Thus MMT fails to address the source of economic instability and the driver of the social and environmental degradation we see all around us. It proposes putting an ambulance at the bottom of the cliff whenever there’s a crash, instead of preventing them happening.
This error comes from the mis-definition of money as debt. The mis-definition of money as debt is incompatible with the Chartal (legal) nature of money that MMT espouses, and history shows us that it is also incompatible with MMT’s stated goals of full employment and price stability. Therefore, MMT has to treat money as money: a necessary medium of exchange – without associated debt – if it wants our money system to reflect reality.
Treating money as money is a pre-requisite for any realistic and sustainable solution. Only then can we enjoy the benefits of technology without endless toil and resource use. When economics is founded on reality, not theory, we’ll all be better off.American Monetary Institute
AMI’s Evaluation of “Modern Monetary Theory” (MMT)
AMI Research, with Steven Walsh; and assistance by Stephen Zarlenga
(h/t Roger Erickson via email)
As Brad DeLong often says, "the department of huh?"
151 comments:
This is what AMI mean:
“money and debt are two different things, that’s why we have different words for them. We pay our debts with money.”
“Money’s essence (apart from whatever is used to signify it) is an abstract social power, embodied in law, as an unconditional means of payment.”
'The Chicago Plan Revisited' paper says something similar:
“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. 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 (Federal Accounting Standards Advisory Board (2012)).”
“irredeemable government-issued money represents equity in the commonwealth rather than debt.”
http://www.imf.org/external/pubs/ft/wp/2012/wp12202.pdf
This AMI critique of Mitchell-Innes' 'Credit Theory of Money' is quite good:
http://www.monetary.org/critique-of-innes/2012/06
"money is more than an abstract power, it is an abstract institution of society based in law. For corroboration we offer the ubiquitous historical examples of the efforts of private bankers, central or otherwise, to be sure the LAW made their private notes acceptable for payments to government... We have seen what happened to their “money” when this privilege was revoked.
The moral element arises because a society depending on private bank credits in place of government created money, is operating in moral quicksand. For that society has established a special privilege of power and money for bankers, which cannot but harm the population as a whole.
When monetizing private credit is done by law, it necessarily confers special privileges on those privates issuing the credit. This is contrary to the spirit of the U.S. Constitution, and if one considers that this privilege amounts to the formation of an aristocracy, then it is also contrary to the letter of the Constitution."
but y,
I dont see how that AMI criticism of Innes has anything to do with how our system here in the US operates today?
ie private central bank? private bank credits in place of govt created money???
rsp,
Tom,
Perhaps file in the "Dept. of not invented here" imo... rsp
They are among those that want to get rid of the private financial system wrt money creation and have govt issue currency directly. It's called "debt-free money." They don't understand that all money is somebody's IOU, nor do they get what gives state money "currency," i.e., it's functioning as a tax credit.
Direct govt issuance of all a state's money is an option that has advantages and disadvantages, like all competing options. The major proponents of "debt-free" money are AMI in the US and the positive money folks in the UK.
Which form of money in existence today is not the liability of some institution? Answer that and I might care about something AMI says.
And their critique of Inness is not interesting. It's an alternative view, not a critique. A critique offers evidence.
And it's not as if MMT invented the idea that money is a debt relation. They can take up their interpretation of history with Graeber, Hudson , and many others if they'd like.
If they would just say "govt money only" or "pvt debt free money" they wouldnt sound like they have no clue what they are talking about. Govt money is still a liability of the govt, and by definition that is debt.
It's to do with the Humpty Dumpty word 'debt' - which has moral implications and is literally impure in many religious circles.
What I find amusing is that these people get themselves worked up into a religious fervour about how marvellous their 100% debt free money is.
So much so that they don't seem to realise that to make that work they have top have no bonds, 0% interest on reserves and a government injection mechanism via spending or tax cuts that offsets the excess savings of the non-government sector...
I see they cite Febrero as an authority on MMT. That should lose them all credibility right there.
This is a particularly bad part:
"Wray says “bond sales … cannot finance or fund deficit spending,”19 but are done “to prevent … a zero per cent bid for reserves, … allowing the [Fed] to hit its target.”20
As above, data published by Treasury and the Fed show the proceeds of bond (and other debt) sales go in and out of Treasury’s account/s at the Fed; [THESE ARE BALANCES] they are used.11 And today the effective bid rate for reserves is at the Fed’s target rate of near-zero,21 yet Treasury is still selling more bonds.22 [NO MENTION OF INTEREST ON RESERVES]
Yet MMT believes that, as Wray says: “Once domestic households and banks are content with their holdings of government bonds and … reserves, then government need not … sell any more bonds.”23
Today holdings of government debt and bank reserves are much higher than ever before, but Treasury is still selling more bonds.22 Aren’t we “content” with government debt yet?"[MMT CAN'T HELP IT THAT GOVT PERSONNEL ARE CLUELESS
This goes on and on...
Looks like they think "the Fed is private" or something ... are confusing the changing of account balances with "money goes in and out"... do not understand interest rate maintenance operations... are not consistent with stocks and flows... are insisting on a singular definition of a word "money" which Alex. delMar who they cite also termed a 'metonym', which cannot be done as a metonym by definition is "a figure of speech used in rhetoric in which a thing or concept is not called by its own name, but by the name of something intimately associated with that thing or concept."
In general, they do not exhibit a detailed mathematical understanding of monetary operations... rsp.
Just a comment about issue that I see as responsible for immense confusion among some of the AMI folks. Here are two issues:
1. MMT and others say that the money issued by the state represents a debt of the state.
2. In our system the broad supply of money expands through the process of commercial bank loans. So banks create money in the form of deposit balances given to borrowers who in the process take on a debt to the bank to repay an amount greater than what is given to them.
Now the thing is, issue 1 has no logical connection to issue 2. Issue 1 is about a debt of the government to the possessor of money. Issue 2 is about a debt of the bank customer to a bank. They have little to do with one another. Even if we employed a form of money that was not a liability of a government, it might still be the case that new dollars are introduced into the private economy though bank lending. And conversely, even if new money were only introduced into the economy by the government directly spending it into the economy rather than through bank lending, it might still be the case that that money is a liability of the government.
But the AMI folks always seem to be running these things together. Their big gripe seems to be with the institution of bank lending as the main institutional means of introducing new money into a growing economy. They want the money spent into existence by government, so that private debts are not created as a concomitant of money issuance - that's the "debt free money" they want. Fine. But that has nothing at all to do with the MMT claim that such money, insofar as it was accompanied by a government guarantee that you can use it to discharge tax obligations, would still be a liability of the government.
"Aren't we “content” with government debt yet?"
As long as bonds carry a positive nominal rate of interest, why would we ever be content with what already exists? No matter what the rate of inflation is, a 0% interest note is always worth less than an X% interest note, for any positive number X.
“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."
It would make life simpler if Tsy issued consols-- the lack of a guarantee to repay principal would seem to put outside the debt ceiling-- which is nothing more or less than a cap on total amount of principal guaranteed repayment.
However, aside from political framing, it doesn't really make a difference whether you call outstanding Treasuries "equity", "debt" or (as banks are wont to do) "deposits".
