I think it is worth summing up Philip Pilkington's excellent post on why endogenous money matters.3spoken
Endogenous money matters - a summary
Neil Wilson
I think it is worth summing up Philip Pilkington's excellent post on why endogenous money matters.3spoken
11 comments:
There's one additional point I think should be made explicit because it comes up so much as a basis for arguments regarding QE.
Exogenous money underpins the "time bomb" argument that QE and excess reserves will cause inflation when that money finds its way/leaks/explodes into the economy.
Endogenous money suggests its a non-issue. No time bomb. No inflation current or future as a result of QE.
Gee,
right heard Santelli on CNBC ranting the other day now he's "changed his tune" that what QE is doing is "planting the seeds" of inflation...
rsp,
The endogenous nature of money has to be worked with in any policy design. Trying to pretend a Cheetah is a vegetarian and treating it as such is bound to cause problems. You have to work with the nature of the beast. Cheetahs like chasing Gazelles and eating them. You might not like that, but that's the way it is.
One of the problems that I see is that some people seem to conflate the definitions of fiat and endogeneity. I don't think they're the same. Endogenous money as far as I have seen is just the market driven nature of bank lending. O.K. Loans create deposits. Got it. Our economy is supposed to get its "money supply" through this means. MMT says it can deal with the pro-cyclical nature of such a credit economy by injecting fiat money (which exists not by nature but by law) at the low end of the cycle and taxing at the high end. Endogeneity is important for the argument because it shows that ultimately the credit system rests on fiat so fiscal policy is the tool to use. There's nothing "natural" about it. We can accept such a system and perhaps design a workable policy around it, but it seems more like feeding and cleaning up after elephants than dealing with "the nature of cheetahs." Elephants eat a lot and they're really messy. At some point you've got to ask: why keep the elephants?
David,
"MMT says it can deal with the pro-cyclical nature of such a credit economy by injecting fiat money (which exists not by nature but by law) at the low end of the cycle and taxing at the high end."
The word "injecting" implies an 'exogenous' characteristic imo.
So perhaps the first part of your comment here identifies "endogenous money" (that which is created by loans creating deposits with govt maintaining intrest rate and the system supplying "itself" with the necessary balances for settlements), but if the govt uses fiscal policy to INJECT "money" when the banking system slows down at the low end of the cycle, then those balances would technically be coming from "without" ie exogenous, if one drew the system boundary solely around the banking system....
Key again is WHERE is the system boundary?
Seems like if you are going to claim that both "loans create deposits money" AND balances created due to fiscal operations are both "endogenous", the system boundary would have to extend further out than just the banking system...
Where is the boundary?
rsp,
Matt,
In my minds eye the boundary is around the domestic non-government (the I-S part of the S/B) and passes "through" the banking system, splitting the banks dual balance sheet between the government and non-government.
Reserve balances, etc. all reside on the part of the balance sheet "outside" of the boundary, invisible to us private-sector observers.
The part of banks balance sheet recording transactions with the private sector are within the boundary. Reconciliation occurs between the bank and the Fed as loans are created/satified.
When a loan is created, a liability is entered on the borrowers balance sheet and on the banks balance sheet between the bank and the Fed.
When the loan is paid of the liability is satified between both the borrower and the bank and the bank and the Fed simultaneously.
When a borrower defaults, the bank is stuck with a liability with the Fed. This goes against the banks capital requirement.
If defaults occur at a level higher than a banks reserve requirement, the bank becomes insolvent, and if bad enough the bank should be closed and it's assets sold off.
Except when the Fed decides it want's to "buy" the banks losses and bail it out.
You likely know all this, I just wanted to write it down and see what it looked like.
Key again is WHERE is the system boundary?
