Modern Money Theory and New Currency Theory
Joseph Huber, “Modern Money Theory and New Currency Theory”, real-world economics review, issue no. 66, 13 January 2014, pp. 38-57.
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Real-World Economics Review Blog 
“Weak expert support is a main bottleneck for advancing monetary reform policies.”
Agreed! I venture to add that in order to facilitate public involvement (which is after all the essence of democracy) there is equal need for an advance in the use of plain English.
Don’t wait for the mainstream to do it. You don’t have to be an economist to figure out that it no longer sells information to the public, but much rather sells the public mind to advertisers under the guise of doing the former. Business lobbies love such confusion.
While in this case, I’m sure the target audience has no problem negotiating a paragraph on the multiplier (p. 42) with 153 words in four sentences, I nonetheless take the liberty of proposing a link to “How banks (don’t) work”, based on much of the same research Professor Huber is proposing, but which has undergone several iterations of linguistic de-specialisation.
“The multiplier model has three fundamental flaws:
1.) It implies that banks have to wait for a deposit before they can start making loans. But they don’t.
2.) It assumes that banks always go through with the multiplication. They don’t. No matter how attractive a framework we provide for them, or if we add money at the base. They control the money supply.
3.) This model claims that our money supply cannot grow uncontrollably, because at some point it must reach the tip of the pyramid.”
http://www.banks-need-boundaries.net/how_banks_work.php
“Don’t you agree? – Even if the system were working fine, shouldn’t we still learn at school where money comes from?
Well … the system isn’t working fine, and we don’t learn where money comes from. Maybe those two facts are connected?!”
http://www.banks-need-boundaries.net/education.php
And speaking of that “residual technical remnant of diminishing importance” (the anachronism called cash), look no further than the PR material of the Swiss National Bank to see how unclear language nips in the bud an intelligent debate across all classes.
http://banksneedboundaries.wordpress.com/2013/12/29/2171/
It’s the tower of babel, folks!
QUOTE: “Building upon primary bank credit/deposits, there is secondary on-lending of existing deposits, or investing these, from and among nonbanks, including nonbank financial
institutions such as funds and insurance companies. ”
As usual with such analyses, the author fails to FOLLOW this thread to its logical conclusion and thus misses the ROOT problem that neither MMT nor NCT recognizes. if money is created by a bank as one loan of P and then, entirely disconnected from the loan that created it, the same money is lent again as existing money, how many debts of P exist?
Two!!! 2P of debt < 1P of Principal to pay it with. Both theories just ignore this problem like it doesn't exist.
How much of our money supply is on-lent? About 75% in normal times, 66% during the booming 90's, 81% at the Crash. Not only can I empirically demonstrate correlation, I can explain causation.
http://paulgrignon.netfirms.com/MoneyasDebt/MAD2014/problem5.htm
Paul,
I would like to reply to your point here, but I am not sure what it is.
I take it you agree with Dr. Huber’s analysis about on-lending, but criticize it for typically not following the analysis to the ‘root’ cause, something missed by both MMT and reformers. What is the root cause , please, and what is the solution offered?
To me. You are simply stating the obvious relationship between debt-based money and the monetary economy. Claims, based in money, can exist in much greater quantity than the money that will be available to pay those claims, this causing, first, scarcity, then pain, then collapse.
We are here(*).
So, what?
Money created by government is permanent money, always available for paying its share of the economy, and never used to repay the debt of its creation. No associated debt exists with its issuance. There is no debt to extinguish.
That this money is on-lent seems non-threatening, as someone must give up the use of THAT money, at a lost-opportunity cost to the holder, in order for someone else to borrow THAT money, and the full economic cost is in the money-cost arbitrage.
There is only one ‘current’ claim to the money that is on-lent. The original holder has no claim to that money, and is receiving its rent payment for giving up that claim. When money is created using a sovereign fiat issuance system, it resolves many of the problems caused by debt-issuance based systems.
I think it’s helpful if you discern between problems associated with the present ‘debt-based’ system, and those that you may claim relate to the equity-based system proposed by Dr. Huber.
If I missed something important, please explain.
Thanks.
QUOTE: “Debt money, i.e. the false identity of credit/debt and money, is not a necessity at all. What was true for traditional currencies holds all the more true for modern fiat money, because it can freely be created at discretion by those who are authorized to do so. There is no reason why modern money should not be spent into circulation debt-free by a monetary authority rather than being loaned into circulation as debt money.”
This is the usual daydream from the “debt-free” money crowd. The fiat coin concept of money was enforced by requiring that TAXES BE PAID IN COIN. Imagine that the sovereign simply spends new money every year and never taxes it back. What happens to the value of the sovereign currency? It would devalue would it not? Taxing it back is necessary to retain its value. Thus it is not debt-free at all. It is spent by the sovereign interest-free and without a scheduled repayment to the banking system, both of which I support. However, calling it debt-free is another “confusion”. It is simply taxes spent in advance of collecting them rather than after.
http://www.moneyasdebt.net
Paul,
You give no cause for the currency to devalue other than it is issued by government fiat spending, when, in fact, the value of the currency is determined by its use within the national economy, regardless of who issues it.
There is no debate about whether the government has the power to issue the nation’s money without debt, as Dr Huber has shown is historically the common, and why would the exercise of that power by the government have any differing effect on the value of the currency than if it were created by private banks? Except in a good way.
The use of the money will determine its value in international commerce and finance; there is no difference between the money once it is issued, so what is the argument for falling purchasing power of the money unit?
Political and economic stability?
Thanks.
Quote: “There is no reason why modern money should not be spent into circulation debt-free by a monetary authority..”
Only IF you believe that the fiat currency is NOT exchangeable for goods and services and that right is guaranteed by the sovereignty.
That is the value of the money. All money is debt as it is ‘legal tender’ and exchangeable upon demand.
One should differentiate between “debt-free money” is an oxymoron.
Maybe it should be called “double indebted money” as it is money issue with TWO owners with entitlement of exchange for the same goods and services.
As Frederick Soddy stated in “The Role of Money” (complete free book download- http://archive.org/details/roleofmoney032861mbp )
***Excerpt from pages 62-63***
“Genuine and Fictitious Loans.-For a loan,if it is a genuine loan does not make a deposit, because what the borrower gets the lender GIVES UP, and there is no increase in the quantity of money,but only an alteration in the identity of the individual owners of it. But if the lender gives up nothing at all what the borrower receives is a new issue of money and the quantity is proportionately increased (is a fictitious loan)….”
“These vast sums of money are entirely of the banks creation…When the bank pretends to lend their money they do not reduce the amount of the claims of the owners to goods and services on demand by a …(CENT). They do not inform them that they can no longer draw it out as it has been lent to others! “
Paul, Love your contributions, but have little time to check all the links now. You do realize that there is no reason NOT to double charge (tax us) for “money” created to “pay” for goods & services rendered to We the People – right? In fact & in principle, as long as currency is issued (directly) in direct proportion to goods & services produced, then devaluation, inflation, deflation, recessions, and depressions cannot be orchestrated by clever manipulators (abusing the system & defrauding the little people). Hence, instead of arguing debt-free currency issues, we can re-establish the basis of a nonprofit money system. If humanity is still too immature or delusional to demand truly trustworthy managers of a nonecocidal (non-expoitable) system, then I suggest making each of us the agent of our cultural mint (our community treasury). After all, each of us are the real arbiters of the conceptual value we create at the moment of agreement per each transaction (whether we call it trading, exchange, barter, gifting, receiving, evaluation, or whatever).
Michael, having followed this via the reference to you rather than to Huber’s paper (that’s good, incidentally), I thought this excellent:
“This is not about good and bad people, it is about good and bad habits, ideas, policies, laws, solutions and options. So, this is about the real nature, scope, depth, and mechanics of The Problem, and how to solve it. Nobody is perfect but, no matter how bad our ideas and habits, most of us love our children and would like to do our best for them and ourselves. By facing the challenge with courageous compassion for our children and grandchildren with adequate understanding, skill, and persistence, we can accomplish The Mission, on this planet or elsewhere.
“Remember, if the Fed’s banking system and its debt dollars can survive on trust and deception, a nonprofit, green credit system will thrive on trust and realism”. A line Huber’s paper on new currency theory sadly doesn’t get round to.
I’m reminded of a couple of famous comments by G K Chesterton: “The thing from which England suffers just now more than from any other evil is not the assertion of falsehoods, but the endless and irrepressible repetition of half-truths”; and “That which is large enough for the rich to covet is large enough for the poor to defend”.
“”First off, it means that MMT, contrary to the author’s claim, is not only aware of the fact that money can simply be spend into existence but claims that currency-issuing governments do exactly that.””
First, I never saw where Dr. Huber claimed that MMT was unaware of the money-issuing power.
Second, on the facts and claims……, Correct. But wrong.
The fact is correct….sovereign fiat currency-issuing governments “can simply spend” real money into existence.(See Kucinich HR 2990)
But, sadly, the claim that our GUV does so is fatally flawed.
When did they start doing so?
What changed from the day before they started doing so?
Any policies, procedures or laws?
Are you ABSOLUTELY sure that the GUV does create money when t spends?
If so, please explain from where you learned this important political-economic fact.
If not, please ask someone who does KNOW from where MMTers learned this, and invite him or her aboard.
This obvious error in MMT-speak becomes its achilles heel, because if the GUV is not issuing the money, then all the rest of the MMT construct becomes in NEED of reform to the money system in order to make what is not happening, ‘happen”.
Which, in case you have never noticed, is what we’re after.
Thanks.
This is to Paul Grignon, #75
Paul,
Thanks. I have read and learned very much of and from your wok over the years, including that on your site linked here.
I really do not think that today you have a proper monetary science understanding of the working of the money system, and most especially not about the equity-based (so-called ‘debt-free’) money system advanced today in the AMI and Kucinich proposals.
You apply money-system consequences from credit system machinations. It does not take more money to pay down ‘credit’-debt principal, just more credit, as I indicated above.
You say here the BIG question – which only comes into play in some future sustainable, so-called ‘steady-state’ economy – is this:
“”OK you now have a steady state economy with as you say, no need for new money.
Therefore the government cannot just create more and spend it.
With what does it fund its operations? Taxes, fees, royalties or what?””
Whoa, Paul.
A couple of biggies like a proper definition of steady-state sustainable economy.
For the ecological economists, it means achieving a balanced resource throughput, a difficult row to hoe from our present “externality-externalizing” capitalist model.
Not impossible, but a long way off.
Perhaps you lost the meaning or significance of my earlier comment which said that because all the money in existence was permanent, public utility money, then it always remains available for its same use from year to year. As in….
We have exactly a $15 Trillion economy for three years in a row. Steady-state is achieved.
The government uses $4Trillion of that permanent ‘public utility’ money for public services for each and every one of those years. No problem. Do it again next year. Nobody will never run out of money in a ‘permanent’, public money system, especially not the issuing government.
Paul, you NEED to be able to get out of the debt-based money-think and recognize the real workings of public money. When money is not ‘created and destroyed’ via debt – in order to HAVE money – it ceases to become an impediment to both economic advancement and resource conservation.
Thanks.
Please ignore this comment…….. it was meant for Paul’s comment #76 far below.
Sorry.
dave
please ignore my comment reply, it was meant for tokugawa98 below(I think)
So,
first I am not an economist, so I might have misunderstood things. Second, I got most of my understanding of MMT from Bill Mitchell (http://bilbo.economicoutlook.net/), who might be an outlier in the community, although I’ve found nothing in the writings of Kelton, Wray, Mosler (on http://neweconomicperspectives.org, for instance) that contradicts him.
But with this background, the paper seemed to misrepresent some MMT positions that it criticized, in some cases stating pretty much the opposite of MMT via Mitchell. This is nowhere clearer than in:
“The emphasis is on pointing out that for net government debt in the
public sector there are corresponding net fortunes in the private sector[.]”
The way Mitchell describes it is that for government DEFICITS there are corresponding surpluses in the private sector.
Public “debt”, however, takes the form of riskless interest-bearing assets and can or CANNOT be issued by government. This decision is INDEPENDENT of the decision to perform deficit spending (http://bilbo.economicoutlook.net/blog/?p=26596).
So it seems to me that the author conflates government deficits and public “debt” in the same way that orthodox economists do, assuming that because currently issuance of interesting bearing assets happens together with deficit spending there is a necessary relationship. That this assumption is indeed the case becomes clear when the author refers to the Eurozone countries as “sovereign” even though they can precisely NOT issue their own currency and the entity that can, the ECB, is forbidden from financing Eurozone government spending directly, contrary to the US Federal Reserve (http://bilbo.economicoutlook.net/blog/?p=26596). This conflation is of the Reinhart-Rogoff-type and somewhat surprising to find here.
The effect of this misconception propagates through large parts of the paper:
First off, it means that MMT, contrary to the author’s claim, is not only aware of the fact that money can simply be spend into existence but claims that currency-issuing governments do exactly that.
Second, the relationship the author describes by
“Primary credit and debt creation only happens when government takes up additional debt with banks; and this – it should be noted – happens as long as the banks want it to happen. If banks and bond markets turn thumbs down, the would-be sovereign-money game is over.”
is in fact reversed: It is the GOVERNMENT that decides how many interest-bearing assets to issue and no matter how much the banks pine for such assets, if the government turns thumbs down, the riskless asset game is up. (http://bilbo.economicoutlook.net/blog/?p=17889)
Third, while the author’s description is correct that bond-issuance makes the rich richer (Mitchell uses the phrase “corporate welfare” to describe this), since the bond issuance is voluntary, it is a political decision that is in no way inherent to the functioning of the monetary system. Furthermore, this means that interest payments do not automatically require additional bond issuance, and, since the government can spend money into existence, such payments can be performed independently from the level of taxation (whether they should be performed is once again, a political discussion).
Fourth, and related to this, this means that decisions regarding taxation don’t have anything to do with the ability of the government to spend, but everything with the goal of reducing purchasing power (or not), depending on how close to full capacity the economy is. In fact, this is a point that every MMTler that I’ve ever read never tires of repeating, hence making clear reference to the “anchor of relative” scarcity the authors desires. The “trust in free markets”, and the references to Fama and Hayek that the author ascribes to MMTlers, on the other hand, is not something I have encountered.
What this leaves me, as a reader, with is criticism of the fractional reserve banking system.
I would like to point out that “MMTers today express no less admiration for what they see as a smoothly run and benign system, apparently unimpressed by the long list of dysfunctions of fractional reserve banking that has been drawn by so many scholars over the last two centuries” seems to be another mischaracterization to me. In fact, Mitchell, while taking care to point out that a) these are prescriptive remarks, not descriptive ones, and b) his personal ones and not necessarily representative of the entire MMT community, has repeatedly stated that he sees banks as institutions akin to utilities, which should therefore be publicly managed, and that the speculative parts of current banks should be split off from the savings-and-loans operations. The former would fulfill the desire of the author for money creation in the hand of the government, the latter solve the problem of banks spending money into existence and fueling bubbles. All within the framework of MMT!
Notwithstanding this, I am left with a criticism of fractional reserve banking system. Now it might be true that this system has problems that MMT misses or disregards but since this criticism is deeply entangled with a number of misrepresentations and wrong conclusions, it is pretty much impossible for me to see whether this particular criticism is valid or an artifact of the author’s understanding of MMT like the others.
In bits, from the last.
“”I would like to point out that “MMTers today express no less admiration for what they see as a smoothly run and benign system, “”
………….running so smoothly and benignly that we express no less admiration for the inequities and suffering produced by such a smoothly running and benign system, where the present privileged aristocracy of money-creators rule over everything that is going on on the planet.
MMT has no less admiration for Debt-based money, it is no problem for those creating the debts and collecting the profits, because our economic theory revolves around the accounting identity. What could be wrong with that? You just gotta get on the right side by creating the credits and debts out of nothing. Ask Jamie D.
Sorry, in a sovereign fiat money system, which MMT trys to associate with, that power belongs to the people.
Paras “But with this…….large parts of the paper”….in which a claim is made that Dr Huber ‘misrepresents’ some MMT positions that it criticized, ….”” and noting language from Bilbo p26596 to show the misrepresentation, which is a pretty broad, deep and undeserved criticism.
If I can boil it down it seems to be primarily about a claim of ‘conflation’ between government deficits, of spending over taxation, and governments issuing public debt, in order to obtain proceeds(balances) for spending beyond taxation.
First, a lot of criticism of MMT comes from the varied ways in which its adherents advance various points, it(MMT) being a made-on-the-fly construct of a patchwork of advancing macro-economic ideas and knowledge.
Having said that Bill’s construct that funding deficit balances through public debt-issuance is not a necessary, but a selective, option is pulled from the top echelon of MMT’s brand, that of the ”voluntary constraints’ of the sovereign, currency-issuing government.
While unfortunately somewhat true, and the obvious primary target of reformers, MMT chooses to propose NO solution to this, such as a model legislative remedy that would abolish the GBC “”government budgeting constraint”” for all national economies.
It is now almost four years since Bill advanced this idea at the MMT Counter-conference on Fiscal Sustainability at GWU, to which I asked for a list of all of these “voluntary constraints” so that we could come up with some legislative language to compare to the American Monetary Act proposal.
After four years, for you to make the same, now meaningless, comment, and attempt to offer it as a critique of Dr. Huber’s alleged mis-statement of MMT theory, is a bit insulting. The laundry is out there. Some MMTers think public debt is the next best thing to ice cream.
The REALITY is that every nation has basically the same budgeting constraint, so that budget deficits DO, by law, equal net changes in public debt issuance, plus or minus, and this abhorrent action takes place at the behest of and benefit to the banker (debt-issuing) class, JUST EXACTLY the ‘corporate welfare’ that Dr. Bill also eschews.
Finally, if I may, it is you who fail to understand sovereignty, as do many MMT adherents.
When the EMU sovereign nations gave up their individual right of “monetary autonomy” over to the EMU, which they did, that was an act of monetary sovereignty. Whenever they decide to take it back, that will also be an act of monetary sovereignty. The nation never gives up its ‘sovereignty’ of its money, or it ceases, for all intents and purposes, of existing as an economic democracy.
All Euro nations can wake up tomorrow and restore their monetary autonomy, exactly because they have not given up their sovereignty. Heads up, RMM.
Much to be said about this misinformation of sovereignty, thanks to the work of Dr. Huber.
Hope this isn’t too long for the moderator.
Wait, so because there are “Some MMTers” that are not in the “top echelon” of MMT’s brand, i.e. Kelton, Wray, Mosler, Mitchell etc, and because those people are getting things wrong, Huber is actually correct in misrepresenting MMT positions on
or in other words in parroting everything that the mainstream gets wrong?
tokugawa98
First, within a developing theoretical construct of modern money, there is nothing wrong with having different ideas out there on the nature of money, debt and deficits .
That should be point number one.
Everything is open for discussion.
Perhaps you have a different meaning of ‘conflation’.
If there is a law or rule associated with government finance that associates a GUV’s deficit with the issue of public debt in order to balance that deficit…..PRIOR TO spending, then joining these two is not a conflation. This is a connection.
It is another connection that reformers in this country want to dissociate by adopting Kucinich’s HR 2990 proposal from the 112th Congress.
We agree with Bill in spades about the unnecessary corporate welfare, but we aim to end that by reform, while most MMTers find the entire system rather comforting; nigh onto essential for carrying on modern capitalism..
