Does Modern Monetary Theory Make Sense? — Steve Keen

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Let's see what iconoclast Professor Steve Keen has to say.

Child In Time — Deep Purple

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Enjoy.

Princes of the Yen - The Japanese Central Bank

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I have translated Richard Werner's New Paradigm in Macroconomics: Solving the Riddle of Japanese Macroeconomic Performance into German.

Neutrality of Money (4) — A Brief History

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Continued from here.

The source:  The Barter Illusion in Classical and Neoclassical Economics by Dudley Dillard.

(Click on images to enlarge them.)

The Natural Rate of Interest (5)

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Continued from here.

Writes L. P. Sill:

One of Keynes’s central tenets is that there is no strong automatic tendency for economies to move towards full employment levels. 

Money doesn’t matter in mainstream macroeconomic models. That’s true. According to the ‘classical dichotomy,’ real variables — output and employment — are independent of monetary variables, and so enables mainstream economics to depict the economy as basically a barter system. 

But in the real world in which we happen to live, money certainly does matter. Money is not neutral and money matters in both the short run and the long run: 

"The theory which I desiderate would deal … with an economy in which money plays a part of its own and affects motives and decisions, and is, in short, one of the operative factors in the situation, so that the course of events cannot be predicted in either the long period or in the short, without a knowledge of the behaviour of money between the first state and the last. And it is this which we ought to mean when we speak of a monetary economy." 

J. M. Keynes A monetary theory of production (1933)

See also (1) Neutrality of Money — Definition and Refutation

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The Natural Rate of Interest (4)

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Continued from here.

Income is boosted by investment, and income makes possible (additional) saving. So what money created from nothing by banks achieves is that additional investment is called into existence which supports more/new income (part of) which can be diverted into saving. So it is not saving that makes investment possible. To the contrary, it is investment made possible by the banks' ability to create money out of nothing that gives rise to additional savings. So, quite unlike the theory of the natural rate of interest claims, there is no naturally/neutrally and necessarily/automatically equilibrating mechanism at work, whereby interest rate changes reduce/increase investment while increasing/reducing saving to keep both always in balance. Instead there is endogenous money creation which is not at all of the automatically equilibrating kind, but quite powerfully capable of supporting productive investment no less than massive misallocations of economic resources.

Postulated by mainstream economics, the idea that money is neutral suggests that it does not affect the real economy.  In reality, money is not neutral, both in the sense 

• (1) that it puts us in the position to make productive investments that we could not have made in its absence, and 

• (2) that it gives us the means to pump up huge bubbles of unproductive investments throwing the economy into crisis.

The natural rate of interest as conceived by mainstream economics does not exist, as the equilibrating mechanism that would be required for it to be determined is a mere figment of the mind — it is absent in the real world where the relationship between saving and investment is characterised by a completely different process.

Writes Bill Mitchell about the theory of the natural interest rate — my emphasis in the below text:

So the interest rate adjusts to the natural interest rate where the full-employment level of savings equals investment and all is well. There is never a shortage of investment projects but their introduction is impacted upon by the cost of funds. There is never unemployment!

Marx by the way had already disassembled all this nonsense in Capital and I urge you to trace out his argument, for to some extent, what followed (Keynes and Kalecki) was anticipated by Marx.

Anyway, it was exactly these issues that Keynes tackled in the General Theory. In Chapter 14, Keynes said (page 189) that:

The classical school proper, that is to say; since it is the attempt to build a bridge on the part of the neo-classical school which has led to the worst muddles of all … This leads on to the idea that there is a “natural” or “neutral” … or “equilibrium” rate of interest, namely, that rate of interest which equates investment to classical savings proper without any addition from “forced savings” … But at this point we are in deep water. “The wild duck has dived down to the bottom — as deep as she can get — and bitten fast hold of the weed and tangle and all the rubbish that is down there, and it would need an extraordinarily clever dog to dive after and fish her up again.”

Thus the traditional analysis is faulty because it has failed to isolate correctly the independent variables of the system. Saving and Investment are the determinates of the system, not the determinants. They are the twin results of the system’s determinants … [aggregate demand] … The traditional analysis has been aware that saving depends on income but it has overlooked the fact that income depends on investment, in such fashion that, when investment changes, income must necessarily change in just that degree which is necessary to make the change in saving equal to the change in investment.

