Thursday, 10 July 2014
The sale of bank assets is deflationary?
Prof. Tim Congen argues that the recent 100bn Euro sale of bank loans by banks to non-bank entities destroys bank deposits and thus reduces the money supply, which (so he claims) is deflationary. The first flaw there is that there is no sharp distinction between money and non-money. In particular, the large sums those non-bank entities had in banks prior to the sale would have been in term accounts, and money in such accounts tends not to be counted as money (quite rightly).
And the fact that so called “money” in a particular type of term account ACTUALLY IS COUNTED as money in particular countries is irrelevant: it doesn’t alter the fact that the longer the “term” the less money-like is that so called money.
Thus it is questionable whether the above sale of loans really reduces the money supply.
Second and as to the above alleged deflationary effect, that hinges on which way cause / effect runs. Congdon has long argued that the amount of commercial bank money influences GDP: in fact he advocates that government should borrow from private banks with a view to increasing the stock of such money.
The idea that government / central bank (GCB) should borrow from private banks when GCB can print its own money is bizarre. Why pay someone else to do something you can do yourself at no cost?
Like many, I suspect cause / effect runs the other way: that is, the amount of commercial bank created money (i.e. amount of loans extended by commercial banks) RESULTS FROM a desire by the non-bank sector to do business.
To illustrate, if I want to set up a widget making business rather than lazy around sun-bathing, I’m liable to need to borrow from a bank in order to set up the widget factory. And if there are people out there who want to buy widgets rather than sun-bath, they’re liable to have to borrow in order to be able to buy widgets.