Larry said 'the central bank can and does create money out of thin air, that is, nothing; but you don’t need to take my word for it, as Ben Bernanke said exactly this at a Congressional hearing – you can see him on youtube.'
I have found various bits of Bernanke at Congress but not the one that Larry must be referring to - anyone have a link?
I found Werner _very_ heavy going. One of those cases where one thinks one understands as you read along, but afterwards are unable to explain (or remember) the steps of the argument. As a teetotaller I don't frequent bars, but I certainly wouldn't try Werner's articles on the clientele of the 'Red Lion' in Holywell (not that anyone suggested I should).
Robert
Professor Robert Moore
School of Sociology and Social Policy
Eleanor Rathbone Building
The University of Liverpool
L69 7ZA
Telephone and fax: 44 (0) 1352 714456
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From: email list for Radical Statistics [[log in to unmask]] on behalf of Macfarlane, Alison [[log in to unmask]]
Sent: 09 September 2016 14:38
To: [log in to unmask]
Subject: Re: "Corbynism after Corbyn" : Can JC arise from the dead?-- Corbyn's macro problem
Can you please write this up for Radical Statistics?
Thanks, Alison
From: jay ginn [mailto:[log in to unmask]]
Sent: 09 September 2016 08:59
To: [log in to unmask]
Subject: Re: "Corbynism after Corbyn" : Can JC arise from the dead?-- Corbyn's macro problem
Thank you Larry for this easy-read explanation of money plus helpful references. I wish youd apply to be .mcDonells advisor at the Shadow Treasury. You are right about Greece as well.
Jay
Sent from my iPad
On 8 Sep 2016, at 15:02, Dr L Brownstein <[log in to unmask]<mailto:[log in to unmask]>> wrote:
Hi John W, John B, and David,
I will do my best to answer the issue that seems to be perplexing. I will not reply to each of you individually. I hope that will be all right. And I will try to make it short.
I think Varoufakis didn’t push this option because Schaeuble may have indicated to him that leaving the Eurozone would be tantamount to leaving the EU, and the latter is anathema for Varoufakis. His most recent explication of his position is outlined in his blog post, Europe’s Left after Brexit -- https://yanisvaroufakis.eu/2016/09/08/europes-left-after-brexit/. Leaving the Eurozone and staying in the EU would have been the best option for Greece, although this would have been a time-consuming and complex process. Yet, the outcome for Greece would have been much better in the long run.
While hyperinflation does destroy the value of monetary assets, the threat of hyperinflation in a neoclassical scare tactic. There is no danger whatsoever of the UK or any advanced industrial nation in the West experiencing hyperinflation at this point in time or in the near future. They are all in a deflationary situation which is being exacerbated by government austerity policies. Hyperinflation is not a general threat in any case and it usually takes place when the state becomes chaotic and begins disintegrating. There are no reasons the UK should become embroiled in a hyperinflationary situation. The examples usually used, Weimar and Zimbabwe, are unusual and certainly not typical. Weimar may even be unique, if you believe the thesis by Mantoux written just before the war, which is that the German government deliberately engineered its hyperinflation in order not to pay any reparations to France. Ritzl of the LSE thinks this claim has merit. In any case, as I think is well known, the reparations demanded by the Allies were greater than Germany’s GDP before the war, hence, impossible to pay and Germany’s infrastructure had been badly damaged.
The fear of inflation is a serious matter, but the fear of inflation is unlikely to lead to inflation if the conditions necessary for it to occur do not exist. Governments can, of course, create inflationary situations if they fail to pay sufficient attention to what they are doing.
I am going to restrict myself primarily to the domestic situation within a nation-state. The reason that a government faces no FINANCIAL constraints on its spending is that it is the monopoly issuer of the currency. In particular, since 1971, most governments have operated what is known as a fiat currency system with a flexible exchange rate. This means that the currency is not pegged to any commodity, like gold, and, therefore, has all the currency it feels it needs at its disposal. In short, it has an unlimited pot of money to pay for what it wants. If it wishes to pay for X or the creation of Y, it credits the relevant bank accounts, whether internally or externally to itself. It does not need taxes to fund anything. This was well understood by e.g. Abba Lerner and Beardsley Ruml in the late ‘30s and early ‘40s when a fiat currency system operated in the US for a brief period. Why would the government need taxes to pay for anything when all it needs to do is to reach into its money pot and take out what it needs, as it were?
