Is Modern Monetary Theory the Answer?

Reference is made to Transfinancial Economics  RS

JUNE 24, 2020  BY GORDON pEARSON

Economic theory continues to evolve as it always has.  That is partly because the real world economy is itself continuously evolving.  But it is also partly because economic theories are far from perfect, but are retained till something better comes along.

Monetary theory is a highly pertinent example right now, given the evolving role of money. As a means of exchange, it has long been reduced to the role of lubricant for relatively minor transactions, with further reduced usage of notes and coin being trialled during the coronavirus lockdown. As a store of value it has long been outperformed by many alternatives of varying security from property to financial speculation. And its lasting function as a unit of exchange is now largely maintained in electronic form enabling further possibilities.

Neoclassical economic theory emerged in mid 19th century as the inadequate but mathematical expression of self-interest maximising humans, profit maximising businesses and efficient markets free from government regulation which the theory promised would be no longer subject to booms and slumps.

That was the context in which monetary theory was given its first coherent expression by Irving Fisher in early 20th century.  It was in the form of a simple equation of exchange: MV=PT, where M is the quantity of money, V the velocity of its circulation, P the overall level of prices and T the volume of transactions taking place in the given time period.  While the equation is a truism and identifies macroeconomic quantities, their content is largely immeasurable and its various interpretations susceptible to simplistic political debate.

Fisher became notorious for his repeated assertion that the stock market had reached ‘a permanently high plateau’. That was just before the 1929 Wall Street Crash, which was followed by the Great Depression, imposed and prolonged by the continued focus on M with policies of austerity. That was only ended by Roosevelt’s relaxing austerity and focusing on V with publicly funded New Deal job creation schemes aimed at putting money into the hands of the poor, who had no choice but to spend it immediately for their survival, thus increasing V and so generating further economic recovery.

The 1970s stagflation was observed by Piatier as having been caused by OPEC’s 400% oil price rises and the stagnation arising from the maturing and decline of 2nd industrial revolution industries.[i]  But neoclassical theorists argued stagflation to be the failure of Keynesian economics, thus enabling monetary theorists to resume control.  But after two decades of application, even leading quantity advocate Milton Friedman admitted the theory had largely failed.[ii]

The lessons of 1929 had been set aside and forgotten as demonstrated by the relearning experience of the early 21st century, a period referred to as ‘the great moderation’ for which both politicians and economists at the time took credit.  That was just before the 2008 crash, which was followed by a decade of austerity in the real economy, which produced only disappointing results, despite massive Quantitative Easing (QE) for the financial economy banking sector – an estimated $14trillion worldwide. [iii]   

That is the context in which Modern Monetary Theory (MMT) emerged, taking account of the limitations of the former theory as well as the evolving possibilities of money itself.  MMT explains how a government that issues its own currency, can control and guide its economic growth absolutely without monetary constraint. That must be the holy grail of modern economy. It does so by promoting growth when needed by increasing the quantity of money in circulation. It could also slow growth by increasing taxation if inflationary pressures threatened to exceed what is advisable. Control of money supply and taxation can both be selective so that the direction of economic growth can also be set. The avoidance of booms and slumps is thus held to be firmly within the grasp of MMT competent governments. The validity of such assumptions will become apparent over the next few years and hopefully it won’t simply be a repeat of the 1929/2008 learning experiences.

Within that broad model, the explosion of new technologies is enabling governments and central banks access to many more detailed control mechanisms which MMT can accommodate. It is a highly dynamic situation in which MMT will continue to develop or could even be replaced by alternative theoretical approaches. One such, currently being promulgated, is Transfinancial Economics (TFE), which takes fuller account of the technological possibilities of developing QE for the global economy.

At this point in time, the possibilities of economic theory, notably of MMT, appear immense, but unpredictable.  As always, the theory is underwritten by political considerations which were previously focused on the M-V dichotomy.

Now, the extreme possibilities of new technologies, make the Real and Financial economic divide absolutely crucial.  The Real Economy is what could produce the needs and wants of everyday life for all people within an environmentally sustainable context. The Financial Economy was initially established to raise the finance for the canals, mills, factories and railways of the first industrial revolution. But since then it has found easier ways of making faster returns than paying for those Real Economy activities. So the Financial Economy has become predatory on the Real by a variety of means, including a process of increasingly sophisticated Merger and Acquisition (M&A) followed by systematic asset stripping and closure of Real Economy organisations. 

It is a process which is ignored since the distinction between the Real and the Financial Economies is not made, a fact celebrated by the simultaneous combination of austerity and QE, symbolic of the global combinations such as tax haven corruptions and the climate crisis.

That Real-Financial dichotomy, so vital to Remaking the Real Economy, is completely ignored by economic theory, including MMT. In orthodox measures such as GDP, a $ is a $, whether it is earned through care home services, bets on the financial casino or prostitution.

However, MMT controls enable both money supply and taxation to be selective, so that the direction of economic progression could be focused on the Real Economy making the financial sector resume its former more restrained role as supportive provider of finance.

Moral philosopher Adam Smith started his inquiry into the nature and causes of the wealth of nations with observation of real economic activity (pin making), rather than theoretical argument. There was no theory at the time.  Real economic activity clearly didn’t require a theory. Today, further progression without detruction might be better achieved if freed from theoretical constraints and diktats.

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[i]  Piatier, A., (1984), ‘Barriers to Innovation’, London: Francis Pinter.

