Tuesday, 3 November 2015

Positive Money versus Dr Mike King.

Mike King makes ten criticisms of PM here. I’ve copied them below and after each one have put my answer (in green). I agree with some of King’s criticisms, but not others. Mike King starts....

1. Positive Money says that profit (seigniorage) accrues to commercial banks on a large scale resulting from money-creation via lending. I say: Lending which results in new money creation is through increased economic activity, and the owners of the new money in the first instance are profitable depositors, not the banks. There is no seigniorage.

Answer. This is complicated, but hopefully the two paragraphs below clarify the issue a bit.

 “Lending which results in new money creation is through increased economic activity..” Nope. If I get a loan for £X, money is created as soon as the £X is credited to my account. No increased economic activity takes place till I spend it, and it’s possible I don’t spend it and indeed quite likely I don’t spend ALL OF IT: people normally borrow MORE THAN they need so that they don’t have to go back to the bank a second time when they find they haven’t borrowed enough.

Seigniorage is the profit that comes from issuing money in exchange for real goods and services. It would be a gross over-simplification to say that every time a loan of £X is granted that the relevant bank makes a seigniorage profit of £X. However, assuming the expansion in the stock of privately created money is £Y in a given year, then that’s pure profit for banks and those they’ve loaned to, IF THAT NEWLY ISSUED MONEY is used as genuine money: i.e. passed from hand to hand fairly quickly. Alternatively, if the so called new money is put into an account where the depositor demands interest, then no money creation has taken place, and there is no seigniorage profit. All that’s happened is that the new depositor has made a loan to the borrower via a bank.

2. Further to this Positive Money says that increased public debt and taxes, and decreased public services, arise from commercial bank lending through seigniorage foregone. I say: there is no seigniorage foregone.

Answer. See above.

3.  Positive Money insists that debt has to be created in order to facilitate economic transactions. I say: this confuses the netting (payment) system and the pooling (savings-loans) system. Only reserves (or cash, which is interchangeable with reserves) are needed for the payment system, a tiny sum in comparison to the total annual transactions in the economy (reserves are ~1/3000 – 1/7000 of broad money).

Answer. PM doesn’t say that, far as I know. But they do subscribe to the view that “without debt there’d be no money”, which I don’t agree with. My reasons are here.

Incidentally, on the subject of “debt has to be created in order to facilitate economic transactions..” that’s true and on a massive scale in that economic activity seems to involve a HUGE amount of trade debt. The total of trade debts for SMEs in the UK is a massive three times GDP.

4.  Further to this Positive Money claims that increased savings reduces the percentage of money available as transactions. I say: reserves and transactions cannot diminish because of increased saving, but where reserves do become a smaller percentage of M4 over time it is because of increased efficiency in clearing.

Answer.  “…that increased savings reduces the percentage of money available as transactions.”.  Not sure exactly what Mike King means by that, but I certainly agree with Keynes’s “paradox of thrift” point: i.e. that increased saving (of money) reduces aggregate demand.

“…where reserves do become a smaller percentage of M4 over time it is because of increased efficiency in clearing”. Strikes me the stock of reserves has nothing to do with “clearing efficiency”. Reserves (and I assume we’re referring to bank reserves, i.e. base money) have increased DRAMATICALLY over the last three years as a result of QE. That has nothing to do with clearing efficiency.

5. Positive Money claims that money, i.e. broad money or M4, is ‘rented’ from the banking system. I say: this confuses deposits which pay interest with loans that charge interest.

Answer. As I explain in the article linked to under “3” above, where banks are into the business of creating money and NOT GRANTING long term loans, THERE ARE costs involved in doing that, i.e. administration costs. And banks would charge for that. However, as pointed out in that article, there is no reason for banks to charge INTEREST. Thus I’d say PM is correct if their “rent” refers just to administration costs, but wrong if they’re claiming anyone has to pay INTEREST on money created by private banks.

Incidentally, the above administration cost involved where private banks create money is in contrast to the creation of central bank money (aka sovereign money), the creation of which is near costless (as pointed out by Milton Friedman). That’s one argument in favour of banning privately created money.

6. Positive Money claims that commercial bank money ‘creation’ is responsible for house price rises. I say: the market has marked up house prices for many reasons, the most significant being the housing shortage.

Answer. PM actually say there are several explanations for high house prices. But I agree: commercial bank money creation doesn’t have much to do with it. Witness the fact that house prices in the UK have doubled in REAL TERMS over the last 30 years, whereas in Germany, Switzerland and Japan, house prices have remained constant. And that’s despite the latter 3 countries having the same bank system as the UK.

7.  Positive Money believes that attempts to pay down debt lead to recessions. I say: causality runs the other way.

Answer. Most economists agree with PM there. That’s an example of Keynes paradox of thrift. I believe Steve Keen actually claims that it’s not increased debt that is stimulatory (and debt reduction that is deflationary): it’s the 2nd power that is important, i.e. the ACCELERATION in levels of debt (or debt reduction) that’s important.

8.  Positive Money believes that an independent committee could better set the rate of money ‘creation’ than the commercial bank system. I say: the rate of money creation, or destruction, is not dictated by the commercial banks at all, but by the rate of growth or shrinkage of the economy.

Answer. There certainly isn't a CLOSE relationship between the expansion of M4 and growth. E.g. prior to the 2007/8 crisis M4 was expanding much faster than the economy.

