Sunday, 17 March 2019

MMT seems to becoming ever more popular recently and I can't really see why. Whilst they do state one or two true things that perhaps some people did not realise - they also spout a lot of incredibly misleading and occasionally downright incorrect stuff. So here are a few examples I came across recently.

1. Randy Wray being very reluctant to say that demand deposits are money. Moneyness is a matter of degree, but if all the things that could conceivably be money were lined up in order of their moneyness, then demand deposits would sit right at the top of the list neck and neck with cash as a near rival. So to have such reluctance to call demand deposits money is just unhelpful.

2. Warren Mosler claiming that QE does not increase the money supply.
This is now the opposite of the Wray problem. Wray was too reluctant to call something money when it blatantly is money and now Mosler is too keen to label something as money when it has rather dubious moneyness - namely government bonds. What percentage of goods and services in our economy is purchased with government bonds? Close to nill I would guess.

3. Randy Wray saying of debt fee money: "it's a non sequitur, it's impossible"
This is simply false. Debt is an IOU. An IOU is a thing which literally or metaphorically has the following form:

I/we/organisation 'X' agree to give the bearer of this thing, some stuff 'Y' at some future time.

The holder of this thing can, at that future time, take the IOU to X and say "Now please can I exchange this IOU for Y". Indeed this exchange will probably be enforceable by law. Once the exchange has taken place the IOU has now done its job and will expire. X may as well destroy the IOU - it will be of no value to them.

So a reasonable test of whether something is an IOU or not is to ask: who is X and what is Y. If you can not answer that then the thing is not an IOU. In addition to that, if Y is simply the same as the thing in question then again that thing is not an IOU.

As an example let us consider demand deposits. Are they IOU's? Let's consider X and Y:

X is: your bank
Y is: cash

The test has been passed, so indeed demand deposits are an IOU.

Now consider coins - i.e. ordinary coins you can buy things with - obviously money. Can you identify X and Y?... Good luck, because I can't. Coins are money but they are not debt.

As another example, take bitcoins which are definitely not debt (Wray says they are not money). This is slightly messy because in recent years their moneyness has diminished but certainly around 5 years ago people were buying and selling goods and services in bitcoin. Unfortunately some design flaws meant that it was a little awkward to use and it tended to be reserved for people of a geeky disposition. But even today there are people (mostly criminals!) that will buy and sell things (mostly illegal things!) with bitcoin. So just as you can say cigarettes are money *in prisons* you can also say that today bitcoins are money *amongst criminals*.

A counter argument I have heard about bitcoin is along the lines of "their inherent value is zero therefore in the long run they will fail" - even if that were perfectly true, that statement is not an argument against bitcoin being money now. Plenty of currencies have ultimately failed due to excessive printing or other issues but that never stopped those same currencies functioning perfectly well as money for many years, perhaps many decades, before their ultimate failure.

Saturday, 18 November 2017

MMT an intellectual slight of hand

Imagine you pour some water into a bucket at a rate of one litre per minute... a minute goes by... how much more water is there in the bucket compared to when you started? One litre more? I hear you say. Wrong! I forgot to mention that there was a hole in the bucket which leaked water at half a litre per minute. What kind of dirty trick is that! I hear you say... well its the same kind of trick used by MMT'ers when they tell you about their beloved "sectoral balances" graph:

The graph seems very compelling - if the government spend $1 billion more then they take in taxes then the private sector has 1 billion more dollars to use... right?... wrong! (hole in the bucket coming up)... the thing they forget to mention is that the private sector can make and destroy money independently of the government via the magic of fractional reserve banking. So the amount of money the private sector has to play with could have gone up by much more or much less than $1 billion. It could even have shrunk. Many people will assume that the vertical axes on the graph corresponds to "money", but it doesn't... instead it corresponds to a rather odd concept of "financial assets" which is not the same thing at all.

It may well be that if you read some MMT books in detail that the precise truth of what's going on in the sectoral balances graph is revealed, but I can't help feeling that the graph is being over-sold.

Sunday, 22 November 2015

George Osborne guides UK on unsustainable trajectory

Ask yourself this question: When have house prices in the UK ever been higher?

According to the Halifax House Price Index, the only time prices have been higher, as a multiple of average earnings, was just in the run up to the crash of 2007/8. And as you can see from the graph below, we are now on course reach or exceed those levels all over again.

So, why should this matter I hear you ask... Maybe house prices will simply flatten out, at some high level and we can just carry on with our great economic recovery... The problem is that a sizeable constituent of the demand for houses is precisely the perception that they are on a rising trajectory. When the trajectory is no longer expected to continue, the enthusiasm for new mortgages drops dramatically and you have a crash in house prices and consequently a crash in demand for new mortgages.

