Yves here. Given the fraught turn the news out of the Middle East has taken, I though it might be time to balance our coverage by returning to our Modern Monetary Theory discussions, for both the benefit of readers who know the terrain and newbies. The implications of repaying bank loans (and writing off principal in loan restructuring) are not sufficiently well recognized, as in they result in a shrinkage of money supplies.
Mind you, loose money will not do much to stimulate economic activity; businesses decide whether to expand or not based on conditions in their industry and niche. However, the ones that do well are ones where interest is one of their biggest costs of business, as in financial institutions and leveraged speculators. But tight money can constrain commercial operations; it can become costly or even impossible to secure needed loans.
This asymmetrical operation of monetary policy is perversely not well understood. It used to be that the Fed acted as if understood that; when it would drop interest rates in recessionary times, it would keep them low for only a quarter and then start tightening. It was under Greenspan, in the dot-bomb era, who took the unprecedented step of keeping interest rates at a negative real interest level for a full nine quarters. Greenspan was obsessed with the stock market and believed (contrary to any solid evidence) that the stock market plunge would afflict the real economy, so he was eager to goose asset prices. He did, but a big beneficiary was residential mortgage lending….and we know how that movie ended.
Richard Murphy has been producing short videos that provide accessible primers to Modern Monetary Theory findings and other banking and economic topics. I hope you’ll circulate this post widely.
By Richard Murphy, part-time Professor of Accounting Practice at Sheffield University Management School, director of the Corporate Accountability Network, member of Finance for the Future LLP, and director of Tax Research LLP. Originally published at Fund the Future
I have published this next video in the Economic Truths series this morning. In it, I argue that if bank loans create money, then repaying those loans destroys money. The money in question literally ceases to exist. That is one of the hardest economic truths to get our heads around.
The audio version of this video is here.
The transcript is:
Repaying bank loans destroys money.
It’s another of those economic truths that doesn’t make a lot of sense until you really think about it. But it has to be true because all the bank created money in the UK gets into our economy because the bank lends money to borrowers.
When the bank lends the money to a borrower, there’s an exchange of promises. I’ve explained this in other videos.
The bank says to the borrower, I will lend you £10,000. And the borrower says, I will repay you £10,000. It is that exchange of promises that are recorded on a keyboard. One is a positive number in a current account. One is a negative number in a loan account with the two together adding up to zero, indicating that this new money is made out of thin air.
And as a consequence of that process, this new money is available for the borrower to spend. And they do spend it. And as a result, as again I’ve explained in another video, savings are created. The loan eventually must give rise to a savingbecause the banking system has to balance.
So, what happens as a consequence of the loan being repaid? The money that was created is destroyed.
I stress that word destroyed. It just doesn’t quietly disappear. It literally no longer exists, because the promises that created that money have been fulfilled. If money is about a promise, and that is all it is because all money is debt, then once the debt is repaid there can be no more money. It is as simple and straightforward as that.
The money that did exist because the loan was created. now no longer exists because the loan has been repaid.
This has enormous consequences, however, for our economy because what you can immediately see is that when we are dependent on only two types of money in our economy, one created by the government which will be the subject of other videos and the other – probably the bigger part in most economies including that of the UK – created by commercial banks as a result of their making loans to people like, well, you and me, we are entirely dependent on this money created by loans. Then what happens is that if all loans were repaid, we’d have no money left.
That is why we live in a debt-based economy. Because we have no other idea about how to create the money we need to undertake our day-to-day transactions. And, therefore, we are dependent upon people continuing to borrow money from banks in the economy to make sure we have a continual supply of new money to replace that which is repaid day-in-day-out by borrowers to banks, with their loans being cancelled as a consequence and money disappearing as a result. So, we have to live in a credit economy, and we have to live in an economy where people borrow.
But that’s really worrying because, as we all know, in economic downturns, people don’t borrow. They lose the confidence to do so, they don’t go out and spend, and as a result, the money supply falls. And that is why we get recessions.
So, what we need inside any economy is a system of balance, which is that when the economy is doing well, and banks create lots of money because people want to borrow, we have a situation where the money supply is strong. And therefore, the government doesn’t necessarily need to inject a lot of money into the economy.