[ii] Friedman, M., (2003), in interviews with Joel Bakan for the documentary film ‘The Corporation’, see https://www.youtube.com/watch?v=Y888wVY5hzw [accessed 10.January 2020].

[iii] Martin, F., (2014), Money: the Unauthorised Biography, London: Vintage Random House.

Gordon Pearson

People’s QE goes mainstream

  

......It is very refreshing indeed that Jeremy Corbyn is willing to make the People's QE a reality if he ever became PM. Ofcourse, it stands to reason if sufficient amounts (monitored by conventional Indicators) of new non-repayable money are created directly into the Economy it could help many people.........But this is only the BEGINNING. What needs to happen next is the introduction of super flexible electronic controls over inflation to really ensure that future amounts of new money could be gradually phased in safely, and successfully. For that to occur, we would need to understand the Economy in Real-Time. With the arrival of Big Data, and Supercomputers/Quantum Computing such a proposal could become increasingly likely, and credible. It would if it succeeds be a massive leap in human evolution. See my evolving project http://www.p2pfoundation.net/Transfinancial_Economics

Written by Fran Boait on August 18, 2015. Positive Money      

           

Labour leadership candidate Jeremy Corbyn has sparked a major debate about monetary and economic policy by calling for what he calls a ‘People’s QE’.
He argues that ‘The Bank of England must be given a new mandate to upgrade our economy to invest in new large scale housing, energy, transport’. People’s QE is similar to proposals called for by Positive Money. We call the idea ‘Sovereign Money’. Ideas in a similar vein have been advocated or at least suggested by notable economists including J M Keynes (1), Milton Friedman (2), Ben Bernanke (3), William Buiter (4) and Martin Wolf (5).  Most recently, Lord Adair Turner (6) has proposed similar ideas, highlighting that ‘there are no technical reasons to reject this option’.
Like Quantitative Easing (QE), Sovereign Money relies on the Bank of England creating money and putting this money into the economy. But whereas QE relied on flooding financial markets and hoping that some of this money would ‘trickle down’ to the real economy, Sovereign Money works by injecting new money directly into the real economy, via government spending, tax cuts or rebates.
Sovereign Money (or People’s QE) tackles the current government’s flawed growth strategy, which is to grow the economy through ever rising household debt. As former FSA chairman Lord Turner put it, this is a “hair of the dog” strategy (7) for economic recovery, treating the cause of the financial crisis – excessive borrowing – as though it could also be the solution. The Office for Budget Responsibility predicts household debt to income ratio surpassing pre crisis levels by 2019 (8).
The pivotal advantage of Sovereign Money is that it requires no increase in either household debt or Government debt. In fact, Sovereign Money can actually reduce the overall levels of household debt. This deleveraging would also make banks more liquid and the economy fundamentally safer.
A common concern with Sovereign Money is that cooperation between the fiscal and monetary authorities is seen as a ‘taboo’ and that it would undermine the Bank of England’s independence. However this argument fails to acknowledge that fiscal and monetary cooperation has already been carried out by recent policies including:  Funding for Lending, Help to Buy, and Quantitative Easing. The difference with Sovereign Money is that the monetary and fiscal cooperation will have to be more explicit.
Another strong concern is that it will lead to the power to create money being excessively used, resulting in high levels of inflation. A strong governance structure is vital, whilst there are several to structure the process Positive Money advocates the Monetary Policy Committee (who decide how much money to create), is separated from the decision of how to spend the money (the government). The simplest way to ensure that the central bank does not create too much money is for monetary policy to continue targeting inflation (on its own or as part of a broader set of targets).
In addition, there is no reason why it should be more inflationary than the creation of money by bank lending (which typically creates inflation in the housing market).  Whereas most money created via bank lending goes into the property market, the money created via Sovereign Money creation would go directly into the veins of the real economy, boosting GDP and employment.  By boosting the capacity of the economy, Sovereign Money should actually be less inflationary than further consumer lending, and the use of Sovereign Money can be restricted should it start to become inflationary.

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1) Keynes, J. M. (1933). An Open Letter to President Roosevelt. New York Times
2) Friedman, M. (1948). A monetary and fiscal framework for economic stability. The American Economic Review, 38(3), 245-264
3) Bernanke, B. S. (2003). Some thoughts on monetary policy in Japan. Speech before the Japan Society of Monetary Economics, 31 May, Tokyo, Japan
4) Buiter, W. H. (2003). Helicopter money: irredeemable fiat money and the liquidity trap (No. w10163). National Bureau of Economic Research
5) Wolf, M. (2013). The case for helicopter money. Financial Times. 12th February 2013
6) http://www.ft.com/cms/s/0/8e3ec518-68cf-11e4-9eeb-00144feabdc0.html#ixzz3IjZNT6bq
7) http://www.bloomberg.com/news/2013-10-28/hair-of-dog-policy-risks-u-k-housing-boom-repeat-turner-says.html
8) http://www.telegraph.co.uk/finance/economics/11770654/Is-the-UK-economy-on-another-credit-fuelled-binge.html

Would Corbyn's 'QE for people' float or sink Britain?

Robert Peston Economics editor/Blogger Ref http://www.p2pfoundation.net/Transfinancial_Economics

• 12 August 2015
• From the section Business BBC

Bookmakers have installed Jeremy Corbyn as favourite in the leadership race

• 
  
  So what are the economic policies of the long-serving Labour backbencher, Jeremy Corbyn, who has become the darling of Labour's new members and - out of nowhere - has become favourite to emerge as leader of Her Majesty's Opposition?

