Home > Uncategorized > Our dysfunctional monetary system (3 graphs)

Our dysfunctional monetary system (3 graphs)

from Steve Keen

The great tragedy of the global economic malaise is that it is caused by a shortage of something that is essentially costless to produce: money.

Both banks and governments can produce money at physically trivial costs. Banks create money by creating a loan, and the establishment costs of a loan are miniscule compared to the value of the money created by it—of the order of $3 for every $100 created.

Governments create money by running a deficit—by spending more on the public than they get back from the public in taxes. As inefficient as government might be, that process too costs a tiny amount, compared to the amount of money generated by the deficit itself.

But despite how easy the money creation process is, in the aftermath to the 2008 crisis, both banks and governments are doing a lousy job of producing the money the public needs, for two very different reasons.

Banks aren’t creating money now because they created too much of it in the past. The booms that preceded the crisis were fuelled by a wave of bank-debt-financed speculation on some useful products (the telecommunications infrastructure of the internet, the DotCom firms that survived the DotCom bubble) and much rubbish (the Liar Loans that are the focus of The Big Short). That lending drove private debt levels to an all-time high across the OECD: the average private debt level is now of the order of 150% of GDP, whereas it was around 60% of GDP in the “Golden Age of Capitalism” during the 1950s and 1960s—see Figure 1.

Figure 1: The private debt mountain that has submerged commerce


In the aftermath of the Subprime bubble, credit-money creation has come to a standstill across the OECD. In the period from 1955 till 1975, credit grew at 8.7% per year in the United States; from 1975 till 2008, it grew at 8% per year; since 2008, it has grown at an average of just 1.5% per year. The same pattern is repeated across the OECD—see Figure 2. Globally, China is the only major country with booming credit growth right now, but that will come crashing down (this probably has already started), and for the same reason as in the West: too much credit-based money has been created already in a speculative bubble.

Figure 2: Credit growth is anaemic now, and will remains so as it has in Japan for 25 years


Japan, of course, got mired in this private debt trap long before the rest of the world succumbed. As Figure 1 shows, its private debt bubble peaked in 1995, and since then it’s had either weak or negative credit growth, so that its private debt to GDP level is now in the middle of the global pack. Economic growth there has come to a standstill since: Japan’s economy grew at an average of 5.4% a year in real terms from 1965 till 1990, when its crisis began; since then, it has grown at a mere 0.4% a year.

That gives us a simple way to perform a “what if?”. What if the rest of the OECD is as ineffective at escaping from the private debt trap as Japan has been? Then the best case scenario for global credit growth is that it will match what has happened since Japan “hit the credit wall” in 1990.

We can guess at that by shifting Japan’s credit growth data forward 18 years, since its crisis began in 1990 while the rest of the world landed in the trap in 2008. Figure 3 shows the result of that exercise—here measuring credit growth as a percentage of GDP—and that predicts an average growth of credit from now till 2035 of 0.5% of GDP a year.

It’s worse still when you consider that most of Japan’s post-crisis credit growth occurred in the first half decade or so after its crisis. Take those early post-crisis years out, and the average rate of growth of credit in Japan has been minus 3 percent of GDP a year. Rather than adding to the money supply, banks have been reducing it for the last 20 years.

Figure 3: Predicting future OECD credit growth on the basis of Japan’s record for the last 18 years.

What about governments? Here we run into a problem with ideology—and bad metaphors. Inspired by visions of a no-government, free market idyll, conservative politicians from Reagan and Thatcher on have promoted restraints on government spending, in the hope that slashing government expenditure will allow the more efficient and dynamic private sector to fill the void. So the pressure has been on to reduce the size of the government sector, to avoid running deficits, and preferably to run surpluses, on the argument that the government is “like a household” and should “live within its means”.

This vision would be all very well if we lived in a barter-based economy, but we don’t. In such an economy, exchanges could occur in kind—your pigs for my computers. But in the real world in which we live, trading pigs for computers—or anything else—requires money. And a government deficit, when it is financed by the Central Bank buying Treasury Bonds, is the other way that money is created. The fetish for small government and budget surpluses means that the government has ignored this task, and effectively abrogated money creation to the private banking sector.

This strategy had no obvious negative consequences while the private banks were on a credit-money-creation binge—as they were effectively from the end of WWII till 2008. But once private debt began to dwarf GDP and the growth of credit slowed to a trickle, the inherent stupidity of this policy became apparent. In their attempt to promote the private sector, conservative proponents of small government are actually strangling it.

As someone who spent 2 years warning about this crisis before it happened, and another 8 years diagnosing it (and proposing remedies that would, I believe, be effective, if only banks and governments together would implement them), I find this dual idiocy incredibly frustrating.

Rather than understanding the real cause of the crisis, we’ve seen the symptom—rising public debt—paraded as its cause. Rather than effective remedies, we’ve had inane policies like QE, which purport to solve the crisis by inflating asset prices when inflated asset prices were one of the symptoms of the bubble that caused the crisis. We’ve seen Central Banks pump up private bank reserves in the belief that this will encourage more bank lending when (a) there’s too much bank debt already and (b) banks physically can’t lend out reserves.

How much longer can governments (and banks) continue with failed policies?

On Japan’s record, the answer appears to be “indefinitely”. Japan’s latest inane attempt to reflate its economy was announced just last week: it will now charge negative interest rates on the excess reserves that Japanese banks now hold in their accounts at the Central Bank. The only direct impact of this policy will be to drive up asset prices yet again—and it might even lead to private banks increasing interest rates on loans to the private sector, as has happened in Switzerland. The net effect on the real economy will at best be trivial, and it will do naught to reduce Japan’s private debt burden, which is the nub of its stagnationist problem.

We are hostage to a dysfunctional monetary system, run by people who don’t understand how it works in the first place. No wonder the global economy is in the doldrums, and finance markets are having dyspeptic attacks.

  1. February 9, 2016 at 2:10 pm

    “The great tragedy of the global economic malaise is that it is caused by a shortage of something that is essentially costless to produce: money.” Nonsense. With all respect to Keen and a long tradition including Marx, Withers, Schumpeter, Keynes (on an off-day), Rowbotham, Dyson, Huber and countless others, he – and they – are mistaken. Money is not a product with zero production costs but a record of obligations – economic obligations as opposed to, for example, religious, moral, or familial obligations – and you cannot manufacture these out of nothing. Nor do the commercial banks manufacture such obligations out of nothing. See my campaign to end the myth of private money creation by banks at http://www.jnani.org/money.

    • antireifier
      February 9, 2016 at 3:31 pm

      In your article (referring to Mike Ralph King’s link) you ask “We can sum this up in a single key question that Positive Money needs to answer: If banks create money, why is it that they have to rent it from their depositors?”

