Carol Wilcox, who comments here often and is an able campaigner on land value tax issues, has asked me to comment on why I take issue with Positive Money's (PM) proposals on money creation, and why I think they conflict with modern monetary theory.
The idea I take issue with is this, which PM say is core to their policy proposals:
The central bank would be exclusively responsible for creating as much new money as was necessary to promote non-inflationary growth. It would manage money creation directly, rather than through the use of interest rates to influence borrowing behaviour and money creation by banks. Decisions on money creation would be taken independently of government, by the Monetary Policy Committee (or a newly formed Money Creation Committee). The Committee would be accountable to the Treasury Select Committee, a cross-party committee of MPs who scrutinise the actions of the Bank of England and Treasury. The Committee would no longer set interest rates, which would now be set in the market.
The central bank would continue to follow the remit set for it by the nation's finance minister or chancellor. In the UK this remit is currently to deliver “price stability” (defined by an inflation target of 2%), and subject to that, to “support the Government's economic objectives including those for growth and employment.” The inflation target acts as a limiter to stop the creation of money becoming excessive, but subject to that, the central bank is able to create additional money.
I always struggle to know where to start when faced with this proposal, it is so overwhelmingly harmful. The following are the objections within the constraints of a reasonable length post. They are not necessarily in order of objectionableness: candidly, they all achieve that status.
First, I object to any unelected committee taking control of our economic policy. I object to the current sham of central bank independence and I object to alternatives to it. We elect governments to run economic policy and not unelected 'wise people' whose status may well be challengeable and most of whom will be slaves to some long-dead economist.
Second, I object to inflation being at the core of money policy. Of course it is vital, but most especially to the interests of those with wealth. The object of money creation should be to ensure that there is enough to create full employment and rising median wages. Since the only inflation that money creation policy can control will not happen until there is full employment making inflation the target is to get every priority wrong in that case, and to put the interests of capital over those of labour. And that's not what any progressive should be doing, in my opinion.
Third, this policy fails to understand what money is. Money is, in the modern world, simply a promise to pay. It comes into existence when that promise is made. It ceases to exist when it is fulfilled. So, governments create money when they promise to pay when spending, and fulfill that promise when accepting the money that they create as payment for tax. And bank borrowers create money when promising to make payment of loans, and do so then they repay them. Conversely, banks promise to pay in the future when accepting net deposits: they say they will recreate the money when returning it. But in each case there is no physical thing called money. There is just a promise. That's all. But Positive Money do not appreciate that. They are saying there is something called 'central bank money' and that a stock of this can be created and distributed for use to banks. This is simply untrue: unless there is a promise to pay there is no money and you cannot distribute promises that do not exist between parties that are unaware that they might make them. The Positive Money idea is not possible unless the fourth objection applies.
Fourth, the PM proposal rations money. This is exactly what the gold standard did. It said money was in limited supply and countries were not at liberty to create it at will. The limitation in supply created a price for money - or interest - which rewarded those who had it and penalised those who had not in a form of rent extraction that reinforced inequality. We have been eliminating this rent: in my opinion this is the best explanation for the rapid decline in real interest rates and the reason why they will not increase again: there is no premium to pay for a commodity that is not now in artificially short supply. But, more important than this, the limitation on money availability constrained growth: desirable transactions could not take place because the means to make settlement was said not to exist. But this shortage is also artificial: there is literally no limit to the promises we can make. The only limit is to the number we are able to fulfill. So long as we focus on productive capacity then (and this is critical) the government's job is to permit all the money required to deliver that capacity and not to constrain it by saying that cash is not available. But that is exactly what PM would do: just as in the 30s the gold standard delivered a depression, so would PM.
Fifth, PM would also hopelessly undermine the use of sterling. The reality is that people borrow and spend in sterling because they need to pay their taxes, and a banking system that can create credit to meet their needs lets them do so. As a result the government has macroeconomic control of the economy. But if credit creation was constrained then people would borrow in and use other currencies: they would have no choice because sterling would cease to be credible. Not only would the microeconomic cost be considerable, as would be the risk, but the loss of macroeconomic control would be catastrophic.
Finally, PM are in any case just wrong: all sterling is already created by the government. It cannot, of course, control other currencies but as it stands in a UK context that does not matter: sterling is the invariable currency of choice. And it is created in two ways. One is by government spending, as ably explained here. Alternatively, it appears to be created by bank lending. But this is a chimaera. Banks may appear to do this, but do so only because customers are willing to offer to pay them in the sterling currency the government creates (and no one else does create it) and second because banks are licenced by the government under very strict controls to accept those promises. There may appear to be lost of banks creating money, but there is only one banking system doing, at the heart of which is the Bank of England that already advances funds to lending banks on demand and controls their lending by reserve requirements and specific regulation as well as specific policy e.g. to encourage or withhold mortgages. The idea that banks float free and do just what they want, as banks, in this system is not true. They do as investment banks, but that is something quite different and why the two should not be in one organisation. But to say banks create most money now is just wrong: they don't. They work under the licence of the Bank of England when doing so. PM are tackling an issue that does not even exist.
PM could play a valuable role in campaigning if they understood modern monetary theory, money and its role in the economy. As it is they promote dangerous policies that would reinforce inequality, crash the economy, and undermine any chance of the government directing any recovery. It's hard to think of many organisations seeking to do much more harm than that. Why it thinks itself progressive when doing so is hard to imagine. There is, thankfully, the MMT alternative. It's the only viable option.
