Money and Banking Lec2-5

I’ve been making the odd note about Mehrling's course . This week I’ll comment on a few more segments from Lecture-2

Money is Not Gold

Mehrling thinks gold is money. This is nuts. He is terribly wrong, since a speck of gold dust is not a promise to redeem, nor a claim on anything.

Of course you can argue semantics: “Well, I’m defining gold dust as a ‘money thing’ so suck it!”

This indeed might be faintly true if a government promised to accept gold dust in return for extinguishing tax liabilities, or someone else was promising t exchange gold for something. Has to be a promise though, otherwise it’s not money of any kind any anthropologist or economics archaeologist has ever known.

Mehrling also thinks credit supply is limited (ultimately by gold I suppose). Idiot.

Credit is infinite. Banks are not constrained by gold, since they do not promise to redeem gold. They are constrained by their need to find legally (or illegally) credit-worthy borrowers. Governments are not even as constrained as that, they are constrained by all real resources not just gold. So a government cannot hire for $\$$15/hour a worker already employed i the private sector for say $\$$20/hour. Resource constraint. Gold is not money, that’s an ancient Neanderthal view, although that’s unfair to Neanderthals. An IOU promising gold is money.

Credit Dynamics

I’ll give Mehrling a pass on the way he explains how credit changes dynamically, and leads to more high powered money being issued. But I do not think he understands how.

Bank credit (endogenous money) nets to zero. No one can change this, no matter what form of credit it gets shifted to. The risk of holding can change, but not he amount (measured in the state’s unit of account, dollars for the USA, yen for Japan, &c.).

In a recession when debtors default (bankruptcy) this destroys the accounting records. Still netting to zero. But about the same time the government has automatic stabilizers, such as welfare payments, which rise in a recession, adding to high powered money.

When this happens the government is moving to more in debt, we are all moving collectively to more in credit (as a whole we move more into credit, less into debt) but being in debt is irrelevant for the monopoly issuer of the currency, which is why we can say the government injection is “high powered” (High Powered Money HPM — is also the acronym for Hyman Minksy, probably no accident.) They’ll always redeem for tax payments, almost without question. When have they ever refused? High powered.

Caveat

On Gold Being Not Money the semantics matters I think. You can tell yourself gold is money, but why? Why the f? Why the f do you want to bind legal obligations to useless (except to engineers, queens and jewellers) metal people have to dig up out of the ground, only to then bury it inside another hole (Fort Know)?

Don’t fetishize the stuff my dudes. Clean water, or the sparkling mineral waters, are far worthier of fetishizing. I’m also partial to carrots, beetroots and avocados.

Bleeding Heart

At this stage my heart bleeds for every student of Mehrling’s and the set of cardinality zero of my students who have to watch Perry’s cringe. The problem being, Mehrling seems like a nice gentleman. Hard to hate him, and I don’t. I love all sincere teachers.

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