tag:blogger.com,1999:blog-8764541874043694159.post1160227840402154333..comments2024-03-28T12:23:39.665+00:00Comments on Coppola Comment: Rediscovering old economic modelsFrances Coppolahttp://www.blogger.com/profile/09399390283774592713noreply@blogger.comBlogger29125tag:blogger.com,1999:blog-8764541874043694159.post-67621995598197887272015-04-27T11:20:32.206+01:002015-04-27T11:20:32.206+01:00http://www.writeversity.com/http://www.writeversity.com/Anonymoushttps://www.blogger.com/profile/09019473502893606013noreply@blogger.comtag:blogger.com,1999:blog-8764541874043694159.post-54760715362547472732015-04-26T10:39:50.906+01:002015-04-26T10:39:50.906+01:001) New Zealand does not have deposit insurance. Wh...1) New Zealand does not have deposit insurance. Where are the bank runs?<br /><br />2) As the pension fund was attempting to withdraw funds in physical cash above the insurance limit, the insurance point does not apply. However, read my point about money laundering rules. Banks can and do refuse or delay physical cash payments even on insured deposits without triggering bank runs. <br /><br />3) The bank has not reneged on payment. It has simply restricted the form in which the payment may be made. <br /><br />I realise that you are shocked and horrified at the thought that a bank may refuse to allow some depositors to withdraw physical cash, but you really need to think this through. We are not talking about universal denial of service. We are talking about denial of physical cash to a small number of very large depositors who arguably should not be keeping money in banks anyway. <br /><br />The progressive dismantling of European government support for banks means that pension funds and other investors can no longer assume that very large sums of money in banks are safe. They are not insured and there is no longer any public appetite for bank bailouts. Really this latest development should be seen as part of the general pressure on European investors to change their ways.<br /><br />Frances Coppolahttps://www.blogger.com/profile/09399390283774592713noreply@blogger.comtag:blogger.com,1999:blog-8764541874043694159.post-50093904220702376952015-04-26T08:51:49.285+01:002015-04-26T08:51:49.285+01:00Worth noting in regard to your next blog entry abo...Worth noting in regard to your next blog entry about Switzerland banks refusing to allow withdrawals: deposits where you can't withdraw them in legal tender are effectively uninsured deposits, and uninsured deposits from a bank which has reneged. They are *guaranteed* to cause a bank run. Probably a multiple-bank run if multiple banks pull this nonsense.Nathanaelnoreply@blogger.comtag:blogger.com,1999:blog-8764541874043694159.post-30291893865707424122015-04-25T07:08:12.356+01:002015-04-25T07:08:12.356+01:00correction:
And, what are the leverage ratio regul...correction:<br />And, what are the leverage ratio regulations for credits created in a foreign unit of account? Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-8764541874043694159.post-87052714689762416432015-04-25T07:05:55.892+01:002015-04-25T07:05:55.892+01:00Endogenous eurodolars? Is that a juicy one?
