Bulk Of Economists Now Say Euro Will Be Gone

[scepticus]

That's credit, not money - broad money is essentially a measure of leverage. I'm leaving FRB out of the equation here intentionally.

narrow money is credit too since it pays interest. 'Money' doesn't pay interest unless its lent.

narrow money is taxpayer leverage, broad money is private sector leverage.

these days we just happen to define taxpayer leverage as 'money'.

simple as that.

[Traktion]

I think I'm still missing it.

If the government balanced its books and there was no FRB then all would be OK? Is that your point?

Why do you want to ignore the FRB? Banks lent and lost more than the GDP of the UK in the crisis. The government's "books" don't matter one iota.

I don't want to 'ignore the FRB' - I've posted many times about it. In this case, I was pointing out that the government is a big borrower and spender within the economy and their policy to borrow or not, could have a profound effect on the value of the currency. I don't think that point is all that controversial?

To put it another way, if there was no FRB, the government's borrowing habits could still cause large fluctuations in the value of the currency. They have more 'borrowing power' than any other single entity within the UK, as us taxpayers guarantee repayment.

If you want to just dwell on FRB, then fine, but I was trying to consider the bigger picture, rather than just a component on it.

[Traktion]

narrow money is credit too since it pays interest. 'Money' doesn't pay interest unless its lent.

narrow money is taxpayer leverage, broad money is private sector leverage.

these days we just happen to define taxpayer leverage as 'money'.

simple as that.

Indeed - and taxpayers can be leveraged to the max. That is central to my point.

Edited June 8, 2010 by Traktion

[Traktion]

Money is credit. If it wasn't - you'd eat it or wipe the nether regions.

Is money different from credit during a bank run?

[scepticus]

Indeed - and taxpayers can be leveraged to the max. That is central to my point.

why?

[scepticus]

Is money different from credit during a bank run?

not any more, because bank runs can be prevented by extending discount window credit.

As we have seen bank runs were prevented in 2008/2009 in this fashion.

Doesn't alter the picture on bank insolvency, but the actions of 2008/2009 does illustrate that money is now exclusively credit.

[Traktion]

not any more, because bank runs can be prevented by extending discount window credit.

As we have seen bank runs were prevented in 2008/2009 in this fashion.

Doesn't alter the picture on bank insolvency, but the actions of 2008/2009 does illustrate that money is now exclusively credit.

Are you saying that the government is now implicitly guaranteeing all deposits then, even those over 50k?

[scepticus]

Are you saying that the government is now implicitly guaranteeing all deposits then, even those over 50k?

no, I am saying a bank run is unlikely because liquidty would be provided at the discount window. That doesn't mean the bank can't be declared insolvent and deposits over 50K put into the bankruptcy process.

the banking sector as a whole can rely on liquidity provision but that doesn't mean that individual banks can't go down.

but the point is, given that liquidity can be arbitraily provided without regard to the existign quantitiy of base money rather implies that base 'money' is a rather redundant concept, don't you think?

[1929crash]

The bulk of economists didn't see the crash coming!

[Traktion]

no, I am saying a bank run is unlikely because liquidty would be provided at the discount window. That doesn't mean the bank can't be declared insolvent and deposits over 50K put into the bankruptcy process.

the banking sector as a whole can rely on liquidity provision but that doesn't mean that individual banks can't go down.

but the point is, given that liquidity can be arbitraily provided without regard to the existign quantitiy of base money rather implies that base 'money' is a rather redundant concept, don't you think?

On your first point, fair enough - as long as the bankruptcy process was put into action.

For your final point though, without credit being anchored to base money, what is to stop endless debt being created? Where would its value come from, if credit could be extended arbitrarily against assets, which in turn would base their value on the availability of credit? How can the market say "enough"? Is this where your concept of a cash free society, with negative base rates comes into play? Or have I misunderstood your point?

[non frog]

I don't want to 'ignore the FRB' - I've posted many times about it. In this case, I was pointing out that the government is a big borrower and spender within the economy and their policy to borrow or not, could have a profound effect on the value of the currency. I don't think that point is all that controversial?

To put it another way, if there was no FRB, the government's borrowing habits could still cause large fluctuations in the value of the currency. They have more 'borrowing power' than any other single entity within the UK, as us taxpayers guarantee repayment.

If you want to just dwell on FRB, then fine, but I was trying to consider the bigger picture, rather than just a component on it.

Yeah yeah. But the government is not the main borrower. Of course they have an effect, but its smaller than the bigger borrowers. Tail wags dog.... The bigger picture is the sh1t the country and the banks are in. The government is just adding to the pain. RBS were and (AFAIK) still are much bigger then the the UK as a financial entity. An HPC of 20 odd percent will drain far more "equity" than the equivalent of a year or two's government spending.

Government borrowing does have an effect, you're quite right, but I think you overestimate it greatly. Government default would have a profound effect - that I would agree with.

[non frog]

..., without credit being anchored to base money, what is to stop endless debt being created?...

