There's that unicorn again ...

Last time I found something totally rediculous written by an MMT theorist I remarked on facebook: "Modern Monetary Theory: one minute everything makes sense, next minute a unicorn is driving down a marshmallow freeway in a gold-plated Lamborghini with triangular wheels."

I haven't yet gotten around to creating that wonderful image, but I did see something that made me think of it again:

Inflation is caused by aggregate demand growing faster than real output capacity.

This is typical of the rubbish MMT comes up with. There is a grain of truth, but stated as it is it has no bearing on reality. It is impossible for "aggregate demand" to grow faster than "real output" in the truest sense, because everyone has to earn money before they can spend it. Saying demand grows faster than output is like saying that people are spending more money than they are earning. The only way that demand could possibly grow faster than output is if fiat money was being introduced into the system - then some people would be able to spend more money than they had earned. Who are those people? Well, they are the people who receive the new money first without producing anything in return for it - typically welfare recipients. In reality it's broader than that because new money goes everywhere bank loans and government spending go, so you cannot be definitive about it, but the fact remains that the government and banks are creating money, which is allowing some people, perhaps even most people, to spend more than they have "earned."
So the constant assertion by MMT theorists that expanding the money supply is not inflationary is simply false - it is inflationary and Friedman was quite correct when he said, "Inflation is always and everywhere a monetary phenomenon." It is a result of an increase in fiat money supplies. Government deficits are inflationary, even if bonds are issued. The only just way for a fiat money system to exist is under constant money supply conditions - no growth or reduction in the money supply at all by anyone.

MMT or Money Matters noT

I'm really very sorry to inflict this on my readers but I simply have to talk a little bit about this MMT stuff. I was reading an article today on BillyBlog and part of it nearly made me cough out my own uvula.

It starts well:

The essential idea is that the “money supply” in an “entrepreneurial economy” is demand-determined – as the demand for credit expands so does the money supply.

It goes on:

As credit is repaid the money supply shrinks. These flows are going on all the time and the stock measure we choose to call the money supply, say M3 (Currency plus bank current deposits of the private non-bank sector plus all other bank deposits from the private non-bank sector) is just an arbitrary reflection of the credit circuit.

OK, no problem with that so far ...

So the supply of money is determined endogenously by the level of GDP ...

Pardon my French but WHAT THE FUCK? MMT is constantly throwing up rubbish like this that just makes you think you've gone mad. He is arguing that the central bank does not determine the money supply, it is determined by the amount of credit lent out of banks. I actually have no beef with that as a statement of truth, I mean I hate it with a passion but it's still just as true. But the other real problem here is that he seems to be saying that the central bank does nothing that affects the money supply, which is plainly false and he must know it. The central bank determines interest rates for the entire economy, and thereby directly controls the amount of money that is lent out, since low interest rates will result in more lending (in the short term) and high interest rates less. The reason for that is that the interest rate it sets is fairly arbitrary, but whatever it is the economy can only support x number of dollars borrowed at some interest rate and it can support only fewer dollars lent out at a higher interest rate, since the only projects getting loans at the higher rate will be those that are forecast to provide a higher return, allowing the interest to be paid off. The actual number of dollars in bank reserves is irrelevant, only the interest rate those reserves produce is relevant.
So the money supply is determined by the interest rate, and the interest rate by the amount of bank reserves (rather, by the percentage change of those reserves), and the bank reserves are controlled by central bank ... so how is that not the central bank determining the money supply? Yeah it doesn't actually go, we need $5T this year, we'd better print it up, but it has every intention of changing the money supply when it changes interest rates, because it's targeting inflation, so why not call a spade a spade?

He also seems to assume that the amount of money in the economy is supposed to increase with GDP. This is one of the more pervasive myths of economics. The quantity theory of money says, broadly, that the money supply at one time t has some value x. It would have value x no matter what the total number of dollars actually was, since money's only function is to enable trade and it will serve that function whether a cent buys a paperclip or a nuclear power station. Decimalised currency can be divided into arbitrarily small units so we can always make change no matter what we buy. Bill seems to completely ignore that by assuming that the money supply should grow with the economy. In fact it does not have to, all that matters is how exactly it changes in size. If a market amount of labour is required to produce it then all is well. If the cost of producing it is way below its "value" in the economy, then the first spenders get by far the most benefit from its creation. The latter state is the current situation in every country on earth and is 90% of the reason we are in so much debt right now. Governments and banks create the money and they get the benefit.

Later he continues:

To repeat, bank lending is not “reserve constrained”. Banks lend to any credit worthy customer they can find and then worry about their reserve positions afterwards. If they are short of reserves (their reserve accounts have to be in positive balance each day and in some countries central banks require certain ratios to be maintained) then they borrow from each other in the interbank market or, ultimately, they will borrow from the central bank.

