Tuesday, 14 October 2014

If you think Positive Money's ideas are crank, you should see the conventional wisdom

Written by Ralph (Guest Author) on . Positive Money .Blogger Ref http://www.p2pfoundation.net/Transfinancial_Economics

Positive Money http://www.positivemoney.org/uk

Just in case you thought Positive Money’s ideas are a bit cranky, they nowhere near as cranky as some of the ideas that make up the conventional wisdom in economics. Here is a selection of truly crackpot ideas which for some extraordinary reason are accepted without question by leading members of the economics profession and the powers that be. I’ll start with interest rates.
The recent recession, like most recessions, was sparked off by excessive and irresponsible borrowing. So how have the authorities responded? By cutting interest rates to record lows – with a view to bringing stimulus via . . . . wait for it . . . . more borrowing!
You couldn’t make it up.
The above absurdity is a bit like the emperor with no clothes. The folk looking at the emperor with no clothes got so used to the sight that they ceased seeing anything absurd. Likewise, most of us are so used to mantra about interest rate reductions being a good way of dealing with recessions that we fail to see the absurdity.
A second, and possibly even more hilarious bit of nonsense is Keynsian “borrow and spend”.
The idea here is that government borrows and then spends the money borrowed. This allegedly brings stimulus. The big problem here is that taking money away from the private sector (borrowing) and then channelling it back to the private sector in the form of more spending quite possibly has no net effect. The tendency of the above borrowing to negate the effects of the above spending is commonly referred to as “crowding out”. And there is very little agreement amongst economists as to how serious this crowding out problem is.
But even if “borrow and spend” does have a net effect, there is still a nonsense involved, as follows. The government of a sovereign currency issuing country (e.g. the U.K., U.S., Japan, etc) can create or “print” any amount of money any time. Now what’s the point of borrowing something (i.e. money), when you can produce it yourself for free? Even worse, what’s the point of borrowing money from OTHER COUNTRIES and paying them interest for the privilege of having something you could have produced yourself for free? Darned if I know.
It’s a bit like a dairy farmer buying milk in a shop when there is a thousand gallon tank of milk right outside the farmer’s back door.
Of course there is the possibility that too much money is printed, which leads to inflation. But there is no reason to suppose that the effect of spending £X borrowed from China will have any different effect to spending £X produced by the Bank of England out of thin air.
As David Hume pointed out in his essay “On Money” 250 years ago, simply creating new money is not inflationary: it’s the fact of spending that money which may cause inflation.
A third absurdity is quantitative easing (QE). This involves giving cash (produced out of thin air) to the rich in exchange for their securities. Now what’s the reaction of the rich going to be? No prizes for guessing the answer.
What they WON’T do is what we want them to do: raise their weekly spending, which would raise demand and create jobs. The spending habits of the rich are not much influenced by changes in the value of their income or assets.
What they WILL do is purchase other assets with their newly acquired pile of cash. That is, they’ll try to buy other securities – hence the stock market appreciation. Or they’ll seek investment opportunities abroad, which messes up other countries: exactly what has happened as a result of QE in the U.S.
And a final big question mark over QE is this. What exactly is the West doing trying to boost its economies by stuffing the pockets of the rich?  First, this does not exactly sound like social justice. And second, in a recession, it’s the ENTIRE economy that needs a boost, not just specific sectors, or specific sectors of the population.
A fourth bit of crackpot nonsense, popular with the political right on both sides of the Atlantic is that cutting the deficit raises “confidence” which in turn induces people to spend, which in turn gets us out of the recession.
Now I ask you, what does the average household do before deciding to spend a bit more? Do they keep a keen eye on the government’s deficit, or on the other hand do they look at their bank balance, their wage or salary, or how much unused credit they have on their credit cards? It’s staggering that I even need to ask the latter question.
Apart from dropping nukes on cities so as to provide re-construction work, I can’t think of a more hopeless collection of anti-recessionary policies than the above. When we eventually come out of this recession, will it be because of various governments’ anti-recessionary policies or will it be in spite of those policies?
And finally, I’ve been thoroughly negative above, which prompts the very reasonable question: do I have any better alternative? The answer is “yes”: Modern Monetary Theory (MMT). MMT does not involve interest rate reductions (the first absurdity dealt with above). It does not involve “borrow and spend” (the second absurdity). And it does not involve the third or fourth absurdity mentioned above.
However, explaining MMT takes hours or several thousand words, and this is not the place for that. Click here to Google “Modern Monetary Theory” if you are interested..
The main point, to repeat, is that if you think Positive Money’s ideas are crank, they are no more crank than the conventional wisdom.

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