I don’t think there are strong reasons for saying causation runs one way rather than the other. My hunch is that if there’s a fit of irrational exuberance amongst the general population and among businesses, private banks just join in the frenzy.

Also note there is very little difference between PM’s independent committee and the BoE MPC.  That is, under the existing system, the latter committee manipulates the money supply when it adjusts interest rates and/or implements QE.

9.  Further to this Positive Money believes that money ‘creation’ by commercial banks is undemocratic. I say: new money arises through increased economic activity and its level cannot be set by a committee, democratically accountable or otherwise.

Answer. The very word “democratic” makes my toes curl. The existing BoE MPC is not democratically elected. But that’s not a problem for me: that committee is a committee of supposed experts. It’s quite right that they aren’t democratically elected. I wouldn’t like to see a democratically elected committee design a nuclear power station, because that’s a job for experts.

I suspect PM is throwing the word “democratic” around for effect – so as to make their ideas appealing for the more naïve section of the population. In which case, well done PM. I’m a great believer in manipulating the naïve section of the population – I mean we don’t want them having real power do we (just to be thoroughly cynical).

10.  Positive Money believes in a concept called ‘debt-money’ as opposed to ‘debt-free money.’ I say: this distinction is vacuous. Money, whether held directly, or borrowed, is an obligation on the market to provide goods, services or labour. Unless that money is created ex nihilo by the state or a counterfeiter, it has arisen through prior provision of goods, services or labour.

Answer. Agreed in that for reasons I gave under No.3 above, I don’t think that money creation by private banks requires anyone to go into debt long term (e.g. take out a mortgage). However, to the extent that private banks are into the business of just creating money, then for everyone with a short term positive balance on their bank account of £Z, there is someone with a short term negative balance of the same amount. MMTers agree with that. To use MMT parlance, “horizontal money nets to nothing”.

As to the idea that base money (aka sovereign money) is “debt free”, I agree: such money is an asset as viewed by the private sector, but there’s no corresponding private sector debt. THERE IS a public sector debt OF A SORT. That is, base money appears as a liability on the BoE’s balance sheet. But it’s a strange sort of liability. For example the state can grab any amount of base money off the private sector any time it likes via tax. If you were able to grab money off the bank that supplied your mortgage, would you be in debt to the bank?


  1. Not sure I understand the claim "But I agree: commercial bank money creation doesn’t have much to do with it.[rising house prices]. The banks fueled, encouraged the bubble. It could not have happened without bank complicity. Underwriting was thrown out the window and poison loans were quickly tranched and sold to exuberant suckers.

    It is my understanding that commercial business loans are a small percentage of bank lending. Much goes to speculation on non-productive endeavors. In addition, nowhere in these discussions do I see the element of time mentioned. The money issued on a long term loan sits out there in the economy for all practical purposes, 'forever'.

    1. That passage of mine leaves room for improvement, to put it mildly. The point I was trying to make was that Germany, Switzerland have exactly the same bank system as we do, but they have not had real house price increases, ergo it cannot be the bank system that is the cause of house price increases.

      On the other hand, as you rightly say, had banks in the UK been barred from money creation over the last 20 years, that would have damped down house price increases or stopped them altogether. But that prohibition would have been very deflationary: excess unemployment etc.

      Positive Money's solution would be more sovereign money, which I agree with. So my hunch is that the net effect of a PM style solution would be that house prices would still have risen, but that the rise would have been less dramatic.

  2. I am baffled by the mocking dismissal of the concept of democracy in the creation of money. It seems to me that monetary policy is an impotent tool for reaching full employment and for the betterment of society. Fiscal policy is the only way to achieve that and that has to be a democratic process in a democracy.
    We rely on the advice of 'committees of experts' all the time, what else do you recommend? The "free" market?!

    As a fiscal policy maker I would want to know what the ramifications of my spending choices are in terms of available resources to absorb money "I" issue. Ultimately it is I, elected by the people, who determines how to distribute that money, not the "committee".
    Thanks (from the "naive section")

  3. I share your doubts about monetary policy (as does Positive Money).

    Re democracy, there are two quite distinct elements in fiscal stimulus decisions: first deciding on the total amount of stimulus, and second, deciding the exact nature of relevant spending (and/or tax cuts). I agree with Pos Money (and the New Economics Foundation and Richard Werner) that the TOTAL should be decided in a relatively undemocratic manner: i.e. by an committee of experts. The extent of lack of democracy there is very much the same as occurs with the existing Bank of England Monetary Policy Committee when it decides on another form of stimulus: interest rate cuts.

    In contrast (and again in line with the thinking of the above three authors) I agree that exact nature of public spending (e.g. whether to spend more on health or roads etc) should be entirely under the control of democratically elected politicians.

    For more on the above three's ideas, see:


  4. Well, I'm guilty of not reading more of your posts to have a better context for your statements. I ran across your blog when searching for discussions on Werner's objection to Positive Money. So many of the discussions on monetary theory seem overly convoluted and puffed up from my "naive" viewpoint :-)

    1. I didn't know Werner had any big objections to PM. Did you find any? In view of the work I mentioned above co-authored by him and PM, strikes me he and PM are largely in agreement.

    2. My apologies - I meant Mike King. It is very difficult for me to follow his logic - a diagram with boxes and arrows might help.


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