Helpfully he produced an economic manifesto, "The Economy in 2020".
At its heart is the precept that "Labour must create a balanced economy that ensures workers and government share fairly in the wealth creation process, that encourages and supports innovation in every sector of the economy; and that invests in skills and infrastructure to build an economy that is more sustainable and more equal".
Which is the sort of statement, absent detail on the means to get there, that most would say sounds alright.
But Corbyn is, famously, of the left. So his path to creating a more sustainable and equal society would not appeal to all.
Even so his opposition to this government's planned cuts to corporation and inheritance tax, and his muscular hatred of tax avoidance and evasion, are not the stuff of swivel-eyed Leninism.
There are plenty of political moderates who question why, at a time of scarce resources, it is a priority for messrs Cameron and Osborne to give tax breaks to better-off dead people.
But of course that is not the end of Corbynism. Like many left-wingers of his generation, he never felt comfortable with privatisations and was not persuaded by his erstwhile leader, Tony Blair, that Labour was right to end its Clause 4 commitment to pursuing public ownership of the means of production.
So Jeremy Corbyn wants the state to re-acquire ownership of the railways (as does another left-ish candidate to lead Labour, the lapsed Blairite, Andy Burnham), he has floated a plan for the government to acquire controlling stakes in energy companies and he has talked about whether Labour should adopt a new modern version of the traditional socialist commitment for the workers to own the towering heights of the economy.
Some of you of a free-market inclination may at this juncture be spluttering into your flat whites and mojitos. But again, there is nothing desperately surprising about any of this.
The hard left didn't die under Tony Blair's aegis. It was marginalised. A bit like punk rock in the reign of the Spice Girls, it retreated into specialist clubs and cabals, knowing that one day there would be a hunger for its seductive remedies for the world's injustices.
So the underlying causes of the ascent of Corbynism are driving politics throughout the rich west - and benefit the extreme populist right (the Front National in France, Trump in the US) as much as the Syrizas and Podemoses of the left.
They include a palpable sense that the establishment parties have for years and consistently lied about the benefits of globalisation, given the inescapable evidence that disproportionate spoils go to the very rich.
And almost everywhere tolerance of an economic model that appeared to disempower all of us, and whose fruits were not available to all, dramatically decreased after the 2008 Crash that turned lacklustre wage growth into sharply squeezed living standards.

Liz Kendall, Andy Burnham, Yvette Cooper and Jeremy Corbyn hope to succeed Ed Miliband

So Corbynism is a kind of collective howl - which can be heard in different accents all over the world - that it doesn't have to be this way.
But what is driving mainstream Labour members bonkers about all of this is the way that Corbyn's supporters - some young and new to the party, others freshly returned from self-imposed exile in other far left caucuses - are wearing their support for Jeremy Corbyn as a badge of protest, the equivalent of a ripped punk-rock t-shirt, but not as part of any practical collective mission to form a Cabinet and actually govern.
And, by the way, what is particularly galling for what you might call conventional Labour is how Ed Miliband's party reforms priced the T-shirt at just £3 - which is all you have to pay to have a vote on Labour's next leader.
In this context, Jeremy Corbyn's most important policy is actually his most novel. And it is what he calls, alluringly, "quantitative easing for people instead of banks".
This is how he describes it: "one option would be for the Bank of England to be given a new mandate to upgrade our economy to invest in new large scale housing, energy, transport and digital projects".
For the avoidance of doubt, this is not same-old, same-old socialism; it is new, radical thinking.
But in a world where globalisation and the free movement of capital are inescapable realities, so-called quantitative easing for people brings considerable risks. Some will see it as stupendously dangerous.
For detail on what it involves, Jeremy Corbyn prays in aid the campaigning tax analyst, Richard Murphy.
Now here it gets a bit technical so bear with me.
What we think of as normal quantitative easing - though it was unconventional when the Bank of England embarked on it in 2009 - involves the Bank of England creating new money to buy government debt.
There is a lively debate about quite how economically useful it has been. It might have pushed down interest rates a bit for all, through a slightly convoluted transmission mechanism. And it might have encouraged a bit of incremental consumption and investment by inflating the price of houses and other assets.
But probably the most important point about quantitative easing as currently configured is that the debt bought by the Bank of England has to be repaid - eventually - by the Treasury.
In other words the £375bn of new money created by the Bank of England through quantitative easing will one day be withdrawn from the economy, through the repayment of debts by the government, when the economy is perceived to be strong enough.
Now it will be decades before all the £375bn is returned. And theoretically it could never be repaid, if the Bank of England simply decided to roll over maturing debts each time they are due for repayment (as it is doing at the moment).
But the important fact is that the debts still exist as a real liability of the Treasury - and that matters.
Here is why.
Central banks, like the Bank of England, have an extraordinary privilege and power to magic money out of nowhere. Which is another way of saying that money has no intrinsic value, and is only worth what we as a society determine it is worth. And, in the reality of global financial capitalism, it is currency traders who decide what sterling is worth, nano-second by nano-second.
So to avoid a collapse in the currency and rampant inflation, central banks have to be seen to be exercising great restraint in the creation of new money.
The lore of central banks - which, rightly or wrongly, is almost universally accepted by investors - says that central banks should only look at whether there is too much or too little money in the economy in determining whether to increase or shrink the supply of money, and not at narrower economic questions such as whether there are enough roads or houses being being built in Britain.
Or to put it another way, successful central banks are those that are not bossed around by politicians, who are perceived to be more interested in being re-elected than in economic stability.