So why should a crash in mortgage demand matter? Surely housing will just be cheaper and we'll all be happy? The problem is, that with our crazy fractional reserve monetary system, the amount of money in the economy is critically dependant on the amount of borrowing that goes on. So a slump in borrowing equals a slump in money. Economists and the media confusingly refer to this as a "credit crunch", but it is more accurately described as a money crunch. Money, quite literally, starts disappearing. As Mervyn King said just after the crash "What the banking system has been doing is destroying money". A shrinking money supply is painful for an economy, and George Osborne is setting us up for just that scenario.

There are ways out of this predicament. We don't actually need rising house prices forever to maintain the money supply. We could actually have normalised interest rates, non-looney house prices and a stable money supply... we just have to fix our crazy monetary system and switch to something sane like full reserve banking as supported by the FT's Martin Wolf.

Monday, 28 September 2015

Not meaning to gloat or anything but...

Mark Carney and other central bankers have been trying to persuade us that higher interest rates are coming any moment now - for years!

Not meaning to gloat or anything but, in my book (published July 2011) I did say: After "bursting of any asset bubble"... "Society can get locked in to low rates, painted into a corner."

Sunday, 14 June 2015

MMT and The Problem with Government Bonds

Proponents of MMT are fond of arguing that the amount of government debt, i.e. the amount government bonds, that a government creates is not a problem. I have to take issue with this idea. The problem is that the interest on government bonds is paid by taxpayers in general, whereas the recipients of the interest are exclusively the bond holders. The greater the government debt, the greater the flow of money from the taxpayer in general to bondholders. This is clearly unfair to tax-paying-non-bond-holders... like me.

A possible counter argument is that the people that purchased government bonds are investing in the government and therefore the rest of us should be grateful for this service, and be happy to repay them with interest payments. The problem with this argument is that the money was not really investment at all. True investment is where you spend money on something that makes future production more efficient, like buying new machinery for a factory. But most of the money received from bond sales is simply spent on running costs, like wages. That's not investment at all.

Monday, 28 July 2014

Share prices with fractional reserve banking

The popular explanation of share prices is that its all determined by “supply and demand”. If the price of something has gone up it must mean that either its supply has diminished, or its demand has increased. It’s all part of a natural stable system. Wise investors are carefully evaluating companies and buying and selling shares accordingly. The government, who claim to believe in free markets, sit on the side-lines and let them get on with it.

IMHO the conventional view is badly wrong and here's why:

Most people would make two assumptions when considering this market:
  1. People buy shares with their money.
  2. If they spend say, £1000 on shares, they will have £1000 less money to spend on other things.
If both these things were true, then share prices may stand a chance of being well behaved and act in the way textbooks may have you believe. But many economists have observed that share prices behave in strange ways. At least part of the reason for this is the fact that neither of the two assumptions is correct. They are incorrect because shares are often purchased with borrowed money, or to be more accurate, part borrowed. Readers of this blog should know by now, that when £1000 is “borrowed” from a bank, that money is created on the out of nothing. There is nobody else in the economy that is deprived of £1000 of spending power. You should get the idea straight away that now something is screwy about the demand side of the supply and demand balance.

Textbooks say that the price of something is what you are willing to give up in order to get something, i.e. the amount of money you will pay for something equals the amount of money you are willing to have disappear from your spending power. But if you are going to buy that thing with 10% your money and 90% borrowed money (a process known as trading on margin) then the textbook concept is busted. Now the amount of money you are willing to pay for something is, instead, enormously sensitive to the interest rate you will be charged for the money you borrow to buy that something.

So now the role of government/central banks, becomes crucial in setting share prices! Instead of standing at the side-lines observing these wise investors analysing the companies, the government is now the dominating factor. If they lower interest rates, then the enthusiasm for borrowing to buy shares increases and their price will rise… and conversely If they raise interest rates, then the enthusiasm for borrowing to buy shares decreases and their price will fall.

By implementing super-low interest rates for such a long time, the government is now stuck in a situation, where returning to normalised interest rates would almost certainly cause a fall (or even crash) in the stock market. Note that I could have made almost exactly the same argument about the housing market too.

The near-zero interest rate policy is in force precisely because of fractional reserve banking and would be entirely unnecessary had we a full reserve system.

Changing to full reserve banking is a key ingredient for making our economy work properly.

Wednesday, 21 May 2014

What nobody is saying about the housing market...

Its seems incredible to me that amongst all the talk about the housing market by Mark Carney, George Osborne and the media, there is scarcely any mention of its connection with the money supply. As readers of this blog should know by now, new loans increase the money supply whist repayments of existing loans shrink it. In the UK, lending is dominated by the housing market. Far more money is lent for house purchasing than for business. Putting these facts together means that the total amount of money that circulates in the economy as a direct function of the state of the housing market. A housing boom corresponds to a growing money supply, whilst a bust would shrink the money supply, just like in 2008. We are now in a very unstable situation. If regulators succeed in bursting the current housing bubble it would either lead to an immediate recession (this is what a shrinking money supply does), or alternatively quantitative easing would have to start all over again.

With this precarious situation, why are the words "money supply" not on everybody's lips?