comments on rwer issue no 99

  1. Romar Correa
    March 27, 2022 at 6:43 am

    Why Not Indeed? A Monetary Circuit reply

    Response to
    Why not Sovereign Money AND Job Guarantee
    Hongkil Kim and Hunter Griffin
    real-world economics review, issue no. 99

    In an allusion often resorted to in these circumstances, it suddenly dawns on Monsieur Jourdain in Molière’s play Le Bourgeois gentilhomme, that he has been speaking prose for forty years without being aware of it. Students of the monetary circuit pioneered by Bernard Schmitt and Alain Parguez in France and Augusto Graziani in Italy might respond to the title of the Hongkil Kim and Hunter Griffin (K&G, hereafter) article with a short and sweet ‘been there, doing that’.
    The monetary circuit is switched on with a loan by a bank to an enterprise. The asset is balanced by writing up the same number as a liability on the other side of the bank balance sheet. Money is emitted. K&G are on board. However, the conclusion they reach shortly after that private banks are in the driver’s seat and that “central banks act and react fractionally” seems to endorse the connection between high-powered money and money supply that has been challenged across the profession. We return to this point below. In the model of the circuit, the credit line is for the purpose of meeting the wage bill. Workers will spend their incomes on Basic goods. The expenditure cycles back to firms as profits which are returned to banks, along with interest, closing the circuit. Echoes will be found in classical Departmental schema and the practitioners of monetary circuit economics, likewise, are scrupulous with the separation of accounts. Indeed, inflation arises precisely when money arising with production in the ‘moment’ is doubly (and more) spent in later ‘moments’. Investment goods are a separate Department. K&G display this accounting sensitivity wherein in their scheme “… the deposit-taking/payment services would be completely separate from investment and merchant banking services …” (page 109). The discussion of firewalls in the inclusion of the Chicago Plan into the proceedings is apposite. However, bank money and central bank money are indistinguishable in circuit economics and there the path diverges from K&G. The essential and virtuous connection between banks and production cannot be missed. Potential vicious dynamics can arise with financial intermediaries and the financing of Non Basics in another Department as K&G have eloquently recorded.
    The monetary circuit can only be strengthened by incorporating problems of asymmetric information. There is no gainsaying the ‘heroic’ intervention of the bank manager both in being proactive in teasing out local environmentally-friendly projects and monitoring them thereafter as Hyman Minsky in his Notes at the Jerome Levy Institute Archive attested. In addition, the central bank as ‘leader of the club of banks’ and Planner can compile a list of projects that are scale-sensitive and auction the allocation. Banks might need to band together as consortia in order to bid effectively. We have noted that K&G seem to go along with the standard money multiplier account with ratios of commercial banks and savers occupying pride of place. The model is discredited even in mainstream macroeconomics. In practice, it turns out, the movement of central bank reserves is the locus of activity in the monetary process. Indeed, K&G allow for the possibility of commercial banks being “able to lend money already created (or temporarily lent at an interest rate) by the central bank …” (page 109). Wholesale central bank reserves, being already digitalised, are regarded as the window to entry into Central Bank Digital Currency (CBDC). Keynesians can contribute massively by fleshing out the so-called “gatekeeper” interface with output by specifying Job Guarantee schemes. The translation, in our terms, is that the central bank is principal and banks are agents in the credit allocation process.
    The fiscal authorities purchase commodities and services complementary to Basics in the form of schools, roads, hospitals, and correspondingly, employment of teachers, care workers. The financial instruments to these ends are government bills and bonds. They can be purchased by members of the private sector. The central banks is the residual holder. The contracts would be dominated in terms of returns and duration by private instruments but we assume that the horizons of workers are longer than those of capitalists and that they are content with lower but less risky returns. The increased incomes generated would provide the taxes for putative accounting balance. We are in agreement with K&G (footnote 6) that the central bank and the fiscal authorities are independent and that they coordinate their activities at the same time.
    The best way to summarise the case is via a Wynne Godley-Marc Lavoie box (with notations). The account below is incomplete and, consequently, the row of zeroes at the bottom is not completely filled. We focus on the compilation of a portfolio of projects by the central bank and their disbursement through the grant of reserves R at a price rL. The banks proceed with due diligence and make loans, L, at the same price. The loans are for the purpose of employing workers, ℓ, at the wage rate, w. The fiscal authorities issue long-term bonds BL. In the spirit of K&G, the bonds are consols, pieces of paper which pay the owner one unit of fiat money, the coupon per period in perpetuity. In other words, if there are BL-1 bonds in existence, the interest disbursed on the stock is BL-1. We assume that the central bank is the sole holder of the bonds. We do not consider the issue of a fresh tranche of bonds so as to finance government plans in the current period. In the event, the financing would be ΔBLpbL with pbL the price of bonds. Many studies demonstrate that the multiplier of the consumption from the income of newly-appointed nurses and counsellors and givers of geriatric care exceeds the value of the traditional multiplier. A complete account will need to include the holdings of bonds by households and the potential earning of capital gains on the stock (ΔpbLBL). The problem of positive profits will need to be addressed with profit disbursement to households, the owners of firms, as another source of income. Taxes have been plugged into the matrix for the sake of completeness and not budget balance. We support K&G that what matters is the positive and negative signs attached to items in the Treasury balance sheet and not their equality. With y, GDP, and p, the GDP deflator, an illustration of quadruple-entry bookkeeping of stock-flow-consistent macroeconomics follows.
    The Monetary Circuit
    Workers Firms Banks/Central Bank Treasury Σ
    Consumption – wℓ + wℓ + rLL/- rLR 0
    [GDP (memo)] [py]
    Income + wℓ – wℓ – rLL/+ rLR 0
    Σ 0 0 0
    + BL-1 – BL-1 0
    -T +T 0

