Excerpt from Monetary Policy Takes Center Stage: MMT, QE or Public Banks?
Now I think this is interesting, Prof. Mary Mellor says that banks issue loans but not the interest the bank requires back, so new money needs to be always lent into existence, so that previous borrowers can earn it to pay back the interest they owe.
That sounds alarming to me, but Prof. Steve Keen says the velocity of money will pay the interest as it cycles many times through the banks, and then back out again into society as they pay for their services, rates, and wage bills. Phew, I feel happier now, but who is right?
UK professor Richard Murphy adds another role for the central bank – as the issuer of new money in the form of “Green Infrastructure Quantitative Easing.” Murphy, who was a member of the original 2008 UK Green New Deal Group, explains:
All QE works by the [central bank] buying debt issued by the government or other bodies using money that it, quite literally, creates out of thin air. … [T]his money creation process is … what happens every time a bank makes a loan. All that is unusual is that we are suggesting that the funds created by the [central bank] using this process be used to buy back debt that is due by the government in one of its many forms, meaning that it is effectively canceled.
The invariable objection to that solution is that it would act as an inflationary force driving up prices, but as argued in my earlier article here, this need not be the case. There is a chronic gap between debt and the money available to repay it that actually needs to be filled with new money every year to avoid a “balance sheet recession.” As UK Prof. Mary Mellor formulates the problem in Debt or Democracy (2016), page 42:
A major contradiction of tying money supply to debt is that the creators of the money always want more money back than they have issued. Debt-based money must be continually repaid with interest. As money is continually being repaid, new debt must be being generated if the money supply is to be maintained.… This builds a growth dynamic into the money supply that would frustrate the aims of those who seek to achieve a more socially and ecologically sustainable economy.
Prof. Mellor is right. Keen quietly corrected his error several years ago.
ReplyDelete"[I]f you admit the reality that banks create money by lending, and that money is destroyed by debt repayment (a point I have to admit that I took some time to appreciate), all the simple equilibrium parables of conventional economics fly out the window. In particular, the level of economic activity now depends on the lending decisions of banks (and the repayment decisions of borrowers). If banks lend more rapidly, or if borrowers repay more slowly, there will be a boom; if the reverse, there will be a slump. As the Bank of England puts it, if new loans simply make up for old ones being repaid, then there is no effect, but if new loans exceed repayment then aggregate demand will increase."
The BoE's sharp shock to monetary illusions — Institute for Dynamic Economic Analysis
Thanks EconCCX. I remember Ellen Brown being really puzzled by what Steve Keen said, and she refused to believe him, even though she's not an economist, and she was right.
ReplyDeleteI've tried to figure out how MMT works myself because the MMT academics only make statements, like the government is the insurer of the currency and so can never run out of dollars, and no tax is required unless inflation starts.
Correct, but they don't explain the mechanism of how it all works, that the government can create money out of thin air and pay for public services with it. But nothing is for free, so how does the system work?
I worked out that when the newly employed public servants spend their wages (money created by the government) private companies will gear up production and employ new staff to provide to extra required. The new people in work will do the work to pay the public servants by producing the extra products and services they need. But the deficit money the government has spent into the economy will need to be taken out again, but MMTers say not necessarily. Well, the government can issue bonds to help reduce the money supply.
Also, some things, like electronics and computers go down in price, so that gives the government wiggle room to spend.
Also, with lots of new money coming into circulation many companies will not only just employ new staff, but will have the confidence to tool up as well, so more automation will bring prices down.
So, what I'm saying is that economics is fiendishly complicated, and that even Steve Keen can get it wrong sometimes, and that his velocity of money theory about paying the interest was wrong.
Wow! So, these things are not easy to understand, and I'm trying to figure it all out in my head.
I read yesterday that a new textbook has just been co-written by Bill Mitchell which really does explain how MMT works.
and no tax is required unless inflation starts.
ReplyDeleteNo new tax laws need to be passed unless inflation starts. And it isn't always the best way to deal with it. But in a spending boom like the roaring 90s, tax revenues will naturally increase - they did then to the extent that the US government ran surpluses. They are automatic stabilizers. Only if spending, from the government and the private sector got really high would new taxes be needed.
Correct, but they don't explain the mechanism of how it all works, that the government can create money out of thin air and pay for public services with it. But nothing is for free, so how does the system work?
Yes, they do. In mind-numbing detail. Look at Wray's books for instance, at Fulwiller's and
Kelton's & Mosler's papers. The accounting and mechanics of bonds and reserves and how it is all a shell game that amounts to next to nothing. All it does is maintain positive interest rates - but does not interfere at all with the government spending at will. That is one thing that is relatively new about MMT - the level of grinding boring detail of the mechanics which you said they don't explain (you're lucky you haven't gone through it! :-) )
I will admit, I haven't read the text books, only ones on the introduction to MMT. I've also watched countless lectures by adj the MMT academics and not once did they explain the mechanism of how it works.
DeleteBy the way, Ellen Brown, who I am arguing with at truthdig, supports AMI/Positive Money/ "debt-free money" (a contradiction in terms). It isn't MMT and it isn't correct.
