The second guest post in this series comes from L Randall Wray, professor of economics at the University of Missouri-Kansas City. If the first was a call to arms for role of the state as entrepreneur, this is another big idea: we need to rethink the role of money in order to recognise the true challenge for finance.
Our Mission Oriented Finance conference explores how to direct funding toward what Hyman Minsky called “the capital development of the economy”, broadly defined to include private investment, public infrastructure, and human development.
But to understand how, we need to understand what money is and why it matters. After all, finance is the process of getting money into the hands of those who will spend it. Read more
In our previous post we argued that one of the reasons QE may have failed to perform as expected, especially when it comes to stimulating price levels and employment, is because the modern monetary system isn’t what many believe it to be. Or at the very least, money doesn’t work exactly the way many economists and analysts believe it does.
As Tyler Cowen noted on Tuesday:
Milton Friedman, some time ago, wrote that money was for the most part neutral, and that the new money rapidly mixes in with the old. That made sense to me at the time, and it nudged me away from Austrian views, yet we have seen decidedly non-neutral effects from the various QEs and the periodic taper talk.
Money markets have a tendency to be misunderstood.
As we’ve mentioned before, this is because most people believe them to represent a market for loanable funds, in which said funds are objectified and thus absolute. Read more
There’s a post FT Alphaville has been trying to write about the art market for a while now. At least a year. Problem is, nobody will talk honestly about the angle we want to discuss.
That being: how much art is being “mined” purely to satisfy the demand for ‘safe-ish’ assets in a liquidity saturated world. Safe assets, which we should add, are often held in bonded warehouses in places like Geneva, outside of the reach of tax authorities, and which later become a type of bearer security in their own right as the depository receipts which allow redemption of the assets begin to circle amongst the wealthy as their own type of non-taxable currency. Read more
How much would you pay for a bundle of 100 1-renminbi bills?
Is the answer Rmb109? Read more
Now there’s this:
“We have been in discussions with the Federal Reserve Bank of New York about the Bundesbank’s holdings of gold,” the Bundesbank said yesterday in a letter to the German parliament’s budget committee. “The discussions have been fruitful and the Federal Reserve has expressed a commitment to work with the Bundesbank to explore ways to address the audit observations, consistent with its own security and control processes and logistical constraints.”
There will be a few people hoping this practice doesn’t spread: Read more
Are money and value, much like time, a function of relativity rather than a definable and quantifiable substance?
A while ago, we made the case that relativity was an under-appreciated factor in determining monetary value. We further argued that fixed exchange regimes, especially ones based on inflexible commodities such as gold, were particularly vulnerable to the warping effects of relativity. Read more
There’s a polite blogosphere debate going on between Paul Krugman and Steve Keen, an Australian economics professor who has some strong views about the role of debt and the financial sector, and about how conventional economics has overlooked or misunderstood them.
Keen, who is a beneficiary of George Soros’ Institute for New Economic Thinking, last week published a summary of a paper he’s going to present at an INET conference next week, which looks at why Hyman Minsky’s ideas are important and how they’ve been misunderstood/misappropriated. Read more
Congratulations to Ben Dyson, self-professed “money and banking specialist” for finally discovering, err, money. Or, how money works.
In a column in the Guardian on Tuesday, Dyson recounts in grand revelatory style how the solution to the system’s current ails is nothing other than recognition of the fact that “money has been privatised”. Shock, horror! Read more
Sometimes it’s the simplest observations that stand out.
For example, when it comes to the question of money, perhaps popular singing sensation ABBA said it best: Read more
Currently doing the rounds on the interweb is the Bank of England’s answer to a curious freedom of information request from one Mr. T. Cuff.
Mr. Cuff, who submitted his request via email on April 15, appears to have wanted to know the answers to the following basic questions: Read more
Buried within Tuesday morning’s monetary supply release from the Bank of England is the long-awaited monthly M4 ex-IOFC measure.
As a reminder, that’s M4 money supply excluding the deposits of ‘intermediate other financial corporations’ – things like central clearing counterparties, SPVs, etc – which the Bank argues distort the measure. In fact, M4 ex-IOFC has pretty much become the BoE’s preferred gauge of money supply, and as such, provides some decent clues regarding whether the central bank thinks its quantitative easing policy is actually working. Read more
Economics wonkiness ahead, but the Bank of England has been trying to modify the way it measures broad money in the UK since September 2007.
Excluding the deposits of ‘intermediate other financial corporations’, the Bank argues, would provide an “economically more relevant measure” of broad money than that based on the traditional M4 definition. IOFCs include central clearing counterparties, mortgage and housing credit corporations, bank holding companies, SPVs, etc. Read more
MV = PY, that’s the formula for the theory of money. M is the quantity (or supply) of money, V is the velocity of money, P is the price level and Y is the aggregate economic output.
Interesting to note currently, according to Standard Chartered, is the V part of the equation and where exactly it’s contracting. The theory initially assumed that V was constant. Of course, the Great Depression showed that that was in fact not true, because the velocity of money fell. Read more