Bretton Woods and the Golden Age Of Capitalism

Last night I went to a presentation for William Mitchell’s and Thomas Fazi’s new book “Reclaiming the State: A Progressive Vision of Sovereignty for a Post-Neoliberal World” . I am long familiar with Bill’s work, have read draft notes of his book published at his blog, Billy Blog. Thomas Fazi is new to me but I heard enough to buy his own book The Battle for Europe: How an Elite Hijacked a Continent – and How we Can Take it Back

The presentation was by Peter Ramsey, Professor of Law at the LSE and a blogger at the group blog The Current Moment:

This is neither a review of either book nor the presentation itself, which I did thoroughly enjoy. I think Peter did a stellar job summing the issues up. He was concerned that he was not an academic economist but I view that as a positive, since if this debate were to remain amongst only academic economists and interested laymen, who have put considerable work into to economics – such as myself – then the debate is lost. We need a far broader base rather than to be dismissed as dealing in complicated and obscure economic debates.

Anyway I really want to just make two comments here, one about Billy blog and the other about a question I asked in the Q&A.

I chatted with Bill in the pub afterwards and was asking about the effort into writing his blog.

Now, if you are not familiar with it, it is prodigious with high quality output, published 6 days a week, 4 of which are very well referenced arguments promoting and applying Bill’s take on the macroeconomics framework he co-founded, called Modern monetary Theory or MMT. Indeed I have not recently seen or followed any other blog in any area with the consistent quality of output from one person as his blog.

That does not mean I agree with everything he says, but I have certainly learnt far more from it, than I have found disagreement with. My learning method is to seek flaws and find challenges to whatever argument is presented, and see how the argument deals with them. I will get back to this just stated point in my following comment below, which was what I perceived as a challenge to his one of his arguments.

What really astounded me is that Bill claims that he tries to limit the time spent on each post to an hour, with a maximum of 90 minutes! If you start reading his blog you will realise why I am astounded. Many of his posts take around 15 or 20 minutes to read and digest! (Heck, maybe I am a bit slow, feel free to claim better). Clearly he does not included the actual research and he must have a very good index system, plus, I guess he knows how to touch type.

This, at least currently, is serving as an inspiration to me. I probably spend far more than 90 minutes a day on this field, including reading Bill’s blog, as well as many others, doing some other research, reading books and writing/building models (not ready to publish just yet), all slotted in amongst my many other commitments. I actually need to save some time on this and focus on other more pressing needs, as passionate as I am on this topic of evidence based macroeconomics. So I have resolved to when I have a clear idea write it up as soon as possible, limited to 90 minutes maximum and publish it, worts and all. I will note (for my own edification how long it took to write – 26 minutes so far, so the target is another 30 minutes, then the rest is references, proof reading etc.).

As a long-term programmer, I am a fast typist, but could far better, both for writing and programming, if I were a copy typist. In my typical maverick way, when I last learnt to type, I chose Dvorak rather than Qwerty. Have to think about that but need to properly learn one or the other soon. I will devote 30 minutes a day to that. I will report back as to whether that helps me writes these posts, if nothing else.

As for frequency of posts, I make no promises on that. I need to build up more content get some ideas in my head on paper to really see where they fit. I am thinking of getting together some like-minded economic thinkers into a group blog. But that is for the future.

Now onto the second comment.

An issue that has bothered me in the writings of MMT theorists is the relation of the “Golden Age of Capitalism” – the Post War to  the beginning of the 1970s period which operated under the Bretton Woods fixed exchange rate regime. Compare that to the post Bretton Woods floating exchange rate regime (from the 1970s till now) period, where MMT argues that states with sovereign non-convertible floating currencies have the largest available policy space. That has been the case in the post Bretton Woods era, (not immediately in some cases, and not at all, more or less with others, due to various attempts at currency boards, and in the Eurozone, the evolution to the Euro). So why was the Golden Age of Capitalism, with full employment, decent GDP growth, growth shared between wages and profits, the era that operated under a fixed exchange rate regime?

Now I was totally confident that Bill would come up with a decent reply, my point really being it should be more clearly stated and answered by Bill and others when writing books on the topics of Europe and states. I think sometimes these authors suffers from not seeing the wood for the trees and those new to these topics need to be shown the trees first.