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But apart from those details….? 🙂
Not a lot….
Has usual you make some very good points! however if you strip it down to it simplest form when money is created it has to pay itself back and interest, that means the interest can only come from future creation of money that is put to work ,that in itself is inflationary! and with compounded with monetary expansion ,in reality isn’t the only expansion of money the interest charged on the amount created?
What’s with the inflation paranoia?
You miss understand my point i)it’s not paranoia it a point,how does a economy pay back the sum created and the interest it must create inflation of money creation to do so????
Tell me why it needs to do so?
£500 is repaid from the £500 being put to work (Crossing the equation )! if it isn’t put to work then it can’t be paid back(or it can from itself unused) and neither can the interest because in both cases ,since the interest makes it a greater sum than was created!!!!! to be able to pay that has well the money has to exist,even if in the form of debt!
I remain baffled as to what you are seeking to say
So if you created £500 and 3% of that was interest then you would have in the economy the amount of money created so you would be creating the money to pay back the loan and interest,without complicating all your other reasoned arguments but at the moment you create £500 and some magic money tree creates the funds to pay the interest back!!! i agree with you on what you say but this is a positive for positive money surely??? it also doesn’t effect the banks profits ! it just creates and destroys the amount in full!
I am sorry….but I am giving up
You are wholly missing the point of MMT as far as I can see
But to be candid, I can’t see much at all in what you are saying
Money can also be created by the treasury, a la Bradburys. Still government spending, of course. Moving along… ” But to say banks create most money now is just wrong: they don’t. They work under the licence of the Bank of England when doing so. PM are tackling an issue that does not even exist” I’m wondering if the issue isn’t more a concern with which money earns interest for the privately-owned banks and which doesn’t, there being a clear motive (wealth extraction) for those banks and their shills to be pushing for as much money in the economy as possible to have been created by them and thus be, for them, interest-bearing. When the govt commands the BofE to create money for spending into the economy via govt. spending, is that interest-bearing? I would think not and that’s the reason proponents of neoliberal philosophy, witness Osborne (the banking scion), carps endlessly on about the ills of the deficit. I am musing here 🙂
I accept there can be Bradbusry’s, but let’s get real: that’s cash and that’s a different issue (literally)
And the reason why I oppose putting bankers in charge is precisely because they will serve the interests of wealth
Very good summary. A pleasure to read.
So what you are basically saying is that the government should have a printing press (called MMT) and the use of that printing press should be controlled exclusively by left-wing high spending politicians?
I mean, what could possibly go wrong! It’s a wonder nobody has ever tried it before……oh wait.
You make so many basic errors in your piece it is really hard to know where to start.
If you wan to make up something I did not say and then say it’w Wrong, that’s fine: the error is all yours.
There are actually no errors in my piece: this is how the economy works.
It is what you are saying though isn’t it?
You say that MMT means that through People’s Quantitative Easing the government could create new money at zero cost and spend it. An electronic printing press.
You also want the government to have control of monetary policy as well as fiscal policy – you object to the BoE’s unelected MPC committee. I assume then government would have control over monetary policy directly as well then?
Riddle me this then:
You say that we don’t have full employment in the UK, so PQE should deployed. UK unemployment is at a roughly 50 year low. Are you basically saying that PQE should essentially always be used then? If not, what are the limits to it? Can you give me an example of any country which HAS had full employment (and when), by your metrics, if the UK currently does not have it?
You are also saying (and I quote “Since the only inflation that money creation policy can control will not happen until there is full employment”) that inflation won’t be caused by PQE until we have full employment. Yet in that same time period the UK has had periods of much higher unemployment yet also much higher inflation. Which blows a massive hole in the claims MMT is making about inflation – that it only happens at full employment. In MMT fantasy land this can’t happen, but back in the real world it happens all the time.
What would MMT policy be if you have rising inflation yet not reached the full employment target?
I’ll leave the (many) other errors you have made for now – lets just focus on the ones I have pointed out above.
MMT says as a matter of fact that the government creates more than £700 bn a year
And controls it
PQE need never come into it.
And yes, of course I want a single economic policy – it’s madness to have two economic agencies, especially when monetary policy does not and now cannot work
But I did not mention People’s QE for a reason on the piece : you made up the fact that I did. I explained the world as it actually is
And what you are also ignoring is that inflation can be caused by factors other than money creation. Let’s take Brexit as an example. But why should we stop having full employment for that reason? As we can already see, government reaction to Brexit inspired inflation is already crushing growth.
To put it another way, you really do need to be a little more sophisticated in your arguments to win this one – because if you keep making up what I say I will, of course, agree with you that’s it wrong – because you said it, and not me
MMT says a lot of things – doesn’t mean its correct. The change in the money supply is the important part when it comes to inflation, and the government ONLY directly controls M0.
Governments have very limited control of M3/M4 via regulation, but ultimately it is monetary policy – interest rates – which truly controls M3/M4.
And it is worth noting at this point that governments can’t even control the amount of their own currency in circulation apart from the physical note and coin which makes up a tiny part of total supply. Banks can lend or borrow in any currency, as long as those currencies can be freely converted. At the IBRD we could lend in almost any currency. We did most of our funding in USD and EUR. The FX and cross-currency swap markets provided the means for us to do this with no governments or central banks involved.
