Posted by: Dirk | October 9, 2015

Draghi on helicopter money

Positive Money noticed that Draghi answered a question on helicopter money. Here it is (full script):

As it stands, the ECB has no instruments available to give money to people for free (helicopter money). It is a political problem to have a central bank engage in fiscal policy. This is traditionally reserved for government, and it is called “tax cuts”. From a democratic point of view it is doubtful that fiscal operations by an institution without a mandate are helpful. It is government that drafts a budget and then goes through with it so that when people do not like the results they can vote for other parties to get rid of this budget.

It seems that Europeans have forgotten a lot of fundamental lessons when it comes to democracy. By accident, it almost seems, member states have given up their sovereignty. Greece is ruled by the Troika, the euro zone the informal Euro Group. None of the reactions and reforms to and in the crisis strengthened democracy. We are on a slippery slope, but not the way that Hayek imagined. Markets seem to take precedence over democracy. A central bank that engages in fiscal operations would be yet another step in the wrong direction.

We need fiscal spending in the euro zone to increase, but the people should get this done by voting for politicians that create some reforms that will help the economy. If that does not seem likely to happen, then actors should start preparing the field right now. What are the real causes behind this crisis? How does credit work? Who created money and why is it accepted? What causes inflation? What about demand weakness?

The Europeans still haven’t entered into this debate, which is a colossal intellectual failure.

Peter Praet, chief economist of the ECB, had a presentation earlier this month at an asset management firm in which he presents this graph:


I think it is quite clear that without a growth in bank loans the amounts of deposits in the euro zone banks will not increase, at least not be way of bank lending. The other significant channels of deposit creation are (net) government spending and (net) exports. Quantitative easing is not one of these channels because it is not “working” empirically. Deposits are created, but they are not spend to a significant extent. There is another graph on real domestic demand which compares the US (rising) with the euro zone (flat).

Anyway, what we have then is a situation in which the ECB understand macroeconomics but the German government doesn’t. There is still no recognition of the fact that to decrease unemployment (and increase economic growth) you need to come up with policies that increase the amount of deposits in the private sector. This is a dangerous situation for Europe and can possibly lead to a break-up once the not so small countries like France and Italy decide for themselves that they’ve had enough.

On a side note, people in financial markets, in central banks and policy makers outside Germany now speak the same language as heterodox economists and enlightened mainstream economists. That is an interesting development!

(For the students out there: the HEN maintains a list of heterodox undergraduate programs here. Our very own BA in Economics, Politics and Social Thought at Bard College Berlin can be recommended as well. It is an amalgamation of mainstream and heterodox.)

Posted by: Dirk | October 7, 2015

Bernanke on Lehman Brothers in his memoirs

The NYT has an article on Ben Bernanke, former chairman of the Fed, and his view on the collapse of Lehman Brothers. I have to admit that I don’t get it:

But crucially, Mr. Bernanke writes: “Hank’s statements were to some extent beside the point, in that the Fed loans were the only government funds available. It would have been the Federal Reserve’s decision — not Hank’s or the Treasury’s — whether to make a loan, had a loan of sufficient size to save the firm been judged feasible.” […]

He writes that it was simply impossible to save Lehman, pointing to the nearly $200 billion of losses that Lehman’s creditors have since suffered. No one has come forward on the record, nor has any contemporaneous document been produced in the past seven years that said the government had found a way to save the company and specifically chose not to do so for political reasons, a point Mr. Bernanke alludes to in his book. “I do not want the notion that Lehman’s failure could have been avoided, and that its failure was consequently a policy choice, to become the received wisdom, for the simple reason that it is not true,” he writes. “We did everything we could think of to avoid it.”

This does not make a lot of sense to me. It seems like an intent to change the way historians see him, but I don’t buy into it. The demise of Lehman Brothers was a powerful symbol, but nothing crucial. The interbank market would have frozen anyway, since no one would have believed that the Fed would be willing to lend unlimited amounts of money to all the banks without any conditions.


Tomorrow at 7PM the permanent archival exhibition  “A EUROPEAN LIBERAL ARTS UNIVERSITY” is launched at Bard College Berlin. According to our website this is what you can expect:

Encompassing archive photographs, publications, and other materials, the exhibition tells the story of the college’s development as a pioneering liberal arts institution in Germany over its 16 years of existence. Introductory remarks will be given by the team who worked on the project. Guests will be able to take guided tours, peruse archive materials, and learn about the history of the college.