When the economy is weak, when people don’t want to borrow, when there’s a threat of recession, when people feel it’s too risky to actually take on another repayment of whatever the loan might be for, then the government has to inject more money into the economy to make sure it all works.
How do we know this happens, and what’s the evidence? Well, it’s very simple, really. After 2008, when there was the global financial crisis, people did not want to borrow. Banks were at risk, they looked pretty dubious, people felt very nervous about the state of the world, they didn’t want to go out and borrow money to buy anything, and therefore, the government had to create vast quantities of new government-created money to inject into the economy to simply keep it moving.
Quantitative easing did that. That’s what it was for, it made good the shortfall in bank lending to ensure that there was enough credit money available in the economy to keep it functioning.
And the same happened all over again when we had COVID. Because for exactly the same reason, people weren’t borrowing. They couldn’t even get to a shop to borrow, to buy, to do anything else. And, therefore, the government had to shut down. There was nothing unusual, nothing wrong, sinister, or to be worried about about this process. It was just the government filling in where the commercial banks frankly failed, and people didn’t want to borrow.
And they had to fill in because the commercial bank loan repayments were going on because that’s what the loan agreements required.
So, the economy was at risk of running out of money and the government made good the shortfall.
The reason why there was that risk It was because when a commercial bank loan is repaid, whether it’s a loan, whether it’s a mortgage, whatever it’s for, when it’s repaid, the money that was created by it is destroyed. It’s gone. It’s disappeared. It’s as if it never existed because the promises that created it have been fulfilled. Over and done with. Finito. Ended.
And you have to understand that if you’re to understand why we live in an economy where credit has to always be produced or the government has to make good the deficit and that there’s nothing sinister about the government doing that. It’s just necessary to make sure there’s cash in the economy to keep us all going.
We’ll deal with government money creation in another video. For the purposes of this video, the fundamental point is repaying a bank loan destroys the money that it created.
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I’ve been commenting on the various UK-based YT channels that I watch (e.g., PoliticsJOE, Novara Media) that were covering Chancellor Rachel Reeves’s speech in the Commons this week that they really should have had Richard Murphy on to see what he had to say about it (and, in fact, this is what he had to say).
In the process I’ve been watching his latest series (launched just this week) Economic Truths, which, along with his other videos (going back four years) are, as the intro states, accessible primers, in fact, very much so. I would highly recommend them to anyone. The guy should have at least a hundred times more subscribers than he has.
Thank you. I too watch those channels. I told my mother before 4th July that the guy who was simultaneously a great Labour head of the local council but was blatantly unqualified to be our new Member of Parliament and I would absolutely not vote for him. I spoilt my ballot. Mum thought I was being deliberately obstructive. Yesterday she suddenly reversed course: Labour are “falling down a hole”. TOLD YOU SO. *sigh*
Have I got News For You platformed Boris Johnson and hey presto we got him as PM. They did a “special” about his downfall. Sorry, I don’t get it and won’t watch you. You’ve platformed Nigel Farage to get eyeballs on screens more recently. If Reeves carries on like this and we get a Reform UK landslide (kinda like what happened to the Canadian Liberals and what their defeated Conservative opponents did in merging with their “Reform” party in the 1990s – look it up) then I’m gonna do a mega “TOLD YOU SO”.
We’re not even a month into the new Labour govt and we’re being sold down the river. It took me TWO hours to get the UK govt TV licence website to load to enable mum to renew the licence. Just another example of crappification.
The big problem is that so much of MMT or MMT-adjacent thinking (there seems to be an increasing number of variations) is inherently counterintuitive. I’ve had many discussions/arguments with people over this, and even very well tuned in, financially literate types can struggle. I once spent an hour with an accountant acquaintance trying to persuade him of exactly the point Murphy very elegantly makes above about bank loans, and despite the fact that he (reluctantly) agreed with the core point that loans are not derived from savings, it still didn’t change his mind fundamentally.
This of course is not an excuse for Reeves, who seems to be smart enough to know exactly how things work, but I have a tiny amount of sympathy for her in that it is extremely difficult to change such an ingrained narrative, especially in the face of a hostile press who not just don’t understand, they wilfully choose not to understand.