In other words, the orthodox position that the interest rate somehow balances investment and saving and that investment requires a prior pool of saving are both incorrect. We learned categorically that investment brings forth its own saving through income adjustments.

What drives all this is effective demand – spending backed by cash (Marx definitely wrote about that in Theories of Surplus Value). The 1930s totally discredited the Wicksellian ideas about the dynamics of the economy and the centrality of interest rate adjustments in stabilising the economy.

But that failed paradigm reappeared in the 1970s and by the 1990s was dominant again. All this talk about neutral interest rates really inherits all that baggage.

The Natural Rate of Interest (3)

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Continued from here.

What makes the theory of the natural interest rate erroneous is the assumption of an  (actually non existing) equilibrating mechanism that ensures a balance between savings and investments. The interest rate is supposed to provide the equilibrating impetus. If consumption falls (because saving rises), the interest rate (in the loanable funds market) falls (excess supply of loans) and investment rises to fill the gap left by the fall in consumption. If consumption increases (because saving declines), the interest rate (in the loanable funds market) increases (tightening supply of loans) and investment is restrained accommodating the rise in consumption.

But, money (loanable funds) is endogenously determined i.  banls create it at will), independent of an exogenous source such as the market for loanable funds or the central bank. To accommodate the need of investors for funds, the banks are not dependent on savers willing to save or a central bank to provide them with bank reserves upfront. The banks create money as long as creditworthy investors are willing to borrow from them (at terms acceptable, i. e. profitable to the latter).

There is no automatic and benign mechanism of equilibration. Banks may create money and lend it out to investors for projects that drive unsustainable bubbles. Lending may create imbalances by supporting the large-scale misallocation of resources which will disequilibrate the economy causing crises of overproduction and unemployment. 

Money can be used to create housing bubbles, bubbles in the securities markets or bubbles of malinvestment like in the dot-come episode at the turn of the century.

And money can be created to support productive investments.

In both capacities, money affects the real economy rather than being a mere veil laid over an economy effectively working on the basis of barter.

Writes Bill Mitchell:

In his classic book – Interest and Prices (1936 edition published by Macmillan and Co) – Wicksell defined a “natural interest rate” as follows (page 102):

There is a certain rate of interest on loans which is neutral in respect to commodity prices, and tend neither to raise nor to lower them. This is necessarily the same as the rate of interest which would be determined by supply and demand if no use were made of money and all lending were effected in the form of real capital goods. It comes to much the same thing to describe it as the current value of the natural rate of interest on capital (emphasis in original).

So consistent with the view held in those times that the loanable funds market brought savers together with investors, the natural rate of interest is that rate where the real demand for investment funds equals the real supply of savings.

Wicksell also differentiated the interest rate in financial markets which is determined by the demand and supply of money and the interest rate that would mediate “real intertemporal transfers” in a world without money. So this meant that “money” had no impact on the “natural interest rate” which reflects only real (not nominal) factors.

He wrote (page 104):

Now if money is loaned at this same rate of interest, it serves as nothing more than a cloak to cover a procedure which, from the purely formal point of view, could have been carried on equally well without it. The conditions of economic equilibrium are fulfilled in precisely the same manner.

All this reasoning is consistent with the idea that classical idea that money is a “veil over the real economy”, that it only affects the price level. The way in which this occurs in Wicksellian thought is that the deviation between the interest rate determined in the financial markets and the natural rate impacts on the price level.

So when the money interest rate is below the natural rate, investment exceeds saving and aggregate demand exceeds aggregate supply. Bank loans create new money to finance the investment gap and inflation results (and vice versa, for money interest rates above the natural rate).

I could write at length outlining why this conception is inapplicable to a modern monetary economy but that isn’t the purpose of this blog.

With the natural rate of interest an unobservable imaginative construct, Wicksell claimed that the link between price level movements and the gap between the two interest rates provided the clue for policy makers.

