Yves here. Randy Wray has decided to address the controversy stirred up by his earlier post on the incoherence of the “debt-free money” construct.
He mentions one idea in passing which is central: any financial asset is someone’s else’s financial liability. This is ever and always true. The failure to understand that is the root of some of the off-beam comments on Wray’s initial post. Some readers sought to depict “equity” as a way to square the circle, that they could have an asset that is not a liability to some other party or entity.
The stock you hold (if you do won shares) is most assuredly a liability. Go look at any corporate balance sheet. It is not on the asset side of the ledger.
Equity is a residual claim on a company’s assets and the cash flows they generate. They are the most junior. Equity is an extraordinarily ambiguous legal claim, to the degree that entrrepreneurship expert, Professor Amar Bhide at Fletcher, has long argued that it is not appropriate to be traded on an anonymous basis. Equity in a public company (unless you manage to accumulate a controlling interest) means “I’ll pay you dividends when I have the profits and when I am in the mood, and you have a vote that I can dilute at pretty much any time. Oh, and you do get to vote on big enough mergers.” Consistent with his views, Bhide thinks the only way to invest in a company is via a venture-capital like relationship, where the investors really know the managers (and not think they know them via reading media puff pieces about how great they are until they aren’t) and are privy to their strategies and opportunities (which public shareholders can never be, since some of the information they need to ascertain whether an equity investment would be sound is competitively sensitive and thus cannot be made public).
Another issue, which seems to pervade discussions about “money” is that people want “money” to be a stable store of value over time. Na ga happen, ever. Any financial asset, and money is a financial asset, is subject to all sorts of vagaries. Physical assets are no safer. That prime costal real estate may be under water in 20 years. Gold has been volatile (just look at its price chart in any currency from 2008 till now) and also has different values in different settings. As we wrote in an introduction to a post earlier this year, The Standard Definition of Money is in Error:
Many people try to attribute a solidity to money (I suspect German has better words that correspond to “thing-ness” for this sort of ideation) that it lacks. The desire to have money be concrete seems to be linked in many cases to the enthusiasm for gold or gold-currencies. But gold’s value isn’t enduring or fixed in any way; it’s value depends on the structure of social relations. For instance, in Vietnam, women typically get a necklace of gold beads in their youth. It’s a dowry of sorts. When conditions became desperate during the war, some women would try trading these beads for food or medicine, or as a way to buy off a possible rapist. The beads, when they were accepted, went for much less than the metal value.
I suspect some readers will take umbrage with a remark by Wray at the top which is critical of some of the comments here at NC on his previous post. That piece attracted a large number of new commentors who appeared to have never or rarely visited the site before. I pointed out in the discussion that as a member of the Occupy Wall Street Alternative Banking Group, we had dealt over a period of months with a small vocal cohort that tried to make the group a vehicle for promoting “debt-free money” when that was not what the rest of us wanted it to be about. It is not an exaggeration to say that this minority persisted with an evangelical zeal. And I saw elements of that in some of the newbie comments on the earlier Wray post.
By L. Randall Wray, Professor of Economics at the University of Missouri-Kansas City, Research Director with the Center for Full Employment and Price Stability and Senior Research Scholar at The Levy Economics Institute. Originally published at New Economic Perspectives
My previous blog sparked a lot of discussion, especially over at Naked Capitalism. I do pity Yves Smith! There’s enough nonsense in the commentary to populate a large nation.
As I have argued, it is very hard to figure out what the debt-free money folks want as they are confused on the accounting, vague on the terminology, and rarely provide details on their proposal. However, a reader has directed me to a fine published article that has mostly got the accounting right, lays out a detailed proposal, and contrasts the proposal against alternatives.
I’ll get to that in a minute. First let me quickly respond to comments on the first piece. I’ll limit my response to two complaints that have been made about Part One of this series.
1. Responses to comments on Part 1
The biggest complaint was that I did not take advantage of a teachable moment that the radio program producer had offered for me to explain MMT to the hosts and audience. Instead I just made fun of debt-free money supporters and insulted the producer.
The critics fail to notice that the producer wrote to me to come on the show to talk about debt-free money. There was no invitation to discuss MMT. Producers can and usually do perform a “background” before inviting a guest. I suppose the producer found that I had written pieces AGAINST debt-free money but still wanted me to discuss the topic. I honestly told him I do not understand what the advocates are proposing and hence would not be a good guest. I introduced the banana money as my best (humorous) guess at what they want–which was in the last piece I had written criticizing the debt-free money proposal. The banana is a stand-in for all forms of debt-free money, which must take a “real” form rather than a “financial” form—for reasons I discussed and will expand upon later. Rather than being offended or deterred the producer ran with the idea and created an entire alternative history of the USA based on banana money. I continued to try to get out of going on his show to discuss a topic I do not find appealing, but eventually agreed to come on to say that they can achieve everything they want through ZIRP, which I indicated would take a minute. At that point he invited me to talk about MMT. I was not offensive and he took no offense. Of that I am sure. The exchange was all in good humor. We had a number of cordial exchanges after that. And I assure you every word I posted was in the exchange; I only deleted identifiers.
I see nothing unfair about the banana analogy. Many of the debt-free proponents refer to money backed by “real wealth”, goods and services, precious metals. They fantasize about the good old medieval days, when gold was money and men hacked up dragons as they rescued damstrels in distress—as depicted, I think, on-screen in Game of Thrones (if I’ve mischaracterized the program it is unintentional as I stopped watching TV when they cancelled the double-header line-up of Melrose Place and Ally McBeal). Me? If I were to go back to a utopian past, it would be the primitive communism of tribal society, as depicted in The Gods Must Be Crazy, before the Coke Bottle Money was dropped from Friedmanian helicopters, destroying an idyllic way of life.
The second most popular complaint was about my use of the word “debt”. But the commentators apparently did not notice that the topic of “debt-free money” was introduced by the producer. He used the term, just as all other debt-free money types do, apparently seeing our current money as debt money. I’m agnostic. My point is that we use double entry book-keeping, and if “money” (however defined) is someone’s financial asset then it is another’s liability. Call it a “credit” (from the point of the view of one holding it), or a “debit” from the other’s point of view; or a debt; or a liability. What debt-free monetary cranks insist is that the money they want the government to create will show up only on the holder’s balance sheet as an asset, with no liability on anyone’s balance sheet. That is what I object to. Some argue that the Treasury, itself, treats coins as “equity”, not “debt”. Fine. Equity is on the liability side of the balance sheet. Twist and mangle the language all you want. But at least do the balance sheets correctly. More on that below.
Calgacus had an excellent response on a blog site explaining the use of the term debt. I hope she/he will not mind if I provide a long quote. This is extremely useful not only for the clear explication of the term, but also for links to early expositions of the views now taken by MMT. In particular, Calgacus responds to comments about my use of the cloakroom token (taken directly from G.F. Knapp) as an example of a debt token—a commentator argued that this is not a debt because the cloakroom doesn’t own the coat. And to the claim that coins issued by government are not debts because the taxpayer is the one with debts, not the government that issues the coin. And to the claim that bank deposits are not debts of the bank, because it is the borrower who owes the bank. Here’s Calgacus’s argument:
“Debt” is a word in English – and in every human language. Even nonhuman social animals have some grasp of it. Wray uses the word in the standard very general dictionary meaning of a social, moral obligation. Here is the full definition from the #1 on google online dictionary:
1. something that is owed or that one is bound to pay to or perform for another:
2. a liability or obligation to pay or render something
3. the condition of being under such an obligation:
4. Theology. an offense requiring reparation; a sin; a trespass.Basically, 4 ways of saying the same thing.
” A cloakroom is not issuing a debt-token.”
It most certainly is. To say it is not is to insist on an alternative meaning of “debt” and to avoid the standard general dictionary meaning, which is Wray’s usage. Alternative meanings involving money & interest are obviously not applicable. Money is credit/debt and obviously this view would be useless & unintelligible gibberish if the latter were defined in terms of the former.
“Nobody will accept this token for payment.” The cloakroom attendant will. Therefore it is a debt, a social, moral obligation, relationship between two moral agents. That is the point.
” the macro-economic substance of the act of issuing the coin is very different from what banks do.”
No, it is precisely the same thing, no more different than the US issuing dollars & the UK issuing pounds. Minsky’s “anybody can create money ….”
“By issuing the coin, the government allows a provider of goods or services to bring forward the settlement of their pre-existing tax debt to the government.”
This is not at all what happens. It could not happen that way, the way the rest of the story proceeds. Issuing of a debt in one direction must precede the settlement, the cancellation of the debt, which can only occur by a debt going the other way.
Here the coin recipient pays the coin to settle his subsequent, not pre-existing taxation. I can’t really understand what is being said here in a coherent way. If the coin is considered a receipt, it is a receipt for taxation-in-kind, taxation in real terms, like a government employee being “taxed” of his labor and given government currency in return. Taxation in kind or taxation in real terms is another word for government spending, which is the opposite of financial taxation – which is what “taxation” means nowadays. In any case, in any system, the coinholder of course relinquishes it, rather than merely keeping & showing it – that’s more like how titles of nobility operated, not coins!
“There is no pre-existing debt of the customer taking the loan. By giving the loan, the bank creates new debt (for which interest is to be paid, whether or not it is put to productive uses).” More errors, at least on what seems to me to be the plain meaning.
