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What We Read Today 02 September 2016

Econintersect: Every day our editors collect the most interesting things they find from around the internet and present a summary "reading list" which will include very brief summaries (and sometimes longer ones) of why each item has gotten our attention. Suggestions from readers for "reading list" items are gratefully reviewed, although sometimes space limits the number included.

This feature is published every day late afternoon New York time. For early morning review of headlines see "The Early Bird" published every day in the early am at GEI News (membership not required for access to "The Early Bird".).

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Topics today include:

  • A collection of articles, notes and papers about "debt" and money options for governments with sovereign currencies

  • Zero Interest Sovereign Debt

  • Trillion Dollar Platinum Coin Revisited

  • What Would Keynes Say About the Eurozone?

  • IS/MY Model

  • What Did Keynes Really Say About Extraordinary Monetary Policy?

  • Hermine is a Bad Gift for the Holiday

  • Clinton's Excuse:  'I Had a Concussion'

  • Critical Clinton Laptop 'Lost in the Mail'

  • Donald Trump vs. Mika Brzezinski

  • North Korea Exports Slave Labor to Norway

  • Spain Headed for Third Election in a Year

  • Putin Says Russia and U.S. Close to a Deal on Syria

  • Obama Urges China to Stop Flexing Muscles in South China Sea

  • And More

Articles about events, conflicts and disease around the world

U.S.

  • Hermine is a dangerous Labor Day weekend threat for East Coast (USA Today, MSN News)  After slamming Florida, deadly Hurricane Hermine weakened to a tropical storm Friday but will still focus its fury on the East Coast through the Labor Day weekend.  As of midday Friday, more than 30 million people from Florida to New York were under tropical storm watches and warnings through the weekend. The National Weather Service said heavy rain, flash floods, strong winds and rip currents were expected as Hermine or its remnants move up the coast.  Even though meteorologists might officially classify the system as "post-tropical" over the weekend, Hermine is expected to remain "a dangerous cyclone through 5 days," according to the hurricane center.

hermine.2016.sep.02

  • Clinton tells FBI she could not recall all briefings on preserving documents (Reuters, MSN News)  - Hillary Clinton, under questioning by federal investigators over whether she had been briefed on how to preserve government records as she was about to leave the State Department, said she had suffered a concussion, was working part-time and could not recall every briefing she received.  Clinton told investigators she could not recall getting any briefings on how to handle classified information or comply with laws governing the preservation of federal records, the summary of her interview shows.  The concussion was widely reported at the time, and Republicans have since used it to attack the 68-year-old candidate's health in a way her staff have said is unfounded.

  • FBI Says a Laptop That Held Clinton’s E-Mails Has Gone Missing (Bloomberg)  A personal laptop computer used to archive Hillary Clinton’s e-mails when she was secretary of state went missing after being put in the mail, according to the FBI’s report on its investigation into her use of a private e-mail system.  E-mails that Clinton sent and received through her private server during her tenure were archived on the laptop in 2013 by a person who was an assistant to former President Bill Clinton, the FBI said in its heavily redacted investigative report released Friday.

  • Trump lashes out at 'crazy and very dumb' Brzezinski (The Hill)  Donald Trump tweeted out his latest attack on MSNBC's "Morning Joe" co-host Mika Brzezinski on Friday, calling her “crazy and very dumb” and saying she had a breakdown on air.

trump.brzezinski.tweet

EU

  • Brexit has “demystified the European Union”: Polish finmin (CNBC)  The U.K.'s Brexit vote may have changed attitudes to the European Union across the continent, Polish Finance Minister Pawel Szalamacha told CNBC Friday, adding that the decision showed that the EU is "no longer the only choice for the nations of Europe."  Szalamacha suggested that more countries could be prompted to leave the 28-nation bloc, such as those "with a strong sense of identity, some of the Nordic countries," or even some countries who may "feel that their destiny … is no longer within their hands."

