A brothel running from a single-bed flat above a Rose Hill shop was shut down by police yesterday. Officers entered the flat to find two Brazilian women aged 33 and 40 at 4.30pm. One said she was married, the other was wearing a towel

December 20, 2013 § Leave a comment

a-brotel-201213

… when you think about money it is at least a good idea to take into account that the definition you use might need to include government bonds. They are a central part of the transaction infrastructure of the U.S. economy.

And if you include government bonds as money, then you’ll see there is very little money creation going in QE. Trading bond-money for reserve-money shifts the components of the money supply but does not necessarily increase it. (If the Fed is paying a premium for the bonds, or the Fed’s buying drives the market for the bonds up, there probably is some marginal increase in the money supply.) Of course, this might have important effects but the effect cannot be explained as simply as the standard monetarist narrative would have it.

So why not consider government bonds money? Here’s how Sumner recently responded in the comment section on his blog:

And I do not consider money and bonds to be close substitutes. When I go shopping I do not agonize about whether to bring cash or T-bills to the grocery store. And bonds pay interest, cash does not. Even reserves paid no interest until 2008, when the Fed shot itself in the foot with IOR.

Frankly, I don’t know what the grocery store insertion accomplishes here. My local grocery store won’t accept bills in denominations larger than $50. Are $100 bills not money? Is the balance of my bank account not money because I have to write a check or go to an ATM to settle a transaction at my grocery store? Is all available consumer credit card indebtedness money because it could be used in grocery stores? The grocery store test is both under-inclusive and over-inclusive.

More importantly, Sumner begs the question: are bonds money? It’s not whether money and bonds are close substitutes but whether, when it comes to figuring out whether QE is inflationary, bonds and reserves are close substitutes and should both count as money. And with both bonds and reserves paying a bit of interest these days, and both being transactional currencies considered both safe and liquid, it seems that they are.

The upside of counting bonds in the relevant money supply is that it explains why the QE-driven enormous expansion of the Fed’s balance sheet—that is, the growth of base money—hasn’t been very inflationary. You don’t have to make up phantom, Occam’s Razor violating concepts such as “demand for reserves,” to explain this. You just notice that QE doesn’t grow the money supply by very much.  read more

PHOTOGRAPH: Andrew Shapter

Advertisements

A subject and a verb walk into a bar. They have a disagreement. They walks out

November 8, 2013 § Leave a comment

a-subject-081113

To put things crudely, there are two ways to get the increase in total spending that we call “economic growth.” One way is for government to spend. The other is for banks to lend. Leaving aside short-term adjustments like increased net exports or financial innovation, that’s basically all there is. Governments and banks are the two entities with the power to create something from nothing. If total spending power is to grow, one or the other of these two great financial motors–public deficits or private loans–has to be in action.

For ordinary people, public budget deficits, despite their bad reputation, are much better than private loans. Deficits put money in private pockets. Private households get more cash. They own that cash free and clear, and they can spend it as they like. If they wish, they can also convert it into interest-earning government bonds or they can repay their debts. This is called an increase in “net financial wealth.” Ordinary people benefit, but there is nothing in it for banks.

And this, in the simplest terms, explains the deficit phobia of Wall Street, the corporate media and the right-wing economists. Bankers don’t like budget deficits because they compete with bank loans as a source of growth. When a bank makes a loan, cash balances in private hands also go up. But now the cash is not owned free and clear. There is a contractual obligation to pay interest and to repay principal. If the enterprise defaults, there may be an asset left over–a house or factory or company–that will then become the property of the bank. It’s easy to see why bankers love private credit but hate public deficits.

All of this should be painfully obvious, but it is deeply obscure. It is obscure because legions of Wall Streeters–led notably in our time by Peter Peterson and his front man, former comptroller general David Walker, and including the Robert Rubin wing of the Democratic Party and numerous “bipartisan” enterprises like the Concord Coalition and the Committee for a Responsible Federal Budget–have labored mightily to confuse the issues. These spirits never uttered a single word of warning about the financial crisis, which originated on Wall Street under the noses of their bag men. But they constantly warn, quite falsely, that the government is a “super subprime” “Ponzi scheme,” which it is not.

