I hate it when I have to disagree with somebody I would have liked to agree with

From Gang8, from Gunnar Tomasson, an excerpt from Wikipedia on the American Monetary Institute:

Research results are published in Zarlenga's 736 page book, The Lost Science of Money.

This book asserts that money did not emerge from barter between individuals, but rather through trade between tribes and as part of religious worship and sacrifice. Though this is not the mainstream view, there are other scholars of money, such as Keith Hart, who agree that money developed in this way. The reason this distinction is believed to be important is because, according to Zarlenga, it is the definition of money which determines how the public will allow the money supply to be controlled.

If money is a commodity to be traded, then all that matters is that the money is 100% backed by some commodity, like gold or silver for example. If money is credit, then it makes sense that bankers control it, as they do in the United States today. But if money is an artifact of law, whose value is derived from law (payment of taxes and legal tender laws) then Zarlenga argues it would only be proper for the government to issue, and control the money supply. According to Zarlenga, it is this last definition that is supported by the history and nature of money.

Zarlenga seems to be arguing in favor of a particular sort of monetary structure for society today, based on one particular event that occurred in the time of cave men.

I find that exasperating. Does no one believe that the economy is a system that functions as a system? Does everyone think we can re-design the economy at will, simply by coming up with a better stupid story about how money was invented??

How money was invented should be the least of our concerns. We should be thinking about where the money went and why we use so much credit and why we have so much debt. The answers come easy, when you ask the right questions.


From the same Gang8: "the financial sector’s assets are the real sector’s liabilities."

Yes, and the financial sector's income is a cost of production. We would do well to reduce that cost.

I find it useful to expand Adam Smith's "factors of production" -- land, labor, and capital -- to include finance. I find it useful to distinguish real sector capital from financial sector capital. Let "profit" be the return to real capital, and "interest" be the return to finance.

I find it useful to examine costs in the economy based on this expanded set of factors.


From the end of the Gang8 remarks:

Ratio of M2 to GDP in selected countries
United States = 83
France = 152
United Kingdom = 171
Netherlands = 226
Japan = 236

See: http://data.worldbank.org/indicator/FM.LBL.MQMY.GD.ZS

There is no “ideal“ or “normal“ ratio of M2 to GDP. Hence, there would be no benchmark values of M2/GDP to guide US Treasury control over money supply.

Gunnar

I looked at the worldbank link. The figures are for 2011.

Based on one stat from five nations for one recent year, Gunnar Tomasson asserts that there is no ideal or normal ratio of M2 to GDP.

Gunnar should take a look at M2 money for all the years since the crisis, and for all the years leading up to the crisis. And for comparison he should look at M2 money for the years when growth was good: the golden age, the first two decades following the end of World War II.

Gunnar should look at the components of M2 money. Here, I found this recently at Philip George's Philipji.com:

M1 consists of currency and the kind of deposits that can be used to write checks. M2 consists of M1 plus other deposits like savings deposits and time deposits. So subtracting M1 from M2 gives us roughly the amount of money available for lending.

That's a good breakdown of the components of M2. If you want to say "loans create deposits" that's fine, too. Just revise George's last sentence to read:

So subtracting M1 from M2 gives us roughly the amount of money in savings.

Don't lose the focus. It is essential to look at these two components of M2 money, the circulating and non-circulating components.

If Gunnar looked at those components, he would find that when savings is a large portion of M2 and circulating is a small part, the economy does poorly. And that when savings is a small portion of M2 and circulating is a large part, the economy does well.

Too much savings: bad. Too little savings: good.

Graph #1 shows the non-circulating component rising through the Roaring '20s. Non-circ was already high by start-of-data, and the Roaring '20s was more a financial than non-financial success, much like the 1990s.

By the end of the Roaring '20s the non-circulating component was very high, and the result was that we had the Great Depression. During the Depression and World War II, the non-circulating component fell as a share of M2 money and the circulating component increased. Finally, non-circ reached a low point, and the Golden Age began soon thereafter.

Graph #1: The Non-Circulating Component of M2, 1915-1970

On Graph #2 below, the FRED data picks up in the midst of the Golden Age. The non-circulating component starts out low and rising. It tries to level off in the 1970s, succeeds in the 1980s, and falls a bit in the early 1990s. Then it rises again, in a financial success comparable to the Roaring '20s. Then, like the Roaring '20s, it ends in Depression.

Graph #2: The Non-Circulating Component of M2, 1959-2011

If Gunnar looked at those components, he would find that when savings is a large portion of M2, and circulating is a small part, the economy does poorly. And that when savings is a small part of M2 and circulating is a large part, the economy does well.

But you know what? Just look at M2 divided by M1 instead. Excessive non-circ still shows up. And it's simpler to think about.