There’s been a bit of discussion in chat about Modern Monetary Theory (MMT) and Universal Basic Incomes (UBI) so I thought I’d start a thread. Two articles to get us started to come:

Starting over again

The covid-19 pandemic is forcing a rethink in macroeconomics
It is not yet clear where it will lead

Jul 25th 2020

In the form it is known today, macroeconomics began in 1936 with the publication of John Maynard Keynes’s “The General Theory of Employment, Interest and Money”. Its subsequent history can be divided into three eras. The era of policy which was guided by Keynes’s ideas began in the 1940s. By the 1970s it had encountered problems that it could not solve and so, in the 1980s, the monetarist era, most commonly associated with the work of Milton Friedman, began. In the 1990s and 2000s economists combined insights from both approaches. But now, in the wreckage left behind by the coronavirus pandemic, a new era is beginning. What does it hold?

The central idea of Keynes’s economics is the management of the business cycle—how to fight recessions and ensure that as many people who want work can get it. By extension, this key idea became the ultimate goal of economic policy. Unlike other forms of economic theory in the early 20th century, Keynesianism envisaged a large role for the state in achieving that end. The experience of the Great Depression had convinced proto-Keynesians that the economy was not a naturally correcting organism. Governments were supposed to run large deficits (ie, spending more than they took in taxes) during downturns to prop up the economy, with the expectation that they would pay down the accumulated debt during the good times.

The Keynesian paradigm collapsed in the 1970s. The persistently high inflation and high unemployment of that decade (“stagflation”) baffled mainstream economists, who thought that the two variables almost always moved in opposite directions. This in turn convinced policymakers that it was no longer possible to “spend your way out of a recession”, as James Callaghan, then Britain’s prime minister, conceded in 1976. A central insight of Friedman’s critique of Keynesianism was that if policymakers tried to stimulate without tackling underlying structural deficiencies then they would raise inflation without bringing unemployment down. And high inflation could then persist, just because it was what people came to expect.

Policymakers looked for something new. The monetarist ideas of the 1980s inspired Paul Volcker, then chairman of the Federal Reserve, to crush inflation by constraining the money supply, even though doing so also produced a recession that sent unemployment soaring. The fact that Volcker had known that this would probably happen revealed that something else had changed. Many monetarists argued that policymakers before them had focused too much on equality of incomes and wealth to the detriment of economic efficiency. They needed instead to focus on the basics—such as low and stable inflation—which would, over the long run, create the conditions in which living standards would rise.

It sounds like a whisper
In the 1990s and 2000s a synthesis of Keynesianism and Friedmanism emerged. It eventually recommended a policy regime loosely known as “flexible inflation targeting”. The central objective of the policy was to achieve low and stable inflation—though there was some room, during downturns, to put employment first even if inflation was uncomfortably high. The primary tool of economic management was the raising and lowering of short-term interest rates, which, it had turned out, were more reliable determinants of consumption and investment than the money supply. Central banks’ independence from governments ensured that they would not fall into the inflationary traps of which Friedman warned. Fiscal policy, as a way to manage the business cycle, was sidelined, in part because it was seen to be too subject to political influence. The job of fiscal policy was to keep public debts low, and to redistribute income to the degree and in the way that politicians saw fit.

Now it seems that this dominant economic paradigm has reached its limit. It first began to wobble after the global financial crisis of 2007-09, as policymakers were confronted by two big problems. The first was that the level of demand in the economy—broadly, the aggregate desire to spend relative to the aggregate desire to save—seemed to have been permanently reduced by the crisis. To fight the downturn central banks slashed interest rates and launched quantitative easing (qe, or printing money to buy bonds). But even with extraordinary monetary policy, the recovery from the crisis was slow and long. gdp growth was weak. Eventually, labour markets boomed, but inflation remained muted (see chart 1). The late 2010s were simultaneously the new 1970s and the anti-1970s: inflation and unemployment were once again not behaving as expected, though this time they were both surprisingly low.

This threw into question the received wisdom about how to manage the economy. Central bankers faced a situation where the interest rate needed to generate enough demand was below zero. That was a point they could not easily reach, since if banks tried to charge negative interest rates, their customers might simply withdraw their cash and stuff it under the mattress. qe was an alternative policy instrument, but its efficacy was debated. Such disputes prompted a rethink. According to a working paper published in July by Michael Woodford and Yinxi Xie of Columbia University the “events of the period since the financial crisis of 2008 have required a significant reappraisal of the previous conventional wisdom, according to which interest-rate policy alone…should suffice to maintain macroeconomic stability.”

The second post-financial-crisis problem related to distribution. While concerns about the costs of globalisation and automation helped boost populist politics, economists asked in whose interests capitalism had lately been working. An apparent surge in American inequality after 1980 became central to much economic research. Some worried that big firms had become too powerful; others, that a globalised society was too sharp-edged or that social mobility was declining.

Some argued that structurally weak economic growth and the maldistribution of the spoils of economic activity were related. The rich have a higher tendency to save rather than spend, so if their share of income rises then overall saving goes up. Meanwhile in the press central banks faced accusations that low interest rates and qe were driving up inequality by boosting the prices of housing and equities.

Yet it was also becoming clear just how much economic stimulus could benefit the poor, if it caused unemployment to drop sufficiently for wages for low-income folk to rise. Just before the pandemic a growing share of gdp across the rich world was accruing to workers in the form of wages and salaries. The benefits were greatest for low-paid workers. “We are hearing loud and clear that this long recovery is now benefiting low- and moderate-income communities to a greater extent than has been felt for decades,” said Jerome Powell, the Fed’s chair, in July 2019. The growing belief in the redistributive power of a booming economy added to the importance of finding new tools to replace interest rates to manage the business cycle.

Tables starting to turn
Then coronavirus hit. Supply chains and production have been disrupted, which all else being equal should have caused prices to surge as raw materials and finished goods were harder to come by. But the bigger impact of the pandemic has been on the demand side, causing expectations for future inflation and interest rates to fall even further. The desire to invest has plunged, while people across the rich world are now saving much of their income.