Would Jeremy Corbyn's policies threaten the Bank of England's independence?

Now to be clear, none of this is to argue that Jeremy Corbyn is wrong to want more investment in energy, housing and other infrastructure. But it is to say that if the Bank of England were mandated to do that, most investors would conclude that the Bank of England's primary objective was no longer to preserve the value of the currency but to finance politically popular projects.
They would fear that if the Bank of England is forced to finance projects that the private sector - by Jeremy Corbyn's admission - won't finance, it would be throwing good money after bad.
In those circumstances, sterling would weaken, with inflationary consequences - and perhaps with devastatingly inflationary consequences.
Probably Jeremy Corbyn and his counsellor Richard Murphy would argue that this is unduly alarmist - and that all the Bank of England would be doing would be to purchase new debt issued by energy or transport companies, presumably state-owned or state-backed, and this is surely not much different from the Bank of England's purchases of gilts or government debt.
That may be right, as a matter of theory, and even - in the case of America - in practice, in that the Federal Reserve in the US has subsidised housing finance for years by purchasing colossal amounts of state-backed mortgage debt.
What is more the former head of the Financial Services Authority, Adair Turner, has been arguing that in order to make meaningful inroads into the UK's massive debt burden, the Bank of England should consider going one step further than quantitative easing and - in a highly prescribed way - create money to actually annul debts.
But the dollar is still the world's reserve currency, and the Fed can take liberties with it that are not available to the Bank of England.
Also it is very difficult to conceive of a way in which the perception - the confidence trick perhaps - of Bank of England independence could be preserved, while obliging it (to repeat Jeremy Corbyn's words) "to invest in new large scale housing, energy, transport and digital projects".
Once it had those explicit objectives, investors would see it as politician's poodle and conclude that preserving the value of sterling would be not quite the priority it has today.
Which is not that the UK would turn into hyperinflationary Zimbabwe or 1923 Germany.
But the risk of investing in sterling and the UK would be seen to have increased. And therefore the cost of finance here would rise - which would mean that there would be even less long-term productive investment here, and a British malaise correctly identified by Jeremy Corbyn would be made more acute.

UPDATE 16:05

The guru of Corbynomics. Richard Murphy, has responded to my blog on Jeremy Corbyn's "quantitative easing for people".
He clarifies that the debt to be acquired by the Bank of England would be issued by a new state-owned investment bank, whose role would be to finance housing, transport, and so on.
But I am not sure the existence of this new public-sector bank significantly helps his cause.
Because there would be widespread concerns that the Bank of England would be indirectly financing white elephants via this investment bank - and would, as I mentioned earlier, be throwing good money after bad.
Or to put it another way, quantitative easing for people makes good economic sense only if you believe that a state investment bank would make viable investments that the private sector refuses to make.

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

Written by Ralph (Guest Author) on May 3, 2011. 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.

Mario Draghi takes historic gamble with negative rates but still stops short of QE

ECB's revolutionary move aims to force banks to pay a charge if they continue to park money for safe-keeping in Frankfurt

Blogger Ref Link http://www.p2pfoundation.net/Transfinancial_Economics

By Ambrose Evans-Pritchard

8:11PM BST 05 Jun 2014 The Telegraph

The European Central Bank has become the first of the world’s monetary superpowers to cut its deposit rate below zero, taking a leap into the unknown as it tries to drive down the euro and head off deflation.

The bank opened the door to direct purchases of private assets or quantitative easing, and announced a €400bn blast of long-term lending at cheap rates for banks.

The benchmark interest rate was cut to a record low of 0.15pc, tantamount to zero. The revolutionary move was to lower the deposit rate to -0.1pc, forcing banks to pay a charge if they continue to park money for safe-keeping in Frankfurt.

“Are we finished? The answer is no,” said Mario Draghi, the ECB’s president. “If required, we will act swiftly with further monetary policy easing. The Governing Council is unanimous in its commitment to using unconventional instruments within its mandate should it become necessary to further address risks of prolonged low inflation.”

The rate cuts prompted fury in Germany, where the head of the German Association of Savings Banks, Georg Fahrenschon, accused the ECB of expropriating savers. “We are tearing a hole in the pensions of savers. Over time these low rates will destroy the value of assets,” he said.

Der Spiegel deemed it was the “end of capitalism”, while Die Welt described Mr Draghi as Europe’s Bismarck, a near autocrat beyond control. It is a foretaste of what may happen if the ECB does graduate to QE later this year, once the machinery is ready.

David Marsh, head of the financial forum OMFIF, said the latest stimulus is mostly window dressing and may backfire. “The fear is that it cannot and will not provide the massive impulse needed to return the euro area to full health. But it will nonetheless be more than sufficient to antagonise public opinion in Germany,” he said.

The anti-euro party Alternative fur Deutschland won seven seats in the European Parliament in last month’s elections, giving it a platform for the first time.

In an extraordinary development, Germany’s finance minister, Wolfgang Schäuble, has called into question the backstop plan for Italian and Spanish bonds unveiled with spectacular effect by Mr Draghi two years ago, saying the scheme cannot go ahead without German consent and “we will not approve of such a programme”. The comments yet again call into question how far Germany is willing to go keep the system together.

David Owen, from Jefferies Fixed Income, said the lending measures offer more than meets the eye and amount to a mini-bazooka. “Draghi has drawn a line in the sand and is telling us that he is not going to raise interest rates for four years. This is highly significant,” he said.