STF should take note that even under the Chicago Plan (at least the iteration Bill Still suggested-- and Milton Friedman endorsed), interest on reserves is more durable than you think. :o)
"The initial rate of interest payable on Treasury Department Deposits shall be equal to the average yield on three-month Treasury bills... Thereafter, it shall be adjusted quarterly [to] average yield of ninety-day commercial paper."
http://www.themoneymasters.com/monetary-reform-act/
+1 MMT
There is no way to have an asset without a corresponding liability. Modern "money" is someone's financial asset and someone else's liability, and with state money that liability is on the side of govt. What's so difficult to get about this? It's simple accounting.
I also can't make sense of the idea that money is government equity. Equity in what? By printing money the government has created for itself an equity share in something?
There is no way to have an asset without a corresponding liability.
Well, you can for non-financial assets. Only for financial assets does the sum of assets in the whole system have to equal the sum of liabilities. So for those who want to deny money is someone's liability, they have to give an account of money that shows it to be some other kind of asset.
@Dan,
"I also can't make sense of the idea that money is government equity."
It's gold standard thinking... gold was an asset and equity (assuming no liabilities) to its holder. If gold is money then money is equity. I find it amazing the number of people that make the same mistake. Money is JUST as much a LIABILITY as bonds are to the government. This is probably the biggest MMT hurdle to overcome. So many people thing money is EVERYONE'S asset!!!???
The idea seems to be that govt acting through a formally consolidated Tsy and cb creates an asset and books it as equity on the LHS since it has no liability, instead of booking it as a liability of the cb with a corresponding Tsy liability in tsy issuance. Govt transfers ("gifts") this asset to the non-govt as an asset, meaning that govt's assets and net worth decrease and non-govt's increase.
In this arrangement there are no tsys required in the accounting so no interest-bearing "debt."
Then govt creates non-govt liabilities (taxes, fees, and fines) and accepts only assets it created in payment.
That's a way to think about it that eliminates the notion of currency as govt debt, which confuses many since no interest or other financial obligation is involved.
That "money" is still a liability on the govt's balance sheet, which "is" debt. Can't avoid money=debt unless you use a commodity money. I've had conversations with AMI-types and they don't want to be bothered with accounting--they want to change the accounting, actually, but they don't understand how it works as is or that their world could function with current accounting and all they'd have to do is just have to stop saying "debt-free money." What they want is a world of fiat money only and 100% reserves--is that so hard to just say? (Aside from the fact that 100% reserves doesn't eliminate banks' abilities to create deposits out of thin air--but save that for another time after they've at least come to grips with accounting.)
"Debt-free" money has become a buzz word lately, i've noticed. Some Occupy types are picking-up on it, too. It's getting traction.
Search on "debt-free money." It's all over. Richard Werner calls tally sticks debt-free money, and Lincoln greenbacks are cited as "debt-free" money, too.
While it may not be correct accounting-wise, it is taking on a life of its own in a "new monetary paradigm" that puts government center-stage in money creation and with the aim of banks only lending out savings (which they have wrong unless they propose to end lender of last resort with all that implies about liquidity crises.
100% reserves doesn't eliminate banks' abilities to create deposits out of thin air--but save that for another time
Why save it for another time? This seems to be the right time to engage in an argument with the "debt-free money" crowd.
The campaign is gaining traction in the U.S. and especially the UK because it builds on a real, massive popular reaction against the power of the financial sector. IMO it would be wrong for MMTers to stay out of this debate on the pretext that said people "don't get the accounting right".
The electorate will never pay attention to accounting technicalities yet MMT will need to get all the support it can among the electorate in order to become a force to be reckoned with in the political sphere - right?
Two points, Jose.
First, "debt-free money" is a winner rhetorically even though it may not be correct logically. I don't think it is worth getting in the way of this meme. It's not technically correct but it has great appeal and we should be look at creating alliances instead of insisting on MMT purity.
Michael Hudson is at UMKC and appears with MMT economists. He associates with AMI, too. Both he and Bill Black are embraced by a number of people across the spectrum. So we should be able to work something out.
Secondly, I think that we have to walk in with out eyes open, too. Other people and especially organizations often have agendas that they regard as proprietary and take ownership of. Their attitude toward "rivals" is "not invented here." AMi is like this, so there should be no illusion that we will win them over or that they will ever become MMT supporters or proponents. But we are not enemies either, and we have common opponents in the "orthodox."
But to gain traction, I think that a big tent approach is appropriate wrt policy, while maintaining one's own integrity wrt to basic understanding. We can cooperate regarding things about which we agree, while holding to our differences, too. It's a matter of emphasis.
For the next 4 years you have either Romney or Obama. No shot in either case for AMI's "debt free money" to become policy. Not worth worrying about, though it's interesting that they're worried about MMT. They might get some public banks out there in addition to ND in the meantime, but that's not problematic from an MMT perspective.
BTW, it's not a point about "purity." It's about knowing what it is that you're actually arguing for/against. Werner--whom I've met and like--has a sort of loanable funds view of money in that bond sales reduce the credit money out there to finance spending. AMI's policy proposals--as Neil points out above--could only work as they want them to in the context of monetary operations that MMT'ers have actually been arguing in favor of for some time. So, we have this negative "evaluation" of MMT by people who don't understand MMT or what they are actually in favor of. Again, "purity" isn't the point.
Kregel's dealt with 100% reserves of late, btw. http://www.levyinstitute.org/pubs/ppb_125.pdf
Another confusion I run across a lot in the present political rhetoric is the confusion between debt and interest or between debt and usury. These are not the same thing. If I owe you a thousand dollars and charge you no interest at all, you still have a $1000 debt to me, even though the loan is interest-free. And if I owe you a $1000 at negative 10% interest, you still have debt to me - a debt of $900. And it doesn't matter whether we switch from money to apples.
Debt is the natural result of contracts, and contracts of some kind are needed to organize any kind of economically complex society. If I make and sell you piece of furniture, and you agree to pay me some money for it a week after I deliver it (or even to give me something in barter exchange a week later) then as soon as I deliver the furniture, you have a debt to me.
The understandable drive to enact some sort of debt jubilee, combined with the half-baked primitiveness of people like David Graeber, has created an quasi-religious intellectual rhetoric of the evil of all debt. The proposals for replacing economic systems based on contract and debt, if you can even call them "proposals", are ludicrously hare-brained and silly.
The idea that anything more complex than a village of a few people could be run on principles of "gifting", where every transaction if purely voluntary - i.e. I "gift" you a piece of furniture as an act of pure grace and then leave it up to you as to whether you want to voluntarily "gift" something back to me later - is so childish that the idea that there are people out there proposing such things is really depressing.
What confuses me about the new 100% reserves craze is that we did not have a financial crisis caused by a collapse of commercial bank lending with some ind of excess of loans to reserves. There was no run on the commercial banks. The financial crisis was caused by the collapse of markets for much more complex financial derivatives, traded by large financial institutions among themselves.
I think many people have the vague impression that a 100% reserve system would break the power of banks, an outcome that is instinctively appealing.
Maybe this can also explain the appeal of such ideas.
One more reason for MMTers to fully engage in the debate, patienly explaining their analysis to the "Positive Money" types. A small investment for potential high rewards.