The pandemic has also exposed and accentuated inequities in the economic system. Those in white-collar jobs can work from home, but “essential” workers—the delivery drivers, the rubbish cleaners—must continue to work, and are therefore at greater risk of contracting covid-19, all the while for poor pay. Those in industries such as hospitality (disproportionately young, female and with black or brown skin) have borne the brunt of job losses.

Even before covid-19, policymakers were starting to focus once again on the greater effect of the bust and boom of the business cycle on the poor. But since the economy has been hit with a crisis that hurts the poorest hardest, a new sense of urgency has emerged. That is behind the shift in macroeconomics. Devising new ways of getting back to full employment is once again the top priority for economists.

But how to go about it? Some argue that covid-19 has proved wrong fears that policymakers cannot fight downturns. So far this year rich countries have announced fiscal stimulus worth some $4.2trn, enough to take their deficits to nearly 17% of gdp, while central-bank balance-sheets have grown by 10% of gdp. This enormous stimulus has calmed markets, stopped businesses from collapsing and protected household incomes. Recent policy action “provides a textbook rebuke of the idea that policymakers can run out of ammunition,” argues Erik Nielsen of Unicredit, a bank.

Yet while nobody doubts that policymakers have found plenty of levers, there remains disagreement over which should continue to be pulled, who should do the pulling, and what the effects will be. Economists and policymakers can be divided into three schools of thought, from least to most radical: one which calls merely for greater courage; one which looks to fiscal policy; and one which says the solution is negative interest rates.

Take the first school. Its proponents say that so long as central banks are able to print money to buy assets they will be able to boost economic growth and inflation. Some economists argue that central banks must do this to the extent necessary to restore growth and hit their inflation targets. If they fail it is not because they are out of ammunition but because they are not trying hard enough.

Not long ago central bankers followed this creed, insisting that they still had the tools to do their job. In 2013 Japan, which has more experience than any other country with low-growth, ultra-low-inflation conditions, appointed a “whatever-it-takes” central banker, Kuroda Haruhiko, to lead the Bank of Japan (boj). He succeeded in stoking a jobs boom, but boosted inflation by less than was promised. Right before the pandemic Ben Bernanke, a former chairman of the Fed, argued in a speech to the American Economic Association that the potential for asset purchases meant that monetary policy alone would probably be sufficient to fight a recession.

But in recent years most central bankers have gravitated towards exhorting governments to use their budgets to boost growth. Christine Lagarde opened her tenure as president of the European Central Bank with a call for fiscal stimulus. Mr Powell recently warned Congress against prematurely withdrawing its fiscal response to the pandemic. In May Philip Lowe, the governor of the Reserve Bank of Australia (rba), told the Australian parliament that “fiscal policy will have to play a more significant role in managing the economic cycle than it has in the past”.

Standing in the welfare lines
That puts most central bankers in the second school of thought, which relies on fiscal policy. Adherents doubt that central-bank asset purchases can deliver unlimited stimulus, or see such purchases as dangerous or unfair—perhaps, for example, because buying corporate debt keeps companies alive that should be allowed to fail. Better for the government to boost spending or cut taxes, with budget deficits soaking up the glut of savings created by the private sector. It may mean running large deficits for a prolonged period, something that Larry Summers of Harvard University has suggested.

This view does not eliminate the role of central banks, but it does relegate them. They become enablers of fiscal stimulus whose main job is to keep even longer-term public borrowing cheap as budget deficits soar. They can do so either by buying bonds up directly, or by pegging longer-term interest rates near zero, as the boj and the rba currently do. As a result of covid-19 “the fine line between monetary policy and government-debt management has become blurred”, according to a report by the Bank for International Settlements (bis), a club of central banks.

Not everyone is happy about this. In June Paul Tucker, formerly deputy governor of the Bank of England, said that, in response to the bank’s vast purchases of government bonds, the question was whether the bank “has now reverted to being the operational arm of the Treasury”. But those influenced by the Keynesian school, such as Adair Turner, a former British financial regulator, want the monetary financing of fiscal stimulus to become a stated policy—an idea known as “helicopter money”.

Huge fiscal-stimulus programmes mean that public-debt-to-gdp ratios are rising (see chart 2). Yet these no longer reliably alarm economists. That is because today’s low interest rates enable governments to service much higher public debts (see chart 3). If interest rates remain lower than nominal economic growth—ie, before adjusting for inflation—then an economy can grow its way out of debt without ever needing to run a budget surplus, a point emphasised by Olivier Blanchard of the Peterson Institute for International Economics, a think-tank. Another way of making the argument is to say that central banks can continue to finance governments so long as inflation remains low, because it is ultimately the prospect of inflation that forces policymakers to raise rates to levels which make debt costly.

To some, the idea of turning the fiscal tap to full blast, and co-opting the central bank to that end, resembles “modern monetary theory” (mmt). This is a heterodox economics which calls for countries that can print their own currency (such as America and Britain) to ignore debt-to-gdp ratios, rely on the central bank to backstop public debt, and continue to run deficit spending unless and until unemployment and inflation return to normal.

And there is indeed a resemblance between this school of thought and mmt. When interest rates are zero, there is no distinction between issuing debt, which would otherwise incur interest costs, and printing money, which text books assume does not incur interest costs. At a zero interest rate it “doesn’t matter whether you finance by money or finance by debt,” said Mr Blanchard in a recent webinar.

But the comparison ends there. While those who advocate mmt want the central bank to peg interest rates at zero permanently, other mainstream economists advocate expansionary fiscal policy precisely because they want interest rates to rise. This, in turn, allows monetary policy to regain traction.

The third school of thought, which focuses on negative interest rates, is the most radical. It worries about how interest rates will remain below rates of economic growth, as Mr Blanchard stipulated. Its proponents view fiscal stimulus, whether financed by debt or by central-bank money creation, with some suspicion, as both leave bills for the future.