We also hear, from the same people, about the impending “bankruptcy” of Social Security, Medicare–even the United States itself. Or of the burden that public debts will “impose on our grandchildren.” Or about “unfunded liabilities” supposedly facing us all. All of this forms part of one of the great misinformation campaigns of all time.

The misinformation is rooted in what many consider to be plain common sense. It may seem like homely wisdom, especially, to say that “just like the family, the government can’t live beyond its means.” But it’s not. In these matters the public and private sectors differ on a very basic point. Your family needs income in order to pay its debts. Your government does not.

Private borrowers can and do default. They go bankrupt (a protection civilized societies afford them instead of debtors’ prisons). Or if they have a mortgage, in most states they can simply walk away from their house if they can no longer continue to make payments on it.

With government, the risk of nonpayment does not exist. Government spends money (and pays interest) simply by typing numbers into a computer. Unlike private debtors, government does not need to have cash on hand. As the inspired amateur economist Warren Mosler likes to say, the person who writes Social Security checks at the Treasury does not have the phone number of the tax collector at the IRS. If you choose to pay taxes in cash, the government will give you a receipt–and shred the bills. Since it is the source of money, government can’t run out.

It’s true that government can spend imprudently. Too much spending, net of taxes, may lead to inflation, often via currency depreciation–though with the world in recession, that’s not an immediate risk. Wasteful spending–on unnecessary military adventures, say–burns real resources. But no government can ever be forced to default on debts in a currency it controls. Public defaults happen only when governments don’t control the currency in which they owe debts–as Argentina owed dollars or as Greece now (it hasn’t defaulted yet) owes euros. But for true sovereigns, bankruptcy is an irrelevant concept. When Obama says, even offhand, that the United States is “out of money,” he’s talking nonsense–dangerous nonsense. One wonders if he believes it.

Nor is public debt a burden on future generations. It does not have to be repaid, and in practice it will never be repaid. Personal debts are generally settled during the lifetime of the debtor or at death, because one person cannot easily encumber another. But public debt does not ever have to be repaid. Governments do not die–except in war or revolution, and when that happens, their debts are generally moot anyway.

So the public debt simply increases from one year to the next. In the entire history of the United States it has done so, with budget deficits and increased public debt on all but about six very short occasions–with each surplus followed by a recession.  read more

PHOTOGRAPH: Michael Wolf

Ain’t got no time for Western medicine

April 10, 2013 § Leave a comment

ain't-got-100413

So back to the 70′s, and continuous oil price hikes by a foreign monopolist. All nations experienced pretty much the same inflation. And it all ended at about the same time as well when the price of crude fell. The ‘heroes’ were coincidental. In fact, my take is they actually made it worse than it needed to be, but it did ‘get better’ and they of course were in the right place at the right time to get credit for that.

With the price of oil being hiked by a foreign monopolist, I see two choices. The first is to try to let there be a relative value shift (as the Fed tries to do today) and not let those price hikes spill into the rest of the price level, which means wages, for the most part. This is another name for a decline in real terms of trade. It would have meant the Saudis would get more real goods and services for the oil. The other choice is to let all other price adjust upward to keep relative value the same, and try to keep real terms of trade from deteriorating. Interestingly, I never heard this argument then and I still don’t hear it now. But that’s how it is none the less. And, ultimately, the answer fell somewhere in between. Some price adjustment and some real terms of trade deterioration. But it all got very ugly along the way.

It was decided the inflation was caused by unions trying to keep up or stay ahead of things for their members, for example. It was forgotten that the power of unions was a derivative of price power of their companies, and as companies lost pricing power to foreign competition, unions lost bargaining power just as fast. And somehow a recession and high unemployment/lost output was the medicine needed for a foreign monopolist to stop hiking prices??? And there was Ford’s ‘whip inflation now’ buttons for his inflation fighting proposal, and Carter with his hostage thing adding to the feeling of vulnerability. And the nat gas dereg of 1978, the thing that actually did break the inflation two years later, hardly got a notice, before or after, and to this day.