I got started thinking about monetary issues because of Stephen Zarlenga. I read a long review of his bookin Acres USA, an alternative farming magazine around 2004. Although the reviewer (editor Charles Walters) didn't have the most lucid writing style, reading what he had to say about Zarlenga's book helped me to understand how little I (and most other people) actually knew about money, even though it affects us all a great deal. I also realized then that this was why most progressive politics was like spitting into the wind. I have since read The Lost Science of Money and consider it very good. It's very readable, gives a lot of historical information and has a definite slant. It's a sort of "people's history of money;" the bad guys are always scheming to get control of what should be the people's prerogative: the right to issue money. If Zarlenga's book were taught in high school I think it would lower the "moron" factor considerably.
One thing to keep in mind is that Zarlenga is not an economist. He worked in the financial industry for many years, but he studied psychology or something in college. What he is is an amateur historian. He spent 10 years or so writing The Lost Science of Money combing through hundreds of volumes of books having bearing on the history of money. It is spotty and arcane literature to be sure. Somewhere along the line he discovered the works of Alexander del Mar and found Aristotle's definition of Nomisma. This was his epiphany. The scales fell from his eyes and all that.
I think the problem between MMT and someone like Zarlenga is one of differing universes of discourse. MMT can say "How can he not see that someone's asset is someone else's liability?" That's true if the universe of discourse is accounting. MMT shifts into a different universe of discourse when it says "the government is not like a household." That's the common vernacular in which debt is considered bad. Once we have explained how the two are different and even gotten our interlocutor to admit that the two differ because the government can "print money," and we then try something of the nature of "think of money as a tax credit" all progress is lost. I have seen this time and time again.
Zarlenga has taken his stand with Aristotle and nomisma and you won't change him. Moreover, on the level of vernacular communication, I think he is absolutely correct to insist on a distinction between "money" and "credit."
Dan,
"The financial crisis was caused by the collapse of markets for much more complex financial derivatives, traded by large financial institutions among themselves."
Good comments here... the mezzaninie/non-GSE subprime MBS failed first at Bear and then at Lehman and Merrill, etc... then the associated CDS failed as the losses were catastrophic and outside of the actuarial models...
if you think in terms of Paul's model, the balances to pay, as you point out, the interest part (ie usury) of the loan obligation was never accounted for at loan origination.
Through continued system savings by the external sector and taxes of USD balances away from the household sector, the system as a whole starts to run short of USD balances
So once the whole system starts to run low on USD balances, "sub-prime" borrowers at this point in the system (non-govt household sector) would naturally be the first to default as the "sub-prime" borrowers in that sector by definition are the ones with the least USD balances (hence "zero down loans") available to them to begin with...
A condition of 0% interest like you point out above can delay this system failure, but not ultimately prevent it as the leakages to external savings (China/Japan), domestic corporate savings (retained earnings), and taxes (FICA) work to remove balances from the system until the failure will ultimately occur again in the household sector which is the "weak point" ...
rsp,
I think he is absolutely correct to insist on a distinction between "money" and "credit."
As do I. Been shouting it from the rooftops from the beginning and have gotten a lot of pushback on the lines of:
"Money is too vague a term, must be more specific, so now I use the term "funds" when I refer to money but this still doesn't bring out the distinction wrt credit..
Still, the difference between money and credit is night-and-day and credit cannot be a stand-in for "money" created by net government spending..
To an observer within the non-government, "money" has no off-setting liability claim against it. This is confusing because one dollar is the same as the next and they all spend the same.
When viewed in the context of aggregates, this is not true. In the aggregate negative dollars also exist and they must be dealt with in the accounting. The sectoral balances identity does not "see" credit money. This is because it can't "see" zero.
As a truism, I'll go out on a limb and call this axiomatic, it is not possible to have growth in the aggregate on the basis of spending enabled by credit. Nominal growth that is. It should follow from that though that real growth can't occur either in the absence of nominal growth, bubble growth occurs instead, and credit can't keep the bubble iinflated.
It isn't possible by simple arithmetic -addition and subtraction.
I just think that Zarlenga is unable to shift the viewing points of describing something related to money as MMT does.
While MMT is having objective viewing and describes it's viewing from every perspective (objective view), Zarlenga takes only goverment positioned view.
Is it a debt or asset, it depends from the viewpoint of holders of the debt/asset not looking from accounting perspective.
Accounting perspective is devoid of emotions in order to see the reality, while others are looking trough self.
Probably was caused by Zarlengas being hurt by MMT members. I do not see the difference in his "critique" of MMT only his missunderstanding of MMT and then described from only one viewpoint.
I think he is right only on Burning tax money. Taxes are going trough accounting still, as he explained, so it matters as accounting number, but effectively it is as it is burned.
David good comments....
"Zarlenga has taken his stand with Aristotle and nomisma and you won't change him. "
In a related way, I have taken a stand with the Lord and you can't change me ;)
"19 Exhibit to Me the poll tax nomisma." Now they bring to Him a denarius.
20 And He is saying to them, "Whose is this image and the inscription?"
21 They are saying, "Caesar's." Then He is saying to them, "Be paying, then, Caesar's to Caesar, and God's to God."
From what you post here about Zarlenga, it looks like he is a semantic person (no mathematical training).
ie "Words matter" with him foremost.
So if some MMT person makes the semantic point that "money is debt", and this pattern of words does not match Zarlenga's preferred pattern, he probably loses his f-ing mind and of course like he does here with this PURELY SEMANTIC critique of MMT ...
Both Aristotle and the Lord use the term "nomisma" which looks like it means "of law" (not nature), so when someone else brings "debt" into it, this could easily be looked upon as a semantic violation according to some... but it really is not imo as at least the Lord in the Greek scriptures (and I would assume Aristotle) used other terms throughout to designate other forms of "money" (a metonym per Del Mar). For instance the Lord often refers to metals and coins that were NOT nomisma in His dealings with Israel...
This is the big problem I see with semantics... people seem to get locked in to specific word patterns and then can't get out when new information is made available ... they cannot adapt/evolve their semantic definitions in their brains for some reason ... this is interesting.
This does not happen (impossible) within mathematical minds where indisputable quantitative relationships rule.
Monetary systems are best described/operated mathematically imo, they are too complex to be understood via semantics (words/definitions) alone and Zarlenga misses the mark here because he doesn't fully "get the math" and is stuck here spinning his wheels having purely semantic arguments.
rsp,
"Taxes are going trough accounting still, as he explained, so it matters as accounting number, but effectively it is as it is burned."
It is important to note that taxes are a sequence in a tax/spend cycle that redistributes funds from a position of low potential to one of high potential.
It is government-induced flow that accounts for some 30% of GDP right off the bat. As these funds move thought the economy through transactions they end up accounting for the bulk of GDP .
So much for the private-sector driving growth.
The importance of the private sector lies in competition. Agents are competing for these funds by producing products, and good products are generally more successful than mediocre ones. This dynamic plays out as a net benefit for the consumer.
Jure,
" Zarlenga is unable to shift the viewing points of describing something related to money as MMT does..."
Right semantic people just seem to get "locked in" and cant adapt/evolve...
It is no help to them if the math people then start to use metaphor like "money is burned" in order to try to help them understand... they look at that and say: "money is not being burned/shredded it's illegal!"... rsp,
Matt
"people seem to get locked in to specific word patterns and then can't get out when new information is made available ... they cannot adapt/evolve their semantic definitions in their brains for some reason ... this is interesting.
"
Is this where we are failing?
Trying to teach from objective perspective to the people that can not shift from selfish self awareness.
