I wrote a while back about how neoclassical economists don’t realize their view that interest on reserves (IOR) stops “printing money” from being inflationary also means that it’s impossible to create inflation by “printing money.” See here.
I’m not 100% sure on this one (and please feel free to correct me if you know better than I do) because I admittedly haven’t given the literature a thorough read, but from what I can tell, it appears “debt-free money” advocates may not realize they are similarly overlooking the actual operations of the monetary system. So, apologies in advance if I’ve misinterpreted.
From what I’ve seen, “debt-free money” (DFM) advocates want a world in which the government spends via cash (i.e., paper money). They are against government issuing bonds or any interest on the debt, since that would suggest the government’s money isn’t “debt free” (again, please correct me if I’m wrong in this description).New Economic Perspectives
What they may not realize (or they might and I just haven’t come across it), though, is that it’s not possible in a modern monetary economy to force “cash” on the private sector (note here that “cash” is not the same thing at all as “income” or “wealth,” as obviously there’s infinite demand for those). There are significant implications for neoclassicals (as I explained in the post I linked to above) and now DFM advocates as well.
(A side note—as Randy Wray explained, the term “debt-free money” is a non-sequitir. I’m going to use the term here simply to identify a group of people with particular views. Also, my overarching point here is to elaborate Randy’s phrase “ZIRP forever” near the end of that post, said in reference to and in some apparent solidarity with DFM’ers.)
“Debt-Free Money” and “ZIRP Forever”Scott T. Fullwiler | James A. Leach Chair in Banking and Monetary Economics and is an Associate Professor of Economics at Wartburg College
6 comments:
Scott’s article is thoughtful, but he gets a fair amount wrong, e.g. he doesn’t understand what advocates of full reserve / debt-free money mean by “debt-free money”. I gave a detailed answer to his article here:
http://ralphanomics.blogspot.co.uk/2014/07/scott-fulwiller-considers-debt-free.html
He also concluded by saying that the debt-free money lot have a fair amount in common with MMT, a point I’ve been making for some time. E.g. both lots claim that in a recession, the authorities should simply create new money and spend it and/or cut taxes.
Debt Free Money is just government spending/tax cuts via the Ways and Means Account dressed up in a new allegedly politically acceptable name.
Neil,
I pretty much agree. I.e. “debt-free” money is just another name for monetary base or “high powered” money or “base money”.
We could do without yet another name for this stuff, certainly. On the other hand Positive Money is not an organisation made up of academics: it’s more of a grass roots or “power to the people” organisation, and thus appeals to emotions by the use of phrases like “debt-free” money. Personally I stick to conventional phrases like “base money”.
“debt-free” money is just another name for monetary base or “high powered” money or “base money”.
The central bank still has the option to sell the bonds and other assets it holds and withdraw that base money. If base money was genuinely ZIRP 'debt-free', there would be no government bonds associated with it. It would be issued when the government spends, and there would be no assets on the central bank balance sheet as a result.
The chief issue regarding direct issuance of currency with no bonds, I.e., default risk-free interest-bearing securities, is the increased risk to the financial system that results from the elimination of "safe assets."
Some argue that reducing this risk arising from eliminating safe assets is a matter that falls under public purpose. It would be relatively low cost since the interest rate wouldn't have to be much above zero in a monetary regime where the central bank sets the rate to zero, as Warren recommends.
Randy proposes to address this issue by permitting interest-bearing time deposits at the central bank open to the private sector on demand in unlimited amounts (as I understand him). There would be no debt-offset for deficits as is presently required and also safe assets in greater abundance, which would reduce systemic risk.
What the Chicago Plan, the Chicago Plan revisited, and PM propose is ending the creation of money endogenously by private lenders with access to the central bank and permitting only the creation of money exogenously by government through direct issuance similar to Lincoln greenbacks instead of the central bank issuing base money and the Treasury obtaining it for deficit spending through bond issuance.
This establishes banks as true intermediaries between savers and borrowers, loanable funds, and monetary policy operating through the quantity theory and government controlling the money supply in MV = PQ.
The chief objection is that this puts the government in control of the economy. This is a top down command and control system.
A second objection is that savers' deposits are at risk of loss in private lending, and depositors are on notice that they are risking their savings by putting them out at interest through the bank acting as their agent. This is basically liquidationism, and in reality no government will permit liquidation in a major crisis. It would not accomplish what advocates claim, and if it did, there would be a panic and then a depression, just like there used to be without a central bank as lender of last resort and deposit insurance.
The alternative is for government to step in and bailout the system, which is what this is supposed to prevent. And history shows who the government tends to rescue first, often leaving the rest to hang out and dry to avoid precipitating inflation or devaluing the currency.
The notion that adopting such proposals would level the financial cycle is just an untested assumption that history tends to belie.
The fact is that nothing needs to change from what is in place now. All that needs to happen is for government to use its policy space differently and there is no guarantee that government would do this if the present configuration were changed.
The mistake that the above proposals make is that the existing system needs to be changed (in ways that politically infeasible, to boot), and that government would act differently than it does now under a tighter command and control regime run by technocrats, who would quite obviously be selected from the elite.
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