Let’s make some simplifying,
but not unrealistic assumptions as follows.
Assume 2% inflation and
2% real growth. Also assume that the amount of base money that the private
sector and public sector employers hold is enough to encourage them to spend at
a rate that brings full employment.
Also assume that the
amount of base money that the above private and public sector entities want to
hold remains constant relative to GDP.
The result of those
assumptions is that the REAL VALUE of the stock of base money, as a proportion
of real GDP will fall at 4% (that’s the above 2% inflation plus the 2% real
growth).
Market monetarism’s
solution to that problem is to have the state print base money and buy up
enough private sector assets to prevent the above 4% decline.
Now half of that “print
and buy” policy is of course attributable to the above 2% real growth. And that
doesn’t matter in that it won’t affect the proportion of all assets held by the
private sector. That’s because private sector assets are presumably expanding
in real terms at 2% in line with the 2% real growth.
However, there is a
problem with the 2% attributable to inflation. To illustrate, let’s suppose
there is no real growth and that there is 2% inflation. The state would have to
print money and buy enough private sector assets to keep the amount of base
money in private sector hands constant in real terms. And let’s say that amounts
to X% of private sector assets.
But a year later, the
state needs to repeat the exercise: that is, print money and buy another X% of
private sector assets.
Well you can see where
that leads: it leads to the state ultimately owning all assets.
There is of course a
solution to that problem, but it’s one that is strongly opposed by market
monetarists. The solution is to have a dollar of fiscal stimulus for every
dollar of monetary stimulus (as advocated by Positive Money and MMTers). That
is, for every dollar of “print and buy government debt” (monetary policy),
there is a dollar of “borrow money from the private sector, spend the money and
give lenders Gilts (in the UK) or Treasuries (in the US). And that’s fiscal
policy. That is, for every dollar of “print and buy assets”, there is a dollar
of “print and distribute government debt”.
Conclusion: market
monetarism is a joke (unless I’ve dropped a clanger).
"Also assume that the amount of base money that the above private and public sector entities want to hold remains constant relative to GDP."
ReplyDelete"base money" is a not defined in this post. Base money could be:
1. Accumulated sum of annual income measured by "GDP less money spent".
2. The total of bank deposits and currency.
3. Gilts (or Treasury's) plus bank deposits and currency.
4. Other.
I think we need a clear definition of "base money".
.
“Base money” is actually a fairly widely used term. It’s a synonym for “monetary base” and “bank reserves” and “high powered money”. God knows why we have to have so many terms for the same thing!!!!
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