Racing to Port – Whilst Draining the Sea – Hawtry & the Global Deflation Spiral

I feel guilty in purposefully setting up Francis Coppola and David Glasner in an internet economic blog flight – to econowonks there is no greater entertainment- even to watching republican candidates competitive accusations of who is the biggest liar.  Here though the debate is conducted in terms of lucid and polite prose.

Frances had eloquently written on the current global deflationary spiral – arguing that in these conditions competitive devaluation was impossible for the system as a whole and therefore it would drive a global downturn – indeed just the kind of global downturn we are seeing which the markets didn’t expect, is spooking them, and driving a further downturn leading to risk of a global recession and negative interest rates, just at the point many conventional economists had predicted a fed led rise in interest rates globally backed up by and driving a final global recovery from the Great Recession.  In terms of understanding what is going on then the stakes could not be higher.

I noticed that almost precisely the opposite to Francis’s view was taken by Hawtry many years ago, and David had eloquently blogged on it.  A sample of Hawtry’s core argument.

The picture of an endless competition in currency depreciation is completely misleading. The race of depreciation is towards a definite goal; it is a competitive return to equilibrium. The situation is like that of a fishing fleet threatened with a storm; no harm is done if their return to a harbor of refuge is “competitive.” Let them race; the sooner they get there the better.

Of course I was setting France’s up and she rose to the bait, or perhaps swam into the nets to extend the fishing analogy and set out why she thought Hawtry’s position – as supported by David Glasner was wrong.  A sample of the gist of her argument:

in a floating fiat currency system such as we have now, if I devalue my currency relative to yours, your currency rises relative to mine. There may be a domestic inflationary effect due to import price rises, but we do not value domestic wages or the prices of finished goods in terms of other currencies, so there can be no relative adjustment of wages to prices such as Hawtrey envisages. Devaluing the currency DOES NOT support domestic demand in a floating fiat currency system. It only rebalances the external position by making imports relatively more expensive and exports relatively cheaper.

This difference is crucial. In a gold standard system, devaluing the currency is a monetary adjustment to support domestic demand. In a floating fiat currency system, it is an external adjustment to improve competitiveness relative to other countries.

And the harbourmaster to our great joy responded. That it doesn’t matter even in a fiat system.

as Hawtrey showed, competitive devaluation is not a problem. Depreciating your currency cushions the fall in nominal income and aggregate demand. If aggregate demand is kept stable, then the increased output, income, and employment associated with a falling exchange rate will spill over into a demand for the exports of other countries and an increase in the home demand for exportable home products. So it’s a win-win situation.

The argument being that purchasing power parity still holds in a non Gold Standard World.

So who is right?  As ever the starting point should be to define the issue in terms of the appropriate accounting identities and how these interact in a world of intersecting balance sheets.

Perhaps a clue to both parties, not having time to blog to the same length of these protagonists,   the accounting identities underlying the impossible trinity and defining the conditions under which it is possible, for the global economy as a whole for aggregate demand to be ‘kept stable’ rather falling to the floor potentially dragging us into a spiraling downturn of debt deflation.

If France’s is right, and my instinct is she is, the effect of too many trading countries trying to have a positive balance of trade, and carrying out austerity at the same time must – through these identities, have much the same effect on the fleet of nations as draining the sea, leading those with the most negative current account balances (made worse by low oil prices to them) hitting the rocks, and there impact on global trade having the effect of slamming the harbour doors so that even the leading boats of the austerian exporters (in both senses) are stranded at sea in the storm just at the point they thought they had found a safe haven.  Hawtrys ‘treasury view’ is the harbour master here, slamming the harbour gates on the global economy.  Much as we admire Hawtry’s framework of a dynamic debt driven trade cycle, his failure to understand the accounting identities of aggregate demand, as Keynes of course demonstrated at book length in almost a letter to Hawtry to prove him wrong,

Lets put this simply, it is impossible for all countries at once to have a positive current account, conduct fiscal austerity and competitively devalue.  If they try it leads to global deflationary spiral, with the trade weighted unit of account of nations ever falling.

