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?