Bill wants to dissociate that connection by claiming that the government’s budgeting constraint itself is a voluntary action; however ‘voluntary implies the ability to do the opposite….it is not a right of action available to the people without a change to laws and regulations – like driving on the other side of the road.
By failing to recognize the cause of that which you find to be unnecessary and damaging corporate welfare to be part and parcel of the legal structure of the money system itself that we are living under ….while ultimately defending that system to its debt-issuing core, then you are failing to identify the purpose of the position.
So what?
Conflation is associating things that are not connected.
The mainstream connection has some uncontested legitimacy when it comes to why, under the present system, deficits lead to increasing debt.
They are wrong on just about everything else.
In the bankers’ money system, the government issues debt instead of money. And it is only due to MMT major error, claiming that the government DOES issue the money, that this reality does not get to the first page of the MMT construct.
“”First off, it means that MMT, contrary to the author’s claim, is not only aware of the fact that money can simply be spend into existence but claims that currency-issuing governments do exactly that.””
Correct. But wrong.
The fact is correct….sovereign fiat currency-issuing governments “can simply spend” real money into existence.
But, sadly, the claim that our GUV does so is fatally flawed.
When did they start doing so?
What changed from the day before they started doing so?
Any policies, procedures or laws?
Are you ABSOLUTLY sure that the GUV does create money when t spends?
If so, please explain from where you learned this important political-economic fact.
If not, please ask someone who does KNOW from where MMTers learned this, and invite him or her aboard.
This obvious error in MMT-speak becomes its achilles heel, because if the GUV is not issuing the money, then all the rest of the MMT construct becomes in NEED of reform to the money system in order to “make that happen”.
Which, in case you have never noticed, is what we’re after.
Thanks.
Second, the relationship the author describes by
“Primary credit and debt creation only happens when government takes up additional debt with banks; and this – it should be noted – happens as long as the banks want it to happen. If banks and bond markets turn thumbs down, the would-be sovereign-money game is over.”
is in fact reversed:
It is the GOVERNMENT that decides how many interest-bearing assets to issue and no matter how much the banks pine for such assets, if the government turns thumbs down, the riskless asset game is up. (http://bilbo.economicoutlook.net/blog/?p=17889)
It’s just a little unfair to provide a link to one of Dr. Bill’s daily economic postulations as evidence of any point you’re making. YOU make the point, and use a reference from Dr. Bill that is a little more informing than his entire daily blog-posting, which I agree are great, to support your claim.
With reference this one: “”It is the GOVERNMENT that decides how many interest-bearing assets to issue and no matter how much the banks pine for such assets, if the government turns thumbs down, the riskless asset game is up.””
From Bilbo p17889……
“”As an aside to the blog theme and in relation to the ES balances, the RBA noted that:
“Within the Reserve Bank’s monetary policy framework, the supply of ES balances is effectively market-determined. That is, the Reserve Bank stands ready to supply whatever quantity of ES balances is necessary (against eligible collateral) to keep the cash rate trading at the Board’s target.
Which tells you that banks can never run out of reserves in a modern monetary system. The central bank is always able to supply whatever liquidity is deemed necessary by the commercial banks to satisfy the payments system and maintain financial stability. “”
I would say that Dr. Huber’s statement that securities issuance “happens as long as the banks want it to happen.” is really pretty much identical to “”the supply of ES balances is effectively market-determined.”””
You claim that Bill claims that the amount of interest-bearing assets are strictly a government ‘option’, but Bill quotes the regulatory authority that finds that the amount of the issuances are what I would call “money”-market-determined’.
So it sounds like the RBA is in complete agreement with Dr. Huber, and not in opposition to his observation.
This might be a bit of a “with friends like these…” case. Much of that post of Prof. Mitchell’s is about how the RBA acts in a fiat economy but talks as if it isn’t. Hence, agreement of the RBA with Huber seems to me damning praise… :)
I found the entire discussion about why governments interest bearing instruments interesting which is why I’d simply linked to blog post, not expecting that readers would focus on the RBA statements instead of Prof. Mitchell’s explanations. But what caught my interest in a nutshell is:
There’s much more in there, such as
According to Mitchell, government is in the driver’s seat, according to Huber the banks are. Mitchell’s argument is in line with a fiat economy, Huber’s with a pre-fiat one.
To tokugawa98 No 17
I am not ignoring the breadth of your comment here, but I hope you don’t mind this change of tact. I am one who seeks common ground with MMT’s broad progressive ‘fiscal-sustainability’ vision whenever possible, and in case you don’t get the MAJOR point here, it is that we reformers ALL agree with Dr. Bill about the unnecessary corporate welfare associated with unnecessary public debt issuance.
My criticism of Dr. Bill at this point would be lack of remedy: Whereas reformers propose something specific for ending this rube public debt-issuance construct, MMT offers less than nothing with many of Bill’s cohorts defending public debt as needed to provide liquidity preference to capital markets. We should take care of our money system and let capital markets take care of themselves.
Bill’s statement that the government is in charge only holds water in light of a government initiative offered to END public debt issuance. Is this what Dr. Bill and the other MMT cadre care to put forward? If it were, we would be well along making a pittance of progress on public monetary policy. Having the government NOT issue debt to balance income and expenses has the immediate effect of placing before the assembly the question of “from where will come that lost income?”
Our answer is integral to our criticism of this bankers’ school policy, the government issues new money by spending, made legal again by reform to the money and banking system as in HR 2990 from the 112th.
Both Dr. Bill and Warren Mosler call for an end to public debt issuance, but there is no agreement among MMTers on the merits or lack thereof of continuing to indebt the citizenry. I say MMTers speak out of both sides of their mouths on almost every tenet of of their theory, and I have WAY too often run into the plausible deniability that comes from the statement that “not ALL MMTers take that position”, whatever the position.
Again, if you think you know HOW the government creates money NOW when it spends, please say where you learned such, so that we can directly address this tenet.
And, you’re just all wrong on which system is that derived from true sovereign fiat. Ideas that claim the opposite of reality are soon bankrupt. The bankers’ school money system of money as debt is the antithesis of that adopted by early monetary pioneers among our Colonies prior to England outlawing the use of the Colonies OWN monies, as Franklin called that the number one cause for our Great American Revolution…. monetary independence.
It’s our money system, and we want it back.
Joseph Huber’s analysis should make a big impact on the academic economic world and, as a result of that, on the world of actual economic development.
That’s a very important consideration. But it also suggests important connected questions about the motives of the main parties involved.
(1) What will motivate increasing numbers of influential people in the academic economic world to support the new monetary paradigm, if influential people in the practical worlds of finance and government don’t accept it and therefore decide to take no notice of academic economists who do?
(2) And what will motivate influential people in the practical worlds of finance and government to make monetary reform happen if there isn’t more academic support for it and media interest in it?
(3) And what will motivate influential people in the media to broadcast the arguments for monetary reform if more influential academics and practitioners in finance and government don’t support it?
There could be log-jam there? How can we break through it?
Weird isn’t it?
“Let me make the songs of a nation, and I care not who makes its laws.” (English proverb)
“Any debate on the origins of money is not of merely academic interest, because it leads directly to a debate on the nature of money, which in turn has a critical bearing on arguments as to who should control the issuance of money.” (IMF wp12202)
It’s as old as New Clothes (The Emperor’s): quite conservatively-minded and IMO un-controversial papers like this one become a threat by implication. The claque senses this, and “unpopular ideas can be silenced and inconvenient facts kept dark without any need for an official ban. And anyone who challenges the prevailing orthodoxy finds himself silenced with surprising effectiveness.” Said Orwell, in his CENSORED preface to Animal Farm, which Chomsky expands: “It’s a general tacit agreement that it wouldn’t do to mention that particular fact.”
“Über Geld spricht man nicht, man hat es” ist one of the strongest three laws of the land. (The other two being: never spend capital, and “Von den Reichen lernst Du sparen”. Translations: “To learn how to spend less/save, observe the rich.” and the first: “Don’t talk about money, HAVE IT!”)
I am in the habit of conducting impromptu studies that break that rule. (Daredevil option: do this at the supermarket checkout, with heightened attention attention from those waiting in line behind one.) Despite the non-representative nature of this survey work, I feel we can all agree that the current mechanism of money creation is understood only by a select few. Adding insult to injury, the select few are literally “selected”, see above.
At this point it usually helps me if I take a step back and simply admire the system for being beautifully self-regulating. Deep breath, everyone!
It was recognised early on that the modern nation state “must be so constituted as to protect the minority of the opulent against the majority” (James Madison).
The “bewildered herd” must be governed by “a specialized class” (Lippmann).
And acknowledge, e.g. when going back to Bernays’ “Propaganda”, that this was mostly done with good intentions (to which the road to hell is paved).
Returning to my hobby of discussing money creation, and a propos hell: I happen to live near Goetheanum (world centre for anthroposophy), so every now and then someone does respond “money was/is created ex nihilo”.* That’s from Faust II, where the creator is Satan, but it could be the Sovereign!
* I am aware of the fact that it’s never entirely ex nihilo, and certain restrictions apply, trying to maintain a relationship between actual value, and the number on our accounts.
To James Roberston: Are you aware of any occasions where the “new monetary paradigm” does in fact get through? Here’s an example, which I find uplifting: If you were to translate Huber’s paper (my interpretation) into Italian, add some jokes and foul language, you get this http://banksneedboundaries.wordpress.com/2014/01/29/beppe-grillo/
Easy answer: we just have to keep at it, like with any social improvement. Organise, get together – have fun! – and make things better!
Detailed response to James Robertson’s question (to those not in-the-know: Huber and Robertson co-authored at least one book on monetary reform): See also my comment #1 – people have to understand money, there’s no way around that. That’s the sunny side of this crisis: many people are starting to learn about money creation, and asking stupid questions in all the right places!
(I’ll skip my own personal run-in with the Swiss National Bank, it’s relayed elsewhere and would be distracting here. Suffice it to say that “money creation” was once missing from its official glossary!)
One way to accomplish this would be by simplifying the system. Then people could understand better what’s going on with their money, and create a better world, maybe even in due course (yes, I’m a trekkie) one without money.
Popular pressure, two examples:
1.) Seattle 1999
In any conflict, it’s a smart strategy to make sure it unfolds in an area where one has relative strength. Hence the importance of Gene Sharp’s work in kickstarting the Arab Spring (that and a facebook group, April 6th, inter alia, for the simple basics of agreeing on meeting places, exchanging information…). Sharp held the position of top non-Arab author at the time! I venture to ask, with all due respect: How many of you money-savvy folks even know who he was? I know I didn’t – until after the fact.
Which brings us to your question about academe. One problem there is fragmentation. To gain a title, it is necessary to “mine” a field that hasn’t been fully exploited yet, while a general overview of what is actually happening in the world rarely factors in. Worst case: That’s just stuff you learn for the tests on your way there, which two weeks later no one even remembers what they were about (but PISA scores are compared like soccer results!)
Someone who was actually in Seattle, Jello Biafra said convincingly that the people who caused that conflict to shift from non-violence (superiority of the critics) to violence (superiority of the powers-that-be) were a bunch of homeless kids breaking windows.
Here, if you will allow me to digress once more, I find Richard Dawkins relevant. Hawks and Doves (Evolutionary Stable Strategy). Attempted paraphrase, updated to modern corporation-based socioeconomics, hoping not to falsify:
As we become more civilised, individual psychopathic entities can thrive inordinately, Here, the nice guys (in PUA terminology: AFCs) have to wise up, and be uncharacteristically brutal to cut them down before things get out of hand. In the case of this particular crisis escalation, that would mean the great US housing bubble no one seemed to see coming. But in the long run, that could well mean overthinking money creation, which brings us back to Professor Huber.
In this context, what Biafra said in his report (if I remember correctly, it’s part of his spoken word album “Become the Media”) translates as: When the doves see someone starting to show illicit Hawkish behaviour, they must temporarily transform themselves into Hawks. Those chanting “no violence”. Should have just grabbed the kids and said “Hey! No violence.” This has to do with the paradox of being served money, just for signing the dotted line. It’s too easy, and the hawks don’t show themselves until it’s too late.
2.) Occupy Wall Street
Same sentiments as Seattle, and maybe a little more specific (thanks i.A. to Graeber …three cheers for academe!) yet there’s a problem I spoke about in my “beeline” post of emotions in a conflict that requires objectivity to solve.
In my part of the world, this broke up after a “Blockupy”. What’s going on? Divide and conquer? Due to our natural inclination to turn on each other? Maybe! (Comedian Bill Hicks jokes about founding a “People who hate people party”). All I know is that “Bockupy” was the last I heard of Occupy in the German-speaking area, and then came “Occupy Money”, which had more focus, but whose website has now been offline for over a month.
Does that answer your question?
In Switzerland, from where I’m writing this, there’s a general consensus that a housing bubble is forming. The National Bank reacted by doubling the “anti-cyclical capital buffer” (AZP) for housing loans. From what I know about nvc (non-verbal communication), the bankers’ representative, contrary to the words coming out of his mouth, was more or less indifferent to this. In other words: despite this huge crisis, arguably one of the largest in history, not much has changed. “May you live in interesting times!”
You ask about the media. I find it despicable that FT can ignore monetary reform, while tolerating columnist Gideon Rachman’s comparison of Chomsky’s work to torture (to him – it probably is!) at the expense of those unfortunate Guantanamo inmates. This is very serious. Does anyone remember the remarkable farewell apology from FT Germany when it was shut down? That’s worth studying! Without some very serious changes in either attitude, or in the way we manage information (read my blog! ;-)) or a further escalation of the crisis to get more people interested, I see only “more of same” (QE)
Iron Man actor Robert Downey Jr. on The Daily Show, I quot from memory: “The difference between an optimist and a pessimist is this: An optimist always believes that things will improve, while the pessimist is better informed.” On that note, I see a possible future of neo-feudalistic rule, with laws made in the name of corporations, enacted selectively (UdHR 25/26 are “a letter to Santa Claus”), with the illegitimate private monopoly on money creation as a gun. Godfather III: “finance is a gun, politics is knowing when to pull the trigger” – the benefits of a well-rounded education :-)
One thing gives me hope, though: while discussing Sovereign Money (Vollgeld) in the Forum of NZZ earlier this year, megabytes of data, electricity and money was wasted to clog up my browser with ads for Credit Suisse, UBS and dating services (slowing it down to almost the bad old days of 56kBit/s modems), all three of which I wouldn’t touch with a ten-foot pole. If that’s the best they can do to exploit my data and try intelligently to extract precious essence from me, there’s hope. All’s well that ends well. PEACE
[condensed from my previous comment #8 https://rwer.wordpress.com/comments-on-rwer-issue-no-66/modern-money-theory-and-new-currency-theory/#comment-43665 which the administrators would be kind to delete, thanks]
Dear James Robertson. Regarding your questions about ‘influential people’. Correct me if I’m wrong, but aren’t we basically approaching the idea of money created by and for the people? In that case, maybe it’s the People who can get this log un-jammed. See also the upcoming Swiss initiative, vollgeld-initiative.ch (German) or http://banksneedboundaries.wordpress.com/2013/10/24/free-money/
The idea of influential people isn’t new, and it’s probably in our nature to have some kind of elite/representation. The state “must be so constituted as to protect the minority of the opulent against the majority” (Madison), and the “bewildered herd” (Lippmann) requires a specialised class.
Politics is slow to follow popular movements. E.g. Seattle 1999: In any conflict, it’s wise to conduct it in an area where one has superiority. That’s why it’s so sad this shifted from factual/moral to physical. On TV it just became a couple of kids smashing windows, not an overdue examination of what is ill-labelled “globalisation”. As Jello Biafra observed, it would have made all the difference if the protesters chanting “no violence” (doves) had simply grabbed those kids smashing windows and said “Hey: no violence!” (one hawkish moment). Occupy Wall Street, by design or not, was “divided and conquered”. The last we heard of Occupy in Germany was a “Blockupy” demo. Then came “Occupy Money” with a more specific focus, but whose website has now been under maintenance for a month.
Present company excluded, it also helps if the Big Thinkers stay in touch with reality and their base. Look no futher than Mankiw’s posting “Good academic, bad human being” for why academe can paint itself into a corner – he fails to stress that economics was founded by observing the real world, not vice-versa.
p.s. This comment was shortened thanks to a remark by…an influential person!
Dear Folks,
On any of the AMI Blogs, any post as long winded as the above one – I’d be tempted to simply erase it, so that people could concentrate on the good questions asked by James Robertson, in the blog above it. Peace!
James essentially asks what it will take to get both the academic community and the business community and thereby the media to face the reality of exploitation of society through the monetary parasitism of using debt for money (as exemplified in fractional reserve banking).
I’ll answer by example: The American Monetary Institute for several years worked with Congressman Dennis Kucinich who then introduced The NEED act into the 112th Congress The National Emergency Employment Defense Act (HR2990). Its a complete monetary reform act and you can read its 12 pages at
Click to access HR-2990.pdf
Every important part of it has been used successfully at some point in our history, but never the three main parts at the same time:
1) Nationalize the Federal Reserve System
2) Bank accounting changes to prohibit banks creating what we use for money when they make loans, via “fractional Reserve” lending.
3) Government creates and spends new money into circulation to pay for infrastructure, health care and education.
(before anyone critiques this I do suggest you read the 12 pages first!)
I believe this qualifies as part of the new monetary Paradigm discussed by Huber and Robertson.
That is what the AMI did and continues to do in answering Jame’s 3 questions. It would be good to hear what the rest of you have done/are doing in this regard?
Stephen Zarlenga
Director,
American Monetary Institute
http://www.monetary.org
Point taken. In hindsight, in a nutshell: “…and what about those who should be the most influential of all: the people?” I do what I can; brevity requires intelligence. Godspeed!
I read it Stephen. I await your refutation of the following two arguments.
As I wrote in my comment above, no one follows the thought process far enough.
QUOTE: (3) To abolish the creation of money, or purchasing power, by private persons through lending against deposits, by means of fractional reserve banking, OR BY ANY OTHER MEANS.
In other words total government monopoly control. Correct?
In your proposed system, Government creates ALL money, supposedly “debt-free”. This money, as with any form of money that is a quantity in itself, will accumulate in the possession of the powerful who will then only LEND it. Soon, we are back to a ‘”money as debt” system, simply due to income disparity. The same would happen if gold coins were money.
Not only that but eventually we must fall into the Perpetual Debt trap.
http://paulgrignon.netfirms.com/MoneyasDebt/MAD2014/problem.htm
QUOTE: A Monetary Authority is created which avoids an inflationary or deflationary money supply.
Government creates new money. If it does this every year, and never taxes it back, the value of that money will depreciate to near-zero eventually. Therefore, once the money supply has reached a sufficient quantity to service the needs of the economy, any additional spending by government will have to be taxed back at a 1: 1 ratio to prevent devaluation.
Therefore, money spent into existence by government is also “money as debt”, it is spending in advance of collecting taxes. The significant advantage is that no interest is paid on this debt.
I am in complete agreement that government should spend money into existence interest-free and extinguish it by taxation.
SPENDING = TAXES
I also contend that anyone who produces anything in reliable demand should be able to spend their credit into existence to produce it and extinguish that credit by sales.
SPENDING = SALES
http://paulgrignon.netfirms.com/MoneyasDebt/MAD2014/solution.htm
The problem is money as a “single uniform commodity in limited supply, the value of which is determined by its scarcity”. The AMI solution fails to escape this paradigm, fails to acknowledge secondary lending, and thus fails to effectively counter the concentration of wealth.
