By Dan Kervick, a PhD in Philosophy and an active independent scholar specializing in the philosophy of David Hume who also does research in decision theory and analytic metaphysics. Cross posted from New Economics Perspectives
Reflections on Modern Money
Before considering what it would mean to make our monetary system more democratic, let’s begin by calling to mind a few familiar features of money and modern monetary systems in general, features we all intuitively understand as users of money in a modern monetary economy.
First, money obviously comes in very different forms. Not only are there different currency systems – the dollar system, the euro system, the renminbi system, etc. – but even within a single system, money can take significantly different forms. There is all of that familiar paper and metal currency, consisting of tangible objects that can be physically transported from one hand to another, and that are denominated with different face values. But money might also exist simply as “points” electronically credited to someone’s digital monetary scorecard at a bank. These points are debited from and credited to various accounts, and need never be exchanged for physical currency. We can already see a near future in which the traditional material currency of metal coins and paper notes will no longer be used. In thinking about our modern monetary system, then, it is useful to think of it as a network of such monetary scorecards. And we can think of the exchange of physical paper and metal currency as just one among several ways of adding and subtracting points from the monetary scorecards of those who exchange the money. Each individual possess such a scorecard, but so do businesses, governments and other organizations.
Conceiving of our monetary transactions in this way is compatible with the intellectual framework developed by Hyman Minsky, who said, “A capitalist economy can be described by a set of interrelated balance sheets and income statements.” However, the world of balance sheets Minsky asked us to describe contains more than just money. These balance sheets record the ownership of other financial assets – that is, promises or commitments of money rather than money itself. And they also contain accounts of real assets – items of positive value to their owners, like cars or buildings or a book collection – that are not financial assets. Finally, the balance sheets are also accounts of liabilities – things that represent negative value to their owners, such as debts that legally commit the owner of the debt to an outflow of wealth over time.
A second thing to note about modern monetary systems is that the market value of these exchangeable monetary points lies, for all of their users, purely in their exchange value. That is, the only value that attaches to the acquisition and possession of money comes from the knowledge that money can be exchanged for other things. It is true that people also seek to acquire money as a “store of value” that they save for indefinite periods and have no definite plans to spend. But the only reason one can be successful in storing value when one saves money is that other things continue to happen out in society that preserve the use of that money as a medium of exchange. If at any time people became unwilling to accept that form of money in exchange, the saver would no longer be storing value when they saved their money, but valueless points on a meaningless scorecard.
The fact that the value of modern money is purely based on its acceptance in exchange makes money different from all of the non-monetary items that we accumulate and exchange. Non-monetary items of value always have a direct practical utility, for at least some significant number of people, a utility that is not dependent on the prior exchange of those items for something else. The utility might be realized in consumption, as it is with a bar of chocolate, or in the production of some other product or service, as with a block of iron. It is true that for some specific people, the entire value of some non-monetary object might derive from the prospect of exchanging that object for something else. So, for example, I might be a philistine art collector who buys paintings only to store value over time and perhaps exchange them later for the things I really want. For me, paintings function as something like money. But I can use paintings in this purely mercenary way, as merely something to exchange for something else, only because there are other people who love paintings for their own sake.
Similarly, I might be a prisoner who trades goods for cigarettes, even though I don’t smoke, but only because some other prisoners do smoke, and are willing to give something up for the cigarettes. But money is different altogether. What makes a certain good a form of money is that its value for pretty much everyone lies entirely in the fact that others will accept it in exchange. There is no non-monetary, non-instrumental foundation for the exchange value of money. There might be a few demented misers with a perverse love for paper bills and metal coins themselves, and a few numismatic hobbyists who collect these bits of money as cultural curiosities and works of art in themselves. But the exchange value of money does not depend in any significant way of the existence of this relatively small number of people.
Thirdly and finally, it is clear that governments play a very important role in the regulation of contemporary monetary systems, and in the creation and destruction of the monetary units in that system. The monies we use have an official, legally institutionalized role in our economies, an official status that is advertized to us by the markings and declarations on the physical currency itself. Almost all money in actual widespread use is some government’s money. The government is central in preserving the value and stability of the government’s money over time. And we know that while we all have a great deal of liberty to exchange the money we personally possess for other good and services, and to exchange goods and services for money, the legal authority to create and destroy the official government money is tightly regulated and protected. It is to such official, government administered monetary systems – at least when they exist in democratic societies – that I refer when I describe a monetary system such as the dollar system as “the public’s money.”
But how do those governmental monetary processes happen? How is the monetary system stabilized over time? How is money actually created and destroyed in a modern monetary economy? The full answer to these questions is not simple. Governments are complex entities, consisting of many separate branches, divisions, departments and agencies, each with its own assigned powers and authorities, and many distinct operational centers have their hands on different aspects of the monetary system. The private sector plays a key role as well. My focus will primarily be on the processes that create and destroy money. We can put off the precise details of government monetary operations for now, and start instead with a simplified model. I will call the government in this simple model a “monetarily sovereign government”, or just a “monetary sovereign”.
Monetary sovereigns can come in different forms, but in a democracy the people as a whole are supposed to be the ultimate seat and source of the government’s sovereignty, including its sovereignty over monetary operations. Think of the monetary sovereign, no matter what individual or group of individuals constitute and exercise that sovereignty, as possessing a single monetary account of its own – a single unified monetary scorecard. Initially, the monetary sovereign’s scorecard can be thought of as very much like anyone else’s monetary scorecard. When the monetary sovereign spends, and either buys something from someone in the private sector or transfers money outright to the private sector, some monetary points are deducted from the monetary sovereign’s scorecard and an equal number of points are added to that private sector scorecard. And going in the other direction, when the monetary sovereign taxes, or when someone purchases some good or service from a government agency, some monetary points are deducted from the private sector scorecard and an equal number of points are added to the monetary sovereign’s scorecard.
But there are two wrinkles, two special circumstances that make the monetary sovereign’s scorecard very different from private sector scorecards.
First, the monetary sovereign is the seat of government, and hence the ultimate administrator of its own scorecard. If you and I exchange money, and the exchange takes place via our bank accounts, the banks that oversee these accounts administer the adjustment of the monetary points on our scorecards. And if two banks exchange money, the government, which operates a central bank that serves as a sort of bank for bankers, administers the adjustment of monetary points between the two bank scorecards. But when a monetary exchange takes place between the monetary sovereign and any other person or entity in the private sector, the monetary sovereign is the ultimate administrator or arbiter of the monetary adjustment. The monetary sovereign’s scorecard is not administered by some third party, but by the monetary sovereign itself.
It is true that the scorecard of some agency within the government might be administered by some other agency of the government. In the US system, for example, the Treasury Department’s monetary transactions are administered by the Federal Reserve System, which holds the Treasury Department’s accounts. But the Fed is ultimately part of the government, which means that the US government as a whole is the ultimate administrator of the government’s own accounts.
The other way in which the monetary sovereign’s monetary scorecard is different from a private sector scorecard is connected with the first difference: A monetarily sovereign government reserves for itself the power of adding or deleting monetary points on its own scorecard or any other scorecard, at its own discretion, without any requirement that an equal number of monetary points are debited from any other scorecard or credited to any other scorecard. And the monetary sovereign uses its power to guarantee that it is the sole entity in the monetary system that possesses such power. The monetary sovereign, in other words, wields the exclusive power to create and destroy money in the monetary system it controls. Currency users in the private sector, on the other hand, can only exchange monetary points in ways that make the books balance. To the extent that agents other than the monetary sovereign are permitted to engage in money-creating and money-destroying operations, these operations take place only with the permission of the monetary sovereign, and under the guidance or supervision of the monetary sovereign.
