Berfrois

Progress and Monetisation

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Adair_Turner_-_Festival_Economia_2012
Adair Turner at Festival Economia, Trento 2012. Photograph by Niccolò Caranti

by Bharat Azad

In a quiet office tucked away in Mayfair – over a long table so white I am hesitant to even place my fingers on it – Adair Turner is speaking to me about the nature of money. His tone is jovial but steely. He pronounces his words with a thoughtfulness undimmed by his many public speeches and lectures. He speaks in clear, hard sentences.

He is, after all, Adair, Lord Turner, Baron Turner of Ecchinswell. Formerly a Director of McKinsey & Co., formerly Director-General of the Confederation of British Industry, one-time Vice-Chairman of Merrill Lynch Europe and, more pertinently for our purposes, former Chairman of the Financial Services Authority, called in by Her Majesty’s Government to keep the financial ship steady in the midst of the 2008 financial crisis. A few years ago, he was tipped to take over the Bank of England. When Mark Carney was instead appointed, one person celebrating was George Soros, publicly saying that this was a good thing: a thinker of Turner’s calibre should not be constrained by the riata of officialdom. Turner is now a Senior Fellow at Soros’s Institute of New Economic Thinking.

What marks Turner out in the current climate, I suggest to him, is his willingness throughout his many careers to look beyond “pure economics” – a discipline acrimoniously divorced from all other areas of human concern – in the age of economic narrowness that has held us captive for the last 30 or so years. As it turns out, Turner tells me it is a kind of continuation of his earlier battles: “I have always tried to connect the different elements of disciplines, modes of thinking, ways of thinking about the world. I did history for two years at university before I did economics. I’ve greatly enjoyed English literature, history of art, as well as mathematics and I rather regret that under the UK system, you have to choose either category of arts or hard sciences when you do A-levels. I’d love to have done some hard sciences as well and have always tried to read genetics, biology and evolutionary theory. So, I’m intellectually interested across the range of ideas, and I’ve always been interested in political philosophy and moral philosophy, and I’ve always been interested in challenging orthodoxies, taking what people believe and being willing to challenge it and therefore I guess one of the things I’m deeply against is all-encompassing belief systems”.

The most prominent of these in his student days – Cambridge of the early ‘70s – was Marxism, which many of his friends gravitated towards. “I instinctively opposed it because I thought it was a thought system which provided the answers to everything”. This approach to the world gave its adherents the morbid logician’s curse: “you took your existing model and you worked out how some little tweak to it would fit the new fact”. But this curse extended beyond Marx’s followers to its most evangelical detractors, says Turner. “I feel that rational expectations-based neoliberal economics is an all-encompassing belief system in the way that Marxist-Leninism was an all-encompassing belief system. But whereas in the 1970s the dominant problem, I thought, intellectually, in western societies, was that a significant minority of people had gone up the cul-de-sac of Marxist-Leninism, I think the dominant problem for the last 20 years is that far too many people have bought off on a simplistic rational-expectations neoliberalism. I oppose that and I try to deconstruct it and I try to illustrate its shortcomings and think through what elements of it are right and what’s wrong in exactly the same way that as a student in the 1970s that was my approach to Marxist-Leninism”. His constant emphasis on this similarity is deliberate.

Turner’s opposition to neoliberal economics carried on through his ascendancy within the financial sector. When I ask him if this was challenging, he readily and disarmingly concedes: “I don’t think I did enough of it: I think that prior to the crisis I was aware of things going wrong with economics and if you look at a book I wrote in 2001 called Just Capital, I did in that deliberately take a counter point of view to some of these propositions. I was always suspicious of the efficient markets hypothesis. There’s a chapter in that book which is entitled “Global Finance: Engine of Growth or Dangerous Casinos?” That was back in 2001. So I had never bought off on the idea that more trading activity, more derivatives, were going to make the world a better place. I never bought off on the idea that just more and more deregulation of markets would necessarily be beneficial, I never bought off on the idea that we had to accept the consequences of capitalism and you can assuage it by some degree of distribution”.

