tag:blogger.com,1999:blog-8764541874043694159.post390686084521435774..comments2024-03-28T12:23:39.665+00:00Comments on Coppola Comment: The Slough of DespondFrances Coppolahttp://www.blogger.com/profile/09399390283774592713noreply@blogger.comBlogger76125tag:blogger.com,1999:blog-8764541874043694159.post-51264606959091179322015-10-16T17:03:45.109+01:002015-10-16T17:03:45.109+01:00Malcolm,
I'm afraid I fundamentally disagree....Malcolm,<br /><br />I'm afraid I fundamentally disagree. Sight deposits are "in circulation". This is for two reasons:<br /><br />- the majority of sight deposits are transaction accounts, on which the balance constantly changes as people buy and sell goods and services. Transaction accounts reflect the activity in the economy. Taxing transaction accounts is thus taxing productive activity. <br /><br />- they form part of the liability side of bank balance sheets that are mainly made up of risky loans. I'm not going to get into another argument about what is meant by "funding", but it is a fact that sight deposits form a large part of the funding for bank lending. <br /><br />Thus, sight deposits are not in any sense "hoarded" money. Hoarding would be buying gold then burying it under the floorboards, or withdrawing physical cash and stuffing mattresses with it. <br /><br />If you want to tax people for hoarding, you should tax time deposits, not sight. Though even those form part of stable funding for lending, including lending to enterprises. Taxing them would therefore seem to be unproductive. <br /><br />Frances Coppolahttps://www.blogger.com/profile/09399390283774592713noreply@blogger.comtag:blogger.com,1999:blog-8764541874043694159.post-86483373190407946642015-10-16T16:54:42.062+01:002015-10-16T16:54:42.062+01:00No, Matt. This is just wrong.
Lehman was allowed...No, Matt. This is just wrong. <br /><br />Lehman was allowed to fail for political reasons. The Fed was then forced to provide liquidity TO THE SYSTEM to keep funds flowing round the economy. The BoE had to follow suit when RBS failed: we were within half an hour of the payments system collapsing. <br /><br />You cannot "decouple" the payments system from the banking system. You may be able to isolate individual failing banks, but what happened in 2008 was a systemic failure.<br /><br />In a systemic crisis, it is not possible to distinguish clearly between solvent and insolvent banks, and it is dangerous to try to do so. It is also dangerous to cherry-pick which institutions qualify for liquidity support, because ALL money runs through banks. All of it. You can't decide to provide liquidity support for retail transactions, but not for wholesale ones, for example. When an investment bank fails, it puts at risk its settlement bank, and through that, the payments system. <br /><br />I don't support bailing out insolvent banks. Indeed, I was one of the early voices calling for banks to be allowed to fail. But they have to be allowed to fail in a managed and orderly way. Disorderly collapses are disastrous. <br /><br />It was the belief that banks shouldn't be bailed out that led to the disastrous decision to allow Lehman to fail. You would not only have allowed Lehman to fail, but then refused to allow the Fed to provide liquidity to the financial system after its collapse. That is insanity, pure and simple. <br /><br />Please, please do some proper research. Your beliefs are not only wrong, they are very, very dangerous. Frances Coppolahttps://www.blogger.com/profile/09399390283774592713noreply@blogger.comtag:blogger.com,1999:blog-8764541874043694159.post-66358842694954505622015-10-16T16:48:12.507+01:002015-10-16T16:48:12.507+01:00To answer Peter's question first: I agree, exc...To answer Peter's question first: I agree, excessive amounts held in sight deposits can't really be regarded as being in circulation.<br /><br />Frances, the underlying problem is an incompatibility between the different functions of money; its value as a medium of exchange depends on it circulating freely but its value as a store of wealth depends on it being taken out of circulation. But the more that is used as a store of wealth, the less is available to facilitate economic activity – and its importance as unit of account constrains the monetary authorities' power to manage that conflict. In <a href="https://treasonableman.files.wordpress.com/2015/09/stable-medium-of-exchange1.pdf" rel="nofollow">my view</a>, a healthy society can't have a monetary system which allows the official medium of exchange to be hoarded. (By official medium of exchange I mean whatever the government expects in payment of taxes.)