There might appear to be one partial exception to the above restriction, however. Private sector banks are also permitted, within certain limits, to create new monetary points in the monetary system. When a bank decides to give a loan to some new borrower, it creates a deposit account for that borrower and credits the loaned amount of dollars to that account. In effect, it creates a new monetary scorecard for the borrower and puts some monetary points on it. As the economists Basil Moore, Scott Fullwiler, Marc Lavoie and many others have emphasized, those points need not come from anywhere. They need not be the result of a transfer of points from some other account to the borrower’s account. Although the bank might be subject to central bank reserve requirements that mandate the bank hold a certain percentage of money against its deposits, in its reserve account at the central bank, the bank typically has several weeks to meet these requirements, and can acquire the reserves after making the initial loan, either from other banks or from the central bank itself.
So bank lending can in some sense create additional money. However, in a very strict sense, what the bank borrower receives is not monetary points, but a promise of monetary points to be delivered in the future. That promise is a liability of the bank – something it now owes the borrower and that the borrower can convert into money on demand. If the borrower decides to withdraw the promised money in the form of material currency, the bank must take cash from its vault and give it to the borrower. At this point, we can see an actual transfer of money from the bank to the borrower. But the bank’s vault cash has to be acquired from the monetary sovereign, and it has to pay for that cash.
Now since bank deposits can be exchanged just about as freely as money in any form, they can be legitimately defined as one form of money itself. There is perhaps no strict line that can be drawn between liabilities for money or promises of money, on the one hand, and money itself, on the other hand. But ultimately, however we define “money”, all of these banking operations are administered and regulated by the monetary sovereign, and so the monetary sovereign’s decisions are ultimately responsible for which lending operations a bank is permitted to conduct, and whether the bank’s lending results in a net increase in money in the monetary system. The monetary system is under the ultimate control of the monetary sovereign, even if the sovereign chooses not to be very assertive in exercising that control, and passively allows banks to create money as they see fit.
So let’s return to the operations of the monetary sovereign itself. In order to bring the nature and ultimate capacities of monetary sovereignty into sharper relief, let’s consider three distinct models or mental pictures of the monetary sovereign’s monetary operations. These mental pictures are designed only to provide a more vivid imaginative understanding of monetary sovereignty. And initially at least, they might appear to be dramatically different pictures. But we will see that in the end the pictures are, somewhat surprisingly, fully equivalent in everything that is really essential and important about the monetary sovereign’s operations.
The first picture can be called the infinite account model. Think of the monetary sovereign as possessing an account or monetary scorecard that holds an infinite quantity of dollars. When it spends in its unit of currency, it credits some amount of units X to some private sector account, but debits X units from its own account. When it taxes, it debits X units from some private sector account, but credits X units from its own account. But since it possesses infinitely many units of the currency in the first place, these operations have no effect on its own balances. Currency units come in and go out, but the addition or subtraction of a finite number of units from an infinite stock of units never makes any difference. The same infinite number of units exists on the monetary sovereign’s scorecard at all times.
A second picture is the empty account model. In this case, think of the monetarily sovereign government as possessing an account that contains no money whatsoever. Its scorecard always stands at zero. When it spends, it credits X units to some private sector account, but makes no change at all in its own account. When it taxes, it debits X units from some private sector account, but again makes no changes at all to its own account. Since it never possesses any money on its books, the monetary sovereign’s basic monetary operations of taxing and spending can be viewed as simply creating private sector monetary points out of thin air and destroying private sector money, not transferring that money back and forth between the private sector and the government. On the empty account model, only private sector monetary scorecards are marked up with monetary balances, and the monetary sovereign never possesses money of its own.
Finally, there is the quotidien account model. The monetarily sovereign government is seen on this model as always possessing a finite amount of currency units – just like a private sector entity. At all times, some finite number of monetary units are on its monetary scorecard, and the monetary sovereign running a quotidien account is scrupulous about balancing the books on its monetary operations. When it spends, it credits X units to some private sector scorecard, but scrupulously debits X units from its own scorecard. When it taxes, it debits X units from some private sector scorecard, but again carefully credits X units to its own account. Since it possesses only finitely many units in the first place, these operations do have an effect on its balances. However, there is one added wrinkle: the monetary sovereign is, as before, legally entitled to create or destroy currency units on its scorecard as a separate operation. So in the end, while there are always some finite number of units on its scorecard, the monetarily sovereign government ultimately chooses exactly how many units that is, since it can add or subtract units from its own scorecard at any time. Even though the sovereign’s bookkeepers are scrupulously balancing the books when it comes to recording exchanges to and from the private sector, the fact that the government can at any time credit or debit some additional amount makes the bookkeeper’s care somewhat absurd or meaningless, at least with regard to the monetary sovereign’s own account.
Recognizing that degree of meaninglessness in the quotidien account model is the key to grasping a very fundamental fact about monetary sovereignty. When it comes to understanding the real economic effects of the monetary sovereign’s operations, it really makes no difference whatsoever which picture one employs. The three pictures are all equivalent. If the monetary sovereign is entitled to create or destroy currency units at will, it really doesn’t matter whether we imagine the sovereign as possessing infinitely many units, zero units or some finite number of units of its own choosing. All that matters is what happens to the accounts in the non-governmental sector. The monetary sovereign administers the monetary system of the real economy, and that real economy consists of the sphere of goods and services that are produced and exchanged by the world outside of the government, a world in which the government’s money plays the role of facilitating exchange, accounting for value in a standard unit of measure and making payments. Since those people and entities in the private sector economy are not permitted to create currency units at will, unless such power has been delegated to them by the monetary sovereign, their spending and savings decisions are constrained at any time by the number of units they possess at that time. And the rate at which money is exchanged for goods and services depends ultimately on the amount and distribution of money that exists out in the private sector. What ultimately matters, then, is whether some government operation has the effect of adding monetary points to some private, non-governmental sector scorecard, or deleting monetary points from some private, non-governmental sector scorecard. What happens to the sovereign’s own scorecard is insignificant with regard to the creation and destruction of value in the real economy, that is, with regard to all of the things we really care about.
Going forward, then, it will be good to use neutral terms to describe the effects of the fundamental monetary operations of the monetary sovereign, terms which do not depend on which of the three models we use to conceive of these operations. We will say, then, that taxes “remove” money from the non-governmental sector, and that government spending “inserts” money into the non-governmental sector. The monetary sovereign possesses the power of a government to make these things happen, and the insertion and removal of money from various places in the private sector can have profound effects. But what happens behind the accounting wall separating the monetary sovereign’s scorecard for all of the other scorecards makes no real difference to anybody. Whether one chooses to regard the insertion of money into the economy as a transfer of money – in accordance with either the infinite account model or the quotidian account model – or as the creation of money from nothing – in accordance with the empty account model – really makes no difference to the effects of these operations in the private sector economy.