As above, there was no pre-existing debt in the government / tax case and the bank doesn’t create the new debt of the customer to the bank, the customer does. There are two credit-debt pairs being created in bank loans, but only one in government spending. That’s a difference between monetary and fiscal.
Basically, this is just Mitchell-Innes & his great predecessors. But only the MMTers – or circuitist / creditary economists like Ingham, Gardiner etc who contributed to the book on Alfred Mitchell Innes great papers seem to get things right. It is all so simple, so obvious, so natural, so easy, so entirely trivial…. That everyone makes a complete mess of it, by scorning the “trivial” chore of getting the trivialities right!
Thanks, Calgacus. Now let’s turn to a concrete proposal.
The Debt-free Stimulus Proposal
It is very difficult to get a handle on the debt-free money proposal because it is hard to find one with any details. However, here is an excellent analysis: “Stimulus Without Debt” by Laurence Seidman, Challenge, vol. 56, no. 6, November/December 2013, pp. 38–59. Now, I cannot be certain whether this is what most debt-free money proponents have in mind. However, Seidman lays out a concrete proposal and contrasts it with alternative methods of stimulus. He even compares his proposal with that of Adair Turner, Chairman of Britain’s Financial Services Authority, who has received a lot of attention for his “overt money financing” of government spending. I know Turner and have great respect for him as a serious critic of our runaway financial system. Many of the debt-free money proponents who have written to me have recommend Turner’s work. Hence, Seidman’s contrast of Turner’s proposal with his own is useful. Finally, as I said earlier, Seidman seems to have a good understanding of accounting.
I am going to use long quotes from Seidman’s piece as I would guess that most readers of this blog have not read the original. I’ll provide commentary along the way. For the most part, I find his analysis impeccable.
First, let’s look at Professor Seidman’s stimulus proposal. He is rightly concerned that fear of budget deficits and government debt hamper the ability to mount sufficient fiscal stimulus to counter a deep downturn, such as the one that followed the Global Financial Crisis. So what can we do next time to finance a stimulus without running up debt? In his example, he presumes the stimulus will take the form of a generous tax rebate for households, much like the one that President Bush pushed through earlier. I won’t go through the evidence he presents that this is an effective way to get income into the hands of consumers who will spend it, thereby stimulating demand. We’ll only concern ourselves with the question, “how can the government finance this without debt”. So here’s the proposal:
the stimulus-without-debt plan proposed here—a particular kind of monetary stimulus—is “a dual-mandate transfer” from the Federal Reserve (the Fed) to the U.S. Treasury. In a severe recession the Federal Reserve Open Market Committee (FOMC) would give a transfer to the Treasury in an amount decided by the FOMC that, in its judgment, would promote the Federal Reserve’s dual legislative mandate—enacted years ago by Congress—of promoting both high employment and low inflation. It must be emphasized that the Federal Reserve would not be buying bonds from the Treasury; the Treasury would not be incurring debt—it would be receiving a transfer.
How does this differ from normal procedure? Seidman explains:
Standard fiscal-monetary stimulus works this way. To raise aggregate demand for goods and services through fiscal stimulus, Congress cuts taxes or raises government spending (transfers or purchases), and the Treasury borrows to finance the resulting deficit by selling U.S. Treasury bonds to the public, thereby increasing government (Treasury) debt held by the public. The Fed then buys an equal amount of Treasury bonds from the public in the “open market,” so that the Fed, not the public, ends up holding the increase in Treasury debt. A crucial point is that the Fed’s action does not reverse the increase in Treasury debt: official Treasury debt increases by an amount equal to the deficit that accompanies the fiscal stimulus, whether or not the Fed buys Treasury bonds from the public. Standard fiscal-monetary stimulus entails “monetizing the debt,” not preventing debt.
The Fed is providing a “transfer” to the Treasury, not a “loan”. How does this affect the Fed’s balance sheet?
If the Fed buys a Treasury bond in the open market, it obtains an asset, but if the Fed gives the Treasury a transfer, it obtains no asset. According to conventional accounting, the Fed’s “net worth” or “capital”—defined as assets minus liabilities—would therefore be lower if the Fed gives the Treasury a transfer instead of buying Treasury bonds.
The Obama fiscal stimulus during the GFC amounted to about $400 billion a year for two years. Federal Government debt was increased by approximately the same amount, $800 billion. If the stimulus had been done through a Fed transfer, the Treasury’s debt would not have been increased. Instead, the Fed’s capital would have been reduced by $800 billion—equal to its transfer. On the Fed’s balance sheet, its liability to the Treasury (deposits) would rise by $400B each year, and its equity would fall by $400B each year. As the Treasury’s checks were deposited in household bank accounts, the Fed would debit the Treasury’s deposits and credit bank reserves by the same amount. As households drew down their deposits buying consumer goods, the deposits would shift from bank-to-bank and the Fed would shift reserves from bank-to-bank. (The reserves would remain at the higher level until either cash is withdrawn from the banks, or banks repay loans to the Fed. Note that the nonbank public decides how much cash to hold, which determines the ratio of reserves/Fed reserve notes.)
Why does a Fed transfer to the Treasury reduce the Fed’s net worth? Note that under normal operations, the Fed either lends (reserves to banks) or buys assets (government bonds from Treasury or from banks, or, recently, purchases of MBSs). Its assets go up by the same amount as its liabilities. If the assets earn more than the Fed pays out on its liabilities (reserves; note that Federal Reserve Notes are also Fed liabilities but don’t pay interest), then its net worth rises. The Fed distributes its profits to the Treasury and to its shareholding banks. Transfers, by contrast, increase reserve liabilities without increasing assets; the difference has to be made up by reducing equity. This reduces equity as well as profits since its earnings on assets have not changed but it pays more interest on reserves (unless for some reason the demand for Federal Reserve notes rises by an amount equal to the transfer—which is unlikely). Lower profits mean the Fed distributes less profits to the Treasury, reducing Treasury’s revenue.
(If the total stimulus amounted to $800B and the interest rate on reserves were 1% then the Fed would have $8 billion less profits to turn over to the Treasury, all else equal. To avoid adding more Treasury debt, the Fed would have to transfer more. This is not a major consideration, but should be recognized: reducing Fed profits reduces Treasury “revenue”.)
If the Fed “transferred” more than its total net worth in its stimulus program, it would have negative equity.
Should we care about the Fed’s balance sheet? On one hand, any bank can operate with negative equity—many have done so and probably some of the biggest ones currently are right now, on rigorous assessment of the values of their assets and liabilities. Banking supervisors often adopt the “extend and pretend” approach—extending the life of insolvent banks while pretending they have positive net worth. We can certainly do that with our central bank, and the justification is probably far stronger. With insolvent banks, the biggest danger is that the incentives are aligned to “bet the bank”—take the riskiest bets imaginable, gambling that some might pay off while the downside is that the already insolvent bank fails. Shareholders have already lost, so who cares. But if the Fed is driven into insolvency while bailing-out the economy in a downturn, that can easily be justified as reasonable public policy.
As such, Professor Seidman recommends changing the way we do accounting:
For a household, firm, or governmental unit, it is important to worry about whether its “liabilities” (what it owes others) listed on its conventional accounting balance sheet are greater than its “assets” (what it owns or is owed by others). But there are at least two problems with using a conventional accounting balance sheet to evaluate the Federal Reserve in the same way it is used to evaluate a firm, household, or other governmental unit. First, Congress has given the Fed the power to create money by writing checks and standing ready to print and provide cash (Federal Reserve notes), a power not available to a firm, household, or other government unit. Second, one of the large liabilities listed on the Fed’s conventional balance sheet—Federal Reserve notes—differs in an important way from the liabilities listed on the balance sheets of firms, households, and other governmental units…the power to create money surely gives the Fed an important tool for meeting its financial obligations not available to firms, households, and government units. A conventional accounting balance sheet alone is therefore inadequate to evaluate the financial position of the Fed.
Second, on the Fed’s conventional accounting balance sheet, the quantity of Federal Reserve notes outstanding is listed as a liability, and it is usually the largest liability on the Fed’s balance sheet. This made sense historically when the Fed promised to pay gold to holders of Federal Reserve notes if the holders requested gold. But this rationale no longer holds because the Fed no longer promises to pay holders of Federal Reserve notes gold or anything else. Thus, it is no longer obvious that Federal Reserve notes are a genuine liability of the Fed—or even if they are still a liability, whether they are as burdensome as other liabilities.
Despite these two problems with applying a conventional accounting balance sheet to the Fed, there will no doubt be concern about any plan that reduces the conventionally measured net worth or capital of the Fed. Advocates of the stimulus-without-debt plan should emphasize these two problems, object to the use of the conventional Fed balance sheet to pass judgment on the stimulus-without-debt plan, and call for new and better ways to evaluate the financial position of the Fed.
OK, accounting is a human invention, although it follows a logic. Congress can, if it chooses, throw logic to the wind and create special accounting for the Fed. It certainly wouldn’t be the first time a government has applied special accounting to itself—it is common in so-called Banana Republics (and maybe appropriate for banana monies!).