That a government can do this does not mean that it can spend like there is no tomorrow or be absurd about it because there ARE constraints on such spending. Hyperinflation or fear of the same is not one of them. Most generally, to avoid inflation (there is no danger of hyperinflation), the government can only spend what the economic system can absorb. Assuming the private sector isn’t spending thereby leading to a deflationary scenario and possible recession, which we are now in and have been for around 10 years, the system can absorb what the government spends if it is followed by an increase in employment and/or the materials needed are available and can be utilized. For instance, suppose the government has all the money it needs to fund the NHS, which is in fact the case in principle, but is unable to spend it because there is a surfeit of doctors. Then it has money that it cannot spend. That the NHS is starved of funds is the consequence of a series of political decisions by successive governments that have no economic justification whatsoever. None.
If the government spends beyond what the system can absorb, such as spending more than is needed to create full employment, then the government can create inflationary pressures. The UK is in no danger of that at this time.
There is an accounting system that is used to keep track of national spending. It is the sectoral balances system of accounts. It was developed by Wynne Godley. You divide the national economic system up into sectors, the government sector, the private sector, and the current accounts sector (which takes account of trade balances). Since accounts need to balance, the sum of the funds in all these sectors must equal zero. Leaving out the current accounts sector (to simplify), if one sector is in surplus, the other must be in deficit, otherwise they would not sum to zero. So, if the government sector is in surplus, as happened under Clinton, the private sector must be in deficit. And vice versa. Hence, Osborne’s fanatical drive to create a government surplus meant that he would drive the private sector into debt. The accounting rules and the processes associated with these rules show this to be the inevitable consequence of his policies.
Since the government with its fiat currency system has all the money it needs, it has no need to worry about being in deficit. It follows from this that a government is nothing at all like a household or a firm. These are currency users, not currency issuers. Again, since the government has all the money it needs, why would it need taxes to fund expenditure. It wouldn’t. Then what are the functions of taxation. If the government doesn’t need taxes, why impose them. Because the government doesn’t need taxes to fund expenditure, this doesn’t mean that taxation doesn’t have any useful or necessary purpose at all. One function of taxation is to force the population to use the government’s currency. It is the only currency you can pay your taxes in. This brings a good deal of stability to the economic system that might otherwise be absent. The American colonists saw the value of such a national currency. Another function of taxation is to control or direct spending, as the government has done recently with alcohol. Whether this is the best way of achieving the desired goal is another matter. Another function is to redistribute income. That it does not do this very well lies in politics and power relationships, not economics.
QE has done very little other than to keep the banks solvent and inflate asset prices. Wages have generally remained stagnant, for those lucky enough to have a good, secure job. It is useful to distinguish two kinds of inflation – price inflation and wage inflation. We currently are experiencing the former but not the latter. They are independent, as can be seen now, and there is no inherent bicausal relation between them. When wages increase, then prices usually increase, though not always, but prices can increase while wages remain stagnant. So, when someone says that there is inflation, it needs to be asked, What kind, then look for the reason. The reason QE hasn’t had the effect claimed for it is that the banks have an insufficient number of borrowers.
Which brings us to the banking system. Rather than go on about them, I will refer you to the fascinating experiment undertaken by Richard Werner testing the three theories of money. I can tell you which theory wins. It is the credit theory of money, set out in modern times in 1913 by Mitchell Innes. You can find Werner’s experiments described in some detail here: Werner, Richard (2015) “A lost century in economics: three theories of banking and the conclusive evidence”. International Review of Financial Analysis, 1-19. (doi:10.1016/j.irfa.2015.08.014<http://dx.doi.org/10.1016/j.irfa.2015.08.014>); Werner, Richard A. (2014) “Can banks individually create money out of nothing? — The theories and the empirical evidence”. International Review of Financial Analysis, 36, 1-19. (doi:10.1016/j.irfa.2014.07.015<http://dx.doi.org/10.1016/j.irfa.2014.07.015>). These are well worth reading. I can say that the central bank can and does create money out of thin air, that is, nothing; but you don’t need to take my word for it, as Ben Bernanke said exactly this at a Congressional hearing – you can see him on youtube.