Yet another problem with MMT, which assumes a closed system where a government can control the supply of its own currency – which it can’t in the real world. How would MMT reduce the supply of a currency if anyone offshore can simply create it at will through the currency markets? Are you going to force exchange controls?
I brought up PQE as that is the extension of MMT you go on to talk about in some of the other pieces I have read of yours. You allude to it when you talk about full employment – and you seem to think that PQE is the only way to get to full employment so…..
BoE does not create economic policy. It reacts to various economic outcomes of fiscal policy to try and achieve a level of price stability. Monetary policy seems to be working quite well. If nothing else, at least it has been thoroughly tested in the real world, unlike MMT based policy, which would likely not work in the real world because politicians are loathe to raise taxes or cut spending, so would be prone to not doing so when required. Let alone the fact that MMTs claims about the causes of inflation, and the distinct lack of any inflation models.
I am NOT ignoring that fact that inflation can be caused by other factors. Quite the opposite in fact. I am saying it is often caused by other factors, so what would MMT do about it? MMT claims you won’t see any inflation until you have full employment. You and other MMTers claim we don’t have full employment (even at a 50 year low). In the last 50 years inflation has been high at times of high unemployment. So would MMT policy be to print and spend more, which would likely increase inflation, or would it be to reduce spending or tax more to reduce inflation, but likely reducing growth and increasing unemployment at the same time.
I am pointing out one of the great fallacies of MMT – that inflation is ONLY about full employment.
I would also like you to give one example of when full employment has occurred. Any country at any time. The reason I ask this is because I am suspicious that your target can and will never be reached, at which point the resulting policy based on MMT just becomes an open ended policy of increased printing and spending.
Let’s assume you’re right (but let’s assume so)
If what you say is correct interest rates control money supply, meaning there is no control left as interest rates are near enough zero and will remain so. So we have no policy at all, in other words
Which may be why we need one
And, thankfully, there is one available and you don’t want to acknowledge it
Oh, and sterling is a closed system: please note the assumptions. No one in MMT says external shocks cannot change the value of sterling. But that’s a wholly different argument, and one you dismiss that I acknoweldge, as ever erronesouly
But the rest is you making up straw men and I have a leaf that means I cannot be bothered with them
Chown,
This the funniest thing I have seen all day:
“UK unemployment is at a roughly 50 year low”.
Thanks – I needed a good laugh.
OK, I am genuinely speechless. Both points you make are absolute howlers.
Monetary policy via interest rates controls broad money supply. It does this by changing the short term funding rates to increase the cost of borrowing. Long term interest rates are free floating, but are closely followed by central banks.
Low or zero interest rate environments does not mean monetary policy suddenly doesn’t work. Apart from the fact that rates can go negative (as they have in several countries) you can also use QE to affect the relationship between short and long term rates. Which central banks did to good effect post 2008 – offsetting the falling post crisis broad money supply.
Most central banks around the world pay close attention to this, and all have a great deal of literature about the money supply and it’s interaction with interest rates and inflation on their websites.
You say MMT can control the money supply though. How would it do this? Increasing the money supply via MMT is easy – just print and spend more. The bit we hear very little about is how MMT based policy would reduce the money supply. MMT can only remove money from the system via taxation. M4 in the UK is of the order of 3000bn. Taxation is of order 800bn. You would have to increase taxes by proportionally vast amounts to manage relatively small changes in broad money supply – and and large money supply increases would simply swamp any ability for taxation to counter it.
Which is one of the many reasons MMT is not seen as a serious method of monetary policy management.
As for Sterling being a closed system. What do you mean, the closed system with freely floating exchange rates, the currency you can raise and settle all over the world and which requires no central bank oversight? GBP is probably the most open currency in the world. If Sterlin is a closed system what would an open system look like? There is literally nothing to stop a foreign bank lending GBP offshore, to another offshore counterparty, and settling the transaction offshore. As long as that bank can fund itself, which it will be able to easily in the markets, there is no problem. Indeed this happens all the time – the GBP is a major global funding currency especially now as US rates have moved higher.
Are you going to answer my question regarding full employment? What level constitutes full employment, and has it ever happened before in the UK or any other major economy? Surely you have a number, or an example you can give us. If you don’t know what your target is, how could you control monetary policy through MMT or gauge how much PQE the economy needs?
If it hasn’t then what you are saying is that MMT says governments should almost endlessly print and spend, and you are implicitly denying the inflation it will cause (as in MMT land you don’t get any till full inflation).
The govt already has a printing press of sorts, two actually, one’s the BofE and the other’s the Treasury. Worth too considering this from the Right Hon. Reginald McKenna, an earlier Coalition chancellor (earlier than Osborne, for instance) in his book of speeches to bankers, ‘Post-War Banking Policy’, “”I am afraid the ordinary citizen will not like to be told that the banks or the Bank of England can create or destroy money. We are in the habit of thinking of money as wealth, as indeed it is in the hands of the individual who owns it, wealth in the most liquid form, and we do not like to hear that some private institution can create it at pleasure. It conjures up a picture of an autocratic and irresponsible body which by some black art of its own contriving can increase or diminish wealth, and presumably make a great deal of profit in the process.”” So it has indeed been tried before, and mostly, in some ways it works.
Of course it was
But most especially so post 1971
Some are just offended by the truth
Richard,
If governments fund themselves through money creation, why don’t we see it in the data? You would see base money supply changing dramatically month to moth if it were the case.
