3spoken

UK: Vacancy Ratio and People Wanting Work - Mar 2013

2013-05-15T19:13:00.001+01:00

People wanting work. There's a definitely drop from the peak, but overal the number of people in the pool isn't going down that much.

The ratio of people out of work wanting work to vacancies. This continues to fall, and the vacancies seem to be with larger companies.

The UK participation rate.

This is the ratio of those 'in the labour force' (ie unemployed and employed) to the household population. It differs from the ONS's 'employment rate' in that it doesn't exclude those over 65 (although over 65s who want a job are still classed as 'retired').
This is still historically in very high territory.

Source: Office of National Statistics, tables MGSC (ILO Unemployment Level Ages 16-64 - Quarterly seasonally adjusted), LFM2 (Inactive - wants a job - Quarterly seasonally adjusted), YCCX (Part time workers - reason for working part time, could not find full time job - Quarterly seasonally adjusted), AP2Y (All vacancies - Quarterly seasonally adjusted), MGSL (LFS Household Population - all aged 16 and over - Quarterly seasonally adjusted) and MGRZ (Employment Level - all aged 16 and over - Quarterly seasonally adjusted).

The misuse of the fiscal multiplier

2013-05-14T07:17:00.000+01:00

The misuse of the fiscal multiplier effect is beginning to annoy me and it's about time that the record is set straight on the issue.

You are seeing classic lines like this :

Tax cuts are only one third as effective as government investment in new capital spending projects

and the propaganda is then backed up by some magic number calculation that shows the multiplier is 1.5 for capital spending and 'only' 0.5 for tax cuts. Obviously the bigger number is better because, well, it always is isn't it.

On the other side you have this belief that if the multiplier is less then 1 for any activity then you shouldn't undertake it.

Let's expose the assumptions those statements are based upon:

There is a fixed amount of money available
If the government spends from this fixed pot of money, it automagically crowds out an alternative activity with a multiplier of one.
That you can ignore the effect on the distribution of savings.

All of those beliefs are rubbish.

Let's look at what the multiplier is first so you can understand what is underneath the numbers.

The multiplier is fairly straightforward. If the government gives money to somebody then they will spend some of it and save some of it. What they spend likely causes a real transaction to occur - and an amount of taxation. What they save will either go to reducing debt or building up financial savings. And in either case the banking system retains what isn't taxed away as bank reserves.

What is spent becomes somebody else's income. Rinse and repeat.

The calculation of the multiplier however only adds up the GDP impact of the transactions over a time period. It is silent on the impact of extra savings caused by the process. And that is where the problem starts.

Firstly it biases the multiplier against tax cuts. The mathematics of the multiplier demonstrates that clearly. It's standard knowledge in simple Keynesian Models that the tax multiplier = 1 - spending multiplier.

So obviously the fiscal multiplier for a tax cut is going to be less than equivalent government spending. That's because you are, as a matter of policy, allowing extra savings first before any consumption happens. Duh!

Secondly the debate is always based upon an amount of government expenditure. Function finance thinking shows this is putting the cart before the horse. Rather than saying how much output can we get for £10bn of government action, we should be saying given we have a GDP output gap of £80bn how much do we need to deploy on the various policies to get that - given the multipliers and savings/income distribution of those policies.

Thirdly there is this idea that government actions inevitably prevents private sector action. This is crowding out again. Endogenous money theory demonstrates that the money supply is elastic. It goes up and down as required by the demands in the economy. You won't run out of money. So if there is stuff stood idle, it can always be brought into use without affecting anything else.

So suggesting that government action with multipliers less than one shouldn't happen is nonsense. It ignores the value of net-savings. It ignores the obvious point that a do-nothing alternative means that nothing additional happens.

Relieving the burden of debt on individuals is a valuable action. It makes them feel more secure and therefore more likely to spend in the future. It reduces the size of bank's balance sheet in the economy and allows you to narrow them more easily - diluting their economic power so that they are no longer too big to fail.

I think that's something we should be looking at doing. Yet you'll still get people pointing out that it has a low fiscal multiplier and we'd be better off building bridges to nowhere instead.

There's more to this game than GDP I feel. The distribution of net-financial assets matters.

Why Citizens Income/Universal Pension/Income Guarantee can't work

2013-05-13T07:26:00.000+01:00

Sometimes I find the quality of debate depressing. In this paper, supposedly on idleness, there isn't a single mention of generating a permanent direct job programme that ensures that people have something to do. It's all indirect and hairy fairy. Irritating. Stick tax rates up on rich people and give it to the poor; that'll cure it. Nirvana will be with us by Tuesday lunch. Honestly, the ideas haven't really evolved since Robin Hood's days.

If the market equilibrium processes worked we wouldn't need to intervene.