I could discuss more, but I had better stop here, as I have no doubt exhausted the patience of some. Sorry about that, but I feel that the issues are so important, and get so little critical attention, merely a repetition of the neoclassical mantra, that people’s queries deserved a serious reply. I trust I have done that.
I hope this helps.
larry
Dr L Brownstein
[Alt-e:] [log in to unmask]<mailto:[log in to unmask]>
From: email list for Radical Statistics [mailto:[log in to unmask]] On Behalf Of Jay Ginn
Sent: 08 September 2016 12:54
To: [log in to unmask]<mailto:[log in to unmask]>
Subject: Re: "Corbynism after Corbyn" : Can JC arise from the dead?-- Corbyn's macro problem
I was sorry to see Greece under Syriza didnt opt to leave Eurozone and create their own new currency to escape their impossible situation. It would have mean defaulting on 'odious debts' and trade would have been difficult at first but maybe overall an improvement on the debt enslavement the country seemed doomed to suffer indefinitely.
Im not an economist and cannot understand why Varoufakis didnt recommend this option. Maybe economists can enlighten me?
jay
On Thu, Sep 8, 2016 at 12:39 PM, BYRNE D.S. <[log in to unmask]<mailto:[log in to unmask]>> wrote:
Hyper inflation destroys the value of monetary assets -for those of us on USS pensions the cap on inflation related upgradings (one of the great attractions of University pensions as they were) - indicates that actuaries just can't cope with the possibility of that since so much of the assets of pension funds are held as bonds. Only countries with control over their own currencies as the UK has since it didn't join the Euro - perhaps the one good thing Brown did while mismanaging the UK economy - can create money and it does change the terms of trade. So the UK pound has fallen against the Euro - good for UK manufacturing whilst we have access to European markets - but with some inflationary potential. German hyper inflation in the 20s was resolved by just issuing a new redenominated currency among other things but think how often this has happened - the French Franc, the Lira, the Zloty - with currencies changed to remove too many zeroes from the value specification on the notes.
David Byrne
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From: email list for Radical Statistics [[log in to unmask]<mailto:[log in to unmask]>] on behalf of John Whittington [[log in to unmask]<mailto:[log in to unmask]>]
Sent: 08 September 2016 12:06
To: [log in to unmask]<mailto:[log in to unmask]>
Subject: Re: "Corbynism after Corbyn" : Can JC arise from the dead?-- Corbyn's macro problem
At 09:22 08/09/2016 +0100, John Bibby wrote:
>You wrote: "...the government, being the monopoly issuer of the currency,
>has no financial constraints on its spending .... ". But what ARE the
>constraints then? I'd like to see this unpicked. In particular, the
>constraints due to fear of inflation.
As someone with no education in economics, I've often pondered that very
basic question. I may be totally wrong, but it seems to me that it only
becomes relevant in terms of international trade (both directions) and is,
indeed, all about inflation (although that probably does not matter, per
se, in the absence of international considerations).
As I see it (quite probably wrongly!), within an 'isolated' country,
currency is simply a convenient tokenisation of 'bartyring'. A country has
finite resources, in terms of both physical resources and, more
importantly, the available labour force. It doesn't really matter whether
people are paid £10 per hour and have to pay £2.50 for a loaf of bread or
whether they are paid £1000 per hour and have to pay £250 for the loaf - in
either case the loaf costs them 15 minutes' income. Although we would call
the latter 'inflation', I don't see that it matters (directly) within an
'isolated' country - but could well become an issue when one has to
interact with the rest of the world. To me, the important issue is that,
even within an isolated country, merely printing more currency does not, in
itself, do anything the increase the resources - so, in the final analysis,
if the resources are already being used optimally and appropriately, there
ought to be nothing more that they could spend on anything, even if they
printed a lot more currency.
It may, of course, be possible to increase the effectiveness/efficiency of
the resources (e.g. by education/training of the workforce), but I can't
see that as being directly related to the currency supply.
Things obviously happen transiently immediately after an increase in
available currency, but I would think that a 'steady state' is probably
usually achieved fairly quickly.
Am I being naive and getting it all totally wrong?
Kind Regards,
John
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