By J. D. Alt, author of The Architect Who Couldn’t Sing, available at Amazon.com or iBooks. Originally published at New Economic Perspectives.
Why do so many people—including the authors of most economics textbooks—believe the U.S. banking system creates the U.S. dollars we earn and spend and pay our taxes with? It’s because the U.S. banking system does, in fact, “issue” the great majority of the dollars we use—by making loans to businesses and citizens which are not backed by “real” dollars the banks have on deposit.
What everyone overlooks, however (for reasons not entirely clear) is the fact that these new loan dollars are “made real” by the U.S. government’s solemn promise to convert them at any time, on demand, into actual, “real”, sovereign U.S. dollars. The U.S. government is able to make this promise because, by law, it can issue the necessary actual dollars by fiat (by simply “declaring” the dollars into existence.) A lot of people (again for reasons not entirely clear) don’t like to hear that last part. But it’s simply a fact of life: the cash dollar bills you get from an ATM machine are not printed up (created) by the banks—they are printed (or created electronically as needed) ONLY by the U.S. sovereign government.
This seamless transmutation of bank dollars into U.S. sovereign dollars has the unfortunate side-effect of hiding the real distinction between the two kinds of money—a distinction (I think) I’m now starting to get a handle on: Bank dollars are created specifically to facilitate the production and exchange of private goods and services. Sovereign dollars, in contrast, are created to facilitate the production of collective goods and services—and, furthermore, one of the PRIMARY collective goods the sovereign dollars create is the private banking system itself (which, as we have just noted, is made possible and viable by the promise of the sovereign-issued dollars.)
Both kinds of dollars represent a “debt”—but the debts they represent couldn’t be more different. Bank dollars represent an I.O.U. the business or citizen who received the bank loan owes to the bank. Sovereign dollars represent an I.O.U. the U.S. sovereign governmentowes to the citizens—specifically, in issuing its dollar, the sovereign is saying: “I owe the bearer of this dollar one dollar’s worth of cancelled taxes.” To repay their I.O.U. to the bank, businesses or citizens must use something (dollars) which they, themselves, cannot legally create—and for this reason they logically cannot spend more than they earn without getting into financial difficulty, defaulting on their I.O.U. and, ultimately, declaring bankruptcy. To repay its I.O.U. to the citizens, however, the sovereign has no such constraint: it does not have to create anything at all, but simply “cancels” a citizen’s or business’ tax liability—and it furthermore has the legal authority to create new tax liabilities to replace the ones that have been canceled, and to issue more of its I.O.U.s (sovereign dollars) as the need arises. The U.S. sovereign government, then, can, does—and, in fact, must—issue sovereign currency by fiat on a continuing basis to keep the whole monetary system (including the private banking system) rolling along. This fact, however, is hidden—and the hiding of it causes enormous confusion and dysfunction in our collective governance.
The obscuring of the distinction between sovereign dollars and bank dollars—and the fact that both kinds of money run simultaneously through the U.S. banking system without any distinction at all—gives rise to the confusing illusion that, in fact, only ONE kind of money exists—the bank dollars we see ourselves earning and spending and borrowing every day. The sovereign’s operation of issuing its fiat currency is, somehow, completely “invisible”. This concealed reality, in turn, gives rise to the even greater confusion that collective goods and services (those which are paid for by the U.S. sovereign government) must therefore, by logic, be paid for with the bank dollars as well (the only kind of money we think exists!) And how will the sovereign government obtain the bank dollars it needs to pay for collective goods? It must (obviously) collect them in taxes—or alternatively borrow them from the private sector economy.
Thus we imagine that, as a collective society, we pay ourselves to create collective goods and services by the following convoluted process: (a) banks make loans to private businesses and citizens, (b) the sovereign government converts those “loan” dollars to real dollars, (c) the sovereign then collects some of those real dollars as tax payments which it then (d) pays back to the citizens in exchange for the needed collective goods. A few moments of reflection should reveal why this imagined reality is, at its deepest level, impossibly illogical:
Step (b) acknowledges that the sovereign power, in fact, creates the “real” dollars by fiat (out of thin air)—however the quantity of “real” dollars it creates is implicitly limited by the willingness of U.S. citizens and businesses to borrow bank dollars. This, in turn, following steps (c) and (d), limits the quantity of dollars the sovereign can obtain to buy collective goods and services. By what logic, however, should the sovereign’s spending for collective goods and services be limited by what U.S. citizens and businesses are willing to borrow from banks for the purpose of creating private goods and services? If the sovereign government can, in fact, issue fiat dollars as needed (since they are only a promise to cancel federal tax liabilities) why should it be limited to issuing those fiat dollars ONLY to make bank dollars “real”? Why should it not, indeed, as a matter of course, issue sovereign dollars DIRECTLY to pay for the collective goods and services that American society needs?
Before considering the likely objections to such a “wild” suggestion, let’s observe how the confused and obscured configuration of reality just described sets the stage for two serious missteps in our collective governance:
First, many things which, by common reason, ought to be treated as collective goods and services (and therefore paid for by the sovereign’s direct issuance of fiat currency) are instead relegated to private, profit-seeking markets. This happens because of the obvious fact that if the sovereign collected enough taxes to pay for the needed goods and services, the citizens would have little money left for their private expenses! The second misstep occurs with needs which are treated as collective goods and services because (a) they’re essential to society’s survival or prosperity, while (b) private markets see no profit in producing them. Spending on these collective goods are skimped to the very minimum because of the belief the sovereign cannot be allowed to “borrow” beyond some theoretical percentage of its expenditures. These two missteps in public governance—generated by our confused construction of monetary reality—are colloquially known as “privatization” and “austerity”.
An example of the first misstep in the United States is higher education (and increasingly preK-12 education as well.) The most basic of common senses should tell us that a great collective benefit is obtained when every young adult citizen receives a secondary education—whether college or trade-school—as a matter of course. In the U.S., however, since it is obvious the sovereign government cannot collect enough taxes to pay for college or trade-school for every young adult, secondary education must be treated as a commodity provided by private markets—and paid for, by the way, with the “loan” dollars created by banks. The serious long-term social damage being done by this misguided perception is evidenced by the fact that the “value” of education itself is now being questioned! What will America gain if increasing numbers of young adults decide to enter the job market, and begin families, without any special training or skills beyond what they learned in high-school? And for those who do choose to borrow the bank dollars to acquire some special skill, what benefit does America gain when they begin their careers forty thousand dollars in debt?
The second misstep (austerity) is exemplified by the U.S. national and regional infrastructures—roads, bridges, electrical grids, water and sewer systems, etc.—which we collectively use and depend upon every waking and sleeping moment of our lives. The American Society of Civil Engineers has recently calculated this public infrastructure requires $3.6 trillion worth of maintenance and repair over the next six years—just to maintain the operational capabilities it has today! Again, the sovereign U.S. government is obviously not going to collect an extra $3.6 trillion from tax-payers to pay for this work—nor is private industry going to borrow the bank dollars to do it either, since they cannot make a profit in doing so. According to our confused and convoluted monetary logic, the only option available is for the sovereign government to borrow the $3.6 trillion from the private markets. But how can we, by logic, allow the government to do that when we know the government can never collect enough tax dollars to repay what it has borrowed? We are placed, then, in a kind of existential dilemma wherein the actual resources necessary to repair and rebuild our collective infrastructure are available (and waiting), but the U.S. sovereign government can’t tax or borrow enough dollars to employ those resources to accomplish the needed work.
With each of these examples I seem to be suggesting that direct sovereign spending—the issuing of sovereign fiat dollars to pay for collective goods and services—ought to be buying things which, by any measure, seem astronomical in “cost.” $3.6 trillion is the bill for just repairing our infrastructure. Modernizing our infrastructure to meet the pressing needs we face in the near future—flooding coastlines, water shortages, non-fossil fuel energy systems, for example—will cost at least that much again, and likely much more. The current student debt for higher education tops $1.2 trillion. After retiring that out of hand, what would be the further “cost” of paying for a secondary education for 21 million college students every year? The numbers seem staggering—and what would be the result IF Congress directed the U.S. sovereign government to simply issue the required dollars, by fiat, and SPEND them?
Well, one set of results would be that our young-adult citizens would stop dropping out of the skilled labor market, we’d get our bridges repaired and maybe a good start on preparing for and mitigating against rising sea-levels. Another set of results would be that a very large number of teachers, educators, bridge repairmen and flood-control engineers (to name just a few) would get paid new fiat dollars for their services—perhaps, in aggregate, lowering U.S. unemployment by several percentage points. What would the objections be to these results?
The primary objection, of course, is that issuing and spending all those new sovereign fiat dollars would dilute the value of U.S. currency, creating hyperinflation, sky-rocketing prices, and economic chaos. But shouldn’t we ask the simple question: What is the difference between the banking system creating new money by issuing “loan” dollars, and the sovereign power issuing new money by fiat? Framed by this question, it’s easy to see that the issue of inflation, in fact, has nothing to do with who is issuing the new dollars, but whether the new dollars issued are actually put to a use that results in the creation of new goods and services. Historically, every instance of hyperinflation has arisen because citizens have been paid a great deal of “money” without producing anything they can spend it on.
Inflation, then, cannot logically be a de facto objection to direct sovereign spending for collective goods. So long as the spending employs unused resources that are actually available—labor, materials, energy, technology—and so long as it contributes to the production of new goods and services that people can actually spend their new dollars on, the only things “threatening” us would be social progress and a level of prosperity our myopic confusion about “money” cannot even dream of.
There is a serious logical flaw in this discussion, which I’ve seen in previous installments:
Saying that paying taxes is the ONLY government requirement supporting fiat money. As I understand it, that is false; the other one is that they cancel PRIVATE debts. If I owe you money and hand you dollars, you are required to take them and discharge the debt. Or give me the goods, etc. Because it applies to private transactions, I suspect that this submerges the distinction between “bank” and “sovereign” dollars.
Payment of taxes would not be enough to support the value of the whole money supply – it’s only about 10% of the economy.
I’ve pointed this out before, with no apparent effect or response. I’m starting to get cranky about it. So I’ll put this as strongly as possible: Mr. Alt is wrong, There aren’t two kinds of money, although the banks’ role is still pretty shady. And it’s the government’s role as enforcer if contracts that supports “fiat” money – the fiat is that you have to take it.
PS: that was Econ 210, Reed College, about 1965. Not new.
Maybe the right question in that case would be, why does the government allow bank credit to be issued in the same unit as its own currency, namely dollars?
A distinction without a difference.
Per the U.S. Treasury,
“There is, however, no Federal statute mandating that a private business, a person or an organization must accept currency or coins as for payment for goods and/or services. Private businesses are free to develop their own policies on whether or not to accept cash unless there is a State law which says otherwise.”
http://www.treasury.gov/resource-center/faqs/currency/pages/legal-tender.aspx
While I don’t really agree with OC’s postulation, the question in play is whether the buyer has satisfied his obligation to pay for the goods and services via rendering his $US payment, and he has. Unless the ‘debt obligation’ has stated otherwise beforehand, the buyer has ‘paid in full’.
“”Private businesses are free to develop their own policies””.
But absent such a policy, agreed to beforehand between the parties, the only thing the seller business can do is to continue to send a Bill.
Which the buyer is free to ignore.
So, what?
The question in play is whether the U.S. government has any laws that force persons/private entities to accept dollars as payment. Apparently the answer is no. The U.S. government does have laws that force you to pay taxes in U.S. dollars.
Absent some specific agreement, it seems logical that a person who offered dollars for a debt and had them refused could make a court case that they’d made a legally valid effort to pay, and that the debt should be cancelled or the other party forced to accept the dollars. Somebody who knows more about it than I do should comment.
You are corrrect: debts can be settled via Monopoly money if those engaged in the transaction agree.
Which is why I said,
“”But absent such a policy, agreed to beforehand between the parties,””
You mean Bitcoins?
Actually, my town is one of many with a local currency, called Hours.
Duhh??!
