Posts Tagged ‘Boom and bust’

Boom and bust.

May 8, 2015

Ideally a country’s economy should have the household sector as net savers and the corporate sector as net borrowers, with the government budget nearly balanced and net exports near zero. “Sectoral balances”, Inflation, interest, money supply: Currencies, May 2015.

The debate about economic austerity involves value judgments and trade-offs as well as economic principles, and there is uncertainty about the economic parameters. “Alternative targets”, in Inflation, interest, money supply: Targets, May 2013.

A k-wave downturn, driven by demographic change, may be a factor in the global financial crisis. Other factors are Chinese exports, American mortgage law, and financial deregulation. Back in the downwave, 1 January 2012.

Alternative explanations for economic long waves include demography or technological innovation, as well as the debt-deflation credit-cycle theory favoured by some post-Keynesian economists. “Alternative targets”, in Inflation, interest, money supply: Targets, November 2013.

Land tax, better management of protectionism, and better understanding of demography may be the best strategies for reducing economic instability. The search for a stable economy, March 2011.

The tax rate on the capital value of land should be kept within the same range as interest rates, so that no more than half of the annual value is collected as tax. Land Tax, Summer 2010.

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Monetary policy.

March 16, 2014

Inflation targeting made central banks reluctant to accommodate the deflationary effects of China’s entry into the world trading system. The excessive liquidity they created fed the credit bubble. The 2008 Crash: Causes, December 2012.

Cabinet member Vince Cable said “It would be useful . . . to take account of different forms of inflation – imported and domestic – as well as asset inflation”. “Alternative targets”, in Inflation, interest, money supply: Targets, 18 February 2013.

The governor of the Bank of England favours regulation, resolution and restructuring for banks. They should rely less on debt, a resolution mechanism is needed for failing banks, and High Street banking should be kept separate from other banking operations. “Three Rs”, in The 2008 Crash: Reregulation, 3 May 2012.

The Positive Money campaign isn’t targeting the kind of banking which was a factor in the 2008 financial crisis, and won’t stop the creation of money by private banks. Positive Money, March 2014.

Modern Monetary Theory says government deficits are always good, even when the economy is in good shape, unless there’s a risk of runaway inflation. Monetary sects, February 2012.

In the eurozone, average current account deficits between 1999 to 2007 are a better indicator of current problems than fiscal deficits or public debt. The euro and the pound. 7 December 2011.

Banking system and economic growth.

January 29, 2011

I sent some replies to a discussion about monetary policy on another blog, but they haven’t appeared. So I’m posting them here instead.

X: Economic growth requires (at least in part) increasing loans. If loans do not increase, the economy, as it is presently structured, fails.

A: This still says that equilibrium in the economy, as it is presently structured, is failure. Zero economic growth is statistically very improbable in any economic system, but a stable balance between small amounts of economic growth and decline is possible in the economy as it is presently structured. For me economic failure is what was happening in 2008, extremely negative growth.

Economic growth or decline is about GDP, in other words, money. Sustainability is about resources, climate, population, and other species, as well as money.

X: A possible factor in economic cycles is engagement and disengagment with reality. There is an analogy to be drawn between bipolar illness and the market.

A: Bipolar illness doesn’t have the regularity of the long Kondratieff cycles (K-waves). Goldstein wrote that “ the relatively fixed length of a generation” is like “a clock that links long waves to calendar time.”  My demographic explanation has this regularity, its wavelength is 1.7 generations.

X: To clarify, I agree that the interest is paid with money that is in circulation. The new money is created at the point that the bank enters a loan into the account of the borrower. This new money is spent into circulation.

A: It doesn’t really matter whether the credit or the debt is defined as new money, as they are equal amounts of money. One is new money, the other is old money, one circulates, the other doesn‘t.

The debt doesn’t circulate, it stays in one place until it disappears when it is cancelled by the repayment by the borrower. Meanwhile the credit could more appropriately be described as “continuing to circulate”, not “being spent into circulation”.

X: My model of businesses A and B holds, because the only valid reason to borrow is to invest. One cannot sustainably borrow in order to provide for daily living needs.

A: Yes one can. Mortgages are an example. They are a way of transferring housing from old people to young people, while the interest on the mortgages transfers money in the other direction, to pensions.

X: Alison, will this cover it?

4 To pay back the interest means that the borrower either has to invest the loan to make a profit on the market, or from earning wages.

A: No, there is interest from other investments, or unearned money such as the scandalous capital gains in the last house price bubble, or pensions, or winning the lottery. Any of the money that is already in circulation may be used to pay the interest on a new loan.

Anyway I don’t see the point of line 4 unless you are wanting to prove that interest is unsustainable, and I don’t believe it is.

X: We need to sort out the impact of debt on growth. . . Hoogendijk has shown that debt necessitates ever increasing production and productivity.

A: I have shown that it doesn’t. Total debt may increase, decrease or be stable. I don’t know who Hoogendijk is, but he wouldn’t be the first expert who has been wrong.

X: Increasing productivity implies increasing unemployment, which entails increasing SS payments, which increases the country’s deficit. . . In order to attain a steady-state economy, which is what ecology requires, we need to ground our economics on ecological reality.

A: Yes, I agree. A Green tax shift from labour to resources and unearned capital gains from land is what is needed.

X: Interesting point from Atlanta Fed. If booms and busts cancel each other out, there has to be a better way of arranging things.

A: Its good that they cancel each other out but we need to make them smaller. Land tax, better management of protectionism, and better understanding of demography were my suggestions.

X: In the UK, they routinely produce 97% of new money.

A: This was your reply to my comment that the banks haven’t got a monopoly. . . See my next comment.

X: Leaving whether “Bank Monopoly” is precisely correct or not, the substantive proposal is that the ratio should move from 97/3 to ~50/50.
Does this meet with your approval?

A: Not really.

1. I wonder how enforceable a required reserve ratio is.
2. The most appropriate level of the ratio probably varies depending on whether stability or a boom or a bust is happening.
3. 50/50 may be too extreme. Between 2006 and 2009 the money multiplier, defined as “broad money relative to central bank money” or “the link between central bank money . . . and money in the economy”, was highest, at about 64, in early 2007, and lowest, at about 25, in late 2008. (Financial Times, 6 March 2009)

So the ratio of broad money to the total of central bank money plus broad money varied between 25/26 and 64/65. That‘s between 96.2% and 98.5%, in three years in which there was a transition from a major bubble to an exceptionally large crash. So a reduction to 50% might be too revolutionary.

A: So in the last 2 days we have found lots more disagreements, about growth, cycles, money creation, sustainable borrowing, interest, debt, cycles, broad money, money multipliers.

Its been interesting but I need to get on with the rest of my life, and don’t want to get involved in the wiki.