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Economics for the people, not for the privileged

The majority of central banks focus on a 2% inflation target. In the developed world, we are experiencing inflation well below this level. I argue this is creating a debt spiral which is completely unnecessary if the true objective should be to increase GDP per capita and equality of income and wealth.

Over the past decades, technology enhancements in extractive industries has increased supply of commodities for any fixed cost. The transfer of knowledge and processes to the developing from the developed world has increased supply and reduced the price of a wide range of industrial and consumer products. The benefit of this should have been a reduction in the general level of prices and a corresponding increase in real wages.

This technology shift, as a result of the digital age, increases potential supply. If real wages were allowed to increase (through falling prices), that supply could have been met by increased demand.

The desire to raise inflation back to 2% has increased outstanding debt across economic business cycles as interest rates are cut to a lower terminal rate as the debt level rises with each cycle. The fear of deflation causes central banks to ease monetary policy too soon, too far in the hope of meeting the 2% inflation target. Debt does not get the chance to either be repaid of written off. Central banks are forced to cut even deeper in the next downturn to cut the interest burden. This creates a spiralling cycle of easy money and increasing debt.

Far better I say, to maintain the money supply as fixed across the business cycle, allow it to increase only to reflect productivity gains. This puts a cap on over-zealous expansion as confidence rises from a recession and forces inefficient operators to default in a slump.

Increasing the money supply, through QE or lower rates, in an attempt to increase prices adds to GDP in the less productive industries if it is not accompanied by rising real wages. Money needs to find a home. Currently it is fed into financial markets increasing asset prices. To some extent this generates activity and GDP; e.g. property sales, but far better to increase output of goods and services which give utility. How does a house or bond sale increase utility yet they add to GDP just as house construction or car production?

But if we allow prices to fall and real wages to rise, the demand will be across all levels of income but have most impact upon those on lower incomes. The demand will not be focussed on financial assets but since it is in the hands of the lower earners, it will create demand for goods and utility based service not financial services.


There is a press conference being held at 2.30 GMT today by the China State Council in relation to the trade deal. The fact it is not a joint presser with the US does lead me to think they are not going to announce a “Big deal”. Could be a volatility event. Take care.

The market doesn’t have a clue what is going on.

The Chinese presser held Friday announced a Phase 1 trade deal but no paperwork. You may remember there was a US presser held in October of a similar nature. No numbers were given Friday and there were contradictions not least of all over when Phase 2 talks could start.

I think the markets may now forget about the upside of a Phase 1 deal. Expectations are limited to $50b of agriculture products. It looks like some existing tariffs will be partially lifted and the December tariffs will not be applied. The muted reaction from equities on the announcement showed it was all built in to expectations.

Phase 2 is not coming any time soon. However, it will be interesting to see if Trump tweets positively about Phase 2 and the algos buy the news.

The risk-on trade is supported by QE. If markets falter going in to the year end (the repo crisis) then expect the Fed to step in quickly. I think however this will be troubling for people and hence confidence as it gets reported more widely in the press.

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If the central banks are back with QE or in the repo market, either way governments are going to be encouraged to increase deficit spending. If the central banks continue to push cash in and suck government bonds out then governments are going to feel entitled to spend freely without raising interest rates.

Perhaps that’s where all this ends. If governments have to increase deficit spending to meet the demand for more government securities then one can expect deficits to rise.

And doesn’t this then remind you of developing countries who lean on the IMF and World Bank only to find themselves defaulting years later. Governments are not known for increasing productivity but give them enough rope and they often hang themselves.

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how is that related to Forex/Commodities? Long Gold?

So as an example, if a country’s govt decides or the electorate decides that money is free it could spell considerable longer term risk of default. This is bad for the currency. One day through Interactive Brokers we may be able to trade bonds as well!

This is long term stuff but just to be aware of profligate governments. Trump despite being Republican strikes me as someone who would like to spend his way to success. The Germans however are digging their heels in. I’m actually negative on the Euro because I think the Europeans will have to spend their way out of the hole they are in.

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The Fed and other central banks across the globe are printing more money. Even India is buying their government bonds at a sharper pace. The globe is monetising debt. That is to say, under this fiat money system, we are printing cash to spend on (currently) financial assets relative to producing assets and services.

