Sunday, 16 February 2014
Market monetarism leads to the state owning all assets.
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).