Posted by: Dirk | September 30, 2015

IMF finds that depreciation leads to increase in exports

The IMF has published a chapter on exchange rate movements and the current account in its recent World Economic Outlook. Here is the summary:

Recent exchange rate movements have been unusually large, triggering a debate regarding their likely effects on trade. Historical experience in advanced and emerging market and developing economies suggests that exchange rate movements typically have sizable effects on export and import volumes. A 10 percent real effective depreciation in an economy’s currency is associated with a rise in real net exports of, on average, 1.5 percent of GDP, with substantial cross-country variation around this average. Although these effects fully materialize over a number of years, much of the adjustment occurs in the first year.

Economists often say that because of globalization (supply chains, lower transport costs, etc.) the expansionary effect of a depreciation or devaluation of the currency do not apply anymore. Countries that would leave the euro zone, for example, could not hope to see improvements in their current account. However that may be, the data says that net exports increase by 1.5 percent of GDP on average. I highlight the fact that the rise in next exports is not 1.5 percent, which would not be much, but 1.5 percent of GDP, which is significant.

The recent depreciation of the euro that was engineered by the ECB (QE) was of that magnitude (about 10% against the USD), so even though euro zone GDP growth is meagre – the forecast by the EU from spring said 1.5% – it would be exactly zero if the euro would not have depreciated if we assume that the depreciation of the euro led to average consequences. This leaves us with a euro zone that is not functional and only grows because of its beggar-thy-neighbor policy which probably led to a crowding out of domestic production elsewhere. After all, the world economy’s GDP growth rate is falling.

Posted by: Dirk | September 28, 2015

California I.O.U.s

The NY Times has an article on the I.O.U.s used in California in July 1992, which are mentioned in the interview. Here is an extract:

Its economy racked by recession and its political leadership paralyzed by stalemate, the State of California ran out of cash today and began to pay its bills with I.O.U.’s for the first time since the Great Depression.

State Controller Gray Davis sent out the first 12,000 of the I.O.U.’s after the Democratic-controlled Assembly failed to reach agreement with the Republican Governor, Pete Wilson, on how to erase a $10.7 billion shortfall in the new state budget before the fiscal year began at 12:01 this morning.

Major banks said that for now they would honor the notes as they would regular checks, but they did not say for how long. Sooner or later, if no agreement is reached, the largest state will close schools, parks and libraries and curtail vital state services.

This story links with last week’s article on Adam Smith’s story of the prince choosing paper money as the thing that extinguishes tax liabilities. It is always useful to know your Adam Smith!

I read an article some days ago about the unemployment trend in Germany. The article was published at, which features mainly IT-related news. The article states:

Die Zeiten stagnierender oder sogar sinkender Arbeitslosigkeit in Deutschland gehen nach Einschätzung von Volkswirten großer Geldinstitute allmählich zu Ende. [..] Für 2016 rechnen viele Wirtschaftsexperten aber bereits mit leicht steigenden Arbeitslosenzahlen. Das geht aus einer Umfrage der Deutschen Presse-Agentur (dpa) hervor. Die befragten Fachleute führen die erwartete Entwicklung vor allem auf den anhaltend starken Zustrom von Flüchtlingen zurück.

An abridged translation would read like this: economists working at big banks think that unemployment will stop falling next year in Germany. Unemployment is forecasted to go up in 2016 by a bit. This has been the result of a survey conducted by press agency dpa. The interviewed experts think that the cause for this development is the sustained strong inflow of immigrants.

Let me explain why I strongly disagree with this assessment. First of all, there is no empirical evidence that an inflow of migrants per se cause unemployment to rise. In the long-term, nations which consist to a very large extent of migrants, like the US, Australia and others, seem to have higher GDP per capita, not lower GDP per capita. Also, these countries do not seem to have a persistent unemployment problem.

Second, from the theoretical perspective it is important what happens to government spending as a result of the inflow. The German government will cut some of its spending to make fiscal room for the financial effort needed to host the immigrants. This is not technically necessary, since the government can increase its debt, but this is what Schäuble seems to be planning (source). However, Schäuble also plans to use the forecasted budget surplus to spend on the issue. This means that according to the German newspaper SZ €6 billion will be spent on the additional immigrants. This constitutes a classic example of expansionary fiscal policy and as such is expansionary.

Of course, other parts of the economy might contract, so the net effect of this expansionary fiscal policy is far from clear. €6 billion is about a quarter of a percentage point of the German GDP, so it is not a large program that would be able to pull the economy upwards by itself. If exports are stalling and investment slumps, then economic growth in 2016 might still slow down. However, the reason will not the “sustained strong inflow of immigrants” but the weakness of domestic or foreign demand.

