Martin Wolf Comes to Adair Turner's Aid

There must be a nest in the UK somewhere – apparently the country is a breeding ground for monetary cranks. The FT's Martin Wolf – who is best known for such glorious epiphanies as “Why it is right for central banks to keep printing“ and „Time to think the unthinkable and start printing again“ (which was published about 15 months after the first article, so clearly nothing about it was ever 'unthinkable' to Mr. Wolf) –  has just penned an article in support of the ideas recently uttered by Lord Adair Turner.

That sure didn't take long – apparently Wolf was deeply disturbed by some people expressing the view that financing government spending directly via the printing press may not be such a good idea after all. But of course it is! Wolf's latest missive is entitled “The Case for Helicopter Money” and continues basically where his previous flashes of inspiration on the topic left off. There is evidently no case for hoary inflationism that doesn't meet with Mr. Wolf's full-throated approval.


In this particular screed his penchant for the joys of central economic planning is on even starker display than usual. It also contains a major error, or rather, what is probably a quite conscious attempt to minimize the extent of monetary inflation that has taken place since the 2008 crisis, by means of employing highly questionable data and presenting them in just as questionable a manner. We'll get to that point a little further below.

Wolf writes:

“Some are sure that the troubled western economies suffer from a surfeit of money. Meanwhile, orthodox policy makers believe that the right way to revive economies is by forcing private spending back up. Almost everybody agrees that monetary financing of governments is lethal. These beliefs are all false.”


In other words, what the economy clearly needs is more spending by government bureaucrats, this time financed directly by the printing press. Anyone who believes otherwise is a priori wrong and hereby preemptively excommunicated in the introductory paragraph.

Next comes the presentation of the highly questionable data we alluded to above, preceded by Wolf invoking a well known authority – probably in the hope that this will serve to silence potential critics of what follows:

“When arguing that monetary policy is already too loose, critics point to exceptionally low interest rates and the expansion of central bank balance sheets. Yet Milton Friedman himself, doyen of postwar monetary economists, argued that the quantity of money alone matters.”


So much for the appeal to authority. Sure enough though, swollen central bank balance sheets alone do not tell us anything about the extent of monetary inflation their expansion has produced. Wolf however continues with the most extraordinary statement we have ever come across regarding the monetary developments of recent years. It appears to be intentionally manipulative and is highly suspect in any event (even if the data such as they are presented are correct, which we cannot verify as no official measure of this sort exists,  they mean at the very least that he either does not know what money actually is, or is intentionally using data that play down what has actually occurred):

Measures of broad money have stagnated since the crisis began, despite ultra-low interest rates and rapid growth in the balance sheets of central banks. Data on “divisia money” (a well-known way of aggregating the components of broad money), computed by the Center for Financial Stability in New York, show that broad money (M4) was 17 per cent below its 1967-2008 trend in December 2012. The US has suffered from famine, not surfeit.”


Maybe we should rename it the 'Center for Financial Instability'? What pray tell is M4? There is of course no 'M4' in the official monetary aggregates of the US (they've even ditched M3). So we learn that this particular monetary aggregate is allegedly “17% below trend”. Divisia money may be 'well known', but that evidently doesn't make it accurate (it is in fact statistical trickery, as it is 'weighting' components of various monetary aggregates, which means one gets the result of a mathematical operation – an index number. However, why not simply count the money instead?). We wonder even so how this miracle is possible, given that actual money – defined as follows: “Money is the general medium of exchange, the thing that all other goods and services are traded for, the final payment for such goods on the market” (Rothbard) – has increased by a cool 76% between January of 2008 and December 2012, from $5.3 trillion to $ 9.3 trillion (the measure TMS-2, the major components of which are currency, demand deposits and savings deposits that are available on demand). Here is a recent chart of this alleged 'money famine':




Wow, the US economy has been positively starved of money by the Federal Reserve's 'QE' policies … – via Michael Pollaro – click for better resolution.



Wolf continues:

“As Claudio Borio of the Bank for International Settlements puts it in a recent paper, “The financial cycle and macroeconomics: what have we learnt?”, “deposits are not endowments that precede loan formation; it is loans that create deposits”. Thus, when banks cease to lend, deposits stagnate. In the UK, the lending counterpart of M4 was 17 per cent lower at the end of 2012 than in March 2009. (See charts.)

Those convinced hyperinflation is around the corner believe that banks expand their lending in direct response to their holdings of reserves at the central bank. Under a gold standard, reserves are indeed limited. Banks need to look at them rather carefully.