      They are required by law to do so in most countries. It perpetuates the very useful myth that banks provide a simple intermediary function to which you seem to be subscribing. They loan out much more money than they rent from depositors so actually don’t “have to rent it from their depositors.” Historical factors that are numerous. Psychological marketing factors.

      It strikes me you suffer from what Galbraith described below and you have harnessed your energy and intelligence in favour of defending yourself against cognitive dissonance created by the mind being repelled:

      ““The process by which banks create money is so simple that the mind is repelled. Where something so important is involved, a deeper mystery seems only decent.”

      John Kenneth Galbraith born October 15, 1908 in Dutton a Scottish settlement in Ontario.

      It strikes me Mike Ralph King that you cannot tolerate the anxiety induced by facing that there is no “deeper mystery” so you deny money creation by the banks.

      • March 10, 2016 at 3:29 pm

        Your point is good however banks do make money via interest on the seigniorage of real money. As John Kenneth Galbraith observed, banks are the only business that must spend money before they get it. Also, if money is what the government accepts for payment of taxes then banks do create money via loans because you can borrow from a bank (ie get a loan) to pay your taxes. Some people avoid the confusion by designating cash as “settlement money” and the bank loans as “bank money.” That said, it is still obvious that CBs are an artifact of the “gold is money” era and do not fit into the age of fiat money.

  2. graccibros
    February 9, 2016 at 3:09 pm

    Hi Steve. I have to chuckle over the timing of this piece. I had just spent about an hour at dinner two days ago explaining to a Hillary Clinton supporter, a refugee from Alabama, the basics of modern monetary theory and L. Randall Wray’s book (of that title), which I again picked up last night to re-read and low and behold, there you were in the Introduction.

    My greatest worry in American politics is that the Right is so far ahead of the left in matters of propagandizing their version of political economy.

    So thanks for this, very much. As Democrats congratulate themselves over the “high level policy” debates they are conducting, does anyone at this blog remember either candidate or anyone from the press even remotely approaching the rather basic economic “building blocks” you cover in this primer? I don’t but I may have had the sound turned off.

    I’m a Sanders supporter, but not uncritical; I just did a post at the Daily Kos yesterday urging him to go “deeper” into the history of left…because I fear that despite many of his policies moving in the right direction, on federal fiscal policy, where the Fed will not tread, he hasn’t addressed the policies you cover here, the monetary side.

  3. antireifier
    February 9, 2016 at 3:11 pm

    This article reminded me of a quote from a professor of economics more than 20 years ago.

    “As every environmentalist knows, over the last few centuries we humans have created an ecologically unsustainable industrial economy. Unless we radically reform our way of doing things and create a sustainable economic system we are doomed to suffer drastic changes.
    “What most environmentalists – and indeed most economists – do not know is that over the last few centuries we humans have also created an economically unsustainable financial system. Unless we radically reform this financial system it will recurringly break down and thwart our efforts to heal this planet.
    “Our current financial system diverts us from our real problems to ask: ‘where is the money going to come from?’ This should be the least of our worries. As long as we have vast unmet human needs and idle human and nonhuman resources … finance should never be allowed to stand in the way of doing what must be done.
    “Could anything be more insane than for the human race to die out because we ‘couldn’t afford’ to save ourselves.”

    Dr. John Hargrove Hotson, Emeritus Professor of Economics, University of Waterloo and co-founder of COMER. 1993 [25-1-1930 to 21-1qq1996]

  4. graccibros
    February 9, 2016 at 3:34 pm

    This discussion, if not the graphs, also remind me of the lectures I heard in the wake of the 2008-2009 crisis by Richard Koo, who emphasized the erratic stop-go pattern of Japanese governmental budget policy, eerily resembling FDR’s ambivalent attitude toward debt and deficits, the inheritance from the 19th century economic moorings that Karl Polanyi so eloquently discusses in the “Great Transformation.” We are still caught in the confusions Polanyi focuses in on in the responses of Western Gov’t of all ideological stripes as they faced the bewildering circumstances of the collapse of all their inherited assumptions.

    Steve, what I know less about is your thinking on labor and wage policies…anytime you would want to do a post on that…I’m looking forward to it.

  5. graccibros
    February 9, 2016 at 5:59 pm

    Of course, more details from all parties here, economists especially, to enlighten the lay folk, about the multipliers and limits governing how much banks can loan out depending on the deposits they take it, also the current miniscule, laughable interest they pay on deposits (CD’s being just one type) compared to the free reign they are given for charging for credit card debt…and other types of loans they make.

    This huge gap – between high teens to low twenties interest on credit card debt – versus interest/rent paid to depositors below 1% in most cases – (can you hear the chorus from the economic establishment just about now lamenting the nation’s low savings rate…never heard the two facets I’m discussing here mentioned in the saving’s sermons, and I do mean sermons) doesn’t seem to have surfaced in our elections…would be logical coming from Sanders, no?

    Could any “sound money” (borrowing a term from the Best Men of the gold standard 19th century policies) men from the Republican Right ever mention the gaps and authorities granted the private sector in these basic matters…? Ah well, its just one of the mal-facts of basic life for the average citizen. No reason to lose sleep over it.

    What am I going to raise next: contemporary usury rates and the Religious Right’s silence?

  6. Peretz
    February 9, 2016 at 7:57 pm

    Jusque dans les années 70, l’argent était tiré du Trésor public, « ex nihilo » selon les besoins du moment, bien qu’avec le contrôle du Parlement. Mais trop facilement au gré des banques, qui estimaient, à juste titre, qu’augmenter la masse monétaire en circulation de cette façon engendrait l’inflation honnie pour tout prêteur qui voit la valeur de ses créances s’amenuiser avec le temps. Les prêteurs savent que cela fait baisser la valeur de l’argent prêté. D’où des lois empêchant l’Etat français de battre monnaie à son gré, en laissant ce soin aux banquiers, qui créent depuis ces sommes en circulation, assorti cette fois d’intérêts, censés être un frein à trop de facilité.
    Depuis cette date les banques ont pris le pouvoir sur l’Etat en le laissant s’endetter comme devant, mais cette fois dans leur propre…intérêt ! Cette technique s’est généralisé avec les traités européens qui ont fait adopter une directive équivalente pour les pays membres de l’U.E. Les banques ont réussi à persuader que l’inflation était toujours malsaine pour la population, ce qui est faux. Comme le démontre la période des trente glorieuses Le lobby bancaire a réussi à persuader les dirigeants qu’il fallait supprimer la « planche à billets », L’Etat, obligé de payer des intérêts devait ainsi se montrer raisonnable dans ses dépenses. Cette technique s’est généralisée avec les traités européens.
    La technique austéritaire récemment imposée par les banques à la Grèce, a été adoptée en France dans les années 75 avec toujours cet objectif déflationniste. La BCE a été créée officiellement dans ce but grâce au traité de Maastricht. Dans ces conditions, où l’argent scriptural est totalement virtuel, où seule l’acceptation de règles conventionnelles uniquement basées sur des chiffres, permet des maniements libérés de toutes contraintes au niveau des Etats. D’où les crises par l’inflation cette fois des dettes qui agissent comme des compensations à l’augmentation de liquidités dues à l’activité économique.
    Ce système est le contraire du système keynésien précédent qui veut lui, augmenter les dépenses de l’Etat, seule façon de créer la croissance alors que l’austérité la diminue, avec comme conséquence évidente le chômage de masse et la montée des inégalités.

