steveb
Junior Member
Posts: 61
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Post by steveb on May 14, 2014 21:54:37 GMT
If I understand what you and the data are saying Mike, the actual quantity of money continued to grow during a period where GDP was is decline, and that the explaining factor would be a sharp deceleration in the velocity of money in the economy. So the actual money supply was growing but economic interactions were becoming less frequent, hence a decline in GDP.
Bearing in mind that the money supply did shrink significantly shortly after Jan 2010, and that GDP and prices are related to both velocity and quantity of money together, do you think that you have good grounds from this one graph to conclude that a shrinking money supply might not be pro-cyclical (i.e. affecting GDP and consequently bank lending and consequently the money supply)? It seems a bit of a willful leap to me.
I am no expert, but I thought that it was well accepted that a sudden or steep reduction in the money supply will have drastic consequences for the economy at large. I can understand that this effect may be ameliorated and/or delayed by various factors. The bank bail outs of 2008 would be one. Another might be the lag time of unemployment, which rose to a peak in 2010, leading to less consumer debt as people tightened the purse strings, triggering a negative trend on money supply.
I would need something more solid in order to be persuaded that there isn't a pro-cyclical aspect to the monetary system. There seem to be so many factors influencing how the crisis unfolded that it is hard to speculate about how things might have turned out under PM. The bail outs wouldn't have happened in the way that they did, the banks could have been allowed to fail. There wouldn't have been the desperate urgency to ensure banks were lending as there was under our current system. People might have lost a lot of savings if they'd had them invested in dodgy subprime markets....etc.
Is the source of the price problem lack of supply? or is it asset price inflation due to bank lending into the property market? Probably a bit of both would be my guess, but your comment suggests you think the former. Three former chancellors have publicly stated that government policy regarding lending is encouraging the price boom rather than supply issues.
If the BoE lent all money into circulation, would they have to change the inscription on the notes to 'I promise to recoup from the bearer on demand the sum of ten pounds' ?
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Post by botanic on May 15, 2014 10:46:09 GMT
Steve
I don't want to argue that a shrinking money supply never has any effects during a down-turn. My comments were made in response to Peter when he said:
"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."
The graphs which I showed demonstrated that GDP fell dramatically in 2008 whilst the money supply was still rising. This single instance suggests that the PM idea that one can avoid future recessions simply by having a fixed (or even a controllable) money supply, is badly mistaken. Saying that the money supply fell dramatically (by about 7.1% according to Peter's figures) a year or two later (when the fall in GDP had levelled out) doesn't really help the PM argument that it is pro-cyclical.
Then you ask: "Is the source of the price problem lack of supply? or is it asset price inflation due to bank lending into the property market?"
Yes it's both, but addressing the supply problem would allow people to live in houses and flats other than the ones owned by their parents. If one tries to tackle the problem by cutting bank lending then it would simply result in people who start out with wealth being able to buy houses, and other people not being able to. Currently people with high incomes have the advantage.
Mike
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steveb
Junior Member
Posts: 61
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Post by steveb on May 16, 2014 10:27:43 GMT
We might have to agree to disagree on this point Mike. I am interested in your viewpoint, but unpersuaded by the argument as it stands.
I think that it is an assumption to say that we should expect GDP and money supply behave in concert, and showing that they didn't in 2008/2009 -although interesting, doesn't (in my mind) undermine the case that there is a pro-cyclical relationship between bank lending and economic output/ forecasting. Things can be related causally without necessarily being co-incident. The situation in 08/09 was extreme of course, and I don't think that it is stretching the point to say that had the government and BoE not intervened with rescue packages and stimulus measures, we would now be in a deep depression, the point being that without the huge intervention into a supposedly 'market economy' by the state, the pro-cyclical relationship would most likely have been all too clear- in the most painful of ways.
Also, the crash followed a boom, and PM claims that the reforms would affect the other side of the pro-cyclicity argument- i.e. that bubbles would not form to the same extent in the first place. It is perhaps oversimplifying to claim that PM's stable money supply wouldn't have staved off the decline in GDP in 09, when the crash itself was the result of a huge debt bubble built up over many years.