So far, I have discussed only two main kinds of government monetary operations: taxing and spending. But I have neglected to discuss borrowing, another significant government financial operation. How should we understand the borrowing operations of a monetarily sovereign government?
To answer this question, we should begin by asking what we mean by “borrowing” and “lending”, in the financial senses of those words. What does it mean to say someone has borrowed money from some bank lender? Well it is clear that we don’t mean quite the same thing that we mean when we talk about other non-monetary acts of borrowing and lending in the everyday world. If my neighbor borrows my lawnmower from me, and I lend it to him, I simply hand over my lawnmower to him for some more-or-less agreed amount of time. He uses it for a while, and then gives it back to me. End of story. The value of the lawnmower has probably depreciated just a tiny bit as a result of the use, and my neighbor has derived some value from the lawnmower for which he did not pay me. But if, instead of agreeing to lend him the lawnmower, I am only willing to hand over the lawnmower for some more-or-less agreed payment from my neighbor, we would probably say that my neighbor has then rented my lawnmower from me, not borrowed it. So in essence, my act of lending constitutes a modest neighborly gift on my part. I give the gift and my neighbor receives it. That’s all.
But clearly, that is not at all the way we are using the terms “borrowing” and “lending” when we apply these terms in the usual way to the borrowing and lending of money. As we all know, a bank loan is no gift! In the case of money, we are talking about an exchange or trade. When people borrow money, they acquire some money in exchange for a promise, a promise to pay some other amount of money in the future – almost always a greater amount. The promise then represents a financial asset for the lender, and a financial liability to the borrower: it represents something the lender is slated to gain and the borrower is slated to lose. The financial instrument, the promise, represents a cash flow. From the point of view of the lender, it represents an inflow of monetary payments, generally associated with a fixed payment schedule. From the point of view of the borrower on the other hand, the financial instrument represents an outflow of money on the same more-or-less fixed payment schedule. A bond – such as the bonds sold by businesses and governments – are essentially financial instruments formalizing promises of this kind. In terms of a monetary scorecard, we can think of a financial asset like a bond as something like some marks on the scorecard corresponding to a schedule of pre-determined point increases. The lender’s scorecard contains the bond as well as any previously existing monetary points the lender possessed. As any one of the various times indicated on the schedule transpire, some marks indicating a scheduled payment of currency units at that time are erased, and the appropriate numbers of actual currency units are added to the scorecard. Gradually what begins as a mere schedule of monetary points to be received in the future is transformed into some quantity of actual monetary points.
People can also sell bonds that they have already purchased from some other party. Suppose A has purchased a bond – a schedule of monetary payments – from B. But suppose A no longer wants to wait for the promised money to be credited to her scorecard on schedule, and prefers some money now. Then A might be able to find some third party C who is willing to buy the remaining schedule of payments from A. A receives some money from C – that is, A’s monetary scorecard is credited by some amount and C’s monetary scorecard is debited by some amount. Now B still owes the remaining schedule of monetary points, but B now owes them to C. In accordance with the remaining schedule of payments, C’s scorecard will be marked up with additional monetary points and B’s schedule will be debited by that amount of points concurrently.
So, borrowing and lending money in financial markets does not involve any kind of gift. It is an exchange in which each party gives something up and each party receives something in return. The borrower receives present money and in return gives up money in the future. The lender gives up present money and in return receives money in the future. Generally, people are only willing to make such an exchange if it is mutually beneficial. It is important to keep the mutually beneficial nature of credit relationships in mind. There is an unfortunate tendency in contemporary discourse about credit to regard the lender as a person who has bestowed some favor, gift or act of grace on the borrower. But that is not the case. Rather, two people have made a simple mutually beneficial exchange. One party to the exchange receives from the other some money in the present; the other party to the exchange receives from the other some money in the future.
But let’s return now to the case of a monetary sovereign, and look at these borrowing and lending processes from the perspective of a monetary sovereign’s operations, in line with any one of the three models we described before. Start with borrowing. What are the effects of government borrowing from the non-government sector, at positive interest? Well, first, the private sector lender buys a bond from the monetary sovereign. At the time of the purchase, some monetary points are removed from the lender’s monetary scorecard, and a schedule of pre-determined monetary points is added to that scorecard. Then over time, some of the marks representing pre-scheduled monetary points are removed and the appropriate number of monetary points are added. These operations are likely to be very important to the private sector lender. But remember that from the standpoint of the monetary sovereign it makes no difference what happens to the monetary sovereign’s own scorecard. All that is important is what happens to the private sector scorecard: some money is first subtracted from the scorecard, and then some greater amount of money is added to the scorecard over time. And since that lender is part of the private sector, the government in this case first removes money from the private sector and then inserts money into the private sector over time, on a pre-determined schedule.
Now what if, instead of borrowing from the private sector, the monetary sovereign lends to the private sector? We can understand the effects of this operation by just reversing the time order and direction of the previously described borrowing operation. When the government lends to a private sector entity, some money is first added to that entity’s scorecard, and then some greater amount of money is subtracted from the scorecard over time. The government in this case first inserts money into the private sector and then removes money from the private sector over time, on a pre-determined schedule. But remember again that from the standpoint of the monetary sovereign it makes no difference what happens to the monetary sovereign’s own scorecard. All that is important is what happens to the private sector scorecard: some money is in this case first added to the scorecard, and then some greater amount of money is subtracted from the scorecard over time.
Now consider the monetary effects of several of these monetary operations together: taxing, transfer spending, borrowing and lending. Both money and official promises of money represent assets to the party that hold them. So the effect of these government monetary operations is the swapping around of government-issued financial assets on private sector balance sheets. In each case, the monetary sovereign is mainly adjusting the schedules on which it will insert and remove money from the private sector, and the accounts on which it will make these changes. In some cases it adjusts a schedule of money removals and money insertions forward in time toward the present; in some cases it adjusts a schedule further off in time toward the future. It is likely engaging in a large and complex combination of such adjustment operations at any time. All of these adjustments help regulate the flow of additional money into and out of the private sector.
Think of it this way: The private sector can be imagined as a collection of wells, and each well is outfitted with a collection of nozzles to which one can attach hoses. Each hose either draws water out of a well and into the monetary sovereign’s well, or draws water out of the monetary sovereign’s well and into the private sector well. Some of the hoses carry a steady flow whenever they are hooked up. Other hoses are outfitted with valves that deliver their water flow in bursts, on a set time schedule. The monetary sovereign’s various monetary operations can then be seen to consist in detaching some hoses and attaching others, sometimes swapping out one hose for another.
But just as before, remember that it doesn’t really matter what happens to the monetary sovereign’s own well. This is perhaps easiest to imagine if we think of the monetary sovereign’s well as infinitely deep – as in the infinite account model. Water flows into and out of the monetary sovereign’s well. But these flows make no difference from the standpoint of the monetary sovereign itself, since the sovereign’s well is always infinitely deep and filled with an infinite amount of water. But the flows of water make quite a bit of difference indeed to the owners of the many ordinary wells out in the private sector.
This is Part Two of a six-part series. Part One is here.
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We will need a whole new way of thinking to solve todays problems. Einstien was no fool but we are. I see a lot of so called good ideas that really amount to nothing more than junk. Until I read “Common Sense 3.1” I was scared for myself, my family and the rest of the world. I’m not afraid anymore. There are truely briliant people out there. And in the end they will break through the garbage ideas that come from politicians and especially the online and telivision talking heads.