But would the Fed’s debt-free stimulus be legal? Seidman discusses the separation of powers that our founders thought important, with the separation further delineated by the creation of the Fed itself in 1913. Seidman downplays the power to create money given by the Constitution to Congress, focusing instead on the apparent intention of Congress to bestow that right on the Fed—something he believes Congress did in order to constrain itself from simply printing up money and causing inflation:
It was therefore a wise and crucial step for Congress, a century ago, to establish an independent central bank that would control the creation of money. Congress thereby gave up the power to cover its deficit by creating money. This has provided an important check against Congress’s setting government spending well above taxes in a normal economy when no stimulus is warranted, creating money to cover the difference, and thereby unilaterally injecting a combined fiscal-monetary stimulus that overheats the economy and generates inflation.
I would guess that this is the view of most economists and I’ll leave it up to our scholars of US legal history to comment (I find it to be a dubious interpretation). I’m also going to leave to the side the typical belief of economists that Congress is naturally hell-bent on ramping up inflation (again, I’m skeptical); as well as thee typical claim that the Fed is independent (nay, it is a creature of Congress and no more independent of government than are other agencies). What is important is Seidman’s recognition that the Fed’s “right” to create money might not give it the “right” to distribute tax rebates. If that is so, he believes Congress has made a lamentable mistake:
It was, however, unwise for Congress to apparently (if this is the judgment of legal scholars) prohibit the independent central bank from unilaterally deciding to give a dual-mandate transfer to the Treasury. The danger in prohibiting a dual-mandate transfer is that it prevents stimulus-without-debt in a recession or a weak recovery. If legal scholars judge that the current Federal Reserve Act in fact contains such a prohibition, then Congress should amend the Act to specifically authorize a dual-mandate transfer—a transfer that the FOMC judges would implement its dual mandate of high employment and low inflation.
Note that Seidman argues his proposal does respect the separation of powers intended by Congress, for he would have the Fed decide how big the tax rebate would be (hence, decide how much money to create, and when to do it), rather than letting Congress dictate how much, and when, the Fed would stimulate. This would be entirely within the Fed’s “dual mandate” to pursue high employment and price stability; it would ramp up the stimulus when unemployment is high, and cut it off when inflation rises. If this is illegal, he recommends changing the law (and presumably, the Constitution, if need be).
(This would expand the powers of the wise men and women who sit on the FOMC—from interest-rate setting to controlling fiscal stimulus. Well, why not–they’ve done such a “Heck-uv-a-job-Brownie” job so far, missing ten out of the last ten recessions and contributing to ten out of the last ten financial crises. The Fed always “fails upward”, gaining power and prestige when it screws up, so that its next screw up will be even more damaging. But I digress…)
Assessment of the Proposal
Seidman has provided us with a coherent proposal for debt-free stimulus. While he uses an example of a tax rebate, there is no reason why the finance method could not be used for a spending stimulus, such as Bernie Sanders’s infrastructure proposal. Instead of Treasury financing using tax revenues or bond sales, the Fed would provide transfers, reducing its net worth. Treasury can treat these as gifts, meaning it will not issue any debt. (Thanks, Aunt Janet!)
In that sense, the proposal is, indeed, “debt-free”. Of course, it is not “debt-free” in a more general sense, because the Fed’s liabilities grow—first in the form of Treasury deposits and then as the Treasury draws those down, in the form of bank reserves. Further, some advocates of “debt-free spending” seem to mean spending financed in a manner that does not commit government to pay interest. However, Seidman’s proposal fails to meet that definition, too, since the Fed pays interest on reserves.
So it is neither debt-free nor interest-free.
As discussed in Part 1 of this series, many argue for use of “debt-free money” to finance government spending. The “money” created by the Fed in Seidman’s proposal also fails that definition since the Fed’s reserve money is the Fed’s liability. Unless we want to invent a quite narrow definition of “debt” to mean something different from “liabilities”, the Fed’s reserves are a “debt money”. We could call them “liability money” and then explain that by “liability” we mean “it is not a debt”. (However, as George Lakoff warns us, if you tell someone NOT to think of an elephant that is the first thing they think of. Our debt-free money folks might consider that as they reframe their meme. Yet another reason to run with the banana money meme?)
Changing the terminology from “debt money” to “liability money” is of course possible. By the same token we could instead invent a definition of “debt” that excludes Treasury liabilities, too. Treasury liabilities such as bills and bonds are much like the Fed’s liabilities: both are presumably backed by the full faith and credit of the Congress and both pay interest. We could invent a new term to cover all such liabilities, replacing the usual term, which is debt. I’m open to suggestions from our wordsmiths. (How about “bananas”? That has the unfortunate disadvantage of bringing to mind bananas, but it does have the advantage that it directs attention away from “debt”. Saying that the government “is trillions of dollars in bananas” sounds so much better than saying it “has trillions of dollars of liabilities”—which sounds an awful lot like debt. Or we could just adopt the convention that if we use words like debt or liabilities, what we mean is bananas. What the bank means when it says I have an onerous mortgage debt is that I have a really big mortgage banana. I feel better already.)
To get closer to the goal of “debt-free money” proposals, Seidman could recommend that the Fed stop paying interest on reserves. In that case, while the Fed’s liabilities would rise with its stimulus, it would not pay interest. Banks would simply hold more reserves but would not receive interest on those reserves. Some of the debt-free money enthusiasts insist that government spending should not generate interest payments—especially to banks. That is easy enough to do in Seidman’s proposal—just return to the pre-GFC practice of the Fed by eliminating interest on reserves. (Some even think this will encourage banks to “lend out” their reserves to business, adding additional stimulus. That is confused, but I won’t go into it here.)
At this point we run into a fundamental problem: if the Fed doesn’t pay interest on reserves and the Fed’s stimulus creates excess reserves, then it will drive the fed funds rate toward zero. Indeed, this is precisely how central banks operate ZIRP (zero interest rate policy)—leaving excess reserves in the system is how you do a ZIRP.
How does a central bank keep the overnight interest rate at a target above zero (non-ZIRP)? It either pays interest on reserves (paying a rate approximately equal to the target) or it offers Treasury bonds in open market sales or REPOs. In normal times (before the GFC and QE), the central bank holds a limited supply of treasury debt to sell. This means it could run out of treasury debt before it could eliminate all the excess reserves it created by engaging in a Seidman-type “debt-free” stimulus policy. The only way to avoid a ZIRP in this case is either to return to paying interest on reserves, or to ask the Treasury to sell new bonds. (Admittedly, the Fed is now awash in treasuries, and thus facing the opposite problem; still it is paying interest on reserves so can maintain a positive rate even with massive excess reserves.)
Here is our “teaching moment”:
Debt-free stimulus, or more generally a debt-free government finance spending proposal, actually requires interest payment on debt, unless the central bank adopts a permanent policy of ZIRP.
Either the Fed or the Treasury must pay interest on debt to avoid ZIRP. We can have the Fed issue the debt rather than the Treasury, but it is still debt and it still pays interest. Or we have permanent ZIRP.
This is why I made the claim that all debt-free money proposals reduce to permanent ZIRP.
For a more detailed explanation of why this must be true, see Scott Fullwiler’s piece from last year.
That is probably a big enough lesson for today. Let that sink in. In Part 3 I will explain why I think there are other shortcomings in such proposals, especially misunderstanding over monetary and fiscal policy operations. It will be instructive on that count to compare Seidman’s proposal with Lord Turner’s.
Oh Wray… stuffing coal in some expectations socks… on this eve…
Skippy… You, Mosler, Black, Yves, Joe, Scott and other malcontents fill my stockings… with joyful tidings… myself is full…
> This is why I made the claim that all debt-free money proposals reduce to permanent ZIRP.
We’re at permanent ZIRP right now, and NIRP in many places around the world. No need for debt-free money discussions because we’re already there.
Lowering rates to 0 was an intentional act by the Fed, so debt-free money was their goal, yes?
> any financial asset is someone’s else’s financial liability
Except for debt-free money, unless you think money is not a financial asset.
Thanks Prof Wray for taking the time to, once again, set the dunderheads straight. It must be a Sisyphean task, and for that I shall pour libations that the gods favor you on this Yule-eve. Oh, Merry Christmas, folks.
Modern Money Theory and New Currency Theory
A comparative discussion, including an assessment of their relevance
to monetary reform
http://www.paecon.net/PAEReview/issue66/Huber66.pdf
https://realcurrencies.wordpress.com/2013/10/11/the-difference-between-debt-free-money-and-interest-free-credit/
https://realcurrencies.wordpress.com/2012/08/25/the-problem-is-not-debt-its-interest-with-video/
https://realcurrencies.wordpress.com/interest-free-economics/
The banana analogy was a good one in demonstrating the depth’s he is prepared to sink to in ridiculing the idea.
Anyway, let’s move on to the IMF who did not use childish banana analogies when discussing debt free money.
The link is below and will probably require moderation before appearing.
It is a resurrection of The Chicago Plan put forward in the 1930s when we last had bankers stupid enough to plunge the world into a global recession after blowing up an asset bubble.
1929 – US stocks
2008 – US housing
The IMF’s banana free report is below:
100% banana free:
http://www.imf.org/external/pubs/ft/wp/2012/wp12202.pdf
The nut, for those not interested in all the pretty math-
Page 6.
“In this context it is critical to realize that the stock of reserves, or money, newly issued by
the government is not a debt of the government. The reason is that fiat money is not
redeemable, in that holders of money cannot claim repayment in something other than
money.1 Money is therefore properly treated as government equity rather than
government debt, which is exactly how treasury coin is currently treated under U.S.
accounting conventions”
Equity. See above.
