Paul Krugman is puzzled why it’s suddenly news that banks have the power to create money. As he noted on his blog this week, it’s hardly something that contradicts standing economic theory. We have, as he notes, known about the money-creation role of banks for a long time — a point we’ve also made before on numerous occasions.
So why then is it suddenly such a talking point? Who is it really that’s been misunderstanding the system for so long and how much damage has this been doing?
Part of the problem according to Krugman is that Econ 101 theory tends to over-simplify things, teaching conclusions without lingering on the peculiar features and complexities of finance. But as he notes:
…this doesn’t mean either that they have unlimited ability to create money or that they are somehow outside the usual rules of economics.
As Martin Wolf has eloquently argued this week, yes, there is a clear-cut and urgent need for state e-money issuance.
But the case for expanding the central bank balance-sheet to the population — something which can easily be done via the issuance of sovereign e-money — does not in our opinion necessarily demand the elimination of private money issuance along with it. More than likely both forms of money can co-exist quite healthily. Read more
With his latest column on the nature of money and credit in the modern monetary system, the FT’s Martin Wolf delves deeper into the murky depths of the “what is money” debate.
Anyone who has speculated about the significance and effects of quantitative easing in the last five years should probably have a read. Read more
Cartels come in many shapes and sizes.
There are Colombian drug cartels. Mafia protection cartels. Oil producer cartels. Diamond cartels. Commodity cartels. Central banks. Altcoin cartels. All sorts.
All of them, however, extract value from potentially low-value things by means of organised collusion and discipline.
Columbian drug cartels organise to ensure drug markets are not oversupplied by wiping out the competition. The mafia organises to extract rents from those who would otherwise not be inclined to pay them, mostly by imposing an artificial market for protection. Oil producers organise to ensure oil markets are not oversupplied for the best possible return from oil prices. Diamond cartels do the same , but since diamonds are not an essential commodity they also create fanciful myths about diamonds being a girl’s best friend to create continuos demand. Central banks control the money supply, and thanks to that can corner and support any market they wish for as long as their underlying currency is demand. Read more
Paul Krugman recounts the point that rentiers are turning into that old horror movie cliche of the killer/zombie/psychopath who just won’t die quietly — even when you think you’ve killed him multiple times. In classic formulaic style, just when you least expect it, they rise again to try to take you down one last time.
The point refers to John Maynard Keynes’s famous observation that one day the global economy would rid itself of the plague of economic value-sucking rentiers by arriving at a post-scarcity moment. At such a time an abundance of capital would make economic rent an impossibility. Rates would naturally fall to zero to reflect the excess of capital, and rentiers would have to die.
Today we’re calling that idea “secular stagnation”. Which of course sounds more impressive than plain old “abundance” and new enough to be able to distance itself from Marxist economics. Read more
Or, why it’s nuts out there
In this series we have thus far presented the economic argument for the introduction of “free money”, whether it be via the rise of private market virtual units or central-bank dropped bundles of helicopter money.
The question which arises, however, is what does it mean when anyone in an economy can self-create money and have it respected without the need for national guarantees? The answer, presumably, is that there is such a shortage of money relative to output that the system flourishes with every virtual unit that’s created by the system — i.e. there is more risk in hoarding output than in distributing it.
And more specifically, that there’s a greater benefit in creating money “no strings attached” than with conditionality attached to it in the form of bank credit money. Read more
We promised at the end of our previous post that we would qualify the economic case for the introduction of “free money” with some direct references to Willem Buiter, Citi chief economist and former BoE MPC member.
So here follow some of his observations on all things “money” during a liquidity trap, as plucked from his papers on seigniorage, the nature of irredeemable fiat money, numerairology and the use of virtual currencies to break through the ZLB from the last decade or so. Read more
In a previous post we presented research by Willem Buiter, Citi chief economist and former BoE MPC member, which he conducted in the mid 2000s, into whether virtual currencies could be a useful mechanism for breaking through the zero-lower bound.
The idea in many ways represents an evolved form of QE, in which differentiable units from dollars are pumped into the economy, inducing an effective negative interest rate on dollars due to the fact that there is less of the new currency in circulation than the established one. Seen from this light, the recent rise of private virtual currencies could can be seen as amounting to the market’s own endogenous version of QE. Read more