Wednesday, 31 October 2018
Warren Mosler wrote a 700 word article in US News a few years go entitled “Federal Reserve Interest Rates Should Be Near Zero Forever”. I agree with the near zero rate idea, but I think his reasons leave a bit of room for improvement. Here’s a summary of his argument.
The 1st para points to various advantages of low interest rates, like cheaper loans for businesses.
The 2nd para says a disadvantage of low rates is that there’s less income for savers, but that doesn’t matter because the cut in demand that that involves is countered by the money that the state (i.e. government and its central bank) injects into the economy by way of interest on government debt.
The 3rd para (starting “The federal deficit…”) says that the deficit also boosts demand.
The 4th para, to quote in full reads, “So this means that when the Fed lower rates, the Treasury pays less interest to the economy on its debt, and that means less income for the economy. In other words, with the economy on balance a big saver, lowering rates removes interest income and therefore acts much like a tax increase, and this hurts the economy.”
Well I’m not sure about that. Interest paid by the Treasury is funded via tax. So if the Treasury pays out $X less by way of interest, then taxes will fall by $X: net effect on household incomes is zero. In fact given that the weekly spending of less well-off households is more closely related to their income than that of better-off households, it follows that a fall in interest rates (as per the conventional wisdom) will boost demand.
The 5th and 6th paras (starting “Fortunately there are….”) repeats the point that deficits can make good deficient demand.
The 7th para (starting “Additionally…”) advocates the Job Guarantee, or Warren Mosler’s particular version of JG.
The 8th and 9th para (starting “So yes…” ) repeats the above general message that any cut in demand stemming from low interest rates can be made good by a deficit.
And that’s it.
So to summarise, the basic argument is that any fall in demand caused by low interest rates can be made good by deficits, ergo low interest rates are beneficial. Well now the first weakness in that argument is that it’s widely accepted that a fall in interest rates causes a rise in demand, not a fall, as intimated above in relation to the 4th para.
Second, the fact that deficits can make good the demand reducing effects of A, B or C is not a brilliant argument for A, B or C. To take a silly example, it would be possible for government agents steal peoples’ wallets and handbags in a random fashion and burn the dollar bills in them. That would cut demand, and no doubt that could be made good, or could be largely made good by deficits. But that’s not a good argument for burning peoples’ $100 bills in the above random fashion.
Better arguments for a zero interest rate.
There are actually some better arguments for a zero interest rate and as follows.
First, it is widely accepted in economics that the optimum price for anything, including the price of borrowed money (i.e. the rate of interest) is the free market rate. The only exception comes where there are obvious social considerations involved. For example it is widely accepted that education for kids should be available for free. And it is widely accepted that alcoholic drinks should be sold at way above the free market price: i.e. heavy taxes on alcohol are justified.
Second, it is not unreasonable to assume that the free market, left to its own devices, will result in a more or less genuine free market rate of interest in that there are millions of lenders and borrowers out there and hundreds of intermediaries between them. I.e. the market in loans looks very much like a genuine free market.
There are of course some exceptions to that: for example the way in which banks bribe politicians into passing bank-friendly legislation is an exception. But that’s a separate issue with its own solution or potential solution: e.g. better control of political donations.
Thus the crucial question in relation to interest rates is whether the state (by which I mean government and central bank) is interfering with the above free market rate.
Well I can think of one very significant way in which that interference does take place: it’s the fact that governments borrow astronomic amounts and without any very good reasons. And that will clearly tend to raise interest rates. Indeed, Warren Mosler goes along with that idea: he advocates zero government borrowing. See his second last para in this Huffington article entitled “Proposals for the banking system.”
I actually set out detailed reasons for thinking that the excuses given for government borrowing are nonsense in the second section of a paper entitled “The arguments for a permanent zero interest rate”.
The state should issue money – base money.
Quite apart from the borrowing issue, one job which the state should certainly do is to issue the country’s basic form of money (Fed issued dollars in the US) in sufficient quantities to keep the economy at capacity, but not in such quantities that excess inflation ensues.
Indeed that function of the state applies even in, for example, a simple economy switching from barter to money for the first time: that is, in any such economy there has to be some sort of central authority that issues the nation’s basic form of money. And in practice throughout history, that function has been performed by kings, rulers and similar.
But it is clearly nonsensical for the latter sort of authority to issue so much money that excess demand and inflation ensues, with the result that the authority then has to impose some sort of deflationary measure like borrowing back some of its own money at interest. That just results in an artificially high rate of interest.
