Category Archives: UBI

The type of credit creation matters

04 Monday Nov 2019

Posted by in Debt, Monetary Policy, Politics, UBI

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Credit impacts the real economy in a different way depending on whether it is to households or to corporates (see Atif Mian’s work, also his interview here). Very generally speaking, credit to households affects the economy directly through the demand-side channel, while credit to corporates – through the supply-side channel directly, and only then, potentially, indirectly through the demand-side channel.

Household debt to GDP was flat for two decades between mid-1960s and mid-1980s; and then it doubled; corporate debt for GDP, on the hand, was flat also for two decades after the S&L crisis, and even now it is only a few per cents higher. But the demand-side reduction from the household debt channel post 2008 is rather unique.

Given that the US was running a negative output gap for most of the period post 2008 (and it might still do, even though official estimate is for a small positive), it was the demand-side that needed some catching up to. Instead, the opposite was essentially happening: credit to households was decreasing relative to credit to corporates. As far as credit was concerned, it was primarily the supply side that was getting stimulated (of course, the question is how much stimulus was really created given that a lot of the corporate debt went to share buybacks).

The other theory, one to which I subscribe, is that the modern economy is essentially always experiencing a demand gap. When real wages stopped growing in the 1990s, post the the financial liberalization of the 1980s, household credit experienced a massive run-up. The demand gap left from the stagnation in real incomes was filled with household debt. Until the sudden stop in 2008.

Household debt to GDP did not grow between 1960s-1980s but real household income did, so there was no demand gap either. Post 2008, though, neither of these two options were available which left the US economy in a demand insufficiency. The ‘stimulus’ provided was mostly through the supply side with very little follow through into the demand side which meant lackluster economic growth.

The bottom line is that the type of credit creation matters. The central bank affects directly only the supply of credit (and in some cases, even less so) thus, it has limited ability (none?) to decide on whether credit goes to firms or households. We may get a lot more from lower interest rates if policy makers start thinking more holistically about the whole process of credit creation. Banks do not care where credit goes (why should they?) as long as they get their money back.

But with overall debt in the economy climbing higher and higher, it is essential to think how we can get the most out of it. And if the market can’t do that (it can’t), someone else should step in.

All this does not mean that US households should get even more indebted! On the contrary, the decline in household debt to GDP is good news only if it were also followed by a similar rise in real household income. And it the private market can’t do that either (it seems, it can’t), then we need to rely on the official sector to take on that burden.

Plenty of liquidity but scarce money

05 Thursday Oct 2017

Posted by in blockchain, Debt, Monetary Policy, UBI

≈ 2 Comments

“All the perplexities, confusion, and distress in America arise…from downright ignorance of the nature of coin, credit and circulation” John Adams in a letter to  Thomas Jefferson

1)We should have never ‘put together’ “store of value” and “medium of exchange”.    

2) If something has intrinsic value which is expected to go up in time, it will be hoarded and exchanged less often.

3)’Money’ is a “unit of account” which we ‘exchange’, in order to efficiently get the things we really need and want in life.

4)Inflation/Deflation are simply measures of whether ‘money’ is abundant or scarce relative to the economic activity we desire.

5)In the economic system we have created, purchasing power is gained either through paid work or through credit.

7)As long as companies earn a profit, they retain more ‘money’ than they distribute in wages and other payments, thus there is insufficient medium of exchange to meet the supply of goods.

7)Even if companies invest the profit in new projects, this only adds to the previous supply-demand imbalance unless new medium of exchange is added endogenously in the form of credit.

8)Advances in technology make the old paradigm of Work=Job=Income obsolete; purchasing power is lost.

9)Credit only makes the scarcity of ‘money’ more acute because new medium of exchange needs to be added just to pay the interest on the debt; a vicious cycle develops.

10)This credit/debt cycle also eventually comes to a natural end (2008); no more purchasing power can be added even endogenously.

11)If we want to keep the current economic system going, we need to find a new way of generating ‘purchasing power’.

12)But if the paradigm has shifted, normalization is meaningless; instead of going back to something that does not work, let’s look forward.