<br /><br />From that perspective, it doesn't matter if people choose to store their wealth in other forms because doing so involves spending the hoarded medium of exchange, thereby releasing it back into circulation. Nor does it matter what people use as a medium of exchange in private transactions which they can choose not to engage in. But if people are required to pay taxes in a form which can be held hostage by the rich, that is pernicious. It creates subservience because it obliges the poor to obtain money on whatever terms the rich set. To my mind that is one of the two principal causes of inequality (the other being derelict laws of land ownership) because it underpins a steady flow of wealth from the poor to the rich. Indirectly it is also a root cause of instability, because hoarded money can come flooding back into circulation unpredictably, making proper management of the monetary system next to impossible.<br /><br />The answer to your second point is implicit in your first: nobody will be <em>forced</em> to hold their earnings in the form of bank deposits. Employers and employees have a mutual contract to provide each other with value. If they regard the official medium of exchange as an unsatisfactory vehicle for that exchange they can choose to use something else. Why should their contract be regarded as imposing an obligation on the state to issue money in a form which favours the rich?<br /><br />You say "... banks [...] rushed to unload the reserves that they were now being taxed to hold. What makes you think that households and businesses would behave differently?"<br /><br />They wouldn't behave differently, Frances - they would spend their excess savings, releasing the hoarded medium of exchange back into circulation. That's the purpose of negative rates, to ensure that the medium of exchange circulates at a healthy rate.<br /><br />It seems to me that you're judging different options by different standards. In your post on <a href="http://www.coppolacomment.com/2013/01/the-problem-of-cash.html" rel="nofollow">The problem of cash</a> you say 'it would be better to allow inflation to be higher so negative rates were not necessary'. Presumably you're assuming, there, that monetary authorities will behave responsibly and not create double-digit inflation. But your arguments on negative rates seem to assume that they will behave irresponsibly.<br /><br />The ability to charge people for holding excessive liquidity is not the same as an obligation to do so, it's merely an additional lever for managing the monetary system. It doesn't preclude allowing positive rates on savings, it merely removes savers' power to demand them. Responsible authorities would set a rate which balanced the need to keep the medium of exchange circulating with the need to keep the banks supplied with funds for investment. I don't know what rates would be, on average, over the long term, but my guess is that, most of the time, they would hover close to zero. At that level, I would expect most savers to be content with the security of government-backed money and not bother seeking riskier savings vehicles.<br /><br />Malcolm Ramsayhttps://treasonableman.wordpress.com/noreply@blogger.comtag:blogger.com,1999:blog-8764541874043694159.post-82080511435010009792015-10-16T16:41:36.270+01:002015-10-16T16:41:36.270+01:00This comment has been removed by the author.hestalhttps://www.blogger.com/profile/06360397201064435600noreply@blogger.comtag:blogger.com,1999:blog-8764541874043694159.post-53327761996094829022015-10-16T16:41:13.994+01:002015-10-16T16:41:13.994+01:00Thanks for the education. It appears that your nat...Thanks for the education. It appears that your nation's financial systems need an overhaul just as much as ours.<br />hestalhttps://www.blogger.com/profile/06360397201064435600noreply@blogger.comtag:blogger.com,1999:blog-8764541874043694159.post-735084487011890542015-10-16T16:37:57.943+01:002015-10-16T16:37:57.943+01:00Do not believe everything the banking industry wil...Do not believe everything the banking industry will tell you. It is pretty clear that Goldman Sachs, together with many other investment banks would have gone under, if they had not had billions of $ pumped into them, to provide liquidity. Their was also no liquidity provision for Lehman, for example, but for other investment banks there was.<br /><br />In fact, their insurer of CDS on their dodgy mortgage securitisation, AIG, went bust, and so would they have, had the Fed not insured that they were bailed out, by providing liquidity.<br /><br />The payment system should be a worry, but that of course can be decoupled much quicker and easier, and especially cheaper, if there is a crisis. If we do some contingency planning. <br /><br />To just proclaim there should be unlimited liquidty in a crisis, as you do, when it is clear that the crisis is caused by some doubt about the solvency of market participants (otherwise we would not have a crisis) is just making the same mistakes again we were made in 2008.<br /><br />So contingency planning has to be different, than throwing buckets of liquidity at the problem. But is is not. Which just shows that we have not learned anything.Matt Usselmannhttp://radicaleconomicthought.wordpress.comnoreply@blogger.comtag:blogger.com,1999:blog-8764541874043694159.post-61291500940087017582015-10-16T14:19:12.138+01:002015-10-16T14:19:12.138+01:00Matt,
