On Some Open Issues in the Theory of Monetary Circuit

Transcription

1 School LUBS of something FACULTY Economics OF Division OTHER A Day in Honour of Augusto Graziani Amphithéâtre Vedel, Faculté Jean Monnet, Université Paris-Sud January 20 th, 2015 On Some Open Issues in the Theory of Monetary Circuit Marco Veronese Passarella

2 Outline 1. Introduction: Graziani and the Italian contribution to the TMC 2. Open issues in the TMC 3. The conception of pricing and the role of demand Graziani s equations / Theoretical consequences 4. The need for a stock-flow consistent redefinition of the TMC model 5. Financialisation in the monetary circuit The standard monetary circuit / A new paradoxical cycle? / Main amendments to the benchmark model / The storyboard / Nominal balance-sheets / Nominal transactions-flow matrix / Some equations / Other equations / The dynamics of the basic model / Wage cut, derivatives and debt repayment 6. Remarks

3 1. Introduction: Graziani and the Italian contribution to the TMC While there are clear affinities of Graziani with French Circuitistes and (Post) Keynesian authors, Graziani s take also shows some distinctive features. Graziani s specific contribution can be defined as a rediscovery of the most far-reaching aspects of the monetary thought of both Karl Marx and a number of dissenting economists of the early twentieth century (e.g. Wicksell 1898, Keynes 1930). The keystone of Graziani s take is the association of Keynes s concept of initial finance with Marx s notion of money capital (Messori, 1983). Capitalism is a circular sequence of monetary (social) relations. Firms need money in order to purchase labour power from workers and to start the production. This initial flow of money is created (ex nihilo) by banks. Graziani s macro-monetary take allows him to clarify that: Looking at capitalists as a social class, capital valorisation can only derive from exchanges capitalists make outside their own class. The only possible external exchange is the purchase of labour-power. [ ] Capitalists profit can only arise from the difference between the total labour employed and the quantity of labour that the worker gets back in the form of real wage. (Graziani 1983, Italian in the original)

4 2. Open issues in the TMC The chief aim of Graziani s TMC is to account for the process of money creation and destruction (both viewed as endogenous phenomena) under a capitalist regime during normal times (i.e. without crisis, Graziani 1984). The precautionary and the speculative motives (liquidity preference) must be ruled out of the analysis. The focus is on a specific subcategory of the transaction motive: the finance motive. Money is regarded as the the initial banking finance enabling firms to start the process of production in a world marked by social stratification (Graziani 2003). The benchmark single-period monetary circuit scheme has been questioned by many, as it would be affected by some theoretical and analytical weaknesses. The paradox of monetary profit Market-clearing pricing and no role for effective demand The pure flow accounting framework and the single-period horizon No room for recent developments in capitalist economies (financialisation)?

5 3. The conception of pricing and the role of demand Graziani s equations Let us suppose that: r l = r b = r m = 0. The algebraic skeleton of the TMC model can be written as follows: (1) X s = N s a (2) p X d = C + I (3) C = 1 s w N d (4) I = b p X s (5) p = (w/a) (1 + σ) (6) L d = w N s (7) N s = N d (8) X s = X d (9) L s = L d (10) M (s) = L s In equations above, C, I, L d, L s, M (s), N s, p, X d, X s and σ are usually regarded as the endogenous variables, whereas a, b, s, w and N d are treated as exogenous. In principle, it would be possible either to derive p and hence σ given N d (and hence X s ), or to derive X s and N d given σ (and, say, I instead of b).

6 3. The conception of pricing and the role of demand Theoretical consequences Graziani chose σ as the endogenous variable: σ = (b s)/(1 b). The scale of production (N d ) is set autonomously by firms, along with the share of investment (b). The rationale of Graziani s choice is linked with the chief aim of the TMC: to analyse how money is created, circulated and destroyed in a capitalist economy during normal times (no uncertainty, no liquidity trap, no credit rationing, no lack of demand). Controversial corollary: any increase in aggregate demand components leads to an increase in profit rate and unit price of output, with no effect on employment and real output. The above conception of pricing is potentially at odd with the vast majority of Post Keynesian, Kaleckian and other heterodox approaches. Graziani s original take looks inconsistent with the recognition of the role of effective demand in determining (i.e. constraining) real output and employment (Seccareccia 2014). When a plurality of sectors is taken into account, it is also inconsistent with the long-run equalisation of the rate of profit across the economy (Lunghini & Bianchi 2004).

