Inflation or Growth Ridiculous Options

We have just sent out the following media statement (but have left out my phone number for this version)

Media Statement

13 March 14

Inflation or Growth Ridiculous Options – New Economics Party

The unproductive arguments raging among economists and central banks about when and how much to raise interest rates to curb inflation illustrates the complete failure of conventional economic theory, according to Deirdre Kent, spokesperson for the New Economics Party.

“Here we have the Reserve Bank putting up the official cash rate to keep inflation below 2 percent and the manufacturers saying that will slow productivity and put people out of work. Economists argue themselves round and round.

"It seems then that under the orthodox economic theory, you can’t both avoid inflation and have a thriving economy. A small child can see how stupid this is. Surely, the child will say, intelligent adults can invent an economic system where there is no inflation yet there are jobs at the same time?

"The problem is that governments and central banks are relatively helpless when they allow banks issue 98% of the country’s overall money supply as they do in New Zealand. They have few tools at their disposal to curb inflation. We end up with this inane cycle of inflation one minute and unemployment the next.

"During the Depression, Wörgl, a small town in Austria, created its own money and charged a circulation fee. Every month the holder of a Work Certificate had to buy a stamp and place it on the back of the note to keep it valid. So the money circulated fast. At one stage there was inflation, so some notes were withdrawn from circulation. Over 15 months, unemployment in Wörgl dropped 25 per cent, when in the rest of Austria it had risen 10 per cent during the same time period."

The New Economics Party supports a return to state seignorage, where the country's legal tender is issued by the Treasury and not by commercial banks.

IMF economist Michael Kumhof says the key function of banks is to create money

imfToday I made the mistake of going to a website where there was a sentence which made me mad. It said that in New Zealand, banks like finance companies can only lend out deposits made with them. Well I rarely get mad these days but I don't like untruths being perpetrated. So I thought the best way to recover would go and transcribe the first seven minutes of a talk Michael Kumhof, economist from the IMF made to a seminar in January 2013.  It is on youtube here and here is my transcript, give or take the odd aside I left out.

"Virtually all money is bank deposits.

The key function of banks is money creation not intermediation. The entire economics literature that you see out there today is that it is intermediation, taking the money from granny, storing it up and then when someone comes and needs it I can lend it out to them. That is complete nonsense. Intermediation of course exists, but it is incidental and secondary and it comes after the actual money creation. Banks do not have to attract deposits before they create money. I’m a former bank manager. I worked for Barclays for five years. I’ve created those book entries. That is how it works. And if a leading light economist like Paul Krugman tries to tell you otherwise, he does not know what he is talking about.

When you approve a loan, as a bank manager you enter on the asset side of your balance sheet the loan, which is your claim against this guy and at the exact same time you create a new deposit on the liability side. You have created new money because this gives this guy purchasing power to go out and buy something with it. Banks have created money at that point. No intermediation, because the asset and liability are in the same name at that moment. What happens afterwards is that that guy can spend it somewhere else later but it is still in the banking system. I care about the aggregate banking system. Looking at the microeconomy and transferring the logic to the macroeconomy is really wrong. Someone will accept that payment.

money

What that means is that it becomes very, very easy for banks to start or lead a lending boom even though policy makers might not, because if they feel that the time is right, they simply expand the money supply. There is no third party involved, just the bank and the customer and I make the loan. The only thing that is required is that someone else will accept that deposit, say as payment for a machine, and he knows that is acceptable because it is legal fiat.

There is an important corollary to this story. A lot of loans are not for investment purposes, in physical capital. Loans that are for investment purposes are a small fraction. The story that is often told in development economics is that first you need to have savings, then once you have the savings, you can have investment. So a country needs to have sufficient savings in order to have enough investment. Nonsense too – at least for the part of investment that is financed through banks because when a bank makes a new loan it creates new purchasing power for the investment to go ahead. The investment goes ahead. Then the investor takes his new bank deposit and gives it to someone else In the end someone is going to leave that new deposit in the bank. That is saving.  The saving is created along with the investment. It’s not that saving has to come before investment. Saving comes after investment, not before. This is important for development economics.

The deposit multiplier that is taught in economics textbooks is a fairytale. I could use less polite terms. The story goes that central bank creates narrow money and there is a multiplier because banks can lend out a fraction. It is actually exactly the opposite. Broad monetary aggregates lead the cycle and narrow monetary aggregates lag the cycle."

Review of Creating Sustainable Societies– The Rebirth of Democracy and Local Economies by John Boik 2012

