or 94%. OK still a little high, maybe, but not the catastrophe the Eurozone has on its hands at the moment.

The key to managing Greek debts is help enable Greece to service  them. There’s no real need  to pay them off with interest rates as low as they are.  That can be best achieved by growing the Greek economy. So what’s the problem? Why isn’t the Troika (the IMF, ECB and EU commission) encouraging the kind of economic policies in the Eurozone peripheral countries which would encourage growth rather than economic austerity which, in both theory and practice, can only produce economic contraction?

The Troika shouldn’t be in any sort of conflict with the Greek  government. Both should be wanting exactly the same thing. Unless Greece comes out of the crisis ahead, no-one gets paid and so no-one else comes out ahead either!

PS If you agree with this post, please re-blog it, tweet the link, wp.me/p42SCg-Q7  ,  post up on your Facebook page, or whatever else you can think of to spread the message. No attribution is needed. We need to show solidarity with Greece right now. It may well be us next!

 

Germany vs Greece: The battle commences!

Well done Syriza and well done Alexis Tsipras! The only way is up from here. Surely the economic crisis can’t get any worse for Greece! We’ll see.

The German population will have been fed a steady stream of disinformation on reckless, untrustworthy, lazy Greeks who agreed to borrow money they had no intention of ever repaying and which they have now squandered etc etc.  It’s all nonsense of course!

So where to now? If Greece’s creditors wish to see any of their money back, there has to be a recognition  that something has to change, and notwithstanding any useful improvements that might be made to the Greek taxation system, primarily that change has to come from the Germans and the EU governing class. The Germans, and others, have to realise that if they want to run a trade surplus, which they seem to like doing,  (it was about 7% of GDP the last time I looked), then they should be actively encouraging other countries, including Greece,  to run deficits. The larger their deficits the higher the German surplus.

Naturally, those trade deficits translate into government budget deficits too. That way the Greek government spends Euros into its economy so that ordinary Greeks will be able to afford more German imports and so further increase German trade surpluses.

If there sounds to be an element of  Alice-Through-The-Looking-Glass about all this, and that  everything is working backwards, that’s because there is. As Alice put it:

“If I had a world of my own, everything would be nonsense. Nothing would be what it is, because everything would be what it isn’t. And contrary wise, what is, it wouldn’t be. And what it wouldn’t be, it would. You see?”

Well, no not quite. And, neither do we quite see the point of Germany insisting that Greece and everyone else in  Euroland runs a surplus too.  How can Germany ever be repaid when it always wants to run its own, even bigger, surplus?  Why does it even care  about being repaid in money it can never spend? Germany, and German creditors,  can only ever be repaid when it decides to change its ways and run a deficit in trade and a deficit in its Government budget.

In the world of international trade, debts can only be repaid in things.  ie real goods and services. If Country A exchanges more things, for fewer things, with Country B, so putting Country B into debt, that debt can only be repaid, at some time in the future if Country B gives Country A more things than it gets back.

So, the battle isn’t just between Greece and Germany. It’s between German neoliberal economic stupidity, otherwise known as  ordo-liberalism,  and the idea of scientific rationalism.

As Alice, herself said:

“It would be so nice if something would make sense for a change! “

 

 

Revaluing the Swiss Franc

There seems to have been rather a lot of surprise over the recent revaluation of the Swiss franc. (CHF).  It jumped about 30% at one point against the Euro but has now settled back slightly. To quote the Guardian :

” What is really baffling is that absolutely no one predicted the SNB’s sudden change of strategy.”

There shouldn’t have been any surprise. It had to happen. The economics are very straightforward.

The Swiss were running a 16% of GDP trade surplus. What is the point of that? What’s the point of swapping more goods and services for fewer goods and services, year in year out?  Unless the Swiss Population, individuals and companies, are saving huge amounts even a moderate budget surplus is likely to represent quite loose fiscal policy. So there was some inflationary risk. Swiss unemployment is reportedly at about 3% which would tend to support that view.

The Swiss were in the position of shipping out useful goods and services in exchange for foreign reserves denominated in pounds, dollars and Euros which they can never spend until they decide to become net importers. In addition they had to keep their exporters happy by creating extra Swiss francs to pay them.

We will have to wait and see if the Swiss will let their currency float that freely. They will probably still manipulate it downwards to maintain an export surplus, albeit a smaller one. But, even so, they could have started to realise that imports are a net benefit and exports are a net cost to any economy. Theirs included. Maybe the Gnomes of Zurich have been reading Bill Mitchell and Warren Mosler!

The Euro Cannot Survive Without Greece!

The consensus of opinion of the ‘great and good’ of European politics and economics is that the Euro can now survive perfectly well without Greece. The Germans aren’t going to succumb to blackmail this time as they did in 2012. They have since worked out what needs to be done.  If the Greeks want to go then ‘good riddance’ seems to be the underlying message.

http://www.dw.de/germany-prepared-to-let-greece-leave-eurozone-if-voters-reject-austerity/a-18169442

Have they really thought this through? Maybe they have and aren’t saying quite what they think. That’s probably why they are being so hard on Greece and are doing  their utmost to try to ensure Greek voters change their minds and vote for one of the ‘sensible’ and ‘responsible’ parties like New Democracy of course!

It will all change after the election result if Syriza win. The Greeks will get all they want and more besides. Sure, technically the Eurozone would probably be better off without Greece, but what if the Greek economy starts to improve once they have left the Euro? It can hardly do any worse. Economic output is some 25% below its 2007 peak. Unemployment is running at close to 30%.  Wages are down even for those lucky enough to have a job. There’s no possibility of any significant growth any time soon under the present economic system.

Anyone who understands MMT knows that the Greek economy is almost bound to improve after the initial shock of leaving. A new Greek currency will make the Greek islands ultra competitive. German, and other, tourists will flock there. The Greeks will need to take some lessons on board. They know they need to improve their taxation system. They know they can’t expect a free ride and they’ll have to do whatever it takes to make their new economy work. It should become a matter of national pride for Greece that it does work. That would wipe the smile off the faces of those smug and self righteous individuals  who have pointed the finger at Greece with accusations of laziness and other racially based slurs.  As the economy improves their currency will rise again, just like it did in Iceland after the shock of the 2008 events.

The powers-that-be in the EU will know this too, deep down. Their worry will be that Ireland, Spain, Portugal, and even France and Italy will see that being outside the Eurozone is working for Greece and will want to be outside too.

That would certainly bring about the end of the Euro. They can’t allow that. Or can they? We can only hope!