Abstract
The Central Bank has a balance sheet. The State also has one, as do banks, companies, households, and companies, households, and each of us. Moreover, these balance sheets are all interconnected: every payment is a receipt, and every debt is a claim. The most realistic representation of the economy is perhaps not that of a market, but rather that of a dynamic network of interconnected balance sheets, influenced by accounting conventions, and in which money serves as a unit of account. This chapter begins with a few basic observations about the creation, circulation and destruction of money in the capitalist economy. This serves as a foundation to identify and discuss the key paradoxes of macroeconomic analysis, including the thrift paradox, the debt paradox, the cost paradox, and the public deficit paradox. We then build on this analysis to describe the detailed monetary mechanisms and macroeconomic implications of government net spending, and we derive the conditions for public debt stability. Finally, we discuss the links between the monetary production economy and sustainability.
This is a preview of subscription content, log in via an institution to check access.
Access this chapter
Tax calculation will be finalised at checkout
Purchases are for personal use only
Similar content being viewed by others
Notes
- 1.
In the financial sphere, each transaction is also the subject of two accounting entries that appear simultaneously on the assets and liabilities of the two parties to the exchange. National accounting records them in specific accounting tables (‘accumulation’ accounts) whose main components are stocks, flows, and revaluations. These concepts will be discussed in more detail in Chap. 5.
- 2.
The drafting of a prospectus is mandatory in the European Union for public offerings of more than 8 million euros or for listing on the bond market (https://eur-lex.europa.eu/legal-content/FR/TXT/HTML/?uri=CELEX:32017R1129&from=FR#d1e2740-12-1). The prospectus documents the financial and legal characteristics of the bond (coupon, maturity, nominal value, etc.), as well as the identity of the issuer.
- 3.
This paradox is close to the balance sheet recession recently developed by the American-Taiwanese economist Richard Koo (see video: https://www.youtube.com/watch?v=X_uihzbbBHg).
- 4.
The monetary base refers to the money that has been created by the Central Bank. It includes fiduciary money (banks and banknotes) and the assets of commercial banks at the Central Bank.
- 5.
Public debt is not really passed on to future generations because it takes the form of sovereign bonds whose maturity rarely exceeds 30 years. It would be more accurate to consider the financing of the debt through taxation as an intra-generational transfer of wealth, from the taxpayer to the financial institutions that generally hold these securities. It should also be noted that the debt burden also depends on the value of the currency in which it is denominated.
- 6.
Examples of recent crises caused by rising bad debts include the Asian crisis of 1997–1998, the subprime crisis in 2007–2008, and some European countries during the sovereign debt crisis in 2009–2010 (notably Ireland and Spain).
- 7.
- 8.
- 9.
The rules of coordination between the Treasury and the Central Bank vary, of course, according to the temporary rules that governments write and impose on themselves. The central bank model presented here describes a monetary system in which the central bank can acquire Treasury bills directly. Such a system is currently in force in many countries such as the USA, Canada, Japan, Sweden, the United Kingdom. In the Eurozone the rules are more complicated, but the effect on financial balance sheets is the same. See Ehnts (2017) for an excellent presentation of government securities issuance in the institutional framework of the euro area.
- 10.
In Table 6.3, the price of the Treasury bill is equal to its present value: (100+5)/(1+5%) = 100.
- 11.
One of the reasons why governments generally prefer to issue Treasury bills rather than ‘printing money’ is to avoid flooding the banking system with reserve money (which would make it more difficult to conduct monetary policy). By issuing a Treasury bill, the government drains reserve money out of the economic system and onto the Central Bank’s balance sheet, thus avoiding a fall in interest rates in the interbank market (Wray, 2015).
- 12.
In Capital (1867), Marx uses the expression of money fetishism: capitalism does not desire money for its own sake, but for what it represents (success, power, etc.). Much later, the late Bernard Maris (1946–2015) wrote that “to accumulate money is to accumulate time, which is to say that the search for infinite growth is to strive for eternal life”.
References
Ehnts, D. (2017). Modern Monetary Theory and European Macroeconomics. Routledge International Studies in Money and Banking.
Godley, W., & Lavoie, M. (2012). Monetary Economics. An Integrated Approach to Credit, Money, Income, Production and Wealth (2nd ed.). Palgrave Macmillan.
Wray, R. (2015). Modern Money Theory. A Primer on Macroeconomics for Sovereign Monetary Systems (2nd ed.). Palgrave Macmillan.
Piketty, T. (2014). Capital in the Twenty-First Century (p. 696). Harvard University Press.
Author information
Authors and Affiliations
Corresponding author
Editor information
Editors and Affiliations
Rights and permissions
Copyright information
© 2023 The Author(s), under exclusive license to Springer Nature Switzerland AG
About this chapter
Cite this chapter
Lagoarde-Segot, T. (2023). The Macroeconomy and the Monetary Circuit. In: Lagoarde-Segot, T. (eds) Ecological Money and Finance. Palgrave Macmillan, Cham. https://doi.org/10.1007/978-3-031-14232-1_6
Download citation
DOI: https://doi.org/10.1007/978-3-031-14232-1_6
Published:
Publisher Name: Palgrave Macmillan, Cham
Print ISBN: 978-3-031-14231-4
Online ISBN: 978-3-031-14232-1
eBook Packages: Economics and FinanceEconomics and Finance (R0)