An economics, investment, trading and policy blog with a focus on Modern Monetary Theory (MMT). We seek the truth, avoid the mainstream and are virulently anti-neoliberalism.
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Sunday, November 29, 2020
Why Money Doesn't Matter That Much — Brian Romanchuk
Brian kindly takes the time to reply to Scott Sumner.
I also posted there an exchange between Tyler Cowen and Scott Sumner in the hopes that Brian would comment on that:
Tyler Cowen had a post back up in 2012 with the following:
"I do not myself believe that currency per se has such extreme power over aggregate demand, at least not in such a credit-intensive economy as ours. That means this proposal doesn’t get at the heart of the AD problem, which is closely linked to credit creation. But if you disagree with me on this one, you end up back at #3."
Scott Sumner had responded with this:
"Even if there is no change in the real demand for credit, a doubling of the money supply will lead to a doubling of the nominal credit stock in the long run. That’s true even if the stock of credit is 100 times larger than the stock of currency. The reverse is not true. Base money is special because we price things in terms of base money. If someone could show me that the previous sentence was wrong, I would disavow everything I’ve written on this blog from day one. It’s the rock on which all of monetary theory is built."
“doubling of the money supply will lead to a doubling of the nominal credit stock in the long run.“
He doesn’t understand how banks are regulated...
Look here we go again you had them increase Reserves in Sept 2008 and cause the crash, then the QEs which caused the Obama malaise, then this past March they added like 700b in a week or something and they crashed it again, now they have Australia doing it and they are rolling over and may eventually crash when they double down, and now Treasury is allegedly going to change TGA policy and increase reserves by 1.2T over 6 months which we can see again what happens.,, US loans and leases in bank credit currently down 400B so far as Reserves/Deposits near/at records and headed higher...
All I need to know about Sumner is that he thinks if we started listing prices in cents instead of dollars we would have 100x higher prices.....hyperinflation!!!!!!!!
Scott Sumner: Even if there is no change in the real demand for credit, a doubling of the money supply will lead to a doubling of the nominal credit stock in the long run. That’s true even if the stock of credit is 100 times larger than the stock of currency. The reverse is not true.
This is false because he has the causality wrong. The amount of base money does not influence purchasing power in the economy, which is essentially due to M1 money supply. There is no money multiplier. Reserves serve as settlement balances to clear in the payments system run by the cb. The cb provides the necessary liquidity to clear, using the discount window at a penalty rate as the lender of last resort. Most economists don't understand central banking.
Base money is special because we price things in terms of base money.
This is true because base money is the currency issued by the government using its cb as agent. This is designated as the unit of account in terms of which credit is extended, goods are priced, and settlement takes place. Note that "currency" can mean both cash notes ("currency in circulation") and also "currency" as the unit of account issued by the currency issuer, e.g., in the US, the USD issued by the federal government under US Constitution Art. 1, section 1. USDs as currency in this sense exist as liabilities of the Fed as a government agency, which includes both reserve balances and FRB notes.
Base money includes reserve balances at the Fed in the payments system and currency in circulation held by the public. Banks' vault cash is counted as reserves until it passes through the window to the public.
Note that the TGA is not included in base money as rb, nor is held in cash. Credits in the TGA are not counted toward any measure of the money supply — base money, M1, M2, M3, although they are spendable by the government. When they are spent or transferred into the economy, they constitute 'new money."
From this account it should be obvious why MMT economists don't explain operations to conventional economists in terms of the conventional model(s). The causality is not there. In fact, it is not exactly true that MMT economists don't explain in terms of the conventional models. They point out the deficiencies in those models and how MMT avoids them.
Conventional models are incorrect about money supply as they understand it affecting aggregate demand. It simply doesn't and MMT explains why it doesn't. Interest rates do affect aggregate demand but not in the ways that monetarists assume and they also act in ways that monetarists ignore.
As the monopolist you have a choice to control price or quantity...... if you want a market , and as Tom says (and Mosler points out) CBs control price and let quantity adjust to that price.
No monopolist can control price AND quantity for very long and still have a market
“ CBs control price and let quantity adjust to that price.”
Price of what? Reserve Assets? They are certainly not letting the quantity of Reserve Assets adjust they are increasing Reserve assets by +125b. per month in (to them) QE and they are currently at $3,150B in another month they will be at all time high above $3,250B... so banks have “more reserves to lend out!”... they’re Monetarists like Sumner......
The guy says: “Deposit growth is favourable as a source of capital because deposits...are cheap. “
Capital is Assets minus Liabilities (A-L) and Deposits are a bank Liability so an increase solely in L (subtrahend) would reduce the result of the subtraction A-L ie would reduce Capital... but they guy says it would increase Capital...