Under fiat (that is, government-made) money, however, the supply of reserves is potentially infinite. True, central banks can pretend reserves are limited. In practice, however, central banks will advance reserves without limit to any solvent bank (and, as we have seen, to insolvent ones). With central banks able to supply reserves at will, the constraints on lending are solvency and profitability. Expanding banking reserves is an ineffective way to increase lending, not a dangerous one.”

Oh, so his major complaint is that the inflationary policy is not effective enough in terms of actually inflating the money supply.

We already said earlier that an expansion of the central bank balance sheet indeed does not tell us anything about whether money in the economy has expanded as well. While bank reserves are the cash assets of banks (ex vault cash), they are merely the raw material upon which credit is normally pyramided and as the term 'excess' reserves intimates, this particular part of them is in excess of reserve requirements. We are not quibbling over the fact that during what is deemed 'normal' times (this is to say, credit expansion boom times) the banks will create deposits by extending loans, and then will get the required reserves either from the interbank market or from the central bank itself, which will supply them in basically unlimited quantity. Moreover, 'reserve requirements' have become nothing but a joke in recent years anyway. They might as well not exist. US banks needed only about $60 billion in reserves to support about $4.5 trillion in deposits in 2007. However, 'those believing in hyperinflation' do not necessarily believe in the mechanistic translation of excess bank reserves into new deposit money (apparently Mr. Wolf erroneously holds that anyone fearing inflation on account of the trajectory policy is currently on cannot possibly know how the system works).

It is moreover true that 'QE' has failed to ignite monetary inflation in the UK so far, as its banks were so crippled by the bust that they simply didn't dare lend a farthing (this is changing lately, as the annualized expansion of UK money TMS has accelerated to 17.6% in the final quarter of 2012). Moreover, private sector borrowers had no intention of borrowing money in the teeth of a severe recession anyway – they are after all not that stupid. But who cares what people actually want – the central planners know better what's good for them!

However, Mr. Wolf – having slyly disposed of the fact that there has been the most massive money supply inflation in the US of the entire post WW2 period in such a short time – naturally also omits the explanation for how it was possible for a very determined central bank like the Fed to inflate that much even in the face of a  private banking system reluctant to lend. The answer is that the Fed buys securities from non-banks as well, and that activity not only creates excess bank reserves, but also directly creates new deposit money. Moreover, banks can create deposits in order to buy securities such as treasury bonds as well. Guess what they have done:



Treasuries and agencies held by commercial banks

Treasury and agency securities held by US commercial banks – click for better resolution.



Martin Wolf, Statist to the Core

Wolf then goes on about how the 'lever' (or monetary transmission mechanism if you will) is 'broken', and that the attempts by central banks to 'get the private sector to lend' may 'create future vulnerabilities' as they drive asset prices to the moon (one wonders though how exactly asset prices can be driven to the moon while the economy is 'starved of money' as Wolf asserts). Fair enough though, creating fresh asset bubbles is probably not particularly smart. In fact, we think that whenever the SPX goes up by 10 points nowadays, the correct way of reporting on the event would be: “In its 13th year of remaining down a humungous amount in real terms, the SPX has just added another 10 points to investors' future losses”.

But then Wolf unearths the 'Chicago Plan'.

Alternatives exist. As Lord Turner notes, a group of economists at the University of Chicago responded to the Depression by arguing for severing the link between the supply of credit to the private sector and creation of money. Henry Simons was the main proponent. But Irving Fisher of Yale University supported the idea, as did Friedman in “A Monetary and Fiscal Framework for Economic Stability”, published in 1948.

The essence of this plan was 100 per cent backing of deposits by public debt. This scheme, they argued, would eliminate the instability of private credit and debt, dramatically reduce overt public debt and largely eliminate the many defects of current forms of private debt. “The Chicago Plan Revisited”, a recent working paper from the International  Monetary Fund, concludes that the scheme would indeed bring these benefits.”


At first, people might say to themselves: 100% reserves! What can be wrong about that? However, consider what these reserves are to consist of: government debt. In essence this is a form of 'Greenbackism' as Gary North explains here. Money would then be entirely under State control, and instead of credit expansion by banks, we'd have credit expansion exclusively directed by government central planning committees. We might as well call them 'GOSPLAN'. As North colorfully concludes, “I dismiss all of this as fiat-money crackpottery. It is central planning by monetary committee. Some version of this doctrine is held by virtually all mainstream economists.”