I th...Endogenous eurodolars? Is that a juicy one?<br /><br />I think the definition of eurdolars are deposits in non American banks with a dollar unit of account, cash and ownership of credits (on the asset side) and credits on the liability side. Sounds like any bank can make loans in any other countries unit of account. <br /><br /> And, what would are the leverage ratio regulations for credits created in a foreign unit of account? Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-8764541874043694159.post-4305047017068721082015-04-22T14:31:42.604+01:002015-04-22T14:31:42.604+01:001) Even taking in account individual contracts cas...1) Even taking in account individual contracts cash advances represent a smaller share. 2) concerning Central Banks I wonder the omission of the function of powerful clearing house (function not guaranteed by private clearing houses)Anonymoushttps://www.blogger.com/profile/16820032624481604225noreply@blogger.comtag:blogger.com,1999:blog-8764541874043694159.post-58710225889994455452015-04-22T12:52:08.517+01:002015-04-22T12:52:08.517+01:00Frances,
The availability of imports and immigran...Frances,<br /><br />The availability of imports and immigrants certainly ALLEVIATES excess demand, on the other hand they certainly don’t always provide a complete solution for excess demand: if they did, there would never be such a thing as demand pull inflation. And most economists agree that there is such a thing as demand pull inflation from time to time, i.e. they agree that the economy hits capacity from time to time.<br /><br />Re your claim that “Savings are not required for lending to occur”, that’s precisely the point at issue. I claim that savings ARE REQUIRED where the economy is at capacity, else demand becomes excessive. <br />Ralph Musgravehttps://www.blogger.com/profile/09443857766263185665noreply@blogger.comtag:blogger.com,1999:blog-8764541874043694159.post-31764524166980189012015-04-22T10:08:15.753+01:002015-04-22T10:08:15.753+01:00Andy,
You seem to agree with me when you say “…co...Andy,<br /><br />You seem to agree with me when you say “…collective borrowing does have a limit, because it puts an additional demand on already fully employed resources.” <br /><br />A more precise statement of that idea is my “law” (see below). To re-state it with different words, WHERE an economy is fully employed (aka at capacity), or TO THE EXTENT THAT it is at capacity, borrowing is limited. I.e. borrowing has to be matched by saving. Alternatively, where or to the extent that the economy is NOT AT capacity, borrowing DOES NOT need to be matched or constrained by saving.<br />Ralph Musgravehttps://www.blogger.com/profile/09443857766263185665noreply@blogger.comtag:blogger.com,1999:blog-8764541874043694159.post-44101240019578525312015-04-22T09:41:39.748+01:002015-04-22T09:41:39.748+01:00What, so firms never get loans lined up to fund th...What, so firms never get loans lined up to fund the purchase of a machine that hasn’t yet been produced? And people who build their own houses (or house extensions) never get loans lined up before firing ahead with the construction?Ralph Musgravehttps://www.blogger.com/profile/09443857766263185665noreply@blogger.comtag:blogger.com,1999:blog-8764541874043694159.post-20940405510877887412015-04-22T02:55:19.173+01:002015-04-22T02:55:19.173+01:00visca barcavisca barcajantung koronerhttp://goo.gl/4tb8rJnoreply@blogger.comtag:blogger.com,1999:blog-8764541874043694159.post-25414450955326978632015-04-21T12:17:31.490+01:002015-04-21T12:17:31.490+01:00No, it isn't.No, it isn't. Frances Coppolahttps://www.blogger.com/profile/09399390283774592713noreply@blogger.comtag:blogger.com,1999:blog-8764541874043694159.post-75533623126063037732015-04-21T12:16:20.029+01:002015-04-21T12:16:20.029+01:00Ralph,
As usual you are thinking in closed-econo...Ralph, <br /><br />As usual you are thinking in closed-economy terms. We don't live in a closed economy. If there are no barriers to trade, then rising credit does not necessarily lead to rising inflation even if the domestic economy is at full capacity. You are also falling into the "lump-of-labour" fallacy - indeed I would argue that "full capacity" if it means "full employment" is intrinsically a lump-of-labour fallacy. Have you never heard of immigration?<br /><br />Regarding lending and saving, you have the precedence wrong - which is odd, considering that you are an avowed MMT supporter. I can only think you don't understand them. Savings are not required for lending to occur. They are a consequence of lending, not a determinant of it. And be careful about stocks and flows, too - you have a tendency to use saving and savings interchangeably. Saving is a flow, savings are a stock. In economic terms, lending (flow) enables spending (flow) which results in saving (flow). This adds to savings (stock). <br /><br />Andy H expresses the flow sequence slightly differently: he says investment drives saving (i.e. S=I, though as this is an identity we have to be a little cautious with assumed predecence). But it's the same thing, really.Frances Coppolahttps://www.blogger.com/profile/09399390283774592713noreply@blogger.comtag:blogger.com,1999:blog-8764541874043694159.post-37561972390056332552015-04-21T09:47:36.038+01:002015-04-21T09:47:36.038+01:00Does anyone agree with this new law of banking? (T...Does anyone agree with this new law of banking? (That’s “new” as in “someone probably thought of it 100 years ago, but yours truly hasn’t read enough about the subject to be aware of the fact”).