Ragging on Ritchie

Richard Murphy says:
September 19 2021 at 8:22 pm
Cite them

And in the world of near zero interest rates explain how that now works?

Real world evidence please

And note Krugman on this and what he says influences long term rates… https://www.nber.org/system/files/chapters/c6948/c6948.pdf

Rajiev says:
September 19 2021 at 9:41 pm
Richard,

As in Krugman’s paper, many factors affect real and nominal exchange rates – interest rates being one of them.

One factor he specifically does NOT mention in this paper you link to is productivity. As is well known, productivity has little or no effect on exchange rates.

It might be worth you reading papers before you link to them in future, as this one does not help your case. Real world examples have also shown, repeatedly that productivity is simply not a factor for driving exchange rates. It is very much the other way around, if anything, with exchange rates driving productivity.

You also ask for real world evidence, yet seem utterly unable to provide any yourself.

Richard Murphy says:
September 19 2021 at 9:46 pm
Have you read the paper?

I suggest you do so and see what he discusses when looking at long term equilibrium exchange rates

Interest rate changes are short term factors and – you might like to muse in this – really do not happen any more

You are, politely, ignoring the evidence

And I note but a single citation again

No more comments like yours will appear

Interest rate changes do not happen any more then? Oh.

And there was me thinking that real interest rates are the combination of the nominal interest rate and the inflation rate. And given that the inflation rate is bouncing around all over the place then the real interest rate is constantly changing. Which might be one of those reasons the FX dealers are still in business, as relative currency rates change?

The first is that this move shows how rigged the supposed UK energy market is. If this supposed market can only work on the basis of regulation and government support it is not a market at all. Why we have to suffer the cost of this sham is hard to work out when at the end of the day there is, in effect, a single national gas supply and the so-called market never actually changes what come out of the pipe we are connected to. The sooner utilities were nationalised to recognise this reality the better.

What comes out of the pipe might come from the N Sea, from a couple of small onshore UK fields, arrive in LNG tankers from abroad, through pipelines from Russia, or parts of Europe. Just because it’s all CH4 (roughly enough) the idea that the market doesn’t change what comes out is asinine to a remarkable degree.

Also, obviously, it’s not the pipelines about to go bust.

But love that nationalisation idea.

Currently we’ve got a substantial part of the domestic user base covered by a price cap. This means that retail prices do not, are not allowed to, vary when wholesale prices do. This is what is driving those intermediaries, the retailers, into bankruptcy. OK, not nationalise everything. Wholesale prices are still what wholesale prices are. Because our sources of gas are still that world market – LNG, pipelines and so on – because we’re not about to do the sensible thing and go fracking.

So, what can happen now? Either that retail price cap has to go – which solves the current problem – or all of that gap between high wholesale and low retail prices has to be covered by the taxpayer. Which is what is being complained about, that the taxpayer is going to have to cover the gap between high wholesale and the capped retail prices.

Nationalisation doesn’t even solve the problem being complained about. Which is asinine, rampant, stupidity.

Second, even though some consumer facing energy companies will be facing bankruptcy in the situation that has developed this does not mean that there isn’t profiteering going on. There clearly is. The cost of producing gas has not risen. All that is happening is that increased demand as the economy reopens is being reflected in increased prices and gas producers are profiteering from it. Of course, in the largest cases these producers also have consumer facing supply companies as well. The exploitation will be very obvious in their accounts, but the abuse is permitted by UK regulators. The question as to why that is has to be asked.

So, we must deny the price system then. Oh, and also extend UK price controls to LNG cargos on the High Seas, to pipelines out of Russia and…..have I said asinine stupidity already?

Fourth, in that case the need for a windfall tax is significant. And it could be done. All the major gas producers will be producing country-by-country reports for tax purposes. These could readily be adapted to indicate appropriate profit allocations to jurisdictions that could then be subject to excess profit taxes. International agreement is not required in that case. Political courage would be though.

British Gas already pays 75% of profits in tax – profits from gas production that is. The Crown owns all gas domestically produced. Our biggest import sources is Norway and we’re to go tax their state owned oil and gas company through country by country reporting, are we?

