Interesting news from yesterday: S&P has finally understood pushing reserves into the system does not cause inflation or more lending.
The title of this paper is straight forward enough everyone can understand:
Why is this important? Lots of people think hyperinflation is right around the corner. These people are wrong.
Not wrong in the sense of a “valid counter argument” wrong, but rather, they are wrong in the “not understanding the logic flow of the operating system” wrong. They are wrong like the guys in business suits telling the programmers the program will crash the computer because “the program is too fast, so slow it down” wrong. They don’t understand the basics of how computers work, so the problems identified and solutions proposed seem hilarious to people who really understand the nuts and bolts of programming.
Unfortunately, the real world consequences of these misunderstandings are gigantic. We are all at least 5% poorer than we should be because of these huge errors.
Cullen has pounded the table on the exact topic of reserves for several years, so it’s nice to have some mainstream recognition of the basic facts of how our monetary system works. It’s remarkable, but this paper reads as though Cullen Roche and JKH were the ghost writers.
Looking at the table of contents, its a point by point agreement with what Monetary Realism and many other bloggers in a loose confederation of truth tellers (like Edward Harrison, Steve Waldman, Ramanan Iver, Steve Roth, and Frances Coppola) have been writing about since the first round of QE started.
Additionally, he name checks MMT, Godley, Lavioe, and Wray in footnote 4.
Really, looking at this more closely, it seems like he might be reading Monetary Realism.
Look at the table of Contents:
Table Of Contents
The Money Multiplier View Of Credit Creation
What Determines The Level Of Central Bank Reserves
How Banks Create Loans
Where Deposits Come From
Interest-Rate-Targeting Central Banks Supply Whatever Reserves Are
How Things Change Under QE
Why Understanding The Balance-Sheet Mechanics Of QE Is Important
The Bottom Line
And then look at this post by JKH: Loans Create Deposits in Context. Additionally footnote 10 reads like it was written by JKH himself:
“Another way to conceptualize QE is as a debt management operation of the consolidated government (the government plus the central bank). When a central bank does QE by buying long-term government debt or government-guaranteed assets, the consolidated government retires long-term debt or guarantees on long-term debt and issues central bank debt (reserves) instead. This shortens the duration and debt servicing costs of the consolidated government’s outstanding debt, particularly when the central bank does not pay interest on excess reserves. This debt management operation effect is the flip side of the portfolio rebalance effect visited on the private sector’s aggregate portfolio”
Also, for some reason, the chief economist of S&P felt compelled to dispel the money multiplier myth, because so many people think there is a money multiplier. He does us a favor by collecting a large number of quotes from influential economists who apparently believe in the money multiplier view of credit creation. Noah Smith, read footnote 2 and weep with us. This view is everywhere.
(Update: I’ve had time to read Paul’s note more carefully. This note will become the primer on understanding banking reserves and how they impact credit creation. Paul’s note on the Platinum Coin is also excellent. His understanding of the system is very deep. )