<br /><br />“If the economy is NOT AT capacity, then additional loans can be made WITHOUT any corresponding savings. In contrast, if the economy IS AT capacity, then new loans must be matched by corresponding saving.”<br /><br />To expand on that, in the first scenario, the new loans increase aggregate demand, but that shouldn’t matter as the economy can accept the additional demand. As to the second scenario, additional demand is permissible, so either interest rates will rise of their own accord, or the central bank will raise them so as to choke off the extra demand. <br />Ralph Musgravehttps://www.blogger.com/profile/09443857766263185665noreply@blogger.comtag:blogger.com,1999:blog-8764541874043694159.post-27331911168824749072015-04-21T09:41:58.471+01:002015-04-21T09:41:58.471+01:00Why "past" production? It's common f...Why "past" production? It's common for a firm or household to get a loan with a view to buying something that has NET YET been produced, isn't it?Ralph Musgravehttps://www.blogger.com/profile/09443857766263185665noreply@blogger.comtag:blogger.com,1999:blog-8764541874043694159.post-6442899731453393602015-04-20T23:11:47.271+01:002015-04-20T23:11:47.271+01:00Banks, in aggregate , are leveraged. That fact alo...Banks, in aggregate , are leveraged. That fact alone , to me , disabuses one of any notion that there is some kind on one-to-one borrower/lender relationship as suggested by "loanable funds".<br /><br />As Summers emphasized at the IMF just recently , the big reason the debts of Greece and other such unpayable debts ( he used the Mexican peso crisis as one particularly relevant example ) were not simply written off is due to the cascading effects that would arise in those leveraged banks.<br /><br />Yes , the global economy is a closed system. Yes , assets and liabililties match. None of that matters. Credit-out-of-thin-air still blows up national economies. History is replete with examples.Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-8764541874043694159.post-77507144995533710162015-04-20T21:48:43.688+01:002015-04-20T21:48:43.688+01:00This is getting hot. Let me add that an important ...This is getting hot. Let me add that an important part of borrowing funded from "thin air" goes to acquisition of past production Anonymoushttps://www.blogger.com/profile/16820032624481604225noreply@blogger.comtag:blogger.com,1999:blog-8764541874043694159.post-11691829917227840172015-04-20T21:36:24.735+01:002015-04-20T21:36:24.735+01:00Andy, this may be heresy, but.... During the Great...Andy, this may be heresy, but.... During the Great Moderation, inflation remained low and stable despite buildup of consumer credit and growing trade deficits in many developed countries. I think this had far more to do with lowering of trade barriers and development of global supply chains than central bank monetary policy. In other words, I think that if enough countries are below capacity, lowering trade barriers moderates inflation in those that are at full capacity. But it does create trade imbalances, which have a tendency to unwind viciously when the associated debt becomes too large. Frances Coppolahttps://www.blogger.com/profile/09399390283774592713noreply@blogger.comtag:blogger.com,1999:blog-8764541874043694159.post-62999231340739184462015-04-20T20:51:28.452+01:002015-04-20T20:51:28.452+01:00Good point about global capacity. It certainly se...Good point about global capacity. It certainly seems that the global economy is very rarely, if ever, at full capacity. But there's a wrinkle in terms of how one defines capacity. A closed economy can be "at full capacity" for macroeconomic purposes even if some sectors have excess capacity, if that capacity cannot readily be used to satisfy marginal aggregate demand. Globally, to the extent that nations specialize, the same issue may arise, where it will appear that demand is quite slack in some places but their resources cannot be readily shifted to the production necessary to satisfy marginal global aggregate demand. When I think about it this way, the assumption that global capacity constraints never bind seems less clearly consistent with experience.Andy Harlesshttps://www.blogger.com/profile/17582263872850949568noreply@blogger.comtag:blogger.com,1999:blog-8764541874043694159.post-37253230364117220672015-04-20T20:25:05.439+01:002015-04-20T20:25:05.439+01:00Interesting comments. Ok, a couple of points.
