Money’s golden connections

A recent email from Positive Money posed an interesting question:
“How is it that lack of money, the only resource that can be created at will, forms the main obstacle for addressing effectively society’s problems?”
If we presume that the resources they refer to are labour, land, energy and money, then it is delightfully true that only one of these is unlimited – and that’s money. And indeed only one of these has been completely invented by man – and that’s money.

How, when we’ve invented it, can we ever even think that there is no money – or even that there is not enough money? Who is limiting it and why?

Prevailing received wisdom seems still to be that money can be limited. And people don’t think of who is limiting it but what is limiting it. So the politician’s and banker’s most powerful weapon is actually there in the collective and individual minds of the electorate – all are still pretty much on the gold standard. Richard Nixon may have moved the world off the gold standard in 1971 but most people are still on it in their minds. And it is telling that the expression still forms part of the language as indicating the absolute best. For some purposes it could be – but it never can be for money.

When money is the preferred method of accounting for society’s resources then we don’t need to count by thinking it is irredeemably attached to a limited commodity.  At its most basic the world clearly has more resources than just gold. Gold makes good jewelry, is fine for filling teeth, is useful in electronics and sometimes compounded in medicine. But that’s about it, so why use it then to limit artificially both the quantity and allocation of your entire range of resources? It is not logical and certainly constrains an economy  – and that’s why we no longer do it.

A further disadvantage is that there is not much opportunity for river panning for gold these days so it is generally mined and refined using mercury or a cyanide compound – both pretty dangerous and dirty procedures. So you really would want to use it only for a beneficial purpose. It is crass stupidity to dig it up from one hole in the ground and refine it, only then to put it into another hole in the ground – probably thousands of miles away – under a bank.

So it needs to be properly recognised that money is society’s invention for the benefit of society and money’s use rests on confidence in its issuers. When people are told on the one hand that money makes the world go round and on the other that there isn’t enough of it that only helps to undermine that same confidence. Increasing private debt and increasing fraud are just two indications that money’s distribution is too limited.

Once we understand that money is created by society for the useful benefit of all its members we can arrive at the conclusion that its creation can be seen as a simple franchise scheme.

This seems to me rather a comforting suggestion and one that might be more understandable by the general public. The private banks are a bit like McDonalds franchisees and we are all partners in the franchisor. Indeed this is an additional reason to ask banks for extra tax – oh alright franchise fees – for having the right to produce almost all of our money.

To ensure the public and the banks get the message I think we should call it the seigniorage tax.

And please beware of anyone who flashes their gold.

The quantity of money

After considering what is money and how it is created, the next step is to look at how much there is, how the quantity changes over time, and what this is telling us. We are in luck because we can look at real data.*

Below I plot the amount of money in circulation in the UK over the last 3 decades. Money is a bit difficult to measure because it depends on what counts. This plot is for the broadest measure called M4 which includes credit and bonds. You can read about it and download the data from the Bank of England website.

When I saw this data I was shocked. Yes we all know that the global financial crisis was a big event and we are still reeling but I had not fully appreciated how dramatically things changed around 2008. Is this the end of neoliberal capitalism as some are suggesting? Look at the curve before 2010. The money supply keeps on growing. This could be regarded as normal. [Note added 17/08/2017: The growth in the money supply is demand driven. Money is created by households, business and governments borrowing on the basis of a promise to do something.] During the Lawson boom of the late `80s, the money supply was growing so fast that inflation rose to 8 percent and interest rates were increased to 15 percent in order to slow the rate of increase which led to the 90-92 recession. A classic boom and bust. But even during the bust, the money supply kept on growing – just at a slightly slower rate. And after 1992, the money supply kept on growing. As Raghuram G. Rajan said in his book Fault Lines, the policy was to “let them eat credit”, and we did. But then in 2008 everything changed.

The phase transition

In 2007-08 we knew we were in trouble and in 2009 the Bank of England decided to inject new money via quantitative easing (indicated by the black bars). The amounts were big – £200 billion in 2009 – but in terms of the total money supply it was a drop in the ocean and did very little. After 2010 the money supply began shrinking again – this was not normal. In 2011 and 2012 the Bank of England did more quantitative easing. Again the amounts were big but it had no noticeable effect. There was a bit of a pick up in 2016, then we had the referendum, more quantitative easing, but still the rate of money growth was no better than the ’90-92 recession.

