Archive for October 15th, 2018

Modern Monetary Theory: Why a Hot New Idea in Economics is Actually a Bad Idea

October 15, 2018

New article by Scott Sumner and Patrick Horan.

In recent years, a radical and unorthodox school of thought called “Modern Monetary Theory” (MMT) has become popular with some progressive economists, as well as with policymakers and activists on the political left.  One of MMT’s most prominent advocates is Stephanie Kelton, a professor at Stony Brook University who advised Senator Bernie Sanders during his 2016 presidential run. The theory has received enough traction that the popular Planet Money podcast recently ran an episode on the topic.

A central idea of MMT is that a government that issues its own fiat currency can pay its bills in that same currency.  These governments need not worry about budget deficits when contemplating additional spending. Thus because the US government has a monopoly on money creation, our federal government does not need to raise all its revenue through tax or bond finance. A government with its own currency cannot go bankrupt because it can always issue more currency to cover any budget deficit. Kelton and other MMT advocates argue that this why the US government can afford expensive programs such as a jobs guarantee and universal healthcare.

While MMTers do not see government debt per se as a problem, they do concede that were the government to spend beyond the capacity of the economy there would be a risk of higher inflation. MMTers argue that if high inflation were to become a danger, the government can increase taxation to remove excess currency from the economy. In the Planet Money podcast, however, Kelton indicated that she is not currently worried about inflation. When asked if putting even more money into the economy might lead to higher inflation, she noted that inflation has been quite low in recent years:

“Well, where is it? We’ve been doing it. We just did it with a $1.5 trillion tax cut. We did it with the $300 billion in additional spending. We’ve done it and done it and done it. Where is the inflation problem? I don’t see it in the UK. I don’t see it in Japan. I don’t see it in the US.”

Kelton is right that inflation has been low in the US and other developed countries, but she and other MMTers are wrong in assuming that fiscal policy determines inflation in those economies.  Since 1990, inflation in the US and many other developed countries has averaged two percent.  This was accomplished through very specific decisions taken by monetary authorities, indeed fiscal policymakers wouldn’t even know how to begin the difficult process of inflation targeting.


Sorry Mystics, Central Banks cannot finance Government spending: Lessons from Yemen

October 15, 2018

John Tamny on Yemen experiences:

Before Yemen’s civil war began in 2015, its currency (the rial) was worth 1/215th of a dollar. According to a report in the Washington Post last week, the rial has plummeted to 1/800th of a dollar, thus “sending food and fuel prices soaring.”

The tragedy underway in Yemen exists as yet another reminder that the Federal Reserve’s definition of inflation is completely upside down. While economists at the Fed believe that economic growth causes inflation, unstable countries in other parts of the world continue to reject the U.S. central bank’s simple-mindedness.

Indeed, it can’t be stressed enough that the biggest driver of rising prices is paradoxically a lack of economic growth. Growth is always and everywhere an effect of investment, and a falling currency repels the very investment necessary for the increased productivity that results in falling prices. In short, true inflation burns its victims twice: through rising prices in the near-term as the cost of goods reflects a shrunken currency, and through slower growth over time as the investment necessary for progress migrates away from the country that is irresponsibly pursuing devaluation.

The tragedy taking place in Yemen also offers a useful lesson about the well-oversold capabilities of central banks. Even certain members of the Austrian School claim that their very existence enables wasteful government spending as far as the eye can see. 


Though various economic schools relentlessly try to revive Santa Claus through their mysticism about governments, central banks and printing presses, the reality is that wealth and economic growth are always produced in the private sector. Government spending and printing presses are a consequence of the latter, and never a driver.

Hmm… These battles will continue forever perhaps…


Iraq’s new and improved banknotes and old India connection…

October 15, 2018

Nice piece on the new banknotes in Iraq, which will have the Governor’s signature and representation of Assyrian community.

As part of the redesign, the new 2018 A.D. and 1440 Hijri-dated banknotes will now feature the title of “Governor of the central bank” underneath his signature, which the central bank has pointed out is compatible with the trend being followed in other countries. The current specifications, in terms of dimensions, remain the same — as well as the current colours — which represent the current series. The 50,000 and 5000-dinar banknotes have not currently undergone an update at present.