If you have a debt, you can always offer to pay it off with dollars. The creditor can always refuse. If he refuses payment in full, the debt is not cancelled, and you cannot force him to accept the money. But he cannot dun you anymore for payment. You can sue him if he continues to do so.
What a weird botch of a law. That’s the basis of our currency? whew.
So – custom and self-interest it is.
Seems very logical and sensible, not weird at all to me
But legal tender is not the basis of our or anyone else’s currency. Taxation is these days, and many countries do not have or never had any “legal tender” concept in their laws
From the bill in my pocket, right under “The United”: “This note is legal tender for all debts, private or public.”
so does that mean nothing?
Your comment sounds like dogma to me.
Legal tender for all debts public is what counts. That means taxation nowadays and most usually throughout history and all over the planet.
The “,and private” is what people usually mean when they speak of legal tender, as you did above. And it just doesn’t mean anything much really. It is not what the government says, but what it does that counts.
I’m curious, why are you hammering this point?
You’ve really mixed up the difference between satisfying a past debt and refusing to accept payment for goods and services not yet rendered. I think the actual phrase in the legalese is:
“…legal tender for all debts, public charges, taxes, and dues…”
There of course is complexity – for example, differences in how ‘face’ value and ‘market’ value are treated for some items, such as gold eagles, but the concept is pretty simple. If you offer FRNs to a creditor, someone to whom you owe a dollar-denominated debt, they are free to accept or reject your FRNs. Either way, your debt obligation is satisfied.
http://www.law.cornell.edu/uscode/text/31/5103
I’m not hammering any point. I was only talking about satisfying a past debt. Oregoncharles asked a different question next, so I gave a different answer in my two comments. He seemed to think I was saying the phrase printed on the bills means nothing. I was not. I said that only the “legal tender for public debts”, like taxes is really meaningful. As evidenced by the fact that legal tender laws were sometimes not enough to make state money acceptable in medieval times, and also the fact that many countries’ legal systems do not incorporate the concept of legal tender.
“”The U.S. government does have laws that force you to pay taxes in U.S. dollars.””
What laws would those be?
And what exactly are “U.S. Dollars” ?
Is my bank-account balance of private banker-credit considered “U.S. Dollars”, because that is what I have always used to pay my taxes, and sans any coercion, is always accepted by the U.S. Government.
Learning Opportunity here.
Thanks.
Per the IRS:
“You must express the amounts you report on your U.S. tax return in U.S. dollars. If you receive all or part of your income or pay some or all of your expenses in foreign currency, you must translate the foreign currency into U.S. dollars. How you do this depends on your functional currency. Your functional currency generally is the U.S. dollar unless you are required to use the currency of a foreign country.
Note: Payments of U.S. tax must be remitted to the U.S. Internal Revenue Service (IRS) in U.S. dollars.”
http://www.irs.gov/Individuals/International-Taxpayers/Foreign-Currency-and-Currency-Exchange-Rates
Jokes on me.
Of course, when you pay your taxes you need to pay in the national currency($US), but I thought you were saying that they had to be paid with, per Phil, ‘sovereign dollars’ (being no such thing.)
Thus my question, ‘what are US Dollars?’ following the dialogue and construct laid out in this post.
“”Bank dollars are created specifically to facilitate the production and exchange of private goods and services. Sovereign dollars, in contrast, are created to facilitate the production of collective goods and services—…””
Because taxes pay for our collective goods and services, I thought you were agreeing with Phil and saying that the Guv required using those imaginary sovereign dollars to pay your taxes.
But you were only saying that you need to use bank money($US-denominated private bank credits) to pay taxes. I misunderstood your point.
Agreed.
I think that when you pay taxes via your bank account the appropriate amount of bank reserves (government U.S. Dollars) is deducted from a balance sheet of a private bank. Because there is difference between two types of payment – to another private entity or to government…
Not true apparently. Argentina attempted to may a payment regarding its debt and was blocked in court by the vulture funds. Argentina is attempting to make this argument, that they have the means to make their payment and the desire, but as they are prevented from doing so, it can not be said to be in “default”.
@elbridge: which businesses never, never do. Why not?
Because in tendering payment, the buyer has fulfilled his or her responsibility to close the transaction, and, absent any pre-agreement or understanding to the contrary, the sellers refusal of acceptance is at his or her peril.
…… if I understood the question.
So my economics professor was wrong, or perhaps it was Samuelson’s textbook. Perhaps it’s in contract law, as implied below? Or perhaps custom and self-interest are enough. I think the matter should be clarified, and I can’t.
Oh – thanks for responding.
Now, having read his conclusion, I have another, more serious problem with Alt, as with all liberal economists:
” the only things “threatening” us would be social progress and a level of prosperity”. Wrong, dangerously wrong. What threatens us is ecological collapse. We can’t grow any more because we’ve reached the limits of the box the economy is in, AKA the world. It’s round. Most economists are flat-earthers – Discworld, perhaps?
Unfortunately, this means the economy really is a zero-sum game, and probably has been for a while (there’s a case that there’s been no real net growth for perhaps a decade – hence all the flopping around). That might be why the top few are trying to pile up all the chips at the expense of the rest of us.
Making the economy grow is the worst thing we can do; recessions are good environmental policy. The real challenge is to link that up with good SOCIAL policy, and that’s a hard one. Again, this is the reason for galloping authoritarianism in this country, and indeed in Europe. We hit the wall first.
(technical note: I have NO idea why it dropped into a smaller typeface for a while, so I’m not going to try to fix it.)
So it only shrank inthe preview. Still weird.
Banks can and should go under if the ‘money’ they create by making loans is based on bad underwriting or fraud. And their executives should be prosecuted in the case of fraud. We (the federal govt, the public purse/interest, the cumulative labor pool) ultimately back this money creation by doing the printing and we shouldn’t be printing to support fraud and enrich the fraudsters.
Realizing these intractable problems with private banking JD seems to be favoring more direct govt spending or using a more public banking system which rather than extracting rents would feed the interest back into the pubic purpose.
Taking out this extractive middleman has helped many economies flourish and has enabled money to be used for huge innovative projects and infrastructure building, provision of cohesive social services and a better environment for productive business rather than fueling inequality and a progressively richer 1%.
Concur…. social license has been perverted to an extreme by some incredibly wonky metaphysical perverted grooming.
I agree.
Why shouldn’t the 6% interest that goes to private parties through our Fed be used instead for public purposes.
If you are referring to the interest spending on T-securities, do you not think that giving money to pension funds and Govt trust funds serves a worthwhile public purpose?
Personally, I dont believe in currency user retirement plans. I think the federal Govt should relieve this terrible burden from businesses and state\local Govts, by establishing a national retirement program funded federally where every US citizen receives the same amount of money at retirement every month until they die. Personally, I think 2X the poverty level would be a good place to start and then adjust from there as necessary.
financial matters:
A quick question…where have “extractive middlemen” been taken out of a major economy? Are you talking about the now defunct State Marxism of the Soviet Block? A barter based commune during the Spanish Civil War? VENEZUELA?
I’m simply curious…not being difficult, because this is quote a statement.
I would use examples like the German Sparkassen, the Japanese Post Bank, the central banks of the Asian Tigers. Early central banks of Canada, Australia and New Zealand.
Mainly where countries realized they could leverage their own sovereignity (labor) and not have to rely on foreign banks or a private banking system for funding.
The banking system seems to function mostly as a system of leverage to provide funding/credit for various endeavors. If this is democratically focused it can fund a lot of useful endeavors. If not it can end up funding M and A and various types of speculation.
“…the government’s role as enforcer…”
Good luck getting people to deal with that aspect of the system!
Well,we’re not commies quite yet. There will be private banking for decades from now. Although we now all understand the difference between sovereign and private banking – it is not part of the way official money circulates. But right now we can establish domestic needs without incurring debt. Right now. The rest, maybe buying a bunch of crap on our credit cards, we can mess around with for a while. But what Alt says right here, the quintessential point, is that it is not money that counts, but it is the USE to which money is put that counts. We all need to get our heads around that one. The purpose of money, to advance the well being of us all and the well being of the planet is what counts. Nobody’s asinine interest rate or usury or need to go to war even compares with the monetary logic of the good uses of money.
And I would expand that to say the purpose of money and the economy and the purpose of Congress to appropriate spending is to advance . . . .
What is lacking in our economy and country is adequate fiscal policy, the duty of Congress to provide for the “general welfare” of all the people, per the preamble to the Constitution.
Right now, we’re leaving it to the Fed and it’s limited monetary policy capability, as if controlling or setting the overnight interest rate is all there is to running a country financially. Congress isn’t telling the Fed what to do, and that’s Congress’s job.
Susan,
Did you mean we can ‘establish’ domestic needs, or ‘meet or satisfy’ domestic needs.
Because we havbeen establishing ‘unmet’ domestic needs for a hundred years or more.
Also,
“”The purpose of money, to advance the well being of us all and the well being of the planet, is what counts.””
Susan, I really wish you would take the time, time that I know you don’t have, to read Soddy’s “The Role of Money”. Because he agrees with that observation to its finest point. Moreover, he proposes a scientific solution toward making that happen, a solution, which very unfortunately for Randy, Warren and others, runs contrary to the endogenous money Theories developed in support of the MMT construct.
Soddy was a physical scientist and his proposals incorporate the needed environmental and ecological considerations that The Second Law of Thermodynamics casts upon our collective stewardship of the planets resources.
https://archive.org/details/roleofmoney032861mbp
At your leisure.
per favore
Oregoncharles,
Yes, your economics professor was wrong.
US currency–our sovereign non-convertible fiat currency with a floating exchange rate–has behind it the taxing power (not the payments) of the nation, and the federal government of the United States controls this power. Private persons do not control the currency. Neither do banks, who are only allowed to issue ‘credit money’, subject to interest, collateral, and repayment, and it all nets to zero. Banks cannot create new currency. That would be counterfeiting.
New, (interest-free) money/currency can only come from the US Treasury, and it shows up as government spending, which then generates the issuance of government-backed treasury bonds, after legal appropriation by Congress.
Money/currency backed by gold is a fiat currency. The fiat is gold. There are three problems with it, which were acknowledged in the early 1930s when people were cashing in their dollars for gold and hoarding it, creating the Great Depression: (1) there’s a limited supply of it, and (2) he/country/gold mine who controls the gold supply controls the nation, and (3) new discoveries of gold devalued the dollar, rendering the economy unstable and threatening the financial security and welfare of the people.
In Benjamin Franklin’s day,
See Benjamin Franklin And the Birth of a Paper Money Economy By Farley Grubb
the Constitution specifically charges Congress with the issuance of the currency.
Somehow this failed to post the first time, so I have to rewrite it. Once more unto the breach:
I think I’ve figured out what bothered me about Alt’s statement that taxation supports the fiat currency:
I think he’s dodging the implications of his own theory. I accept that sovereign governments can issue, print, etc. their own currency. But that means that they don’t need to levy taxes for revenue. And taxes aren’t a large enough part of the economy to support the currency. (From the dollar bill: This note is legal tender for all debts, public and private.” Either that means nothing, or it’s the reason we use dollars.)
I think the MMT theorists dreamed up the taxation theory because they weren’t willing to say that taxes are unnecessary. For one thing, they’re a very useful way to regulate economic activity. I think this is a big opportunity: we should go for the regulation aspect. That means giving up the personal income tax, a huge nuisance for most people, and switch to extraction and pollution taxes for environmental regulation, luxury taxes to correct inequality and pull money out if necessary, a sharply graduated corporate income tax as an antitrust measure that would work, an anti-speculation tax, and perhaps a small customs duty to promote national self-reliance – for a few examples.
There is another issue and another reason for claiming that taxes support the currency: MMT comes within a hair of proving that modern currencies are a confidence game – literally, the money is worth something just because we think it is. That’s a big, scary can of worms. For one thing, it means they can collapse – the Euro is well on its way to being the first example.
This note is legal tender for all debts, public and private.
Means government muat accept dollars to extinguish the bearer’s tax liability, and that it can also be used in private transactions.
That note was printed by Treasury but issued into the circulation by private bankers – meaning by another journal entry onto the books of the bankers – which is when it became ‘money’ for exchange purposes and part of the M-0 and M-1 monetary aggregates.
