Let's Talk About Money and Government Spending

[pErvinalia]

You are putting the cart before the horse. That will only happen if such a system causes inflation. Can you explain how it would create inflation?

[Brian Peacock]

I thought this was interesting...

Mark Carney [Governor of The Bank of England] can himself do far more to bring about his desire for the rebalancing of the economy to help the “left behind” (Globalisation victims must now get a share of the gains, warns Carney, 6 December). In August the Bank of England announced a further £60bn of its quantitative easing programme, taking the total of e-printed money to £435bn, the equivalent of nearly £7,000 for every man, woman and child in the country.

Instead of using this staggering amount of money to prop up the banks and inflate stock markets, property and other assets, the new £60bn of QE should be used to buy bonds from a national investment bank and from local authorities to generate a “jobs in every constituency” programme. This would give all people, not just the left behind, a sense of hope about their economic future and should involve decentralised infrastructure projects centred on a decades-long, multi-skilled programme of energy refits of all the nation’s 30 million dwellings, a shift to localised renewable energy, and a rebuilding of local transport, food and flood defence systems.

Such an approach is technically feasible, and Mark Carney is on record as saying [FT: pay wall] that, if the government requested it, then the next round of QE could be used to buy assets other than government debt. It’s time he and the government worked together to achieve this jobs-everywhere approach, and in doing so really tackle the economic insecurity that is pure oxygen for the extreme right.

Colin Hines
Convener, Green New Deal group

https://www.theguardian.com/society/201 ... insecurity

[pErvinalia]

Isn't that something like Corbyn's "People's QE"? In any case, that's not really related to what I am proposing. That's standard Keynesian economics with the same monetary system that we have now. I'm talking about a radical new monetary system that will behave totally different to what we have now.

[Brian Peacock]

I know. I just thought it was interesting. It highlights that the notion of wealth by debt is a mindset which is hard to break - even in those who are looking to find a new paradigm.

[pErvinalia]

New video out from Stephen Keene about some problems with the neoclassical economic model. Covers some of the same stuff I am talking about (and also people's QE).

[pErvinalia]

Interesting article about Iceland's proposal to change their monetary system.

One of the oddest things about the aftermath of the financial crisis is the extent to which things haven’t changed.

Yes, there are plenty of new rules, and stress tests, and of course there are more fines for wrongdoing, but the basic structure of the financial system doesn’t look much different from before it blew up. There is still plenty of money to be made (and lost) issuing short-term “safe” debt to buy long-term, illiquid, risky assets. Lenders still exacerbate the cycle by increasing their leverage when asset prices rise only to cut back on lending when the economy sours. And everyone knows that taxpayers are still on the hook when things go bad, which acts as a massive subsidy for the financial industry.

As if all that weren’t bad enough, the current system makes it far too hard for central bankers to accomplish their mission of stabilising the economy. Right now, changes in nominal spending power are largely due to decisions made at banks and other financial firms. The level of short-term interest rates affects their behaviour, as do asset purchases, but monetary policy is only one force among many that determines total nominal spending. Modestly raising the cost of short-term funds isn’t enough to stop excessive credit growth, just as aggressive bond-buying has proven insufficient to restore the pre-crisis trend of nominal spending.

The continuity can’t be explained by the lack of better ideas. In fact, the basic alternative to the status quo — moving the power to create money from private financial firms to the state — was suggested in detail in the 1930s by a group of economists led by Irving Fisher. Subsequent proponents have included Milton Friedman, James Tobin, researchers at the International Monetary Fund, John Cochrane, and Martin Wolf. (And me.)

Whether it was a fear of change or simply the power of vested interests, the reformers never made much headway. Despite the general willingness of the US government to experiment with all sorts of genuinely bad economic ideas in the 1930s, the 1933 “Chicago Plan” failed to gain traction. Then came World War II. Yawning budget deficits accommodated by the Federal Reserve’s interest rate caps caused nominal spending to soar by about 122 per cent between 1940 and 1945. Private debts, as a share of national income, fell by about 100 percentage points during the war. That laid the groundwork for the subsequent boom and, understandably, dulled the appetite for significant reforms of the financial system.

The more recent crisis could have been another golden opportunity. In February, 2009, Alan Greenspan — Alan Greenspan! — was telling the Financial Times that “it may be necessary to temporarily nationalise some banks in order to facilitate a swift and orderly restructuring”. However, the success of countercyclical policy (relative to the 1930s, anyway) seems to have had a comparable impact on the public debate as the WWII reflation.

But now it looks as if tiny Iceland, a country one one-thousandth the size of the US that nevertheless endured the third-biggest financial failure in history, is exploring more radical options. Frosti Sigurjonsson, the chairman of the Icelandic parliament’s Economic Affairs Committee, recently published a report, commissioned by Iceland’s prime minister, that argues for the establishment of what he calls a “Sovereign Money System”.

The essential proposal will sound familiar: separate money — the stuff we use for emergency savings and transactions — from credit, which is inherently risky but promises the possibility of higher returns. The Central Bank of Iceland would become the sole provider of “money” (analogous to today’s bank reserves, except available to everyone) and safeguard it in “risk-free, electronic safe deposit boxes”.

Commercial banks would manage these “Transaction Accounts” in exchange for fees, but they wouldn’t themselves issue anything resembling demand deposits. Meanwhile, banks would only make loans to borrowers after first raising the money from savers, rather than by simply creating new money. (Read this Bank of England primer for more details on how the current system works.)
(cont)

https://webcache.googleusercontent.com/ ... =firefox-b

[pErvinalia]

I think I might have to throw up the white flag. I've been trying to read up on inflation and there's so much theoretical mumbo jumbo, it's impenetrable. The best description I found said that inflation will only happen when the economy is at full capacity (i.e. full employment and/or full productive capacity). So short of full capacity, any government or otherwise spending won't push up inflation as capacity (employment and/or production) is just expanded to soak up the extra investment. If the economy is at full capacity, extra money will push up demand which pushes up wages and prices and therefore inflation.

[rainbow]

To simplify.

Inflation is caused by too much money chasing too few goods and services.

[pErvinalia]

Yeah. But that only applies at full capacity, apparently. As capacity can expand so that the goods and services match the money chasing it. Up to the point of full capacity. So, then some of the ideas that I am presenting and the concepts of "People's QE" and what Iceland is doing should work fine while ever the system isn't at full capacity. Well, as far as I can work out, that's the Keynesian "Quality Theory of inflation". Yet even then you have people arguing (i.e I think it's the monetarists with their "Quantity Theory of Inflation", but the mumbo jumbo is so thick I can't even be sure of that) that they won't work. And then the question becomes, what do you do if you reach full capacity? If the government funds $50bn of productive economic activity one year and the system gets to full capacity because of that, then what happens the next year? If it was the government money that was funding the extra salaries and production in that first year, then who continues funding those? It seems to me that if the government doesn't continue funding those salaries, then demand drops and the economy slows down and falls below capacity again. So bloody confusing. No wonder no journalists can see through this stuff.