Also, please note that a very important part of MMT is granted as a given- an issuer of fiat cannot default on it’s own money. They just rename “debt” to “equity”, given this “fact”.
Semantics, and, again, as noted above, debt and equity are still on the liability side of the balance sheet.
It reminds me of the following:
Lifespan = Birth + Death.
Birth and Death are on the same side.
Don’t you mean-
Lifespan = Death – Birth?
Or, Birth + Lifespan = Death?
We’re all doomed– at birth! ….by definition
Depending on if you assign a positive value or negative value to Death.
Is it liberation or end of everything?
It’s liberation, of course.
Christians talk of hell….but my description of hell is Earth.
BTW, I hope Jamie Dimon comes back to Earth in his next life as a cockroach. Then I would have confirmation that God has a sense of humor and retribution.
There’s a podcast by the author:
http://www.lse.ac.uk/publicEvents/events/2013/11/20131112t1830vOT.aspx
Yo craazyman. I figured out how you can buy yourself a really nice second suit really, really cheap! Much cheaper than going to a fancy men’s store, or even on ebay.
Go to a cloakroom! Strip down, hand ’em your first suit, and get the little wooden coin they give you. Then go about your business and return later. You can then hand them this obviously worthless wooden coin and they will give you a nice suit for it!!!!!!
Sounds a little confusing at first, but if it works, it works!
can i go in with a Joseph A. Bank suit and come out with an Andersen & Sheppard suit?
That’s money for you. Whatever was there in potential is catalyzed into reality through some process that’s not quite clear. Professors Wray and Kelton have completed their schooling, and they are correct in my view on the technicals, but have not yet started their education. They should do a semester at U. Magonia.
I’m a little confused now because I bought those two expensive suits but, honestly, I think I like my Joseph A Bank suit better! The fit’s not great so that ‘s a problem but the expensive suit, they seem not as sturdily built. I’m not suit expert, so maybe I’m paying for brand more than manufacture. But the brand itself is solid and I trust them to do it right so maybe I’m missing some basic stuff. I also like budweiser more than European beer. I like Lipton tea more than English tea. I like cash more than credit. I like money more than debt.
I’m not sure Professor Wray should have used the word “crank” but I won’t criticize. It’s just an observation I’m making. To me, it’s all crankery and arguments over mechanics miss the phenomenon of the machine. Money is a boundary and mediating idea between conflict and cooperation. Anybody that uses money, to give it value, has to contribute in some constructive way to the cooperational structures that underly it’s value. That can be called “culture” or “goverment” or whatever abstraction one choses. Owing that cooperation to give money value, that’s a debt, it’s an implicit absttract debt but if money itself is real then so is that debt. it’s both imagination annd reality. What happens when a currency collapses? Like the U.S. Confederate currency, for example. What has collapsed is an underlying organizational idea of order and the debt is extinguished and so the currency loses value. I’m a bit concerned this is now happening to gold. Peope think since gold is a substance it’s somehow more real than “money”, but it’s no more real. It’s only been a persistent organizing idea.There no doubt are other culturess where totems of a bizarre nature were venerated and as such were stores of value. When those cultures collapsed so did the value. It will be curious to see if gold resumes its climb or grinds down to some sort of industrial value. The phrase “barborous relic” of course says this idea in two words.
“can i go in with a Joseph A. Bank suit and come out with an Andersen & Sheppard suit?”
Not at a normal cloakroom, but maybe at a hedge fund cloakroom in New Yawk there. OTOH, you might have to ride the bus home in your underwear. There is risk.
Gold is shiny, pretty and rare. It will always have a devout following. ‘Course in a total collapse of civilization, you want a heavily fortified wheat field with a bakery on it and you will soon own all the gold in the world. Unfortunately, I can’t afford total collapse, so I don’t worry about it.
craazyman, I always assumed you were being purposefully obstinate about mmt. Now I get your point, if the culture has decayed, it doesn’t matter if you fix the semantic based rule that makes it easier for the bad guys to win debates. My only objection would be that there’s no revolution without sweeping reforms that fail to sweep enough.
Maybe on the Martian Republic where it’s tax free and duty free, can you have debt-free money.
“Government by donation. You never have to pay anything to the government and the government doesn’t have to, ever, extinguish a liability to you.”
Money is created and overflows the make-a-wish fountain at the plaza where it’s distributed equally to all citizens, along with duty-free bananas from Earth.
When there is too much money in circulation, people gather for a money-immolation bonfire party to satisfy the Money God.
Make that ‘Inflated Money God.’
Any financial asset, and money is a financial asset, is subject to all sorts of vagaries. Physical assets are no safer.
In all seriousness, that’s not quite true. Land, solar panels, passive solar water heaters, ammo, rations, a productive garden, etc, are all assets that have a baseline of value no matter what happens: they can help ensure survival.
It’s not a good idea to confuse financial/political speculation, such as for example by having gold or dollars, or by relying on social security or pensions for survival, with actual physical safety and security, especially in this age of collapsing empires and disintegrating economic systems.
Is anyone really debt free?
We all owe so much to Mother Nature.
just extending my confusion about how capitalism can use mama as debt/money and call it capital so that we can keep an economy going – why can’t we make the earth our most important asset – our biggest and most reliable form of collateral since we’re running short of all our financialized synthetic collateral – all the banksters have to to is recognize earth assets – and to do this would require that we do not over-produce stuff; that we maintain the value of our real assets… So how much is the planet worth? And how much should we all be paid for not having a car. This works out at some level, right? So what things will we buy and sell? Bundles of rights, like property rights, to clean air and water, the good faith pursuit of science and research, good education, good social services, clever recycling and etc. etc. We are so efficient at manufacturing “things” that our economy gets in trouble fast with over-supply – and the more jobs we create to make “things” the worse it gets.
…and Humanity is still stuck with monetization of the commons, fraud and theft and simple robberry and murder by those so inclined, and that old rotted chestnut about “the price of everything, the value (or maybe worth?) of nothing…”
Wrong and false, all assets decay over time and are subject to context. All those you listed, depending on context, can become worthless and in many cases would.
Civilization is an strategy of building up safety in numbers, there is no guarantee that other strategies which doom-sayers promote are guaranteed to be any more successful on aggregate. It’s all driven by zealot ideological bias not better than those they want to ‘school’ (the ‘civlizationists’ so to speak).
The universe is uncertain, and that’s pretty much the only truism we can be sure about. If anything, knowledge and capacity to adapt (redundancy) are the true valuable assets to own.
Adapting too well, the host (Nature) becomes vulnerable.
See the Human Adaption History (so far).
This comment does not make sense. Of course the survival value of all assets is relative. A garden under a shade tree is about as useful as tits on a bull. Hopefully the intrepid survivalist has enough common sense to pay attention to the environment (including the social and community environment) to use strategies and assets that are useful rather than not. Admittedly that’s by no means assured with all the crazy/dumb people out there, but with proper training and situational awareness it’s not that difficult.
Humans are AWFUL at predicting the future.
There is no certainty that investing any efforts or wealth on that will ever pay off over compared to others.
Cemeteries are full of doomsayers which died waiting for the apocalypse.
To an extent you’re right, but the overall point you’re making is not useful. Sure the exact timing is impossible to know, but if you see a raw egg rolling around on a table being able to figure out that’ll eventually hit the ground and break apart isn’t that difficult. In fact, I’d say that closing your eyes, sticking your fingers in your ears and chanting “the egg’s not gonna break. It’s not gonna break. It won’t fall and break!” Is kind of dumb.
All of those things have utility in a wide variety of circumstances, but that is not the same as having inherent value.
Land is devalued if it sinks underwater from sea level rise. Solar panels are useless if the sun is blotted out by nuclear winter. Ammo doesn’t help if there is nothing to hunt. Rations aren’t necessary in a time of plenty.
Circumstances change and that changes the value of things. Of course some things are going to be more stable in their value than others and that is a truth worth acknowledging.
Thank you for the follow-up Randy and NC. I accept the accounting problems with debt-free money, but the accounting seems opaque, which seems to be the source of confusion for me. Also I’m not sure what the impact of the accounting ought to be on public policy, as the Fed/Congress is a unique entity and thus can respond to balance-sheet and cash-flow insolvency concerns differently.
I think I have a few sources of confusion, and I’d really appreciate anyone setting me straight.
1) Subtle/hidden accounting links exist in the way our banking system is set up, and this totally mucks with our intuition and how we tie together social and financial/legal concepts of debt.
I think untangling how undebtedness works out when banks and other corporations and governments create new debt would really help illuminate things. Who owes whom when a new financial asset is created?
When a private bank creates debt to satisfy a client’s request, what happens?
The bank receives a debit (legal right to future revenue stream).
The client receives a credit (legal obligation to provide a revenue stream).
The client receives a debit (money, a legal right to pay off tax obligations)
The government/Fed receives a credit (as there are now more dollars/FRNs outstanding).
If that’s right, that means that new debt creation doesn’t always involve just the two parties you’d think are involved: private banks can create Federal Reserve liabilities in the form of cash. Hidden links like that in the accounting probably ‘account’ for lots of the confusion, including mine. If there are any other such subtle relationships when new debts are created in different contexts, I’d be interested in hearing them, especially involving the Fed and Treasury.
