Regular Features Sandpit August 8, 2016 John Quiggin13 Comments A new sandpit for long side discussions, conspiracy theories, idees fixes and so on. Share this:TwitterFacebookLike this:Like Loading... Related
13 thoughts on “Sandpit”
This is not an MMT tract. I should make that clear up front. It is a discussion of the effects of fiat money and credit money from a (hopefully) logical perspective.
The government creates and taxes back fiat money. In that arena it has control of the money supply. However, private banks are permitted to create credit money. Credit money is indistinguishable from fiat money when it is in the precise act of circulation. True, it is distinguishable in the book entries. There is a bank debt entry to match the credit which has become money in circulation. This particular difference between government fiat money and credit money is something which projects forward in time and only begins to operate in time. Government fiat money may or may not be withdrawn by taxes in the future. It depends on the government budgets being in surplus or deficit. Credit money however is usually withdrawn at the rate at which loans are paid off, except for the important case of default where they are withdrawn at one stroke as a loss to the lender.
Debt money has a contracted, accelerating half-life as it were. Standard repayments on compound interest debt halve the debt at more and more rapid intervals. However, the “accelerated half-life” of an individual debt is scarcely of any meaning to the money supply. What is of meaning is whether or not credit money overall in the total economy, in the form of a net result, is being created (loaned) or destroyed (paid off). This net number affects the money supply just as does the creation or destruction of fiat money by the state.
In essence, banks are being permitted to create fiat money also. These units become interchangeable and indistinguishable from government fiat units when in circulation. Also, loans will create deposits. So other banks can lend on the basis of one bank’s credit creation. Banks also can lend beyond their reserve ability and shore it up from the discount window of the federal reserve (RBA in Australia). There is, in this part of the theory, no limit to money creation in the model. In practice limits are reached. There is a limit to credit-worthy customers. There are also legislated capital requirements.
A person’s income (from any source) may be spent on whatever the person wishes at least so far as discretionary spending goes. However, a loan like a housing loan can only be spent on a house. The money will be lent for a house and secured against the house as an asset. In the primary case, the borrower taking out the mortgage must buy a house with it. Thus house sales in the primary instance are assured. House price inflation (asset inflation) also seems almost assured by this situation. It is true that many other people like builders and real estate salespersons earn income from this process. And this income could become part of their discretionary spending on other items generating general goods and services inflation. However, each of these persons also needs to live somewhere. Both house and apartment prices and rentals will be higher priced due to the asset price inflation in the housing and accommodation market. So each of these persons in turn needs to place a larger proportion (than would otherwise be the case) of their income to purchase or rental of accomodation or the paying off of loans acquired for that purpose. In turn, banks will take earned income from housing loans and leverage it into more housing loans.
This seems to be a system almost expressly designed to generate housing asset inflation or appreciation (and stock market appreciation or gains from this and related policies like negative gearing) while keeping general goods and services inflation relatively flat. One has to ask why this deliberate construction or rather deliberate distortion of the economy is so attractive to capital (and capitalists). The answer is easy to find. It is an expressly and consciously engineered situation. Those who possess high assets (and thus income from assets rather than from personal effort) prefer a situation which combines asset appreciation with general goods and services price stability (low consumer inflation). They are most advantaged by this situation. It functions extremely well to allow the rich to become ever richer and the middle and the poor to become relatively poorer, and as is now the case in the US and soon to be in Australia, to become absolutely poorer.
On reflection, only the last two paragraphs of my post above are worth reading. That is if any of it worth reading at all. Everything preceding the last two paragraphs is preamble waffle which is neutral so far as orthodox economics and heterodox economics are concerned. It is couched in terms and draws conclusions which (I hope) none would object to.
The final two paragraphs suggest a kind of thesis, namely that Australia’s current economic settings are deliberately geared to produce significant asset appreciation coupled with low consumer goods and services inflation.
Ikon, I am not convinced the phenomenon you described (quite well, IMHO) is the result of a deliberate policy setting in Australia, which aims to create more wealth concentration. It is conceivable that it is the result of partial changes in the institutional environment without corresponding changes in the measurement framework, by mistake rather than by design. (I am setting aside demagogues who, for unexplainable reasons, believe the word ‘private’ by itself creates ‘economic miricles’. I don’t know, maybe this set of people have a strange religious belief. Whatever, they are definitely not mainstream economics, notwithstanding neo-classical economics.)
As for partial institutional changes I have in mind legislation that comes under the heading ‘deregulation’, ‘globalisation’, ‘flexibility’, ‘competitiveness’ (see for example JQ’s ‘Zombie’ book).
Throughout this, by now long time, of institutional changes all going in the same direction, as indicated above, the macro-economic data collection framework remained largely Keynesian. Evidence: CPI (consumer price index), GDP (and its derivations), unemployment statistics. A bit of Monetarist framework (eg money multiplier model and its various measures of ‘money’ as recorded in the RBA publications).
But under the Keynesian system, the financial system was very different to what we have now.
You may recall JQ’s posts on how ‘inflation’ during the 1970s caused a problem for the Keynesian ‘mainstream’ economics, ushering in legislative changes. Outcome: Asset price inflation was ignored. (The insights of Roy Radner’s G.E. model of a sequence economy with commodity and securities models was ignored – not Keynesian!)
