Swiss sovereign money referendum
from Lars Syll
The people behind the proposal in Switzerland are effectively trying to get gold back into the monetary system.
This is an extremely bad idea.
Eighty-seven years ago Keynes could congratulate Great Britain on finally having got rid of the biggest ”barbarous relic” of his time – the gold standard. He lamented that advocates of the ancient standard do not observe how remote it now is from the spirit and the requirement of the age … [T]he long age of Commodity Money has at last passed away before the age of Representative Money. Gold has ceased to be a coin, a hoard, a tangible claim to wealth … It has become a much more abstract thing – just a standard of value; and it only keeps this nominal status by being handed round from time to time in quite small quantities amongst a group of Central Banks.
Ending the use of fiat money guaranteed by promises for currencies once more backed by gold is not the way out of the present economic crisis. Far from being the sole prophylactic against the alleged problems of fiat money, as the “gold bugs” maintain, a return to gold would only make things far worse. So yours truly – just as Keynes did – most certainly reject any proposals for restoring the gold standard.
The “gold bugs” seem to forget that we actually have tried the gold standard before – in the era more or less between 1870 and 1930 – and with disastrous results!
Implementing a new gold standard today would only lead to a generally falling price level. Sounds great? If you think so, read what Keynes wrote already eighty years ago in Essays in Persuasion:
Of course, a fall in prices, which is the the same thing as a rise in the value of claims on money, means that real wealth is transferred from the debtor in favour of the creditor, so that a larger proportion of the real assets is represented by the claims of the depositor, and a smaller proportion belongs to the nominal owner of the asset who has borrowed in order to buy.
Allowing this debt deflation process – the analysis of which was later developed by Irving Fisher and Hyman Minsky – would land us in a situation where output and wages would fall and unemployment and the real burden of debt would increase. The only winners would probably be banks and financial institutes.
So why would anyone want to reinstate a gold standard? The best surmise is probably that it’s a question of ideology and politics. Libertarians and market fundamentalists that advocate a return to gold, want to restrict the possibilities of governments to intervene in the economy and – even harder than with “independent” central banks – force countries to pursue restrictive economic policies that at all costs keep inflation down.
Still not convinced of why a return to gold is a bad idea? Then, at least, remember what Keynes wrote in The Economic Consequences of Mr Churchill (1925):
We stand midway between two theories of economic society. The one theory maintains that wages should be fixed by reference to what is ’fair’ and ’reasonable’ as between classes. The other theory – the theory of the economic juggernaut – is that wages should be settled by economic pressure, otherwise called ’hard facts’, and that our vast machine should crash along, with regard only to its equilibrium as a whole, and without attention to the chance consequences of the journey to individual groups. The gold standard, with its dependence on pure chance, its faith in the ’automatic adjustments’, and its general regardlessness of social detail, is an essential emblem and idol of those who sit in the top tier of the machine. I think that they are immensely rash… in their comfortable belief that nothing really serious ever happens. Nine times out of ten, nothing really does happen–merely a little distress to individuals or to groups. But we run a risk of the tenth time (and stupid into the bargain), if we continue to apply the principles of an economics, which was worked out on the hypothesis of laissez-faire and free competition, to a society which is rapidly abandoning these hypotheses.
So, next time you want to come up with some new idea on how to solve our economic problems with a magic gold bullet, remember new economic thinking starts with reading old books! Why not start with the best there are – those written by John Maynard Keynes.
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I have been following Positive Money for some years now. They do not advocate a gold standard nor have I seen any evidence that the Vollgeld movement in Switzerland wants that either.
What they would say is that money should be created by the state(via the treasury and central bank ). There would NOT be a fixed amount of money in circulation since this level would be adjusted according to the demands in the economy at any given time. This would, therefore, be a flexible money supply. It is nothing like the gold standard, which does indeed have far to a limiting effect on money and quite rightly was dropped many decades ago.
Agreed.
I am of the same opinion. The above critique of the Swiss sovereign money initiative is completely misdirected.
One step forward – revoke the legislated privileges for private for profit banks.
Two steps backward- go on gold standard.
