Friday, 6 October 2017

Bryan Gould To Labour: This Is No Time For “Conventional Answers”.

Poking The Luminaries: Former Vice-Chancellor of Waikato University and one-time aspirant for Jeremy Corbyn's current job, Bryan Gould, has urged Labour's luminaries to follow the brave example of Michael Joseph Savage's government of the 1930s and shake off the shackles of economic orthodoxy.

BIG UPS TO BRYAN GOULD. Perhaps anticipating a disappointing choice from NZ First on 12 October, the former Vice-Chancellor of Waikato University has put the rhetorical boot  into Labour’s fiscal and monetary caution.

Holding up the example of the First Labour Government’s radical solution to the problem of how to fund its ambitious state housing programme (Mickey savage’s government hit upon the novel idea of simply borrowing the money from itself!) Gould is demanding an equal display of courage and innovation from Labour’s current crop of leaders. 2020 looms as a year of new departures, politically. Gould wants the centre-left to be ready.

Even if NZ First turns left, Gould’s critique remains timely. Grant Robertson, guided by his patron, Sir Michael Cullen, will attempt to put the kibosh on Winston Peters’ expansive (and expensive!) economic programme. So, waving the bright red flag of a NZ First-friendly alternative monetary and fiscal strategy in advance of coalition talks strikes me as a damn good idea. Gould just might convince the “Three-Headed-Beast” to do a little more thinking before binding itself in the chains of Robertson’s reactionary “Budget Responsibility Rules”.

In the simplest terms, Gould’s argument boils down to this. If the private banks are allowed to create money (by crediting us with the money to buy our houses and then charging us interest on our mortgages) then why shouldn’t the state? He then argues that not only isn’t there a good reason why the state shouldn’t do this, but that it already has. “Quantitative Easing”, says Gould, was all about northern hemisphere states crediting their private banks with the money they needed to remain solvent. What, then, stops our own state from funding crucial infrastructure projects: railway and port expansion; new state houses; fully-funded training for thousands of new doctors and teachers; with similar financial instruments?

In his own words:

“Our leaders, however, including luminaries of both right and left, some with experience of senior roles in managing our economy – and in case it is thought impolite to name them I leave it to you to guess who they are – prefer to remain in their fearful self-imposed shackles, ignoring not only the views of experts and the experience of braver leaders in other countries and earlier times, but – surprisingly enough – denying even our own home-grown New Zealand experience.”

Gould’s gentlemanly reticence is all very well, but sometimes a spade should be called a bloody Grant Robertson! Thousands of New Zealanders are pinning their hopes on Winston veering left – as if that’s all that needs to happen. These same people do not appear to have the slightest idea that Labour’s current economic policies would render a Labour-NZ First-Green government next-to-useless. Yes, there might be just enough money to keep health and education stumbling along for the next three years – but there’ll be bugger-all for anything, or anybody, else.

Gould may be too polite to state the matter so bluntly, but I’m not all that interested in politeness. The awful political truth that we all need to get our heads around, is that “orthodox economics” is how otherwise “decent” politicians deliver pain and suffering to the most vulnerable people in our society. And that, at present, just about all the senior figures in the Labour Party and its parliamentary caucus are irrevocably wedded to orthodox economics.

If Winston is of a mind to veer left, therefore, he will first need to persuade Jacinda to abandon her opposition to any person other than Labour’s finance spokesperson taking on the role of Finance Minister. Labour’s intransigence on this matter is a strong indication of the party’s unwillingness to step away from economic orthodoxy. But, neoliberal orthodoxy is precisely what Winston has set his own, and his party’s, face against. How can he possibly enter into a coalition with Labour and the Greens while they remain committed to their ultra-orthodox Budget Responsibility Rules?

Jacinda should interpret Gould’s latest blogpost as a last-minute appeal for her to think outside the conceptual box in which Labour has imprisoned itself. If life is to be made better for those New Zealanders on the receiving end of neoliberal economic orthodoxy, then Labour must reach back into its collective memory and summon forth the courage and creativity which made New Zealand the “social laboratory of the world”.

In this regard, Gould deserves the last word:

“Many of today’s generation will have forgotten or be unaware of the brave and successful initiative taken by our Prime Minister in the 1930s – the great Michael Joseph Savage.  He created new money with which he built thousands of state houses, thereby bringing an end to the Great Depression in New Zealand and providing decent houses for young families (my own included) who needed them.