2) US gov’t debt and Fed debt don’t work like private debt. As Randy hints when writing about the different Fed accounting, the gov’t cannot go cash-flow insolvent absent self-imposed restraints because it can keep making new money to satisfy its obligations. In a wise and non-corrupt system, its only concerns would revolve around the value of the currency, stability of the environment, and so on.
3) FRN liabilities seem confusing. With bonds, a chunk of cash is exchanged for a future revenue flow. I love Randy’s description of equity, a super legally weak and easily diluted claim to leftover profits occasionally – but there’s still a possible future revenue stream going from debtor to creditor. With FRNs, when the government prints, what’s the corresponding social obligation that makes up the underlying debt?
If the gov’t prints and spends a dollar, how is that a liability of the gov’t? We say the gov’t is obligated to accept the dollar in taxes, right? Well what if taxes aren’t increased in proportion to the new amounts of cash? If the money paid out increases and the money obligated back doesn’t, how is the difference debt? I get that currency is ‘debt’ from an accounting perspective, but in terms of social relations, what’s the obligation that is the underlying social tie that makes indebtedness when more cash is printed and taxes aren’t raised?
If the gov’t printed a stack of 100s and paid them out for some large projects (hopefully ecosystem restoration and workshops in permaculture and effective anarchy [self-governance]; we don’t need more infrastructure or ‘growth’), and didn’t demand them back through taxes, what liability would the cash represent? It would still have value so long as merchants or others accept it. Similarly, what if the Treasury sold debt to finance spending, the Fed bought the debt, and then canceled/forgave the debt? Either way, cash goes out and gov’t public indebtedness doesn’t increase – FRN liabilities increase only, but there’s no corresponding revenue stream in the opposite direction going back to the Fed, the issuer of the debt/FRNs.
I suspect this is what ‘debt-free money’ people are thinking of: FRN liabilities that have no corresponding promise of future payment attached. Spent into the ‘economy’ properly, these wouldn’t create inflation.
One idea for bringing clarity to the whole thing: perhaps when we wish to not reference the current reality, but the fantasy-possibility of how government policy could work and serve the public welfare, lump the Fed and Congress back together for sake of discussion, since it’s an arbitrary (and corrupting) split in the first place, and the legal, social, regulatory, and other relationships seem quite complex and irrelevant in discussing alternatives until we start to consider how to get to an alternative from here.
If anyone can help me understand FRN liabilities and the social/indebtedness obligation better, I’d be most grateful.
I think this is a key point
“how government policy could work and serve the public welfare, lump the Fed and Congress back together for sake of discussion, since it’s an arbitrary (and corrupting) split in the first place, and the legal, social, regulatory, and other relationships seem quite complex and irrelevant in discussing alternatives until we start to consider how to get to an alternative from here.”
I think this is the main value that MMT and the platinum coin have brought to the discussion. They try and untie the Fed/Treasury/Congress complexities.
I think the main point they try to make is that the Fed/Treasury act as a single agent at the bidding of Congress and that the public purse should be used for the public good.
I’m not sure all ‘debt free money’ people are talking about the same thing. Some people see it as 100% reserves which could have an adverse impact on credit creation and some see it just as public banks on the model of North Dakota having more control over credit creation.
To paraphrase what you already said: when the government creates/spends money, it creates additional get-out-of-jail cards that can be passed around and given back to the government at tax time. Just because there may be more dollars out there (in accounts at the Fed, of course, and in currency) than the current sum total of tax liabilities doesn’t mean that new dollars can’t also be used as get-out-of-jail cards–especially if the government raises taxes.
Will’s point 3) is the crux of the confusion, which Wray, despite his usual nice overall analysis, still fails to effectively explicate (though I’m sure he understands it.) Seidman puts it: “Thus, it is no longer obvious that Federal Reserve notes are a genuine liability of the Fed—or even if they are still a liability, whether they are as burdensome as other liabilities.” The real, overarching question is, ‘what is the genuine nature of a “liability” of the Fed vs. a “liability” of a private entity?’
When I, a private person or business-owner, have a debt or liability, it represents a future expected reduction in my assets, which translates, presumably, into a reduction in my future “standard of living” (my ability to exchange those assets for things I desire.) But what desires can the Fed/Gov’t not achieve due to its ‘liabilities’ of bank reserves and/or outstanding cash? What future assets will it forfeit? Answer: none, in reality (effectively, rather than nominally), because it can always print more money, which is the only “asset” people really demand from the Gov’t. Thus, there is a fundamental difference in what the words debt or liability connote or entail in the case of Gov’t, vs. the case of a private entity.
MMT knows this, but it doesn’t think there is a problem with labeling those “liabilities” of the Fed/Gov’t as such–it doesn’t see the labeling as a problem. But DFM sees the labeling as a problem. In this they have a point–when the same word is used in situations that differ in reality by a hugely important real-world factor, perhaps it makes sense to use different words, not to say (as MMT does) “we insist on using the same nominal word, while fully understanding that the real world implications are different.” Or perhaps it doesn’t make sense–but either way, both sides agree that there is a difference in the reality of the situations, so why not focus on the agreement, not the nominal disagreement?
That difference is what Seidman explicitly addresses–yet Wray doesn’t take that teachable moment and explicate it. My approach would be to say, “yes, the word ‘liability’ carries a private-entity implication that is wholly absent from any such use regarding the Fed/gov’t situation, so I can see why people find it confusing to label it that way. But our real mutual goal is to avoid having confusion like this harm society, so let’s agree that DFM and MMT are merely taking different approaches to remedying the nominal confusion, while both wanting to help society in roughly the same way.”
Asset demanded from the government? I, and my grandkids, from one perspective and set of hopes and wishes, expect that “regulation and enforcement” thing from what we think of as “the government.” The Fokkers on the Streets, Wall and K and the Chamber of Commerce’s Main, want “regulation” too, just a slightly different flavor. The government, that collection of people and powers, has been deputized to glom onto and disburse and disperse all the elements of the commons. But it’s all about who has the clout to say how the machinery of government is built and rebuilt and calibrated to function. And the Rich Sh-ts who run things now know that the will be long gone, satiated, before Murphy comes to enforce his ineluctable Law…
Rust never sleeps.
What future assets will it forfeit? Is that a serious question, because it does touch upon an important issue: MMT undervalues time.
What the government forfeits is the time of its citizens. Money is labor (there are no currency costs at a macro level to extract resources, only labor costs).
The more extreme the squandering of currency units by the national government, the more extreme will be the ways in which the government must control citizens in order acquire the resources desired by the government. Until you hit a point like the US today where we run the largest prison system on the planet and have tens of millions of crappy jobs and make work jobs. In short, the cost of bad tax and spending policies is the squandering of billions upon billions of hours of human life.
I’ve run into the debt-free money crowd on a few occasions. They believe banks are the plague of the world. So, maybe the best avenue to take with them is to say, “I agree with you that banks have far too much power. Let’s talk about ways other than debt-free money to reduce their power.”
I’ve had the answer as to how to reduce the banksters power, it involves building a guillotine.
To those who have little or no assets, banks ARE the plague of the world. To those at the top of the food chain, they are the mechanism to maintain social and political control and expand the rich-poor gap. Monetary creation and credit expansion boost asset values, which is only a good thing for those who already hold the wealth assets. Not for everyone else.
Prof. Wray, thanks for taking the time to go through the argument again for those of us who got lost in the last piece.
This is a recurring problem in my experience:
Looking at the accounting framework makes it clearer. Mentally imagining what happens in the T-account as the discussion proceeds and whose ledger it is occurring in is tedious but clarifying.
But that does not get to what is motivating all of the attempts to continue spending without debt, which is the failure to take the accounts seriously and pay the piper at an appropriate time. And it is the “necessity” of military spending that continues to drive up the debt along with the idea that tax cuts are the appropriate way to stimulate the economy. When Congress threatens default, it does not put the house back in order, just kicks the can down the road. For most people, this is a terrifyingly irresponsible way of governing the economy. People are searching for a work-around for Congress’s folly that can prevent catastrophe. Was not that what the trillion-dollar coin idea was about, not a realistic monetary policy but an emergency work-around?
The notion that Congress creates inflation is strong, but is it true? Or is it true that inflation is a greater danger than panic at fraudulent value? The popular entrepreneurship discussions about “other people’s money” make it seem like there is a way to have debt-free money to enrich you. And from those who never seem to catch that method, it seems to be true that one can bankrupt himself to billions. No wonder that banana money seems perpetually attractive.
Ok, so by the broad definition of debt you use, there can be no debt-free money. It would contradict with the very definition of what money is. It was really a semantic issue that had me confused. Then you go to show that interest-free government money creation is essentially ZIRP(though I suppose you could leave the discount rate a bit above zero to drive out the excess reserves, or am I missing something?). It does seem to me that this proposal would favor the government balance sheet slightly more than recent ZIRP policy as its liabilities would bear no interest. The other area where the debt-free money folks have kind of a point is when they talk about the difference between coinage minted by the treasury and federal reserve notes. The slight difference comes from the cut taken by FED shareholders of profits on treasury bond interest vs the direct credit on the Treasury’s account when the FED takes the coins as a deposit. IIRC this amounts to several billions of dollars a year and has been enough to influence debates about introducing higher coinage denominations. As it is the FED has millions of dollars of unused $1 coins in storage because some congressmen wanted more coins of Sacagewea or their state’s token president minted.