Why not go two steps forward: revoke the privilege of issuing new currency while allowing banks to borrow directly from the Central Bank.
This will correct the systemic flaw without impeding the flow.
May I rephrase your comment ; “So, next time you want to come up with some new idea on how to solve our economic problems with a magic gold bullet, remember new economic thinking starts with reading old books! Why not start with the best …” ever written, “The Role Of Money” by Frederick Soddy.
“There never was an idea stated
that woke men out of their stupid indifference
but its originator was spoken of as a crank.”
— Oliver Wendell Holmes, Sr.
(1809-1894) American Poet
.*** BUT, why not read and challenge a Noble Laureate for Physics and challenge ? ******Excerpt from http://en.wikipedia.org/wiki/Frederick_Soddy
“In four books written from 1921 to 1934, Soddy carried on a “quixotic campaign for a radical restructuring of global monetary relationships”[this quote needs a citation], offering a perspective on economics rooted in physics—the laws of thermodynamics, in particular—and was “roundly dismissed as a crank”[this quote needs a citation]. While most of his proposals – “to abandon the gold standard, let international exchange rates float, use federal surpluses and deficits as macroeconomic policy tools that could counter cyclical trends, and establish bureaus of economic statistics (including a consumer price index) in order to facilitate this effort” – are now conventional practice, his critique of fractional-reserve banking still “remains outside the bounds of conventional wisdom”[this quote needs a citation]. Soddy wrote that financial debts grew exponentially at compound interest…”
“Why not go two steps forward: revoke the privilege of issuing new currency while allowing banks to borrow directly from the Central Bank.” Revoking the money creation rights of commercial banks is exactly what Vollgeld / Sovereign Money does!!!!
As to “allowing banks to borrow direct from the CB”, Vollgeld is basically the same as the existing bank system in that banks borrow from households and non-bank firms. The only difference is that equity (or similar) funds loans, not instant access deposits. Positive Money do suggest some “borrowing from CBs” might be desirable, but personally I’d rather leave borrowing and lending to market forces: i.e. have commercial banks as intermediaries between savers and borrowers.
The idea that Vollgeld / Sovereign Money equals the gold standard is total and complete nonsense. For a start, Vollgeld advocates are happy with a 2% inflation target. In contrast, the price of gold (whether under the gold standard or not) may well not change in price all that much relative to other goods over the long term. E.g. the price of bread in Britain in 1910 was the same as was over a century earlier, in 1800.
Secondly, under Vollgeld there is no “debt deflation”, as Syll suggests. What happens is that government and central bank create and spend enough money into the economy each year to bring full employment, plus whatever inflation target is desired (e.g. 2%).
The plan is not about gold. The video explains quite clearly that they want to eliminate the ability of banks to create money by balance sheet operations and instead require that they store and distribute 100% central bank reserves. Also known as positive money or the Chicago Plan.
The immediate effect of this is to make banks safer. Today, money and banks are inseparable, so if a bank fails as a business and goes bankrupt the money disappears. With this proposal, the bank can fail and the money will still be held by the central bank, I guess. The bank is just an intermediary.
This is not the only way to make banks safe. A simpler way would be to pass laws where, when a bank fails, the business and the managers and all that disappears but the balance sheet containing the money and loans is immediately nationalized.
As for the systemic effect of the change depends on the central bank’s intentions. Today, a private bank decides to make a loan by itself, if it thinks it’ll be profitable. With the change, the bank will either have to attract savings (of existing money) or will have to ask the central bank to create reserves. What will the central bank do?
And here’s the rub. If the central bank has a policy or belief to keep the amount of money fixed, it’ll be exactly like gold with all the regressive disadvantages and maybe that’s what Lars is assuming. If instead the Swiss central bank correctly measures assets and transient goods in the real economy and creates money to match, it’ll work great. What will they do? I’ve no knowledge of Swiss monetary ideology to be able to comment. I just hope it’s different from the Austrians :)
Does Lars or anyone else know from the past conduct and ideology of the Swiss central bank if they’re likely to pursue a gold standard or Keynesian path?
That’s a great idea to nationalise the balance sheet of any failed bank. I would even suggest that at least one commercial bank should be government owned at all times, as an instrument of interest rates control via competition.
