www.interfluidity.com/posts/1233118501.shtml
I don't agree with all of his conclusions, but the perspective he's developing is quite beautiful, and very useful. I'm going to highlight a few of the bits I really like, and add a bit of spin.
comment at Brad Setser's: Money is the bubble that doesn't need to pop. As long as there is demand for indirect exchange, at least one asset will be stockpiled by hoarders, hence experience demand that is not a consequence of any direct utility, hence be overvalued. As long as the storage cost for this asset is zero and the supply in existence is fixed, you have a perfect Nash equilibrium - using any other asset as a medium of indirect exchange provides no advantage, and runs the risk of buying into a bubble which will subsequently pop as punters revert back to the stable standard.
recently offered by John Cochrane: The value of government debt, including money, is equal to the present value of the primary surpluses that the government will run in order to pay off the debt. Nominal debt is stock in the government, a claim to its taxing power.
If bank loans sour, it is the government who is out the money. Bank creditors do not discipline banks, or select banks based on their investing acumen. The connection between the deposit base of a bank and that institution's ability to lend is formal and vestigal, and is disappearing as reserve requirements become an ever less binding constraint on bank lending.
Winterspeak presents a view of the monetary/finacial system in which the government is ultimately the hub. As above, when we "save" without explicitly investing, we don't lend to banks which then lend to businesses. We lend to the state -- we hold instruments that are ultimately claims against the state -- while the government organizes the distribution of loans, implicitly via how it structures bank lending or explicitly by various forms of directed credit.
view of taxation: Everyone agrees, more or less, that the Federal Government has the power to print money. Since the Federal Government can print it's own money, in whatever quantity it chooses, have you ever wondered why it taxes at all? In fact, if you chose to mail in your 2009 taxes in crisp Federal Reserve Notes, the Government would take that paper money and shred it. The Federal Government does not need taxes in order to spend. At the Federal level, because the Fed is a currency issuer, the sole purpose of taxes is to extinguish money, reduce aggregate supply, and therefore limit inflation to a tolerable level.
creates it: The Government creates money and transfers it to the private sector by spending. The private sector transfers the money amongst itself (spending, investment) and puts the rest in the bank. If the private sector wants to put more money in the bank, that money can either come at the expense of transactions, or it can come from the Government simply running a larger deficit, and thus creating additional money for the private sector. So long as the private sector uses this money to save, it's creation is not inflationary and will not show up in the CPI. Inflation is caused by too many dollars chasing too few goods, and dollars under the mattress are not chasing anything. There's an elegance to this perspective that comes with what is of course oversimplification. Winterspeak invites us to consider the government, the central bank, and the private banking system as a consolidated entity. Money taxed, lent to the government or deposited in a bank is money destroyed (at least temporarily). Money spent by the government, or borrowed from a bank is money created. Questions of control are not addressed -- we don't know whether it is Congress, the Fed chair, or private bankers who most influence this public-private hybrid at the core of the monetary system. But thinking about money this way cuts through a lot of confusion. Let's combine all this with the Moldbugian insight that money is the bubble that needn't break, that its value is due to the stability of a Nash equilibrium -- as long as everyone wants it, it is rational for everyone to want it. The government/banking system, then, has the incredible power of creating what everyone wants or destroying it, as it sees fit via spending and taxation, but also via lending and borrowing. However, there may be constraints on its ability to use that power, for institutional and political reasons, but most profoundly because of the dynamics and potential fragility of Nash equilibria.
Paul Krugman would agree that the current crisis, at least in part, is a phenomenon related to an unusual increase in people's desire to hold money. Moldbug's Nash equilibrium is on overdrive somehow: all everyone wants is what everyone wants, claims against the government that the government can create or destroy at will. To understand the implications of this phenomenon, we have to add a bit more substance to the meaning of "savings" and "investment".
Winterspeak: The Issue Essentially, Cochrane and Fama both assert that savings = investment (+ capital account), and so say that any Government stimulus will crowd out private investment. Here's the derivation (by identity) to get you S = I Y = C + I + G National savings can be thought of as the amount of remaining money that is not consumed, or spent by government. In a simple model of a closed economy, anything that is not spent is assumed to be invested: NationalSavings = Y - C - G = I If you think that banks make (investment) loans based on their deposits, then it's reasonable to assume that all money not spent (ie. In fact, banks make loans first and then those loans become deposits. Remember -- loans create deposits, deposits do not "enable" loans. Loans create deposits Banks, by way of their Federal charter, can expand both sides of their balance sheet at will, subject to capital requirements. This money is created ex-nihilo, but always nets out to zero in the private sector, as each (private) asset that a bank creates must be matched by a (private) liability. Government can create money outside of the system, but banks always need to net out and balance the balance sheet. People believe that fractional reserve banking, in some weird way, has banks taking deposits, multiplying it (through what seems like a strange and fraudulent process), and then making a larger quantity of loans. In fact, banks make whatever loans they think make sense from a credit perspective, and then borrow the money they need from the interbank market to meet their reserve requirements. If the banking sector as a whole is net short of deposits, it can borrow the extra money it needs from the Fed. If you think this is a weird and pointless regulation you are correct. Canada, for example, has no reserve requirements and yet seems to have a banking sector. The quantity banks can loan out is constrained by capital requirements and credit assessments. Facts on the ground If a description of how banks actually work doesn't shatter your belief that savings = investment, consider Reality. From about 2000-2006, American savings went negative, yet banks loaned out huge amounts of money (made huge investments). In fact, they came up with all kinds of clever ways to skirt capital requirements so they could make even more investments. If savings = investments, and savings fall, how can investments rise? By the same token, from 2006 to now, the private sector has actually delevered, saved, but banks aren't making any loans (investments). More Facts on the ground Anyone who thought they were saving by putting money in the S&P500 has had a rude wakeup call. They were not saving, they were investing, and now 40% of that money is gone. I don't think they will confuse saving with investing in the near future. A better way to think of savings is to think of it as what's left after taxes, consumption, and investment. Y = C + I + G Net Private Savings = Y - C - I - T = G - T Austrians will howl that it is unreasonable to define savings as a residual, there should be a term S for active savings, but people have to save in currency, and in a fiat, floating fx, non-convertible world, currency is not a store of value. Fiat currency trades bankruptcy ...
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