    Sorry about non translating this french text. I hope you all will be able to do better than me.

  7. Hepion
    February 10, 2016 at 4:46 am

    Debts have been growing for a long time. Other side of the coin is that assets have also been growing. Although it complicates the analysis, it kinda makes no sense to talk about one without the other. After all, private debts could not be growing without the wealth growth, and seem to follow it, especially housing wealth.

    • February 11, 2016 at 4:18 pm

      I agree with Hepion. That loans are exactly equal to deposits is a simple empirical fact (see below), regardless of which way we believe causality flows. Because of this neither the endogenous money nor the loanable funds model are complete. You could say that Keen and Krugman were both right – or both wrong – but either way theory still has a long way to go to account for the data.

  8. February 10, 2016 at 12:39 pm

    First of all antireifier is mistaken when he says of banks that “They loan out much more money than they rent from depositors.” The correct view, as an accounting entity, is that “deposits + equity capital = loans”, where equity capital comprises a range of instruments including bonds and shares.

    If we graph deposits and loans in the form of M4 and M4L for the BoE UK MFI sector, then the difference between loans and deposits is not that big, and comprises equity capital (or “net other assets” in BoE terminology). To obtain the precise accounting identity the BoE stats run like this: M4 + net other assets = M4 lending + (net foreign currency lending to private sector + net lending to public sector (including coin) + net lending to non-residents), or LPQAUYM + (LPQVZNA + LPQVZNB) = LPQVQKQ + (LPQVWZR + LPQVWZO + LPQVWZX). (A similar exercise can be run with Fed stats.)

    We can consider the various sight deposits and time deposits that make up what we lump together as ‘deposits’ as no different in their ultimate nature to the instruments that make up ‘equity capital’ – they are all monies that customers entrust to banks in return for either interest, dividends, coupon, or services in kind. All have different risk-return characteristics that’s all. Hence it is correct to say, as Krugman holds and as Hepion points out above, that “loans = savings”. Of course, an identity does not say anything about the flow of causality, but that is dealt with in my paper: http://www.jnani.org/money/papers/King%20-%20Why%20Positive%20Money%20is%20Wrong.pdf

    Secondly, let’s consider the claim by graccibros that interest charged on loans is far greater than interest paid on deposits. Certainly, if you pick instruments to suit your argument as he does, it looks convincing. But if you consider interest charged across all instruments against interest paid across all instruments you get a different picture. If one graphs the total interest charged and paid by the UK MFIs, according to BoE statistics (from Table B3.2), one you will see that the gap is nothing like as big as graccibros claims: that the average ratio of interest paid to interest earned from 2004-2014 is 73%. From the remaining sum all other overheads have to be paid by banks, leaving pre-tax profits at an average for the period of 7.8% of interest received.

    Hence I think my question stands: If banks create money, why is it that they have to rent it from their depositors?

    Finally references have been made to MMT by graccibros. When Keen says “Governments create money by running a deficit—by spending more on the public than they get back from the public in taxes” he is reciting a mantra of MMT which I believe, again, to be nonsense. I would be interested to know what you all think, therefore, of Huber’s thorough critique of MMT in “Modern Money Theory and New Currency Theory” in real-world economics review issue 66.

    • February 11, 2016 at 1:31 pm

      You’ve got the timing backwards. Banks don’t do this:
      Welcome depositors -> Collect $100 deposit -> Offer loans -> Make $100 loan

      They do it in the opposite order:
      Offer loans -> Make $100 loan and $100 deposit for same person

      The overwhelming majority of bank activity is they don’t collect deposits. They create deposits. When you sign up for $100 loan the bank creates $100 out of nothing and gives it to you, that’s a deposit, and you’re obligated to pay the bank $100, that’s a loan.

      As others have said, banks do accept deposits for historical and cultural reasons but it’s an inconvenience for them if anything (because they have to invest it). Deposits do not fund banks. Loans do.

    • d_h
      February 13, 2016 at 1:02 am

      Mike, how do you respond to this Bank Of England piece, which to me appears to contradict what you believe.

      Click to access qb14q1prereleasemoneycreation.pdf

    • February 14, 2016 at 3:00 am

      Mike Ralph King: I looked at your site a while ago; you are rather closer to MMT, which is an “obligation analysis”, than you think – as shown by your rejection of “positive” or “debt-free” money Huber’s MMT critique is confused; I can try to give a rebuttal from an MMT point of view on any particular point of it.

      If one denies that banks create money, then one simply is not using the word “money” as it is usually used, as it is historically used. Bank money is not the same thing as state money, and banks cannot create state money, but bank money is most money used today.

      While common or standard academic usage should not be followed slavishly, especially when it embodies incoherent concepts and thinking, it shouldn’t be ignored either.

      • February 14, 2016 at 8:00 pm

        Calgacus: it worked! Firstly on Huber, I would be most interested to see your rebuttal of his critique of MMT. Perhaps we can do this at the end of the comment thread on his paper at https://rwer.wordpress.com/comments-on-rwer-issue-no-66/modern-money-theory-and-new-currency-theory/ If you post it there I’ll look out for it and reply there.

        On using the term “money” I follow Withers’ (1909) distinction between money as cash and money as loans, which I carefully elaborate on in my paper (http://www.jnani.org/money/papers/King%20-%20Why%20Positive%20Money%20is%20Wrong.pdf):

        “The essential difference between them is that the holder of cash is the only party involved and when a purchase is made obligations are settled immediately. The BoE puts it this way: ‘… when a banknote changes hands, a transfer of value takes place with immediate settlement finality.’ (Fish and Whymark 2015:2) In contrast loans always involve two counterparties and when a purchase is made with a loan, although the purchase transaction itself may have ‘settlement finality’, there remain outstanding obligations to repay the loan.”

        Fish, T. and Whymark, R. (2015). ‘How has cash usage evolved in recent decades? What might drive demand in the future?’ Bank of England Quarterly Bulletin, London: Bank of England, Q3
        Withers, H. (1909). The Meaning of Money. New York: E. P. Dutton.

