Chartalist & Circuitist analyses of money

There has been a substantial debate on Debtwatch between those who favour the Chartalist perspective on money and those who favour the Circuitist perspective. This thread will host this continuing debate.

Great to see you posting here, Steve. You must be busy hosting three sites!

I'm going for Monetary circuit theory myself.

Chartalism seems to have as its base that only governments can produce fiat money.

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In The Roving Cavaliers of Credit, I thought that Steve made a series of points that are difficult to refute. I find it hard to imagine why credit created by banks is somehow not as important as that created by government.

Every economist and journalist reporting on the economy should be made to read Steve's article before making any pronouncements themselves. To understand the mess that we are in at the moment, you have to start with credit.

Admittedly, this area is my weakest point - but can't we have a combo of both?

I 100% agree that money is created by banks by extending credit first, which creates an asset for them, which they then get reserves for later.

It makes sense to may that governments also create money explicitly via monetising new debt (printing money), and implicitly via reserve banks by encouraging lower-than-normal interest rates.

To put it out there, I'm a strong advocate for the private money market setting the natural rate of interest, not a reserve bank or government. I believe its one crucial point (amongst many other crucial points) in understanding why we continue to have boom and busts.

__________________
Its not whether you are right or wrong that matters, but how much money you make when you're right and how much you don't lose when you're wrong - 

 George Soros.
www.empireinvesting.com.au

I'm fairly certain that Circuit theory includes government funds as part of its fundamental model. It is only Chartalism that excludes non-government money.

Thanks - I admit I am a neophyte when it comes to this - I studied economics previously (BComm - not finished, will attempt to do so later this year) and we never talked about either theory.

__________________
Its not whether you are right or wrong that matters, but how much money you make when you're right and how much you don't lose when you're wrong - 

 George Soros.
www.empireinvesting.com.au

So would you advocate a quantity target for monetary policy rather than interest rate targets?

This was attempted during the by many central banks during the 1980s, and didn't meet with too much success. The RBA tried it, albeit with a less rigid approach than some others, and basically came to the conclusion that it was a difficult way to try to manage monetary policy.

Hi Gamma,

No I don't advocate any monetary policy at all, quantitative easing/setting interest rates or other interferences in the free market supply of money and credit.

The market should be regulated by the cost of money -the interest rate set by supply and demand - the supply of savers, the demand of borrowers.

If we agree that the increase in the money supply is done first by private banks anyway, why do we need a regulatory body TRYING to match the natural cost of money?

The RBA have been extremely lucky (and extremely careless) in trying to match what the so-called neutral rate. They are the exception to the rule - the Fed being the most careless of the bunch.

Artificially low rates were one of many causes of this crisis - when you look at the reduction in the cost of money over the last two centuries, mainly due to expansive, accommodative and politically motivated monetary policy, the results have been devastating.

__________________
Its not whether you are right or wrong that matters, but how much money you make when you're right and how much you don't lose when you're wrong - 

 George Soros.
www.empireinvesting.com.au

I flirted with chartalism for a while but am now happy to consider myself a circuitist, however I seem to have reached conclusions that are not entirely compatible with Dr Keen's.

I am currently struggling with the fact that in a pure credit circuit, there cannot really be any notion of capital, as in bank vault cash, which is currently held in the form of government liabilities. This sounds like capital and is currently regulated as such but in reality it is an equity stake in the whole economy, and that makes a good deal of difference when considered against the traditional view of bank capital as an inviolable gold like substance.

So if you advocate no monetary policy, does this mean no form of government sponsored money? Only bank issued money?

Yes, that's right - government should have nothing to do with money - it provides them with the impetus to run up deficits which destabilise the economy.

Banks (either reserve or retail) should issue their own scrip - which could be anything, gold credit to me seems a good compromise. (i.e physical gold or similar commodity mix in the vault, but credit written on it) as it would be recognised by many banks, thus facilitating exchange.

the practical application of that would be near impossible, in the current environment however....

__________________
Its not whether you are right or wrong that matters, but how much money you make when you're right and how much you don't lose when you're wrong - 

 George Soros.
www.empireinvesting.com.au