Despite his foresight, Turner was not one of the thinkers who saw the coming storm. “I had no idea before autumn 2008 how radically unstable the global financial system was. So when it occurred, it wasn’t a categorical shock to me, it wasn’t a shock to a belief system in the way that it was to an Alan Greenspan where, in a famous piece of congressional testimony, he said, “I have discovered the flaw in my model”. I didn’t have a strong mental model where I accepted it. I had a whole series of ways of suspecting and knowing that financial markets could be unstable. But, to be absolutely honest, I did not know that they could be as radically unstable as then”. He ends this by another concession: “even though I had my suspicions, if I had been a regulator before the crisis rather than immediately afterwards, I fear I would have made exactly the same mistakes as other people. The crisis has forced me to build on my previous suspicions to a more radical analysis of what is wrong with global finance. But I wasn’t clever enough to do that ahead of a large event making it obvious that we needed to do it”.

I turn at that point to a relatively little-known fact that Turner has been emphasising with some zeal since: money and credit creation. It sounds dull and, prior to the financial crash it was safely lodged, snug and undisturbed in its shell, left solely to academics. The crisis gave this subject a new significance.

Banks can not only act as intermediary between borrowers and lenders, but can have the power to act as a source. Murmurs of this have surfaced amongst thinkers as diverse as Martin Wolf (chief economics commentator of the Financial Times), Sir Mervyn King (former Governor of the Bank of England), the economists Ann Pettifor and Steve Keen (who had an acrimonious argument with Paul Krugman over the matter), the Occupy movement and Turner himself. In short, and in Turner’s felicitous phrasing, “Banks, it is often said, take deposits from savers (for instance households) and lend it to borrowers (for instance businesses). But in fact they don’t just allocate pre-existing savings; collectively they create both credit and the deposit money which appears to finance that credit”. This increases the potential risk in the economy, most notably through leverage. The many anodyne analyses promoted by the majority of commentators changes with the introduction of this fact. It is a known fact that central banks can do this (for example Quantitative Easing). Some parts of the left would argue that the Coalition’s austerity policies have been sundered by this revelation, particularly the infamous letter left behind by the previous Treasury chief to the current one: “there’s no money left”.

Until last summer, there has been scant official acknowledgment that retail banks can create money, too.

*

“This is interesting”, Turner smiles, looking at my much scribbled-upon copy.

“You’ve been saying this a while”, I say.

“I’ve been saying this a while”, he replies.

We are looking at a paper in the Bank of England’s quarterly bulletin, “Money creation in the modern economy”. The paper’s diffident title conceals its revolutionary content. This is the first official public statement by the Bank of England setting out the mechanics of money. “The reality of how money is created today differs from the description found in some economics textbooks”, the authors state with some modest mischief, “rather than banks receiving deposits when households save and then lending them out, bank lending creates deposits”.

This came as a shock to many who already question the standard model but also as a surprise to Turner himself: “this was the Bank of England at last saying it, whereas I can tell you, you will find things in the Bank of England before which were expressing the previous, I think wrong, model. You will find them repeating the idea that what banks do is take money from savers and they lend it to borrowers in order to allocate between alternate capital investment projects and I think this document you’re quoting from is a major step forward”.

I tell Turner that my shock stemmed from a conversation I had some 3 years ago with a very senior official at the Bank of England, proposing this alternate view of credit creation. I was listened to with bemusement. I had got it wrong, I was told, politely but with a slight look of incredulity. A major central banker did not know this three years ago but this is far from an anomalous example, Turner says: “I was told by a very, very senior economist – I won’t tell you whom – in a global organisation, not long ago. We had lunch together and I had given him a copy of a recent lecture I’d done and he said in advance, “just to spice up our lunchtime discussion, I do not believe that banks create money, I think they intermediate money that already exists”. And I tried to persuade him that he was wrong”.

Despite the revolutionary implications for our economic understanding, the news has not spread to that shortcut for common knowledge, the man on the Clapham omnibus. Nor, apparently, to the senior banker I spoke to very recently. Perhaps strange new ideas take time to filter into wider consciousness but the biggest surprise is that this was not known even to many who studied finance and economics. Turner understands my surprise and tries to sketch his personal history as an explanation.