As today, the problem back then was no one of political consequence understood the monetary system, including the mainstream Keynesians who had been the intellectual leadership for a long time. The monetarists came into vogue for real only after the failure of the Keynesians, who never did recover, and to this day I’ve heard those still alive push for price and wage controls, fixed exchange rates, etc. etc. in the name of price stability.

So in this context the rise of Thatcher types, including Reagan, makes perfect sense. And even today, those critical of Thatcher type policies have yet to propose any kind of comprehensive proposals that make any sense to me. They now all agree we have a long term deficit problem, and so put forth proposals accordingly, etc. as they are all destroying our civilization with their abject ignorance of the monetary system. Or, for some unknown reason, they are just plain subversive.

Thatcher? It was the blind leading the blind then and it’s the same now.  read more

COVER: [unattributed]

As I have told you about eight times

March 1, 2013 § Leave a comment

as-i-010313

Penrose made the sensational claim that he had glimpsed a signal originating from before the Big Bang working with Vahe Gurzadyn of the Yerevan Physics Institute in Armenia. Penrose came to this conclusion after analyzing maps from the Wilkinson Anisotropy Probe.

These maps reveal the cosmic microwave background, believed to have been created just 300,000 years after the Big Bang and offering clues to the conditions at that time. Penrose’s finding runs directly counter to the widely accepted inflationary model of cosmology which states that the universe started from a point of infinite density known as the Big Bang about 13.7 billion years ago, expanded extremely rapidly for a fraction of a second and has continued to expand much more slowly ever since, during which time stars, planets and ultimately humans have emerged.

That expansion is now believed to be accelerating due to a scientific X factor called dark energy and is expected to result in a cold, uniform, featureless universe. Penrose, however, reports Physics World, takes issue with the inflationary picture “and in particular believes it cannot account for the very low entropy state in which the universe was believed to have been born – an extremely high degree of order that made complex matter possible. He does not believe that space and time came into existence at the moment of the Big Bang but that the Big Bang was in fact just one in a series of many, with each big bang marking the start of a new “aeon” in the history of the universe.”

The core concept in Penrose’s theory is the idea that in the very distant future the universe will in one sense become very similar to how it was at the Big Bang. Penrose says that “at these points the shape, or geometry, of the universe was and will be very smooth, in contrast to its current very jagged form. This continuity of shape, he maintains, will allow a transition from the end of the current aeon, when the universe will have expanded to become infinitely large, to the start of the next, when it once again becomes infinitesimally small and explodes outwards from the next big bang.

Crucially, he says, the entropy at this transition stage will be extremely low, because black holes, which destroy all information that they suck in, evaporate as the universe expands and in so doing remove entropy from the universe.”

The foundation for Penrose’s theory is found in the cosmic microwave background, the all-pervasive microwave radiation that was believed to have been created when the universe was just 300,000 years old and which tells us what conditions were like at that time. The evidence was obtained by Vahe Gurzadyan of the Yerevan Physics Institute in Armenia, who analysed seven years’ worth of microwave data from WMAP, as well as data from the BOOMERanG balloon experiment in Antarctica.

Penrose and Gurzadyan say they have clearly identified concentric circles within the data – regions in the microwave sky in which the range of the radiation’s temperature is markedly smaller than elsewhere. The Cosmic Microwave Background (CMB) radiation is the remnant heat from the Big Bang. This radiation pervades the universe and, if we could see in microwaves, it would appear as a nearly uniform glow across the entire sky.

However, when we measure this radiation very carefully we can discern extremely faint variations in the brightness from point to point across the sky, called “anisotropy”. These variations encode a great deal of information about the properties of our universe, such as its age and content. The “Wilkinson Microwave Anisotropy Probe” (WMAP) mission has measured these variations and found that the universe is 13.7 billion years old, and it consists of 4.6% atoms, 23% dark matter, and 72% dark energy.

