Wednesday, May 14, 2014

Cullen Roche and Ann Pettifor go off the rails.

Cullen Roche and Ann Pettifor have fallen for the currently fashionable idea that because loans preceed deposits that therefor lenders don’t need to worry or are not influenced by savers (i.e. the willingness of people to deposit or “save”). AP’s video is here:

The fact that apples must be grown before they are eaten does not stop the relationship between apple growers and apple eaters being a bog standard supply / demand relationship. Likewise, the relationship between borrowers and lenders is a bog standard supply / demand one, with the free market rate of interest being the rate at which they do business (absent central bank interference in the rate of interest).
To illustrate that, suppose the economy is at capacity and banks extend more loans. The relevant money will be deposited, but what if those depositors just don’t want to save more: i.e. keep that money in their accounts for an extended period? They’ll try to spend that money and the result will be a rise in demand and thus inflation.
The central bank will then raise interest rates, which will cut the amount of lending and borrowing. Net result: no extra borrowing takes place. Alternatively, the authorities might impose fiscal constraints, in which case lending based economic activity would rise, and non-lending based activity would fall.
Another possibility is no countervailing activity by the authorities at all. In that case the extra lending and unwillingness of savers to save would result in inflation. Under a gold standard, that would result in the value of “promises to pay gold” by commercial banks dropping relative to the price of gold, thus all and sundry would demand gold in exchange for their dollar bills or pound notes. Banks would run short of gold, which would induce them to pull in their horns: i.e. cut their lending.
Yet another possibility is a purely fiat currency and no countervailing actions by the authorities. In that case the extra lending would result in excess inflation (far as I can see).
Ann Pettifor attacks the idea that banks are intermediaries between borrowers and lenders around 15.30 in the video. And around 26.00 she attacks the idea that the rate of interest governs the relationship between lenders and borrowers.

And around 26.20 she makes the strange claim that private banks gain from seignorage. Seignorage is the $X profit that comes from printing $X, and private banks do not make $X when they supply borrowers with an $X loan. What they do (if they are competent) is to charge the borrower with interest and administration costs, and hopefully make a profit at the end of the day. But of course, some banks make disastrous losses in attempting to do the latter. So where is the “seignorage” there?
And finally, I do like the idea that saving is not needed in order for investment to take place. This is truly wondrous news. I’m looking forward to having that explained to me in more detail.

But I do like the work that AP authored with Victoria Chick: "The Economic Consequences of Mr Osborne", so I'm prepared to overlook a few of her blemishes. Hope she overlooks mine.

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