Wednesday, April 25, 2012

Nick Rowe — Wicksteed, stocks and flows


Hmmm. That's starting to sound like a transactions demand for money function. But if we have a demand to hold money for transactions purposes, we can still get an equilibrium in which money is held and valued even if T(t) is always zero.

(Wicksteed said (HT David Glasner) that fiat money has value because the government requires it for payment of taxes. I'm saying that's not sufficient. And it's not even necessary, in the sense that if my local recycler accepted fiat money, even at a negligible price, that would be enough to replace T(t)>0 in ruling out the equilibrium in which fiat money has a price of zero.)
Read it at Worthwhile Canadian Initiative
Wicksteed, stocks and flows
by Nick Rowe

Seems like Nick is saying that the money supply is set exogenously by government whereas the operational reality is that in a system in which the central bank is the lender of last resort the money base is determined by demand for reserves for settlement and reserve requirements based on credit creation. Moreover, the size of the money supply (M2) is set endogenously by credit extension that creates credit money.

There is no doubt that money is an idea rather than a thing, that is, a human social construct that underlies a primary social, economic and financial institution. The state theory of money does not deny this and admits that credit money predates state money historically. Anthropologists have also observed that credit money grew out of social relationships involving reciprocity and trust.

The Chartalist claim is that state money, that is, currency, gets value from the necessity of the private sector to settle its government-imposed obligations with government when government only accepts is own liabilities as credits. This allows government to shift private assets to public use through currency expenditures.

9 comments:

Matt Franko said...

"This allows government to shift private assets to public use through currency expenditures."

right Tom, I dont think when Nick says in his model that something is free lying on the ground that is congruent with your statement here.

It looks as though Nick may not be including that non-govt must provide some sort of real provision to the govt in order to obtain the 'polymer' in the first place..

So the polymer is not just lying there just to be picked up, the non-govt must surrender some sort of govt required real provision in order to get it... so maybe he can tweak his model there...

I have to say that to perhaps his point that it necessarily is more than a tax liability that gives the currency it's value, all these nations that run a CA surplus with the US dont have a USD tax liability yet they zealously seek to obtain USD balances.... so perhaps there is more at work than just the tax liability....

resp,

Anonymous said...

Matt,, they "seek" USD balances because it is the natural result of trade. If they are left with a CA surplus, then they are left with USD by definition. The mercantilists, instead of converting back to home currency, then hold/invest those USD balances to maintain an undervalued ccy. I guess you can then make the case that they do this with the knowledge that the USD does have intrinsic value via the tax obligation, and that the solvency of their investment is not in question ... but it is an additional source of demand, just like Basel requirements, just like flight to safety, just like the fact that assets such as commodities are priced in USD, and "reserve status". Not all sovereign countries enjoy the latter couple of examples to be sure, but they share the basics.

Apj

Ralph Musgrave said...

I agree with Matt when he says there is “more than a tax liability that gives the currency its value”. Seems obvious to me that people want money in order to do business between themselves and as a store of value.

One effect of tax, given the amount of tax that governments collect relative to GDP in the 21st century, is that the government’s money becomes the dominant form of money: it drives out, or keeps in abeyance other forms of money, e.g. Ithaca hour money.

Anonymous said...

I thought the state theory was based on the idea that money originates in 'the state' (in its widest sense) in some way. The credit theory sees things differently, but gives no account of where the original 'value' of credit actually comes from. Metallists argue it must be based on barter. The state theory solves this problem, by arguing that state money precedes private credit money.

Nick Rowe said...

Matt: "So the polymer is not just lying there just to be picked up, the non-govt must surrender some sort of govt required real provision in order to get it... so maybe he can tweak his model there..."

Good point. In my model, G(t) is just a transfer payment. I did in fact consider introducing new money in my model the way you are suggesting. The flow of new money G(t) is auctioned in a competitive market to buy G(t).P(t) quantity of goods, where P(t) is the price of money (the reciprocal of the price level). But I decided against it, because it made no difference to the analysis, and just complicated things. You still get an equilibrium in which P(t)=0, so the government is selling the money at a price of 0, which is like giving it away.

Alex Godofsky suggested a different modification, in which taxes are fully indexed. That eliminates the P(t)=0 equilibrium, because if P(t) were 0 T(t) would be infinite, and M(t) would very quickly go to 0.

Nick Rowe said...

Tom: my assumption is that taxes and government spending are set exogenously by the government. You can either interpret my M(t) as "government money + government bonds", or else ignore bonds for simplicity.

Matt Franko said...

Prof Rowe,

I need more time to go over the maths...

But consider that recipients/beneficiaries of transfer payments are wards of the govt sector and thus should be included in the govt sector in analysis.

All seniors receiving our Social Security balances then use those balances to provision themselves by buying food, etc, and again we have the govt (in the form of seniors who are govt wards) provisioning itself by providing balances to grocery stores, etc..

But let me go over your maths for now for myself...

Resp,

Tom Hickey said...

Matt: "I have to say that to perhaps his point that it necessarily is more than a tax liability that gives the currency it's value, all these nations that run a CA surplus with the US dont have a USD tax liability yet they zealously seek to obtain USD balances.... so perhaps there is more at work than just the tax liability...."

Anon "I thought the state theory was based on the idea that money originates in 'the state' (in its widest sense) in some way. The credit theory sees things differently, but gives no account of where the original 'value' of credit actually comes from. Metallists argue it must be based on barter. The state theory solves this problem, by arguing that state money precedes private credit money."

The state theory of money is about state money, i.e., "currency" of which the state is the sole provider. Chartalists agree that historically credit money predates state money and presently is complementary to it. In nations with central banking, banks are public-private "franchises" in which the private sector gets to participate in the currency system run by the cb, but they cannot issue or withdraw currency from the economy, which are fiscal operations reserved to govt.

MMT "neo-Chartalists" are also institutionalists and agree that money is a social construct rather than a thing (as commodity money implies). This social construct that arose historically out of social relations involving reciprocity and trust has developed into one of the principal institutions of modern economies.

It is the institutional character of money that allows it to function as it does. However, the institutional construct is not the primary driver at the micro level. Credit money is based on relationships of reciprocity and trust among counterparties, and state money must be obtained by households and firm to meet liabilities to the state that are imposed by the state, which accepts only its own liabilities in meeting obligations to it.

Matt Franko said...

Prof Rowe,

maths seem to check out imo...

but please perhaps reconsider your assumptions that "at some point the price of the green stuff is zero"

Govt always requires some provision for itself or it's wards when it spends.

Perhaps the only exception is the interest on Treasury securities which our Tom here has always identified as a subsidy ie "free money" to those who have been fortunate enough to be able to acquire them.

Perhaps to your point that at some point the "money has a price of zero" that I guess is true when govt pays interest on govt securities or reserves... govt expects no provision in exchange for those balances...

Resp,