Showing posts from January, 2015

Reflections on Recovery and Reform

As Greece prepares to reject the fiscal austerity that has been imposed on it for the last six years, here are some thoughts on the process of Recovery and Reform that Greece, and others in the Eurozone, have been undertaking in the past few years. They are not mine: the identity of the writer will be revealed later in this post (though many of you will no doubt recognise the writing style, if not the actual words). "You are engaged on a double task, Recovery and Reform;--recovery from the slump and the passage of those business and social reforms which are long overdue. For the first, speed and quick results are essential. The second may be urgent too; but haste will be injurious, and wisdom of long-range purpose is more necessary than immediate achievement. It will be through raising high the prestige of your administration by success in short-range Recovery, that you will have the driving force to accomplish long-range Reform. On the other hand, even wise and necessar

Banks, bonds and deficits

Lots of you pointed out that in my last post the monetary effect of government bond purchases was unclear. Indeed, I had rather skated over it and thereby created confusion. I gave the impression that government can always sterilise spending (broad money creation) by issuing bonds. But this isn't quite true. It all depends on who buys them and how they finance their purchases. So I thought I'd do a few scenarios to show what happens when different types of private sector actors buy and sell government bonds. Firstly, let's look at primary issues. Government issues sufficient bonds to sterilise its entire deficit spending. This is normal fiscal behaviour. Primary issue: bonds entirely bought by banks I'm going to consider the banks in aggregate here, rather than as individual entities, and I'm going to assume that the same banks also intermediate government spending. As I noted in my previous post, in the absence of pre-funding, governments will run overdra

Oh, what have you done?

My latest Forbes post discusses the reasons for the Swiss National Bank's sudden removal of exchange controls and imposition of record negative rates. Here's a taster: This action has without question been   very costly . So why did the SNB do it? Frankly, I don’t buy the SNB’s “cap is no longer needed” story. If the currency peg was really redundant, market reaction would have been far less extreme. Nor do I agree with   Markus Brunnermeier and Harold James   that this was due to domestic political worries about SNB solvency. In my view this is all about ECB QE – and about the power dynamics between central banks. To read the whole post, click here . The title to the Forbes post has confused lots of people, so let me explain. It's a reference to David Bowie's song  Love is Lost : It's the darkest hour, you're 22 The voice of youth, the hour of dread It's the darkest hour, and your voice is new Love is lost, and lost is love Your country&

The fiscal theory of monetary expansion

I am tired of theories of monetary expansion that ignore the considerable role of both commercial banks and fiscal authorities in the creation of money. To hear some people talk, you would think that all that is needed is for the central bank to increase base money (M0), and the total amount of money (M3) circulating in the economy will magically increase. So when the economy is on the floor, monetary conditions are tight and commercial banks not lending, inflate M0 by any means available and wait for life to return. This amounts to believing, in the face of considerable evidence to the contrary, that the earth is flat. In a credit money system, the vast majority of money in circulation is created not by the central bank but by commercial banks. Furthermore, government deficit spending increases the total amount of money circulating in the economy (unless this money expansion is actively neutralised). Therefore the combination of fiscal authorities and commercial banks can create all

A Latin American tragedy

In my recent Forbes post about Venezuela , I said that neither the exchange rate policy nor the government's fiscal policy were sustainable, and the Maduro regime would eventually be forced to devalue and enact painful fiscal reforms. In the comments, Alexander Guerrero observed that it is already too late for this, because the economic mismanagement of the last few years has all but destroyed the supply-side of the economy: devaluation now would be likely to result in hyperinflation and default.  The tragedy is that what is playing out now in Venezuela has happened many times before. Those who do not learn from history are doomed to repeat it.....and nowhere is that more true than in Latin America. In this paper from 1989, Dornbusch & Edwards examine the reasons for the parlous state of Peru's economy at that time in the light of the economic collapse of Chile in the early 1970s. These comments set the scene (my emphasis): Our purpose in setting out these experie