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Ultra-liquidity…

by Metatone Sat Aug 30th, 2014 at 04:09:42 AM EST

Ultra-liquidity

Ultra-liquidity
Posted by Frances Coppola on Aug 27th 2014, 2 Comments

This is the first of several posts covering topics discussed at the recent Lindau Meeting for Economic Sciences.

Several economists at the Lindau meeting were severely critical of central banks' conduct of monetary policy in the light of continuing depression in the US, Japan and much of Europe, and called for greater use of fiscal policy to bring about recovery. Among the most critical was Christopher Sims, who gave a trenchant presentation on "Inflation, Fear of Inflation and Public Debt".

He started by announcing the death of the quantity theory of money, MV=PY. Due to interest on reserves and near-zero interest rates, "money" can no longer be clearly distinguished from other financial assets. This is a fundamental point which requires some explanation.

These days, nearly all forms of money bear interest, which makes them indistinguishable from interest-bearing assets. For Sims, the paying of interest on bank reserves, coupled with the decline of physical currency, all but eliminates the distinction between interest-bearing safe assets such as Treasury bills and what we traditionally call "money". All assets can be regarded as "money" to a greater or lesser extent: the extent to which assets have "moneyness" is really a matter of liquidity.

front-paged by afew


Read the whole thing... it's very interesting.

I put this comment on Frances Coppola's blog:
(Pieria's comment system is so awkward that barely anyone uses it.)

Coppola Comment: Ultra-liquidity

Metatone29 August 2014 12:00

Fascinating read.
The implication about monetary and fiscal policy collapsing together seems all too correct.
What your piece made me think of is that (as a small business owner) the new "low interest" environment stifles outsiders (or to put it another way, entrenches inequality.)

Capital is now cheap, if you meet the other criteria for borrowing. On the SME side these often include: so much money, you don't need to borrow and/or large scale collateral.

Now risk is real and banks have been burned, so this makes sense at their level.
However, it's a disaster for the economy as it entrenches the already successful as the only ones who can take on new debt and try new things...

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The author of the post, Frances Coppola politely agreed that collateral is a problem for small businesses, but didn't really take on my inequality point...
by Metatone (metatone [a|t] gmail (dot) com) on Fri Aug 29th, 2014 at 02:59:30 PM EST
Of course, beyond inequality, this suggests that low interest rates will be with us for some time - and I think if we consider that there are considerable forces who would never want to see inflation above the interest rate, well that puts a big barrier in the way of ending austerity...
by Metatone (metatone [a|t] gmail (dot) com) on Fri Aug 29th, 2014 at 03:01:10 PM EST
With UK interest rate at .05% this is exactly the time for the State to borrow in order to invest in infrastructure and the future.  That this is not happening is indicative of the level of RW understanding of economics.  Which is to say, not much.

She believed in nothing; only her skepticism kept her from being an atheist. -- Jean-Paul Sartre
by ATinNM on Sat Aug 30th, 2014 at 12:13:26 PM EST
Why invest when you can torture the poor?
by ThatBritGuy (thatbritguy (at) googlemail.com) on Mon Sep 1st, 2014 at 11:08:11 AM EST
[ Parent ]
this is exactly the time for the State to borrow in order to invest in infrastructure and the future.
I could not agree more, and for the USA as well. But for the governments to adopt such policies it would require that a solid majority of the politicians holding elective office agree that acting in the interests of the nation as a whole is what should be done. The fact that this is not being done is evidence that those leaders prefer to prioritize the current policies of looting by wealthy elites over the needs of the population in general and the nation as a whole.

"It is not necessary to have hope in order to persevere."
by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Tue Sep 16th, 2014 at 02:52:55 PM EST
[ Parent ]


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