Our response to critics in the Cambridge Journal of Economics https://t.co/UxXcrltKGG— Positive Money (@PositiveMoneyUK) July 24, 2016
Ever read something by a professional economist, full of the usual impressive jargon, then your jaw drops: you suddenly realise they have no grasp of the BASICS? Here’s an example.
In the Cambridge Journal of Economics paper by Malcolm Sawyer and Giuseppe Fontana referred to above, the authors (S&F) don’t appear to understand that when a central bank creates money and government spends it, that that money ends up in private sector bank accounts. You’d think that was a simple enough point, wouldn’t you? But S&F say:
“…it is not clear where the prior savings alluded to by Daly and other advocates of full reserve banking have come from. It is technically impossible for banks as a whole to collect deposits without at the same time granting loans for the same amount. Therefore, at least initially there must have been a process of credit creation in the economy, which was completely unconstrained and unrelated to pre-existing resources.”
Technically impossible for banks to collect deposits without at the same time granting loans??? Whaat?? Let’s run thru this V-E-R-Y S-L-O-W-L-Y.
In the case of a helicopter drop (to take just one example), that involves the central bank creating new money out of thin air, which money is then spent in some way or other. For example the CB could just send a cheque to every household in the country, which, contrary to the “technical impossibility” referred to by S&F, results in households’ bank accounts being boosted.
Another alternative is for the CB to give the money to government / the treasury, which then spends the money (and/or cuts taxes). In that case, as well, new money boosts private sector bank accounts.
Standard fiscal stimulus.
In contrast to helicopter drops, there is standard fiscal stimulus. That consists of government borrowing $X, spending $X (and / or cutting taxes), and giving $X worth of bonds to those it has borrowed from. However, that on its own is likely to raise interest rates, which the CB is unlikely to allow assuming there really is a recession which justifies the fiscal stimulus. Thus the CB is likely to print a fair amount of money and buy back some of the latter bonds. Indeed, over the last five years or so, and as a result of QE, the Bank of England bought back ALMOST ALL the new bonds issued by government.
And that all nets out the same thing as a helicopter drop, i.e. “the state prints money and spends it and/or cuts taxes”.
So, as in the case of a helicopter drop, new money is created by the state and fed into the private sector, which (gasps of amazement) boosts private sector bank balances.
As for S&F’s point that “. Therefore, at least initially there must have been a process of credit creation in the economy, which was completely unconstrained and unrelated to pre-existing resources”, well yes: S&F are right there. There is indeed a “process of credit creation” which is “unrelated to pre-existing resources”. It’s the CB and its money printing operations!! Doh!
Hope that’s clear, children. Hope it’s also clear that Sawyer and Fontana don’t have much of grasp of the basic book-keeping entries done by central and commercial banks – not that S&F are the only so called “economists” who don’t have a grasp of the basics.
(P.S. The inclusion of the tweet above by Positive Money should not be taken as a suggestion that PM agrees with the above article.