8 responses to ““Positive Money” : A Fallacy Built on a Little Known Truth. (Part 2)

  1. Also – the central bank can and in the last few years does pay interest on cash when it is held overnight in a central bank account as reserves. So there is even less difference between cash and bonds …

  2. “If the main fallacy of Positive Money is based on the little known truth that banks can indeed create a form of money out of thin air…” But if there’s one thing that Positive Money keeps screaming from the rooftops it’s that banks CAN CREATE MONEY!!!!!!!

    “Yet, PM doesn’t consider money created by government to be an IOU..” So in what sense is a £10 note an IOU? I mean if you go along to the Bank of England and ask for £10 of gold or anything else in exchange for you “IOU”, the reality is that you’ll be told to shove off.

    I.E. Positive Money is quite right to be very sceptical about whether a £10 really is any sort of IOU.

  3. “Yes, commercial banks can write out IOUs or create money, in the process of creating loans, but that money doesn’t stay in the economy until the loan is repaid.”
    What exactly do you mean by this sentence, Peter? My understanding is that when the principal of a bank loan is repaid, the ‘money’ that the bank created ex nihilo is cancelled, i.e. the ‘money’ disappears back into the nothing from whence it came. Are you saying that that is not the case? The literal meaning of your sentence above is that only when a commercial bank ‘loan’ is repaid does the money stay in the economy. How can that be true? Surely, the ‘money’ has stayed in the economy from the instant that the loan principal was first spent by the borrower. It is plainly evident to me that in this instance, at least, your writing is lacking in clarity.

    “It is not the repaying of loans which causes a recession it is the removal of money from the economy as that newly created money is taxed away by Government.”
    Positive Money does not claim that it is the repaying of loans that causes a recession. Rather, it points out the fact that when the time rate of loan principal repayments exceeds the time rate of commercial banks’ granting of loan principals, the total quantity of ‘money’ in the economy decreases, and that that can be one cause of a recession. Apart from that, unless the government is running a surplus, the money that it removes from the economy via taxation is promptly spent by government back into the economy, paying rents, wages and salaries, purchasing goods, etc., and has no net effect on the quantity of money that is circulating in the economy.

    • PJM,

      For a very short term loan, what you say is possibly correct. For a longer term loan the chances of bank created money staying in the economy long enough to evade the taxman are slim. The taxman doesn’t want bank IOUs and demands payment in government IOUs instead. The banks end up holding their own IOUs so naturally they just rip them up like you or I would. See the last three paragraphs in Part 1
      https://petermartin2001.wordpress.com/2014/05/09/positive-money-a-fallacy-built-on-a-little-known-truth/

      If you think “Positive Money does not claim that it is the repaying of loans that causes a recession.” I’d invite you to read the first quote in the post and ref (1).

      There is generally no link between government revenues and government spending. If your statement:
      “the money that it removes from the economy via taxation is promptly spent by government back into the economy”

      were true there wouldn’t be recessions – although there could be inflationary problems. When governments receive a sudden increase in tax revenue generated by the stimulatory effect of private bank lending they use it to reduce their deficits or even create a surplus. They boast about how their successful policies have created such favourable economic conditions. President Clinton in the late 90’s claimed “a [future]10-year surplus of $1.87 trillion” and that the “booming economy also will allow the country to pay off the debt by 2009”.

      http://abcnews.go.com/Business/story?id=88866

      This is economic incompetence of the highest order!

      A public sector surplus corresponds to private sector deficit unless there is a large influx of export money into the economy, as there is with, for example, the German economy. Inevitably a recession will follow the boom.

      The graph in the link above shows how the US private domestic sector was consistently in deficit following the Clinton surplus until the GFC hit in 2008.
      All caused by excessive bank lending in the late 90’s and early 00’s.

      Blaming the banks is an easy option. Banks will do what banks do. The real blame has to be borne by the politicians for letting it happen and also by the economics profession, apart from a few exceptions, for not pointing out what was happening. Neither Clinton nor Bush knew what they were doing and they perhaps do have a fig leaf of an excuse that they weren’t properly advised.

  4. “If you think “Positive Money does not claim that it is the repaying of loans that causes a recession.” I’d invite you to read the first quote in the post and ref (1).”
    I don’t just think, I know! I repeat what I wrote in my previous post: Positive Money does not claim that it is the repaying of loans that causes a recession. Rather, it points out the fact that when the time rate of loan principal repayments exceeds the time rate of commercial banks’ granting of loan principals, the total quantity of ‘money’ in the economy decreases, and that that can be one cause of a recession. Apart from that, unless the government is running a surplus, the money that it removes from the economy via taxation is promptly spent by government back into the economy, paying rents, wages and salaries, purchasing goods, etc., and has no net effect on the quantity of money that is circulating in the economy.

    Perhaps you have a reading problem, Peter.

    • PJM,

      Look, I do welcome debate and intelligent comment but If you want to continue on here further I’d suggest you provide referenced arguments rather than just repeating your previous unsubstantiated assertions. Show me where Positive Money explains that the recession of 2008 was caused by governments taxing away newly created commercial bank money, or show me where it argues against that. From my reading of Positive Money it has not considered that possibility at all. But, if I’ve missed something show me what I’ve missed rather than just tell me you “know” and insult my level of literacy.

      Show me a reference to back up your claim that governments allow spending to rise when tax receipts are high. The reference I provided clearly shows otherwise. They’ll do anything to reduce their deficit or ‘achieve’ a surplus – even if the economy suffers as a result. Sovereign governments are not operationally constrained by taxation revenue. When sovereign governments spend they create new money. When they tax they destroy money. Why? Because they issue IOUs. Just like you or I would, they write out new ones as needed and tear up old ones as they are returned.

      Your thinking is along the lines of government as a user of someone else’s money rather than an issuer of its own money.

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s