“When I was at Cambridge and immediately afterwards I used to supervise undergraduate economics. I taught money, credit and public finance at the time when undergraduate courses included it in the way that they often do not do so now. I guess I had gone through the theory of how banks create money, yet, somehow, over the years, it wasn’t foremost in my mind…as I said, before the crisis I was suspicious of derivatives, even back in 2005 if you’d said to me, “are CDOs (collateralised debt obligations) making the world a better place?”, I’d have said, “probably not but they’re making my friend down the street somewhat richer than he needs to be”.

“But it’s only really after the crisis that I have really discovered and thought about money creation, and in that, I’ve gone back to some texts that I’ve read before. But I also read texts that I hadn’t read: when I was at Cambridge, I don’t think I’d read Hayek, I’m sure I didn’t read Wicksell, I did read Keynes but the Keynes of the General Theory doesn’t focus on this, the Treatise on Money does a bit more, but Hayek and Wicksell were clear about it. So I sort of knew it but I hadn’t focused on it. I have to say that what happened was that, after the crisis occurred, it was so huge that I, in addition to doing the work that had to be done, I would spend my time trying to understand what had gone wrong and I began to go back to reading old texts that I hadn’t before and it wasn’t complete news to me that banks created money – at the back of my mind I knew that, but I really began to focus on it in a way that I hadn’t before”.

This deliberation Turner underwent seems not to have been widespread. But the implications of this fact, I put it to Turner, sunder some incredible myths we have built around finance. Take a thoughtful piece in The New Yorker three years ago. The author, James Surowiecki asks why, “Given how much housing prices have fallen, the question is why more people aren’t just walking away”? Practical considerations aside, he writes, “the biggest hurdle… is social: while companies get called “very smart” for restructuring their contracts, there’s a real stigma attached to defaulting on your mortgage. According to one study, eighty-one per cent of Americans think it’s immoral not to pay your mortgage when you can, and the idea of default is shaped by what Brent White, a law professor at the University of Arizona, calls a discourse of “shame, guilt, and fear.” When the housing bubble burst, the banking industry was terrified by the possibility that homeowners might walk away en masse, since that would have stuck lenders with large losses and a huge number of marked-down homes. So strategic default was portrayed as the act of dishonorable deadbeats. David Walker, of the Peterson Foundation, waxed nostalgic about debtors’ prisons, and John Courson, the head of the Mortgage Bankers Association, argued that defaulters were sending the wrong message “to their family and their kids and their friends.”

Implicitly, if we accept the standard model, by defaulting on our debts, we have played with someone else’s hard-earned money. But banks and corporations see themselves as acting rationally when they do the same. Quite the double standard, as Surowiecki points out: “When it comes to debt, then, the corporate attitude is ‘do as I say, not as I do’. And, while homeowners are cautioned to think of more than the bottom line, banks, naturally, have done business in coldly rational terms”. But what if banks create the money themselves? The picture looks different now.

*

We come now to the meat of the subject.

“There’s a set of things here which one has to be clear about. Private banks can create credit and money… and governments can create fiat money, as we call it, and we find that very simple to understand in terms of Milton Friedman: you could print some dollar or sterling bills and drop them from a helicopter. But governments can also print it in form of paying £1,000 into your internet account, so we can do it in an electronic way but it’s still fiat money creation. And banks can create private credit and money”.

But why the taboo on central banks printing money? Particularly as private banks are allowed to do the same? (Some commentators argue that 97% of the money currently in circulation in the UK is created by private banks).