A side-effect of qe is that it leaves the central bank unable to raise interest rates without paying interest on the enormous quantity of electronic money that banks have parked with it. The more money it prints to buy government bonds, the more cash will be deposited with it. If short-term rates rise, so will the central bank’s “interest on reserves” bill. In other words, a central bank creating money to finance stimulus is, in economic terms, doing something surprisingly similar to a government issuing floating-rate debt. And central banks are, ultimately, part of the government.

So there are no free lunches. “The higher the outstanding qe as a share of total government debt, the more the government is exposed to fluctuations in short-term interest rates,” explained Gertjan Vlieghe of the Bank of England in a recent speech. A further concern is that in the coming decades governments will face still more pressure on their budgets from the pension and health-care spending associated with an ageing population, investments to fight climate change, and any further catastrophes in the mould of covid-19. The best way to stimulate economies on an ongoing basis is not, therefore, to create endless bills to be paid when rates rise again. It is to take interest rates negative.

Waiting for a promotion
Some interest rates are already marginally negative. The Swiss National Bank’s policy rate is -0.75%, while some rates in the euro zone, Japan and Sweden are also in the red. But the likes of Kenneth Rogoff of Harvard University and Willem Buiter, the former chief economist of Citigroup, a bank, envision interest rates of -3% or lower—a much more radical proposition. To stimulate spending and borrowing these rates would have to spread throughout the economy: to financial markets, to the interest charges on bank loans, and also to deposits in banks, which would need to shrink over time. This would discourage saving—in a depressed economy, after all, too much saving is the fundamental problem—though it is easy to imagine negative interest rates stirring a populist backlash.

Many people would also want to take their money out of banks and stuff it under the mattress. Making these proposals effective, therefore, would require sweeping reform. Various ideas for how to do this exist, but the brute-force method is to abolish at least high-denomination banknotes, making holding large quantities of physical cash expensive and impractical. Mr Rogoff suggests that eventually cash might exist only as “weighty coins”.

Negative rates also pose problems for banks and the financial system. In a paper in 2018 Markus Brunnermeier and Yann Koby of Princeton University argue that there is a “reversal interest rate” beneath which interest-rate cuts actually deter bank lending—harming the economy rather than boosting it. Below a certain interest rate, which experience suggests must be negative, banks might be unwilling to pass on interest-rate cuts to their depositors, for fear of prompting peeved customers to move their deposits to a rival bank. Deeply negative interest rates could squash banks’ profits, even in a cashless economy.

Take what’s theirs
Several factors might yet make the economy more hospitable to negative rates, however. Cash is in decline—another trend the pandemic has accelerated. Banks are becoming less important to finance, with ever more intermediation happening in capital markets (see article). Capital markets, notes Mr Buiter, are unaffected by the “reversal rate” argument. Central bankers, meanwhile, are toying with the idea of creating their own digital currencies which could act like deposit accounts for the public, allowing the central bank to pay or charge interest on deposits directly, rather than via the banking system. Joe Biden’s campaign for the White House includes similar ideas, which would allow the Fed to directly serve those who do not have a private bank account.

Policymakers now have to weigh up the risks to choose from in the post-covid world: widespread central-bank intervention in asset markets, ongoing increases in public debt or a shake-up of the financial system. Yet increasing numbers of economists fear that even these radical changes are not enough. They argue that deeper problems exist which can only be solved by structural reform.

A new paper by Atif Mian of Princeton University, Ludwig Straub of Harvard University and Amir Sufi of the University of Chicago expands on the idea that inequality saps demand from the economy. Just as inequality creates a need for stimulus, they argue, stimulus eventually creates more inequality. This is because it leaves economies more indebted, either because low interest rates encourage households or firms to borrow, or because the government has run deficits. Both public and private indebtedness transfer income to rich investors who own the debt, thereby depressing demand and interest rates still further.

The secular trends of recent decades, of higher inequality, higher debt-to-gdp ratios and lower interest rates, thus reinforce one another. The authors argue that escaping the trap “requires consideration of less standard macroeconomic policies, such as those focused on redistribution or those reducing the structural sources of high inequality.” One of these “structural sources of high inequality” might be a lack of competitiveness. Big businesses with captive markets need not invest as much as they would if they faced more competition.

A new working paper by Anna Stansbury, also of Harvard University, and Mr Summers, rejects that view and instead blames workers’ declining bargaining power in the labour market. According to the authors, this can explain all manner of American economic trends: the decline (until the mid-2010s) in workers’ share of income, reduced unemployment and inflation, and high corporate profitability. Business owners may be more likely to save than workers, they suggest, so as corporate income rises, aggregate savings increase.

Ms Stansbury and Mr Summers favour policies such as strengthening labour unions or promoting “corporate-governance arrangements that increase worker power”. They argue that such policies “would need to be carefully considered in light of the possible risks of increasing unemployment.” Ideas for increasing the power of workers as individuals may be more promising. One is to strengthen the safety-net, which would increase workers’ bargaining power and ability to walk away from unattractive working arrangements.

In a recent book Martin Sandbu, a columnist at the Financial Times, suggests replacing tax-free earnings allowances with small universal basic incomes. Another idea is to strengthen the enforcement of existing employment law, currently weak in many rich countries. Tighter regulation of mergers and acquisitions, to prevent new monopolies forming, would also help.

All these new ideas will now compete for space in a political environment in which change suddenly seems much more possible. Who could have imagined, just six months ago, that tens of millions of workers across Europe would have their wages paid for by government-funded furlough schemes, or that seven in ten American job-losers in the recession would earn more from unemployment-insurance payments than they had done on the job? Owing to mass bail-outs, “the role of the state in the economy will probably loom considerably larger,” says the bis.

Talking about a revolution
Many economists want precisely this state intervention, but it presents clear risks. Governments which already carry heavy debts could decide that worrying about deficits is for wimps and that central-bank independence does not matter. That could at last unleash high inflation and provide a painful reminder of the benefits of the old regime. Financial-sector reforms could backfire. Greater redistribution might snap the economy out of a funk in the manner that Mr Sufi, Ms Stansbury and their respective colleagues describe—but heavy taxes could equally discourage employment, enterprise and innovation.

