A suggestion for increasing investment under Positive Money

[botanic]

Hello

One problem I have with Positive Money (PM) is that there might be a very large reduction in the amount of loans available and this might decimate the economy. I would like to make a suggestion to solve this problem.

Under PM all money is fiat money and most of it is spent into the economy by the Government/Bank of England (GBoE). Small amounts may also get into the economy as a result of the GBoE investing in businesses if they thought there was insufficient private investment.

My suggestion is that the GBoE should lend all the fiat money into the economy instead of spending it in.

This would mean that every pound in the economy would correspond to a one pound loan - exactly as it does in our current banking system. However it would also mean that the GBoE would decide broadly where this money gets invested, in much the same way that ordinary people would under PM.

So there would be no shortage of loans except in those parts of the economy where the GBoE decided loans would be harmful.

Mike

[richardb]

hello

This does seem like a concern a number of people have at the moment.
I'd look at the replies on the positive money website 

www.positivemoney.org/2014/04/ann-pettifor-there-will-be-no-shortage-of-money/

also balance sheets in a powerpoint quite good as well.

www.positivemoney.org/wp-content/uploads/2014/05/Positive-Money-Reforms-Transition-Presentation.pptx


rich b

 

[steveb]

I am interested in why you (Mike) think that the government lending all money into the economy might be preferable to spending it into the economy? To my mind a key idea of PM is that money is created debt free.

Why not spend some and lend some? (I think that the more successful experiments with scrip money in the American colonies realised that circulating money through government lending plus introducing new money via spending was most effective).

Another repeated criticism of the PM proposals is that it would signal the end of banking. I am all for the banking and finance 'industries' taking a more proportionate place in our society and economy, but not sure that government becoming the primary lender of money is such a great prospect.

[botanic]

Hello

Thanks for the links Rich.

PM says that the Central Bank can lend money to businesses through banks when there is a shortage. Your first link confirms this and it is also mentioned in the Modernising Money book on page 215. But in both cases it appears to be seen either as a temporary solution or just a minor adjustment.

My concern is that the loans to businesses and other socially necessary things could turn out to be woefully inadequate under PM. This is why I made my suggestion that the GBoE could lend all the fiat money into the economy instead of spending it in.

I think one thing needs to be made clear. Once the GBoE has spent money into the economy it would be difficult to remove it again. Whereas if it lends money into the economy then the loans can be recycled indefinitely. When some are repaid the money can be loaned out again.

So it might be a good idea to lend money into the economy at the start and only spend it in once we are sure that there would be sufficient loans for businesses.

Mike

[botanic]

Hello

Thanks for your comment Steve.

I know PM wants all money to be 'debt free' and some supporters want to be rid of debts altogether but I think there is some confusion here.

Many debts are harmful to borrowers and eliminating these would be a very good idea. But all loans incur debts. Some are harmful and some not. Loans to businesses don't normally cause harm; quite the opposite.

So to my mind it is a question about whether there would be enough loans under PM and whether they would go to the right places.

I am more concerned about this than I am about whether any particular amount of money comes into being as a GBoE spend or a GBoE loan. There could be a mixture of both, as you say.

Mike

[steveb]

This is a key point and I am all for pursuing it further, as it has been raised this week as a criticism of the PM proposals in the financial press articles that are linked on the national website blog.

I think we need to be clear about some terms and concepts. Firstly I don't think that it is useful to use the abbreviation GBoE as a reference to a supposed single institution that both creates and distributes new money. It is a fundamental aspect of the reform idea that these are separate entities with separate roles in the proposed system; the BoE being creator, the government being distributor. This may read as nit picking, but it is stressed as being crucially important in PM literature so it seemed worth flagging up.

I do think that it is key also to acknowledge the distinction between a system where money is actually created without an accompanying debt (that can circulate indefinitely through subsequent saving, lending and spending), and the current system which is utterly dependent upon debt for its money supply (be that for whatever purpose it may be desired/ used). I write this because I wonder (without any reference to econometric modelling to back up my assertion) if such concerns about a huge credit shortage are really based upon viewing the proposals with unacknowledged assumptions drawn from the current status quo. If there were no longer a huge drain of debt repayments with interest necessary merely to maintain the current monetary supply, surely there would be a sizable surplus of funds looking for a place to go. Peer to peer lending could take off in a big way, banks could actually get back into the business of lending to businesses again, businesses could raise funding through equity etc.
My point is that the economy needs money, and we have become accustomed to thinking that (because money only comes through lending) that what the economy really needs is credit. There is a strong argument that credit is a useful and probably inevitable aspect of human economies, but if money itself is on loan to private corporations then the medicine becomes a poison, no? I keep thinking that the positive money proposals are, in truth, merely suggesting that the banking and monetary systems are run the way that a majority of people think that they are run currently. It is not so radical to make electronic money obey the same rules and behaviours as notes and coins- it is a reform toward 'normality'.