Indeed as I have argued in a none gold standard world the numeraire of global aggregate demand is a kind of Bancor – the desire of investors to hold a piece of the pie of the GVA of that nation.  And it is this desire which means that Central Banks can issue notes in their currencies which are a liability to their central banks.

Perhaps the best attempt to model theoretically these three intersecting identities comes from the recent work of my great friend Steve Keen.  Sadly he forever frustrates us all by never having time to finish his magnum opus, which might settle this argument once and for all.  It is why of course Steve was one of the very few to predict the events of the last few months and why he continues to top the charts of macro forecasters. Perhaps Steve if he has time to read this post – which he hasn’t – can post his recent lectures where he talked on their dynamic relationship.  None of us have time to go through every post on his You Tube Channel.


Update:  France’s replies to David here – I had not seen was as usual on an aeroplane.



Policy Exchange Proposes to Move Tykes, Pikeys, Syrians and the Feckless To Scotland

The latest wheeze by dumb tank Policy Exchange is to allow and subsidise assist new windfarms, – but in Wales and Scotland- well away from Tory voters.  A convenient cop out for a government that was thrashing around for an energy policy now that  onshore wind and solar is the cheapest  form of energy and the only one capable of meeting its own carbon targets.

We understand that a forthcoming research paper is to take this idea to its logical conclusion.  ‘We had a great idea over a liquid lunch one Monday at the Westminster Arms’  ‘After all if we could export energy, the nuclear deterrent and progressive politics to Scotland why not go the whole hog’  ‘There are lots of things we could shift’  ‘We worked out on the back of the long bill that we could fit every council estate in Hammersmith and Fulham onto Papa Westray.  ‘It would be just like Shasamane‘  said the source, Ethiopia allows those pot head Rastafari to settle’ ‘So a few quid to Nicola Sturgeon and she’ll be happy to provide a new spiritual home for Shoreditch Twats, Weegie Stoaterers and Outsiders of all kinds’.

Treasury Confirms it has Given up on Planning Reforms, Infrastructure Spending & ‘Shovel Ready’ Projects

Nick Macpherson’s – Permanent Secretary to The Treasury – speech to the British Academy on the General Theory at 80: Keynes and Treasury policy-making today. 4 Feb 2016

the mythical “shovel ready” infrastructure project is precisely that: a myth. This is nothing new. The Treasury made the same point in the 1930s. But it is more of a problem today given the inexorable growth in planning law and wider regulation. Keynes’s suggestion in Chapter 10 of the General Theory that “the Treasury fill old bottles with bank-notes, bury them…in disused coalmines which are then filled up to the surface with town rubbish, and leave it to private enterprise…to dig up” would be the victim of many a health and safety regulation and environmental impact assessment today. In short, the lead times for getting public investment up and running are long and variable….I’d like to think that Maynard Keynes – who understood markets as well as anybody – would have approved of what the Treasury has done since 2008.

Quite a shocking statement given the treasury has been directly responsible for that ‘inexorable growth in planning law’ all having the opposite effect of that intended slowing down plan making .  As I have long said the Government seems to have given up using the ‘Build What You Like Where you Like’ as a hypothetical not to be used to get planning seeded up and is left with a ‘Build What You Like Where you Like’ reality.  But even this extreme situation has only got us to half way to the houses we need and ministers are clear it has hot its maximum buffers, the problem is with the structure of the house building industry which IS something the Treasury can do something about with a tool within its arsenal it has forgotten how to use – tax.

Notwithstanding the planning issue in economics terms I took great delight, as someone whose weird hobby is the history of economic theory, in the speech, as almost every sentence contains a classic fallacy which Keynes spent 20 years (in the end successfully though temporarily) persuading  the Treasury on.  In the end having to write a whole rewriting the conventions of economic theory to overcome his most stubborn protagonists of the ‘Treasury View’ – the General Theory being a book effectively written as a long letter to the Treasury stating – look even if we accept what are saying is right fiscal policy will still work – because your underlying economic theory is wrong.  Keynes succeeded – Hawtry, his great friend & who originated the Treasury View admitted in the 1950s hat Keynes was right on this point – Fiscal policy had and did work, Hansen – who read rival theories in original french and German that even Keynes had not seen and did not become standard till after his death, at first fascinatingly dismissive became his greatest propagandist, hey even Hayek admitted he was (partially) wrong.