Your response Stephen?
“”SPENDING = TAXES””
Revisited.
Sorry,
Taxes do not equal anything, except themselves.
Taxes are A source of revenue to the government.
They are part of the government’s income.
Right now, another part of GUV income is net proceeds from the issuance of public debt securities.
After passage, the ‘other than taxation’ portion of the income side of the government’s budget will become the seigniorage from creating that amount of new money into the economy, assuming the economy requires more money in circulation to achieve GDP-potential………without inflation or deflation..
That’s what happens when we take back the money power.
Spending is what is paid for with government income.
Regardless of its source.
Dear Paul,
My response?
Seriously, which part of your comments really merit a response? Your attack on Huber’s paper(?):
“This is the usual daydream from the “debt-free” money crowd.”
That’s insulting not only to Prof. Huber, but indirectly to the the editors of REWR, who have brought Huber’s excellent monetary work to attention of the list. Serious public policy questions are involved here, and to be taken seriously, you could try commenting more maturely!
My response to your criticism of HR2990? (you write:”The AMI solution fails to escape this paradigm, fails to acknowledge secondary lending, and thus fails to effectively counter the concentration of wealth.”)
Consider that the failure, if any, may be in your ability to understand provisions of the bill and how they function, and dramatically reduce the concentration of wealth.
The AMI is always available for reasonable (i.e. mature) discussion on HR2990 if people ask. Anyone interested, should start with the “20 Questions” and answers we provide at http://www.monetary.org/intro-to-monetary-reform/faqs
and go from there. We are always ready to add a question “21” on HR2990 if needed.
Precisely.
Huber’s reading is that the MMT-crowd is captured by the beliefs that money always comes into being as debt, that private banks are essentially benign, and that the free market will succeed in regulating money supply and demand. If he is right, the question in light of empirical evidence to the contrary is: what motivates their beliefs?
My reading is that Huber misrepresents MMT writings, ascribing positions to MMT proponents that they simply don’t take. If I am right, the question in light of easily accessible MMT writing is: what motivates his misrepresentations?
Interestingly, the result is the same: MMTlers and NCTlers don’t cooperate to propagandize for a saner monetary system.
Unfortunately, some really great stuff motivates their beliefs. That’s why I follow them. I assume the same with your comments.
I can add little to Dr. Huber’s work here, in fact nothing, on what MMT is about in the political economic spectrum between bankers-based and sovereign-based money.
That speaks for itself, and very well from my point of learning..
But I also have my personal walk through the MMT wave, with my personal background study of the money system, and saw early on what they had right and what they had wrong.
I much later discovered the critique of MMT by the Monetary Realist(MR) group and others, Post-Keynesian friends of MMT.
It is because they remain so steadfastly supportive of that in which they believe – especially like the good that can come from a public purposed money system – that this is what I believe motivates their beliefs.
Given that MMT draws upon a foundation of a progressive political mantle, macroeconomically-speaking, we will be cooperating once MMTers, perhaps like yourself, realize the difference between a private, debt-based,,corporatized money system and one of public equity issuance and benefit.
I congratulate Warren for that “smoothly and benignly” achievement.
joe bongiovanni wrote: After passage, the ‘other than taxation’ portion of the income side of the government’s budget will become the seigniorage from creating that amount of new money into the economy, assuming the economy requires more money in circulation to achieve GDP-potential………without inflation or deflation..
This is just more growth-addicted thinking. Assuming a steady state economy with enough money in circulation already, seigniorage income will be ZERO.
So, in a steady state economy, if government wants to spend new money to pay for its own activities, it will have to tax it back, one way or another to prevent devaluation.
This is to Paul Grignon from 2/13 with apologies for the lateness of my reply.
I fail to understand the issue you are making at all.
“Growth-addicted thinking”??
I would think that you more than almost anybody would recognize that it is debt-based money that ‘inseminates’ growth-addicted thinking.
And that monetary reform will go a long way to erase the money-system’s driver of that paradigm.
I was merely applying reform methodology to today’s political-economy that stems from that debt-based money system.
My personal understandings of the relationships between money and either resource-constrained or steady-state economics is informed, in the first case by Soddy’s Lectures in Cartesian Economics “”The Bearing of Physical Science Upon State Stewardship”
and in the latter by Herman E. Daly and John Cobb’s writing in their “”Afterword: Money, Debt and Wealth”” from the Second Edition of their “For the Common Good”” writings.
.
That there is or is not inflation-free growth potential in the national economy cannot be determined by the money system in place…… rather the money system can only provide for whatever ‘potential-growth’ that public policy determines to be resource optimal.
In a steady-state economy and no need for new money, AFTER monetary reform, all the money in circulation is permanently advancing public policy, and thus not forcing a tax upon the citizens for its use, as the private bankers do now.
Per chance, do you think that your learning over the years provides a better and more workable solution than the reforms proposed by both AMI (HR 2990) and Dr. Huber, then please say what they are, and why.
Thanks.
Joe Bongiovanni,”Finally, if I may, it is you who fail to understand sovereignty, as do many MMT adherents.
When the EMU sovereign nations gave up their individual right of “monetary autonomy” over to the EMU, which they did, that was an act of monetary sovereignty. Whenever they decide to take it back, that will also be an act of monetary sovereignty. The nation never gives up its ‘sovereignty’ of its money, or it ceases, for all intents and purposes, of existing as an economic democracy.
All Euro nations can wake up tomorrow and restore their monetary autonomy, exactly because they have not given up their sovereignty. Heads up, RMM.”
My I add,When “we the people” gave up our right ‘…of sole issuance as well as sole right to taxation of our sovereign currency…’,we also gave up the right of “monetary autonomy”.
DO FOR YOURSELVES WHAT YOU ALLOW THE CENTRAL BANK TO DO FOR THE BANKS !
LOAN YOUR MONEY AND CHARGE A TAX ON IT.
” A Central Bank Working For The People (CBWFTP)
instead of for Private For Profit Banks (PFPB).”
If something in a system can cause ‘systemic failure’,wouldn’t you consider that to be such a major problem that because of its awesome capability , that is : Destruction of the entire system that it should be consider perhaps as the cause of , if not all, maybe most problems.
We have legislated self destruction by allowing Private For Profit Banks to issue our sovereign currency and also allowing Private For Profit Banks to tax that issuance. This is their weapon of mass economical and political destruction that allows inequality, injustice and servitude.
We MUST separate our central bank from the private for profit banks.
Excerpt from:
When will the people of Italy ( Read, Greece, Spain, any Sovereignty ) realize they have a Central Bank that does not work for their people, in fact it works to make profits for the top 1% of the people in the world.
Italy (Read…Greece, Spain, any Sovereignty which is not monetary sovereign), you can take back your right to prosperity. Create the Central Bank Of Italy, (Greece, Spain, any Sovereignty) and your Central Bank with an account showing 2 trillion “NEW LIRA”, that being todays wealth of the Italian peoples goods and services as of this date. All monetary transactions shall be recorded in “NEW LIRA”. All balances shall be equal in number and converted to “NEW LIRA”. All receipts in an equal denomination of “NEW LIRA” for each Euro. The balance of all debt will be fixed on this date , set with a specific redemption plan.(E.g.,2% for 36 yrs., ).
Who would not accept this nation as not having a wealth of all that is Italian as not being at least 2 trillion,”NEW LIRA”? As for those who would be that stupid, not to accept that capitalization, please allow them to accept default.
It is not the cost of government but the cost of money itself that has bankrupted the nations.If any country wishes to free itself from the shackles of debt and restore the prosperity it once had, it will need to take back its monetary sovereignty and issue its own money, either directly or through its own nationalized central bank.(This is the solution for any sovereignty).
For any nation to be a Monetary Sovereignty….
.. it must be the sole creator of its sovereign currency.
…it must have the ways and means to control its sovereign currency for quality and quantity.
…it must under modern money systems be fiat since its money is transferable “thru thin air”.
…it must understand that it is the guardian of the value of the currency , if it wishes to be capitalistic; otherwise that nation will be totalitarian. As a guardian (recording and exchanging) it does not own the value of the currency it creates.
…it must use that currency knowing that it must also return it back to the community (the rightful owners).
…all transactions using sovereign currency must be “REAL”, meaning backed by 100% of issued sovereign currency.In order to prevent “systemic failure” it must make available the currency as loans at a fixed rate and duration in amounts deemed necessary to allow the private banking system to be solvent.
We MUST separate our central bank from the private for profit banks.
Excerpt from:
http://realmoneyecon.org/lev2/answers.html
Real Money Economics: The Details and Results.
Real Money Economics proposes to instill hard ethics into the current monetary system and not just prescribe more regulations meant to firm up an internally unstable system. The solution presented only involves 2 fundamental steps outlined below under A. and B..
Trust Banking System
Under this system, banks would be divided into 2 totally separate parts or “windows”, one being the trust depository side and the other the credit side (lending and investments). In effect this could be called “Glass-Steagall on steroids”.
1. Depository or Payment Window
In a Trust Banking System when a normal deposit is made at a bank into the depositor’s account, the funds would continue to belong to the depositor (versus exchanged for an IOU as under the current system) and the bank is simply given instructions by the depositor as to what to do with the money, e.g., when a check is presented for payment, it will be paid. This would all be covered under the standard depository agreement between the bank and the customer. 100% of the depository base will at all times be covered by cash in the vault or deposits at the Fed. The only source of income for a bank from the Depository Window would be fees for services. No deposit creation would exist in this system and thus no new money created by private banks. Further, because all deposits would at all times be fully covered, the needed oversight would be minimized as the system is autonomously stable.
2. Credit or Investment Window
Under the Trust Banking System banks would become true intermediaries (as most think that banks are today) and offer loans and other investment products from those with cash wishing to have it invested. This would be done through the Credit Window of banks but none of the funds under the Depository Window would be available for this purpose. Instead, savers and investors would subscribe to a series of offered mutual funds in say, car loans, or mortgages, or commercial loans of various kinds, and so on. These could be open or close-ended funds as desired with maturities, risk levels, and return levels published by the bank in advance. Thus credit would now be driven by savings rather than the arbitrary increase (or decrease) of high powered money and deposit creation. Savers would again be rewarded for savings and interest rates would be controlled by the market rather than largely by Fed edict and actions as now.”
Comments by Justaluckyfool ( http://bit.ly/MlQWNs )
( “You are always welcome to share, copy, plagiarize, improve, etc..any comments.)
Based upon an opinion by “Justaluckyfool” of the concepts of Noble Laureate Frederick Soddy, “The Role Of Money” (1926,1933)
*********************
Read :Frederick Soddy writings, namely “The Role Of Money”
(Entire book as a free download… http://archive.org/details/roleofmoney032861mbp
“PREFACE
This book attempts to clear up the mystery of
money in its social aspect. With the monetary
system of the whole world in chaos, this mystery
has never been so carefully fostered as it is to-day.
And this is all the more curious inasmuch as
there is not the slightest reason for this mystery.
This book will show what money now is, what it
does, and what it should do. From this will
emerge the recognition of what has always been
the true role of money. The standpoint from
which most books on modern money are written
has been reversed. In this book the subject is not
treated from the point of view of the bankers
as those are called who create by far the greater
proportion of money but from that of the
PUBLIC, who at present have to give up valuable
goods and services to the bankers in return for
the money that they have so cleverly created
and create. This, surely, is what the public
really wants to know about money.
It was recognized in Athens and Sparta ten
centuries before the birth of Christ that one
of the most vital prerogatives of the State was
the sole right to issue money. How curious that
the unique quality of this prerogative is only now
being re-discovered. The” money-power
” which has been able to overshadow ostensibly responsible
government, is not the power of the merely ultrarich,
but is nothing more nor less than a new
technique designed to create and destroy money
by adding and withdrawing figures in bank ledgers,
without the slightest concern for the interests of
the community or the real role that money ought
to perform therein.”
‘ ***** “Believe nothing merely because you have been told it…But whatsoever, after due examination and analysis,you find to be kind, conducive to the good, the benefit,the welfare of all beings – that doctrine believe and cling to,and take it as your guide.”- Buddha’‘”)
“”May I add, When “we the people” gave up our right ‘…of sole issuance as well as sole right to taxation of our sovereign currency…’,we also gave up the right of “monetary autonomy”.””
Of course you may add that.
I am in complete agreement…..
To the point that at the AMI conference this Fall, I read aloud the entire PREFACE from Soddy’s “The Role of Money”, with the indulgence and later thanks of those in attendance.
Private , ledger-entry money creation.
“”This surely is what the public wants to know about money”..
But also that which MMT seems to find ‘a smoothly running and benign system’, obviously not in need of reform.
Thanks, jalf.
@ Stephen Zarlenga
Point 9a) of the FAQs reads:
At present when bank loans are repaid to the banks by their customers, those credits/debts go out of circulation/out of existence and the credit money supply contracts as loans are repaid, until they make new loans. But under the American Monetary Act, since it’s now money, those monies will not go out of circulation the way the credits did. They are repaid to the government in satisfaction of the debt the banks incurred in converting them from credit to money. That goes into a pool which can be used by Congress for the items in Title V of the AMA (as described on pages 8 and 9), or it can even be re-lent to the banks at an adjusted interest rate. Note: this action de-leverages the banks, but does not reduce the money supply.
regarding this passage:
They are repaid to the government in satisfaction of the debt the banks incurred in converting them from credit to money.
DOes this refer to the one-time debt incurred by banks during the transition phase from old credit money to new ‘real’ money? Or does it describe an ongoing process by which banks may become indebted to the money supplier? If the former, why is it relevant as a general case? If the latter, in which way is it any different from the current arrangement in which banks borrow base money from the central bank? What happens at the end of the month when all companies that kept their cash in savings accounts (not money by your definition) during 30 days of the month, suddenly convert it all into real money to make loan payments? What mechanism deals with the massive fluctuation of ‘real’ money needed IN AGGREGATE around that one day of the month?
regarding this passage:
That goes into a pool which can be used by Congress for the items in Title V of the AMA (as described on pages 8 and 9), or it can even be re-lent to the banks at an adjusted interest rate.
By this account, the amount of loans repaid by private customers to banks determines the amount of money that government may spend on certain things (couldn’t find Title V). Why does govrenment need a pool of funds if it can just spend money incto existence, as you seem to be saying? Further, it says that the pool CAN be used by Congress. So yes, by virtue of the fact that the money in the pool counts towards your definition of the money supply, the money supply overall hasn’t changed. But, in economic terms, namely income and transactions, the pool is an economically meaningless number until it IS speant by Congress. So, getting back to my first point, not only is the pool superfluous, but for it to work, Congress MUST immediately spend everything in it. How exactly would that work? And again, considering that that is not what would happen in reality, how is it in any way different from the current arrangement?
And last, a general question:
What is your opinion on the theory of endogenous money? Do we have endogeneous money now? Should we have it? And is there a way around it? Is that what your proposal is about?
Thanks for your questions Oliver. You ask:
“regarding this passage: They are repaid to the government in satisfaction of the debt the banks incurred in converting them from credit to money.
DOes this refer to the one-time debt incurred by banks during the transition phase from old credit money to new ‘real’ money?”
YES EXACTLY. While it was legal for the banks to have created this debt in place of money, it was still wrong for society. The money reform legislation (both HR2990, and the American Monetary Act) after the fact remedies the process. When a loan the bank has created gets paid back, (all such loans having now become money, not credit, with passage of the Act), the bank pays over that amount to the U.S. Treasury, into a special “Revolving Account.”
It is available there for Congress (and in more limited ways, the Monetary Authority) to use for any of the items in Title 5: To be spent for Infrastructure, Health Care and Education, etc. Title V is important. Its on page 13 and 14 of HR2990, take a look at
Click to access HR-2990.pdf
If banks later become indebted to the Treasury for additional borrowings, they are simply borrowing money, not credit, and repaying money.
The big differences between that and the present system is that government money, not bank debt will be circulating, and any seigniorage will be captured for the people, through the Treasury, not for the banks. To see some of the other important differences please read the summary page at the front of the HR2990 link provided.
Congress also has the power to create new money (Art.1 section 5 of the constitution) which can be used, for example to pay off the existing government debt as it comes due, and for the Title 5 elements also.
You also ask: “What happens at the end of the month when all companies that kept their cash in savings accounts (not money by your definition) during 30 days of the month, suddenly convert it all into real money to make loan payments?”
THAT DOSEN’T HAPPEN. The conversion is universal, all at the same time. Its an abstract accounting process, not mechanical.
You ask: “Why does govrenment need a pool of funds if it can just spend money into existence, as you seem to be saying?”
The Revolving fund has made it much easier for people to understand, that HR2990 is in no way deflationary – the normal historical danger for monetary reform. Its also a good way to help measure that the Congress is doing a good monetary job.
You want to really know what will be different? The control of our monetary system will be placed into the hands of our people, through their representatives. Since whoever controls the money system controls the nation, this will be a good thing. Thats what our proposal is about.
If you want to expand your question on “Endogenous” money, I’ll discuss that later.
Please do read through HR2990 again if you get the chance.
HR 2990 states:
(1) the authority to create money within the United States shall hereafter reside exclusively with the Federal Government; …
(…)
(2) it shall be unlawful for any person to designate any credit, note, bond, script or other financial instrument as United States Money.
This contradicts your statement in reply to my question:
“What happens at the end of the month when all companies that kept their cash in savings accounts (not money by your definition) during 30 days of the month, suddenly convert it all into real money to make loan payments?”
Your reply:
THAT DOSEN’T HAPPEN. The conversion is universal, all at the same time. Its an abstract accounting process, not mechanical.
The process of universal conversion is nothing else than the creation of money by a bank!
And, in my opinion, and also connecting to my question about the endogeneity of money, it cannot be any other way. The existence of debt, i.e the existence of contractual agreements that can only be dissolved thorugh payment of money (the means of final settlement), whether public or private, whether with interest or without, whether specific or universal, in specie or as mere accounting, neccessitates the universal availability of the means of final settlement for the system not to fail. You either ban debt as a legal constuct, or you furnish financial intermediaries with the power to settle (private) debts by means of issuing settlement balances (money). This can either be a two-tier system such as the current – with bank money & government / interbank money – or one could imagine a one-tiert system in which government also provides the only bank, or indeed a multi-tier system such as the one suggested by Paul Grignon. I am not fully in agreement with Paul grigon for other reasons (in a nutshell, I believe the universality of money is its main asset, not a bug that needs remedying) but I agree with his critique of the proposal put forward by the AMI and in HR 2990.
I believe that the AMI view has fallen prey to various fallacies of a) viewing money as an asset without a corresponding liability, b) viewing money as an asset / liability without a corresponding output and c) considering the hierarchies of finance as separable from one another and each controllable in quantity, as opposed to quality. You cannot control the amount of money without causing either mass defaults or without running a total command economy, aka communism.
Or to phrase that last sentence differently: If production can be financed privately (capitalism), then private ‘money’ must qualify to extinguish the obligation incurred through the original investment. If only government money may serve the purpose of extinguishing debt, then either only government may invest (communism), or there are other private monies that are not convertible at par into government money (The Grignon proposal, or 19th century banking) or private institutions must be able to issue government money (the current system). The first should not be up for discussion, the second basically establishes many different currencies (bank monies + government money) and greatly reduces the security of savers and the last is precisely what we have today.
Can’t see a button to reply to Oliver’s 2 posts below so:
Oliver I don’t have any idea what you are talking about below, and wonder if you do either?
