David Graeber wrote a good piece in the Guardian yesterday regarding the Bank of England’s research on endogenous money. Graeber obviously understands that most money is credit in a fiat monetary system. And he understands that this should have big implications for how we all think of the monetary system. In particular, it should force economists to reconsider theories based on the loanable funds model or concepts such as the money multiplier. This is important stuff because it means the IS/LM model is flawed and it means that the way most of us understand money is wrong (thinking of it as a government creation and not a private banking creation).
Unfortunately, I don’t share David’s enthusiasm for how impactful this might be. For instance, David says:
“the [BOE] has effectively thrown the entire theoretical basis for austerity out of the window.”
I don’t really think that’s true. Most economists and laypeople still work from the position that governments “print money”. After all, the basis for much of the fear about government debt is a result of the idea that government’s print too much money or that their central banks can “monetize” the debt via programs like QE. And let’s be honest, it’s not exactly a secret that a government has a printing press despite the way some people seem to talk about this as though it’s some sort of “modern” revelation.
Whether the Austerians really understand the details isn’t that important to them. They think that government spending is usually bad and if it doesn’t result in government default then it will eventually lead to high inflation. This is why the same people tend to make those same arguments about the inevitable post-crisis hyperinflation OR sovereign default in places like the USA. Clearly, they don’t understand the actual details of how money is created or how it can cause default or inflation. But that doesn’t matter to them. To them, the government is an inefficient spender of money whether it creates the money or whether it borrows it.
And that’s why I don’t share Graeber’s enthusiasm. Yes, this might force a few economists to rethink their models, but I doubt we’ll see big shifts in policy any time soon. If anything, all this does is shift the discussion away from default in some countries and more towards inflation. But that’s about it.