And that is what happens big time in 21st century economies: the state borrows back large amounts of its own money.
Plus don’t be fooled by the fact that the conventional 21st century arrangement is for governments to borrow first, with central banks then creating new money as required and buying back some of that debt. That is just one way of juggling the ratio of the stock of base money relative to the stock of government debt. It would be perfectly easy, as just intimated, to do the money creation first, with government or “the state” then borrowing back some of its own money as required. Those two arrangements amount to the same thing.
Raising interest rates in emergencies.
Having argued for a zero or near zero rate of interest, it is legitimate to ask which of those two is preferable. Well since there are no good arguments for the state borrowing back its own money, I suggest the answer is “zero except in emergencies”. In other words the objective should always be zero, though clearly if an exceptionally large clamp down on demand is required, then a temporary rise above zero might be justified.
Indeed Milton Friedman advocated much the same, except that the emergency he had in mind was war. I.e. he advocated a zero government borrowing regime, though he thought government borrowing would be justified to fund a war. See his paragraph starting “Under the proposal…”.
Friday, 26 October 2018
Let’s start by illustrating the reasons for thinking monetary policy is nonsense by reference to a simple barter economy that introduces money for the first time.
In practice when money is introduced for the first time it has normally been some sort of ruler or king who does it, and with a view to making tax collection easier. That is, rulers have announced what the form of money shall be (e.g. metal coins of some sort), plus they announce that taxes must be paid using that form of money. That creates a demand for the “king’s money”, which gives it value.
The fiat money issued by 21st century governments and their central banks comes to essentially the same thing, and I’ll jump a few centuries and assume that form of money is in operation. (Money issued by private banks will be considered briefly at the end of this article).
The more money people have, the more they are likely to spend, so clearly the amount of money distributed or issued in an economy that introduces money for the first time needs to be enough to induce the population to spend at a rate that brings full employment, but no so much that excess inflation ensues.
Another possibility is for government to issue too much money and then contain the resultant excess demand and excess inflation by borrowing back some of that money at interest. But that’s a clearly nonsensical policy: what’s the point of implementing stimulus in the form of issuing or spending money into the economy and then negating some of that stimulus? Deliberately doing that is pointless, though of course there may be occasions when government issues too much money by mistake and with a view to reining in demand, it temporarily raises interest rates. (Incidentally, the word government is used here to refer to government and its central banks, assuming it’s a central bank that issues the country’s basic form of money (base money)).
In practice what happens in the real world is that interest rate raising “mistakes” of the sort mentioned above for the most part take the form of politicians (i.e. governments) borrowing too much because that is what politicians are always tempted to do, as pointed out by David Hume almost three hundred years ago: a phenomenon which Prof Simon Wren-Lewis calls “deficit bias”. The net effect is that mortgagors and other borrowers have to pay an artificially high rate of interest for years on end just to enable monetary policy to be used. To put it politely, it is not obvious why that’s a strategy that maximises output per hour of the workforce.
To summarise so far, the optimum rate of interest (i.e. the rate that government pays to borrow back its own money) is zero. That is, such borrowing should not happen ideally, and if there is no such borrowing, then there are no bonds for government to buy back with a view to cutting interest rates.
The claim that the optimum rate of interest is zero is not of course to say that the optimum rate for other borrowers, e.g. mortgagors, should be zero. The rate for mortgages and similar will always be significantly above zero.
The claim that the optimum rate of interest is zero is not original. Milton Friedman advocated that idea as did Warren Mosler. But as far as I know they did not actually claim monetary policy is nonsense, though clearly what they were saying was close to saying it is nonsense. (For Friedman, see his para starting “Under the proposal…”.)
Astute readers will have noticed that while simply creating new money and spending it into the economy is possible (and is indeed advocated by various groups like Positive Money), in practice nowadays, new money is introduced by a more indirect method. That is, governments borrow $X, spend it and give $X worth of bonds to lenders. Then the central bank creates new money and buys back whatever proportion of those new bonds it thinks is appropriate. Indeed, while QE was in operation, almost all those new bonds were being bought back.
But clearly it does not make much difference whether bonds are issued first and then bought back a few weeks later, or whether new money is created first with government borrowing that money back a few weeks later and issuing bonds to lenders.
Borrowing to fund infrastructure.
A possible objection to the above argument is that far from government borrowing making no sense, such borrowing can be justified if it funds public investments like infrastructure. Indeed, the UK Labour Party’s new “fiscal rule” is the latest of a long line of instances of that idea being invoked.