Eighth, this feels like another part in the systemic failure I mentioned a few days ago: we have constructed a wholly artificial market in energy that cannot manage the world we now live in, and the consequences are real as the failure imposes cost. How many times must we now suffer this?

What the hell’s artificial about a market where when demand rises in the face of short term static supply the price rises?

As the FT has noted this morning:

John Glen, City minister, has vowed that Britain’s financial services sector will enjoy “competitive tax rates” as he paved the way for a Budget cut to the 8 per cent surcharge on the sector.

The same article also noted that the government was reviewing the cap on bankers’ bonuses, which was an EU requirement. The aim is to boost the City of London.

So, as large numbers of working people in the UK face increased NIC, consumer price inflation, massive employment uncertainty, cuts in universal credit, and straightforward shortages because business cannot plan how to get out of a paper bag, let alone recover from an economic lockdown, the City’s bankers face tax cuts and bigger bonuses.

1) Taxes on bonuses are higher – because NI – than taxes on profits plus dividends. So, removing the limit on bonuses will mean a larger portion of the City’s total profit plus labour bill – aka added value – will go in tax payments. For someone who believes in MOAR TAX this is good, surely?

2) The 8% surcharge is on bank profits. The P³ stoutly maintains that taxes upon profits do not impact upon worker wages. Yet here he says that bankers will gain lower tax rates. So, profit taxes on banks must impact upon the wages of bankers.

He never does think through what he says, does he?

If ever there was a wrong person for a job right now Haldane is it.

I can think of the occasional person less suited to be an economics professor, for example.

Nigel Dawson says:
September 19 2021 at 1:38 pm
Surely even the most basic economist must know that FX rates are primarily driven by interest rates in different currencies, not productivity?

Reply
Richard Murphy says:
September 19 2021 at 2:40 pm
They’re not

That’s why no one knows that

Reply

Oh.

11.1 INTRODUCTION
It is conventional in macroeconomics textbooks to see the interest rate
as the price of money and to consider it in the context of the supply of
and demand for money. Here, however, we consider the interest rate
alongside the exchange rate. The reason for this is that because capital
can move freely into and out of the country, UK interest rates are
closely linked to interest rates in international markets, particularly
those in the USA, Europe and Japan. Because investors, in deciding
where to place their funds, are choosing between assets denominated in
different currencies, this leads to a close connection (explored in detail
later in this chapter) between interest rates and exchange rates. In an
open economy such as the UK, the link between interest rates and
exchange rates is stronger and more direct than the link between
interest rates and the money supply. We start with interest rates, and
then consider exchange rates.

It’s astonishing what he doesn’t know, isn’t it? And yet he attempts to advise governments?

And we’ve the international Fisher effect, and interest rate parity to think about as well.

Ho Hum.

It’s also unnecessary. Given that exchange rates are largely set by relative productivity rates after hot money flows are taken out of account

Err, no. They’re – largely – set by differences in inflation rates/interest rates, those two being rather intimately combined. The FX rate is a monetary phenomenon, thus influenced by monetary factors.

We can indeed look at the real exchange rate and productivity, but not really the nominal.

And last, there is the rather odd assumption that the Scottish people would not be willing to lend their own government money after independence. As in the rest of the UK there are substantial savings owned by Scottish people. My research has shown that maybe 80% of UK savings are tax driven as to their location. This is likely to be true in Scotland, therefore. If the Scottish government decided that it wished to change tax incentives in ISAs, pensions and its own range of savings accounts to encourage people to save with it then that would very likely be successful in raising significant funds for it. The dependence on foreign money markets could be eliminated.

Better still, my solution puts Scottish savings to work, when at present few of those savings will actually fulfil any useful function within the economy. Much will be lying dormant in bank accounts earning almost nothing. And by Saving for Scotland what people will also do is provide the capital for the solid foundation of their new state – and in the process help build it for the generations to come. As a move towards national solidarity little could work better.

And that hot money he talks about is oft referred to, more correctly, as portfolio investment, which is exactly what those savings he’s talking about are. So, we’re to solve that FX problem of portfolio investment by portfolio investment. Hmm….