Perhaps because I am not an ivory tower theorist or academic but simply an un educated peasant with a wide range of experience in the real world, your comments June 8,2018 at 12:34 am make perfect sense to me.Ted.
Interesting that the economist interviewed in the video (Prof Joe Mitchell, University of Bristol) said right at the end of the interview that he disagreed with Positive Money’s solution to the problem of monetary booms and busts — which is to strip banks of their ability to create new deposit money. Unfortunately he was not allowed to give the reasons for his disagreement before the interview concluded.
here is part 2 https://www.youtube.com/watch?v=2v3PgR6Jp04
Hello Mr.Syll,
I am a stundent of Educational Sciences at the University of Munich, Germany and looking for interview participants for a mini-research project.
The interview will be held over skype and will be about communication in online communities, and especially about pauses in the online communication.
I would like to ask you a few questions about the way you see the communication in this online community.
It will only take about 30 minutes.
Your participation would be anonymous and voluntary.
If you should feel uncomfortable for any reasons, you can quit at any time without any consequences.
The interview contents will only be used for academic research, no third parties will have access to it.
I would be grateful for your participaton and to hear from you soon.
Please note the movements backwards and forwards of the First ever non-UK central bank manager and his current location and position.
One must repeat oneself, but briefly not to insult anyone’s intelligence: at times of “crises”, the only temporary movements belong to the permanent, tried, tested and seasoned managers of central banks or similar institutions in charge of monetary systems.
Once the dust settles/the bubble bursts, the cycle will be repeated with plenty of hands-on experience left behind or near by for perhaps younger and/or more energetic managers from some appropriate place. Spot on, while the previous manager will take on an “advisory” role, or a back seat to relax and tell us all about their memories, their achievements while in office, their joys and regrets, dishing out a brand new “nth Way” as a new manifesto for decent money laundering/bond management/ethical investment all combined, offering the readers the best choices available to the best of their vast global knowledge, boring anyone who has read a single decent classic novel to death.
Come on! Honestly, there are better books to read, most of them children’s books.
A suggestion for Lars Syll: how about retracting what you’ve written and apologizing to your readers for the blatant misrepresentation of the facts – as most of those who have already commented pointed out?
I generally greatly appreciate Lars’ analyses and more generally, the rwer blogs, they are usually spot-on. But here Lars went completely off-track. The classic way of trying to defeat a new idea (or in this case, a revived idea): make up a bunk argument that does not at all represent what is proposed, and then attack that. It’s worse than what I have read from many more genuine opponents.
Though I don’t think Lars’ wrote this with such malicious intent: more probably, you did not properly inform yourself? Please do, start by reading the Positive Money documentation. And then comment – at a later stage. But first, retract.
Why does it matter? Because monetary reform along the lines proposed by Positive Money and Vollgeld is the only way for society to address its global environmental and social challenges. Without taking back the right to create money, debt-free, the state will be unable to finance the trainsition to an ecologically sustainable and socially equitable society. For more details, check http://new-economics.info/our-money-the-book/.
It is true that the proposal is not put forward in terms of gold-backing, but I would still argue that the basic logic behind ‘Vollgeld’ proposals have always been the same as that behind the proposals for ‘100% money’ or any kind of ‘gold standard.’
The basic logic behind the gold standard is to have a (rock-)solid backing for the value of money issued by the state and thus, avoid inflation. The basic logic behind the Vollgeld and other monetary proposals is to take away the power and privilege to create money from private banks, and give back it back to the State. This will allow the State to create money to serve the needs of society and the public at large instead of those of a small group of bank shareholders and managers. It will also allow the creation of debt-free money, thus greatly reducing public and private indebtedness. And the profit made on money creation, of seigniorage, goes to society as a whole and again, not a small group of bank shareholders and managers.
There are many additional benefits, such as a much more stable economy. I hope you’ll see fit to take a look at the literature, for a quick-read overview see the Our Money booklet.