Banks will be able to borrow €400bn for four years at near zero rates at LTRO (long-term refinancing operation) auctions in September and December. The magic is in the details. While the sums are far lower than earlier LTRO auctions, the banks will be able to tap the ECB for funds equal to 7pc of their private loan book without using up collateral. “They can get free money for four years so long as they lend it to the real economy,” he said.

ECB officials hope that this will unlock a surge of lending. The aim is to stop “passive tapering” as banks rush to repay loans and beef up capital ratios, a phenomena that has caused the ECB’s balance sheets to shrink by €800bn.

Mr Draghi has also copied a tool deployed by the Bank of Japan in February, letting banks obtain liquidity equal to three times their lending. The first trickle of QE is coming through as €165bn bonds held from an earlier scheme are no longer “sterilised”, but the pace will be glacial.

The ECB package of emergency measures is in striking contrast with developments in the US and Britain, where central banks are moving toward the exit door, deeming the job done.

It underscores the gravity of the crisis in Europe, where lending to the private sector is declining at a rate of 1.8pc and several countries are in deflation. Italy, Holland and Portugal relapsed into economic contraction in the first quarter, while France fell back to zero growth. The recovery is in danger of withering on the vine.

The blitz comes late, with EMU inflation already down to 0.5pc. The ECB slashed its inflation forecast for this year to 0.7pc, making a mockery of the coming stress test for banks, which deems 1pc to be the most extreme “adverse scenario”.

The ECB also lowered its inflation estimate to 1.1pc in 2015 and 1.4pc in 2016, showing how far it has strayed from its 2pc target. Mr Draghi has warned in the past of a “pernicious negative spiral” in prices, but insisted that their is currently no “self-fulfilling” dynamic at work pulling Europe into a trap.

Even so, the prolonged effects of “lowflation” are serious, since any drop in the rate at this stage can have powerful effects on the intensity of debt-deflation in the crisis countries. It is a key reason why debt ratios keep spiralling higher despite austerity cuts.

Danae Kyriakopoulou, from the Centre for Economics and Business Research, said the negative deposit rate may do more harm than good. Banks hold just €30bn in cash reserves at the ECB – down from €700bn in mid-2012 – so the move will not free up much money for lending.

“What we may see instead is deposit flight as savers look for banks more willing to take on their cash elsewhere, as happened in Denmark. This in turn could even lead to a fall in lending, making the rate cut effectively contractionary, and do little to raise eurozone inflation,” she said.

The negative deposit rate risks causing havoc in the money market industry, one reason why the US Federal Reserve never tried it. The industry is worth €843bn in Europe, of which €375bn is from foreign funds.

The ECB is clearly hoping that some of this money will drift away, pulling down the euro exchange rate, which has strengthened 5pc in the past year and pushed the bloc closer to deflation. Early on Thursday the euro plunged one cent against the US dollar to $1.35 but bounced back and ended slightly higher.

Hans Redeker, currency chief at Morgan Stanley, said it will be a struggle to weaken the euro for long given the eurozone’s ballooning current account surplus of €280bn and the repatriation of funds by banks shoring up defences at home. “The ECB has bought time but Europe’s banks are incapable of recycling the surplus,” he said.

The stock markets rallied by 1pc in France, 1.1pc in Spain and 1.5pc in Italy on the historic measures, though reaction in Germany was muted. Many of the details were flagged in advance. Jens Nordvig, from Nomura, said credit markets have already priced in near perfection. It may take “broad-based” asset purchases to keep the rallies going.

Full-blown QE is not yet on the cards, though the ECB has a €1 trillion plan for use in extremis. Mr Draghi said the bank wants to “signal” that it is willing to buy asset-back securities if need be. They would be packages of loans but not the incendiary concoctions that led to the US subprime crisis. “They should be simple, not CDS (collateralised debt securities) cubed, or squared. They should be real loans, not based on derivatives,” he said.

It is an immature market in Europe, with just €700bn of assets to buy, and it is unclear whether purchases of asset-backed securities can direct much lending to small businesses, where it is most needed. It is costly to put together packages of sellable loans for family firms. “Their importance to politicians far outstrips their attractiveness to creditors,” said Matt King, from Citigroup.

In the end, the ECB may have to bite the bullet and resort to full-blown purchases of sovereign debt, just like the central banks of the US, Britain and Japan. That thorny issue has been put off for a few more months while the ECB prays for a miracle.

Steve Keen’s Debt Jubilee Idea

Friday, 25 May 2012

Blogger Ref Link http://www.p2pfoundation.net/Transfinancial_Economics

Summary: I have plenty of respect for Steve Keen, but don’t agree with his debt jubilee idea. He argues that the process of paying off debts is deflationary, and that if we want to get the debt reduction process over quickly and return to normal levels of aggregate demand, we need stimulus, with debtors being made to use the stimulus money they receive to pay down their debts.

Strikes me the bureaucracy involved there is a problem. But more fundamentally, it’s the PROCESS OF PAYING OFF DEBTS that is deflationary. Thus if debtors who seriously want to remain indebted are allowed to do so, there is no deflationary effect. As to debtors who WANT TO reduce their debts, they will do so AUTOMATICALLY given stimulus. Thus there is no need for any sort of special “debt forgiveness” scheme.

___________

 
There has been a big rise in private sector debt over the last decade or so. Paying off this debt will have a similarly big and long lasting deflationary effect. So Keen wants the “paying off” to be speeded up with a “debt forgiveness” program or “debt jubilee”.