I could go through the speech line by line but im sure as we speak Lord Skidelsky and Bill Keegan are writing book length rebuttals.

So ill pick on the shovel ready bit.  The famous digging up milk bottles case was designed to meet the argument advance in the 30s and now called the ‘Shovel Ready’ (myth).  Keynes didn’t believe it but was arguing that even if you we accept the premise that there are no shovel ready projects if you just give people shovels – zero capital/infrastructure growth – my theory still works.  Incrementally the New Deal did just that effectively, with a successful programme of ‘Digging for Dollars’ an archaology programme, that Keynes must have had in mind. This also became the origin of the term ‘Shovel ready’ as within weeks shovels were at the ready.  You can read about it in Shovel Ready: Archaeology and Roosevelt’s New Deal for America   2013 Bernard K. Means.

‘Favored were projects deemed as “shovel ready” because they could quickly provide jobs to laborers desperately seeking employment.’


The ‘there is no such thing as shovel ready’ mantra arises from a famous 57 page memo from Larry Summmers (in reality he commissioned  his follow Keynsian Christina Roma to write much of it – and Obama clearly read every word.  The Memo looked at four options 550-890 billion dollars, so you can understand why it was so carefully read.

Summers favoured 800  billion stimulus  – towards the top end – of that estimates but about half of the level of additional spending he had calculated was needed to ensure recovery.  So why this level?

Because $225 billion of “actual spending on priority investments” is all that the government could get out the door over a two year time span” (and so the rest had to be made up of tax cuts, aid to states, etc.). Seemingly overiding Christina Romer (Chair of the Council of Economic Advisors) – who fampously wrote a long article after she stood down saying how the higher figure could have staved off the Great Recession.

However as ever getting nearly a trillion of stimuls of of the door proved challenging

Obama’s Council on Jobs and Competitiveness met today in Durham (june 2011), NC at Cree Inc., a company that manufactures energy-efficient LED lighting. One of the Council’s recommendations to President Obama was to streamline the federal permit process for construction and infrastructure projects. It was explained to Obama that the permitting process can delay projects for “months to years … and in many cases even cause projects to be abandoned … I’m sure that when you implemented the Recovery Act your staff briefed you on many of these challenges.” At this point, Obama smiled and interjected, “Shovel-ready was not as … uh .. shovel-ready as we expected. The Council, led by GE’s Jeffrey Immelt, erupted in laughter.

Such subtleties of pragmatism have been lost in how the phrase has been pilloried as a talking point.

He was not saying abandon 800 billion as surplus, simply that they take time to get out pof the door.

As he said a year earlier to the NYT

He realized too late that “there’s no such thing as shovel-ready projects” when it comes to public works.

I.e. they take time.  The Stimulus was successful, saving 2.5% of GDP compared to Gideon’s disastrous austerity in the UK, making everyone in the UK many thousands of pounds worse off compared to had a sensible spending policy been pursued.

So stimulus on infrastructure was balanced with quick win projects such as ‘cash for clunkers’  where the’no such thing as shovel ready charge is completely irrelevant.  Equally you can cut taxes as stimulus not just raise spending.  MacPheson had no argument for this, arther he was spouting the same kind of false history as talk radio bigots such as Rush Limbaugh, well below the standing of someone of his status.

The argument though is just bad economics and based on a fallacy.  Its not that on any one day when you increase infrastructure spending the planning for all new projects commences.  At any one time there is a stock and flow of projects at various stages of preparation.  It is like a forest where in any one year you chop down the most mature trees.  Any well managed agency will keep a schedule of projects including some which fall just below the benefit:cost ratio to be funded this year, but may be funded if new capital funding comes forward.  Once enacted it will take a while for shovels to hit the ground, but this is no reason not to do it at all.  Silly argument treasury, if we need to do it and at the ZLB shows a positive return to treasury standards we should fund them.

