Monetary Methodone

From One Of Professor Keen’s blogs:

Bernanke has everything entirely wrong. When he says “final” goods and services what he means is consumer goods. Consumption is where wealth is destroyed not created. As necessary as consumption is, the consuming of extra goods, through public policy, is no way to increase productive power. Likewise he has matters totally wrong on interest. He is seeking to get the public into yet more debt, through what is effectively a subsidy to the banks. But it was debt and bank parasitism (as well as government deficits) which brought on this problem.

There is much confusion in Bernanke’s thinking. And the confusion arises from CALLING BANK SUBSIDIES “MONETARY POLICY”.

Think about it? Why have a low interest rate policy for banks? Why not have a low interest rate policy for economists? How about a low interest rate policy for me? How about a low interest rate policy for me and a dozen females, specifically of my choosing?

It becomes obvious that low interest rate policy means more subsidy for the banks. Such a policy goes counter to what is needed for recovery. Since there is less incentive to save. It also means a forestalling of the necessary starvation of the banking and finance sector. To bring that sector down to a small part of the economy, so that former bankers may be more productively employed.

The idea is to stop calling bank subsidies “monetary policy”. Once we do that we see that monetary policy for expansion consists of new cash creation via debt retirement. Monetary policy to prevent overheating consists of raising the reserve asset ratio up a percentage point or two.

Now that we know what monetary policy is we see that as more and more of the money supply is in the form of cash, rather than bank-ponzi-money, it gets easier and easier for the central bank to hit what it is aiming at in terms of business spending.

The other source of confusion is the reliance on GDP as the relevant measure. I work in a company that only buys from other businesses and only sells to other businesses. Our activity is not included in GDP. GDP doesn’t measure economic activity very well. We want to add back business-to-business spending. We wind up with the measure of Gross Domestic Revenue (see Reisman).

” I think the US should have printed a lot of money and directed it toward the real economy–manufacturers, the unemployed, alternative energy, whatever, just not the banks and not a homebuyers credit.”

Of course you have matters entirely right. But you must not forget the critical factor of the reserve asset ratio. For if you add all this cash without a reserve asset ratio the banks will pyramid on top of that new cash. Which is what they are doing right about now in this country.

Low interest rate policy brings extra spending through more debt and subsidised bankers. New cash creation/reserve asset ratio policy brings more spending through less debt, and less bank subsidy.

We want to focus on gross domestic revenue, and business to business spending. The motto is “bounce and flatten”. That is to say we want to bounce business spending at least to its formerly highest level, before the monetary crunch hit. Then we want to flatten this spending out.

Possibly a better option might be to bounce to ten per cent higher then the previous high. But warn business that the spending levels will from there on in, be flattening out. Warn business that after the bounce spending isn’t going to grow at all for a very long time. At least until they are on a pathway to wringing out most of the debt from the economy.

They must be warned. The extra revenue is their opportunity to get their debt levels down.