“Who among our current leaders would disown that hugely valuable legacy?”


This essay was originally posted on The Daily Blog of Thursday, 5 October 2017.

32 comments:

Polly. said...

Good comment Chris:
Grant Robertson/ Jacinda Ardern are both entrenched Neo Liberals, both fawn to the left and right of politics.
Both are desperate.
They should have Bryan Gould in their team, but they shunned him a long time ago.
The shallowness and desperation of Labours leadership is Winnie's strength in coalition discussions.

The National party will not be chained by Winnie, I sense from them a hardening to a "walk away".

Kiwiwit said...

Sorry to be so blunt but I have to pick up on your and Gould's ignorance of economics. The New Zealand money supply (M3) has increased about 10% year-on-year over recent years. This IS quantitative easing. The NZ banks cannot create money without the Reserve Bank's direction and the increase in money supply in recent years has resulted in equivalent inflation in the area it has been mostly directed - housing. Further QE will have the same effect - more inflation - except if that money is released into the broader economy (through government benefits as you no doubt want) its inflationary effects will be seen across the board and any benefits received by those on lower incomes will be wiped out. We will be back to the 1970s with wages and salaries and interest on savings unable to keep pace with inflation and the only people who benefit will be speculators.

Jens Meder said...

But according to NZ economics taught at Auckland University in the early 1950s, there were idle capital resources in the NZ banking system during the depression of the early 1930s,

the "limit-less"(?) credit advocate John A Lee was sacked from his government (or/and the Labour Party?),

and the Savage and subsequent governments borrowed all the 7.5% of compulsory savings (from income additionally to income tax) initiated by the Savage government to build up the NZ Super Fund to help financing and guarantee universal NZ Super from age 65.

The Fund was supposed to he "mature" by the early 1970s, when it was "discovered" that it had all been consumed, and the state houses and infrastructure it helped to finance, were not assets owned by the Super Fund.

For "Keynesian credit creation" to be sustainable, requires at least an adequate savings for debt repayments rate.

Charles E said...

Ludicrous nonsense Chris. What on earth are you and Gould, an academic talking about. Typical of Gould, from a person who has never had a proper job. Also had tax payer funded huge salaries.

Kiwiwit has is correct. We already have maxed out the credit card and printing more money does not create wealth it courts disaster.
The simple ecomonics that Grant Robinson actually has a light grasp of and even Ardern by now I bet is like the facts of like: Conservative and sound. Cullen knows it well and the man best qualified to lead this country, Bill English (a Rhodes Scholar) knows it backwards.

The fact is, once an economy is sound, as our is, if the rate it runs at gets even better still, loads more rolls into the treasury and there would be plenty for your give it to the poor ideas. Not that it is what the poor really need. They need their own money from better paying jobs and self discipline on spending (and investing) it. Not more of other peoples money.

peter petterson said...

Well let's create 100 billion dollars of credit out of thin air and build everything we need. The banks can obviously do it, so why not the state?

Anonymous said...

@kiwiwit
And I'm sorry, but that comment cannot be allowed to stand uncritically. There is an alternative take on inflation you can listen to here:

http://www.radionz.co.nz/national/programmes/sunday/audio/201852897/there-s-no-such-thing-as-fair-austerity

The analysis by the Professor rather more accurately describes the underlying causes of housing inflation in NZ (private money supply largely from abroad unabated, while consenting and construction cannot keep pace), and backs up the argument in the post for government spending on critical infrastructure including education.

In other words spending of the sort detailed in Chris' article is extremely unlikely to have an inflationary effect. I recommend you listen closely.

D G E

Guerilla Surgeon said...

Oh anonymous...... Are you new here? Charles and his sympathisers don't take any notice of perfessers. Their opinion is all the facts they need.

Anonymous said...

