Willy Hutton comes over to the Friedmanite dark side

Government must therefore set a policy framework that forces the close collaboration of monetary, financial and fiscal policy to induce a sustained rise in credit from our very wounded and risk-averse financial system. The British government, along with other western governments, must replace its redundant inflation target with a target for the growth of the value of the goods and services we produce – the growth of GDP in cash terms. It should say that every instrument of policy – quantitative easing, interest rates, government borrowing, guarantees for new bank lending – will be used to sustain the growth of money GDP by 7% a year for the next five years.

This is NGDP targetting.

Of course, Willy being Willy he doesn\’t understand that this is a direct outgrowth of Friedmanite monetarism.

Nor does he understand that it\’s all about money, the money supply, the monetary stance. None of the rest of his blather about government subsidies and direction of investment is necessary at all.

But then if Willy understood the genesis of his pronouncements, the implications of them, then he wouldn\’t be Willy, would he?

23 comments on “Willy Hutton comes over to the Friedmanite dark side

  1. So, the problem is that we have too much debt. The solution is more credit. Which is debt. Erm..?

    Investment does not “propel” “wealth creation” i.e. growth. The creation of new productive facilities creates a demand for borrowing. But the cart does not push the horse.

    The problem is this; under the current, very odd system, money has to be borrowed into existence. Even when the government “prints” it, it only prints bank reserves, which are then loaned out. Increasing the money supply is inextricably the same process as creating more debt. Would anyone, if they were setting up a new nation on virgin soil, and they sat around saying, “we need a medium of exchange, how shall we create it?” come up with such a mad system?

    There is of course a very simple and very obvious alternative system. Simply have the government print money, if you feel the money supply is too small, and then spend it into the system. No more national debt. No more interest payments by taxpayers. Loan brokerage simply becomes another ordinary business within the economy, rather than its basis. And if a bank fails, the money supply does not disappear. What’s not to love?

  2. Ian B, where do you think the current system came from? It wasn’t imposed by aliens, it was a natural evolution. Of course people would re-invent it if they had to because that’s what they did before.

    What’s “weird” about it? The very first economies were “gift” economies with a duty to reciprocate. That duty is the credit with which you pay for your consumption. Then to stop cheats a money commodity enters the picture, followed by bills of exchange, which again are credit instruments where I promise to pay cash for my purchases at a later date. Credit will always inextricably be linked with the money (or “clearing”) system because the alternative is to carry around 100% of your income in case you need to buy something with it.

    “What’s not to love?” It’s not based on any kind of economics beyond the most tired old fallacies about banking?

  3. The current system was deliberately created when the Bank Of England was set up. There’s nothing natural about it at all. It was started very deliberately here in 1694, and the USA famously didn’t finally succumb to it until 1913.

    Having to borrow every one of your currency units into existence, with the attendant eternal interest payements, is the single most absurd system one could possibly imagine.

    redit will always inextricably be linked with the money (or “clearing”) system because the alternative is to carry around 100% of your income in case you need to buy something with it.

    This is just bizarre. Carrying around an accounting of your money instead of the money itself (a “bank note”) is not credit. It is certainly not credit money, since the money is an existant commodity that was dug out of a gold mine and is sitting in the bank.

    And, of course, most of those “tired old fallacies” are in fact valid (to varying degrees) criticisms of an extremely stupid system which benefits a few at the expense of everyone else.

    It’s also unclear that the first economies were “gift” economies. They seem to have been, initially, “take what you need from nature” and then internally communal and externally capitalist/trade based, as evidenced by the very ancient trades in rare non-local goods like amber, and tin for bronze, etc.

  4. I got the impression that new money was created out of thin air. The central bank just prints it. The government takes the money by offering up bonds etc. and then wastes, sorry, spends it on stuff.

  5. Creating it out of thin air and spending it is what I’m proposing. Currently, bank reserves are created out of thin air, and then everyone else, including the government, has to borrow it off them. It’s a big boggling, but perhaps the best way to characterise it is the previously existing credit is used to buy new bank reserves into existence, which are then loaned out as more credit, which is used to buy more reserves…

    Anyway, the net consequence of this intrinsically corrupt methodology is that paying back loans destroys bank reserves, so if everyone pays back their debts, including the State, the money supply literally vanishes.