Norway

Spain

  • Countdown to third Spanish election begins as Rajoy loses vote (Reuters)  Acting Prime Minister Mariano Rajoy failed in a second attempt on Friday to win parliament's backing to form a government, increasing the likelihood that Spain will have to hold another election - its third in a year.  After inconclusive elections in December and June, an entrenched stand-off between the parties has left Spain without a government for eight months, posing a threat to the economic recovery and putting a freeze on spending plans.  Rajoy, leader of the center-right People's Party (PP), stumbled at the first attempt to win a second term on Wednesday when he fell six short of the 176 votes needed for an absolute majority in the 350-seat assembly.

Russia

  • Putin Says Russia and U.S. Close to Breakthrough Deal on Syria (Bloomberg)  Vladimir Putin said Russia and the U.S. are close to striking a deal on fighting terrorists in Syria, potentially a major step toward ending a civil war that’s flooded Europe with refugees and helped give rise to Islamic State.

  • Putin Blasts Trump and Clinton for ‘Shock’ Campaign Tactics (Bloomberg)  Vladimir Putin blasted both Donald Trump’s and Hillary Clinton’s tactics on the campaign trail but refused to publicly take sides in a U.S. presidential race in which he’s been accused of secretly favoring the New York real estate billionaire.

China

  • Obama urges China to stop flexing muscles over South China Sea: CNN (Reuters)  China needs to be a more responsible power as it gains global influence and avoid flexing its muscles in disputes with smaller countries over issues like the South China Sea, U.S. President Barack Obama told CNN in an interview to be aired on Sunday.  Obama said in excerpts released by CNN:

"If you sign a treaty that calls for international arbitration around maritime issues, the fact that you're bigger than the Philippines or Vietnam or other countries ... is not a reason for you to go around and flex your muscles.  You've got to abide by international law."

Other Scientific, Health, Political, Economics and Business Items of Note - plus Miscellanea

Today we have a collection of articles, notes and papers about "debt" and money options for governments with sovereign currencies.  This very short compendium constitutes what might be a very good weekend reading and study package for those inclined to do some deeper thinking between libations.

  • Wright Patman's Proposal to Fund Government Debt at Zero Interest Rates:  Lessons for the Current Debate on the U.S. Debt Limit (Jan Kriegel, Levy Research Institute Policy Note)  JK has contributed to GEI.  See also second article following below.  This note was written during the debt ceiling crisis of late 2013 - early 2014. John Wright Patman (D) was U.S. Congressman fromTexas in Texas's 1st congressional district (1929-1976) and chair of the United States House Committee on Banking and Currency (1965–75).  In 1943 he attempted unsuccessfully to support financing the U.S. war effort (WW II) without expanding unduly the debt of the U.S. government.  His proposal, H.R.1 (1943):

    "...a bill providing for the issuance of nonnegotiable United States bonds to Federal Reserve banks and terminating the authority of the Treasury to issue other interestbearing obligations of the United States to commercial banks, and for other purposes”

    Prof Kriegel summarizes thusly:

    In simple terms, the bill required that all government debt be placed directly with the Federal Reserve Banks, eliminating the problem of market financing. Since the debt would not pay interest, it also eliminated the need to return the interest received by the District Banks to the Treasury, reducing the size of the accumulated debt. 

    See next article for a proposal which is functionally equivalent.

  • Coin Seigniorage: One Solution to Debt Ceiling (Joseph Firestone, GEI Opinion)  This article was written in the time of an earlier debt ceiling 'crisis' (2011) and discusses the idea that was (unintentionally) authorized by 1996 U.S. legislation intended to authorize commemorative coins.  The idea involves the treasury minting a small platinum coin and declaring it to have a value of $1 trillion.  The deposit of said coin with the federal reserve would automatically expand the money available for the government to spend without offsetting tax revenues and without creating additional debt.  This is functionally equivalent to the Wright Patman zero interest bond proposal in the preceding article.  Econintersect:  Of course the banks called this very logical (and technically legal) proposal lunacy.  What would you expect when such a process would diminish the banks' ability to extract taxpayer dollars through their monopoly money creation power via issuance of credit. 