Maybe not with Zarlenga here... iow at least these folks can tell that something is wrong... so they are not perhaps being selfish other than perhaps how they "lock in" in their own perspective...
So I would not call them "morons".
The morons are the ones who dont see anything wrong here..
I would hope that these AMI folks could be made to see that these systems are mathematical and then realize they they are semantic people and back off a bit...
rsp,
MMT distinguishes between "money" and "credit", too. It's called fiat money vs. credit money, or horizontal money vs. vertical money. But all of those monies are still liabilities of some institution and thus debt unless they are commodity monies. In other words, any money is inextricably linked to debt, and you can't talk intelligently about the former without showing you understand the latter.
A separate problem is that, yes, most do use the term "money" sloppily because they invoke it at different times to mean currency, deposits, income, or "that which by definition creates inflation." I don't count AMI among those people, as far as I've seen; hence, my point about "separate problem." They are actually quite specific about what they want money to be, they just don't understand the implications of their own views, or those of MMT for that matter.
I think the problem between MMT and someone like Zarlenga is one of differing universes of discourse.
This is my point. Wrt monetary economics, MMT is accounting-based, as it should be. As a direct result of this the problem MMT is encountering is two-fold. First, much accounting terminology is either not understood by the public or seems counter-intuitive based on ordinary language meanings. Secondly, MMT economists run into difficulty communicating with mainstream economists because the mainstream is based in econometrics (math modeling) and not accounting. The standard objection is where's your model.
I am not suggesting that MMT economists should do anything different wrt to what they are doing, but to communicate with others it's going to means either shifting their universe of discourse or ours.
I would suggest that the way to proceed is a little of both, that is, showing how terminology of one of the universes can be translated into the other and, if there are problems with the accounting, show that, too.
Within a universe of discourse, say ordinary language within a particular culture like the US, the universe can be divided into logic and rhetoric. Linguistic analysts, psycholinguists, cognitive scientists began to discover how this operates in terms of argument and persuasion in the last century and in about mid-century, advertising and marketing professionals picked up on it and so did political strategists. Since then discourse aimed at persuading has become highly crafted, including empirical testing on what works best.
If so one's objective is to persuade a lot of people quickly, ignore this at one's peril. One's are using it to achieve their own self-serving objectives in the same field. Look at political discourse. It's all about using "debt" as a fear factor to motivate to action in the desired direction, that is, cutting back social benefits.
"Debt-free money" is a counter to this strategy and tactics. People conversant wit this field know that "debt" is a highly negative word that inspires fear and loathing. They also know that "free" is the most powerful motivator there is. Combine them and you have a sure winner.
For example, "debt" conjures up the image of liability — connotation = "bad." "Money" conjures up the image of asset — connotation = "good." The MMT dictum that money is debt is on the wrong side of this one rhetorically and will inevitably lose because very few will take the trouble to understand it. Remember, we are dealing with strong cognitive biases that are built into use of ordinary language, as well as minds that are already made up and very difficult to change. So being on the right side rhetorically is a sine qua non of successful persuasion. So hod you logical nose and figure out how to express this rhetorically in a way that MMT can live with.
Secondly, the trend is toward digital money. Any presentation that is going to reach those who have grown up in the digital age has to feature digital money. We really need to be developing digital metaphor to reach younger people.
In other words, any money is inextricably linked to debt, stf
Not really. If a monetary sovereign never ran budget surpluses and sometimes ran budget deficits without borrowing then debt-free money would accumulate in the economy equal to the cumulative sum of the budget deficits.
Also, common stock is a potential private money form that requires no debt. Instead, common stock pools and "shares" capital for economies of scale.
frlbane
You seem to be equating debt-based money with tsy issuance of interest-bearing securities redeemable in the future. Accounting-wise, direct issuance of currency like LIncoln greenback is a govt liability hence govt debt.
Jure Jordan Probably was caused by Zarlengas being hurt by MMT members. I do not see the difference in his "critique" of MMT only his missunderstanding of MMT and then described from only one viewpoint.
We should remember that AMI is a policy-oriented institution. MMT is a "school" of monetary economics that is defined by the publications of those who are associated with the school by being associated with each other. MMT is policy-free, although MMT economists and proponents do put forward policy views independently. Those policy views should not be confused with MMT if they are not part and parcel of MMT macro, as is the MMT JG. At the same time, MMT economists have said that the MMT JG is not a sine qua non of implementing MMT, whereas the SFC sectoral balance approach and functional finance would be necessary for implementation.
Let's be clear: the mission of AMI is to change government policy. The mission of MMT is to understand monetary economics and to promote that understanding through education, formal and informal. This is a huge difference.
Here at MNE, our goal is both to promote understanding of monetary economics, taking the angle of MMT but also elucidating other views, and also to provide a forum for debate of policy alternatives and their rationales. MNE also looks at important factors that influence society, politics, policy, and the economy, on the assumption that they are all interrelated and influence each other in the context of social systems.
Matt Monetary systems are best described/operated mathematically imo, they are too complex to be understood via semantics (words/definitions) alone and Zarlenga misses the mark here because he doesn't fully "get the math" and is stuck here spinning his wheels having purely semantic arguments.
Agreed, and I don't think it is either a mistake or an oversight on Zarlenga's part. He is interested in changing policy and he knows that for that one has to go to words. For policy change, policy proposals have to be worded in a way that the public will get behind. Even politicians who understand the math will not get behind the wrong words, as matter of political survival.
Not really. If a monetary sovereign never ran budget surpluses and sometimes ran budget deficits without borrowing then debt-free money would accumulate in the economy equal to the cumulative sum of the budget deficits.
It has nothing to do with government deficits and borrowing. If people are going to criticize the MMT framework they need to understand what that framework is. MMT says money is government debt or government liability because it can be used to extinguish a tax obligation. That's it. There are ways of criticizing this view, and I have done so myself in the past. But you can't criticize it if you don't know what it is.
Dan Kervick It has nothing to do with government deficits and borrowing. If people are going to criticize the MMT framework they need to understand what that framework is. MMT says money is government debt or government liability because it can be used to extinguish a tax obligation. That's it. There are ways of criticizing this view, and I have done so myself in the past. But you can't criticize it if you don't know what it is.
Right. All of us who came to MMT as newbies probably had to struggle a bit to figure this out because it is counter-intuitive in terms of the prevailing ordinary language universe of discourse.
My suggest would therefore be to start with the prevailing universe of discourse instead of fighting it and express the correct idea in terms of it.
For example, just about everyone gets that the federal government creates the "money" we all use, i.e., notes and coins. Most people don't know much about either bank money or govt money created by credit bank account. So just start with what they are familiar with an draw the crucial distinction with which they already agree, that is the currency issuer and currency users, and build on that.
Most people that understand basic accounting terms but not their context would say if asked that physical currency is an asset. Since it came from govt initially, govt created that asset and then transferred it to non-govt through spending, transfers (SS), and interest payments. That is totally intuitive to them, even though the accounting terminology is not technically correct.
"Not really. If a monetary sovereign never ran budget surpluses and sometimes ran budget deficits without borrowing then debt-free money would accumulate in the economy equal to the cumulative sum of the budget deficits."
Accumulated govt budget deficits are government DEBT by definition.
"Also, common stock is a potential private money form that requires no debt. Instead, common stock pools and "shares" capital for economies of scale."