I have now had an opportunity to look at part 1 and part 2 of the interview with Prof Joe Mitchell and he his account has reinforced my previous impression that many Positive Money advocates have a poor understanding of how virtually all monetary systems operate. In particular they do not understand that payment of the interest component of a bank loan (to the lending bank) does not require the creation of additional new money in order to accommodate that payment. And that is because interest is a flow, not a stock. All of the interest extracted from the money supply for the interest payment is effectively restored to the money supply, by a variety of routes. The mechanics of how those routes operate is well understood — it’s not rocket science.
“All of the interest extracted from the money supply for the interest payment is effectively restored to the money supply, by a variety of routes.”
This is not true even under the most ideal circumstances or conjectures. Money pooling, rentiering, ever rising depreciation costs, and numerous other moment to moment extractions of the flow of money from the economy like re-investment of savings and profit back into the economy introduce time lags/flows and flows of additional costs to the economy. Add to this the increasingly disruptive and erosive effects on aggregate demand of technological innovation and AI and also the entirely obvious outsized revenue of the business model of finance and it should be obvious that the only actual solution to the mess of the current paradigm of Debt Only is the new financial, monetary and economic paradigm of Direct and Reciprocal Monetary Gifting.
Positive Money’s idea of returning monetary sovereignty to the state is an essential first step. Then one needs to find the policy means of thoroughly integrating Monetary Gifting into the economic system, and finally recognizing the concept/ethic/zeitgeist behind even the new paradigm so as to have a sufficient ethical guide for the continuance of the new paradigm and for curbing the vices inherent in the old one.
Make the trailing end of the final sentence, “so as to have a sufficient ethical guide for the continuance of the new paradigm and for curbing both the private and public vices inherent in the old one.
The time lags are irrelevant, because the monetary flows are virtually continuous across the entire economy. The end result being that there are no ongoing lags or “additional costs”. Moreover, direct monetary “gifting” already occurs within every economy for which the central government is a monetary sovereign. That “gifting” is more commonly known as the injection of net financial assets into the real economy, and it occurs via deficit spending. Deficit spending – as the secular trend – is absolutely essential if the private sector is to have the means (i.e.is to have a surplus) for the purposes of spending, saving and investing. It is sad to see Positive Money supporting the debt virus hypothesis, which has been thoroughly debunked by those orthodox and heterodox economists of every persuasion who possess some in-depth knowledge of banking and financial economics. As the creators of retail deposit money, banks have no need for such money and do not store it. Bank financial assets are not money, but consist of the bank’s retail loan securities, reserves (exchange settlement funds) and financial investments (mostly Treasury securities). None of these make up any part of M1 — the form of money used by non-banks for transactions.
Here’s a suggestion for, or rather an appeal to Economic reform, Craig, and Lars: keep your eye on the ball. Don’t deviate into opaque and dubious reasoning on relatively minor, theoretical issues, with that typical economist arrogance marked by patronizing comments and claims to absolute truth (“it is sad to see” and “it has been thoroughly debunked”). Instead, look at and analyze the various major shortcomings of and problems with our current monetary system, and think constructively about ways how to fix them. If you haven’t done so yet, at least approach constructively well-thought out and elaborated proposals by organizations such as Positive Money, rather than brushing them off with highly doubtful reasoning that claims implicitly to be the absolute truth but is nothing of the kind. And remember that in economics the only reasonable claim of something having been debunked is that of economics itself. As the record shows economics is little more than an ideologically tinted faith that has failed as a science, with the scale of its failures being matched only by the condescension of its practitioners.
Here’s an even better suggestion for Frans to consider. We seem to be in agreement that “economics is little more than an ideologically tinted faith that has failed as a science”. However this does not mean that economics can never become a science. The rigorous application of scientific methodology and logical reasoning would go a long way towards making this happen. Unfortunately many within the Positive Money movement do not appear to possess the ability to undertake such processes, nor do they possess the in-depth knowledge of accounting principles, financial dynamics or banking that would be required for making sense of the current array of destructive banking practices, and the role of private banks as an essential component of the neo-liberal agenda.