In fact the latter “infrastructure” argument is weak in the extreme.
One weakness is that education is one huge investment, but for some strange reason no one ever claims that publically funded education should be paid for via borrowing. At least state education for kids up to about eighteen in most countries is funded basically via tax rather than borrowing. Thus advocates of the “public investment justifies borrowing” idea have clearly not got their act together.
But even if there are particularly good arguments for funding public investments via borrowing, there is another problem for the “pro borrowing” brigade as follows.
Interest rate cuts (and indeed QE) are effected by having the central bank create new money and buy back bonds. But that clashes with the idea that there are particularly good reasons for funding public investments via borrowing. That is, if relevant bonds are bought back by the central bank, then relevant investments will then have been funded not by borrowing but by money printing!
In short, the whole idea that public investments should be funded via borrowing is in a mess at the moment.
Apart from the latter public investment excuse for government borrowing, there are a host of other alleged reasons for such borrowing. They are all as hopeless as the above “investment” reason as I show in section two here. (Title of that article is “The arguments for a permanent zero interest rate.”)
Having argued that monetary policy is nonsense, that does not necessarily mean that traditional fiscal policy is vastly better. That’s fiscal policy as in “government borrows $X, spends the money and gives $X of bonds to lenders”.
The obvious anomaly with that ploy is that while the latter spending is stimulatory, the borrowing element is “anti-stimulatory”. It’s a bit silly doing something anti-stimulatory (i.e. deflationary) when the object of the exercise is stimulus!
On that basis, the best form of stimulus is simply to have the state (government and central bank) create new money and spend it (and/or cut taxes).
Commercial bank issued money.
Having based the above argument on the assumption that the only form of money is central bank money (base money), obviously it is relevant to say something about the fact that in reality in 21st century economies the majority of money is issued by commercial banks.
In fact that does not make much difference to the argument. Reason is that all commercial banks do is to lever up base money: i.e. whatever size economy we’re talking about, it is normal for commercial banks to create roughly ten times as much money as central banks. So, to illustrate, the statement made near the outset above that if too much base money is issued, the result will be excess inflation still holds: that is, commercial banks may well lever up the latter new money, making the latter inflation even worse. Though notice that they will not necessarily do that: there has been a vast and unprecedented increase in the stock of base money over the last five years or so as a result of QE, but there has certainly not been a pro rate increase in the stock of commercial bank money.
Monday, 22 October 2018
It’s certainly better than the lies and nonsense we got from George Osborne when he was UK finance minister.
The rule is that government income must equal government spending over a five year period, but with two exceptions. The first is that government can borrow to make investments, and second, spending can exceed income by even more when interest rates decline to zero (because in that circumstance the only alternative way of boosting the economy is to cut interest rates to below zero and there are well known problems there).
The main problem with the new fiscal rule has to do with investment. The idea that investment justifies borrowing may sound sensible, but in fact no household or firm abides by that rule. Reason is that the idea is nonsense: e.g. if a taxi driver wants a new taxi and happens to have enough cash to pay for it, perhaps because he’s been saving up, he won’t borrow: he’ll just pay cash. Quite right. I.e. what justifies borrowing is a shortage of cash. But governments are never short of cash in that they can grab limitless amounts of cash from taxpayers (and print a limited amount of money every year).
Plus education is one huge investment (in the future of our children), but no one ever suggests funding the entire education budget via borrowing. Thus the whole “investment justifies borrowing” idea is nonsense, or at least advocates of the idea have a lot of work to do before they’ve got their house in order.
In fact if the latter questionable idea about borrowing for investment was removed from Labour’s fiscal rule, then the rule would amount to something very similar to the permanent zero interest rate idea advocated by Milton Friedman and Warren Mosler. Reasons are as follows.
A balanced budget is bound to have a deflationary effect (that’s deflation in the “demand reducing” sense). Reason is that if the stock of base money and government debt is not constantly topped up via a deficit, then the real value of that stock will decline relative to GDP because inflation constantly eats away at the value of that stock. And when the private sector has what it thinks is an inadequate stock of base money and government debt, it will tend to try to save so as to acquire its desired stock. The effect of saving is deflationary.
Thus under Labour’s fiscal rule minus the “borrow for investment” element, interest rates will tend to bump along just above zero and actually hit zero from time to time. Clearly that is similar to the above mentioned permanent zero interest rate scenario.
