tag:blogger.com,1999:blog-2277215496195926573.post4226111350570027213..comments2024-01-01T07:41:51.347-08:00Comments on RALPHONOMICS: The loanable funds doctrine is not totally invalid.Ralph Musgravehttp://www.blogger.com/profile/09443857766263185665noreply@blogger.comBlogger12125tag:blogger.com,1999:blog-2277215496195926573.post-53402129818915812062014-09-19T02:22:40.769-07:002014-09-19T02:22:40.769-07:00Peter,
I think Pos Money does get SOME THINGS wro...Peter,<br /><br />I think Pos Money does get SOME THINGS wrong – see section 3 of my forthcoming book featured at the top of the left hand column. However, PM are perfectly well aware that when government spends, it feeds base money (or national debt) into the private sector. In fact they SPECIFICALLY ADVOCATE having government create and spend new base money into the private sector when stimulus is needed.<br /><br />Re the rest of your comment, yes, clearly there are limits to how much thin air money the commercial bank system can create and lend out. The main constraint is the willingness of borrowers to borrow. But I’d argue that that constraint is not enough. Certainly when the private sector goes into a fit of irrational exuberance, lending can get excessive (e.g. NINJA mortgages). <br />Ralph Musgravehttps://www.blogger.com/profile/09443857766263185665noreply@blogger.comtag:blogger.com,1999:blog-2277215496195926573.post-15033436915237541412014-09-18T16:52:59.722-07:002014-09-18T16:52:59.722-07:00Hi Ralph,
Well its not just VAT. Its all taxes. T...Hi Ralph,<br /><br />Well its not just VAT. Its all taxes. The best way to think about all this is that Government creates money when it spends and destroys it when it taxes. But it wants to destroy its own IOUs just like you or I would. It's not interested in destroying any IOUs written by Barclays or Lloyds Bank. <br /><br />I think this is the point that the Positive Money misses and by missing that they end up with a completely the wrong impression about how the monetary system works.<br /><br />The theory of loanable funds is essentially about the limits to bank lending. If you take the argument about 'banks creating money out of thin air' then there isn't any limit. Banks can never go bust which is just absurd.<br /><br />But when you realise that banks have to support the IOUs they create then there is obviously a limit. Each bank essentially creates its own currency like a Lloyds Pound, a Santander Pound etc which is pegged on a 1:1 basis with BoE pounds. <br /><br />There has to be a finite limit on any organisation's ability to maintain that peg which will depend on their financial capitalisation rather than the amount of reserves held by themAnonymoushttps://www.blogger.com/profile/12069544918200377508noreply@blogger.comtag:blogger.com,1999:blog-2277215496195926573.post-14364875937934023922014-09-18T00:44:28.477-07:002014-09-18T00:44:28.477-07:00Hi Peter,
I didn’t think of that VAT point. Howev...Hi Peter,<br /><br />I didn’t think of that VAT point. However that point is not a problem if one assumes the VAT money collected is spent by government on the usual public spending items: education, roads or whatever. And I think that’s a reasonable assumption.<br />Ralph Musgravehttps://www.blogger.com/profile/09443857766263185665noreply@blogger.comtag:blogger.com,1999:blog-2277215496195926573.post-75377294975143840152014-09-17T16:59:01.204-07:002014-09-17T16:59:01.204-07:00(continued) ultimately settle some part of that tr...(continued) ultimately settle some part of that transaction from their reserves.<br />Also the money created by the bank could be used to purchase imports. The Chinese and Germans don't want bank created money. They want real Fed created dollars or real BoE created pounds. Again the bank needs to make these payments from its reserves.<br />So I would tend to agree that the loanable funds theory needs to be modified to reflect the reality of banks creating their own money rather than being completely discarded.Anonymoushttps://www.blogger.com/profile/12069544918200377508noreply@blogger.comtag:blogger.com,1999:blog-2277215496195926573.post-22594042749354420112014-09-17T09:44:37.883-07:002014-09-17T09:44:37.883-07:00"That is, if every bank expands the amount it..."That is, if every bank expands the amount it lends out by the same percentage, no individual bank will run out of reserves"<br /><br />It still could because most financial transactions involve the payment of some tax. 20% VAT for example. So every transaction handled by the bank means they will have toAnonymoushttps://www.blogger.com/profile/12069544918200377508noreply@blogger.comtag:blogger.com,1999:blog-2277215496195926573.post-82289152746297312862014-02-24T03:51:43.923-08:002014-02-24T03:51:43.923-08:00Hi Clint,
I wasn’t trying to argue in the above p...Hi Clint,<br /><br />I wasn’t trying to argue in the above post that the loanable funds idea is TOTALLY invalid. Hence the title of the post. I’m saying it has SOME VALIDITY and in the following sense.<br /><br />Suppose the private banking system spots a series of viable lending opportunities. It will simply credit the account of relevant borrowers without bothering to see if it has enough depositors’ money in place to cover the loans. So to that extent the loanable funds idea is invalid.<br /><br />However, assuming the economy is at capacity, then sundry households have to be persuaded to abstain from consumption in order to make available resources to the new borrowers. And that can only be done if interest rates rise. I.e. ASSUMING CONSTANT INTEREST RATES, private banks do have to find new long term depositors to cover new loans, or a net increase in loans. So to that extent the loanable funds idea is valid.<br /><br />Alternatively, if interest rates don’t rise of their own accord, then the additional spending arising from those new borrowers will be inflationary, so the central bank will raise interest rates . . . much the same outcome.