The rethink of economics is an opportunity. There now exists a growing consensus that tight labour markets could give workers more bargaining power without the need for a big expansion of redistribution. A level-headed reassessment of public debt could lead to the green public investment necessary to fight climate change. And governments could unleash a new era of finance, involving more innovation, cheaper financial intermediation and, perhaps, a monetary policy that is not constrained by the presence of physical cash. What is clear is that the old economic paradigm is looking tired. One way or another, change is coming.

https://www.economist.com/briefing/2020/07/25/the-covid-19-pandemic-is-forcing-a-rethink-in-macroeconomics?

OPINION
Too big to fail: How the Fed averted another financial crisis
Stephen Bartholomeusz

Senior business columnist
July 28, 2020 — 11.57am

It is clear with hindsight that the US Federal Reserve Board’s decision in March to throw the kitchen sink at whatever the coronavirus would do to financial markets provided a turning point for the US financial system, and prevented it from breaking.

That begs the question of what might have happened had the Fed not acted so quickly and emphatically to pour liquidity into the US and global financial systems. A number of post-mortems on what was happening at the epicentre of market action have suggested the Fed averted another financial crisis.

A research paper published by the Fed itself this month said that that a sudden $US100 billion ($140 billion) tightening of liquidity in the market for Treasury securities created a moment equivalent to the collapse of the big US hedge fund Long-Term Capital Management in 1998.

The paper said the decline in liquidity was significantly smaller than what had occurred when Lehman Brothers collapsed in 2008 and precipitated the global financial crisis, although who knows what might have happened had the Fed not intervened.

In a speech earlier this month, New York Fed President John Williams said the markets for Treasury securities and mortgage-backed securities, which were normally highly liquid, nearly “buckled” under the strain of the massive flows of funds in response to the pandemic.

The market for Treasury securities provides the foundation of the US financial system and is a key plank – in fact, the key plank – within the global system.

did buttress the market’s conviction that in any moment of stress and in response to any market tantrum the Fed will step in, as it has since the financial crisis, to protect investors from loss and inflate, or re-inflate, the value of financial assets.

The functioning of that market influences the markets for corporate debt. Historically, if there is illiquidity in the market for Treasuries, access to corporate debt and mortgage financing dries up, among other forms of credit. There’s also a correlation between liquidity in the Treasury market and the sharemarket.

What happened in that market in March has echoes of an event last year and provides more insights into the way the post-financial crisis banking reforms have changed the way key markets function and have, in some respects, introduced new vulnerabilities.

In particular, they highlight the importance of “shadow banks”, or non-bank financial institutions, to the functioning of the system. These entities – hedge funds and the like – are lightly regulated.

While the post-crisis reforms did force some of their operations to become more transparent, the Trump administration’s deregulatory efforts – namely its rollback of some of the post-crisis Dodd-Frank reforms to financial regulation in the US – halted efforts to increase the supervision of non-banks and made it near impossible for a non-bank or a cohort of non-banks to be deemed systemically important.

Fixing the plumbing
Indeed, the US Treasury went so far as to advocate the banning of the term “shadow banking” by regulators and government agencies, replacing it with “market-based finance”, such was the administration’s aversion to a description that Treasury Secretary Steven Mnuchin (a former hedge fund manager) regards as pejorative.

What happened in March before the Fed intervened was similar to what happened last September, when the plumbing of the US financial system seized up.

“Repo” markets provide short-term liquidity to companies and institutions in exchange for high-quality collateral like Treasury bills. Borrowers sell the securities for cash while contracting to buy them back in the near term for a marginally higher price. A sudden liquidity squeeze in that market saw “repo rates” soar and the market freeze before the Fed pumped billions of cash into the market.

In early March, the market was functioning normally before the sudden awareness of the economic impacts of the pandemic caused yields to slump, volatility to spike and bid-ask spreads – the margin between what price sellers of securities want and what buyers are prepared to pay – blew out. Investors and traders were cashing up.

Flight to cash
Major players in the repo market are hedge funds pursuing a simple arbitrage trade, buying Treasuries and selling interest rate futures to profit from the tiny margins available in what is usually termed the “basis” trade.

To make the profits worthwhile, those hedge funds use a lot of debt and also use the Treasuries they acquire as part of the trade as collateral for cash, which they then use to buy Treasuries in a continuous loop of transactions.

That’s a strategy that works until it doesn’t – until there is a flight to cash, as there was in early March, which caused the hedge funds engaged in the basis trades to lose heavily as they tried to cover their positions under the pressure of margin calls. Instead of buying Treasuries they were selling them and instead of selling futures they were buying them to close out their trades.

When the Fed intervened with its open-ended purchases of Treasury securities and mortgages, providing a massive injection of liquidity, it not only restored the functioning of the markets but it also effectively bailed out the hedge funds, both domestic and international.

Shadow banks, it appears, are too important and too big – they play too critical a role in the functioning of the markets for liquidity and credit – to be allowed to fail.

The Fed would no doubt see this – and a parallel impact on sharemarkets that enabled equity investors to recover the heavy losses they had experienced in the previous month or so — as an unintended consequence, albeit not necessarily an adverse one if the alternative is a broken or at least malfunctioning financial system.

Its actions were designed to maintain a flow of credit to businesses and households and ensure the regulated element of the financial system continued to operate smoothly. They worked.

They did, however, also buttress the market’s conviction that in any moment of stress and in response to any market tantrum the Fed will step in, as it has since the financial crisis, to protect investors from loss and inflate, or re-inflate, the value of financial assets.

The concept of risk-free markets and a state-provided safety net for investments by leveraged and non-regulated institutions is contrary to the fundamental principles of market capitalism.

That might help explain why, in the post-financial crisis era, capitalism has been under increasing attack from those on the wrong side of policies that bail out wealthy institutions and individuals and lead to increased income and wealth inequality.

https://www.theage.com.au/business/markets/too-big-to-fail-how-the-fed-averted-another-financial-crisis-20200728-p55g5i.html

Difficult to comment on that without cutting huge sections out of the articles.

