Peak Money
What does it mean?
Tony Greenham
nef (the new economics foundation)
Transition Network
25th April 2012
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A few questions of minor importance
1. What is money?
2. Where does it come from?
3. What is the relationship between money, debt &
economic growth?
4. What happens next?
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What is money?
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Money is a social relationship
• Unit of account, means of exchange, store of value, means of
final settlement
• Classical/neoclassical economics: a ‘neutral veil’ lying over the
‘real’ economy (exchange/production)
• Truth: social relation (of credit and debt) determined in an
abstract money of account (Innes 1913; Ingham 2004)
• The state/monarch has been determining the money of
account for over 4000 years (Keynes 1931)
• i.e. money (credit/debt) precedes the capitalist market
economy (Graeber 2011)
• Control of money is a social and political issue
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What do banks do?
Look after
our gold?
Lend our savings out to businesses and fellow citizens?
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Banks create new money
Source: Ryan-Collins et al. (2011) Where does Money Come From?, nef (the new economics foundation), p56
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Central bank vs commercial money
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Source: Ryan-Collins et al. (2011) Where does Money Come
From?, nef (the new economics foundation), p59
Central bank money ‘merry-go-round’
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Source: Ryan-Collins et al. (2011) Where does Money Come From?, nef (the new economics foundation), p63
The tail wags the dog
‘In the real world, banks extend
credit, creating deposits in the
process, and look for the reserves
later.’
Alan R. Holmes, Federal Reserve Bank of
New York (1969)
‘In reality the sequence works
more in the opposite direction
with banks taking first their credit
decisions and then looking for the
necessary funding and reserves
of central bank money.’
Source: Ryan-Collins et al. (2011) Where does Money Come From?, nef (the new economics
foundation), p23
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Vitor Constancio, vice president of the
European Central Bank (2011)
So debt and deposits take off
Source: Bank of England, Interactive Database, data series LPQAUYM (M4),
LPQVQKT (notes and coins), YWMB43D (Central bank reserves).
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Where has the money gone?
Source: Ryan-Collins et al. (2011) Where does Money Come From?,
nef (the new economics foundation), p109
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Growing Inequality
Debt / money slides
Reproduced from the Economist
http://www.economist.com/blogs/graphicdetail/2012/01/daily-chart-8
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Where are we now?
Reproduced from Business Insider
http://articles.businessinsider.com/2011-12-04/markets/30473957_1_household-debt-uk-safe-haven
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Debt: an economics blindspot?
“I’m all for including the banking sector in stories where it’s relevant, but
why is it so crucial to a story about debt and leverage?”
“I think it has something to do with the notion that creating money =
creating demand, but again that isn’t right in any model I understand.”
Paul Krugman (2012),
http://krugman.blogs.nytimes.com/2012/03/27/minksy-and-methodology-wonkish
“It proved extraordinarily difficult for economists to recognize that
bank loans and bank investments do create deposits.”
Schumpeter, J. A. (1954)
History of economic analysis, Allen & Unwin, p1114.
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Money, debt and growth
• Argument: money created as debt requires growth
– Contested whether this is necessarily true in theory
– But given the inequality of debt, and tendency of the
current system to create money for financial speculation
means it is likely to be true in practice
– The sheer quantity of debt appears to be overwhelming
the economic system
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What happens next?
1. Repay it: ‘Austerity’
–
–
–
–
Requires increases in real income, growth or redistribution
Real income is falling – the ‘paradox of thrift’
Redistribution of income and wealth? Yeah, right
Ecological limits and the end of growth?
2. Default
–
Likely the wealthiest will protect themselves. Social and economic
damage could be extensive
3. ‘Slow default’ – inflation and financial repression
4. Debt jubilee + debt-free money produced by state or people
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More information
tony.greenham@neweconomics.org
www.neweconomics.org/projects/monetary-reform
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