7 4. The need for a stock-flow consistent redefinition of the TMC model The benchmark TMC model relies on a pure-flow accounting framework. It is usually defined in static terms, i.e. within a single-period horizon. That was a useful simplifying assumption, but it should be dropped. The dynamics of the economic system should be modelled explicitly. When a multi-period model is adopted, stocks and their relations with flows have to be accounted for. The TMC model should be revised in the light of the stock-flow consistent modelling technique (e.g. Godley 2005, Lavoie 2005, Godley & Lavoie 2007, Zezza 2004, Zezza 2012). The coherence of the TMC narrative with Godley s take has been recognised explicitly by Graziani when defining the nature and the amount of the initial finance (e.g. Graziani 2003, p. 28; to be compared with Godley and Lavoie 2007, p. 49). This crossbreeding, inter alia, makes it possible both to amend the TMC price-setting (in order to take into account the impact of demand on real output) and to extend the monetary circuit scheme to the analysis of the financialisation.

8 Main amendments to the benchmark model The starting point is the benchmark TMC model (Graziani 2003): closed economy with no government sector. Production/investment are financed by inside money created by banks. The benchmark TMC scheme is redefined in a SFC fashion (call it Model DER). Model DER can be considered an amended version of Model BMW created by Zezza 2006 and corresponding to the model used in Godley & Lavoie 2007, Ch. 7. Main amendments concern: Households can access credit (Van Treeck 2009) Workers vs. rentiers (Dos Santos & Zezza 2006, Van Treeck 2009) Banks vs. other financial intermediaries (Sawyer 2014) Securitisation and derivatives (Veronese Passarella 2014)

9 The standard monetary circuit Banking System debt discharge: closing (5) (1) initial finance: opening Financial Market final finance (4) Firms wage-bill (2) Households consumption (3.a) Commodity Market household saving (3.b)

10 A new paradoxical cycle? Clearing Banks OFIs (1) consumer credit Firms Rentiers corporate extra-profits financial investment (3) (4) Financial Market derivatives (securitisation) (financial asset inflation) Workers Rentiers Commodity Market (2) credit-based consumption

11 The storyboard Bank credit is used by both rentiers and workers to finance additional consumption. The amount of new loans to rentiers ( L r ) is an increasing function of their wealth (V r ), the latter being used as collateral. Loans to workers ( L w ) are an increasing function of both workers wealth (V w ) and the degree of cartolarisation of household debt (φ). The banking sector is split into two subsectors: clearing banks vs. other financial intermediaries (OFIs). Unlike loans to firms, loans to households are created by banks and then handed to OFIs (e.g. via structured investment vehicles). The role of OFIs is not to create money, but to transform a portion of household loans into financial derivatives (securitisation) (d s ). These are sold to rentiers who seek for high return rates on their financial investment.

12 Nominal balance-sheets Households Banking sector Production firms Workers Rentiers Clearing Banks OFIs Σ Deposits +M w +M r M +M o 0 Loans L w L r L f +L f +L h ( L h ) (+L h ) 0 Capital +K +K Securities of firms (+B) ( B) 0 Derivatives +d p d d p d 0 Balance (net worth) +V w V r V h Σ Notes: A + before a magnitude denotes an asset, whereas denotes a liability.

13 Nominal transactions-flow matrix Workers Rentiers Production firms Clearing Banks OFIs Current Capital Current Capital Current Capital Consumption C w C r +C 0 Investment (change in capital stock) +I = +ΔK I = ΔK Wages +WB WB 0 Depreciation allowances DA +DA Interest on loans r l, 1 L w, 1 r l, 1 L r, 1 r l, 1 L f, 1 +r l, 1 L f, 1 +r l, 1 L h, 1 0 Interest on deposits +r m, 1 M w, 1 +r m, 1 M r, 1 r m, 1 M, 1 +r m, 1 M o, 1 0 Return on securities +r b, 1 B 1 r b, 1 B 1 0 Return on derivatives +r d, 1 p d d 1 r d, 1 p d d 1 0 Entrepreneurial profits +F f F f 0 Bank profits +F b F b 0 Financial profits +F o F o 0 Change in loans +ΔL w +ΔL r +ΔL f ΔL f ΔL h (+ΔL h ) ( ΔL h ) 0 Change in deposits ΔM w ΔM r +ΔM ΔM o 0 Change in securities ( ΔB) (+ΔB) 0 Change in derivatives Δd p d +Δd p d Σ Memo: capital gains Δp d d 1 +Δp d d 1 Σ 0 Notes: A + before a magnitude denotes a receipt or a source of funds, whereas denotes a payment or a use of funds.