Stuff for people to do doesn't turn up magically - it has to be created and organised. You can't just give people money and expect it all to sort itself out. The economic system has systematically failed to create adequate work for people to do. Why on earth would anybody think that if you just shuffle the cash around it would magically create an adequate standard of living? It's a pipe-dream.

If there is one thing to be taken from MMT it is that there is no direct connection between money and stuff. The monetary circuit and the real production circuit have no direct link. Instead the process operates more like electrical induction. Sometimes the flow of money induces lots of efficient real production, sometimes the same flow of money induces nothing of real benefit at all.

Assuming a one-to-one correlation between money and stuff is a dangerous simplification that will lead you into error.

I'm very grateful that Pavlina Tcherneva has taken the time to write up the argument for why we need a proper Job Guarantee - an alternative job offer available to all at the living wage working to further the public good - that helps anchor the monetary and real circuits together. And I can do no more than offer a quote from that paper - which I would encourage you all to read in full.

For a genuine transformation within the marketplace or the household, an active agent of change is needed. Income support programs are passive agents of change – they make their recipients invisible and hide them from the sphere of most socio-economic life. Even if income afforded greater degree of freedom to individuals, transformative changes occur when individual action is harnessed by institutions that can propel the collective interests forward. The JG is just such an institution—it puts human needs first and redefines what is “efficient” from what is “profitable” to what is “socially useful”. It engages its members directly in the goal of advancing the public purpose and is therefore a program that promotes inclusion.

Funding for Lending for Dummies

2013-04-24T20:15:00.000+01:00

For those following the UK developments you may have heard trumpeted the news that the fabled Funding for Lending Scheme (FLS) is being extended to January 2015. But few understand what it is, or what it does.

And importantly what it doesn't do.

So I thought I'd try and shed some light on the system.

FLS is a discount window that banks are less embarrassed to use. There is huge embarrassment about the discount window in the UK - primarily because it has only just been invented here. Prior to 2008 there wasn't really one in place, and after that the banks have treated it like the financial version of an STD clinic. In contrast the FLS offers a good chunk of four year money at a very low rate to those who fulfil the criteria and the government sector is encouraging its use.
FLS is really 'funded' by HM Treasury. As you can see from the graphic above the 'money creation' is actually initiated by HM Treasury - in that they create the 9 month Treasury Bills and lend them to the Bank of England, who then lend them onto the FLS participant. Conveniently that doesn't show up on the Bank of England balance sheet, as it's a 'Stock Lending Transaction'. See how the consolidated government sector MMT analyses is used when required, despite all the Wizard of Oz style smoke and mirrors about 'central bank independence'.
FLS differentiates between different loan types. Banks get access to more funding if they increase their lending over time and even more cheap funding if they lend or cause certain others to lend to SMEs. Which is of course a form of central planning. Bang goes the efficient capital allocation of financial markets theories.
Funding for Lending is more Lending for Funding. Less driving the amount of 'real world' lending forward and more desperately trying to stem the retreat. MMT analysis tells us that so long as the margin between the return on the loan and the rate they would have to borrow from the central bank through the discount window is sufficient, a bank will lend. The continuing retreat in lending suggest that the problem is lack of demand at the current price - even with funding costs suppressed by FLS.
FLS is about setting a limit. The amount of money drawn down from FLS is less important than its expectation effect on the rest of the debt market. The cost of risk funding had been rising prior to the widening of the discount window in this way. Widening the window has returned the cost of risk funding to near what it was previously.
FLS does not affect bank capital. The discount window is a collateral upgrade system. You pledge risky assets and get less risky assets in return - which increases your liquidity. It does nothing about your solvency though. As far as I can see Treasury Bills don't add to regulatory capital, which means that the amount of lending is still capped by the price of obtaining that regulatory capital in the market.
FLS demonstrates that its all about the width and depth of the discount window. How much further does this market manipulation have to go before the powers that be realise that central banks hold interest rates up and set corridors as required. And therefore by far the most rational approach is simply to disintermediate the entire process, with the central bank providing all the bank funding required to those who will narrow their banking business to underwriting those capital projects required by society.

UK Sectoral Balances and Private Debt Levels - Q4 2012

2013-04-04T07:29:00.002+01:00

Apologies for the delay in getting these out. I've been checking the figures to make sure I've got things right. Fortunately ONS published the Economic Review for April 2013, which included a section on sectoral balances. I've adopted their approach of using a four quarter moving average.
Overall the non-government sector is saving to excess driving the government deficit - largely via the automatic stabilisers. Note the rise in the external sector balance.
The five sector chart shows that households are barely saving, and the financial sector is back to net lending - however that may be an artifact of the Post Office pension fund transfer.

And finally the private debt levels:

Private debt levels are holding around the 435% of GDP levels. The financial sector increase in debt offsetting the small decrease in non-financial sector debt.