      • February 15, 2016 at 11:22 pm

        Huber’s paper is long – give me a particular criticism & I’ll say why it’s wrong there. :-) Describing your ideas as “obligation analysis” is one thing that prompted me to reply. A good description of core MMT, which is stubbornly nothing but that,

        Common usage & dictionaries are better – academically, intellectually, logically better than nearly any other source of definitions. A very few philosophers & MMT / creditary fellow travelers and antecedents are the only exception. Almost everyone else focuses on the wrong features & quickly descends to patent falsehoods, whose patentness is obscured by the morass of uninteresting detail on these irrelevant features. The best sources are Alfred Mitchell-Innes papers above all, and the volume on him with contributions from Wray, Kelton, Henry, Ingham, Gardiner, Hudson etc.

        The essential difference between them is that the holder of cash is the only party involved

        False. If cash means state money, like dollar bills, then there are two parties involved. The holder & the state. There are always 2 parties involved, because money is debt is credit is an entirely immaterial social relationship between two moral agents, and absolutely nothing else.

        Therefore cash payments are NOT final settlements, the BoE etc is just plain wrong. Cash is penultimate settlement. Ultimate settlement is when the holder holds no cash and owes nothing to the state, having used all his dough to pay his taxes or buy stuff from the state ( the first is a case of the second.)

        MMT etc is just saying completely trivial and “obvious” things. They’re important to say clearly because almost everyone else gets them quite wrong.

      • February 21, 2016 at 9:14 pm

        IF as Calgacus says, “Bank money is not the same thing as state money, and banks cannot create state money, but bank money is most money used today.” How is it that this “non-state money “can not ever be distinguished between already deposited money when it is “deposited”. Surely there is no difference or ability to see it is counterfeit when it is used to purchase anything just like the “coined legal tender.”
        One needs only to understand, when bans make “loan deposits” they are creating a second owner for that amount of already owned money.

      • February 24, 2016 at 6:12 am

        How is it that this “non-state money “can not ever be distinguished between already deposited money when it is “deposited”. non-state= bank money can be distinguished easily from state money – the simplest case is when you have a dollar bill (state money) & an old-fashioned bank note in your pocket. You can deposit the dollar bill in a bank. It is a meaningful act.

        But you can’t deposit the bank-note in the bank – because it is already a deposit in the bank. Doing this is as meaningless as changing your account number at a bank. But this doesn’t make bank money meaningless or counterfeit. Correspondingly, you can “deposit” a bank check at the Fed, for instance. But you can’t meaningfully deposit a dollar bill at the Fed, because it already is a deposit at the Fed – that’s why reserve requirements for banks tot up the Fed reserves it has plus the vault cash. (They’re just the same as two reserve accounts with different account numbers.)

        The problem is non-MMT, non-creditary economists make very basic errors about what money is, and are constantly tying themselves in knots & saying things that happen every day are impossible or meaningless – & vice versa. They don’t look at how ordinary usage, standard dictionaries and careful philosophers understand these things – in a coherent and “scientific” way.

        But the way that most specialists in economics, finance & even accounting understand these things is not coherent. The economists are about as scientific at the foundations of their subject as fortunetellers & psychics. Accountants do things right, but at least according to Geoffrey Gardiner, hardly any out of millions know why they’re doing what they’re doing.

    • Michael Kowalik
      February 20, 2016 at 12:36 am

      “If banks create money, why is it that they have to rent it from their depositors?”

      Deposit balances on the books of the bank are a liability for the bank. Banks need only ‘reserves’, which currently constitute about 3% of total liabilities, at least in Australia.

      But attracting deposits is still, to a degree, necessary. Despite being a liability, electronic deposits generally constitute also a claim on the reserves of some other bank, if the deposited amount was created as a loan originating in another bank. The whole idea is to avoid ‘deposit account balances’ being withdrawn in cash while keeping in sync with other banks so that outflows of reserves in interbank settlements can be kept to a minimum. Interbank settlements must ‘roughly’ offset one another in order for the system to function on minimal reserves, what allows for the maximum leverage of the reserves. Banks do essentially work together on this but still try different things to out-do one another without compromising the mutually beneficial structure.

      But it is a fair objection as to where are those amazing profits if banks create 97% of the means of payment and charge interest on it. Actually, the reported (taxable) profits attributable to the banks are only a smaller fraction of total profits, and the larger fraction is distributed to wholesale bond holders and is written off as costs. These bond holders are the real owners of the banks, or perhaps offshore subsidiaries of the same banks used to conceal most of the profits. These ‘costs of funding’ by far outweigh any plausible amount of rent payable on 3% reserves.

      • February 20, 2016 at 9:12 am

        I don’t know about Australia but figures from the Bank of England show that interest paid by private banks on deposits averages about 73% of interest earned on loans, hardly negligible. For example in 2007 interest ‘receivable’ was £352bn, while interest ‘payable’ was £310bn (Table B 3.2). If endogenous theory claims that banks don’t need deposits, then on the basis of these huge costs you would think they would have found some way of getting rid of them by now. No, deposits in all forms are the deferred spending power that is always a little greater than, and stands behind, loan-engendered spending power.

        By the way I would assume that interest payable includes coupon to bond holders.

        Also unsure why you talk about ‘rent payable’ on reserves, um, these are assets of the private banks which currently EARN interest, not liabilities on which banks PAY interest. Or are you considering the case of negative interest rates on reserves, which certainly would be an additional cost for banks?

    • Michael Kowalik
      February 20, 2016 at 12:32 pm

      It is my understanding that if a bank has insufficient reserves to meet its overnight settlement obligations with other banks it needs to borrow (or pay interest on the outstanding balance) at the Interbank Overnight Cash Rate (IBOC), hence the (positive) ‘rent’ reference. And this is precisely the reason why attracting customer deposits plays an important part: most deposits constitute a liability on the deposit-taking bank but also a claim against the bank from whom the deposit has originated. Since customer deposits attract interest which is a fraction of IBOC, attracting deposits is a cost effective way to offset obligations to other banks. But once the respective claims and liabilities are offset following a transfer, deposits are a liability for the deposit taking bank. They cannot be invested or re-lent by the bank because these are amounts that bank does not have but owes: it is the bank’s debt to the deposit-account holder and you cannot incest your own debt to someone else.