OK first of all, banks can increase money supply without bank reserves increasing. Bank reserves in NZ (M0)as I understand it have changed little over time - deposits however have increased massively. That is because when banks make loans THEY CREATE DEPOSITS (included in the measure M3). Then they worry about reserves. The reseverve bank of NZ does not control the money supply - it only influences (it thinks) lending by setting an interest rate affecting the profitability of making loans.
Secondly, if the government "printed money" and spent it (by say guaranteeing everyone a job doing productive socially useful things) it would only be inflationary if the economy was at capacity, everyone was gainfully employed and there was no scope for companies to improve output or for us to import goods from overseas. Inflation is at 1.7% people. This is not Zimbabwe where we have destroyed our productive capacity. I believe our underutilisation rate of labour is at 11-12%. What we risk now is deflation - arising from debt deleveraging - all of us saving at once when the real estate bubble bursts or at the very least real estate borrowing slows and badly affects demand. Please people, the oil shocks of the 1970s created inflation. We have spent 40 years destroying working people's lives with the NAIRU fighting imaginary inflation in subsequent years as a result. It's time to get over it. Lots of even mainstream economists now admit that monetary policy doesn't cut it. Pushing on a string.

Jens Meder said...

peter petterson - the banks can only "do it" (grant overdraft credit)
up to a safe proportion of their reserves, and it is not sustainable if those loans are not repaid by genuine savings out of genuine income.

Humans are not able to create anything on the material level "out of thin air", i.e.
out of nothing, and a sustainable credit economy requires wealth reserves and debt repayments.

David Stone said...

Kiwiwit

Further to D G E's comment and ref. In a sense you are right that the same process a QE is carried out by our reserve bank and all others as a day to day activate managing the money supply . It differs in it's magnitude from normal operations, and esp at the beginning of QE in that not only government bonds were purchased from banks to provide them with urgently needed cash, but also mortgage backed securities and bonds issued by major companies in US esp. to rescue them from bankruptcy. This is not normal central bank activity.
The New Zealand banks were limited in what they could lend by the reserve bank through the credit reserve ratio system , which limited their lending to a variable proportion of their deposits, earlier still the portion they were not allowed to lend had to be deposited with the reserve bank but that was abandoned some time ago. Now the NZ banks along with the UK banks an AUS banks are not restricted by the CRR system which has been abandoned in these countries, and they are only limited in their lending by a ratio of loans to assets. But when you look up bank assets you find that they are almost entirely they loans.
So the reference by Gould to the BOE article (and there is a much more recent one to the same effect) , concluding that there is no external restriction on the amount of credit (mortgages etc.) the banks can issue is correct. Here as there.

Also the IMF a while ago detailed a couple of their economists to make a study of US regulations and determine if there was any outside effective control of the amount of credit US banks can issue , and the came to the same conclusion. None.
I'm not giving references because months or years after I have looked up the same articles I would have to google it all again to find them and then I wouldn't have time to write this comment, and if you chase the information up yourself it will be much more convincing.

Jens " But according to NZ economics taught at Auckland University in the early 1950s, there were idle capital resources in the NZ banking system during the depression of the early 1930s, "
Exactly, just as there are idle capital resources in the banking system now, It's just that no one can see a profit in any useful employment generating activity to apply them to so no one is borrowing for that sort of activity and the banks won't lend for productive activity anyway because they have no faith in it's viability. So all bank lending is going into the housing market that they do have confidence in , and the share markets around the world which have completely detached from earning capacity.
John A Lee Parted company with Labour because labour turned away from the sovereign money system they had adopted. The state housing advance being an example of how they were going to run the countries' banking system and money supply. They bought the Bank of NZ from it's mostly UK shareholders to be the peoples bank to facilitate this policy, but the bankers they employed to run it talked them out of it and it continued to operate like any other bank to John's Fury.

Charles... We tend to be on opposite sides of the left-right spectrum, but your often "tongue in cheek" needling of us lefties is often amusing, and I'm sure you have a perfectly operational brain.
You haven't engaged it in your criticisms of Chris and Bryan . Why don't you analyse the arguments and explain where and why they are wrong instead of just making a series of assertions without argument. I'm sure that if you put aside some time and made a bit of a study of how money works you would realise that their ideas aren't so silly at all.
To read your last paragraph one would get the impression that you think money is created as a sort of by-product of the production of goods and services . It isn't, it has to be created separately to facilitate the buying and selling of goods and services, and the volume of it has to be carefully managed .
Cheers all D J S

Guerilla Surgeon said...

David. Your last paragraph in that rather well constructed destruction qualifies you for sainthood. I really must try to engage with Charles on a more rational level – but I've come to the conclusion that no matter what rational arguments you might present he will ignore them. Because eyes I said before, he has largely lost the ability to distinguish between fact and opinion. Or at least fact and HIS opinion. But I really admire you for trying.

