Book Excerpt: Financial Assets Matter, Not Money

If we abolish money from economic theory, what replaces it? The answer is: financial assets. Although this might be viewed as a superficial change, there are important implications. In particular, the central bank can manipulate the amount outstanding of some types of financial assets, but it cannot control all of them. We end up with a more realistic view of central bank power. They no longer control “money” and hence all commerce, rather they are reduced to worrying about setting interest rates.

(This is an excerpt from my book Abolish Money (From Economics)! (affiliate link), which I do not think has been previously published. In case it is not obvious, I have been tied up up with non-writing tasks in recent months. Luckily, there is a light at the end of the tunnel of distractions.)

Exports And The Cycle

Not all "automatic stabilisers" in the economy are due to government policy; there are patterns of private sector behaviour that tend to act in a counter-cyclical fashion. The role of the external sector is an important stabiliser (at least most of the time). This article is a basic primer on the subject.

No More Neutral Rate?

Last Friday, Reuters published the article "No more neutral rate? The shine comes off the Fed's r-star," by Howard Schneider. He refers to a paper published at a recent conference that low rates lead to a lower estimated "neutral interest rate" (r*). I am unsure about the exact argumentation behind the research that the article is based on, but this is a theme I have discussed in the past.

Jayadev/Mason Article On MMT

Arjun Dayadev and J.W. Mason recently published "Mainstream Macroeconomics and Modern Monetary Theory: What Really Divides Them?", which suggests that the gulf between Modern Monetary Theory (MMT) and mainstream macroeconomics is smaller than suggested, that MMT is much closer to orthodoxy than is normally portrayed.

Japan And The Costs Of Bond Yield Control

The dangers of distorting free market interest rates is one of the bits of market folklore that keeps getting passed around. There is actually not a whole lot of data to defend this view; it is best viewed as faith-based reasoning. This topic is particularly interesting in the case of Japan. I am somewhat agnostic on this issue; I do not see particular risks from manipulating the yield curve in the current environment, yet I can see some plausible dangers.

U.S. Indicator Recap

This article briefly runs through some indicator charts for the current situation in the United States. They seem consistent with a fairly bland outlook. Although the yield curve flattening (above) attracts some attention, I am unsure it is telling us very much, as I discussed earlier. In order to generate more excitement, we need to either talk up an inflation story, or find some reason to believe a recession is immanent.

Should We Care About Money Supply Growth?

Although money should not be accorded special status within economic theory, this does not mean monetary aggregates by themselves are useless as economic indicators. There are reasons to expect that “money numbers” are going to be a relatively good quality economic indicator, particularly in countries where national statistics are weak. This was certainly the case during the initial decades after World War II, when macroeconomic statistics measurements were in their infancy. (This can explain why older economists might pay more attention to money numbers.)

Note: This article is an excerpt from Abolish Money (From Economics)! (Section 8). The book was published in January 2017, and the text and charts were (mostly) not updated. The fact that updates were not seen as necessary might be viewed as an editorial comment on the information content of money supply growth.