I'm very sorry, but your comment just ...Matt, <br /><br />I'm very sorry, but your comment just displays how little you know. Liquidity doesn't "bail out banks". It keeps the payment system going, enabling ordinary people to pay their bills and receive their wages, businesses to pay their suppliers and their employees. Without that support, interruption in the flow of funds around the economy such as happened after the failure of Lehman would have been catastrophic. No "resolution regime" can ever be an adequate substitute for liquidity provision in a crisis. Frances Coppolahttps://www.blogger.com/profile/09399390283774592713noreply@blogger.comtag:blogger.com,1999:blog-8764541874043694159.post-19921162812040228122015-10-16T13:12:32.562+01:002015-10-16T13:12:32.562+01:00Frances:
"Not providing liquidity to the bank...Frances:<br />"Not providing liquidity to the banks in a crisis is an unbelievably dangerous proposal. That is why it is not part of the public discourse."<br /><br />It is only dangerous if you do not have any other resolution regime to hand.<br /><br />It is absolutely ludicrous to suggest, as you seem to be doing, we should again pay billions to the likes of Goldman Sachs (as the public did last time) to bail them out for some dodgy derivatives trades. <br /><br />You are suggesting we do the same thing again. Clearly, the next time a crisis comes along, all these banks should allowed to go bust. In a nice orderly manner, taken over by the government, which would ensure that bad banks would be set up, which would take all the dodgy assets over, and return the remainder of the banks to the private sector, if that is what is wanted.<br /><br />The cry "liquidity for everything" in a crash situation, brought about by the failure of one or more major banks in the world, should certainly be avoided. Matt Usselmannhttp://radicaleconomicthought.wordpress.comnoreply@blogger.comtag:blogger.com,1999:blog-8764541874043694159.post-34879052324214351392015-10-16T08:19:13.777+01:002015-10-16T08:19:13.777+01:00Below is an interesting quote from Willem Buiter (...Below is an interesting quote from Willem Buiter (http://willembuiter.com/numerairology.pdf). He defines your "abacus" thus: "What serves as unit of account in private transactions and private contracts and in the mental arithmetic involved in economic calculation and computation"<br /><br />Full quote:<br /><br />"The determination of the numéraire and its significance is a much-neglected issue in monetary economics. The great monetary economists of previous generations distinguished carefully between what one of them, Patinkin, called “the abstract unit of account” and the actual, physical (and today also digital), medium of exchange. The abstract unit of account “...serves only for purposes of computation and record keeping. This unit has no physical existence;” (Patinkin 1965, p. 15). Patinkin refers to prices in terms of the abstract unit of account as accounting prices and prices in terms of the medium of exchange, as money prices. In what follows, accounting prices will also be identified with contracting prices and invoicing prices. (p. 131)<br /><br /><br />What serves as unit of account in private transactions and private contracts and in the mental arithmetic involved in economic calculation and computation is determined by individual choice conditioned by social convention, rooted in culture and history, not by government decree. (p. 147)"Peter Golovatscheffhttps://www.blogger.com/profile/16845984508247222295noreply@blogger.comtag:blogger.com,1999:blog-8764541874043694159.post-62479047719927335992015-10-16T08:12:36.364+01:002015-10-16T08:12:36.364+01:00Frances, now you're spot on! I do regard money...Frances, now you're spot on! I do regard money solely as an abstract unit of account.<br /><br />Whereas these previous writers (Hawtrey and Hicks are perhaps best examples) have been talking about a "pure credit economy" which they don't consider reality -- although Hicks said we are moving towards it --, I am arguing that we live, indeed, in a pure credit economy. Previous writers haven't got over "fiat money", but I define that, too, as a credit balance (and I'm able to show how that credit balance is a real liability).<br /><br />It's interesting that you call it a "pure barter economy". So did Jevons ("a complicated and perfected system of barter"). Adam Smith, on the other hand, said that if money didn't exists, then we would need to turn to "barter and credit".