Err.. that's kind of like why we are in the sh1t dude.

[Traktion]

Err.. that's kind of like why we are in the sh1t dude.

I'm inclined to agree, but I'd like to hear Scepticus expand on his point.

[scepticus]

For your final point though, without credit being anchored to base money, what is to stop endless debt being created?

interest rates. one sets the rate to maintain price stability to whatever the target.

the only other way is to use taxation and public spending to drain and inject money into the economy.

Where would its value come from, if credit could be extended arbitrarily against assets, which in turn would base their value on the availability of credit? How can the market say "enough"? Is this where your concept of a cash free society, with negative base rates comes into play? Or have I misunderstood your point?

one needs to divide the economy into at least two theoretically arbitrary sections. Then each sector has its own credit economy, the capital base of which is measured in the debt holdings that is has upon the other sector.

because capitalism can only work when there is a state to enforce property rights, a service which requires taxation to pay for, one sector is necessarily the state. The other sector, is everything else.

A pure credit economy has no actual money, but rather each sector counts its stock of 'money' (properly termed 'outside money' from the POV of the holder) as the debt obligations it holds on the other sector. This serves to ensure (in theory) both sectors act in the common good.

Hence, credit easing, which is when the public sector buys up a bunch of private sector credit assets like RMBS and commercial paper, or alternatively, buys up a bunch of companies like banks, oil cos and so on. Look at norway - most norweigan banks and oil companies are nearly 50% state owned.

So we recently had a major sectoral imbalance between public and private sectors in which the private sector owned a very large amount of public sector debt but not vice versa. Now there is a rebalancing going on and the public sector owns a large amount of mortgages, commercial debt and so on.

This serves to devaule the public money, creating a pseudo-negative interest rate on money. But that only happens because the perception is that those private sector assets they are buying are a bit crappy.

But then that is what the policy wonks want, an effective negative real rate of interest. And rightly so, because without that we get a collapse which devaulues everyones savings, and everyones future.

[Traktion]

interest rates. one sets the rate to maintain price stability to whatever the target.

the only other way is to use taxation and public spending to drain and inject money into the economy.

one needs to divide the economy into at least two theoretically arbitrary sections. Then each sector has its own credit economy, the capital base of which is measured in the debt holdings that is has upon the other sector.

because capitalism can only work when there is a state to enforce property rights, a service which requires taxation to pay for, one sector is necessarily the state. The other sector, is everything else.

A pure credit economy has no actual money, but rather each sector counts its stock of 'money' (properly termed 'outside money' from the POV of the holder) as the debt obligations it holds on the other sector. This serves to ensure (in theory) both sectors act in the common good.

Hence, credit easing, which is when the public sector buys up a bunch of private sector credit assets like RMBS and commercial paper, or alternatively, buys up a bunch of companies like banks, oil cos and so on. Look at norway - most norweigan banks and oil companies are nearly 50% state owned.

So we recently had a major sectoral imbalance between public and private sectors in which the private sector owned a very large amount of public sector debt but not vice versa. Now there is a rebalancing going on and the public sector owns a large amount of mortgages, commercial debt and so on.

This serves to devaule the public money, creating a pseudo-negative interest rate on money. But that only happens because the perception is that those private sector assets they are buying are a bit crappy.

But then that is what the policy wonks want, an effective negative real rate of interest. And rightly so, because without that we get a collapse which devaulues everyones savings, and everyones future.

Interesting. It all sounds a bit complicated and would rely on a lot of central planning and government involvement, but I can at least see where you are coming from now. It doesn't really sound like good progress to me, as I'd rather see as little government involvement in money as possible, with the market dictating rates and providing flexibility. Thanks for taking the time to share your thoughts with me.

[scepticus]

Interesting. It all sounds a bit complicated and would rely on a lot of central planning and government involvement, but I can at least see where you are coming from now. It doesn't really sound like good progress to me, as I'd rather see as little government involvement in money as possible, with the market dictating rates and providing flexibility. Thanks for taking the time to share your thoughts with me.

I think you misunderstood me - this is what is happening now and has been happening now for two years. It is not a theory of mine, it is an explaination of what is actually going on right now.

What do you think TALF, TARP, SLS, euroSLS and all the rest of the alphabet soup is?

[Traktion]

I think you misunderstood me - this is what is happening now and has been happening now for two years. It is not a theory of mine, it is an explaination of what is actually going on right now.

What do you think TALF, TARP, SLS, euroSLS and all the rest of the alphabet soup is?

Kicking the can down the road?

[scepticus]

Kicking the can down the road?

this scheme can likely be kicked down the road ad infinitum. In which case it is an equilibrium, not kicking the can.

[kraft]

These must be the same economists that didn't see the tech bubble or the housing bubble. They were probably too busy laughing at Peter Schiff on Bloomberg.

You mean Peter Schiff who runs EUROPAC and was telling everyone to buy Euros last year ?