Ultimately, this isn’t a battle that will be won over who is technically right or wrong about the nature of money, but who creates the best narrative. Keynes of course was right 70 years ago when he pointed out that if something is within a societies resource capacity to carry out, then money is (literally) not an obstacle. Keynes so often was right about nearly everything on economics, which is why of course pretty much the entire post war academic economics project was devoted to discrediting him.
I think part of the resistance to a proper understanding of money (which is to say that it is a system of credits and debits as registered upon a ledger netting to zero) is that almost without exception our very first encounter with it as children is with the government issue tokens (coins and bills) which are themselves only a very tiny fraction of the system as a whole. A perception is then imprinted upon us that money is an object (a material thing which can be piled up or hoarded) rather than a network — in this case a network of obligations which is designed to facilitate public purpose (which is why money is issued and regulated by the state rather than by individuals) in what is essentially a highly sophisticated and flexible form of corvee labour (with fiscal policy/taxation rather than time served). That “imprinting” is very sticky, raising all sorts of barriers to understanding the system properly — we’re like the blind Indian who is holding the elephant’s trunk and declaring that we have grasped a snake.
I also find it helpful to think of what we use in our day to day transactions as “bank credit” or “tax credits” rather than “money” since the latter term has far too many different meanings to different people to be very useful for accurate communication.
This is the syndrome described in Venezuela as “They have changed their minds, but they have not changed their hearts.”
When I first learned about MMT, it felt like selectively turning my brain inside out. Yet if you look at the T-account workups, what they show is beyond dispute.
Most people aren’t willing to accept fundamentally new ideas as adults. Hence the Max Planck saying about science progressing one funeral at a time.
The fallacy of MMT arguments can be exposed by this FT chart showing QE and asset prices correlation.
If inflation was defined as it should, CPI+ asset prices, then QE would be seen for what it was, money printing with severe cantillon effects that enriched the asset holders beyond imagination.
Now the rest of us pay the price through inflation.
The only way for the QE to have any moral standing is if the FED brought her balance sheet to where it was before QE, under one trillion.
We know it will never happen and in the next crisis it will expand even more.
Because if money is a promise, then a promise only engages those who believe in it, and we would very rapidly be living in a society of liars and suckers…or maybe we are already there.
https://www.ft.com/content/ddf57993-3c63-305c-a0b1-c7d6548a3e43
I can’t see the FT chart but I assume it shows share prices rising with QE. MMT, by doing the accounting, says that QE is just a shift of balances from a savings account (bonds) to a current account (reserves). If you count bonds as a kind of money then no money was created. Non-banks who had their bonds bought now had liquid money needing a place to go, so asset prices rose.
The non-MMT argument was that the banks’ increase in reserves would enable them to lend more. This is bogus, banks can’t lend reserves except to each other.
One way inflation is caused is by too much spending. No amount of new money will have any effect if it is not spent.
Trust in the promises of money runs in a chain through the banks to the government. The government promises to put you in jail if you don’t pay your taxes with the government’s money whether you believe in it or not.
Thanks, the “narrative” point is crucial. Round here, it is SO obvious that the “GDP per capita” quoted rates of the UK are garbage and massively skewed by London. The narrative round here is “we’re screwed and that New Labour MP ain’t gonna do anything to change things”.
People here KNOW there is something profoundly wrong: but, as you say, they are no better than our MP at understanding why MMT could “activate” the huge amount of unused real capacity to rehabilitate this corner of Nottingham. So they “kick back” by voting BREXIT or REFORM. Labour is not part of the solution, ergo it is part of the problem. I’m glad I’m not the only person who struggles to explain MMT to peers. I can get as a far as the macroeconomic accounting identities but struggle when I get into the details.
The proof of the pudding is in the eating, as they used to say. And these first few weeks make me think Labour will get an almighty shock at the next election unless they make a radical course correction, involving being bold to “change the narrative”. I saw this happen in the 2nd Blair govt (2001-2005) when Gordon Brown basically turned the funding taps on after 4 years of “showing economic competence” *rolls eyes”. People round here will most definitely NOT give a 4 year term to Labour to repeat that trick. Deliver within 3 years or you’re toast.
NB this was DEFINITELY written as a reply to PK. I know NC is not to blame – Yves once kindly took time to explain how certain aspects of the moderation process are not in her hands. I tried to delete and repost this as reply. This is 2nd time this has happened in a month.
