Tag: money

On the persistence of inadequate ideas like the money multiplier

On the persistence of inadequate ideas like the money multiplier

I have been saying for years now that the money multiplier does not adequately explain how money is created in a modern fiat money economy. In particular, the idea that banks are passive intermediaries who simply respond to injections of central bank money by creating more loans is fundamentally wrong. Banks actively determine the amount of “inside money” circulating in the economy. When they create loans or buy securities, inside money increases. When loans are repaid or written off, or securities are sold, inside money reduces. The constraints on bank lending are multiple and complex, and don’t include reserve availability (though the price of reserves is a constraint). The Bank of England’s description of the process is broadly accurate.

Interest rates and deflation

Interest rates and deflation

By Frances Coppola Scott Sumner argues that when the monetary base is fixed, low interest rates are deflationary. I’ve emphasised the fixed monetary base because it is an important condition. If the monetary base is NOT fixed then the relationship between low interest rates and deflation is much less clear. Logically, this makes sense. If the supply of base money […]

How money matters: The Old Lady fails to get an “A”

How money matters: The Old Lady fails to get an “A”

Andrea Terzi Dr. Terzi is a Professor of Economics at Franklin University Switzerland and a Research Associate with the Levy Economics Institute of Bard College. One thing’s for sure: The financial crisis has dealt a deadly blow to what was until recently considered the state-of-the-art of monetary policy. Just compare the 1992 edition of Modern Money Mechanics, published by the […]

The BoE’s sharp shock to monetary illusions

The BoE’s sharp shock to monetary illusions

I’m doffing my cap to the researchers at Threadneedle Street for a new paper “Money creation in the modern economy,” which gives a truly realistic explanation of how money is created, why this really matters, and why virtually everything that economic textbooks say about money is wrong. The bank is going gangbusters to get its message across, with an introductory paper on what money is, and two short videos on what money is and money creation, both shot in its gold vault. It clearly wants economic textbooks to throw out the neat, plausible but wrong rubbish they currently teach about money, and connect with the real world instead.

A few insights on Japan and thoughts about wealth confiscation and default

A few insights on Japan and thoughts about wealth confiscation and default

Abenomics is one of the most aggressive economic experiments we have witnessed in the post-Marshall Plan developed world. The questions is whether the massive stimulus campaign can work when politically there will always be discomfort with the large deficits at the heart of the campaign. Deficit reduction is now coming online via tax increases. Below are some threads on what is happening in Japan as this occurs.

Malinvestment and the endogeneity of money

Malinvestment and the endogeneity of money

So much has been written about the endogeneity of money that I thought it was now widely accepted. But recent exchanges have shown me that people STILL aren’t getting it. Most recently, there have been two themes doing the rounds that bother me: – malinvestment is caused by a growing money supply; the presence of excess reserves in the system indicates a growing money supply (and therefore malinvestment). Both are wrong.

How QE works and what this means for asset prices and credit

How QE works and what this means for asset prices and credit

One of the most contentious topics in America is the impact of the Federal Reserve’s policy of “Quantitative Easing” – otherwise known as ‘QE’. The Federal Reserve has committed to spending $85 billion every month buying a wide range of bonds from banks, until such time as the US unemployment rate falls below 6.5 per cent. The Fed has implemented this policy because it believes it is the best way to stimulate demand in a depressed economy. Its critics oppose it because they believe this massive amount of ‘money printing’ must inevitably lead to ruinous inflation. I reckon they’re both wrong, and in a seriously wonky post I’ll try to explain why.

Money is Gold

Money is Gold

“With the current policy, [European leaders] will need force to keep it going against the interests of the people. You do not need to be a eurosceptic to conclude that such a monetary union is also deeply immoral.” – Wolfgang Manchau, Eurozone Break-Up Edges Even Closer, Financial Times, March 25, 2013

The People are growing angry. The People will become very, very angry.