Accountancy does always require double entry. Tett is worrying about the size of the credit – as is so commonplace, based on government debt obsession – but the consequences of the debit – which represents the asset that ownership of debt represents – is just as significant.

Growing debt represents increasing wealth inequality. There is no widespread ownership of this debt, and nor is there widespread ownership of the legal entities that own that debt, such as banks. Pension entitlement is, for example, very concentrated.

Borrowing is required to provide access to funding for those without it. But that creates increasing wealth for a smaller number. In my opinion the issue here is not the debt as such. It is the increase in inequality that really matters here, I think, because that is the real cause of the stress Gillian Tett is worrying about.

How to tackle that? Additional taxes on wealth are one very obvious way to do this, not because we need the money to fund anything, but because inequality has to be reduced. It is time we recognised that.

So we tax folks more, reducing the debit, which means – ineluctably – reducing the credit which is that borrowing that is required.

This works how then?

We have short term price pressure because of Brexit, Covid and climate change, but when iron ore prices can fall by 20% in a week, as they gave done in the last week, this can be seen as the price of disrupted markets and not the consequence of any underlying monetary trend that can be tackled by central banks.

All monetary explanations of inflation are wrong because the iron ore price can fall. Good to have that sorted out then, eh?

What is the way forward? With this post already 1,000 words long this is not the moment to address that in detail. But there is one over-riding message, which is that nothing will change until it is accepted that what we have had is broken, irreparably. Whilst we hanker for what was, and the idea that we can ‘get back to normal’ remains a dominant narrative, we remain in trouble.

What was has, I rather strongly suspect, gone. What we have to do now is build what comes next. It does not matter whether we want to or not. We have no option. The way we were was not sustainable in any sense, whether politically, economically or socially. When that is recognised we can move forward. My big concern is that I doubt that we are there yet. At the same time, I also think that awareness is coming. And that’s my basis for hope.

We must do something different though I know not what. A useful guide that, eh?

The allegation is that the process was corrupted.

There is much fury in the development community about this, and those who have always seen the World Bank as a neoliberal enemy are having a field day.

I admit I see things slightly differently. I am delighted by the demise of the Doing Business report. It has always promoted a profoundly inappropriate view of the world concentrating as it did on light regulation and low tax as the basis for prosperity when quite clearly what was not true. This report was part of the old Washington Consensus which the world can most definitely do without.

The background here is that the World Banks’ “Doing Business” report ended up with some governments putting the pressure on to get better results. They’ve thus cancelled the report.

Hmm, well, that just never does happen in other international bodies, not at all. The WHO is not, in any manner, beholden to China over ‘rona for example. Nope. Therefore we should not take this as an example of why we should be leery of international bodies and law. Nope.

But rather more interesting is the insistence that the WB is on the side of low tax and light regulation. And that this report measured that. Not really, no:

The reference to tax rates is here. It’s not even a majority of the ease of paying taxes measure.

It’s not even about light regulation. It doesn’t ask anything at all about gaining permission to operate in a particular sector or anything. It is about effective regulation – rule of law, contracts, courts, property rights and so on. But then those are ease of doing business, not predelictions for light regs and low taxes.

But the P³s opposition isn’t based on knowledge of what the measurements actually are anyway. As with his opposition to the Washington Consensus itself – merely a list of 10 stupid things you shouldn’t do to an economy – it’s just that there’s a vague lefty unease at anyone measuring bad government therefore the measuring should be opposed.

How to tackle that issue remains very largely unknown, but acknowledgement of the issue is a key first step.

Third, in that case what this suggests is that better data on many aspects of employment is required from employers. Gender, class, and race and ethnicity pay gaps are all required now by that most important of stakeholders of all corporations, which is what employees are.

There is no accounting standard on this issue. There should be. It’s on my list.

We’ve no idea what to do about this but someone should pay me to write some blather about it.

Cool!

It is already the case that the financial services sector is piling in to make money out of offset. And since scarcity will pay them rich rewards you can be sure that they are going to restrict supply. In that case assuming the availability of offset opportunities when suggesting a route to net zero is naive at best, and profoundly misleading at worst.