Finally, I second Richard's links to the blog articles that answer your concerns, referring to the proposals that banks could lend on funds created by BoE specifically for that purpose, thereby filling any credit gap.

[steveb]

but if money itself is on loan to private corporations then the medicine becomes a poison, no?

Sorry, that should read '...on loan from private corporations...'

[richardb]

hello,


So post reform banks will get money from 3 sources
1 deposits from customers in the "investment accounts"
2 The banks own funds "profits or shareholders"
3 The BOE loaning the BOE like a overdraft.

So there never need be a lack of credit
Its a "pure" floating exchange rate fiat system
just like the one we have now just without the
debt built in.


rich b

[botanic]

Hello

I don't mind you 'nit picking' Steve! But I will continue to use the term 'GBoE' when it's convenient and differentiate the Government from the Bank of England when necessary.

On the question of whether there would be enough loans available under PM, I think there is no way of knowing in advance. An extreme pessimist might say that people wouldn't lend a lot, especially in a prolonged downturn when all loans are risky. An extreme optimist might say that people would lend lots and they would lend it all for socially useful purposes. I'm not prepared to guess what would actually happen but I do think that the result of insufficient loans would be a disaster.

The main point of my suggestion that the GBoE could lend money into the economy instead of spending it in, is to imagine a way to be sure that there would be sufficient loans.

My suggestion also allows one to see three distinct options for a banking system and what each one would be like. In order to do this I will look at a 'pure' version of each option and avoid hybrids.

(1) The current banking system.
This provides plenty of loans because every pound in the money supply corresponds to one pound loaned. However the commercial banks decide both the quantity of these loans and who gets them. The banks can make very irresponsible loans, leading to unsustainable debts.

(2) Positive Money with 100% debt free money (GBoE lends no money in this 'pure' version).
The total amount of loans and who gets them, is decided by people individually. There is no certainty about how this would turn out and nothing straightforward that a government could do if it turned out badly.

(3) Positive Money with the GBoE lending all the money into the economy.
This would provide the same amount of loans as the current banking system and probably more. If the Government is capable of directing these loans to socially useful purposes then there is no reason to suppose that they would end up as harmful debts. Also the GBoE wouldn't have a monopoly on lending. Ordinary people could also lend money in this system just as they would with orthodox PM.

[steveb]

I guess I don't think I was 'nit picking', only that it might read that way; the separation of government and central bank lies at the core of the PM proposals, and has bearing on what you seem to be suggesting (see below).

In your three 'pure' scenarios, the first is the current system which 'provides plenty of loans'. But it does so only in boom times, the past five years however, have been difficult times to get loans especially for those smaller businesses and first time house buyers. A key feature of a monetary system dependent upon debt is its pro-cyclical nature of credit availability, so whilst a degree of credit contraction might be expected in slower economic conditions, there is the double whammy of a shrinking money supply and all that that entails.

The second scenario you describe is the PM proposal where 'The total amount of loans and who gets them, is decided by people individually. There is no certainty about how this would turn out and nothing straightforward that a government could do if it turned out badly.'

However, this doesn't represent the Positive Money proposals. I recommend you read 'A Reply to Anne Pettifor' which addresses this point:

Its important to note that under the specific policy choices outlined in Modernising Money, the amount of credit (lending) available to businesses is not limited to people’s savings, as Ann claims....... in fact the quantity of bank lending would be limited to peoples savings plus the amount that the Bank of England made available to banks to on lend into the economy. In Modernising Money we suggest that the Bank of England should only lend new money to banks on the condition that the new money will be subsequently lent to businesses in the real economy.

On your third example, where all money would be lent into the economy and none spent, I am intrigued about several points:

1. Who would hold the debt, the government or the Bank of England?
2. What would happen to defaulters?
3. How could the government lend so much money into circulation? Government is essentially a spending institution, how could it 'lend' public sector wages or 'lend' tax cuts or 'lend' infrastructure projects (to use three examples of how government might spend money into the economy)?
4. How would the interest rate be set on the billions lent every year necessary just to maintain a stable money supply?

I see your concerns, but I think that bearing in mind that so little bank lending goes to businesses now, and that there are options in the PM proposals to cover possible shortfalls in credit availability under a PM system, I don't see the advantage of money lent rather than spent into existence.

[botanic]

Hello

The second banking option I described was 'pure' Positive Money where 100% of the money was debt free. In your comment Steve, you said:
'.... in fact the quantity of bank lending [to businesses] would be limited to peoples savings plus the amount that the Bank of England made available to banks to on lend into the economy.'
I had assumed that the amount that the Bank of England made available to banks to lend on into the economy, would consist of newly created fiat money. In that case it wouldn't be debt free. I suppose the extra lending could be debt free if it came from existing money obtained from tax. Hmmmm

The answers to your questions on the third option are as follows:

1. Who would hold the debt, the government or the Bank of England? ......The BoE would hold the debt.

2. What would happen to defaulters? ....... The money would be loaned through ordinary banks, just as all money would be loaned under PM. So the defaulters would be dealt with by those banks.