“What I think happened in the course of the mid-20th century is that we crystallised a philosophy that said because there has been over-use and abuse of fiat money creation – most famously in Weimar etc. – we ended up with an absolute prohibition of government fiat money creation. It’s the taboo, it’s what central banks are there to stop. And we ended up with a totally relaxed attitude to private money creation, essentially believing that private money was a product or service like any other: like bananas or restaurant trips etc. And we don’t ask questions in economics about how many bananas there should be in the economy or how many restaurant trips. We simply say, “well, there will be the number of bananas or restaurant trips that consumers choice and competition results in. And if there’s more bananas and less oranges or there’s more restaurants and less trips to football matches, well, that’s consumer choice!” So we ended up with an attitude to private credit and money that says it’s a product or service like any other and, therefore, we don’t have to ask questions about how much there is in total. And I think these two problems are at the absolute core of what went wrong and the problems we now have, because the absolute relaxation about private credit and money left us blind to the problems which were building up and the absolutely prohibition on creating new fiat money leaves us ill-equipped to think about the full range of policy options to deal with the aftermath of when the thing blew up.

“That’s the way I think about it. And so at the end of one chapter I said we need a philosophy which is far more worried about private credit creation and less categorical about its opposition to fiat money creation. Now does that mean we can be completely relaxed about fiat money creation? No! Because if you create fiat money in small amounts each year in line with the growth of productive potential of the economy, you’ll produce a reasonably balanced economy but, quite clearly, we can go out and print huge amounts of money and we can produce hyperinflation. But I think again that people hanker after absolutes, and the absolute that governments printing money is terrible and private sector creating credit and money is absolutely fine because it’s governed by free market forces…both of these absolutes are overstated. You have to realise that both of these things have potential advantages and potential dangers and we have to construct political economy and regulations which constrain the dangers but get the benefits of both and that’s the core of a sensible economic policy”.

Turner has, in fact, made some policy suggestions regarding fiat money himself. Milton Friedman’s aforementioned helicopter is his inspiration. The concept, as Friedman formulated, is simple. In a situation where people of a given community are short of money – not dissimilar to our current state – a potential solution is to drop money from a helicopter to the community’s inhabitants. The idea has an interesting intellectual history which Turner dives into with relish:

“An example of that is Michael Kumhof and Romain Ranciere’s paper, an International Monetary Fund working paper which sets out a formal model. It’s very interesting, the intellectual background of this debate, because some of the people who argued most strongly that a) you should sometimes use fiat money to stimulate the economy and b) that you should far more tightly control private credit are people from the 1930s whom we associate with extremely free market points of view: Irving Fisher is no socialist. Henry Simons, in particular, is absolutely no socialist but there is a sort of intellectual link between them and Hyman Minsky about the dangers of private credit creation. And there is an intellectual link between them and the Positive Money and helicopter money bit as well. And the 1948 Friedman article is very much part of that intellectual transmission mechanism, that article is both looking back to the sort of 100% reserve banking model of the Chicago Plan and Fisher and Simons and is expressing the helicopter money idea of what you do in a recession. So it is seen in various parts of the intellectual spectrum.

“I think the crucial thing, the crucial question you need to answer when you accept that we can do fiat money creation is how to discipline and I’m going to address this subject in a lecture in Germany in February, because some of my very senior German friends have said to me, “Adair, you’re absolutely technically right that this is possible”, but, without quite putting it this way, they say, “we mustn’t tell the people!” Because if the people know, and if the backbenches of Parliament as well as the small elite technocrats know that this is possible, people want to do it – not to the extent of 2% of GDP or not just when we’re in a crisis – they’ll want to do it to the extent of 10% of GDP every single year because the Chancellor of the Exchequer will know that he can always create some fiat money so the head of the Department of Health will come through and say, “so why don’t I have some of this?”

“So, we have to find…the way I think about what we did with fiat money creation…it’s like medicine which, taken in small amounts, is good for us but taken in large amounts is toxic and fatal and, essentially, we’ve decided that it’s so dangerous that we’ll put it in the medicine cabinet, lock the door and throw the key away. And for most time, throwing away that key hasn’t harmed us too much because there were other things that were so great in the economy but I think we are now in an environment where throwing away the key has harmed us. If we take it out of the medicine cabinet, we’ve got to have a believable set of political economy processes. And I think that’s the challenge to the Occupy movement and people on the radical left: how would you place it in a discipline. Now here’s one way I might place it in a discipline, say we can do it within the framework of an independent central bank: you could have a thing that says the Treasury can have an element of an unfunded deficit or it can write off some of the existing debt owned by the central bank but only with the approval of the Monetary Policy Committee of the central bank in the pursuit of a 2% inflation mandate. They can agree this amount in order to make sure at least that you hit the 2% inflation target but they have control of it. In some way or another you’ve got to place limits on it because central banks independence and rules on non-monetising, they’re like those commitment devices that people who are trying to give up smoking, or diets. On one level, it’s completely arbitrary to say you’re not allowed another chocolate until 4 o’clock in the afternoon rather than 3:59 but you have to do these rules because otherwise you won’t stick to it”.