What we do see in the data though is the monthly Public Sector Net Borrowing Requirements (PSNBR), which is the difference between government spending and tax revenues. We also then see the DMO issue short and long terms Gilts to cover any shortfall (on top of rolling any maturing debt).
Just because MMT says something happens doesn’t mean it actually does in real life. Government spending in the UK is WHOLLY funded by tax revenues and debt issuance. There is ZERO funding from money creation.
Of course you see PSNBR – they recover most of the money they create
And the rest they offer to people as a secure savings medium
But I think you’re wasting my time now because next you will tell me the Sun revolves around the Earth
Chown says:
“So what you are basically saying is that the government should have a printing press (called MMT) …”
No, Chown. That’s what there is not what there might be.
“….and the use of that printing press should be controlled exclusively by left-wing high spending politicians?…”
Wrong again. It could also be controlled by high spending right wing politicians as we have witnessed in the past eight, arguably ten, years. No other way to explain that.
“I mean, what could possibly go wrong!…” It could all be targetted in such away that it artificially inflates property and other asset prices to the exclusion of investment in the real economy.
“It’s a wonder nobody has ever tried it before……oh wait.”
Indeed; ‘Oh wait’. You just lived through it being done very badly. So badly it will need to be done again before very long unless I miss my guess, because we’re running out of steam. And there’s only the casino still working. And even that’s looking shaky.
“You make so many basic errors in your piece it is really hard to know where to ”
Ah! The blissful arrogance of ignorance. Sometimes confused with stupidity.
Andy,
Governments fund themselves through taxation and debt issuance. MMT and PQE type policies say a government can simply print all the money it needs. Technically this might be true but it rather ignores the effects of what would happen if a government decided to do this.
Printing more money does not create more wealth, assets or all the the other good things people want to spend that money on.
And before you claim they already have via QE, no, they really haven’t. PQE would increase M0, QE increased M3/M4 BY LOWERING INTEREST RATES. I assume you understand the difference.
I doubt PQE would ever be controlled by right wing politicians. PQE is a left wing high spending policy, with the onus on presenting the benefits but ignoring the many negative side-effects of such a policy.
I also can assume that you are anti-austerity, yet are now attacking the high spending right-wing politicians? Which is it to be?
Please tell me why you think MMT/PQE has never been tried, if it is a cure-all for the worlds economic ills. There are plenty of intelligent people out there, and it’s not like MMT hasn’t been around for a while. Surely some government out there would have had a go, if it could massively increase employment, provide a huge boost to public spending and all at no cost and no risk. Surely it would be a massive vote winner?
You are simply wrong: governments fund themselves through money creation
Maybe you should seek out the flat earth society too
Schofield
I’m not sure what you are getting at. There won’t be any real correlation between DEFICITS and inflation.
There will likely be some correlation between TOTAL government spending and inflation.
There is DEFINITELY a correlation between money supply and inflation. MMT type policies would drastically increase the money supply.
Chown
In a comment you prove how little you understand economic relationships
Or economics at all, come to that
As a time waster I have no blocked you: this place if for informed debate
Richard
Chown. You’ve put for forward an argument. Now produce the evidence to support it with an historical chart showing inflation in the UK relative to government deficit spending. Here’s one for the US showing no correlation:-
https://mythfighter.com/2018/03/17/what-is-the-complex-relationship-among-inflation-deficits-interest-rates-oil-prices-tax-cuts-and-gdp/
If you don’t produce it it seems perfectly fair to say you expressed a personal belief with no evidence to back it.
Chown,
I wasn’t going to waste time on you but seeing that R. Murphy has allowed you to persist with your hysterical, hyperbolic style and your obvious strawman flagellation. I’ll relent momentarily
I get it that you are probably young but that’s no excuse for fabricating a fictional version of MMT (or any other concept) and then proudly condemning a phenomenon that doesn’t exist. It just looks stupid. No one is going feel obliged to defend something they never espoused although they might hit you for needlessly misrepresenting them which is all that you have done here.
Meanwhile I am not going to pick over every single thing that you have got wrong so I’ll pick just 2 of the most obvious:
“Are you going to answer my question regarding full employment? What level constitutes full employment, and has it ever happened before in the UK or any other major economy?”
Full employment existed from the early 1950’s to to the early 1970’s in most of the Western World under Keynesian policies and the Bretton Woods accord. Everyone who knows anything knows that.
Here, you need some “economics help” the first chart here may be of assistance (nice & simple):
https://www.economicshelp.org/blog/780/unemployment/unemployment-rates-history/
Your hilarious suggestion that ““UK unemployment is at a roughly 50 year low” is technically wrong ( 1967, ’68 and ’69 don’t concur) and it seeks to compare our circumstances with a time when zero-hours jobs, systemic casualistion and massive underemployment simply didn’t exist. As Business Insider magazine and the ONS explain:
“There are now twice as many “underemployed” workers as unemployed”
https://www.businessinsider.com.au/ons-underemployment-double-unemployment-rate-2017-9?r=UK&IR=T
And you are probably wondering the government isn’t loudly boasting about its “low” unemployment figures – that’s why. Low unemployment is something that we normally associate with a robust booming economy. What we have now is stagnation stretching from 2008 onwards. And that is not just a perception, it is there in all the other main indicators.
Now as for this: “Low or zero interest rate environments does not mean monetary policy suddenly doesn’t work.”
