Nick Rowe: Has an Incomplete Theory of money

Nick: Here is my general theory: when the central bank buys something, with central bank money, the money supply expands, because whoever sold them that something now holds extra money. Done. It does not matter whether the central bank buys a bond, or a computer, or whatever. Hell, it could just give the money away to its favourite charity (helicopter money), and the result would be the same.

The complete theory of money deliveries the equations of steady state flow of cash relative to the central bank.  Money is neither created nor destroyed until we have the complete flow, and Nick does not provide both ends of the flow.

Here is the correct theory of money:

   In the steady state, the government owned fiat monopoly banker earns a net gain for its capital owner, the government.  That total gain to the government, plus increases in bank expenses, are the amount of money created. If the central bank mostly loses money to the economy, including all seigniorage and expenses, then the government exits the monopoly fiat business fairly quickly..

This model includes all the boundary conditions, and  includes seigniorage, as a profit, and handles the steady state result. Nick barely got half way there.  What are the boundary conditions?

Can the central bank lose money to the economy and still gain from seigniorage? Yes they can, for a while.  In fact, on net, in a growing economy they will lose money on trades; and gain all of that back, plus expenses and profit from the seigniorage account. As Uncle Milt would say, the purpose of the central bank is to misplace about 3% of GDP each year.  The money has to be lost, off the books, having no counterbalancing liabilities; for it to be created.

How can a monopoly fiat bank create or destroy money reliably? Central bank lending is profitable, money leaves the economy; central bank borrowing is not profitable, money moves to the economy.

The whole issue came up because, as we all know, when the central bank dominates a bank lending sector, it then earns lots of money from the economy from the monopoly effect.  The monopoly bank thus forces banks out of the industry. The general result is a continuing drain from the economy to Congress, and that is disinflationary. All the data we have seen supports this theory.