High prices being the solution to high prices. For, of course, when seeing the vast amounts to be paid for offsets folks will go create more offsets.

Has he even reached that chart on page 3 of the standard Econ textbook yet?

And in the meantime discussions on sustainable cost accounting suggest that it is being noticed. The awareness that the sustainability reporting being proposed at COP 26 will fall far short of real need is increasing as investors realise that knowing how much carbon a company produces does not indicate how the problem will be solved, or what the cost of doing so might be. Despite this the government seems wedded to this approach that will fall so far short of investor needs, and those of society. I am being encouraged to write an alternative accounting standard on this issue and that is requiring some thought.

Have a carbon tax. That puts emissions into all market prices. Corporate accounts are compiled from market prices. Job done.

Of course, that doesn’t get me a one day a week job from Copenhagen Business School for the next four years so perhaps someone would care to just give the cash up front right now?

The idea that MMT says there may be money creation without limit is so grossly wrong it is absurd: what it emphatically says is the exact opposite. It recognises the real physical limits of the economy. The authors do not even hint of their awareness of that. It makes one wonder how much they have actually read about MMT. They only reference one MMT article by an MMT author, which is by Stephanie Kelton, but rather more by opponents.

What they have emphatically also not realised, or deliberately ignore, is that MMT has a very strong focus on inflation control.

They also, therefore, ign0re the role of tax in MMT, even though they read an edition of the Real World Economic Review where I had an article that discussed the role of tax within MMT.

From the article being fistthumped at:

Arguably, proponents of MMT are aware of this history. What they derive from these insights is that the roles of fiscal and monetary authorities (Treasury/Congress and the Fed) could be effectively reversed. Under MMT, the Fed finances the deficit by printing money, while the Treasury and Congress use their tools (taxation, expenditures and fees) to stabilize the economy and fight inflation. For example, Congress could raise taxes to dampen aggregate demand when the economy heats up. In fact, many MMT theorists are quite concerned about the dangers of inflation — perhaps to a greater extent than adherents to post-Keynesian or even New Keynesian views — because it erodes the purchasing power of wages. While in the latter frameworks, inflation greases the wheels of the economy, this is not necessary under MMT since the government’s printing presses provide lubrication. The hallmark of MMT is thus a fiscal view of the world, where the fiscal authority becomes responsible for the traditional monetary policy domain. In fact, MMT might be more aptly called “modern fiscal theory.”

So, they talk about tax being used to control inflation, this shows that they don’t talk about tax to control inflation in MMT does it?

Dr Tim Rideout says:
September 10 2021 at 5:06 pm
My expectation is that a post-Brexit sterling continues its 100 year pattern of decline so sinks against all currencies including the S£. So I am leaving the S£ unchanged and predicting a continuous slow erosion of sterling. We would not want the S£ to rise against the Euro, Dollar etc. Back when my mum went to Switzerland in 1947 you got 25 SFr to £1, today it is about one to one. I don’t think it would be good to pin ourselves to sterling unless somebody thinks we need a devaluation against everything else.

The P³ in charge of money printing will lead to the Bawbie rising against the £ sterling, will it? And an;t it quaint to think that the FX rate is in the control of a government anyway?

This is fun too:

Richard Murphy says:
September 11 2021 at 7:16 am
Jim

Scotland should never, ever join the euro and there is no reason for it to do so or peg. That would be economic madness. And Sweden proves it is not necessary.

Richard

So, Bawbieland can sign an international treaty promising to do something and not do it, ever, and that’s just fine. But for the UK to breach the NI protocol by having a border in Ireland – something not even mentioned in the Good Friday Agreement – is such a breach of international law that Boris should be on the wrong end of a pike?

The bit that’s being missed in that little hope is that there will be much in those bank accounts to convert on 1/2 Jan…..given that they themselves are predicting depreciation, won’t everyone move into sterling first, before the Bawbie?

