ABSTRACT
The direction of the arrows in Table 11.1 is important. The process analysis in Chapters 5 and 6 (particularly in Figure 6.1) shows that it is the funding decisions of firms (or, more generally, of wealth managers) between bank loans and equity issues that determines the stock of credit-money that must then be held by households (or, more generally, by savers) at any moment in time. Households, of course, have their own liquidity preferences, and so the funding decisions of firms may lead to a greater stock of credit-money than households are willing to hold in their portfolios. In the two-asset model ofthis book, any excess supply of money must be matched by an excess demand for equities, and this excess demand will cause equity prices to rise. All writers on this subject are agreed to this point of the analysis. As Howells (1995b; 1997) and Arestis and Howells (1996; 1999) have recently summarised, the standard finance analysis then continues as follows. 2 Assuming that future returns are held constant, an increase in the price of equities reduces their yield, which therefore reduces the interest rate spreads between equities and bank loans, and between equities and bank deposits. Everything else staying the same, this should encourage firms to reduce the proportion of their
Table 11.1 Credit-money as 'intermediated capital'
Loans~ Advances~ Deposits ~ Money Capital Wealth
Equities -------------.~ Equities
capital funded by bank loans (since equity issues are now relatively cheaper), and should encourage households to increase their demand for credit-money (since equity returns are now relatively lower), until balance between supply and demand is restored.