Sunday, 21 October 2018
Morgan Ricks (Associate Professor of Law at the Vanderbilt University Law School) published an article in 2016 criticising Adam Levitin’s full reserve banking proposals. The title of Ricks’s article is “Safety First? The Deceptive Allure of Full Reserve Banking”.
Ricks’s main criticism of full reserve is in his Part II, and he starts by pointing out (correctly) that if money issued by commercial / private banks is banned, government and central bank will have to make up for that by issuing more central bank created money (i.e. base money).
Ricks suggests that can be done by having the central bank create base money and buy up government debt, and certainly that’s one way of doing it. But Ricks then gets worried about what happens if there is not enough government debt: he says that government will have to implement fiscal stimulus so as to create such debt. That is, government will have to borrow $X, spend it, and give $X worth of government bonds to lenders. Then the central bank can create more base money and buy up some or all of those bonds.
But according to Ricks there is a problem there, namely that money creation is then dependent on politicians agreeing on how to implement fiscal stimulus: e.g. should the stimulus come in the form of more public spending or tax cuts, and if it’s the former, should the extra spending involve more education, health care or what? And as Ricks rightly says, politicians (particularly in the US) often spending months if not years arguing over those sort of details before actually implementing the stimulus.
As Ricks says, “In this world, fiscal expansion must precede monetary expansion. Monetary stimulus therefore becomes contingent upon the resolution of contentious political questions. Who gets a tax cut? What additional expenditures should the government undertake?”
Well luckily the advocates of full reserve tumbled to the existence of the latter “Ricks problem” years before Ricks’s article, plus the advocates of full reserve thought of answers which are as follows.
The first answer is that fiscal adjustments do not necessarily have to be delayed for months while politicians argue about them: in the UK, the finance minister has powers to adjust taxes at the flick of a switch and the UK finance minister did precisely that during the recent crisis: he adjusted the sales tax VAT twice.
And that is moderately democratic in that the finance minister is democratically elected. But in addition, there is nothing to stop other politicians (the House of Commons in the case of the UK) subsequently making adjustments to “finance minister instigated” fiscal adjustments.
Another possibility is to have some sort of committee of economists decide how much stimulus is needed in the next year or so. Indeed such committees already exist: for example there is the Bank of England Monetary Policy Committee, which currently decides whether to adjust interest rates, though it could easily be given the additional task of deciding how big the deficit should be over the next year or so.
As to exactly what form that deficit takes (e.g. tax cuts or more public spending), politicians could be given a relatively SHORT TIME to decide on their preferences there, and absent a decision, the above committee could be given powers to simply raise public spending AND cut taxes in about equal measure (where a country already devotes about 50% of GDP to public spending). That would not be wildly undemocratic.
But of course, there’d be nothing (as in the case of the above mentioned UK finance minister instigated fiscal adjustments) to stop politicians in general making subsequent changes to for example the mix of public and private spending as a proportion of GDP.
Moreover, there’d be nothing to stop politicians, if they have their wits about them, deciding PRIOR to any fiscal stimulus, what form that stimulus should take. The above delay of about a month would then not be necessary. At least there’d be nothing to stop politicians deciding ROUGHLY what their preferences are, even if they don’t decide every detail.
The latter sort of system, where a committee of economists decides on the size of deficits, while politicians decide on the exact nature of the deficit was set out several years ago by Positive Money and co-authors. Plus Ben Bernanke claimed more recently that such a system would not be difficult to arrange – see Bernanke’s para starting “A possible arrangement….” In this Fortune article entitled “Here's How Ben Bernanke's "Helicopter Money" Plan Might Work.”
Incidentally the above mentioned “government creates debt and the central bank then buys back that debt” process is a bit cumbersome, and indeed Positive Money’s proposals involve short circuiting that process: that is, under the PM system, the central bank simply creates what it thinks is the right amount of money and politicians spend that. Under that system of course, politicians do not gain direct access to the printing press, which is an important consideration for many people.
It would be nice if Morgan Ricks had read more of the literature before putting pen to paper.
Saturday, 20 October 2018
Monday, 15 October 2018
MMT has suddenly become much more popular and widely recognised in the last three months or so. The recent converts and some of the old timers keep banging on about the MMT claim that taxes don’t fund public spending: rather, governments simply print / create money and spend it, then they collect whatever amount of tax is needed to control the resulting inflation.
