Global Economic Symposium (GES): The Future of Global Money – Die Diskussion geht weiter

Wie berichtet, bin ich Anfang September beim Global Economic Symposium in Kuala Lumpur und nehme am Panel zur “Future of Global Money” teil. Meinen Diskussionsbeitrag habe ich Montag hier veröffentlicht. Vorgestern die erste Kritik an meinem Vorschlag und meine Replik.

Prof. Dr. Stefan Kooths, der Diskussionsleiter, ist mit folgenden Punkten/Hinweisen in die Diskussion eingestiegen:

“Let me get the ball rolling with two shorts comments from myself:

• To George Selin (BTO: derjenige, dessen Kritik ich am Mittwoch vorgestellt habe): “Had it not been for [fractional reserve] banks, there would be no developed economies at all” – this is an argument that is frequently put forward in this debate, but the theoretical background often remains in the dark. Could you elaborate on this? Why would 100-percent-banking be so costly? What cost categories do you have in mind?
• To Daniel: “Return to the gold standard: too inflexible” – again, why do we need elastic money supply? Why couldn’t the price level do the job? You are arguing that our current fractional reserve systems are somewhat “too flexible” and that a new issuance body might do a better (less erratic) job than today’s tandem of central banks and commercial banks. Is this really realistic? Shouldn’t we suspect that whoever gets the license to create new money out of thin air will have a strong (superhuman?) incentive to create more money than any originally set fixed rule would allow. This might give a strong point in favour of any money (like gold) that cannot be manipulated by policy makers. And just a minor remark: “The total government debt in the world has crossed the $100 trillion mark” – The $100 trillion mark as published by the BIS refers to total outstanding debt, public debt so far stands at $43 trillion “only”. Of course, this does not alter you overall argument with respect to the global debt-overhang at all.”

Auch hierauf habe ich ausführlich geantwortet:

Response to questions raised by Stefan Kooths

Dear Stefan,

Thank you very much for getting the discussion going. I would like to react to the points you raised and further clarify the rationale for my proposal. Of course you are right concerning the debt numbers. This was an unfortunate simplification. Overall debt keeps growing faster than income and this is indeed the core of the problem.

With that, I’d like to address the two other points you have raised in this regard. In essence, the first issue raises the question, why it is that I am not proposing returning to a gold standard. The second one asks, whether we can realistically trust a political body to ensure monetary stability and non-inflationary growth. I really appreciate both these concerns of yours, as they are highly relevant, especially as we look into monetary history since we gave up the last link to gold in the 1970s.

My position regarding returning to a gold standard

1. A gold standard would lead to a low growth of money supply and therefore lead to an adjustment via the “price level” as you correctly point out.
2. Given a certain growth rate of the economy this would imply a slight deflation, i.e. prices would fall and we would have a tendency for deflation.
3. Deflation in itself is not bad: interest rates would be low and the economy could grow in a sizeable way as we have seen in the past, and as was shown by studies like Atkeson/Kehoe: Deflation and Depression: is there an empirical link[1], and also pointed out by the BIS in its last annual report.
4. The problem is that we will have to deal with much lower fundamental growth rates in the future. In contrast to the periods analyzed by the Fed and others we have
   1. Less population growth: population shrinking, not growing!
   2. Less productivity growth: e.g. refer to the views of Robert Gordon, Is US Economic Growth Over?[2]
5. This makes it harder for our economic system to function. The capitalist system, which in reality is a system driven by debt-dynamics, requires debtors to pay back their debts in a product they cannot produce themselves: money. They have to earn the money in the marketplace by selling products. This is much easier to achieve in an environment of nominal growth of the economy, than in an environment where the economy is shrinking. Therefore in an environment of structural low growth an adjustment via the price level has significant negative side effects which it did not have in the past periods of high fundamental growth due to growing workforce and high gains in productivity. Keep in mind, that productivity is actually shrinking right now in the west and in 2013 even on a worldwide scale!
6. Samuel Brittan of the FT summarized the problem very nicely: “Theoretically, the world should be in reach of a new equilibrium where people are better off and can consume more goods and services”. But the process involves a reduction of the general price level (…) likely to be much messier than in a schematic analysis (…) likely to be a general atmosphere of doom and gloom (…)”. “At the very least governments and central bankers may want to increase cash spending (…) that (…) the benefit is obtained (…) by higher nominal incomes and not just a lower price level”[3]
7. Fixing monetary growth to the supply of gold might work well in an environment of high fundamental growth, but not so much in an environment of shrinking populations and disappointing productivity gains.

Therefore I am not in favor of a gold standard or a system which leads to a monetary restriction which amplifies the problems of our economic system. I have lots of sympathy for the gold standard but think that we should allow for a higher monetary growth rate to facilitate our economic development

My position regarding the central body regulating money supply

• I share the skepticism concerning the central body deciding on the growth of money supply. If left unchecked, the potential risks of political misuse are significant. To address this, one could think of a mechanical growth rate fixed in law or mathematical algorithms. In all cases, the pressure of politicians for higher monetary growth will be significant.
• Still, if the new money provided is distributed directly to the citizens, it might limit the risks. As we know since Cantillon, those who get the money first will benefit the most. If we ensure that new money reaches every citizen at the same time in the same amount, we might overcome this issue.

The alternative of fully private money works well in theory but not in practice. On a global scale it would be difficult to be implemented. Here, I rather prefer a competition of monetary systems, and am optimistic, that a fully funded system on central bank money works best.

Overcoming the debt overhang in a “smart way”

As laid out in my paper, one additional advantage of shifting to a full money framework would be the realized gains due to the transition itself. As I am convinced that the debt needs to be reduced significantly in order to restore economic growth and that politicians will shy away from the drastic measures needed this would provide an easy option to deal with this problem.

To reduce debt levels substantially from their current levels, the gold standard would of course work as well. The central banks could just announce a new price for gold, and in doing so, revalue their existing holdings. The resulting gains would be paid out to governments to pay back loans and recapitalize banks. Of course all financial assets would lose significantly in value – as this would imply a huge inflation.

Fortsetzung folgt.