Looking at the graph as a whole, the difference, before and after 2010 is stark – physicists call this a phase change, economists might call it a complete failure of monetary policy. So what exactly did change? The best explanation has been given by the economist Richard Koo (this is one of my favourite economics talks of all – my favorite moment is when Koo says “we live in a very strange world”). He calls our debt hangover a balance sheet recession and it works like this: For money to be created there needs to be borrowers but after 2010 there were too few borrowers, because rather than borrowing, people, companies and government were all trying to pay down debt, destroying money in the process. Consequently, rather than the normal phase where the money supply grows exponentially over time, after 2010 we observe an anomalous phase where the money supply is at best flat and at worse actually falls. It could have been fine if only households had decided to save but when individuals, companies and government all decide to pay off their debts at the same time then the economy stalls. Keynes called this, the paradox of thrift – saving is a virtue unless everyone does it.

Exactly the same kind of debt overhang or balance sheet recession happened in Japan after 1990. The lesson from Japan is that there is no quick fix. You can move the debt around, from private to public but the only way out is growth. Japan at least has a relatively strong manufacturing base, and relatively low inequality which both help growth.

What did not work?

In the UK, the government had hoped that by reducing corporation taxes they would encourage companies to borrow, to invest, to raise productivity and grow the economy, but it did not happen. At the same time they were trying to reduce government spending.  The Oxford economist Simon Wren Lewis calls this, “the most damaging UK macroeconomic policy mistake in my lifetime”. The problem is that if households are paying down debt and governments are reducing spending then comsumers have less surplus money and there is a lack of demand. If there is no demand, companies have no incentive to invest and the virtuous circle of rising production, rising wages and rising demand cannot begin. Also, by lowering corporation taxes, companies can increase profit without trying. If you look at the graph in Follow the money you can see that only corporations are sitting on a surplus. Households are back in the red which cannot last long.

End game

To end I will switch to a recurring theme. Throughout history, empires or economies fall not because the workers stop working, but because the elite become lazy, greedy, or corrupt. Economies stall when the elite focus on rent extraction rather than production. The historian Mikhail Rostovtzeff sums up the problem in this passage:

The prevailing outlook of the municipal bourgeoisie was that of the rentier: the chief object of economic activity was to secure for the individual or for the family a placid and inactive life on a safe, if moderate, income. The creative forces which [….] produced a rapid growth [….] suffered a gradual atrophy, which resulted in an increasing stagnation of economic life.

Rostovtzeff, M., The Social and Economic History of the Roman Empire, OUP 1957.

Sound familiar? The rentiers of today are the CEOs, the banks, the buy-to-let landlords, the stock market investors. They have no need to innovate, no need to find new ways to create wealth, because they are doing just fine while the rest are struggling. Until we rebalance tax incentives away from rent extraction towards production, until we switch power away from the financiers and back towards entrepreneurs and small business, and address the failing ratio of wages to capital, until then we cannot expect a more favourable outcome.

*In science there is data. Sometimes there is a theory – a hunch. Scientists test hunches by collecting data and then decide if a theory is useful. A theory without data remains no more than speculation. If economics wants to be a science, it can only do so by focusing on the data. Repeat after me. “No science without data.”

Sovereignty is a matter of degree

This is a copy of a letter recently sent to a newspaper though I regret have lost the reference as to which.
Its destination is not important but its sentiment is.
We have someone here from a very small (rather attractive, if I recall correctly) town of about 5,000 in Bedfordshire, who considers sovereignty beyond price.

Like charity, sovereignty begins at home.
So Roger’s sovereignty is undoubtedly already likely to be compromised.
Probably he has a wife and children so that is his first problem. Even if he doesn’t does he refuse to deal with Shefford Town Council?

And what about Bedfordshire County Council?
I think we might have heard if he had refused to pay his Council tax.
Sovereignty is a matter of degree.

It seems as though Roger wants Parliament to look more like the highest court in the land, though of course it has always been and remains so – whether we leave the EU or not. It just means that Parliament may cede, by agreement, a little of its control to the European Court of Justice, the European Commission or even Bedfordshire County Council.

Clearly Roger didn’t mean that sovereignty was beyond price but that sovereignty has its price. His price is drawing the line under Brussels to include Westminster and Bedfordshire County Council. And to make himself, and others, poorer.

It is often said that North Korea is the the most fearlessly sovereign and independant country in the world. It too, is poor. Yet, remuneration aside, even that hasn’t been going too well of late has it Roger?

Now I’ve given up on Kim jong-un, but how do we persuade Roger to widen his horizons?