Chris said...

To Charles E and Kiwiwit and Jens Meder. I suggest you may wish to do some homework.

The Bank of England says you're wrong. http://www.bankofengland.co.uk/publications/Documents/quarterlybulletin/2014/qb14q1prereleasemoneycreation.pdf

The German Central bank says you're wrong https://www.bundesbank.de/Redaktion/EN/Downloads/Publications/Monthly_Report_Articles/2017/2017_04_money_creation_process.pdf?__blob=publicationFile

The IMF says you're wrong http://www.imf.org/external/pubs/ft/fandd/2016/03/kumhof.htm

When you've read and digested those articles let me know. I'll provide you with some further - like from Adair Turner - Chairman of Britain's Financial Services Authority, the British Pensions Commission, the Committee on Climate Change, Director-General of the Confederation of British Industry, and former vice chairman of Merrill Lynch Europe.

Alternatively keep on supporting the status quo, where $4.5 billion in taxpayer dollars is paid out every year in interest on government borrowing from overseas owned banks, when it could go into health care, education, infrastructure etc instead.

Charles E said...

DJS I clearly fully support the argument and reasoning of Kiwiwit so don't be patronising. In return I could point out your posts are unnecessarily long winded. Get to the point earlier perhaps? I'm actually more interested in what your opinion is, not how you got there. This is not science, it is opinion. What money is and how it works is not fully understood, like a lot of economics. An economy is more like a living thing, and living things do not always behave the way we think logic might predict. You poke them and if they react, it is not always the same.

And I did put in reasoning, which as it happens is the same as Bill English's and has not been countered: Once you have a good economy striding along, generating wealth, it is likely the government income will go up nicely (so that is money created yes, but not from thin air, from goods and services produced and done). So that is actually happening here in NZ now. We are already creating money. Government income has gone up significantly and that is forecast to continue (most likely under Bill I would suggest, as he's proven good at the helmsman's job) so there is no need to take the risk of printing the stuff expressly. We are not the US or EU. Thank heavens. Here things are more simple I suggest, easier to see that sound money can be created, so we have no need to risk magical experiments.
I'm also clearly Gould is not qualified to direct us. I'm arguing Bill knows a lot more about how our economy works than Bryan and that is not just political bias on my part. A neutral reader of their career histories and CVs would have no trouble agreeing with that. So I am saying Mr B Gould's view has no more weight than my GP's or the professor I had for Law 101 at Canterbury.

Ewan Cornor said...

Just accept the truth, Banks do create money "out of thin Air" . Every time they create a mortgage. They never have enough money (M3) to cover the money they create. Thus a "run" on the Banks send them into a tail spin, and the government (us) has to bail them out.

David Stone said...

Charles E
Sorry about my long-windedness, it's a constant battle.
I do not agree that no one understands money , Though to quote some ancient sage " I have known only two people in my life who properly understood money, one a senior banker and the other a lowly clerk. But they disagreed".
The thing is about it seems to be that ever since it stopped being represented by physical minted coin it has become more of a system for recording value. Bookkeeping. And it's issue an arbitrary creation. It is entirely insubstantial , and for it to be accepted and to work it seems to have been deemed by authorities down the years as working better if most of the ignorant masses like us do not understand it. Else we would have no faith in it and commerce would be impossible.
This plays beautifully into the hands of the banks of corse as they "laugh all the way to the bank" so to speak.
I don't think you should accept that an understanding of how it works is beyond you however , or beyond anyone else of reasonable intelligence with the time available to make a bit of a study of it. But its no use asking your bank manager , there lies only obfuscation. But the internet makes discovery infinitely more easily available than it was back when I was trying to make sense of my uncle's obsession with Social Credit .
Cheers D J S

greywarbler said...

Anonymous at 18.52 seems to make sense. However I can't be sure unless Sir Michael Cullen and Don Brash pasteurize it and kill any bugs lurking in it.
The Bank of England or other large financial entities overseas don't really know anything compared to what we know in this small distant country with a
population less than a small city overseas. Just to prove that, we managed to stay upright in the logrolling contests of earlier years like in 2008.

Victor said...

DJS

I find myself in theoretical agreement with you but concerned over how, in practice, a sudden influx of governmental fiat money would impact on our finances.