I strongly suspect crappification is hitting skynet :(
It’s a quirk of the commenting system, not crapification of Skynet.
If you write something in the comment box, it’s “sticky”—it will be “remembered” if you cancel the reply until you click off the page or refresh it. (That could be handy if you inadvertently cancel the reply.)
But it’s overly sticky: if you cancel the reply, whatever you wrote will then appear automatically in the general comment box at the bottom of the page. And, if you click Reply to another comment on the page, what you wrote will appear as a reply in that comment box that appears—and if you cancel that reply, what you wrote will also appear automatically in the general comment box at the bottom of the page.
If you are replying to the bottommost comment and what you wrote appears in the general comment box via one of those scenarios, it’s easy to mistake that for replying to the specific comment because the specific comment appears right above it. (There’s a difference between the two: the reply to the specific comment has above it Reply to [Name of Commenter]; the general comment box has Leave a Reply* above it.)
So probably what happened in both cases was that you did either one of those scenarios, saw what you wrote in the general Leave a Reply comment box, and posted that. The position of the comment you posted intended as a reply (i.e., directly below the comment you intended to reply to) is consistent with that.
*It probably would be better if the wording for the general comment box said Leave a Comment because you’re not really replying to anyone.
The script could clear (set it’s value to an empty string) the single textarea element it is using when user clicks “Cancel reply”. A minor, but logical thing to do. Also often “not worth the payoff” complicated to add afterwards to live website.
On the other hand, I’ve noticed that if you notice you posted wrong reply to wrong place, you do can use the edit feature (while it’s available) to remove all text then click “save”, and the whole comment of yours will disappear to the ether like it never was.
Yeah, that was how I thought it worked until I played around with it. (I did know about the text in the textarea element reappearing in the “general comment” text area but it took a few moments to figure out how it worked exactly.) And, sure, you can use the edit feature while available to clear the text entirely and save. (Maybe “delete” works also.)
I just wanted to let Terry know that he wasn’t going bonkers and to let people know generally to not assume that just because they started with a reply to a specific person doesn’t mean they end up with that—and it’s probably a good idea to check before you click Post Comment or while you can still make changes.
Hmm. Delete works to clear the text in the textarea element but not as reliably to actually delete the comment.
I wrote the above comment, decided to test if Delete worked (so I didn’t have to say “maybe”—why not know for sure?), posted it and then deleted it—the textarea element did clear—and then posted the one below, and here they both are! Oh, well.
Yeah, that was how I thought it worked until I played around with it. (I did know about the text in the textarea element reappearing in the “general comment” text area but it took a few moments to figure out how it worked exactly.) And, sure, you can use the edit feature while available to clear the text entirely and save. (Clicking Delete works also—the text doesn’t reappear elsewhere so it functions like we’d assume Cancel reply would—so copying all the text and then deleting the misplaced reply might be even easier.)
I just wanted to let Terry know that he wasn’t going bonkers and to let people know generally that just because they started with a reply to a specific person doesn’t mean they end up with that—and it’s probably a good idea to check before you click Post Comment or while you can still make changes.
A logical flaw in these slippery thoughts: the money that was created by it is destroyed. It’s gone. It’s disappeared. It’s as if it never existed because the promises that created it have been fulfilled. Over and done with. Finito. Ended.Here’s one more point of view. The money that was created is not all gone. When it is paid back, a bigger amount returns to the bank than the amount taken out. Unless banking = philanthropy, and no one thinks that, the payback is bigger than the loan due to interest. So now, this not-sum-zero fragment is real, and either a profit or some other category in MMT. But, MMT does not mirror reality.
Sorry, that is not correct.
There is time value to money. A dollar now is worth more than a dollar in the future.
And interest (to reflect the time value) is not repayment of principal. Paying interest does not reduce the balance of the loan outstanding.
newbie to this “class” in MMT. complete financial dufus. well not complete, thanks to yves. i do understand the paradox of thrift, which i learned about here during the Great Recession.
could one say that the money that has been borrowed and then used to buy something thereby has ceased to exist AS MONEY but has been transformed into (or its value has been transferred to) whatever was bought with it? such that the money that is then used to repay the loan actually doesn’t really exist either? or if the borrower has had to work to earn to pay the mortgage, it represents the value of their labor?
