Again, it’s nice to see my spewage validated by experts, particularly those I think highly of.
Here a paper by Steve Keen; skip the math part unless you are a masochist,
There is now a substantial empirical literature (largely involving Post Keynesian rather than neoclassical economists, though Kydland and Prescott (1990) is an exception) that shows that the a priori hypothesis of the neutrality of the nominal money supply is empirically false (Moore (1979); Moore (1983)). In particular, the classic causal mechanism of the “money multiplier” model of money creation, in which base money must be created before credit money, is the reverse of what is found in the actual data.
Kydland and Prescott’s conclusion emphasizes this, and also throws down a challenge for economic theory that has been largely ignored by neoclassical economists: The fact that the transaction component of real cash balances (M1) moves contemporaneously with the cycle while the much larger nontransaction component (M2) leads the cycle suggests that credit arrangements could play a significant role in future business cycle theory. Introducing money and credit into growth theory in a way that accounts for the cyclical behavior of monetary as well as real aggregates is an important open problem in economics. Kydland and Prescott (1990, p. 15. Emphasis added.)
The Post Keynesian “Circuitist” school of thought has risen to this challenge, and has developed the theory of endogenous money creation (Moore (1988); Rochon (1999); Graziani (2003)) in which economic activity is explicitly driven by private credit. One essential aspect of this approach is a reversal of the causal mechanism of credit money creation given by the conventional “money multiplier” model.
The money multiplier model begins with an injection of government-created “fiat” money $F in a fractional banking system with a reserve requirement RR. The sum $F is deposited in a bank account, from which the bank makes a loan $F.(1-RR), which is in turn deposited in another bank account. An iterative process then follows till the total sum of money created equals $F/RR. In this model, “deposits create loans (with a time lag)”.
The endogenous money approach instead begins with a bank making a loan $L to a firm, and that loan simultaneously creates an equivalent deposit (any need to meet reserve requirements is fulfilled later: Moore (1983, p. 539); Holmes (1969, p. 73)).2 The
endogenously created credit money then fuels economic activity. In this model, “loans create deposits (instantaneously)”.
In fiat money systems – which include all money systems in all countries on planet Earth – the dollars and other currencies are lent into existence by banks and other finance houses. The principle behind this is simple, double- entry bookkeeping. A deposit to a bank account – a loan from another bank, often – is recycled as loans to others, that are in turn deposited by sellers in other banks to be lend again and again. Every loan is an asset to the lender, balanced by deposits which are loans to the bank. normal daily business results in the creation of money; central banks, the G20, finance ministers, the UN or other authorities don’t create money. In the process of borrowing money, you and I create it.
It’s good to be on the right track, for once. Part of the solution to the ‘two economies’ problem is to better understand where the finance system can be reformed. Stay tuned …
Keen’s business is to make a model that allows for a ‘Minsky Moment’. I don’t know if his model will allow it. I’m beginning to suspect the events of the past year were indeed a ‘Black Swan’ against a backdrop of economic erosion caused by rising oil prices. The erosion will – of course – continue. Occasionally, a market ‘move’ might take oil up to +$100 and another black swan will fly. Perhaps I can think of a simple, linear accounting model. Hat tip to James Hamilton.
Here’s something from Paul ‘Mr Stimulus’ Krugman;
The Journal has always maintained that changes in exchange rates play no useful role, that stable exchange rates — preferably enforced by some barbarous relic like the gold standard — are the essence of sound policy.
I explained why this is all wrong a long time ago. But it’s especially important to understand the wrongness of this view right now. If there’s one overwhelming lesson from the Great Depression, it is that putting a higher priority on stabilizing your currency than on domestic recovery is utterly disastrous. Barry Eichengreen pointed out years ago
Britain, Germany, US, France. The correlation between going off gold and recovery is in fact perfect. that major economies went off gold in the following order: Japan,
I usually don’t agree with PK, but i do this time:
If gold is the money, the rich can sit back and wait for it to come; trading food for gold. A person without gold would be destitute. For those with some gold, becoming destitute would be a matter of time. All the gold bugs ever talk about is buying gold, nothing is ever mentioned about selling. What does one buy with the gold? Paper money? A can of beans? Gold, like any other currency has no value unless it is spent, a person spending gold does not have it any more. If gold is the money, that person has nothing. The shift from gold to paper signified an historic shift, from possessing wealth to transacting business. In a fiat system, if there is a shortage of money, the people themselves can lend/borrow some more into existence.
The gold bugs have an American notion, that the solution to the current problem of over- consumption is to buy something from a store. More from the ironic universe, it seems …