Source: Office of National Statistics, tables RPZD, RPYN, RQAW, RPZT, RQCH, DJDS (Seasonally adjusted Net Lending/Borrowing per sector plus residual error) and YBHA (Gross domestic product at market prices, seasonally adjusted). Private sector debt based on tables J8XI, NLBC, NKZA, NNQC, NNRE, NNXI, NNXM, NNWK, J8XK, NLSY, NLUA, J8XM, NJCS, and NJBQ (Lending, securites and derivatives per sector, not seasonally adjusted) scaled by BKTL (Gross domestic product at market prices, not seasonally adjusted).

UK borrowed foreign currency from IMF in 1976

2013-03-28T07:04:00.000Z

The 1976 IMF debacle in the UK was a defining moment when the promotion of full employment ended. Fundamentally though it was a political mistake by people who didn't understand that floating the UK pound fundamentally changed how it behaved.

The government was terrified about a 'run on the pound' and wanted to keep an exchange rate of $2 to the £. The panic set in with it got to $1.80. Of course since then the £ has been down to near parity with the dollar at one point and the world didn't end.

It's important to remember that throughout the Bretton Woods era the UK had made frequent use of the IMF facilities to keep the pound in it range. And that is what the UK government wanted to do in 1975 and 1976 using the same old fashioned techniques. But to do that you have to have sufficient foreign exchange reserves. Providing those is what the IMF did throughout Bretton Woods, and did again in 1976.

The difference was the size of the loan - the biggest ever at that point - and the fact that previous drawings had been cleared by that time. Politically it was a huge win for the opponents of the Labour approach to government.

What is amusing is that using fixed exchange rate thinking with floating rate currency areas is still the problem today.

The nature of the loan is described in this document at HM Treasury dated 15th December 1976 and the appropriate section is reproduced below.

The government of the United Kingdom hereby requests of the International Monetary Fund a stand-by arrangement under which for a period of two years the Government of the United Kingdom will have the right to purchase from the Fund currencies of other members in exchange for sterling up to an amount equivalent to SDR 3,360 million. Before making purchases under the stand-by arrangement, the Government will consult with the Managing Director on the particular currencies to be purchased from the Fund.

2. The purpose of this request is to support the policies that have been adopted by the Government of the United Kingdom to strengthen the balance of payments and create the conditions in which it will be possible to get both unemployment and domestic inflation down from the present unacceptable levels and keep them down. The standy-by arrangement will also help to repay external debt now falling due and assist in maintaining orderly conditions in the exchange market for sterling. ...

Quick note on Cyprus deal

2013-03-25T09:18:00.001Z

Interesting that the Cyprus deal has finally come full circle back to resolving the banks that are bust. The one interesting element is that the ELA of Laiki is to be transferred to the 'good bank'.

ELA is Emergency Loan Assistance that is backed by the ECB via the local National Central Bank - because the collateral on offer isn't good enough to access the direct ECB schemes.

Some people have struggled with why that is being transferred. My theory is to do with the assets.

Remember that ELA is collateralised against a set of assets. The Laiki assets were assessed by the Cypriot National Central Bank as being good for the ELA.

So I suspect that the Assets and the linked ELA are being transferred to the 'good bank' to avoid the central bank having to resolve the assets and get the value for them.

Which I suspect would lead to awkward questions about whether ELA should ever have occurred in the first place.

UK People wanting work and vacancies - Jan 13

2013-03-20T18:05:00.000Z

People wanting work

The ratio of people out of work wanting work to vacancies

The UK participation rate.

This is the ratio of those 'in the labour force' (ie unemployed and employed) to the household population. It differs from the ONS's 'employment rate' in that it doesn't exclude those over 65 (although over 65s who want a job are still classed as 'retired').

Source: Office of National Statistics, tables MGSC (ILO Unemployment Level Ages 16-64 - Quarterly seasonally adjusted), LFM2 (Inactive - wants a job - Quarterly seasonally adjusted), YCCX (Part time workers - reason for working part time, could not find full time job - Quarterly seasonally adjusted), AP2Y (All vacancies - Quarterly seasonally adjusted), MGSL (LFS Household Population - all aged 16 and over - Quarterly seasonally adjusted) and MGRZ (Employment Level - all aged 16 and over - Quarterly seasonally adjusted).

A Rational Solution to the Cyprus Issue

2013-03-20T09:01:00.000Z

There is a lot of fluff and nonsense written about the Cyprus bail-out/bail-in deal. It's very difficult to get hard numbers about the depth of the funding problem.

Anyway here's my twopenn'orth:

The banks have bad loans on their books and are insolvent. All the remaining loans have been pledged to the Cypriot Central Bank in return for Emergency Loans Assistance (ELA). So the banks are bust and should be put into administration. They have no free assets left.