… and if it’s my home, by paying off the loan i buy another form of value, equity? is this a form of money creation?
i understand this may be too OT for today’s lesson.
Modern monetary theory is – as most economics – mostly focused on the movement of money. MMT is just more empirical in that it looks at what the transactions actually look like at the accounting level, rather then trying to deduce it from the 10 000 feet level.
The money in the accounting system hasn’t as such been transformed into your house. (Unless you used glued together stacks of bills to build it.)
What the loan did was creating the money at a time so that the house could be built without you first saving up the money. You still have to save up the money (and then some to pay interest, the banks earnings), but you could live in your house while doing so. So the loan moved the transaction between the house owner and the builders decades. Ideally mobilising resources that would otherwise be idle (as in unemployed workers, an “unproductive” plot of land, bricks that couldn’t be sold).
Or at least that is how I understand it.
Not really. For the interest payments to be deposited at the lending bank, they had to be withdrawn from somewhere else.
To appear here they had to disappear elsewhere; perhaps a conjuror’s sleight-of-hand has kept you from noticing where elsewhere is.
In fact that’s why capitalism requires growth. There’s a constant need for more money to pay the interest on the money that’s already there. If increased velocity doesn’t fill the gap then there can be trouble.
Over time the banks, through charging interest, accumulate money which they have not created. That money must ultimately come either from net exports or from government spending. You have not found a flaw in MMT.
Just a random thought here but if money is destroyed when a loan to a bank is repaid, could you say then that bank-notes are actually “receipts” for that loan? That repaying that loan means that you no longer need those receipts? It’s an intriguing thought that.
Kind of, if you think in terms of bank deposits. Bank notes are usually issued by the government and could be thought of as tax credits that can be used to extinguish your debt to the government.
I had to take humaities and social sciences courses within my BS program to “be well rounded”. I chose economics. I took a course in “Money and Banking” 1971(?).
One of the precepts I hold to this day from that endeavor is: “lending creates money”!
Nixon was president! I do not recall any discussion about how to destroy money. I had thought defaulting, but agree paying the note eliminates money in the accounts.
That and my technical studies I always thought interests rates should be related to the rate of return on projects financed. How could zero interest rates be good for society, too many projects with dismal real returns…..
I cannot understand why everyone is demanding rate cuts with low UE and 2.8 to 2.8% GDP growth!
I took my M&B course in ’68 or ’69. I remember that precept. But it wasn’t my understanding that money was “created”. My presumption was that if I deposited $10 in the bank then the bank could lend $100 to a borrower. But, the further presumption was that the bank had a big cash stock just lying around that they could then lend. The idea of the bank just creating money out of thin air was beyond the pale.
but, but, but… everything RM says makes sense except for the underlying reality that money is a token. I agree it is a token of our cooperation. But it is not actually a token of value, merely of exchange. So, here I go again – the reality is that the only intrinsic value here is Nature. And simply repaying a money debt does absolutely nothing to repair and repay Nature. Clearly it makes ultimate sense that money needs to be spent in real-time to conserve and protect Nature. Thats the only way to clear our real, as opposed to token, debt.
There is no redeeming from paying debt, you only perpetrate the immoral cycle.
Redemption can only come by forgiving it.
Currency is and always has been a legal artifice of the state. Per se one nations metal coin was worth more than another even if in the same metal. Got nothing to do with value or storage of it. Debt is a social construct and unless you think one can stop people from making contracts there will always be debt.
Debt is not anti freedom as I owe a social debt to everyone around me where I live. It can not be payed by money but, only by action. Yes contracts can be impossible to fulfill and that is when law comes in to settle the matter. So one might reconcile decades of pro corporate Judiciary flowing out of Universities that are funded by Corporatists.
Its a vicious cycle that well off people funded over decades to shape society for their benefit. Don’t make it all a debt/money drama when what was in some peoples head proceeded it all …
The real value rests among the armed government men who will take your stuff and freedom unless you pony up some of the right money in taxes. If that money must be dollars you will in turn be forced to accept dollars for your labour and goods.
The promise of violence is the promise underpinning it all. And freedom from armed thugs clearly has a value.