ReplyDeleteEven though PM and Ellen Brown may have some things wrong, I quite like them, and I think they are going in the right direction. We should be debating with them, not getting angry with them.
ReplyDeleteI came across PM long before I came across MMT and I became a member straight away. I give them some money every month.
PM is a bottom up movement and MMT is bottom down. PM has groups all over the UK where people meet to discuss things and become activists. It's nice, but I'm not well enough to participate at this point.
When I joined MNE'S I got cold feet and said to Mike that I wasn't up on enough economics, and he said, we have plenty of economics, come on and do some politics.
I met Ellen Brown in person three times in 2007 (she and I are both from Los Angeles) and afterward I communicated with her via email for six months, trying to explain some things to her about money, but she would not have it. For her, all money is created by banks as loans.
ReplyDeleteI myself am an ex-banker, and Ellen is an ex-attorney, so there was a wall between us that I could never breach.
She could have learned a couple of things from me, but she was not interested. So be it.
I am not superior to her. I look at myself when younger and I think, “God you were an idiot."
I hope you chip in from time to time, Konrad.
ReplyDeleteMellor is talking nonsense and Keen is right. EconCCX: where did Keen “correct” his error? I couldn’t find anything in that link you gave.
ReplyDeleteMellor (and many like her) assume that when interest is paid to a bank, the money disappears. It doesn’t: that money is part of the bank’s income, which gets paid to depositors, bank employees, bank shareholders, people who make computers for the bank, etc etc. I.e. the money becomes part of the general circulation of money.
Yes, Ralph, and no bank makes 100% profit, more like 5% to 10%, like most companies, and so most of the money goes back out again. Steve Keen even had software models proving it.
ReplyDeleteAs well as being a top economist, Steve Keen is an excellent mathematician, and expert on climate change, as well as being a first class software designer.
And he's humble, too. He comes across as a down to earth regular guy.
EconCCX: where did Keen “correct” his error? I couldn’t find anything in that link you gave.
ReplyDeleteGreetings Ralph. Here’s Keen’s old position, from the comments section of this post:
http://www.debtdeflation.com/blogs/2011/09/15/behavioral-finance-lecture-07-endogenous-money-circuit-theory/
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Commenter: One point. When Steve says he doesn't believe that repayment of loans destroys money, I presume he is referring to repayment in cash, which then becomes bank reserves. Repayment of loans obviously does destroy credit - this is just the opposite of credit creation by taking out a loan from a bank.
Steve Keen: • 8 years ago
No it does not Barry--it takes money out of circulation but does not destroy it. This is a point on which I happily differ from most modern Post-Keynesian economists and instead concur with Keynes: credit money circulates, it is not destroyed by loan repayment. The argument that repayment destroys money made no logical sense to me when I first heard it, and was treated as absurd when I discussed it with bank accountants as well. I'll elaborate more fully on this in future lectures.
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And on that very same comments page, five years later:
Steve Keen • 3 years ago
I've actually realised that I was wrong on that point. With a double-entry viewpoint, if the asset is reduced by repaying debt, then the liability side falls by the same amount. Since we trade using banking sector liabilities (ie by transfers between deposit accounts), the money is destroyed by repayment.
Cash complicates the issue: cash repayment transfers money from active to inactive circulation (bank deposit accounts to the bank vault). But it is still taken out of circulation and will only get back into it via another loan.
RM: "money is part of the bank’s income, which gets paid to depositors, bank employees, bank shareholders, people who make computers for the bank, etc etc." But, there is the problem, the money that goes to the shareholders is economic rent which leaves the real economy and goes into the financial economy to be added to asset inflation which hurts the real economy.
ReplyDeleteThe creation of money via lending by banks results in an inescapable ever-increasing debt spiral. Where does the 300k necessary to pay off the 100k mortgage come from? From the issuance of more bank loans. Where does the money to pay off the new loans come from? Endless recursion. QE is the mechanism that allows this system to survive. QE for citizens would have allowed a stable environment for dismantling the private banking system. Instead, the bankster government used QE to bail out the crooks. Surprise, surprise.
ReplyDeleteIn regard to taxes, there are two principle purposes: regulating the economy (which is supposedly done - ineffectively - with interest rates that benefit banksters and the wealthy, who play the spread) and regulating behavior. Ever time the tax on cigarettes goes up the number of smokers goes down. Hoarding of money should be taxed to the point of impossibility. The direct effect of this would be the elimination of the wealth power that buys government favor and service. Until this is accomplished there will never be democracy.
"The creation of money via lending by banks results in an inescapable ever-increasing debt spiral. " Exactly. The more money that finance takes out of the economy the more currency the government has to put back in which means more government debt. Let me say that I know that the government creates the money but with the current system it is still shown as debt and the bankers will complain about the national debt in order to restrain the government so that they can loan more money. Bankers are not our friends.
ReplyDeleteHello.
ReplyDeleteI am Japanese. I’m reading and writing with machine translation.
I found a very interesting article on interest.
Is this article correct?
Let me hear your opinion.
Debunking the “Debt-Virus Hypothesis”
http://www.ardeshirmehta.com/DebunkingTheDebt-VirusHypothesis.html