Thursday, February 07, 2013

Interfluidity: Borrowing is a feature, not a bug

SRW is supportive of wealth distribution per se. He has a long post on inequality, but never talks about how other tools, such as immigration policy, might also have some bearing on this subject.

What I wanted to raise was his point that, to support inequality, the poor had to borrow more which the Fed supported via lower interest rates.
Obviously, one can invent any number of explanations for the slow and steady decline in real rates that began with but has outlived the “Great Moderation”. My explanation is that growing inequality required ever greater inducement of ever less solvent households to borrow in order to sustain adequate demand, and central banks delivered. Other stories I’ve encountered don’t strike me as very plausible. Markets would have to be pretty inefficient, or bad news would have had to come in very small drips, if technology or demography is at the root of the decline.
SRW is a monetarist, and therefore beleives that somehow, the quantity of reserves banks trade with one another to clear cheques, impacts the aggregate demand, but has never been clear on exactly how. Here is his mechanism -- lower interest rates generate the "ever greater inducement of ever less solvent households to borrow in order to sustain adequate demand" -- because how else can it work? And the biggest ticket item households can leverage against is real estate, so housing is the closest you can come to for a monetary mechanism.

There is a simpler way for the Government to stimulate aggregate demand: higher deficits through lower taxes of more spending, depending on your politics. When you are a currency issuer, you don't borrow to spend, you simply spend the currency into existence, and tax it into non-existance if you spend too much.


Blogger Steve Randy Waldman said...

First time I've ever heard I was a monetarist!

3:25 PM  
Blogger Steve Randy Waldman said...

(More seriously, this is about a 180 degree mischaracterization of my normative views. I agree with you that encouraging lending is a poor way to stimulate aggregate demand. But I think it is the way that we have stimulated aggregated demand throughout the so-called Great Moderation.)

4:24 PM  
Blogger winterspeak said...

SRW: Apologies for the mis-characterization! By monetarist, I merely meant that someone who believed in monetarism, namely that by controlling the money supply, governments can influence national output in the short run and price level in the long run.

I don't believe you have given up your orthodox position on these matters in light of your back and forth with Krugman.

Lending, particularly lending against real estate, is exactly how we have stimulated aggregate demand through the so-called great moderation and it is the only mechanism by monetarism can actually operate.

4:44 PM  
Blogger paul said...

With all due respect, artificial stimulation of the economy through credit expansion had reached it's nexus...Elvis has left the building.

Debt expansion creates demand by enabling the spending of funds that haven't been earned yet. How far in the future do you think we can go?

If one believes that debt creates income that in turn can extinguish the debt that created it then one believes in perpetual motion.

Good luck with that one.

7:36 PM  
Blogger Neil Wilson said...

"If one believes that debt creates income that in turn can extinguish the debt that created it then one believes in perpetual motion."

That is exactly what happens.

Debt is a stock which is then multiplied by business to create a flow called turnover (the stock turn). From this flow the factors of production are paid - interest, profit, wages and reduction in principal.

The limits of that capacity are the ability to create sufficient turn via the real production system.

The problems are the drift of into playing casino games and speculating in assets - all of which do not create the production expansion we require.

12:21 AM  
Blogger paul said...

Neil, how does your perpetual-motion machine account for leakages such as saving and imperfect settlement?

Is that funded through more borrowing? If so on what assets is the borrowing based, and does your model limit debt by assets, ability to service or both?

Does Keen's model include a fiscal contribution?

When you say "stock turn" are you saying that production increases the number of net dollars in the system?

So many questions.

5:58 AM  
Blogger Oliver said...

Winterspeak, I think you are mischarcterising SRW. Saying that there is a quantitative transmission effect between amount of reserves and volume of bank lending (monetarism) is very different from saying that a lower interest rate encourages borrowing vis à vis a higher rate environment, ceteris paribus ad expectations of rate changes notwithstanding. The latter is what I believe SRW is saying and to me is perfectly compatible with endogenous money, MMT etc..

There is a further transmission to keep in mind, namely that from asset prices to consumption. To the extent that lending simply causes asset prices to rise, effects on consumer prices are purely indirect via the wealth effect. But that doesn't mean they don't exist.

6:28 AM  
Blogger winterspeak said...

Oliver: SRW, like most of us I suppose, began with standard textbook economics when it came to the role of reserves, monetary policy, etc. He then learned all about MMT, but has not found it persuasive. Which is fine.