He wrote (p.189) that:

This does not mean that the banks ought actually to ascertain the natural rate before fixing their own rates of interest. That would, of course, be impracticable, and would also be quite unnecessary. For the current level of commodity prices provides a reliable test of the agreement of diversion of the two rates. The procedure should rather be simply as follows: So long as prices remain unaltered the banks’ rate of interest is to remain unaltered. If prices rise, the rate of interest is to be raised; and if prices fall, the rate of interest is to be lowered; and the rate of interest is henceforth to be maintained at its new level until a further movement of prices calls for a further change in one direction or the other. (emphasis in original).

So you can see the genesis of the natural rate concept that central bankers still hold onto – but now prefer to refer to it as the “neutral rate of interest”.

In this vein, there was an important speech given by former Federal Reserve Chairman Alan Greenspan in 1993 which elevated this concept back into mainstream policy considerations. Central bankers in the 1980s had been beguiled by Milton Friedman’s view that they needed to control the stock of money if they were to maintain price stability. As a consequence monetary targetting was pursued and soon after turned out to be a total failure.

It was obvious that the stock of money could not be controlled by the central bank given it was endogenously determined by the demand for credit. Modern monetary theory never considered money to be exogenously determined – which is the main presumption in mainstream macroeconomics textbooks.

Anyway, to fill the gap, central bankers shifted ground. In his Statement to the Congress, on July 20, 1993 (published in the Federal Reserve Bulletin, September 1993, pages 849-855, Greenspan told the Congress that:

In assessing real rates, the central issue is their relationship to an equilibrium interest rate, specifically the real rate level that, if maintained, would keep the economy at its production potential over time. Rates persisting above that level, history tells us, tend to be associated with … disinflation … and rates below that level tend to be associated with eventual resource bottlenecks and rising inflation, which ultimately engender economic contraction.

This was an important break from the money targeting period and marked the beginnings of inflation targeting whereby central banks would announce or imply a target rate of inflation and then adjust the interest rate up or down to manipulate (so they thought) aggregate demand and hence prices. This ap[p]roach explicitly used unemployment as a policy tool to suppress inflation – high unemployment was maintained over this period to suppress aggregate demand as part of the “inflation-first” macroeconomic strategy.

You can see that Greenspan’s “equilibrium interest rate” is just a replay of Wicksell’s “natural interest rate” theory which was dominant in the days before the Great Depression. However, to advocate Wicksell’s theory you have to buy into the whole theoretical box-and-dice – in all its inanity and inconsistency.

Accordingly, you have to consider markets equilibrate through price adjustments and the economy tends to full employment (meaning there cannot be a deficiency of aggregate demand). So if consumption falls (because saving rises), the interest rate (in the loanable funds market) falls (excess supply of loans) and investment rises to fill the gap left by the fall in consumption. This is Say’s Law which is restated as Walras’ Law when multiple markets are introduced.

So the interest rate adjusts to the natural interest rate where the full-employment level of savings equals investment and all is well. There is never a shortage of investment projects but their introduction is impacted upon by the cost of funds. There is never unemployment!

Continued here.

Many Weighty Reasons to Leave the EU (2)

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Fortgesetzt von hier.

Ich habe folgende Replik erhalten:

Es gibt bestimmt andere Aspekte wie z.B. kulturelle. Mein Punkt war, darauf hinzuweisen, dass die politische Rechte das Thema Einwanderung als Sündenbock für die belastenden Auswirkungen der harschen Sparpolitik nutzte. 

Die Globale Finanzkrise war offensichtlich ein sehr wichtiges Ereignis an sich. Aber sie hätte sicherlich nicht zu fiscal austerity führen müssen.

Meine Antwort:

Ich gebe Ihnen in allen drei Punkten völlig recht.  

Gleichzeitig möchte ich betonen, dass (1) es schon immer eine Skepsis in der breiten Bevölkerung Großbritanniens gegenüber dem politischen Europa (EEG etc.) gegeben hat und gerade die Linke, denken Sie an Tony Benn, sich in der Problematisierung dieser supranationalen Konstrukte hervorgetan hat - zu Recht. 