2901963840_6f0583695a_b
The downfall of Mother Bank, Henry R. Robinson, 1833

This puts Turner in interesting intellectual company. Quite aside from Friedman, Simons and the like, suggestions of a similar sort have emanated from the Occupy movement, some of whom have popularised the idea of a Debt Jubilee: use the fiat money to pay off private debt (mortgages, student loans etc.) but this would require much more money to be printed. Naturally, the primary objection to this is hyperinflation. We don’t want to be carting around money in wheelbarrows with the sum total of our savings barely able to buy a loaf of bread. Debt Jubilee/fiat money advocates point to the relationship between money supply and inflation. Inflation occurs, broadly speaking, when the money supply in an economic exceeds economic growth, if there is growth in line with the increased money supply, the former reins in the latter. But every time a debt – created by private banks – is paid off, the money supply decreases by the amount of debt paid off.

Turner is cautiously approving of the broad theory. “Well, you’ve got to pay off the debt, you’ve got to pay off the private money as well. If you write off the debt and you just leave the private money there, you’ve just got bankrupt banks, you’ve got to shrink both sides of the bank balance sheet in some way.

“Here’s an example of how monetisation works: Greece – which is going to be a big issue this year – owes 170% of GDP in debt. Some of this debt is owned by the European central bank which, in buying that debt, has created money. The ECB could now say that this debt either doesn’t exist at all or is a completely notional, never-repayable, zero interest bond. Doesn’t matter whether you call it nothing or perpetual zero interest bearing, either way nobody has to debt service it. If the ECB did that, you would have removed the burden of fiscal adjustment on the Greek government but you wouldn’t actually have created any more money than has already been created. What you would do is make it easier for the Greek government to borrow money…I think what you’re saying is broadly speaking right: most monetisation options do not create inflation immediately, they create inflation and inflationary expectations if, through a political economy process, they lead to further money creation in the future or to the expectation of further money creation in the future, and expectations are incredibly important here”.

Despite the theory hyperinflation is still a major concern. Take the UK Treasury’s Review of the Monetary Policy framework 2013. Buried away in this document is a very revealing statement:

In theory, central banks could go beyond the range of unconventional instruments deployed by central banks in advanced economies since the 2008-09 financial crisis. For example, it is theoretically possible for monetary authorities to finance fiscal deficits through the creation of money. In theory, this could allow governments to increase spending or reduce taxation without raising corresponding financing from the private sector. Adair Turner, Chairman of the Financial Services Authority, has suggested this could be a tool to use in extreme circumstances.

Naturally, left wing economists have claimed that this sunders the Chancellor, George Osborne’s rationale for austerity, particularly as this emanates from his own department.

This is the first time Turner has seen this. He studies the passage speedily. “Well…”, he begins to read out from the document, “’Theory also highlights the risk that money financing can rapidly undermine the stability of inflation expectations’ is absolutely right. The crucial word here is “can”. It can. It also provides some other examples where it didn’t. So if you look at how the Union government of the US pays for the American Civil War, it does significantly with greenbacks, which are a tacit form of money finance. It does produce significant inflation over the five years of the Civil War in Friedman and Schwartz’s figures, there’s about 80% inflation so about 16% per annum. We’d think that pretty high but it doesn’t lead to such a self-reinforcing explosion of inflation expectations that it ends in hyperinflation. We simply have years of high inflation and then it moderates back down again. The Pennsylvania colony of the 1720s ran with printed money and did not produce hyperinflation. Other colonies over printed, there’s a lovely phrase from Adam Smith: but the same technique employed by other units, for lack of moderation, led to a problem. So the whole thing is how much do you do? Finance minister Takahashi in Japan in the early ‘30s used money finance of deficits to pull the Japanese economy out of recession and he did it without creating hyperinflation. Everything is about how much you do and, if you do it in a moderate amount, how credible is your promise that you are only going to do it in a moderate amount?”