So yeah, the “debt-free money” people who have invaded NC thinking they’ve uncovered some panacea for the nation’s economic woes are totally deluded. That doesn’t mean that their proposals, once you work out what they would actually mean, are either totally nonsensical or without any distinction from how the system currently operates. They just essentially boil down to abandoning monetary policy as a means of influencing the economy.
when a company issues stock it gets either money or an asset of equivalent value.
when a company transforms intermediate goods into finished goods it expenses the cost of those intermediate goods and recognizes an asset by debiting the value of the finished goods whilst crediting revenues/equity. (zero net change of equity)
Given that bonds (and taxes) are paid for by money(no yield perpetuity), then the private sector must first have the money. If you consolidate the treasury and central bank then on money creation you’d debit an asset (money) and credit equity (money not owed to a creditor).
If you don’t consolidate then the treasury can issue bonds and the central bank can buy the bonds thereby creating money for the treasury to spend and then tax. In this case for the treasury assets and liabilities go up, then assets and equity goes down and on taxation assets and equity goes up, this means that government looks indebted.
And banking instability is a feature not a bug.
The financial system is built to support the undertakings of society.
For every debtor there is a creditor. For every financial liability there is a financial asset. A financial liability is debt. Money is debt. The collateral that secures the debt (money) can be a hard asset or a promise. The value of a hard asset is determined by its resale value. The same principle applies to financial assets. The return on investment of any asset is determined,in part, by its resale value. The tax rate on income of the asset also, in part, determines the demand to purchase different assets. If the tax on hard capital assets is lower than a financial asset (debt/money) the desire to invest in the collateral will be greater than to invest in the financial asset (debt/money). If the demand to purchase the collateral is too much, the demand will drive the prices of assets higher and higher until a bubble is created. When bubbles implode the value of collateral decreases, and the value of the financial asset also decreases, creating financial crisis. To help prevent bubbles and financial crisis from occurring we need financial regulation AND automatic temporary tax changes to reduce demand for hard capital assets during periods of high asset appreciation to maintain full employment and price stability. I recommend the passage of the 2% Appreciation/Inflation Taxation Policy. For more information go to http://www.taxpolicyusa.wordpress.com
The Tsarist regime was gone, it was no longer the debtor of its bonds. It was dead.
The people holding those loans, the creditors were (and are) still around.
Many creditors.
No debtor.,,until 1996.
I am not a ‘debt-free proponent’. Nor do I “fantasize about the good old medieval days, when gold was money and men hacked up dragons as they rescued damstrels in distress”. But I still believe money should be backed by “real wealth”. (For that to happen, of course, you have to know what “real wealth” is; and that seems to be a problem for a civilization that knows “…the price of everything and the value of nothing.”) Wray proudly proclaims himself “agnostic” on the question of whether or not money IS actually debt, staking his belief that it ‘might be’ on accounting conventions.
Part of the peanut gallery’s frustration with Wray’s ideas may be their at times complete disconnect from historic and contemporary realities. Invoking Knapp’s state theory of money (i.e. the value of money comes from its ability to pay tax debts) is a bitter joke in an era when “only little people pay taxes”. For the 99% what insures the value of money “is the reasonable likelihood its possessor will be able to exchange it for wealth equal in value to what (s)he presumably had to give up in exchange for that money.”
Yves opines that people’s desire for “money” to be a stable store of value over time” ain’t never going to happen. (“Na ga happen, ever.”) As long as the world’s ‘financial engineers’ (the first of which were the fractional reserve bankers) are allowed to run rampant with their creation of ex nihilo (NOT ‘other people’s’) money she may be right. But there is nothing inherent in the process of capitalism’s “creative destruction” dictating this should be the case. On the contrary, over time money should GAIN value as the real wealth for which it was exchanged becomes less expensive to produce. As Michael Hudson correctly notes the only way this embezzlement of the public’s real wealth is if that ex nihilo money is invested in real wealth creation (which these days is more likely to be for public infrastructure than dividends or capital gains producing investments payable to economic rent collectors) allowing the embezzled wealth to be repaid.
The one redeeming virtue of gold is the limits its relatively finite supply imposed on ex nihilo money creation when fractional reserve bankers had to at least make some pretense of observing a ‘gold standard’. I contend that the value of gold depends much more on the public’s confidence in the banking and financial system than “on the structure of social relations “ Take a look at Nomi Prins’ “All the Presidents’ Bankers”. Prins seems to suggest that the end of Bretton Woods (BW) had more to do with American bankers’ desire to be free of the limitations on money creation imposed on them by BW than any inherent unworkability of the system. (After all, you could just keep raising the price of gold – though admittedly it would have exposed what was going on to the public.)
Some extremists might think fiat money (creatio ex nihilo) created out of nothing is worth nothing.
An ounce of gold may be worth 1000 units of that fiat money today.
Tomorrow, it may be worth 1,5000 units of that fiat money.
But if that fiat money is nothing (i.e. zero), 1,000 x 0 = 0, just as 1,500 x 0 = 0.
Maybe looking at how much an ounce of gold is quoted in fiat money is not such a good idea.
So, we are back to ‘an ounce of gold can get you 10 bolts of silk 2,000 years and also today.’
But as you say, ” over time money should GAIN value as the real wealth for which it was exchanged becomes less expensive to produce.”
That is, we assume gold doesn’t become less expensive to produce over time.
It’s value lies in its zero-improvement in efficiency.
In the mean time, with genetic modification, for example, we can produce twice as much GM wheat as we could with organic wheat.
And by investing in gold, that immune-to-productivity-improvement metal, we can preserve our purchasing power (or more – gaining value) and buy twice as much GM wheat.
I suspect the value of gold comes more from its chemical properties, i.e. that it is not very chemically reactive, than its cost of production. If you want to ‘store value’ far better to try it with something like gold rather than bananas. Yves suggests that gold’s “value depends on the structure of social relations” offering as an example the “necklace of gold beads” worn by young Vietnamese women. My example would be the hoards of gold held by exchange traded funds for a public getting nervous about the ability of its money to ‘store value’ until they need it.
When times are good, i.e. when capitalism’s ‘creative destruction’ is really roaring, as in dot.coms, etc, no one wants to hold gold. It is only when the ability of money to store value becomes problematic that gold becomes relatively more valuable – when permitted to do so by its ‘market makers’, the banks.
Debt is money. The more debt that is created in excesst of available products and services increases the odds that inflation will be created in an economy. When inflation is created the person holding the debt (money) loses value and the person holding the hard capital asset gains value. Our income tax can correct this imbalance in value annually if we reduce the tax on income derived from interest annually, and at the same time reduce the deductibility of interest paid during year of high asset price appreciation/inflation. In this way money gains back some value lost to inflation. The tax increase the asset credit purchaser will pay will replace the tax the creditor will not be paying. Therefore the government will not lose revenue. The creditor will have more confidence that the money he has loaned will be returned without losing excessive value. This confidence increase in the value of the debt (money) will allow the economy to think long term creating a better, more stable economy. For more information go to http://www.taxpolicyusa.wordpress.com
Economists decided 2% inflation is good for us, and that civilization is too stupid to deal with minus signs and the negative half of the real number system. Hence, we are now grappling with the need for a negative Fed rate rather than everyone (and business) having their existing loan rates indexed down (without paying re-fi costs) for naturally occurring deflation due to productivity and technology gains. (which are due to our hard work) And our purchasing power would go up, even if you can’t get a raise outta da stingy boss.
Pertaining to money and related liabilities, it seems we have gone down the rabbit hole and find ourselves in a hall of mirrors and complex maze of interconnected but competing interests and global carry. Will be interesting in a Chinese curse sort of way to see how purchases of equities through ETFs, aka lesser quality liabilities, by Kuroda’s Bank of Japan plays out. Seems t/b a test, kinda like how products are test marketed to see if there will be adequate public acceptance. But does that really matter?
http://www.bloomberg.com/news/articles/2015-12-20/the-bank-of-japan-s-2-5-billion-plan-to-buy-non-existent-etfs
Also wonder to what extent various Sovereign Wealth Funds are now driving stock market prices, and where they got their money? Seems SWF assets exploded higher to the tune of ~$5 trillion along with Western banks’ QE. At what point on the spectrum does government ownership of formerly privately owned corporate equities formally tip the definitional balance away from capitalism… or does it? Has that line already been crossed?
Looking fwd to Part 3. Thanks.
In communist countries, the government owns all major factors of production.
I think they did it by decree, often, if not always, without compensation.
Less forcibly, they could also just create money, like the Bank of Japan, and buy them.
“Ganbare, Kuroda-san!!!!”
“You can do it. You’re almost there.”
Perhaps a blend is emerging:
http://www.bloomberg.com/news/articles/2015-11-04/the-no-1-business-rule-of-this-billionaire-and-buddhist-priest
Thanks!
From the article:
To ‘their growth.”
More broadly – the economy of the people, for the people, by the people.
Education to help the student live a healthy and happy life, not molding him/her into a cog in the giant machine.
The economy should be about you, not about the GDP, its growth nor efficiency.
“A robot that can do everything? Everything? We all are out of work? That robot is going to be able to do everything? Well, the inventor is of course history’s smartest genius, but what about us? All of us?”