      So yes, deposits matter in that sense. They allow banks to perpetually roll-over their debt to customers without ever having to cash it out in full (which is off course impossible, since 3% monetary base cannot pay 97% of liabilities), and that is the essence of fractional reserve banking and the associated broad monetary expansion. But it is also an infringement on monetary sovereignty of the state, in that banks benefit from the sovereign prerogative over the issuance (and sometimes from the destruction) of the means of payment. The banks get significant seigniorage from this monetary expansion (they can use their own credit to fund real asset purchases, as R Werner has shown) but its primary source of profit is the interest charged on these newly generated (even if temporary) means of payment. But I’m digressing…

      BTW, 73% sound plausible only if all ‘costs of borrowing’, including coupons, are included. But let’s look at some estimates. If a bank has $100 of mortgage and business credit assets on the books (earning on average 6% interest), $100 of deposits/liabilities (costing on average 1.7% interest), $4.5 dollars of reserves which we can assume are not owned but borrowed (conservatively, at 6% percent interest), $0.3 equity in real estate, plant and equipment, and operating expenses of $2, then we can calculate the rate of return on equity of $0.3. The Net profit is $2: so the return on equity is 666%. Not bad for an intermediary…

      (I have used current figures of a real major bank for the operating expenses, real estate plant and equipment, reserves, as a proportion of their value of loans)

      • February 21, 2016 at 10:05 am

        I have now persuaded even Ben Dyson of Positive Money that private banks don’t make any seigniorage, and as a result he has taken down a post asserting that on the PM website and promised to rewrite his book. Here is the reason banks don’t make seigniorage:

        If the sovereign creates £1m money with negligible costs it makes £1m seigniorage (though practice since WW2 is to LEND that seigniorage at interest, netting, for example, the UK sovereign about 0.3% of fiscal budget (prior to QE) on coins and notes). If a private bank creates £1m money with negligible costs as a bank asset, i.e. loan that will be repaid, it necessarily entails a bank liability in the account of the borrower. When the loan is repaid money is destroyed, the bank making money on interest and fees of course, but nothing remains of the £1m, and there is no further interest . However when the lending that sovereign seigniorage has purchased is repaid (matures) the sovereign is £1m in profit again (normally rolled over of course for further interest). These are utterly different mechanisms with utterly different outcomes and only one of them should be dignified with the term ‘seigniorage’.

    • Michael Kowalik
      February 21, 2016 at 11:37 am

      That’s mostly correct but misses two essential points.

      1. When a bank issues credit to itself (yes, it is possible, just like writing a cheque to itself, a practice which is governed under the Cheques Act in Australia and I presume that a very similar Act is in force in the UK) it never needs to repay that ‘loan’ but simply roll it over until complete devaluation via inflation. There are limitations to this process since the funds thus generated and spent still become liability for the bank. But since liabilities are never meant to be cashed out beyond 3% of their nominal value this allows plenty of elbow room for the bank to self-finance. Hence seigniorage is present, and probably nets as much as the sovereign seigniorage purely on account of the value of the bank issued financial assets compared to the value of M0 monetary expansion. The ratio is roughly 30:1, so few percent of credit to self can be perpetually accommodated by the bank portfolio especially if it is invested in capital that qualifies under BASEL capital requirements. Richard Werner published a couple of papers on this process, and I hope more detailed work is yet to come.

      2. Even though individual loans are indeed paid off and the associated means of payment are erased, the accrual of positive interest on the established ‘loans’ guarantees demand for (systemically) ever increasing loans. so even though individual loans are paid off the loans portfolio is systemically guaranteed (short of systemic collapse or bankruptcy) to perpetually expand rather than be erased. This in turn guarantees that the bank’s liabilities associated with spending of credit issued to itself will be, in time, devalued and thus effectively, but imperceptibly the most, discharged by the bank customers. The bank still retains the assets/capita acquired by means of such self-funding operations.

      But nothing beats the 666% return on bare bones equity accomplished by means of interest charged on temporary funds generated via credit expansion. The banks therefore don’t really need seigniorage to make amazing profits, just like they don’t need to delay interbank EFTs to save few million pa, but all these tricks are something extra that competing bank managers can do to outdo one another in serving their masters, and they laugh at us because so few people even notice.

      • February 21, 2016 at 12:30 pm

        Which Werner papers? If you mean “How do banks create money, and why can other firms not do the same?” (2014) then his Barclays example is spurious.

        But on your first point: if a bank ‘writes a cheque to itself’ it will pay interest to itself, so that cancels out. If it spends it on anything, whether physical or financial assets, then it loses reserves. Put it another way: unless you can back this up with Fed or BoE stats it remains mere speculation for me. Similarly I have no idea what this 666% return on equity means or where in central bank stats you find empirical support for it.

        However we do seem to be agreed that banks, however huge their profits are, do not generate seigniorage.

    • Michael Kowalik
      February 21, 2016 at 6:56 pm

      Yes, I meant that paper. If you are disputing the facts that Werner alleges then I cannot make a better evidential case myself. But I have not seen a refutation of this example either. What does Werner have to say about this?

      But regarding loosing reserves, that is precisely the point of fractional reserve banking that the amount of reserves ‘lost’ is only a tiny fraction of the nominal amount of the fund generated by the bank. So that point is not correct if you mean a 1:1 relationship. All the bank must do is to pay some interest, if any, on the full amount of the same funds being re-deposited. If the interest paid on deposits is lower than the rate of inflation (normally the case) then the bank still gains something out of this exercise of the kind of value that can be described as seigniorage, but I am not too attached to this definition if the associated gains are accounted for otherwise.

      Regarding the 666% return on equity, this is based on figures obtained from the latest financial report of Natuonal Australia Bank, and normalised the figures against the loans value. I used wighted interest rates that currently prevail in Australia for unsecured business lending and mortgage credit, and for current deposits and long term or incentive deposits. So these figures are quite solid. I am assuming that reserves are not equity but are rented and have included interest associated cost for this item at the same rate as for credit. I was surprised that the number came out as 666% which I thought was humorous, but nonetheless representative of the real ratio of ‘bare bones’ equity to profits.

      • February 22, 2016 at 11:47 am

        I hope you don’t mind but I’ll just respond on Werner’s Barclays example for now. I don’t dispute the facts that Werner usefully presents to us, just his interpretation. He is claiming that Barclays created £5.8 bn of new money as bank capital which he explicitly claims is “purchasing power”. It is not. For a start, although the bank’s asset column expanded by £5.8 bn of loans and the liabilities column expanded by the same amount of capital, in no sense is there any money created. That is because the capital is equity capital, which under no money aggregate counts towards broad money, for good reasons. Barclays gained not a single penny of purchasing power, for the simple reason that, unlike when a client buys shares with cash, no net reserves were transferred to its account.

        This transaction is a little like shorting, where both parties are taking a punt on future outcomes. The Gulf client was gambling that Barclays would not go bust, in which case its shares would be worthless but would owe the receiver £5.8 bn. Barclays was gambling that when the time came for repayment of the loan the Gulf client could pay, otherwise it would have toxic assets of £5.8 bn. In the meantime one party paid dividends, the other interest, but beyond that the transaction did not have any impact on the economy – no new spending power for either party of the order of £5.8 bn was created. What Barclays achieved through this paper exercise was a slightly better capital ratio, where an outside party was genuinely shouldering some of its risk. The normal clients of Barclays, had it gone bust, would have been £5.8 bn better off when the Gulf client coughed up.

