by Metatone
Sat Aug 30th, 2014 at 04:09:42 AM EST
Ultra-liquidity
Ultra-liquidity
Posted by Frances Coppola on Aug 27th 2014, 2 Comments This is the first of several posts covering topics discussed at the recent Lindau Meeting for Economic Sciences.
Several economists at the Lindau meeting were severely critical of central banks' conduct of monetary policy in the light of continuing depression in the US, Japan and much of Europe, and called for greater use of fiscal policy to bring about recovery. Among the most critical was Christopher Sims, who gave a trenchant presentation on "Inflation, Fear of Inflation and Public Debt".
He started by announcing the death of the quantity theory of money, MV=PY. Due to interest on reserves and near-zero interest rates, "money" can no longer be clearly distinguished from other financial assets. This is a fundamental point which requires some explanation.
These days, nearly all forms of money bear interest, which makes them indistinguishable from interest-bearing assets. For Sims, the paying of interest on bank reserves, coupled with the decline of physical currency, all but eliminates the distinction between interest-bearing safe assets such as Treasury bills and what we traditionally call "money". All assets can be regarded as "money" to a greater or lesser extent: the extent to which assets have "moneyness" is really a matter of liquidity.
front-paged by afew
Read the whole thing... it's very interesting.
I put this comment on Frances Coppola's blog:
(Pieria's comment system is so awkward that barely anyone uses it.)
Coppola Comment: Ultra-liquidity
Metatone29 August 2014 12:00Fascinating read.
The implication about monetary and fiscal policy collapsing together seems all too correct.
What your piece made me think of is that (as a small business owner) the new "low interest" environment stifles outsiders (or to put it another way, entrenches inequality.)
Capital is now cheap, if you meet the other criteria for borrowing. On the SME side these often include: so much money, you don't need to borrow and/or large scale collateral.
Now risk is real and banks have been burned, so this makes sense at their level.
However, it's a disaster for the economy as it entrenches the already successful as the only ones who can take on new debt and try new things...