As I have said earlier, the Guv accepts very little $US currency in tax payments, with over 99 percent satisfied with plain old vanilla banker-credit monies.
So what is the significance of the ‘government money’ again?
So “legal tender” means two different things in the same sentence? These explanations are approaching gibberish.
As I said above, US currency is ALWAYS used in private transactions (mostly, of course, in electronic form) and is ALWAYS accepted. If it isn’t required by explicit law, everybody certainly acts as if it is. As I also said above, the whole structure may be coasting on pure custom, a pretty shaky basis for a whole economy and NOT what MMT appears to say.
And so far, no one’s addressed the “confidence game” aspect.
Oregoncharles: The problem appears to be what you assume to be true or obvious, which is neither.
Payment of taxes would not be enough to support the value of the whole money supply – it’s only about 10% of the economy. or And taxes aren’t a large enough part of the economy to support the currency.
This just is not true. You’re assuming what you want to prove. Taxes, government runs around 20-30% of GDP, or even more. This is quite enough to support the value of government spending & the amount of state money (widely considered) = National Debt outstanding: as proven by the real world, not a priori reasoning. Of course if the taxation is less, government spending will have to be very roughly proportionately less, other things being roughly equal, but there is no problem with having a solid currency supported by a tax (or other payments to government) take of 3-5% of the economy, as in the “laissez-faire” era.
I stand corrected about the percentage, but you’re also assuming what you’re trying to prove: that it’s taxes that support the currency. In the laissez-faire era (which we’re rapidly going back to), we were on the gold standard.
I still think it’s “legal tender” – even if it’s at least partly an illusion.
No, I am not assuming that. I am pointing it out. People do save money, and they are not crazy to do so, because money is a good store of value against an uncertain future. Because in addition to death, taxes are also certain. “Legal tender” is basically useless as a backing. Gold is pretty much useless as a “backing”. Gold is only valuable because other foolish countries make it valuable by wasting their valuable “fiat” money on it. It boils down to truly useful things purchased from a government, or taxes in the end. Why do countries that don’t have legal tender laws, but have taxes and money that is legal tender for public debts, have working currency systems?
Salmon Chase – who as Lincoln’s Treasury Secretary issued the Greenbacks, and then declared them unconstitutional on the Supreme Court in the Legal Tender Cases, understood this perfectly well. The USA was blessed for a very long time by usually having someone somewhere in government who actually understood money. Not any more in the current dark age of monetary-economics. Chase’s opinion was that making money “legal tender” made it less valuable. MMT forebear Mitchell-Innes commented that that was going a bit too far. It just does very little, is all.
Amends Cal… I might step too far here given history and all… tho… in a sense… we ***all*** are “money” by statement and act.. tho not by commodity, but, by servile – survivalistic kinship.
Skippy… that this has been perverted for narrow ideological reasons.. is more a case for tribalism [belonging], than actual forensic genealogical anthropology.
It seems that with MMT, as the debits and credits rise with the increase in production of fiat money, there is reputation risk that seeps out of the ever expanding balloon. At some point it has to be noticed that the emperor has no clothes. Similar to an average household that is given an endless supply of credit cards to buy garbage. At some point the depreciation of the “assets” purchased, and the inability for the fiat maker to keep up with the production of new goods, will be the tipping point. At that time it seems the strongest currencies/reputations will float and the weak currencies/reputations will get pummeled.
Government is not like a household (at least a government that issues its own currency). File under agnotology, please.
Sorry, only the REALLY smart kids have an ‘agnotology’ file.
I’ll try to use smaller words for Lambert next time.
Just don’t use tropes that make people dumb.
(Words almost all of one syllable.)
Nobody is saying there is no point that the Govt cant create and spend too much money. Yes, the sky is blue.
But the amount of Govt money in existence has increase 1800% since 1980 and nobody has noticed, and it hasn’t been enough to maintain full employment. And when it increases 1800% over the next 35 years, nobody will notice and it still wont be enough, as the private money supply most likely wont grow as much over the next 35 years as it has over the previous 35 (given our already extremely high levels).
Illegal Country,
The system of debits and credits has been around since the Sumerians, that we know of. That was 5500 years ago. They were recorded on clay tablets (3500 BC), and the system worked. How else was agriculture to flourish? Farmers planted seed in the spring and bought everything on credit until the harvest when they got the dough to pay up. The fiat maker, as you call it, in those days was the state. It bought the agricultural products too as a store to protect the people, and their governments or kingdoms, in times of drought, war, or catastrophe. These assets didn’t depreciate or diminish. You’ve got the logic all wrong. (Gold, btw, didn’t show up as a fiat token until 700 BC–2,800 years later–when the Greek temples starting issuing them.)
Most currencies in the world these days float.
My logic is right. You’re just talking about Sumerian beans and trying to equate it to today’s magic beans. The two aren’t the same. Your beans had a store of value. There was probably some loss in storing the crops in your example due to mice, grasshoppers, water damage but the store of value most likely stayed pretty much the same. In today’s world (not 5500 years ago) we have bank printed currency (loans that did not abide by the terms of the PSA) being converted into Alt’s “sovereign” dollars through TARP, QE, etc. These assets were purchased with sovereign dollars far above true value. Depreciation was not recognized (and still hasn’t been) when they were converted. This conversion falsely anchored the value. Currencies do float…you are correct. My point is that the US has had to bs their arses off in order to make it appear that these mbs had a store of value-or float the currency. These magic beans have a store of value but not what is being represented by the US. This leads to reputational risk. The Sumerians were transparent in their record keeping. The same cannot be said of the debits and credits today.
Are you saying that a government doesn’t have to worry about reputational risk (credit scores for a household) as the fiat supply expands without offsetting non-depreciating assets?
That’s what taxes are for: to drain excess money that’s been filling the bath and that has served its purpose. I know it’s a delicate religious matter, and that various people believe that taxation is the Devil, the Deity and nothing at all. But there it is.
This appears to be a monetarist argument, that government spending can only push supply of currency beyond market demand and thereby devalue the currency. That outcome is not possible.
That is not a ‘monetarist’ claim at all.
Here ‘monetarist’ = MMT whipping boy.
You’re right that it can’t happen, and the only reason it is NOT possible is because government spending has exactly ZERO effect on the supply of money, because ‘government’ is merely a ‘user’ of the private bankers system of money.
Charted legality’s say differently.
Not true…it was not intended as a monetarist argument. It’s merely pointing out that reputation is a constraint on the fiat system. The problem with banks printing money (via loans in the fiat system) is that the reputation of the currency is damaged when banksters have the backing of the US government through bailouts – thereby converting “their” money to “our” money. There is a certain amount of polishing or b.s. needed in order for the $ to maintain its status. How much b.s. the system can take is dictated by reputation when compared to competing parties…the $ is the pig with the prettiest lipstick.
You show a consistent pattern of not thoroughly reading comments. You are agreeing (according to your response) that government spending cannot push money supply beyond demand; you are not agreeing that government cannot increase money supply. Sorry, but you don’t get to edit a sentence and then claim it is correct or incorrect. Try responding to what is actually said.
Secondly your response shows you are completely unfamiliar with Friedman’s work or monetarist theory as the increase in prices via government expansion of money supply is central to the work of monetarist proponents. Anyone who has studied economics at the undergraduate level is aware of this, yet you aren’t.
MV =Py: where M is the monetary aggregate, V is velocity, P is the price level and y is output. Friedman and the monetarists assumed that velocity is fixed and output is always at its possible maximum.
Therefore increasing money supply via fiscal policy would by definition push beyond demand for liquidity and result in a rising price level. This is, however, impossible as government spending or central bank “helicopter drops” can only function via consensual transaction. Banks must agree to sell the Fed bonds while private firms must agree to sell their goods and services to the legislative and administrative branches, ergo the very act of cooperating with the purchases is an expression of additional demand for the government’s unit of account.
What was said?
BJ This appears to be a monetarist argument,
Me That is not a ‘monetarist’ claim at all.
I would like to be responsive to the matter, always, and I don’t understand why you didn’t just say what it was that was wrong, so we could be discussing it.
I don’t agree with any characterization you presume about what I’m saying….. here:.
‘and the only reason it is NOT possible [ that government spending can only push supply of currency beyond market demand and thereby devalue the currency ] is because government spending has exactly ZERO effect on the supply of money, because ‘government’ is merely a ‘user’ of the private bankers system of money.’
That’s what I said.
It’s hard for me to follow your postulation of that position, here
“”You are agreeing (according to your response) that government spending cannot push money supply beyond demand; you are not agreeing that government cannot increase money supply.””
Huh?
No, I’m agreeing to the first part because of the second (*)part. Except that the word ‘government’ here(*) means government spending. Government spending has no effect on the money supply, except temporally, but never as to affect the currency.
And as far as Friedman’s monetarist views, which have been much discussed in MMT and highly cited recently by Lord Adair Turner in his totally monetarist ‘Permanent Overt Money Financing’ of deficits, Friedman was in favor of a real sovereign fiat money system of government issue. As is Turner….to a degree.
When the government is issuing the currency, there will be zero setting target rates for anything to do with the money supply. The Guv is issuing the money supply.
Friedman called for direct payment of money into the economy by the sovereign, with seigniorage advantage to the taxpayers.
Wray has written a bit on Friedman’s 1948 paper titled A Fiscal and Monetary Framework for Economic Stability, where his proposal for reform is spelled out.
He was there- direct money issuance – after picking up on the work of Irving Fisher with his proposal for 100 Percent Money, which, on these pages, needs the explanation that with any full reserve or 100 percent money system, the government becomes the money creator. It’s automatic. Any discussion of the effect of or on reserves is a rabbit hole. The revolution is in public money creation, something, ironically, advocated by Friedman but not by MMT, and the driver behind his monetarist money system views. Friedman’s view also contains the explanation THAT, once changed to public issuance, the money supply issued becomes permanent in nature, changing in number with each seigniorage gain.
So, to be clear, Friedman advocated a reform to the money system that included the end of fractional reserve lending and the introduction of new money into the economy via government spending.
(I think he would have known if the Guv was already creating money by spending.)
I never got to the bizschools where they teach about economics.
Gettin’ some economic schoolin’.
“”Friedman and the monetarists assumed that velocity is fixed and output is always at its possible maximum.””
Not exactly, but what they assumed is irrelevant to either the equation or this discussion.
“”Therefore increasing money supply via fiscal policy would by definition push beyond demand for liquidity and result in a rising price level.””
Assuming those are your words, how do you presume the fiscal policy money supply increase would happen? Helicopter drop?
As in Fisher and Friedman, it would happen by having the government pay for goods and services through seigniorage gains associated with sovereign money power.
Seigniorage gains would replace public debt as the funding source for a portion of the revenue part of the government’s budget that had already been approved.
So, fiscal money additions are only a fraction of the demands of the government’s budget, and thus no rising price level would result.
The name of Friedman’s paper was ‘A fiscal and monetary framework FOR ECONOMIC STABILITY’. There was no advocacy for inflationary policy.
The only question here seems to be whether a ‘fiscal’ type injection of new money MUST by definition be something that is in excess of potential GDP, and which therefore must, kinda ipso-facto-ish, cause inflation. This seems absurd to monetarists. And Friedman’s fiscal framework proposal worked in the opposite manner.
The government budget being part of national GDP, new money spent of the government budget CANNOT cause inflation.
It might just be me but, Milton was caught red handed accepting bribes from land developers and a key actor in establishing FEE [long list of upper most quintile fat cats ideological agency fog emitter]. So for you to say your mobs 100% reserve system is ***OURS***… is massively ludicrous.
Not exactly, but what they assumed is irrelevant to either the equation or this discussion.
Yes, exactly. That you dodged is another indication you don’t know what you’re talking about.
Assuming those are your words, how do you presume the fiscal policy money supply increase would happen? Helicopter drop?
As in Fisher and Friedman, it would happen by having the government pay for goods and services through seigniorage gains associated with sovereign money power.