The problem is the UKs stodgynous in not keeping a schedule of major projects that are needed in the housing field.  Nick’s argument is the treasury hasnt done its job in the past so is unable to do its job in the future.  No wonder Keynes got so frustrated with its pathological stupidity and laziness.





RIP – The Homes and Communities Agency – All Social Housing Needs to be Given Away and You are in the Way

The news on the abolition of the HCA as told by Hillary Mantel.

This week King Henry the IIX  George Osborne 

Seized the assets of the Catholic Church  Housing Associations/HCA by authoritarian  decree Henry IIX clause in the Housing Bill

The dictator minister has deemed that all institutions in the way of his plans to seize lands to give to rich  landowners  householders are to be swept away so that their ownership can be transferred to placate a political class that was rebelling against his rule.  This is the biggest seizure of private assets by the State in English History.

Foolish lacky Thomas Cromwell David Orr has now been beheaded, he hoped that he could avoid a civil war by doing the dictators bidding, but now finds the dictator has used him and abolished his power base using it to secure his position.

The once fine Monestaries  Social Housing estates now lie smashed and grabbed by the new class alliance able to consolidate the power of the dictator and those who followed him.


As this Holbein shows an alliance with a narrow overly influential group of Fundamentalists with court influence, who proposed the seizure, did not save him from Beheading.  In the end even his closest allies turned against him, and the groups he sought to represent were destroyed

With the Catholic Church HCA disestablished England lacked the ability and expertise  to construct large scale integrated communities like Monestaries Garden Cities, England became a backwater and minor power in Europe for two centuries, as its rivals constructed many new Towns  and built their national infrastructure.

The Inspiring Story of the True Origin of the Term ‘Shovel Ready’

I have been investigating the origin of the term ‘shovel ready’ suspicious that has gained a definition (capital intensive stimulus) quite different from that in the New Deal Era (labour intensive stimulus).

The argument that projects were too capital intensive and long term for stimulus to work  raged in the 30s.  Roosevelt disagreed that this was paying people just to ‘lean on a shovel’ – postmaster General Jim Farey posted Roosevelt a newspaper clipping about a worker who had broken a bone after slipping leaning on his shovel handle (presumably after exhaustion) joking they should have non slip handles.  He focused on projects where low skilled workers had shovels in hand. As the New Deal song from a 1939 review – answering Texas Congressman Die’s (The Cruz of his day & first Chairman of the House American Activities  Committee) accusation of communist supporting ‘Shovel Leaners’ ,goes:

When you look at things today
Like Boulder Dam and TVA
And all those playgrounds where kids can play
We did it–by leaning on a shovel!…

Miles of Roads and Highways too
And Schools and Buildings Bright and New

Change a few words it could be a them song for Hilary ‘Hiliarycare and EPA’ there is even a verse about reading Karl Marx in New York – (ahem).

This must have been I think the origin of Keynes parable in the General Theory of digging up bottles stuffed with money – a joke aimed straight at his Treasury View opponents   – expressed to the Macmillan Commission – that roads took too long to build.  Keynes argued here that even if true (which it wasn’t), his theory upended the conventional view that putting people to work and preventing them starving has no positive economic effect.  Slam dunk, Keynes had provider a killer argument that being what we now call ‘shovel ready’ was not the most important factor in stimulus – what was was putting people to work and giving them money to spend and buy on inventory which would clear and the retail sector would restock and factories would reboot – though of course infrastructure upgrades help in addition.

Now the conservative Myth is that Obama invented the term ‘Shovel Ready’ in 2008 as if he were changing the language like he is accused of changing the laws of physics and the direction the earth should spin.  Actually as the Washington Post points out  Hilary first used it in 2007 and she seems to have picked it up from upstate New York where local utility National Grid has used it to promote its projects since the 1990s.  Did it go back further though, and what was it about Up State New York?

A clue the Mohawk valley was the home of the Iroquois who built dramatic bark longhouses. Could there possibly be a connection?