        Here is the key point: banks never create money in any normal sense of either the word ‘create’ or ‘money’, because (a) they are not the sole causal agent (which is what ‘create’ means) and (b) they do not create new spending power (which is what ‘money’ means if you are not technically informed).

      • February 22, 2016 at 1:36 pm

        You’re referring to the “shadow banking” system which of course is utter folly and the epitome of instability. It must be unwound BETWEEN THE PARTIES INVOLVED, or in the case of pension funds unwound in their favor. If that means a TBTF bank has to go bankrupt and/or go into receivership….so be it. Speculation is one thing, idiocy is quite another.

      • February 22, 2016 at 8:09 pm

        Please, mikeralphking explain: When the bank makes the loan and gives a check to the borrower, why is this “worthless “check accepted anywhere in the world as “legal tender”,
        albeit it was created “from nothing but thin air” ?
        Please check: The difference between ‘Genuine loans vs. Fictitious Loans”.
        A genuine loan withdraws real money from the bank.
        A fictitious loan creates temporary money out of thin air.
        You will get a real kick when you discover that the interest paid back can only be in the form of real money.

    • Michael Kowalik
      February 23, 2016 at 1:10 am

      I think it is only fair for Werner to have an opportunity to respond to your critical interpretation. I strongly suggest to present your thoughts in an article format and publish in a peer reviewed journal. If you are right this should dispel some misconception. But it seems to me that you might be oversimplifying the problem to validate your established belief. What gives me this impression is that you do not pursue the logical consequences of capital creation the above example. I grant that this may be only due to limitations of the present discussion platform, so that is why a paper on the subject might be necessary to convince.

      Regarding your claim that Barclays may have created capital but not purchasing power, I don’t think it is as explicit as that. The banks capacity for creating purchasing power and therefore for earning interest is highly dependent of the capital ratios. While Capital can be leveraged, any credit based purchasing power cannot, so the transfer of purchasing power is not a strict 1:1 between assets and liabilities in this case. The newly generated asset, capital, even though nominally of the same value on the balance sheet, is over 10 times more valuable from the point of view of expanding the banks capacity to issue credit. This is effectively self funding ex nihilo, and if that is not counted in any of the monetary aggregates that is a problem with the definition of aggregates.

      But the more pressing issue arises in the last part of your comment:

      “banks never create money in any normal sense of either the word ‘create’ or ‘money’, because (a) they are not the sole causal agent (which is what ‘create’ means) and (b) they do not create new spending power”

      In point a) you commit a reductionist fallacy. Since ontological relatedness, or being in-the-same-world, implies causal relatedness (things coexist only insofar that they are mutually causally related) a sole causal agent is an ontological impossibility. For example, if you were to assert that you were the sole causal agent in writing you previous comment, you would be committing a performative contradiction, in that you are explicitly addressing, and therefore ‘responding to’, a comment written by me. Nothing in the world is the sole cause or causal agent of anything else, which, according to your definition of ‘create’, implies that nothing is ever created. This is not the sense of ‘create’ that is in either common, economic or legal usage. The bank does create purchasing power by issuing credit, even if it is not the sole causal agent. Otherwise there would be no difference between M0 and M3. One could say that the bank is the dominant causal agent, in that it both creates purchasing power and then misrepresents this creation as a loan. The lender is explicitly made to believe that he is a recipient of a loan, being a 1:1 transfer of purchasing power, so even the causal contribution of the lender is determined by the bank.

      Point be is refuted by the difference between M0 and M3, both of which signify measures of purchasing power, one created only by the central bank, the other including 30 times more purchasing power on account of credit expansion by the banks. Nearly all payment made in the economy utilise the purchasing power created by the banks. You error lies, it seems to me, in the belief that there is a strict transfer of purchasing power between assets and liabilities, but in fact assets (‘loans’) must be repaid with real, unleveraged economic value, like labour, goods or property, while liabilities are never meant to be or can be redeemed in amount greater that, generally, 3%. If there is a ‘run’ on the bank that exceeds the 3% in demands to redeem/withdraw, the banks goes into liquidation (or gets bailed out by appropriating labour and property of others), liabilities are written off (depositors lose their assets) while bond holders, bank managers and CEOs get to keep their past profits, bonuses and assets. It is a system intrinsically geared to instability bracause the cost of insolvency is orders of magnitude lower then the profits obtained from maximum leveraging and systematic deception.

      • February 23, 2016 at 9:22 am

        I did have an email correspondence with Werner where I put the points about the Barclays example, but he did not respond. I will publish in due course and then the proposition that banks can create their own equity capital will be properly debated.

        Equity is properly not included in monetary aggregates because issuing equity results in no liability for the issuer to repay its original value, as does, for example, a bond.

        You are absolutely right of course that equity capital is leveraged about 10:1 in new loan-granting capacity, though in the case of Barclays all it was probably doing was restoring a damaged capital ratio to the regulatory baseline. Where we depart of course is that I don’t agree that banks create new purchasing power when they extend a new loan. That is because deferred spending in the system is always greater than loan spending by the small margin of reserves plus vault cash.

        On causality, all I will say is that my original training was in physics.

  9. February 10, 2016 at 3:54 pm

    Our dysfunctional monetary system (3 graphs).. Steve Keen
    “The great tragedy of the global economic malaise is that it is caused by a shortage of something that is essentially costless to produce: money.
    Both banks and governments can produce money…”

    This one statement being true not only states the “fatal flaw” of Capitalism, it also
    states its solution of how to prevent “monetary collapse.”

    IMHO as “JUSTALUCKYFOOL” an interpretation of SODDYISM:

    “When a honest Central Bank while being the SOLE creator of the sovereign currency functions for the betterment of the community in a capitalistic economy, it will be the greatest system ever devised by mankind.”

    “It is concerned less with the details of particular schemes
    of monetary reform that have been advocated than with the general principles to which, in the
    author’s opinion, every monetary system must at long last conform, if it is to fulfil its proper role
    as the distributive mechanism of society. To allow it to become a source of revenue to private issuers is to create, first, a secret and illicit arm of the government and, last, a rival power strong enough ultimately to overthrow all other forms of government.”
    Frederick Soddy writings, namely “The Role Of Money”
    (Entire book as a free download.) http://archive.org/details/roleofmoney032861mbp

    Thank you to all members of “RWER”, for allowing voices to be heard.