12)’Helicopter money’ has an, unjustifiably, bad reputation historically.

13)UBI is politically unfeasible to implement in a large country with open borders.

14)The problem with them in the past has been our lack of knowledge of existing economic activity, and thus our inability to disburse the right amount of purchasing power needed.

15)M≠PxT, so we invent V, in order to MxV=PxT

16) Both of them, however, are great ideas which need to be put in the context of our existing institutional framework.

17)The central bank opening its balance sheet (CBDC) to the public at large is the next step in monetary/fiscal policy.

18)Blockchain, as in a large, open, decentralized, distributed, real-time database of all economic transactions, is the digital equivalent of ‘GDP’ of the industrial era.

19)The Fisher’s equation above then takes the form of CBDC=Blockchain, ‘money’ matches economic activity.

What if central banks gave the QE money to the people?

03 Tuesday Oct 2017

Posted by in blockchain, Debt, Monetary Policy, Questions, UBI

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I would not be blindfolded by the fact that the US is trying to go back to ‘normal’ with the Fed on a rate-raising spree. ‘Normal’ changed a long time before 2008. You cannot go back to ‘normal’ with a broken monetary transmission mechanism. We can create all the money in the world but if it goes in the hands of the few, if it is subsequently ‘hoarded’ and if it cannot  reach the end consumer because Work≠Job≠Income (whether that is because of technology, globalization or whatever) or because the credit channel is closed (the end of the private debt super-cycle in 2008), the economy is not going to go anywhere. And if there is little demand because there are not enough mediums of exchange, aka money, circulating in the economy, optimizing production is a waste of time and resources.

Instead of focusing on going back to a ‘normal’ interest rate policy, a forward-looking central bank would be looking into the opportunity presented by the rise of the blockchain technology and the subsequent spread of digital cryptocurrencies. The latter are a direct response to the broken down monetary transmission mechanism: if the traditional mediums of exchange do not circulate in the economy, people are devising their own ways of exchanging goods and services.

The interest-rate cycle is something of the past now. If the financial crisis of 2008 did not make it obvious, perhaps, we have to wait for the next one, which would be here like clockwork as policy makers embark on the policy of ‘normalization’. But there is some hope that some central banks are looking into ways to introduce a digital currency of their own and opening their balance sheet to the public at large.

Back of the envelope calculation shows that if the money spent on buying financial  assets by the central banks of UK, US and Japan, was instead disbursed directly to the people, working wages would have risen substantially.

Between 2008 and 2016, central banks’ balance sheets have risen by 360% in the UK, 99% in the US and 280% in Japan.

Source: Bank of England, US Federal Reserve, Bank of Japan

At the same time, over this period, nominal wages have risen by only 14.8% in the UK, 18.4% in the US and actually fallen by 2.9% in Japan! In 2016, the average annual wage in the UK was GBP 34,142, in the US – USD 60,154 and in Japan – Yen 4,425,380.

Source: OECD

Japan is peculiar also because its working age population declined by 7.4%, while US’ and UK’s rose by 4.5% and 2.7%, respectively, during this period.

Source: OECD

I took the actual change in central bank balance sheets and divided it over the average working age population between 2008 and 2016. If this money could have been disbursed directly to the people, workers would have received a lump sum of GBP8,574, USD10,997, Yen4,430,424 over the period.

Let’s imagine that this lump sum was disbursed to the working age population at the end of 2016. Compared to 2008, their wages in 2016 would then have been higher by 44% (UK), 40% (US), 98% (Japan)!

If wages could indeed ‘miraculously’ rise by almost half in the UK and US and almost double in Japan over this 8 year period, what are the chances that we would still be stuck around 2% inflation in the US and UK and around 0% in Japan? Where would GDP be?

This is a very simple exercise. Undoubtedly real life is much more complicated that this and it is rarely black and white. Moreover, this would have been a lump sum disbursement, a one-off boost to income, and not a permanent rise in wages. Consumer behavior in this case, Ricardian equivalence, etc., would have been very different from a situation with a permanent rise in wages.