At that point the Cypriot government needs Euros to be able to recapitalise these banks and payout on the deposit insurance. Therefore in return for a tighter and narrower banking regulation system and sensible taxes the ECB, et al should purchase the required amount of Cyprus government bonds to cover that cost.

That then allows the transactional and lending functions of those banks to be resurrected by the new bank purchasing the infrastructure of the old bank out of administration. A wide discount window at the Cyprus central bank is likely required to handle the flights between the various banks in the Eurozone - until everything settles down again. That all nets off in the background.

The result is two nationalised banks back on sound footing, and an administration shell that can resolve in the usual fashion paying whatever creditor dividend remains. In due course the new banks can be privatised which would help repay that chunk of the government debt.

Yes this will mean that > 100,000EUR accounts will likely get wiped out. That is what should happen. Saving money in a foreign bank in a foreign currency and/or in excess of the deposit insurance is a risk investment and should be treated as such. To do otherwise is to distort wildly the investment process.

The savings have to come down because the investments failed - Russians or no Russians.

What I find amazing about this last five years is that there is still no rational administration procedure in place to deal with banks that are bust. And that probably tells you a lot about the politics.

The Tri-party Government Sector

2013-03-16T07:29:00.000Z

Currently in the government sector, we have two entities mapped onto two policy ideas:

The central bank runs monetary policy
The government runs fiscal policy

The theology of modern economics is that fiscal policy is 'inert' and that the central bank is all powerful just by moving the overnight interest rate.

That has turned out to be nonsense and the powers that be are now desperately struggling to fit a working system into a model that is simply unfit for purpose.

One option that might just work is a tri-party structure along these sort of lines:

the central bank dealing with monetary policy. Exclusively targeted at maintaining an appropriate level of credit for investment while preventing ponzi schemes developing and asset bubbles. The governing board is a committee of parliament who make actually make the big decisions (based on advice from whatever 'experts' parliament chooses to consult). That deals with the current gaping democratic deficit at the central bank.
the Executive, what is normally called 'government'. Elected by the population to 'do something' (presumably different from the 'other lot'). They gets an account at the central bank and can borrow from the central bank at an interest rate the central bank decides. (Bear in mind the point above that the central bank is controlled by parliament). They are expected to maintain a balanced budget over their tenure and any loans are 'written off' when the electorate finally sacks them (ie there will be an automatic default built into the system which will limit the amount parliament will allow them to borrow). The Executive operation can then be managed more like a normal business/charitable entity which is in keeping with most people's experience - particularly the limited experience of politicians.
A new countercyclical fiscal authority reportable and governed by parliament that can borrow from the central bank at interest on an unlimited overdraft, but also which receives the central bank dividend (so the effective rate is zero). This authority funds the automatic stabilisers and any public facilities that are 'settled' (the NHS, public education, etc) and is tasked with maintaining full employment and price stability. It should probably do its taxing via a land tax and the sales tax. Making any spending the responsibility of the fiscal authority (and removing any spending) would require a 2/3rds vote in parliament.

By separating the cyclical components out and making that 'independent' rather than the central bank, you get the economy stabilised while at the same time allowing the Executive to pursue the plans it was elected to execute.

The fun starts of course when these three entities start pulling in different directions. But that's always the exciting bit when you're designing control structures.

The Insidious Arrangement Fee

2013-02-28T10:10:00.000Z

The excellent post by John Carney on the basics of a bank loan hit a chord with me and brought into focus something that has been worrying me for a long time.

John's post shows that although banks are notionally capital constrained and reserve constrained, it is fairly straightforward to create loans that are self-financing or partially self-financing.

The trick is to realise that banks fund their capital by converting a deposit into a capital instrument. And the easiest way to do that is to create the required capital instrument at the point the deposit is created - when the loan is advanced.

So you issue a loan in the standard fashion - but you charge an 'arrangement fee' and roll it into the loan. That arrangement fee goes straight to the bottom line. The bottom line is the profit and loss account and the profit and loss account is regulatory capital.

Here's a self-funding bank making a £20K loan under the UK regulatory system - covering the cash deposit ratio of 0.11% and an 8% capital requirement with a £1600 arrangement fee.

Self Funding Bank
Assets		Liabilities
CB Reserves	24	Inter Bank Loan	24
Loans	21600	Deposit	20000
		Profit	1600

Now we're not quite at the fully self-funding stage. But the general upward creep in the size of arrangement fees suggests that partial self-funding is already here. Here's today's top buy from my local building society (which incidentally has a reserve account at the Bank of England).

I know as a fact it doesn't cost them that much to set up the loan - even at a fixed rate.

So are there Gresham dynamics at work here. Is a tight capital market and the tyranny of the 'best buy' tables forcing the rise and rise of the arrangement fee - which then undermines the regulatory capital constraints.

Warren is very fond of saying that capital is always available at a price. That price may be somewhat lower than many imagine.