  10. Political Economist
    February 10, 2016 at 6:03 pm

    Great succinct post. Always appreciate Keen’s keen insights. But, regarding “As inefficient as government might be,” I was a littletaken aback. Certainly in the US the government traditionally has done a lot of things well and better than the private sector, like supplying water, or even in terms of deep entrepreneurialism (see M Mazzucato’s THE ENTREPRENEURIAL STATE).

  11. February 11, 2016 at 3:06 pm

    Economies are graphs, as in networks, and economies work when we manage to find loops of value within those graphs: Fred gives Bob a fish, Bob gives Sally bike repairs, Sally gives Fred software. The economy works when these cycles get formed and they are sustainable, meaning that the value recycles and doesn’t accumulate on somebody. That’s really the basic principle of an economy.

    Barter will only find trivial cycles, so we use money to find all the other ones. Money is a token of reciprocity that stands for the cycle closing. This lets two people find their edge on the cycle, and then another two people find their edge and so on using money to proxy for the rest of the loop. When all the edges are made the cycle is formed and at that point money should cancel out.

    It doesn’t matter if you use positive or negative money. In ancient debt-based economies people barter first and ration by their debt second. With coins or positive money people get a lump of money and then shop until they exhaust it. What matters is having enough money to discover the loops, and for the loops to be fair. Fair means people expect to get equal value back, or they accept they’ll get less.

    If there’s not enough money because the people who issue the tokens hold them back then the economy can’t find cycles to connect resources to needs. That’s the liquidity problem you’re describing. Sometimes the token-issuing people are just bone-headed.

    The more common problem is loops of value weren’t equal in the first place, say fish was worth much more than bikes or apps, so Fred is upset he’s been giving out free fish. He’s got all the money and wants people to give him free stuff for a while. That’s a debt overhang caused by trade imbalances.

    Really the only way out is to take it easy and catch fewer fish, or to agree that giving out free fish wasn’t so bad after all. I mean Fred didn’t seem to mind for years, the economic cycle was moving along, and it only became a problem when Fred decided to take score and went “hang on a minute…”

    So yeah, we can take Fred’s money and share it, that’s called taxes, or we can make new money and let it pile up while Fred keeps giving out free fish. That’s called inflation. Either way the essence of a working economy is understanding fairness and free fish.

  12. graccibros
    February 11, 2016 at 8:49 pm

    to Mike Ralph King:

    I’m sorry, MRK, I wasn’t cherry picking, although it might look that way; I don’t have command of the interest paid for those intermediate instruments you cited as balancing the equations more equitably to the banks better fairness “standing.” I chose the instruments that the average citizen uses, and is familiar with, as opposed to what I suspect are the more commercial forms used by larger financial actors. That was a point in itself, I think, that the average citizen is treated more unfairly than the higher end commercial users. By design…or default?

    We have also left out of the discussion, forgive me if I missed it, the rather prominent feature of the 1980’s on…the “carry trade” which, if I understand it, became especially unfair since QE instruments were in full bloom, post Great Financial Crisis, allowed only the largest borrowers; what was the threshold – one or ten million – to borrow from the Fed at under 1% and then chase the much higher returns, perhaps albeit riskier ones, in emerging markets. A pretty simple money maker, but alas, unavailable to middle class families unless I’m missing some collective instruments where they could pool together.

    And then there should be a discussion of the terms available, and at what thresholds, in those murky overnight markets offered by the Fed windows…called “Repo” markets…please explain to our readers what the margin requirements, leverage allowed and instruments accepted evolved from 1995-2008…and maybe where they stand today. Has the average citizen, the little investor ever heard a politician from either of the two parties address the fairness, or not, of Repo? I first learned of the term from a book by the chairman of the religion Department at Columbia University, Mark C. Taylor, who did a pretty good job in describing why mortgage backed derivatives were a house of cards in 2004, just a bit later than Dean Baker and with a different focus, in his “Confidence Games: Money and Markets in a World without Redemption” (yes, well, he’s a post-modern Religion depart. chair, judging from the title and the book). Taylor said the trend in Wall St. speculation, including esp. repos, was aiming for “zero collateral and infinite leverage.” We may have come down a bit from that…but I have to look pretty hard for updates as to what is going on in Repo. Citizen duty, though, I suppose. Any takers?

    • February 13, 2016 at 11:00 am

      Thanks for this graccibros, and I quite agree. You may remember the old banking adage: “3-5-3 – borrow at 3%, lend at 5%, be on the golf course by 3.00.” Empirical data from the BoE suggest that over quite long periods the average aggregate ratio is more like 3% borrowing costs to only 4% interest income, though I think costs here may take into account all of bank overheads. Where we all agree is that when times are good the ratio goes up in favour of the banks and when times are bad the taxpayer bails them out, and that this sorry state of affairs is down to weak regulation.

      On repos – I am not sure that these are particularly evil, being one mechanism by which private banks borrow reserves from the central bank, though of course I agree that the public are faced with far higher rates than banks or shadow banks are. Note of course since QE private banks hold massive reserves and don’t need repos, and as far as I understand the BoE has suspended repos as part of its reserve averaging programme since 2008. I guess it’s the same for the Fed.

      • graccibros
        February 13, 2016 at 4:03 pm

        Thanks for your response MRK. I’ve lost touch with the changes in Repo you’ve noted; when I was following very closely in “The Warnings” period before and in the “wake of” the crash, it was the lowering quality of the collateral the speculators were posting and the leverage they were “inventing” that was worrisome…so I need to do some current homework prompted by your comments…When do we, somewhat – hah – always from outside the innermost loops – ever quite catch up to the “play” of the moment – and boy do I hate that euphemism…I will note that I have a clear sense that whenever US regulations about derivatives is advanced, the banks always plead here that they’ll be hamstrung because Europe – they mean London – will be much looser…and that’s where they’ve run to keep the derivatives game going…so I better take another look in light of your notes about “over there.”

  13. February 13, 2016 at 10:11 am

    This is a reply to Pavlos’s reply to my post of February 10, 2016.

    My point was that loans = deposits across the banking system, to correct the view held by some that banks make more loans than there are deposits. When it comes to causal flow, we all know that there are two sets of schools, the endogenous money schools which Pavlos sums up, and the adequate funds schools. Endogenous money, e.g. Keen, posits that the flow is loans-deposits-loans (L-D-L), while adequate funds, e.g. Krugman, posits deposits-loans-deposits (D-L-D), though more usually framed as L-D vs D-L. I believe both are inadequate to the facts. Krugman is wrong because D-L-D cannot explain broad money growth, and Keen is wrong because L-D-L cannot explain the phenomenon of savings.

