Re: Stiglitz on Soros

["Gunnar Tomasson" <gunnar.tomasson@xxxxxxxxxxx>]

Re. the following:

> (Note that not all growth in bank lending need cause current account
> deficits.  Appropriate monetary rules can ensure that the growth of bank
> credit contributes to monetary stablility, full employment, economic
growth
> and international stablility.)

In Gang8 exchanges, such "appropriate monetary rules" are subsumed under the
label of "the Quality Theory of Money".

Geoffrey Gardiner and Chris Meakin (who coined the phrase) came across draft
U.K. legislation from 1946 calling for the institution of such a "quality"
approach to credit creation - with the draft reflecting tell-tale signs of
Keynes' authorship.

Gunnar


----- Original Message -----
From: "Leigh Harkness" <Leigh@xxxxxxxxxxxxxxxxxxxx>
To: "paul davidson" <pdavidson@xxxxxxx>
Cc: <pkt@xxxxxxxxxxxxxxxx>
Sent: Wednesday, May 15, 2002 5:31 AM
Subject: Re: Stiglitz on Soros


> Paul
>
> You wrote:
>
> > Here you are assuming both nations are already at fully employment and
> then
> > government policy creates "excess demand" -- while I am tlking about the
> > real world -- where almost no country is even near full employment and
yet
> > persistent imports exceeding exports (e.g., Argentina, ) continue to
> occur.
>
> When I say a country has excess demand, I do not mean that a country has
> full employment.  A country can have excess demand without full
employment.
>
> Let me explain.
>
> Let us assume that a country is initially stable.  To remove the
> employment/unemployment factor, let us assume that there is 8%
unemployment.
>
> For simplicity, let us assume that it has a fixed exchange rate system and
> international receipts and payments are equal.  We will also assume that
it
> has no monetary growth.  The money people earn from production (both from
> local demand and exports) they spend on consumption and capital goods
> (supplied from the local economy and from imports).  For this economy to
be
> stable, exports and imports would be equal.
>
> Now let us assume that the counrtry's banks increase their  total lending
so
> that they increased the money supply, thereby increasing current
> entitlements in the economy (that is, increase current demand).
>
> In this process the banks incease their deposits (bank liabilities) and
also
> increase their loans outstanding (bank assets).  To the economy, these
loans
> outstanding represent an obligation to supply goods to the economy.
>
> But note that the timing between the increase in entitlements and the
> increased obligation to supply is different.  The banks increase current
> entitlements but the obligation to supply products to the economy is a
> future obligation.
>
> Hence in the current period, there is excess demand.  That is, the growth
in
> current entitlements has exceeded the growth in current obligations to
> supply.
>
> In accounting terms, the banks books are balanced.  But in the real
economic
> world, there increase in current entitlements above the increase in
current
> obligations causes a current account deficit.  If the country cannot
obtain
> foreign goods to make up for this deficit, it is likely to experience
> hyper-inflation associated with a rising money supply facing a depleted
> supply of products.
>
> It is this definition of excess demand that I take to cause current
account
> deficit deficits.  It does not matter whether the bank credit is used to
> finance government or private sector expenditure.
>
> Printing money to finance goverernment expenditure could have similar
> effects but this is relatively trivial in the real world.  I have tried it
> and it has a very limited effect.  The banks send the money back to the
> government, debit the banks accounts and the government ends up
effectively
> borrowing from the banks, anyway.
>
> This has been my experience with current account deficits. It has nothing
to
> do with full employment.   I presume this form of excess demand was the
> cause of the current account deficits in Argentina, as they are in
Australia
> and most likely the USA.
>
> Do you know of any other source of excess demand (in the real world) that
> could cause a current account deficit?
>
> (Note that not all growth in bank lending need cause current account
> deficits.  Appropriate monetary rules can ensure that the growth of bank
> credit contributes to monetary stablility, full employment, economic
growth
> and international stablility.)
>
>
> Leigh
>
>
>