Governments are already running budget deficits and the burden of debt will continue to increase as central banks and the population at large condones the behaviour.

So what? Where is this all going and when?

I believe we are almost at the stage where the public will question central banks about their plans. The questions to ask are: are you going to stand behind all the debt issued in our country? Will you always be there to support the markets or will you ever step away and let prices float freely?

These are questions the central banks cannot answer. If they do, either way, the markets will panic. To admit to stepping away will lead to a massive sell off in bonds and equities. To publicly state the central bank is behind the markets is to admit to a communist style regime and investment will collapse since returns are not at the behest of the market and skill but rather all will be treated equally and none will fail - why take any risk if you don’t have to.

So when will people ask this question of their governments (read central banks as they become one and the same?).

We are seeing the gap between the rich and poor grow in terms of assets. As long as the central banks never answer the question, eventually government power will end up in the hands of the extremists - socialist or fascist will depend on who emerges as a voice for the people. Anyone who can promise what the people want and reach a wide enough audience will win.

The end game will be reached all the quicker if food and fuel inflation rises strongly. Any surprise upside in these figures may lead to falling asset prices and a relative increase in lower risk assets.

What does the word ‘debt’ even mean nowadays, when Central Banks can print money as if it’s nothing?


They should call it “Death Clock”… :skull:

It’s truly depressing (and frightening).

Central banks have been expanding the money supply hoping to raise inflation to their arbitrary 2% target. The theory they are working from is that increasing money supply generates aggregate demand through encouraging lending and investment. The problem they face however is that money is not in short supply. Indeed there is too much money and hence it remains in the financial economy pushing up asset prices as opposed to the real economy acting on demand.

Central banks have been implicitly asking governments to increase their budget deficits in order to increase aggregate demand directly. Whether this be through tax cuts increasing disposable income or raising spending, either way governments can increate aggregate demand. If there is insufficient demand in the economy versus the supply of goods and services this will close the gap and eventually lead to inflation picking up - provided of course the supply of goods and services does not increase at the same time (a lack of both supply and demand typical of a recession).

This shows the interrelatedness of the economy. The target of any economy is to increase real GDP, i.e. the amount of goods and services in the economy. To avoid unrest those goods and services should also be distributed not too unevenly across the country, age and classes. An imbalance between the supply and demand of goods and services creates inflation or disinflation and even deflation. Any excess imbalance in the money supply vis a vis aggregate demand acts on the price of financial assets.

As we sit today, with employment at record highs and excess money supply, the missing element we have in this economy is aggregate demand. Whilst interest rates are at record lows and hence the interest burden is not impinging on the ability to spend, the level of debt outstanding and lack of employment security amongst the lower and middle classes does not encourage them to increase spending.

If central banks had allowed defaults and layoffs to run their full extent before adding stimulus then debt levels would have been lower moving into the next cycle upturn. It is the fault of central banks to not allow the down-leg of the cycle to run its natural course which restricts the expansion on the upturn and requires ever lower interest rates to continue the expansion.

Given the appropriate monetary expansion, an economy can expand at a natural rate which equates to how quickly it can expand the supply of goods and services. With idle labour and technological advances, growth can be faster than otherwise. In advanced economies, without either an increase in the workforce or productivity, it is not possible to increase the real economy. In this circumstance, increasing aggregate demand adds to inflation or increasing money supply adds to financial asset prices (if working through the banking system) or demand and inflation if working through fiscal channels.

Democratic governments will always try and increase GDP but they face the political challenge whereby increases in population and expanding the public sector are often vote-losers. This has been very evident in the UK and was a force for the Brexit vote. It is also evident in Trump’s campaign rhetoric promising the building of a wall to keep out immigrants who would likely be just what the US economy needs right now.

Whilst the coronavirus will likely last at least a few more months and have a noticeable impact on global GDP, the economy will recover once the antidote is developed.

Bernie Sanders on the other hand could be a long term problem for those wanting business as usual. A self-described ‘democratic socialist’, Bernie represents change in a way Trump is not. Whilst Trump’s foreign policy may upset many if not most, he has overseen a continuation of economic times since he took office. The U.S. delivers growth through the expansion of debt and not productivity. Trump has always been a fan of debt and verbally campaigns for lower interest rates. That was the same path the economy has been on since 2008 and arguably the 1980s.