I do not think the monetary system and descriptions of it can ever take us where we need to go. As the last 35 years have taught us it can always be gamed. Its complexity easily produces confusion, and with that confusion comes the possibility of manipulation. Speak to most people about money, credits and debits and their eyes will glaze over.
I think we need to step away from the monetary system and look at what money is really a stand in for. It gives us access to our society’s resources, and these are not just commodities and finished products but all of our skills, knowledge, and genius. People may not understand money but they do understand resources. It is very near impossible to convince most people that the repatriation of money from the rich who stole and looted it from them is not itself some kind of theft. Indeed even before the last 35 years of building kleptocracy, for centuries, this is the story the rich have driven into our bones. Invocations of MMT will not change this. But speak of our nation’s resources which include each and everyone of us and it is another matter. Re-allocating and redistributing resources is not theft but common sense. It ceases to be about other people’s money, however they came by it. It becomes about us, because we are our society’s primary resource, and the kind of society we wish to have. My advice is to forget about the money. Ultimately, it is a distraction, and distraction is the chief arm of the rich in their class war against us.
I agree that the only real constraint that binds us as a nation comes from the limits real resources we have available to us: our people, natural resources, physical capital goods we already possess, technologies and skills we already possess, etc.
The point of asking people to think carefully about the foundations of our monetary system is to help break the spell of money, so that we can stop dwelling so much on thoughts like:
“Where will the money come from?” “We’re broke.” “We’re out of money.”
Money is just a tool, and the easiest thing in the world for a sovereign government to produce and wield. But there are abundant real resources in this country that are not being employed in producing the value they could be producing. So the real question is what do we have to do to employ those resources.
“My advice is to forget about the money. Ultimately, it is a distraction, and distraction is the chief arm of the rich in their class war against us.”
That advice would be very disaterous, and the situation you describe has already come upon us. We are more easily made tools and pawns of the folks in the corner offices and boardrooms by remaining ignorant of how a very powerful tool works. For that is what the author of the article is pointing to; money is a tool and can be used for ill or for good.
We can build mass transit systems in 100 of the larger cities but don’t- not because we ‘can’t afford that’ but because the wealthy elitist don’t need mass transit and so don’t want to be bothered.
Affordable health care could be available for almost anyone who might need it-again the wealthy elite get along without everyone being covered because they are covered so they excuse their lack of concern with ‘ that would be impossible to fund.’
And so reads the litany of the occupiers-education, transportation, health care, housing, food, clothing: the elite have enough (in the short run I hastily add) to meet their needs; the rest of us are expected to survive on the slivers and crumbs that fall to the floor. Progressives need to bone up on MMT to show that what stops us from moving to a better world is the blockheadedness of our leadership not the matter of ‘we can’t afford that.’ We can afford anything we can dream up-what stops us from building our dreams into the real world is . . .
Our own fears?
Our own distorted sense of self worth that says we don’t deserve better?
We may all find the negative motivation that puts the brakes on building our dreams.
But you’re correct in that it is not about the money-it’s about the unwillingness to use the money as a tool to reach our most desired and deeply cherished goals.
Can’t anybody see through this MMT claptrap? Is there anyone who doesn’t understand that the reason our government is compelled to borrow money (instead of just printing it) is to control the jackals who hijack government in our pointless elections? Unfortunately, we have failed to control the jackals who have hijacked our banks. We need a government that can regulate banks, not a government that replaces them. Giving Obamas, and Bushes, and Clintons (and the plutocrats who own them) plenary power over money! Now, there’s a great idea.
I can. I have commented that MMT is functionally true but not politically true, for the reason you cite.
As the artistically wise say, “It’s never the camera, it’s always the photographer.” Meaning you can give a cheap camera to a skilled photographer and you’ll have awesome photos that may even rise to the level of art. And you can give a Leica M9 with a top Leica lens to an unskilled photographer and you’ll have boring photos that are painful to look at.
You can give a regulated banking system to a debased culture and you’ll have chaos. And you can give MMT to a debased culture and you’ll have chaos. Or you can give a banking system to a healthy and concious culture and you’ll have reasonably good regulation and results. Or you can give MMT to the same and you’ll have reasonably good results.
Of course there is, in George Soros’ phrase, a “reflexive” relationship between the culture and the system, but it’s not a totally determinative relationship. Other factors, many of which are deeply complex, come into play.
But Mr. Kervick impresses me with his observation (which I myself have commented on) that money only achieves a stock value only by virtue of its flow value. And non-financial assets retain a stock value partly in relation to money’s flow value. Those who wish to retain the stock value of their wealth (the tip of the 1%) would be wise to promote political arrangements that foster enduring social cooperation and thereby retain money’s flow value, which would decline considerably if society descends imto a state of nature. But sadly, most are too feebleminded to understand this, even though it isn’t especially subtle.
Great comment. I also especially liked the the observation that value of stock is inextricably intertwined, and in a sense caused by, value of flow.
I’m skeptical of using the term “politically true”, but the larger point is sound. No matter what the structure of your government, the people must be vigilant in supervising the agents working in government. I think MMT’s strength is that it provides a better framework for understanding how money works uniquely for sovereign nations rather than other entities.
Not really. It was determined back in the 1800’s that the problems of bank failures were caused by the money originators printing too much money when they were also the lenders. Politicians seeking the spoils of elected office were also identified as problematic. The printing of money was kept separate from politicians and the lenders. Bank reserves limited lending as a capital control. Interest rates are capital controls.
The broker-dealers and their expanding presence have created a complex web of money substitutes (counterfeiters). Behind every financial collapse you will find a broker-dealer and money substitutes. All this can be junked with digital money and clearing houses with the correct capital controls and the monitoring of capital ratios. Money becomes, use it or lose it. Once converted to an asset, the asset must pay to counter depreciation. Ultimately you have a system of depreciating assets or stamp money (use it or lose it). Having idle capital becomes a hassle. Better to lift everyone’s standard of living.
A stable currency is just one aspect of a stable economy. A major component of the economy is labor and it is not well understood by economists. To keep money safe requires banks and vaults, labor requires food, clothes, water and housing.
Craazyman,
“You can give a regulated banking system to a debased culture and you’ll have chaos. And you can give MMT to a debased culture and you’ll have chaos.You can give a regulated banking system to a debased culture and you’ll have chaos. And you can give MMT to a debased culture and you’ll have chaos.”
True but that does not mean one should not try to setup a system which will encourage destructive behavior. If there a two way to issue currency (as in our system) one where the gov can spend currency into existence and the other where the banks can lend it into existence. Bankers will bend over backwards to not have gov create money so they can create money and get power and interest income. Our monetary system has setup the wrong incentives for bankers. They will act this way even when they know their behaviour is extremely destructive to our civilization.
Even in a good culture a society should not setup systems which tempt people too much or else the culture will not remain good for long.
mansoor h. khan
Is there anyone who doesn’t understand that the reason our government is compelled to borrow money (instead of just printing it) is to control the jackals who hijack government in our pointless elections? jake chase
Actually, government borrowing is just as inflationary since US Treasuries are effectively money too.
The purpose of US Government borrowing is simply to provide a risk-free return to some at the expense of everyone else. It is also crucial for banking system. It is thus fascist.