As 75 years ago

when the Society for American Archaeology (SAA) was founded, the United States was deep in the throes of the Great Depression. During the same year of SAA’s founding, Franklin Delano Roosevelt initiated a massive government work relief program designed to alleviate the burden of crippling nation-wide unemployment, the Works Progress Administration, or WPA. Under the auspices of the WPA, and other “alphabet soup” programs such as the Civil Works Administration (CWA) and the Civilian Conservation Corps (CCC), relief workers tackled a diverse group of projects across the country, including archaeological investigations at varying scales-ranging from small camps to large mounds.

Theres even a book about it, several even, the term ‘Shovel Ready being more than a modern play on words

The book, in its opening chapter by Bernard Means,  tells how the SAA sold the concept to the ‘Alphabet Soup’ Agencies

The goal of these federally funded work relief programs was to put people to work quickly, so funds were directed to projects that could get started very quickly—thus, they were shovel ready. Archaeology projects, of course, were literally shovel ready, as shovels are used regularly to move soil during the excavation process. Incidentally, on some projects, workers had to bring their own tools, including shovels, as work relief funding focused on meeting labor costs.

And some of the greatest discoveries of the project was were several Iriqois Longhouses one  – where? upstate New York bigger than a football pitch in size which must have required a small army to excavate, embedding the excavation on local folk memory.

Snow’s presents a finegrained analysis of the organization of production in a completely excavated Iroqouian longhouse in upstate New York. The house dates between ca. AD 1450and ca. AD 1520. The area excavated is a stupendous 7572 m

So Larry Summers and eventutally President Omana neednt have become dissillusioned by teh term, whilst back other forms of stimulus.

In economic terms if you need to expand infrastructure do so, any any time rates are low, as it is long term.  Even pay for that with bank borrowing by the government with the by product of helping global liquidity.    Don’t worry about immediate labour impact, for that you need labour intensive not capital intensive programmes, like a cyclical work guarantee, pay for that with QE direct to people’s pockets, and if inflation is at risk (unlikley with spare capacity at the ZLB), slap on a sales tax which removes the money from circulation (as every good circuitist knows).

Ultimately it is unlikley we could run out of things that need doing that could be geared up quickly

But maybe there are no such investments?  As N. Kocherlakota writes this week powerfully


That’s a tough argument to sustain quantitatively.  The current market real interest rate – which I would argue is actually above the natural real rate r* – is about 1% out to thirty years.  This low natural real rate represents an incredible opportunity for the US. We can afford to do more to ensure that all of our cities have safe water for our children to drink.  We can afford to do more to ensure that our nuclear power plants won’t spring leaks.  We can afford to do more to ensure that our bridges won’t collapse under commuters.

These opportunities barely scratch the surface.  With a 30-year r* below 1%, our government can afford to make progress on a myriad of social problems.  It is choosing not to. 

If the government issued more debt and undertook these opportunities, it would push up r*.  That would make life easier for monetary policymakers, because they could achieve their mandated objectives with higher nominal interest rates. But, more importantly, the change in fiscal policy would make life a lot better for all of us.

Get those shovels ready, more archaeology next time.



Dover Shows Why English Urban Planning is the Pits

CPOing these lubyanka’s – yay

Which replaced this Georgian Townscape

And Replacing it with this scheme – the St James Scheme –  via CPO – not going to win any awards – unless there is an urban design equivalent of the Razzis.

Tear down a lubyanka put up a parking lot – yeah yeah yeah

To this errr ‘masterplan – criminally turning its back on the Seafront area – and not even connecting the Sea?marine Parade to the town centre.  If I had seen any student producing this – sorry E-.  Almost a caricature.


And preventing the through link to Marine Parade and the Marina – potentially the most exciting seafront/town centre opportunity in England (if you can solve the A20 issue)

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Can Kickstarter ‘Regional Planner: The Board Game’ Help Fix the Least Affordable City in West

From the guy who brought you the smash hit games ‘The California Water Crisis’and High Speed Rail the Game’ comes…Regional Planner.  You have drawn a bust card, bankers do not go to jail.