One of the things Steve Keen says is that because we have double entry bookkeeping our sovereign liabilities are also our assets and can be nullified on both sides of the ledger. And the money having been spent on a better society, money does not devalue. Wray says there are 2 parties to a bank loan but only one in government spending. And Wray also says that since we no longer honor our obligations gold it is no longer clear if Federal Reserve notes are a liability of the Fed – of us. The mention of Seidman’s proposal to just let the Fed do Fiscal stimulus directly (tax rebates or fiscal projects) sounds like the most efficient way of achieving a balanced economy – but for sure Congress is jealous of it’s pursestrings and will not allow the Fed to do fiscal ever. So the Fed’s hands are tied by a mandate that spins in circles and we never achieve “stability”. So is the Fed screwing up or is Congress? My guess is it’s Congress. Can anyone even imagine congress writing off both sides of the ledger?
Also, though fiat is necessarily a liability of the issuing government there is no requirement at all that it pay interest. Indeed, such interest is “corporate welfare” as Professor Billy Mitchell attests.
This whole discussion reminds me of why I decided to dump Econ. as my major during my senior year in college.
Sad. You coulda transferred to UMKC and gotten all foamed up with some friendly coeds:
http://info.umkc.edu/unews/umkc-students-participate-in-the-creation-of-a-campus-tradition/
Go Roos!
This trenchant study analyzes the rise and decline in the quality and format of science in America since World War II.
During the Cold War, the U.S. government amply funded basic research in science and medicine. Starting in the 1980s, however, this support began to decline and for-profit corporations became the largest funders of research. Philip Mirowski argues that a powerful neoliberal ideology promoted a radically different view of knowledge and discovery: the fruits of scientific investigation are not a public good that should be freely available to all, but are commodities that could be monetized.
Consequently, patent and intellectual property laws were greatly strengthened, universities demanded patents on the discoveries of their faculty, information sharing among researchers was impeded, and the line between universities and corporations began to blur. At the same time, corporations shed their in-house research laboratories, contracting with independent firms both in the States and abroad to supply new products. Among such firms were AT&T and IBM, whose outstanding research laboratories during much of the twentieth century produced Nobel Prize–winning work in chemistry and physics, ranging from the transistor to superconductivity.
Science-Mart offers a provocative, learned, and timely critique, of interest to anyone concerned that American science—once the envy of the world—must be more than just another way to make money.
http://www.hup.harvard.edu/catalog.php?isbn=9780674046467
Skippy… Always a treat to see those that complain about the state of stuff… blind to their own agency… self fulfilling prophesy thingy…
I hate to add fuel to a debate about definitions, but here goes. Merry Christmas!
I think that this discussion is largely within the wrong universe. The right one is the universe of politics. And in that universe the “debt” in “debt free money” is well defined. It is the amount of money that is reported as gov’t debt. Any money that the gov’t creates and spends that is not reported in that number is debt free money.
Is debt that the gov’t owes itself reported as gov’t debt? One might think not, but that is a political decision. Are gov’t issued consols debt? One might think so, but they are not considered so, by current accounting. Accounting, like nearly everything else, is political. A ten trillion dollar coin may be debt, but it is not reported as such, and it would be debt free money in the political universe.
The question of debt free money is political, because the gov’t debt scares the bejeesus out of average people, and even economists argue about whether it is a burden, and to whom. The connotation of debt as sin is powerful.
I would like to share a slightly modified quote I recently read that might shed some light on the heart of the disagreement here.
But before I do, I’d like to make clear (lest I be categorized as a DFM ideologue) that I personally do not agree with the reform proposals of the DFM crowd. I think they are too restrictive and too centralized for a diverse, dynamic, open-ended, technological, industrial economy. I’m more in line with monetary reformers (of which MMT and NC are apart of) who, in addition to other regulations designed to stem banking excesses, favor a banking system with a significant public option or state-owned banks.
But anyway, here is the slightly modified quote:
“[‘Money’] and [‘Debt’] are both what have been called ‘suitcase’ words. They are words into which we pack many meanings so that we can talk about complex issues in a shorthand way. When we look inside these words we find many different aspects, mechanisms, and levels of understanding. This makes answering the perennial question of [‘What is Money?’] fraught with danger…”
This is why, although I agree with MMT on many things, I am sympathetic to those who are resistant to their definition of money (as opposed to the accounting details of how current monetary systems work). Because given the nature of these “suitcase” words, people can emphasize or focus on different aspects of the complex phenomena shorthandedly referred to by them, effecting how they define them. Some people focus more on the accounting treatment and other ways money is like a debt, whereas other people focus more on the power dynamics and other ways money is like a resource (albeit a virtual one) or a unique type of power.
Obviously, both perspectives are true to some degree, given the complexity of the phenomena involved and the unavoidable ambiguity of the shorthand terms, which is probably why these debates are so perennially “fraught with danger.”
Great quote Ernest:
“[Money] and [Debt] are both what has been called “suitcase” words. They are words into which we pack many meanings so that we can talk about complex issues in a shorthand way. When we look at these words we find many different aspects, mechanisms, and levels of understanding.”
This quote also raises the broader philosophical issue of the relationship between words and things and how this relationship is even more fraught with danger for differing economic frameworks partially seeking hegemony through a continuing battle over which framework is more accurate in its linguistic descriptions of monetary reality.
What if the vocabularies that we invoke to register our observations on debt and encode our reflections on money can never be conclusively and authoritatively shown to be the only relevant vocabularies for this subject matter?
If it looks like a word salad, it is a word salad.
Jim, I agree.
The danger does seem to increase when hegemony and privileges become a factor, or when how something is defined or labeled can play a subtle part in a drive for or rationalization of hegemony (and I hope nobody construes this as any kind of intimation of ulterior motives by any side involved in this debate, just agreeing with what I thought was a good related point.)
Also agree with your second point. It seems to be the nature of many of these “suitcase” words, given the complexity and often “emergent” nature of the underlying phenomena involved, that their definitions are often based on concepts that are themselves composed of subtle — and often not readily apparent — analogies and combinations of analogies (as popularly explained by writers like Lakoff and Pinker), and the various analogies each capture or emphasize different aspects of the underlying phenomena, making them each valid ways of seeing it to some degree, and by no means the only way.
In this debate, it seems both sides have alighted on one of the various analogies that we use to understand monetary systems and sees it as definitive and exclusive of others.
Can you provide an explanation of what monetary reforms MMT are proponents of? I certainly have been unable to locate proposals for reforming the monetary system within their writings.
I would like to share a slightly modified quote I recently read that might shed some light on the heart of the disagreement here.
But before I do, I’d like to make clear (lest I be categorized as a DFM ideologue) that I personally do not agree with the reform proposals of the DFM crowd. I think they are too restrictive and too centralized for a diverse, dynamic, open-ended, technological, industrial economy. I’m more in line with monetary reformers (of which MMT and NC are apart of) who, in addition to other regulations designed to stem banking excesses, favor a banking system with a significant public option or state-owned banks.
But anyway, here is the slightly modified quote:
“[‘Money’] and [‘Debt’] are both what have been called ‘suitcase’ words. They are words into which we pack many meanings so that we can talk about complex issues in a shorthand way. When we look inside these words we find many different aspects, mechanisms, and levels of understanding. This makes answering the perennial question of [‘What is Money?’] fraught with danger…”
This is why, although I agree with MMT on many things, I am sympathetic to those who are resistant to their definition of money (as opposed to the accounting details of how current monetary systems work). Because given the nature of these “suitcase” words, people can emphasize or focus on different aspects of the complex phenomena shorthandedly referred to by them, effecting how they define them. Some people focus more on the accounting treatment and other ways money is like a debt, whereas other people focus more on the power dynamics and other ways money is like a resource (albeit a virtual one) or a unique type of power.
Obviously, both perspectives are true to some degree, given the complexity of the phenomena involved and the unavoidable ambiguity of the shorthand terms, and arguably defensible to some degree (regardless of current conventions of double entry bookkeeping).
My former financial adviser told me that ownership of stock is actually not an asset but just “exposure to risk.” Which makes all the rest make sense to me. I think.
You missed the statement both Wray and I made.
Any financial asset is someone else’s financial liability.
Stock is an asset to you. It is a liability of the company, or more accurately, a residual claim once all the holders of liabiilties have been paid. It is an obligation of the company.
Yves, I’ve long since got the message, have known in every fiber of my being that stock is an asset since I bought shares of Wrigley and Ma Bell with my paper route money in the late 50s and early 60s. My comment was intended to be purely ironic, related to how the characterization of how Dumb Money gets to take part in the Great Market, “risk exposure” rather than “investment in good companies,” so please do not add me to your list of nonbalance-sheet Annoying True Believers…
And may you and Lambert and all you care about have a peaceful and untroubled Christmas and coming year! God bless us, every one, except Dimon and Blankfein and Schauble and Netanyahoo and Obama and the Clown Car and NATO and Boko Haram and the Caliphate and General Atomic and Lockheed Martin and DowDupontMonsanto and on and on…
I know that. Should have added snark tag. Though in present climate that might not even have helped. Please don’t shoot those who agree with you.
Merry Christmas and a happy and peaceful new year to all.
Gee and I thought this gold coin I have in my hand was a “financial asset”, the Constitution says it’s “money” and last time I checked that was a financial asset…but I can’t for the life of me figure out whose liability this gold coin is.