How ludicrous can you get? I won’t waste time – just google: “Zero Lower Bound” and “Negative Real Interest Rates” then see if you can overcome your arithmetic problem. And no – QE was an emergency measure that, for obvious reasons was never meant to be permanent.
If you are trying to defend Positive Money I would remind you that it is little more than a variation on the failed Monetarist concept that Friedman and Thatcher introduced in the 1980’s and that very few people, left, right or centre, are ever going to be interested in it.
Thanks
‘First, I object to any unelected committee taking control of our economic policy.’
But this is in effect what’s happening under our current money system. People on the boards of the big banks do just that – they control the flow of credit – the promises to pay. In 2008, they turned off the supply because it suited them. And not only are they unelected, they are also unaccountable and unknown (to the public at large).
As to elected individuals being in control of our economic policy:
1.Come on – they aren’t really, are they?
2. PM are talking about the money system as needing a technical fix so that the economy can function in the interests of the majority, not the elite.
3. It’s a paradox that if we let elected politicians directly control the money supply, then they’d inevitably screw it up, because the needs of democracy (their getting re-elected) would lead to unintended consequencies (cf the brexit referendum).
I have long explained the answer to that: it is People’s QE. It is not banking reform.
And no PM are not talking about a fix that will let the economyfunction for the majority – they are putting the interests of wealth at the heart of their policy and are putting an elite in charge of doing so
I can’t overcome your dislike of democracy. I can only despair at what you think might be better. Remember what Churchill said of it: the worst system of government we’ve tried, barring all the others.
That’s unfair. I don’t dislike democracy & I agree with Churchill. But embedded in that quote is a recognition of its weaknesses.
We put doctors in charge of the health service (or should)
We put professors in charge of academia (or should)
We put teachers in charge of our children’s education (or should)
It would be foolish to let half-baked politicians & their cronies dictate how we run such important public services. I mean, if the likes of Gove, Hunt & Johnson were to … oh, no….too late.
All I’m saying is that if you left a here today-gone tomorrow unscrupulous egotist in charge of the till, what could possibly go wrong?
The state we’re in was caused by banks & bankers. But the solution is banks & bankers. But not the ones we’ve got now. Nothing will change until bankers are public servants. That won’t happen until the source of their power is taken away. And that source is control of the money system.
How wrong can you be?
We, of course, put doctors (et al) in charge of the actual supply of services but we put ministers in charge of the service
But on money ministers have abrogated authority to bankers – who have a considerably worse track record
So, of course, we need ministers to be accountable – even if they engage experts to deliver for them (we hope)
Mike W says of:
‘First, I object to any unelected committee taking control of our economic policy.’
But this is in effect what’s happening under our current money system.”
Yes exactly so.
“As to elected individuals being in control of our economic policy:
1.Come on — they aren’t really, are they?”
Of course they are.
Should have gone to Specsavers. It’s not too late.
OK Andy, that was a claim too far. I’ll clean my lenses.
Nominally, formally, ministers are in control. But I ask the question: ‘If you are not in control of the money system, can you ever be fully in control of economic policy?’
And ministers aren’t.
And they should be
[…] Cross-posted from Tax Research UK […]
I agree. In a hangover from the Global Financial Crisis, PM made the mistake of thinking that private bank lending is intrinsically bad.
As explained here
http://www.coppolacomment.com/2017/10/money-creation-in-post-crisis-world.html
a loan is an asset swap where
“the bank converted an illiquid asset (the debtor’s future ability to repay) into a liquid one.”
and both parties benefit, e.g. I can live in my house NOW rather than have to work and save for 25 years first, and the bank can employ people with the interest I pay.
The problem with banks is not their ability to make loans, it is the lack of good regulation and too-big-to-fail.
Agreed
Charles,
I’d be inclined to qualify this bit:
“and both parties benefit”
People in foreclosure or negative equity (for example) may not agree.
Charles Adams says:
“The problem with banks is not their ability to make loans, it is the lack of good regulation and too-big-to-fail.”
I don’t think there is a problem with banks. I think perhaps there are many.
One is the lack of good regulation as you say. If ‘free markets’ were really a good system they would regulate themselves, but they don’t. There’s no inbuilt negative feedback to moderate excesses. (Except violence and theft and we use the full weight of the law to prevent that. Sentences often more severe than for causing personal injury and even death)
Poor regulation is compounded in the housing sector which you refer to, because there is a lack of competition. The banks operate as a cartel and the only alternative is the state and the public sector is not playing at present. It’s out of fashion.
If government won’t spend, the private sector has default monopoly powers over money supply and its cost.
Much to disagree with but I will confine myself to your first point.
As far as I know Positive Money have no opinion on the composition of a money creation committee, the number of members, their terms of office or method of appointment. That’s all a matter for debate, and I see no reason why it should result in a narrow elite.
This committee would not “run economic policy” to any greater degree than the current MPC. Government would still determine the levels and targets of taxation and the size of their deficit – funded by bond issuance.
Wow: talk about nitpicking and missing the point
Who cares who’s on it: it’s wrong in principle
And the MPC does run economic policy
Whilst bond issuance does not – and never will – fund the deficit
You clearly have a geat deal to learn. I suggest watching this http://www.taxresearch.org.uk/Blog/2018/05/05/the-case-for-a-job-guarantee-in-the-uk/
Thank you Richard – from the horses mouth
“bond issuance does not – and never will – fund the deficit”
that makes what you believe very clear.
