|
|
By Anthony J. Evans, on 8 July 11
I have recently updated an “Austrian” measure of the UK money supply labelled MA. The Executive Summary is as follows:
The 2008/09 financial crisis and subsequent recession has created renewed attention to UK monetary aggregates. This discussion paper argues that although measures of the money supply are crucial to understanding the economy, existing approaches are flawed: “Notes and Coin” is too narrow, and M4 is too broad. An alternative measure that is based on the Austrian school approach to the definition of money (MA) is proposed, which indicates the following:
- From January 2008 – January 2009 MA fell from a monthly growth rate of 27.9% to one of – 3.9%
- In the 30 months from December 2008 – May 2011 MA grew in 6 of them but contracted in 24
This finds evidence to support the conventional wisdom that a sustained and increasing monetary expansion during the “great moderation” was followed in 2008 by a catastrophic slowdown in money creation that has become a sustained monetary contraction.
The paper can be viewed here and the data is available to view via Kaleidic Economics. Kaleidic is a business roundtable that will be launching soon.
Note that in May 2011 MA fell by -5.9% (compared to the previous year), meaning that it has been contracting since October last year. The monetary deflation that has followed the financial crisis shows no signs of abating.
By Anthony J. Evans, on 13 June 11
As one of the few Austrian economists in the UK, I’ve become somewhat frustrated by the lack of attention to knowledge processes when talking about the UK experience of the financial crisis. This isn’t to say that perverse incentives weren’t important, but that in many cases they provide an alternative hypothesis to knowledge problems. And it’s a distinctly Austrian approach to illuminate the latter. See this working paper for more; comments and feedback most welcome.
This paper seeks to provide a distinctly Austrian interpretation of the financial crisis and subsequent recession that affected the UK economy in 2007-2010. In doing so it challenges the conventional wisdom that focuses on poorly aligned incentives, providing a theoretical and empirical claim for the primacy of ignorance explanations. Particular emphasis is given to the role of regime uncertainty and so-called “big players”, as well as how faulty behavioural foundations and “price naivety” misunderstand economic calculation and recalculation. Far from being an example of “market failure”, the financial crisis has revealed that almost a century on from the socialist calculation debate many economists still fail to understand the basic principles of a market economy.
Read the article here: http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1861540
By Anthony J. Evans, on 1 June 11
George Selgin is well known for having conducted detailed empirical work on the history and emergence of free banking. Most of his contributions have been in demonstrating the viability and ubiquity of fractionally reserved “free banks”, but in a recent blog post he is making another claim:
every significant 100-percent bank known to history was a government-sponsored enterprise, which depended for its existence on some combination of direct government subsidies, compulsory patronage, or laws suppressing rival (fractional reserve) institutions
Well worth a read.
By Anthony J. Evans, on 23 May 11
Consider this diagram showing the billions of euros that each of 8 EU countries owes the other.
Whilst the numbers are far from perfect, they give a clear understanding of the extent to which EU debt obligations are interlinked. But why try to raise money to pay someone off if they owe you even more? Why not cross cancel the debts and be left with the difference?
To see how this might work I recently ran a classroom simulation where students did precisely that. After three trading rounds they had managed to generate the following results:
- The countries can reduce their total debt by 64% through cross cancellation of interlinked debt, taking total debt from 40.47% of GDP to 14.58%
- Six countries – Ireland, Italy, Spain, Britain, France and Germany – can write off more than 50% of their outstanding debt
- Three countries – Ireland, Italy, and Germany – can reduce their obligations such that they owe more than €1bn to only 2 other countries
- Ireland can reduce its debt from almost 130% of GDP to under 20% of GDP
- France can virtually eliminate its debt – reducing it to just 0.06% of GDP
The final picture demonstrates the scope for cross cancellation. It is hard to see how such a policy would be possible, let alone desirable, but as a pedagogical exercise I think it is worth consideration. For those interested in more details I have set up a website: http://www.eudebtwriteoff.com. You can also download the full report: The Great EU Debt Write Off (.pdf)
Related articles
By Anthony J. Evans, on 13 May 11
Three of the world’s leading centres of liberty – the Foundation for Economic Education, Liberty Fund and the Universidad Francisco Marroquin, have joined forces to make available the Complete Henry Hazlitt Archive. This is over 17,000 documents including articles, personal correspondance, and subject files. Although a journalist, Hazlitt made important contributions to our understanding of economics, with some particularly effective responses to Keynesian economics. He’s a constant reminder that readibility does not imply simplicity, and that good economic ideas can be communicated to the masses. I, for one, am looking forward to mining this new resource.
By Anthony J. Evans, on 2 May 11
Regular readers may recollect Philipp Bagus and David Howden’s recent publication in the QJAE, where they provide a critique of fractional reserve free banking. They place particular emphasis on the work of George Selgin, and he has responded with “Mere Quibbles: Bagus and Howden’s Critique of The Theory of Free Banking“.
Steve Horwitz and I have also written a response, touching some of the same ground as George but intending to focus on different points. Here is the abstract:
In their recent article in the Quarterly Journal of Austrian Economics, Bagus and Howden (2010) present “quibbles” with fractional reserve free banking. Or specifically, what they call “unaddressed issues” in this system, with a particular emphasis on Selgin (1988). We deem their arguments to be more substantial than “quibbles” and are part of a longstanding debate about fundamental aspects of monetary theory. We respond to their objections and attempt to specify how debate between the two sides might proceed more productively.
It’s called “An Appeal for Better Scholarly Discourse: How Bagus and Howden Have it Wrong on Free Banking“, and can be downloaded here.