(Full reservist might like to reflect on the fact that bank capital is converted to deposits by the loan process, and those deposits are then converted back into capital based on bank demand. Rinse and repeat. It's an infinite spiral constrained by price in that system too. There's no magic. Just a change in price.)

The New Model Bank

2013-02-24T17:09:00.000Z

In all my years of analysing systems there is one line you hear over and over again.

"That's how we've always done it"

The implication is always that there no possibility it could be done any other way. The assumptions are unchallengeable, the procedures unalterable and the reasoning unquestionable.

Then I come along and I question, challenge and where necessary alter things.

So let's do that with a bank - starting at the very beginning.

Banking is fundamentally a very simple spread operation. You charge more for your assets than you pay on your liabilities. Hence the old 3-6-3 line 'pay 3%, charge 6% and be on the golf course by 3pm'.

So we'll start with those principles for the initial model.

I'm going to build this model within the Sterling Monetary Framework - since that is the one that I'm familiar with and interested in. I want this model to be one that could run as an actual bank in the UK.

The Funding for Lending data page shows the lending size of regulated institutions in the UK. The newly formed Metro Bank is the smallest, holding £78m of lending. So operating at that sort of size it should therefore be possible to obtain regulatory authorisation, a Reserve Account and access to the Discount Window Facility at the Bank of England.

There is no Cash Ratio Deposit requirements for institutions under £500m of liabilities so the capital adequacy ratio is going to be, if I've read the Basel runes correctly, about 8-9%. So £100m of lending is going to require a minimum carrying equity of about £8m. (As a comparison Metro Bank has raised about £120m of equity to set up its operations).

Now as we know on the margins loans create deposits, but as the excellent JKH post shows within the current framework you still have to manage your liabilities mostly within the private sector.

However there is one point that post overlooks - which is that the liability always exists while the loan does. All that happens is that the person that the bank is liable to changes. An example will hopefully demonstrate what I mean.

So initially after you create the loan the balance sheet looks like:

Lending Bank		Transactional Bank
Assets	Liabilities	Assets	Liabilities
CB Reserves £0	Deposit £100
Loan £100		CB Reserves £0	Deposit £0

then the Lending Bank loan customer pays somebody at the Transactional Bank and you get:

Lending Bank		Transactional Bank
Assets	Liabilities	Assets	Liabilities
	Deposit £0
Loan £100	CB Reserves £100	CB Reserves £100	Deposit £100

Then given that Transactional Bank gets just the bank rate of interest from the CB Reserves it will try and lend them out, and, importantly, the only taker will be Lending Bank (let's assume for simplicity this is the only loan in the clearing period we're analysing). So you then get.

Lending Bank		Transactional Bank
Assets	Liabilities	Assets	Liabilities
CB Reserves £0	Deposit £0	Inter Bank Reserves £100
Loan £100	Inter Bank Deposit £100	CB Reserves £0	Deposit £100

So the net result of the decision by the initial borrower to pay somebody at Transactional Bank is to force Transactional Bank to become the replacement depositor in Lending Bank. (That's 'force' in the sense of maximising income from the excess reserves).

That gives us the first cut of a new model for a Lending Bank - outsource the expense of managing retail deposits to Transactional Bank and just use the overnight market permanently to cover off the mortgage loans made. The interest rate hedge is that the loans made are simply charged at a percentage above the overnight rate.

Currently the best tracker on offer is priced at 1.88% above. Running that through the model with an average expected loss ratio (which is generally less than 0.5% of the outstanding book on these types of loans) seems to show a reasonable return on equity. The costs of running this loan model will be very low - particularly if you push the loan origination out via the brokers so that origination costs scale with turnover. You then get paid for your underwriting talent.

By creating the loan in an entity with a reserve account you pretty much force the system to loan you the matching deposit for as long as the loan exists. Therefore it doesn't seem to make any sense to pay a time premium for longer term money.

So would this work? Thoughts welcome.

New Keynesian? More like New Procrustean

2013-02-19T08:59:00.002Z

The problem with mainstream economists is that they have a model that they believe in. They believe in it absolutely. It has become part of their core identity. And because the model is pure and perfect in their eyes it is therefore obvious that everything in the world must be adjusted to fit the model.

So we end up with governments that have their hands tied, we end up with persistent unemployment and we end up with silly inflexible system designs like the Euro.

And when the real world throws up endless evidence that the model is utterly wrong, the mainstream economists scream that, no, the world must be forced back into the model.

And so we have Greece effectively stretched on the rack, we have unemployed living in pipes and the Spanish youth left to wander the streets scratching a living and their heads.

Under a New-Keynesian economic system there must be suffering so that the purity of the model is maintained. And since this religion fits with the views of those with the money and power it is funded and propagated.

This is a Procrustean attitude. There is one average size of bed and all must be made to fit it.