The focus in your comments seems to be on the importance of credit availability, and I am interested with the notion that this might be downplayed or overlooked by PM and PM supporters. However, when I read some of your arguments I keep returning to thinking how utterly dependent the monetary supply and consequently the economy is upon private bank lending. Credit is so completely important precisely because without it we would be without money, and that is the essential core argument of monetary reform; society can facilitate its economic activity through money by other means.
I support PM because I think that debt is a tool that is so easily turned into a weapon, and want to live in a society with significantly less debt. I also support PM because it realises that credit is also a useful tool when given its proper place in our world, the question is ,'What is its proper place?'
With regard to housing, I think that if a portion of money was going to be lent by BoE into the economy, your idea of housing associations and affordable housing is a good one, as long as that money didn't go into mortgages for already existing properties.
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Post by botanic on May 18, 2014 8:45:09 GMT
Steve
I am happy to agree to disagree about the exact relationship between downturns and shrinking money supplies.
This thread was originally about loans and I am happy to return to "the importance of credit availability, and ... the notion that this might be downplayed or overlooked by PM and PM supporters." However I need to deal with a potential difficulty first.
Supporters of PM often seem to imply that some people must borrow money for the purpose of keeping the money supply high so that everyone else can conduct their business. They also seem to imply that everyone must pay interest in order to have this money supply.
I find this picture very misleading. I cannot imagine anyone thinking "the money supply is shrinking, so I must borrow some money to stop this happening". In practice people borrow money for individual or group reasons; never to benefit the whole economy!
It is probably true that a shrinking money supply results in some people needing to borrow more money than they would have done otherwise. But I doubt whether this is the main reason why most money is borrowed.
So I would be happy to consider how much credit the economy actually needs, provide that we can get past this idea that we need to borrow money simply to support the money supply.
Mike
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steveb
Junior Member
Posts: 61
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Post by steveb on May 18, 2014 18:14:35 GMT
No, nor can I imagine such a thing, that would be most odd. I agree that money is borrowed for group and individual reasons.
I have never interpreted the assertion in that way, maybe you have come across some comments that I haven't (?). I always took it to mean that society as a whole has to constantly borrow (and that the economy's managers have to constantly encourage bank lending) in order for there to be money in the system.
It is perhaps a matter of interpretation of the notion of choice...so if- hypothetically, wages drop so low that people need to borrow money for the essentials of living, then we could say that strictly speaking they are going into debt for their own personal reasons. Likewise if a local authority cannot fund its services through taxation and central government revenue then they might 'choose' to borrow money to keep those services going. If society is structured around a monetary system that is dependent upon debt, then its likely that individuals and groups will have little or no choice about whether to borrow money or not. High levels of debt are hard wired into the system, and although I'm sure people aren't borrowing with the idea of benefiting the economy in mind; the end result is a lack of real choice in how to fund economic enterprises. At least that is how I see it. Books like David Graeber's 'Debt - the first 5,000 years' are full of examples of people 'choosing' to take on debts to the extent that they end up selling relatives (or themselves) into slavery to service those loans.
Do you agree with the claim that for every pound in our pocket or bank account, someone somewhere is a pound in debt?
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Post by botanic on May 19, 2014 12:46:02 GMT
Steve
Yes in our current system every pound of credit in a bank means that someone has a corresponding pound of debt. It also means that they have had the benefit from their loan originally. What use they made of that benefit and what choice they had in getting it is another matter.
About your hypothetical situation "if- hypothetically, wages drop so low that people need to borrow money for the essentials of living, then we could say that strictly speaking they are going into debt for their own personal reasons. Likewise if a local authority cannot fund its services through taxation and central government revenue then they might 'choose' to borrow money to keep those services going. If society is structured around a monetary system that is dependent upon debt, then its likely that individuals and groups will have little or no choice about whether to borrow money or not." This picture of individuals and groups being forced into more debt each month to compensate for insufficient income, cannot work over the long term. These kinds of loans would build up continuously and they would inevitably all result in defaults. Yes I know this actually happens in many cases but the idea that the whole banking system could work indefinitely with ever increasing numbers of defaults is nonsense.