The essence of his argument is under the heading “A Modern Jubilee”. In contrast, the paragraphs PRIOR to that heading contain the technicalities and evidence to back his argument. His argument, as I understand it, is essentially as follows.

The accumulation of private debts is an important contributor to aggregate demand (AD), and in particular the ACCELERATION in the growth of this debt is the vital factor.

I have no quarrel with that.

He then claims that the LEVEL of private debt accumulation over the last ten years or is unprecedented, and that paying it off will involve such a degree of AD reduction that the only solution is a debt jubilee.

Now that argument would be valid if the only source of AD or potential AD was debt accumulation. But it’s not: government and central bank can perfectly well make up for any lack of AD by boosting private and/or public spending.

Indeed, Keen’s proposal is to do EXACTLY the latter, but channel a portion of the extra money towards debt reduction. He says:

“A Modern Jubilee would create fiat money in the same way as with Quantitative Easing, but would direct that money to the bank accounts of the public with the requirement that the first use of this money would be to reduce debt. Debtors whose debt exceeded their injection would have their debt reduced but not eliminated, while at the other extreme, recipients with no debt would receive a cash injection into their deposit accounts.”

First, I’m not sure that QE alone would have the required stimulatory effect, because QE has a negligible effect on private sector net financial assets. But that is a minor quibble: it’s not of crucial relevance to the basic argument here.

So let’s just assume that stimulus is implemented, and the net effect is to channel money into everyone’s pockets (debtors, creditors, you name it).


Bureaucracy.

The first problem with requiring debtors to use their newly acquired stock of money (stimulus money) to pay off their debts is the ENORMOUS amount of bureaucracy involved.

For example, just assuming debtors are induced to write out checks to their creditors, what’s to stop those debtors (where they want to maintain their level of debt) quietly incurring a similar amount of debt from other creditors (or even re-financing via the SAME ORIGINAL CREDITOR/S a few months later)?


Stimulus plus jubilee equals stimulus.

The second problem is this. As far as ultimate effects go, there is very little difference between Keen’s idea and a straightforward dose of stimulus (SDS) WITHOUT any specific attempts to have debtors pay off their debts.

To illustrate this point, I’ve listed below the six changes that Keen claims would result from his jubilee idea. Plus I’ve put comments in orange below after each.

1. Debtors would have their debt level reduced;

Same applies to SDS to the extent that debtors think the best use they can make of a cash windfall is to pay off their debts. In contrast, to the extent that they see fit to MAINTAIN their level of debts (and assuming their creditors are happy with that) I see no good reason to pay off the debts.) Moreover, simply MAINTAINING a debt at a constant level does not have a deflationary effect: it’s the PAYING OFF of debts that has the deflationary effect. So if a set of debtors want to maintain their indebtedness, where is the harm?

2. Non-debtors would receive a cash injection.

Same goes for SDS.

3. The value of bank assets would remain constant, but the distribution would alter with debt-instruments declining in value and cash assets rising;

To the extent that debtors see fit to pay off their debts, exactly the same applies to SDS.

4. Bank income would fall, since debt is an income-earning asset for a bank while cash reserves are not;

Same again: to the extent that debtors see fit to pay off their debts, exactly the same applies to SDS.

5. The income flows to asset-backed securities would fall, since a substantial proportion of the debt backing such securities would be paid off;

Same again: to the extent that debtors see fit to pay off their debts, exactly the same applies to SDS.

6. Members of the public (both individuals and corporations) who owned asset-backed-securities would have increased cash holdings out of which they could spend in lieu of the income stream from ABS’s on which they were previously dependent.

Same again: to the extent that debtors see fit to pay off their debts, exactly the same applies to SDS.

Ref  RALPHONOMICS

A different kind of QE – stimulus injected into the veins of the economy

Nov28 2013

 

Written by Positive Money on . Posted in Bank of England & QE, Economic Analysis, Theory, Financial Crisis, Global Situation, Housing, In the News

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‘The comedian Russell Brand has stirred debate with his talk of revolution. Russell Brand is more right than wrong. Pre-revolutionary grievances are simmering in half the world, openly in France and Italy, less openly in Russia and China”, reads the article in the Telegraph of 21st November 2013 entitled “There is talk of revolution in the air” by Ambrose Evans-Pritchard, International Business Editor.  

He explains that the income inequality has been rising for 25 years almost everywhere:

“the income share of the richest 1pc of Americans reached a record 19.6pc last year. It never rose above 10pc for the whole post-War era until the mid-1980s.”

and argues that:

“quantitative easing as conducted in the rich countries risks making matters worse. The money is leaking into asset booms, without much economic trickle down.”

Instead of Quantitative Easing he offers an alternative :

Rather than relying on more bond purchases, the stimulus could be injected into the veins of the economy, or into the “income stream”

“We can spend it on roads, railways, smart electricity grids, or anything we want,” said Lord Turner, ex-chief of the Financial Services Authority. “Or we can cut taxes, targeting employers’ national insurance so that it creates jobs here and does not leak out.”

You can read the whole article here
These ideas are very similar to what Positive Money is advocating in the most recent publication Sovereign Money Creation: Paving the Way for a Sustainable Recovery.