However, it is the newly revised 1000-dinar note that seems to be getting the most significant makeover and attention. The previous design of the symbol of the Ikhlas Surah from the Quran in the centre of the current design has been removed and in its place is what appears to be an Assyrian star. The Assyrian people are a predominately Christian minority group concentrated around Northern Iraq. Many of them were displaced or forced to flee abroad during the recent conflict that was initiated by rebel forces seeking a separate caliphate known as the Islamic State of Iraq and Syria.

In recognition of the status of the Marshlands, which have been added to the list of endangered and protected regions in 2016, the new 1000-dinar note will also feature the words: “Enlisting the marshes and heritage of Southern Iraq on world heritage list,” which is placed around the Assyrian star motif.

During the regime of Saddam Hussein, Iraq’s marshes were almost completely drained in order to flush out rebel groups. These insurgents were in opposition to his rule, and, as a result, the rich natural habitat and the culture of the marshland’s inhabitants were almost lost. Since the downfall of the Hussein regime, both international and localised efforts have sought to bring the people back to their homelands and revive the culture back to life.

While reading up on Iraqi Dinar, Wikipedia mentions how Indian Rupee was the legal tender in Iraq from WW I to 1931:

The dinar was introduced into circulation in 1932, by replacing the Indian rupee, which had been the official currency since the British occupation of the country in World War I, at a rate of 1 dinar = 11 rupees. The dinar was pegged at par with the British pound until 1959 when, without changing its value, the peg was switched to the United States dollar at the rate of 1 dinar = 2.8 dollars. By not following the devaluations of the US currency in 1971 and 1973, the dinar rose to a value of US$3.3778, before a 5 percent devaluation reduced the value of the dinar to US$3.2169, a rate which remained until the Gulf War, although in late 1989, the black market rate was reported at five to six times higher than the official rate.[1]

After the Gulf War in 1991, due to UN sanctions, the previously used Swiss printing method was no longer available so new, inferior quality, notes were produced. The previously produced notes became known as the Swiss dinar and continued to circulate in the Kurdish region of Iraq. Due to sanctions placed on Iraq by the United States and the international community along with excessive government printing, the new dinar notes devalued quickly. By late 1995, US$1 was valued at 3,000 dinars at the black market.

Following the deposition of Saddam Hussein in the 2003 invasion of Iraq, the Iraqi Governing Council and the Office for Reconstruction and Humanitarian Assistance began printing more Saddam dinar notes as a stopgap measure to maintain the money supply until new currency could be introduced.

Between 15 October 2003, and 15 January 2004, the Coalition Provisional Authority issued new Iraqi dinar coins and notes, with the notes printed by the British security printing firm De La Rue using modern anti-forgery techniques to “create a single unified currency that is used throughout all of Iraq and will also make money more convenient to use in people’s everyday lives”. Multiple trillions of Dinar were then shipped to Iraq and secured in the CBI for distribution to the masses in exchange for the ‘Saddam dinar’.[2] Old banknotes were exchanged for new at a one-to-one rate, except for the Swiss dinars, which were exchanged at a rate of 150 new dinars for one Swiss dinar. At this point, the UN, IMF, WB and US combined to limit the value of the dinar to less than 1/10 of a cent to prevent looting and counterfeiting. The US Treasury was commissioned to print multiple billions of US currency, specific to Iraq so as to easily identified as different from that used elsewhere in the world. This new currency was then wrapped and stacked on pallets and shipped in dozens of USAF transports to Iraq. There it was transferred covertly to the CBI, where it was stored in very secure vaults.[citation needed]

Also see the images of Dinar Series in the Wikipedia post. How much history one can figure profiling and figuring these banknotes…

Why Corporate Finance is a misnomer and how behavioral corporate finance can help…

October 15, 2018

Interesting paper by Prof Ulrike Malmendier of UC Berkeley.

She starts the paper with this emphatic statement:

The field of Corporate Finance might well be the area of economic research with the most misleading name (followed by Behavioral Economics as a close second). Many of the research papers identified as “Corporate Finance” deal neither with corporations nor with financing decisions. In this chapter
of the Handbook, I first conceptualize the breadth and boundaries of Corporate Finance research, and then present the advances that have resulted from applying insights from psychology. I illustrate how the behavioral toolbox has allowed for progress on long-standing puzzles regarding corporate
investment, mergers and acquisitions, and corporate financing choices.