So just how do excess reserves generate additional lending? What economic role do they play at all? In MMT they are largely irrelevant, and since the impact of low rates is unclear and context dependent, it may or may not stimulate AD as the sector trades off cheaper borrowing against less interest income.

There was a great paper which empirically showed just how central residential real estate was in business cycles, so if you really want a monetary mechanism, and SRW does, there it is.

The solution to all of this is straightforward -- just run larger deficits. But to Steve, the ability for a Mary to take money from a Paul (bad Paul!) and give it to Peter (good Peter!) is important, so he keeps coming up with more and more complicated stories advocating for redistribution.

7:13 AM  
Blogger Neil Wilson said...

"When you say "stock turn" are you saying that production increases the number of net dollars in the system?"

That's basic business.

Businesses operate by leveraging their assets to generate a turnover. The turn is the sales turnover divided by the assets employed. How many times you turn your assets is one measure of how effective the business is.

Turnover is a flow and the capital is a stock.

So when you borrow £100, you spend that £100 on wages, etc. which gives people £100 to buy your stuff, which you then spend again on wages, interest and profit, giving people another £100 to buy your stuff. And so on.

So for any given period the original £100 'turns over' several times through the system. And each time it does that you get a bunch of accounting entries recording sales and costs. The more it does that the more efficient the economic system in place.

It's the flow of money around the system that causes real things to happen.

You've got to be clear what is just a stock and what is a flow.

7:56 AM  
Blogger Oliver said...

I read SRW's last piece as well as the one on the great moderation as distinct criticisms of the mortgage led cycle which he rightly pinpoints as definitive of the monetarist status quo.

I'll grant you the caveat of the interest income channel.

In the redistribute vs. deficit debate, I find it's more a matter of politics and taste than economics in deciding which of the two deserves more attention. In any case they aren't mutually exclusive. A 'better' distribution will make the same deficit go further.

Also, work such as Jamie Galbraith's 'inequality and instability' has proven links between, well, inequality and instability.

Personally, I think economics is always and everywhere a game of morals. And this is where I think your differences with SRW lie? At least I don't think it's your economics, because from where I stand, your economic differences seem minute.

8:08 AM  
Blogger winterspeak said...

Yup, all politics. Steve tortures economics to make the point he wants which is for the state to use its power and redistribute wealth.

9:44 AM  
Blogger Steve Randy Waldman said...

WS — Your description of my biography, intellectual or otherwise, is forever unrecognizable to me. But my biography is uninteresting even to me; there's no reason why others should get it right.

I never "rejected" MMT; I think I said it offers "a coherent and important perspective on fiscal and monetary issues that ought to be anyone serious about macroeconomics." I don't identify as an MMT-er, as I don't identify as a monetarist or a Keynesian or an Austrian or any other such thing. I like to take what I can from everyone. (I guess that's the redistributionist peeking out!)

My views on the role of reserves seem awfully close to those of, well, Scott Fulwiler, who I think does identify as an MMT-er. The mechanism by which I claim reserve emission led in the past to additional lending is via price: in the past, the quantity of reserves was closely coupled to the interbank interest rate. The whole point of my discussion with Krugman was to argue that the quantity of reserves is not so likely to be very effective at affecting demand, when the central bank manages the price of reserves by paying interest on them and the quantity outstanding is always in excess.

I think you torture my economics because you dislike my politics. I do think that distribution is at the heart of our economic malaise, but I don't advocate jackbooted thugs to evict the rich from their beachside homes in Malibu to reeducation camps. I advocate mostly something like a basic income, and dealing with the inflation/taxation tradeoffs a reasonably-sized basic income might engender. My views on money are very consistent with the MMT-perspective: the quantity of money is endogenous when the CB targets an interest rate and doesn't pay interest on base money, and is mostly irrelevant when the central bank operates under a floor regime, except insofar as it is one of many ways of financing the much more relevant deficit. I do go beyond the MMT view in thinking that the character and financing of deficits matter: I think that the maturity with which debts are financed, the split between tax-reduction and spending, and the specific manner of taxation and spending are important. That's not inconsistent with MMT -- in fact, some MMT-ers consider a particular form of deficit spending to be a sine qua non of the theory (the job guarantee). But I think these issues go beyond what one might call the MMT baseline, and the take on it to which you adhere. But I don't want to start mischaracterizing your views!

5:31 PM  
Blogger winterspeak said...

SRW: With respect, I did not say you rejected MMT, I said you were unpersuaded by it. You found it interesting, but you did not re-wire your brain. This is an excellent decision btw. Scott has not and likely will never be invited to the Fed for tea & cookies. It is best to remain respectable, and MMT is not.