(2) Es war auch die inzwischen verschwundene Linke, die ein sehr differenziertes und problembewusstes Bild von der Immigrationsfrage gezeichnet hat und ganz entschieden gegen "open borders" aufgetreten ist. 

(Ich rechne mich weder der Linken noch der Rechten zu, komme aber aus dem Staunen nicht heraus, wie schnell sich die moderate Linke, sagen wir die Sozialdemokratie eines Willy Brandt, nicht nur in Deutschland in Luft aufgelöst bzw. sich - endgültig mit dem engagierten Gutheißen der EU - auf die Seite der Neoliberalen geschlagen hat - eben auch in Sachen "open border"). 

Es stört mich sehr, dass man heutzutage in Bausch und Bogen als Rechtsradikaler oder gar als Nazi abgestempelt wird, wenn man für eine No-Open-Border-Politik mit klarer Gesetzeslage, also für eine klassisch linke Position eintritt. Und eine solche, nach dem Positiven wie nach dem Negativen offene Haltung wird - was zurzeit der Tabuisierung unterliegt - auch das Problematische in Vorschlägen zur Immigrationspolitik berücksichtigen - z. B. auch die Nachteile einer Open-Border-Politik für die Länder, denen die Menschen davonlaufen.

Siehe auch The Left Used To Be Anti-Open-Border. 

Many Weighty Reasons to Leave the EU (1)

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Ich habe hier folgenden Kommentar eingestellt:

Ich schätze Ihren Blog sehr. 

Darf ich anmerken, dass ich es für verständlich halte, dass ein Demos sich dagegen wendet, sich die Zuwanderungspolitik für das eigene Land von einer fernen Bürokratie (oder Potentaten anderer Länder wie Frau Merkel) diktieren zu lassen.

Die Konsequenzen der Immigration sind vielfältig, bei ihrer Beurteilung sollte man sich nicht auf nur eine Variante einer (unter vielen unterschiedlichen Ansätzen einer) ökonomischen Bewertung beschränken. [Im Übrigen ist eine rein ökonomische Einschätzung von Effekten der Zuwanderung kaum sachgerecht – viele andere Gebiete wollen ebenso berücksichtigt werden. Siehe auch The Left Used To Be Anti-Open-Border.]

Die EU liefert zahlreiche andere schwerwiegende Gründe für einen Austritt aus ihr, die gewiss eine Rolle in der Entscheidungsfindung im Vereinigten Königreich gespielt haben: ihr undemokratischer Charakter und die dazu passende fait-accomply-Politik der einflussreichsten Mitglieder (allen voran Deutschland – die EU sollte ja andere Länder gerade vor deutscher Willkür schützen).

Zudem ist die EU schon in den eigenen Vorabeinschätzungen ihrer Lebensfähigkeit und Zweckmäßigkeit glatt durchgefallen (Werner Report und MacDougall Report) und hat sich dennoch mit denen darin angemahnten Merkmalen einer schweren Fehlkonstruktion (ihr prozyklischer Nicht-Verschuldungs-und-Austeritäts-Fetischismus, der auf dem Rücken von hunderten von Millionen Europäern ausgetragen wird) ohne angemessene demokratische Entscheidungsfindung und dank des Alleingangs von Politikern (die die Möglichkeiten der EU, am Volk vorbeizuregieren, begierig unterstützt haben) selbst inthronisiert.

Die Entscheidung des britischen Demos darauf zu reduzieren, dass sich ein immigrationsfeindlicher Populismus durchgesetzt habe, erscheint mir deshalb verfehlt.

28. November 2018 um 15:39

Fortgesetzt hier.

Doing It With Models

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The Coyote describes how they are doing it with models:

I seldom trust a computer model I did not build and I NEVER trust a model I did build (because I know the flaws and assumptions and plug variables all too well).

By the way, the mention of plug variable reminds me of one of the most interesting studies I have seen on climate modeling, by Kiel in 2007.  It was so damning that I haven't seen anyone do it since (at least get published doing it).  I wrote about it in 2011 at Forbes:

My skepticism was increased when several skeptics pointed out a problem that should have been obvious. The ten or twelve IPCC climate models all had very different climate sensitivities -- how, if they have different climate sensitivities, do they all nearly exactly model past temperatures? If each embodies a correct model of the climate, and each has a different climate sensitivity, only one (at most) should replicate observed data. But they all do. It is like someone saying she has ten clocks all showing a different time but asserting that all are correct (or worse, as the IPCC does, claiming that the average must be the right time). 