Perhaps in a spirit of compromise, Roger might be ideally placed to give a little help to Mr Trump  with his reponsibilities – he might wish to use this simple map as a start?

If they did have a chat they might both realise that sovereignty is always a matter of degree and definitely has its price.


Why can’t a household be more like a bank?

The short answer to this question is of course that householders don’t issue their own money.

But banks do.

So perhaps we should be complaining less about the household analogy that is the bugbear of a proper understanding of how the economy works  – and suggesting another more fitting analogy.

A government with a sovereign currency is more like a bank.

There are other similarities – issuing money is good for business, indeed is the business.

Unlike a household, a bank doesn’t put money away for a rainy day into savings – it invests. Just as a competent government ought.

And a bank doesn’t want to be in surplus with extra money sloshing around in its coffers. Good business relies on the bank being in deficit.

So the government is like a bank.

Perhaps this analogy might yet get people thinking about banks – as well as about the government and the economy!

BoM August 2017

Our Book of the Month for August is a classic and strongly recommended by the Equality Trust.

The Spirit Level: Why More Equal Societies Almost Always Do Better was published in 2009. Written by Kate Pickett and Richard Wilkinson, the book highlights the “pernicious effects that inequality has on societies: eroding trust, increasing anxiety and illness, (and) encouraging excessive consumption”. It shows that for each of eleven different health and social problems: physical health, mental health, drug abuse, education, imprisonment, obesity, social mobility, trust and community life, violence, teenage pregnancies, and child well-being, outcomes are significantly worse in more unequal rich countries.

As of September 2012, the book had sold more than 150,000 copies in English. It is available in 23 foreign editions.

A collection of Powerpoint slides regarding The Spirit Level can be downloaded here.

For a small contribution, the data underpinning the findings in The Spirit Level can be obtained from here.

The actual book is available here.

If it was a vote for anything, Brexit was a vote for import substitution

The UK is unable to properly negotiate trade deals until it has left the EU, so the government seems to be trying to soften up various countries with a view to signing deals as soon as possible after Brexit.  I imagine this is why Liam Fox has been to America and Boris Johnson to Australia.

It may be all fine and dandy to seek to substitute access to the largest Customs Union in the world with individual deals for access to countries – none of whom, even together, are markets of the same size as the market the Brexiteers are so keen to leave – but it is safe to say that no trade deal will be completed before the two year deadline from triggering Article 50.

The Brexit vote was seen by the government largely as a vote against immigration, presumably because Nigel Farage said so. (My opinion has always been that it was more likely to be a vote against the hopelessness of austerity.) Yet the EU’s central purpose is as a block for mutual trade so what the vote was most clearly, was a vote against international trading with our closest neighbours in Europe.

Yet we now have the government trying to increase our international trade with the rest of the world. This is a further indication of the English exceptionalism that has previously been mentioned here and elsewhere. The UK does not wish to trade with its nearest neighbours in Europe but really desperately wants to trade with countries on the other side of the world. That harks back to the empire. The two need not of course, be mutually exclusive but the Brexit vote seems to have made them so.

Given the lack of preparedness and general paucity of skilled capabilities in the current government we should be concentrating our limited resources less on world trade and much more on import substitution.

Land may be Britain’s most important resource but we cannot untie from our mooring off the coast of mainland Europe for a more desirable location. It is equally arguable that people are the country’s most important resource but certainly they are at least a very close second.

If, therefore, you treat the Brexit vote as an anti immigration vote then you need import substitution. That needs investment in that second most important resource: people. That means the finest possible training and education for the British population so immigrants find it so difficult to compete they are not required.

It means too, increasing minimum wages and – especially – enforcing minimum wages so that all jobs provide rewarding employment which enable a proper family life and so all the jobs which we are told the home population do not want to do, become desirable to someone.

It also needs investment in things. At the minimum this requires a National Investment Bank targeting funds towards industries where imports could be substituted. And Green QE would be beneficial for substituting energy imports.

And there is no danger this would not be useful whether or not the UK eventually parts company from the EU.

Even for the most ardent Brexiteer logically there is nothing ‘not to like’. Proper investment to make the country happy and glorious (as their National Anthem has it) and certainly happy and prosperous.

Instead the government lie to us that there is no money. And we have a toxic tribe of Brexiteers who think austerity is the future.

Never has a country been so utterly failed by its government.
Even when they call a binary referendum they do not understand the reply.