Suggest you read some of the materials at our website, and if you sign up at the red arrows box there, you’ll get some really outstanding monetary materials sent to you about every 10 days or so, free. They will help you.
The AMI page as well as HR 2990 are so full of political posturing, it’s hard to cut through to the economics behind them.
In a nutshell, what I hear you saying is:
1 full reserve banking
2 massive expansion of government spending
3 lender of last resort facilities (lending money!)
4 the assertion that banks will not be able to create official money themselves
my assertions:
– 3 & 4 cannot possibly go together
– thus banks will be able to create government money under HR 2990
– any other system would see either the evolution of parallel monies (bank and government) or have to be labeled a command economy
if you’re interested, see here for example: http://www.csbancari.ch/pubblicazioni/rmelab/rossi2.pdf
an excerpt:
As the theory of the monetary circuit shows, although this is also a conclusion reached by post-Keynesians, money is a necessary result of a debt relationship between a borrower and a lender (see Graziani, 2003, but also Hicks, 1967, p. 11). In this sense, money is a social relation (see Ingham, 1996). To place a value on the debt, a value system needs to be developed by society. In this respect, money is a social, numerical counter supplied by the banking system just as it is required, as was stated by Hicks (quoted by Laidler and Parkin, 1975, p. 742). This then means that any transaction, and a fortiori any payment, necessitates a bookkeeping system to record debt obligations and their final settlement. In bookkeeping terms, the creation of money is the means by which the banking system provides the economy with a number of money units that are debited and credited to the payer, respectively to the payee, who use them to exchange objects between them.17 This number of money units is necessarily created by banks, or by their predecessors (say, goldsmiths). This creation may of course take different physical forms depending on the technological and institutional framework, but is always an endogenous phenomenon, because it stems from the agents’ demand for a (final) means of payment – be it in the form of gold coins, paper money, or purely book-entry money. As Ingham (1996, p. 510) argues, “all forms of money are social relations”, “including its archaic ‘commodity’ forms”
Basically, the term debt-free money is snake oil.
Stephen Zarlenga wrote: “Seriously, which part of your comments really merit a response?”
ALL of them Stephen. But you choose to avoid answering my “serious” mathematically simple and rigorous questions and act insulted instead. Am I supposed to feel ashamed for challenging your irrefutable wisdom?
I have read all of your 20 FAQ questions, Stephen. I have studied your proposals for years, as you are well aware. I also challenged you years ago to account for secondary lending, which you have NOT done. Months ago I challenged your associate Jamie Walton with the same question. No response as yet.
So here is question 21. Poorer people borrow money. Rich people keep it and will only lend it. Therefore, in the system as a whole, the only way the poorer people can pay off their loans is to borrow existing money from richer people or take a new loan from a bank. This creates a perpetual debt that depends on continuous growth of the money supply. Otherwise debtors default by mathematical certainty, not through any fault of their own.
You can create the same inherent math problem with “debt-free” government money, bank credit, gold coins or cowrie shells and in the complete absence of interest.
Here is my WEA paper on the topic.
http://peemconference2013.worldeconomicsassociation.org/?paper=proposed-new-metric-the-perpetual-debt-level
How does the Huber proposal deal with this unavoidable dynamic that happens when lending combines with income disparity? I don’t even see secondary lending mentioned.
If you expect me to take YOU seriously you should at least TRY to answer my question. You have been avoiding it for 5 years now. You may not be aware that I have incessantly posed this same challenge to the whole list of WEA economists for the past 2 years. Only one attempted to refute me and he conceded. Steve Keen avoids the issue just like you do.
http://paulgrignon.netfirms.com/MoneyasDebt/MAD2014/problem.htm
Here is my analysis, When you have read it through, as I have done with yours, and discovered why I am wrong I EXPECT TO READ YOUR REFUTATION RIGHT HERE. Fair enough? Serious enough?
If you can prove me wrong, DO IT!!!!!!!!!!! PLEASE!!!!!!!!
Joe, I see you agree that debt exceeds the money to pay it in the current system. And you think that “debt-free” government money will solve the problem.
I didn’t discern between the current system and the Huber proposal because in the current system most money is created as debt and in a system where money is NOT created as debt, it will eventually concentrate into the hands of the powerful and once again, only enter circulation as debt. It takes longer but the end result is the same.
This is easier to picture if all money is, say, a gold coin of inherent worth or a fiat coin of decreed value. Once the powerful have accumulated almost all of the coins, most money will enter circulation as a debt just like today. To limit the number of coins, which so many people advocate as the way to make money “sound” will only lock the debt-prison more tightly. Do we need to bring out Charles Dickens to remind us of what life was like under that system?
The fundamental problem is the concept of money as a single uniform commodity in limited supply that can be accumulated ad infinitum. The solution is to expand our concept of money to include money as a time-limited promise of something specific from someone specific. Redeem it for product before the deadline or lose it.
That way current production and demand determines the supply of money and all such money is redeemable for goods or services. Money is not created by the willingness of borrowers to take on a debt of money to a bank that will not be earned in full for 30 years.
This change in math makes amazing things possible.
http://paulgrignon.netfirms.com/MoneyasDebt/MAD2014/solution.htm
Read the chapter on Mortgages for the best example.
http://paulgrignon.netfirms.com/MoneyasDebt/MAD2014/solution7mortgages.htm
Paul,
Thanks for the opportunity here.
PG – “”I didn’t discern between the current system and the Huber proposal because in the current system most money is created as debt and in a system where money is NOT created as debt, it will eventually concentrate into the hands of the powerful and once again, only enter circulation as debt. It takes longer but the end result is the same.””
I would like to think this is a problem caused by ‘terms’ being misused here.
‘Money’ that is on-lent creates another transaction with that money, it does not create new money in circulation as debt-money, it merely creates new credit and debt with THAT money. After reform, money only enters permanent circulation ONCE, as equity and not debt.
Once in private hands it can be either spent( thus determining a velocity factor) or saved(thus determining a hoarding factor).
THAT permanent equity money is both spent and saved after it enters circulation is part of the formulation of measures that are considered in order to determine subsequent changes in the money supply. More of either and less of either provides the data needed, and informs the monetary authority of the need, or lack thereof, for new money.
The fact that the ‘powerful’ hoard money need have zero effect n monetary operations,
AND, when that money serves as an income source to the savers who give up its use for lending, there is not more debt-money created.
ONLY the Guv is creating money. There is nothing in the Bill to prevent the rich and powerful from accumulating the money and using those savings for investment. After doing so, there will be EXACTLY the same amount of ‘money’ in circulation. The money MUST move from the saver’s account to the borrower’s account. There is never a quantity of new money thus entering circulation. ALL of the money remains in circulation, even when saved.
Please state clearly what you think the problem is with such a mechanism.
Thanks.
Paul, let me first agree with Stephen at #24: “Serious public policy questions are involved here, and to be taken seriously, you could try commenting more maturely!” Why do you want us to refute you when we (or in any case I) agree with you? – and with the need to reduce the argument to a simplicity the rising generation can understand. We almost all agree there is a problem, and you’ve picked out the bones of it, so why are you not moving on to evaluating (not refuting) the different ways other people are suggesting of avoiding, resolving or at least containing the problem, and offering support to the better ones?
James Robertson’s contribution at #17 is very much to the point. Having a similar (but more mathematical/scientific) background and reasons for getting involved, I too have worried about his “log-jam” and asked myself the same questions. As a Christian I see conversion in a Copernican-style intellectual rather than bloody revolution as the way forward, this perhaps happening by mathematical astronomers persuading navigators of the advantage of it, navigators enthusing merchants with their more reliable navigation, this changing the expectation of what should be taught in the navigation schools sponsored by the merchants and thus allowing the schools to continue to teach what was expected of them: this having changed in the mean time. Am I suggesting the need for mathematicians to teach the directors of supermarket chains the mathematics of continuous processes as against the mathematics of countable points? [I’m looking at http://en.wikipedia.org/wiki/Cartesian_coordinate_system, which fails to distinguish the complex units of flow lines, field areas, bounded volumes and energetic forces from those of countable points: see the subsection on complex number and compare “natural”, rational, real [i.e. continuous] and complex number systems].
“so why are you not moving on to evaluating (not refuting) the different ways other people are suggesting of avoiding, resolving or at least containing the problem, and offering support to the better ones?”
I have stated in all three movies since 2006, that I fully support governments spending money into existence debt-free and removing it from circulation by means of taxes, user fees, or whatever works. That money is not “debt-free”. It is interest-free and those who call it debt-free are deluding themselves and others, and that’s what I tell them and have told them for years already, Stephen Zarlenga included.
None of these reformers will even try to refute my argument as to why their proposed reforms miss the mark so why should I put myself out for them?
According to my analysis, none of the proposed reforms are anywhere near adequate to address the root problem which goes completely unexamined and unaddressed. So why on Earth should I waste my unpaid time evaluating such proposals? I am currently involved full time in building the solution I propose.
This change in math makes amazing things possible.
http://paulgrignon.netfirms.com/MoneyasDebt/MAD2014/solution.htm
Read the chapter on Mortgages for the best example.
http://paulgrignon.netfirms.com/MoneyasDebt/MAD2014/solution7mortgages.htm
“And you think that “debt-free” government money will solve the problem.”
Debt free money will not COMPLETELY solve the problem…if it is loaned even at 0%…because that incurs an additional cost…to the borrower. Cost, cost, proper and complete assessment of cost is what economists and every other theorist has overlooked, forgotten, refused to confront or has invalidated…because they have not comprehensively examined fallacious theory…concocted to “explain” the empirical data. The empirical monetary data, and the economic consequences of that data are to be found in the COST accounting figures in any enterprise that isn’t going bankrupt. If you don’t go there…which is where the trouble actually STARTS…then you’re always going to be mistakenly discerning causes…which are actually effects.
Lending, fractional, twice lent or otherwise is not the root of the problem. It (the deepest problem) is that the rate of flow of total costs and hence prices….when money actually has entered the economy via an enterprise…will always EXCEED the rate of flow of total individual incomes. When money actually enters the economy….you cannot abstract out cost and you cannot escape the above individual monetary scarcity….in ratio to even minimal prices necessary to be liquidated for an equilibrium to be possible.That means that the economy is inherently price inflationary and erosive of purchasing power and profits.
Now that doesn’t mean that excessive or even reasonable borrowing doesn’t also incur a cost…it does…it’s just that it is not the deepest or primary cost, and it’s not the economic reason the economy is unstable.
If economics is ever to have any actual claim to being scientific it’s going to have to go first to the empirical monetary evidence and then decipher the economic effects of that data while also realizing that the rules of cost accounting (ALL costs must go into price) are ALWAYS in effect….and so the only way to equate total individual incomes with total prices….is TO GIVE THE INDIVIDUAL a supplement to their incomes….because that’s the only way to actually equate them…..without incurring an additional COST.
Oliver wrote: “I am not fully in agreement with Paul grigon for other reasons (in a nutshell, I believe the universality of money is its main asset, not a bug that needs remedying)”
To clarify, Oliver… the system I am proposing is a global one with a universal inflation-proofed value unit.
http://paulgrignon.netfirms.com/MoneyasDebt/MAD2014/solution5.htm
Government credit backed by the power to collect taxes could be quite “universal” since in this system, guaranteed demand for Boston property tax credits by Bostonians, will make them reliable money to spend in London England, Mumbai India or anywhere else on the planet.
Exactly the same potential will arise with Toyota Credits, Microsoft credits etc. Any productive entity with assured demand can issue Credits against their own assured production and sales. Those Credits could circulate as money worldwide, all of it DEFINED in value by what is promised in redemption. Thus inflating or deflating the supply of these Credits in the aggregate, makes no difference to their value. The concept of a “money supply” under anyone’s control is inapplicable.
BUT… the system I am proposing does not need to do away with the current one. It actually solves the mathematical dilemma of “twice-lent” money that causes this system to crash periodically. Partnering my Producer Credit System with the current fiat/banking system is the completely non-disruptive “cure” I am proposing because it moves fiat/bank credit money savings directly into short term investment, returning the fiat/bank credit money to circulation where the original borrower can theoretically earn it and pay it back.
Any productive entity with assured demand can issue Credits against their own assured production and sales. Those Credits could circulate as money worldwide, all of it DEFINED in value by what is promised in redemption.
Hi Paul
Yours is a static view but reality is dynamic. The relative values of what is promised in redemption will inevitably vary between the time of issuance and that of redemption. That is another way of saying that company credits will trade at constantly varying discounts with one another, which in turn is another way of saying that your proposal is in effect one of many different currencies.
Unless, that is, you propose some kind of global credit guarantee and lending facility analogue to deposit guarantee and lender of last resort facilities that guarantee that bank liabilites trade at par with one another. But then, guaranteeing the value of all output is a feature of communist regimes, not of capitalist societies. In capitalism, companies must be allowed to fail, which means their equity (company credits) becomes worthless.
“Yours is a static view but reality is dynamic.”
Exactly. So why not incorporate both the static and the dynamic nature of the economy and also solve the actual problem that bedevils us, namely that the rate of flow of total prices exceeds the rate of flow of total individual incomes…..by directly distributing a gift of money to individuals and implementing a general discount on prices based on the formula of total cost of consumption over the total cost of production for the same period of time? That is the very definition of BOTH static AND dynamic equilibrium.
It is a direct, full and continuing resolution of the actual deepest problem afflicting the system, not some round about, wrong end of the telescope non-confront, mistaken resolution like “producer credits”.
I have debated Paul Grignon on these issues before wherein he first denies that there is a scarcity of individual incomes in ratio to prices simultaneously produced….and then he promptly turns around and offers the “solution” of “producer credits” which is an admission that….there is a scarcity of credit. The truth is there is a scarcity of INDIVIDUAL INCOMES, and also too much COST that must be liquidated. And the solution is to meet these problems head on and directly in both a statistical and dynamic way…as per above?
And as for ‘twice-lent’ money, I cannot follow what you are saying. The mathematical nature of double entry book-keeping assures that there is always exactly one unit of financial asset for every unit of financial liability. And principal owed is a finanical liability. So, if you claim thers is a doubling of assets (not impossible), there must also be a corresponding doubing of liabilites in the system. Please go thorugh the t-accounts to make your point.
You write:
if money is created by a bank as one loan of P and then, entirely disconnected from the loan that created it, the same money is lent again as existing money, how many debts of P exist?
Two!!! 2P of debt < 1P of Principal to pay it with. Both theories just ignore this problem like it doesn't exist.
I’ll go through the t-accounts:
T=0 (ground zero)
bank:
liabilities = 0
assets = 0
borrower:
liabilities = 0
assets = 0
lender:
liabilities = 0
assets = 100 (real asset)
T=1 (initial loan)
bank:
liabilities = 100 (deposit of lender)
assets = 100 (loan to borrower)
borrower:
liabilities = 100 (loan from bank)
assets = 100 (real asset)
lender:
liabilities = 0
assets = 100 (deposit claim on bank)
T=2 (on-lending)
bank:
liabilities = 100 (deposit of lender 2)
assets = 100 (loan to borrower 1)
borrower 1:
liabilities = 100 (loan from bank)
assets = 100 (real asset)
lender 1:
liabilities = 0
assets = 100 (claim on borrower 2)
borrower 2:
liabilities = 100 (loan from lender 1)
assets = 100 (real asset 2)
lender 2:
liabilities = 0
assets = 100 (deposit claim on bank)
Your claim is, that in T=2 there are only 100 in means of payments vs. 200 in total debt?
This leverage and corresponding systemic fragility is accounted for in the hierarchy of finance concept as found in MMT, Minsky and others.
The counterfactual to T=2 is T=3
bank:
liabilities = 200 (deposit of lenders 1 & 2)
assets = 200 (loan to borrowers 1 & 2)
borrower 1:
liabilities = 100 (loan from bank)
assets = 100 (real asset 1)
lender 1:
liabilities = 0
assets = 100 (deposit claim on bank)
borrower 2:
liabilities = 100 (loan from bank)
assets = 100 (real asset 2)
lender 2:
liabilities = 0
assets = 100 (deposit claim on bank)
This captures a situation in which the hierarchy of financial assets is flatter, i.e. the economy is less levered. MMT policy proposals aim at favouring T=3 over T=2 for systemic reasons. In any case, there is never a mismatch between financial assets and liabilities and, assuming that borrowers buy real assets as opposed to financial assets (leveraged buyouts, etc.), there are always enough real assets (at book value) to back financial claims.
It is not the loan that can not be repaid it is the interest that is collected and not spent. Modify your balance sheet to include anticipated interest.
it is the interest that is collected and not spent.
Yes, maybe that’s what he’s saying. But it hasn’t been ignored either way. The distinction between asset/liabilities that can be used in payment and such that can’t is well known. As is the phenomenon of saving as a ‘leakage’ to the flow of money and thus as an inhibition to paying down debt or interest.
See here, for MMT specific examples: http://www.levyinstitute.org/pubs/wp_656.pdf
http://softcurrencyeconomics.com/category/soft-currency/aggregate-demand/
Stephen,
My moniker BFWR (Ben Franklin Was Right) was adopted by myself after reading your “The Lost Science of Money”. I really enjoyed that book, but have come to believe that Franklin’s/Pennsylvania’s Distributive monetary system was once removed from workability because its entirely wise Distributive paradigm actually went to enterprises instead of to individuals…who are the “entities” that have the scarcity of income in ratio to systemic prices necessary to be liquidated…if economic equilibrium is to ever actually to be the reality….that theorists (mistakenly) believe is the productive system’s tendency.
I know at one time that AMI’s HR2990 had an initial “citizen’s dividend”. Does it still have that component? I assert a continuing citizen’s dividend is enlightened because today’s monetary inflation is really just the unfortunately necessary effect of a deeper cause which is that the rate of flow of total costs (and hence total prices) must, by cost accounting rules exceed total individual incomes. Now some might say, “Oh, but velocity theory equates things”, but as we see post 2007, theories aren’t always…very accurate. There is a laundry list of costs/ and other factors that lead to the reduction of individual incomes that can be produced, identified by various economic theories. For instance Georgism, etc. and yes, even the crazy Austrian/Libertarian/Tea Party types see a particle of the truth, namely that the system’s APPARENT tendency as currently constructed is monetary inflation followed by deflation…it’s just that they mistakenly think deflation is a cure…and again, also don’t realize that monetary inflation is actually an effect of the necessity to throw continuous money in the form of debt into the system….because if that didn’t occur the economy would quickly implode…because the rate of flow of total prices always exceeds the rate of flow of total individual incomes.
In other words the system is actually price inflationary which means it is erosive of purchasing power and profits, and to keep it “in the air” continuous monetary inflation….is “necessary”. .Of course the Banking system is very pleased to accommodate this because “for a season” its profitable and when TSHTF….they still end up “making off like bandits” as well.
A direct, Distributive consumer financial paradigm (citizen’s Dividend) of course would short circuit all of this because it would virtually equate individual incomes in real time instead of relying on an inaccurate abstraction like velocity theory to (never actually ) equate them in some equally abstract future time and occurrence. And then the other monetary mechanism of Douglas’s Social Credit, the mathematically derived general Discount on retail prices, prevents any incidental inflation and still enables and makes Social Credit fit seamlessly within a profit making system.
So lets have the above and actually solve the system’s instabilities instead of palliating them (Keynesianism) or worshiping a delusionary and godlike abstraction like the market (Austrianism).