The answer to this paradox came in a 2007 study by climate modeler Jeffrey Kiehl. To understand his findings, we need to understand a bit of background on aerosols. Aerosols are man-made pollutants, mainly combustion products, that are thought to have the effect of cooling the Earth's climate. 

What Kiehl demonstrated was that these aerosols are likely the answer to my old question about how models with high sensitivities are able to accurately model historic temperatures. 

When simulating history, scientists add aerosols to their high-sensitivity models in sufficient quantities to cool them to match historic temperatures. Then, since such aerosols are much easier to eliminate as combustion products than is CO2, they assume these aerosols go away in the future, allowing their models to produce enormous amounts of future warming. 

Specifically, when he looked at the climate models used by the IPCC, Kiehl found they all used very different assumptions for aerosol cooling and, most significantly, he found that each of these varying assumptions were exactly what was required to combine with that model's unique sensitivity assumptions to reproduce historical temperatures. In my terminology, aerosol cooling was the plug variable.

When I was active doing computer models for markets and economics, we used the term "plug variable."  Now, I think "goal-seeking" is the hip word, but it is all the same phenomenon.

Money and the Impossibility of Equilibrium

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I commented here:

I wish I could pack as many good points into the space of 13 minutes [see video below]. 

From my very specific point of view, what needs more spelling out is the connection between the ideological compulsion to view the economy as a barter economy (unaffected in its basic relationships by money) and the misconceived idea of a benignly equilibrating system of free markets (capitalism). 

See my  (2) Neutrality of Money — Say's Law and The Need to Believe in a False Theory.

I see a great strength of MMT in its ability to show that money as it operates in a real economy disproves the mechanisms of equilibration asserted by mainstream economics (e. g. loanable funds theory).

A Winter Tale

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Now a decade later, the global climate has not warmed 1° F as forecast by the IPCC but has cooled slightly until 2007-08 when global temperatures turned sharply downward. In 2008, NASA satellite imagery (Figure 6) confirmed that the Pacific Ocean had switched from the warm mode it had been in since 1977 to its cool mode, similar to that of the 1945-1977 global cooling period. The shift strongly suggests that the next several decades will be cooler, not warmer as predicted by the IPCC. 

Read the full account written in 2008.

Looking Dumber by the Day — Corporate Share Buybacks

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This most recent share buyback binge was dumb money on steroids, with artificially low interest rates leading corporations to borrow big and buy back their stock on the twin assumptions that: 

1) since the cost to borrow was less than their stock dividend, they were generating “free cash flow” and 

2) buying their own stock forced up the price, which would make the CEO look smart. 

Both assumptions were only valid while the market was rising. And since most of the buying took place late in a bull market, with share prices at or near record highs, it was only a matter of time before a correction or (more recently) an actual bear market turned that free cash flow into a monumental capital loss and made that smart CEO look not just dumb but criminally negligent.

It gets even better:

Now much of the cash that the company “returned” to shareholders has become money that the company lost for shareholders. And – here’s where the macro part of the dumb money story begins – the fact that corporate America has leveraged itself to the hilt to buy back stock leaves hundreds of companies in varying degrees of dire financial straits. In other words, with sales growth slowing and free cash flow evaporating, these over-leveraged companies will have to raise capital to shore up their balance sheets. But interest rates are up, which makes new borrowing a massively cash flow negative proposition. Asset sales, meanwhile, become “fire sales” in a downturn (note the above GE example), so that’s a painful and embarrassing option. What’s left? Why, equity sales, of course.

So – as usually happens at the end of long credit parties – the same companies that bought back their shares so aggressively at ever-higher prices now have to pull those same shares out of storage and sell them at ever-lower prices, creating a mini death spiral in which a rising share count pushes down the share price, necessitating more equity sales, and so on.

The full story. 