Bernie on the other hand represents what many thought they were voting for when electing Trump. A change in the ruling elite. Trump canvassed heavily and played to the blue-collar workers who he had identified as listening for change. Trump however, is media-savvy and happy to say one thing whilst delivering something else. Trump’s focus is not on equality or raising people out of poverty but headline GDP and specifically, headline S&P.

Bernie is a man of values. Reminiscent of the UK’s Corbyn who holds populist policies, Bernie also delivers on personality. He has a following young and old across the country. There are 2 clear hurdles, Democratic candidate and Presidential election. They present different problems.

Democrats are not as left-wing as Bernie as a group. Just like Corbyn’s parliamentary party was not behind his candidature, Bernie faces a similar issue. Will delegates want a socialist to lead them and if they do, do they think he can beat Trump. Hillary Clinton’s Democratic victory was likely due to the expectation she would trump Trump. Not so. And perhaps, the Democrats, after seeing Trump’s win, can envisage a Bernie win.

After all, Trump swung to victory as he has the support of Republicans and spoke to many outside his party. He represented to many marginal voters 2 fingers to the establishment. They were wrong of course but they were open to that story. Bernie however has substance and would likely carry out real change. He would switch spending from defence to social security and waive student debt. Corporates would not influence his decisions and this would up-end the S&P.

One of the first jobs would be to decide on the Fed Chair. Powell may remain for a time but I suspect Bernie is more MMT than QE.


Bernie Sanders, just like Corbyn in the UK, is not popular with the core of his party’s elected members. Yet both of them score very well with the electorate (Corbyn did at least) which one would think was important when electing someone to run for office.

Bernie polls better against Trump than Biden and yet it is clear that the Democratic party don’t want to see Bernie win. All the moderates stood down and endorsed Biden just ahead of Super Tuesday ensuring he had enough wind behind him. Those who support Biden will be rewarded.

It seems it is more important to have a job as an elected official than to be in power.

US job numbers were strong this week both in terms of jobs added and hours worked. Over the last few years, service sector jobs have outstripped manufacturing. But looking ahead with the virus taking hold, what will the situation look like? Will we be mingling in coffee shops?

It seems to me that those most at risk from a downturn will be low-paid, casual labour often on zero hours contracts. Those who often have less than 3 months of savings and cannot afford not to work.
Will they receive emergency payments? Will banks be asked to extend credit or defer loan repayments? Will governments issue emergency bonds - think War loans?

The longest economic expansion on record has been facilitated by people being able to find low paid casual work - the gig economy has supported many. But what if we stop ordering pizza, cut back on our online orders?

Despite low pay, low interest rates and high employment has supported the housing market and rising house prices has instilled confidence. The wealth effect from housing and equities should not be underestimated, especially if this is to reverse.

Those firms already at risk will likely fail in this downturn. In the UK, the largest domestic airline Flybe, has finally gone under without a rescue.

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Have you had your free money yet? As a resident of Jersey, I’ve just been told I will receive £100 by September to spend in Jersey. Of course, it’s not only me, every man, woman and child will receive a £100 by voucher or pre-paid card with an expected time limit of November before the money needs to be spent. With roughly 100,000 residents in Jersey this comes at a cost of around £10 million. This will likely represent more than 20% of the tax revenues raised by the Jersey Government in 2020. Whilst this is an historic amount to spend, what’s a government to do?

Governments across the globe have been desperately trying to stimulate growth above 2% since the Great Financial Crash of 2008. During that time, inflation has been a thorn in their side refusing to budge higher despite endless monetary easing. Zero interest rates and trillions of dollars of QE have lifted the money supply but done nothing to raise consumer inflation; only asset prices.

Take a look at the decline in the Fed Funds rate in the chart below. When faced with wavering demand in the economy, since the conquering of inflation in the 80s, the central bank response has been to cut rates, every time.

With each card the economy has dealt the Fed, their response has been to raise the stakes; betting on their reading of how the consumer and business will react. In 2020, with all cards on the table, the Fed is face to face with those people it is employed to help. It needs to throw everything it has on the table. There is no time left to let this pandemic and the ‘return to work’ play out. There is no way the economy is recovering to pre-pandemic levels.