Again, no arguments there, but there is a little fly in the ointment called the interest rate. As I have argued previously, fewer people will be credit-worthy at a higher interest rate than at a lower one, so while banks are not technically reserve constrained they have to raise interest rates if their reserves are being persistently depleted, both in order to increase profits and to decrease the number of people making demands on their reserves. If they do not they will always have to borrow reserves and that is more expensive than having them in the form of demand deposits, their profits will fall relative to the other banks and they will be driven out of the market.

More than anything else the MMT school totally ignores the movement of real wealth in the economy, which is the whole point of the thing. Economics is not just about making the numbers work, it's about real people trading real things for real benefits. The MMT model places the central bank and the government firmly in control of the economy, and as such is really another form of statism, which all economic models are at some level apart from the laissez faire Austrian school. In a way it is the worst because it understands the full implications of state control of the money system. It encourages the state to use its power for good but never questions whether the state ought to have the power at all, which I believe with all my heart it should not.

We must bring back market money. It has been totally abandoned and we are blessed with the collapse of our economy as a result. We must bring back sound money, sane interest rates determined by the market, end fractional reserve banking forever, and abandon the idolatry of a government solution to every private problem.

You saw it here first

It seems very much as if a Japanese company has gone and taken my idea: you can now buy a Geiger counter attachment for your phone. If you recall just about a year ago I said that radiation detection could be part of an expanded sensor suite in smartphones.

Yeah it's not on board but close enough

Most people don't know but all camera phones are equipped to detect radiation already - their camera sensor. Another enterprising programmer uses this fact to turn the stock iPhone into a radiation detector - albeit not a very good one. Simply stick some black tape over the lens to block out the flood of visible light and bam, instant Geiger counter. In the article the software provider clearly likes my vision of smart phones too:

The team behind the app plans to develop a tool that uses data gathered from various users to generate a map showing radiation levels in different locations - hence the wiki prefix. With the ultimate vision of developing a platform that uses a network of devices - particularly smartphones - as a sensor network to measure various aspects of environmental quality, the company also has plans to develop apps to measure Wi-Fi waves, relay antenna waves, magnetic fields, earthquakes, greenhouse gases, UVA/UVB light, oxygen and temperature.

UV, check. Temperature, check. I like the way they think!

In other news, the Geneve Motor Show is showing off a few extended range electric cars, which you no doubt recall me praising back in November. I won't claim originality for that one, but really, the motor show has gone electric-mad. Infiniti paraded their sports coupe and even Tata waded in with a frankly astonishing effort. Naturally many other manufacturers are there with pure electric cars - no one will want them now guys - but frankly electric cars are a bith 19th century now. Petrol-electric, or for the pure-as-the-driven-snow eco mentalists, diesel-electric, will rule the road from now on. Batteries are too limiting and the fuel cell car is really still a pipe dream in terms of costs. We have petrol stations now, the technology works now, the price is within reach now. Hyrdogen has none out of three on that score, and pure electric? Don't make me laugh. No one with the choice of buying only one car will have an electric, since you can never go on a road trip as the Top Gear team showed with amusing results last year. In the words of Clarkson: "You just have to hope that [your girlfriend] doesn't live at the other end of the country."

STOP PRESS Scientist announces results of experiment without using a control group

A recent article in The Conversation has me wondering what Linda Weiss did to become a scientist. She argues that all economies benefit from the interaction of the State, and that some how the evidence for this is that all contries have experienced government interference in their economy:

State “guidance” of the economy, in the broadest sense, is the shared history of all countries that have successfully industrialised.
... It is not that one set of countries practise “free-market capitalism” while another set practise “state-guided capitalism”. It is closer to the truth to point to the differing ways in which all economies – whether emerging or advanced – draw on state involvement in guiding and shaping development. It is recognition of this point that is long overdue in mainstream economic and political thinking.
... it has been the rapid rise of China and other emerging giants, India and Brazil – the so-called BICs — that has done more to challenge the Washington Consensus idea that state activism is always inimical to economic prosperity.

So, all countries have experienced state guidance of industry, their industry has grown, and this means that state guidance is a good thing. That's like saying that all people die, people are a good thing, therefore death is a good thing. All cats have four legs; my dog has four legs, therefore my dog is a cat.

I hope that by now you are getting the picture: she has taken a sample of all cubes and says there's no such thing as a circle. You must have a control group in any experiment - in this case it would involve looking at economies that were not controlled by the state. Since no such economy has ever lasted long, at least not recently, we have no data on that front. However, the Adam Smith Institute has an article that examines the next best thing - plotting economic prosperity against state interference in the economy, and it tells a rather different story:
As you can see there is definitely a correlation there, and it doesn't come down in favour of state interference. I'm not going to call that a clinching argument - clearly there are other factors at play since for a freedom rating of 7, for example, there is a wide variance of GDP per capita, but it strongly supports the case that government interference is killing the economy, not helping it.