Not sure what you mean by the “Positive Money movement”? Are you referring to the monetary reform movement overall, with organizations in a range of countries? Or are you referring to the British monetary reform organization Positive Money (www.positivemoney.org)? If the latter, you are the first person I encounter to judge this organization so negatively, and I wonder what you base your judgement on. Many well-known financial experts / economists take their proposals seriously, as does the Bank of England, with which there is close cooperation. The former director of Positive Money, Ben Dyson, now works there.
As to the in-depth knowledge of accounting principles, financial dynamics or banking that would be required for making sense of the current array of destructive banking practices, I can’t judge to what extent PM staff has this. I certainly do not have it. But that does not mean I can’t analyze and judge the outcomes of the present system. Compare it to nuclear energy: we don’t need to have in-depth knowledge of how nuclear power plants work to make an assessment of the pro’s and con’s of nuclear energy, and on the basis of that assessment, form an opinion on whether we want nuclear energy or not. Likewise with the financial system.
So what’s your suggestion, Economicreform? The “rigorous application of scientific methodology and logical reasoning” you suggest should, if done properly, lead to the conclusion that economics will have to rebuilt from the ground up. Great. But in the meantime we’re stuck with a financial system that will lead us to financial, economic, ecological and social disaster. We better start working on that.
The real distinction and significance that is not being comprehended in economics and monetary theory is the actual moment to moment problem lies in the scarcity ratio of total INDIVIDUAL INCOMES to total costs/prices NOT TOTAL MONEY in the system, and that finding an integrative economic way to invert and transform that ratio is not only key to fixing the problem but to creating the new paradigm.
Thanks for your detailed response Frans. In answer to your questions: 1. The term “Positive Money movement” does not refer to monetary reformers overall (far from it). It refers to PM (UK) and its various PM affiliates. 2. I am not the first person to criticize PM for its errors of both fact and judgement — others, including various heterodox economists, have done so. 3. My judgement is based on my understanding of economic principles, accounting principles, and a long-standing interest in financial and banking dynamics. 4. It is difficult to entertain PM’s proposals seriously when they persist in displaying their ignorance of banking fundamentals, including apparently a belief in the debt virus hypothesis. 5. The fact that Ben Dyson might happen to work at the BoE is irrelevant. 6. My suggestion is that one cannot rebuild the financial system without a thorough understanding of how it works – based on rational principles and logical reasoning – as well as an understanding of the dysfunctionality of mainstream economics.
Also, the trick is to try to be continually open, affirming and integrative about economic reforms. As I have said here I agree with 99% of what the heterodox economists say here. My problem is they do not seem to be aware of how to implement their largely accurate critiques.
Double entry bookkeeping being the underlying moment to moment micro-economic infrastructure for all commerce, the sales/macro-economic aggregation points throughout the entirety of the economy and also a digital system where equal debits and credits sum to zero makes it the perfect system and means for inverting and transforming the above seeming problematic monetary and economic ratio with the discount/rebate policies I have posted here, and makes their temporal monetary and economic effects simple, elegant and powerful. Once you see it and how it cuts through all of the correctly identified complexity of the economy the normal reaction is…how did I not see this? The answer of course is if you do not look in the right place and think economically….you do not perceive and recognize solutions.
To economic reform: I am not sure where you obtained the idea that PM entertains the debt virus hypothesis. In fact, I’m not familiar with the concept, so I googled it, and got all of 276 hits – so I believe I may be pardoned for my ignorance, in this case anyway.
Again, whether PM believes in this hypothesis or not is of less relevance. And again: let’s focus on the ball. PM indicates that with the present monetary system too much money is created in boom periods – exuberant optimism – resulting at some point in yet another crisis. Whereas in bust periods, after the crisis, when more money is needed, banks create too little. Public money creation by the state would solve that problem. And that’s only one of the advantages. Also, creating money as debt and charging interest on it makes economic growth an imperative. But with finite (natural) resources we can’t grow forever – we’re already crossing our ecological boundaries on a huge scale.
But here is the important point. Let’s assume you are right, and there are certain issues PM does not understand or gets wrong. Then again I suggest not to discard all of their ideas and throw out the child with the bathwater, as you are doing. Let’s try to improve things rather than just criticize from the sidelines. If you think PM’s proposals have merit, shortcomings and all, and are worthy of further consideration, elaboration, and at some point, implementation, then help correct the weak points. And if not, come up with an alternative. Or is your alternative to blunder on with the present system?