Sovereign Money Creation (SMC) offers a way to make the recovery sustainable. In a similar way to Quantitative Easing, SMC relies on the state creating money and putting this money into the economy. But whereas QE relied on flooding financial markets and hoping that some of this money would ‘trickle down’ to the real economy, SMC works by injecting new money directly into the real economy, via government spending, tax cuts or rebates. Our analysis shows that by getting spending power directly into the hands of the public, this new solution could be up to 37 times more effective than Quantitative Easing in boosting GDP.
The pivotal advantage of SMC is that unlike the Government’s current growth strategies – which all rely on an over-indebted household sector going even further into debt – SMC requires no increase in either household debt or Government debt. In fact, SMC can actually reduce the overall levels of household debt. It would also make banks more liquid and the economy fundamentally safer.
Similar ideas have recently been proposed by Lord Adair Turner, under the name Overt Money Finance. The March 2013 budget included a review of the monetary policy framework, which expressly permitted the Bank of England to use ‘unconventional policy instruments’ to support the government’s objectives for growth and employment, meaning that SMC could be used within the current operating framework.


Download Here (Free, PDF, 60 pages)

Quantitative Easing: What happened to the money?

Quantitative Easing (QE) created reserves to pay for bonds (eventually entirely government bonds) bought by the Bank of England from the private sector. The expectation was that those who sold the bonds would use the money to buy new bonds issued by private corporations to replace bank lending which had dried up.
The first chart shows how the levels of securities outstanding have changed relative to their levels in March 2009, the start of QE.







In the run-up to the crisis, private non-financial corporations (PNFCs) were not raising any new money by issuing bonds or shares, whilst banks and other financial corporations (OFCs) were each issuing new securities at a similar rate to the government. These rates accelerated sharply after Lehmans’ collapse in September 2008, but slowed markedly at the onset of QE (although the gilt issue settled at around £15bn a month – by September 2013, the par value of gilts in issue had increased by £825bn since the onset of QE). PNFCs however, did start to issue bonds to take advantage of the QE money.
The second chart stacks the bond issues together to compare the amounts raised with the money made available by QE.







This shows that for the first round of QE, around 75% of the money was taken up through bond issues by the private sector, although the finance sector took the lions’ share. With the onset of the second round, however, the banks began to pay off their bonds, and with the third round, so did the other financial corporations. The PNFCs, however, continue to raise money through this route.
The third chart shows that the banks were able to retire their debt funding because of the accumulation of retained earnings, which stabilised their levels of capital, although these slipped back during the second half of last year.







The other financial corporations were presumably also able to redeem their bonds by accumulating retained earnings.
It can be surmised from this, that the balance of the money from the first round of QE, and substantially all of that from subsequent rounds was used to purchase gilts, and the fourth chart shows that there were plenty to choose from, with falling yields providing attractive opportunities for capital gains.






In conclusion, quantitative easing has had three effects:

1. by creating an artificial demand for gilts it increased their market price, thereby reducing yields and increasing the attractiveness of higher-yielding corporate bonds;
2. in a time of uncertain asset valuations it enabled the financial sector to raise temporary loss-absorbing loan capital by issuing bonds, which gave them the breathing space to build up their equity; and
3. it provided for those corporations who were able to manage the issue of bonds a source of debt funding to replace the bank lending which had dried up due to that uncertainty.

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QE for Jobs

Home » Blog » 2013 » June » 03 » QE for jobs

       Blogger Ref Link  http://www.p2pfoundation.net/Transfinancial_Economics

 

Written by Positive Money on . Posted in Bank of England & QE, Campaigns, Updates

 

Could you create jobs with £375 billion to spend?

Since the crisis the Bank of England has created £375 billion of new money in an attempt to get the economy going again. But instead of putting it into the real economy, where it could support businesses, shops and real jobs, they’ve just pumped it into the financial markets.
That’s why the stock market is near its highest ever level, even though there are around 2.5 million people who can’t find jobs at all, and a further 3 million people who can’t get enough hours of employment. [1] Meanwhile over 500,000 people have become dependent on food banks to live. [2]
This is crazy…
This is a crazy approach to fixing a broken economy. If just a fraction of that £375 billion had been spent into the real economy by the government, as new debt-free money, it would have created jobs, allowed us to reduce our debts, and get the economy going again. We have tried to explain this to the government [3], and even the former chairman of the Financial Services Authority, Lord Adair Turner has said that “If [President] Herbert Hoover had known in 1931 that [the policy of creating money and spending it into the economy through government budgets] was possible, the US Great Depression would have been less severe.” [4]

We want to campaign for a better approach

Instead of seeing more money flooding the financial markets, we want to see the power to create money be used for something useful. There’s so much that needs to be done, including:

• Rebuilding the hundreds of school buildings that are not fit for purpose (the government has just borrowed £700million from private banks – who will create the money used to pay for the rebuilding – instead of using their own power to create money).
• Switching the country over to clean and renewable energy so that we don’t become dependent on countries like Qatar for energy imports in the future
• Getting money directly to ordinary people by creating jobs so that they can start to pay down some of their debts

It’s an idea that’s already been mentioned by leading economic commentators in all the mainstream papers. And now even the Treasury is interested – in their latest review of monetary policy [5], they included a section on Adair Turner’s suggestions. So now is the best time for this campaign.
Our campaign (codename “QE for jobs”) would ask for £50 billion to be created by the Bank of England and spent by government with the aim of increasing employment and doing some of the long-term things that are essential for this country.