City Metric – Begging for versions for London, Brum and commuting areas

Monopoly is one of the best-known board games of all time. It pits players against each other with the goal of dominating real estate markets through a series of land grabs, jacking up rents and hotel fees, and being a generally nasty human being.

Now, though, there’s a new board game that’s turning that premise on its head, challenging players to work together to solve a housing crisis. And, in a doubly ironic twist, it’s focusing on an urban area known for shunning low-tech board games in favour of start-ups and apps: San Francisco.

The choice of location is certainly apt. San Francisco’s housing crunch is one of the most acute anywhere in the world, rivalling other global cities like London and New York.

Housing horror stories abound. The city’s landlords make use of California’s Ellis Act, which allows landlords to remove tenants and go out of business, to evict low income tenants with ruthless efficiency. Single room occupant housing – an affordable place to stay for lower income San Franciscans – is closing all around town. Some landlords have exploited rent control loopholes to raise rents by as much as $6000 within a span of a few months.

And the proliferation of tech companies in the city has led to a plethora of tone-deaf computerised solutions to the city’s rent woes. An app launched to combat homelessness has made little headway, and has been criticised as simply a way to “snitch” the location of the homeless. And last year, AirBnB took it upon itself to launch a snarky ad campaign criticising the city government for wasting its tax money, in hopes that loosening restrictions for them would somehow lower housing costs for locals.

Game designer Alfred Twu had a different idea. Instead of looking for a high-tech solution to the solution, he would try a less technological, if equally unorthodox, solution: a board game.

Twu has already built something of a name for himself as a designer of board games tackling somewhat wonky subject matter, releasing games such as “California Water Crisis” and “The US High Speed Rail Game”. But in late 2015, he decided to set his sights on the housing crisis that, as a resident of nearby Berkeley, hit close to home for him.

On 6 December, Twu launched a Kickstarter campaign for his new game, “Bay Area Regional Planner”. The campaign immediately began drawing favourable media coverage, getting picked up by both Curbed San Francisco, and then by Citylab the following day. This attention helped make his campaign a success, far surpassing his initial goal of $500, for a total of $18,361 by the end of December.

Given the game’s subject matter, it’s no surprise to find its objective framed in unconventional terms. Instead of being asked to plop costly houses and hotels on top of colourful tiles and nab “get out of jail free” cards, their goal is to “Get ready to compromise and make coalitions!”

The game, which is now in production, can be played by 2 to 12 players, and takes roughly 60-90 minutes to play through. Played on a board formed into a large grid resembling the Bay Area, it asks players to work together to up-zone various squares on the grid, representing Bay Area cities, to provide housing to meet the demand from 2m hypothetical new residents.

Though housing is the main goal, players also have to worry about other goals, including traffic and historical preservation. They will also have to deal with the overall economy; turns begin by drawing economy cards (including “recession”, “boom”, and “bubble”) that may constrain zoning options.

On the game’s Kickstarter page, Twu details the planning principles that went into the game’s creation. He lays out the connections between zoning for greater density and increased traffic congestion (while also offering a hypothetical transit map of a densified San Jose), as well as a discussion of the effects of retail space on housing costs. He also talks about how his own experiences at planning meetings fed into the creation of the game.

Will the game make a difference? Critics point out that, at the end of the day, it may be no more effective than the apps that have drawn fire from activists. And its steep price tag of $44.99 might be offputting to those Bay Area residents, struggling to get by, who would benefit the most from more housing options.

Despite these drawbacks, however, the game may serve to bolster one element often glossed over by apps and AirBnB ads: collaboration, something sorely lacking in Bay Area regional planning.

Many of the area’s current housing woes are due in no small part to the rampant NIMBYism that runs the length of the San Francisco Bay. Though residents are proud to point out that this once had positive effects – San Francisco’s property owners banded together back in the 1960s to defeat freeway plans that would have plowed through the city’s neighborhoods – today it is a major obstacle to desperately needed new housing. All too often, existing property owners stand in the way of new building, fearing its negative effects while conveniently increasing the value of their own homes at the same time.

To put it in board game terms, many in the area still see housing as a game of Monopoly. Perhaps a few rounds of Bay Area Regional Planner might help to change their minds.