Dear BFWR,
Was wondering what BFWR stood for! Glad you enjoyed my book. Franklin’s system of Pennsylvania loaning money into circulation (1723 and 1726) and having the interest on it be used for colonial expenses was not as direct as Massachusetts earlier (1690) “bills of credit” which were spent into circulation (at a small discount) on colonial expenses and accepted back for monies due to Massachusetts.
Yes, Kucinich’s NEED Act (HR2990 of 2011) Has a provision for a citizen’s dividend. Its under title v reads: (at http://www.monetary.org/wp-content/uploads/2013/01/HR-2990.pdf)
“SEC. 507. INITIAL MONETARY DIVIDEND TO CITIZENS.
(a) In General- Before the effective date, the Secretary, in cooperation with the Monetary
Authority, shall make recommendations to the Congress for payment of a Citizens Dividend as a tax-free grant to all United States citizens residing in the United States in order to provide liquidity to the banking system at the commencement of this Act, before governmental infrastructure expenditures have had a chance to work into circulation.
(b) Study of Effects of Citizens Dividend- The Secretary shall maintain a thorough study of the effects of the Citizens Dividend observing its effects on production and consumption, prices, morale, and other economic and fiscal factors.”
BFWR, the amount – if any – would be determined by Congress. We thought that instead of bailing out the banks, the money should go to the people. For example, If the bailout to banks was worth 3 trillion $, that could have meant $10,000. to every man, woman and child. $40,000 to a family of four. The recession/depression would be over. Banks could have competed for these deposits.
Stephen Zarlenga wrote: “Massachusetts earlier (1690) “bills of credit” which were spent into circulation (at a small discount) on colonial expenses and accepted back for monies due to Massachusetts.”
Clearly that was not debt-free as the money was spent and collected back as tax debt just as I pointed out. And neither was the the money issued in Pennsylvania. So how is it that you call what AMI proposes “debt-free money”?
Stephen Zarlenga wrote: “We thought that instead of bailing out the banks, the money should go to the people. For example, If the bailout to banks was worth 3 trillion $, that could have meant $10,000. to every man, woman and child. $40,000 to a family of four. The recession/depression would be over. Banks could have competed for these deposits.”
Unless you were planning to drop cash from helicopters, wouldn’t the deposits be in bank accounts already?
And.. 3 Trillion. How much of that money was owed and in potential default? Possibly all of it and more. Without debt forgiveness, that “debt-free” legal tender (Keen) would just have been paid to the banks who would then simply stop lending altogether, crash the economy and buy up what they don’t already own at a penny on the dollar with the debt-free 3 Trillion in legal tender you just handed them for free.
In response to Oliver: I will happily put my argument in your terms. Thank you for engaging me. Your T accounts need to be carried forward in time.
T = 2 (on-lending)
bank:
liabilities = 100 (deposit of lender 2)
assets = 100 (loan to borrower 1)
borrower 1:
liabilities = 100 (loan from bank)
assets = 100 (real asset)
lender 1:
liabilities = 0
assets = 100 (claim on borrower 2)
borrower 2:
liabilities = 100 (loan from lender 1)
assets = 100 (real asset 2)
lender 2:
liabilities = 0
assets = 100 (deposit claim on bank)
Carrying on from where you left off…if we assume all money to be in the same situation, we can continue to treat this as a closed system.
Because the 100 dollars borrower 1 created is currently only available as a loan from non-bank lender 2, borrower 1 can only pay off its loan by borrowing the 100 from non-bank lender 2.
borrower 1 repays the bank.
bank:
liabilities = 0
assets = 0
borrower 1:
liabilities = 0
assets = 100 (real asset)
lender 1:
liabilities = 0
assets = 100 (claim on borrower 2)
borrower 2:
liabilities = 100 ( loan from lender 1)
assets = 100 (real asset 2)
lender 2:
liabilities = 0
assets = 100 (claim on borrower 1 )
At this point in time, after the original Principal has been extinguished, there is ZERO money in existence and TWO outstanding 100 dollar principal debts of that no longer existing principal.
Imagine that the next bank borrower only borrows 50 new dollars into existence.
Default is mathematically inevitable, is it not?
You wrote: “there are always enough real assets (at book value) to back financial claims.”
True, but that is cold comfort to the millions of people foreclosed upon and evicted from their homes due to a general increase in savings and on-lending, not by any fault of their own. Do you really accept a system DESIGNED to have this result?
T=3 the MMT “solution”
Again, if we assume that all money is in the same situation, then we can treat this as a closed system, and carry on from where you left off. As long as lenders 1 & 2 have the 100 each, the only way borrowers can pay back the bank is to borrow the money from lenders 1 & 2. After the borrowers have paid back the bank.
bank:
liabilities = 0
assets = 0
borrower 1:
liabilities = 100 ( to lender 1)
assets = 100 ( real asset 1)
lender 1: liabilities = 0
assets = 100 ( claim on borrower 1 )
borrower 2:
liabilities = 100 ( to lender 2 )
assets = 100 ( real asset 2 )
lender 2:
liabilities = 0
assets = 100 ( claim on borrower 2)
At this point in time, after the original Principal has been extinguished, there is ZERO money in existence and TWO outstanding 100 dollar principal debts, just as before.
So clearly, just as in the first scenario, there is no money left in the system, therefore both borrowers will default and lose their real assets, unless 200 new dollars in bank credit is created ON TIME by someone going into debt to a bank.
In reality, of course, the debt to a bank will be paid and extinguished with whatever principal-debt-to-a-bank that can be obtained, leaving THAT loan without any principal with which to pay it.
Each increase in the amount must be maintained. That’s why I call it the Perpetual Debt Level.
The Perpetual Debt creates a “ratchet effect” growth imperative and periodic waves of defaults to clear the impossible math out of the system. And that’s not the end of it.
The lent 100 can subsequently be captured by N non-bank lender/borrower pairs until the total principal debt is N x 100. Borrower 1 earns the 100 and pays it back to the bank and extinguishes it.
Now total defaults will be N x 100, where N has NO LIMIT.
In the chart of M1 and M2 whenever M1 is flat while M2 continues to climb, a recession and a spike in foreclosures follows, just as my analysis predicts.
http://paulgrignon.netfirms.com/MoneyasDebt/MAD2014/problem5.htm
Well, there are solutions to both examples in which debt can be paid down / does not represent a problem. Take the base case of circuit theory:
Firms employ workers and (borrow from banks) to pay them money wages. In spending
their money wages, workers gain access to a fraction of the output, the size of that fraction
varying according to the price they pay for goods in markets. Symmetrically, firms earn
profits formed by the surplus of the price received for the goods sold over the wage-bill
the firms paid out, allowing them and their backers to appropriate the complementary
part of the output.
The solutions lies in the fact that money changes hands when it is earned as income for the production of something that itself then demands being bought. And it is when that cycle no longer works that companies default thus shortening overall balance sheets. This is a feature, not a bug of capitalism.
You can also add in investment, where wage earners spend not on output but on company debt that is then spent on fixed capital. That debt is then tied up in the company and does not represent anything that can be consumed as such and thus cannot really be paid down. It is supposed to yield a cash flow through its productivity. If it doesn’t live up to that promise, again companies must default on their obligations.
There are probably many other examples in which this does not work out quite so nicely. But then, maybe those are the kind of examples we should be avoiding?
My general case would be that our system is not as FUBAR as we make it out to be, in fact it is quite ingenious in many ways. But I do think we have very serious quality issues in human interaction that need addressing. It isn’t the system we should distrust, it is ourselves we must learn to find new trust in.
I fail to see how either of those arguments even addresses the dynamic I provided you in response to your T account analysis. It looks to me like you are trying to escape my argument by changing the subject.
You can pay $2 in Principal debt with only $1 of Principal? You must be a magician.
In my analysis, interest is assumed to be taken in by the lender and spent.
If it is not spent, it is lent and becomes twice-lent Principal.
http://paulgrignon.netfirms.com/MoneyasDebt/twicelentanimated.html
If you lend me 10$ at 10% and keep the 1$ interest and lend it to me again, principal is now 11$. So? All that means is I have to work longer to pay you back not, that I can’t pay you back. The flow of income is important here, not debt in itself. It is meaningless as a stand alone number. I don’t borrow money to pay it back. I borrow money to invest.
Oliver wrote: “If you lend me 10$ at 10% and keep the 1$ interest and lend it to me again, principal is now 11$. So? All that means is I have to work longer to pay you back not, that I can’t pay you back.”
Where did you get the $1? If all money is created as Principal Debt to a Bank, there’s no outside source to get it from.
We are talking about the bank credit money system. Only $10 exists and the debt is payable only in $.
Principal is LENT, by definition. Money is created as Principal.Therefore only ONE dollar of Principal Debt can be paid with ONE dollar of Principal.
You don’t get “twice-lent money”?
Let’s walk through 2 simplified theoretical situations:
1. deposits are lent a second time
The bank creates $10 and I spend it.
The seller deposits it, $5 into non-bank lending capital and $5 in spending money.
Time comes to pay the bank.
I earn $5 and and borrow $5 from the non-bank lender.
Total Principal in the system is $10.
I pay the bank and extinguish the $10, leaving behind a Principal debt of $5 to the non-bank lender, for which no Principal exists. This debt will have to be paid with $5 from some other loan leaving it $5 short and so on forever… Perpetual Debt.
2. deposits are not lent a second time
The bank creates $10 and I spend it.
The seller deposits it, $5 into indefinite savings and $5 in spending money.
Time comes to pay the bank.
I earn $5 and and borrow $5 in new money from another bank.
Total Principal in the system is now $15
I pay the original bank and extinguish $10.
Some bank still has a liability to its savings depositor for $5.
I still owe $5 to the second bank.
If the $5 stays in savings, this debt will have to be paid with $5 from some other loan leaving it $5 short and so on forever… Perpetual Debt.
This is basic logic and grade school arithmetic and is sufficient explanation for the root instability of our money system, by itself, without adding on the many other causes that also exist.
http://paulgrignon.netfirms.com/MoneyasDebt/MAD2014/problem5.htm
According to this chart, just the savings in M2 constitute 75% of all money created in normal times. So in the above illustration, the Perpetual Debt would be $7.50 in a money supply of $10.00 and that does not include M3 savings and an unknown number of private debts that could be attached to any of it.
Twice-lent money is the minimal case that sets up Perpetual Debt.
N-lent money is the cause of N defaults when new Perpetual Debt Principal is not forthcoming ON TIME.
The same token by which you can create 11$ of debt out of 10$ of cash, namely by relending, I can also pay those 11$ down, namely by re-earning. The problem arises when all lenders (banks) want their money back at the same time. That is what I meant by fragility above. The run for liquidity can only be stopped with emergency lending facilities (or full reserves). Those who do not enjoy such privileges, namely non-bank lenders, can only default or hope for a bailout. But there is no mathematical impossibility of paying back 2P of debt with 1P of means of payment. What you are describing above is a permanent state of Ponzi finance. That can not just be assumed as a general case.
The so-called “debt-free” money is simply taxes spent in advance of collecting them, the tax-debt being used as circulating money until the taxes are due. I totally support this idea. It is proposed in all three of my movies.
I don’t support the delusion that it is “debt-free” money. Nor do I support the idea that money be a Federal monopoly.
I have been telling Stephen this for about 8 years now. I was personally invited by Stephen to speak at the AMI conference in 2010. When I told him I would be speaking on my critique of the AMI proposal, the invitation was withdrawn instantly.
BFWR wrote: “I have debated Paul Grignon on these issues before wherein he first denies that there is a scarcity of individual incomes in ratio to prices simultaneously produced….and then he promptly turns around and offers the “solution” of “producer credits” which is an admission that….there is a scarcity of credit.”
The Grignon solution is to the problem of twice-lent money. The Social Credit solution becomes entirely unnecessary in my proposed system. The problem cannot even arise.
“Producer credits” already exist in the form of depreciation allowances which enable businesses (but not the individual) to better deal with the actual problem…which is a general scarcity of total individual incomes continuously created and enforced by the current rules of cost accounting which say that all costs must go into prices, and yet labor costs, that is individual incomes are always only a fraction of….total costs and hence total prices. And this most basic and most deeply embedded rule….is always in effect. That’s always as in never not in effect for any and all amounts of money entering or re-entering the economy.
The individual receives no such credit and yet all costs including capital costs go into the absolute minimum of possible prices….and individuals must pay all of those prices…without the ability to do so.There are also a laundry list of other factors like international wage arbitrage and technological innovation which are also acceleratingly decreasing total individual incomes. However, the most often unfactored reality is the above flaw in the cost accounting rules which guarantees that the rate of flow of total costs/prices will always exceed the rate of flow of total individual incomes. This above most basic empirical monetary and economic data graphed will show two upwardly sloping lines, the top one, prices and the lower one incomes and they are diverging through time. This is the picture of price inflation and the elemental economic reality of the entire productive process. Price inflation necessitates monetary inflation because without continuous injection of debt into the economy the scarcity of individual incomes in ratio to prices would result in goods sitting on store shelves which would result in slow downs and stoppages of production….which of course would result in…..less individual incomes. All factors being considered, including exports and the circulation of money, which is another post, the overall reality is A (Total Individual Incomes [labor costs] will not pay for A + B (all other costs).
“Producer credits” is a solution which is derived from prior theory, namely Quantity and Velocity Theory. Theories as we see post 2008 are often not accurate. Better to base a solution on empirical data as per above.
Paul, no reply to my post above? And by the way Banks do not loan out their deposits, and person to person loans are a minuscule part of the financial market let alone the entire economy.
Oliver wrote:
See here, for MMT specific examples: http://www.levyinstitute.org/pubs/wp_656.pdf
QUOTE: “The notion of “velocity” of circulation applies as the single demand deposit created in the initial bank loan is used to finance the whole stream of purchases and payments until the loan is finally retired.”
This convenient assumption is WRONG.
About 75% of all bank credit money created is permanently locked up in savings. Therefore, 75% of the money supply is permanently unavailable to pay down the debt that created it without creating another debt. When that percentage was 66% we had the mid-90’s prosperity. When it hit 81% we had the Crash. And that makes perfect sense and was predictable.
Savings aren’t some mysterious and complex “leakage” as the report calls it. They are an INTERRUPTION of the credit cycle. They are the absolute FAILURE of “velocity”. Bank credit money does NOT have velocity as velocity has both speed and direction. Nothing directs bank credit back to the borrower that created it. In fact we are encouraged to save and thus make repayment impossible without perpetual growth of aggregate debt to banks.
That creates Perpetual Debt, the Growth Imperative and periodic Crashes.
All your proposed other forms of liquidity come into being with their own debt and have zero bearing on this situation.
Sorry, only just saw this. (Im am not Wray, btw., nor am I MMT).
I agree, the notion of velocity as he uses it here is not useful. Existing demand deposits do not finance any new investment / new production. They can be passed around in asset swaps but are themselves only the legacies of investment cycles that remain open and thus of debt that remains unpaid.
I’m not sure it’s correct to say that the money is unavailable to pay down debt, because that would be inferring that depositors cannot at the same time be debtors, which is obviously not correct. In fact it is often wealthy individuals and corporations that are most indebted in absolute terms (not necessarily vs. their income / net worth). So it is safer to say that existing deposits aren’t (or weren’t) being used to pay down debt. And we also know that if everybody pays down debt at the same time, we’re in trouble because of the paradox of thrift.
I do not see a necessary connection between gross debt levels and periodic crashes. Again, the debt level itself says nothing about the stability of the system. It is only vs. other measures such as income that we can establish an indicator of financial sustainability. If a saturated Western economy thinks it’s producing 10% value added p/a while the only visible output is McMansions and bubbly baech front property for example, that is probably a good indicator of Minskyan hubris. I.e. those so-called investments are bound to go sour at some point.
There is a lot in MMT literature about disencouraging saving. I don’t see much disagreement there. I agree with you about the terms leakage and velocity.
Paul:
“”About 75% of all bank credit money created is permanently locked up in savings. Therefore, 75% of the money supply is permanently unavailable to pay down the debt that created it without creating another debt..””
Not disputing any data or facts (except for ‘”permanently” locked up in savings’, but I fail to see why you do not understand that this is a problem of debt-based, bank-credit money, and not with that of of permanent, debt-free-issuance by the public.
BTW, the term ‘debt-free-money’ refers to its issuance method, NOT that it cannot or would not later be saved and invested through lending.
YES, IF you lend money. But what happens when the TBTF banks e.g., make $11trillion Amount outstanding 2014) in ‘home loans’ with an average of 4% over 30 years. Using no money of their own (only 6% of OPM needed), they then receive over $22 trillion in payments. Where does this over $11 trillion in profit come from?
The ‘borrowers ‘ who really “owe their soul to the company store”.
When will the people be told, “When we legislated that Private For Profit Banks may issue our currency and charge interest (TAX) it, we have placed ourselves into servitude.”
Quote Thomas Jefferson:
“The system of banking [is] a blot left in all our Constitutions,
which, if not covered, will end in their destruction…
I sincerely believe that banking institutions are more dangerous
than standing armies; and that the principle of spending money to
be paid by posterity… is but swindling futurity on a large scale.”
— Thomas Jefferson
(1743-1826), US Founding Father, drafted the Declaration of Independence, 3rd US President
Source: stated in 1811 when President Jefferson refused to renew the charter for the First Bank of the United States (the 2nd central bank chartered by Congress in 1791)
http://quotes.liberty-tree.ca/quote_blog/Thomas.Jefferson.Quote.78B4
“By a declaration of rights, I mean one which shall stipulate
freedom of religion, freedom of the press, freedom of commerce
against monopolies, trial by juries in all cases, no suspensions
of the habeas corpus, no standing armies. These are fetters against
doing evil which no honest government should decline.”
— Thomas Jefferson
(1743-1826), US Founding Father, drafted the Declaration of Independence, 3rd US President
http://quotes.liberty-tree.ca/quote_blog/Thomas.Jefferson.Quote.58AE
“I consider the foundation of the Constitution as laid on this ground that ‘all powers not delegated to the United States by the Constitution, nor prohibited by it to the states, are preserved to the states or to the people.’ … To take a single step beyond the boundaries thus specially drawn around the powers of Congress is to take possession of a boundless field of power, no longer susceptible of any definition. The incorporation of a bank, and the powers assumed by this bill (chartering the first Bank of the United States), have not, been delegated to the United States by the Constitution.”
— Thomas Jefferson
(1743-1826), US Founding Father, drafted the Declaration of Independence, 3rd US President
Source: in opposition to the chartering of the first Bank of the United States (1791).
http://quotes.liberty-tree.ca/quote_blog/Thomas.Jefferson.Quote.B253
“The happiness and prosperity of our citizens
is the only legitimate object of government.”
— Thomas Jefferson
(1743-1826), US Founding Father, drafted the Declaration of Independence, 3rd US President
1811
Justlucky wrote: “..what happens when the TBTF banks e.g., make $11trillion Amount outstanding 2014) in ‘home loans’ with an average of 4% over 30 years.. they then receive over $22 trillion in payments. Where does this over $11 trillion in profit come from?
You pay the interest. The bank spends it. You earn it and pay it to the bank again.
If monthly payments are $1 and the banks spends the dollar each time, you can theoretically pay an infinite amount of interest with a single dollar.