You have not really shown any proof for your statement:
“Is there anyone who doesn’t understand that the reason our government is compelled to borrow money (instead of just printing it) is to control the jackals who hijack government in our pointless elections?”
I am putting together a collection of resources for MMT at
http://www.usaliberalism.com to show that the theory needs to be taken seriously. The proof of the pudding is in the eating and MMT is what we have had for the last 40 years-to the extent that it has been seriously understood, which it has not been. Politicians in the Oval office and Congress are behaving Sort of like an eleven year old child prodigy pounding out a Beethoven Piano Sonata without being able to talk about it seriously or to be able to explain the underlying theory and structure – but that does not mean the composition just happened while the eleven year old’s performance does just happen and if the listeners were not so enamored of the fact that the player was eleven, would hear what is really going on.
A very complicated way of expressing a belief in magic. There are large wastes of irrelevant truism, as when the author says “So, borrowing and lending money in financial markets does not involve any kind of gift. It is an exchange in which each party gives something up and each party receives something in return. The borrower receives present money and in return gives up money in the future….” and so on and so on and so on.
However, when we come down to the proposals, they are basically magical thinking, there will be some way of spending more than we raise in taxes, without any bad consequences. What way will that be, then? It will be magic!
The solution to this issue, if it is an issue, is basically very simple, its to run the government balance sheet and income statements in the way that a prudent corporation or household would. There are investments which it is prudent to finance from debt, and there are expenses which should be met out of current income.
All this desperate twisting and turning to pretend that debt is not really debt, and inflation not really inflation…. Silliness, and part of the magical thinking that has got us into our present mess.
“There are investments which it is prudent to finance from debt, and there are expenses which should be met out of current income.”
What’s the difference between an “investment” and an “expense”? And how much debt is allowed for investments?
Who makes those decisions and on what grounds?
Where is “magical” thinking now that we really need it?
The distinction between investments and expenses is clear in business accounting. An investment is something which is amortized over some period longer than one accounting period. An expense is taken against income in the year in which it is spent.
What’s the problem?
Later on people say that it is ridiculous to compare a country to a business or household, because it can print money. Yes, but it cannot get it accepted anywhere that matters. The idea that the situation is any different is magical thinking.
A company can print money too. Its just that no-one will take it. In a way that is what it does when it floats a bond. Its just that do it too long and too much, and no-one will buy the bonds which means you have no money.
I realize I might be trying some people’s patience by going on at length about things that might seem obvious to them. But I am trying to address different audiences at once, and also lay a solid foundation for the proposals to come. I haven’t gotten to the apparent magic yet.
But the real magic comes from the plutocratic prestidigitators who have conjured up the mass public illusion of constraints that don’t actually exist.
Our. government. is. not. like. a. household. Households cannot print money or raise taxes. This is gold standard thinking and we have been off the gold standard for 40 years.
Kleptocracy is a disease of both the economic and political system. As craazyman notes, you can not fix the economy without fixing the political process at the same time. To do so would just be throwing good money after bad. Our government should spend its money wisely. A household should as well, but this does not make one into the other just as if you obey the law and a lawyer obeys the law, that doesn’t make you an attorney.
Isn’t it amazing that someone can be inquisitive enough, and take the time, to read this article, and then compare our sovereign nation to a household or a corporation?
Some things are similar but have distinguishing features that completely alter an analysis. This gets lost on people, apparently.
Humans are frustrating creatures.
“However, when we come down to the proposals, they are basically magical thinking, there will be some way of spending more than we raise in taxes, without any bad consequence/”
You did not catch the point that taxes do not pay for anything? They are a control on spending-the government Does Not-it can’t, the money system can’t be used so that taxes pay for anything. The government central bank simply moves digits around on computerized spread sheets.
A very long pause-into the middle of July 2012 if need be to let that sink in-
Let summertime mellow you out my friend.
Catfish are jumpin’
and the cotton is high;
You’re daddy’s rich, and your mamma is good looking
So hush pretty baby
Don’t you cry.
That should be taxes are a control on spending in the private sector-obviously as the money is taken from folks who already have too little. They can then line up at the local tentacle of the zombie squid vampire to get a loan while the Feds feed the squid more loans.
Considering that we seem to be “stuck in Lodi” here, I believe the answer is to put all the politicians in Washington D.C. on those wonderful “Russian Soyuz Rockets”, shoot them into space, which in my opinion will solve the problem. Either the politicians get their collective act together, or . . . . . . . . . , well I think it’s better then “Off With Their Heads”!
“[…] The monetary system is under the ultimate control of the monetary sovereign, even if the sovereign chooses not to be very assertive in exercising that control, and passively allows banks to create money as they see fit.”
Whilst being correct de jure, de facto this statement is completely wrong, what the current situation is concerned! It almost seems like the author has never heard of TBTF financial institutions. Of course the government theoretically has the power to not honor privately created money, in practice however this would lead to a rather swift end of the world economy if implemented(it was tried on a small scale with the decision not to bail out Lehmann). Under current circumstances the monetary sovereign is forced to accomodate private arrangements. Hence stating that the monetary sovereign has ultimate control, whilst being theoretically correct, is irrelevant in practice!
Permitting the existence of TBTF institutions in the first place is one case of the kind passivity I had in mind.
Fair enough, but I thought you are trying to make some kind of point about how the real world works. If it´s just what would be if…, why don´t we discuss whether communism/state planning might be more efficient than free market competition given the processing power that modern IT offers. Also a very interesting question, and about as relevant as assuming away TBTF!
A long and brilliant article with no mention of common stock, an IDEAL private money form in every way I can think of (forgive the Bible references “It burns, it burns!” :) ):
1) Common stock as money requires no borrowing or lending. Assets and labor would simply be bought with new stock issue. Thus no PMs, usury, or fractional reserves are required. This is a huge benefit since PMs, usury (see Deuteronomy 23:19-20) and fractional reserves are all problematic.
2) All price inflation is born by the owners of the corporation since every receiver of the new common stock money is by definition a part owner of the corporation. This is an important moral consideration.
3) Without fractional reserves or even lending, then deflation is not a serious threat.
4) Since all money holders are part owners of the corporation then they could vote on how much new money is issued and for what purposes. Thus price inflation is under the control of only those affected by it.
5) The assets of a corporation are typically performing assets though PMs could easily be accommodated too.
6) Common stock as money shares wealth at the same times as it consolidates it for purposes of economies of scale. Labor problems should be non-existent since the workers would be paid in common stock and thus be part owners. The number of those with a stake in capitalism would increase. The need and desire for socialism should decrease.
I am amazed that Progressives don’t tout a money form that shares wealth and power rather than concentrates it. Or maybe not.
price inflation would affect more than just the owners of the corporation
price inflation would affect more than just the owners of the corporation Frank Speaking
How? Anyone who accepted a corporation’s common stock money would instantly become a co-owner of that corporation.
oh, and for the record the corporation being the arbiter of all things economic in a society would make that society a fascist society—unless you eliminate the state
The State would still exist but it would no longer be able to tax by inflation. As for corporate power, the concentration of that power would DECREASE as corporations were forced by economic pressure to raise capital via new equity issue rather than by borrowing from the government enforced counterfeiting cartel.