<br /><br /><br />Ralph Musgravehttps://www.blogger.com/profile/09443857766263185665noreply@blogger.comtag:blogger.com,1999:blog-2277215496195926573.post-34037906687000103762014-02-23T20:08:42.944-08:002014-02-23T20:08:42.944-08:00BTW this is the comment I think you were mainly re...BTW this is the comment I think you were mainly responding to on my page <br />"Ralph,<br />As always, good points.<br /><br />However, on one point there is a problem.<br />You write: “I suggest the above “asset” point is not relevant. The money supply increase comes about as follows. Someone deposits $X at a bank, and the bank lends that money on, then both the depositor and borrower have access to $X: i.e. $X has been turned into $2X.”<br /><br />This is not correct – this is the old discredited “loanable funds” idea [and, incidentally, the reason some people get hung up on reserve requirements, which are not important bc the system does not work that way].<br /><br />Banks do NOT wait for anyone to deposit before they loan. They loan to any creditworthy person who walks in the door, regardless of their reserves. They then find reserves, and the Fed (in the US) has to accommodate them since they target interest rates. So the tail wags the dog here – the private banks force the hand of the Fed on money creation. This is what is usually meant when people talk about money being “endogenous” – its creation comes from “within” the economy, and is not dictated by “outside”, by the government.<br /><br />It is crucial to understand that the “loanable funds” model is false to understand why quantitative easing does not work. Mainstream economists still believe in QE, because they still DO think banks are waiting to have money to be able to loan it.<br /><br />So they gave the banks money and…..nothing happened.<br /><br />That is because the loanable funds model is false. Banks make loans whenever there are creditworthy customers, and after 2008, there aren’t many.<br />So it is the desire and quality of borrowers that allows banks to lend, and private bank-credit money rises and falls with this process. Some people see this as a good thing – an elegant system that allows the private sector to create the funds needed to make the economy work without the government interfering. They think anyone who criticizes this system just doesn’t “get it”.<br />I think they are mesmerized by the elegance of it.<br />Box- jellyfish are also elegant, but I don’t want to swim with them.<br /><br />A system of only circulating Treasury notes as money seems overall much fairer, more functional, and more stable. A nice golden retriever instead of a box-jellyfish."<br /><br />http://clintballinger.edublogs.org/2013/11/11/mmt-private-debt-dialogue-part-ii/#comment-283 <br /><br />Cheers,<br />Clint<br />Clint Ballingerhttps://www.blogger.com/profile/16484643778860969972noreply@blogger.comtag:blogger.com,1999:blog-2277215496195926573.post-74432060316610064022013-11-13T07:57:09.552-08:002013-11-13T07:57:09.552-08:00It discusses the 'loanable funds' theory. ...It discusses the 'loanable funds' theory. I happened to be reading it the day Ralph wrote this post and thought it was interesting.<br /><br />"Another aspect of the importance of the contractual nature of income is demonstrated by the investment-saving identity and the related ‘loanable funds’ fallacy. Despite Keynes having devoted so much effort to defining income and its consequence in terms of the equality of the values of aggregate investment and saving, many economists persist in the view that an imbalance of some kind between saving and investment can affect the rate of interest. This is a further example of real-exchange economic thinking that breaks down when applied to the observable monetary economy. <br />The idea that interest is the price that clears the market for loanable funds can only make <br />sense in a non-monetary, corn model with a single form of homogeneous output that can be <br />consumed, stored (saved) or planted (invested)."<br /><br />http://www.postkeynesian.net/downloads/wpaper/PKWP1209.pdf<br /><br />By the way there are lots of other interesting post-Keynesian papers and talks on this site:<br /><br />http://www.postkeynesian.net/yhttps://www.blogger.com/profile/03233997168975370006noreply@blogger.comtag:blogger.com,1999:blog-2277215496195926573.post-57920140972052901642013-11-12T17:51:24.846-08:002013-11-12T17:51:24.846-08:00@ y
Please explain the relevance of this academic ...@ y<br />Please explain the relevance of this academic paper.KongKinghttps://www.blogger.com/profile/10992633301481631373noreply@blogger.comtag:blogger.com,1999:blog-2277215496195926573.post-84144324041172057632013-11-12T12:32:17.359-08:002013-11-12T12:32:17.359-08:00Ralph - sorry, I was dashing out the door before &...Ralph - sorry, I was dashing out the door before & had only skimmed your article and commented quickly - I will look more carefully at it. I wonder what real numbers the circuit theorists would/could put on what you write about.(?) <br />y - thanks for the link - looks interesting. Clint Ballingerhttps://www.blogger.com/profile/16484643778860969972noreply@blogger.comtag:blogger.com,1999:blog-2277215496195926573.post-41834077183236418702013-11-12T08:31:13.710-08:002013-11-12T08:31:13.710-08:00I just read this paper, which might interest you, ...I just read this paper, which might interest you, regarding 'loanable funds':<br /><br />http://www.postkeynesian.net/downloads/wpaper/PKWP1209.pdfyhttps://www.blogger.com/profile/03233997168975370006noreply@blogger.comtag:blogger.com,1999:blog-2277215496195926573.post-44111518247938966712013-11-12T04:53:02.142-08:002013-11-12T04:53:02.142-08:00Ralph - I have to run so this is quick - but even ...Ralph - I have to run so this is quick - but even individual banks can make loans with no reserves - they then seek out the reserves after the fact, and the Fed (in the US) has to give them bc it targets interest rates. Clint Ballingerhttps://www.blogger.com/profile/16484643778860969972noreply@blogger.com