Thanks for the reply Stephen. And I salute your inclusion of a citizen’s dividend in your bill. It is a direct and courageous challenge to the Banks’ utterly restrictive grip on the paradigm of credit issuance to the individual, namely loan only. The Banks have ascended to their too big to fail status in no small way as a result of this lack of competition in the consumer financial paradigm. What an oddity that such monopolistic powers are given to Banks…in allegedly free market theory.
If anyone here can give me an instant when cost is not a factor in the economic system, and an instant when individual incomes, i.e. labor costs are ever anything other than a fraction of total costs,….then how can the rate of flow of total individual incomes ever be equal to the rate of flow of total costs/prices? The usual economic reply is the velocity of money, but as we see since 2007 theories…aren’t always very accurate or well modeled. Velocity theory is flawed at best and worst is completely fallacious, and whichever it actually is….it has never been adequate to its alleged monetary effects. Finally, there is a laundry list of factors that increasingly mitigate its faulty modeling and inadequate at best effects.
Yes you can create $11 (or any amount) of Principal debt by re-lending $10 in cash.
I want to know how you think you can pay back $20 in Principal Debt with only $10 of Principal in existence.
Please walk us through the process or “re-earning” step by step.
Paul, this comment goes to whether you’re talking about the money supply(created by a debt-instrument) , or the credit supply, which can be any multiple of the money supply..
That on-lending thing.
You lend me $10, I lend it to John, who lends it to Stephen who lends it to Oliver.
There is $40 sum of credit-based, Principal ‘debt’ owed.
Oliver repays Stephen, who repays John who repays me.
I repay you.
There is still exactly $10 in existence, and it has extinguished $40 in credit-based, but not debt-money based credits.
This is silly stuff.
In your analysis, thee seems no distinction between the credit and monetary aggregates.
joe bongiovanni wrote: “In a steady-state economy and no need for new money, AFTER monetary reform, all the money in circulation is permanently advancing public policy, and thus not forcing a tax upon the citizens for its use, as the private bankers do now.
OK you now have a steady state economy with as you say, no need for new money.
Therefore the government cannot just create more and spend it. With what does it fund its operations? Taxes, fees, royalties or what?
joe bongiovanni wrote: “Per chance, do you think that your learning over the years provides a better and more workable solution than the reforms proposed by both AMI (HR 2990) and Dr. Huber, then please say what they are, and why.”
The problem is our concept of money. The solution is to expand our concept of money.
I have a 2/12 hour animated movie and a full website presenting both my analysis and my proposed solution in great detail at http://www.moneyasdebt.net.
joe bongiovanni wrote: “You lend me $10, I lend it to John, who lends it to Stephen who lends it to Oliver. There is $40 sum of credit-based, Principal ‘debt’ owed.Oliver repays Stephen, who repays John who repays me.I repay you.
There is still exactly $10 in existence, and it has extinguished $40 in credit-based, but not debt-money based credits”
Steve Keen dismissed me with the exact same response, even after reading the clear distinction I am going to illustrate for you now.
Your definition of debt is faulty.
I have your promise of repayment as an asset, you have John’s, John has Stephen’s and Stephen has Oliver’s. None of us is in debt.
Only Oliver is in debt for $10. There is only a single debt of $10 through several intermediaries. So $40 of debt was not extinguished with $10. $10 of Principal debt was extinguished with $10.
This is NOT what I mean by twice-lent money.
Here’s the REAL puzzle for you and everyone else who cares to try:
I, the bank, lend you $10. You spend it and it passes through 1000 transactions until 2,000 miles away, Bob has it and will only lend it, either as a deposit at a bank or as a “real” loan. Bob neither knows nor cares that you need that money, ON TIME, to pay me back.
Bob is going to keep $7.50 of it out on loan forever.
Therefore, that $7.50 you borrowed from me will NEVER be available for YOU to earn and pay me back unless someone borrows it from Bob.
Someone borrows the $7.50 from Bob, it circulates, you earn it plus the available $2.50 and pay me back the whole $10.
Whether I am a bank creating and destroying money or a non-bank that only lends its operating capital, the result is the same. There will be no further Principal available unless it is BORROWED into circulation.
Someone still owes Bob $7.50. Otherwise he forecloses.
Total money available to pay Bob at this moment = ZERO
Because, in the real world, money is created as debt to banks, any time the creation of new bank credit slows down, people will lose their homes through mathematical certainty, and by the design of the money system itself.
Why did I choose $7.50? Because that is the proportion of the total money supply that is in (M2-M1) permanent savings in normal times. The Crash happened when it hit $8.10 out of $10.
http://paulgrignon.netfirms.com/MoneyasDebt/MAD2014/problem5.htm
This is in reply to Paul Grignon $76
Paul,
Thanks. I have read and learned much from your wok over the years, including that on your site linked here.
I really do not think that today you have a proper monetary science understanding of the working of the money system, and most especially not about the equity-based (so-called ‘debt-free’) money system advanced today in the AMI and Kucinich proposals.
You take money-system consequences from credit system machinations. It does not take more money to pay down ‘credit’-debt principal, just more credit, as I indicated above.
You say here the BIG question – which only comes into play in some future sustainable, so-called ‘steady-state’ economy – is this:
“”OK you now have a steady state economy with as you say, no need for new money.
Therefore the government cannot just create more and spend it.
With what does it fund its operations? Taxes, fees, royalties or what?””
Whoa, Paul.
A couple of biggies like a proper definition of steady-state sustainable economy.
For the ecological economists, it means achieving a balanced resource throughput, a difficult row to hoe from our present “externality-externalizing” capitalist model.
Not impossible, but a long way off.
Perhaps you lost the meaning or significance of my earlier comment which said that because all the money in existence was permanent, public utility money, then it always remains available for its same use from year to year.
We have exactly a $15 Trillion economy for three years in a row.
The government uses $4Trillion of that permanent ‘public utility’ money for public services for each and every one of those years. No problem. Do it again next year. Nobody will never run out of money in a ‘permanent’, public money system, especially not the issuing government.
Paul, get out of the debt-based money-think and recognize the real workings of public money. When money is not ‘created and destroyed’ via debt – in order to HAVE money – it ceases to become an impediment to resource conservation.
Thanks.
“Stephen Zarlenga wrote: “We thought that instead of bailing out the banks, the money should go to the people. For example, If the bailout to banks was worth 3 trillion $, that could have meant $10,000. to every man, woman and child. $40,000 to a family of four. The recession/depression would be over. Banks could have competed for these deposits.”
BUT “Justaluckyfool”, http://bit.ly/MlQWNs wrote:” What IF the Fed purchased all “residential loans” replacing the ‘thin air bank money’ with the peoples money- a simple book entry.
Let’s say $12 trillion is the entry needed to replace the “fractional reserve created money”.
The Fed could then modified the loans at 2% for 40 years- making them AAA for ‘the value of the property with an assumable mortgage would make the risk be at less then 2%.
This bailout would not only create over 2 million jobs by instantly stabilizing the housing market, but also would “raise over $12 trillion over the 40 years FOR THE PEOPLE!
Do you not see as it works now (The Fed working for the PFPBanks they get to distribute that $12 trillion plus to the top 10%) IF the Fed was working for the people and the only source of new issuance and charged a tax called interest on it HOW many trillions would have-no must be distributed back to the people via Congress (SS,Medicare, etc) just so they could pay the note?
A thirty second solution to (J)ob (G)uarantee, and smaller inequality gaps..
*WHAT IF THE …The Fed Reserve were to become the CENTRAL BANK WORKING FOR THE PEOPLE (CBWFTP) instead of working for the Private For Profit Banks (PFPB) .
Let’s try this game: Substitute the words “Central Bank Working For The People” (CBWFTP) where ever” Private For Profit Banks” (PFPB) appears.
****PFPB have $100 trillion in assets as mortgages on residential and commercial real property (RE) loans. The average compound interest rate is 4% for a term of 36 years. The PFPB would have created that $100 trillion ‘out of thin air’ which would have an attachment that would require $400 trillion to be paid to the PFPB in order for the loan to be paid in full. YES, take away the smoke and mirrors. Now we must replace (reduce to zero ) the initial loan amount by subtracting $100 trillion; leaving a profit,income,taxation from ‘somewhere else’ of $300 trillion. This amount goes as profits to the PFPB. Revenue they may use for their own selfish purposes.
READ IT AGAIN,
BUT THIS TIME REPLACE “PFPB” WITH “CBWFTP”.
Why would you not want prosperity for yourselves and your children?
Why would you not want $300 trillion turned over to Congress, to be used..”to form a more perfect Union, establish Justice, insure domestic Tranquility, provide for the common defense, promote the general Welfare, and secure the Blessings of Liberty to ourselves and our Posterity,…”
The Federal Reserve would purchase all real estate loans and modify them with terms and conditions, these loans shall be assumable at 2% interest for 36 years. The Federal Reserve would also make available $10 trillion for new residential construction. Also up to $50 trillion available for buyers mortgages.Being an American citizen with an income deems that person as ‘creditworthy’. The real asset value is in the completed product and its land value.
IF $72 trillion in loans, that would produce $4 trillion a year in REVENUE from taxation.
How many jobs ?
What if $1trillion per state being available for infrastructure ?
….disaster relief?
….renewable energy?
$2TRILLION a year that that must be distributed via health,education, and welfare programs so that the loans can be paid without causing deflation. $2 TRILLION should be used to create new loans to perpetuate the system.
What would be the unintended consequence ? Perhaps a need for a larger population? Surely there would be more jobs created than available employable ?
We need only to take the advice of Keynes, Minsky, Soddy, even von Mises, and many others: Separate the private for profit banking system from government.
Trust Banking System
Under this system, banks would be divided into 2 totally separate parts or “windows”, one being the trust depository side and the other the credit side (lending and investments). In effect this could be called “Glass-Steagall on steroids”.
1. Depository or Payment Window
In a Trust Banking System when a normal deposit is made at a bank into the depositor’s account, the funds would continue to belong to the depositor (versus exchanged for an IOU as under the current system) and the bank is simply given instructions by the depositor as to what to do with the money, e.g., when a check is presented for payment, it will be paid. This would all be covered under the standard depository agreement between the bank and the customer. 100% of the depository base will at all times be covered by cash in the vault or deposits at the Fed. The only source of income for a bank from the Depository Window would be fees for services. No deposit creation would exist in this system and thus no new money created by private banks. Further, because all deposits would at all times be fully covered, the needed oversight would be minimized as the system is autonomously stable.
2. Credit or Investment Window
Under the Trust Banking System banks would become true intermediaries (as most think that banks are today) and offer loans and other investment products from those with cash wishing to have it invested. This would be done through the Credit Window of banks but none of the funds under the Depository Window would be available for this purpose. Instead, savers and investors would subscribe to a series of offered mutual funds in say, car loans, or mortgages, or commercial loans of various kinds, and so on. These could be open or close-ended funds as desired with maturities, risk levels, and return levels published by the bank in advance. Thus credit would now be driven by savings rather than the arbitrary increase (or decrease) of high powered money and deposit creation. Savers would again be rewarded for savings and interest rates would be controlled by the market rather than largely by Fed edict and actions as now.
READ MORE:
Frederick Soddy writings, namely “The Role Of Money”
(Entire book as a free download… http://archive.org/details/roleofmoney032861mbp
Please note .
No inflation and at least 50% of the money MUST be put back into circulation for the Fed is mandated to quality and quantity control!
100% correct:” You pay the interest. The bank spends it. ”
Bribe politicians, maybe just help their own, whatever the PFPBanks want to do with it.
OMG: what if they wanted to give it back to the people via SS or Medicaid ?
They got it by “taxation on their issuance”, they call it ‘interest income’ but it is earned using OPM, not their own.
BTW, how much goes to those that earn less than $25,000 (those below the poverty line).?
They are part of the Other Peoples Money used.
Michael Lucas Monterey
January 19, 2014 at 9:51 pm | #6
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…You do realize that there is no reason NOT to double charge (tax us) for “money” created to “pay” for goods & services rendered to We the People – right? In fact & in principle, as long as currency is issued (directly) in direct proportion to goods & services produced, then devaluation, inflation, deflation, recessions, and depressions cannot be orchestrated by clever manipulators (abusing the system & defrauding the little people). Hence, instead of arguing debt-free currency issues, we can re-establish the basis of a nonprofit money system. If humanity is still too immature or delusional to demand truly trustworthy managers of a nonecocidal (non-expoitable) system, then I suggest making each of us the agent of our cultural mint (our community treasury). After all, each of us are the real arbiters of the conceptual value we create at the moment of agreement per each transaction (whether we call it trading, exchange, barter, gifting, receiving, evaluation, or whatever).
Why not tax the issuance “Summary :Obama,’To lower taxes,you must raise revenue somewhere’.How would a government be able “to form a more perfect Union, establish Justice, insure domestic Tranquility, provide for the common defense, promote the general Welfare, and secure the Blessings of Liberty to ourselves and our Posterity,…” , while maintaining control of the quality and quantity of its currency? The answer lies in how the most powerful force in the universe is used. “The most powerful force in the universe is compounding, and in economics;that is compound interest.” Read, then prove it to be false,or correct , then endorse it. Justaluckyfool’s comments re Soddy, “The Role Of Money” http://bit.ly/MlQWNs
Jalf, much as I appreciate your logical argument, for me the issue is why “clever manipulators” WANT to “abuse the system and defraud little people”. My (tongue-in-cheek) argument is that their wives love gold and diamonds, so husbands take these as valuable rather than symbols of their wives’ beauty, treat paper money as of equivalent value and consequently want it to please their wives. If the social convention was that this was indebting their wives to the rest of society (as it is) then perhaps they wouldn’t be so motivated.
joe bongiovanni wrote: “After reform, money only enters permanent circulation ONCE, as equity and not debt.”
In my view, if money is “equity” it has to be redeemable for something real. Otherwise using the word “equity’ is simply the same self-delusion as “debt-free”.
“Once in private hands it can be either spent( thus determining a velocity factor) or saved (thus determining a hoarding factor).”
Saved means lent, and you conveniently left out lending and borrowing.
And when almost all money is in the possession of economically powerful lenders, most money will be put into circulation as debt, no matter what form “money” takes.
joe bongiovanni wrote: ” I fail to see why you do not understand that this is a problem of debt-based, bank-credit money, and not with that of of permanent, debt-free-issuance by the public.”
So the government is going to buy houses and cars for us and finance farmers and industry basically own and run everything as in Soviet Communism. The only source of finance will be the government and anyone else caught lending money will go to the gulag.
If that isn’t your intention, the banks will still be lending this “debt-free” money to house buyers and industry and once the lent money is tied up in a second debt-of-itself, your reforms will have had no effect on the root problem whatsoever.
Paul, this is either glaring ignorance, or defensive posturing.
“”So the government is going to buy houses and cars for us and finance farmers and industry basically own and run everything as in Soviet Communism.””
No, Paul, the government is going to do NONE of that. Have you read HR 2990?
The government is going to be the vehicle by which public purchasing power enters PRIVATE bank accounts in order for that money to remain permanently within the national economy(money-issuance), and what happens with those private bank accounts after the Guv spends the purchasing power into existence is none of the government’s care nor the government’s business.
Are you REALLY equating the proposals of Simons, Fisher and Friedman, now Huber and Turner, with “Soviet Communism”?
The only source of ‘finance’ will be those private bank accounts.
So, yes, of course, the banks will still be lending that “debt-free-at-issuance” money for mortgages and industry….. but when you say…….””, once the lent money is tied up in a second debt-of-itself””, you, Paul, have wandered off the reservation.
When it’s in the bank accounts, there is no associated debt.
When it moves to a savings account or investment trust, the banks are in ‘debt’ to their depositors. There is ZERO debt associated with the money coming into existence. Until it is lent by the bank for a mortgage or industry, there is ZERO associated ‘debt’, again by its legal definition.
The banks are not creating ‘money’ when they make those loans, but credit.
And, again, if THAT reform scenario presents you with any ‘money-system’ problem, then please say what that problem is.
Thanks.
joe bongiovanni wrote: “You lend me $10, I lend it to John, who lends it to Stephen who lends it to Oliver. There is $40 sum of credit-based, Principal ‘debt’ owed.Oliver repays Stephen, who repays John who repays me.I repay you.There is still exactly $10 in existence, and it has extinguished $40 in credit-based, but not debt-money based credits”
Steve Keen dismissed me with the exact same response, even after reading the clear distinction I am going to illustrate for you now.
Your definition of debt is faulty.
I have your promise of repayment as an asset, you have John’s, John has Stephen’s and Stephen has Oliver’s. None of us is in debt.
Only Oliver is in debt for $10. There is only a single debt of $10 through several intermediaries. So $40 of debt was not extinguished with $10. $10 of Principal debt was extinguished with $10.
This is NOT what I mean by twice-lent money.
Here’s the REAL puzzle for you and everyone else who cares to try:
I, the bank, lend you $10. You spend it and it passes through 1000 transactions until 2,000 miles away, Bob has it and will only lend it, either as a deposit at a bank or as a “real” loan. Bob neither knows nor cares that you need that money, ON TIME, to pay me back.
Bob is going to keep $7.50 of it out on loan forever.
Therefore, that $7.50 you borrowed from me will NEVER be available for YOU to earn and pay me back unless someone borrows it from Bob.
Someone borrows the $7.50 from Bob, it circulates, you earn it plus the available $2.50 and pay me back the whole $10.
Whether I am a bank creating and destroying money or a non-bank that only lends its operating capital, the result is the same. There will be no further Principal available unless it is BORROWED into circulation.
Someone still owes Bob $7.50. Otherwise he forecloses.
Total money available to pay Bob at this moment = ZERO
Because, in the real world, money is created as debt to banks, any time the creation of new bank credit slows down, people will lose their homes through mathematical certainty, and by the design of the money system itself.
Why did I choose $7.50? Because that is the proportion of the total money supply that is in (M2-M1) permanent savings in normal times. The Crash happened when it hit $8.10 out of $10.
http://paulgrignon.netfirms.com/MoneyasDebt/MAD2014/problem5.htm
Paul, thamks.
I’m really sorry to tell you that none of this makes any ‘money’ sense.
It includes one element of truth about ‘debt-based’ money that has zero relationship to ‘equity-based’ money, as in the AMI, Kucinich and Huber’s ‘sovereign-money’ proposals.
In the reform world, as I thought you agreed earlier on, the operating premise is that ONLY the government can create the nation’s money supply. I asked for your ‘problem’ with the public money construct.
PG: “”Because, in the real world, money is created as debt to banks,”” is a non-starter and shows your failure to come to grips with true reform to the way money is created and issued.
Yeah, there’s a musical-chairs aspect to debt-based money, but we have all known that for many decades, and it is one reason to change to a new money system.
In a reform world, NO MONEY is created when banks make loans. ALL the money is created by government spending. So, what more is there to discuss?
Also, changing the meaning of terms is an unfair effort.
PG : “”Your definition of debt is faulty. I have your promise of repayment as an asset, you have John’s, John has Stephen’s and Stephen has Oliver’s. None of us is in debt. “”
Sorry, Paul, maybe you think you know what you mean by this shorthand, but if YOU have MY “”promise of repayment as an asset””, then obviously, I am “in debt” to you for a tenner.
The same is true for John, Stephen and Oliver.
Otherwise, by definition, (None of us is in debt) then nobody has anyone’s “promise to repay” asset.
What we are NOT, is indebted to a debt-money-issuing bank.
So, if what you want to do is identify another potential problem for the debt-based money system, then you need to try to convince someone else whose answers to money problems does not include reforms.
