Its my Friday Lay Day blog and I have several deadlines on other projects coming up like today even! But I am sick of the Economist Magazine being held out as a voice of moderation and sound analysis. It has always been a merchant of so-called free market myths and adopting the conservative, anti-government intervention line. It claims that it “offers authoritative insight and opinion on international news, politics, business, finance, science and technology”. It frothed lovingly when Margaret Thatcher was running her wrecking ball through the UK under the guise of ‘reform’. It didn’t say a word when the financial market deregulation that her government and its successors, including Tony Blair’s New Labour, set in place and fostered, started to turn ugly well before the crash that started the GFC. It is not moderate at all. It has come to the Attack Corbyn Campaign somewhat later in the piece but better late than never I suppose. It article (September 24, 2015) – Murphy’s law unto himself – is a disgrace. Its reveals that the Econmomist is a tawdry little rag that feigns understanding but reveals ignorance. This article is really just a spewing out of some poor undergraduate mainstream macroeconomics textbook chapter or two without any guile or deeper comprehension.
It is an attack on the so-called (and badly named) People’s Quantitative Easing (PQE) that Jeremy Corbyn proposed in his – The Economy in 2020 – manifesto.
I considered PQE, which I prefer to call Overt Monetary Financing (OMF) in some detail in these blogs:
Note Stephanie Kelton added a G to the OMF and thought that was funny (Overt Monetary Financing of Government). I laughed too!
Scott Fullwiler also added this knowledge on September 14, 2015 – Corbynomics 101—It’s the Deficit, Stupid!.
There was an interesting article on OMF (PQE) – Time for “Quantitative Easing for People instead of Banks” (PQE): Raining Money on Main Street – from Ellen Brown on September 23, 2015 that is worth a look at.
Once you get your head around the material in those blogs then you will see how poorly crafted the Economist Magazine article really is.
Anyway, the Economist Magazine, with the intermediate macroeconomics textbook opened on the desk, says that:
To recap on PQE: it is a radical twist on a policy that the Bank of England has pursued since 2009. Instead of using newly created money to buy government bonds, as happens under ordinary QE, Mr Corbyn seems to want the BoE to use that cash for more productive purposes, by buying bonds from a proposed national investment bank.
Which is its first major error.
OMF is not related to QE. They are fundamentally different operations with fundamentally different impacts on the non-government sector.
The differences are (see PQE is sound economics but is not in the QE family:
1. QE does not change the net financial asset position of the non-government sector at all – that is, the net wealth remains unchanged. It is an asset swap. The non-government sector just rearranges is wealth portfolio – more cash, less bonds. No net change.
That is the essence of a – monetary policy operation – which alters the liquidity in the economy. It does it by portfolio swaps and in doing so influences the interest rates and the term structure.
2. PQE (or OMF) means the central bank, as one part of the consolidated government sector, the other being the Treasury, would use the currency-issuing capacity of the government to facilitate the purchase of real goods and services to build productive infrastructure.
The NIB is just a fancy title for a government agency and would be engaged in public spending – that is, in a fiscal operation. It would be spending out of some account the Bank of England created on its behalf and filled with numbers, presumably with many zeros after the first few digits.
PQE is not QE because it is a fiscal operation, which means it would increase the net financial assets in the non-government sector because it would increase national income (via spending on infrastructure).
PQE as envisaged is a fiscal operation, not a monetary operation, whereas QE as practiced by the Bank of England, the Federal Reserve Bank of America, the Bank of Japan etc are not fiscal operations.
That is a fundamental difference and so the arrogant assertion that PQE is just a “radical twist” on QE is plain wrong and betray the ignorance of the writer. I suppose the intent was to get the “radical” in there somewhere early in the article to ensure the reader was already feeling a little insecure about Jeremy Corbyn proposed policies.
The rest is immature undergraduate stuff – the sort of stuff that indoctrinated students regurgitate in examinations thinking an uncritical rendition of some erroneous textbook they are using is what constitutes education.
First, there is the attack based on PQE’s alleged compromise of central bank independence. The Economists trots out the usual line that central banks are largely independent and that is good because “it makes it less likely that politicians will engineer a pre-election boom”.
You know the line – the crazy politicians will go and spend like drunken sailors with all that central bank money so they have to have some unelected officials in the central bank stopping them.
But the reality is that governments appoint central bank offiicals (boards etc). In many nations, the elected government can change the monetary policy decision if it doesn’t like it. Yes, this would create a major issue but it can be done.
More importantly, and apparently not understood by the Economist author is that every single day the government (treasury/finance) and the central bank are in close dialogue about the patterns of government spending and taxation and the impacts those patterns will have on the state of liqudity in the system.
The central bank needs to manage that liquidity in order to ensure its monetary policy targets are met.