A different viewpoint though yields the obvious solution. What we need is a bed that is big enough for all. This is what the MMT approach shows us.

We can have jobs for all and sufficient income for all. There is no need for poverty. And very likely without having to 'tax the rich' either. So we all win.

Let's harness the output we're leaving on the table. Let's stop chopping people's feet off to fit the New Procrustean bed.

Let's make the bed big enough for all of us.

Musings on MMT - Firming Up The Soft Bits

2013-02-09T13:49:00.001Z

Many moons ago I did a post about the soft bits of MMT - those where it wasn't 100% clear precisely what happens. I've had a few people mention these points recently and this post brings my thoughts up to date.

It's important to realise that you can never understand the current system completely, and you certainly can't be 100% sure what will happen when you change it. It's always a balance of probabilities game.

In systems design this leads to the classic barrier to change - knowns as 'analysis paralysis'.

You spend ever increasing amounts of time studying the current way of doing things because fundamentally you're frightened of proposing a change and getting it wrong. So nothing ever happens, or things change underneath you rendering your studies obsolete.

So you can only ever get to a point where you know enough so that you can manage the risks. Then you've got to try something and see if it works - backing out if it doesn't. Otherwise nothing every changes.

I think we're at that point now where we know enough about the current model that we can get on and build solid proposals for a brave new world.

We're ready to try something.

So let's see where the state of the art suggests we are at the moment.

Quantity vs. Price Expansion

I've read around quite a lot on this point and when combined with my own experience of how businesses and customers actually work in the field I think its pretty clear that an economy that is depressed will tend to quantity expand first. And in service led economies that will be even more marked. It's rare to find a hairdresser who can't squeeze in another head of hair.

You have to believe in unique equilibrium fantasies to think that it can do anything else. Once you understand that businesses always have a degree of spare capacity the current 'productivity conundrums' go away and instead you have a rich field ripe for quantity expansion of output. Output that is there for the taking if you can just get enough monetary flow through the system.

Essentially the reason nobody gets rich speculating in socks, because there is almost always going to be capacity to make more socks.

The key here is to design policies that allow as much quantity expansion as possible to occur and to guide production towards needed elements within society. Which is one of the many things the Job Guarantee does.

That is not to say that the supply side isn't important. I feel that relying on demand side or supply side exclusively is a mistake. The system will feel tightness from both sides on occasions and policy needs to be able to deal flexibly with both issues.

Effect on the Exchange Rate

The problem here I think is a matter of viewpoint. The world is a closed system. Each individual monetary area operates within that closed system. So if you press in one area, the results of that will pop up somewhere else in the world.

The world can be modelled as an interacting set of non-convertible floating rate monetary systems (with pegged nations treated as part of the currency area they are pegged to). So that means for your currency to go down all the others have to go up. It only takes the central bank of one of the other areas to start buying your currency to halt that decline.

And if a currency area has an export led policy, then they will intervene to assist their exporters by providing liquidity in the currency the exporters actually want - their own. This is pretty much what the Swiss did against the Euro, and frankly as the Chinese central bank does against pretty much everything.

So I think the driver is not so much demand for your currency, as desire to access your market by foreign exporters. And that is obviously linked to how wealthy your country is perceived by export-led nations.

So if somebody suggests that your currency will collapse if your local government intervenes in the economy, they will need to explain why the export nations that are responsible for your trade deficit would allow that to happen.

What exchange rates do is difficult to predict (they will 'fluctuate' - to borrow a phrase). There is no overarching theory of exchange rates in economics that stacks up with the empirical data.

But certainly the idea of a sudden unstoppable collapse because you're trying to improve the lot of poor people is just another example of playing the fear card.

Cost Push Inflation

As I mentioned in the previous post this is essentially down to demand for goods and services from outside of your currency area. Demand your policies are unlikely to affect.

So I think the previous suggestion of strategic buffer stocks to smooth out rapid fluctuations is as good as any. Certainly the idea that you can leave it to the futures market is likely to be a mistake. You need to have the physical product in hand.

In case of extreme supply shortage you can use a system that is know to work very well indeed - rationing. It got us through the Second World War.

Wealth Concentration

Money is power and I think our current situation demonstrates that in spades. The question is how to fix it.

It's important that we defend the principle of one person one vote. And that very likely means we have to pay our politicians very well indeed.

Because if we don't, then somebody else will.

The problem with that is that most people thing paying politicians out in buttons would be too much. They are held in such low esteem. So its not an easy problem to fix.

Beyond that I think it is imperative that we make the game harder to play. It should be more of a challenge to get wealthy. Think of it as going to Level 2 on a video game.

So build the equality into the distribution system as far as you can, starting with reversing the decline in the wage share and preventing the excess build up of ponzi private debt by getting the banks into line.