This is manifestly what is popularly believed by 99.999% of people out there ....
You guys are in cloud cuckoo land if you are thinking otherwise..
Seems to me they primarily set an interest rate (price) and adjust the quantity to keep that price..... no ? You are right that they often are fighting them selves because they set reserve levels for banks as well (which is a quantity they can control but usually support) but sometimes this can’t be met due to private loan conditions/ market levels and then they must make up difference so their own rules/limits end up binding them into unsatisfactory conditions, especially when the economy is most in need of coordinated support.
So doesn’t this support my comment? As a monopolist, if you try to control/manipulate both the price and quantity you can end up in quite a bind when times are the worst. When times are good even the non monopolists are doing fine. When times are the worst is when you think it would be great to be a monopolist but........even monopolists can’t do whatever the hell they want, they have constraints
Not anywhere that actually understands how to do banking.
"There has been a popular tendency to believe that reserves created by QE sit on banks’ balance sheets rather than being lent out. This characterisation misunderstands the role of reserves in the UK banking system in two ways. First, reserves are highly unlikely to have sat statically on banks’ balance sheets. Reserves are the ultimate means of settlement, such that when payments are made by banks’ customers, absent any offsetting payments, they are settled in reserves. Second, such a characterisation seems to assume there is a normal tight link between reserves, money and the quantity of lending via a money multiplier. But the UK sterling monetary framework has no such feature."
Yes they control “supply” which is a reification error they think the abstractions are real and they have to provide reserves (regulatory accounting abstractions used in RRR) “to lend out”...
Collapses regulatory leverage ratios and causes a simultaneous reduction in bank risk assets and/or risk asset prices... which is allegedly what they are trying to increase...
They are all just not qualified and incompetent.... need a complete replacement of key personnel...
I left a comment after Brian's article.
ReplyDeleteI also posted there an exchange between Tyler Cowen and Scott Sumner in the hopes that Brian would comment on that:
ReplyDeleteTyler Cowen had a post back up in 2012 with the following:
"I do not myself believe that currency per se has such extreme power over aggregate demand, at least not in such a credit-intensive economy as ours. That means this proposal doesn’t get at the heart of the AD problem, which is closely linked to credit creation. But if you disagree with me on this one, you end up back at #3."
Scott Sumner had responded with this:
"Even if there is no change in the real demand for credit, a doubling of the money supply will lead to a doubling of the nominal credit stock in the long run. That’s true even if the stock of credit is 100 times larger than the stock of currency. The reverse is not true. Base money is special because we price things in terms of base money. If someone could show me that the previous sentence was wrong, I would disavow everything I’ve written on this blog from day one. It’s the rock on which all of monetary theory is built."
“doubling of the money supply will lead to a doubling of the nominal credit stock in the long run.“
ReplyDeleteHe doesn’t understand how banks are regulated...
Look here we go again you had them increase Reserves in Sept 2008 and cause the crash, then the QEs which caused the Obama malaise, then this past March they added like 700b in a week or something and they crashed it again, now they have Australia doing it and they are rolling over and may eventually crash when they double down, and now Treasury is allegedly going to change TGA policy and increase reserves by 1.2T over 6 months which we can see again what happens.,, US loans and leases in bank credit currently down 400B so far as Reserves/Deposits near/at records and headed higher...
All I need to know about Sumner is that he thinks if we started listing prices in cents instead of dollars we would have 100x higher prices.....hyperinflation!!!!!!!!
ReplyDelete@ Ahmed Fares
ReplyDeleteScott Sumner: Even if there is no change in the real demand for credit, a doubling of the money supply will lead to a doubling of the nominal credit stock in the long run. That’s true even if the stock of credit is 100 times larger than the stock of currency. The reverse is not true.
This is false because he has the causality wrong. The amount of base money does not influence purchasing power in the economy, which is essentially due to M1 money supply. There is no money multiplier. Reserves serve as settlement balances to clear in the payments system run by the cb. The cb provides the necessary liquidity to clear, using the discount window at a penalty rate as the lender of last resort. Most economists don't understand central banking.
Base money is special because we price things in terms of base money.
This is true because base money is the currency issued by the government using its cb as agent. This is designated as the unit of account in terms of which credit is extended, goods are priced, and settlement takes place. Note that "currency" can mean both cash notes ("currency in circulation") and also "currency" as the unit of account issued by the currency issuer, e.g., in the US, the USD issued by the federal government under US Constitution Art. 1, section 1. USDs as currency in this sense exist as liabilities of the Fed as a government agency, which includes both reserve balances and FRB notes.
Base money includes reserve balances at the Fed in the payments system and currency in circulation held by the public. Banks' vault cash is counted as reserves until it passes through the window to the public.
