SighAugust 17, 2015 Tim WorstallRagging on Ritchie16 CommentsIn other words: printing money is neutral from an economic perspective. Yer wha’? previousJolyon and the LHTD Speak!nextTimmy elsewhere 16 thoughts on “Sigh” Paul August 17, 2015 at 9:52 am Doesn’t printing money pretty much automatically devalue the currency ? If it is “neutral” why does nobody (other than Zimbabwe etc.) adopt this as a simple policy “Corbyn style” – want new hospitals, print the money. Why not print lots of money and give it to everyone ? Why not have the state employ all the unemployed and print money to pay them ? abacab August 17, 2015 at 10:13 am Well, except for the entirely predictable and well-experimentally-proved hyperinflation, then I guess it’s neutral. All you have to do is refuse to acknowledge the last 100 years of economic history. Here’s the comprehensive list of hyperinflations: http://object.cato.org/sites/cato.org/files/pubs/pdf/hanke-krus-hyperinflation-table-may-2013.pdf Luis Enrique August 17, 2015 at 10:24 am is this a reference to the long-run neutrality of money? https://en.wikipedia.org/wiki/Neutrality_of_money Ralph Musgrave August 17, 2015 at 10:24 am Paul and Abacab, Money printing is not inflationary unless it results in excess aggregate demand. Moreover, it’s possible for there to be excess AD even when no money printing takes place, e.g. given irrational exuberance. Dinero August 17, 2015 at 10:57 am Its not neutral as it creates new demand rather than transferring deposits from bond buyers to tax recipients, Deposits which have accompanying loan contracts with an obligation to provide supply. Dinero August 17, 2015 at 11:15 am Its not neutral as it creates new demand rather than transferring deposits from bond buyers to the recipients of government spending. Deposits which have accompanying loan contracts with an obligation to provide supply. Philip Walker August 17, 2015 at 1:51 pm More to the point, Our Murph is betraying, once more, the sad fact that a village has lost its idiot. How else can we explain the fact that he believes, simultaneously, (a) that printing money will boost the economy, and (b) that printing money has no economic effects? abacab August 17, 2015 at 2:51 pm “How else can we explain the fact that he believes, simultaneously, (a) that printing money will boost the economy, and (b) that printing money has no economic effects?” It’s different holes in his Flash Gordon stump. There is no other plausible explanation. Frederick August 17, 2015 at 4:15 pm It had no economic impact in 1920s Germany or recent history of Zimbabwe. DBC Reed August 17, 2015 at 5:21 pm Do those banks engaged in creating money by pretending to be lending on their customers deposits devalue the currency? John miller August 17, 2015 at 6:01 pm IF a bank creates money out of thin air and iF increasing the amount of money has no effect on the economy why can’t I get a bank loan for £1 trillion? Then I could buy Paris and shut it… PF August 17, 2015 at 7:14 pm DBC Reed Do those banks engaged in creating money by pretending to be lending on their customers deposits devalue the currency? No, because at the end of the day, any money that has been “so called created” in your terminology has been matched off (through interbank clearing) by equivalent monetary liabilities across the £ zone. No net new £ cash created by 4pm. If you look at the UK balance sheet, there are some £25-30 trillion of £ cash sitting on the debit sides of balance sheets, in all of its different forms (not the coins / M0 bit), matched off by £25-30 trillion of equivalent loans and liabilities. Broad versus M0? John Fembup August 17, 2015 at 7:47 pm abacab, thanks for the link. Seems to me when the monthly inflation rate can be expressed in scientific notation, there is a real problem regardless of what someone may tell us to call it – or, not call it. PF August 17, 2015 at 8:06 pm Quick follow up. I am being a bit liberal with the word “cash”, ie, I do mean in all of its “various” asset forms… Page 11 http://www.ons.gov.uk/ons/dcp171778_386098.pdf And looking afresh, I have no idea if “£ zone” is technically accurate here or not, and I can’t be bothered to check. It doesn’t change the basic principle that – unless physical coins & notes are involved, or the central bank carries out some creative double entry book keeping, ie debit cash, credit magic money tree (“reserves”) – then ultimately any asset created on a ledger will have an equivalent liability created? And which in itself does not debase the currency, but which substantial M0 creation obviously would. NiV August 17, 2015 at 10:10 pm “Do those banks engaged in creating money by pretending to be lending on their customers deposits devalue the currency?” How many times do I have to say this? The banks are not creating money. Their customers are. The bank is simply exchanging one form of money for another, of equal value. They receive a signed contract promising to repay the debt – which they can keep in their vault, declare on their balance sheet, or sell to somebody else for cash. And they pay back an equal value of money (approximately) to the borrower, but in a more liquid form. Net zero. Customer deposits are used as the basis of this alternative more liquid form, but they don’t actually need this full degree of liquidity of cash to meet their purpose. Hence fractional reserve banking dilutes the liquidity somewhat, yielding a significantly greater profit (via interest paid) to their customers in exchange for a slightly greater risk. However, the bank is only providing liquidity – they don’t create money. Only the borrower does that, by signing a piece of paper saying “I promise to repay the bearer on an agreed schedule the sum of…”, which apart from the calendar part is identical to what a £20 note says. That money is backed by the writer’s possession of a job, or house, or other assets, or skills, or other guarantee of being able to make good on the debt, something of real economic value. The interest rate compensates the holder for the probability of default, since such promises cannot be guaranteed absolutely. Anyone can create money. Most of us have. The difference is in what we promise in return. A currency has value by being exchangeable for something everybody wants. Domestic debts are exchangeable for people’s work, which is always desirable. So-called fiat currencies are backed by the government’s promise not to throw you in jail for not paying your taxes. (That is to say, they are backed by the government’s promise to accept it in payment of taxes.) That is indeed something of economic value, that pretty much everybody wants. Hence, fiat currencies do have a solid basis for their value. It’s rather like loan shark debts being more solid because everybody thinks it is inconvenient to have their legs broken. However, taxes are fundamentally bounded by the productivity of the taxed economy, just as your domestic debts are bounded by the amount of work you can fit in before retirement age. Money is a promise to repay, and promises only have value if they are credible. The government printing money is a declaration of intent to take more of the economy in tax, and if they are already taking everything, then the promise to to take even more is not credible. Even the most threatening loan shark eventually hits a dry river bed, when there’s nothing left. They always run out of other people’s money. (And even if seizing a bigger slice *is* credible, that only makes the nominal price of the products of government ‘cheaper’, while making everything else in the rest of the economy more expensive.) It works exactly the same way with domestic debt. If you are either already up to your eyeballs in debt, or have just lost your job, or are entering a messy divorce, then the credibility of your promises to repay plummet, the value of the money you can print by signing repayment agreements drops. You find yourself having to pay ever higher interest rates to compensate. This is closely analogous to inflation. The value of your ‘money’ drops to the point that only people like ‘Wonga’ are willing to accept it. It’s not a problem for the economy as a whole, because there are always plenty of other people still printing good money. When the government lose credibility, though, it hits everybody. The question you have to ask anyone offering to print money (i.e. to take out a loan) is “How are you going to repay it? What asset of real economic value are you offering us?” But if it’s actually your *aim* to expand the state at the expense of the rest of the economy, and you are happy for your answer to the question above to be to say “For your comfort and convenience we are offering not to jail you, (for the time being)” then it makes *perfect* sense. Communists. It always ends the same bloody way. PF August 17, 2015 at 11:28 pm NiV I like the clarity. Leave a Reply Cancel replyYour email address will not be published. Required fields are marked *Comment Name * Email * Website Save my name, email, and website in this browser for the next time I comment.