Cheetahs would tell you that they'd love their gazelle meat on tap. But indulging that just makes them fat and lazy. Really cheetahs like chasing gazelle and the faster the gazelle the more enjoyment there is in the catch.

The limits of MMT

It's important to remember that MMT is a macro monetary theory. It is not a universal solution to life's problems. It can only make sure there is sufficient monetary flow to ensure that real production is as much as it can and try to stop build up of problems in debt and wage distribution.

Addressing the other problems, like the limits to growth and measures to stop us boiling the planet, are a whole separate debate.

Those are my thoughts. Feel free to add yours below.

Government borrowing explained: a guide for urine drinkers

2013-02-03T15:34:00.000Z

Calling all chronic Urine Drinkers and Dung Eaters. I'd like to explain government borrowing for you.

Don't think that applies to you. Think again.

All the water you drank today was sewage in the recent past and very possibly excreted by the person sat next to you right now.

Their output made your coffee possible. That and the stewed cowpats in which the coffee grew.

Still thirsty?

Water operates in a cycle, and therefore starting at any point on that cycle is as valid as any other point. But the emotional impact is vastly different.

The standard water cycle always starts with evaporation. Even the pre-treatment of water to make it drinkable is barely mentioned, and we certainly don't go into the mechanics of what happens after you flush.

But wind that cycle back a stage and you can immediately generate a severe disgust reaction. So much so that even in areas with a severe shortage of water any attempt to use our advanced technological knowhow to short-circuit the evaporation/precipitation part of the cycle gets a label: "toilet to tap".

And that tends to stop any rational debate on the subject stone dead.

Precisely the same trick is used with government spending. Government spending is just like the pre-treatment of water. It is an artificial intervention into the natural system that stops people and businesses dying unnecessarily. It is why we have an advanced economy rather than all of us having to stew our own cowpat juice.

And, like water, any spending in a credit economy creates a form of effluent that has to be dealt with by an active intervention. These are the excess saving desires of the non-government sector. They have to be sorted out or everything starts to go very smelly very quickly.

And it is all a cycle. Government spending generates a taxation flow or an amount of excess saving 'solids' that has to be processed by the government sector to stop it causing paradox of thrift problems.

Opponents of this advanced technology then invoke the 'toilet to tap' line to create a disgust reaction - simply by winding the spending cycle back a step.

They imply that government spending depends upon borrowing and they call the excess savings the Public Sector Borrowing Requirement.

Since in our society borrowing is considered dirty, if not outright sinful, it tends to stop any rational debate on the subject.

Our advanced water treatment mechanisms allow us to augment the natural process. Without it our population would be decimated by our own effluent and our standard of living would be dire. Many in the world are still without it. Unnecessarily.

Similarly advanced fiat money technology augments the natural spending cycle. Without it our economies would be in depression and our standard of living much, much lower.

Never let the philistines win the argument with their emotional trickery - on water or money.

Trying a new look

2013-01-27T07:59:00.000Z

A few people have commented that I have a few posts on here that get hidden away and should be on the front page. So I thought I'd try the new dynamic view options in Blogger and see whether that helps.

UK People wanting work and vacancies - Nov 12

2013-01-23T19:00:00.000Z

More support for MMT's external sector analysis

2013-01-05T09:41:00.002Z

One of the points that comes out of MMT's floating rate analysis is that when export-led nations and import-led nations trade with each other there is a tendency for the export-led government sectors to accumulate net-savings in the import-led government sectors. This is due to liquidity action and intervention by the export-led nations in support of their exporters.

Ambrose Evans Pritchard in the Telegraph describes this incorrectly as a currency war (Switzerland and Britain are now at currency war, Daily Telegraph, 3 Jan 2013). He states 'The Swiss and UK central banks are effectively fighting a "low intensity" currency war against each other' without realising that this is essentially the normal state of affairs. It's just that at the moment it can't slip under the radar because the effects are large due to the level of net savings in all the economies.

The graphs in the article are instructive though - showing clearly how the Swiss are loading up on other country's 'debt' to keep their currency down. What MMT suggests is that this, plus the interest paid on it, is unlikely to see the light of day again. Because to do that would be to invite your own currency to rise - to the detriment of your export sector. So these financial assets essentially become 'prisoners of war' - held in Stalag Central Bank Ledger and out of circulation.

Only a policy shift away from an export-led economy would change the balance - at which point the nation is wanting to sell less abroad and more at home. Which of course reduces imports naturally in that nation's trading partners.

So it's not the US that is 'special', and its not Japan that is 'unique'. It's a general phenomenon - certainly amongst the wealthier nations.

Henry Ford on Wages

2013-01-02T11:56:00.002Z

A pertinent quote I think given that benefits are now being attacked because they are going up faster than wages.