<br /><br />I might sound crazy, but I'm serious in arguing that money-as-a-medium-of-exchange doesn't exist. Was I not sure that it existed? Of course I was. For 35 years. But when the facts change... :-)Peter Golovatscheffhttps://www.blogger.com/profile/16845984508247222295noreply@blogger.comtag:blogger.com,1999:blog-8764541874043694159.post-78106817859338044812015-10-16T07:59:10.570+01:002015-10-16T07:59:10.570+01:00What kind of interaction between people you refer ...What kind of interaction between people you refer to? I wrote: "Why do we give these instructions? Usually the need to do it arises from real transactions (sales and purchases)." There is a flow of real goods and services between people, and this flow results in banks being instructed to adjust their ledgers. This adjustment doesn't lead to "money" being transferred to the seller, but to the seller ending up with a higher credit balance (she is owed more).Peter Golovatscheffhttps://www.blogger.com/profile/16845984508247222295noreply@blogger.comtag:blogger.com,1999:blog-8764541874043694159.post-25199923544133995972015-10-16T07:52:32.113+01:002015-10-16T07:52:32.113+01:00Malcolm, could you explain what you mean by circul...Malcolm, could you explain what you mean by circulation in "Stuffing cash under the mattress is taking it out of circulation"? Is a deposit I "sit on" in circulation? I don't think so.<br /><br />Frances:<br /><br />I think your two points are very good. One sentence makes me think, though:<br /><br />"morally justifiable to force people to hold their earnings in only one form (bank deposits) while charging them to do so"<br /><br />Are people forced to hold their "earnings" in only one form? Behind this thought lurks "the money earned", a way of thinking which I'm trying to challenge. All these people have earned so far are credit balances, which means that they are owed something (by the society). We will find out what this something is when they make purchases of goods and services (that is, only ex-post). (They always have the alternative to hold their earnings in real assets.)<br /><br />So the real question is: Is it morally justifiable to charge people for holding credit balances in our common bookkeeping system? My answer: It depends. We must differentiate between a "nominal charge" and "a real charge". If you're charged 1 % p.a. nominally while deflation runs at 2 %, then there is no real charge, and I would be tempted to conclude that the nominal charge is a fair one. But, there will always be the question of "implicit agreement". Did these creditors have a good reason to expect that they would never be charged even nominally, so that one should be able to make a speculative profit during deflation by holding zero-interest credit balances? Or was that just a rule we all had thought existed, but it didn't?<br /><br />Once more: There is no "money".Peter Golovatscheffhttps://www.blogger.com/profile/16845984508247222295noreply@blogger.comtag:blogger.com,1999:blog-8764541874043694159.post-15507054008627084862015-10-16T06:20:40.722+01:002015-10-16T06:20:40.722+01:00I can see the point about the spread being the sam...I can see the point about the spread being the same, but.<br /><br />If Savers were to get 3.5% instead of 1.5% that they are getting now they might just start spending this interest. They are too frightened to spend too much capitol.<br />So interest rates to borrowers start to rise back to historical norms. <br /><br />If it was signalled well in advance that interest that this was going to happen over the next two years, people could plan, plus it might give confidence that the system is returning to normal?? Then we might start to believe what the politicians/economists are saying.Lupulcohttps://www.blogger.com/profile/17606432377014654038noreply@blogger.comtag:blogger.com,1999:blog-8764541874043694159.post-4501064426126001912015-10-16T00:59:57.495+01:002015-10-16T00:59:57.495+01:00"I fear for my children. But not because of p..."I fear for my children. But not because of public debt. No, I fear for them because of unemployment, underemployment, low wages, debt, poverty. And war. OMG, war. Can't we see that the path we are on now has in the past always led to war?"<br /><br />Well yes. <br /><br />I'm not qualified to comment on the different forms of banking, or money creation, discussed above. I follow you Frances and others discussing this because the questions around who (or what) controls the creation and distribution of money are obviously at the heart of the apocalypse we are making for ourselves.<br /><br />It often strikes me though that this is all *just* about paper, or its electronic substitute. An entirely human creation not subject to any physical forces but laws we make up. That's what really comes out of 'thin air'. Blindingly obvious perhaps, but worth remembering sometimes.<br /><br />It puts me in the slough of despair often but it also gives me hope - people can decide to change this, there's no god involved, and no escape velocity. If we survive this current nonsense I'm sure we'll look back in wonder at how self-inflicted this all is, and laugh at the absurdity.<br /><br />Anyway thank you for a good post.cityeyriehttps://www.blogger.com/profile/06979142874251797238noreply@blogger.comtag:blogger.com,1999:blog-8764541874043694159.post-75439194048488378702015-10-16T00:59:13.411+01:002015-10-16T00:59:13.411+01:00Two points.