What can you do at the poker table when your reputation is at stake. The world’s eyes are on the Fed and indeed all the major central banks and governments. They claim to know what they’re doing and hence they need to follow through with policy action. You cannot cut rates to zero, add trillions to your balance sheet and then just wait, because by now, the numbers should be turning in your favour.

Since their only other option is to fold, I think they will go all in. They will stand by the side of government in support of free money, ‘helicopter money’ and what has become know as MMT or Modern Monetary Theory.

They have the perfect excuse. And since they are all politicians on a public stage, they will use it. The corona virus has clearly accelerated indebtedness and slain many businesses. Governments will issue money and central banks will finance the debt. It will be marketed as a necessary but temporary solution. Just as QE was, each and every time it was rolled out.

Initially it will not work since people will believe it is temporary. When I take my £100 to spend, I will not form a habit of increased spending. I will view it as a one-off gift. Sure, businesses will welcome the temporary increase in spending. It will get them to Christmas, some of them. But what then? Will confidence be restored?

Even if there is a vaccine, the level of additional debt added by consumers who lost work, by businesses who lost custom and by state and local government who paid for the health emergency, will be a chain around the neck. Inflation will continue to be subdued and interest rates floored.

The only way to create confidence in spending is to convince people the free money is not temporary, but permanent. Imagine, believing, perhaps even knowing, you are to receive an additional amount each and every month which means you have no concerns over paying your rent, your bills and even splashing out once or twice a week. You would spend it. You would not need to repay your debt since there is more where that came from. You would not need a nest egg, since the free money would always be there. That is how you create inflation. And with central banks printing money and acting out on their promises, who is to argue against them?

Then and only then will inflation rise. And it will not stop rising, until central banks realise they cannot control inflation through micro-managing rates and the balance sheet. By the time they admit this however, inflation will already be in the psyche; just as it was in the 70s. Significant negative real interest rates will crush asset prices. likely much faster than they’ve risen.

The Fed having gone ‘all in’ to save its reputation will be found wanting and its credibility shot to pieces.


MMT Revisited: National Capital Investment Accounts


This article aims to offer a solution to the weakness in consumption, productivity deficit and debt burden of the country. No small task.

The answer I offer to our ills is to create an investment account for every voting member of society (i.e. they must vote, not simply be registered to vote). That investment account is credited with a gift from government which may only be spent on newly created investment capital (i.e. not pre-existing securities). The scheme is centrally administered (not necessarily by government or by one firm) and allows for trading on a dedicated exchange. Capital gains and dividends accrue to the holders and are taxed on an unrealised basis. All registered businesses may apply to issue capital in the form of shares, not debt, and in exchange must submit accounts which are available through a central records database which is open to public scrutiny (not just the shareholders).

The money given to voters is not required to be repaid and hence not private debt. It is financed by specific central bank lending to government. Due to being a scheme designed to add to long term productive capacity, foreign investors should not take flight and the currency should not suffer in value.

The problem with government, GDP and existing forms of modern monetary theory

I’ve always been frustrated by governments’ continual focus on GDP as an indicator of the country’s prosperity. GDP is more a record of activity and says little for the prospects of a country’s future or for how income and wealth are shared. It is a strange mix of spending (government and consumer) and investment.

Consumption only satisfies today’s wants and needs, it is non-productive. The UK’s scheme of ‘eat out to help out’ is a form of modern monetary theory. Government spending, currently part-financed through central bank purchases, is being aimed at cafes and restaurants in dire need of custom whilst the coronavirus social distancing rules remain in place. This will help maintain jobs in the hospitality industry but this industry is low in the ranking of adding productive capacity to the economy. Whilst it creates jobs, it relies on an expansion in bank lending and the multiplier effect to expand economic wealth. And since the banking sector is operating with a near flat yield curve they are not incentivised to lend.

The US scheme of simply handing checks to people was even less targeted and short sighted in nature. I do however appreciate immediate help was needed as such a scheme as I am suggesting will take time to design.

Focusing on consumption however is not a long term solution. Far better to develop an economy which is rewarded for adding to productive capacity. The great advances in wealth were built on each last round of technological development. In recent history, this has included the factories of the industrial revolution, the train network and the telephony and internet revolutions. Capital investment creates jobs but also creates a more efficient and hence productive environment in which entrepreneurs can develop the next round of productive capacity. Each round also throws off new and improved consumer products and services which enhances our lives and adds to the nation’s well-being. Only investment has the capacity for adding to a country’s wealth and hence should be the focus.