Whoever it is, that’s one *very clever* sucker indeed.
hahaha. I think it was Lord Blankfein that blurted out, post GFC, “Our clients come to us looking for risk!”. Sometimes CEOs say things without running it past the PR folks first.
Lord Blanketfail and his four horsemen of “money”…interest rates, taxes, lawsuits and inflation…
Merry Christmas Mister Potter…
and to all a good night…
Precisely.
It’s a mystery why someone as sophisticated as Yves could make such a glaring mistake.
Unless gold is not being considered a “financial asset”.
Some coincidences:
Double entry bookkeeping was brought to the west by Luca Pacioli, as associate of Leonardo Da Vinci, who also brought the rule of 70 (or 69 or 72) which is a formula for calculating the doubling time of an investment or loan at a given interest rate.
The discussion here rolled toward the real problem which is one of semantics, the definition and use of certain words, most importantly debt. Double entry bookkeeping was a process to increase accuracy and avoid mistakes in the keeping of accounts, nothing else. It has no relevance to any reality or in any discussion except that is widespread in use. It would benefit the discussion if the precise definition of terms, which was alluded to here, could be continued and perhaps a common language would result.
Another coincidence worth noting here is with hat checks. If a large group of people checked their hats and were given a number but the hat checker did not mark any of their hats, the odds that no one would get their own hat back is about 37%, Which is 1/e, e being 2.718.. the base of the natural logarithms. This is closely related to the Rule of 70. e is the yield on a loan at 100% interest compounded continuously over the life of the loan.
The formula for compound interest is at the root of formulas for organic growth and decay. It was introduced into science via knowledge of money and interest. Perhaps science could now return the favor.
Money is Game. Not money is a game or money is best looked at through game theory. Money is Game. It is the game on which all other games are based. Let’s play two.
—-……Either the Fed or the Treasury must pay interest on debt to avoid ZIRP. We can have the Fed issue the debt rather than the Treasury, but it is still debt and it still pays interest. Or we have permanent ZIRP.—-
Why is Wray writing pages and pages without ever mentioning that Warren Mosler (founder of MMT) advocates permanent Zero interest and also to stop issuing Treasury ? Therefore, according to the founder of MMT and according to Wray’s own logic, we can have Debt Free Money.
Debt Free Money means simpy that you do not issue gov bonds to finance public deficits.Wray is confusing ad obfuscating a simple issue.
You are correct, Giovanni Zibordi. This whole argument is just a waste of time. Nothing of value will come from it, and probably nothing of value will come from MMT either.
Some of this discussion is beyond my comprehension, but as a long-time bookkeeper/accountant I don’t believe the act of issuing money currency has much to do with general accounting principles that keeps track of (mostly) tangible assets and (mostly) tangible liabilities. Money seems more of an intangible asset that can be easily destroyed (eg, via losing a war and the currency is declared worthless, inflation, etc).
A human economy may function much better with the introduction of currency, just as the wheel and other technology makes society function better, but none of these human inventions can or should be quantified as an “asset” or “liability” with some sort of value that is either owned by someone, or owed to someone. Money is merely paper or trinkets we use to facilitate human-to-human transactions.
What I and others object to is the payment of hundreds of billions of of wealth (interest) to the richest 1%ers just because of the mechanism the government currently uses to issue currency. I also object to the government using regressive taxes (sales, VAT, payroll type taxes) to take wealth from working people, some of which is paid to very wealthy 1%ers in the form of interest. It appears we owe this interest because the government issues currency through a private federal reserve bank that for some reason demands the payment of interest. This is the process that needs attention – ie, stopping the issuance of currency in a way such that we have to pay billions of dollars of interest to the favored 1%ers.
“They fantasize about the good old medieval days, when gold was money.”
Never existed, basically. For the majority of the European medieval period most of the gold (and to a lesser extent the silver) was locked away in places like churches, not doing much of anything other than being shiny. This only changed in the Renaissance, when the Spanish flooded Europe with New World gold (debasing the value of gold in the process. And the natives they took it from didn’t value it much other than as a trinket. So much for inherent worth…) The bulk of day-to-day transactions were done with tokens, mostly tally sticks. The tokens in and of themselves had no value, they merely recorded debt/credit and measured value as a tool of comparison. Personal honor and trustworthiness was synonymous with credit. In England this eventually evolved into the King’s Tally under Henry I (circa 1100), which had some value in and of itself because it was accepted as tax payment (surprise surprise, just as MMT claims). These remained in use for 700 years, until 1826, when the Exchequer stopped accepting them. Afterwards the sticks were literally destroyed by burning (accidentally burning down the original Parliament building in the process).
As with so many things economic, if you want answers you’re mostly going to find them in other fields, like archeology and sociology. Economists mostly don’t understand economics, it seems. Economic historians tend to be much better at it though. It also doesn’t help that much of this information isn’t to be easily found on the internet, instead residing in expensive academic books like this one http://www.amazon.com/The-Economy-Obligation-Culture-Relations/dp/0312215657.
Whenever I read about historical debt/credit systems like this, I always want to know more about the nature, in these societies, of law enforcement (if any), debt enforcement, and the use of violence when conflicts over debt would arise.
Was it closer to modern states, with a strong, centralized legal system and law enforcement apparatus that effectively monopolized the legitimate use of violence, where most conflicts over debt were mediated by central authorities of some kind?
Or was debt enforcement and violence more decentralized and anarchic, where if you had a problem with a debtor who wouldn’t pay, it was your job to enforce the debt by any means you could devise?
And I also wonder what is the scale of these societies with these kind of debt/credit systems? Are they of a population size and geographic reach where transactions often occur between strangers, where there is no prior history with each other and where tracking someone down after the transaction can be difficult or impractical?
Loan sharks and bookies got it organized long since. And drug economy, and the sneaky Pete’s and jackals. Vig is an entitlement after all, and “legal enforcement” except at the retail level is mythology.
That’s a good one, I was thinking about gold as a banana without the negative interest rate of physical decay
That’s the thing. Wray (or perhaps more accurately, some people using MMT ideas) doesn’t address the implication of distinguishing between money and wealth. Once we use fiat money to sever the link between ‘medium of exchange’ and ‘store of value’, we cannot later claim some sort of buffer stock can serve as a price anchor. That is intellectually dishonest.
The whole point of sovereign money is that monetary prices of real wealth have no price anchor. To assign a price anchor is to say that money does have a store of value function.
And that is the huge blind spot in some types of policy advocacy appealing to the MMT Insight. It focuses on the quantity of money when the quantity of something that is not a store of value is completely and totally irrelevant. What matters is the quality – how the money is spent. If the money is spent unwisely, we end up with prices that are too high, from housing to healthcare to higher education, and government programs out of control, from GWOT to TSA to the drug war.
I cannot help but note the irony here. It is quite difficult to get a JG/ELR/FE proposal with specific details. Even securing the most basic elements of a plan, like specific dollar figures for revenue and taxation for the federal budget, or a specific schedule of wages and benefits for JG workers, or the criteria by which to determine which public jobs are JG and which are not JG, or the management structure for how specific jobs are to be created and supervised, is like pulling teeth.
What about carbon cap and trade schemes? Do these involve creating debt free money? It looks to me like credits are created and can then be traded. There is an incentive to hold them if you wish to pollute. Thus they have money-like qualities but are created debt free. I think this is an interesting question because there are political purposes to which these schemes could be put.
“Once a corporation is formed by filing articles of incorporation, the people or entities involved who will own the company are issued shares of stock in exchange for their capital contributions, such as contributions of cash or services. The corporation is not required to issue all of the shares that were authorized in the articles of incorporation. However, the holders of shares of stock in the corporation are its owners, and their ownership percentage is determined by the percentage of shares they hold of the total number of shares that have been actually issued by the corporation, called outstanding shares.” from Who Legally Owns a Corporation? [bold added]
Since the stock holders are the owners of a corporation, they already OWN the equity of the corporation (if it exists) and thus are OWED NOTHING from the corporation except their rights as co-owners.
Therefore not all financial assets are someone else’s liability. Therefore Yves is mistaken when she says otherwise. Therefore debt-free money is possible and already exists as shares in equity (common stock).
You really don’t understand accounting at all. You’ve made it clear you don’t know how to do T accounts, which are the foundation of accounting.
The process you describe demonstrates PRECISELY why equity (which is an asset to someone who owns stock) is a liability to the company. Go do the T accounts in double entry bookkeeping.
When corporation is formed, it’s an empty shell. No assets, no liabilities.
Let’s say this company issues shares to the shareholders for $1000.
The $1000 goes into the company as an asset on the ASSET side of the balance sheet.
A corresponding entry of $1000 is made for “shareholders equity” on the liability side of the balance sheet to represent their ownership interest.
The owners have effectively exchanged one asset ($1000 in cash) for another ($1000 in equity).
I think your beef is with double entry bookkeeping, not Yves. This is a semantic argument about debt, not a substantive one. Accounting is relative and debatable (kinda like physics). From the perspective of the corporation – which is what the balance sheet is – those rights of the co-owners represent an obligation, a liability, an expectation, a debt, whatever.
So there may be interesting discussion here on the substance, but the semantic route doesn’t accomplish anything. What is the implication of your position? In other words, why does it matter whether debt free money is possible? What does that allow us to do in the real world?