Ours is a small, globalised and hence vulnerable economy, in a world in which the austeriac, free-market ideology continues to reign supreme and punishes, instantly and almost unconsciously, all those who offend against its shibboleths.

Would it be possible to achieve the goals that you and others on this thread have ably championed without a punishingly huge and swift flight from our dollar, the spiralling of interest rates, a drying-up of overseas credit etc?

You may say that it's exactly what we did during the 1930s. But, during that decade, New Zealand's economy benefited from the massive indirect subsidy of guaranteed entry for its produce into the UK market.

Moreover, we were part of the Sterling Area, which involved doffing our collective cap to the austeriacs at the Bank of England but, even so, provided us with the buffer of membership of a quasi-autarchic system, which was also a source of most investment capital.

Even so, despite the risks, it may be the case that we will need an injection of fiat money to cope with the compacted effect of our current infrastructural, social, ecological and productivity deficits.

But before we rush down this potentially perilous path, should we not ask ourselves whether there are other alternatives to the fiscal conservatism so readily embraced by both Labour and the Greens.

Could we, for example, substantially close the likely revenue gap by, as thre Greens still advocate,simply raising the top, marginal tax rate?

Yes, I agree, we have a tax-phobic population that's all too easily inflamed by Sir Lytton Crosby and his minions. But it's harder to inflame such passion against clear, finite, comprehensible proposals that won't substantially harm the bank accounts of most of the population than it is against the apparently confused and open-ended proposals that Labour was easily characterised as proposing.

Another approach might be to markedly reduce the speed with which we plan to retire our rather low level of existing public debt.

Last time I looked at the IMF's net public debt to GDP figures, our ratio stood at 26.4%, compared to 84% for France, 102% for the Republic of Ireland, 134% for Japan, 88% for the USA and 83% for the UK. Even tight-wad Mutti Merkel runs a net ratio of 57%.

So, although there are finer paragons of fiscal virtue than ourselves (e.g. Australia, most of Scandinavia and the Baltics)we do seem to have quite a bit of wiggle room.

Perhaps what's needed is a combination of approaches, including higher marginal income tax, slower debt retiring, fresh borrowing and, maybe, a sliver of fiat money.

I'm not an economist and I tread warily in these matters. But I'm really nor sure that our choices are as simple and un-nuanced as this thread suggests.

What do you think?

David Stone said...

Victor
I'll have a go at a reply but not today. Too busy.
D J S

Charles E said...

Victor and DJS you make a lot off sense. I still maintain the thing is actually mysterious. A parallel in biology, which I have said is apt, is the immune system. Another is the role of bacteria in our bodies and yet another, the role and functioning of fungi in the soil working with plant roots.
We know a lot about these living things, but the more we think we have it nailed the more we find we are wrong about that.
So NZ has to be careful either way and I am sure that is what Cullen & others are saying to the smiley one right now. DO NOT either blow in with experiments or give WinFirst too much say or you could go down as a 3 year wonder.

Getting back to politics I hope the yellow team do hook the back hood. I want my lovely National team unsullied. They deserve a break on the opposition benches anyway, they have done so well. I don't want their reputations ruined by that old crook. They have been in my view the best government we have ever had so that will remain their record. Hey and btw to the Key haters. He got it absolutely right with his timing eh, as he always did. Bill was up to it and is clearly the best person for the MP's job right now. But I hope he bows out, uncontaminated by the stench of corruption, which is what the black team are about.

David Stone said...

Victor
First of all, my offerings on this topic seem to be being given generous credit by some of you other contributors. Thanks. But I should make it clear that I have only an introductory level of formal education on the subject and that a very long time ago. So just because I state my ideas with conviction, and I do feel that conviction, I have to acknowledge those ideas are not backed by much academic qualification, only a lifetime's interest.

So...no1
Bare in mind that the reserve bank can remove money out of the system just as easily as it can feed it in. Bonds that are bought with new money to increase he money supply can be sold again and the money paid extinguished, to reduce it. Alternatively the government can increase taxation if it is deemed t everyone has too much buying power. But the critical point is that using fiat money this way is simply an alternative point of entry for money that was to be entered into the system anyway.Not necessarily additional money at all.

