A picture of a Richard Murphy

The Progressive Economics Group is hoping to aid and inform progressive politicians with their incisive series of briefing papers on matters of current interest. As they say, such papers should be:

Policy briefs should address an issue or issues directly relevant to economic problems facing the United Kingdom. The policy briefs are designed in particular to serve as short briefing papers for shadow ministers and their advisers, with links to longer and more technical treatments.

Excellent, one can imagine useful versions of such being written by the likes of Chris Dillow for example.

This isn’t that version nor that useful:

A growing economy requires general price increases, or inflation. Except under unusual circumstances, a general increase in prices requires an increasing money supply. A fiscal deficit is the only way in which money can be injected into an economy continuously. It follows that governments must run a near perpetual deficit or face the risk of creating a liquidity crisis due to a shortage in the money supply, which would then create a risk of deflation.

This is Elynomics not economics. From, as you will have guessed already, the Sage of Ely.

A growing economy does not require inflation. The British economy in 1910 was substantially larger than that of 1810 and the general price level hadn’t changed all that much in either direction. We also do not require an increase in money to have price changes. There are supply and demand shocks as well as monetary factors. It isn’t true that a fiscal deficit is the only way to have more money. Inflation is influenced (moving toward determined the more monetarist you are) by the wide or broad money supply. Government issued money is only the narrow money supply. The two are connected by the transmission mechanism of things like interest rates, credit issuance and the velocity of circulation of money.

It is true that a growing economy can be usefully serviced by an increase in the money supply, as Milton Friedman noted, but that’s not the same point at all, is it?

All of which means that the money supply is not an argument to support a permanent budget deficit.

But there’s more of that deep and special knowledge required to brief shadow ministers on display here:

That said, although the gilts market is, in theory, now entirely unnecessary for the purposes of funding government deficits it has turned out that in practice there are significant, and overall beneficial, uses for government created bonds. The most obvious is as a place of guaranteed safe deposit for those with funds they wish to save. A government can never default on a bond that it issues in its own currency because it can always instruct its central bank to create the money required to make repayment of a bond when redemption is due. As a consequence the owners of gilts have an absolute guarantee that their funds are safe. This is fundamental to the financial security of an economy.

There are some hundreds of historical examples of government defaulting upon their own bonds. Some of them even in their own currencies. What is actually meant by the Great Tuber is that a government doesn’t have to default on a bond in its own currency, it can keep printing. As Zimbabwe showed so vibrantly. Yes, quite, what’s being missed is the value of the money being printed, that default through inflation. If you’d lent money to the British government in 1950 you’d have got how much back in 1990?

And there’s yet more:

Gilts also appeal to those who wish to deposit extremely large amounts for short periods of time. Very large amounts cannot receive the guarantee that the government gives normal bank depositors. In particular, companies seeking to place millions and even billions of pounds on deposit overnight seek security for their cash. They achieve this security not by placing the funds in bank accounts, but by temporarily purchasing government bonds from banks. These they then sell back to government the following morning at a very marginally higher price to cover the interest earned. This is called the ‘repo’ market.

The kindest description of that possible is “piffle.” When this was pointed out elsewhere one reader commented:

So The Egregious Tuber doesn’t know the difference between the repo market and the overnight market? In repo it’s the banks buying the bonds, not companies. Repo is not necessarily overnight (most US is, most Euro is not). And I wonder if he has even the foggiest idea why we want a repo market? It’s not primarily for security of overnight deposits, for god’s sake. It’s good for securely stashing liquid assets, yes, but also for, inter alia, increasing liquidity, hedging, broadening and funding and stabilising the money market, lowering yield volatility, and as a way for central banks to communicate monetary policy decisions to the broader economy. It’s also one of the ways banks actually do bail-outs rather than Spud’s fantasy of firing up the printing presses.

Christ, I don’t even work in finance and I know this.

The writer of this progressive policy paper is a retired accountant from Wandsworth and the inventor of Corbynomics. The writer of that comment is a software developer in Costa Rica. We might have something of a clue here as to why progressive economics is close to an oxymoron. So few involved in it know anything about economics, less actually than software developers.

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  1. Putting aside quibbles over the “progressive” label, “hoping to aid and inform progressive politicians” seems to mean making a case for governments spending without feeling limited by their own revenue, even if you have to turn economics on its head. Can Paul Krugman no longer do the job?

    One way an economy grows, invention of new productivity tools, has no requirement that government currency lose value, nor even that population steadily increase (by opening borders if the locals no longer want to become parents). Prosperity means being able to do what we want for lower costs, not that aggregate statistics be as big a number as possible.