Stock is a claim on the business. Ask anyone who's ever been funded by venture capitalists. It's not debt in the technical sense of no risk of bankruptcy on the part of the issuer, but Godley/Lavoie explained in detail why it's most appropriate to consider them to be much the same for the purposes of understanding the monetary system (i.e., both are claims).
Digital money changes nothing. It just means the credits/debits are accounting for on a computer screen or the like rather than by hand on an accounting ledger. We've had this for decades already with Fedwire, CHIPS, etc. Going "electronic" changed nothing except the ability to keep track of a lot more transactions and execute a lot more transactions quickly.
I explained some of this in "setting interest rates in the modern money era."
Dan,
"I also can't make sense of the idea that money is government equity."
I think you might have it the wrong way round.
A standard company balance sheet has three parts: Assets, liabilities and equity.
Money can be treated as equity rather than as a liability/ debt (on the government balance sheet).
"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"
STF Digital money changes nothing.
Right. What I am saying regards presentation. Just as older folks think of "money" in terms of cash, younger people think digitally. So they hold certain intuitions about money that have to be taken into consideration in developing a presentation, too.
Presentations have to to tailored to fit specific audiences, from high school kids to central bankers, and one needs to start from where people already are.
STF,
"Stock is a claim on the business... It's not debt in the technical sense of no risk of bankruptcy on the part of the issuer, but Godley/Lavoie explained in detail why it's most appropriate to consider them to be much the same for the purposes of understanding the monetary system (i.e., both are claims)."
So both are claims, but they are not both debt. I think this might be quite close to the "equity" view.
"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"
To construct a simple model, let's presume that all money is issued directly by govt as gold weights. Govt by law owns all gold that is produced within its jurisdiction. There is no external sector. Govt has a monopoly on gold production and money is obviously exogenous, since govt is the only source.
Govt books its gold holdings as an asset on the RHS. It has no liabilities that are claims on gold. Therefore all gold is also booked as equity on the LHS.
Now assume a convertible system with 100% gold reserves and corresponding tokens. The tokens go proxy for the gold as a matter of convenience. Govt, of course, is the only one that can create the tokens. Nothing material changes. The change is procedural.
Now eliminate the gold reserves and convertibility. Now all that remains is the tokens but the accounting is substantially the same, but something material does change, i.e., there is no backing of the currency. But the accounting remains the same. The tokens are booked as assets on the RHS and as equity on the LHS.
Of course, the tokens could be digital rather than physical.
I suspect that this approximates the way that many people think about money intuitively.
Accounting-wise, direct issuance of currency like LIncoln greenback is a govt liability hence govt debt. Tom Hickey
The government's liability is to accept that fiat for taxes. But as for the population, net deficit spending without borrowing is an asset without a corresponding liability. Hence, net deficit spending without borrowing by the government is equity for the population.
Tom, that seems to agree with the equity view of government money expressed above. I guess money-as-equity would be booked on the liabilities side of the government's balance sheet, as is the norm in accounting.
I'm not sure if Zarlenga shares this "equity view" with Benes & Kumhof.
"Formally, shareholders' equity is part of the company's liabilities: they are funds "owing" to shareholders (after payment of all other liabilities); usually, however, "liabilities" is used in the more restrictive sense of liabilities excluding shareholders' equity. The balance of assets and liabilities (including shareholders' equity) is not a coincidence. Records of the values of each account in the balance sheet are maintained using a system of accounting known as double-entry bookkeeping. In this sense, shareholders' equity by construction must equal assets minus liabilities, and are a residual."
http://en.wikipedia.org/wiki/Balance_sheet#Equity
Stock is a claim on the business. STF
The common stock owners are the owners of the business. There is no "claim" on the business since the common stock owners already own it!
Money can be treated as equity rather than as a liability/ debt (on the government balance sheet).
Whose equity y? And equity in what?
From the intuitive POV it's probably more understandable to say that money represents a "claim," rather than using "debt," which is counterintuitive for many. Similarly, equities are "claims" on ownership, i.e., "shares." No one thinks of equities as company debt, even though booked on the LHS. "money" is a claim on real resources that are for sale, which is similar to shares as claims on ownership. Similarly, too, prospectors "stake a claim," even through they do not hold title.
The common stock owners are the owners of the business. There is no "claim" on the business since the common stock owners already own it!
Perhaps a lawyer can weigh in here. I think of shares as proof of ownership, just as title are proof of ownership of land. In this sense, shares and titles are claims. There are various types of claim here too. Shares in one's name are more secure legally than shares held in brokerage account, and holding title is far different from not. One doesn't get the title until the loans are paid off, even though one is said to "own" the property.
Money can be treated as equity rather than as a liability/ debt (on the government balance sheet).
Whose equity y? And equity in what?
Yes, this is what my simple example illustrates. When there is gold convertibility then there is a physical asset corresponding to the equity. But with non-convertibility, the accounting is the same but no physical asset as equity.
In a fiat currency the govt's "asset" backing its currency is its taxing power. It can create non-govt obligations as liabilities that only its currency as a non-govt asset can be used to satisfy. So its "assets" are the tax credits govt creates using its monopoly power due to the law. In the US, this power is enumerated in the US Constitution, art 1, sec 8.
One doesn't get the title until the loans are paid off, even though one is said to "own" the property. Tom Hickey
True. But with common stock as private money there is no need for debt. Instead, assets would be bought with new stock issue.
But why "share" wealth and power to buy assets when one can simply borrow the population's stolen purchasing power from the banking cartel?
Really the same issue with the cb issuing non-convertible reserves as govt liabilities. It doesn't matter how the accounting is done, there is no real asset that is backing.
This is problematic in that intuitively there appear to be something "wrong" with this. E.g. there was gold banking and then it was taken away. We all know the charges that are made about this, from fraud to counterfeiting.
What is required is a jump of understanding to the fact that money is not a "thing" or a "stuff," but an idea, specifically a social construct as a part of an institution. Institutions are constructed from rules. Modern money is set of behavioral rules rather than "a real something."
It's really difficult to start out with this as a simple intuitive explanation when very few experts in the field actually understand the underlying logic.
@ frlbane
Right. The underlying logic of growth is that businesses fund ordinary growth from profits and capital expansion with new issues as needed. High levels of debt to equity and debt to income used to be associated with poor management.
Methinks AMI was trying to promote "debt-free money" and realized "money=debt" and things along those lines.
Hence they oppose.
Wikipedia: "... Zarlenga argues it would only be proper for the government to issue, and control the money supply"
All these approaches finally implicitly assume (wrongly) the truth of the quantity theory of money and somehow want a system in which the quantity of money is fixed (or varied at some exogenous rate of growth). So they are more or less equivalent to Austrian economics or Monetarism with just some differences in emphasis than a completely different approach.
Somehow the quantity theory of money is deeply ingrained in almost everyone's mind. Even Keynes could not escape from it.
for the population, net deficit spending without borrowing is an asset without a corresponding liability. Hence, net deficit spending without borrowing by the government is equity for the population.
This statement seems to be 100% correct.
It's also an argument made by some among those who favour so-called "debt-free money". They say all new deposits would (should) be created by government deficit-spending, thus eliminating "debt" from the system.
What's MMT's take on this?
What's MMT's take on this?
It just seems to be another way of expressing the MMT point that if the non-government sector holds net financial assets then that is because the government sector has a net liability to the non-government sector.