This is false. Friedman’s helicopter drops assumed quantitative easing would encourage bank lending and liquidity demand. You do not know what you are talking about.
The name of Friedman’s paper was ‘A fiscal and monetary framework FOR ECONOMIC STABILITY’. There was no advocacy for inflationary policy.
Again, you’ve failed to thoroughly read the comment to which you respond, or you simply don’t underestand. No one made the claim that Friedman advocated inflationary policy; were you familiar with Friedman’s work it would be clear he believed a central bank policy of encouraging bank loans was a non-inflationary method of stimulus.
Stop trolling.
You know Benny, you’ve got a lot of nerve for someone who knows so little and proves it again here with these comments.
Somebody ought to be yanking your cord.
This has all become unnecessarily convoluted. but….
BJ here : “” No one made the claim that Friedman advocated inflationary policy;””
Well, maybe no one except Benny the J.
EARLIER ..from Ben, .to which I replied….
“”Secondly your response shows you are completely unfamiliar with Friedman’s work or monetarist theory as the increase in prices via government expansion of money supply is central to the work of monetarist proponents.””
So you stated clearly enough for me to respond that “increases in prices via government expansion of the money supply” was central to the work of Friedman and other ‘monetary’ proponents. Increases in general prices defines inflation.
So from where TF do you get the audacity to state here for me to answer that “No one made the claim that Friedman advocated inflationary policy”.
YOU DID. F.C.S.
A soap-based mouth-washing is in order.
Then, this :
B the J to me here : “” were you familiar with Friedman’s work it would be clear he believed a central bank policy of encouraging bank loans was a non-inflationary method of stimulus.””
You are totally wrong.
Central bank and bank loans had NOTHING to with his monetary proposals, which I quoted, using Wray, elsewhere.
Read his Program for Monetary Stability, along with his 1948 paper I referred to earlier. His money-thinking was so far advanced beyond yours that he saw the government’s DIRECT payments of fiat as the non-inflationary method to advance prosperity.
He called your central bank-bank based money functions as “the creation and destruction of capital” and abhorred it as unworkable in the long run…. as do I.
So, you are way off the friggin wall on this stuff.
Benny the J again here:
“” You are wrong. Friedman’s helicopter drops assumed quantitative easing would encourage bank lending and liquidity demand. You do not know what you are talking about.””
It should be so obvious to knowledgeable people that it is you who does not know what you’re talking about and I apologize for the double sending….this is from Wray’s Working Paper No.22.
“”But what was unusual was Friedman’s “proposal” to finance budget deficits through money creation. Surpluses would destroy money. He thus proposed to combine monetary policy and fiscal policy, using the budget to control monetary emission in a countercyclical manner. He also would have eliminated private money creation by banks
through a 100% reserve requirement, something that he had picked up from Fisher and Simons, hence, there would be no “net” money creation by private banks — they would expand the supply of bank money only as they accumulated reserves of government-issued money.””
Got that, Benny?
According to our friend Dr. Randy Wray, Friedman’s proposal did NOT involve quantitative easing to encourage bank lending to stimulate demand.
I have been studying Friedman for decades longer than you have studied MMT.
Get your facts straight next time and get back with me.
And I don’t ‘dodge’ anything…. the monetarist view on ‘velocity’ was limited to ‘little change in the short run’, but being that may or may not have been correct at the time has absolutely nothing to do with this discussion.
If you think it does so, say why, rather than claiming superiority in your small-minded manner.
Thanks.
You think QE was a stimulus? This is what David endlessly tried to promote, monetarist bias strikes again.
Skippy… asset swaps utilized to back fill fraudulent credit issuance is not a stimulus. Obummer knocked back Paulson’s principle write downs, work it out from there…
Did I say I thought QE was a stimulus?
No. So, why the question?
Money-economic equivalent of when will you stop beating your wife.
cute.
QE is bassackwards money expansion.
Of course, if you read, I am advocating what Fisher and Friedman were advocating in Wray’s description….the financing of deficits through fiat money creation.
Is that so hard to understand?
Isn’t that a ‘premise’ that MMT espouses, albeit falsely so, as any proposal made here to ACTUALLY fund deficits with fiat money creation is immediately branded “cranky’ monetary economics.
Why?
Dead wrong. Read Freedom From National Debt (2013) by Frank N Newman. He was Deputy Secretary of the US Treasury and in his 87-page book he explains what you don’t know about the money supply and how government spending works.
Read it long ago, also his other book.
Says nothing
Banker Newman loves public debt because the One-Percent-bankers like sucking the lifeblood out of the Ninety-Nine-percent-taxpayers.
And MMT helps with the ‘savings account’ identity.
It’s the “bankers’ school” system of money we have here, folks.
I thought we beat it in the last Revolution, but I guess not.
Learn about sovereign fiat money.
It’s what the Colonies had.
Because it’s OUR money system.
Banker Newman loves public debt because the One-Percent-bankers like sucking the lifeblood out of the Ninety-Nine-percent-taxpayers.
Polemics, last refuge of the weak-minded.
No need for you to admit that here, Ben.
The irony of Alt’s post here is that Alt is talking in monetarist language(!). He’s saying that the problems in our society are fundamentally due to an improper number of currency units being spent by the government. He’s worried about the amount, the quantity, of money.
That’s one of the issues MMT doesn’t seem self-aware of yet; it worries about things that sound monetarist, yet simultaneously bashes monetarists.
“He’s saying that the problems in our society are fundamentally due to an improper number of currency units being spent by the government. He’s worried about the amount, the quantity, of money.”
Yes, MMTers think this, but its always within the context of the savings desires of the private sector. Because wealthier people save more of their income, distribution matters. If more of the national income went to the lower income groups, they would spend more of that money on consumer goods and services which expand output and employment, which results in a lower required deficit aka “number of currency units” in order to maintain full employment.
Or the distribution can stay the same, and the private sector can be take on a lot of debt and spend it (dis-saving), like the reagan, clinton, or bush private debt booms. Again, because of the lower savings desire, the deficit would be smaller at full employment.
Or the distribution can stay the same but the private domestic sector could get its savings from foreigners through a trade surplus. Here too, the govt’s deficit could be smaller at full employment.
But given our current trade balance, income distribution, private debt (money) creation levels, the deficit (addition of Govt money) is too small to maintain full employment.
Monetarists are silly because they believe in loanable funds, money multiplier, crowding out, omnipotence of the CB, etc.
J.D.s topic is monetary flows. Monetarism is about targeting monetary aggregates. These two things are not alike.
I would disagree there. Alt is not talking about using government to tax existing dollars lying dormant to get them moving through the economy.
Quite the contrary, he is talking about using government to spend new dollars into the economy.
Exactly as it should be when the economy is in the tank, and 45 million are unemployed or underemployed.
Who else is going to spend to get the economy going again? Households either don’t have the income or are hoarding. Businesses are sitting on $2 trillion waiting for customers to come back, and willing to spend. And the foreign sector is investing in treasury securities, and those are sitting in the NY Fed, by and large, doing zip.
Who else is going to spend to get the economy going again?
That part wasn’t thought out when it was decided to move making stuff to China.
“Households either don’t have the income or are hoarding.”
Well, that answers the who problem right there. The problem isn’t an insufficiently large amount of government spending.
Rather, the problem is that government is taking money from those that don’t have to give to those that do have, to such an extent those households have nothing to do but hoard all this wealth. So, one option would be to stop subsidizing these hoarders, and instead, tax them.
He isn’t talking about taxation because taxing is not a flow, spending is a flow. Velocity rises from spending, not taxation.
Sorrry, JD’s article ‘purports’ to be about two kinds of money, one is private bank money and the other is something or other having to do with
“”Sovereign dollars, in contrast, are created to facilitate the production of collective goods and services—and, furthermore, one of the PRIMARY collective goods the sovereign dollars create is the private banking system itself (which, as we have just noted, is made possible and viable by the promise of the sovereign-issued dollars.)””
What total BS. All the way around……..LOL.
The private money-creating banking system, THAT WHICH creates the One Percentum, is a public good.
Only MMT has such a loose footing to its foundation to be able to shoehorn such an argument with a straight face.
And that SOMEHOW there is public money issued to pay for our ‘collective’ public goods, any stocks and flows of that novel little rubric?
Seems to me that you all miss the point that the Federal Reserve note, no matter how it comes into existence, is a guarantee that 2 out of 5 of your neighbors must fail for you to succeed. Booms are to expand the amount of devalued currency in the market. Crashes are so that money can be returned to the public in the form of interest on savings, return on investments, and of course the bank gets it share.
The fact that you can only create the principle, accounting 101 since; about, forever, so I think, a little beyond, Reed College, ECON210 1965, would seem to be the convincing factor, here, that the US currency, and any like it built on debt, is one in which a certain portion of the public, that uses, it must fail for it to succeed as a payment form.
Interest is the illusion not the principle.
Not in a monetary system with an endogenous money supply.
“The fact that you can only create the principle, accounting 101 since; about, forever,”
This is a myth – and in fact if you had studied economics – even the very flawed version currently on offer – you would understand the difference between stock and flow. The flow of loan-created money covers the interest as it is spent.
Steve Keen covers this in a talk he gave a few years ago. I couldn’t find the original but this post refers to it.
http://www.renegadeeconomist.com/blog/from-a-renegade-correspondent/is-interest-repayable/Page-2.html
Well, since all he does is refer to Keen, what is there to say?
I’ve read dozens of such over the years.
Here’s a clue for working this out.
The outstanding interest question:
From where does the money come (read originate) to pay the interest obligation on the loan ??
That question can NEVER be answered by showing, with any model or otherwise, where the interest payment GOES.
Banks are businesses, and like any business receives income that recirculates in the economy.
Bank interest income is no different from BurgerKing income, or TrueValue income in terms of where the income GOES.
We know that ALL income, axiomatically, must derive from monies created out of debt.
Does bank interest income derive from monies created out of debt…..thus creating an exponential compounding interest demand that is derived, always, out of somebody else’s debt principal, or not?
Is that not the source of the Musical Chairs analogy?
At the end of the game there is one chair and one player.
But with debt, in the end there is one more round of interest payments due, but NO chair.
But, who care, In confusion there is profit.
That question can NEVER be answered by showing, with any model or otherwise, where the interest payment GOES.
It goes into an account, although you appear to think angels are somehow involved.
“”It goes into an account,””, as does all the payments made by Burger King and True Value, or me….or even you.
But the question is where does the ‘money’ used for the interest payments come from.
MMT claims some affinity to stocks-and-flows of money accounting, and the question I am posing here is what are the stock and flows associated with these monies prior to them being made for any interest payments.
So, because I doubt the angels are involved here, where is it coming from?
I’m sure you all know the answer to this.
Just trying to learn something.
The US Treasury calculates the interest payments owed annually and issues treasury securities–yes, prints them out of thin air–at auction to meet the need.
MRW
Here you avoid the LARGER question of the source (origination) of monies used to pay PRIVATE debt-contract interest obligations, and move to the much smaller issue of the source of money used to pay interest on Treasury securities.
I guess ou didn’t think about it a lot.
“”The US Treasury calculates the interest payments owed annually and issues treasury securities at auction to meet the need.””
You’ve given a new meaning to the term ‘compounding interest’.
Sometimes MMTers need a refresher course on money.
As in:
Treasuries issued are NOT money, and they cannot be used to pay the interest to the government that issues them.
Treasuries issued are sold to bankers, who pay bank-credit money to the Guv, so that the Guv can use it to pay Bills, including the Bill for interest payments on those Treasuries.
The only thing the Treasury calculates is the size of the deficit and issues Treasuries as cash-flow requires……… to pay its Bills, which may or may not include its interest payments on the Guv’s debts.
BUT, I thought the Guv was the monopoly issuer of the currency???
And, if so, why borrow?
https://www.youtube.com/watch?v=2HRt6sSXpOQ
You’re confused about how these financial operations work, and mixing up public and private operations.
This is incomprehensible: “Treasuries issued are NOT money, and they cannot be used to pay the interest to the government that issues them.” The government pays the interest on treasury securities, as the issuer. It derives that interest by issuing more treasury securities in the amount of the interest required annually.