> The Keynesian paradigm collapsed in the 1970s. The persistently high inflation and high unemployment of that decade (“stagflation”) baffled mainstream economists, who thought that the two variables almost always moved in opposite directions. This in turn convinced policymakers that it was no longer possible to “spend your way out of a recession”, as James Callaghan, then Britain’s prime minister, conceded in 1976. A central insight of Friedman’s critique of Keynesianism was that if policymakers tried to stimulate without tackling underlying structural deficiencies then they would raise inflation without bringing unemployment down. And high inflation could then persist.

Yep. No argument from me about that.

> a synthesis of Keynesianism and Friedmanism emerged. It eventually recommended a policy regime loosely known as “flexible inflation targeting”. The central objective of the policy was to achieve low and stable inflation—though there was some room, during downturns, to put employment first even if inflation was uncomfortably high. The primary tool of economic management was the raising and lowering of short-term interest rates, which, it had turned out, were more reliable determinants of consumption and investment than the money supply.

Yep.

> The late 2010s: inflation and unemployment were once again not behaving as expected, though this time they were both surprisingly low

Argument here. Unemployment was not low at all. If anything it was way too high. Any claims of it being low are a result of cooking the books, ie. deliberately changing the definition of unemployment artificially to make it look lower than it is. I’m continually seeing governments recooking the books as regards unemployment figures.

> central banks faced accusations that low interest rates and qe were driving up inequality by boosting the prices of housing and equities.

I’ll say. Interest rates are way too freaking low. This kills off investment and at the same time drives house prices up to ridiculously high values. The claim that low interest rates encourage investment is a total fallacy.

> Devising new ways of getting back to full employment is once again the top priority for economists.

Good.

mollwollfumble said:

The claim that low interest rates encourage investment is a total fallacy.

Why is it?

OPINION
Trump’s $US1 trillion rescue deal is too small to succeed

By Ambrose Evans-Pritchard
July 29, 2020 — 10.04am

The US economic rebound has stalled. The Census Bureau estimates that the total number of employed workers across America is now lower than in early May.

The rush to reopen without an east Asian or German tracing regime has been an economic policy blunder of the first order. It risks turning a manageable shock into something more dangerous. That is why the US dollar is in freefall and why gold has hit an all-time high.

The new Household Pulse Survey designed to capture what is happening in the US labour market in real time shows that 128 million people had jobs over the working week from July 9 to July 14, down seven million from a post-COVID peak in June. This is an even darker message than the data on initial jobless claims, which has also rolled over.

The New York Fed’s weekly output index has stalled. The V-shaped recovery pocketed by Wall Street has not in fact materialised.

“It does look as if equity markets are whistling past the graveyard,” said Ethan Harris, Bank of America’s chief US economist. “The virus is out of control and we have reversals in 40 per cent of the country.

“We’re losing 1.5 million to 2 million jobs a week, deep into the reopening, and that is very troubling. Two thirds of the drop in employment has not yet come back. This is nothing close to a ‘V’, it is more like an ‘L’ right now for the US.

“Businesses are being told to repair their balance sheets rather than invest: it’s a classic recessionary response. There are going to be bankruptcies and more shoes to drop, with second round feedback loops.”

It is this sort of delayed reaction to output shocks that can cause downturns to metastasise, and it is why countercyclical stimulus must be maintained until the economy reaches escape velocity. Yet, by curse of timing, the $US3 trillion ($4.2 trillion) relief package rushed through Congress in March with rare bipartisan comity is running out.

The first fiscal cliff-edge hit last Saturday with the expiry of weekly cheques worth $US600 to 30 million people unable to work. It has been a remarkably generous subsidy that comes on top of normal state unemployment benefits and renders two thirds of recipients better off than they were before the pandemic, but it is also remarkably expensive.

House Democrats have already passed a fresh $US3.5 trillion package that extends these blanket payments until January, but Washington is once again an ideological battleground as the election nears.

The Republican Senate and the White House have countered with a skinny $US1 trillion plan that slashes jobless cheques by two thirds to $US200 and limits total support to 70 per cent of former earnings, an impeccable decision if you are worried about moral hazard and bad incentives but a contractionary fiscal twist if new job openings do not exist. The Republican plan unveiled on Monday night offers no pandemic relief for states and local governments that cannot run deficits and are in dire shape. They need a $US1 trillion rescue of their own, and will soon be forced into procyclical austerity cuts without it. The $US660 billion fund to help small firms hold on to staff gets a modest top-up but is essentially in run-off.

Even this skinny package is too much for Texas senator Ted Cruz and a chunk of the Republican base, which will make it very hard to reach a cross-party compromise. “There is significant resistance to yet another trillion dollars,” he said.

Appetite for further giant rescues is fading as the budget deficit explodes to 18 per cent of GDP this fiscal year and the debt ratio surpasses the peak seen during the Second World War. Mismanaging COVID-19 is proving as costly as general mobilisation and the defeat of fascism.

It is in any case an article of faith in the Trump administration that the recovery is on its way and that the huge stash of savings built up by households over the last four months will soon feed into a spending boom. Treasury secretary Steve Mnuchin predicts an explosive take-off in the third quarter (one month of which has already elapsed), even though the US death toll from COVID-19 has topped a thousand for the last five days in a row and the Centres for Disease Control and Prevention’s COVID Tracking Project describes the surge in hospitalisations as “alarming”.

It is almost irrelevant at this point whether or not states go back into lockdown. The accumulated evidence from credit card and mobility data is that 90 per cent of the economic damage is caused by people taking matters into their own hands. They have heard the message that diabetes/obesity makes COVID-19 a deadly threat.

The vast stock of pent-up savings and “high-powered money” may indeed catch fire and lead to economic overheating but it might equally lie inert as “precautionary savings”, and do so long enough for economic metastasis to set in. This episode is unusually binary and could go either way with considerable force, which is why it is so hard to judge.

Even before the pandemic, the US Treasury was already fretting about the record high ratio of corporate debt to GDP and the unprecedented rise in companies with debt above six times earnings.