By Anthony J. Evans, on 30 April 11
Earlier this week, The Taxpayers’ Alliance published a policy brief that I wrote on corporation tax. The report looks at the efficiency, fairness, simplicity, and predictability of the corporation tax system and finds it failing on all counts. The recent furore over various UK Uncut campaigns are used to argue that the corporation tax system is not understood by either the general public or journalists. Bottom line: corporations don’t pay tax, people do. And not necessarily who you think.
By Anthony J. Evans, on 31 March 11
Regular readers of this site may be aware of a debate relating to the contractual devices that banks might use to ensure that they are solvent. One of the terms that has been used is a “notice of withdrawal clause”, but what is this?
It might be argued that a notice of withdrawal clause (or a “withdrawal clause”) is merely another term for the more often invoked “option clause”. This has received extensive treatment in the “free banking” literature (for example Dowd (1988), Selgin & White (1994, 1997)), and we can use the following definition:
option clauses… give banks the option of deferring redemption of their notes provided that they later pay compensation to the noteholders whose demands for redemption are deferred” (Dowd, 1998, p.319)
The confusion may stem from the fact that in some instances option clauses and withdrawal clauses are used interchangeably. For example Selgin & White (1997) say:
one possible run-proofing device discussed in the literature is an “option clause” or “notice of withdrawal clause” allowing a bank temporarily to suspend the redeemability of some or all of its liabilities (notes or demand deposits) provided the bank pays a pre-specified (penalty) rate of interest on the suspended liabilities
However, I believe there is stronger textual support for the idea that they are distinct devices. In an earlier article Selgin & White (1994) say the following:
a bank might contractually reserve the option to suspend for a limited time the redeemability of its notes or demand deposits, as Scottish banks did with banknotes before 1765 (when the practice was outlawed) and as banks do today when they include “notices of withdrawal” clauses in deposit contracts
My reading is that they are often used interchangeably (or perhaps as though a withdrawal clause is a type of option clause), because they perform the same economic function. But a detailed reading would reveal them to be different.
In my working paper on the sound money debate I define a withdrawal clause as follows:
In addition to the option clause banks might also offer (and historically did offer) a “notice of withdrawal” clause, specifying that their customers were required to give
30 days notice prior to making a redemption claim. The fact that this clause existed (to protect the bank from a legal point of view if it were ever to suffer a liquidity crisis) does not mean it is always invoked, and banks could routinely not enforce this rule and satisfy immediate redemption requests.
Firstly, note that this is presented as a different clause to the option clause. But secondly, we can see that it differs from the option clause in terms of the default nature of the contract.
Recollect that an option clause allows banks – under certain conditions – to convert a demand deposit into a timed deposit (thus giving them time to generate liquidity whilst avoiding firesale losses). This is seen to be good for the banks (obviously!) but also good for the customers (since it’s better to receive the deposit plus interest at some point in the future than to see the bank being wiped out).
However in the case of the withdrawal clause there is a notice period written into the contract – it is technically a timed deposit (where the notice period serves as a minimum term). But if the bank wanted to offer an instant access account it can simply publicise the fact that it does not routinely enforce this notice period and that it satisfies redemptions on demand.
I suspect the reason withdrawal clauses received less explicit attention in the literature is that unlike the option clause they are not a uniquely “free banking” concept. Indeed, notices of withdrawal are routinely used in contemporary banking. Investopedia define it as follows:
A notice given to a bank by a depositor. As its name implies, a notice of withdrawal states the depositor’s intention to withdraw funds from an account. This notice applies to both time-deposit and NOW accounts
In short, the option clause means that a de jure demand deposit can be treated as a de facto timed deposit. The withdrawal clause means that a de jure timed deposit can be treated as a de facto demand deposit. They are two sides of the same coin – both allow instant access fractional reserve accounts, the only difference is the default position.
So perhaps provisions such as option clauses and withdrawal clauses allow banks to offer fractional reserve accounts that aren’t fraudulent or reliant on legal privilege, but does that make the 100% reserve argument wrong? Not necessarily. The withdrawal clause in particular “works” precisely because it changes the de jure status of the account. A counter argument might be “if a withdrawal clause applies to a timed deposit then you are admitting that fractional reserve banking is irreconcilable with demand deposits”. From the view of legal theory (and depending on your definitions), this may well be correct. However the de facto status of this account is instant access and redeemable “on demand”. In terms of the economic function of the account it exists exactly as “free bankers” envisage.
References
By Anthony J. Evans, on 30 March 11
For several years now there has been a highly successful seminar held at Sidney Sussex college, at the University of Cambridge. Around 30 undergraduates from across the UK converge for a week long, fully paid submersion in classical liberal political economy.
Modelled on the famous IHS and FEE summer programmes, Freedom Week brings together leading academics to lecture and socialise with students in a relaxed, informal environment. Aside from several hours of lectures per day there are formal dinners, BBQs, punting, and social drinking.
The seminar is free: accommodation, tuition and meals are fully paid for; students only need to get to Cambridge by Monday lunchtime and remain throughout the week.
I have previously given talks on the Financial Crisis and Competition and Monopoly, and am always impressed by the enthusiasm and intellectual curiosity of the students that attend. The Freedom Week alumni is growing significantly and it’s helped launch the careers of a number of UK think tankers. This is a hugely important programme of the UK free market movement.
I highly recommend the programme, and encourage people to pass on the details to interested students.
For more information: http://www.freedom-week.org/
By Anthony J. Evans, on 23 March 11
Today is the 2011 Budget, and I will be live blogging it for Reuters. Click here to follow live coverage throughout the day.
As a prelude, I have written a short op-ed for The Spectator, where I focus on statistical variability, tax transparency, and burdens on high earners:
With the removal of barriers to growth the Chancellor can help. But his main role is balancing the books and letting the private sector run the economy. He needs to stop gimmicks that hurt the economy and start the vital work of long term tax reform.
|
|