You’re assuming that treasury securities are not money because they appear to be illiquid in note (2-10 yr maturity) and bond (10-30 yr maturity) form. But they are 100% tradable; the US trades $500 billion in treasury securities every day. Physical cash and coins, on the other hand, amount to only 11-12% of the total US money.
@elbridge Banks are businesses, and like any business receives income that recirculates in the economy. Bank interest income is no different from BurgerKing income, or TrueValue income in terms of where the income GOES.
A payment to Burger King leaves M2 unchanged. A payment to a bank from a deposit account — principal, interest or fee — diminishes M2 without augmenting any other money aggregate. Our explanation to Keen is here, with a little help from Soddy and the Federal Reserve Bank of New York.
In FRBNY’s own words: “if the seller uses the money to pay down debt, the broad money supply declines again by the amount of the debt repayment.” As you often represent the Soddy camp in this comment section, I hope you’ll take the time to see why this is so. As Keen eventually did.
Having mentioned Soddy, I’d like too think there is something to discuss.
I read Fieberger’s piece on Soddy that was largely based on the NYT interview with Eric Zencey over at MR while it was happening.
One of the best things done at MR, in my opinion.
I opened your link to the Keen page with you comment and MR-Fieberger link.
But I’m lost on what this is trying to show.
As above, where I have said that what happens to all the payments BY the bank and Burger King and others DO NOT MATTER on the question of the ‘source of’ the interest payment money ( and to be honest I have watched Steve do his modeling on this in a lecture) , and YET, your reply comes back to me with what happens to a payment made TO Burger King, etc……and how the payment TO Burger King does or not affect M2…… ???
which is relevant, how?
FRBNY : “If the seller uses the money…..”
Seller of what?
Uses what money?
Just trying to figure out what’s the point.
Is there a special point on that Steve Keen blog that is relevant, beyond your comment.
After Soddy, Simons, Fisher, Knight, Douglas, Friedman and too many others, it took til Sept. 2013 for Keen to acknowledge that money is destroyed in loan repayments……..
He better have that debunking the interest payment hyperbole down pat.
@Nell The flow of loan-created money covers the interest as it is spent. Steve Keen covers this in a talk he gave a few years ago.
Keen’s 2010 analysis is here. But he quietly acknowledged his error last March:
Thanks for the link, but I am not sure how the quote links to my point about interest on loans. Keen is talking about stock in this quote (ie number of loans). I was talking about flow – which is associated with money changing hands (ie velocity). The higher the velocity the higher the multiplier. And it is the flow – ie the velocity of money created from a loan that covers interest. That doesn’t mean there is someone at the bank making decisions on interest rates based on velocity information, it is just a characteristic of our existing monetary system – one that is well known and well documented.
Keen’s explanation involves calculus -and I am not good at explaining calculus. The simpler explanation I found was around a discussion of the local multiplier effect in support of the local economy. Quoted below http://b.3cdn.net/nefoundation/7c0985cd522f66fb75_o0m6boezu.pdf
It is the same principle of money multipliers discussed in relation to fiscal spending – ie there is the stock of money provided by government spending and then there is the multiplier effect applied to that stock where every $1 spent generates $1.50 in income (assuming a 1.5 multiplier)
Quote on local money multiplier
“Here comes Jack. It’s his birthday and his Aunt Anne has sent him a nice gift: a £10 note to spend. He buys a bargain glass vase for £2 in the retail park in nearby Outletston, and returns home where he buys some flowers from the florist for £8. The florist can then get a long-awaited hairdo, so she runs over to the hair salon next door, where she spends £6.40 (that’s 80% of £8). And she spends the rest of this money on a mail order subscription to Flowers Today magazine. The hairstylist feels peckish, so she pops out for something after finishing the florist’s hair. She spends £5.12 (80% of £6.40) on a pizza, and saves the rest towards a forthcoming hairstyling conference in Curlyburg.
So what do we have in the way of blue fingers? Jack received £10 from Aunt Anne and spent £8 at the local florist; the florist spent £6.40 at the hairstylist, and the stylist spent £5.12 at the pizzeria. The rest of the money left the local economy because the vase was from Outletston, the florist’s magazine is produced in Basildon, and the hairstylist’s conference is in Curlyburg. So that’s a grand total of £29.52 for Jack’s town, all because of Aunt Anne. If we take Aunt Anne’s original £10 out, then that means an extra £19.52 circulated in Localton all due to her original £10 gift, and that is only the first three rounds of spending”
@ Mr. Butler: Please rewrite; clear as mud.
“Thus we imagine that, as a collective society, we pay ourselves to create collective goods and services by the following convoluted process: (a) banks make loans to private businesses and citizens, (b) the sovereign government converts those “loan” dollars to real dollars, (c) the sovereign then collects some of those real dollars as tax payments which it then (d) pays back to the citizens in exchange for the needed collective goods. A few moments of reflection should reveal why this imagined reality is, at its deepest level, impossibly illogical:”
The logic of this argument does not follow – as one of the premises is false. People don’t believe that the sovereign government converts loans into real dollars for the very reason outlined in the preamble – the role of the government in the monetary system is invisible. And when you try to explain the government’s role in the monetary system people get very uncomfortable and sometimes even angry. It is like you are attacking the very fabric of civilization. Of course, if you conceive of money as a social relation then attempts to change people’s beliefs on how the monetary system operates is an attack on a basic aspect of our social environment. This is not to say that we should give up, but we are in a similar position to environmentalists in the 70’s and 80’s. It is an uphill battle. Fortunately, the bankers and their politicians are making such a hash of running economies across the world that the crises they produce will eventually lead to widespread acceptance. Unfortunately, a lot of people are going to suffer miserable lives meanwhile.
I don’t think the environmentalists ever really succeeded; for one thing, economists like Alt are still talking about “groaf”, as if we could.
Depends on how you define ‘sucess’. In the 70’s and 80’s environmentalism was a fringe issue. Now it is a globally recognized issue. The fact that our political leaders are failures at implementing environmental policies is part of a wider context of failure of political leadership across the board. The sucess was getting environmentalism moved from fringe to a recognized global issue.
Gawd,
Another awkward, self-awakening to monetary relationships that distinguish between the two ‘kinds’ of money, private and sovereign, a distinction that does not exist. Got that figured out now, have you JD ?
There is one kind of national money…..US Dollars($US) , that’s the sovereign money system’s unit of account.
All US money, issued into circulation in $US units is “issued” by the private banks’ debt contracts(loans), it is all in control of the private bankers, and the role of the federal government, since 1913, in the bankers’ money system is to ‘enable’ and ‘service’ the bankers’ money.
That is painfully evident in JD’s claim here.
“”…Bank dollars are created specifically to facilitate the production and exchange of private goods and services. Sovereign dollars, in contrast, are created to facilitate the production of collective goods and services—and, furthermore, one of the PRIMARY collective goods the sovereign dollars create is the private banking system itself……””
But, there ARE no sovereign dollars that are distinct from bank dollars, a fact that JD twistingly confirms throughout this post. ALL $US are the same …… same unit, same issuer and same beneficiary ….. the One Percent.
Because MMT embraces the “bankers’ school’ of money, and yet has a strong desire to find a ‘public purpose’ to that private wealth-creating machine, we find this plethora of lengthy and meaningless attempts put some lipstick on that pig, here sold as if this wealth-dividing system, making the rich richer and the poor get the picture, is a ‘collective good’. Versus, a collective ‘bad’. LOL
There are NO sovereign dollars created to facilitate the production of ‘collective’ goods and services. ALL public spending is funded by either tax collections of already existing banker-money, or debt-issuance that MUST BE funded from the same source….for one reason.
Because the banks issue ALL the money into circulation (c,e,). It matters not who ‘prints’ the Bills, as it is not money and not currency until it is issued into circulation.
JD : “” With each of these examples I seem to be suggesting that direct sovereign spending—the issuing of sovereign fiat dollars to pay for collective goods and services—ought to be buying things which, …””
Sorry, JD is not suggesting that sovereign spending of money into circulation “ought to” be doing anything. Rather, MMT’s misplaced foundation is that the government IS the monopoly issuer of the currency, meaning that we ARE doing those things now, which we’re not.
Thus, the only way MMT can synch what ‘ought’ to be happening via sovereign-ISSUED money and the accomplishment of MMT’s worthy public purpose objectives, is for that same GUV, that has the power to issue the money, to issue DEBT instead.(It’s not REALLY debt, it’s private sector ‘savings’.)
Queue the banker-Frank Newman philosophy that DEBT is good for you and you NEVER have to pay it back.
Money is the topic of the day. Adding more fog to the money ‘issue’ via these baseless claims about publicly funding our “collective” goods and services is laughable, and prevents the reforms to a real ‘sovereign’ money system, where public money DOES pay for the public good, from ever taking place.
http://www.paecon.net/PAEReview/issue66/Huber66.pdf
You keep trotting out Huber who is for all intent a free market acolyte – “Critics argue that ecological modernization will fail to protect the environment and does nothing to alter the impulses within the capitalist economic mode of production (see capitalism) that inevitably lead to environmental degradation (Foster, 2002). As such, it is just a form of ‘green-washing’. Critics question whether technological advances alone can achieve resource conservation and better environmental protection, particularly if left to business self-regulation practices (York and Rosa, 2003). For instance, many technological improvements are currently feasible but not widely utilized. The most environmentally friendly product or manufacturing process (which is often also the most economically efficient) is not always the one automatically chosen by self-regulating corporations (e.g. hydrogen or biofuel vs. peak oil). In addition, some critics have argued that ecological modernization does not redress gross injustices that are produced within the capitalist system, such as environmental racism – where people of color and low income earners bear a disproportionate burden of environmental harm such as pollution, and lack access to environmental benefits such as parks, and social justice issues such as eliminating unemployment (Bullard, 1993; Gleeson and Low, 1999; Harvey, 1996) – environmental racism is also referred to as issues of the asymmetric distribution of environmental resources and services (Everett & Neu, 2000). Moreover, the theory seems to have limited global efficacy, applying primarily to its countries of origin – Germany and the Netherlands, and having little to say about the developing world (Fisher and Freudenburg, 2001). Perhaps the harshest criticism though, is that ecological modernization is predicated upon the notion of ‘sustainable growth’, and in reality this is not possible because growth entails the consumption of natural and human capital at great costs to ecosystems and societies.”
Skippy… now if you want to have a crack at the political corporatist agency which has dominate the sociopolitical vistas, well, that’s a more cogent observation.
skippy
elbridge suggests sticking to short bursts of wittiness, rather than letting your money system rationale hang out there, it being inanely incorrect all the way around.
Starting here:
“Huber….is for all intent a free market acolyte”
Sorry, opposite from the truth.
Huber’s advocacy for a public money system is painfully obvious as the opposite of the capital-markets based private bank-credit system originated as the “bankers’ school’ money system.
skipster…….wake up.
It is ‘you guys’ at MMT that are advocating the free market system of money, known fondly as ‘endogenous’ money.
And there is no better criticism of the role of the corporatocracy in destroying our natural environment, and what needs to be done to protect it, than was penned by Soddy some 90+ years ago as the beginnings of the science of ecological economics.
http://habitat.aq.upm.es/boletin/n37/afsod.en.html
His work was later picked up by Hubbard, Daly, Cobb, Georgescu-Roegen and others in advancing the ‘ecological economics’ construct, still going on today.
Sorry, skip, we KNOW the science of money.
And MMT ain’t it.
Pro tip there is no such thing as “money science” and it diminishes the term science wrongfully.
‘ecological economics’ is a misnomer as it has little or zero connection with actual – environmental economics – i.e. its a play of terms. Something I’ve unpacked below.
skippy… Maybe you could recite some Pound for us next
Ignorance of the science of money might make one a pro in the field of ‘fogging’ our collective monetary knowledge. Congrats on the status, but for what purpose.
