
Do You Need More Money for Economic Growth to Occur? - bpolania
https://growthecon.wordpress.com/2016/01/15/do-you-need-more-money-for-economic-growth-to-occur/
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ChuckMcM
I tend to agree with his summary:

 _Economic growth occurs either because we produce more of existing things, or
because we introduce new things that that are more valuable than the old
things we produced – which shows up in relative price differences. The level
of absolute prices is irrelevant. The level of nominal spending is irrelevant.
The stock of money is irrelevant._

One of the things that I find challenging, is explaining that the "rich" don't
have all the money in a bank somewhere and if they would just let it out there
would be more for the "not rich" people. When someone's portfolio invests in
corporate bonds that the corporation issuing those bonds is using the proceeds
to increase their production, they are creating an expansion in the economy
which will provide jobs for people and by working money for them to spend. And
yet the company will pay back the bonds and the rich person will still have
all their "money" and more people will now have jobs.

~~~
rayuela
This couldn't be anymore incorrect. Arguing that nominal prices and the stock
of money are irrelevant is to argue that the federal reserve's actions have no
effect on the economy, which just simply is not the case.

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Eliezer
No. In the real world there are tiny little behavioral complications like
price-setters being more reluctant to lower prices than to raise them
(especially wage-takers and wage prices) and people trying to hold more money
as they feel less secure or as prices are falling, and these add up to huge
macro effects that prevent this neat scenario from being remotely true in
reality. In reality, too little money flowing often prevents trades from
occurring. Understanding that is practically the story of the last 100 years
in economics from Keynes to Friedman to Scott Sumner.

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carsongross
I think updating the TLDR version to "No, that confuses a stock with a flow,
which is a common error in economics" would help people who are going to glaze
over past the first paragraph to understand the crux of the issue better.

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dibujante
The author is technically correct but leaves out an analysis of deflation.

To tl;dr their argument: if the economy consists of 10 cans of beer and also
of $10, then you distribute the beer at $1 per beer. If the number of beers
jumps to 20, then you distribute the beer at $0.5 per beer. Economic growth
(more beer) has occurred, even though the money supply hasn't.

But what if you know that next year there will be 20 cans of beer? Then you
don't buy any beer this year, because each beer you buy this year costs you
two beers you could have had next year. If the number of beers goes up year
after year, then it is always advisable to wait to buy beer.

However, if you don't buy beer this year, then the beer company might not be
able to expand its production of beer next year. In that case, everyone loses
- you didn't buy beer when you should have bought beer, and the beer company
doesn't get to expand production for a market that wants it to expand
production.

Deflation is a prisoner's dilemma that is solved by printing money to match,
as closely as possible, the rate of economic growth.

~~~
bcg1
It is a fallacy to assume that purchases will be deferred just because they
have the prospect of being less expensive in the future. If that was the case,
no one would be using credit; they would just defer their expenses until they
could pay cash and forgo the interest.

~~~
dibujante
I disagree. The most common form of debt in the United States is the mortgage.
Mortgages are often entered into because of an assumption that equity growth
will outweigh interest.

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xyzzy4
When private companies take out loans, that creates more money. So economic
growth causes the money supply to increase. If they default on the loans, the
money created previously is still there.

~~~
neffy
Actually, no.

When bank loans are written off, there is a corresponding removal of money
from the money supply.

So the correct way to formulate this is to say: when loans are taken out from
the banking system, money is created, but whether or not the money supply
grows depends on the balance between new lending, vs loan repayment and loan
default which both cause money to be destroyed.

Only bank loans do this btw., so if a company raises money some other way,
it's money supply neutral.

~~~
sirsar
Could you elaborate a bit more? I feel like I'm missing something.

Let's say A puts $100 in the bank. The bank loans $50 to B while still telling
A that his full $100 is available for withdrawal. (Fractional reserve.) B pays
C $50 for services. The services fail to make a profit for B and B defaults on
the bank loan. The bank writes it off as a loss.

In this scenario, after a default, A still has $100 and C has $50. Total money
supply is $150; money supply delta is +50.

Say instead that B gets $55 from D (the services were a good investment), and
pays back the loan with $5 as interest. Now the money supply delta is 0: (100
0 0 55) has changed to (100 0 50 0) plus 5 profit for the bank.

The only thing I can think of is fractional reserve requirements somehow cause
the new money in the first scenario to disappear.

~~~
neffy
You're missing double entry book keeping essentially. The economic textbook
examples of this are mostly flat out wrong.

The mistake that just keeps getting repeated in the economic literature is to
confuse the two different kinds of money in the system. Banks are essentially
performing statistical multiplexing between asset cash, and liability deposit
accounts.

So - A puts $100 in a bank.

Double Entry Bookkeeping (DEB), that's: [debit cash, credit deposit account]

Bank loans $50 to B:

That's [debit loan (also an asset, creating it), credit deposit B]

Total assets: $150, total liabilities: $150

Notice B never got physical asset cash - they got a deposit account. Only if B
withdraws the cash, or transferred the money to another bank, does physical
cash get touched. Let's say B just bought something from A with the money,
that would be: [debit deposit account B, credit deposit account A]

Loan gets written off. In this scenario, the bank has no interest income, no
profits, and no capital. It would get closed down by the FDIC before it ever
got a chance to lend B any money :)

But in a more usual case, where is has received some interest income - which
would be [debit account B, credit bank interest income], it would first deduct
against its required loss reserves, then its interest income, also removing
that amount of the loan, [credit loan, debit loss reserves], then from any
other profits, and finally from its capital holdings.

Note, credit and debit mean different things depending if the ledger is an
asset or a liability - the right hand side is what you think it should be, and
the left hand side isn't.

~~~
bcg1
To quantify; the deposits are (generally) M1:

[https://research.stlouisfed.org/fred2/series/M1](https://research.stlouisfed.org/fred2/series/M1)

The "created" money is the delta between M1 and M2:

[https://research.stlouisfed.org/fred2/series/M2](https://research.stlouisfed.org/fred2/series/M2)

There is also M3 but those numbers are no longer reported so I am ignoring for
the sake of brevity and because "you get the point"

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calibraxis
I hope I didn't just skim a long-winded explanation of money velocity... in
some attempt to debug the usefulness of increasing the money supply in a real
economy.

~~~
ArkyBeagle
You didn't. It completely ignores monetary velocity, in addition to ( as
carsongross said ) conflating stocks and flows.

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neffy
tldr: You need more money for measurements of economic growth to grow, whether
you need it for actual growth is an open research question.

~~~
laotzu
What is there to research? Money is a debt based measurement of economic
output. Measurements do not exist of themselves but describe something else.

Take an acre of land for example. It is measured at 1 acre. Just because we
decide to pretend that it is 2 acres is arbitrary and makes no difference in
physical reality.

Though I would agree that money is far more abstract and obfuscated as
measurement system and is at heart a confidence game. So, it may be that
arbitrarily doubling the money supply could alter psychological perceptions
positively or negatively even though it is pure abstraction. The word Voodoo
comes to mind

~~~
hellameta
I think he means basically this:
[http://www.zerohedge.com/news/2014-09-22/illustrated-
guide-k...](http://www.zerohedge.com/news/2014-09-22/illustrated-guide-
keynesian-vs-austrian-economics)

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rdlecler1
Dear author: You lost me when he made a quip about Bud watering down beer
'even more'. It's a 5% beer. That's how they make it, nothing more or less.
You loose the trust of your audience when you throw in things like that. I
don't want to feel that I have to read the article which checking everything
you say. I'd rather not read it.