Review of Creating Sustainable Societies– The Rebirth of Democracy and Local Economies by John Boik 2012 John Boik, a cancer biologist from Los Angeles, is courageous and original. He faces the big issues of our time– financial, environmental, economic, social, and even technological threats – and presents a blueprint to solve them by opt-in grassroots solutions. Boik’s ideas are idealistic and refreshing and some of them have a practical appeal. A who’s who of the complementary currency and democracy movements commend the book and Bernard Lietaer wrote the preface. Boik advocates a token exchange system, a principled business model and collaborative governance and applies democratic principles to each. He envisages a network of principled businesses and a network of policy makers. His blueprint could have a profound effect on national systems and whole populations. He describes an approach and technology that would allow citizens to voluntarily cooperate at the metro level in demonstrating new, sustainable financial, economic, and governance systems. The proposal for democratic self-governance can be demonstrated in a pilot scheme in a small group in one city. If it is as successful he hopes that the idea spreads quickly to every metro area in the U.S. and to cities in many other countries. He expects that the ideas on which it is based would start to influence state and national politics. The book contains an excellent section on writing legislation, where he applies decision making processes of open source software development and his knowledge of genetics, with each round being more sophisticated than the last. Though he advocates pilot schemes he is probably aware that top down solutions are part of the mix and when these solutions are creative and benign they are very powerful. One of the problems with reinventing society is that so few include resource-based taxation in their agenda. The current political process has a lot going for it and we should retain what is effective. The process by which a new policy comes into being is first by public advocacy, controversy and finally by legislation? While Boik understands the growing role of the Internet in shaping public opinion, he doesn’t mention the role of the media in this matter. Elegant and simple legislative solutions always trump a patch-on solution. Politics at its best can be the most creative enterprise of all. The right policies send signals to businesses and avoids the artificiality of exceptions and of picking winners. Boik is an American in an American society. While some states have referenda, the US doesn’t have proportional representation. Geoffrey Palmer’s introduction of Select Committees was a huge advance in democracy. This is not yet, I believe, emulated in the US. While New Zealand has much further to go in achieving better democracy, we at least are a small country and can constantly refine and improve what we have.  500 people actively participated in rewriting the constitution of Iceland, a country with only 350,000 people. His idea of a local currency is the Token and he believes some should be diverted into investment and some into loans. However, the feasibilility of this idea will depend on the scale of the currency and maybe he underestimates its potential size. Of course we should use democratic means to choose which business to invest in. Some publicly owned banks are doing this already to some degree. Here again the role of legislation is underestimated. Good legislation will bring good investment decisions, just as well designed currencies will. He acknowledges that housing accounts for 42% of consumer spending and that his proposed Tokens won’t help much with this. Plaudits for his stimulating and original suggestion of how to change the world and rescue us just in time from total environmental and economic collapse. Consistent with his philosophy is publishing the book free as a pdf and allowing anyone to publish a hard copy of the book as long as they give 50% to the Principled Societies Project.) An excellent short animated video, the first of four is now on the website associated with thisbook at http://www.principledsocietiesproject.org/local-financial-system-animation/.   Review by Deirdre Kent deirdre.kent@gmail.com

A Knowledge Currency to Save Money in Education

We have just witnessed a three-week debacle in the politics of education, ending in a back down by Minister Hekia Parata who had been told by her Finance Minister to save money.  Badly advised and supported, she chose the wrong method (increasing class sizes) and had to completely reverse her decision. Teachers and parents throughout the country said with one voice they don’t want class sizes reduced and they triumphed. Parata still has a problem. She wants to deliver quality learning without increasing the education budget. In these days of austerity, the problems are international. This made me go back to something I had read about a learning currency proposed in Brazil in a book called Creating Wealth by Bernard Lietaer and Gwendolyn Hallsmith. Called the saber, the proposal is that children mentor their juniors and earn a currency called sabers for doing so. Sabers can eventually be cashed in to pay for university education. It works like this: The Education Ministry gives out sabers to 7 year olds who each find themselves a 10 year old who can help them learn something of their choice. They pay the 10 year old in sabers. Then the 10 year old asks a 12 year old who in turn asks a 15 year old, and they ask a 17 year old.  Each hour spent earns a saber. The dated sabers owned by 17 year olds are now taken to the university, who exchanges them at a 50% discount for national dollars. (The reason is that half the university’s expenses will have to be in national dollars.)  So what has happened in this process? We all know that you learn a little of what you hear in a lecture, more if you both hear the message and see it, but a larger percentage if you see it demonstrated or discussed. And you learn more still if you practise it. Yes, you learn 90% of what you teach. So it works by getting learners at all levels to mentor their juniors. Hence there is a great deal of extra learning at all levels. First, every saber circulates at least five times through five different pupils so it does five times the good of one transaction. Then the schools saves national dollars by not increasing teacher pupil allocation. Lietaer argues that in some cases there could be as much as a hundred times as much learning for the buck as before. Even if we got it to ten or twenty times the learning, that would  dramatically raise literacy and numeracy in our country. This currency is cancelled once the sabers are cashed in for university education for a nominated year. This design is to encourage smooth and fast circulation of the currency, and ensure that the number of students arriving in any university doesn't exceed the capacity to handle them. New Zealand has succeeded remarkably well with education. We have advanced from chalk and talk to “learning by doing”, to group learning. We have been using multimedia for years. However we have not yet advanced to the stage of every learner becoming a teacher.  So although the above is just the bones of a well designed currency and it needs fleshing out by the experienced educating community, it has great promise. Another interesting proposal to save money came from the principal of Shirley Boys High on TV3’s “The Nation” June 10. Among his many other suggestions, John Laurenson proposed integrating the whole education sector, which of course would be needed for sabers to work well.

Trade dollars acceptable for paying tax

Currencies of Barter Companies Barter companies offer great advantages to small and medium sized businesses. Active membership of a barter company can increase the customer base of a business, sell excess stock and bring new trade.But governments have failed to recognise the alternative currencies of the trade dollars. The currencies of barter companies currencies would be acceptable in the payment of tax at national level. These are generally referred to as Trade Dollars. The Inland Revenue Department has too long been inflexible in this regard. If they accepted the currency they could easily spend it with one of the members of the barter company. In New Zealand Bartercard has 75,000 members worldwide who could provide goods or services to government. It is time Government supported barter companies.   This section needs work done on it.