“”STATE AUTHORITY behind the printed note Is the best means of establishing a JUST and HONEST currency. The Chinese grasped that over 1,000 years ago, as we can see from the Tang STATE (not Bank) NOTE. SOVEREIGNTY inheres in the right to ISSUE money (tickets) and to determine the value thereof.””
Pound’s…..’What Is Money For?’
According to Pound, the authority of the sovereign was all that was necessary to make the national money system workable. Nothing about ‘taxation’ there.
Environmental economics is fine as far is it goes, being a long ago student of Lovins and Henderson, and practitioner of energy public policy management. But it avoids the deep ecology associated with the interchange of natural science and our socio-political institutions, the interchange addressed directly by Soddy in his Lectures in Cartesian Economics.
Wake up, skipster, MMT offers nothing in the way of providing ecological sustainability for the grandkids. Either WE fix the money system, and make it work to that end, or this major money phuqueup is theirs to do all over again.
“Cornel West may not have the answer, but he understands the question. In sharp contrast to the mild-mannered, delightfully nerdy Akerlof, West speaks with the bold sweep and poetic passion of a prophetic theologian. He challenged the room to consider the “structures of domination” that are “terrorizing people” in our economy, and he roundly criticized the reliance on mathematics to address real human suffering. To that sally, Akerlof agreed sheepishly that “We need to know how to talk about power.”
Unlike Akerlof, West does not think the economy is working particularly well. He cited high poverty rates and growing economic inequality as signs that the class war was going rather badly for most folks. He warned, however, that giving into cynicism would only stymie efforts to challenge exploitation and alleviate economic pain. West emphasized the need for economists to wake up from their “mechanistic, Cartesian dream” and focus more on the lessons of history. He applauded the great economist John Maynard Keynes for his association with the Bloomsbury Group, where the literary and historical perspectives of figures like Virginia Woolf informed his economic vision. Betty Sue Flowers noted that 19th-century poets had a deep understanding of human temptation and often deployed religious imagery to describe our vulnerability to exploitation. ” – Lynn Stuart Parramore
Skippy… yeah someone needs to wake up…
That you try to burnish your mobs image with a completely corporatist compromised group like the Serra club and an anarchist syndicate green group, that, and I not compelled by Calvinistic sociopolitical systems dressed up as empiricism because you whack a bit of physics and bad math on it either.
Serra Club and Chesapeake energy partnering up [lool]… NGO’s and big business [corporatist hearts and minds psyopt]… anarchist syndicate green white washing mobs is just another name for AN-Caps with narrow focus marketing advertizing.
Protest Inc.: The Corporatization of Activism – Peter Dauvergne, Genevieve LeBaron
http://books.google.com.au/books?id=gRvnAgAAQBAJ&pg=PT35&lpg=PT35&dq=Serra+club+has+been+corporatized&source=bl&ots=H8XuaavBen&sig=5hKqtgSKYsoSDZrIhJkIE7cPPrA&hl=en&sa=X&ei=C0kKVNLAOYi0uATsm4GwCQ&ved=0CFsQ6AEwCQ#v=onepage&q=Serra%20club%20has%20been%20corporatized&f=false
“A number of organizations and individuals have criticized aspects of the ‘Green Economy’, particularly the mainstream conceptions of it based on using price mechanisms to protect nature, arguing that this will extend corporate control into new areas from forestry to water. The research organisation ETC Group argues that the corporate emphasis on bio-economy “will spur even greater convergence of corporate power and unleash the most massive resource grab in more than 500 years.”[9] Venezuelan professor Edgardo Lander says that the UNEP’s report, Towards a Green Economy,[10] while well-intentioned “ignores the fact that the capacity of existing political systems to establish regulations and restrictions to the free operation of the markets – even when a large majority of the population call for them – is seriously limited by the political and financial power of the corporations.”[11] Ulrich Hoffmann, in a paper for UNCTAD also says that the focus on Green Economy and “green growth” in particular, “based on an evolutionary (and often reductionist) approach will not be sufficient to cope with the complexities of climate change” and “may rather give much false hope and excuses to do nothing really fundamental that can bring about a U-turn of global greenhouse gas emissions.[12] Clive Spash, an ecological economist, has criticised the use of economic growth to address environmental losses,[13] and argued that the Green Economy, as advocated by the UN, is not a new approach at all and is actually a diversion from the real drivers of environmental crisis.[14] He has also criticised the UN’s project on the economics of ecosystems and biodiversity (TEEB),[15] and the basis for valuing ecosystems services in monetary terms.[16]”
Skippy…. Marginalism barf~
Obviously you completely misunderstand and have never read Soddy’s Cartesian Economics lectures.
http://habitat.aq.upm.es/boletin/n37/afsod.en.html
You should.
And then you can try to criticize his understandings.
Which has absolutely NOTHING to do with your Sierra Club diatribe.
And completely agrees with every one of your ‘development-relationship’ postulations.
And I’m sure Rev. Westl would agree with every sentence in the Preface to The Role of Money as it describes our situation today.
Why remain ignorant?
“Obviously you completely misunderstand and have never read Soddy’s Cartesian Economics lectures.”
Personalized projections are a poor form of argument, that, and can not serve as a refutation.
BTW your the one that trotted out the Serra Club – Green economics in an attempt to give gravitas, to your assertions. That I expose the actual state of affairs wrt these institutions and provide evidence of their driving agency, is your problem, not mine.
Soddy makes the same mistake that von Mises, Friedman, and a host of others make, start out with a biased world view and then seek to justify it [w/ what every they can concoct].
skippy…. personally I find “5000 Years of Debt” much more compelling due to the breadth and width of its scope.
You are dead wrong, and haven’t done your homework. When Congress appropriates spending–its congressional duty–it authorizes the US Treasury to notify the Federal Reserve to do two things (1) mark up the US Treasury’s General Account at the Fed by the amount of new spending, and (2) authorizes the Federal Reserve to then deplete the General Account by marking up the bank accounts of the vendors the spending is for.
Let’s say, for example, it’s $100 billion in new spending (an overly large amount for a spending bill). There’s now a $100 billion increase in the money supply. As soon as the Fed depletes Treasury’s General Account by $100 billion by marking up the vendors’ accounts–yes, by keystrokes–there’s an overdraft or no money in the US Treasury’s General Account. By law from the days of the gold standard, the US Treasury is not allowed to have an overdraft in its General Account. (Congress could change this if it wanted to.)
The US Treasury then issues $100 billion in treasury securities, the amount of new spending–which it auctions on the open market to the non-governmental sector worldwide every month. The Federal Reserve cannot buy these securities. Because of the strength of the US dollar and the desire of individuals, trusts, pension funds, government, foreign investors and governments, businesses, and banks to have a risk-free place to put their money (the FDIC does not insure commercial or private banks past $250,000), these treasury securities are gone in a nanosecond. And the money supply is restored to balance.
The interest on these treasury securities, which the US Treasury pays, is computed annually (August?) and more treasury securities are issued to cover these specific interest costs. Taxpayers don’t pay for them. Banks don’t cover them.
Private bankers have absolutely zip to do with the issuance of these treasury securities, treas. sec. interest payments, or any control over this process.
Researchers G. Edward Griffin, Antony Sutton, Eustace Mullins, Gary Kah, and Thomas Scharf, et al never bothered to nail down how this really works, and persist in the “private bankers control the Federal Reserve and money supply” myth to the great detriment of the majority of the American people whose knowledge is mainly adoptive on the subject rather than research-based.
Second time I’ve been claimed ‘dead wrong’ today.
Turns out I was right last time, and here again?
After accusing ME of not doing my homework……Your para as:
“” When Congress appropriates spending–its congressional duty–it authorizes the US Treasury to notify the Federal Reserve to do two things (1) mark up the US Treasury’s General Account at the Fed by the amount of new spending, and (2) authorizes the Federal Reserve to then deplete the General Account by marking up the bank accounts of the vendors the spending is for.””
is a TOTALLY stylized fabrication of anything that actually happens.
So, where is your homework om this?
When Congress appropriates spending ….???
In what class did you learn this, and who taught this to you, or what is the source of this information?
Did someone in Congress tell you what it authorizes Treasury to do?
Or did you just read it somewhere?
Did someone at Treasury explain their authorizations from Congress to notify the federal reserve what to do?
Or did you just read it somewhere?
Did someone at the federal reserve tell you about their directive from Treasury, which was authorized by Congress?
Or did you just read it somewhere?
How do you know this stuff?
Has anyone from Congress, OR from the Treasury, OR from the Federal Reserve ever told this to you?
I’m doing my homework.
Please explain.
Because I sure do not believe it is true at all.
Congress NEVER tells Treasury to notify the Fed to do anything with its accounts…..Treasury manages its own accounts and does not authorize any payment (appropriate[v.)] spending) unless there is money in the account.
Yes, Treasury says that all the time.
Former Deputy Secretary of the US Treasury, Frank N Newman, explained the process…you know, in the book you claimed you read.
And yes, I verified with the Federal Reserve, the government’s banker. But you don’t have to believe me. Watch Bernanke say it: “We are the agent of the Treasury, and it’s our job to do whatever they tell us to do.” Actual quote at 1:35:35
http://www.c-span.org/video/?c4454549/bernanke-agent-treasury
As for Congress’s duty, read the Constitution. Only Congress can set taxes, and it is Congress’s duty to provide for the “general welfare” of the people, which it does by spending.
Backwards. The federal government spends first, and only Congress can do it, and it does it by appropriation. THEN, the US Treasury issues treasury securities in the amount of the spending to restore the General Account, and rebalance the money supply.
The delineation between ecological and environmental economics should always be crystal clear i.e. they are completely different animals. Ecological economics is a free market green washing marketing ploy, where as Environmental economics uses a scientific approach to sustainable activity’s and stewardship of our planets resources.
“Commodification of other ecological relations as in carbon credit and direct payments to farmers to preserve ecosystem services are likewise examples that enable private parties to play more direct roles protecting biodiversity. The United Nations Food and Agriculture Organization achieved near-universal agreement in 2008[61] that such payments directly valuing ecosystem preservation and encouraging permaculture were the only practical way out of a food crisis. The holdouts were all English-speaking countries that export GMOs and promote “free trade” agreements that facilitate their own control of the world transport network: The US, UK, Canada and Australia.[62]”
Above is a prime example of the country’s that support free market ideology and where their ideological bias is grounded.
Ha Ha.
This free trade bullshit has nothing to do with ecological economics, a study originated by Soddy, and continued with the works of Herman Daly, John Cobb, Nicolas Georgescu-Roegen , a school of science long housed at the University of Maryland and today at the Gund Institute of the University of Vermont.
It is a science universally UN-accepting of the concept of ‘commodification’.
It was actually the environmental scientists (NRDC and others similar) who accepted the free-market solutions around carbon-trading markets, NEVER accepted with deep ecologists like EarthFIRST, and even the Sierra Club who opted for carbon taxes.
Skippy here is just plain ignorant.
Stop quoting a bunch of irrelevant stuff, and, instead, show us what you KNOW.
“What everyone overlooks, however (for reasons not entirely clear) is the fact that these new loan dollars are “made real” by the U.S. government…”
I see this flawed premise continues to be advanced with no evidence to support it. Who overlooks this? The banksters themselves have asked for – and taken – government bailouts!
‘New loan dollars are “made real” by the U.S. government’s solemn promise to convert them at any time, on demand, into actual, “real”, sovereign U.S. dollars.’
This claim is funny, for those who recall monetary history. The wording on a 1950s silver certificate reads:
‘This certifies that there is on deposit in the Treasury of the United States of America ONE DOLLAR in silver payable to the bearer on demand.’
Missing from the Federal Reserve Notes which replaced silver certificates is any promise at all.
You don’t need no PhD Econ to realize that the former is more valuable than the latter. Would you rather have a piece of paper that says ‘I promise to serve the bearer one beer,’ or another piece of paper that simply has a photo of a beer on it? DUH … *scratches head* … let me put on mah thinkin’ cap!
But a whole academic cottage industry has arisen to argue for the opposite proposition: you can never run out of beer certificates, if they aren’t actually redeemable in beer. The brilliance of this deduction astounds the pedestrian mind.
it depends on who took the photo and how many there are. Evidently, there are some photographs that sell at Sotheby’s for more than $1 million dollars. That’s a lot of beer!