She says much of corporate finance is too narrow and fails to include topics which are relevant today:


How banks boomed during World War I and then busted due to agricultural price shock post World War I

October 15, 2018

Matthew S. Jaremski and David C. Wheelock in this paper show evidence of American banks boom and bust:

Bank lending booms and asset price booms are often intertwined. Although possibly triggered by a fundamental shock, rising asset prices can stimulate lending that pushes asset prices higher, leading to more lending, and so on. Such a dynamic seems to have characterized the agricultural
land boom surrounding World War I.

This paper examines i) how banks responded to the boom and were affected by the bust; ii) how various banking regulations and policies influenced those
effects; and iii) how bank closures contributed to falling land prices in the bust.

We find that rising crop prices encouraged bank entry and balance sheet expansion in agricultural counties (with new banks accounting disproportionately for growth in lending and banking system risk). State deposit insurance systems amplified the impact of rising crop prices on bank portfolios, while higher minimum capital requirements dampened the effects.

When farmland prices collapsed, banks that had responded most aggressively to the asset boom had a higher probability of closing, and counties with more bank closures experienced larger declines in land prices.

Just replace the  farmland with real estate, infrastructure and so on. One will get a similar picture of most banking crises….Yet we are surprised each time…

150 years of Tata Group…

October 15, 2018

It all started in 1968 by Jamsetji Tata:

Nothing of Jamsetji’s childhood suggested he would create his own destiny. Born on March 3, 1839, in the sleepy town of Navsari in Gujarat, he was the first child and only son of Nusserwanji Tata, the scion of a family of Parsee priests. Many generations of the Tatas had joined the priesthood, but the enterprising Nusserwanji broke the mould, becoming the first member of the family to try his hand at business.

Raised in Navsari, Jamsetji joined his father in Bombay when he was 14. Nusserwanji got him enrolled at Elphinstone College, from where he passed in 1858 as a ‘green scholar’, the equivalent of today’s graduate. The liberal education he received would fuel in Jamsetji a lifelong admiration for academics and a love of reading. Those passions would, though, soon take a backseat to what Jamsetji quickly understood was the true calling of life: business.

It was a far-from-opportune time for a young native to take his first, tentative steps into the volatile world that was business in the subcontinent. Jamsetji’s entrepreneurial career began, in the words of JRD Tata, “when the passive despair engendered by colonial rule was at its peak”. The Indian Mutiny of 1857 was but two years past when Jamsetji joined the small firm that his father, a merchant and banker, ran. He had just turned 20.

Nusserwanji and Kaliandas, the partnership company his father presided over, was Jamsetji’s first port of call. With Nusserwanji for teacher, Jamsetji, an eager learner, gradually grew from apprentice to a skilful practitioner of the business arts. He gained knowledge about commodities and markets, trading and banking.

In 1868, aged 29 and wiser for the experience garnered by nine years of working with his father, Jamsetji started a trading company with a capital of Rs21,000. The budding entrepreneur was by now accustomed to the fickleness of the business life, being witness to the failure of his father’s banking enterprise. This episode blighted his first visit to England, where he was besieged by creditors, but Jamsetji also learned a lot on this trip, most significantly about the textile business.

Jamsetji’s maiden expedition to England, and others that he made in subsequent years, convinced him that there was tremendous scope for Indian companies to make a dent in the prevailing British dominance of the textile industry. Jamsetji made his move into textiles in 1869. He acquired a dilapidated and bankrupt oil mill in Chinchpokli, in the industrial heart of Bombay, renamed the property Alexandra Mill and converted it into a cotton mill.

Two years later, Jamsetji sold the mill for a significant profit to a local cotton merchant. He followed this up with an extended visit to England, and an exhaustive study of the Lancashire cotton trade. The quality of men, machinery and produce that Jamsetji saw during this sojourn was impressive, but he was certain he could replicate the story in his own country. Jamsetji believed he could take on and beat the colonial masters at a game they had rigged to their advantage.