Monty Python should have had some scenes with money and the violence inherit in the system. Would have helped with the narrative.
The entire “Dennis Moore” sketches are MMT adjacent.
“Give me all of your lupines!”
Your point, if I’m understanding it correctly, resonates with what is discussed at length by Steve Keen is his latest book and more recent writings. He points out that the great flaw in much of current economics comes about because of a fundamental misunderstanding in the inherent limits imposed by two of the three pillars of physical chemistry, namely thermodynamics and kinetics. If I have the history correct, at the time of Adam Smith’s The Wealth of Nations, the Physiocrats recognized land’s primary role in wealth creation. In arguing that wealth originates only from capital and labor, Smith ignored the irreplaceable role of land itself. Profit, Keen argues, isn’t generated by work alone, but (to your point) only by work that transforms what already exists in the natural world around us:
I apologize that I can’t cite specifically where Keen said or wrote this, I only scribbled it as a note in following his blog one day.
Another Keenism of which I’m very fond:
My apologies again if this has already been cited and discussed in NC — I often don’t get to look at this forum until late in the day.
A mere century ago national wealth was found in the encyclopedias (or at least the ones I have looked in) and GDP was not. National wealth was the sum of productive land, roads, bridges, railroads, machinery, horses, cows, other animals, houses etc that was found in a country. Similar to how a deceased person’s estate would at the time be valued down to wooden spoons etc, but on a national level. It wasn’t something that could easily be calculated, but estimates were probably done.
My suspicion, that I haven’t been able to confirm, is that GDP replaced national wealth as the primary estimate of how rich a country is somewhere around when essentially all incomes were taxed and it was possible to sum up tax records for an entire country.
Someone enlighten me here.
I took a loan from the bank for $600k to buy my house.
When I paid it off , I had paid to the bank about $1million.
So while our initial contract was extinguished, the bank ended up with more than $400k of my labor.
And all this for something the bank didn’t have in her vaults (as no savings required for the bank to make the loan if I understood this correctly) yet lent it to me and made a bundle.
If true, this seems to be the most luciferian system to have ever been invented for the enslavement of the human race.
Please see the comment above. Money has time value. A dollar today is worth more than a dollar in the future. That is why borrowers pay interest.
Another reason they pay more is that some of that interest is effectively an insurance premium for the risk of default.
Its confusing. If we take David Graber’s definition of money as the mathematization of a contractual obligation between a debtor and creditor (which seems the correct one to me) then money is simply debt. Then why should the worth of debt change with time?
Mortgage Etymology:
“mortgage (n.)
late 14c., morgage, “a conveyance of property on condition as security for a loan or agreement,” from Old French morgage (13c.), mort gaige, literally “dead pledge” (replaced in modern French by hypothèque), from mort “dead” (see mortal (adj.)) + gage “pledge” (see wage (n.)).
So called because the deal dies either when the debt is paid or when payment fails. Old French mort is from Vulgar Latin *mortus “dead,” from Latin mortuus, past participle of mori “to die” (from PIE root *mer- “to rub away, harm,” also “to die” and forming words referring to death and to beings subject to death). The -t- was restored in Modern English based on Latin”
Etymology as a predicting science is the closest thing that comes to economics.
Anything goes and its impossible to prove one wrong.
I followed you down to Latin mori, but the PIE is utter rubbish in my opinion.
How do we know that PIE mer = to rub, harm and is linked to mori?
By proclamation?
Because there is no one who can prove you wrong.
And if linguists can predict the past , why not try to predict the future how people will be speaking in 100 years, I am sure it will make for some hilarious predictions.
Proto indo European is an extrapolation or conjecture. Follow enough Romance, Germanic, Slavic, Celtic etc languages back and you get some conserved forms. That doesn’t make it wrong. It is a tool for reasoning about languages.
By the same mark, you must think palaeontology, cladistics and large parts of genetics are also wrong.
> Then what happens is that if all loans were repaid, we’d have no money left.
This is false. The money doing the repaying is created as a debt (which the author recognizes but still manages to contradict himself). So there’s still debt (money) in the system. Only asset-based money can extinguish debt. This is elementary.