1) How long do you suppose it would t...Two points.<br /><br />1) How long do you suppose it would take for the private sector (non-banks) to devise methods of storing money without incurring the tax? And what do you suppose would happen to banks that could not avoid the tax? They would be forced to absorb it in order to compete for deposits. That would involve raising rates to borrowers. I'd suggest you have a look at the effect of Regulation Q in the USA. <br /><br />2) It is not clear to me why it is morally justifiable to force people to hold their earnings in only one form (bank deposits) while charging them to do so. It is also not clear to me how it is possible to do so. One of the immediate effects of the ECB's negative rate in reserves was to trigger mass purchases of government debt by banks, as they rushed to unload the reserves that they were now being taxed to hold. What makes you think that households and businesses would behave differently? And what makes you think that private sector providers would not help them to do do? If central banks abolish cash to enable negative rates, I'm buying shares in Bitcoin. Frances Coppolahttps://www.blogger.com/profile/09399390283774592713noreply@blogger.comtag:blogger.com,1999:blog-8764541874043694159.post-16326218927191468062015-10-16T00:13:16.829+01:002015-10-16T00:13:16.829+01:00"It is actually because savers DON'T have..."It is actually because savers DON'T have the power to take money out of circulation that banks are likely to raise interest rates to borrowers if they are taxed for holding money on deposit at the central bank."<br /><br />You've lost me there, Frances; I can't see the logic in that at all.<br /><br />As you say yourself in one of those articles you linked to "Realistically [banks] cannot cut their deposit rates to savers to below zero (savers would stuff mattresses instead)". Stuffing cash under the mattress is taking it out of circulation and, as long as savers have the right to withdraw their savings in a physical form which maintains its nominal value, there is no practical way to charge people for holding excessive liquidity. And if banks can't pass the cost of negative rates on to savers then of course they pass them on to borrowers.<br /><br />However, if we had a system in which the physical medium of exchange lost value if it ceased to circulate (which wasn't technologically feasible in Gesell's day but would be today) then banks would be able to charge for holding money at sight. In that situation they would be able to lower lending rates, which would widen the pool of creditworthy borrowers. <br /><br />If, when you characterise negative rates as a tax, you mean that people would perceive it that way then yes, if it was introduced clumsily, that's exactly how most people would see it - because most people don't distinguish between money and what it represents. But, as you know, they're not the same. When you're given a banknote, the value it represents becomes yours but the note itself does not; it remains the property of the issuer. Money is a vehicle which carries value, and the provider of that vehicle is providing a service. Traditionally that service has been provided free of charge, without any limits to how long money can be held, but that's largely the result of historical happenstance, and there's no necessity for that to continue for ever more. <br /><br />We don't regard it as a tax when we are charged for using a phone, so why would it be a tax if we were charged for the use of money? We'd simply be paying for a service (and the charge would only be applied if we used it in a way which adversely affected others ability to use it).<br /><br />If we want a healthy economy the monetary system needs to properly represent the real world and, in the real world, storing wealth generally imposes costs; it is absurd that storing money not only carries no cost but actually imposes costs on others. Introducing such a radical change won't be straightforward but we'll never have a stable monetary system until we do.Malcolm Ramsayhttps://treasonableman.wordpress.com/noreply@blogger.comtag:blogger.com,1999:blog-8764541874043694159.post-53426911815076413632015-10-15T23:40:01.441+01:002015-10-15T23:40:01.441+01:00damn good postdamn good postAnonymousnoreply@blogger.comtag:blogger.com,1999:blog-8764541874043694159.post-46954284175973768672015-10-15T23:27:58.050+01:002015-10-15T23:27:58.050+01:00Matt, which bit of ' bored of seeing the same ...Matt, which bit of ' bored of seeing the same proposals over and over' gave you the impression that it was time to offer the same proposals