Indeed. However, luckily, Martin Wolf 'doesn't want to go that far' (at least not yet, one presumes). Perhaps some of those no-good private banks are providing the FT with ad revenue, so one cannot just advocate doing away with their main source of free money in favor of leaving it all to the State alone. He then immediately tells us though how far he is prepared to go:

“Let us not go so far. But this plan still brings out two important points.

First, it is impossible to justify the conventional view that fiat money should operate almost exclusively via today’s system of private borrowing and lending. Why should state-created currency be predominantly employed to back the money created by banks as a byproduct of often irresponsible lending? Why is it good to support the leveraging of private property, but not the supply of public infrastructure? I fail to see any moral force to the idea that fiat money should only promote private, not public, spending.”


(emphasis added)

OK, so why exactly should one not fear hyperinflation when people like Wolf are taken seriously? He sounds almost as though he was an adviser to Rudolf von Havenstein in an earlier life! Fiat money should not be used for either of these things, it should in fact ideally not be used for anything. It should simply be abolished in favor of a free market-based money in combination with a free banking system based on traditional legal principles.

We might also ask, what's so magic about State-directed 'infrastructure spending'? We know that many people actually think that it is a legitimate government function, but the idea does not hold up under close scrutiny. Leaving aside that fiat money cannot fund anything, as the funding of all  economic activity requires real resources – even if one were to say that the State should divert real resources from wherever they are now employed to 'infrastructure spending', it should be clear that this will suffer from the strictures imposed by the socialist calculation problem (at least in the wider sense).

Since government bureaucrats don't operate according to the categories of profit and loss, they simply cannot know what exactly they should spend on. This bridge or that road? There is no way for them to ascertain the opportunity costs involved. All that is certain is that the resources will be withdrawn from where consumers wanted to see them employed to an activity chosen by bureaucrats. Moreover, knowing how government operates, the spending will go to the politically well connected, essentially to the government cronies du jour (think Solyndra, but there are even more jaw-dropping examples of government waste). How exactly is that is going to be socially beneficial?

Wolf continues:

Second, in the present exceptional circumstances, when expanding private credit and spending is so hard, if not downright dangerous, the case for using the state’s power to create credit and money in support of public spending is strong. The quantity of extra central bank money required would surely be smaller than under today’s scattergun quantitative easing. Why not employ monetary financing to recapitalise commercial banks, build infrastructure or cut taxes? The case for letting fiscal deficits facilitate private deleveraging, without undue expansion in overt public debt, is surely also strong.”


Here Wolf once again seemingly confuses money and capital.  Yes, one can erase the losses of banks by 'recapitalizing' them with newly printed fiat money. However, this merely means that they are given the means to lay claim on real capital that they have not produced. It will mean impoverishment for everyone else. It is equally illusory – in fact, it is completely naive – to believe that “facilitating private deleveraging without undue expansion in overt public debt” by simply printing money is perfectly feasible and won't have any undesirable consequences. Apart from the fact that it will favor some groups over others – surely Mr. Wolf isn't exactly planning to let all private debtors partake in this 'debt jubilee for free' – someone will have to pay for it all, whether the deficit is 'overt' or 'covert'. Mr. Wolf calls himself an economist, but he keeps pretending that the printing press can somehow create wealth. Either he really doesn't know any better, in which case he is not qualified to speak about such matters, or he is deliberately attempting to mislead his readers. There is no other possibility.

Wolf continues, still managing to sound like he was born yesterday:

What makes this policy so powerful is the combination of fiscal spending with monetary expansion: Keynesians can enjoy the former; monetarists the latter. Provided the decision on the scale of financing rests in the hands of the central bank and it, in turn, looks at the impact of the policy on the economy, this need not even generate high inflation, let alone hyperinflation. This would require discussions between the ministry of finance and the independent central bank. So be it. That cannot be avoided in extreme predicaments.”


Yeah sure, letting the government get financed directly by money printing  “won't generate 'inflation'” (meaning here: rising prices), just as long as the 'ministry of finance and the central bank discuss it'. On what planet? Rigel 2? Because it sure isn't going to work in our solar system. Who cares what the Keynesias and monetarists will 'enjoy'?

Wolf then invokes Turner again, quoting assertions that are simply not provable – which however also seem to suggest that financing the State directly with money printing will somehow bring us closer to that famed Keynesian miracle of 'turning stones into bread':

“Cancer sufferers have to undergo dangerous treatments. Yet the result can still be a cure. As Lord Turner notes, “Japan should have done some outright monetary financing over the last 20 years, and if it had done so would now have a higher nominal gross domestic product, some combination of a higher price level and a higher real output level, and a lower debt to gross domestic product ratio”. The conventional policy turned out to be dangerous. Whether this is also true of troubled countries today can be debated. But the view that it is never right to respond to a financial crisis with monetary financing of a consciously expanded fiscal deficit – helicopter money, in brief – is wrong. It simply has to be in the tool kit.”


