A Wonky (But Worthwhile) Read
The Bank of England’s intervention reminded me of this essay, published nearly twenty years ago by MMT economist, Professor L. Randall Wray. Some of you will be familiar with the Currency School-Banking School debates of the early 19th century and with the evolution of monetary policy (in theory and in practice) in the years since.
Wray’s essay is somewhat long—it covers a lot of ground—but it’s well worth your time, especially if you don’t already understand how to contextualize today’s intervention.
Most economists do not understand that monetary policy has nothing to do with the quantity of money. ~L. Randall Wray
Oh, Zamir, Zamir, Zamir. You came to the wrong newsletter, buddy.
Here's the proper frame for thinking about economic ideas.
There is Ptolemy and there is Kepler.
Ptolemy's model says the Earth is at the center of the universe and everything revolves around us in circular orbits, moving at constant speed in those orbits.
Kepler's model says the Sun is at the center of our solar system and the planets orbit the sun in elliptical orbits. Moreover, the areas swept out by the planet (in the ellipse) are equal for equal time intervals. Given the eccentricity of an ellipse this can only be possible if the planet's speed is faster the closer it is to the sun.
What's my point? My point is your model of how money works in a monetary production economy works is wrong. Your model is Ptolemy. Now, even kids in middle school know Kepler's model is the accurate one.
And your language is imprecise.
What does "recklessly creating money" mean?
Do you mean the Bureau of Printing and Engraving actually making paper Federal Reserve notes?
Do you mean the Federal Reserve crediting the reserve accounts of commercial banks?
Do you mean the legislature and executive of the United States (Congress and President) passing a spending bill?
Do you mean commercial banks creating money by making commercial or personal loans?
What do you mean?
I hope you don't mean QE because QE is not money creation.
https://www.hks.harvard.edu/sites/default/files/centers/mrcbg/files/PSheardQEQAAugust2014.pdf
Now George, what do you mean by Britain's "crash and burn." What, exactly, do you mean? What precisely are you saying?
Do you mean the price of the pound declining relative to the US dollar? Why is that a crash and burn?
Or do you mean the price of energy going up for UK citizens, which of course has nothing to do with "money creation" and everything to do with neoliberal fake markets.
Here's a 23 minute lesson on European electricity markets: https://www.youtube.com/watch?v=NicE0-N9ux0&t=2195s
And here's Steven Keen's latest explanation, for what feels like the thousandth time, of why governments spending money don't necessarily create inflation: https://shows.acast.com/debunkingeconomics/episodes/how-much-money-is-too-much
Now, the key word is "necessarily." Everyone's favorite fake Nobel prize winner*, Milton Friedman, said "Inflation is always and everywhere a monetary phenomenon, in the sense that it is and can be produced only by a more rapid increase in the quantity of money than in output."
REALLY? Always? Always an everywhere? It can ONLY be produced by a more rapid increase in quantity of money than output?"
So prices can't increase because, hmm, we run low on some important input to production?
Prices can't increase because a monopoly increases the price?
Prices can't increase because an oligopoly forms a cartel and fixes the price higher than you want?
Prices can't increase because a monopsony, or near-monopsony exists, in the middle of some market? (For example, four firms control buying of meat from livestock farmers. That's why beef prices went up in the U.S. The price paid to the cattle ranchers didn't go up. The middlemen kept paying them the same but then raised the prices to consumers.)
The government can't run out of money This is a fact. There is exactly one entity in the entire world that can create US dollars: The government of the United States (and its authorized agents, i.e., the central bank and commercial banks). Therefore the government, any government, cannot run out of its own money.
But the society CAN run out of workers, raw materials, land, clean water, etc. And the society can CHOOSE to structure markets so whatever money is created goes to one group of people and not a different group. But that is a choice. The UK government can choose to lower taxes of rich people and corporations and give a subsidy to other people so they can pay their energy costs. The direct effect of the tax reduction and subsidies are greater profits for the energy sellers. Or the UK government could just skip all that by regulating prices and taxing windfall profits. These are choices, not needs.
You're right, Zamir. It IS time for humility. It's time for all the Ptolemaics and Copernicans of the world to put down their bad models and epicycles, and listen to Kepler and Newton.
Listen and learn. Put aside what you THINK you know and become an observer of reality.
I say follow the professor's advice. Read the paper. I've been reading, and re-reading, and re-reading again, that paper since since 2016, just after reading Professor Wray's book.
When all you know is Ptolemaic astronomy, learning Kepler takes time. You'll have to read it more than once. But you will learn a lot.
Here are great follow-ups, Professors Papadimitriou and Wray talking about inflation in 1994 and again last December. Turns out the neoclassicals at the Fed have no idea what to do about inflation and there isn't much they can do that is useful anyway. (Or they know but don't care.)
https://econwpa.ub.uni-muenchen.de/econ-wp/mac/papers/9903/9903011.pdf
https://www.levyinstitute.org/pubs/ppb_156.pdf
*The "Nobel Prize in Economics" is fake because it's not one of the original Nobel prizes endowed by Alfred Nobel (for physics, chemistry, medicine or physiology, literature and peace). The economics one is in fact the Sveriges Riksbank Prize in Economic Sciences in Memory of Alfred Nobel. That's because it was invented in 1968 by the Swedish central bank. The Nobel prizes were supposed to be for "benefits to mankind." Neoclassical economics has done very little, I'd say nothing, to benefit mankind.
The Wray article is an interesting read. It's the first time I've been able to wrap my head around the "Banking School vs. the Currency School" debate enough to answer the question, "Which side are you on?"
The article appears to have been written so as to be a chapter in a book of essays, probably by different authors. Is that inference correct? If so, was the book ever published?
It would be interesting to have Randy republish this with updates and annotations. For example, now that the U.S. Federal Reserve pays interest on reserves, to what extent does it still engage in open market operations?