Timmy elsewhereJuly 10, 2013 Tim WorstallTimmy Elsewhere32 CommentsAt the ASI. Why I tend not to believe in macroeconomics very much. previousThis is cutenextThe complete absurdity of Ha Joon Chang 32 thoughts on “Timmy elsewhere” Dinero July 10, 2013 at 10:04 am Ah but its not quite the same thing at the Brussels level. Bond debt effects the currency and thus the other members of the Euro. The issue with the suplliers is an internal matter. Ian B July 10, 2013 at 11:23 am Because there is no macroeconomics, as imagined by macroeconomists. Like many false theories though, its adherents believe not that its failure is disproof, but that its failure is proof of the need for more epicycles. Possibly the core fallacy is the idea that “economic growth”, an aggregate variable, is a consequence of government monetary policy. There seems to be a widespread belief that economic growth can be created by either (a) raising the interest rate or (b) lowering the interest rate and that the key to success with this is to find, somewhere in the world, a genius who knows the precise moment when to do either. Hence, all the faith of the nation is currently with a Canadian with a plywood smile who we are assured is directly psychically connected to the interest rates aether. It’s like a bunch of Aztec priests furiously arguing about whether the key to making the crops grow is (a) more sacrifices or (b) less sacrifices. Barking mad. Dinero July 10, 2013 at 11:37 am It is novel. Anyone could comply with the Brussels deficit rule by openning credit accounts with their suppliers. Andrew M July 10, 2013 at 1:08 pm An extended family member got a job teaching English to out-of-work adults in rural Italy. It’s a government-funded scheme, the idea being that re-skilling workers will help them find new jobs. He hasn’t been paid by the language school in six months. The language school hasn’t been paid by the government since even longer. Apparently this is not uncommon in Italy. Luke July 10, 2013 at 1:13 pm Ian B, “Possibly the core fallacy is the idea that “economic growth”, an aggregate variable, is a consequence of government monetary policy. ” So if the B of E were to raise interest rates to 50%, that would have no effect on growth? Because it is, as you say, a fallacy that government monetary policy has an effect on growth? Ian B July 10, 2013 at 1:24 pm Luke, I didn’t say that. Lots of things can affect economic growth. A massive earthquake will negatively impact economic growth, or an infestation of wild boars. But neither earthquakes nor boars are causative of economic growth. Dinero July 10, 2013 at 1:32 pm someone has got to set interest rates Ian B July 10, 2013 at 1:33 pm Why? Dinero July 10, 2013 at 1:35 pm Well otherewise there would not be any Ian B July 10, 2013 at 1:37 pm You mean people in the marketplace are incapable of deciding at what rate they wish to lend capital, without a government policy on the matter? Dinero July 10, 2013 at 1:39 pm Banks are free to charge more than the bank rate if they please. Dinero July 10, 2013 at 1:43 pm The FED and BOE are independant , in principle , from government – so it is not government setting interest rates, it is Banks setting interest rates. Ian B July 10, 2013 at 1:59 pm “In principle” being the important clause there. They would not exist without government and the special powers which government grants them (particularly, the money creation power which is a crime when perpetrated by anybody else). Dinero July 10, 2013 at 2:04 pm Banks operated quite ok before the FED and the BOE creating credit or as you say “money”. Ian B July 10, 2013 at 2:08 pm Indeed, which is why we need to return to a free market banking system. Dinero July 10, 2013 at 2:12 pm what is your objection to the BOE acting as the central clearing bank and lender of last resort Dinero July 10, 2013 at 2:13 pm free banks also create money but you call it a crime Ian B July 10, 2013 at 2:21 pm Short answer (since we seem to be doing them): because it acts as the mechanism for the imposition of central economic policy on the market, with ruinous consequences. Dinero July 10, 2013 at 2:27 pm Yes it is a bit odd when the central bank starts manipulating the nations currency for a politco-economic goal .Especially the FED , which has a mandate to aim for full employment. But the BOE does not have that mandate. And any financial system is going to have a central clearing mechanism, with its assosiated policies., and the underlying BOE policies don’t seem unreasonable. Maybe the 2% inflation target is a bit controvercial. DBC Reed July 10, 2013 at 2:33 pm The key question is why are governments