‘But they ARE redeemable in beer – or silver, for that matter. I’ve bought quite a bit of it over time.
Separately from my above comment on the MMT Insight, the author is fundamentally misguided about the nature of the problem in two specific examples that are cited:
“In the U.S., however, since it is obvious the sovereign government cannot collect enough taxes to pay for college or trade-school for every young adult, secondary education must be treated as a commodity provided by private markets—and paid for, by the way, with the “loan” dollars created by banks.”
Um, on what planet is higher education paid for by banks? Student loans are backed by the government’s court system. And more generally, higher ed is funded by preferred tax treatment, such as tax-exempt status and tax-deductible contributions. And direct grants, particularly for the national security state and corporate welfare.
But even discounting all of that on the support side, there is a second way Alt is just flat out missing what has happened in higher education over the past couple decades: why does it cost so much, and, why is dropping out of high school such a problem in impoverished communities? The answer to that, of course, is because our system of education has little to do anymore with creating a broadly inquisitive and intellectual and informed citizenry. If testing and the drug war doesn’t wipe you out of high school, then lavishly paid administrators and professors will bilk you after you graduate from college. Assuming of course you even graduate from college, which is not guaranteed even for those who start.
“The second misstep (austerity) is exemplified by the U.S. national and regional infrastructures…”
Um, has the author been living under a rock for the entire 21st century? Ever heard terms like GWOT or TARP or the drug war or the surveillance state or the police state or the national security state or corporate welfare? The US government spends massively. It just doesn’t spend it on the things you want it to spend it on. Those are vastly different problems, and to confuse them shows either an amazing level of ignorance, or a purposeful willingness to be part of the obfuscation of what is actually happening in terms of how public policy allocates resources in our society.
Um, on what planet is higher education paid for by banks?
Loans. Bank loans are commonly used to make payments for higher education costs.
Right…and loans are made by banks. Backed by the government. Without the government, those loans don’t get made. What does this focus on payment mechanisms have to do with what is wrong with higher education?
Alt doesn’t explain how he would change our current system of higher education to turn it into a public good. He simply assumes as his starting point that it is already a public good. The elitism dripping from Alt – OMG, people might have jobs and families without a piece of paper from a university – is certainly a legitimate perspective.
It just ain’t the only one.
Easy. The Federal government issues transfer payments to the states to pay for education. No skin off your teeth financially. Public higher education (UofC) was free for all California students in the 1970s. The bankers gamed the system by taking over students loans from the govt during Bush II, getting a 100% government guarantee for their supposed “risk”, then changing the bankruptcy laws in 2004 or 2005 so that students couldn’t discharge their student debts in bankruptcy.
How could they get away with this scam? That’s easy too. People don’t understand how the monetary system works, and like everything else financial it seems, didn’t scream bloody murder.
You are assuming that extra marginal dollars spent on today’s higher education system are applied toward actually educating people.
I question that assumption. Like healthcare, higher ed is a bloated wasteland of mismanagement and predation and fiefdoms. Government already subsidizes it in ways large and small.
When lots of money isn’t solving the problem, even more money is unlikely to change things for the better. It takes a structural change to the system itself to make any difference.
But of course, that requires talking about bloated salaries of top professors and administrators and other highly paid staff and the palatial buildings in which they work. Can’t shine a light too brightly on such things.
Got that right.
Present money creation system
Treasury prints money.
Federal Reserve auctions bonds for amount of money treasure prints
Private sector loans money for the auction bonds and charges interest.
The above system is called debt created money system and is what the USA is using.
To have a debt free money system.
The government simply spends or loans the money the treasury prints into the system, which creates no debt on the money created. Could even make money by charging interest to the private sector for its use; which is the reverse of what is done under the present system.
“Present money creation system”
Not exactly
“Treasury prints money.”
Fed prints money (reserves)
“Federal Reserve auctions bonds for amount of money treasure prints”
TSY auctions bonds for amount of money the Fed prints (through repos mainly)
“Private sector loans money for the auction bonds and charges interest.”
Private sector exchanges the newly created reserves for the T-security credits, which the Govt subsidizes with interest payments. The amount of interest is a political decision, as demonstrated by QE. TSY is under no obligation to issue T-bonds and T-notes, they could issue nothing but 3-month T-bills and have essentially zero interest spending going to pension funds, Govt trust funds, and foreign Govts along with financial institutions.
“The above system is called debt created money system and is what the USA is using.”
There is no such thing as US debt. The USA govt issues different types of liabilities. Some pay interest and some dont. But the Govt is the only entity that can pay off its liabilities with its own liabilities. Everyone else has to pay off their liabilities with their assets.
“Fed prints money (reserves)” Auburn Parks
NO.
The Treasury prints and mints all paper currency and coins in circulation through the Bureau of Engraving and Printing and the United States Mint. http://en.wikipedia.org/wiki/United_States_Department_of_the_Treasury
manufacturing the paper currency is irrelevant as its not monetized until its accepted by the Fed. And dollars are reserves in paper form, banks exchange reserves for them. Therefore the reserves (electronic form) must come first.
Irrelevant only if you can bank or spend a book keeping entry.
“There is no such thing as US debt. The USA govt issues different types of liabilities. Some pay interest and some dont. But the Govt is the only entity that can pay off its liabilities with its own liabilities. Everyone else has to pay off their liabilities with their assets.” Auburn Parks
Its true that you can only receive a dollar for a dollar as it a sovereign currency. But the USA does pay interest on bonds which is loaned by the Federal Reserve (which is a private bank) at low interest charges threw the discount window. This interest (debt) has become a large part of the national budget.
The US Treasury pays interest on bonds by figuring out what is owed annually (I think it’s August), then issuing treasury securities at auction in that amount to pay the interest. The Federal Reserve can’t buy the treasury securities that Treasury auctions; prohibited by law.
The discount window is used by banks as a last resort to get funds to met their reserve requirement. It doesn’t have anything to do with treasury securities.
beene,
You don’t understand the process. See my post here.
MRW, thanks for the correction on treasuries.
tried, be back if I can
Head Start: On Surround & Drown
I can give you a head start, but what you do with it is up to you. It may sound counterintuitive, but always begin in the basement, regardless of birth. The empire is psychological, and the majority cannot, nor will ever be able to, swim against the current, of false assumptions embedded in DNA. The trigger and the cliff are one and the same.
Does Putin’s seven point plan sound familiar? Where may you expect the twist?
You are a lifeguard, and a distribution is caught in the current, afraid of drowning. Who do you save?
Hint: Not all are quite so stupid as the role they play in the empire makes them appear.
Baby yoga, early childhood education, and prep schooling are all obvious extensions of public education, peer pressure immersion, normalization, further embedding false assumptions, before psychological maturity, all of which depends upon natural resource exploitation.
If the consumers see you producing, they will surround and drown you, on the assumption that there will always be another automaton producer, because that is the case, in a closed system built for the purpose, until it isn’t. Don’t be stupid, unless you want to be surrounded.
Feeding people is not a miracle. The planet does it everyday, with no public education required. Planetary processes do not depend upon fiat, gold, or digital QE, artificial extensions of gravity, but the majority does, saying one thing and doing another, not seeing the contradiction, because it’s normal. You are expected to know it’s all a lie, and when you act on the lie, you are to blame.
There is no such thing as a trust and savings bank, sorry.
Putin cannot afford to care about external transaction fiat in transition. America made the move, with gas, because its mythology unraveled, as everyone, but most Americans, expected, and war is always the outcome. Now, the critters are swapping contracts faster than they can run away from them(selves). Everyone is a friend and everyone is an enemy, within the empire, which is still expecting a motor to present itself, by process of elimination.
In this episode of empire, America is spy headquarters, assuming that it will not be carpet bombed, because the wave of war has begun on the other side of the planet and it has always done the bombing, while its collectivist conscience fears the unknown, creating a positive feedback loop of increasing gravity, currently burning with busy work to ignore the obvious. And the chauvinists have dropped the weight on the feminists, like they always do, many of whom do not realize that they are feminists.
Choose a spouse outside the Bell Curve, a compliment, which appears to the majority as your opposite. Respect your parents, but do not let them drown you, and vice versa. Time is a perception of the majority, a derivative in the past, and it’s going to speed up, within the empire, as the empire subjects itself to pressure and heat beyond threshold.
Rest the timing, before you go to all the trouble of troubleshooting, an arbitrary software algorithm in an arbitrary computer chip, running the lives of those that designed it, seeking privilege without responsibility, and demanding equal rights at the end of the FILO bankruptcy queue, like they always do.
The tide is always turning. The majority simply changes its focus, to ignore the obvious, and prints, until it can’t. There is no exit, for tl/dr and the misogynists, and mom is always on the edge of the cliff. “Suspicion builds confidence.” “Consumers for Christ,” “delivering organic change…” crack me up.
employ one to discount the other.
The most important type of money is missing from this discussion – the ‘near money’ of US (and other) government debt. Currencies get to be reserve currencies because there are financial markets in which that debt can be converted into bank dollars and if necessary fiat or sovereign dollars in order to secure their acceptance “for all debts public and private” by invoking the coercive power of the state. What matters is not so much what the money is used for but how that money is ‘backed’.
JD is mistaken in limiting “the even greater confusion” to “collective goods and services”. There is nothing wrong with the “logic” is that any money created must be ‘backed’ by real wealth for it to purchase, either directly or through taxes. Whoever creates it, too much money chasing too few goods will cause inflation; and as libertarians tell us inflation is just another form of taxation. (When that money is created by private parties without a government charter, the process is called counterfeiting and is theoretically illegal.)
But inflation doesn’t HAVE to be the inevitable consequence of excessive ‘money printing’, at least in the short run. If the excess is taken out of circulation for purposes of acquiring government debt (‘sterilization’) or even just caught up in a tornado of global financial speculation that never or very seldom touches down in the real economy the whole process can be just as benign as a game of Monopoly.
With its discovery of fraction reserve banking, the West learned 300 years ago the lack of ‘real money’ (money with some inherent value?) need not be an impediment to taking advantage of advances in science and technology to create wealth more efficiently. Where this was accomplished without ‘robbing the commons’ (e.g. the lives and health of the community) the result could be considered genuine progress – and the profits so derived could be considered legitimate.
What the West seems not to have learned is that more efficient creation of wealth was the source of its wealth, not the monetary profits racked up in the process. On the contrary it seems to have assumed that anything that made money was progress unless demonstrably proved to the contrary.
In summary, money IS debt. A nation’s wealth is in its people, its resources and the extent to which the latter is made available for the use of the former. But it is much easier to create debt than it is real wealth. Just ask the Fed. So we have the supreme irony of the West’s real powers that be (it’s financiers, CEOs, etc) selling off or refusing to develop their nation’s real wealth so they can accumulate more debt ultimately ‘backed’ by the wealth creating potential of the people whose ability to repay that debt they are destroying through off-shoring, austerity, etc.
Lot’s of truth in there, but me thinks you could use a read of Soddy’s “Wealth, Virtual Wealth and Debt” for a rounding out of your understanding, hopefully correcting your one egregious error that ‘money IS debt’.
http://www.scribd.com/doc/228308123/wealth-virtual-wealth-and-debt-frederick-soddy
Today, our money system is licensed to private bankers and is issued AS a debt, but the legal, social construct of money in a national money system has nothing to do with debt….it’s just that “The Bankers Run This Town”…….and also this money system.
“Many of the theories of the money cranks were flimsy at best, however, and some had markedly negative tendencies. C.H. Douglas’ theories of social credit were influenced by Medieval Scholastic ideas about a Just Price’ and manifested a tendency to blame most of the world’s economic ills on ‘usury’. In the hands of their most famous proponent — the American fascist poet Ezra Pound — they were easily combined with virulent antisemitism and Nazi idealism.”
