Ragging on Ritchie

So, what if interest rates rise?

That £800 billion on deposit from the banks at the Bank of England will now need to pay more than 0.1%. So, how do we stop that being necessary?

Just issue perpetuals, or 100 year bonds, to the bank ins exchange for their £800 billion. Job done.

There is a certain amount of glee with which he tells us that inflation will mean that £800 billion in a century is irrelevant. Which does sit oddly with his insistence that everyone should invest in bonds for their pensions.

It also sits oddly with his insistence that rational expectations is rubbish. Because the reason that one third of gilts are inflation linked is because they did that inflating out of debt to investors before and some of them at least have learned from this. They are, rationally, not willing to lend to government, long term, without inflation protection, as a result of their expectations.

But now think through this. The banks don’t own those reserves in the central bank account. Well, they perhaps do in one sense but not in the important one. These are deposits by customers of the banks that the banks are then parking there.

As a check on this – and I don’t know the answer – what is the capital base of the UK banking system? £800 billion? Would surprise the hell out of me if it were. So, it’s not actually “shareholder” money in the BoE. It’s depositor. And those depositors might like it back at some time. If it’s in a perpetual bond the banks cannot sell then they’re bust when everyone asks for it back.

So, perhaps bankrupting the banking system might not be a good idea.

OK, so perhaps they can sell them? Perpetuals at 0.1%.

Hmm. So, what happens then? Well, think what QE is. We invent money down in the basement of the BoE and go buy bonds with it. This increases the money supply and reduces the number of bonds floating around thereby reducing interest rates/increasing bonds prices/reducing yields.

The money so created ends up in the BoE in these reserve accounts.

Spud tells us that we need not, should not, cannot, reverse QE because this would destroy money.

So, instead, we’re going to change the new money created, now in the reserve accounts, for bonds which the banks will sell to the market. Which increases the number of bonds on the market, increases interest rates, lowers bond prices and raises bond yields. Oh, and what does the BoE do with the money that it now has instead of those bonds it’s just given to the banks? It destroys it of course.

Because, you know, if it sends it out again it just ends up in the reserve accounts again in the name of the banks.

That is, giving the banks saleable bonds instead of reserves is reversing QE. Exactly the thing that Snippa tells us need not be, should never be, done.

Oh. And if those bonds can be sold then they are part of the national debt and need to be counted as such. So Spud’s caterwauling about the size of the national debt is also wrong.

As to why he doesn’t already grasp these aspects of his plan it’s because he doesn’t grasp the subject he’s trying to talk about. But then there’s nothing new there, is there?

Giving the banks bonds for the QE money sitting in BoE reserve accounts is reversing QE. And it’s the man insisting we must never reverse QE who suggests giving the banks bonds.

BTW, this man teaches economics at a British university. Sigh.

That is because I do not accept the premises of rational expectations theory,

Hmm.

So why are some one third of gilts index linked then?

To be clear, when interest rates cannot be used to control inflation, as is the case in almost every developed country now (and many others as well) because official interest rates are at, or near zero, tax is the only tool available for this task.

Interest rates are at near zero as a method of controlling inflation twatto. You know, to stop inflation being too low? And if we find that inflation rises then we can, of course, raise interest rates to control it the other way around, to reduce it.

Seriously, why does he think interest rates are at zero if it’s not to control inflation?

And that, of course, is populist politics in a nutshell. Ignore the evidence. Dismiss the experts. Create a grievance. Hype it in the media. Find someone to blame. Ramp up the rhetoric. Repeat as often as necessary. Glow in the aftermath of rebellion. Never accept responsibility. Move on.

Everyone else who has done MMT hasn’t done real MMT – Venezuela, Zimbabwe etc. Everyone but me is wrong about MMT and that Friedman bloke, hunh, what did he know? It’s the Bastard Tories’ fault that we can’t have everything. Write lots of pieces about this and spout the nonsense on radio. It’s all the Bastard Tories’ fault we can;t have sugar and spice. Repeat as often as necessary. Glow in the aftermath of rebellion. Move on.

And never, of course, come back to explain why things didn’t work out. Just as he hasn’t over that previous Jihad about tax avoidance.

So, yes, I think we can safely say our Snippa is a populist. By his own definition. The defence would be that he’s monumentally unaware of his own behaviour…..

This event is tomorrow. It was going to be a discussion but due to illness of other participants, it’s now a Q&A with me on MMT.

Even the prospect of working with Snippa leads to illness….

