My immediate reaction was that the labor supply effects of the UBI were very small. I feel that the authors of the study were confusing statistical significance with actual significance. I’ll try to write something about this.
I missed the ‘ask me anything’ week but have been wanting to ask a question for a while now: Do government effectively print money by setting a low reserve ratio for bank lending? Despite large amounts burrowed for speculation, I’m assuming most money is lent to businesses for the production of real goods and services to supply growing consumer demand. Money is created to provide most of the cash for these loans is created of thin air but is not inflationary while there is capacity for growth in the economy. New resources, labour and/or land is exploited. Or, as is increasingly the case, I think, existing resources, land and labour is more efficiently exploited with better technology. This increase in economic activity requires an increase in money supply.
Am I right in thinking that a low reserve ratio therefore acts as an automatic printing press that supplies money so that real economic growth can take place? I realise that this ‘new money’ also feeds speculative churn which uses most of the cash in circulation but it seems that this is normally how money is issued to facilitate normal economic activity and the state only issues money when there is unemployed capacity and risk of recession.
I have been thinking about this for a while watching debates on crypto, inflation and debt and it puts arguments of the evils of printing money in a different complexion. It also seems like a good way for governments to distance themselves, rightly or wrongly, from the responsibility of issuing new money.
Although you can ask me anything, I can't always give a useful answer. I've never really got my head around reserve ratios and similar questions. I think mostly in terms of the real economy and not about money
John, hi. I've posted an item to the latest Monday Message Board about some US research undermining the credibility and viability of a universal basic income. Lacking ready access to academic research resources I couldn't find anything which demonstrated a different and credible research outcome. The Xitter post I linked was seeing pretty active support from bots and the usual RWNJ suspects. Any thoughts?
John I am trying to understand what I am missing - apart from the need to fund imports in some cases, what is the difference between borrowing form OS and printing money?
Is there a cogent explanation of the difference between printing money and borrowing from overseas? I appreciate that overseas borrowing does impact the Bal of Payments and the exchange rate and has kept many countries in penury.
Whilst OS borrowing may impact on the exchange rate, and help pay for imports if the country lacks an export base, this is only short term - over time borrowings result in a negative cash flow:
Further complicated by the fact that external debt is denominated in other currencies and increases if the local currency loses value. So, in Australia's case borrowing from OS leads to capital outflow and pressure on the dollar, a lower dollar increases our indebtedness from what it would otherwise have been.
Hi David, as you say at the end, there's a big difference if the debt is denominated in foreign currencies. But Australian government debt is denominated in $A, so borrowing from foreigners to pay for imported goods is quite similar to printing money and paying them cash.
More generally, what matters most is the real exchange of goods that is involved. As a first approximation, the financing mechanism only affects the price level.
The crucial factor is that the appropriate size of the budget deficit is determined by the requirement to balance domestic aggregate demand and supply at a level consistent with full employment and stable inflation. This means that you can't just print money because you want to buy things with it. If the deficit is initially at an appropriate level, increasing it will cause inflation.
Until recently, unemployment was too high, inflation was negligible and the deficit was too low. So, both MMT and standard Keynesian models supported printing money, but lots of "pop" presentations of MMT implied that this a permanent, not cyclical situation, and therefore that we could have whatever we wanted without raising taxes.
Now that we've experienced a big round of inflation, we can't ignore it any more, so pop MMT has gone out of fashion. And it's become obvious that the sensible version of MMT is mostly just another way of framing orthodox Keynesianism. That has led to a reduction of interest in the approach, although there is still plenty to be discussed.
Thanks John, yes, I understand that MMT can be seen as a re-statement of Keynesian economics. My narrow focus is - what is the difference between printing money or borrowing money from OS?
I am not considering whether it is inflationary or not, just the narrow comparison as they both would seem to have the same inflationary impact.
Whilst I understand that funds may be needed to support imports there seems little difference in the inflationary impact - except that this will eventually become a negative flow reducing demand.
I guess this becomes complicated by the large fund creation industry in compulsory super that sends funds overseas...
I guess the capital flows in and out of Australia contribute to or reduce demand - and also seem to be outside of Government control and therefore neither the RBA or Treasury are able to influence this, other than by interest rates.
My immediate reaction was that the labor supply effects of the UBI were very small. I feel that the authors of the study were confusing statistical significance with actual significance. I’ll try to write something about this.