From the Pages of an Infallible Newspaper

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"Science is the belief in the ignorance of the experts" – Richard Feynman

One of the newspapers the gentleman that I refer to here mentioned among those that he puts absolute faith in is The New York Times.

It is hard to believe that anyone, let alone such an honest, capable and intelligent man, would vouch for the infallibility of a newspaper — in fact, three newspapers, including Süddeutsche Zeitung and Der Spiegel, all three of which being ideologically committed to a very partial set of beliefs.

They may or may or not be excellent newspapers, but they are certainly not infallible and very unlikely to be free from bias, especially given their forthright support of certain political ideas and convictions and their willingness to act as partisan watch and attack dogs for political personalities, parties and programs.

It is not difficult to find examples of the fallibility of the The New York Times, here is a case in point.

Subservience Rushing Ahead of the Command - Vorauseilender Gehorsam

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Some people are so eager to obey, they act in compliance before a command is issued.

Today, I talked to a gentleman, who listed to me the newspapers that he absolutely trusts.

The gentleman was very nice, very intelligent and very well-educated — it was a pleasure talking to him. I found it all the more astounding that a discerning and astute mind such as his would exempt certain media outlets from the need to be subjected to critical thinking — of which the gentleman is capable of in ample measure.

There is no institution in my country that requires, still less forces, you to make such a commitment which is equivalent to swearing an oath to believe and defend as unassailable truth whatever is being reported by a (certain group of) newspaper(s).

Yet, the gentleman was absolutely adamant about guaranteed enlightenment by his sources of revelation.

He engaged in an act of religious conviction. But his posture was meant to assure me of the scientific/objective quality of information relayed to him and his right to draw indubitable conclusions from it.

Such a commitment is the sure sign of a person having joined a community of believers as opposed to being the participant of an open debate.

The remarkable thing is how that person makes it his own business to authenticate the infallibility of a (group of) newspaper(s).

An act of astonishing hubris born of zealotry — who is he to provide such authentication? —, especially in view of the fact that this person admits he/she has no time to ascertain facts and therefore relies on his preferred media outlets to acquire indubitable knowledge.

There is a grotesque circularity involved: I believe in the truth of what my newspaper writes, because the "truth" disseminated therein accords with my own belief. My belief is correct because it is being confirmed by a newspaper that I absolutely trust and that happens to report findings that square precisely with my belief.

The observation is significant as it seems to demonstrate how the best in our society can be made to switch off (of their own accord) their critical faculties for select purposes. 

Certain issues are branded "taboo" in the sense that "you must not deny them" unless you are willing to be seen as committing a sin. They are turned into matters of faith (morally and socially) immunised against critical questioning.

Once an issue has been established as such a taboo-brand (something to be believed in as a matter of moral purity and absolute truth) in the mind of a person, the believer may be otherwise as well-educated and intelligent as one might wish, she/he will not be able to take a critical and questioning stance vis-à-vis the issue and be oriented toward revering any presentation of it that accords with the taboo.

That is why political correctness is so important to politicians — it is the system that establishes taboo-brands among the population.

The fact that political correctness is openly demanded seems to me a sign reflecting the willingness of many to act subserviently in rushing ahead of what they think they will be required to say, do or believe — as demonstrated in the adamant claim that the veracity of certain press organs is beyond doubt.

Obviously, a society that emphasises political correctness cannot be a society that advises its citizens to apply critical thinking to every issue — it is a dangerous society as it actively builds taboo-protected areas, where criticism is considered morally objectionable and socially worth of condemnation ("climate change deniers").

A white elephant of the proportions of the Energiewende is only possible in exactly such a society where vorauseilender Gehorsam, the uncritical acceptance of taboos and the naive identification of large parts of the public with the politically correct powers-that-be have reached an advanced stage.

A standard reply to criticism of political maldevelopments in my country comes in the form of a question: do you believe in a conspiracy theory?

Well, it would seem, there is no need for a conspiracy, people are eagerly playing along, confirming what they think they are expected to think and say even before anyone is demanding them to do so, or ever will (see the first underlined paragraph above).