Jose, MMT is in basic agreement with the sentiment of that statemen but not the accounting. Govt does keep books and that "equity" (net financial assets) created by deficit spending has to show up on the govts books. It just wouldn't be booked as tsys as it is now and there would be no interest obligation.
Also some MMT'ers do favor formally consolidating the Tsy and cb functions under Tsy, issuing max 3-mo T-bills as demanded, setting the rate to zero, and using fiscal policy (sectoral balances and functional finance) instead of monetary policy.
See also Warren's proposals for reform of the financial system. Bill Mitchell would go further and nationalize banking.
The government already does supervise the issue of money. Most commercial banks are part of the Federal Reserve system, a bureaucracy that is part of the government, and banks are entitled to do in our monetary system because of powers that have been granted to them under law. If people think some other system would work better, then we should by all means change it. But we need detailed proposals, grounded in well thought-out economic and public policy arguments. This is a practical question; not a question about the metaphysics of money.
I'm quite aware what equity is and don't need someone to pretend I need accounting 101 lessons.
At any rate, here's JKH from Keen's blog back in 2009 on common stock, since there's no point reinventing the wheel:
http://www.debtdeflation.com/blogs/2009/09/27/it%E2%80%99s-hard-being-a-bear-part-sixgood-alternative-theory/comment-page-8/#comment-15324
Any household financial asset that is not a direct obligation of the government must by definition be the obligation of another non government entity.
E.g. a corporate bond held by the household sector is the liability of the corporate sector.
Therefore, although the corporate bond contributes to both the gross and the net financial asset position of the household, it does not contribute to the net financial asset position of the entire non government sector, due to cancellation of the household asset against its corresponding representation as a non government liability.
This relationship holds for all financial claims of non government entities on other non government entities.
Importantly, this includes equity financial claims. This can seem a bit counterintuitive. Equity claims represented in the usual way on a balance sheet are not categorized as liabilities. However, the essential double entry book keeping characteristic is that they are on the right hand side of the balance sheet. The right hand equity entry directly offsets the corresponding asset entry on the balance sheet of the equity claim holder.
E.g. common stock held by the household sector is that sector’s financial asset. It is not technically a liability of the corporate sector. Nevertheless, it is a financial claim issued by the corporate sector in the sense that the owner of the stock has the right to benefit from all cash flows and valuation effects that accrue directly to the stock (dividends and marked to market stock price changes). This benefit reflects a comprehensive valuation of the operation of the issuer, including its deployment of real assets, its use of liabilities, and its ability to generate profits, etc. The point is that even though common stock is not categorized as a balance sheet liability, it is a financial claim issued by the corporate sector and a financial asset held in this case by the household sector. Common stock and equity claims in general are treated as a financial asset of the holder and a financial obligation of the issuer (cash flow and marked to market evaluated), and because of that essentially net to zero when consolidating the net financial asset position of the non government sector. The residual as a result of this equity netting includes the real assets of the issuer that are instrumental to the generation of such gross equity value. Depending on the objective of a given measurement exercise, those real assets obviously can also be valued separately from their representation as value embedded in the liability and equity structure of the issuer’s balance sheet. They are excluded from direct representation in the measure of net household worth because their implicit valuation has already been transmitted via the direct debt and equity valuation of the enterprise.
Dan,
"Whose equity y?"
Whoever holds the money, I suppose.
And equity in what?
A system of law, perhaps?
Or as Tom says, perhaps "a claim on real resources that are for sale".
Zarlenga says that "money is an abstract institution of society based in law". If we relate this to the money-as-equity idea then money-things could be "shares" in that institution.
Which leads on to Zarlenga's main bugbear - that these govt-issued "shares" have been supplanted by bank-issued debt, as bank credit has been "monetised" by law. This has given banks an unfair legal power and advantage, which goes against both the spirit and the letter of the Constitution.
STF,
If Benes and Kumhof are right and treasury coin is treated as equity under U.S. accounting conventions, then that's at odds with the description of government-issued money as debt, isn't it?
"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 (Federal Accounting Standards Advisory Board (2012)).”
http://www.imf.org/external/pubs/ft/wp/2012/wp12202.pdf
If Benes and Kumhof are right and treasury coin is treated as equity under U.S. accounting conventions, then that's at odds with the description of government-issued money as debt, isn't it?
Still on the LHS.
Focusing on the presentation, I think that "debt-free" money essentially means "interest-free money" to most people, and the contention is that govt can issue "money" that is free of interest. There is no operational necessity to issue interest-bearing securities to get the reserves to clear that the cb alone can create. That is correct in MMT terms. It's also an increasingly popular idea.
For presentation purposes again, I don't think that most people are concerned with the accounting behind it, and I don't think it is necessary to feature it.
If I were teaching a HS in economics I would present alternative systems that depend on policy choices — a govt money system, a non-govt money system, and a hybrid system such as we have now, and also a convertible fixed rate system and non-convertible floating rate system. The outline could be sketched out with minimal accounting. Then I would discuss the major advantages and disadvantages of each. Finally, I would do a "you decide" to get some involvement and see how well the lesson was digested.
I suspect that most high schoolers' parents' wouldn't be of much assistance with the homework and if asked, who likely confuse more than help. That's a sad state for an electorate to be in given the importance of the policy involved wrt people's lives.
"Still on the LHS"
Are you saying that there is no difference between debt and equity?
I suggest we try to revisit the "pure" neo-chartalist view of deficit spending to see how (whether) it could integrate with the perspective of the debt-free money types.
Say the government spends 100 in excess of taxes. It starts by issuing T-bills to its (underline its, meaning the government and the NCB are consolidated into one single entity) central bank, creating a government deposit in the process.
Step 2 is the deficit spending proper. Government deposits are transferred as payments to the household or corporate sector, resulting in 100 of bank reserves (a bank asset) and 100 in household/corporate deposits (a bank liability and a private sector asset).
The banks are inundated with reserves and the interest rate thus falls towards zero: this is the "natural" rate of interest of the neo-chartalist narrative, that would prevail in the absence of compensating operations by the central bank.
On the NCB's books we now have an asset (T-bills) and a liability (bank deposits aka reserves). But these are a liability only in an accounting sense; in common sense terms, since this "liability" corresponds to mere keystrokes that the government-controlled central bank can create ad infinitum and at zero cost it would presumably not be understood as having the characteristics that define "debt".
It seems that he "debt-free money" proponents would add a formal interdiction to this MMT-like scenario: commercial banks wouldn't be allowed to lend the deposits that resulted from deficit spending. These deposits and the corresponding reserves would simply stay put on the banks' books, with the customers paying a fee for the privilege.
This would result in an economy with no credit and thus no "debt". There would be no loans allowed in this debt-free money system, apparently.
Question: could you still call such a system - admitting it would be feasible in real life - capitalism?
Can't speak for the AMI crew, but the Chicago Plan iteration that the IMF paper wasn't actually a 100% reserve plan.
"In other words, at all times, when banks ask for reserves, the central bank obliges. Reserves therefore impose no constraint."
If you like, call it a 100% reserve plus discount window plan (in the process, shutting down the overnight market). Unlike the original Chicago plan which targeted money suppy (see Bill Still link above), the IMF plan targeted interest rates (discount window rate = policy rate) and capital requirement on banks and/or borrowers. The next time someone says the IMF paper was about a 100% reserve plan, please tell them, "that's just your fear and ignorance talking." :o)
y,
Internal consistency requires coin be called a liability of the Federal Government.