borrowing in the first place? If banks create money why pay them to do it when the guv can create the money itself, cutting out the (private sector) middleman. The way Abraham Lincoln paid for the American Civil war: he just issued Greenbacks which everybody accepted. (as Ian B has pointed out before). All these unpaid people could be paid in cheques or electronic payments dished out by the Guv thus increasing the money supply but so what? Dinero July 10, 2013 at 2:39 pm > DBC Reed If governments had no imperative to repay their borrowing there would be no measure of the benefit or harm of there spending, and so bad policy could go on incidiously indefinately until the economy, and therefore the tax base from where the repayments come from , was wiped out. Ian B July 10, 2013 at 2:56 pm The current system doesn’t measure the benefit or harm of government spending either. It just locks governments (i.e. their taxpayers) onto an escalator of interest payments. Who benefits from this? (Clue: not the taxpayer). As DBC says- if you want to expand the money supply, print greebacks. No debt. No interest. No excess profits to the bank cartel you paid to create money on your behalf. Too much money in circulation? Tax it andthrow it in a slush fund ready for the next bust, and make the ghost of Keynes happy on his cloud. If you had a banknote printing press, why would you give it to somebody else and borrow the bills they print at interest? You’d be mad to do that, wouldn’t you? Dinero July 10, 2013 at 3:02 pm It does act as a measure. Yes there is outstanding national debt, but there is constant pressure to reduce the deficit. In the capatalist system you spend productively, and earn money or not at all. The government is no exception. Its earnings are called tax. The banks don’t create money , it is the borrower who creates the money, it is the creditworthiness and earning power that gives their IOU value. If you had a printing press would you spend prudently or un prudently. Ian B July 10, 2013 at 3:07 pm So we seem to be back to this canard that “the banks don’t create money”, in which case I will once again ask the question, “then who does?”. Check prices now compared to, say, 1970. Or GDP. There’s much more money about now. Where did it come from? Did the money fairy create it? DBC Reed July 10, 2013 at 3:10 pm Ian B has got this pretty well sorted. Dinero July 10, 2013 at 3:14 pm Well the point is the borrower is the one who is insticating the credit issue but entering into an IOU agreement and the banks facilitate this. The amount of money in circulation is determined by the requirements of bank customers that borrow. Dinero July 10, 2013 at 3:19 pm The money comes from the credit issue. The idea that that banks can only lend out deposits that already exist is a wrong. A bank can issue a cheque to a borrower and then owe that money to the bank where the borrower deposits it. Ian B July 10, 2013 at 3:21 pm I hereby copyright “greeback” 😉 There’s one other wrinkle on this; the “discipline” occurs at the wrong phase of teh business cycle. During the boom, when there is excess money creation, nobody exerts any discipline. Times are good, leverage goes through the roof, spend, spend, spend! More particularly, borrow, borrow, borrow! When the inevitable crash comes, the “discipline” appears, but it’s too late. The money managers are faced with two options, equally bad. Cut spending, “austerity”. But you can’t reduce the deficit because you’re just borrowing more and more to pay the interest on the previous borrowing. Or, keep spending and, er keep borrowing even more to pay the interest. Neither can have a positive effect, which is the position we find ourselves in since 2008. The interest is the problem. It’s like James Goodfellow, who borrowed tens of thousands on his credit cards. Which was a fabulous policy until he couldn’t get more credit. Now, he starts to impose “discipline” on himself, but it’s too late. Even with discipline, he can’t pay the interest. His spending cuts are too late in the cycle. Dinero July 10, 2013 at 3:25 pm true, true, to be prudent, the government should not be borrowing during the boom Matthew L July 10, 2013 at 4:07 pm So is Pareto efficiency macro or micro? http://www.smbc-comics.com/index.php?db=comics&id=3045 Ian B July 10, 2013 at 4:17 pm Where (and if) meaningful, micro. Unfortunately, you run into the immediate brick wall of defining optimally efficient distribution objectively, and end up with a bloody nose. Matthew L July 10, 2013 at 5:10 pm and end up with a bloody nose. Depends on the time of the month, surely? 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