Chartalist & Circuitist analyses of money - Page 2

Excuse me if I'm misunderstanding your point, but as long as you use it as money, gold is still an equity stake in the economy. The difference with gold is that if you don't like that stake (purchasing power drops), stop using it as money, and melt it down for jewelry, it's more valuable than paper.

Seen some misunderstandings of both chartalist and circuitist analyses already. Steve may be right that we need a required reading list to make this a productive discussion.

Nick, Steve's circuit models of endogenous money creation make it clear that the banking system can generate boom/bust cycles on its own, without any help from central banks. You should read that post in its entirety. As for free banking and the "natural rate of interest," not sure how that relates to the topic so let's start a new thread, please. This discussion will get plenty heated without it.

SuitablyIronicMoniker, Chartalism does not ignore private credit creation. You will find discussions of banking reform and debt-GDP ratios on chartalist Bill Mitchell's blog. Nor do they make the neoclassical and Austrian mistake of assuming that central banks can control the money supply (the money multiplier fallacy).

The main difference is the relative importance ascribed to the vertical (the treasury and central bank) or horizontal ("fractional reserve" lending) avenues of monetary expansion/contraction. Steve thinks the scale of private deleveraging will thwart fiscal stimulus. Bill Mitchell claims there is no depression that bigger deficits can't fix.

Steve has said he has no problem with chartalist accounting (Modern Monetary Theory), just the model of the economy those numbers are fed into. This is the second area of dispute, as I undertand it. Chartalists assert that “government spending will [only] approach an inflation barrier as the economy approaches full employment of resources." Brightspark and several other people on this blog think this assertion is based on a static model of the economy. Steve was mostly staying out of the debate until he could put an "agreed upon chartalist position into a dynamic model of the economy" but it looks like he'll be too busy for a while.

i second your comments quantativeeasing. i subscribe to both chartalist and circuitist and monetary theories; chartalist describing the vertical transactions, circuitist describing the horizantal transactions. i think the reason that credit money is not put on the same level as government money is chartalists look at the non-government sector as a whole. credit creates an equal amount of savings and dissavings in the private sector so that credit can not satisify the entire private sector's desire to save. government money does not create a corrosponding liability in the private sector so deficit spending creates net financial assets among the private sector.

Its funny how people go around declaring whatever they are in the economics field. Its a real cultural fixation in this area. I ask, what is the relevance in wrapping yourself in any particular flag when so much of economics has been discredited for such a long time? It doesn't progress the field at all. This is not a personal attack, its an observation I make having seen how "real" fields of science operate. The ones that are data driven do not spend much time on declaring which camp they are in, they get down to the hard work of figuring out the problem.

It is important that "Economics" becomes data/experiment driven, so that it can be determined what ideas are real and contribute something to the field. Economics is complicated and does need some heavy duty work to better understand it. In the end ideas from all the different "churches" of economics will be incorporated into a functional theory of economics. It usually happens that way in areas of science that sort themselves out. Thats why thinking you belong to a particular "church" runs the risk of allowing you to miss important issues because of your biases.

If I've learned one thing from Prof Keen and the GFC it is this - the boom/bust cycle is a function of easy credit used by speculators to leverage secondary asset markets.

Hence, the solution to remove or straighten this cycle is relatively simple: make getting credit more difficult (without stopping real capital investment and the entrepreneur) and change the very nature of secondary assets.

That is my point about central banks - an accommodative monetary policy that makes the creation of credit cheap and easy is one part of the equation. The other half - allowing speculators to make capital gains from secondary asset markets - is in the hands of the regulators and legislators.

__________________
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 George Soros.
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I'm sure that there are as many versions of Chartalism as there are economists. But the underlying principle is still true. Only governments create net money.

I find the arguments about vertical money and horizontal money to be pure sophistry.

If I can use it to buy bananas, then to me it's money. I prefer Steve's models.

Moniker,

I don't understand the meaning of statements like -

"Chartalism states that money is created on a net basis by government deficit spending. Private banks can create money through lending against assets. However, banks do not create net money as each loan creates a liability held against an asset."

when the value of assets is determined by the amount of money created. This is all to circular. The US housing market and CRE market has demonstrated this quite convincingly. The more money you pump into an economy the faster housing (assets!) go up in price. Take away the money pumping and the value of the "asset" collapses and all the banks are caught with their pants down! Hence the asset price is artificial and can reduce in value quickly. Is this really an asset? I guess it is, but it doesn't behave in the way the banks and a lot of other people think it does, i.e. maintains its value.

If you believe this then you have to believe in negative nominal interest rates when the supply of savings exceeds to demand for borrowing them.

If you impose an arbitrary lower limit of 0 on rates, then you don't have a market which can adjust prices to supply and demand.

In fact to have an arbitrary lower rate of 0 requires that there be a non-credit 'cash' in circulation.

But as soon as you have cash, you have money, and as soon as you have money, you will have monetary policy. The latter existed with central banks setting rates while the gold standard was in force and gold was cash.

frankly i think the reason you don't put much weight behind the fundemental difference between vertical and horizontal money is you don't understand the implications. when chartalists say that horizantal transactions do not produce net financial assets ie net money, we do not mean that money has not been created ( that would be silly of course money has been created), we mean that from an accounting prespective the entire private sector does not have on net more money (the liability created by the loan cancels out the money created by the loan). why is this important? it is important because if their is not enough government money (for simplicity's sake lets say that the government is running a balanced budget) the only way for the economy to grow is through increasing leverage. to any reader of steve keen's blog it is obvious that this is an unsustainable way to grow and will end in tears. a government budget deficit however does not create a corresponding liability in the private sector and thus does increase net financial assets ie net money. i agree with steve keen that aggregate demand is income + the increase in debt. vertical transactions increase aggregate demand by increasing income thus reducing the need for leverage in the economy. in short, we do believe you can buy bananas with credit created money

Wikipedia does poor job of explaining it, and Bill Mitchell isn't always that helpful either, but I've read enough from chartalists (especially L. Randall Wray) to think it's more than sophistry. Only governments create net financial assets.

Money, as usually understood and measured (M0, M2, M3) is a cash flow variable. Banks can credit a borrower's account without debiting its depositors' accounts (at least until constrained by reserve and capital requirements) creating an increase in cash flow as lending increases.

Many chartalists avoid using the word "money" for this reason. They are concerned with balance sheets.

In terms of balance sheet accounting, the private sector nets to zero. The lender's asset is matched by the borrower's liability. If a wave of bankruptcies threatens the solvency of major financial institutions, their efforts to reduce their leverage will reduce assets for someone else. One party's savings reduce another party's income. When banks cut back their net lending, cash flows and income for the private sector falls. By itself, private sector deleveraging defeats itself, putting the economy into freefall. Steve Keen has modeled this. The more debtors pay, the more they owe.

When government "prints money," it creates an asset for the private sector that is not balanced by a government liability. This is true even if the "money printing" power is delegated to a semi-private, semi-autonomous central bank whose activities are off the books. For the public sector as a whole, "printing money" requires budget deficits, which are limited only by the spare capacity of the real economy and political will. Deficits create net assets, which allow the private sector as a whole to improve its balance sheet, stopping the free fall.