This is not the place to go deeper into the question why people are over-compliant. But one aspect of it I will mention in concluding this post. Compliance with social norms is of the essence in any functioning society. In countless contexts, it is a positive thing to uncritically adopt social norms -—imagine every time I extend my arm for a handshake people start a vicious debate about the appropriateness of such a gesture.

Uncritical adoption of social norms is not unproblematic in every field. Politicians will try to inculcate their ideas through that mechanism, which is what political correctness is all about — a phrase that openly promotes the idea of a dress code of political convictions that needs to be adhered to by everyone — a blessing handed down from above. Again, a sign of just how sure politicians are of their ability to manipulate the population and their confidence in the gullibility and subservience of the people.

The Natural Rate of Interest (2)

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Continued from here.

We shall have to say more on this in future posts. For the time being, note that one of the assumptions underlying the concept of the natural rate of interest is an equilibrating mechanism that actually does not exist. The mechanism postulated by the loanable funds theory does not exist and — a fortiori — does not provide a "market clearing level for interest rates" — a natural interest rate, as Wicksell calls it.

No wonder that "the neutral rate is a hypothetical construct, [for which reason] we cannot observe it" — (see below). Those participating in this metaphysical guessing game come up with very different estimates, like medieval scholars estimating how many angels fit in the top of a needle.

Definition of neutral rate of interest

The neutral (or natural) rate of interest is the rate at which real GDP is growing at its trend rate, and inflation is stable. It is attributed to Swedish economist Knut Wicksell, and forms an important part of the Austrian theory of the business cycle. 

The neutral rate provides an important benchmark for policymakers to compare with the market rate. When interest rates are neutral the economy is on a sustainable path, and it is deviations from neutrality that cause booms and busts. For example if the market rate is pushed artificially below the neutral rate (for example through monetary expansion) then people receive a false signal to invest in more interest-sensitive projects. It is by separating interest rates from their market clearing level that central banks have the potential to create monetary instability. 

Because the neutral rate is a hypothetical construct we cannot observe it. Economists tend to believe that it is around 5 per cent, although Morgan Stanley estimates that it is currently under 3 per cent.

The source.


Continued here.

The Natural Rate of Interest (1)

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The notion of natural or normal magnitudes and values in economics refers to the results expected as the outcome of a specified institutional context. The relevant institutional context specified herein is a monetary system with a state (or tax-driven) currency and a floating exchange rate policy. There is significant historical and theoretical support for such a system’s relevance. It has been shown that in this context, the government budget will normally be in deficit, corresponding to net savings of financial assets in the non-government sectors. Deficit spending will result in net central bank reserve credits in the aggregate banking system, which will drive the short-term overnight inter-bank lending rate to zero. While government security sales may be used to drain the excess reserves to maintain some positive overnight rate, or the central bank may pay interest on reserve balances, absent such government intervention the base rate of interest is zero. In other words, the natural rate of interest is zero. As many other key rates of interest in the economy continue to follow the fed funds rate very closely, this will serve as the base rate in the economy, with markets determining the credit spreads 16 through risk assessment. Furthermore, there are a number of reasons why allowing the rate of interest to settle at its natural rate of zero makes good economic sense.

The source.

Continued here.

The Left Used To Be Anti-Open-Border

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Let's get this straight: the Left used to be anti-open-border, before their neoliberal turn and their new fangeled indifference to the working class.

Angela Nagle summarises The Left's Case against Open Borders - make sure to read the entire article:

The transformation of open borders into a “Left” position is a very new phenomenon and runs counter to the history of the organized Left in fundamental ways. [...]

Open borders and mass immigration are a victory for the bosses. [...]

But acting on the correct moral impulse to defend the human dignity of migrants, the Left has ended up pulling the front line too far back, effectively defending the exploitative system of migration itself. 

Today’s well-intentioned activists have become the useful idiots of big business. With their adoption of “open borders” advocacy—and a fierce moral absolutism that regards any limit to migration as an unspeakable evil—any criticism of the exploitative system of mass migration is effectively dismissed as blasphemy. 

Even solidly leftist politicians, like Bernie Sanders in the United States and Jeremy Corbyn in the United Kingdom, are accused of “nativism” by critics if they recognize the legitimacy of borders or migration restriction at any point. 