  6. Growth in money GDP was fastest under Will’s hero, Harold Wilson. Real GDP grew faster under Churchill, Eden, MacMillan, Home, Thatcher and Major. [Heath’s numbers are controversial – should you include or exclude the impact of the miners’ strike]

  7. Ian B

    David Graeber’s fascinating book “Debt: the first 5000 years” provides ample evidence that credit long predates actual money: use of a system of favours, or obligations, goes back to the very earliest known economies.

    Having said that, I am personally of the opinion that in a fiat money system it is immaterial whether government borrows the money it spends or prints it. There should be equivalence between the reduced currency value arising from printing and the interest paid on borrowing. Therefore, cet. par. as usual of course, there should be no preference. I admit I’ve never seen any econometrics to prove this one way or the other.

    Regarding private debt, of course, Willy’s arguments are fundamentally flawed. The private sector is trying to reduce its debt, because it is still suffering from near-terminal indigestion after its credit binge in the 2000s.
    It’s not likely to want to increase its borrowing significantly any time soon. And do we really want to reinflate the credit bubble anyway?

    Also, when the private sector doesn’t want to borrow, it’s pointless throwing money at banks. They can’t lend it to people and companies that don’t want to borrow.

    Willy, as usual, has misdiagnosed the disease and prescribed the wrong medicine.

  8. Frances-

    There’s nothing wrong with debt, credit, lending and borrowing. They are a normal economic activity. It’s the question of the money system we’re talking about. And sure, favours predate money. We still do favours. But favours and obligations are not in fact very efficient, which is why for serious economic matters we prefer a market, not “you owe me a favour because I helped you build a barn last year, remember?”

    The problem with a debt fiat is that the goals work against one another. When the debt burden is far too high- as happened recently- the natural desire of economic agents is to pay down their debts. But paying down their debts reduces the very money supply the State wants to expand. You can’t get more spending without more debt. But people don’t want any more debt, and the banks have run out of people who can afford to take on more debt, hence the “low velocity” of bank lending.

    So you have a policy of stimulating consumption by printing money. But you can’t give the money to consumers, because they will pay down debts with it and reduce the money supply again. So you give it to banks, to lend, but there is nobody to lend it to.

    We have to break the link between money and debt, so that the debts in the economy become smply part of it, not the basis of it. You can do that with a commodity money, or you can do it with a raw fiat. I am these days more in favour of a raw fiat, because (a) it would be hard to get back on the gold standard and (b) if you do, the government will eventually fall off it again anyway, as they did in the past whenever they needed a lot of money to fight the Germans, French, etc; and once “off the gold standard” (i.e. in fiat territory) it is very painful reversing the inflation to get back on it again. Only to fall off again. Nobody will prefer monetary purity to national survival, so the gold standard would never be a rigorous defence against “going fiat”; so let’s be honest and have a well managed fiat, which can arrive in the world without debt attached.

    Banking, lending, mortgages, all the rest will still exist in a debtless money system. They simply will use money (like any other business) rather than being the source of it.

  9. Banking, lending, mortgages, all the rest will still exist in a debtless money system.

    So, if I understand this sentence you are saying that ‘lending long and borrowing short’ – i.e banking and debt; the issuance of debt; the issuance of long-term secured debt will all exist in a “debtless money system”.

    Surely you mean “in a non-fractional-reserve money system”?

  10. Surreptitious Evil-

    Fractional reseve is a significant, but different issue. There is a lot of heated debate about whether FRB is a form of fraud or not, and whether it would exist in an ideal free market. The thing I’m talking about here is the system of government debt generating the money supply itself by acting as the lending base for FRB.

  11. Ian B

    I think you’ve repeated quite a lot of what I said, just differently!

    I have some sympathy for the idea of targeting NGDP. My suggestion that there is no reason for a government to prefer debt issuance over money creation (or vice versa either) applies to normal circumstances. In abnormal circumstances there may be very good reasons for preferring one over the other.