“All money is debt” means the money is “destroyed” with its replacement created as debt plus interest. Net-net money is not destroyed, which is why the money supply keeps growing.
>> Then what happens is that if all loans were repaid, we’d have no money left.
The author should consider that a bank meets payroll and pays other expenses by augmenting its own liquid liabilities in the form of deposit accounts. Thus the wherewithal of borrowers to pay down debts to the bank is not limited, even purely at the level of private bankmoney, to those balances first created as payments against loan deposits.
> Only asset-based money can extinguish debt. This is elementary.
Not so. The borrower’s debt to the lending bank is extinguished by that bank’s — or any other bank’s — debt to the borrower, deployed in favor of the lending bank. If the mortgage payment is made against a deposit account at another bank, the lending bank gains an asset, typically an augmented reserve balance. If the payment is made instead against a deposit account at the lending bank itself, that bank gains no asset, but rather extinguishes some of its own liability to the depositor, to the same net effect on its balance sheet. Thus no asset-based money is needed to pay down a debt to a bank; the offsetting debt of a bank will suffice. The payment reduces both debts, and in the process extinguishes some of the bank liabilities we use as money.
A fuller explanation here.
>If the payment is made instead against a deposit account at the lending bank itself, that bank gains no asset, but rather extinguishes some of its own liability to the depositor, to the same net effect on its balance sheet.
Because there’s no asset-money in your example. Asset-money is gold or silver or some other commodity money. A debt paid in gold requires zero new debt creation. It literally extinguishes debt.
It can happen in this system. If you post 100% collateral in gold for a loan and later default, the gold has extinguished the debt with no new debt-money creation.
>Because there’s no asset-money in your example
Indeed, and yet two debts are extinguished in the course of repayment, contrary to the cited assertion that only asset money can extinguish debt.
Huh? You’re just double counting debts. No thanks.
Ah, TV Licensing. The people who write you increasingly presumptuous and threatening letters on autopilot. I take great pleasure in ignoring them when they mistaken and waiting for the climax of shrill apoplexy.
They have the worst systems. There is no way to find out which TV licence direct debit is which online (we have several properties) and their login requires you to guess how the badly trained gorilla hammered your address into the system. There are dropdown fields that bear no relation to reality, it is almost impossible to correctly describe a corporate entity as the licensee and the resultant mess in our details makes it impossible to pass online security!
Plus I hardly watch the BBC or listen to its radio channels It is mediocre, centrist drivel. I get all my news online from “newspapers”, NC and Twitter (mainly pro Russian).
I have begun to feel the licence fee should be abolished.
Wonder if Prof. Murphy is familiar with UK based Positive Money which is, in a way, also adjacent/related to MMT. This is their graphic illustration of how commercial bank money is created and they were the ones, afaik, who first coined the truism that loans create deposits, not the flipside of deposits being used to make loans.
https://www.youtube.com/watch?v=KvpbQlQwl0A
Positive money[tm] is all you need to know about that group. Money is and never has been negative or positive in the rhetoric its being portrayed. Yet all these sorts endlessly cast a narrative that if you use their system all of humanities woes will just go poof and we will all become virtuous humans because it dictates it.
If I understood it correctly, Positive Money wants to restore money creation solely to the state and get rid of private commercial banks whose current loan portfolios account for 97% of all money in circulation.
Its hard money in every way save the name and very Austrian in its economic views. All the talk is about banks and not the larger corporatist agenda that started off with the Powell memo and neoliberalism.
Talked with a few of their higher ups in the UK post 08.
Same goes for the Science of Money AMI group.
Labor/left/progressives should also challenge the sociopathy of Powell Memo and the neoliberal regime. In the meantime, we are all subject to a money system that’s been hijacked by, per Michael Hudson, financial parasites of Wall Street and London so there’s that to deal with too.
Prof. Murphy has a new short video making the case for public banking.
https://www.youtube.com/watch?v=aMwYlCDBiM4
The question was about the Positive Money views which never have had a larger socioeconomic view outside some notion of state money vs bank credit. The later was dealt with via regulations and as we know that was all rolled back in the name of free markets and innovation.
The issue is the system we have now can be repurposed to achieve the same results, only political will stands in the way just the same as it does ideas of complete overhaul of monetary systems.