Trying again here.
Hi John,
I missed the ‘ask me anything’ week but have been wanting to ask a question for a while now: Do government effectively print money by setting a low reserve ratio for bank lending? Despite large amounts burrowed for speculation, I’m assuming most money is lent to businesses for the production of real goods and services to supply growing consumer demand. Money is created to provide most of the cash for these loans is created of thin air but is not inflationary while there is capacity for growth in the economy. New resources, labour and/or land is exploited. Or, as is increasingly the case, I think, existing resources, land and labour is more efficiently exploited with better technology. This increase in economic activity requires an increase in money supply.
Am I right in thinking that a low reserve ratio therefore acts as an automatic printing press that supplies money so that real economic growth can take place? I realise that this ‘new money’ also feeds speculative churn which uses most of the cash in circulation but it seems that this is normally how money is issued to facilitate normal economic activity and the state only issues money when there is unemployed capacity and risk of recession.
I have been thinking about this for a while watching debates on crypto, inflation and debt and it puts arguments of the evils of printing money in a different complexion. It also seems like a good way for governments to distance themselves, rightly or wrongly, from the responsibility of issuing new money.
Hi Cam,
Although you can ask me anything, I can't always give a useful answer. I've never really got my head around reserve ratios and similar questions. I think mostly in terms of the real economy and not about money
John, hi. I've posted an item to the latest Monday Message Board about some US research undermining the credibility and viability of a universal basic income. Lacking ready access to academic research resources I couldn't find anything which demonstrated a different and credible research outcome. The Xitter post I linked was seeing pretty active support from bots and the usual RWNJ suspects. Any thoughts?
I'll try to get on to this soon. I've seen varying reports of (what I assume is) the same study
John I am trying to understand what I am missing - apart from the need to fund imports in some cases, what is the difference between borrowing form OS and printing money?
Is there a cogent explanation of the difference between printing money and borrowing from overseas? I appreciate that overseas borrowing does impact the Bal of Payments and the exchange rate and has kept many countries in penury.
Whilst OS borrowing may impact on the exchange rate, and help pay for imports if the country lacks an export base, this is only short term - over time borrowings result in a negative cash flow:
(Borrowings) - (Interest) - (Debt Repayments) = (Payment Outflow)
Further complicated by the fact that external debt is denominated in other currencies and increases if the local currency loses value. So, in Australia's case borrowing from OS leads to capital outflow and pressure on the dollar, a lower dollar increases our indebtedness from what it would otherwise have been.
What am I missing?
Hi David, as you say at the end, there's a big difference if the debt is denominated in foreign currencies. But Australian government debt is denominated in $A, so borrowing from foreigners to pay for imported goods is quite similar to printing money and paying them cash.
More generally, what matters most is the real exchange of goods that is involved. As a first approximation, the financing mechanism only affects the price level.
The crucial factor is that the appropriate size of the budget deficit is determined by the requirement to balance domestic aggregate demand and supply at a level consistent with full employment and stable inflation. This means that you can't just print money because you want to buy things with it. If the deficit is initially at an appropriate level, increasing it will cause inflation.
Until recently, unemployment was too high, inflation was negligible and the deficit was too low. So, both MMT and standard Keynesian models supported printing money, but lots of "pop" presentations of MMT implied that this a permanent, not cyclical situation, and therefore that we could have whatever we wanted without raising taxes.
Now that we've experienced a big round of inflation, we can't ignore it any more, so pop MMT has gone out of fashion. And it's become obvious that the sensible version of MMT is mostly just another way of framing orthodox Keynesianism. That has led to a reduction of interest in the approach, although there is still plenty to be discussed.
Thanks John, yes, I understand that MMT can be seen as a re-statement of Keynesian economics. My narrow focus is - what is the difference between printing money or borrowing money from OS?
I am not considering whether it is inflationary or not, just the narrow comparison as they both would seem to have the same inflationary impact.
Whilst I understand that funds may be needed to support imports there seems little difference in the inflationary impact - except that this will eventually become a negative flow reducing demand.
I guess this becomes complicated by the large fund creation industry in compulsory super that sends funds overseas...
I guess the capital flows in and out of Australia contribute to or reduce demand - and also seem to be outside of Government control and therefore neither the RBA or Treasury are able to influence this, other than by interest rates.