    In Keen’s paper ‘Solving the paradox of monetary profits’ (Economics: The Open-Access, Open Assessment E-Journal, Vol. 4, 2010-31, October 28, 2010) Keen makes a fundamental mistake in pursuing his L-D-L theory. He posits a new bank fulfilling the legal requirements for Free Banking (as defined in Bodenhorn 2008), but makes a selective reading of the history of Free Banking in the US as described by Bodenhorn. On p.4 of his paper Keen imagines such a private bank can start business by printing banknotes which it then lends to customers. He then iterates the process whereby this creates deposits, and then further loans are made, i.e. the L-D-L cycle. Unfortunately under Free Banking in the US industry regulation would never permit the printing of notes without corresponding capital in the form of government bonds deposited with the state comptroller, as Bodenhorn tells us. Thus, in real life, the cycle begins with savings – in this case in the form of bonds – after which loans are made, hence a D-L-D cycle.

    However, as I say, neither D-L-D nor L-D-L are adequate models to the data. See my paper at http://www.jnani.org/money/papers/King%20-%20Why%20Positive%20Money%20is%20Wrong.pdf for the resolution to this.

  14. February 13, 2016 at 3:12 pm

    A quick reply to D_H (until someone tells me how I can reply to replies). D_H says “Mike, how do you respond to this Bank Of England piece, which to me appears to contradict what you believe.” I wish I had a dollar, pound or euro for every time this article has been thrown at me! I respond to it in detail in my paper at: http://www.jnani.org/money/papers/King%20-%20Why%20Positive%20Money%20is%20Wrong.pdf. In brief, as the BoE paper says, money is destroyed when loans are repaid, so what matters is whether a loan is spent with a recipient who uses it to (a) repay a loan, in which case no new money is created by the loan, or (b) saves it in which case new money is created, or (c) spends it in which case the next recipient faces the same choices, leaving only (a) or (b) over iterations. In normal times about 90% of loans result in (a), not (b), so we have to ask, how is it that the recipient of loan spending can save in those rare cases? Answer: their inputs cost less than their outputs when in an in-profit situation. Ergo broad money growth is the result of economic growth.

    • February 13, 2016 at 10:57 pm

      What a load of bull, MRK. Historically, broad money growth by reserve banking was the cause of (in the valuable sense of permitting) real growth in the economy in the forms of industrialisation and the building of stately homes. But what happens to the fictitious money (if Steve Keen said “printing banknotes” that was surely just a visualisable figure of speech), claimed to be owned and loaned by the bank that issued it and “earning” interest on long-term investments like homes and public services usually far more in total than the amount repaid? It is spent by the banks not just on running costs but on buying naive or corrupt polticians to hide their fraud behind misleading law, regulation and education; on advertising themselves by impressive buildings and media coverage; and on bankers’ bonuses: usually money-laundered by investment in financial assets, inflating their price and so deflating the value of institutional and pension endowment incomes. So if you mean by economic growth the growth of fictitious money, of course it grows in the banks’ normal in-profit situation, and when the Ponzi scheme fails there are always, as we have seen, friends in high places ready with Quantative Easing.

      But that is not growth of the value of the real economy, to which the Law of Diminishing Returns applies. One can have too much of a good thing, and as of now, in the War against Ecological Self-Destructon, we need fair rationing and maintenance of what we already have, not growth in the production of surplus physical goods.

  15. February 19, 2016 at 12:51 pm

    Keen writes this:

    “Governments create money by running a deficit—by spending more on the public than they get back from the public in taxes. As inefficient as government might be, that process too costs a tiny amount, compared to the amount of money generated by the deficit itself.”

    Let me translate, using language the general public will understand:

    “Governments have to borrow money when running a deficit—which is caused by spending more on the public than they get back from the public in taxes. As inefficient as government might be, that process costs a tiny amount in interest (because interest rates are historically low), compared to the amount of money borrowed to finance the deficit itself.”

    • February 19, 2016 at 8:40 pm

      I would have to guess that you are not aware This low cost for 2016 is just a measly
      $728 BILLION ! IT’S in the budget, a line item as ‘debt service’.

      • February 20, 2016 at 2:03 pm

        I agree! Debt service is not negligible at all. However I was merely paraphrasing Keen, not to suggest that debt servicing is negligible (though it is small of course as he says in proportion to the debt itself), but to highlight how ridiculous is the idea that governments create money by deficit spending. That is of course a MMT fantasy, though if by ‘money’ you mean debt, then of course governments generate debt by going into debt. In other words Keen is saying nothing.

    • February 19, 2016 at 9:09 pm

      I disagree with Keen when you look at the actual amounts transferred to the well-off as interest on the debt as well as the impact on other fiscal spending.

      In Canada the interest alone on the federal debt is the third highest budget item even in a low interest environment because the government does not borrow from the Bank of Canada. In a high interest environment, the amount being transferred to the well-off is even higher and does little or nothing to stimulate the real economy and contributes to the growth in the financial sector. It is also used as justification for austerity measures and not providing people with needed services and programmes. $25.7 billion dollars in the current budget. It matters from whom the government borrows but that seems to be ignored in this discussion.

      The notion prevalent these days that the Bank of Canada should be allowed to operate autonomously from government and that government should be concerned only with fiscal matters where the right-wingers flog the problem of debt for future generations compounds these problems.

      • February 19, 2016 at 10:31 pm

        Herb Wiseman, “In Canada the interest alone on the federal debt is the third highest budget item even in a low interest environment because the government does not borrow from the Bank of Canada. In a high interest environment, the amount being transferred to the well-off is even higher and does little or nothing to stimulate the real economy and contributes to the growth in the financial sector. It is also used as justification for austerity measures and not providing people with needed services and programmes. $25.7 billion dollars in the current budget. It matters from whom the government borrows but that seems to be ignored in this discussion.”
        PEANUTS, my friend. In the 2016 USA budget, the entitlement to the top 10%ers is
        $728 billion ! It is a line item, named “Debt Service” right alone side…Social Security, Medicare, etc.

        Peterson Foundation ‏@pgpfoundation Jan 29
        Over next 10 yrs, net interest costs on #NationalDebt will total $5.8 trillion http://bit.ly/1m0wSHE #AskForAPlan

        IMHO, That will be updated….maybe $8 to $10 trillion.

        Just remember Frederick Soddy predicted this in the 1920’s:
        “It is concerned less with the details of particular schemes
        of monetary reform that have been advocated than with the general principles to which, in the
        author’s opinion, every monetary system must at long last conform, if it is to fulfil its proper role
        as the distributive mechanism of society. To allow it to become a source of revenue to private issuers is to create, first, a secret and illicit arm of the government and, last, a rival power strong enough ultimately to overthrow all other forms of government.”

        Frederick Soddy writings, namely “The Role Of Money”
        (Entire book as a free download… http://archive.org/details/roleofmoney032861mbp

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