The truth is that that is just ONE WAY of looking at it. Another equally valid way of looking at it, is the more traditional way, namely that governments aim to have taxes fund public spending, and they then ideally run whatever deficit is needed to maximise numbers employed without bring excess inflation. Indeed the latter way of looking at is the way Keynes “looked at it” for what that’s worth, the MMT can almost be defined as Keynes writ large.
However, the above first way of looking at it is certainly a useful mental exercise: it’s a particularly useful exercise for the more clueless members of the economics profession. That’s the members of the profession who suffer from “debt-phobia” and “deficit-phobia”, or “mediamacro” as Simon Wren-Lewis calls it.
In short, I don’t think the above first “taxes don’t fund public spending” is a big insight. At least it’s not an insight of the same importance as the demolition of “fiscal space” idea (popular in IMF circles) which various MMTers have set out. E.g. see this “Billyblog” article, and one of my articles on the subject.
Friday, 12 October 2018
Under full reserve, anyone wanting interest from their bank, i.e. anyone who wants their bank to lend on their money, is deemed (quite correctly) to be a money lender. That is, they are into commerce. And there is a widely accepted principle that while entering into commerce is thoroughly laudable, it is not the job of taxpayers to come to the rescue of commercial ventures which fail.
That principle is adhered to under full reserve, in contrast to the existing bank system which basks in the delusion that money which has been loaned on is totally safe.
Moreover, under most versions of full reserve (certainly under Laurence Kotlikoff’s), depositors can CHOOSE what sort of borrowers get their money: that is, depositors have a choice between for example funding mortgagors with plenty of equity in their houses, or NINJA mortgages, or loans to Greece (which has a long history of not repaying debts) so as to enable Greece to buy German built submarines, and so on.
Under full reserve, precious few depositors would have chosen to lend to Greece (or Argentina, come to that). In contrast, under the existing system, Euro banks assume the ECB will come to their rescue however silly their loans. So why not lend like there’s no tomorrow?
Of course the above “full reserve treatment” for Greece would probably not have meant Greece escaping austerity entirely. But at least austerity in a relatively mild form would have kicked in earlier, and remained relatively mild, which in turn might have meant that by now (2018) the whole Greek mess might have been solved.
Wednesday, 10 October 2018
Their latest barmy idea is that government can be compared to a household in that they claim the ratio of government assets to government liabilities are important. The reality is demand for government liabilities would probably exist even if government had no assets at all.
Conversely, it is perfectly conceivable that despite a government having trillions worth of assets, there is relatively little demand for its liabilities. And if in that situation the relevant government tried to issue liabilities to match its assets, the private sector would just try to spend away those liabilities (i.e. base money and government debt): the result would be excess inflation.
The IMPORTANT consideration is what rate of interest government pays on its liabilities: if it has issued far more liabilities than the private sector wants to hold, government will have to INDUCE the private sector to hold those liabilities by offering a high rate of interest: not a good idea.
In contrast, if the rate of interest is about equal to the rate of inflation, as is the case with the UK at present, then in real terms, government is paying no interest at all on its liabilities. Personally I’d recommend always aiming to keep the rate of interest below the rate of inflation: that way the relevant government makes a profit at the expense of its creditors.
A very similar objective is a permanent zero rate of interest as recommended by Milton Friedman and the two co-founders of MMT, namely Warren Mosler and Bill Mitchell. For more on the permanent zero interest idea and for links to relevant works of those three authors, see my “Open Thesis” paper entitled “The arguments for a permanent zero interest rate.”
Monday, 8 October 2018
It has become fashionable among advocates of the Job Guarantee (JG) in the last year or two to argue that the wage for JG should be well above the existing minimum wage. In fact various Levy Institute works have argued that the JG wage should be DOUBLE the existing minimum wage.
Well now, there can’t possibly be any objections in principle to raising the minimum wage - maybe even doubling it. The pros and cons of that are obvious. The pros include better pay for the less well off, while the obvious potential con is less work for those lacking skills, experience and so on. Thus a decision on the minimum wage simply requires research into where the best compromise between the various pros and cons lies.
But what is completely barmy is advocating a JG wage well above the existing minimum wage while not advocating a rise in the minimum wage itself, or at least not raising the minimum wage for non-JG employers to the JG level.
The currently fashionable answer to the latter point in JG circles is that the existence of a generous JG wage will force other employers to compete, and raise their minimum wages to about the same level. Well that’s a bit like saying that the minimum wage for employers with more than twenty employees should be raised in the expectation that those with FEWER THAN twenty employees will be forced to compete! Why not just raise the minimum wage for ALL EMPLOYERS?? Be a darned sight simpler wouldn’t it?