    Money creation in the form of QE does not necessarily go to banks. It is paid directly to asset holders in return for the securities they hold. They may of course choose to put that money in the bank. But they could spend it on other assets. There is a small complication, in that banks are needed to intermediate QE money into money that can actually be spent into the real economy. But that doesn’t have to be through lending. QE does directly increase broad money without increasing overall debt levels, therefore. That’s it’s purpose.

  12. Ian B, you’ve gone from wrong to ganz falsch, “not even wrong”. In your first post you mentioned money being “borrowed into existence”. That means fractional reserve banking. A central bank has nothing to do with it. Money can be borrowed into existence on a gold-backed fractional reserve system without any hint of government involvement. You know, the system that evolved organically in northern Italy during the High Middle Ages.

  13. Sorry about the apostrophe scatter at the end of my last post. Should be “That’s its purpose”, of course.

  14. “QE does directly increase broad money without increasing overall debt levels, therefore”

    QE does increase the gross liabilities of the banking sector, so it “looks” lending in many ways.

  15. Nope, Richard, you’re making the common error of looking at part of the system instead of the whole system (shades of Bastiat) as with Tim’s “FRB doesn’t create money” posts passim.

    The money creation system is a feedback loop which ultimately hinges on the treatment of Government debt as “base money”, which is bought with “credit money” (M3, etc) but then turns into M0 when it gets into a bank reserve. No one part of the system directly creates new money, in the same way as no one part of the engine drives a car’s wheels. It’s all of it.

    FRB by itself doesn’t create new money. It creates new credit. Without base reserve expansion, FRB can only generate some multiple of the fixed base currency, as discussed ad nauseam here and elsewhere. The trick in base money expansion is the use of the M3 to buy new M0 into existence, via government debt.

    Which is why the banks are in disarray at the moment, because their government debts are about to lose all their value.

    The FRB multiplier itself is intrinsically limited by the strain on banks’s solvency. It cannot on its own continously expand the monetary base. Any bank that keeps increasng its credit/base ratio will eventually collapse; as Mervyng King explained in the 2010 Bagehot lecture, banks at the time of the crash were running higher than 50:1. The market tried to destroy them as a consequence.

    So anyway, the basic problem is allowing banks to treat government debt as reserves, in a nutshell. That’s what allows the money supply to expand indefinitely.

  16. Frances-

    QE isn’t the normal modus operandi though. It’s very famously a last resort. There’s also the question of what happens when QE money spends a little while circulating then ends up being used to purchase government debt, and the bonds end up in the banks’ reserves and…

    but then my head tends to asplode.

  17. Sorry, my previous comment got screwed up.

    “They may of course choose to put that money in the bank”

    This is wrong – they have no choice. Only clearing banks and the government can hold central bank money (reserves); pension funds, individuals, and foreigners cannot.

    Pension fund P owns £1K of gilts, and has holding account H with clearing bank B. If the pension fund sells that £1K of gilts in a QE operation, then the clearing bank will pick up £1K of reserves in clearing, and it will have £1K of liabilities to the pension fund.

    You can’t have an increase in broad money *without* a change in gross debt levels of *somebody*. The two things are mostly interchangeable.

  18. Actually, Mervy Baby’s 2010 Bagehot Lecture (available on an internet near you) is an interesting read. It comes across to me as a talk by a man who has grasped that something is terribly, terribly wrong with the whole structure, and really drastic change is needed.

  19. “QE isn’t the normal modus operandi though”

    It is not that different. The BOE has been extending their balance sheet by “printing money” forever. That is what they do to adjust short term interest rates – buy a few gilts with “printed money”.

  20. “So you have a policy of stimulating consumption by printing money”

    This is basically BS, though. The BOE tries to buy gilts from pension funds. The most direct route for QE money to get into the “real economy” is:

    1. pension fund sells gilts for £1K QE
    2. pension fund subscribes £1K to corporate bond issue (primary market)
    3. corporation buys new capital goods with proceeds of bond issuance

    I think it’s reasonable to say that QE is much more likely to change investment plans than consumption plans.

  21. JustAnotherTaxpayer

    I did say that banks are needed to intermediate QE money, so of course it always goes through bank accounts. But it doesn’t necessarily stay there. What I meant was that gilt sellers may choose to leave the money in a deposit account rather than use the intermediated money to do something else such as buying corporate bonds.

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