Recent posts.

The official mandate of the Bank of England has changed. It is now responsible for promoting growth as well as curbing inflation. But the Bank has already been making this inflation-growth trade-off, with little impact on the economy. “Target change”, in Inflation, interest, and the supply of money, part 2, March 2013.

The Basic Income need not be just a distant vision. It could be appropriate right now. It could be presented as a simplified benefit with a conventional “progressive” tax, but more efficient, less judgmental, and no more expensive than the current mess. “Welfare policy in the Great Recession”, in Welfare reform for the 21st century, February 2013.

A Basic Income or Citizens Income in the UK in 2003-4 could have been higher than the job-seekers allowance (the unemployment benefit) at that time, and revenue-neutral. Is a Basic or Citizens Income affordable?.

Money may be printed to stimulate the domestic economy. But it shouldn’t be printed to devalue the currency. So it may not be easy to achieve growth while maintaining good international relations and reducing budget deficits. “Currencies”, in Inflation, interest, and the supply of money, part 2, February 2013.

Inflation targeting has not worked in recent years, but discussion of the new tools needed has hardly begun. Interest rate commitments, employment or growth targets, prudential regulation, and asset and import price accounting have all been suggested. “Alternative targets”, in Inflation, interest, and the supply of money, part 2.

Economic malaise.

A k-wave downturn, driven by demographic change, may be a factor in the global financial crisis. Other factors are American mortgage law, Chinese exports, and financial deregulation. Back in the downwave, 1 January 2012.

Inflation targeting made central banks reluctant to accommodate the deflationary effects of China’s entry into the world trading system. The excessive liquidity they created fed the credit bubble. “Deflation”, in Inflation, interest, and the supply of money, part 2, 13 December 2012.

The governor of the Bank of England favours regulation, resolution and restructuring for banks. They should rely less on debt, a resolution mechanism is needed for failing banks, and High Street banking should be kept separate from other banking operations. “Three Rs”, in The 2008 Crash: Reregulation, 3 May 2012.

In the eurozone, average current account deficits between 1999 to 2007 are a better indicator of current problems than fiscal deficits or public debt. “Debts and deficits, Europe”, in The 2008 Crash: Recovery. 7 December 2011.

The weakness of European banks was primarily driven by their exposure to falling US markets and the US dollar. The 2008 Crash: Causes. 18 July 2011.

Stop the high house prices, inefficient taxes, and speculative fevers which have destabilised the entire global economy. Land tax, 8 July 2010.

Environmental policy.

An effective Green tax switch or shift is being prevented by the widespread belief that progressive income taxes are essential for reducing inequality. “Red and Blue reasons for a Green tax shift”, in Green taxes and prices. November 2007.

The earth is currently in the cooling stage of its long-term orbit cycle. But the global warming signal is now louder than the noise of random weather. A gradually rising carbon fee, collected from fossil fuel companies, should be distributed to all Americans on a per-capita basis every month. “Game over for the climate”, Green taxes and prices, 9 May 2012.

The UK government’s nuclear power subsidy could seriously damage wind and wave schemes. “Energy subsidies”, in Green taxes and prices. 2 June 2011.

Climate change is complicated, but the temperature increase in the last 3 decades is probably due to man-made atmospheric CO2. A short history of climate change, March 2007.

The estimated effects of a global carbon tax could be used to set national targets for carbon emissions. “A Way Forward”, from “Making Globalization Work”, Joseph Stiglitz, 2006, in Green taxes and prices.

Welfare policy.

Work should be allocated by self-selection not compulsion, but beneficiaries should have a reasonable financial incentive to do paid work. Effective marginal tax rates should ideally be no higher for beneficiaries than for high-income taxpayers. Welfare reform for the 21st century, August 2010.

Making marginal tax more progressive doesn’t necessarily make average tax more progressive. “Coalition policy, 2010“, in Citizens incomes and progressive tax.

