Monies, debt and policy. The concept of endogenous money as a basis for household and non-financial companies instead of bank centered monetary statistics
Please cite the paper as:
“Merijn Knibbe, Erwan Mahé, Remco Schrijvers, (2013), Monies, debt and policy. The concept of endogenous money as a basis for household and non-financial companies instead of bank centered monetary statistics, World Economics Association (WEA) Conferences, No. 1 2013, The political economy of economic metrics, 28th January to 14th March, 2013”
Summary. The lack of attention to the stock of debt and, to an extent, the flow of credit by central banks and central bankers was one of the reasons why the Great Financial Crisis took them by surprise. Their focus on consumer price inflation led them astray. This is remarkable, as the very monetary statistics of the central banks are based upon the idea that money creation is ‘joined at the hip’ with debt creation: ‘loans create deposits’. The statistics show this, including sectoral differences and differences between loans. This enables central banks to differentiate between different sources of money growth. National differences as well as differences between debts for asset purchases and debts to finance productive investments come to mind. Monetary statistics which are more focused on national differences and debt will, in the Eurozone, also enable a more coherent formulation of national and Eurozone economic policies as the data matrix of the EU ‘Macro Economic Imbalances Procedure’ Eurostat financial accounts of countries already contains sectoral debt and asset price related variables. Using ‘debt’ as a standard element of monetary analysis however requires a wholesale acceptance of the idea, inherent in the statistics but not in central bank monetary philosophy, that money and debt creation constitute an endogenous, dynamic process largely outside the control of central banks. To enable this a much broader concept of ‘Money’ than the rather narrow concept which at the moment dominates monetary analysis is needed. Much attention is paid to establish such a concept, which unlike the present concept is consistent with monetary statistics, quadruple entry accounting, the reality of economic transactions as well as monetary history.
Update: the paper uses the term ‘legal tender’ in a de facto way. It however turns out that the phrase has a precise de jure meaning. Where the phrase is used, read: “money that can be exchanged 1:1 with no risk in legal tender”. h/t Paul Grignon
I am in agreement with the authors as far as their analysis goes.
At one point the authors note that money can be created as debt and then leave the premises, never to return. How is the debt to be paid if the money created as that debt never comes back to be earned? Germany has worthless Greek credits and little need for Greek stuff, the Greeks have unpayable debt and German goods. This is treated as if it were only a Eurozone national imbalance-of-trade problem, which it most certainly is.
But this analysis of “endogenous money” fails to note that the same problem is inherent to any system in which money enters circulation as debt and debts are payable only in money. Income disparity (imbalance-of-trade) causes money created as one debt to only be available as another debt, not as earnings (balance-of-trade). This sets up a Perpetual Debt, a borrow from Peter to pay Paul and vice versa dependence on new money creation loans NEVER DECREASING.
Every acceleration of debt creation results in mathematically caused defaults proportionate to the level of Perpetual Debt whenever money creation debt growth slows down.
In my view, this is the very simple reason for the crash economists failed to see coming.
If the private sector doesn’t borrow enough new money into existence to stave off an avalanche of mathematically caused defaults, the national taxpayer must go into debt to do so.
Claudio Borio at the BIS calls for an explanatory model that fulfills certain requirements.
I sent him the same answer which fulfills all but one of his requirements.
This is my full illustrated explanation:
9-minute movie on YouTube:
(1) Thanks for the comment
(2) I largely agree with you (though things like internationa liquidity and the like and money flight (Greece) might sometiems complicate things.
Yes it is all extremely complicated. And yet I see it in very simple terms.
Money flight happens to all of us. It flies from the borrowers (like Greece) to the rich depositors (like Germany) who only lend it. It flies from sub-prime borrowers to Goldman Sachs. It flies from the poor to the rich all the time.
It seems to me that everyone recognizes national imbalances of trade, but not the imbalance of trade between borrowers and depositors in the system as a whole. This imbalance of trade is an advertised feature of banking and the CORE DESIGN of the banking system itself.
The current system actively works AGAINST the successful completion of credit cycles. And therefore, like the bus in the movie Speed, the system has to blow up whenever aggregate debt growth slows down.