These firms had to take on even more loans in order to survive when the pandemic hit and have since begun a ruthless effort to pay down liabilities before insolvency closes in. That is why total lending has contracted by $US300 billion since early May to $US10.6 trillion and is one key reason why the Fed’s balance sheet is also contracting. The lending schemes are not being used.

The Fed’s ability to keep the show on the road with plain vanilla QE is being tested. Mass bond purchases are no longer gaining much additional traction. Money is piling up as excess bank reserves. Much of it is being recycled back to the Fed in a weird loop. The velocity of circulation will recover – as monetarists say – but will it do so soon enough?

My guess is that gold bugs are already anticipating the next Hail Mary pass: a change in the Federal Reserve Act. Will the law be changed under a Biden administration and Democratic Congress to allow outright Fed financing of government spending? Is the global dollar system heading towards fiscal dominance and the advent of Modern Monetary Theory? That is for another piece.

Telegraph, London

https://www.theage.com.au/business/the-economy/trump-s-us1-trillion-rescue-deal-is-too-small-to-succeed-20200729-p55geb.html

The Rev Dodgson said:

mollwollfumble said:

The claim that low interest rates encourage investment is a total fallacy.

Why is it?

Because any interest rate below 2% is SFA, you can’t live on that.
It pushes house prices up so you can’t buy a house without taking out a massive loan.
And that just leaves the roulette wheel which is called shares. If you win you pay tax and if you lose, you lose.

SFA worth investing in when interest rates are low.

mollwollfumble said:

The Rev Dodgson said:

mollwollfumble said:

The claim that low interest rates encourage investment is a total fallacy.

Why is it?

Because any interest rate below 2% is SFA, you can’t live on that.
It pushes house prices up so you can’t buy a house without taking out a massive loan.
And that just leaves the roulette wheel which is called shares. If you win you pay tax and if you lose, you lose.

SFA worth investing in when interest rates are low.

Low interest rates are a boon to businesses that want to invest.

mollwollfumble said:

The Rev Dodgson said:

mollwollfumble said:

The claim that low interest rates encourage investment is a total fallacy.

Why is it?

Because any interest rate below 2% is SFA, you can’t live on that.
It pushes house prices up so you can’t buy a house without taking out a massive loan.
And that just leaves the roulette wheel which is called shares. If you win you pay tax and if you lose, you lose.

SFA worth investing in when interest rates are low.

Your argument seems to be based on the idea that the only available investment is fixed interest loans.

But that’s so obviously ridiculous that I must have missed something in your argument.

So could you re-state in more detail please, explaining how someone managing a business with the opportunity to increase income by investing some money will find that low interest rates makes that investment less attractive.

Bips and bytes
A shift from paper to virtual cash will empower central banks
Officially issued digital currencies could help usher in negative interest rates

Finance & economics

Jul 23rd 2020
SHANGHAI

America’s federal reserve recognised the disruptive potential of electronic money long ago. “This is a service which it is expected will be more and more availed of as the ease and economy of using it are understood,” its New York arm declared in a report. The year was 1917, and the Fed had just started allowing banks to transfer funds by telegram free of any interest charge. More than a century on, central banks are grappling with another technological revolution: the rise of mobile payments and the turn away from cash.

Just as in the early 20th century, when central banks created telegraph transfer networks, they are now coming to the view that they must design their own digital-payment networks in order to retain control of their monetary systems. One idea gaining favour is to issue a so-called central-bank digital currency (cbdc), which would exist only as electrons on a computer chip, rather than a coin or bill. Roughly 80% of central banks are doing some kind of cbdc work, from research to trials, according to one survey. Although still early, it is a trend that could give rise to tantalising new possibilities for monetary policy.

Most central bankers were sceptical about cbdcs at first, but in recent months their views have turned more positive, according to an analysis of their speeches by the Bank for International Settlements (bis), a club of central banks (see chart). Partly, that is because they are now more familiar with the concept. China has already put the digital yuan into use on a limited test basis, and Sweden is close to that with the e-krona. The coronavirus pandemic has added to the urgency as more people shop online or pay with contactless cards or phones rather than cash.

The primary motivation for issuing a cbdc is likely to be defensive. The gradual demise of cash poses two basic risks. First, online-payment systems could fail, suffering outages or hacks. To safeguard the integrity of their currencies, central banks hope to offer fail-safe digital alternatives.

The second risk is that private-sector systems are too successful, with more people switching to payment platforms offered by big tech firms such as Facebook or Tencent. Many central banks began taking this risk more seriously when Facebook unveiled its plans for a digital currency in 2019. As Hyun Song Shin, head of research at the bis, has put it, a shift towards such currencies would be like moving the economy from a town-square market—where all vendors happily accept cash—to competition between full-service department stores. Once popular enough, the department stores could stop you from shopping elsewhere and might also introduce new fees. Regulators could require private payment platforms to interconnect, but a well-designed cbdc would help ensure that this happens, by forming a digital bridge between different systems.

European central bankers are most exercised by the effects of a privately run digital currency on competition and the consumer interest. The Fed seems farther away from considering the idea, in part because Americans are keener on cash.

cbdcs also give central banks more control. They could allow for transactions to be easily tracked, perhaps making them more alluring to China’s authorities. In the West, where surveys show that the public cares more about privacy, cbdcs may need to ensure anonymity, without circumventing anti-money-laundering checks.

Where things get really interesting from a theoretical perspective are the implications for monetary policy. This is particularly the case if the new currencies are “retail” cbdcs, made available for use by the public. (A less exciting option would be to issue “wholesale” cbdcs exclusively to commercial banks, much as they already get funds from the central bank, albeit underpinned by whizzier technology.)

cbdcs may make it easier to implement negative interest rates. Unlike old-fashioned cash, digital fiat can be programmed. For now, rates cannot go too negative, because savers can always demand cash, which by definition offers an interest rate of zero. But if digital cash is programmed to have a negative interest rate, people would have fewer fallbacks and central banks more flexibility.