I have learned through the years a good deal about wages. I believe in the first place that, all other considerations aside, our own sales depend in a measure upon the wages we pay. If we can distribute high wages, then that money is going to be spent and it will serve to make storekeepers and distributors and manufacturers and workers in other lines more prosperous and their prosperity will be reflected in our sales.

My Life and Work – an autobiography of Henry Ford, pp 86

UK Sectoral Balances and Private Debt Levels - Q3 2012

2012-12-22T09:29:00.000Z

Q3 2012 Figures are out.

Normal service is resumed in Q3 after the Q2 post office pension transfer anomaly. Overall the non-government sector is saving to excess driving the government deficit - largely via the automatic stabilisers.

The five sector chart shows that the the government deficit is divided fairly equally between the business sector, external sector and households. So its a general level of excess savings desires in the non-government sector.

And finally the private debt levels:

The big news here is that the UK has started to relever in 2012. There's a definite trend emerging there now.

Source: Office of National Statistics, tables RPZD, RPYN, RQAW, RPZT, RQCH, DJDS (Seasonally adjusted Net Lending/Borrowing per sector plus residual error) and YBHA (Gross domestic product at market prices, seasonally adjusted). Private sector debt based on tables J8XI, NLBC, NKZA, NNQC, NNRE, NNXI, NNXM, NNWK, J8XK, NLSY, NLUA, J8XM, NJCS, and NJBQ (Lending, securites and derivatives per sector, not seasonally adjusted) scaled by BKTL (Gross domestic product at market prices, not seasonally adjusted).

Micawber Job Rule

2012-11-24T09:22:00.000Z

Number of workers: 20, number of jobs: 19, result misery.

UK people wanting work and vacancies - Sep 2012

2012-11-14T10:06:00.001Z

UK people wanting work and vacancies - Aug 2012

2012-10-17T11:11:00.000+01:00

Endogenous money matters - a summary.

2012-10-02T09:27:00.002+01:00

I think it is worth summing up Philip Pilkington's excellent post on why endogenous money matters

Mainstream believes:

that there is a mechanical relationship between the amount of money, the interest rate and the level of investment
that for every borrower there is a saver
there is a fixed supply of funds available in any economy at any given time and if the government borrows those funds to pay for its deficits, the private sector will not be able to borrow them

The endogenous view is different

there is never any mechanical relationship between the amount of money in the system and the rate of investment. Yes, if the interest rate is lowered this may have effects on investment, but these effects are highly indeterminate and always reliant on other variables (like confidence and the outstanding level of effective demand)
banking in a capitalist economy is inherently and structurally unstable. It is not distribution that matters so much as it is the institutional arrangements of banks themselves. If banks are able to issue credit whenever bubbles begin to inflate in the economy, thus accommodating their expansion, it simply does not matter whether savers are saving – the credits are simply entries on computer balance sheets.
Crowding out, can never ever be a problem in an economy where the central bank sets a target rate of interest. Interest rates will always be set by the central bank and private sector actors will get access to funds at this price regardless of how big the government deficit is. In this way the quantity of money in the system is never fixed, but fluctuating with regard to how much private sector demand for that money there is at any given point in time

The endogenous nature of money has to be worked with in any policy design. Trying to pretend a Cheetah is a vegetarian and treating it as such is bound to cause problems. You have to work with the nature of the beast. Cheetahs like chasing Gazelles and eating them. You might not like that, but that's the way it is.

UK Sectoral Balances and Private Debt Levels - Q2 2012

2012-10-01T08:00:00.001+01:00

Q2 2012 Figures are out. Apologies for the delay in getting these up - it's been a busy week at Wilson Towers.

The figures are skewed this quarter due to the nationalisation of the 'Post Office Pension Fund'. This has been a massive £28bn transfer from the financial sector to the government sector. What it does show though is that it is possible to 'pay off' the national debt by nationalising pension funds (which are mostly Gilts anyway) switching them from an 'invested' basis to a 'pay as you go' basis.

Given that pensions are always a current production distribution problem, you have to wonder which genius thought that offsetting the 'paradox of thrift' for several decades was a good design for a pension system in the first place.

The five sector chart shows the pension transfer much more clearly.

And finally the private debt levels:

Households continue to deleverage very slowly, but private non-financials are still gearing up again.

Source: Office of National Statistics, tables RPZD, RPYN, RQAW, RPZT, RQCH, DJDS (Seasonally adjusted Net Lending/Borrowing per sector plus residual error) and YBHA (Gross domestic product at market prices, seasonally adjusted). Private sector debt based on tables J8XI, NLBC, NKZA, NNQC, NNRE, NNXI, NNXM, NNWK, J8XK, NLSY, NLUA, J8XM, NJCS, and NJBQ (Lending, securites and derivatives per sector, not seasonally adjusted) scaled by BKTL (Gross domestic product at market prices, not seasonally adjusted).