For me the problem starts with accepting the Innes version: money=credit. I tend to prefer the Aristotle-Knapp-Del Mar distinction between money and credit. Other monetary reform proposals preserve the distinction and talk about a "money rule" which "injects" money as needed. So, yes, it's exogenous and also fiat. Our system is dominated by finance, economically and politically. Finance wants us to be dependent on private credit creation. The payment management system including reserves, rate setting and the rest of it is insufficient to operate the economy at a decent level after the boom becomes a bust. MMT says that exogenous "injection" or deficit spending/tax reduction at this point is necessary too. You can't "push on the string" because banks don't lend reserves as the monetarists maintain. The system is hermetically sealed except when it's not. MMT understands all this but is trying to work around a system that in itself doesn't make much sense. Reform is difficult. That's why MMT would rather "work with the nature of the beast" than take it on more fundamentally. I just think it is worthwhile to remind ourselves once in a while that the existing system is a man-made creation and could be changed.
David, the crux of the issue boils down to capitalism "as we know it." Capitalism is about investment at risk. There are two kinds of financial capital that are used for investment, capital from savings and borrowed capital. Obviously, the financial capital that is borrowed has to come from loan extension and this is generally from two sources, other households and financial intermediaries like banks.
Banks create the credit money they lend. The savings that are invested also have to come from somewhere, and the only two sources available are govt fiscal injection, govt loans, and bank credit. In most modern economies the bulk comes from bank credit.
This is by design as a "feature" of capitalism. Just as investors risk their financial assets in ventures, so too bank risk their capital in making loans. This is considered integral to "capitalism as we know it," which is based on private risk assumption.
Govt injection or loan could supplant bank credit as the chief source of money, but this would not be capitalism as we know it. Government would be calling the shots rather than people "with skin in the game." The fear is that the process would be politicized, and corruption, cronyism and malinvestment would abound. This fear is not an unreasonable fear.
Changing this system would be to change the entire conception of economics and political economy.
MMT economists choose to function within the system "as we know it." They may not all agree that this is the preferred system, but all of them recognize that it's the system we've got and will likely have for the foreseeable future.
Many of us would prefer to see a different system in place, but we also realize that we need to confront the challenge of working with the system we've got. MMT is a pretty good solution in that context.
Tom,
Not that I disagree with what you wrote…
Financing consumer spending with debt is a highly unsustainable, bubble-inducing way to stimulate an economy.
Except for the past 30 years or so that is not how it was done.
Continuing to do so has zero chance of succeeding over the long (or even medium) term.
Why should we go down that path?
Financing investment with credit is another story. The debt is extinguished as the funds to satisfy the debt are recovered through sales, plus a profit.
Financing consumer spending with debt is a highly unsustainable, bubble-inducing way to stimulate an economy.
Agree. That decision was made in cutting back the labor share of income and extending consumer credit in a way that was never attempted before. The experiment predictably failed. Let's see if the lesson was learned. Probably not.
Tom,
well said, and I don't disagree. If I wanted to quibble I would say that as the "risk assumption" aspect of capitalism seems to have been inverted on behalf of a privileged few, who seem to be wholly insulated from risk while extracting exorbitant rewards at the same time, I'm not sure I would even call it capitalism. I never had any intrinsic interest in monetary economics before, I just had a need to find out what the hell was going on. I also never thought capitalism was "fair," but it seems that the more I learn the worse it looks. I do agree with you, that, despite everything, MMT is still probably the best game in town.
DAvid I'm not sure I would even call it capitalism
It's not. See the post linking to Tao Jonesing I just put up. It's pure propaganda that entrenches the elite.
The problem with the pure capitalism that some Libertarians favor, like Bob Roddis, is that it leads to elite capture through accumulation of wealth by a few due to the "magic of compound interest" and the morphing of the system into monopol capitalism. This is the point of the game Monopoly™ that children are supposed to learn, not that they are supposed to become landlords.
No system can substitute for level of consciousness. As long as the collective level of consciousness remains low, it will be subject to hijacking by elites of different types. Look at history for a sampling.
The task of humanity is raising the level of collective consciousness quickly enough to be able to meet the challenge of increasing complexity by increasing the adaptability rate and return on coordination faster than the rate of complexity is increasing. This is approaching an existential crisis, and MMT alone is not going to do the job.
Post a Comment