Central bankers might also be tempted by the potential for targeted interventions—much to the horror of those already worried about the clout of unelected monetary officials. Rather than lending to commercial banks, central banks would be able to top up individual currency accounts. During a downturn, they could transfer funds to those with low balances. After a natural disaster, they could direct support to affected areas. And they could offer consumption rebates depending on how and where the money is spent.

Yet these newfound powers would have drawbacks. For the cbdc to be a conduit for negative rates, countries would probably need to have eliminated cash, otherwise people could still opt for physical over virtual money. Moreover, if the cbdc does have a deeply negative interest rate, people might lose confidence in it. Savers could demand another currency or a different asset, such as gold. As for targeted interventions, there is a danger in programming too many special features into digital currencies. They would start to resemble securities with specific purposes, undermining the fungibility that has been a feature of money since the days of cowrie shells.

Central banks would also have to pay heed to new vulnerabilities. In the event of a panic, savers could convert their bank deposits into their cbdc accounts, adding to stresses on the financial system. Even without a panic, strong demand for cbdcs could chip away at banks’ deposit bases, making them more reliant on wholesale funding, which is often more costly and less stable. Some economists argue that limits on withdrawals and on issuance might help avoid some of these effects.

In any case, the policy ramifications are the stuff of monetary fiction for now. A more practical concern is whether central banks can succeed in building sturdy, easy-to-use cbdcs. The past few months have brought several examples of failures in public technology, from overwhelmed unemployment websites in America to an abandoned coronavirus-tracing app in Britain. No government wants to see its currency crash, even if only virtually.

https://www.economist.com/finance-and-economics/2020/07/23/a-shift-from-paper-to-virtual-cash-will-empower-central-banks

From unthinkable to universal
Universal basic income gains momentum in America
Paying for it remains another matter

United States
Aug 8th 2020 edition
NEW YORK

Colette smith and her husband are both out of work. They had exhausted their savings, when she received a one-time $1,000 cash infusion as part of a scheme run by Neighbourhood Trust, a financial coaching non-profit, and Humanity Forward, an organisation devoted to building support for universal basic income (ubi) founded by Andrew Yang. ubi was the centrepiece of Mr Yang’s run for the Democratic presidential nomination, in which he advocated a guaranteed income of $1,000 a month, a “Freedom Dividend”, as he called it, for every American adult, regardless of their financial circumstances.

There are two big hurdles to introducing ubi in America. One is building support for something that sounds, to many, alarmingly socialist. The other is working out how to pay for it. Mr Yang’s campaign for the Democratic nomination may have failed. But on one of these points he has been wildly successful. A recent Stanford study showed that people are warming to the ubi idea. In April 88% of liberals backed it, while support among conservatives rose from 28% before covid-19 to 45%. Universal benefits can be easier for politicians to sell, because they are less vulnerable to the racial politics that have undermined support for welfare spending in the past.

Dreams of a ubi have a peculiar history in America. In 1967 a coalition of welfare recipients, led by African-American women, demanded “decent income as a right”. Martin Luther King wrote about it in his final book. At the other end of the political spectrum, Donald Rumsfeld and Dick Cheney drew up a guaranteed minimum-income proposal for President Richard Nixon. Milton Friedman and Friedrich Hayek, beloved of libertarians, were enthusiasts too.

More recently, ubi has been taken up by technologists who believe that software will leave a large number of Americans jobless, leading to social unrest. It has also been promoted by some of the organisations which make up the Black Lives Matter movement, who see it as a way to mend racial disparities in wealth.

Mr Yang points out that the approval rating for ubi was only about 25% when he began his presidential run, but by the time he ended it, in February, it was 66%. “The energy around universal basic income has skyrocketed, and it’s going to remain elevated until a bill passes,” says Mr Yang, who believes the job losses caused by covid-19 will not quickly be reversed. In June Jack Dorsey, Twitter’s boss, gave Mr Yang’s organisation $5m to build the case for ubi.

Funding a generous ubi has always seemed impossible. But many seemingly impossible economic policies have been enacted recently, opening the door to wackier ideas. Under America’s economic-stimulus plan to deal with the fallout from the pandemic, for example, Congress sent $1,200 to every adult. The scheme was so generous that, combined with extended unemployment benefits, aggregate household income is forecast to rise this year.

In May more than dozen cities, including Atlanta, Los Angeles, Newark and St Paul, along with the Economic Security Project, launched Mayors for a Guaranteed Income, a network of mayors experimenting with ubi-like schemes. Mr Dorsey has also given money to this group. In February 2019 Stockton, California, began an 18-month experiment to give $500 to 125 randomly selected people. This is being extended for another six months to help participants weather the slump.

In Jackson, Mississippi, the Magnolia Mother’s Trust provides poor African-American mothers with $1,000 in cash monthly, no strings attached, for a year. It recently began a larger experiment with 110 participants. Hudson, a small city in upstate New York, recently announced a five-year scheme to give a monthly $500 payment to 20 people. In Newark, New Jersey, Ras Baraka, the mayor, is hoping to get a pilot programme up and running. A third of Newark’s residents live in poverty and have to make tough decisions, Mr Baraka says, like “heat or eat.” Nearly 60% of Newark households carry delinquent debt. But to introduce a proper ubi in Newark, he says, would require federal funding.

For all the enthusiasm about ubi experiments, they remain problematic. It is hard to fully evaluate their effect because they are not universal (in the sense of received by everyone). Most take the form of occasional cash payments to poorer Americans. Nor are they generous enough to live on, which is what true ubi believers advocate. Finally, because they tend to be funded by philanthropy, the experiments do not factor in the substantial tax rises that would be needed to pay for them.

The proposal Mr Yang ran on would have cost $2.8trn annually, which is about what the federal government spends each year on Social Security (pensions), Medicare (health care for the elderly) and Medicaid (health care for the poor) combined. Even then it would provide adults with no more than $12,000 a year—not enough to lift a workless family with two adults and two children above the federal poverty line.