I put to him some other rebuttals I have been given from the right: moral hazard (if we relieve people/governments of their debts, we are simply giving them permission to rack up unsustainable debts all over again) and “the market will go crazy”. Neither of which, we should note, are strictly economic points.

“Well, moral hazard and the market going crazy are two slightly different arguments. The moral hazard argument is if I let the Greek government off some of its debt, why on earth should the Greek government, in 2020, not build up the debt all over again? That’s the moral hazard argument: I’ve told you, you can do it, so why not do it all over again? The markets will go crazy argument is, I think, going to be very interesting to see in Japan over the next two years because I think Japan is sort of approaching the end game of pretence here, we’re getting to the point where it is transparently obvious to anybody who looks at the figures that Japan is not going to repay its fiscal debt in the normal sense of the word repay: you switch from a primary debt to a primary surplus and pay back debt with real resources.

“I think we’re also getting to the point where it’ll be equally obvious that the bank of Japan, having bought all these JGBs is never going to be able to sell them back to the market. At that point somebody is going to say, “well, shouldn’t we tell the Japanese people that, of their 250% debt-to-GDP, 60% is owned by the Bank of Japan so the figure is not really 250%, it’s 190%?” And what is the market’s reaction to that? Now, at the moment, you could say de facto they’re sort of doing it in any case. And so far all the market ever does is queue up to lend money to the Bank of Japan at an even lower interest rate, so far there is no sign of the panic.

“My gut feeling is that what we’re going to see in Japan is a move towards overt recognition that we’ve done permanent monetisation and that the market will probably at that stage say, “Sure. That was it. So what?” But there is at least a small probability that the market will go, “Oh, God! That’s monetisation, that’s awful”, and the Yen will fall by more than the government of Japan wants the Yen to fall and that people will suddenly refuse to lend money to the Japanese government at 0.5%, they’ll demand 3%. And I just don’t know.

“And I think actually what that illustrates is that you should avoid getting to very, very large levels of government debt in the first place. And this is why Bernanke was right in 2002, they should have been doing some permanent monetisation 12 or 15 years ago before they were playing around with such enormous quantities. Because once you have enormous quantities of government debt and central bank balance sheets, you may be able to permanently monetise without scaring the markets but, bluntly, none of us know, and that goes back to the fact that given that markets are not wholly rational and efficient, how could we possibly know? We can’t”.

Quite.

Turner then later returns to the Japanese situation and this is the closest he will get to making a prediction. “I think that Japan is going to be the interesting case…I’m getting close to being willing to bet that Japan will effectively de facto end up doing permanent monetisation and that also more and more people over the next year will point out that de facto they’ve done it and I think there’s a fair possibility that within the next five years it will be officially admitted that they’ve done it and that there will be a statement of why it was a perfectly sensible thing to do, simply because the reality is the debt can’t be repaid in any other way. In the Eurozone, it would be great if we could have a helicopter money drop, but I don’t think it will occur because the ECB will not be allowed to do it. But I think Japan is going to be the forcing device because it is bound now de facto to occur, it will be the forcing device for – I hope a more – open-minded debate at global level as to the circumstances in which it should occur”.

Two and a half years ago, Mario Draghi, President of the European Central Bank said he would do “whatever it takes” to protect the besieged and fragile Euro. Does “whatever it takes” include helicopter drops? Time will tell. At the time of going to press, the word on the financial street is that Draghi is going to undertake an enormous Quantitative Easing programme, rumoured to be worth €1 trillion. Not quite helicopter drops, but fiat money nonetheless.

 *

At this point I am feeling optimistic. I have managed not to sunder the pristine white table, Turner and I seem to have got on fairly well and the wintry economic climate plaguing the world seems (only somewhat) less depressing.