Or how about raising the minimum wage for all those working INDOORS in offices and factories in the hope that employers will be forced to raise the minimum wage for those working OUTDOORS? Equally barmy, don’t you reckon?
Another problem with the above barmy idea is that a higher wage for JG work than for other employers will draw employees away from regular work and into JG work which is inherently less productive than regular work, and that clearly has a GDP reducing effect – not that I’m saying the OVERALL effect of JG is necessarily to reduce GDP.
As for exactly WHY JG work is less productive than regular work, that’s quite simple. Reason is that employers, both private and public create the most productive jobs first, i.e. they abstain from turning potential jobs in to real jobs if they think those potential jobs are insufficiently productive. In contrast, if some sort of employment subsidy is available, JG or any other type of employment subsidy, then employers will bring some of those relatively unproductive jobs into being.
Another point is that it’s not very politically astute to advocate a new system, JG or any other new system, in its most expensive form: that is guaranteed to turn off finance ministers and politicians who are always desperate to avoid more government spending, given that there are a near infinite number of worthy projects that can potentially absorb billions upon billions of taxpayers’ money.
Put another way, why not advocate the new system, at least initially, in a relatively cheap or paired down form? That will be more acceptable to politicians. Plus there is such a thing as diminishing returns: that is (as the introductory economics text books explain), the INITIAL tranche of any new product normally brings big benefits, while as output of the new product increases, the benefits of yet more of the product gradually decline as output increases. Or to put in economics jargon, marginal product declines as output rises. And that phenomenon is almost bound to apply to JG.
So if you want to impress politicians with the benefits of a new product or system, keep it small scale to start with.
And finally, anything new is bound to have teething problems (in as far as JG is a new idea, which it isn't really). That means that if you go for small scale initially, the mistakes will be small. In contrast, if you go for big scale, any mistakes will be catastrophes, which will make your new idea a laughing stock for the next decade.
Friday, 5 October 2018
Private Eye is an excellent guide to what's really going on in the world: much better than those deluded respectable broadsheet newspapers like the Guardian or Telegraph. I'm pleased to see Private Eye is doing its bit to fight financial fraud in its latest issue. See below.
Thursday, 4 October 2018
One of the basic flaws in the existing bank system is that commercial banks (i.e. money lenders) can to a significant extent simply print the money they lend out: i.e. create it via book-keeping entries out of thin air. If you’re a money lender, clearly that’s preferable to having to actually EARN the money you lend out or borrow it at the going rate of interest.
That constitutes a subsidy of commercial banks: indeed the French Nobel laureate economist, Maurice Allais, and David Hume (writing almost 300 years ago) argued that the above activity essentially amounts to counterfeiting. Re Allais, see opening sentences here.
On the other hand it could be argued that no matter how dodgy a bank is, there is nothing wrong with government run deposit insurance which pays for itself, as does the US deposit insurance system, the FDIC. After all: if an activity pays for itself, if it’s commercially viable, what’s wrong with it?
And when the liabilities of a commercial bank (i.e. deposits at a bank) are backed by state run deposit insurance, those deposits are then “as good as gold”: i.e. they are as good as $100 bills or £10 notes.
So what’s wrong with that “commercially viable” deposit insurance? Well I suggest what’s wrong is as follows.
There is no sharp dividing line between money and non-money. For example, what’s the difference between $X of bonds which someone holds in a reputable non-bank corporation and which mature in a week’s time, and $X which they have in a term account at a bank and which matures in a week’s time? Almost do difference at all!
Thus there are an infinite number of shades of grey between money and non-money, with the purest form of money being anything which is absolutely guaranteed not to lose value (inflation apart) and which is available to the “money holder” relatively quickly.
Thus the simple fact of upgrading a form of money from relatively dodgy money to “fully backed by taxpayers” money, which is what deposit insurance does, is itself a form of money creation. And whoever creates money is subsidised by the community at large, whether it’s a traditional backstreet counterfeiter turning out fake $100 bills or a respectable commercial bank creating money from thin air.
Ergo, deposit insurance is not quite what it seems: it is not a bog standard commercial activity which is entirely justified because it pays for itself. Part of the reason it pays for itself is that it is a surreptitious form of counterfeiting, or to put it in more polite language, it involves upgrading a not entirely secure form of money to something better. And that ipso fact is a form of money creation.