    By way of conclusion, we emphasise that a Job Guarantee Program (JG) is a buffer-stock operation in willing and able workers. The government enters in the downturn when the private sector is in retreat and retreats in the upswing when the labour market tightens. The floor to dignified work at a decent wage provided by the government by way of a ‘reserve army of the employed’ is key to retaining worker morale. As K&G note, training should be an integral part of government intervention so that not only do skills not decay but are brought up-to-date.

  2. March 28, 2022 at 1:32 pm

    Response to
    Why not Sovereign Money AND Job Guarantee
    Hongkil Kim and Hunter Griffin
    real-world economics review, issue no. 99

    Hongkil Kim and Hunter Griffin set out the case for sovereign money in place of commercial bank money creation, and claim that Job Guarantee is a superior economic and social solution to UBI.

    There are two important sub-definitions of sovereign money, i) whether all money creation should be restricted to a state monopoly, or a hybrid system would allow commercial money creation to continue alongside sovereign money creation, and ii) whether sovereign money creation needs to assume debt.

    My proposal is for a hybrid system, since central banks lack the resource and expertise to manage individual and business loan applications. This was the core reason for the Swiss central bank opposition to the national referendum for a state monopoly of money creation.

    I also argue that sovereign money can and should be debt-free. This is important to meet the urgent need to reduce national debt and its concomitant austerity implication. As Kumhof and others argue, money is not quintessentially debt, either legally or in accounting terms. Whilst Randall Wray is correct that central banks do write money creation to a debt account, this is not necessarily so. As the authors point out, recent Covid support schemes, such as the UK furlough scheme, which paid £24,000 to 3m people at a total cost of £69bn, funded these by central bank purchase of government debt, which, since the central bank is government owned, is equivalent to debt-free sovereign money. This caused neither inflation nor devaluation, since it replaced lost labour income.

    Similarly, since UBI replaces consumer labour income lost to automation, it would also not be inflationary in the way the authors casually claim. Again, contrary to their claims, UBI pilot projects have not shown any inflation generating reduction in the labour participation rate. Current macroeconomic modelling work being undertaken by Cambridge Econometrics in the UK, shows in initial calibration runs that up to £100bn aggregate UBI causes no inflation, as the supply side of the economy has adequate capacity. The model also shows that UBI funded by debt-free sovereign money is unambiguously redistributive. The next phase of the modelling work will test the efficacy of UBI funded by debt-free sovereign money to replace future labour income lost to assumed automation. A full report of this work is due in the near future.