This is not in my nature. And given our earlier conversation about Turner’s intellectual influences, it doesn’t seem characteristic of him either.

Looking at history, I tell him, rationalists, functionalists, and utilitarians tend to be very optimistic. They tend to be meliorists, sometimes uncritically accepting human progress as a given. Because they think of society as a series of problems, curved lines that if straightened, likes Sherlock Holmes’s poker, would give us secular salvation. But Turner doesn’t wear a square hat. He thinks more, I feel, in rhomboids. There is a more Romantic (in the Isaiah Berlin sense) flavour to his thinking, I press him. He takes longer than usual to answer this.

“Well, I think the answer is we have to deal with the reality of radical uncertainty”. One of his foremost influences at university was that great scourge of historicism, Karl Popper. For Turner, Popper “rejects both the rationalist idea that we can make the world perfect but also rejects a pessimistic idea that we can do nothing or the idea that the world is perfect in any case”. Once again, Turner’s mini tours of intellectual history are amongst the most interesting.

“There’s a set of ideas to reject: there’s a free market belief that the world is already perfect so there’s no need to do anything. There’s a Marxist idea that the world is not yet perfect but we can make it perfect. Or there’s a conservative pessimism that nothing is possible, the world is highly imperfect, a Hobbesian disaster. I don’t accept any of those. I think that human beings, both in their individual and collective behaviours are part rational, part irrational. I think we have a certain ability to progress, and I am enough of an Enlightenment Whig to believe that there’s something called progress, but I do not that think that progress is at all certain. So I think there exists the possibility that we will produce OK answers to climate change and nuclear proliferation and world conflict and macroeconomic management. And one might as well try to think those through as best as possible but I do not exclude the possibility that we will have a major nuclear war in the 21st century, I do not exclude the possibility that persuading people on rational economic policies will prove impossible and we will spend the next 15 years in unnecessarily deep recession to the harm of many people’s welfare. So my point of view is that there is neither a Marxist nor an Enlightenment Whig natural progress of humanity but we can make progress and we should have a shot”.

Our time is up. As we both leave, Turner has a mischievous glint in his eye. There is more trouble to come from him, I can tell. In the lift going down I replay Soros’s quote in my mind. Indeed, I say to myself. The old man was right.

 

  • The cartoon looks interesting, but I can’t read all the print. Do you know where a good quality copy can be downloaded from?

  • This is a really good interview. There’s just one problem, all deficit spending by Central Govt’s with sovereign, fiat, floating FX currency is “printing money”. There is no meaningful distinction between fiat currency in a checking account and fiat currency in a CD account at a central bank (Govt securities). Just because the mainstream mis-labels securities accounts as Govt “debt” doesnt mean they are correct or that the term is relevant.

    Money in a 6-month CD account at Chase is prominently featured in mainstream aggregates of the “money supply” (M2).

    But money in a 6-month T-bill account at the Fed is not considered “money”

    The only possible explanation for the distinction is ideology where private = good and public = bad.

    Govt’s necessarily spend by issuing their own IOUs (reserves), issuing Govt securities (going into “debt” is nothing but exchanging one type of Govt IOU for another type of Govt IOU. But the total number of Govt IOUs issued does not change.

    This is the one thing that Turner is confused about, Govt’s dont need to do anything special to “print” money and help the economy, they simply need to run bigger deficits.

  • Auburn, I agree: short term government debt certain ought to be counted as money. Every country has its own way of distinguishing between stuff which is obviously money and liquid assets which are “near money”. I suspect most countries have 2 to 3 months as the dividing line rather than your 6 months. But I’m not 100% sure about that.

  • editor

    From the Library of Congress: http://www.loc.gov/pictures/item/2008661758/

  • Pingback: MMTers: Does Adair Turner have a point? | alittleecon()

  • Marco Saba

    “But every time a debt – created by private banks – is paid off, the money supply decreases by the amount of debt paid off.” – Not at all. This is another misconception due to the fact that people don’t know that bank accounting of money creation is flawed. At the time of creation, money is not registered as an asset in the bank balance. So the net effect is that when the loan is paid back – the bank hold the money but the balance show…. ZERO !