I would highlight how Russia has been dealing with things and how sanctions even helped them do it. Dealing with corruption, capital returning home, taxes, et al.
There’s that discussion between Prof. Hudson and Richard Wolff which Yves posted yesterday and they talked about how western imposed sanctions hurts more the sanctioner than the sanctionee and how financial colonialism is forcing directional split in civilization.
I’m guessing that BRICS could find useful utility from the insights provided by both Positive Money and MMT because they would still be needing some form of money system to trade goods and services between and within their respective countries.
Prof. Wolff have of course previously expressed disagreement with MMT narrative and, being a Marxist, that might have something to do with his viewpoint that MMT is just out there to prolong late stage capitalism (corporate bailouts, etc.).
MMT has been in use for sometime now and the only drama with it is the ideological administration of it via orthodox economics and adjacent. MMT as a description is only to inform policy debate, many have attempted to hang agendas on it to force the debate into an ideological framework.
This then devolves in to terms like sound money et al and not functional money. For all Marx’s views that have stood time I would not use the money views because history and actual examination/understanding of it never happened. Politics proceed everything, followed by laws, ultimately with settled with contracts. Its the contracts and not the money that is key, see Russian efforts on this topic.
Not clear what you meant by Russian efforts.
In the video, it’s said that Quantitative easing injects money into the economy, but isn’t QE just an asset swap, so how does the later inject new money into the economy?
From the transcript:
“When the economy is weak, when people don’t want to borrow, when there’s a threat of recession, when people feel it’s too risky to actually take on another repayment of whatever the loan might be for, then the government has to inject more money into the economy to make sure it all works.
How do we know this happens, and what’s the evidence? Well, it’s very simple, really. After 2008, when there was the global financial crisis, people did not want to borrow. Banks were at risk, they looked pretty dubious, people felt very nervous about the state of the world, they didn’t want to go out and borrow money to buy anything, and therefore, the government had to create vast quantities of new government-created money to inject into the economy to simply keep it moving.
Quantitative easing did that. That’s what it was for, it made good the shortfall in bank lending to ensure that there was enough credit money available in the economy to keep it functioning.”
Oh well, in Richard’s (presumably it’s the same Richard) own words: https://www.taxresearch.org.uk/Blog/2023/06/20/the-qe-process/
From the end of the article: “Also note that if QE does create money for the reason noted then quantitative tightening does, when properly understood, destroy money by removing it from use.”
That I think actually makes more sense than a simple asset swap.
The problem is this new money was not put to socially productive enterprise but more financial trading like stock buy backs or silicon valley antics, not to mention overseas investment.
PS look at Russia now.
That’s somewhat besides the point as my original question had to do with the mechanics of QE as mentioned in the transcript. Now to your point, I think central bankers and government officials have been trying to wag the tail of the economy with QE. Businesses borrow money if they think they can make a positive return by investing in their enterprises, not because the government has made additional funds available to be borrowed. Even with a zero percent loan, there’s a possibility a business will make a negative return because no one’s buying their products and/or services.
In a normal economy, the stock market should reflect the underlying strength of well performing companies, but instead with QE, the government basically tried to stimulate the economy by giving sheen to companies in the stock market i.e. “hei look, the stock market is going up, so the economy must be doing well, so let’s go buy things.”, hence the tail wagging the dog.
Since nothing is free in the world, the whole thing can only end in tears IMHO, knowing when that might happen though requires a well tested crystal ball.
I’m reminded of Marxist ideas about “hoarding and the turnover of capital” that I learned about from Costas Lapavitsas while at SOAS.
I can’t find a link which isn’t in a walled journal though. I’m also no longer sharp enough to do decent economic analysis!
I will be blunt SJO .. QE was a bailout of the wealth class e.g. largest transfer of wealth and power in modernity as noted on NC. Not based on functional economics but, socioeconomic preferences in how society is structured and why.
Its ridiculous to look at the growing number of Billionaires in the US and increasing social dysfunction and then bang on about money/currency dramas when power dictates outcomes via a share holder democracy in a plutocratic $$$$ buys votes dilemma.
There is no currant political answer to the issues mate. Worst is geopol is making things very interesting. Where one lives is just a matter of when Jackpot arrives.
I can’t do anything about it save ride the wave.