Monday, March 25, 2013

News for professional economists: printing money costs nothing.

Most people know that the cost of printing a £10 note is about 1/000th of its face value. And in fact the cost of money creation is even less than that because the vast bulk of money is simply a book keeping entry or a number in a computer.
But amazingly, it’s far from unusual for so called professional economists to put arguments that assume that the cost of creating and spending £X is £X.
Of course if the amount of money printed is excessive and leads to excess inflation, then clearly there is a REAL COST. Plus in the latter instance there is a cost in the sense that government steals purchasing power from the private sector.
But assuming there is room for extra demand, then there is no real cost involved in having government print and spending £X (or – the political right’s preferred option – leave public spending untouched while cutting taxes).

Maturity transformation.
A common example of failure to appreciate the above “zero cost of printing” point comes in the popular argument for maturity transformation (put for example by Paul Krugman and Brad DeLong.).
That’s the idea that if commercial banks are allowed to borrow short and lend long (i.e. do maturity transformation), then better use is being made of depositors’ funds.
Now clearly there is a good argument for making the best use possible of REAL ASSETS. But “funds” are very different: they are simply book keeping entries or numbers in computers.
And there is no pressing reason to make good use of those numbers because those numbers can be added to by any amount we choose and at any time.
Or in the words of Milton Friedman, “It need cost society essentially nothing in real resources to provide the individual with the current services of an additional dollar in cash balances. (Ch 3 of his book “A Program for Monetary Stability”)
Now borrow short and lend long is inherently risky. Hundreds of banks throughout history have been brought down by taking that strategy too far, with Northern Rock being only the most recent example.
But the risks, and the associated REAL COSTS can be removed by banning or clamping down on “borrow short and lend long” while compensating for that with a measure that is totally costless: printing and distributing more money.

Brad DeLong.
Brad DeLongpretty much repeats the above Krugman article here. That is, DeLong says that the effect of banning maturity transformation would be deflationary, plus he suggests (penultimate sentence) that that could be compensated for by having government print and distribute money.
Quite right. So why not go for it? That is, why not dispense with the risks and REAL COSTS involved in maturity transformation, and make up for that with a totally costless measure: having government print and spend more money into the economy?

Full reserve banking.
Another example of a so called professional economist making the same mistake is Dimitri Papadimitriou who claims that full reserve banking would be “chronically reliant on demand injections from government”.
Well the word “chronic” is just emotive propaganda. But certainly implementing full reserve would have an initial deflationary effect, because it restricts what commercial banks can do, and that which make necessary some (costless) money printing.
And Jan Kregel makes the same fallacious criticism of full reserve (p.6, 1stcol.) in the same paper.

No comments:

Post a Comment