The prevailing orthodoxy of the time determined that Bombay was the place to set up the new project, but Jamsetji’s genius told him otherwise. He figured he could maximise his chances of success if he factored three crucial points into his plans: close proximity to cotton-growing areas, easy access to a railway junction, and plentiful supplies of water and fuel. Nagpur, near the heart of Maharashtra’s cotton country, met all these conditions. In 1874, Jamsetji had floated a fresh enterprise, the Central India Spinning, Weaving and Manufacturing Company, with a seed capital of Rs1.5 lakh. Three years later, his venture was ready to realise its destiny. On January 1, 1877, the day Queen Victoria was proclaimed Empress of India, the Empress Mills came into existence in Nagpur. At the age of 37, Jamsetji had embarked on the first of his fantastic odysseys.

Lots of links here. Chronology of the Tata Group is here.

I mean Tatas are such a behemoth and historical of an organisation, that no amount of reading is enough. Just amazing how this business group has built over the years…

100 years of the Czech koruna..

October 15, 2018

As I keep saying the year 2018 is just so much about anniversaries.

Jiří Rusnok, Governor of the Czech National Bank (their central bank) in this speech talks about the 100 year journey:

It is an honour and a pleasure for me to welcome you to today’s conference on the currency, taxes and other institutes of financial law. The 100th anniversary of the foundation of the independent Czechoslovakia is a good opportunity to look back and identify the main features of our national economic history. As you know, we have been through four periods since 1918 – the period of political and economic emancipation from Austria-Hungary, the wartime economy, the era of central-planning-based totalitarian communism, and finally almost three decades of democracy and a market economy. So, more than enough has happened in our country over the last 100 years.

Although these periods could not have been more different, two common features have appeared in various guises. I would characterise them on the one hand as economic moderation, prudence and discipline, and on the other as a struggle for economic independence and a willingness and ability to bear the consequences. Let me give some examples of both.

Czechoslovakia’s founding fathers Tomáš Garrigue Masaryk, Karel Kramář and Alois Rašín were well aware that nurturing a sound financial environment was crucial to the prosperity of the young nation. The Czech Lands had been a key industrial and economic part of the former Austria-Hungary and hence had a relatively well-developed banking sector. An awareness of the close links between government finances, the banking sector, firms and households shaped the economic policy of the First Czechoslovak Republic.

Karel Engliš worked systematically to balance the budget and deserves most of the credit for sorting out public finances in the early 1920s. In 1927 he submitted three tax laws that substantially lowered corporate taxation and supported the creation of capital. At the same time, though, he tied the tax reform, which led to lower revenues, to cuts in government expenditure and a streamlining of the civil service. So, Rašín and Engliš established a trinity of traditions in our country: a stable currency, sound government finances and non-inflationary economic policy. These traditions became a theoretical, practical and moral legacy for subsequent generations of economic policymakers.

It is unusual these days to look back to the communist period for economic inspiration. The socialist system was inefficient and cumbersome and discouraged initiative and innovation. Central planning by definition made the system less adaptable to change and created an economy of shortage. Despite this, the Czechoslovak version of socialism tried to eliminate the most glaring imbalances and preserve basic macroeconomic equilibrium. Fortunately, our central planners didn’t cause any major imbalances in the consumer market in the 1980s, so the savings surplus wasn’t as large as in other communist countries. Not that I want to defend the past economic regime in any way, of course, but let’s not forget that it had elements which can be traced back at least implicitly to the pre-war period.

Not very often you see central bankers having a soft corner for socialist past.

There are 3 lessons from the past which have mattered for post-1989 economy:

  • …..the liberalisation of prices and foreign trade in 1991 was accompanied by effective stabilisation measures.
  •  is an ability to cope with the consequences of the struggle for economic independence.
  • All this tells us that the Czech nation is reasonably good at running its own macroeconomic, monetary and financial affairs.


To sum up, the past 100 years have not been a series of random economic events. Despite all the discontinuities, there has been some continuity. In the same way that we inherit various physical and personality traits from our forebears, economists learn their craft from those that came before them and pave the way for those that come after. I am sure this conference will bear me out on that.

Nice bit…

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