This open borders radicalism ultimately benefits the elites within the most powerful countries in the world, further disempowers organized labor, robs the developing world of desperately needed professionals, and turns workers against workers. [...]

[According to] Marx [...] the priority for labor organizing in England was “to make the English workers realize that for them the national emancipation of Ireland is not a question of abstract justice or humanitarian sentiment but the first condition of their own social emancipation.” 

Here Marx pointed the way to an approach that is scarcely found today. The importation of low-paid labor is a tool of oppression that divides workers and benefits those in power. The proper response, therefore, is not abstract moralism about welcoming all migrants as an imagined act of charity, but rather addressing the root causes of migration in the relationship between large and powerful economies and the smaller or developing economies from which people migrate. [...] 

Advocates of open borders often overlook the costs of mass migration for developing countries. Indeed, globalization often creates a vicious cycle: liberalized trade policies destroy a region’s economy, which in turn leads to mass emigration from that area, further eroding the potential of the origin country while depressing wages for the lowest paid workers in the destination country. [...]

[T]he toll of the migration brain drain on developing economies has been enormous. According to the Census Bureau’s figures for 2017, about 45 percent of migrants who have arrived in the United States since 2010 are college educated. 

Developing countries are struggling to retain their skilled and professional citizens, often trained at great public cost, because the largest and wealthiest economies that dominate the global market have the wealth to snap them up. 

Today, Mexico also ranks as one of the world’s biggest exporters of educated professionals, and its economy consequently suffers from a persistent “qualified employment deficit.” This developmental injustice is certainly not limited to Mexico. According to Foreign Policy magazine, 

“There are more Ethiopian physicians practicing in Chicago today than in all of Ethiopia, a country of 80 million.”  

It is not difficult to see why the political and economic elites of the world’s richest countries would want the world to “send their best,” regardless of the consequences for the rest of the world. But why is the moralizing, pro–open borders Left providing a humanitarian face for this naked self-interest? [...]

[W]orkers from economies devastated by U.S. agriculture will continue to be invited in with the promise of work in order to be cheaply and illegally exploited. Lacking full legal rights, these noncitizens will be impossible to unionize and will be kept in constant fear of being arrested and criminalized. [...]

There are many economic pros and cons to high immigration, but it is more likely to negatively impact low-skilled and low-paid native workers while benefiting wealthier native workers and the corporate sector. As George J. Borjas has argued, it functions as a kind of upward wealth redistribution. A 2017 study by the National Academy of Sciences called “The Economic and Fiscal Consequences of Immigration” found that current immigration policies have resulted in disproportionately negative effects on poor and minority Americans, a finding that would have come as no surprise to figures like Marcus Garvey or Frederick Douglass. No doubt they, too, would have to be considered “anti-immigrant” by today’s standards for warning of this. [...]

Immigration policies should be designed to ensure that the bargaining power of workers is not significantly imperiled. This is especially true in times of wage stagnation, weak unions, and massive inequality. [...]

Employers, not immigrants, should be the primary focus of enforcement efforts. These employers take advantage of immigrants who lack ordinary legal protections in order to perpetuate a race to the bottom in wages while also evading payroll taxes and the provision of other benefits. Such incentives must be eliminated if any workers are to be treated fairly. [...]

Reducing the tensions of mass migration thus requires improving the prospects of the world’s poor. Mass migration itself will not accomplish this: it creates a race to the bottom for workers in wealthy countries and a brain drain in poor ones. The only real solution is to correct the imbalances in the global economy, and radically restructure a system of globalization that was designed to benefit the wealthy at the expense of the poor. This involves, to start with, structural changes to trade policies that prevent necessary, state-led development in emerging economies. Anti-labor trade deals like nafta must also be opposed. It is equally necessary to take on a financial system that funnels capital away from the developing world and into inequality-heightening asset bubbles in rich countries. Finally, although the reckless foreign policies of the George W. Bush administration have been discredited, the temptation to engage in military crusades seems to live on. This should be opposed. U.S.-led foreign invasions have killed millions in the Middle East, created millions of refugees and migrants, and devastated fundamental infrastructure.

See also my lecture on immigration here.