This is because if the amount of coins in circulation reduce because people want lesser coins, the liabilities of the government shouldn't change just because of the result of this.
The government itself may not account it as a liability but from a consistent flow of funds point of view, it is a liability.
All these intuitions such as "debt-free money" results from viewing money as commodity and not credit.
"Still on the LHS"
Are you saying that there is no difference between debt and equity?
I am saying that this is basically an accounting terminology issue that nothing to do with "stuff" in a fiat system. Gold owned by the govt is an asset that adds to equity if liabilities remain constant. That much is pretty obvious. What is fiat? What is the asset on the RHS of the govt book? Where is it accounted for on the LHS? These are accounting conventions since nothing actual is involved. But how we label them makes a difference wrt connotation in ordinary language. I would rather see it show up on the LHS as "equity" instead of a "liability" or "debt" for presentation purposes. After all, we make up these conventions, and we can make them work for us.
When it came to the accounting conventions and their actual consequences during the crisis, mark to market was simply changed to mark to model to disappear the problem. Did it affect the banks actual position? No. Did it affect how it would be perceived and dealt with. Decidedly. Look at how equity markets reacted. They took off upward.
Question: could you still call such a system - admitting it would be feasible in real life - capitalism?
If capitalism is defined as private ownership of means of production, then no problem. Capex can be funded entirely by owner savings w/o borrowing.
Beowulf,
"the Chicago Plan iteration that the IMF paper wasn't actually a 100% reserve plan."
If banks can borrow reserves that doesn't make it a non-100% reserve plan. They can borrow reserves but not create demand deposits when they make loans.
Ramanan All these intuitions such as "debt-free money" results from viewing money as commodity and not credit.
Exactly. Which is why the AMI folks want to switch the convention to bring it in line with the intuitive, which is what my simple examples above were designed to illustrate.
On one level the problem is merely semantic. On another level it is really an issue of paying interest, or not. Which Lincoln's greenback solution illustrates historically.
If capitalism is defined as private ownership of means of production, then no problem
But it would be a form of capitalism with a severely diminished role - and thus power - for the financial sector.
I'd bet banks would not like this type of "reform".
Ramanan,
I don't know if Benes and Kumhof are right when they say that treasury coin is treated as equity under U.S. accounting conventions, but you appear to be saying that if that's the case then the US accounting conventions are wrong. Which would be unusual for you(!).
I was saying that equity sits on the liability side of the balance sheet for accounting reasons but is obviously different to debt.
Could you explain why the idea of debt-free money comes from "viewing money as commodity and not credit"?
This would result in an economy with no credit and thus no "debt". There would be no loans allowed in this debt-free money system, apparently. Jose Guilherme
Not so. Just as the banks only lend each other reserves so would the general population only lend each other reserves. How? By eliminating government deposit insurance (and a legal tender lender of last resort) and by requiring that the monetary sovereign itself (e.g. US Treasury) provide a risk-free fiat storage and transaction service for the entire population that pays no interest and makes no loans.
Banks could still try to issue credit but without iron-clad deposit insurance and no reserve lender of last resort, their reserves would quickly drain to the government provided risk-free service almost as fast as the banks created new deposits.
"It seems that he "debt-free money" proponents would add a formal interdiction to this MMT-like scenario: commercial banks wouldn't be allowed to lend the deposits that resulted from deficit spending. These deposits and the corresponding reserves would simply stay put on the banks' books, with the customers paying a fee for the privilege."
Jose, this isn't what Benes and Kumhof say in 'The Chicago Plan Revisited' at all. You should have a look:
http://www.imf.org/external/pubs/ft/wp/2012/wp12202.pdf
The AMI have their own plan, which I haven't read:
http://www.monetary.org/wp-content/uploads/2010/11/amacolorpamphlet.pdf
Does anyone know what Michael Hudson's take on this is? Apparently he's friends with Kumhof and Zarlenga.
Does anyone know what Michael Hudson's take on this is? Apparently he's friends with Kumhof and Zarlenga.
On the last day of the conference, after Stephen Zarlenga and 2 AMI researchers (Steven Walsh and Jamie Walton) gave two talks explaining the problems we see with the theories of Mitchell Innes and of what is called "Modern Monetary Theory (MMT)," Dr. Michael Hudson objected to our treatment of Innes and MMT. Much passionate discussion followed, by participants around the room - and its all on video! While the issue was not resolved in the discussion, what emerged was that Prof. Nic Tideman, offered to act as an ambassadorial intermediary between Hudson and Zarlenga and see how the questions that came up can be resolved accurately, since they are largely factual. Zarlenga and Hudson agreed to this process, and Hudson suggested that David Kelley also be an intermediary, and Zarlenga agreed. This ongoing process will be posted to the AMI Google list, and also be available to those who have signed in at the red arrows box on our homepage. Join the fun folks! I'm thinking this process can lead to real growth in understanding whats needed for monetary reform.
Great videos of A great AMI Conference
gang of 8: The Chicago Plan Revisited - Sovereign currency aspects,
Clarificiation of Michael Kumhof's proposal,
The Chicago Plan and The Gang That Couldn't Shoot Straight,
Must money be debt? - my Facebook entry todayoups.yahoo.com/group/gang8/message/16724
The gang of 8 comment doesn't seem to make sense to me:
"IF “the stock of reserves, or money, newly issued by the government is not a debt of the government [because] holders of money cannot claim repayment in something other than money”, and considering that foreign holders of U.S Treasury Bills cannot claim repayment in something other than money – e.g. gold – THEN such U.S. Treasury Bills are NOT represent a debt of the U.S. government."
This seems to miss the point that treasury bills can be repaid in govt-issued money, but government-issued money is not 'repaid' in something else.
However, it's interesting that federal reserve notes are defined in the US Code as liabilities of the federal reserve and 'obligations' of the United States (government), which "shall be redeemed in lawful money on demand at the Treasury Department of the United States, or at any Federal Reserve bank."
http://www.law.cornell.edu/uscode/text/12/411
'Lawful money' basically means money issued by the treasury, such as coins and treasury notes. However courts have ruled that federal reserve notes are also 'lawful money' (perhaps because they are actually created by the treasury and then sold to the federal reserve?).
So if Kumhof is correct then a fed note is a fed liability, and a goverment obligation, which can be redeemed for government equity (coin). (Is equity an obligation?)
Definition is from Lisbon Treaty, IIRC.
which definition?
“the stock of reserves, or money, newly issued by the government is not a debt of the government [because] holders of money cannot claim repayment in something other than money”
y,
It's funny. They propose debt-free money - thereby implicitly saying that in their new world, money is not debt. But they criticize the present world description taking issues with "money=debt".
It is a bit difficult to explain how they actually think because it is all inconsistent. I said commodity money because if there exists a world in which gold (for example) is the only money, it is debt free money since gold is not anyone's liability. But somehow they don't want gold so debt-free money. So they have debt-free money which is a thing like gold which people can borrow. Banks have 100% reserve backing so their picture is that we give this "money" to the bank which is keeps at the central bank. So banks do not "cheat" in this world. Since loans do not create deposits in this world, the banks lend that thing and since the amount of money is fixed, and the story starts to appear more and more funny.