    Proposals for job guarantee schemes suffer from their inability to provide work equivalent to people’s qualifications, location, professional skills, and earning profiles. Their counter-cyclical definition makes them unsuitable to professions such as care which have permanent needs, and cannot be ramped up and down according to the business cycle. Most JG schemes are mute as to whether job offers can be declined without loss of benefits, rendering them workfare.

    But insisting on work rather than income as the solution to extensive economic and social depravation, relies on a future prognosis of high wage work availability, essentially on an unchanged macro-production function. UK data from 1948 shows an inexorable reduction in labour income against aggregate consumer expenditure, with non-labour income of welfare, pensions, dividends, and household debt making up the gap, the latter being of particular concern, leading as it does to default and economic crisis. The authors cannot simply dismiss the reality of technology and automation reducing labour income. Other indicators such as in-work poverty, and ‘bullshit’ jobs demonstrate that work and wage are insufficient to provide adequate income. We face the twin urgent need to get income to households and debt out of the system. The only effective solution is UBI funded by debt-free sovereign money.

  3. Mary Sanderson
    April 2, 2022 at 7:36 pm

    Thanks for concise and understandable portrayal of sovereign money. I have posted this for discussion at the Alliance For Just Money ( You are invited.

    The biggest shortcoming I see is a universal one in these conversations IMO. We speculate on economic schemes given certain variables . . . when our imaginations can not reach the completely different social/economic/physical world we could be living in if money creation had a PUBLIC PURPOSE. and were not loaded down with debt of course.

    Our empathetic impulses no longer stomped by the dog-eat-dog culture of a purposely extractive (usurious) money system, humans could live in ‘share & care’ families for example. When survival no longer depends on ruthless competition, there’ll be infinite ways to begin to heal all this growing trauma/alienation, including meaningful jobs programs for all, farmers, caretakers, artists and musicians included

    IMAGINE ENOUGH. addiction to war would be broken by taking away commercial banks’ capture of seigniorage and first use of new money. IMAGINE THAT while going to sleep tonight.

    thanks and congrats on this paper!

  4. Paul Lebow
    April 2, 2022 at 10:32 pm

    The job guarantee is fine but the article is based upon a false premise, that sovereign money reform does not include a job guarantee. Any monetary system will fail if it is not backed up by sound fiscal policy including models, economic indicators, free basic needs, highly progressive taxation and some form of human resource expansion including a job guarantee.

    One of the hidden and to me, unseemly uses of a job guarantee is to treat human beings as a “buffer stock” of marginally paid and willing workers to absorb fluctuating needs of private corporations. In order to combat inflation, fiscal policy must increase the value of human labor via education and training in order to absorb government created money. A “job” per se is not necessarily the goal. What is needed are valuable jobs that in many cases, the private sector cannot and should not be providing. I’d prefer an FDR New Deal style of job creation where the jobs were of tremendous benefit to society, not just a holding pattern for when the private sector deems it profitable to hire.

    It’s somewhat of a myth that the needs of the private sector are an indicator of the needs of society. There is a huge market for unproductive and destructive goods and services. I would not take a sudden surge in demand for labor from the private sector as a reason to displace gov jobs in response.

    Sovereign money places a huge burden on sound fiscal policy to work. Freely accessible government money opens up a whole new unchartered space – to run away from that in fear of corruption and “politics” in favor of some “safe” automatic stabilizer seems limiting.

  5. yoshinorishiozawa
    May 17, 2022 at 1:46 pm

    A comment on
    The mathematics of profit maximization is incorrect
    by Philip George
    real-world economics review, issue no. 99, pp.143-150.

    As a criticism of neoclassical economics, Philip George’s paper is almost right. My comment on it is this question: Is this criticism sufficient for a reconstruction of economics? The answer will surely be “No!” I want to know what is George’s idea for constructing a new economics.

    It would be unjust if I do not give my own scheme. For a short account, please see my recent paper: The principle of effective demand: a new formulation. The Review of Keynesian Studies 3: 67-95. (Open access)

    If you are interested in discussing this question in detail, I will send you our book Microfoundations of Evolutionary Economics on which my argument draws.

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