again? NielsRhttps://www.blogger.com/profile/05781173116235851944noreply@blogger.comtag:blogger.com,1999:blog-8764541874043694159.post-23926376234732130162015-10-15T23:27:54.592+01:002015-10-15T23:27:54.592+01:00Matt, which bit of ' bored of seeing the same ...Matt, which bit of ' bored of seeing the same proposals over and over' gave you the impression that it was time to offer the same proposals again? NielsRhttps://www.blogger.com/profile/05781173116235851944noreply@blogger.comtag:blogger.com,1999:blog-8764541874043694159.post-27490426213318855182015-10-15T18:18:00.722+01:002015-10-15T18:18:00.722+01:00He remortgages his house to provide startup capita...He remortgages his house to provide startup capital for his business. Frances Coppolahttps://www.blogger.com/profile/09399390283774592713noreply@blogger.comtag:blogger.com,1999:blog-8764541874043694159.post-2363707214716080212015-10-15T18:12:05.582+01:002015-10-15T18:12:05.582+01:00Your quote from Hawtrey defines the nature of the ...Your quote from Hawtrey defines the nature of the disagreement between us. You are regarding money solely as a medium of account - an abacus, if you like. Clearly, viewed in this way, money is simply a tally and cannot be said to "move" anywhere. <br /><br />But I'm afraid I regard this as an inadequate view of money. Hawtrey specifically excludes money's other purpose, which is as a medium of exchange. He is discussing a pure barter economy. They do not exist. In our real world, transactions occur using money not just as a tally but as a means of communication - a common language, if you like. Frances Coppolahttps://www.blogger.com/profile/09399390283774592713noreply@blogger.comtag:blogger.com,1999:blog-8764541874043694159.post-59581179308934258702015-10-15T18:04:22.247+01:002015-10-15T18:04:22.247+01:00Or rather, the flow is the interaction between peo...Or rather, the flow is the interaction between people that results in banks being instructed to make bookkeeping entries to change their respective deposit balances. Frances Coppolahttps://www.blogger.com/profile/09399390283774592713noreply@blogger.comtag:blogger.com,1999:blog-8764541874043694159.post-45562338399132638142015-10-15T17:58:01.675+01:002015-10-15T17:58:01.675+01:00Your point doesn't escape me at all. Rather, m...Your point doesn't escape me at all. Rather, mine seems to escape you. The bookkeeping entries that change the balances are not the flows. They merely document the effect of the flows. The flow itself is the movement of instructions between the banks. Frances Coppolahttps://www.blogger.com/profile/09399390283774592713noreply@blogger.comtag:blogger.com,1999:blog-8764541874043694159.post-13185249037028799812015-10-15T17:56:48.559+01:002015-10-15T17:56:48.559+01:00By the way, think about what a rise in a credit ba...By the way, think about what a rise in a credit balance (as a consequence of a credit entry that was made on the account) means. It means that the holder of the balance has extended credit. And this change in a credit balance we are used to call, following the prevailing view, a "payment"! It just doesn't make sense. Seen from my viewpoint, everything looks more coherent.<br /><br />I hope you can stay constructive. I'm not here to show that you are wrong. We have all been looking at the system from an incomplete viewpoint. That's my message.Peter Golovatscheffhttps://www.blogger.com/profile/16845984508247222295noreply@blogger.comtag:blogger.com,1999:blog-8764541874043694159.post-67078955169342167212015-10-15T17:44:29.519+01:002015-10-15T17:44:29.519+01:00Well, you tried to adopt my view and what you saw ...Well, you tried to adopt my view and what you saw was sadly incomplete :-) That doesn't make my view incomplete. It's actually not missing anything of what you refer to when you talk about "instructions". Why do we give these instructions? Usually the need to do it arises from real transactions (sales and purchases). It might also arise from our need to have a credit balance in another bank's ledger and so we instruct both banks (the banking system) to arrange it. My view covers all this and, oh, so much more.<br /><br />My point, which still seems to escape you is this: We can explain the monetary system in terms of credit and debit balances, and entries that change those balances (your "flows"), and thus get entirely rid of the mental picture of "money" moving between accounts. The instructions you refer to are us asking the "bookkeepers" (banks) to make changes in their ledgers which track the credit/debt relationships in the economy. We don't ask them to "move funds" or to "make payments" -- no matter if this is how it seems to be (the Sun seemed to revolve around the Earth).Peter Golovatscheffhttps://www.blogger.com/profile/16845984508247222295noreply@blogger.com