Here’s the plan:

Over the next 2 years we’re aiming to:
·         get the idea of ‘QE for jobs’ into the mainstream public debate
·         get the main political parties to adopt it into their 2015 manifesto
·         build a large  movement of individuals and groups in support of the campaign
·         get business leaders to write an open letter to George Osborne asking him to carry it out
This doesn’t mean we are changing direction. Our main objective will always be to fully change the way that money is created so that banks can no longer create money and cause the kind of crisis that we’re facing today.[6]
This is a campaign that we think will lead the way to getting the money creation more mainstream. It is a step in the right direction and would mean our reforms are more likely to be implemented. It could also raise our profile and broaden our network along the way.

Can you help us kickstart the campaign?

We’ve speaking to potential partners and there’s a lot of interest in this idea, but we need to have the funds to get the ball rolling.
Currently we have 378 people who donate every month, and this keeps the campaign going. If we can increase that to 430, we’ll be able to focus on this huge opportunity to get a change in the monetary system and have money created in the public interest for the first time in decades.
If you can, please help by donating monthly, either by direct debit or paypal:
Donate now
Why donate to Positive Money?
Compared to most not-for-profits and charities, we’re tiny and don’t have any huge funders to support our work. However, we are tackling one of the root causes of many problems. We depend on the monthly donations of around 350 of the 11,500 people receiving this email, to provide half of all our funding, plus a number of grants from smaller charitable trusts.
Any donations made in June will be DOUBLED…
The James Gibb Stuart Trust, who helped Positive Money to get off the ground, are currently matching any donations set up this month, for the next 12 months. That means if you start donating £10 a month, it’ll be matched with an additional £120 over the next year.
Plus if you donate £10 or more per month – we will send you a free copy of the book Modernising Money.
 If we can raise an extra £1200 a month in donations, this will be doubled by the James Gibb Stuart Trust and we’ll be able to cover a significant amount of our costs for a QE campaign and at least keep Positive Money going until the 2015 election.
Donate now
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[1] http://www.bbc.co.uk/news/business-20509189
[2] http://www.church-poverty.org.uk/foodfuelfinance/walkingthebreadline/report
[3] http://www.publications.parliament.uk/pa/cm201213/cmselect/cmtreasy/writev/qe/m08.htm
[4] http://www.fsa.gov.uk/static/pubs/speeches/0206-at.pdf - p34.
[5] http://cdn.hm-treasury.gov.uk/ukecon_mon_policy_framework.pdf
[6] http://www.positivemoney.org/about/statement-of-purpose/

Blogger Reference Link  http://www.p2pfoundation.net/Transfinancial_Economics

 

Does the eurozone have a monetary policy transmission mechanism? Or rather a liquidity leak?

by Tyler Cowen on May 17, 2013 at 2:03 am in Economics, Uncategorized | Permalink

What would happen if the ECB immediately and directly ran a helicopter drop of money to the periphery?  I don’t find that an easy question to answer.  Here is one recent report:

But the indicator [interest rate spreads] has since risen again and reached a record of 3.7 percentage points in January, indicating companies in southern Europe were paying significantly higher interest rates than northern rivals.
“Market segmentation remains, divergence in bank lending rates persists and, as a result, immediate growth prospects in the periphery are bleak,” said Huw Pill, European economist at Goldman Sachs, who was previously a senior monetary policy official at the ECB in Frankfurt.

Or read this update. Here is a more specific story about how small to mid-sized Italian banks are contracting.
Would the new helicopter drop money be kept in periphery banks and lent out to stimulate business investment?  Or does the new money flee say Portugal because Portuguese banks are not safe enough, Portuguese loans are not lucrative and safe enough, and Portuguese mattresses are too cumbersome?
The former scenario implies that monetary policy should be potent.  The latter scenario implies that the helicopter drop will be for naught and the fiscal policy multiplier also will be low, on the upside at the very least (fiscal cuts still might cause a lot of damage on the downside).  I call this the liquidity leak, rather than the liquidity trap.
So which scenario is it?
Does it matter who gets the helicopter drop?  Perhaps a granny gets the money first and sticks it in the local bank.  Alternatively, a financial manager in Lisbon would transfer that same euro rather seamlessly to his second account in Frankfurt.  Under this differential scenario, changes in the distribution of wealth also have nominal and eventually real effects.
Is the flow of marginal deposits the problem or the flow of marginal loans?  Or both?
Ryan Avent suggests allowing banks to swap their risky commercial loans for safer assets.  Other ideas propose running QE on packages of small to mid-sized loans or accepting those loans as collateral at the ECB.  Of course these assets are difficult to price and also moral hazard problems would loom.  If the ECB is not “overpaying” for the small loans, they won’t be encouraged.  If the ECB is overpaying, there are plenty of Sicilian businessmen who have friends at the local bank.  The mere lending isn’t enough, the projects also need to be good ones, because in these cases we are talking about tackling issues in the real economy.  Can a long-distance ECB collateral support operation spur good, growth-inducing projects?  It is easy to see why the Germans might be skeptical.
In some regards these problems will look like liquidity traps, because monetary policy will not always work.  But in the periphery lending rates are high (albeit with restricted credit), and standard liquidity trap models will not in general apply.  Again, I call it the liquidity leak.
Liquidity trap approaches will encourage you to think in terms of raising expectations of inflation (which is indeed the correct question in many settings), but here the geographic distribution of credit and economic activity is instead the crux of the matter.  Our current macroeconomic tools are not well-suited for integration with spatial economics, I am sorry to say.


http://marginalrevolution.com/

                                                                      


Bloggers Reference Link  http://www.p2pfoundation.net/Transfinancial_Economics