Please discuss the money-supply effects of loan defaults?

As professor Keen observes, banks create money into the economy which has the effect of raising demand and driving GDP growth through turnover of money stocks. The money supply will depend on the leverage level defined by new loans minus repayments of principal and interest. It follows that defaults prevent the destruction of money through repayments (less liquidation of collateral). In this way, defaults contribute a large part of the real economy. To date I have seen no analysis to measure this affect, I suspect that many people are being sacrificed through foreclosures (etc) in order to balance the money supply when this role should be undertaken by government printing presses. I would appreciate your thoughts?


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  • published this page in Ask Prof. Wolff 2016-07-13 22:01:45 -0400

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