I also added two elements. The first was that this growth was after the devastation and destruction of people and land. This, surely, made it easier to create full employment, given the tragic loss of other working age able-bodied people in the war, and, given, the need for huge infrastructure repairs, across Europe, for both the victors and losers, for significant growth. Given this, could we hope to go back to such days, since we far from having a deficit of workers and skills have the opposite (mostly) and we have a far better level of infrastructure (yes London roads are still terrible compared to most of Europe) than starting after the war.

Bill answered the first part of this question and Thomas answered the second.

Now I probably made my question clearer here than when I asked from the floor at the presentation, as both Bill and Thomas seemed to not fully address my question until I probed further. Was this due to my inadequacy in how I asked, or was this due to their frames missing the point, possibly thinking I was an anti-MMTer looking to find flaws in their views? I don’t know. I do often find people making interesting points but not answering my question even online and the question is there in black and white. I wont dwell on their initial responses, which whilst somewhat missing the point, I quite agree with anyway.

I will flesh out Bill’s reply with one addition of my own (clearly implied in Bill’s answer), that do not alter the substance of his reply. This addition is the Mundell-Flemming Trilemma which states “The policy trilemma, also known as the impossible or inconsistent trinity, says a country must choose between free capital mobility, exchange-rate management and monetary autonomy (the three corners of the triangle in the diagram). Only two of the three are possible. A country that wants to fix the value of its currency and have an interest-rate policy that is free from outside influence (side C of the triangle) cannot allow capital to flow freely across its borders. If the exchange rate is fixed but the country is open to cross-border capital flows, it cannot have an independent monetary policy (side A). And if a country chooses free capital mobility and wants monetary autonomy, it has to allow its currency to float (side B).” I chose this Economist quote, quite deliberately as it partly misrepresents the argument, which is not just about domestic monetary policy (interest rate management) but also domestic fiscal policy. That will be a topic for a future post.

Whilst states under a fixed exchange rate system need to earn the convertible base (in the case US dollars or the gold equivalent under Bretton Woods), they also had capital controls which prevented, mostly, capital flight and domestic currency destabilization and speculation. This did not prevent, in some cases, internal devaluation (austerity) or, failing that, currency revaluation (devaluation) but the rest of the time the social democratic policy of a mixed economy focused on full employment, with significant unemployment support (which was actually short-term in those days due to the full employment policies enable when possible), coupled with worker protection, and other welfare states provisions.

Now in the post Bretton Woods era there have been significant changes. Capital controls have been dismantled and the Monetarist/Supply-side Trickle-Down/Neoliberal ideology (there is no real empirical evidence for any of it), has also dismantled key worker and social protections and seek to demolish state regulation of the market and, with it, the whole mixed economy model that supported full employment.

We now live in a world of free capital and floating currencies and it looks like domestic monetary and fiscal policy suffers, with the increase of the capital share of growth and the decrease of worker share of growth. That is prior to the many new issues ensuing after the Great Recession of 2007/8.

Still it is not entirely clear to me how much of that Golden Age was specifically due to starting from both a lower infrastructure point and a surfeit of skills and workers, rather than this difference in the Policy Trilemma coupled with the Neoliberal versus “Keynesian” version of state governance. (I put Keynesian in scare quotes but this is also a topic for a future post).

So, with all this in mind, is it still feasible to get to the level and shares of worker in GDP and full employment?

Thomas answers yes but things will be different. The needs of today’s societies have changed to that period and require new and alternative skills and applications. The Job Guarantee and other state guided policies (such as Peoples QE – but drop the misleading label – Bill argues) can provide a range of jobs fit for social purpose that are invisible to the profit motivated private sector.

I want what Thomas (and Bill) says to be correct. One of the key thrusts of this blog is to investigate the Job Guarantee and other fiscal policy tools further.


A better review of Steve Keen’s “Can we avoid another financial crisis?”

Here is a better review than my own (that is one reason why I am blogging  – to get better at writing including reviews – practise makes perfect). This is by  Michael Hudson: Review of Steve Keen’s “Can we avoid another financial crisis?”