Because it’s true
Well,
I’ve waited this long to see if anyone would point out the obvious and they haven’t so, lets consider these bits from the Positive Money proposal:
“The central bank would be exclusively responsible for creating as much new money as was necessary to promote non-inflationary growth. It would manage money creation directly, rather than through the use of interest rates…”
“The Committee would no longer set interest rates, which would now be set in the market.”
This has already been done – throughout the 1980’s and throughout most of the Western World. It was called “Monetarism” it was largely conceived by Milton Friedman, it used money supply rather than interest rate targets, became standard Conservative policy and it was a hopeless failure.
At the time conservatives and those that we now call neo-liberals were called “monetarists”. The policy was abandoned by conservatives and everyone else after tight money supply targets resulted in record interest rates and double digit unemployment. Inflation was never as low as 2% throughout the period and a loosening of money supply targets saw inflation peak at 10.9%. The relationship between money supply targets and inflation was always difficult to identify and control.
https://tradingeconomics.com/united-kingdom/interest-rate (click “MAX”)
https://www.ons.gov.uk/employmentandlabourmarket/peoplenotinwork/unemployment/timeseries/mgsx/lms
https://www.ons.gov.uk/economy/inflationandpriceindices/timeseries/czbh/mm23
The Monetarist regime was quietly replaced in the early 1990’s with the current regime that sets interest rates in order to target inflation (“inflation targeting”). That system, as we know, has achieved price stability at the cost of permanent (albeit “lower”) unemployment and asset-price inflation. The inflation targeting regime gave us the GFC and its demise seems imminent as it is now hopelessly stuck at the zero lower bound and has been for years.
MMT and PQE proposals, by way of contrast, erase the distinction between monetary and fiscal policy by proposing the overt monetary financing of govt. spending and investment (subject to inflation constraints). Analysts have put the failure of Monetarism down to many factors, one was its failure to recognise or understand the role of endogenous (private bank) money.
It seems that the Positive Money advocates have a new version of that misunderstanding . If I was to add an additional objection to those that Richard has already raised it is that those that seek to reintroduce a variety of monetarism under new pretences must have short memories and they would do little more than make a bad situation worse.
P.S. This could be better but its worth a quick look: http://www.bbc.com/news/31559074
An excellent additional point
My understanding of the monetarist episode was that inflation was targeted by what was then considered a more direct metric – the broad money supply measures – on the assertion that inflation is “always and everywhere a monetary phenomenon”.
Broad money is created by bank lending and the BofE attempted to control it by means of adjusting the price of money – the interest rate. The Bank would sometimes enter the bond markets in Open Market Operations – adjusting the reserves pool to push market prices towards the policy rate.
In my opinion the high interest rate regimes of the era under monetarism, NAIRU and then targeting the Deutsche Mark under the ERM were really about generating high unemployment in order to drive down wages.
I don’t see anything analogous to what PM are proposing in this.
John says:
“I don’t see anything analogous to what PM are proposing in this.”
Well then you are not looking hard enough. I explained that at the start of my comment with perfectly clear reference to PM’s own policy statement – and I’m not going to repeat that because you weren’t paying attention.
What’s more your “understanding of the monetarist episode” is plain wrong (and lazy) because your references to interest rate adjustment and open market operations are characteristic of the current “inflation targeting”regime . Your “understanding” is a mish-mashed confusion of two different “episodes”
Here, as previously recommended, try this for starters: http://www.bbc.com/news/31559074 , then Wikipedia and work your way up from there.
As I understand it Positive Money now style themselves as a think tank and are less wedded to th idea that a Monetary Policy Committee on steroids should create all money. http://www.progressivepulse.org/economics/does-positive-money-really-think-inflation-is-worse-than-tax.
But any admission that PM do still believe in it means that they think a democracy needs protection from itself. Even if on occasions one might possibly feel that is arguable, to consider that BANKERS should be the ones to do it is compleletly crazy. They’re the ones who’ve been misleading us all this time: think what the founder of the Rothschild Bank, Mayer Anschel Rothschild, said, “Permit me to issue and control the money of a nation and I care not who makes its laws.”
And as Richard Werner further finds in his ‘short side principle’ on anything that is in short supply – the short side wields power. Indeed, austerity too can be seen in that context.
Peter
I should have given your article a nod
I used what they say are their core beliefs – just to make sure I could not get it wrong
And as you note, they really do fall on the wrong side here
If I might say so, you seem to be missing the point when trying to divert attention to other issues
I am bemused
I used what PM said
And as I pointed out, they want a committee of the central bank to make all money
And as I pointed out, as all money is debt, that cannot happen
But worse, if it did, there may be, to quote Franklin, too little money, and that’s disastrous
So in other words PM want a quasi gold standard. And in the process they would encourage the use of alternative currencies because there would not be enough of what we actually need – i.e. money
I am far fro0m alone in this: many would wholly agree, from Ann Pettifor onwards
There is no strawman in my argument: I addressed what PM say and point out that a) they do not understand money is debt and b) their proposal would take us back to a dark age
There is none of the packing in that you suggest exists: no JG, or anything else. Just plainly that they really do not know what money is. It’s debt. And a committee cannot make debt.
You really need to get your head around that fact
PS And if Ben Dyson is at the BoE I’m not surprised: why not employ someone who denies the truth if you want to hold out against it?
First Post here. I am mostly interested in LVT.