14 Some equations (20) Share of securitised loans φ = d s p d l w, 1 +l r, 1 (28) Number of rentiers N r = h 1 N s + h 2 ε (29, 30) Nominal consumption of workers and rentiers C w = α 0 + α 1 YD w e + L w, C r = β 0 + β 1 YD r e + L r (36) Loans to workers L w = α 2 V w, 1 + α 3 C r N r C w N s α 4 w w 1 p p 1 rep 1 L w, 1 (37) Loans/wealth ratio of workers α 2 = η 1 1 [L w, 1 rep 1 +r c ] V w + η 2 φ

15 Other equations (38) Premium over risk on loans to workers π = π 0 + π 1 L w, 1 rep 1 V w, 1 (41) Demand for firms securities of workers B w V w = λ 0 + λ 1 r b λ 2 YD w V w (44) Demand for derivatives of rentiers p d d r V r = λ 3 + λ 4 r d λ 5 YD r V r Structure of return rates: (17) r m = r l add (deposits) (21) r c = r l + π (consumer credit) (22) r d = r c (derivatives) (23) r b = r m (securities)

16 The dynamics of the basic model Figure 1: Evolution of C and YD following an increase in autonomous consumption of workers Figure 2: Evolution of Id and DA following an increase in autonomus consumption of workers Total disposable income Aggregate consumption Gross investment Capital depreciation Figure 3: Evolution of C and YD following an increase in the propensity to save of workers Figure 4: Evolution of the output to capital ratio following an increase in the propensity to save of workers Total disposable income Aggregate consumption

17 Wage cut, derivatives and debt repayment (I) Figure 1A: Evolution in GDP and total consumption following a wage cut GDP (left axis) Aggregate consumption (right axis) Figure 1B: Evolution in income distribution following a wage cut 93.8% 93.7% 93.6% 93.5% 93.4% 93.3% 93.2% 6.9% 6.8% 6.7% 6.6% 6.5% 6.4% 6.3% 93.1% 6.2% Disposable income of workers (to total, left axis) Disposable income of rentiers (to total, right axis)

18 Wage cut, derivatives and debt repayment (II) Figure 1C: Evolution in leverage ratios of households following a wage cut 31.2% 23.64% Figure 1D: Evolution of interest on derivatives following a wage cut 12.0% 4.3% 30.8% 30.4% 23.60% 23.56% 11.9% 4.2% 30.0% 23.52% 11.8% 4.1% 29.6% 23.48% 11.7% 4.0% 29.2% 28.8% 23.44% 23.40% 11.6% 3.9% 28.4% 23.36% Leverage ratio of workers (to total, left axis) Leverage ratio of rentiers (to total, right axis) 11.5% 3.8% Interest rate on derivatives (left axis) Interest rate on bank loans (right axis)

19 Wage cut, derivatives and debt repayment (III) Figure 1E: Evolution of financial profitability following a wage cut 3.860% 3.856% 3.852% 3.848% 3.844% 3.840% 3.836% 3.832% 3.828% 3.824% 1.29% Bank profit to GDP (left axis) OFIs profit to GDP (right axis) 1.38% 1.37% 1.36% 1.35% 1.34% 1.33% 1.32% 1.31% 1.30% Figure 1F: Evolution of derivatives following a wage cut % 10.1% 10.0% 9.9% 9.8% 9.7% 9.6% 9.5% 9.4% % Total amount of derivatives (left axis) Derivatives to GDP ratio (right axis)

20 6. Remarks Graziani s approach allows us to point out that: The creation of bank money is a both historical and logical necessary condition to start the production process While it is usually neglected by mainstream economics, class divide is a fundamental feature of capitalist society Workers do not control means of production, i.e. investment and production decisions are taken autonomously by the ruling class (capitalists or rentiers) Clearing banks are linked with, but different from, other financial intermediaries: they are different economic units with different functions in the monetary circuit While the analysis of financialisation requires an extension / improvement of the basic TMC scheme, TMC s pillars still look rather sound

21 School LUBS of something FACULTY Economics OF Division OTHER Thank You