“For example, New Classical macroeconomists will not argue that fiscal stimulus does not lead to increased GDP by accounting identity but instead will furnish a behavioral theory that negates any impact this might have (i.e. Ricardian equivalence). This gives economic discussion a level of academic rigour that the discussions of the money cranks lack entirely. In the land of the money crank once the theory is accepted as True it cannot be revised in light of evidence, whether logical or empirical, to the contrary.
Other cranks tended to get angry because they saw professional economists as poaching their ideas. Soddy was enraged that Irving Fisher’s proposal for 100% reserve banking was identical in many respects to the one he had put forward ten years earlier. Of course, Fisher never made claims to originality and listed Soddy’s work in the bibliography along with other similar historical work — such as a proposal from 1823! Many of the money crank ideas that were embraced by economists during the Depression had been around since the time when economics as a discipline started.
The Economic Forum also carried a wide range of other authors. Many of these were prominent people working within Treasury departments in major Western powers who had schemes of their own to get the economy moving again. It also carried some work by market socialists who claimed that marginalist equilibrium economics was to be the true functional economics of advanced socialism (an historical point of interest often forgotten in contemporary left-wing critiques of marginalist economics!). By the mid-1930s, however, the periodical had been hijacked by mainstream thinkers from banks who advocated austerity together with newly emerging public relations men like Sigmund Freud’s nephew Edward Bernays.”
http://fixingtheeconomists.wordpress.com/2014/04/17/the-interaction-of-economists-and-money-cranks-in-the-depression-years/
Skippy…. 5000 years of human history vs. a handful of cranks
J.D.,
For clarification, I think you should change the second sentence in this
To this:
This is getting ridiculous. Do banks create money or don’t they? I would think this is a key thing that needs to be established. Monetarists says yes, and even say governments don’t create money. MMT doesn’t seem to have a consensus, some saying yes, others saying no, and still others trying to argue banks create some kind of other money which is different yet the same.
The question here is very basic. Do banks create money or not? And while we are at it, do governments create money or not? If MMT is to have any scientific credibility, both claims need to be falsifiable. We should look in the field and determine through obviation that both are true or false.
And for this to happen, there needs to be a clear definition for currency and wealth. MMT doesn’t seem to have a clear definition for these either. Moniterists however do have a stated theory arguing money as a store and or measure of wealth. One dollar equals one dollar’s worth of wealth. This doesn’t satisfy me and strikes me as being circular. One dollar is worth a dollar worth of wealth, and one dollar worth of wealth is worth one dollar.
So let me do some thinking out loud here. I am probably wrong here, so the point is to ask for clarification.
Let’s try and make a test for a currency. I know of at least two examples where I believe I am dealing with a currency for goods, so I will start there. One is a cash exchange. I go to the gas station and trade $1.25 for a 24 ounce can of soda. I have a non-cash exchange where I feed my debit card into the gas pump and I buy 18 gallons worth of gas for about 30 dollars or so. I observe my cash account (the number of dollars & various coins) is interchangeable with my non-cash account (the number of dollars I see displayed in my checking about when I do a balance inquiry at the ATM.); I can withdraw cash from any ATM, or deposit cash into the ATM to make the conversion.
But there is a problem here. Cash and non-cash, while clearly interchangeable, but they are also very difference. One is substantial, while the other is in-substantial. Cash is not created or destroyed as it changes hands. But non-cash are insubstantial and can not change hands as there is nothing to exchange. Non-cash behave a lot more like a computer file. I do not “move” a file from one hard drive to another, but rather I make a copy of that file to the other hard drive, than delete the original. For non-cash, for each dollar one account is debited, another account is credited by the same amount.
I also observe that because of this difference, this gives cash and non-cash different properties. Cash is restrained by the availability of cash, non-cash is not. If I go up to a vending machine to by a can of soda for $1.25, and I discover I only have $1.20, I can not buy that soda. Like wise if I attempt to withdraw $100 from an ATM and it only has $20 (two twenties), it can not honor the request, even if I do have more than enough money in my checking account to cover the withdraw. But no such restraint exists if the vending machine will accept my credit card.
The ATM makes thinks complicated. The ATM owner loads the machine up with cash. He gets this cash from the bank, debiting his own bank account. Owner has say $5000.00 in an account, and zero cash in hand. The bank has $5000.00 in cash in hand (all in twenties, meaning 250 individual bills). He withdrawals $1000 in twenties, he now has 50 $20 bills in hand, and a bank account of $4000. The bank has 200 twenties still in hand.
ATM owner has $4000 in the account + $1000 in hand, for $5000. That works. The bank however only has $4000 where before it had $5000. $1000 has gone missing. To stay in balance, the banks will have to credit an existing or new account by $1000 to represent the owner’s withdrawal. Thus the bank now has $4000 in bills, and $1000 in non-cash.
While one dollar of cash is equal one dollar of non-cash, the two are not equivalent and are not interchangeable. The sum of cash + non-cash remains constant, as do the sum of cash and non-cash independently.
Ah, this might shed some light on the question. We must make a distinction between cash currency, and non-cash currency. Both must qualify as our currency as we recognize both to be currency. So any definition of money must respect the properties of both cash and non-cash currencies. This may be tricky given the radically differing properties between the two.
But this gives us at least one testable property = consistent volume. Absent the creation or destruction of money from the issuer, the volume of currency in circulation shall be constant. This is true for cash as well as non-cash currency. Now cash can be destroyed, such as in a fire or other disaster, but we will include that as the nature of cash and call this anomalous. But cash can not be created by a non-issuer, thus counterfeiting.
But this also poses the question of what is the distinction between counterfeiting currency, and legitimate issuance of a currency by the state? Why couldn’t a bank also have this power? Or a privet citizen for that mater?
Do banks create money? Well if we do not respect the distinction between cash and non-cash currencies, it might appear to be so. If we disregard cash on hand, it looks as if the banks made $1000 while the ATM owner was debited by the same. But I do not think this is the form of money creation moniterists are considering. This would seem a trivial accounting issue.
Okay, moving on.
I put a barrow and a lender in a box; there is no entrance or exit. There is no way for cash currency to leave or enter into the system. Both have $1000 dollars for a sum of $2000. The lender gives the barrower $100, to be paid back with 10% interest ($10). So now the lender has $900 dollars, while the barrower has $1100 dollars. The loan is paid back. Now the lender has $1010 dollars while the barrower has $990 dollars. Rule of consistency is respected.
18 gallons of gas for $30.
Are you living in 1999 ?
Do banks create money or don’t they? … MMT doesn’t seem to have a consensus, some saying yes, others saying no, and still others trying to argue banks create some kind of other money which is different yet the same.
Sometimes people speak unclearly or don’t understand enough, The “still others” are the ones who are correct above. The thing to remember is MMT Godfather Hyman Minsky’s: “Anybody can create money, the problem is to get others to accept it”. Another important thing to remember is Galbraith’s observation that everything about money is so simple that it repels the mind.
Banks create money. Governments create money. Even private individuals can create money that others accept. (Warren Buffet, Albert Einstein). Creating money is easy – it is just issuing an I O U, going into debt. Ordinary people do it when they pay for things with credit cards. Bank money and state money are not interchangeable ab initio, although they are the same thing conceptually – bank money is a debt of the bank, state money is a debt of the state. In modern systems bank money and government money are usually interchangeable because they have been made effectively interchangeable by acts and regulations of the state. But one fundamentally pays debts to a bank with bank money, and debts to a state with state money. In particular, the only thing that the state accepts for final settlement of debts to itself is state money.
The word currency is sometimes used to include bank money. MMT does not, and restricts it to government issued currency – state money – FR or Treasury notes, greenbacks, reserves. Basically the two kinds are folding money and bank reserves. Sometimes these are also called high-powered money, or HPM, a coinage of Hyman Phillip Minsky – which he managed to get others to accept!
But that’s the thing with this kind of semantics. The ‘bank money’ is only valuable to the extent that it is backed by the ‘state money’.
So it’s a distinction without a difference.
***
Banks don’t create money. They transform the creditworthiness of the borrower to collect state money (currency units) in the future into present currency units. For a fee of course, denominated in currency units – that’s how banks ‘create’ money, like any other business, by creating value for their customers. Banks that lend beyond the creditworthiness of the borrower go bankrupt, because they only get money to the extent they add value. It is finite, limited to their actual productivity, losses constrained by the ability to maintain profitability.
Or they get bailed out by the state. Those are the only two options. Either lend only to the extent that borrowers bring money to the table, or require money from the government to make up the difference. Banks simply can’t create money themselves. The fact that banks go belly up or get bailed out demonstrates this conclusively, beyond any doubt whatsoever, to the point that it it silly to claim banks make money.
Now of course anyone can issue their own IOUs. Non-state money promises happen all the time in society. But that has nothing to do with banks.
Washunate:
Maybe it would have been clearer if I said Banks create bank money. Governments create government money. They aren’t the same, because one is a relationship with a bank, one is a relationship with a government. But they “are the same” in that they are both relationships, IOUs. And in modern societies, for most purposes, bank money and state money are interchangeable for most people, most purposes. You can usually go to a bank and get state money, state dollars “from” your account. You can go back and deposit the same dollars “into” your account.
The ‘bank money’ is only valuable to the extent that it is backed by the ‘state money’. That is not correct, if banks are being run properly in a healthy economy. Bank money is backed by sound banking practices. Modern, especially 20th century banks are so backed by the state that this mistake is easy to make. But look backward – less true during the free banking era. Not true at all – anybody could tell you it was false during medieval times, when state money often traded below par with respect to bank money.
Now of course anyone can issue their own IOUs. Non-state money promises happen all the time in society. But that has nothing to do with banks. This is so wrong it is hard to think what to say. Bank IOUs = non-state promises, & a type of money, are what is “in” the bank when we have a bank account. Bank accounts are the same as old-fashioned bank notes, which nobody ever thought were “not money”. They weren’t as good money as state money in modern times. Just the same way, another state’s money may not be as good money as the US dollar. But that doesn’t make them “not money”, not an IOU. Bank money = bank debt = bank IOUs = bank notes = bank accounts.
It is finite, limited to their actual productivity, losses constrained by the ability to maintain profitability. Yes, of course. The value of bank money is constrained by how well it does its job of lending = creating bank money / IOUs. The value of government money is constrained by how well it does its job of running the whole economy, neither creating too much nor too little money/IOUs.
Again, your conclusion from this that banks don’t create money doesn’t make sense, is a non sequitur. They just don’t create state money, but bank money. Just like the UK creates pounds. The US creates dollars, but pounds and dollars are both money.
One can equally wrongly say:
Governments simply can’t create money themselves. The fact that governments fall or their currency (hyper)inflates demonstrates this conclusively, beyond any doubt whatsoever, to the point that it it silly to claim governments create money.
Me thinks that HPM, the financial economist and not the base money of yore, would be a little embarrassed today by the bulk of MMT’s hyperbole being lain upon the shoulders of his teachings.
In 1994 HPM penned his working paper No. 127, wherein he embraced that wild-assed-notion of Fisher’s 100 Percent Money proposal.
http://papers.ssrn.com/sol3/papers.cfm?abstract_id=100888
MMT ignores this change from Minsky’s earlier concerns over ‘narrow banking’, but he clearly called for a National Monetary Commission to study the changes to our system of money and banking needed ‘to support a progressive democracy”.
“” But one fundamentally pays debts to a bank with bank money, and debts to a state with state money. In particular, the only thing that the state accepts for final settlement of debts to itself is state money.””
Not only false, but asinine on its face.
My check from my bank-credit’ account satisfies my (tax) obligation to the state…..ALWAYS….. as long as its big enough.
Please don’t give me the erroneous ‘but the bank creates ‘reserves’ which are state money….’
NOBODY cares about reserve accounting (except a few hangers-on at MMT) ….. not ME, not the Treasury…..nobody.
And ‘reserves’ are, AGAIN, not money.
“the U.S. government’s solemn promise to convert (bank dollars) at any time, on demand, into actual, “real”, sovereign U.S. dollars”.
This is garbage. Under 31 USC 5115(b) :
“The amount of United States currency notes outstanding and in circulation—
(1) may not be more than $300,000,000; …”