The comment is, of course, misleading. There is no chance of the US running out of cash, or defaulting, unless that is what the Republicans choose that it should. The US can in reality create as much money as it wants, subject (if it is prudent) to inflation constraints and, of course, politics.

The Republicans could try to crash the dollar. But let’s be quite clear, that is not necessary. And the impression given that the US is running out of money is false. It can’t do that unless some deeply misguided politicians choose otherwise.

Sigh, if only he knew anything.

The US has a legal debt limit. Congress has passed a law – you know, democracy and all that – which says that the national debt can only become “yea big”.

Every few years they realise how much this is constraining their spendthrift ways and vote again to make the new debt limit “yea plus big”.

The Federal Reserve does not print dollars and send them to Treasury. Instead, financing is done by the Fed buying Treasury bonds (bills, notes) meaning that the debt size is, given the debt cap, a constraint of the number of dollars available to the government.

Congress has, in the past, refused to raise the debt cap. And government has started to close down for lack of money. They do, generally, quickly then raise the debt cap.

The US is one of those places where the national government can actually run out of its own cash.

the one unexpected element, which was an increase in the dividend tax rate by 1.25%.

Dealing with the latter first, this should be seen for what it is. It is a sop to criticism. It supposedly addresses the issue of national insurance avoidance by those who pay themselves using dividends from limited companies. I have no particular problem with tackling that issue, but there is a flaw. The implication is that genuine investment income – the dividends received in ISAs and by savings institutions, interest and rents – should all remain exempt from this charge. Implicit in this move was another attack on working people as a consequence, with the very obvious intention being that genuine wealth should be untouched by the demand that it contribute to society. The bias could not be clearer.

Genuine wealth contributing to society by being, umm, invested in it perhaps? That capital stock does have to come from somewhere, after all. Whatever is to be said about MMT and money printing it’s still true that for there to be a capital stock someone, somewhere, has had to delay their consumption….

I think I need add very little. I would much rather none of these issues had needed to be drawn to public attention, but eventually John and I, for differing but related reasons, felt we had no choice but to disassociate with TJN because we now consider it is doing more harm than good when it comes to tax justice-related issues. The colleague who reviewed the comments made by Alex Cobham to The Times agreed. But what their analysis suggests is that this is not an issue that can be laid at the door of what that commentator calls the ‘founding group’ (otherwise called John Christensen and me) and can instead, on the basis of Alex Cobham’s own analysis provided to The Times and on its blog be laid firmly at his door, rather as John and I have suggested.

The bit they’re missing is that every organisation not subject to market forces does turn to shit. The market forces having the glorious result that when it does turn to shit then it goes bust and is cleared from the environment. This is the grand glory of the system.

You know, the system the P³ thinks shouldn’t have such prominence despite his own personal experience.

The professional bodies with a concern about tax – whether of lawyers or accountants or the dedicated tax profession – all have one thing in common. They supposedly exist to promote high professional standards in the public interest. I emphasise the last point.
…
It’s possible for the tax profession to engage in policy debate with your doing politics. But right now my allegation is that its silence is profoundly political. In the absence of comment the status quo and the prevailing narrative are maintained. That is what the taxed professions are permitting. And when what is happening is clearly not optimal tax policy that does them no credit.

It’s time the tax profession acted in the public interest – and right now I am not at all convinced that it is.

All must be politics, all the time politics. The professional bodies should be arguing for a specific set of political policies that is. Instead of, you know, paying unto Caesar and otherwise shutting up?

What’s really cute about it is the underlying assumption that if those bodies did do politics then they’d do the politics the P³ approves of. Which isn’t, to put it mildly, what we have seen when people who know what they’re talking about do opine now, is it?

Charging national insurance at 12% on all employees, including those earning over £50,000 a year, could raise £14 billion of extra tax a year

That would put us well over the peak of the Laffer Curve. Which, in that Saez and Diamond paper was put at 54% in taxes paid upon employment income. Note the careful description there. Not income tax, but taxes paid upon employment income and as the paper says, that includes employer paid employment taxes.

40 or 45% income tax, 12% employee NI, 13.8% employer NI – we’re well over 54%, aren’t we?