No 2 & 3
I don't think there's anything unconscious about the way in which we would be victimised by the ideologues in charge of the global neoliberal system if we went for a wholesale revolution along the lines of a fully sovereign banking system. But I don't think it would cause disruption in our trade with China, or the other BRICS countries. Russia and China are moving to break from the dollar monopoly anyway. But the mood is changing all over the world, and I think co operation with like minded political movements in other countries is the way forward.

4
In that 30s Government was the nucleus of Social Credit. The Fiat money for major state run projects was core Social Credit doctrine . They wanted a completely sovereign banking system and that is what was supposed to happen. But the bankers they engaged to run the BNZ bought for the purpose talked them out of going that far. And I expect their arguments against it were pretty persuasive; Like "Britain will no longer buy your butter, or your meat or your wool, and no international banks will make transactions with your bank. And if you allow it to be known that this was our argument the same will happen." for instance.

Next
What I said in 2/3 . But I think we are probably in a more flexible trading position now than we were then. China is our main partner now after Australia. and though US would hate it we could easily increase trade with Russia.

The tax question must just be arithmetic . Are there enough people earning enough more money than they need to balance the number of people who don't get as much as they need? It might be more a matter of decency than a solution ,but someone will have the numbers.

Labour's recent tax proposals seem to have been more about engineering the economy than raising revenue , Jacinda was made to feel she had to come up with new ideas in a very short space of time. Saying we will set up a comity to decide frightened everyone.

On debt.. I think that though govt. debt seems to be low, as a nation it is not. We just owe it individually and on the remaining SOEs. World debt is out of control. Increasing it even if some countries have more can only be a temporary solution I think. There must be a day of reckoning some time.

To your last
I pretty much agree a bit of everything, but I expect we could get away with a repeat of the 30's state housing project on Fiat money without being ostracised. But as you suggest it would be international reaction that would be the hazard , not the Fiat money itself.
, Cheers David J S

Victor said...

DJS

In haste.....

1.If you’re not proposing the introduction of more money, how would fiat money help fill the revenue gap?

2. I agree that there would be considerable conscious pressure placed on our economy, should we too obviously jettison the established rule book. But the unconscious and semi-conscious pressure would start instantaneously . It will be yesterday’s news by the time you get up in the morning. Except that there would be far more of it by the following morning.

3.I agree that such a move may not detract from our trading relations with China. But, to my mind, we’re already too enmeshed in Beijing’s co-prosperity sphere for the good of either our sovereignty or our democratic political system. A challenge, as I see it, is to diversify our commercial ties away from excessive reliance on authoritarian, nationalist behemoths with quasi-colonialist aims . And, yes, I do include the US in that rogue’s gallery, although its decision-making processes aren’t quite as centralised. I also agree that there will be benefits when the world turns (as it is already turning )away from the neo-liberal consensus. But do we need to be a martyr for the cause?

4.I’m not sure what point you’re making here

I agree entirely with you over Labour’s tax proposals. And, long term, CGT, could play a significant role in helping to reengineer our economy. But, with or without it, there will still be a revenue gap, if we’re to deal with the accumulated problems currently facing us. So, whatever else you do, a higher top marginal rate seems like a good idea.

As to debt, our joint public and private indebtedness is not too spectacularly out of kilter compared to the rest of the OECD. Moreover, much of our private debt has been driven by a real estate boom that may (hopefully) be starting to peter out and, which, anyhow, should reduce, were we to get a Labour- led administration, with a consequent firmer stance on investment property flick-offs and overseas ownership plus Kiwi-Build and, eventually, CGT and maybe a land tax.

But, I agree, we should be wary of excessive new borrowing, not least because of the likely pressure of higher interest rates on the part of Northern Hemisphere lenders.

Finally, I apologise if I’ve been excessively polite. I’ll try to get back to snarl mode.

Kiwiana said...

Brian Gould Is right. As I’ve come to understand from reading papers from Bank of England, and Steve Keen, Richard Werner and others the commercial banks largely determine how much credit (debt) is created in economies like NZ, constrained primarily by things like capital adequacy ratios and their commercial judgements. And since mortgage lending is considered, for various reasons, including central bank policies, a safer form of lending, credit growth is all about mortgages.
Richard Werner’s stunning work ‘Princes of the Yen’ ( see book or excellent you tube video) notes that the explosive postwar industrial growth in Japan was to a large delivered by keeping it on a sort of war footing, but one that was focused on the production of consumer goods. Key to this was the Japanese Central Bank directing where and how much the credit growth should occur, by sector. This was called It was called ‘window guidancek . According to Werner It was brought to an end when the CB turned free market (neoliberal) and deliberately engineered a huge debt blowout in real estate, followed by stopping credit growth which led to an almighty crash and the lost decades. This was done as a crisis of this magnitude was considered necessary to enable reform initiatives to be implemented.