I think the last part of your hypothetical is flawed. Yes, the money supply depends on the existence of loans and debt. But it doesn't necessarily follow that people are forced into debt unwillingly. It is at least possible that everyone who holds a debt holds it as the result of having had a genuinely useful loan , which they have benefitted from and from which they continue to benefit.
The idea that ".. the economy's managers have to constantly encourage bank lending in order for there to be money in the system." is both true and interesting. Low interest rates encourage more borrowing and therefore an increase in the money supply. This may have various effects. It makes business loans more affordable so it should result in more employment. It also makes personal loans easier, so it probably results in more unsustainable debt.
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steveb
Junior Member
Posts: 61
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Post by steveb on May 19, 2014 17:40:42 GMT
So, to summarise, it seems we agree that individuals and groups/ organisations within society can exercise choice with regard to taking on debt and deciding for what reasons they want to borrow money. Also, collectively as a society, we absolutely have no choice about whether to take on debt, but still can exercise a degree of choice on where those loans go. Where do these slightly contradictory scenarios 'meet'? Imagine person A might live modestly and within their means, perhaps they are content with waiting for their savings to accumulate before buying that new car or the latest smartphone, perhaps they choose to rent property rather than take on a mortgage. Similarly, company A is a prudent enterprise that seeks to avoid high risk strategies, to fund its development through company savings and selling shares rather than taking on big loans at interest. Person B is a shop-aholic who lives in the milieu of advertising and must have their consumer desires met NOW, they are permanently in debt, and luckily can service the interest payments to keep the creditors from knocking at their door (as long as their income doesn't dry up). Company B is an aggressive corporation bent on market domination, the managers take on ambitious risky loans as they seek to expand and undercut their competitors, in the hope that it will pay off if they end up on top. So this is a crude caricature of two approaches to financing decisions. I realise that loans can be taken on by responsible people and organisations for responsible purposes. However, I make the comparison because, for me, and I think for many, the 'Eureka' idea when learning about the nature of the monetary system, is that the idea of personal choice at the heart of modern capitalism is ultimately illusory. Society seems to be encouraging person B's and company B's, perhaps because there simply isn't enough demand for credit from people A's and company A's to keep the show going. Perhaps it is lucrative for the class of creditors who currently own so much of the world to encourage such a situation..? With regard to defaults, there are many people, myself included who are convinced that at some point in the future -most likely in my lifetime, that either the defaults will outweigh the ability of the banking system to write them off, or that the demands of interest payments will be beyond the capacity of the economy to pay them. Then the whole system will collapse. Ben Dyson said as much himself when he visited Sheffield, answering a question at the end of his talk, he basically said that the system will inevitably collapse and speaking realistically, PM are sowing seeds for what might hopefully replace it.
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Post by botanic on May 20, 2014 13:13:21 GMT
I am almost happy to accept your person A and company A and person B and company B picture, but not quite!
Your 'A' categories assume that significant numbers of people and companies finance their needs entirely from existing wealth or by saving up for things. So they don't require any loans. Whereas your 'B' categories assume that only impatient people or aggressive companies take out loans.
This implies that only irresponsible (or desperate) people take out loans. I think this is wrong - there are many cases where responsible people take out loans too. For instance people buy houses (even without inflated prices a new house might cost between £50,000 and £100,000 to build) and they take out mortgages to do so because saving up for a house means they would be too old to fully enjoy it.
So I would be happier if your 'A' categories consisted of people and companies who took out sustainable loans and your 'B' categories consisted of people who took out unsustainable loans. People who don't take out any loans are not really relevant to our discussions.
If your categories were changed in this way then we could see that people and companies in both categories take out loans and therefore they both increase the money supply.
Perhaps the question should be 'What is the balance between the sustainable and the unsustainable loans?' You appear to think it goes much too far towards the unsustainable loans. I suspect that in normal times it may be otherwise.
But I will accept one thing, which is that the BoE assumes that the total money supply and a healthy amount of credit in the economy must magically amount to the same figure! One advantage of having PM and the GBoE lending fiat money into the economy instead of spending it in, would be that the size of the money supply and the total amount of credit could be controlled separately. Or they could be if part of the money was loaned in rather than spent in.
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