I can’t grasp the idea of how I would know the Common Stock issued by I Swindle You Daily Inc would be something I would want to hold on to. Especially if I Swindle You Daily runs their business in a AKA frame and presents themselves as We Are The Best Guys On The Block Inc.
The borrower receives present money and in return gives up money in the future. Dan Kervick
And what does the innocent bystander get? His purchasing power is stolen when the loan is made and he maybe loses his job from deflation when the loan is repaid plus interest.
Banking is crooked, unstable and unnecessary. Government money can simply be spent into existence and (partially) taxed out of existence. Private money likewise requires no usury with the difference being that private money is exchanged for goods and services to extinguish it.
Banking is not necessarily crooked and unstable. It works fine when banks are small, well regulated, and allowed to fail. Crooked politicians and central bankers in thrall to bogus ideologies enabled every aspect of the financial crisis and are still doing it four years later. In solving problems it is best first to identify what the problems are.
Stark contrasts. Our financial “system” just blew up in a giant debt and derivatives bubble that sent the whole world reeling. From the late 90s on, our Fed followed a policy to cover the investment banks’ losses, and released mild statements about inflation in the housing market and the stock market and referred to it all as “irrational exuberance.” And as the cost of everything got totally out of whack, money was sucked out of everyone’s pockets. So now we are faced with two problems. One is getting our financial “system” in order, working order; the other is budgeting for the things we need today. Case in point: The states which were offered matching funds to do high speed rail cannot meet their half of the bargain. It’s DOA. Point in case: the “system” can no longer save itself. I would like to think that Congress can pass new laws to create public monetary control, but left and right alike are mute.
what you describe is true and troubling.
I don’t know if it is the perennial concern politicians have with getting out front putting reelection in question or if it is more proof that the lobbyists are in control and unless and until they bring an full formed idea forward to be endorsed by our elected representative nothing happens.
The chances of lobbyists bringing forward a plan threatening the interests of those who pay their way are slim to none.
There simply in no legislative force for inovation and in the view of elected officials inovation is all risk and downside outcomes from their narrow perspective of the election cycle.
Not promising, but it is what exists.
With Part I the author laid the groundwork for MMT, with the intention of leading the reader to understand that MMT can go far in solving many problems, that with a sovereign currency system massive printing (mostly digitally of course), can fund targeted economic growth.
With the US dollar being the world’s reserve currency the US has a one-sided advantage that no other country has. What is most important here is on what basis does the US privilege of a reserve currency base itself. How did it come about and how is it maintained? The answer, most simply and bluntly, is by way of its political and economic dominance, globally. It used to be called imperialism, today that concept has been assigned to the dustbin.
Time to bring the concept back (some now refer to it as neo-imperialism). Only by maintaining its global economic and political (and imperial) status can the US also exercise its privilege as the owner of the world’s reserve currency. To a very large degree that privilege and dominance forms the basis of MMT designs and any success its advocate assume of it.
I hope the other addresses this aspect of MMT assumptions somewhere in subsequent Parts 3-6.
Regrettably, I did not take time to address foreign policy in this essay. It’s already very long as it is!
But one thing I will point out is that monetary sovereignty, as I have defined it, is something that both small countries and large countries can possess.
“But one thing I will point out is that monetary sovereignty, as I have defined it, is something that both small countries and large countries can possess.”
Would the exercise of monetary sovereignty by countries large and small not lead to an across the board race to the bottom, in which each country activating money printing to fund economic expansion is in effect working to depreciate it’s currency? Would their be consequences as a result, including global inflationary pressures, with each country is seeking to increase its exports?
In any case, these countries would still have to trade in US dollars — since international trade is based on the dollar as reserve currency, which provides the US with a clear advantage. Why not address such a crucial factor?
Seems to me MMT needs to look at its assumptions from an international perspective, rather than limiting itself to US domestic interests in a vacuum.
Would the exercise of monetary sovereignty by countries large and small not lead to an across the board race to the bottom, in which each country activating money printing to fund economic expansion is in effect working to depreciate it’s currency? Would their be consequences as a result, including global inflationary pressures, with each country is seeking to increase its exports?
No. A race to the bottom is a logical impossibility. What would happen would be stability. We have seen this already during the full employment/Keynesian/Bretton Woods/balanced trade golden age. As Abba Lerner noted, the natural tendency of prosperity, caused by functional finance (as MMT was then called) or from any other reason, is currency depreciation. Prosperity->more imports->depreciation. Each country would not “seek to” increase exports, but effectively increase imports. Exports are a cost. Imports are a benefit.
What happened during Bretton Woods was that each state ran sane full employment economies, printing the money that their economies desired. But since everyone did it at once, their currencies “simultaneously depreciated /devalued against each other” (a logical impossibility, but I hope you get the point) In other words they didn’t devalue at all – that is why a fixed-exchange rate regime was tenable.
The US relative to Europe has been more Keynesian/full employment since the golden age ended. Which is why the dollar has tended to fall, while the US has grown relatively. France under Mitterand was the last European major state to go for a sensible Keynesian expansion. But idiotically, it snatched defeat from the jaws of victory because of the cult of currency strength, fearing the natural and beneficial result of prosperity – currency weakness.
Seems to me MMT needs to look at its assumptions from an international perspective, rather than limiting itself to US domestic interests in a vacuum. MMT/FF/accounting has no assumptions that anyone sane can reject. All it is is accounting. Sure, take a look at the international situation. But the MMT /FF point of view makes it clear that one should primarily look at open economies as a special case of closed economies. (Yes, I mean that & not the reverse)
“Similarly, I might be a prisoner who trades goods for cigarettes…”
it is more likely that you are a prisoner working as an economic slave…so much for democracy in our economy and this is what public money is really providing—fascism.
in 2003 “…prisoners in state and Federal institutions in the U.S. produced over $2 billion worth of commodities, both goods and services. In addition, prisoners performed various acts of labor such as food preparation, maintenance, laundry, and cleaning–forms of labor which, though necessary for the operation of every prison–do not produce commodities with market prices. A conservative estimate places the value of these goods and services at $9 billion.
“This dissertation analyzes the organization of prison labor and the increasingly important prison industries producing saleable commodities; in particular, we focus on the division between the products of prison labor consumed by the inmates and that appropriated from them by the prison authorities for other uses.
“This research yields the striking conclusion that the basic organization of prison labor in the U.S. today most closely resembles a form of slavery. Inmates are compelled by economic, cultural, and political forces to enter into this prison slavery, where the products of their labor are taken by others both inside and outside the prison. The effects of prison slavery on both the inmates who are enslaved as well as on American society as a whole are also explored.”
http://scholarworks.umass.edu/dissertations/AAI3152671/
3 SIMPLE STARTS
FED FUND ELECTION–6 MONTHS-3 PRIMARY 3 GENERAL
Free equal tv time–debate a week is 12 or enough to evaluate candidates No $$
Congress and White House members can accept Nothing Of Value nothing=O
Progressve Flat Tax–burn tax book–start anew–
this gets Additional 2000B + of revenue and balances our budget. Progressive tax can be adjusted to pay down our debt
Thanks for highlighting the pernicious mechanism of prison privatization here in this forum.
Dr Kervick nakes the point;
“There might appear to be one partial exception to the above restriction, however (that only sovereigns create money). Private sector banks are also permitted, within certain limits, to create new monetary points in the monetary system. …..Although the bank might be subject to central bank reserve requirements ….”