Steve Keen’s ” Can we avoid another finacial crisis?”: A review (Updated)

[UPDATE: This is a heavily revised and improved review]

Steve Keen is one of the few economists to have warned about the impending Global Financial Crash (GFC) of 2008.  Here he  shows the core reasoning that helped him make that call. Using the same approach, what can he say about the present in 2017 going forward?  Whether one ultimately agrees with his arguments or not, surely he has better earned a position at the high table than many others who failed to call the GFC, who  undeservedly remain at that table without merit? Would we not all benefit by having him and his arguments as part of the core debate of economic policy? This book is a bold, accessible and provocative attempt to remedy that sorry situation.

The Professor and Head of the School of Economics, History and Politics at Kingston University in London,  “Can we avoid another financial crisis” is his second book after “Debunking Economics” (He also has a collection of his papers in
“Developing an economics for the post-crisis world”). It is far more accessible than his first book and clearly his intended audience is different and broader. Indeed, even MPs and political journalists should be able to understand this except, maybe, it is still beyond George Osborne … since this is not a Ladybird book.

His concern is over the growth and change in growth of private debt as a threat to economic growth and financial stability. His main argument is that when the debt grows too large, its maintenance becomes unsustainable, and the process of us repairing our balance sheets leads to a reduction in the demand for credit, which, in turn, reduces total demand the economy and, especially if the debt is large enough, this can stall the economy and lead to a recession. This makes it even harder to repair our balance sheets and a vicious cycle can ensue.

He argues that a demonstrably erroneous and almost anti-empirical design and application  of mainstream neoclassical macroeconomics has rendered this perspective invisible, until recently mostly denying any importance or significance of private debt, as they must, given that their core models, as Steve says, excludes “banks, debt and money”! This  is why they all missed calling the GFC. This, in turn, misinformed and misinforms its ideological neoliberal sibling, so policies since the GFC have not enabled us to sufficiently repair our balance sheets and slow or negative credit growth has turned some economies into “zombies”.

Now  whether one agrees with him or not, can one reasonably deny that this should be part of the Overton window (the window of discourse)?  and, if nothing else, this book is a highly forceful and concisely readable argument to make this a central focus of future economic and populist debate.

Given modern attention spans this is a short book and certainly readable in a few hours but possibly quite dense in new ideas if one if unfamiliar with his work. This is probably easier to get with the background of  a decent scientific understanding but far less so if one is already immersed in (or corrupted by?) mainstream dogma or, even worse, educated in a  PPE course at university as far too many of our politicians and commentators have been.

There are many things he does not address (but maybe I read it too quickly) such as criticising the erroneous application of the household analogy to governments nor does he specifically mention the Loanable Funds doctrine although he does discuss this foundational mistake of mainstream economics at length and very clearly. Overall he amply argues for and demonstrates his theme that one of the main concerns of policy makers should the growth and change in growth of private debt – worryingly still not a concern of the UK Treasury and OBR. He shows, in very elegant fashion, without a single equation in sight (some are verbally stated to describe the most simple of his pure credit models) why this is likely the case. He also makes some very concise and clear arguments as to why the mainstream neoclassicals and New Keynesians – the backbone of neoliberal political ideology – repeatedly miss the point. I, in particular, liked his simple and profound verbalisation of the Sonnenschein–Mantel–Debreu theorem  which really demolishes the micro-foundation argument for macro economic DSGE models. However  he does not mention issues such as the Arrow Debreu model which was one response to this, although he does note Gorman‘s arguments. The point is this work will suffice to get you to understand the main issues involved, but would not be sufficient to argue with someone suitably informed but there are other sources, including his first book to take you further, if you are so inclined.

He is relatively pessimistic over the final outcomes that are possible or, certainly, politically feasible and, sadly, I have to agree. I wonder if he does not dwell enough on policy space and bank reform. He does discuss his debt forgiveness jubilee approach and how to circumvent the moral hazard issue of only rewarding debtors. Still he does not mention say, MMT’s Job Guarantee whilst possibly too fleetingly discusses MMT’s Godley inspired sectoral balances approach to clarify what Government or Public debt really is.  Futher, as two off the cuff examples, both Bill Mitchell‘s argument that banks should not on sell their originated loans and Richard Werner‘s argument over how to direct banking to more productive financing (he does discuss that though) could have augmented his arguments without much addition, focus or loss of clarity.