So, in practice, they work together which makes the appeal to ‘independence’ look a little wan.
Please read my blog – The sham of central bank independence – for more discussion on this point.
What the conservatives don’t like is the fact that the proposal frees up the government to spend without rising public debt. The latter is used by the conservatives as a battering ram to keep governments from acting in the best interests of the wider public.
Of course, the conservatives also want rising debt ratios because public debt is corporate welfare and the elites love to indulge in their risk free annuities. But they don’t let on about that do they?
So where might the Economist article go next. That’s right – we could have written it for them – straight onto the ‘inflation bogey’.
We read that:
… the criticism is really that monetary financing of government deficits is a problem … The problem is as follows. Let’s assume that inflation rises back to 2% … Prime Minister Corbyn wants to build lots more houses. With PQE, he could lean on the BoE to buy the debt that he had issued to finance those investments. Now, the link between money supply and inflation is far from precise; but you can see why there might be a big problem with allowing the prime minister simply to print money to finance deficit spending. At some point, increasing the money supply will boost inflation to unwelcome levels; and, no matter how much you hate them, international financiers will worry if the BoE’s independence seems compromised.
We might ask the writer to explain why Japan hasn’t had hyperinflation given its expanding money supply over the last twenty or so years?
The crucial phrase is “At some point, increasing the money supply will boost inflation to unwelcome levels”. And what point might that be?
The only constraint that the government would have to be aware of would be the limits of the available real resources that it seeks to deploy in productive ways.
When that limit is reached, any further boost to nominal aggregate spending – no matter where it comes from – will add to inflationary pressures.
Why would the government keep increasing the growth of its spending once the economy was beyond full employment and was no longer able to increase output?
But it is false to claim that increasing the money supply will be inflationary. That is Monetarist nonsense. The money supply can increase continuously without there being any inflationary pressures.
OMF does not increase the risk of inflation.
The reason they keep making these false predictions is that they rely on two textbook notions – one which is just plain wrong while the other has limited applicability during a recession.
The first notion is the rather technical sounding concept of the ‘money multiplier’, which links so-called central bank money or the ‘monetary base’ to the total stock of money in the economy (called the money supply).
The second notion then links the growth in that stock of money to the inflation rate. The combined causality then allows the mainstream economists to assert that if the central bank expands the money supply it will cause inflation, which is their prima facie case against OMF.
As is often the case, many financial commentators who wax lyrical about the dangers of OMF do not even fully understand the theoretical route that is alleged to link central bank monetary expansion with inflation.
Please read my blog – Money multiplier and other myths – for more discussion on why the money multiplier is a flawed concept and inapplicable to the real world.
The second flawed aspect of the antagonism against OMF relates to the mainstream theory of inflation captured by the so-called Quantity Theory of Money (QTM).
The QTM links the expansion of the money supply with accelerating inflation. It is the most intuitive part of the neo-liberal story and the one that resonates with the public.
While the QTM was formulated in the 16th century, the idea still forms the core of what became known as Monetarism in the 1970s and is the principle reason for the taboo against OMF.
The QTM posits that an expansion of the money supply causes inflation because it adds nominal spending growth to a fully employed economy.
The only way the economy could adjust to more spending when it was already at full capacity was to ration that spending off with higher prices. Financial commentators simplify this and say that inflation arises when there is ‘too much money chasing too few goods’.
The main problem with the theory (there are several) is that capitalist economies are rarely operating at full employment. The Classical theory essentially denied the possibility of unemployment.
The fact that economies typically operate with spare productive capacity and often with persistently high rates of unemployment, means that it is hard to maintain the view that there is no scope for firms to expand the supply of real goods and services when there is an increase in total spending growth. If a firm has poor sales and lots of spare productive capacity, why would it hike prices when sales improved?
Thus, if there was an increase in availability of credit and borrowers used the deposits that were created by the loans to purchase goods and services, it is likely that firms with excess capacity will respond by increasing the supply of goods and services to maintain or increase market share rather than push up prices.
In other words, an evaluation of the inflationary consequences of OMF should be made with reference to the state of the economy.
If there is idle capacity then it is most unlikely that OMF will be inflationary. At some point, when unemployment is low and firms are operating at close to or at full capacity, then any further spending, whether funded by OMF or some other scheme, will likely introduce an inflationary risk into the policy deliberations.
OMF does not increase the inflation risk at all.
All components of total spending, private consumption expenditure, private investment, exports and government consumption and investment spending carry inflation risk if they become excessive. Inflation is caused by total spending growing faster than the capacity of the economy to produce real goods and services in response.
In that situation, firms have no flexibility to increase production, and thus ‘ration’ off the spending growth by putting up prices. Significantly, the reserve position of the banks is not functionally related to that process.
