Karl Denninger* has posted a fascinating article** which not only explains why "all money is in fact debt"***, but on the basis of decades' worth of figures comparing money velocity, federal debt and economic growth, shows that it is perfectly possible that once confidence in the economy has fallen to a certain level, printing additional dollars actually reduces the size of the economy, i.e. it's worse than ineffective ("pushing a piece of string").
* An American who writes about economics. I don't know what his day job is or where he stands politically (in despair, probably) but his Genesis Plan to fix US banks was pretty much the same as my own Five Point Plan in the context of UK banks.
** H/t Gardeniadotnet.
*** I tried to explain why 'money' and 'credit' are the same thing a few posts ago ('credit' and 'debt' are just two names for the same thing, of course). Tim W has now covered the topic and I left a comment there as well.
Sunday, 4 January 2009
It's not just me then
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10 comments:
It would be a great help if the velocity aspect of money supply were more to the fore.People keep banging on about the quantity ( volume) of money but if people hoard it (or land) it does n't matter how much there is of it.There have been ingenious schemes to make people get rid of money as fast they get it,but even land taxers look down their noses at the best known one ( Gesell's stamp scrip scheme which was explicity Georgist and stopped the hoarding of both land and money) perhaps because it reminds people too starkly that money ( and land) have no intrinsic value.
DBC, each to his own, but the basic idea underpinning this appears to be ...
Gesell suggested that a periodic tax placed on money could do the trick. By making it costly to hold money, he believed people would be encouraged to spend it.
This is like negative interest rates, i.e. where inflation is greater than interest income minus tax, which is what we have in the UK at present.
But seeing as Mrs W and I, for example, have a wodge of cash which we have earmarked for buying a house, as long as house prices are falling by 20% a year and out negative interest rate is, at worst, 3% a year, we are still best advised to hang on while prices are falling, as we still get 17% more house for our money each year we wait.
I, for one, have stopped "banging on" about 'money' in the narrow sense because it is meaningless in terms of what's important to the economy. What's important is confidence - and not just confidence in ever rising property prices, which as we both know is a hiding to nothing.
Denninger is a man very much with his finger on the pulse.
Many thanks for the background piece on Stamp scrip. I had no idea so many American cities used it.
I dunno about the 3% carrying tax. If you look up Aberhart's velocity dollars on Net,Time magazine says at the time that a one cent stamp had to be stuck on in Alberta every week making 52% pa.A bit fierce.After 2 years (104 cents) you could redeem this no doubt very tatty note for a regular Canadian dollar.
Also don't forget that land prices would be steady with his George inspired system of compensated land nationalisation (which Keynes considered of "altogether secondary importance" [to stamp scrip]) .So you would n't have had the bubble in the first place and the tantalising wait for the bottom to be reached after it collapsed.
Lets get the semantics right.
Money IS a form of debt.
Credit is not debt.
Money is not credit.
AC1, if the bank gives me credit of £100 then I have debts of £100. It's two words for the same thing.
Money is a form of credit. If I give somebody an IOU for later payment, that is credit. If the government gives people an IOU (in the shape of a banknote or coin) than that is a form of credit. And the government is correspondingly in debt.
But credit interest turns into money only if its repaid so it cannot be money.
Also if Money is a Credit, where's the debtor?
AC1, from the point of view of the government, it makes little difference whether it issues proper gilts (promise to pay £x in y years/months at z% interest) or prints a bank note (promise to pay bearer on demand, undated, without interest).
Coins and notes are just an interest free loan to the government. They are considered to be 'money' but it is just a specific way in which the government can borrow. In either case, the government, and ultimately the taxpayer, is the debtor.
Was the Weimar Republic an economic success given the bundles of notes in circulation!?!
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