Adam K – Stanley Fisher “fishy loanable funds”

source Mitchel blog/apropo MMT post/Sep 2019

Adam K  something fishy : Stanley Fisher and the naive classical version of loanable funds theory in action.   

“The article links to a paper written by and others for Black Rock Institute “Dealing with the next downturn: From unconventional monetary policy to unprecedented policy coordination”

There is something fishy there.
“The strength and persistence of global precautionary saving pushed real interest rates below growth … But a significant increase in borrowing by governments globally could absorb part or all of this saving glut, pushing real interest rates towards or even above growth.”
The authors still see the process of issuing government debt and financing government spending as depending on the presence of preexisting “savings”. They got the causality wrong. This is the naive classical version of loanable funds theory in action.

The monetary savings are the residual between what has been earned by the private sector and what has been spent. Michał Kalecki has convincingly demonstrated that spending comes first. You cannot save money which has not been spent into existence either by taking a loan in a bank or by the government sector consisting of a central bank and treasury, creating currency.

What New Keynesians cannot see is the following chain of phenomena:

1. The redistribution of disposable income towards rich lowers overall marginal spending propensity of the society. We can assume that poor spend whatever they got while the rich spend (per annum) a fixed fraction of their expected wealth. And even this is optimistic.

2. Investment spending depends on anticipated profits on new capital. No company and no individual will spend just because they have earned money. Saving in liquid monetary assets is mostly not “precautionary” or a result in the changes of the Keynesian liquidity preference. It is the residual. It is forced saving as in unbalanced communist economies of the late era where it was called an inflationary overhang. Stanley Fisher should have remembered this. But the forced saving of the rich in capitalism is not latent CPI inflation. It is their wealth they are hoarding.

3. The difference between the not consumed income (savings) and investment spending is the growth in liquid monetary assets (currency, bank money and bonds). This is first accounting identity (the accrual process providing stock-flow consistency) . The second accounting identity is that the growth in liquid monetary assets is identical to the growth in the sum of private sector and government liabilities (debt).

4. The credit expansion of the private sector (mainly binging on mortgages) has largely run its course, households are indebted up to the hilt. Obviously increasing government spending will increase the flow of money through the system, increase the GDP due to the (super)multiplier effect and as a consequence increase the hoarding.

5. Whether this hoarding occurs in bonds or currency or deposits is irrelevant as long as interests rates do not change. This is money or “near money”. At a stable zero rate there is no difference between bonds and currency.

5. The unintended consequence of the growth the stock of unspent money / near money is a bubble in everything. How a sane person can anticipate that a startup which has never made any profits and whose business model is based on finding loopholes in labour law will grow almost indefinitely and should be valued at tens of billions of dollars? It is pets dot com all over the place – again. Buying preexisting shares or preexisting assets does not get rid of money and requires someone else to sell. The quantity of money and shares / land / gold remains constant. There is no true anchor there as there is no buffer stock. New shares will only be issued if companies want to spend in physical capital. But this is determined by the need to expand production. This need may only arise if expected aggregate demand increases (possibly due to increased government spending), then the investment accelerator will kick in.

6. Fiddling with negative interests will only make the bubble in everything grow bigger. The “inflationary overhang” known from imbalanced communist economies (where consumption was suppressed due to physical shortages of goods) is indeed inflationary – causing an inflation in the prices of assets as there is an objective shortage of assets. The most striking example is the housing bubble in Australia, initially ignited by artificially constraining the supply of residential land (“Sydney is full” – Bob Carr. Or rather “Sydneysiders are fools”) . The ratio of the value of properties (mainly determined by the value of land) to average disposable income keeps rising… Freshly built townhouses near the place I am living are flogged for $720k and this is 40 km away from the centre of Sydney. Just insane.

7. If they want to get rid of the imbalance causing the stagnation they should tax the rich to start confiscating the hoard, reduce tax burden on the poorest and simultaneously increase government spending. There are two knobs which need to be turned simultaneously not the only one, if they want to save capitalism from its own contradictions. They may do the latter and start flying helicopters loaded with money. They will never do the first. Someone will write another New Keynesian paper finding another source of the frictions in the system. My garage will be worth a million but my kids will have to live in tents in the backyard because they will never be able to buy houses on their own and renting is even more expensive than paying back the mortgage.

Adam K”