Wednesday, June 7, 2017

Richard Werner on “Strategic QE: Money Creation for Sustainable Investment”

Richard Werner gives a talk below on “Strategic QE: Money Creation for Sustainable Investment” at the EU Parliament:

A minor point: I don’t think it is correct to say that the banks, when they create a new loan, record their liability as a “fictitious deposit.” Instead, the new demand deposit is technically and legally an IOU or promise to pay, but also a type of credit money, so that new demand deposits expand the broad money supply.

I don’t accept Werner’s “quantity theory of credit” either (you can listen to a talk on the subject here), because it concedes too much to the flawed Neoclassical quantity theory.

However, the point that our modern financial system – because it has been so poorly regulated and deregulated – is driving asset price inflation by credit bubbles is absolutely correct.

And Richard Werner has a radical solution to the below-replacement fertility rate in the Western world, namely, generous subsidies for new children:

This sounds excellent to me, and much better than the disastrous Neoliberal attempts at population replacement, which is now being pushed by the United Nations.

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  1. Hello LK,
    Correct me if I am wrong but you seem to assume (in this post and a n earlier one)that it si crucial for a population to have its fertility rate beyond the replacement level.
    I am not convinced. When you look at Japan a shrinking population seems to be ok. I mean a tighter work supply is ok as long as productivity gains are at hand. According to Steindl, it is even bolstering productivity gains. The real estate market might fall a little bit but that would be good news in cities like London and Paris, would it not ?
    Notice also how low fertility rates seems to be somehow linked to better education performances (other things being grossly equal). Not to speak of the many naturals resources we are running short of...
    (I think populationnist ideals stem from the times where rulers needed lots of young fellows to go to war in their name and may be a lingering of religious beliefs.)

  2. "I don’t accept Werner’s “quantity theory of credit” either (you can listen to a talk on the subject here), because it concedes too much to the flawed Neoclassical quantity theory."

    The big difference is that Prof Werner does not assume that the economy is at full employment.

  3. "Abstract
    The financial crisis of 2007–2008 triggered monetary policy designed to boost nominal demand, including ‘Quantitative Easing’, ‘Credit Easing’, ‘Forward Guidance’ and ‘Funding for Lending’. A key aim of these policies was to boost the quantity of bank credit to the non-financial corporate and household sectors. In the previous decades, however, policy-makers had not focused on bank credit. Indeed, over the past half century, different variables were raised to prominence in the quest to achieve desired nominal GDP outcomes. This paper conducts a long-overdue horse race between the various contenders in terms of their ability to account for observed nominal GDP growth, using a half-century of UK data since 1963. Employing the ‘General-to-Specific’ methodology, an equilibrium-correction model is estimated suggesting a long-run cointegrating relationship between disaggregated real economy credit and nominal GDP. Short-term and long-term interest rates and broad money do not appear to influence nominal GDP significantly. Vector autoregression and vector error correction modelling shows the real economy credit growth variable to be strongly exogenous to nominal GDP growth. Policy-makers are hence right to finally emphasise the role of bank credit, although they need to disaggregate it and specifically target bank credit for GDP-transactions."

  4. The problem with monetary policy is two fold. It is not direct and it does not take responsible as in ethical control of the deepest problem of the economy....which is the economy's dominance by the paradigms of Finance, that is the ideas of Debt and Loan ONLY.

  5. Off topic, but ... take a bow LK, you are vindicated in the most explicit way possible.

  6. Werner is a quantity theorist, the only thing he takes from Post Keynesians is how banks create money. I don't know why a lot of Post Keynesians regard him highly, the guy doesn't understand how a fiat operates. This credit rationing what he describes is not possible under circumstances the central banks operate. He is not advocating for govbernment deficit and he talks about less important things like the Fed is privately owned like a good conspiracy theorist. A charlatan if you asked me. He is lecturing with Steve Keen and generally he is regarded highly, It gets me because any Post Keynesian should see through this bullshit instantly. I wouldn't be surprised if he is supporting Posittive Money. Can't find It now but he has written that governent deficit spending takes money away from private sector, dollar for dollar. I have to admit that I was very interested in his work years ago when I first started researching the money and banking subject. He must reject endogenous money because quantity theory doesn't fit with It.

  7. " A charlatan if you asked me."

    Is this the approach of 'A Charlatan'?

    "The empirical approach of a new paradigm requires data. By the time data becomes available, it is about the past. Thus history provides the data set upon which theories should be built. The solutions offered in this part of the book are the result of years of conducting empirical research according to the inductive methodology, and the desire to explain the true cause of things, as best as possible, without being beholden to any preconceived idea or ideological blinkers.”

  8. “This “equilibrium” graph (Figure 3) and the ideas behind it have been re-iterated so many times in the past half-century that many observes assume they represent one of the few firmly proven facts in economics. Not at all. There is no empirical evidence whatsoever that demand equals supply in any market and that, indeed, markets work in the way this story narrates.
    We know this by simply paying attention to the details of the narrative presented. The innocuous assumptions briefly mentioned at the outset are in fact necessary joint conditions in order for the result of equilibrium to be obtained. There are at least eight of these result-critical necessary assumptions: Firstly, all market participants have to have “perfect information”, aware of all existing information (thus not needing lecture rooms, books, television or the internet to gather information in a time-consuming manner; there are no lawyers, consultants or estate agents in the economy). Secondly, there are markets trading everything (and their grandmother). Thirdly, all markets are characterized by millions of small firms that compete fiercely so that there are no profits at all in the corporate sector (and certainly there are no oligopolies or monopolies; computer software is produced by so many firms, one hardly knows what operating system to choose…). Fourthly, prices change all the time, even during the course of each day, to reflect changed circumstances (no labels are to be found on the wares offered in supermarkets as a result, except in LCD-form). Fifthly, there are no transaction costs (it costs no petrol to drive to the supermarket, stock brokers charge no commission, estate agents work for free – actually, don’t exist, due to perfect information!). Sixthly, everyone has an infinite amount of time and lives infinitely long lives. Seventhly, market participants are solely interested in increasing their own material benefit and do not care for others (so there are no babies, human reproduction has stopped – since babies have all died of neglect; this is where the eternal life of the grown-ups helps). Eighthly, nobody can be influenced by others in any way (so trillion-dollar advertising industry does not exist, just like the legal services and estate agent industries).
    It is only in this theoretical dreamworld defined by this conflagration of wholly unrealistic assumptions that markets can be expected to clear, delivering equilibrium and rendering prices the important variable in the economy – including the price of money as the key variable in the macroeconomy. This is the origin of the idea that interest rates are the key variable driving the economy: it is the price of money that determines economic outcomes, since quantities fall into place."