Even if argued from the supply side this should be the result. More potential workers are likely to increase output and not diminish it. If you think it through, why should an influx of potential workers into an economy lead to less production? Historically, GDP grew in parallel with population, though not 1:1. A negative correlation would be highly unlikely. A case in point is the migration inside Germany, where regions that lost workers – mostly in the east – have grown slower than the receiving regions in the west.

The economists of German banks that were interviewed are not reported to have explained why they thing that the inflow of migrants increases unemployment. As it stands, the whole thing smells of a cheap political trick to find a scape goat for the potential rise in unemployment in Germany which is due to other causes, mostly the austerity policies imposed on Europe and the consequences of the depreciation of the euro for the world economy. Whereas austerity policy has been imposed directly by the German government, the QE program by the ECB is an indirect consequence of its refusal to use fiscal policy to stimulate the economy.

Posted by: Dirk | September 25, 2015

Adam Smith on tax-driven paper money

I am teaching Origins of Political Economy this fall which allows me to (re)read some classical books starting with Adam Smith. Having read Ricardo, students were wondering whether the metalist view still holds today and if not, what replaced it. I found this paper by Stephanie Bell very enlightening, which contains a quote from Adam Smith. Here is the full paragraph (source) from ‘Chapter II (continuation): On Money considered as a particular Branch of the general Stock of the Society, or of the Expense of maintaining the National Capital‘:

A prince who should enact that a certain proportion of his taxes should be paid in a paper money of a certain kind might thereby give a certain value to this paper money, even though the term of its final discharge and redemption should depend altogether upon the will of the prince. If the bank which issued this paper was careful to keep the quantity of it always somewhat below what could easily be employed in this manner, the demand for it might be such as to make it even bear a premium, or sell for somewhat more in the market than the quantity of gold or silver currency for which it was issued. Some people account in this manner for what is called the Agio of the bank of Amsterdam, or for the superiority of bank money over current money; though this bank money, as they pretend, cannot be taken out of the bank at the will of the owner. The greater part of foreign bills of exchange must be paid in bank money, that is, by a transfer in the books of the bank; and the directors of the bank, they allege, are careful to keep the whole quantity of bank money always below what this use occasions a demand for. It is upon this account, they say, that bank money sells for a premium, or bears an agio of four or five per cent above the same nominal sum of the gold and silver currency of the country. This account of the bank of Amsterdam, however, it will appear hereafter, is in a great measure chimerical.

So, Adam Smith already knew that the prince could chose a money of his liking that is required to pay taxes, thus presenting us with an early Chartalist exposition.

This October (22-24) the FMM conference 2015 will take place in Berlin-Steglitz. The title of the conference is The Spectre of Stagnation? Europe in the World Economy. The program is available now on the website of the organizers. There are many very interesting session on the crisis and beyond. The conference also features a panel on Modern Monetary Theory (MMT) on Friday (23rd) from 3PM onwards:


What is Modern Monetary Theory? It is an approach of understanding the economic system from a balance sheet perspective. The methodology is hence completely different from mainstream equilibrium approaches. Lately, MMT has gained more and more traction both in the US and elsewhere. For those who are interested in reading a bit before attending the session (hopefully) I can recommend Randall Wray’s US-centered Primer in MMT (online, book) and my own book (in German) which is compatible with MMT and focuses on the euro zone (blog, book).

Posted by: Dirk | September 21, 2015

The Reincarnation of Keynesian Economics

While cleaning up my home office I found some old goodies, among them the paper with the title “The Reincarnation of Keynesian Economics” by Gregory Mankiw from 1991 published at NBER. Here is an extract:

Keynesian Proposition #3: Capitalist economies are threatened by the possibility of excessive saving, which could lead to secular stagnation: deficit spending is, therefore, good for the economy.

The author should be congratulated since secular stagnation is all the rage in today’s mainstream economics, and many economists argue for deficit spending. However, the full quote from the Mankiw paper reads (my highlighting):

Dubious Keynesian Proposition #3: Capitalist economies are threatened by the possibility of excessive saving, which could lead to secular stagnation: deficit spending is, therefore, good for the economy.


Mankiw continues his attack on this proposition and finds that: “Few economists today believe that excessive saving threatens the economy”. I spare you the rest of the paper, but the lesson should be clear: economists are human, they make mistakes. It is the task of today’s economists to find out where they went wrong and then to rebuild economics to provide guidance for economic policies that are to the benefit of society. There is no need to crucify economists like Mankiw (why should anyone to that anyway?), it is time for the discipline to move on.

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