—-
seems to me this point deserves greater scrutiny and emphasis and is at the crux of the crisis
banks and bank like institutions have created financial instruments that have a fictional notional value
these instruments were traded and used as collateral and hypothecated to create a pyramid of “wealth” and ultimately a financial house of cards
i would suggest, at the core, our financial crisis the private sector… created a mountain of money, quasi money, or money substitutes, and as the bubble collapsed the privately created money stand-ins, were worth-less.
and then oh so conveniently the government stepped in to make the criminals whole
who makes the money, who is at the head of the line to receive newly created money and subject to what regulation, is at the core of our crisis
mock turtle
I can’t disagree with any of this mock turtle. It will be addressed to some extent in Part Six.
I agree with mock turtle.
The failure of MMT folks to wrestle with inheritance and accumulated private ownership of “property” is the same failure that we continue to hold mainstream economists to……
If you ignore the context of your model, its relevance decreases in proportion to the amount your theory externalizes realities of our “civilization”.
My only other observation is that I would call the US sovereign situation one of providing sovereign cover for private ownership and further control as Reserve Currency”….to be more clear in your model.
Like art, money has decorative value. If I were to bring in $150 million for myself this year, I would be beautiful in a way I just could not attain otherwise.
I appreciate this whole assessment.
To sum up.
‘Money’ is a distributed and interrelated system of valuations.
But, on the other hand, there must be some sovereign who ensures the exchangability of all those valuations.
From basic needs (=commodities) to paintings to virtual financial assets.
here we are lost in the woods, I think.
One hint the author gives us.
…
Monetary sovereigns can come in different forms, but in a DEMOCRACY the people as a whole are supposed to be the ultimate seat and source of the government’s sovereignty, including its sovereignty over monetary operations.
…
Which it is not.
Below the surface-structure of tradeability of all those diveres valuations lies a POWER-RELATINSHIP, which enforces itself when needed.
The socalled Schwundgeld of Gilvio Gesell, as a proxy for a system of exchange in a societal substructure wahst simply forced out of existence by decree by the Austrian government at that time.
The same would be with Gold nowadays, if it gained widespread acceptance as a store valuations.
Small international means of valuation, –even the Euro– if they would be a threat to the currency of power –i.e. the Dollar– would be forced out.
Anything threatening the dominant mode of exchange for socalled valuations will be forced out of the game if necessary.
those are only playgrounds , which are accepted for such a long time.
Then raw power steps in.
How long it can prevail, I dont know.
but the modus operandi is different from that of the Roman Empire, which had to resort to gradually reduce the silver-content of its coins, to exercise its power for so long, nowadays the mode of exchange can be deactivated by the microsecond.
So watch out!
We can count the beans as long as we will, but all our intellectual constructions of what the ‘real’ system of valuations is, are neutralized by that exercise of power, which is hiding behind the veil, and raises its ugly head anytime.
Power is laughing all its way home, because the intellectuals lost the game again, like so many times before.
my goodness.
corrections:
diveres valuations = diverse valuations
POWER RELATINSHIP= POWER RELATIONSHIP,
Gilvio Gesell= Silvio Gesell
diveres valuations = diverse valuations
constructions = constructs
as a store valuations = as a store of valuations.
others…
The basic mode of operation of the system is making sure, that PROPERTY is secured unconditionally.
‘Property’ is the ultimate abstract, equalling the concrete, which is land-value.
Our friend GWBush acquired large property in Paraguay, where one wonders, how he could ‘secure’ that?
Making something ‘secure’ is a legal issue, underlying that there is a social contract.
Obviously he ascribed some ‘value’ on that property, with its vast water reserves beneath.
Which is, if You think about that, an intellectual endeavor of the highest order.
How can he secure ‘rights’ in the outskirts of Paraguay?
This can only be accomplished by a system of Power, which stretches over continents and is independent of local valuations, which the author assumes to be somewhat of a benign counterweight to big Power.
Same with Ted Turner in Southern Argentina.
So lets not waste our time with MMT and such, but concentrate on pseudo-legal acquisitions of ‘property’, which belong exactly to noone. They are virtual in themselves.
Beautiful corrollary:
It is exactly the same virtuality which brought them their ‘whealth’ in the first place.
Whether our overlords considered this delicate problem or not, I do’nt know. Presumably not.
They just assume, that the contract is enforced by the invisible hand of … whom exactly?
sometimes I think that the NC-community is very astute, but does not see wood for the trees.
Deconstructing the whole economic figment is surely frightening, right?
One has to hurry back into some uncomfortable rabbit hole, paw over the ears, wait for the explosion.
I understand that.
Not really.
###########
Eleanor Rigby
I look at all the lonely people
I look at all the lonely people
Eleanor Rigby picks up the rice in the church where a wedding has been
Lives in a dream
Waits at the window, wearing the face that she keeps in a jar by the door
Who is it for?
All the lonely people
Where do they all come from?
All the lonely people
Where do they all belong?
Father McKenzie writing the words of a sermon that no one will hear
No one comes near.
Look at him working, darning his socks in the night when there’s nobody there
What does he care?
All the lonely people
Where do they all come from?
All the lonely people
Where do they all belong?
Ah, look at all the lonely people
Ah, look at all the lonely people
Eleanor Rigby died in the church and was buried along with her name
Nobody came
Father McKenzie wiping the dirt from his hands as he walks from the grave
No one was saved
All the lonely people
Where do they all come from?
All the lonely people
Where do they all belong?
###########
Any resemblance to current economic thinking?
Anyway. You guess.
@groo, I am liking your style. Of course the artificial constructs of values and property rights (including the implicit rights of the elite to pollute, extract from, or compromise property they do not even officially own, eg. Deepwater Horizon or Fukushima, Monsanto and mountain-top removal) are enforced by violence, or the threat of violence.
Similarly, legal tender laws are backed up by violence.
As I commented previously, my “Sicilian” side thinks it is odd to turn over a physical house and land for a piece of paper in return. However, this scheme is enforced by a system no longer under our control (nor was it ever meant to be under our control. N.B.).
While the comments here are always interesting, at some point one must wait for the rest of the series before or instead of trying to tear down the first two parts.
The table has been set. Dinner will be served.
“”Step right up folks.
I’m selling MY version of public money.
Listen to all the logic and intelligence my version of public money has going on about it – accounts and transactions and suchwhat.
The price is rather cheap to achieve MY version of public money. The price is YOUR monetary sovereignty.””
Sorry, folks, but this is an extreme makeover of what the national public money system actually IS and should be, and in its stead there is favor to a new brand of public money in which the public be damned, for good reason having to do with who is keeping scorecards.
No, this is NOT what money is.
Money is the sovereign construct of free peoples. We fought the revolution over the right to become sovereign in money.
It’s bad enough that we lent for a hundred years to the private bankers who destroyed our national economy with unconscionable and un-payable debts.
But we did make that decision when we know what money was, what a national money system was and what the tradeoffs were between the differences being offered.
We did make the mistake of not choosing the Progressive Party in 1912,with its platform of real public money and against the private bankers’ Aldrich Plan. And, in 1913, we lost out to the banksters of the private federal reserve.
This chicanery that would have us believe that government does not have an administrative functionary role with regard to the operation of the money system and the use of money in determining the well being of the people and the benefits to our national economy, may not be scurilous in nature, but are undoubtedly misguided and wrong, and do not represent the best science available on the subject of money.