Women should have their own money as individuals, not just as part of a family or household, and children need at least as much money as adults, if the cost of childcare, including the opportunity cost of parental childcare, is taken into account. Welfare reform for the 21st century, August 2010.

High priority was given to the need for tax and income support for women working in the home, and for more childcare facilities. The most logical way of doing this, with the least fuss, is by the basic income method. History of Basic Income politics in New Zealand, 1996.

Benefit withdrawal is effectively a tax, and effective marginal tax rates, including benefit withdrawal, should be no higher for beneficiaries than for high income earners. “Full employment”, in Alison’s manifesto.

Going round in circles, again.

The monetary reformer quoted some of my last lot of replies out of context, and didn’t put the rest on his blog. So I’m not sending him this lot, I’m just posting them here. I hope there won’t be any more.

X: For you, economics seems to be about money. For us, economics is about life.

A: That’s not fair.

You wrote: “Economic growth requires (at least in part) increasing loans. If loans do not increase, the economy, as it is presently structured, fails.“

That’s a purely monetary definition of economic failure. Also I think its wrong, from a monetary point of view as well as from a Green one.

I wrote “Economic growth or decline is about GDP, in other words, money. Sustainability is about resources, climate, population, and other species, as well as money.”

That definition of economic growth is not just my opinion. Wikipedia says: Economic growth is the increase of per capita gross domestic product (GDP) or other measure of aggregate income, typically reported as the annual rate of change in real GDP. (en.wikipedia.org/wiki/Economic_growth)

And we agree that there is more than just money to the definition of a sustainable economy, but I said it before you did.

X: I take it you standardised the figures for a generation according to the life expectancy at the time you were measuring?

A: Its about age at reproduction not life expectancy. I used lognormal distributions to model age-specific fertility rates, and let the computer find the numbers which fitted the data best. For more details, see “Couples and the K-wave” on my website.

X: If it is not created at the point a loan is made, where and when is it created, in your view?

A: You‘re arguing with yourself. I’ve already agreed that money is created when a loan is made.

X: One cannot sustainably borrow in order to provide for daily living needs.

A: As I’ve already commented, the mortgage system is an example of sustainable borrowing to meet daily needs, and its also an example of sustainable investment, usually, with exceptions, as in the last decade.

X: A: I have shown that [debt does not necessitate ever increasing production and productivity.]

A: The bit in square brackets was added by you. Its confusing without a hyphen after “ever”. You had written “Hoogendijk has shown that debt necessitates ever increasing production and productivity.” I replied that I had shown that it doesn’t. My opinion is that debt does not always make it necessary to increase production and productivity.

X: Two manufacturing firms . . . They are now in competition as before, but now they have to service their debt. How can this fail to drive both to boost throughput of materials?

A: You’re talking to yourself again. I didn’t say it would fail, I said they probably wouldn’t get into debt if the economy was unfavourable, because they wouldn‘t get a loan.

X: This system is an important driver of economic growth, since the real economy is burdened with the necessity of paying back interest.

A: Now you’ve gone full circle right back to where we started.

1. The real economy also benefits from the interest, which is paid to the depositor, from the borrower, through the bank.
2. The real economy is also burdened with the necessity of paying wages. Nobody thinks that wages should therefore be abolished.

I don’t want to go round this circle again so I hope there won’t be any more replies.

Banking system and economic growth.

I sent some replies to a discussion about monetary policy on another blog, but they haven’t appeared. So I’m posting them here instead.

X: Economic growth requires (at least in part) increasing loans. If loans do not increase, the economy, as it is presently structured, fails.

A: This still says that equilibrium in the economy, as it is presently structured, is failure. Zero economic growth is statistically very improbable in any economic system, but a stable balance between small amounts of economic growth and decline is possible in the economy as it is presently structured. For me economic failure is what was happening in 2008, extremely negative growth.

Economic growth or decline is about GDP, in other words, money. Sustainability is about resources, climate, population, and other species, as well as money.

