Tuesday, 5 August 2014
Monetarism 2: Keynesianism and Stagflation
Sunday, 6 July 2014
The changed brief of the central banks makes monetarism obsolete?
In 1923, hyperinflation in Weimar Germany  was caused by the central government printing money to pay for its obligations to employees and millions of striking workers in the Ruhr. The absurdity of this was (surely) obvious to all. The so-called Austrian School of economics  arose based on the apparently inexorable link between an increase in the quantity of money and the decrease in its value. At that level it was satisfyingly faultless, irrefragable, unassailable, for it was a priori .
But what is money? In the twenties and thirties the definition was relatively simple: it meant notes-and-coin. That is to say, the unlimited production of notes-and-coin soon swamped everything else. Over the subsequent decades innovations in banking have made the definition fuzzy and obscure. But obscure because fuzzy. It has become hard to define what should count as money in the context of the monetarist formula because different assets can have different roles depending on time-scales, and personal psychology. Is the money in my current account mine or the bank's? What about in my deposit account, or my 90-day account? Is an asset like a house to be included? No? But what if I sell the house and spend the proceeds? What if I merely think I could sell the house? What if I can sell the house but think I cannot? Quantitative Easing in the USA and Europe since 2008 has seen a dramatic increase in the Monetary Base (which on existing theories should have caused an even more dramatic increase in commercial activity), but there has been no sign of concomitant inflation, and surprisingly little effect on employment.
The Austrian School is in trouble. People now spend days and weeks researching and writing papers to define money in such as way that the Austrian School's formula can be shown to be valid. (This problem is thoroughly aired in reference .) Gone is the certainty of the a priori. A fuzzy definition brings in judgments, and fuzzy answers. If money is in short supply, it is not spent; but the reverse is not equally true; money does not have to be spent simply because it is there. Humans are as much emotional as logical.
The Austrian School is in trouble, but worse is to come. It is the duty of Central Banks to maintain: [a] maximum employment, [b] stable prices (including prevention of either inflation or deflation), and [c] moderate long-term interest rates (insofar as it is possible to reconcile those three different aims) . They are not required to maintain a constant supply of money as such. Many years ago it became clear that it was necessary to release more money in mid-December when it is needed, and withdraw it again in mid-January when it is idle. Money is now created when it is needed. If you want to predict inflation, do not look at the money supply, look at inflation; for that is what the Bank of England is doing (or should be doing***). If money supply (however calculated, M0, M2, M4, MA, MAex, etc), is not a leading but a lagging indicator, there is no point in monitoring it. Nothing will be learned from it that could not be learned earlier by looking at the triple target of the Central Banks, viz employment, prices and interest rates. (The only gain will be for the 'Austrians' themselves if they finally find the right measure of the Money Supply; they will then be able to say they were right all along.)
(*** Of course people make mistakes. House prices in South East England are inflating steeply. So let us build lots more houses, in North East England where there is unemployment and plenty spare land. "Oh! Sorry! Now you tell me that house prices are falling in the North East. Wish you had told me earlier!")
Cawstein, Morpeth, U.K.
Saturday, 21 June 2014
Government of the People, by the Rich, for the Rich?
The marginal propensity to consume.
Wednesday, 18 June 2014
The difficulty of Keynes's Style
"Since we are here concerned in determining what sum will be spent on consumption when employment is at a given level, we should, strictly speaking, consider the function which relates the former quantity (C) to the latter (N)."
Since we are concerned in determining what sum will be spent on consumption (C) when employment (N) is at a given level, we should, strictly speaking, consider the function that relates the two.
"....; whereas they do not resist reductions of real wages, which (that) are associated with increases in aggregate employment and leave relative money-wages unchanged, unless the reduction proceeds so far as to threaten a reduction of the real wage below the marginal disutility of the existing volume of employment."
"Men are involuntarily unemployed if, in the event of a small rise in the price of wage-goods relatively to the money-wage, both the aggregate supply of labour willing to work for the current money-wage and the aggregate demand for it at that wage would be greater than the existing volume of employment. "
Wednesday, 4 June 2014
Saturday, 12 April 2014
Debt 6 — How bad is debt?
"Neither a borrower nor a lender be; for loan oft loses both itself and friend, and borrowing dulls the edge of husbandry." Hamlet 1.3
These words have found resonnance in puritan heads from Shakespeare till the last part of the 20th century. Polonius could have said more against borrowing. A debtor who is unable to repay his debts finds himself at a considerable disadvantage; he may lose his liberty, or his house, or find himself tied to a tredmill, paying interest he can ill afford without hope of escape. Furthermore, Polonius mentioned none of the advantages of debt.
Is debt, in general, a good thing or a bad thing?
Well, it is a good thing for the lenders who can expect a return on their capital of 2 or more % above inflation, even if their loans are of the non productive sort. And it is a good thing for the entrepreneur who is trying to expand a winning business model (productive borrowing). But it is a bad thing for the "over indebted". Citizens Advice Bureaux (CAB) estimate that keeping up with bills and other financial commitments is a burden (or worse) for nine per cent of the population .
But the 90% who can manage their affairs intelligently can freely choose to enjoy a house and a car while they are young and pay as they get older. Inflation will considerably mitigate the amount they lose in interest payments. If they come on hard times they could lose their house; but end where they started, little the worse. Many young people nowadays will take thought, and borrow. The case will depend on: [a] rate of inflation, [b] stability of the jobs market; but can be skewed by governmental tamperings such as [c] capital gains legislation, [d] income tax relief, etc. Another factor is [e] temperament; cautious individuals will overestimate the chance of losing their job while the reckless will underestimate that.
Since 1975 the household debt as a fraction of annual disposable income rose in most western countries; in the UK it almost trebled from 0.64 in 1975 to a peak in 2008 of 1.80, from which it has sunk in 2012 to 1.55  We are more deeply indebted than the US, but trail Denmark, Norway and Switzerland. Since 2000, Germany has almost halved its debt/income ratio, while most other countries have only reduced personal debt in the last 5 years. One suspects that these data reflect a spectrum of several underlying factors: caution, stability, cost of the housing stock, age distribution of the population.
(Unscrupulous lending (offering money to someone unable to calculate the consequences) is a social evil, like drunkenness, and should be subject to social and even legal regulation. Predatory lending (where a secured loan is offered in the hope that it cannot be repaid so that the lender can acquire the security) would be criminal were it possible to prove.)
Though it goes against my gut feeling to let myself be beholden in that way, I conclude that there is little case against debt if it is entered into with due thought, but that it should not be encouraged by the state (to the benefit of the bankers and to the detriment of the economy and society generally. Furthermore, there should be closer scrutiny, and better means of regulation and redress.
Ian West, 12 Longhirst Village, NE61 3LT