According to Penrose and Gurzadyan, as described in arXiv: 1011.3706, these circles allow us to “see through” the Big Bang into the aeon that would have existed beforehand. They are the visible signature left in our aeon by the spherical ripples of gravitational waves that were generated when black holes collided in the previous aeon.

The “Penrose circles” pose a huge challenge to inflationary theory because this theory says that the distribution of temperature variations across the sky should be Gaussian, or random, rather than having discernable structures within it.  read more

Now hold on. I can hear you counting. One two three four. I know you’re coming around me. What I propose is that we move out together. Count it out together. That was always the plan

February 20, 2013 § Leave a comment

now-hold-200213

So what would happen if a sovereign, currency-issuing government (with a flexible exchange rate) ran a budget deficit without issuing debt?

Like all government spending, the Treasury would credit the reserve accounts held by the commercial bank at the central bank. The commercial bank in question would be where the target of the spending had an account. So the commercial bank’s assets rise and its liabilities also increase because a deposit would be made.

The transactions are clear: The commercial bank’s assets rise and its liabilities also increase because a new deposit has been made. Further, the target of the fiscal initiative enjoys increased assets (bank deposit) and net worth (a liability/equity entry on their balance sheet).

Taxation does the opposite and so a deficit (spending greater than taxation) means that reserves increase and private net worth increases.

This means that there are likely to be excess reserves in the “cash system” which then raises issues for the central bank about its liquidity management. The aim of the central bank is to “hit” a target interest rate and so it has to ensure that competitive forces in the interbank market do not compromise that target.

When there are excess reserves there is downward pressure on the overnight interest rate (as banks scurry to seek interest-earning opportunities), the central bank then has to sell government bonds to the banks to soak the excess up and maintain liquidity at a level consistent with the target. Some central banks offer a return on overnight reserves which reduces the need to sell debt as a liquidity management operation.

There is no sense that these debt sales have anything to do with “financing” government net spending. The sales are a monetary operation aimed at interest-rate maintenance. So M1 (deposits in the non-government sector) rise as a result of the deficit without a corresponding increase in liabilities. It is this result that leads to the conclusion that that deficits increase net financial assets in the non-government sector.

What happens when there are bond sales? All that happens is that the bank reserves are reduced by the bond sales but this does not reduce the deposits created by the net spending. So net worth is not altered. What is changed is the composition of the asset portfolio held in the non-government sector.

The only difference between the Treasury “borrowing from the central bank” and issuing debt to the private sector is that the central bank has to use different operations to pursue its policy interest rate target. If it debt is not issued to match the deficit then it has to either pay interest on excess reserves (which most central banks are doing now anyway) or let the target rate fall to zero (the Japan solution).

There is no difference to the impact of the deficits on net worth in the non-government sector.

Mainstream economists would say that by draining the reserves, the central bank has reduced the ability of banks to lend which then, via the money multiplier, expands the money supply.

However, the reality is that:

• Building bank reserves does not increase the ability of the banks to lend.
• The money multiplier process so loved by the mainstream does not describe the way in which banks make loans.
• Inflation is caused by aggregate demand growing faster than real output capacity. The reserve position of the banks is not functionally related with that process.

So the banks are able to create as much credit as they can find credit-worthy customers to hold irrespective of the operations that accompany government net spending.

This doesn’t lead to the conclusion that deficits do not carry an inflation risk. All components of aggregate demand carry an inflation risk if they become excessive, which can only be defined in terms of the relation between spending and productive capacity.

But it is totally fallacious to think that private placement of debt reduces the inflation risk. It does not.  read more

PHOTOGRAPH: Inès

reading it carelessly as if to tell you your fears were justified

November 30, 2012 § Leave a comment

reading-it-301112

Governments are not households.  watch

PHOTOGRAPH: Dara Scully

Where Am I?

You are currently browsing entries tagged with inflation at my nerves are bad to-night.