Critic says:
‘And it is worth noting at this point that governments can’t even control the amount of their own currency in circulation apart from the physical note and coin which makes up a tiny part of total supply. Banks can lend or borrow in any currency, as long as those currencies can be freely converted. At the IBRD we could lend in almost any currency. We did most of our funding in USD and EUR. The FX and cross-currency swap markets provided the means for us to do this with no governments or central banks involved.’
M0 stuff agreed.How does this relate to domestic currency cheque accounts at M1, we all use to purchase goods and services and pay tax with ? You jump. How does it relate to MMT which will focus on employment and inflation/deflation; using both monetry policy (zero rate) and fiscal policy? Haven’t ‘clever’ people known that you cannot perfectly control bank money creation for years?
From my perspective, LVT often gets the ‘clever people’ have known about it for years; why hasn’t it been tried treatment too. When the hostile critic has tried every other trick in the book. Hmmm.
The point is simple: IBRD is not representative of the real world
The comment is than a case of ‘so what?’
Might we engage with the world in which sterling is used in the Uk?
RM Agreed. MMT just describes the ability/powers of a sovereign state, fiat money issuer, after all.
Second post here,
Hostile critic then says;
‘say MMT can control the money supply though. How would it do this? Increasing the money supply via MMT is easy — just print and spend more. The bit we hear very little about is how MMT based policy would reduce the money supply. MMT can only remove money from the system via taxation. M4 in the UK is of the order of 3000bn. Taxation is of order 800bn. You would have to increase taxes by proportionally vast amounts to manage relatively small changes in broad money supply — and and large money supply increases would simply swamp any ability for taxation to counter it.’
Is it not the case that UK Guv is actually carrying out ‘MMT policy’ even in the quote above? Can every penny of the £3000 bn of M4 hit the shops and car show rooms tomorrow? No. That’s rather the whole point of your Guv bonds then. After all, UK Guv didn’t need to ‘borrow’ from anybody did it?
MMT argument is the rich would prefer to buy bonds and put the money on ice for years, rather than jam today and tax. Fine. We can move/ transform their cash from: M0, M1 to M4 bonds, to inflation target as MMT aims.
MMT/Keynes. Lord Keynes how shall we pay for the war? ‘Why issue War Bonds of course!’ After Guv has already placed tank, ship, plane contracts and has politically decided on Total Warfare. Why? Guv invents money on balance sheet to build Churchill tanks etc. But, the middle class savers will have nothing to buy in civilian economy until after the war is won (a wall of fearful, middle class money, chasing a jar of jam and a bag of chips in the blitz, is a political and social problem even a Tory guv cannot ignore as a ‘price worth paying’).
Different Mike W,
Are you a beat poet?
On Government Bonds and Lord Keynes.
This link is to the Bank of England Blog, Bank Underground. It describes the issue of 1914 War Loan; the famous funding of WWI by the British Empire as a demonstration of its unmatched financial power: £350m of resources, triumphantly raised in short order. Only it wasn’t (I have written about this before).
https://bankunderground.co.uk/2017/08/08/your-country-needs-funds-the-extraordinary-story-of-britains-early-efforts-to-finance-the-first-world-war/
“Financing World War I required the UK government to borrow the equivalent of a full year’s GDP. But its first effort to raise capital in the bond market was a spectacular failure. The 1914 War Loan raised less than a third of its £350m target and attracted only a very narrow set of investors. This failure and its subsequent cover-up has only recently come to light following research analysing the Bank’s ledgers. It reveals the shortfall was secretly plugged by the Bank, with funds registered individually under the names of the Chief Cashier and his deputy to hide their true origin. Keynes, one of a handful of officials in the know at the time, described the concealment as “a masterly manipulation”.
Nothing is ever what it seems. The really interesting feature is the necessity Keynes and everyone who knew were desperate to ensure that the cover-up succeeded. What is really important is not “reality” (although it is), but what people believe (the reality that survives, provided it is not found-out). The second is, frighteningly, the one on which ‘politics’ has come to rely.
I know this case
But your point is, apart from the deception?
The ships were built, the guns were manufactured, the people paid…..
As the main proponent of LVT here;o) I’m using your comment, Mike, to add something which I wanted to say on reading this blog. Drawing a comparison with MMT and PM, I think that Henry George correctly analysed the land market and produced a great policy which has never been implemented – yet. But his followers have made little progress on the original analysis and continue to rely on work from a bygone agrarian age. They have founded a religion and come out with nonsense like ATCOR (All Taxes Come Out of Rent) – using rent in the sense of land rent only and the Single Tax. Even the good socialists I know can’t seem to see that this comes from liberarian thinking
Of course energy is fundamental but I have to agree with RM that it’s a bit diversionary here. I do like your cartoon though!
Roger
I think you are making excuses to publish your own literature
With respect, I am bored by being told what I do not know by you, and candidly, I think you’re promoting some pretty extreme twaddle which has no place here
Future comments will be deleted
Richard
Roger,
I know that I make some long comments but I do try to make sure that they say something (or several things) with some economy of prose .
Yours remind me of those American docu-drama TV shows (like 20/20) where a 5 minute story is stretched out to an hour and sometimes, at the end of it, they are still inconclusive.