To Frans Doorman: I would suggest taking a look at the criticism of PM – and in particular its misconceptions about interest flows – by Prof Joe Mitchell, who is an excellent economist (although even he has a few things only half right, but he is far better in his understanding of banking dynamics than most other economists). The link to the interview of him is: https://www.youtube.com/watch?v=2v3PgR6Jp04
…just a reminder that today the 10 of June, the Swiss vote on this issue… none of the major political parties has given the Vollgeld a nation wide positive recommendation but the political fractions in the cantons have. Interesting as well is, that the pro and contra voices go right across the political spectrum…
here is the site https://www.vollgeld-initiative.ch/ in several languages
As long as money is foremost a unit of account, a “no-thing”, it cannot also be a “thing”. Policy-making in terms of one concept rules out coherency in the other. Keynes was wrong too. For an underlying philosophical argument, however concise, read at least the closing comments of my paper “Marx_Debunked” on my website. Blockchain technology, as indicated in the post following, will be the way to solve the economic problem; but with government-run crypto-currencies, while outlawing all others.
Vince Thorne on June 8, 2018 at 6.04 am: Thanks for the link.
So Jo Michell is at his age a PROFESSOR and the best he can do is to deny the Positive Money cyclic model is correct in order to avoid the issues of production and consumption with his exposition of the standard micro-founded macro input-output model? This is not only leaves out all the real facts but is deceptive in that it suggests the people inputting are the same as those receiving the output, which is the point at issue.
Though the Positive Money diagram Michell produces is more correct than his, the curious fact is that it doesn’t account for where the money comes from, nor where the interest goes. Nor does it parallel wages with produce and consumption with scarcity creating markets.
If one parallels interest by loans going in the opposite direction, then the key to the profitability of banks is that rate of point is that loans and repayments cost them virtually nothing so the interest is (as the PM diagram suggests) virtually pure profit. So what happens to it? A little gets “banked” (i.e. saved rather than spent in the current economic cycle) but so much of it gets “spent” on investments in other types of “financial assets” like stocks, shares and rentable property that it inflates their prices; the increase in monetary circulation in these markets reduces circulation in the market for real goods to such an extent that it is now down to about 3% of the total circulating. No wonder CityBank could advise its customers that they could ignore the real market.
The snag of course is that this is a classic Ponzi scheme, and despite what Michell would have us believe (that the system would have failed by now if it were), confidence in it has repeatedly collapsed in its weakest sectors when compared with gold and even with the elastic measure of central bank reserves. I am disappointed that economicreformer has been taken in by Michell. Though a macro economy accounts for everything, that doesn’t mean it consists of homogeneous and continuous flows or even that it is like a braided river. At a minimum the parallelism in its circuitry is more like that of a Wheatstone Bridge. Add control of the monetary control system and you have another such circuit. Add the realisation that what is circulating is not a thing called money but exchanges of information in terms of a unit of account about credits and debts conveyed by diverse monetary tokens, and it becomes obvious one can be both mistaken as to directions of flow and deliberately misled by lies.
A pity the Swiss voted so conclusively against the Positive Money recommendation. Government control cannot be the answer, however, when governments recruit and promote bankers through a revolving door.
If you want something doing, do it yourself? That’s what happens with an intelligently used credit card. We create our own money as and when needed, but debts incurred by our spending are accounted for, so the incentive is to spend no more than we need and on average, less than the credit we receive for having worked or sold goods. Monthly repayments are conventionally interest free, which could be extended to large-scale purchases so long as the agreed repayments are on time. Interest would then reduce to a fine as a disincentive to unjustifiable late payment. People working together earn their share of the production or service company’s credit and resources, so the whole “shadow economy” could in effect be replaced by cooperatives. High achievers will earn higher credit limits.
The sums work out and (more importantly) the necessary work (including study) is automatically financed without either banking or government intervention. We already have the accounting system and governments simply needs to establish the appropriate “constitutional conventions”: the way we do things in our system, like drive on the right side of the road. What we still don’t have is people here engaging with this seriously enough to discuss it so they can grow used to seeing its possibilities.