That would require the learning of the works of Frederick Soddy and his economist-successors on what money is and how banking can be made stable and the currency sound, but also in Soddy’s successsors in the field of ecological economics.
Sorry, MMT ain’t it.
The scientific solution to the money question now before us is already itself before the Congress as H.R.2990,introduced by the traditional progressive Congressman Dennis Kucinich of Ohio.
http://kucinich.house.gov/UploadedFiles/NEED_ACT.pdf
It transforms money back to working for the common good. And it does not do it by explaining fanciful accounting, where the first understanding given about what money is becomes,in the MMT functional financial norm, as a vehicle for scoring a transaction.
Money primarily serves its national economy through its function of providing the means of exchange in the development of that national economy. The workings of the government are the only tools democratically available to we the people to control our future destiny.
Don’t give up that social, political and economic right for whomever is building the scoreboard.
For the Money System Common
OK. I will get at least one Soddy book to read. Which should I start with in your opinion?
The Role of Money, and I’d start with Chapter 2. It’s online:
http://www.archive.org/details/roleofmoney032861mbp
Thanks. Actually, I prefer paper books for some reason.
Hi Joe, In what way do you think Dan disagrees with you?
>>Hi Joe, In what way do you think Dan disagrees with you?
Not to speak for Joe, nor has Dan entered the prescriptive phase of his argument, but…
MMT depends on the premise that, because new bank money is created against a mortgage or other security, it represents a zero net creation of new financial assets. In fact, the bank creates TWO or more such instruments: a negotiable medium of exchange, and thus a claim on real assets, PLUS a salable mortgage that can collateralize more money creation. These don’t net to zero; each has a financial life, value and time span of its own. For each new dollar of exchange media, 1.x dollars of compounding debt.
MMT isn’t arguing that the US should reclaim its monetary sovereignty, but rather that it already exercises it. That economic activity can be spurred to maximize some measure of welfare by changing the numbers on interest, debt, currency and public expenditure, rather than by reclaiming the public monopoly on money creation, or otherwise altering the engineering of money.
(I personally argue for service-backed, service-denominated money, such as bridge tolls, phone minutes, Forever stamps. These can be public or private, and turn transactional money into a form of barter.)
Recent lively thread at:
http://www.nakedcapitalism.com/2011/12/philip-pilkington-a-scribbler%E2%80%99s-response-to-marc-lavoie-on-mmt.html
Thanks,Joe
The answer is that Dan does not respect that which Lincoln described as the supreme prerogative of the government of the sovereign peoples, the creation of the nation’s money.
Dan pigeon-holes governmental functions related to money as those of an equal economic player, rather than the owner and issuer of the public money system,and its roles become limited to taxation, spending and borrowing.
What about the role of government in the role of money in the national economy? That of the provision of the national circulating media?
If we deign to discuss public money, how about starting not with “transactions’ , but with what money is and how it works in a monetary economy.
Yes, Soddy’s The Role of Money, or his Cartesian Economics Lecture: On the Bearing of Physical Science upon State Stewardship?
Science and Money.
The Money System Common
Thanks.
Sorry Joeb and EconCCX,
Please point out quotes from this series by Dan that you disagree with. I’m afraid I don’t see any EconCCX, you began talking about what MMT says, but I asked you about what Dan says and really wanted to see a quote from him that you think is makes a false claim.
Joeb. when you say”
I wonder where the content in Dan’s piece is that leads you to this characterization. Again, I’d like to see even just one quote that says the above.
Sorry, to be such a stickler folks. But I really think that far too many of these debates are generated by mis-characterizations of what people are saying and I really think that we could avoid a lot of that if we had a quote and then a characterization so we could compare the two.
Thanks.
>>I asked you about what Dan says and really wanted to see a quote from him that you think is makes a false claim.<<
Dan nowhere makes the distinction between the public employees who constitute the Federal Reserve Board of Governors, and the privately-owned Federal Reserve Banks. The US, unfortunately, surrendered its monetary sovereignty, and ultimately its political sovereignty, when it borrowed from private entities in gold. One virtual default is described here:
http://jonathanturley.org/2011/02/06/j-p-morgan-and-the-reverse-bailout-that-saved-the-u-s/
That's also why FDR "confiscated" privately held gold for $20.67/oz and sold it to Federal Reserve BANKS at $35/oz. Not the actions of a monetary sovereign. The price of withdrawing from the gold standard was to enshrine the privileges of private gold-lenders in paper.
Our financial crisis is founded on the disparity between the growth of money and the compounding of debt. Trillion dollar coin entries solve Uncle Sam's nominal problem, while crashing the dollar, and putting the US at war with those nations that have used the dollar as reserve currency and a store of value.
The FR Board sets policy, with a modicum of public accountability. But it's the private FR banks that maintain the accounts. Because they're owned by historic creditors. I'd dispute any of Dan's references to the "Fed" that elide that essential distinction.
“What happens to the sovereign’s own scorecard is insignificant with regard to the creation and destruction of value in the real economy, that is, with regard to all of the things we really care about.”
This is the most presumptuous statement in this article. It completely denies any effect of the sovereign on the “creation and destruction of value in the real economy”. Polemics are not enough to convince me.
Part III on this seemingly agrees with me. Oh well, just a spurious statement.
This is wrong:
“Well, first, the private sector lender buys a bond from the monetary sovereign. At the time of the purchase, some monetary points are removed from the lender’s monetary scorecard, and a schedule of pre-determined monetary points is added to that scorecard. ”
Treasury securities are sold at auction to primary dealer banks, private banks who enjoy the exclusive privilege of dealing directly in Treasury auctions. These banks do NOT pay for the Treasuries with money they already have. They do not ‘deduct points from their monetary scorecard’. They create a new bank deposit to buy the Treasury debt, an addition to the US$ money supply (M1-checking account deposit money). Private banks create the circulating money supply by purchasing government securities (like Treasuries) and by making loans to private borrowers, in which case the bank ‘buys’ the borrower’s promissory note, his promise to pay interest and to repay all the principal. Private banks borrow currency (cash) from their central bank, and private banks are liable for converting their customers’ deposit balances into cash on demand. So deposits are “liabilities” to banks because they are liable for converting money they do create (bank deposit balances) into money they have to borrow (central bank banknotes); and also because banks are legally liable for ensuring that all loans are repaid. If the borrower defaults and doesn’t pay, then the bank must pay the balance out of its profits, or out of its capital, or by selling off its assets to convert them to cash to cover loan losses. But cash in circulation is not an ‘addition’ to the money supply, because a bank customer can only get cash by converting some or all of his deposit balance to cash, and ALL of the bank deposits in the system originated as bank ‘loans’. Private banks, not the government, create our money. It need not be so, as Joe Firestone will explain, because Congress has authorized the Executive to mint proof platinum coins of “arbitrary” face value. Joe argues that the President should order the minting of a one ounce coin of $60 trillion face value and make a $60 trillion deposit in Treasury’s accounts at the Fed. But instead of the government exercising its monetary sovereignty by creating its own money and spending it, Congress insists on forcing Treasury to borrow its deficit spending money at interest from private bankers. Which means the bankers, not the government, are the ones who are “exercising” monetary sovereignty.