I think we citizens (via our government and its institutions) must get some form of control over the creation of credit. Perhaps window guidance is a way to do this. In any event, it should not be left to commercial banks, as the current arrangements are largely why we have such a total mess with unaffordable houses and horrendous levels of private debt in many developed countries.

mikesh said...

¨The fact is, once an economy is sound, as our is, if the rate it runs at gets even better still, loads more rolls into the treasury and there would be plenty for your give it to the poor ideas. Not that it is what the poor really need. They need their own money from better paying jobs and self discipline on spending (and investing) it. Not more of other peoples money.¨

A vibrant economy creates income, not money. Income is created as money changes hands, but the supply of money remains the same. The money itself is created by the commercial banks in the process of lending out demand deposits; and by the the Reserve Bank when they purchase bonds.

David Stone said...

Victor
1... Not sure where the revenue gap occurs; You expressed concern about how the influx would effect finances . Most discussion has been about the idea causing inflation , putting extra money into circulation. I am saying that this ain't necessarily so.
2... Yes
3... I can't se any reason not to trade with whoever has a need for our produce. Better if we are not overly dependant on any one country. Trading our sovereignty and autonomy for the privilege of being allowed to trade is what I find horrifying. But I se no justification for complicating any deal. If you don't want it don't buy it and vice versa . No reason for anything else to come into it.
4... Just reflecting on pressure we could come under if policy was disapproved by the external powers that be, and how it may have been applied in the past.

Whether the articles referenced by Chris above denying the operation of a fractional reserve system and stating that at least in UK lending has no relation with people's savings; or believe Wikipedia which says we at least do still operate that system,
it makes clear that almost all money in circulation is bank money created in making loans . It must follow that if all loans are paid off both private and public , the money supply would be almost eliminated. Under the UK model only cash and coin is issued for public circulation by the central bank and is not debt, and the vast majority ex cash must be the same. Everyone thats cashed up with money in the bank, that money is someone else's debt. It makes conceptualising "fiscal responsibility" austerity , and state indebtedness interesting doesn't it! Seems like the choice is to have State created "positive money " circulating for nothing, or have bank debt issued money and pay the banks for the privilege of using it.
At the level of debt the world has now, and the fragility of the world economy, I think any significant interest hike would quickly cause collapse as almost no one would be able to pay it and bankruptcies would be an epidemic. I think they know this so an interest hike like in the 70s isn't likely just now.
Cheers D J S

Victor said...

David

In even greater haste......

1. The potential revenue gap is surely what we're talking about. We're faced with a social, infrastructural, productivity, housing...you name it...deficit. And, looming is the problem of a jobs-short future. All of the above are likely to require significant additional government expenditure. If we're not concerned about this, why are we bothering with the conversation?

2. Fine

3. See: http://www.bryangould.com/what-do-the-chinese-pay-for/

4.Fine

As a lifelong Keynesian, I find your subsequent two paragraphs intriguing and will give then further thought.

As to interest rate hikes, I'm certainly not anticipating a return to the soaring highs of the 1970s but merely a continuation of the current perceivable retreat from the historic lows of the last several years.

mikesh said...

¨Not sure where the revenue gap occurs;¨

A revenue gap occurs when the government runs a deficit. To pay for the deficit the Treasury borrows from the private sector - at which point the Reserve Bank has the option of either buying back the loan with fiat money; or doing nothing, which would have the effect of increasing the public debt. Both courses have their disadvantages: The first risks inflation; and the second can squeeze private sector credit, and cause nervousness in the financial sector.

The alternative is a balanced budget, but in that case we could be looking at ¨austerity¨.

David Stone said...