For reformers, the solution is non-debt-based money. Which, obviously solves for all of the problems you cite.
And your ‘postulated’ events DO NOT include money reform, such as the sovereign money proposals considered here. You’re in trouble if Steve Keen and I agree on what you’re saying, because Steve and I agree on very little.
See: https://www.youtube.com/watch?v=TU_cYkNpxSU
Thanks.
joebhed wrote: “In a reform world, NO MONEY is created when banks make loans. ALL the money is created by government spending. So, what more is there to discuss?”
Wow. I guess nothing. You have made zero effort to understand what I am talking about and any further efforts on my part would be wasted, wouldn’t they? The problem I am trying to get you to see applies to money as cowrie shells, gold, silver, fiat cash, government-spent “debt-free” money, bank credit and Bitcoin. Until you comprehend why that is, you comprehend nothing of what I say.
According to you, there’s nothing more to discuss. So do not reply.
joebhed wrote: “Also, changing the meaning of terms is an unfair effort. PG : “”Your definition of debt is faulty. I have your promise of repayment as an asset, you have John’s, John has Stephen’s and Stephen has Oliver’s. None of us is in debt. “”
Sorry, Paul, maybe you think you know what you mean by this shorthand, but if YOU have MY “”promise of repayment as an asset””, then obviously, I am “in debt” to you for a tenner.
The same is true for John, Stephen and Oliver.”
If you have my promise of repayment of $10 and I have Oliver’s promise of $10, what is my net position? ZERO. I am at risk of being in debt if Oliver doesn’t pay me. I am NOT in debt.
Each person in that chain has a $10 promise of repayment that zeros out their own $10 promise of repayment to the next guy in the chain. Net Principal debt is the $10 owed by Oliver who has no balancing debt asset.
In a system where money is created as a debt-of-itself a “genuine” loan can only be made with the proceeds of a fictitious one. Therefore, P of money < 2P of debt of that money
Therefore, a genuine loan, which includes ALL bank deposits, is "twice-lent" and is the source of the mathematical growth imperative.
Dear Mr. Bongiovanni,
While I am sympathetic to your views, I just can’t get by what seems to me to be a denial of basic accounting principles.
Every financial asset has a corresponding liability.
Money is undoubtedly a financial asset (of the bearer) & therefore, by definition, must also be the liability of someone (the issuer).
I don’t see how it can be otherwise.
The only reason I can see for denying the reality of accounting is for the purposes of propaganda (no negative connotations intended). The slogan “debt-free money” may indeed be an effective tool towards achieving your desired reforms.
The issue isn’t over the nature of your reforms, it’s over the accounting description of these reforms.
Accurately describing reality doesn’t alter reality.
Respectfully,
Vilhelmo
The only debt-free money is a commodity of inherent value such as cattle and salt. Numbers cranked out by government is not “equity”, nor is it debt-free.
Cheap shot.
And not very thoughtful.
The ONLY thing that can make cattle or wheat debt-free ‘money’ is the cranking out of an account of same BY THE GOVERNMENT.
IF the government can do that with ‘commodities’ that results in debt-free money (in fact, it cannot because of the ‘commodity nature of those assets) then why can’t it do so with $US-denominated, United States Money that it spends into existence?
Is it BECAUSE you say there is no such thing?
@Vilhelmo
Money is undoubtedly a financial asset (of the bearer) & therefore, by definition, must also be the liability of someone (the issuer).
Vilhelmo, you’re mistaken. USG coins are indeed issued debt-free. They thus serve to illustrate the difference between the sovereign government, which issues the coins, and the privately-owned Reserve Banks, which issue the notes, i.e. paper money.
Here are two representative financial statements:
– A statistical release for the Federal Reserve Banks
– Summary General Ledger Balances for the US Government
Let’s consider first the FRB release. Reserve bank assets and liabilities are Part 8 of the report.
Notice that outstanding Federal Reserve Notes are, as you’d expect, liabilities of the Federal Reserve Banks. The notes are those banks’ promises to pay, as are the line items that follow: Deposits held held by depository institutions, i.e. Reserves ($2.61 T), and the Treasury General Account, an amount the banks owe the Government ($27.4B) against which the USG may write checks.
Reserve Notes held by the banks are neither asset nor liability, as they’re unissued promises to pay, just as a check you’ve written and signed that is still in your possession is not yet an outstanding liability. Reserve Notes, liabilities to Reserve Banks, are assets to anyone else who lawfully holds them.
You can also see in Part 8 that US Government Coins are assets of the Reserve Banks, as are the US Government debt instruments they own.
Now consider, by contrast, the US Government General Ledger summary balances.
Very first line. Cash is an asset to the US Government. Whether it’s Reserve Notes, Reserve Bank Balances, or Treasury coins. Outstanding Treasury securities are liabilities, just as you’d expect. As are outstanding Treasury Checks, Postal Money Orders, et. al.
But nowhere will you find outstanding Treasury coins as a liability, neither of the Government nor of the Reserve Banks. Coins are declared to have value by fiat; they are assets to whoever lawfully possesses them. Paying a dollar bill to a Reserve Bank extinguishes that much reserve bank liability. But paying a dollar coin, whether the bank, the government or your nephew, conveys an asset. It never extinguishes a liability. A coin isn’t a promise to pay; it is that which was promised. It isn’t a debt; it’s a final way of discharging debt. Acceptability for taxes isn’t a liability; it’s an obligation. There’s no one-to-one relationship between taxes and coins, as you’ve incorrectly argued there is for money assets and liabilities.
And there would be accounting chaos if it were otherwise. If Treasury coins held by Treasury were assets, and Treasury coins outstanding were liabilities, then every coin dollar the USG spent would cost two on the books. One for the asset it no longer has, one for the liability it has just incurred. Same is true for Reserve Notes, which are liabilities if outstanding, accounting-neutral if vaulted at FRB.
The coin. Debt-Free Money. Always an asset, never a liability. I’m not recommending debt-free money as wider policy, only demonstrating the concept and correcting your accounting.
Vilhelmo,
Thanks for your considered comment.
Perhaps you are an MMTer who sees an accounting ‘identity’ as proof that “money IS debt”; so how can you have money without debt?
Perhaps not. But none of that is true…..just someone’s opinion.
Every monetary economist I have met who embraces reform (Huber, Yamaguchi, Kumhof, Turner) all admit to ‘discovery’ of a new(old) paradigm that flows from this reality….
In a national economy, the monetary system is the foundation upon which financial economics, and also macro- and micro-economics, functions.
That is the fact of political-economic reality in a modern monetary economy..
Political economies do not comport to accounting norms, rather accounting norms can merely tell us how our political economy is working, from their Uniform system of accounts, adopted, always, by national and trans-national jurisdictions.
Accounting, itself, must serve a purpose.
Are you really saying that a government CANNOT issue money without issuing debt, as did many of the Colonies for a hundred years before The Revolution, and as did Lincoln with Greenbacks during the Civil War?
Are you saying that because the ‘accounting’ does not work, this cannot happen?
Please.
We begin by acknowledging that ALL money IS CREATED…. It does not exist until we say it exists……… by ledger-entry today.
The burden for proof here is upon those who say that the accounting cannot work. And you need to be specific.
What accounting norm( which are changed ALL the time) does not allow the Gov to create money as equity? Can that norm be changed, if necessary?
It most certainly is not THIS statement:
“”Money is undoubtedly a financial asset (of the bearer) & therefore, by definition, must also be the liability of someone (the issuer).””
Of course, debt-free money is advantaged to the public issuer by direct payment into existence, rather than by a private bank issuing a debt into existence that counts as money. That seigniorage privilege is the public benefit from public money.
The government’s liability from this issuance is its equity, and not its debt.
So, public money is an asset to its (account-balance) holder and an equity-liability to the government.
Viola. The accounts balance.
So, there is no ‘otherwise’, except that otherwise, it is equity, and not debt.
We would never deny either the accounting reality, nor the NEED to square the accounting reality.
So, with all due respect backatcha, you’re conjuring up an ill-informed accounting problem, one that is stuck in the debt-based money paradigm. You, or some financial accountant, ought to make a video explaining why this is not possible, from an accounting reality.
I have made many videos on this subject, and they can be found here:
http://www.youtube.com/user/economicstability.
There is no propaganda needed. It’s our money system. And we want it back.
Thanks, Vilhelmo.
@ Mr. Bongiovanni,
BTW, by “propaganda” I simply meant the propagation of ideas.
What is ignored in economics and accounting is “the unearned increment of association.” In other words individuals, including capitalists, when they come together are able to produce much more than does an individual him/herself. Now with the financial resources distributed to the capitalist he is able to determine what wage he will pay to his employees, and this is fine. However, the wages generated by production are always less than a ratio of 1:1 to total costs and so prices in real time, and in any future time as well if one understands:
1) the exact process of how and where money flows as well as recognizing all of the factors simultaneously raising costs/prices and lowering individual incomes, all of the diminutions/extractions of money from the economy in its “circulation” and
2) the absolute embeddedness, inescapability and natural reality of cost in commerce…that enforces the less than 1:1 ratio above.
These realities place in motion inevitable monetary and economic instabilities that will result…unless total wages are equated with total costs/prices….without incurring an additional cost…and so higher prices.
Unionism, for all of its correct intentions, (and non-monetary benefits) is unable to resolve this problem because a rise in wages is simply passed on as an additional cost…which is resolved by a rise in prices.
However, if a gift of credit/money is created by an independent agency outside of the normal financial/commercial credit issuance and flow, and is distributed directly to the individual instead of injected into the economy via an enterprise (which would then re-initiate the less than 1:1 ratio of individual incomes to prices inherent in the commercial/productive process) ….then no additional cost is created that justifies the business owner simply passing it along in prices, and not coincidentally the business owner now has sufficient domestic demand to liquidate his prices and make a profit AND the individual, who receives the direct payment/supplement of income…is set free from the necessity to seek employment….when technology and innovation are lowering the rational need for human effort and increasingly even the need for human input/employment. That means more freedom for businesses and individuals and last but not least the more free flowingness of the entire system…all the way around….as in theory AND in fact.
Finally, because temporal reality and the future is not completely knowable, a periodic macro-economic general adjustment to prices should be implemented based on a mathematically derived formula which maintains the virtual equation of costs/prices and individual incomes….in perpetuity.
I thought Gesell explained all this very clearly in The Natural Economic Order. Money that is both an asset and a liability, as debt money is, is a conflicted money at odds with itself that will cause recurring economic problems, which it has. “…So we must make money worse as a commodity if we wish to make it better as a medium of exchange.” – Gesell This was mathematically proven by Fredrick Soddy as well as Albert Bartlett… but beliefs are difficult for people to change. Facts don’t seem to have much effect, it takes inner work.
joebhed wrote: “The only source of ‘finance’ will be those private bank accounts.”
“The government is going to be the vehicle by which public purchasing power enters PRIVATE bank accounts in order for that money to remain permanently within the national economy(money-issuance), and what happens with those private bank accounts after the Guv spends the purchasing power into existence is none of the government’s care nor the government’s business.”
‘if THAT reform scenario presents you with any ‘money-system’ problem, then please say what that problem is.”
Perhaps a numbered list will help.
Step 1: The government creates $1000 to pay me to perform a task that serves the public.
Step 2: This is done by crediting my private bank account with $1000 that I can now spend as a positive number, as it is not owed to anyone. Everyone can pass this $1000 around forever, because it isn’t owed to a bank. Problem solved.
This seems to be as far as your thinking takes it.
Problem 1: Worthless monopoly money. At least bank credit is “backed” by the hypothecated value of the borrower’s future productivity in society. Unless your money is explicitly “backed” by taxes, it is meaningless in terms of real economic value and demand.
Problem 2: You explain away the Quantity Theory of Money when it suits you, and rely on endless economic growth, just like the current system. My goal is a stable conservation economy that must be capable of handling a shrinking money supply without causing mathematically induced distress. In such a stable or shrinking money supply, the government cannot spend $1000 without taxing $1000 back. Otherwise, it will rob people indiscriminately via devaluation. This makes it “money as debt on a schedule” as surely as bank credit is, but without the interest charges.
Problem 3: You refuse to think through the consequences after this “money as debt on a schedule” has entered the private economy. Let’s imagine that $750 has accumulated into the hands of savers permanently and is only ever available as a loan. Once paid back to the government in taxes, $750 is still owed to the private lenders. For as long as $750 is permanently tied up in savings and secondary lending , there will be a Perpetual Debt of $750, just like the current system, except that the money-creation debt cycle would be from government to taxpayers rather than from banks to borrowers.
Should the taxpayers decide to pay less taxes and lower government spending, this would result in less new money to service the Perpetual Debt with the result being that some debtors, perhaps parents with a mortgage, will default due to an actual mathematical shortage of money.
Problem 4: Governments would still tax us indirectly by spending more than they take back in taxes resulting in devaluation. In fact this seems to be the proposed program, endless spending of worthless fantasy money without taxation, defying the quantity Theory of money.
Problem 5: As income disparity increases due to political power disparity the level of Perpetual Debt increases until it breaks the system as in 2008 and millions lose their homes to foreclosure, through mathematical certainty and the design of the system. The reforms make not a whit of difference.
Five problems should be enough for now.
Paul,
Hope it’s OK to reply here.
Thanks for enumerating these ideas.
Problem 1 – Worthless Monopoly Money……While there may be items in a government budget that make them ‘worthless’ in terms of our social economy, if the GUV issues money that pays for it’s budgeted expenses – “purchases” the goods and services available in the economy – from Paul Grignon or whomever – then what exactly would make that money not have purchasing power when in the account of you, the payee?
Money cannot be made ‘worthless’ via misunderstanding money operations.
Problem 2
I don’t recall engaging the Quantity Theory of Money. And the postulation of decreasing, or ‘steady-state’ economic activity would not negate that theory. I have explained how steady-state economics is accommodated with steady-state public money just fine. I would agree that reducing the supply of money would require taxing back a commensurate un-spent amount. Why is that any problem for public money?
Problem 3.
Paul, if you can distinguish clearly the difference between money and credit, then your $750 ‘permanent debt” is in no way a ‘money’ problem. In a permanent money system, all bank loans must be funded by real money saved by depositors. This reality, rather than problem no. 3, is rather another tidbit of information that goes into the assessment BY the monetary authority for determining the annual money supply (how much ‘hoarding’ is going on?) . With public money, banks can only create new debts based on having ‘money’ in their deposit accounts, or, they would be creating new money illegally.
It’s true that I fail to see the problem after this ‘real money’ enters the real economy…..maybe because……that’s the whole idea.
Problem No. 4
Not sure how you can postulate any connection between government taxation and the Quantity Theory of Money. Speaking of Irving Fisher, I assume you have read the 1939 Program for Monetary Reform, by Fisher, Frank Graham, Paul Douglas, et al, supported publicly by over 400 economists, where the ‘reform’ is achieved by exactly what you describe here, the government intentionally and purposely creating money by spending more than taxation.
The most advanced monetary economists of their time all agreed this is the way to go. But Paul Grignon says this ‘defies the quantity theory’, without explanation. Sorry, this is Paul’s problem, not a public money problem.
Problem 5.
OK, finally, a REAL problem…..but one for debt-based money. There’s a certain irony apparent in reading your postulation that you don’t see how it is the “debt” that is the tool of those purveyors, and that “having money” is the opposite of “needing debt”.
Having adequate public money in circulation not only negates the need for additional borrower debt, it removes the bubble-building “create more debt-money” tactic from the bankers’ toolbox, putting it in public hands..
Sorry, Paul, almost to the word, those were five ‘eye-of-the-beholder’ types of problems. And, sorry that it took so long for my reply.
I can see that your deepest problem is to comprehend the ‘permanent’ money system’. We should maybe focus on that.
For the Money System Common
joebongiovanni wrote: “Perhaps you lost the meaning or significance of my earlier comment which said that because all the money in existence was permanent, public utility money, then it always remains available for its same use from year to year.
We have exactly a $15 Trillion economy for three years in a row.
The government uses $4Trillion of that permanent ‘public utility’ money for public services for each and every one of those years. No problem. Do it again next year. Nobody will never run out of money in a ‘permanent’, public money system, especially not the issuing government.”
Let’s follow that argument step-by-step
Step 1. The government spends $15 Trillion dollars into permanent circulation.
Step 2. After that, the government spends $4 Trillion of this permanent money every year ad infinitum to pay for the government’s services.
My question: If the government already spent the $15 Trillion once, and only $15 Trillion exists and any more would cause devaluation, how does the government get it back to spend it again every year ad infinitum without collecting it in the form of payment for services rendered (taxes, user fees etc.)?
If the government just spends the $4 Trillion “debt-free” there will now be $19 Trillion causing a devaluation to only 79% of the original purchasing power which means to provide the same services next year, the government will have to spend $4 Trillion/.79 = $5 Trillion making total 24 Trillion and so on until the “debt-free” money is worthless. This is indirect and indiscriminate taxation that will destroy the currency and the economy with it.
To keep the money supply at $15 Trillion is it not obvious that every dollar subsequently spent has to be taxed back to be re-spent? And that, if the government wants to spend $4 Trillion every year, it has to tax back $4 Trillion every year?
If money is created as a debt against taxes then it is money as debt on a schedule just like bank credit and susceptible to exactly the same design problem that afflicts bank credit, indefinite savings which interrupt the scheduled debt cycles.
Paul,
This question shows some clear misunderstandings, claiming things I have never claimed. After reform, the Guv always gets its income from tax revenues and money-creation seigniorage. Always. Perpetually. Automatically.
I want to take a minute to explain a couple of things. First with a publicly-monetized $15 Trillion national economy, it just means that “over time” the government has caused there to be created $15 Trillion in permanent money, which serves as the money supply for the entire public and private economies.
So there’s nothing to THAT the Guv has already spent the $15 Trillion once.
It may have, or it may not have.
Importantly, the monetary authority has DETERMINED that $15 Trillion is the right number for the total national economy.
There’s a budget process that shows Guv expenditures of $4 Trillion.
The amount the government gets back from the taxpayers is whatever the non-money income of the Guv is, typically say $3.5 Trillion to run the $4Trillion public economy.
There is a tax rate that stays in effect and gives the government $3.5 Trillion in revenues. Every year. Automatically.
The APPROVED Guv budget also shows $500 Billion in public-money seigniorage.
That $500 Billion, in that case, comes from GUV spending, without taxation, that money into the economy.
The Guv approves and spends its budget.
Nothing changes.
There’s no magic.
Year after year.
There’s $15 Trillion in circulation, and that is all we need to achieve our GDP potential.
There’s no devaluation, there is safety and security to the money system.
WHY would you think that you need NEW money, for an annual cycle of national economic activity funded by permanent public money?
Is it because you do not understand permanent, public money?
What should be obvious from this is that the Guv spending $4 Trillion does NOT increase the money supply by one cent.
P.G. “”To keep the money supply at $15 Trillion is it not obvious that every dollar subsequently spent has to be taxed back to be re-spent? And that, if the government wants to spend $4 Trillion every year, it has to tax back $4 Trillion every year?””
This reflects a nonexistent distinction between the Guv’ $4 Trillion portion of the national economy and the $15 Trillion money supply. So, first, it is ALL permanent money and, as such, the taxation amount would be the same every year (either $3.5 or $4 Trillion) which would , of course, come from taxpayer’s use of the same $15 Trillion money supply.
I would say you were creating a mountain out of a mole-hill, but even the mole-hill here is based on misunderstanding.