All in all this feels like a well-edited if not, possibly, an over edited book. By this I mean some other points including some as just noted could have been also simply argued but this might have detracted from the overall force of the book.

Still what results is a very important and accessible work. We need to insure that every MP, journalist and pundit is familiar with this.  I hope if you read this and you happen to know such a person you send them a copy in return for them giving you their informed opinion on it. If they are unable to do so then they really have no business being involved in politics.  What would result is that no-one could claim ignorance of the issue of private debt and that it becomes a key focus of the economic debate going to forward.


Cowdung and Credit Creation

Today is a momentous day for the United Kingdon, as Teresa May officially invokes article 50 to leave the European  Union.

Sadly, I am not yet ready to add commentary to current events, however important. My initial theme is to carry on explaining the operations of the UK banking system, presented in a way that should be available and understandable to anyone who is concerned about the economic reality we live in. No-one should be denied such access and needs to be equipped to detect and avoid the distortions presented by the COmmon Wisdom of the DominaNt Group a.k.a. “CowDung”. hopefully these posts can help in that regard.

In my last post on this topic, Can Banks Create Credit?, I noted that you should not take my word for this. This post is the first answer to that.

The Bank of England publishes an online  quarterly magazine called the Quarterly Bulletin. The Quarterly Bulletin 2014 Q4  contains two important articles with accompanying video overviews:-

This is essential reading for anyone interested money, pretty much everyone!

Money in the modern economy: an introduction

Money is essential to the workings of a modern economy, but its nature has varied substantially over time. This article provides an introduction to what money is today. Money today is a type of IOU, but one that is special because everyone in the economy trusts that it will be accepted by other people in exchange for goods and services. There are three main types of money: currency, bank deposits and central bank reserves. Each represents an IOU from one sector of the economy to another. Most money in the modern economy is in the form of bank deposits, which are created by commercial banks themselves.

This article has introduced what money means and the different types of money that exist in a modern economy. Money today is a form of debt, but a special kind of debt that is accepted as the medium of exchange in the economy. And most of that money takes the form of bank deposits, which are created by commercial banks themselves. A companion piece to this article, ‘Money creation in the modern economy’. describes the process of money creation by commercial banks in more detail.


Money creation in the modern economy

This article explains how the majority of money in the modern economy is created by commercial banks making loans. Money creation in practice differs from some popular misconceptions — banks do not act simply as intermediaries, lending out deposits that savers place with them, and nor do they ‘multiply up’ central bank money to create new loans and deposits. The amount of money created in the economy ultimately depends on the monetary policy of the central bank. In normal times, this is carried out by setting interest rates. The central bank can also affect the amount of money directly through purchasing assets or ‘quantitative easing’.[My emphasis]

This article emphasizes some of the themes I have noted in previous posts regarding the myths of  Loanable Funds, Fractional Reserves and the Money Multiplier and the implications of these myths will be explored in following posts. Note that “some popular conceptions” (and other statements in the article) are a polite and diplomatic way of calling bullshit (or cowdung) on the banking sections of economics textbooks.

I need to finish with a  couple of caveats.

First is that just because this is published by the BoE does not mean it is immune from criticism. Far from it. Indeed a theme I will develop is how many central banks have misled themselves as well as others with distorting if not fatally flawed in-house models of their economies. Still I do regard the above two articles as very accurate given my background in actual banking.

Second, these articles were published in 2014, there are other and older references for these accurate descriptions of money in the Uk and elsewhere. I have not yet found a good summary post of all those central bank references and am slowly building up a file which I will post when I am satisfied with the content.

“The Eurozone, Groupthink and denial on a grand scale”

An excellent talk by Bill Mitchell, Professor of Economics at the University of Newcastle, New South Wales, Australia and a Post Keynsian specifically one of the founders and proponents of Modern Monetary Theory school. He gave the talk as the 3rd Joan Muysken Lecture  at the Maastricht University School of Business and Economics.

(Watch on Youtube)