This paper introduces the notion of monetary disorder. The underlying theory rests on a
twin circuits view of the macro economy. The idea of monetary disorder has relevance
for understanding the experience and consequences of the recent decade-long period of
monetized large budget deficits and ultra-easy monetary policy. Current policy rests on
Keynesian logic whereby a large fall in aggregate demand warrants robust offsetting
monetary and fiscal policy actions. That logic neglects potential monetary disorder being
bred within the financial circuit in the form of inflated asset prices and leveraged balance
sheets. That disorder is likely to develop long before inflation accelerates so that inflation
targeting fails to protect against it. Political factors increase the policy danger as the
benefits of disorder are front-loaded and the costs backloaded. The paper concludes with
a policy discussion regarding how to prevent Keynesian goods market counter-cyclical
stabilization policy from causing monetary disorder.
The basic idea here is that excess money can flow into three different disorders. If it flows into the "real" goods economy it produces an inflationary disorder, which is classical Monetarism. If it flows into foreign currencies it produces a currency disorder. And if it flows into the financial sector it produces an asset market disorder (financial asset inflation).
It also describes four different taxonomies of disorders based on what kind of financing is driving the disorder (Money/Equity or Debt-financed) and if the Assets driving the speculation are New or Existing assets. Obviously it is concerned with our current debt-fueled financing of existing assets (commercial real estate, AirBnB, residential real estate, and many unprofitable 'zombie' companies).
It talks about economies having "real" and "financial" circuits and that excess money can "land" differently on either circuit. In a country that has only a small financial system it will tend to land in the real circuit and produce goods inflation. In a country with large financial system it depends on who receives the money and what they do with it.
One nugget from the paper:
> Figure 4 shows the case of a helicopter money drop. Now, money is effectively
dropped into the financial circuit, and the real economic impact of the drop depends on
the extent to which households spend that money in the real circuit. The economic impact
of a helicopter drop therefore depends on what type of households receive the drop. If the
drop goes to poorer households, they will tend to spend it and the impact on the real
circuit will be large. If it goes to richer households, they will tend to hoard it and the
impact on the real circuit will be small.
And:
> One reason for absence of accelerated inflation in a twin circuits economy is that
policy induced monetary excess may get diverted into the financial circuit, where it will
show up as pathological asset price inflation and credit expansion rather than generalized
inflation. That is especially true of an economy like the US which has a large financial
sector with a wide array of tradeable assets and well-developed real estate markets, both
commercial and residential. Long before full employment is reached or before inflation
starts to accelerate, the seeds of monetary disorder can be sown in financial markets via
the combination of large money financed budget deficits and near-zero interest rates.
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[ 3.0 ms ] story [ 10.8 ms ] threadThis paper introduces the notion of monetary disorder. The underlying theory rests on a twin circuits view of the macro economy. The idea of monetary disorder has relevance for understanding the experience and consequences of the recent decade-long period of monetized large budget deficits and ultra-easy monetary policy. Current policy rests on Keynesian logic whereby a large fall in aggregate demand warrants robust offsetting monetary and fiscal policy actions. That logic neglects potential monetary disorder being bred within the financial circuit in the form of inflated asset prices and leveraged balance sheets. That disorder is likely to develop long before inflation accelerates so that inflation targeting fails to protect against it. Political factors increase the policy danger as the benefits of disorder are front-loaded and the costs backloaded. The paper concludes with a policy discussion regarding how to prevent Keynesian goods market counter-cyclical stabilization policy from causing monetary disorder.
It also describes four different taxonomies of disorders based on what kind of financing is driving the disorder (Money/Equity or Debt-financed) and if the Assets driving the speculation are New or Existing assets. Obviously it is concerned with our current debt-fueled financing of existing assets (commercial real estate, AirBnB, residential real estate, and many unprofitable 'zombie' companies).
It talks about economies having "real" and "financial" circuits and that excess money can "land" differently on either circuit. In a country that has only a small financial system it will tend to land in the real circuit and produce goods inflation. In a country with large financial system it depends on who receives the money and what they do with it.
One nugget from the paper:
> Figure 4 shows the case of a helicopter money drop. Now, money is effectively dropped into the financial circuit, and the real economic impact of the drop depends on the extent to which households spend that money in the real circuit. The economic impact of a helicopter drop therefore depends on what type of households receive the drop. If the drop goes to poorer households, they will tend to spend it and the impact on the real circuit will be large. If it goes to richer households, they will tend to hoard it and the impact on the real circuit will be small.
And:
> One reason for absence of accelerated inflation in a twin circuits economy is that policy induced monetary excess may get diverted into the financial circuit, where it will show up as pathological asset price inflation and credit expansion rather than generalized inflation. That is especially true of an economy like the US which has a large financial sector with a wide array of tradeable assets and well-developed real estate markets, both commercial and residential. Long before full employment is reached or before inflation starts to accelerate, the seeds of monetary disorder can be sown in financial markets via the combination of large money financed budget deficits and near-zero interest rates.