I hope that making you think in terms of permanent public money will clarify the concepts and constructs that are being advanced in the Kucinich Bill, and the works AMI, Positive Money and Dr. Huber.
If not, I suggest a read of the recent paper of Lord Adair Turner at Volcker’s Group of Thirty, where Dr. Turner has engaged the taboo of public, debt-free money under his new concept called Permanent Overt Money Finance.
Click to access OP%2087.pdf
Money is not created as debt against taxes.
Thanks.
EconCCX wrote: “The coin. Debt-Free Money. Always an asset, never a liability. I’m not recommending debt-free money as wider policy, only demonstrating the concept and correcting your accounting.”
Let’s presume that all money is fiat coins and the government simply mints them and spends them so called “debt-free”. Once the money supply is sufficient, the minting of any additional coins will tax the users indiscriminately via devaluation. Therefore the government, to preserve a steady state money supply must tax back a $1 fiat coin for every $1 fiat coin it spends.
Therefore a fiat coin minted and spent for real consideration must be paid back with real consideration and is therefore, just another form of money-as-debt.
@EconCCX, “USG coins are indeed issued debt-free. ”
Not so. For any issuance by any government has a guarantee “That government will exchange their issuance for something of value upon demand”, as their issuance is legal tender-be it colorful paper, coin or computer digit.
Any issuance by the government that does not carry this indebtedness is not “money”.
Why do economist use ‘terms’ that are written and or spoken the same that have diffeent meanings?
There can not be “debt-free money. Just as there can not be dehydrated water.
Perhaps they mean interest, or tax free money ?
The playing field is not level. Issuance by private for profit banks by way of loans with interest attached is: Taxation of our currency; no matter what kind of “rose” it is.
Quote comment: Quote: “Are you really saying that a government CANNOT issue money without issuing debt, as did many of the Colonies for a hundred years before The Revolution, and as did Lincoln with Greenbacks during the Civil War?”
Quote: “There is no reason why modern money should not be spent into circulation debt-free by a monetary authority..”
Only IF you believe that the fiat currency is NOT exchangeable for goods and services and that right is guaranteed by the sovereignty.
That is the value of the money. All money is debt as it is ‘legal tender’ and exchangeable upon demand.
One should differentiate between “debt-free money” is an oxymoron.
Maybe it should be called “double indebted money” as it is money issue with TWO owners with entitlement of exchange for the same goods and services.
As Frederick Soddy stated in “The Role of Money” (complete free book download- http://archive.org/details/roleofmoney032861mbp )
***Excerpt from pages 62-63***
“Genuine and Fictitious Loans.-For a loan,if it is a genuine loan does not make a deposit, because what the borrower gets the lender GIVES UP, and there is no increase in the quantity of money,but only an alteration in the identity of the individual owners of it. But if the lender gives up nothing at all what the borrower receives is a new issue of money and the quantity is proportionately increased (is a fictitious loan)….”
“These vast sums of money are entirely of the banks creation…When the bank pretends to lend their money they do not reduce the amount of the claims of the owners to goods and services on demand by a …(CENT). They do not inform them that they can no longer draw it out as it has been lent to others! “
Dear Mr. Bongiovanni,
I appreciate the opportunity for honest debate.
You are truly a Gentleman & a Scholar.
No, that is NOT what I am saying.
What I’m saying is that the Greenback is a debt. It is a non-interest bearing debt.
I’m saying the accounting does work!
I think you misunderstand my criticism.
I’m not arguing against the possibility of Public “Debt-free” Money only accounting representation or record of it.
OK, at least we can agree it is a liability.
I find it bizarre to record it as equity but possible. Functionally, it would be the same.
I don’t really see the point.
Government Money would still be a liability of the issuer & asset of the bearer.
For example, take a $10 (non-interest bearing) currency note.
Recorded as equity (liabilities owed to owners), the note would be recorded like stock but having a defined value ($10), no dividends/interest, is otherwise identical to a non-interest bearing liability/debt/IOU.
As stock, the note would be the asset of the bearer & the liability of the issuer, the Government.
Recorded as a liability, the note represents a $10 non-interest bearing debt. It is the asset of the bearer & the liability of the issuer, the Government.
Sincerely,
Vilhelmo.
Vilhelmo,
Thanks so much for your civility in spite of my obvious lack of appreciation for your point.
Having said that, I hope we can clarify further…….
While you find it bizarre to record government money as equity, you agree it could be done as so, but you ‘really don’t see the point’….. I presume (sorry if I’m wrong) that you do not see the point of recording it as equity(??)…….
because, as you say….
Vilhelmo: “”I’m not arguing against the possibility of Public “Debt-free” Money only accounting representation or record of it.””
“What I’m saying is that the Greenback is a debt. It is a non-interest bearing debt.”.
Perhaps Vilhelmo has a definition of debt that goes beyond what I use as a definition of a monetary debt, which I always pull from H.A. Mann’s “The Legal Aspect of Money.”
Anyone can have their own definition of what constitutes a ‘debt’. However, Mann describes what is today accepted among international legal-economic scholars as a legal debt within a legal money system, so, what other definition of ‘debt’ can be attributable to a monetary discussion? Some accounting norm?
Greenbacks do not meet the legal definition of a ‘debt’ under Mann. Had Greenback issuance coincided with a like issuance of public debt, there might be some debt-association with the Greenbacks claimed. The Greenback statutes specified no associated debt issuance. As issued, the Greenbacks were themselves the circulating money of the realm, they contained the purchasing power because the government had the power to issue them without issuing any debt…..a previously unrecognized governmental power that Lincoln later described as “the supreme prerogative of government”.
Perhaps you can explain what makes them a debt by your definition.
The ten-dollar-currency note example is a little inadequate, because whether the note is a debt or not would be determined by who issued the note, and how it is issued.
If the note were issued similarly to coin issuance…..with seigniorage to the sovereign issuer……..it is an asset to the holder, what we are calling an “equity-liability”of the issuer, the same as coins. The seigniorage associated with Greenbacks accrued to the public.
The only real ‘liability’ associated with ‘any’ public money issuance is the Guv’s agreement(obligation?), as contained in the Legal Tender statutes, that the public money can be used to satisfy a separate private-public monetary obligation (for tax payments).
This was a qualitative, legal condition bestowed upon the Greenbacks, and which would be bestowed upon all public money. That condition would make neither a ‘debt’.
To be clear, my acceptance that public money IS, in fact, a public liability, is so limited. That we have adopted double-counting standards for our money system has nothing to do with the true nature of money………..rather it is a confusing and confounding abstraction to the real world of political-economy, where this discussion belongs.
Thanks a lot, Vilhelmo.
Respectfully,
Joe B.
Yes, they are a financial asset of the bearer.
As such they MUST be a corresponding liability of the issuer. A financial asset without a matching liability is worthless.
What are you talking about?
A dollar coin given in payment of Federal Taxes to the Government extinguishes a tax liability.
It is a State IOU stamped on metal.
Actually, it’s neither.
There is no one-to-one relationship between taxes and coins.
But there is, by definition, a one-to-one relationship between financial assets (including monetary assets) & liabilities.
What are you talking about?
Treasury coins held by Treasury are both an asset & liability of the Treasury.
Treasury coins outstanding are liabilities of the Treasury & assets of the bearers.
When the Treasury spends a $1 coin into the Private Sector, the Treasury’s liabilities increase by $1 & the Private Sector’s assets increase by $1.
ALL fiat currency issued is “debt”.
ALL fiat currency has a “conversion right to goods and services on demand” that is owed to the holder .
There can not be “debt free” currency just as there can not be water w/o H2O.
Would not the proper term be “currency issued without an interest attachment?
“Greenbacks, colorful paper, coin are all debts, receipts of value that is to be transferred on demand .
But Greenbacks and colorful paper and $1trillion coins could be issue “without any need for return and interest free-on a 1 to 1 conversion of its “debt ” on demand .
Paul Grignon makes a equally valid point and question regarding lending. Unless regulated those lending at interest will garner an ever growing amount of the overall money supply, with money equating to political power and the ensuing hazard. This seems to be a problem for any economic/monetary theory that needs to be addressed.
Dear Vilhelmo & JustaLuckyFool (above) – Respectfully Suggest You two read Huber’s piece again, Both of you gentlemen are making at least two errors in order to reach your faulty “conclusions”:
First you destroy the concept of money and second you mis define (really wreck) the concept of debt. These are the same basic errors embraced and promoted by the MMT crowd. Huber’s paper renders those mistakes both futile, and really unacceptable in intelligent discussion. Read it! Thank you RWER Editors! Time for “MMT” to respond? Or do they plan to hide out in Kansas CIty? We have invited them to address Huber’s paper at our 10th Annual AMI Monetary Reform Conference, Oct. 2-5, in Chicago.
Greenbacker’s from the mid 19th century, had a far superior understanding of both money and debt than either of you are displaying. Civil War General Benjamin Franklin Butler, who ran for President of the U,S, used to call the Greenbacks “certificates of value.” (see The Lost Science of Money, P. 476)
I prefer the term “money.”
@stephenzarlenga Please explain to this fool and any other fool (perhaps the greatest ‘fool’ Frederick Soddy), how you have arrived at the verdict that “Justaluckyfool”,QUOTE SZ,
” First you destroy the concept of money and second you mis define (really wreck) the concept of debt. ”
Isn’t the concept of money: The NOTHING you get for SOMETHING to exchange for ANYTHING?
Isn’t the sovereign currency just a physical form of the NOTHING one receives from the sov. gov as a record of their something given up ,something that has as ‘good faith ‘ exchangeable rights?
Isn’t money a ‘debt’, of exchange into ANYTHING, owed to the holder?
AND how sir could you possibly say,”These are the same basic errors embraced and promoted by the MMT crowd.”
Surely, to make such a statement, you must not be aware of Soddy’s “The Role Of Money” ,
(Entire book as a free download… http://archive.org/details/roleofmoney032861mbp )
How about an invite for me, or at least a challenge.
AMI has gotten it 90% right. Would you like to know the other 10%
BTW, 5% is :
http://realmoneyecon.org/lev2/answers.html
Real Money Economics: The Details and Results
Real Money Economics proposes to instill hard ethics into the current monetary system and not just prescribe more regulations meant to firm up an internally unstable system. The solution presented only involves 2 fundamental steps outlined below under A. and B..
Trust Banking System
Under this system, banks would be divided into 2 totally separate parts or “windows”, one being the trust depository side and the other the credit side (lending and investments). In effect this could be called “Glass-Steagall on steroids”.
1. Depository or Payment Window
In a Trust Banking System when a normal deposit is made at a bank into the depositor’s account, the funds would continue to belong to the depositor (versus exchanged for an IOU as under the current system) and the bank is simply given instructions by the depositor as to what to do with the money, e.g., when a check is presented for payment, it will be paid. This would all be covered under the standard depository agreement between the bank and the customer. 100% of the depository base will at all times be covered by cash in the vault or deposits at the Fed. The only source of income for a bank from the Depository Window would be fees for services. No deposit creation would exist in this system and thus no new money created by private banks. Further, because all deposits would at all times be fully covered, the needed oversight would be minimized as the system is autonomously stable.
2. Credit or Investment Window
Under the Trust Banking System banks would become true intermediaries (as most think that banks are today) and offer loans and other investment products from those with cash wishing to have it invested. This would be done through the Credit Window of banks but none of the funds under the Depository Window would be available for this purpose. Instead, savers and investors would subscribe to a series of offered mutual funds in say, car loans, or mortgages, or commercial loans of various kinds, and so on. These could be open or close-ended funds as desired with maturities, risk levels, and return levels published by the bank in advance. Thus credit would now be driven by savings rather than the arbitrary increase (or decrease) of high powered money and deposit creation. Savers would again be rewarded for savings and interest rates would be controlled by the market rather than largely by Fed edict and actions as now.
*****You now only need to get the CENTRAL BANK part correct and the ‘masses’ may join.
“End the taxation on our own currency issuance”,Justaluckyfool.
‘ ***** “Believe nothing merely because you have been told it…But whatsoever, after due examination and analysis,you find to be kind, conducive to the good, the benefit,the welfare of all beings – that doctrine believe and cling to,and take it as your guide.”- Buddha’‘
DO YOUR DUE DILIGENCE, THEN CLAIM YOUR ACCURACY
Read more comments by Justaluckyfool ( http://bit.ly/MlQWNs )
( “You are always welcome to share, copy, plagiarize, improve, etc..any comments, none of which are my own rather just what I have by chance come across on the internet.)
No, thank you.
I sincerely appreciate the courtesy & respect you’ve shown for an ignorant rube like myself.
.
I don’t see what difference it makes.
Either way money is a liability of the issuer.
If one group wants to record it as “debt” & the other as “equity” the results are the same.
As you said, the accounting adds up regardless.
All I mean is that they were a liability of the issuer in the sense that they must be accepted back in payment of taxes.
That’s all I mean by “debt”.
What I call “debt-liability” & you call “equity-liability” are identical.
We mean the same thing.
Then we agree, money is a public liability.
That’s all I mean when I say “money is debt”.
Sincerely,
Vilhelmo.
Maybe, perhaps ,my comment may help. Money regardless of how or why it is “issued”,printed, or any form that it takes is a debt; simply because it is a physical record of a value of ‘goods and services’ given up so that they can be EXCHANGED on demand for ANYTHING else desired or acceptable. The issuer of the money is beholden to the holder
by ‘good faith and credit’ to redeem that money be it coin, colorful paper or ink dots.
But this is where the banks have a special privilege: they are allowed to ‘counterfeit’ money they issue as loans by printing money that does NOT have ‘goods and services given up’.
This is the key to understanding-” Where We Went Wrong and How To Fix It.”
Soddy said, 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.”
He got it wrong; they are no longer secret!
Frederick Soddy writings, namely “The Role Of Money”
(Entire book as a free download… http://archive.org/details/roleofmoney032861mbp
It seems to me that the advocates of MMT and NCT have misunderstandings about each others’ positions. I perceive that there are important truths in each viewpoint, and I do not see any contradiction between the main thrusts of each story. To critique Huber’s very interesting RWER paper (http://www.paecon.net/PAEReview/issue66/Huber66.pdf) in detail would take a lot of effort, however I would like to draw attention here to one section where his assertions struck me as being obviously incorrect. Let me quote the section:
“ Don’t let yourself be fooled. The biggest part of government expenditure is funded by taxes. Tax revenues represent transfers of already existing money. The money that serves for paying taxes is neither extinguished upon paying taxes, nor is it created or re-created when government spends its tax revenues. In actual fact, this is all about simple circulation of existing money. “
The MMT position that the government injects new money into the real economy when it spends, and withdraws money from the real economy when it taxes and borrows, implies that Treasury’s general account with the central bank (CB) is not actually composed of money at all and is therefore merely an operating account.
This rings true to me because it is not difficult to see why the credits held in Treasury’s general account cannot be regarded as money, in any sense of the word. One of the characteristics of an entity which is entitled to be called “money” is that it is used by a set of marketplace players and may be loaned and transferred between those players. Thus, for example, the credits that banking institutions maintain within their CB accounts (reserves, or exchange settlement funds) must be regarded as a form of money because – apart from satisfying the usual criteria of medium of exchange, store of value, and unit of account – may be loaned between those players and directly transferred between their respective CB accounts. However the credits held within Treasury’s account with the CB are never loaned out or transferred to any other institution under any circumstances. When the central government spends, new bank credit money is created by the payee’s bank and matching new reserves are created in that bank’s CB account. Reserves are not transferred, because the definition of reserves excludes Treasury deposits. Anyway, that’s my story.
” However the credits held within Treasury’s account with the CB are never loaned out or transferred to any other institution under any circumstances.”
This is not so. Government accounts at the central bank are transferable to commercial banks. In the UK, any credit balance in the government’s account (the Consolidated Fund) at the Bank of England is lent out overnight to commercial banks and those of their customers who are participants in the wholesale money market (deficit balances are cleared overnight by borrowing from the money market). This ensures that bank reserves depleted by net payments to government are returned to banks at close of business each day to preserve the liquidity of the banking system, and it provides a source of revenue for the government. In the US, the issue is handled differently. There, the Treasury operates numerous Tax and Loan accounts at small commercial banks throughout the country (Federal depository banks) who are therefore the recipients of the reserves transferred by net payments to government. The Treasury targets an overnight balance in its FRB account and deposits any surplus with the depository banks. It is these who lend out the excess reserves overnight to the Wall Street fed funds market.
This paper misrepresents some of MMT’s positions. Money isn’t just debt. That’s an oversimplification. It is both credit and debt. It also doesn’t need to be loaned into circulation. It can be spent into circulation interest free. It also doesn’t subscribe to the traditional policy of deficits when things are bad and surpluses in the good times. It isn’t that simple. Deficits are stimulatory and surpluses are the opposite. It has nothing to do with paying down the debt.
Don’t get me wrong. I like a lot of what you guys stand for and I’m not trying to be a rabble rouser. I just think our two causes are very similar in a lot of respects. A lot more than both admit. Thanks in advance!
MMT CONFUSIONS AND HUBER’S PAPER. I read Huber’s paper and the various comments here with interest. However I have not found amongst all this a recognition of where MMT really goes wrong, beyond Huber’s point, made by many, that MMT conflates Government and the central bank. (My points now are based mostly on Wray’s MMT book, 2nd edition and the Fullwiler paper it is based on: if these sources are atypical of MMT please let me know.) Fullwiler (2011, http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1825303) details two quite separate Fed processes as if they are one, firstly reserves averaging (monetary policy operations) and secondly government borrowing via Treasuries issuance. The two processes are mangled into his “six transactions for Treasury debt operations for the purpose of deficit spending.” While Fullwiler may possibly have understood the difference, it is clear that Wray does not.
Now, Fullwiler reports that government debt issuance necessitates a prior increase in reserves, to deal with which the Fed undertakes open market Treasuries purchases. (I don’t believe that the BoE undertakes anything similar, having found no reference to it in the Red Book or the DMO literature, but please correct me if I am wrong on this.) This may well have been true for the Fed, but all reserve averaging procedures like this are now abandoned since QE because the banks have massive surplus reserves and reserves averaging is off the table, which Fullwiler does acknowledge but Wray does not. While Wray “shows” that government deficit spending has the same outcome whether government and central bank are consolidated or unconsolidated, he certainly has not understood the confusion he enters when consolidating government borrowing with monetary policy operations. And none of this confusion actually matters it turns out because his endpoint, an entirely fictitious scenario where government borrows from private banks, still requires the government to pay back what it has borrowed. Governments do not of course borrow from private banks, but from private sector investors. This means that in real life the loans made to the government do not create new money, as Wray has it. (If it did, the UK M4 aggregate, for example, of ~£3trn would be expanded by government debt of ~£1.5trn.) Still, never mind the mounting misrepresentations, because, it turns out, Wray’s conclusions are anyway a non sequitur. These conclusions, that government spending is not constrained by borrowing, because issuing bonds is not borrowing “in the usual sense of the term”, or, putting it another way, that deficit spending need not require taxation, were present in the opening sections of the book, in the middle, at the end, and wherever Wray feels like mentioning them again. There is no logical path from his exposition of government borrowing to his conclusions – and nor could there ever be, given its multiple inaccuracies.
In short, MMT justifies a fiction with irrelevant misconceptions. Huber has only scratched the surface of these errors. (Again do let me know if Wray/Fullwiler are not actually representative of MMT, so I can qualify the statements here.)