“We must act today because the cost of doing so tomorrow will be greater than it is now, and the scale of the issue we will face will have increased.” This is the view of Professor Richard Murphy FCA.

Stick within his own assumptions here.

OK, so, more emissions make climate change worse. We would like to reduce emissions early then. As the Stern Review – and all economics on the subject – points out, there are costs to reducing emissions. Nordhaus even gained the Nobel for exploring this.

Now, imagine – no, just imagine – that the costs of reducing emissions decline over time even as the costs of not reducing emissions rise over time. That makes life complicated for we have to look for that sweet spot, that optimal moment to reduce emissions, or perhaps the optimal rate at which to do so.

Just to invent numbers, the cost of not reducing emissions in 2020 is 100, of delaying until 2030 is 150. But the cost of reducing emissions in 2020 is 100 and in 2030 it’s 50. Or 10. Or 90.

The 50/10/90 difference changes the optimal moment or amount of emissions reduction.

So, our question is whether our imagine about emissions reductions costing less over time is true. Which, of course, it is. Try replacing oil with solar at 1980 prices. Try again at 2020 prices. This even before we get to the Nordhaus point about the capital cycle.

Murphy’s claim – at best – needs a lot more calculation and support than he’s offering. At worst it’s simply wrong.

Political economy recognises that all power persists so long as its narrative can be supported by society. And political economy presumes that those with alternative narratives have power simply because of their ability to tell those other stories.

MMT is an alternative narrative.

Even, just making stuff up. Explains a lot.

What are the right words to describe this? Contemptuous? Aggressive? Bullying? Incompetent? Arrogant? It is certain that nothing positive comes to mind.

Stage 3 QE works alongside a transformation of savings. State subsidies to savings – that drive the Ponzi scheme arrangements we have – need to change. So pensions funds, to get tax relief, must save 25% of their new contributions in investments that create new green employment.

The function of investment is to create jobs now, is it?

Teaspoons all ’round then.

Now actually try thinking about this. Investment means buying machines ‘n’ stuff to get work done. That is, exactly the opposite of creating jobs. Because the machines are the automation of the work, aren’t they?

As I say, the man’s insane.

QE had the aim of removing gilts from the market. The idea was that money would go as a result go into riskier assets, and new investment. It didn’t. It went into speculation.

Speculation is riskier assets, isn’t it?

Raymond Carter says:
November 27 2020 at 2:13 pm
Haven’t we had inflation without full employment in the past?

Richard Murphy says:
November 27 2020 at 4:01 pm
Yes, due to an external shock called oil

But that cannot be controlled using any economic policy

It just has to be worked through

Only oil can be that external shock creating inflation? Our word there, our word. That medal from Stockholm is imminent.

No one else has managed to explain stagflation so simply. Nor things like imported inflation as the FX rate slumps because of excessive money creation – just to give one other example.

Sam says:
November 27 2020 at 12:26 pm
Is the answer when faced with the usual retort “by creating more money you are pushing the value of sterling lower” that this mainly affects overseas investors or could it have an impact on imports for UK businesses and how is this offset?

Reply
Richard Murphy says:
November 27 2020 at 12:46 pm
Where is the evidence for this?

Err, Zimbabwe? Venezuela?

What does investing in a sustainable economy look like?

Most important, it is about making the UK’s 30 million buildings energy efficient. Triple glazing. Insulation. New boilers. Heat pumps. And solar power. All done street-by-street by a mass of newly trained people to do the job.

It’s as if he’s never heard of the Great Leap Forward. Or even the Australian Great Green Bodge Job.

But, as I have already noted, the assumptions that underpin this are that business and consumers spend, spend, spend from 2022 onwards and there is simply no evidence based on past economic recoveries, where caution persists for a long time after recovery begins, to suggest that this is likely.

His already noted part is a piece which looks at post-2008. That is, not past economic recoveries but the last economic recovery. Which is a pretty thin evidence base really, one time in one place.

Actual economists who opine on such things have pointed out – in fact good ones, like Krugman, were pointing this out in 2008 – that recessions following a Kaboom in the financial system – or accompanied by, or which cause, your taste there – take a long time to recover from. Recessions so unaccompanied do not.

He’s fighting the last war and only the last war, rather than looking at what economics and economist actually have to say. But then this is Snippa, isn’t it?

The Tre Professore has told us this morning that very few people understand UK economic statistics. Apparently, because the ONS site isn’t very good.

Hmm, it could be because some people just don’t understand economic statistics:

What is happening is aberrational. Households are saving almost 30% of their incomes.

Of course, that helps explain an economic downturn. This translates into a lack of demand in the economy.