  • Party_Fants

    I think you miss the point. The point of the article is to reinforce how money creation by private banks affects the economic system. Its also about how Quantitative Easing’s usage is being directed at the wrong areas. if you have £100 in an economy and never add to it there is no depreciation by volume of money. If however you introduce another £100 you depreciate the value of the original amount in the system. Now if you are not in control of the input of new money into the cycle (Central Banks in the Best case produce 5% or in the worst introduce 3%) the economy is no longer in the control of government or public, it is totally controlled by the banks or loaners of money. You want to argue minutiae and Adair wants you too see the big picture.

  • “Its also about how Quantitative Easing’s usage is being directed at the wrong areas.”

    This line only demonstrates your misunderstanding. QE isnt really directed anywhere. When the Fed exchanges reserves for securities its not giving you anything, just like when you CD at Chase matures, you arent any wealthier.

    ” if you have £100 in an economy and never add to it there is no depreciation by volume of money. If however you introduce another £100 you depreciate the value of the original amount in the system.”

    More mythology. If inflation can approximately be described as MV = PQ, none of the variables are ever constant, so you cant make statements like you just did wrt how changes in the money supply will affect prices. Q is never at its maximum, so if M increases causing more output, the result need not be inflation at all. which is of course why there is only a very weak relationship between M and P in modern capitalist economies.

    ” Now if you are not in control of the input of new money into the cycle (Central Banks in the Best case produce 5% or in the worst introduce 3%) the economy is no longer in the control of government or public, it is totally controlled by the banks or loaners of money”

    If you correctly include total deficits in your count of the money supply, then Govt’s actually contribute about 25% of the money supply ( at least in the USA). Govt is always in control as they have the monopoly authority. If you want a more Govt centric money supply, then limit private borrowing and increase deficits, its not that complicated.

  • skintnick

    “once you have enormous quantities of government debt and central bank balance sheets, you may be able to permanently monetise without scaring the markets”

    But if all the governments and central banks are playing the same game “the markets” have no sound alternative to choose from. Beggar-thy-neighbour. Where does an investor find safe-haven? Judging by bond yields – 16% all issuance currently negative I’m told – there ain’t much left anywhere. No bankable projects. Zip. This baby’s going down.

  • “Where does an investor find a safe-haven?” Cash! Of course that yields zero interest, but then so too (more or less) does government debt nowadays. Low interest is nice for borrowers and not so nice for lenders. I couldn’t care less. Where’s the problem?

  • skintnick

    The very essence of capitalism is to invest capital and generate a profit. It is broken,

  • No. The fact that there’s no return on zero risk stuff or near zero risk stuff, e.g. government debt, doesn’t mean there’s no return on riskier investments. Indeed, investors demand a return on the risker stuff amongst other things to compensate them for the risk.

    Milton Friedman (in 1948) and more recently Warren Mosler advocated a permanent zero return on base money and government so called debt. (Government debt with a zero return is essentially the same as money, as pointed out by Martin Wolf in the Financial Times recently). Personally I think Friedman and Mosler are right.

  • skintnick

    Mmm, I see your point, thanks. And having listened to Jim Rickards on CBC earlier I can see that in a deflationary environment negative nominal rates do not equate with negative real returns (he believes further large tranches of QE are coming in all quarters). Nonetheless, the expectation of deflation and spectre of subsequent hyperinflation are huge concerns.

    Without going into all the details I still firmly believe (a la Heinberg) we’ve reached The End of Growth, and so a new financial landscape/ecosystem will emerge by accident or design. It might still even be capitalism – still not sure to what extent the growth imperative is embedded in that – but our debt-money system, which does demand continuous growth from finite resources, is finally broken.

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  • Morgen

    I think you’re both saying the same thing. What the article means is that the money is created at the moment the debt is written. If the debt is never repaid, we will forever have that extra amount in circulation. If they repay it, that extra amount is removed and that money is destroyed. Net result of zero, but until the repayment, there is extra money.

  • I don’t think he gets it. We’re a conquered people and money’s the tool’s been used to do it.

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