Where the money comes from is no secret, and neither is what happens to the interest. Like virtually all of the debt virus advocates, davetaylor does not understand monetary dynamics. The increase in bank equity derived from interest payments to banks goes entirely into bank spending, payments to bank shareholders, interest payments to bank depositors, government tax obligations, purchase of investments (including Treasury securities), salaries and bonuses of employees, other overheads, etc etc. In all of these cases, the deposit money (credit money) removed from the real economy by each interest payment is restored to the real economy within an accounting cycle via these routes. Banks do not store credit money. Note also in this regard that bank financial assets (and also bank equity) are not money, at least not the form of money that is used within the non-bank sector of the economy. I can elaborate on all of this if anyone is interested.
Where the money comes from is NOW no secret, though how to profit from other people’s misfortunes goes back to biblical times. Sure bank money gets distributed to the already fortunate, with a little trickling down in the form of pensions etc, and of course economicnonreformer can choose to think of shares in other people’s debts as non-money rather than non-productive wealth. I’m not myself a Humpty Dumpty. My aim is to find an interpretation of words which generates the right motivation, so that we don’t continue destroying each other and the viability of the world we live in.
As for the slander claiming that I do not understanding monetary dynamics, I’ve worked with dynamic systems for 65 years, and feel it much more likely that economicnonreformer is still misunderstanding them by thinking statically, i.e. of inputs and outputs – rather than the channels in which streams run; parallel and interactive circuits, varying distributions of flow densities, the information they convey and the effect of safety valves like central bank reserve requirements reducing not only share values but thereby monetary circulation through trade and communal enterprise, with nominal creditors able to corner any compensation. As a believer in crediting people with their own value rather than indebting them for using our surplus, I don’t entirely agree with Richard Murphy; but what he says about debt rules affecting government creation of money is very relevant to this discussion.
https://braveneweurope.com/richard-murphy-modern-monetary-theory-economics-for-an-economy-focussed-on-meeting-the-needs-of-most-people
Davetaylor1 has either missed my point or is deliberately obfuscating. Whatever the truth of that matter, I will amplify what I said previously: commercial bank financial assets are some combination of retail loan securities, investment securities, and banking reserves (exchange settlement funds). None of these are money as used by the non-bank sector, and therefore they make up no part of M1. The increase in equity (bank capital) occurring as a result of loan interest payments is temporary and rapidly disappears via the routes already mentioned accompanied by an increase in deposit money (newly-created bank credit money). The routes by which this occurs include bank spending, new bank investments, interest payments, shareholder dividends, tax payments, staff salaries and bonuses, etc etc.
Even the small portion of bank income usually designated as “retained income” or “retained profits” largely takes the form of secure financial investments, often purchased from securities dealers. The dealer might have purchased it from another dealer. Pursuing the sequence of such buying and selling by various dealers, one arrives ultimately at a first transaction in which a dealer purchased a newly created security from either (a) a corporation, (b) a federal government agency, (c) the central bank in association with its open market operations. In some of these transactions, reserves were returned to the government or the central bank.
And in particular, the purchase of Treasury securities securities may be subdivided into those that are purchased directly from Treasury and those that are purchased from a securities dealer. Direct Treasury purchases immediately free up government fiscal space, which facilitates government spending into the non-bank private sector (limited only by the necessity to constrain undue inflationary pressures). Purchase from a dealer enables that dealer to purchase other securities from another source, with the intention of making a profit from the interest margin. In addition, a certain fraction of these assets also will be purchased by the central bank, as part of its open market operations. In practice a sequence of borrowing and lending operations by security dealers occurs, providing each dealer in the chain with substantial income, and the money thus obtained will be largely spent into the real economy in order to accommodate the dealer’s living costs.
The important consequence of all this is that, one way or another, the purchase and repurchase of these financial assets facilitates the flow of money through the real (productive) economy, rather than having that money removed, or saved/stored in some way.
That is correct. With multiplier and trickle down effects that circulate the other way around. Upwards.