Monday, 13 December 2010

Comedy of the week: A book on economics by Gordon Brown

I was looking in my local bookshop at the latest batch of books on economics. I did a double-take when I saw this:

Gordon Brown was one of the main cheerleaders of the financial bubble. How he has the cheek to lecture anyone on economics is beyond me!

Luckily the book has a reassuringly bad set of reviews on

Wednesday, 8 December 2010

Bill Black

Bill Black speaks with great authority about the Fed and the crash in this interview with the real news network here.

Sunday, 28 November 2010

Mickanomics - the book!

It's about 70% complete and I'm now seeking feedback - you can view the current state of the book here.

Wednesday, 24 November 2010

Definition of the money supply

There seems to be little agreement about how the "money supply" should be defined, and I'm just now beginning to understand why. This can by illustrated by first giving my definition:

The money supply is the sum, for all people and businesses, at any single instant, of the answer to the question "How much money do you have at this instant that you are freely and legally able to buy things with".

At this point you may be thinking that this "definition" is rather sloppy because "freely" is rather vague. My answer to this criticism would be "Exactly! - and that's why economists can not agree of a more formal definition".

Its rather like the problems definition of defining almost any complex item. Say for example a "car". Imagine you had a slicing machine that could cut off thin slices of a car one by one. At what point would the remaining chunk of metal fail the definition of a car... its not so clear. Indeed it makes far more sense to say that its actually a "matter of degree" i.e. as the car gets slices taken off it becomes less and less like a car.

So now as an example, take a debatable point within the definition of the money supply - time deposits. If the time deposits are strictly enforced, i.e. there is no possibility at all of getting your money out early, then clearly this can not be considered part of the money supply. But what if you can take the money out early with some penalty - now its a grey area! Under my sloppy definition, I'd say the the degree to which the time deposit is part of the money supply is a function of the size and form of the penalty.

Saturday, 20 November 2010

The myth of fractional reserve banking and the monetary multiplier

Trying to get to the bottom of fractional reserve banking is hard work. But I discovered an unusually enlightening article here.

Monday, 18 October 2010

New favourite lecture

For a long time I considered Peter Schiff's lecture:
Why the Meltdown Should Have Surprised No One to be the most insightful lecture on the state of our economy you can find on the internet. I've now changed my mind. I'd say it has been topped by Michael Hudson's lecture at the American Monetary Institute in October 2010. To see it go to this page on Steve Keen's blog and scroll down to where it says "Hudson Talk". The viewer is expected to already know about fractional reserve banking and I don't think the lecture will make much sense without that.

Thursday, 7 October 2010


I've said this before, but I'd just like to say it again in another way...

Since the crash and for several years to come, as the leverage unwinding progresses. The things purchased with borrowed money will fall in price relative to the price of things bought with saved money.

Things bought with borrowed money include:

Housing (I'm talking about the price of the house, not the size of the mortgage payments).
Shares (trading on margin).

Things bought without borrowing money include:
Utilities (water, gas,electricity)

Note that in many countries the standard inflation measures (like CPI in the UK) tend not to include (or give much weighting to) things purchased with borrowed money.

Now whether the absolute numerical price of these things rises or falls depends on the rate at which governments pump up their monetary bases. If they pump very fast they may get rising prices in both classes of good. If they pump up slowly there may be falls in both classes. However there is a wide range in between where the price of shares and housing can fall while the price of food and services will rise.

Tuesday, 28 September 2010

How can savings fail?

A concept I have discussed before on this blog is that it is impossible for everyone (or even just a large fraction of the population) to save at the same time. If there is an attempt to do so then the savings will perform less well than people may expect. I have come up with a story to illustrate the point. Imagine a very simple society with only two types of good, Apples and Jewels. These choices are actually surrogates for "Essential, perishable, goods" and "Non essential, non-perishable goods". There is no money, only barter. People normally only ever swap apples for jewels if they have plenty of apples spare and want the jewels simply to wear, look good and show off their status".

Let us say that the apples are grown year round. There are no fridges, so apples can only be stored for a few days before rotting.

One day the newspapers publish an (accurate) prediction that the apple crops will take a marked downturn in a few months time because of an expected weather event, perhaps el-nino or some such. Everyone will now want to "save" so that they don't go hungry. They can not store up apples because they will rot, so instead they all want to buy jewels so they can "sell" (exchange) them for apples at a later date. The jewel/apple exchange rate will rise dramatically. People will see the high jewel/apple ratio and assume that they have lots of savings. Later on the harvest fails and there is a shortage of apples. People will now be forced to start selling their jewels for apples. The jewel/apple exchange rate will plummet. The amount of apples people can buy with their jewels will be disappointing.

Here is a diagram of the situation (click on it to show full size):

Now in the real world the jewels may be a variety of savings vehicles, shares/bonds/money. Unfortunately things are complicated by the fact that the amount of money in the system is variable (due to the magic of fractional reserve banking) but one way or another, in the real world, our current savings are liable to disappoint. Either through defaults, monetary inflation or even both.

Tuesday, 14 September 2010

Bank of England seem confused about inflation.

Yet again the CPI inflation figures are above target. This seems to be confusing the Bank of England who are sure that inflation should be falling because the money supply is falling. Maybe they should have read this blog entry from last year.

Thursday, 11 March 2010

UK jobs - let's do the math

The chief secretary to the treasury has just announced that they plan to reduce government spending by 38 billion pounds per year, by 2014. Let's assume that each government job corresponds to a spend of £35,000 (admittedly a bit of a wild guess). Now 38,000,000,000 divided by 35,000 is 1,085,714 or approximately one million. That's one heck of a lot of jobs to be found elsewhere in the economy!

Monday, 11 January 2010

Mickanomics, the book!

Just in case you were wondering why I've been so quiet recently. The answer is that I've decided to compile my thoughts about economics in to a book. I have decided that perhaps a blog is not really the right format for my ideas. The problem with a blog is that people only ever want to read the most recent entries and I don't think my later posts make a lot of sense unless you start reading form the beginning. Also I think that the discipline of writing a book is a good way to check that my ideas are consistent.

If anyone would like to check out the chapters I have written so far and give me some feedback on errors/style/clarity etc. please just drop me an email to reissgo(at)