Sunday, 19 November 2017
Francis Coppola’s “money from thin air” argument.
Her "thin air" argument appears in the initial paragraphs of an article of hers entitled “Money Creation in a Post Crisis World”.
Her argument is that the money created by commercial banks is not “created from thin air” because the money is backed by a debt. That is a flawed argument for the following reasons.
When a bank grants a loan, it credits the account of the borrower and in doing so “creates money”. But not unreasonably, the bank will want that money back at some stage, and to represent that obligation to repay, the bank debits another account with the borrower’s name on it. That’s the debt owed by the borrower to the bank.
But both book-keeping entries are just that: book-keeping entries. That is, both obligations arise out of thin air. Why does the fact that they are equal and opposite obligations created out of thin air make them “non-thin-air” rather than “thin air”? Darned if I know.
Next, there is no question but that governments and central banks create money out of thin air (as Francis herself points out – para starting “But in fact…”). Thus there is nothing inherently wrong with creating money out of thin air. What MAY BE wrong in the case of private banks creating money out of thin air is that they reap an unjustified profit from doing so. And in fact I argue (as have others) that there is indeed such an unjustified profit there in a paper entitled “Taxpayers subsidize private money creation.”
Thus the “thin-airness” of money is irrelevant: the important point is the possible unjustified profit.
Donations to charity.
Next, there is nothing to stop a commercial bank crediting someone’s account WITHOUT there being any corresponding debt owed to the bank. That would be a gift by the bank to the account holder. Indeed, some banks may actually do that, for all I know, when they make gifts to a charity which happens to have an account at the relevant bank.
In that case, the book keeping entries would be: “credit charity Y” and debit “gifts to charities” account, which in turn will be debited to the profit and loss account at the end of the year.
Of course gifts to charities by banks are a small proportion of banks’ turnover. “Gifts” to politicians and political parties with a view to getting bank favorable legislation passed are doubtless more common, though even those will be a small proportion of banks’ turnover. But the important point here is that contrary to Francis’s claim, a debt owed to a bank is not needed in order for the bank to create money “out of thin air”.
Next Francis Coppola criticises the claim by Zoe Williams in the Guardian that too much is loaned to allegedly unproductive sectors of the economy like mortgages, with not enough going to SMEs. I fully agree with Francis there. The fact is that the proportion of SMEs which fail to repay loans is double the equivalent proportion for mortgagors. I.e. there just aren’t all that number of viable potential loans to SMEs out there.
It is also a mistake by Zoe Williams to claim that mortgages which fund the purchase of existing houses are less productive than mortgages which fund to construction of new houses. Basic reason is that the purchase existing houses pushes up the price of houses, which in turn induces builders to build more houses. I go into that in more detail in an article entitled “Borrowing to BUILD houses is no more productive…”.
Positive Money and debt.
Next, Francis says “Those who propose "sovereign money" to replace money creation through bank lending appear to be driven by an irrational, though perhaps understandable, fear of debt. And they also, to my mind, place far too much faith in central planners, as this comment from Zoe Williams shows.”
The comment by Zoe Williams is thus:
“The nature of centrally created money should itself be opened up for debate, whose starting point is: if we agree that commercially created money is skewing the economy, can we then agree that it should be created by a public authority, even if we don’t yet know what that authority would look like.”
Re “Those who propose “sovereign money””, that’s a reference to Positive Money which (far as I know) is the only organisation to use the phrase “Sovereign Money”, though it’s not the only organisation to advocate full reserve banking (a system under which private money creation is banned).
Re Francis’s reference to “irrational fear of debt”, I agree that about 95% of those who write on the subject of debt are motivated by the negative emotional overtones of the word debt rather than by reason or logic. Indeed that phenomenon is even worse in Germany, where the word debt (schuld) also means “guilt”. Yup: I’m afraid about 95% of the human race are motivated by emotion rather than reason.
Also in the above passage quoted from Francis’s article, she refers to “placing far too much faith” in mysterious “central planners” who would decide on the amount of money to periodically create in a “central bank money only” system (i.e. full reserve banking).
Well I have news: money created by the state and spent into the economy is simply a way of imparting STIMULUS, something a committee of “central planners” already does.!!! Those “central planners” are more popularly referred to in the case of the UK as the “Bank of England Monetary Policy Committee” and the "Treasury". Plus the latter to bodies actually effect stimulus in much the same way as Positive Money proposes.
Now what happens if the Treasury and BoE agree that stimulus is needed? Well the Treasury borrows and spends more, and the BoE (with a view to making sure that extra borrowing does not raise interest rates) will very likely print money and buy back some of that debt. And what d’yer know? The net effect of that is: “the state prints money and spends it into the economy”. Indeed, over the last few years, the BoE has bought back virtually ALL the debt incurred by the Treausury via QE.
Hey presto: the existing system is little more than a roundabout way of doing what Positive Money (and others) propose.
But there is absolutely no “central planning” there: at least there is no central planning in the old Communist / Eastern Europe sense of the phrase: that is, some central organisation deciding whether to expand a steel plant or supermarket in Vladivostok or Manchester.
Put another way, under both the existing system and Positive Money’s proposed system the only job the people “at the center” do is to implement stimulus as required.
Conclusion: both Francis and Zoe William’s references to “central planners” are flawed.