1. We live in an endogenous money world. That means that demand for and supply of credit – not base money supply – largely determine broad money supply and credit growth aggregates. In our post-crisis world we are seeing this. 2. Increases in base money will not spur credit growth. The attempts to spur economic growth via credit growth are at heart based on the money multiplier fallacy that sees credit growth as dependent on base money growth. But in an endogenous money world this hasn’t worked and it won’t work. 3. The problem is private debt. You cannot get broader credit and money aggregates to grow in a world of restrained credit demand/supply no matter how much QE you do to add to the monetary base. The system is constrained by high levels of private sector debt and the attendant balance sheet issues at financial institutions servicing that debt. 4. So what happens in the next downturn? I have always believed this is the critical question. As I laid out this thesis mentally, I asked myself what happened when you have near-zero rates, extraordinary levels of monetary ease and liquidity, increasing public debt, and high private debt when recession begins? I think you get deflation, spiking non-performing loans, credit writedowns, insolvent financial institutions, massive private and public sector pension problems and renewed crisis. This is Japan.
Posted on: Sun, 04 Aug 2013 12:28:50 +0000
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