You are quite right, what you are talking about is not MMT. (As an aside, since my undergraduate days, I had no confidence in the teachings of mainstream economics in two areas, one being international trade models and the other money and banking.)
Allowing banks to charge whatever fees they like is an example of a deliberate policy that produces significant asset appreciation.
Allowing developers to move in on public housing sites is another example of a deliberate policy that produces significant asset appreciation.
Allowing workers only occasional CPI wage increases is an example of a deliberate policy that produces significant asset appreciation.
The imbalance in peoples abilities to asset appreciate is based on a underlying imbalance in peoples abilities to deploy capital and use other people’s labour to obtain a reward.
Once someone has a small wealth advantage, they can capitalise it as a “middle class” Mum and Dad investor and then deliberate policy settings will allow them to build up their assets ahead of the rest of the working class who suffer wage cuts.
Negative gearing is an example of a deliberate policy setting.
The major banks form a cartel oligopoly. I have a theory (no idea if it is original) which I call “Cartel Bridge”. Essentially businesses in a cartel can signal to each other with price changes in the manner that bridge players signal to each other in a bridge game. Bids can provide signalling information. It might or might not require an initial covert cartel conspiracy (a meeting or a scrambled phone hookup on “burners”) to set up a bid signalling system. A bid signalling system could also arise by observation, learning and custom.
What could bids signal? I am no expert in this field. I am sure the people who do it are far more experienced and inventive than I. However, bids could signal ceilings and floors for prices. That is one example. Price changes approaching an intended ceiling or floor price could signal the ceiling or floor in various manners via increments which look uncoordinated but in fact contain signals pointing to the intended goal. Bids could also signal an intent to be a price maker or a price taker. In different subsets of the business, different oligopolistic firms may have or may not have the ability or intent to be a price maker or a price taker. They may signal this accordingly.
The overall problem in banking is weak regulation from the government. I am of the opinion that retail banking profits should be solely made from interest charges. No other fees should ever be chargeable by law. That way price comparisons would be easy for all users of retail banking. In addition, small users (say pensioners) would be protected from charges exceeding the commonly pitiable interest they receive. Certain penalties (but not simply fees for transactions) might be permitted for certain customer “infractions” like overdrawing. This would have to be comprehensively covered by regulation. The simplest way to cover it would be to say in legislation that penalties are not legally chargeable unless expressly detailed and permitted in the legislation.
Yes, that is pretty much how I see things.
The defacto cartel allows banks to set charges and fees in pursuit of super-profits which they get by the billions.
I take your point. What is deliberate or intentional is quite often hard enough to establish with respect to individuals let alone with groups. Even with individuals, there is the whole free will debate (does it exist or not?) plus the issue of unconscious versus conscious intention.
With groups there is probably a greater possibility of “emergent intention”. That is to say some effect might be discovered adventitiously. Once it is discovered and it is realised by multiple actors that it can be exploited then the burgeoning process begins.
Perhaps it would be better to speak of “goal-seeking” rather than “intention”. The notions of will or intention make assumptions related to consciouness and free will. “Goal-seeking” is a more neutral term and any system with the right qualities might goal seek without consciouness and free will. Certain “intelligent” goal-seeking systems require algorithms and heuristics. More basic biological goal-seeking like homeostasis might or might not use analogs to algorithms and heuristics. I am not educated enough in physiology issues to do more than hazard a guess on that matter. However, my guess (or my hypothesis) I was studying such matters would be to look for physiological analogs to algorithms and heuristics as well as looking for the more obvious detection and feedback routes.
Perhaps I should say that “emergent goal-seeking” from and in service of a certain class has occurred with respect to the burgeoning preference for policies like negative gearing and others which favour asset appreciation. Also, I don’t discount the other factors you mention. I would have to think and read about them a lot more first before I could entertain more ideas.
Land of the ‘fair go’ no more:
Your #2 of 8 Aug:
I wish you’d posted that before I got through reading your whole essay.
In future, you should precede your longer posts by a ‘reader’s guide’ which tells us which parts to read. 😦 <- just in case you are tempted to tell yourself that I'm serious.
Your #3 of 9 Aug:
So, if the choice is between a conspiracy and a stuffup, choose stuffup every time.
Or maybe as someone might once have said: even without a stuffup, the invisible hand writes, and having writ moves on and all your piety or wit shall not cancel half a line, nor your tears wash out a word of it.
But thanks to Ikono for his analytical description and for your reinforcing concurrence to it. I hadn’t grasped the “half life” concept of repayment of compound interest debt – useful and informative (It’s along time since I paid off my life’s one and only mortgage … which incidentally was for a house valued back at the time of purchase at $75,000 and now at more like $850,000. Yay asset inflation !).
Yes and if something like that happened now if even at a fraction of the severity, wouldn’t it be a disaster? When it happened at the end of the Youger Dryas, we didn’t have trillions of dollars of infrastructure sitting bellow a couple of metres above sea level.
So your argument on this topic (as far as I can see) has either of the following justifications.
1. If it has happened due to natural phenomenon why should we care if it happens due human activity?
2. If the severity of the changes due to natural phenomenon have been much larger than the changers occurring now, how can we be sure that the current changes aren’t natural?
If 1, you really are a selfish individual who cares naught for future generations. If 2 see the quote of Muller that I provided earlier.
Instead of using the term CAGW, how about EAGW – Expensive AGW. But you won’t be paying for it so why worry.