Monday, April 16, 2012

Rogue Economist — Some limits to bank printing 'out of thin air'


Rogue Economist summarizes a discussion in a comment thread here on bank-created credit money.

Read it at Rogue Economist Rants
Some limits to bank printing 'out of thin air'
by Rogue Economist

1 comment:

Anonymous said...

Professor Lars Pålsson Syll that studied for Hyman Minsky and have a PhD in economic history and another in economics. professor in economic history in 1995 at Lund University. Since 2004 been professor of at Malmö University.He made an astute statement in favor of MMT on his blog:
"Krugman on Modern Monetary Theory
2 April, 2012 at 15:31 |

"As the ongoing debate with Steve Keen abundantly shows, Paul Krugman seems to have great problems with understanding Modern Monetary Theory. Somehow he also seems to think the idea behind it is new and originates from economic cranks.

New? Cranks? How about reading one of the great founders of neoclassical economics – Knut Wicksell. This is what Wicksell wrote in 1898 on “pure credit systems” in Interest and Prices (Geldzins und Güterpreise), 1936 (1898), p. 68f:

"It is possible to go even further. There is no real need for any money at all if a payment between two customers can be accomplished by simply transferring the appropriate sum of money in the books of the bank

A pure credit system has not yet … been completely developed in this form. But here and there it is to be found in the somewhat different guise of the banknote system …

We intend therefor, as a basis for the following discussion, to imagine a state of affairs in which money does not actually circulate at all, neither in the form of coin … nor in the form of notes, but where all domestic payments are effected by means of the Giro system and bookkeeping transfers. A thorough analysis of this purely imaginary case seems to me to be worth while, for it provides a precise antithesis to the equally imaginay case of a pure cash system, in which credit plays no part whatever [the exact equivalent of Krugman's often used model assumption of "cash in advance" - LPS] …

For the sake of simplicity, let us then assume that the whole monetary system of a country is in the hands of a single credit institution, provided with an adequate number of branches, at which each independent economic individual keeps an account on which he can draw cheques."

What Modern Monetary Theory (MMT) basically does is exactly what Wicksell tried to do more than a hundred years ago. The difference is that today the “pure credit economy” is a reality and not just a theoretical curiosity – MMT describes a fiat currency system that almost every country in the world is operating under.

In modern times legal currencies are totally based on fiat. Currencies no longer have intrinsic value (as gold and silver). What gives them value is basically the simple fact that you have to pay your taxes with them. That also enables governments to run a kind of monopoly business where it never can run out of money. A fortiori, spending becomes the prime mover and taxing and borrowing is degraded to following acts. If we have a depression, the solution, then, is not austerity. It is spending. Budget deficits are not the major problem, since fiat money means that governments can always make more of them."
http://larspsyll.wordpress.com/?s=MMT+wicksell