Comments on RWER issue no. 71

real-world economics review issue no. 71
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In this issue:

  1. Patrick Moriarty
    May 29, 2015 at 1:25 am

    Great article, Richard! I had no idea things were so bad there.
    I’m not sure that China’s GNI has passed the US. Although PPP values would partly close the gap, the World bank figures for 2013 (in 2005 exchange rate $) give 4.84 trillion and 14.46 trillion for China and US respectively.

  2. Lino Zeddies
    May 31, 2015 at 10:41 am

    Very interesting proposal!
    One issue I would be worried about though is that if this reform would work out smoothly, eventually the government might spend too many TANs and given the level of corruption, give considerable amounts to cronies. Therefore some limiting measures might be appropriate or some independent committee deciding on a cap for TAN spending/creation.
    Interestingly, there are many parallels to a sovereign money reform.

  3. Richard Smith
    June 1, 2015 at 1:28 pm

    Thanks Patrick. I’m pleased you found the article useful. But you also had no idea how fast China’s economy has been growing. According to the IMF in December 2014, China produced $17.6 trillion vs. $17.4 trillion for the U.S. in 2014. Google it; you’ll see. But GDP is of course only one measure of size. If you compare by indices of major resource consumption, China’s economy is vastly larger than the U.S. economy even allowing for the 20% or so industrial production which is producing goods we used to produce ourselves in the west.

  4. Jorge Buzaglo
    June 1, 2015 at 6:57 pm

    According to the article (p. 52) “… it has been estimated that [Chinese] princelings and other high cadres, cronies and capitalists have funneled between 1 and 4 trillion U.S. dollars in unreported assets out of the country since 2000.”

    One has however to keep in mind that (according to Tax Justice Network) the global super-rich elite had between 21 and 32 trillion dollars hidden in secret tax havens by the end of 2010 (http://www.taxjustice.net/cms/upload/pdf/The_Price_of_Offshore_Revisited_Presser_120722.pdf).

    Let us thus roughly estimate the relative importance of Chinese flight capital. At the lower limit, the Chinese super-rich elite would own 1 of 32 trillion dollars hidden in tax havens — that would be around 3 percent of global hidden capital. This would mean, given the present relative size of the Chinese economy, that Chinese capitalists and associates have still a long way to go to attain the levels of corruption normal in global capitalism.

    At the other extreme, the Chinese super-rich would own 4 out of 21 trillion, or 19 percent of total hidden funds—a much higher share than China’s (13 percent) share of global GDP. This upper limit would indicate much higher levels of alienation, fear and corruption among Chinese capitalists (and associates) than those of the average global capitalist — average levels very high and deleterious in themselves.

    The truth is perhaps somewhere in between.

  5. anmayhew
    June 1, 2015 at 9:11 pm

    Ib Ravn makes the sensible suggestion that economists in explaining how money is created in modern economies should skip such conventional explanations as the credit multiplier, fractional reserve, and banks as intermediators and go straight to the processes themselves as described by, for example, those at the Bank of England (McLeay, Radia & Thomas). For, says Ravn, “when explaining to a child how the solar system is organized, who would start by offering the geocentric model?” Unfortunately, in laying out the analogies that he suggests we use, Ravn falls back on other misstatements of actual processes. As, for example, in his statement that “a nation’s money constitutesT a finite and countable sum.” This is only the case if you take a statistical snapshot at the end of each accounting period; there is not a fixed fum available to use as the widespread use of credit cards reveals. The credit card I use may in any month be worth $0 or up to some thousands depending upon how I use it. Same for the lines of credit of firms and for government transactions. I suggest that those interested in useful analogies to explain money creation check out my article, “Copeland on Money as Electricity,” in the July 2010 issue the RWER. Morris Copeland developed his electricity analogy for money by recognizing that money and credit are essentially the same in modern economies and that the amount of money depends upon the activities of transactors, be they individuals, firms, banks, central banks, or central governments. Ravn is absolutely right that we need a good analogy to explain what money is and how it is created; Copeland provided the best that I have ever encountered.

