The European Tribune is a forum for thoughtful dialogue of European and international issues. You are invited to post comments and your own articles.
Please REGISTER to post.
You don't think that the fact that central banks do not create new money - they merely exchange existing money for other forms of money with different term structures - has any bearing on the ability of the central bank to compensate for a total withdrawal of all sovereign money creation?
Did you understand anything in that paper?
Friends come and go. Enemies accumulate.
They may create fiat currency either in paper or virtual (QE) form opaquely as de facto and unacknowledged agents of Treasuries, but they still do so.
"The future is already here -- it's just not very evenly distributed"
Of course they do it anyway, but that's because they're busy usurping Treasury functions.
By the same token, under scheme 2, an expansion of reserves in excess of any requirement does not give banks more resources to expand lending. It only changes the composition of liquid assets of the banking system. Given the very high substitutability between bank reserves and other government assets held for liquidity purposes, the impact can be marginal at best. This is true in both normal and also in stress conditions. Importantly, excess reserves do not represent idle resources nor should they be viewed as somehow undesired by banks (again, recall that our notion of excess refers to holdings above minimum requirements). When the opportunity cost of excess reserves is zero, either because they are remunerated at the policy rate or the latter reaches the zero lower bound, they simply represent a form of liquid asset for banks.
This paragraph says two things. The first thing it says is that everything Bofinger thinks he knows about banks, banking and money is wrong.
The second, and for the purposes of our discussion, more important, is that the amount of base money in the system is irrelevant to the amount of bank lending, because the central bank always has the option to remunerate excess reserves at the policy rate, or extend rediscount facilities to banks that fail to meet liquidity requirements.
In other words, bank lending is equity constrained, not liquidity constrained. And since the central bank can not provide new equity (unless it is prepared to take equity risk onto its books, something you generally do not want your central bank to do, for a whole host of excellent reasons), the central bank can not affect the volume of lending, except by tightening and relaxing solvency requirements (something you definitely do not want to do).
Absent cash-for-trash programmes by central banks, private sector equity can come from precisely three places, as a matter of simple accounting identity: Private sector physical investment in excess of physical deterioration of the capital plant. A net foreign surplus. And government deficit spending.
Now, unless you wish to postulate that every country can run a foreign surplus (in which case you may want to look into repealing the rules of addition and subtraction), this means that sustainable private sector equity increases are equal to net expansion of capital plant plus sovereign deficit. Give or take maybe half a percent of the GDP of the countries you trade with, as a maximum sustainable trade imbalance.
Running a balanced budget, a responsible central bank rediscount policy, and balanced foreign accounts means that, asymptotically, the private sector's net financial position is zero. That is, the private sector will be unable to save up any high powered money in excess of whatever debt other parts of the private sector may owe the sovereign at any given time.
Why, precisely, is that a good thing?
Absent persistent fiscal deficits and unsustainable foreign positions, the private sector will still have equity (Robinson Crusoe can still stockpile coconuts). It just won't have any net financial position (Robinson Crusoe can't stockpile pound sterling).
Since the private sector usually wants to stockpile financial assets (particularly sovereign financial assets), to provide a cushion against future expenses in the only asset class that is guaranteed by law to cover certain types of expenses, not allowing it to obtain a net financial position is usually Bad.
by Frank Schnittger - Oct 16 22 comments
by Cat - Oct 21
by Frank Schnittger - Oct 17 75 comments
by Frank Schnittger - Oct 12 30 comments
by Frank Schnittger - Oct 2 36 comments
by fjallstrom - Sep 29 41 comments
by Frank Schnittger - Sep 30 21 comments
by Cat - Oct 21
by Frank Schnittger - Oct 1775 comments
by Frank Schnittger - Oct 1622 comments
by Frank Schnittger - Oct 1230 comments
by Frank Schnittger - Oct 236 comments
by Frank Schnittger - Sep 3021 comments
by fjallstrom - Sep 2941 comments
by Frank Schnittger - Sep 262 comments
by Cat - Sep 1423 comments