  • Wright Patman's Proposal to Fund Government Debt at Zero Interest Rates:  Lessons for the Current Debate on the U.S. Debt Limit (Jan Kriegel, Levy Research Institute Policy Note)  JK has contributed to GEI.  This discussion covers a part of this article not covered two items above.  Wright Patman in 1943 House debate discussed the process related to what would come to be called "quantitative easing" (QE) by Ben Bernanke in the Fed's monetary policy actions in response to The Financial Crash if 2008 and The Great Recession.  Wright Patman called the process "illogical and inefficient".  His argument:

    "If it desires, the Treasury can deliver bonds to the 12 Federal Reserve banks directly and receive credit for the amount of the bonds on the books of the 12 Federal Reserve banks. Then as the Treasury pays its debts, checks are given on these 12 Federal Reserve banks and the funds are transferred from the Treasury to the ones receiving the checks. In this way the Government is paying interest to the Federal Reserve banks just the same as it pays interest to the private banks and to individuals, although the Federal Reserve banks operate on the Government’s credit."

    ". . . if the receiver of a Treasury check . . . desires the money instead of credit in his local bank, he is given Federal Reserve notes. These notes are not obligations of the Federal Reserve banks, they are obligations of the United States Government. Therefore, the Government and Congress, particularly, finds itself in the idiotic position of permitting the Treasury to deliver one form of Government obligation—interest bearing notes—to the privately owned Federal Reserve banks and receiving credit therefor, and then when the Federal Reserve banks are called upon for the money they issue another form of Government obligation, Federal Reserve notes, to satisfy the demand. In each case Government obligations are used. The net result is that the taxpayers are paying [interest] for the use of their own credit."

    Of course, a majority of the interest paid by taxpayers is returned to the U.S. Treasury by the Fed as long as the treasury securities are held, but Wright Patman argued that this artifice was simply a layer of financial inefficiency which could and should be avoided by issuance of zero interest government bonds directly to the Fed.  

  • The euro zone crisis: what would John Maynard do? (Dirk Ehnts, Institute for International Political Economy Berlin)  DE is a frequent contributor to GEI.  Dr. Ehnts has constructed a model by modifying the traditional ISLM formulation (which depends on the fallacious assumption that equilibrium exists between supply and demand) with a formulation which defines 'equilibrium' as the national accounts sectoral accounting identity.  (Econintersect:  Although this new model does use a correct 'snapshot' of the macroeconomy, it still needs to be extended to time variation functionality.  As it exists it simply defines a direction at any point in time based on that occasion's instantaneous accounting 'book'.  We look forward to the extension into dynamic modeling.)  A graphical representation of the new model is shown later, below.  Go to the paper for an explanatory discussion.  Here is the definition of the new model (in which Dr. Ehnts acknowledges the need for dynamic extension ("extended stock-flow consistent version"):

The IS/MY model is a graphical representation of a small set of equations that is quite similar in look and feel to the IS/LM model but contains a number of alternative choices, incorporating:

  1. Endogenous money, thus recognizing that the link between the nominal short-term interest rate set by the central bank (and other interest rates) and the quantity of credit is weak and at times non-existent.15

  2. Sectoral balances, dividing the economy into public, private and external sectors.

  3. The balance of payment identity, so that the change in net financial debt of all three sectors (private, public, rest of the world) must equal zero, which is a new definition of „equilibrium‟ (against the idea of supply equals demand as equilibrium). 16

  4. The economy can run in two modes: profit-maximizing and debt-minimizing, thus allowing the economy to be driven by financial deleveraging of the private sector.17 Other modes, like export-led or profit-/wage-led could easily be added to the model.

The model should therefore contain the essential building blocks that are needed to explain mass unemployment in a modern monetary economy. The sectoral decomposition allows us to examine the techniques of recovery identified by Keynes one by one. The model does not allow us to look at stocks explicitly, which is why more insights might by gained through looking at an extended stock-flow consistent version of this model. For the purposes of this exercise it should be enough to note that public debt can rise infinitely (at least theoretically) whereas private and foreign debt cannot. 18

ismy.model

  • Was Keynes’s Monetary Policy, à Outrance in the Treatise, a Forerunnner of ZIRP and QE? Did He Change His Mind in the General Theory? (Jan Kriegel, Levy Research Institute Policy Note)  JK has contributed to GEI.  Prof Kriegel argues that qunatitative easing (QE), a monetary policy practice in response to the financial crisis of 2008, is very non-Keynesian.  Yes, Keynes did argue in his Treatise on Money (1930) for monetary policy action much like the recent ubiquitous ZIRP policy:

    “ . . . deliberate and vigorous action” to reduce interest rates and reverse the crisis. He argues that until “extraordinary,” “unorthodox” monetary policy action “has been taken along such lines as these and has failed, need we, in the light of the argument of this treatise, admit that the banking system can not, on this occasion, control the rate of investment, and, therefore, the level of prices”

    In Keynes' General Theory (1936) Prof. Kriegel points out that JMK had advanced his thinking to recognize the difference between investing in financial assets ('savings') and capital assets ('investments').  (Econintersect:  JMK recognized the difference between productive use of money and hoarding.)  Then JMK discussed investment:

    “ . . . current investment will depend . . . on what we shall call the inducement to invest; and the inducement to invest will be found to depend on the relation between the schedule of the marginal efficiency of capital and the complex of rates of interest on loans of various maturities and risks.” (Keynes 1936, 27).

    “The schedule of the marginal efficiency of capital may be said to govern the terms on which loanable funds are demanded for the purpose of new investment; whilst the rate of interest governs the terms on which funds are being currently supplied” (Keynes 1936, 165)

    Econintersect:  Our reading of JMK's use of the term "loanable funds" is that it is not related to the "loanable funds model of banking".  Keynes use of the term does not affect the argument he presents - he would have better used the term "available credit" - his logic would not have been changed.  Note:  One version of then loanable funds 'story' is the so-called "loanable funds doctrine"  which adds to existing savings (deposits) the credit expansion capability of banks.  In the last half century banking operations have almost exclusively used the credit expansion capability for making loans without regard to pre-existing deposits.

    Prof. Kriegel then reviews JMK's analysis of 'confidence' and 'uncertainty' (Econintersect:  the former widely misinterpreted by later economists and the later largely ignored) to present Keynes' conclusions that: 

    A collapse in the price of equities, which has had disastrous reactions on the marginal efficiency of capital, may have been due to the weakening either of speculative confidence or of the state of credit. But whereas the weakening of either is enough to cause a collapse, recovery requires the revival of both. For whilst the weakening of credit is sufficient to bring about a collapse, its strengthening, though a necessary condition of recovery, is not a sufficient condition” (Keynes 1936, 158)

    Econintersect:  Keynes used the term 'equities' but the argument is equally valid if other forms of capital are use, i.e. 'equipment' or 'real estate', for example. 

    Prof Kriegel concludes with the stated 1936 modification of JMK's earlier views on the efficacy of monetary policy in a crisis:

    “we are still entitled to return to the latter [i.e., the rate of interest] as exercising, at any rate, in normal circumstances, a great, though not a decisive, influence on the rate of investment. Only experience, however, can show how far management of the rate of interest is capable of continuously stimulating the appropriate volume of investment. For my own part I am now somewhat sceptical of the success of a merely monetary policy directed towards influencing the rate of interest. I expect to see the State, which is in a position to calculate the marginal efficiency of capital-goods on long views and on the basis of the general social advantage, taking an ever greater responsibility for directly organising investment; since it seems likely that the fluctuations in the market estimation of the marginal efficiency of different types of capital, calculated on the principles I have described above, will be too great to be offset by any practicable changes in the rate of interest.” (Keynes, 1936, 604)

    Prof. Kriegel concludes with a remark (which we relate to the condition of debt deflation, a concept developed contemporaneously by Irving Fisher) which links the discussion to the processes of the Financial Crisis of 2008 and the ensuing years:

    Finally, in comparison with the current period, Keynes did not take into account the impact of capital loss on the inducement to invest and the propensity to consume, factors that in all likelihood would have led him to place even greater emphasis on the role of government spending in bringing about recovery 

  • Here is a short list of related articles:

Helicopter Money 101

The Problem With Money And Banking: Inseparability

Will Bank Of Japan Deploy Helicopters?

U.S. Government is a User, Should Be an Issuer of Money

Money And Credit: It's Time To Recognize The Difference


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