  6. stephen browne
    June 14, 2015 at 2:01 pm

    this technological solution is oblivious to, or ignores (in order to mislead), the political solution that the overwhelming majority of the greeks want: a socialist economy, vis a vis a neoliberal one that they have now. this technological solution will produce the result the greek majority wants only when implemented with the socialization (workers and consumers own and operate), equal distribution (every member of the society has equal stake in), and public-interest-driven management (as opposed to maximum-private-profit-driven), of all major means of production including land and real estate properties. otherwise, most of the anticipated technical problems such as “spontaneous usury,” speculative or rogue currency manipulation, and cronyism in currency allocation, will happen, canceling any positive effects.

  7. June 21, 2015 at 4:32 am

    Why not skip TANs and go straight to Bitcoin?

  8. Walter Hanschitz-Jandl
    June 23, 2015 at 10:10 am

    As a layman I would note first on Ravn’s article that it does not matter, in a layperson‘s understanding, whether we call the bank practice decribed by Ravn as money creation or give it another name. We would not make a mistake if we defined as money only tangible money. In this case there would, by definition, be no money creation by commercial banks. But maybe there would be a problem through certain bank practices which certain authors call money creation. Of account „money“ we would then speak as a claim to (tangible) money. What it really is. To transfer such claims, however, is generally accepted as payment. For this reason manipulations with account „money“ can have the same effects as the manipulation of the supply of tangible money. This is – basically – easy to understand for us laypersons, I think.
    The article does not provide any evidence for such manipulations. Nevertheless it permanently speaks of the fact of „money creation“ by banks. In reality it only tries to explain the way in which this can happen. But these two things must be kept apart, showing an empirical fact and explaining theoretically a possibility. It may be common in economics to think up „reality“, but it should not be so.
    Richard A. Werner, in a recent article, claims to provide the first empirical evidence for money creation by individual banks. Nevertheless many authors have been dealing with money creation by individual banks for over hundred years as if it were a proven fact (should one not say that usurpation, or fraud or theft through this practice is the fact, since the question if this is money creation is a question of definition?).
    Generally, I wonder if it is correct to speak of money creation ab nihilo, as certainly no bank will make loans in the way described without possessing tangible money.
    What I do not understand is, that Ravn treats our present (tangible) money as if it were debt-free. To my knowledge banknotes are issued in a process of mutual indebtedness against interest just like account „money“, which is a problematic practice in my view.
    This is why I like his idea of debt-free money, which is spent into being, instead of our „double negative money“ („I give you an IOU of mine as credit“), which is incomprehensable to simple laypersons‘ minds like mine (or maybe the practice is mad, but only simple minds understand this).

  9. June 24, 2015 at 8:14 pm

    Its a very interesting proposal especially in relation to the way playing cards where introduced into early Canada’s economy to combat similar stagnant circumstances: https://thewealthofchips.wordpress.com/2015/05/06/the-history-of-money-and-playing-cards-in-canada/

    “…it occurred to me to issue, instead of money, notes on cards, which I have cut in quarters. . . I have issued an ordinance by which I have obliged all the inhabitants to receive this money in payments, and to give it circulation, at the same time pledging myself, in my own name, to redeem the said notes.”

    It is quite related since much of the purpose was to facilitate taxes to the king or rather to not have to worry about the dangers and cost of transport to France. Much of the problems were solved and the issues that arose afterwards seem well addressed by the tax-coin implications of this proposal.

    “As a financial tool, card money played a significant role as a means of exchange. Despite the worries of French officials, colonial authorities were successful in arguing that card money served as a financial medium in Canada just as coinage did in France (Bank of Canada, 1990, p. 9). An economic substitute to the dangerous transfer of specie across the Atlantic, card money allowed France to benefit, since the King did not have the obligation to send coinage to Canada, which would have risked loss “either from the sea or from enemies” (Bank of Canada, 1990, p. 8).”