No, no it doesn’t. The numbers being quoted are up to the end of June. We’re in November now, they are not current numbers. Further, the Telegraph can tell us what is actually going on:

The Office for National Statistics’ more detailed breakdown of the April-June quarter – the worst decline on record – showed average household savings jumping to a record high of 29.1pc after the shuttering of all but non-essential shops.

Household spending over the quarter sank by a record £80.5bn

Yes, and?

The UK economy is 21.8pc smaller than it was at the end of last year.

But thanks to the effect of the furlough scheme, as well as support for self employed workers, employee compensation “only” fell 2.2pc over the quarter.

People couldn’t go out and spend during lockdown. But they still had incomes. If you can;t spend then you must save. QED.

A bemoaning:

But they’re not alone in producing hopeless information. Until a couple of years ago the Treasury produced a useful monthly publication called te Treasury Pocketbook. They have now abandoned it. I know not why.

And the Office for Budget Responsibility replacement is not that good.

Is it really beyond the wit of the OS to publish a monthly pocketbook of economic data in an accessible form, with links to accessible explanation? I think that the minimum we should expect from them.

The, err, pocketbook sources are listed – by the government – here.

Sigh.

It even knows that the NHS is not fit for purpose now, and its only answer is to outsource.

We have indeed known that for some time Snippa.

Seeing off austerity will require the realisation that QE must be used to help finance longer-term measures to deal with regional inequality, the need for secure jobs in every constituency, the repair of our threadbare social infrastructure and the climate crisis.
Colin Hines
Convenor, UK Green New Deal Group

That’s really turning it into a magic money tree, isn’t it?

Just keep printing money until the heart’s desires of the ex-economist of Greenpeace* are achieved.

*I think?

What do MMTers think would have happened if the Fed had bought $500 billion in bonds in 1998, and announced that the increase was permanent? And why?

Sadly, the MMT guru we have won’t even understand the question.

There is no such things as taxpayers’ money. The UK government is the monopoly producer of sterling. It is government-created money that we use. That money is created when the government spends. The part of that spending not taxed back – the so-called national debt – is the government created money that keeps our economy functioning. We can’t do without it. And we couldn’t pay our taxes unless this money existed. Government money is what keeps the UK going.

Well, try a Marxist rewrite on the basis that labour is the valuation of everything:

There is no such things as taxpayers’ labour. The UK government is the monopoly producer of labour. It is government-created labour that we use. That labour is created when the government spends. The part of that labour not taxed back – the so-called national debt – is the government created labour that keeps our economy functioning. We can’t do without it. And we couldn’t pay our taxes unless this labour existed. Government labour is what keeps the UK going.

We could also insert, more correctly, resources, or even value added. There is x amount of value added in the UK each year. That’s what GDP is. Government abstracts some of that to do what government thinks should be done rather than what the people who create think should be done. Not quite so powerful an idea that it all belongs to government now, is it?

Around £800bn of the national debt is owned by the UK government. It's bought its own debt back using quantitative easing (QE). So this debt is not now owed to anyone. After all, you can't owe yourself money. So why are we obsessing about this? For no good reason, I'd suggest.

— Richard Murphy (@RichardJMurphy) November 23, 2020

We don’t want to pay off the £800 billion right now. But we might well want to in the future.

The £800 billion is £800 billion in new money that has been created. So, with all that new money sloshing around the economy we might get inflation. Don;t worry too much about whether we actually need full employment for this to happen as Smurph insists or whether we can have inflation and unemployment – stagflation, as we historically have had.

Just run with the idea that lots of new money might lead to inflation. As it might.

So, we’ve two solutions here.

One is the Murphy/MMT one. We’ve got inflation, we increase taxes, feed the money back into the Bank of England and cancel it.

There’s the standard QE explanation of what we do. We sell the bonds back into the market and raise interest rates which curbs inflation. The money we’ve received for the bonds is fed back into the Bank of England and cancelled. Cool. But, note, we’ve now got £800 billion of gilts not owned by government but owned by all of us out here. And we’d likely like to have our money back, or at least the interest payments. So, taxes must rise to pay us all.

So, MMT or QE, doesn’t matter. If inflation turns up – I’d say it will but that isn’t crucial to this point – then taxes must rise and the debt paid off in order to destroy the money.

We get to the same place either way.

So, why would we like to pay off the £800 billion? To kill inflation if it arrives.

There now, that wasn’t difficult, was it? Well, assuming your name isn’t Richard Murphy it wasn’t difficult.