A more targeted effort that did not aim to be universal could do much more on that score. Ms Smith, along with 1,000 other residents of the Bronx, received a one-off $1,000 grant from Mr Yang’s outfit. This allowed her to buy food and to restore the internet, which her 14-year-old son needed for remote learning. This helped a great deal. But ubi advocates still have to explain why it would not be better to give families such as hers larger sums rather than a smaller payment that also goes to those who do not need it.■

https://www.economist.com/united-states/2020/08/08/universal-basic-income-gains-momentum-in-america?

Macroeconomics
Governments must beware the lure of free money
Budget constraints have gone missing. That presents both danger and opportunity

Leaders
Jul 23rd 2020 edition

It is sometimes said that governments wasted the global financial crisis of 2007-09 by failing to rethink economic policy after the dust settled. Nobody will say the same about the covid-19 pandemic. It has led to a desperate scramble to enact policies that only a few months ago were either unimaginable or heretical. A profound shift is now taking place in economics as a result, of the sort that happens only once in a generation. Much as in the 1970s when clubby Keynesianism gave way to Milton Friedman’s austere monetarism, and in the 1990s when central banks were given their independence, so the pandemic marks the start of a new era. Its overriding preoccupation will be exploiting the opportunities and containing the enormous risks that stem from a supersized level of state intervention in the economy and financial markets.

This new epoch has four defining features. The first is the jaw-dropping scale of today’s government borrowing, and the seemingly limitless potential for yet more. The imf predicts that rich countries will borrow 17% of their combined gdp this year to fund $4.2trn in spending and tax cuts designed to keep the economy going. They are not done. In America Congress is debating another spending package (see article). The European Union has just agreed on a new stimulus funded by common borrowing, crossing a political Rubicon (see Leader).

The second feature is the whirring of the printing presses. In America, Britain, the euro zone and Japan central banks have created new reserves of money worth some $3.7trn in 2020. Much of this has been used to buy government debt, meaning that central banks are tacitly financing the stimulus. The result is that long-term interest rates stay low even while public-debt issuance soars.

The state’s growing role as capital-allocator-in-chief is the third aspect of the new age. To see off a credit crunch, the Federal Reserve, acting with the Treasury, has waded into financial markets, buying up the bonds of at&t, Apple and even Coca-Cola, and lending directly to everyone from bond dealers to non-profit hospitals. Together the Fed and Treasury are now backstopping 11% of America’s entire stock of business debt. Across the rich world, governments and central banks are following suit.

The final feature is the most important: low inflation. The absence of upward pressure on prices means there is no immediate need to slow the growth of central-bank balance-sheets or to raise short-term interest rates from their floor around zero. Low inflation is therefore the fundamental reason not to worry about public debt, which, thanks to accommodative monetary policy, now costs so little to service that it looks like free money.

Don’t fool yourself that the role of the state will magically return to normal once the pandemic passes and unemployment falls. Yes, governments and central banks may dial down their spending and bail-outs. But the new era of economics reflects the culmination of long-term trends. Even before the pandemic, inflation and interest rates were subdued despite a jobs boom. Today the bond market still shows no sign of worrying about long-term inflation. If it is right, deficits and money-printing may well become the standard tools of policymaking for decades. The central banks’ growing role in financial markets, meanwhile, reflects the stagnation of banks as intermediaries and the prominence of innovative and risk-hungry shadow banks and capital markets (see article). In the old days, when commercial banks ruled the roost, central banks acted as lenders of last resort to them. Now central banks increasingly have to get their hands dirty on Wall Street and elsewhere by acting as mammoth “marketmakers of last resort”.

A state with a permanently broader and deeper reach across the economy creates some opportunities. Low rates make it cheaper for the government to borrow to build new infrastructure, from research labs to electricity grids, that will boost growth and tackle threats such as pandemics and climate change. As societies age, rising spending on health and pensions is inevitable—if the resulting deficits help provide a necessary stimulus to the economy, all the more reason to embrace them.

Yet the new era also presents grave risks. If inflation jumps unexpectedly the entire edifice of debt will shake, as central banks have to raise their policy rates and in turn pay out vast sums of interest on the new reserves that they have created to buy bonds. And even if inflation stays low, the new machinery is vulnerable to capture by lobbyists, unions and cronies.

One of monetarism’s key insights was that sprawling macroeconomic management leads to infinite opportunities for politicians to play favourites. Already they are deciding which firms get tax breaks and which workers should be paid by the state to wait for their old jobs to reappear. Soon some loans to the private sector will turn sour, leaving governments to choose which firms fail. When money is free, why not rescue companies, protect obsolete jobs and save investors?

However, though that would provide a brief stimulus, it is a recipe for distorted markets, moral hazard and low growth. Fear of politicians’ myopia was why many countries delegated power to independent central banks, which wielded a single, simple tool—interest rates—to manage the economic cycle. Yet today interest rates, so close to zero, seem impotent and the monarchs who run the world’s central banks are becoming rather like servants working as the government’s debt-management arm.

Free markets and free lunches
Each new era of economics confronts a new challenge. After the 1930s the task was to prevent depressions. In the 1970s and early 1980s the holy grail was to end stagflation. Today the task for policymakers is to create a framework that allows the business cycle to be managed and financial crises to be fought without a politicised takeover of the economy. As our briefing this week explains, this may involve delegating fiscal firepower to technocrats, or reforming the financial system to enable central banks to take interest rates deeply negative, exploiting the revolutionary shift among consumers away from old-style banking to fintech and digital payments. The stakes are high. Failure will mean the age of free money eventually comes at a staggering price.■

https://www.economist.com/leaders/2020/07/23/governments-must-beware-the-lure-of-free-money?

SCIENCE said:

So is almost everybody else.

SCIENCE said:

Hard to read exactly, but it looks like between 2005 and 2010 the wealth of the bottom 50 plunged from about 2.5 trillion to very close to zero, and since then to 2021 it grew to close to 5 trillion.

So using 2010 as the benchmark, proportionately it has grown way faster than the rich people’s wealth, other than flatlining a bit in the Biden years.