Ral...Interesting comments. Ok, a couple of points.<br /><br />Ralph, B does not increase consumption, but s/he doesn't reduce it either. The extra saving is ADDITIONAL. It is technically wrong (as Andy says) to regard debt-funded consumption as zero-sum. <br /><br />Andy, yes my example is too simple. However, if we assume that the global economy is never at full capacity even if individual countries may be, then if there are no barriers to trade, borrowing to consume in a country that is at full capacity will suck in imports. The effect would be felt as a growing trade deficit rather than rising inflation. Frances Coppolahttps://www.blogger.com/profile/09399390283774592713noreply@blogger.comtag:blogger.com,1999:blog-8764541874043694159.post-90239915758135112532015-04-20T17:25:35.873+01:002015-04-20T17:25:35.873+01:00"I don’t agree with your last para which seem..."I don’t agree with your last para which seems to claim there are no constraints on output. I agree that increased demand CAN SOMETIMES increase supply: e.g. after a long recession and inadequate investment, a rise in demand would probably induce more investment. But have made those investments, there is then an absolutely cast iron constraint on additional output, for a given level of technological development."<br /><br />It depends what's being supplied, of course. But I would have thought that the marginal cost of extra capacity is extremely low on a large swathe of goods. At one end, for software it's virtually zero, the service industry has massive under-employment, consumer manufacturing (iPads, cars) uses high productivity or large reservoirs of foreign labour. Then there's the famed "productivity gap".gastro georgenoreply@blogger.comtag:blogger.com,1999:blog-8764541874043694159.post-44960806823928195362015-04-20T16:34:52.002+01:002015-04-20T16:34:52.002+01:00I think Ralph is technically wrong here, but I thi...I think Ralph is technically wrong here, but I think his original point is valid if properly stated. In the lawnmower scenario, B is not in fact saving anything: she is merely changing the form of her savings from physical capital (or inventory, depending on how you classify a lawnmower) to money. So, yes, bank loans can be used merely to transfer physical assets from one person to another, and if the seller is happy to hold assets in the form of money (which might be the case if interest rates are very low), then, even at full capacity, a marginal bank loan does not necessarily result in a need for some policy offset in the form of higher interest rates or tighter fiscal policy. <br /><br />However, here I think it becomes misleading to talk about one individual borrower. In a real world situation, there will be many marginal borrowers, and at least some of them will be contemplating borrowing to purchase items that are either as-yet unproduced or likely to be replaced immediately in sellers' inventories. In that case, collective borrowing does have a limit, because it puts an additional demand on already fully employed resources.<br /><br />Now one could get more precise and talk about different shocks that have different effects. Some shocks, perhaps, only affect transfer-borrowing, and if one of those shocks hits at full capacity, then you're fine, with no need for a policy response. But other shocks will affect borrowing to buy newly-produced output, and if one of those shocks hits at full capacity, it will require a policy response (or cause inflation).Andy Harlesshttps://www.blogger.com/profile/17582263872850949568noreply@blogger.comtag:blogger.com,1999:blog-8764541874043694159.post-58533424491113211602015-04-20T10:25:38.847+01:002015-04-20T10:25:38.847+01:00If there were commercial banks operating without a...If there were commercial banks operating without a central bank and without a concirn for infaltion then those banks would not have an inentive to increase interest rates. They would not not want to stop there buisiness of lending. There wold be no incentive., no upward pressure on interest rates to the point that the bank's buisiness was reduced.Dinerohttps://www.blogger.com/profile/14632385731642361211noreply@blogger.comtag:blogger.com,1999:blog-8764541874043694159.post-70322627618936939852015-04-20T09:46:03.192+01:002015-04-20T09:46:03.192+01:00Frances,
Re your A,B,C, and lawnmover scenario, I...Frances,<br /><br />Re your A,B,C, and lawnmover scenario, I do appreciate people who produce simple hypothetical scenarios that get to the root of problems. And that scenario very neatly gets to the root of the problem.<br /><br />But seems to me that that scenario supports my point. That is, the loan enables A to spend more, but that is matched by B saving more. That is, assuming the ABC economy was at capacity before the loan, then B cannot just go out and spend that new money. The money has to be saved.<br /><br />I don’t agree with your last para which seems to claim there are no constraints on output. I agree that increased demand CAN SOMETIMES increase supply: e.g. after a long recession and inadequate investment, a rise in demand would probably induce more investment. But have made those investments, there is then an absolutely cast iron constraint on additional output, for a given level of technological development. (Technology can of course be improved in the LONG TERM, but not by limitless amounts in the short term.)<br /><br />As to interest rates, I agree there is little or no effect on interest rates. Anyway interest rates are not what really concerns me. What DOES CONCERN me is my above points about aggregate demand.<br /><br /><br />Ralph Musgravehttps://www.blogger.com/profile/09443857766263185665noreply@blogger.comtag:blogger.com,1999:blog-8764541874043694159.post-16342977695728154542015-04-19T18:22:18.153+01:002015-04-19T18:22:18.153+01:00Ralph,
Still a logical fallacy, I'm afraid.