3. How could the government lend so much money into circulation? Government is essentially a spending institution, how could it 'lend' public sector wages or 'lend' tax cuts or 'lend' infrastructure projects (to use three examples of how government might spend money into the economy)? ....... The BoE would lend the money, with the government saying which categories of borrowers it wanted to lend to, just as ordinary lenders would do under PM.
Obviously these loans could not be used to pay public sector wages (these would be funded by taxes as normal) nor could they be used to fund tax cuts. However they could be used to help companies grow so that they could provide extra employment. They could also be used to give Housing Associations long term loans so that they can provide more houses at affordable rents. Etcetera.

4. How would the interest rate be set on the billions lent every year necessary just to maintain a stable money supply? ...... The BoE would require interest rates to be high enough to cover bad debts. This would be necessary so that the loans could be recycled indefinitely. Presumably this would be as low or lower than the rates given to private investors in the banks.

I'm afraid I need to go offline for about three days. I apologise.

Mike

[peterv]

An interesting discussion.

My view is that the government / BoE should not be involved in any lending activities at all. It runs the risk of defaults being passed back to the state, and we are back in the 'private gain public pain' scenario. I actually prefer what botanic described as the "pure" Positive Money approach, ie. that the BoE is responsible only for the creation of money - not for deciding where it gets spent, and not for lending. I know that Modernising Money talks about the BoE lending to banks in special circumstances but to my mind this is a bit of a fudge. It sort of suggests that the "pure" approach might not work so we need a sticking plaster.

Personally, I don't have any doubts that there will be enough money lent out through investment accounts in total, but I share with botanic a concern that it might not be lent in socially useful areas. After all the banks lend primarily into the financial and housing sectors because that is where the best balance between risk and reward is. Why should it be any different when it is individual lenders deciding which sector to invest in?

However (and to answer my own concern!), the rise of peer to peer lending has shown that there IS an appetite for lending to consumers and small businesses. The total lent out through p2p platforms has recently passed the £1bn mark, and with the announcement in the budget that p2p lending will be included in ISAs this is expected to grow hugely. In fact, the power of the internet could mean that p2p lending to SMEs rivals bank lending within a few years.

The other point that I would make is - why is lending to SMEs considered risky? I think it's largely a post-crash phenomenon. Bank lending is pro-cyclical, so once the economy starts to go into recession the money supply shrinks making the situation worse. There will be no such shrinkage post-reform, so business cycles will be dampened rather than reinforced, and the risk of businesses failing will be at a relatively stable level. There will still be some risk (some businesses have to fail in a healthy economy) but the risk will be incorporated into the interest rates.

[botanic]

Hello

I would like to pick up on your last paragraph Peter, where you refer to the money supply shrinking during a recession.

It may shrink but not as much as many supporters of PM seem to imagine. See the first graph on the page here

You can see from the blue line that the growth rate of the money supply fell to about 7% at the end of 2009 but the total amount of money didn't shrink at all.
However you can also see from the orange line that the growth rate fell massively when it was calculated taking account of the velocity of money.
The obvious conclusion is that the so-called shortage of money during a recession has more to do with the velocity of money than with the total amount of money in the economy.

This suggests that fixing the total amount of money in the economy, as in PM, might not dampen the business cycle as much as one would like.

In my opinion the question of who gets loans is probably far more important than the so-called shortage of money.

Mike

[peterv]

May 11, 2014 13:07:59 GMT botanic said:

It may shrink but not as much as many supporters of PM seem to imagine. See the first graph on the page here

But that graph ends in 2009!

Using the latest figures of M4 from the BoE statistical database, a peak of £2,219bn was hit in Feb 2010. It then fell to a low point of £2,059bn in Mar 2012.

So that's a fall of £160bn in 2 years, well over £1bn per week. That's a significant fall which I have no doubt contributed adversely to the recession, in addition to any fall in velocity during that period.

Put another way, under the PM system there would have been £160bn more in the economy in 2012 (even assuming no additional money creation)

[botanic]

Peter

All is not quite as it appears with the idea that a shrinking money supply is pro-cyclical.

Looking at the change in UK GDP one can see that the big drop occurred throughout 2008. If a shrinkage in the money supply was pro-cyclical then one would expect the money supply to shrink during that year.

However the UK Money Supply actually grew in 2008 and it didn't shrink until 2010 onwards.

That is why I found the UK M4 adjusted for velocity much more persuasive. It shows the money supply falling in 2008, when the GDP was also falling. But only when the money supply is adjusted for the velocity of money.

My conclusion would be that fixing the money supply using PM probably wouldn't have dampened the recession.

On a different issue

I would like to follow up the question first suggested by Steve: If the GBoE did lend all or much of the new fiat money into the economy, instead of spending it in, what might the consequences be?

I think it would be interesting to speculate how this might work. If the GBoE gave long term loans to Housing Associations to build massive amounts of new social housing on brownfield sites, how much lending would it take? Could this solve the house price problem by addressing the source of the problem?

Mike