Last night, we aired two segments on endogenous money on Boom Bust, the TV show I am now producing on RT, the Russian broadcaster. Frances Coppola and Cullen Roche do a good job of explaining the details. Take a look
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.
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 […]
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 […]
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.
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.
2013 has been a breakout year for Bitcoin, the virtual payment system. I haven’t written anything on it to date but I have been following the market. Here are some ideas on Bitcoin based on what I have seen.
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.
Sober look argues that little doubt remains at this stage that the Fed will begin slowing its securities purchases this September. The central bank under Bernanke’s leadership has been highly focused on data and will consider the following 5 broad indicators to reach its decision.
In spite of the divergence in the chart, the “loans create deposits” axiom still stands – deposits are still created through bank credit. Two key developments explain much of this divergence without violating these principles.
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.
“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.