Carol, never met an old school ‘single taxer’ on my journey 🙂
Marco never met a ‘beat poet’ can you recommend one? 🙂
Allen Ginsberg 🙂
Hello Richard,
Thanks to your writings on this blog, I am interested in learning about modern monetary theory in some detail. Doubtless your “The Joy of Tax” will contain a fair bit about it (and I will be getting my hands on a copy as soon as I can), but can you recommend any other books on the subject of MMT for the (mathematically literate, in my case) layman? For that matter, do you by chance have any other texts you regard as essential for non-specialists? Thank you very much.
I should add that it is known that the Bank used £113.5m of its reserves to cover the shortfall, but since the overall shortfall was apparently over 67% of the offer (c.£235m), it seems less clear how the rest of the shortfall (c.£120m+?) was covered up. It raises the question whether there was resort to the printing press, although I have seen no specific evidence. I may be taking speculation too far; perhaps someone can explain the “trick”?
By ‘printing press’ I mean double-entry book-keeping. I suppose what I am curious about is this. If there was an element of deliberate money creation in the Bank of England’s manipulation of the 1914 War Loan (I do not know precisely what happened), what did Keynes think was happening? Would he consider it some form of public-sector Ponzi scheme? Some economists appear to have suggested Keynes was a precursor of MMT. Bill Mitchell does not agree (his Blog, 25th August, 2015): “for me the real sticking point against Keynes was his view that fiscal deficits should be balanced over the business cycle and that would allow governments to pay back debt incurred in the deficit years.”
I have mentioned this issue in my post on share valuation today
Bill,
That Mitchell observation doesn’t seem fair. Keynes lived in the era of the Gold Standard in this case there’s little point in saying that he is at odds with one aspect of a philosophy that has fiat currency at its core.
MMT is an advance on Post-Keynesian endogenous money theory (which was recently vindicated by the BoE: https://www.bankofengland.co.uk/-/media/boe/files/quarterly-bulletin/2014/money-creation-in-the-modern-economy.pdf).
And the Post-Keynesian theories draw upon a number of Keynes’ ideas. That’s the link. Bill Mitchell should know that. He probably does and may have been over-emphasising a point.
This is exactly the point I made today
It is also why our Keynes cannot answer our issues now
We need a new fiscalism
Sorry. I meant to address that to John (S. Warren) not “Bill”.
I think Mitchell was doing a little more than “overstating”. The title of this Blog was “The roots of MMT do not lie in Keynes”, and a longer excerpt from the quotation I used, is, in fact relentless:
“My own view is that many of the important insights in Keynes were already sketched out in some detail in Marx. Further, the work of the Polish economist MichaÅ‚ Kalecki was much deeper in insight than the work of his contemporary, Keynes. But for me the real sticking point against Keynes was his view that fiscal deficits should be balanced over the business cycle and that would allow governments to pay back debt incurred in the deficit years. That view has crippled progressive thought ever since and is antithetical to MMT.”
I hasten to add that I have no dog in this fight, but I am really interested what Keynes understood happened with 2014 War Loan, and whether it influenced his understanding of the monetary issues. This seems to me an interesting issue in economic history.
I would have thought MMT was rooted in Lerner, not Keynes
But that would be where I would go
I am not sure why he argues it is in Marx, but then I have not read his discussion either
Richard,
To save you the trouble, that is the sole mention of Marx in the Blog.
🙂
There’s this on that subject in some detail
https://archive.sustecweb.co.uk/past/sustec12-6/extract_from_the_financiers_and.htm
and this more specifically
https://www.independent.co.uk/news/business/news/first-world-war-bank-of-england-war-loan-cover-up-germany-financial-times-a7883171.html
so it appears the war bonds, themselves created from nothing, were purchased by money created from nothing by the BofE, giving our wonderful Establishment the means to obliterate a generation.
Thank you very much for this. I had read the Independent piece, but was still not quite following the trail. I assume they were prepared to use reserves and borrowings, but I am still not clear how the remaining – substantial – shortfall was explained (not least to the secret little group in the know), and I could not pick it up from the BofE Blog. Did they knowingly create the money from nothing? The secrecy surrounding the failure was absolute, and was not discovered for many years.
The Tom Johnston piece is new to me. The plot thickens. I take the War Loan, 1914 which failed and was manipulated, was the November, 1914; 3.5% War Loan. Total amount £350m. I do not think Johnston knew anything at all about the deception. What a tangled web. He is however fixed on the ‘Gold Standard’ and is describing what he thinks is an issue of legal tender with no backing, at the beginning of the War (it reads a little like the 2007-8 Crash). This is fascinating. At the outbreak of War, he goes on,
“Private enterprise banking thus being on the verge of collapse, the Government (Mr. Lloyd George at the time was Chancellor of the Exchequer) hurriedly declared a moratorium, i.e. it authorized the banks not to pay out (which in any event the banks could not do), and it extended the August Bank Holiday for another three days. During these three or four days when the banks and stock exchanges were closed, the bankers held anxious negotiation with the Chancellor of the Exchequer. And one of them has placed upon record the fact that ‘he (Mr. George) did everything that we asked him to do.’ When the banks reopened, the public discovered that, instead of getting their money back in gold, they were paid in a new legal tender of Treasury notes (the £1 notes in black and the 10s. notes in red colours). This new currency had been issued by the State, was backed by the credit of the State, and was issued to the banks to prevent the banks from utter collapse. The public cheerfully accepted the new notes ; and nobody talked about inflation.”
I wonder if anyone among Tax Research UK readers is well-informed about this?
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