The central bank can ‘sterilise’ the liquidity impacts of the deficit spending by selling bonds to the private sector. But that doesn’t reduce the inflation risk of the initial spending. It just means the private sector has more bonds and less deposits. The government spending has already occurred. Of course, no responsible government would desire to expand the economy beyond its real limit given the political problems it would face should inflation rise sharply.
OMF thus doesn’t add any new elements to this risk.
On the Economist’s claim that the international financiers would ditch the UK if OMF was introduced – just ask Japan if they cared about them!
Please read my blog – Who is in charge? – for more discussion on this point.
Students in every mainstream macroeconomics class, and that means almost all students, would have predicted, based on the nonsense they were learning, that the high deficits and high public debt ratios in Japan at the time, should have driven interest rates sky high, that bond markets should have stopped buying government bonds, that the government should have run out of money, and all the time that these disasters were unfolding, that inflation should have been be galloping towards hyperinflation.
These consequences did not happen. Why? The mainstream textbooks are largely wrong.
This was a very tawdry little article. The writer should be ashamed of him/herself pumping such garbage out into the public space.
Fun word analysis tool
This little tool – Analyze Words – analyses word usage in terms of personality traits.
It is the work of – James W. Pennebaker – an American social psychologist, who researches how language reflects “basic social and personality processes”.
Here is the science that underpins the results of the tool.
Oversee mass fraud and take home a few mill!
The recently (pushed out) VW boss who is responsible for anything that happens within his company has demonstrated how the corporate world rewards its own – stuff up or otherwise.
Apparently he “is expected to qualify for a €1m (£740,000) annual pension and could also be in line for a €3.2m payoff. Winterkorn’s salary of €1.6m was topped up to nearly €16m last year as a result of bonuses and loyalty payments” (Source).
The only question I have is how many of them will go to prison for extended periods for their criminality.
One of the characteristics of groups that are caught up in their own umbrella of denial is that they become deeply suspicious and paranoid of any evidence that appears contrary to their maintained hubris.
A classic case of this was revealed yesterday in the Australian press. The national broadcaster ABC reported (September 24, 2015) – Tony Abbott’s department discussed investigation into Bureau of Meteorology over global warming exaggeration claims, FOI documents reveal.
What is that about?
Tony Abbott, our recently deposed Prime Minister and now running hard to be labelled the worst PM in our history (and that takes some beating given the bevy of conservative dunces that we have had to mostly deal with), is a climate change denialist.
He scrapped the carbon tax and think coal is the future of humanity.
Apparently in August and September 2014, after the Murdoch right-wing rag The Australian (our only national newspaper) wrote some ridiculous articles which claimed that the Bureau of Meteorology’s (BoM), the national public weather organisation had published temperature data which was:
… wilfully ignoring evidence that contradicts its own propaganda.
The claim was that BOM was deliberately altering historical climate data “to exaggerate estimates of global warming”.
The then PM Abbott, then considered setting up a “taskforce to carry out ‘due diligence’ on the BoM’s climate records”, seemingly believing every word The Australian wrote.
He was advised that “The way the Bureau manages its climate records is recognised internationally as among the best in the world”.
But his office still considered an investigation (‘star chamber’) was necessary to force BOM officials to account for themselves.
The report notes that then the buffoon-like chair of the PM’s “business advisory council” pushed the matter further with a ridiculous article in the conservative press demanding a review of the BOM.
Music – Early Bob Marley
Here is a classic from 1965. Recorded at Clement ‘Coxsone’ Dodd’s Studio One in Kingston, Jamaica. It features a very early Bob Marley and the Wailers (Bunny Wailer and Peter Tosh) with the Soul Brothers Orchestra.
It is the classic rock steady of the era – heavy reverb and gorgeous harmonies. Rock Steady evolved out of Ska during this period and is the precursor to Reggae music. It was slower and more soulful than Ska music.
The Soul Brothers Orchestra emerged in August 1965, just after the Skatalites disbanded (for the first time) and included ex-Skatalites members Jackie Mittoo (keyboards), Roland Alphonso (tenor sax), Johnny Moore (trumpet) and Lloyd Brevitt (double bass).
They were augmented by Wallin Cameron (guitar) and Bunny Williams (drums)
They took over from the Skatalites as the Studio One house band. They played their own music (Ska and Jump-Up) and appeared on stacks of albums from other artists, such as the Wailers.
Their sound developed from the Skatalites as electric keyboards and guitars became the norm.
Anyway, a nice background to typing this morning. I still have the 7″ disk – when records were records!
The Saturday Quiz will be back again tomorrow. It will be of an appropriate order of difficulty (-:
That is enough for today!
(c) Copyright 2015 William Mitchell. All Rights Reserved.