...Ralph,<br /><br />Still a logical fallacy, I'm afraid.<br /><br />If A borrows in order to spend, we must assume that he is not currently fulfilling all his consumption desires. Therefore demand is not "as high as possible". You seem to think that spending is somehow a zero-sum game - that if one person spends more, another person must spend less. That is not true. <br /><br />Let's suppose we have a economy with two people, A and B, and a bank which creates money when it lends, C. A borrows money from C to buy a lawnmower from B, thus fulfilling his need for a lawnmower. B has no immediate use for the money, because he has already done all his desired consumption for that period, so he puts the money in C. C now has a loan to A (asset) and a deposit from B (liability) which match exactly and BOTH were created by lending. The money created by lending was spent, yes, but it then became part of the stock of savings. The increased spending A puts upwards pressure on interest rate, but the increased saving by B puts downwards pressure on interest rates. In this example, therefore, it is a wash. There is no change in interest rates. <br /><br />I'm also not very into "lump of production" theories. Increased demand tends to lead to increased supply. If it doesn't, then yes prices would rise and a rise in interest rates to deter borrowing might be wise. But usually there would be an increase in output. I think "full capacity" as a constraint on supply growth in response to demand is a myth. Frances Coppolahttps://www.blogger.com/profile/09399390283774592713noreply@blogger.comtag:blogger.com,1999:blog-8764541874043694159.post-5893855479697002862015-04-19T14:56:12.505+01:002015-04-19T14:56:12.505+01:00Frances,
If A borrows, then A will spend approxim...Frances,<br /><br />If A borrows, then A will spend approximately the amount borrowed – people and firms borrow so as to SPEND on something, usually an investment item like a new car or house, or in the case of a firm, a new machine.<br /><br />So assuming all else equal, i.e. assuming constant GDP, or if you like, assuming GDP must remain constant because the economy is at capacity, then someone else absolutely must cut their spending / consumption, else the latter “all else equal” assumption is broken. I.e. demand will become excessive.<br /><br />And what adds force to my point, is that exactly the same applies in a simply barter economy. E.g. if Robinson Crusoe wants to invest in a new fishing rod (assuming constant GDP in the desert island economy) then Crusoe or someone else on the island has to abstain from consumption (e.g. they might spend a day cutting down a tree and supplying Crusoe with wood for the fishing rod rather than use the wood for a fire to do their cooking (an example of consumption)).<br /><br />The point you seem to be making (and I may have got you wrong) is that when a bank creates £X out of thin air and lends it to A, then the total stock of “savings” (in the sense of “money regarded by its holder as allocated for investment rather than current consumption”) will rise. That’s true. And it remains true where B, C, D etc are happy with their existing incomes, expenditure, amounts saved, etc etc.<br /> <br />But the problem comes as soon as that £X is SPENT. At that point demand rises. And that’s not permissible, assuming demand is already as high as is possible.<br />Ralph Musgravehttps://www.blogger.com/profile/09443857766263185665noreply@blogger.com