Central banks and the national deficit

At this time, central banks around the world are buying their government’s debt. Their argument is by keeping yields low they encourage borrowing and investment and hope also to create wealth through increasing asset prices. In reality of course, borrowing for investment is constrained due to high debt levels and rising asset prices increases wealth inequality due to assets being held by a subset of society.

The central bank ambition of creating inflation is not being fulfilled due to the money they are creating remaining in the financial economy and not the consumer economy (often referred to as the ‘real economy’). The central bank can expand its balance sheet in this way for an indefinite period as long as foreign investment does not lose confidence. But buying government debt in issue (as is currently the central bank strategy) is limited by the government’s choice in how to spend the money; i.e. central banks buy the debt post-issuance and hence cannot influence how the money is spent.

Central banks are of course constrained by their focus on maintaining inflation. For me, the creation of inflation should not be the aim. Moderate inflation is not the cause of a healthy economy but just one mark. Inflation should be considered as a by-product of an active society whose aim is to create productive capacity. Instead central banks should focus on full long term employment. Whilst this is part of the Fed’s mandate, many other countries would need to amend their central bank’s mandate since they focus only on stable prices.

The solution

The requirements for the solution are many-fold. It must add to long term productivity, it must be cohesive for society (i.e. considered fair), it must create employment, not distort investment decisions (i.e. be wasteful) and it must not add to private debt. Since, if it succeeds, it will create inflation and add to productivity, government debt will erode over time.

At this time we face a lack of demand, not just from the virus. Since the 1970s conquering of inflation, interest rates have been cut to encourage demand. But such demand is constrained by the burden of debt. Consumers cannot raise capital unlike corporations and hence the current central bank policy of low interest rates is self-defeating. Consumption erodes the wealth of the nation (I am aware we need to enjoy life and do not advocate zero consumption!) and when financed through debt, it must by definition either result in reduced future consumption or default. Either way, it is not productive.

Demand must therefore be financed through wages. As a nation we must encourage both an increase in employment (adding workers) and an increase in high value-added (productive) employment which attract higher wages. We must not however fall into the trap of ignoring the benefits of a cohesive and inclusive society. Spending on health and education should also be factored in since this adds to both current and future wealth. Whilst difficult to measure, those benefits should be measured and included in monetary terms. Consumption is not bad but we must do more to encourage productive investment.

The answer is to give each participating member of society a credit in their investment account which they are free to invest in the shares of any participating business. Only those who vote are rewarded in this way to encourage people to take an active role in the governance of their country. Any business can participate with the proviso they must be incorporated to ensure legal security over the asset of the business. This also aids the trading of capital on an exchange which will require known legal rights and benefits. In itself this will create a national enthusiasm and pride which will breed confidence, current consumption and inflation.

The problem with handing people cash to invest in pre-existing securities is that this is not productive. It simply increases the demand of securities in issue, resulting in increased prices.



Whilst central banks can freely create capital, a poorly designed investment scheme could lead to a misallocation and hence waste of natural resources including labour. Businesses may act fraudulently to acquire capital with no intention to invest. This is why businesses must be required to register, file accounts and minimum information about their business as well as be open to public scrutiny and debate. As capital (shares) are freely traded on the exchange (both long and short) there will be an incentive to root out fraud.

A very poorly designed scheme may encourage someone to establish and register a business only to collude with people to take in their capital. The business owner may promise to hand back 50% of the capital invested in cash and keep the other 50% for non-productive means. Again, registration alongside due diligence by the public will ensure that any fraud is duly prosecuted and hence discouraged. Monies raised should flow through registered bank accounts and material amounts can be investigated. Whilst no-one can be prosecuted for poor investment decisions, the FCA currently monitors for securities fraud and hence a base exists which can be expanded appropriately for monitoring.


Whilst a gift in voucher or cash form may lead to immediate consumption and hence helps to maintain existing employment, this national investment scheme does not. It will lead to future employment as the capital is deployed. The intention is to encourage long term productive employment due to the benefit of increased dividend and capital gains to investors than would otherwise be the case investing in a less productive business.

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