‘Positive Money’ and the fallacy of the need
for a state money producer
By Detlev Schlichter
I am usually inclined to encourage the inquiry of the fundamental aspects
of money and banking. This is because I tend to believe that only by going back
to first principles is it possible to cut through the thicket of widely
accepted but deeply flawed theories that dominate the current debate in
mainstream media, politics and the financial industry. From my own experience
in financial markets I can appreciate how convenient and tempting it is in a
business context, where quick and easy communication is of the essence, to
adopt a certain, widely shared set of paradigms, regardless of how flimsy their
theoretical foundations. Fund managers, traders and financial journalists live
in the immediate present, preoccupied as they are with what makes headlines today,
and they work in intensely collaborative enterprises. They have neither the
time nor inclination to question the body of theories – often no longer even
perceived as ‘theories’ but considered accepted common wisdom – that shapes the
way they view and talk about the outside world. Thus, erroneous concepts and
even outright fallacies often remain unquestioned and, by virtue of constant
repetition, live comfortably in the bloodstream of policy debates, economic
analysis, and financial market reportage.
This goes a long way in explaining the undeserved survival of a number of
persistent modern myths: deflation is the gravest economic danger we face;
Japan has been crippled by deflation for years and would grow again if it only
managed to create some inflation; lack of ‘aggregate demand’ explains
recessions and must be countered with easy monetary policy; and money-printing,
as long as it does not lead to higher inflation, is a free lunch, i.e. we can
only expect good from it. None of these statements stand up to scrutiny. In
fact, they are all utterly absurd. Yet, we can barely open a newspaper and not
have this nonsense stare us in the face, if not quite as bluntly as stated
above, than at least as the intellectual soil from which the analysis or
commentary presented has sprung. Deep-rooted misconceptions can only be
dismantled through dissection of their building blocs and a discussion of basic
concepts.
The dangers of going back to basics
However, going back to basics and to first principles, analyzing critically
the fundamental aspects of our financial system, is not free of danger. Here,
too, lies a minefield of potentially grave intellectual error, and when things
go wrong here, at the basic level, the results and policy recommendations
derived from such analysis are bound to be nonsensical too, if not even more
nonsensical than what the mainstream believes. In this and the following essays
I am going to address some of the erroneous notions at the fundamental level of
money and banking that seem to have gained currency in the public debate of
late.
I get periodically confronted with these confusions through readers’
comments on my website. Some of the questions and suggestions expressed there
reveal the same, or very similar, errors and misunderstandings, and these often
seem to have their origin in other publications circulating elsewhere on the
web. Among them are the following fallacies, in no particular order:
§ The idea that
the charging of interest, or in particular the charging of interest on money,
is a fundamental problem in our financial system.
§ The notion that
there must be a systematic shortage of money in the economy because banks,
through fractional-reserve banking, bring into circulation only amounts of
money equivalent to the principal of the loans they create but not the
necessary amount to pay the interest on these loans.
§ The notion that
it is a problem that money-creation is tied to debt-creation (again, as a
consequence of fractional-reserve banking) and that it would be possible and
advantageous to have the state issue money directly (debt-free) rather than
have the banks do it.
§ The idea that
schemes are feasible that allow the painless shrinkage or even disappearance of
the national debt.
All these ideas are nonsensical, based on bad economics and
fundamental logical flaws, and to the extent that they entail policy proposals,
these policies, if enacted, would not only not give us a stable and more
prosperous economy but would surely lead to new instabilities or even outright
chaos.
None of these misconceptions originate, or even resonate, as far as I can
tell, with the ‘mainstream’. The mainstream– the financial market
professionals, the central bankers, financial regulators, and the media –
remain resolutely uninterested in dealing with fundamental questions of money
and banking for the reasons given above. Here, the discussion continues to
centre on how the economy can be ‘stimulated’ more, what ‘unconventional’
policies the central banks may still have up their sleeves, and if the central
banks need new targets or better central bankers. Icebergs or no icebergs,
these deckchairs need re-arranging.
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