Posted To RWER Blog 05/03/2018

PB:  All true but it’s slightly more complicated. There are actually two sources of new money in a credit economy. For sure, one is government deficit spending, but another is private bank lending to private borrowers. When banks lend they create an asset called a signed note which they post to their balance sheet. They then create new credit money by funding said loan (a liability of the bank) by crediting the borrowers demand account at the bank. This second source of newly created money can and often does dwarf the money creation by government. This bank credit can lead to instability when bank lending turns down as money supply growth stalls. When this happens government must step in by running deficits to hold the money supply constant. Steve Keen is doing great work in this area.

Me:  All of that is correct, except running a fiscal deficit does next to nothing for the moment to moment and inherent scarcity of individual demand in ratio to total costs and so total prices that is the generally unperceived even by heterodox economists root cause of instability of modern technologically advanced profit making economies.

Dr. Keen has a brilliant and iconoclastic economic mind, but new paradigms, which he regularly gives lip service to, require more than iconoclasm for their perception.

And everything less than paradigm perception is a mere perturbative epicycle of the current one.

L:  “There are actually two sources of new money in a credit economy. For sure, one is government deficit spending, but another is private bank lending to private borrowers” Whoa, there. Bank-created money that is lent into the real economy is paid back with interest. The principal is extinguished, and the interest is the bank’s profit. This is a zero sum process except for (1) bad loans, the upaid principal of which is an unencumbered addition to the money supply, and (2) the paid interest, which is a drain on the real economy money supply, and is probably funneled into the Wall Street casino.
I am not sure what you are getting at with the remarks about Dr. Keen and new paradigms. Have you the same criticism about Stephanie Kelton?

Me:  L,

I’m certainly on board with your understanding that the rentier/purely financialized aspect of the economy is outrageously outsized. The derivative nonsense that preceded the “great financial crisis” resulted from from private banking’s fallacious belief that the economy tends toward general equilibrium…”so we can re-hypothecate the same collateral ad infinitum….right?” ….wrong!

I’m on board with what MMT says about the mechanics of money creation and virtually all of what Steve Keen says. What I’m pointing at is that the advocates of neither MMT nor Keen’s disequilibrium-Minsky’s instability theory are able to craft policies that would implement a new monetary and economic paradigm.

This is mostly because they are caught up in abstractions rather than taking a zen like focus on the moment to moment operations of commerce/the economy, recognizing the economic significance of the stopping-ending and summing point of retail sale throughout the entire legitimate economic process…and then putting all of that knowledge together and crafting policies that would usher in the above new paradigm.

PB:  More fundamentally the cognitive error is failing to distinguish endogenous shocks from exogenous shocks and their corresponding risks and instabilities. It’s as though ship designers only obsessed about capsize risk from tidal waves hitting the ship while utterly ignoring the possibility of hull breach due to corrosion from deferred maintenance or running aground due to poor sailing. This is not an exaggeration, and the stubborn failure by economics to consider any possible mechanism of internally derived systemic failure is breathtaking.

Me:  “It’s as though ship designers only obsessed about capsize risk from tidal waves hitting the ship while utterly ignoring the possibility of hull breach due to corrosion from deferred maintenance or running aground due to poor sailing. This is not an exaggeration, and the stubborn failure by economics to consider any possible mechanism of internally derived systemic failure is breathtaking.”

Precisely. And the best way to do that would be to find the precise points within and throughout the entire economy where one could undo the dominating and monopolistic monetary and financial paradigm of Debt Only and at the same time thoroughly integrate costless monetary policies at those same points that benefited all agents and resolved modern demand constrained economies….all in one fell swoop. Don’t ya think?

L:  Are you on board with the sectoral balances model described at https://en.wikipedia.org/wiki/Sectoral_balances ? Kelton and others have described what could be done by a benevolent sovereign by monitoring the sectoral changes and using public spending for infrastructure to affect the deficit of the private sector. This would also take a realistic view of public spending as a prerogative of the sovereign–i.e., realization that deficit spending by the government is necessary, and that the national debt is not a debt to be repaid. This means realization that the government has infinitely deep pockets and does not ever need to borrow to spend.

Me:  Yes, that’s valid, but monetarily and like the Catholic Church demanding that grace/salvation could only be received via the sacraments….it’s still indirect to the individual via employment.

The new monetary paradigm is DIRECT and Reciprocal Monetary Gifting….implemented by a universal dividend and with the discount/rebate policies at the point of retail sale. Paradigm changes have signatures that are reflective of each other, and directness of effect is one of them…..as is the natural philosophical concept of grace reflected in the Reformation and now in economics as grace as in gifting.

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