Victor
I replied last night but it hasn't come through so here I go again.
The revenue gap; I thought I was addressing people's concern that Bryan's fiat money printing proposal would be inflationary , i.e. overfilling the gap. I was saying it doesn't need to be. Beyond that using fiat money for that and similar purposes would be a way of targeting such gaps .
Within the framework of the present monetary system, the only ways money can be acquired to fill the gap that I can see are subject to what I argued in my last paragraph previous.
Given that virtually all if not all money arises from someone's bank loan somewhere in the system, the shortfall / gap can only be filled by someone borrowing more money. Either the government borrows it directly, or raises taxes or introduces new ones so that some one else has to borrow it. However complex and remote the identification of the ultimate contributors might be.
Though our present government debt is not excessive by present international standards there are articles about that say this does not apply to private debt. We have very high levels of private debt, and raising taxation to fill these various gaps is the process by which our government would further load up private debt in order to avoid shouldering it publicly. A tax system that reduced or removed GST in favour of a more scaled income tax would be more equitable , but though we have some people receiving a huge income compared to most there may not be large enough numbers of very high income earners for a more scaled income tax structure to make much difference to overall tax revenue. Thats a mater for numbers and arithmetic.
The US is trying to get their markets attuned to the idea of increasing interest rates in order to pretend the normality is returning. I don't think they will get far. As soon as rates rise a little bit there will be stress in many quarters, ( say about 4) and they will have to retreat.Debt must be close to saturation point.

@ mikesh
The reserve bank is specifically separate from government, so the R B buying govt bonds is not the government buying it's loan back. Not under the present structure. As things are it is the RB that issues fiat money for that purpose and not the Govt. The govt. is still liable for the repayment of those bonds at their due date whoever holds them whether that is a bank, a private individual , or the RB. Or someone the RB has subsequently sold them on to.
Cheers David J S

mikesh said...

¨The reserve bank is specifically separate from government, so the R B buying govt bonds is not the government buying it's loan back. Not under the present structure. As things are it is the RB that issues fiat money for that purpose and not the Govt.¨

They may be separate transactions, but the Treasury selling bonds and the Reserve Bank purchasing bonds has the effect of ¨buying back the loan¨. When the Treasury bonds mature, the government can either pay them back from taxation or roll them over.































¨The govt. is still liable for the repayment of those bonds at their due date whoever holds them whether that is a bank, a private individual , or the RB. Or someone the RB has subsequently sold them on to.¨

This is true but, I think, irrelevant. If the Treasury can pay them back from taxation then presumably they will, but otherwise they will roll them over.

David Stone said...

Mikesh
I think we are on the same page. My point was that the new money created by the reserve bank to buy the bonds already issued ,does not pay off the loan . We still owe it as the public. The new money goes into the hands of the previous holders of the bonds. Mostly banks.
Cheers D J S

Victor said...

DJS

"The revenue gap; I thought I was addressing people's concern that Bryan's fiat money printing proposal would be inflationary , i.e. overfilling the gap. I was saying it doesn't need to be. Beyond that using fiat money for that and similar purposes would be a way of targeting such gaps."

No, I thought I'd made it quite clear that I was talking about how to fill the gap and not how to cope with over-filling.

"Though our present government debt is not excessive by present international standards there are articles about that say this does not apply to private debt."

Our current government debt barely reaches the level of "not excessive". It's miniscule. And because of our low level of government debt, our total indebtedness, while obviously larger, is not huge by OECD levels and, in time, is likely to come down as a result of the end of the property spiral.

"raising taxation to fill these various gaps is the process by which our government would further load up private debt in order to avoid shouldering it publicly."

A good point and further evidence that no economic policy is withoutits downside. The question is always: does the likely upside balance the downside?

"A tax system that reduced or removed GST in favour of a more scaled income tax would be more equitable"

Agreed

Victor said...

DJS

Further to previous post.....

In the short to medium term, I'm not particularly concerned with inflation because the problem of the last decade has been recession and consequent deflation.

Looking to the future, we might again have runaway inflation, amongst other reasons, because of raw material shortages and price hikes comparable to those that fed the stagflation of the 70s.

But I would agree with you that,if it worked in other respects, funding by frank governmental fiat would be easier to control and scale back than non-state money creation.

David Stone said...

Victor

I have more thoughts on this but we are being over indulged by our host. The topic is bound to arise again and others who have dropped off this now might like to participate when it does. Basically I agree with your "bit of everything " approach in the short term, but I would be sending two trusted emissaries to talk to Corbyn's people, Bearnie Sanders' people , and other socialist parties around the world about a co-ordinated change to money and banking along the lines of Chris's post without offending trading partners.
Cheers D J S