    Probably there is also useful point from the lecture Ideal Money (http://sites.stat.psu.edu/~babu/nash/money.pdf) by John Nash. There is a lot of small points made about Greece’s position and history in relation to the Euro. Specifically about issuing a new currency:

    ” There is a problem for the issuer of a currency, whether in coinage, paper, or electronic form, that if this currency (or money) is too good, then it could be exploited by all sorts of parties and interests that might simply wish to safely deposit a store of wealth or even to conservatively invest some assets for future good value.

    …under extreme conditions the currency issued by a state could be exploited by parties not of that state as a sort of “safe-deposit box” on which they would not need to pay any rental fees or fees like those paid to the managers of mutual funds for investment.

    If the value trend of a currency is such that a natural interest rate is not negative, then it is not an unattractive task for a central currency authority to mint or print the physical currency that would circulate. Then the issuer of currency would be partially in the position of a borrower not paying interest on borrowed money.

    …the issuer of a currency also needs to be properly prepared for the possibility of speculation on the part of interests domiciled in foreign states, etc., etc.

    But, simply to improve the conditions under which agreements regarding long-term lending and borrowing would be made, a money would be more or less equivalently good if it had a completely steady and constant rate of inflation. Then this inflation rate could be added to all lending an borrowing contracts. Hence, the problem of a money that would be too good is avoidable.”

    Here is some more quotes and explanations of different writings and lectures on the subject: https://thewealthofchips.wordpress.com/2015/04/13/how-to-issue-a-currency-short-form/
    https://thewealthofchips.wordpress.com/2015/05/07/the-levation-of-ideal-money/

    Ultimately there maybe of a problem of “political corruption” or insecure issuance, and so I think also what is relevant is Smart Contracts (http://szabo.best.vwh.net/smart_contracts_idea.html) and their implementation: (http://www.erights.org/talks/pisa/paper/index.html

  10. January 13, 2016 at 7:07 pm

    As a layman I would note first on Ravn’s article that it does not matter, in a layperson‘s understanding, whether we call the bank practice decribed by Ravn as money creation or give it another name. We would not make a mistake if we defined as money only tangible money. In this case there would, by definition, be no money creation by commercial banks. But maybe there would be a problem through certain bank practices which certain authors call money creation. Of account „money“ we would then speak as a claim to (tangible) money. What it really is. To transfer such claims, however, is generally accepted as payment. For this reason manipulations with account „money“ can have the same effects as the manipulation of the supply of tangible money. This is – basically – easy to understand for us laypersons, I think.
    https://genevaandreas.wordpress.com/2016/01/09/auto-repair-advice-that-can-benefit-you/

  11. January 13, 2016 at 7:09 pm

    Great article, Richard! I had no idea things were so bad there.
    I’m not sure that China’s GNI has passed the US. Although PPP values would partly close the gap, the World bank figures for 2013 (in 2005 exchange rate $) give 4.84 trillion and 14.46 trillion for China and US respectively.
    https://genevaandreas.wordpress.com/2016/01/09/auto-repair-advice-that-can-benefit-you/

  12. January 21, 2016 at 6:10 pm

    A short comment on “Explaining money creation by commercial banks: Five analogies for public education” by Ib Ravn. On p. 102 he says “But a bank can: create legal tender out of something as evanescent as a promise to pay.” I would suggest that it is incorrect to declare that a private bank creates legal tender when they make a loan. Please see the Royal Mint’s definition of ‘legal tender’: http://www.royalmint.com/aboutus/policies-and-guidelines/legal-tender-guidelines

    • merijntknibbe
      October 1, 2016 at 3:03 am

      Yep. The point is: the government guarantees that the bank money has a 1:1 exchange rate with legal tender. See however what happened in the EU, in respectively Greece and Cyprus.

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