Note that the TGA is not included in base money as rb, nor is held in cash. Credits in the TGA are not counted toward any measure of the money supply — base money, M1, M2, M3, although they are spendable by the government. When they are spent or transferred into the economy, they constitute 'new money."
From this account it should be obvious why MMT economists don't explain operations to conventional economists in terms of the conventional model(s). The causality is not there. In fact, it is not exactly true that MMT economists don't explain in terms of the conventional models. They point out the deficiencies in those models and how MMT avoids them.
Conventional models are incorrect about money supply as they understand it affecting aggregate demand. It simply doesn't and MMT explains why it doesn't. Interest rates do affect aggregate demand but not in the ways that monetarists assume and they also act in ways that monetarists ignore.
" It simply doesn't and MMT explains why it doesn't. "
ReplyDeleteNo they dont they just say it doesnt... then the Monetarists say it does... then MMT says it doesnt... then Monetarists say it does...
Its the dialogic method... doesnt work....
The monetarists say it is about quantity, the MMT economists say it is about price. Banks confirm the MMT view.
ReplyDeleteAs the monopolist you have a choice to control price or quantity...... if you want a market , and as Tom says (and Mosler points out)
ReplyDeleteCBs control price and let quantity adjust to that price.
No monopolist can control price AND quantity for very long and still have a market
“ Banks confirm the MMT view”
ReplyDeleteNo they don’t MMT just says they do... the people at banks are monetarists who think they are lending out the deposits...
“ CBs control price and let quantity adjust to that price.”
ReplyDeletePrice of what? Reserve Assets? They are certainly not letting the quantity of Reserve Assets adjust they are increasing Reserve assets by +125b. per month in (to them) QE and they are currently at $3,150B in another month they will be at all time high above $3,250B... so banks have “more reserves to lend out!”... they’re Monetarists like Sumner......
Here:
ReplyDeletehttps://www.federalreserve.gov/releases/h41/current/default.htm
3,143b ready to surpass previous high of 3,250 back in spring when they were crashing the whole thing....
Banks have built 60b more equity since then though... we might be ok now till they gat it somewhere above 3,500b
Here:
ReplyDeletehttps://www.kitco.com/news/2020-11-25/Canadian-banks-record-deposits-sluggish-lending-to-drive-3rd-straight-profit-drop.html
The guy says: “Deposit growth is favourable as a source of capital because deposits...are cheap. “
Capital is Assets minus Liabilities (A-L) and Deposits are a bank Liability so an increase solely in L (subtrahend) would reduce the result of the subtraction A-L ie would reduce Capital... but they guy says it would increase Capital...
This is manifestly what is popularly believed by 99.999% of people out there ....
You guys are in cloud cuckoo land if you are thinking otherwise..
Seems to me they primarily set an interest rate (price) and adjust the quantity to keep that price..... no ? You are right that they often are fighting them selves because they set reserve levels for banks as well (which is a quantity they can control but usually support) but sometimes this can’t be met due to private loan conditions/ market levels and then they must make up difference so their own rules/limits end up binding them into unsatisfactory conditions, especially when the economy is most in need of coordinated support.
ReplyDeleteSo doesn’t this support my comment? As a monopolist, if you try to control/manipulate both the price and quantity you can end up in quite a bind when times are the worst. When times are good even the non monopolists are doing fine. When times are the worst is when you think it would be great to be a monopolist but........even monopolists can’t do whatever the hell they want, they have constraints
" the people at banks are monetarists"
ReplyDeleteNot anywhere that actually understands how to do banking.
"There has been a popular
tendency to believe that reserves created by QE sit on banks’ balance sheets rather than
being lent out. This characterisation misunderstands the role of reserves in the UK banking
system in two ways. First, reserves are highly unlikely to have sat statically on banks’ balance
sheets. Reserves are the ultimate means of settlement, such that when payments are made by
banks’ customers, absent any offsetting payments, they are settled in reserves. Second, such
a characterisation seems to assume there is a normal tight link between reserves, money and
the quantity of lending via a money multiplier. But the UK sterling monetary framework has
no such feature."
QE and the lending channel
“ Not anywhere that actually understands how to do banking.”
ReplyDeleteThat is so small a cohort that it properly should be considered zero...
“So doesn’t this support my comment?“
ReplyDeleteProbably... I didn’t think I disagreed with it...
Yes they control “supply” which is a reification error they think the abstractions are real and they have to provide reserves (regulatory accounting abstractions used in RRR) “to lend out”...
Collapses regulatory leverage ratios and causes a simultaneous reduction in bank risk assets and/or risk asset prices... which is allegedly what they are trying to increase...
They are all just not qualified and incompetent.... need a complete replacement of key personnel...