It is true I don't like your politics, but I do like you and your writing.

The distribution problem at the heart of our malaise is that the Government isn't distributing enough money to the non-Govt. The Govt isn't doing this because it thinks it cannot, but it is wrong. You know the why of all this too, but still, you reach for the redistribution lever anyway? I admire your zeal, Comrade, but cannot we simply put a round peg in this round hole for now?

It is the very unwillingness of the Govt to distribution to the non-Govt which has made the Govt so reliant on the finance sector to shore up AD via credit. It is the growth in finance which has, by and large, lead to the top end of wealth becoming so skewed. If the Govt was willing to distribute, then it could have taken the banks down in the aftermath of the 2008 crises instead of propping them up.

9:07 PM  
Blogger Greg said...

Well my politics are probably much closer to Mr Waldmans but Winterspeak was the first writer I read that talked about MMT four years ago so I have learned much about where he comes from on these manners as well.

My take here is that the mal-distribution, which leads to the urge for re-distribution is THE problem. I too find the problem being that too many people cant afford their debt payments to banks while a few can afford to pay cash for entire countries (like Greece maybe) and that without this reversing course somehow we will not see the recovery that most of us hope for (we also have to admit that are likely plenty who dont want any type of "recovery" and this is working against all of us as well)

I think the maldistribution HAS come from a refusal by the govt to use its fiscal powers to run whatever deficits are needed, instead relying on banks, mostly via the real estate market, to keep peoples borrowing power alive and well. This refusal has been driven by a cadre of well paid and trained academic economists who mostly adhere to quasi monetarist views on reserves, inflation and Central Bank powers.

Its been an interesting back and forth Winter and Mr Waldman and I think its interesting that you really both agree on much

Winterspeak rightly suggests that the bad distribution we see today would have been avoided had govts been doing what hey were capable of the last 30+ yrs since abandoning gold standards. Relying on bank credit to the degree we have has been THE cause of our situation today. Obsession with balanced budgets "over a long term" or surpluses has been the result of flawed economic models which view govts just like households.

SRW sees the situation today and wants to rectify it ( I do too BTW). I think it is very hard to rectify this situation using modern econ models, which essentially see govt financing as a zero sum game with the private sector. To give to someone who doesnt have means to take from someone who has... and this doesnt sit well with many people who think we have all earned what it is we have.

I dont see that much space between you guys except on what to do today. Winter says we'd never be in this extreme distribution had we been doing all we could all along....... but we didnt. So now we have to get out of what we created with our bad models.

Tax holidays....forever.... on SS/medicare would be a great start. Let everyone who earns less than 104,000 get a 7% raise immediately and still promise payments to every recipient. Businesses would see a 7% reduction in outlays as well.

Do away with the ridiculous debt ceiling forever. Just have Congress do its job and decide the fiscal stance of our nation.

These two things would immediately reduce income inequality and reduce political zero sum games where all new spending must be "financed" by cuts somewhere. Not the whole game by any stretch but a good start.

5:03 AM  
Blogger Ignacio said...

Neil, too bad the collateral used to leverage (real estate) is subject to supply & demand and price shocks will make the whole edifice crumble.

This is where you say that the problem is not the mechanism itself, but what assets & business models are pursued to produce that leverage.

Well, the truth is that such levels of "growth" would be impossible to achieve otherwise, at least if we have to account history for something (credit expansions have been always propelled in a similar way). So depending on ponzi economics for the system to work seems to me like a bad deal in the long run.

And because democracy and capitalism (oligarchy) are intrinsically opposed (the real deal here, the elephant in the room economists always ignore), at least at their core, we have to use this subterfuges to coordinate a sustainable (not) situation, until it no longer is sustainable.

Due to the very own nature and dynamics of profits and wealth transmission/accumulation, the breakdown has to happen at some point. This is when historically we have seen governments act to make situation sustainable again (providing a frame where stabilization is possible, providing safety so capital can be invested, and provide means to the people to repair their own financial situation).

As suggested in other way, we have to find ways to make the current credit system work in a more equitable way, more compatible with democracy, instead of being focused towards oligarchy (all sort of corporate wealthcare). If that means changing the institutional structure of the financial system, or a more wise use of fiscal policy non-based in harmful memes ("governments can run out of money"), remains to be seen (probably the one which again is more keen to keep the current mixed status quo).

10:13 AM  

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