Tuesday, 8 December 2015
A slight mistake by David Graeber and others.
Graeber should be congratulated for helping explain how the bank and monetary system really works, which is significantly different from how the proverbial man in the street understands it, and indeed how some economics text books explain it. However the following sentence of his in The Guardian is not correct. (The same error is made incidentally by others)
“What this means is that the real limit on the amount of money in circulation is not how much the central bank is willing to lend, but how much government, firms, and ordinary citizens, are willing to borrow.”
The flaw in that argument is that the total amount of debt VASTLY exceeds the amount of money needed to make the economy work.
To illustrate, in the UK, SME trade debts alone amount to three times GDP, never mind mortgages and debts between large firms, etc. (That probably doubles the "three times" figure).
In contrast, the amount of money needed by the average household is little more than what's needed to tide them over from one monthly pay day to the next. That's roughly one twelfth GDP. But trebble that if you like and make it a quarter of GDP. That quarter of GDP figure is a minute fraction of the above three or six times GDP figure.
That point can be illustrated by reference to King Henry I and tally sticks, which are a form of money. Henry (who came to the throne in 1100) introduced tally sticks to England in a big way (though tally sticks were being used in some sort of fashion throughout Europe long before that).
You could argue that the amount of tally stick money was limited during Henry’s reign by the amount of wood available from which to make those tally sticks. However, that’s not a brilliant argument given that the amount of wood available for tally stick production was probably a good million times the amount actually needed.