Re: Credit creation and excess money

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> Date: Thu, 03 Nov 1994 08:54:13 -0700
> From: Marc Lavoie <MLAVOIE@xxxxxxxxxxxxxxxxxx>
> Subject: Credit creation and excess money
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> About the issue of whether or not credit creation to firms which expand
> production may or may not lead to excess money supply, I am glad to see that
> most now agree on the Banking School principle of reflux, i.e., on the fact
>
> that economic agents will use the deposits that they do no want to hold either
> to reimburse their debts or to purchase goods, in which case the firms will
> use their newly acquired deposits to reimburse their own debts. The principle
> of reflux thus applies even though households have no debts.
> Victoria Chick adds however that the additional credit may lead to higher
> asset or output prices. It may also lead to lower asset or output prices, for
> the additional output permitted by the additional credit may be inferior to the
> additional demand generated by this additional production, if one sticks to a
> standard demand and supply analysis. As to asset prices, we need to know, still
> keeping with standard analysis, whether firms will offer additional bonds or
> not. Briefly put, what is important is the reflux principle: the portfolio
> effects that may be induced by the additional credit are secondary to the
> picture, and they may go in any direction.

Marc

    Many thanks . I haven't used the term "Principle of Reflux", but
will now. Is there a particular citation?

    On portfolio effects, I argue that since the CB establishes the
short rate, insofar as long rates are determined by expectations of
future rates, there will not be much change in rates, unless the new
credit induces a change in expectations. Do you agree?

Basil
ps. I have just sent you my comments on your paper. I liked it very
much!  Well done!