Ah, the 'tool kit' of the central planners – let's enhance it by adding a few Gideon Gono wrenches! What could possibly go wrong! Maybe someone should  tell Mr. Wolf that the economy is not a 'cancer sufferer' and that the contraction did not just drop out of the sky, but was the result of the inflationist policies pursued in the name of fighting the previous recession (which he undoubtedly supported and advocated). However, that is what Keynesians like Wolf actually believe: namely that recessions are 'accidents of nature' a.k.a. 'market failures'. To paraphrase Dimitri Speck, this is like saying that an airplane crash is a failure of physics.

Meanwhile, to assert that Japan pursued anything resembling 'conventional policies' is the height of absurdity. How exactly did it end up with the biggest debt mountain of an industrialized nation in peace time ever? By means of 'conventional policies'? It seems Wolf is so jaded by now that he thinks that the only policy that actually deserves to be called 'unconventional' is following the Havenstein/Gono recipe outright – just as long as we are 'careful' about it and the right people (him?) are doing the 'planning'.

It was official before, but it is even more so now: Martin Wolf is a monetary quack, a crank of the first water. Given that people are not braying with laughter reading his stuff but are actually seriously debating its alleged merits, shows that even the worst economic ideas have more lives than a cat.

Maybe we should start a competition for the title of monetary crackpot of the year. Wolf is definitely a very strong contender for the crown.

We leave you with another quote by Gary North:


“The economics guild today is burdened by a century of erroneous monetary theory. Central planning is the universal doctrine still: central planning of money. The quest for power through politics has been the dream of all would-be philosopher kings from the days of Plato. It is the dream that politicians will listen to experts at all times, especially times of crisis. This dream is inherently crackpot. Why would anyone with any understanding of politics take it seriously? But economists do take it seriously — all except the Austrians.”

Addendum: Re. Claudio Borio's Paper

We wanted to take the opportunity to point out to readers that the paper by Claudio Borio ("The financial cycle and macroeconomics: What have we learnt?”) cited by Mr. Wolf is actually well worth the read.
It is actually a bit surprising that Mr. Wolf of all people mentions it, since a number of points it makes are very 'Austrian'. It is also a sign that perhaps, there is a bit of movement in mainstream economic analysis of the boom-bust cycle.




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2 Responses to “The Money Cranks Are Loose”

  • Rothbard saw this coming in the introduction he wrote to the 4th edition of America’s Great Depression. Hopefully posting this paragraph is okay:

    Since Friedmanite gradualism will not permit a sharp enough
    recession to clear out the debt, this means that the American economy
    will be increasingly faced with two alternatives: either a massive
    deflationary 1929-type depression to clear out the debt, or a
    massive inflationary bailout by the Federal Reserve. Hard money
    rhetoric or no rhetoric, the timidity and confusion of Reaganomics
    make very clear what its choice will be: massive inflation of money
    and credit, and hence the resumption of double-digit and perhaps
    higher inflation, which will drive interest rates even higher and
    prevent recovery. A Democratic administration may be expected to
    inflate with even more enthusiasm. We can look forward, therefore,
    not precisely to a 1929-type depression, but to an inflationary
    depression of massive proportions. Until then, the Austrian
    program of hard money, the gold standard, abolition of the Fed,
    and laissez-faire, will have been rejected by everyone: economists,
    politicians, and the public, as too harsh and Draconian. But Austrian
    policies are comfortable and moderate compared to the economic
    hell of permanent inflation, stagnation, high unemployment,
    and inflationary depression that Keynesians and Friedmanite
    neo-Keynesians have gotten us into. Perhaps, this present and
    future economic holocaust will cause the American public to turn
    away from failed nostrums and toward the analysis and policy conclusions
    of the Austrian School.

    As it is now, the inflation is primarily in what can be acquired, namely assets. The spending power of the non-upper classes along with their creditworthiness has failed to bring about more than moderate CPI inflation so far. Thus we are faced with either a resumption of high inflation, should Obama succeed in maintaining and increasing spending or a collapse in asset prices, due to low end demand. Hyperinflation would be the result of Bernanke and company destroying the international position of the dollar. In the meantime, the interest of bankers around the world is the dollar maintain. A country like China could go rogue in this matter and topple the whole house of cards. Or, there would just be a revolution.

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