X: A possible factor in economic cycles is engagement and disengagment with reality. There is an analogy to be drawn between bipolar illness and the market.

A: Bipolar illness doesn’t have the regularity of the long Kondratieff cycles (K-waves). Goldstein wrote that “ the relatively fixed length of a generation” is like “a clock that links long waves to calendar time.”  My demographic explanation has this regularity, its wavelength is 1.7 generations.

X: To clarify, I agree that the interest is paid with money that is in circulation. The new money is created at the point that the bank enters a loan into the account of the borrower. This new money is spent into circulation.

A: It doesn’t really matter whether the credit or the debt is defined as new money, as they are equal amounts of money. One is new money, the other is old money, one circulates, the other doesn‘t.

The debt doesn’t circulate, it stays in one place until it disappears when it is cancelled by the repayment by the borrower. Meanwhile the credit could more appropriately be described as “continuing to circulate”, not “being spent into circulation”.

X: My model of businesses A and B holds, because the only valid reason to borrow is to invest. One cannot sustainably borrow in order to provide for daily living needs.

A: Yes one can. Mortgages are an example. They are a way of transferring housing from old people to young people, while the interest on the mortgages transfers money in the other direction, to pensions.

X: Alison, will this cover it?

4 To pay back the interest means that the borrower either has to invest the loan to make a profit on the market, or from earning wages.

A: No, there is interest from other investments, or unearned money such as the scandalous capital gains in the last house price bubble, or pensions, or winning the lottery. Any of the money that is already in circulation may be used to pay the interest on a new loan.

Anyway I don’t see the point of line 4 unless you are wanting to prove that interest is unsustainable, and I don’t believe it is.

X: We need to sort out the impact of debt on growth. . . Hoogendijk has shown that debt necessitates ever increasing production and productivity.

A: I have shown that it doesn’t. Total debt may increase, decrease or be stable. I don’t know who Hoogendijk is, but he wouldn’t be the first expert who has been wrong.

X: Increasing productivity implies increasing unemployment, which entails increasing SS payments, which increases the country’s deficit. . . In order to attain a steady-state economy, which is what ecology requires, we need to ground our economics on ecological reality.

A: Yes, I agree. A Green tax shift from labour to resources and unearned capital gains from land is what is needed.

X: Interesting point from Atlanta Fed. If booms and busts cancel each other out, there has to be a better way of arranging things.

A: Its good that they cancel each other out but we need to make them smaller. Land tax, better management of protectionism, and better understanding of demography were my suggestions.

X: In the UK, they routinely produce 97% of new money.

A: This was your reply to my comment that the banks haven’t got a monopoly. . . See my next comment.

X: Leaving whether “Bank Monopoly” is precisely correct or not, the substantive proposal is that the ratio should move from 97/3 to ~50/50.
Does this meet with your approval?

A: Not really.

1. I wonder how enforceable a required reserve ratio is.
2. The most appropriate level of the ratio probably varies depending on whether stability or a boom or a bust is happening.
3. 50/50 may be too extreme. Between 2006 and 2009 the money multiplier, defined as “broad money relative to central bank money” or “the link between central bank money . . . and money in the economy”, was highest, at about 64, in early 2007, and lowest, at about 25, in late 2008. (Financial Times, 6 March 2009)

So the ratio of broad money to the total of central bank money plus broad money varied between 25/26 and 64/65. That‘s between 96.2% and 98.5%, in three years in which there was a transition from a major bubble to an exceptionally large crash. So a reduction to 50% might be too revolutionary.

A: So in the last 2 days we have found lots more disagreements, about growth, cycles, money creation, sustainable borrowing, interest, debt, cycles, broad money, money multipliers.

Its been interesting but I need to get on with the rest of my life, and don’t want to get involved in the wiki.

Economics, environment, welfare.

All the other pages on this site are listed in ammpol.wordpress.com/about, with a brief description of each page following its title and link.

They are grouped into four categories: Economics, Environment, Welfare, and Summaries.