However, instead of patting ourselves on the back that things could have been much worse had the central banks not backstopped the financial system by buying financial  assets, can we not also think how they could  have also been much better if we found a better use for the money miraculously created out of thin air? If we could create money out of thin air to boost financial asset prices, is it really not possible to devise a way whereby the consumer also gets a permanent rise in income? Can we have an adult conversation about the effects of such an experiment without resorting to the taboos of the past? Can we include people other than economists in this conversation?

The free market may be the best and most efficient optimization model available so far to us, but what if we are optimizing the wrong variable?

Corporate vs. state UBI

04 Friday Aug 2017

Posted by in UBI

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It has been amusing to observe how people keep have been getting Japan wrong throughout the years, both fundamentally, when it comes to society’s structure and wealth, as well as asset price-wise.

For example, the widow-maker’s trade: betting on higher JGB yields ‘for ever’ not realizing the power of technology to create superfluous extra (surplus) capital and labor in peace time. In fact, if one thinks of the famous hockey stick chart of human progress (also the chart used by Kurzweil to show Singularity), the chart of global developed markets sovereign yields going back centuries has a similar shape but in the opposite direction: steep and high 2000 years ago to flat and zero now. You could say, the higher the “culture” the lower the yield.

Similar for stock prices: people have been betting on higher stock prices not realizing the Japanese corporates’ eroding profitability due to the hidden cost of BS jobs and corporate Universal Basic Income (both represented in the low unemployment figures, see below).

Demographics plays a very small role in GDP because as society progresses labor’s utility in the production function has greatly diminished at the expense of technology.  It is not that dissimilar on the consumption side either. In the post-consumerism (increasingly digital) society that we live in, the young are consuming even less material things (the ones that matter for GDP) than the old. In Japan specifically, demographics has long ago stopped to matter.

Productivity, on the other hand, is a function of both labor and technology. We can very easily increase productivity when we substitute labor with technology. We have chosen to do the opposite, despite plenty of advances in technology, however, because we do not have an alternative method of distributing wealth rather than Work=Job=Income. In fact, if we choose to increase productivity right now while using the same old method of wealth distribution, inequality will rise even more.

Demographics and productivity are basically remnants of the old industrial model of classical economics – the same model which only looks at how to increase GDP without regard to human wealth being (again, it is very easy to increase GDP if that is our goal but that does not mean society would be better off).

Japan’s GDP per worker (i.e. a much narrower definition than GDP per capita) is and has been actually higher than the equivalent in the US during Japan’s supposedly lost decades (and that is despite a very slow adoption of technology – slower than what it could have been given an alternative wealth distribution method).

I can see a lot of similarities between how Japan has decided to structure its society and how some rich oil countries in the Middle East have done the same. Japan uses technology and the corporates to distribute wealth, while in the Middle East, is the state distributing and the source of wealth is abundant oil (note, there is a similar UBI mechanism also in Alaska and Norway).

There are numerous other UBI experiments going on in many different countries and cities. I wonder if the fact that society is very homogeneous in Japan and the Middle East help with UBI being more accepted: here I mean the right to citizenship being very strict and narrow. For example, in the Middle East, where technology is not so well advanced yet, it is foreigners who do most of the everyday jobs; Japan could easily use more robots to do the work. In both cases, only citizens would receive, unconditionally, the benefits of (someone else’s) labor and the spoils of technology or the luck of natural resources.

I am struggling to reconcile this new reality with the idea that in the past immigration and an open society have greatly contributed to human advancement by allowing for diversity and the free dissemination of knowledge. Now open borders seem to be a hurdle for any county which wants to introduce this new model of wealth distribution. In addition, ideas disseminate much easier due to the Internet and open source also allows anyone to benefit from new inventions.

Oil (and all natural resources) are finite, while demographics means Japan is slowly running out of people to employ. None of this is a problem if the Middle East invests its substantial wealth in labor saving technologies (and constantly innovates) or if Japan changes it wealth distribution model. Is a country a free rider if it chooses to close its borders and take care only of its own citizens? What is the right model to structure society so that it works for everyone not just for only a small number of countries?