From the website:
"Banks would then act as intermediaries accepting savings deposits and loaning them out to borrowers. They would do what people think they do now."
What I meant in my original comment when I used commodity is that the description does not involve the credit function of money or fully self-consistent. It is purely imaginary.
Did Knapp ever describe government-issued money (state money) explicitly as a government debt?
Here's Knapp:
"The unit of value is a legal concept."
"Debts expressed in units of value can be discharged by engraved pieces, either coins or notes, which have by law a certain validity in units of value. Such pieces are called Chartal means of payment, or money. The validity is independent of the contents of the pieces.
Law proceeds from the State; money is accordingly a State institution."
"State money may be recognised by the fact that it is accepted in payment by the State.
... There must be at least one definitive kind of money, i.e. which the creditor must take without being legally entitled to receive other kinds of money for it. There are also provisional kinds of money, legally convertible into definitive money.
The definitive kind of money which the State chooses as final for its own payments and makes compuIsory in dubious cases, is called valuta money. All other kinds of money are called accessory. The valuta money is the " standard," in the narrower sense of the word."
http://socserv.mcmaster.ca/econ/ugcm/3ll3/knapp/StateTheoryMoney.pdf
Sounds like Zarlenga's saying something similar.
No explicit mention by Knapp of money as a government debt, though there is a mention of a "creditor"...
...Which might contradict Zarlenga.
Ramanan,
what do you think of 'The Chicago Plan Revisited"? Just as bad?
Modern money is created by crediting an account. That credit is an asset of the account holder and a liability of the creditor of the account.
When a private bank credits an account in lending, it is lending against its assets.
But when govt credits an account, it is using its legal power as currency issuer as monopoly provider of the currency. It also has the power to tax. So govt can create financial assets for non-govt in the form of currency and also impose financial liabilities on non-govt that are only satisfied by currency.
As currency issuer, govt creates claims on real resources that it uses to move real resources from private use to public use. The only obligation that the govt incurs from this is that of also accepting these claims it creates in payment of taxes it levies.
In return, non-govt gets markets that operate using a common unit of account and medium of exchange, national defense, law and order, and public investment.
Modern societies acquiesce to this arrangement because it works to the benefit of enough people to ensure acceptance of the currency. Should that arrangement break down there there are problems.
So in this sense, money is created by credit and is therefore "credit." That credit must have a corresponding debit according to the rules of double-entry accounting. So where there is "credit" there is also "debt" (debit).
When govt "credits" a nongovt account it creates a tax "credit," which engenders a corresponding obligation on the part of govt to cancel a tax liability it imposes. So the currency is a govt IOU in that sense.
When a private bank credits an account in lending, it is lending against its assets. Tom Hickey
Not quite. The so-called "private" bank is obtaining an asset, a promise to repay, often backed by real collateral, in exchange for a liability that it most often need not redeem in even nominal terms because government deposit insurance insures that most of liabilities created remain in the banking system. And should the banking system as a whole need reserves, the CB stands ready to create them thereby making a mockery of a bank's liabilities in real terms.
Here's some more from Knapp.
He apparently disagrees with MMT and agrees with Zarlenga:
"Money always signifies a Chartal means of payment. Every Chartal means of payment we call money. The definition of money is therefore "a Chartal means of payment."
"There is also another objection which is often raised against non-material Chartal money. Such tickets as paper money pure and simple are, it is said, acknowledgments of the State's indebtedness. Payment in such tickets is therefore only a claim on the State, a provisional satisfaction still leaving something to be done on the part of the State. It is not a definitive payment, consequently not a payment at all in the strict sense.
“The question is, how these pieces stand in the eye of the law. On their face they may admit that they
are debts, but in point of fact they are not so if the debts are not meant to be paid. In the case of paper money proper the State offers no other means of payment; therefore it is not an acknowledgment of the State's indebtedness, even if this is expressly stated. The statement is only a political good intention, and it is not actually true that the State will convert it into some other means of payment.
The decisive factor is not what the State would do if it could, but what the State does. It is therefore a mistake to see no actual payment in payment by inconvertible paper money. It is a true payment, though it is not material.
“If it is said that the State makes the greatest efforts to give up that paper system and to convert its notes into material money as soon as it can, and that the notes accordingly are a claim on it for better money to come later, and therefore a debt of the State, what are we to say in reply?
The answer is that the notes are still not a debt of the State in the legal sense, but at most appear to be so in the course of legal history when the State shows the intention of altering the means of payment some time or other, and of changing the present means of payment, according to some proportion to be found later, into new means of payment.
To judge by that intention, the notes can be called a debt of the State; but in this sense any means of payment, even the autometallistic ones, are a debt of the State. On this account, therefore, the title of true definitive means of payment should not be refused to the notes."
"A note would only be a debt in the legal sense if it were convertible without any radical general change in the means of payment, and this the note according to our premises certainly is not.
Instead of perpetually insisting on the defects of autogenic money, just think a little of its services. It frees us from our debts, and a man who gets rid of his debts does not need to spend time considering whether his means of payment were material or not. First and foremost it frees us from our debts towards the State, for the State, when emitting it,acknowledges that, in receiving, it will accept this means of payment. The greater the part played by the taxes, the more important is this fact to the tax-payer."
p.38 - 52
http://socserv.mcmaster.ca/econ/ugcm/3ll3/knapp/StateTheoryMoney.pdf
Zarlenga:
“money and debt are two different things, that’s why we have different words for them. We pay our debts with money.”
“Money’s essence (apart from whatever is used to signify it) is an abstract social power, embodied in law, as an unconditional means of payment.”
http://www.monetary.org/mmtevaluation
As far as I can tell from the above, Knapp's Chartalism appears to have more in common with Zarlenga's work than it does with MMT (which combines aspects of Chartalism with Innes' credit/debt theory of money).
(!)
Y,
I don't know if they're right or not, but the govt can call it whatever it wants. Regardless, coins circulating are a claim on the govt--if you present them to the govt in payment, it accepts them. It's exactly the same as if you write a check on your own deposit account at the bank to settle a payment (loan repayment, fee, etc.). That's the point I am making, and it's consistent (though different context) with the point JKH is making in the quote above.
As for Knapp vs. MMT, I have no idea what point you are making there. I don't see anything in the quotes you've provided inconsistent with MMT.
I'm with Ramanan on everything he's said here, too.
y,
Don't really plan to read the IMF's Chicago plan revisited.
Neoclassical economics and its cousins are based on the scarcity of money. When they realize that the actual world doesn't really have monetary scarcity, they propose to make it work like they want.
Also, in neoclassical economics there is little place for institutions and there is no place for active management of the economy.
It is weird. The government shouldn't intervene in the free markets according to them and yet the central bank is supposed to control the money supply. How contradictory to the ideology.
The present system is a nice system and the system is to be managed actively such as via more regulation instead of saying banks should have 100% reserve backing and so on.
Of course, there are related more sound rules such as banks having to keep liquid assets as per Basel rules etc which are good but this 100% reserve backing is silly.
right Ramanan,
Even if this semantic issue were to be settled once and for all, nothing would be "fixed" (system still operated incorrectly...)
and I must say, (FD: I'm not a semantic person) this sentence here by Knapp:
"The decisive factor is not what the State would do if it could, but what the State does. It is therefore a mistake to see no actual payment in payment by inconvertible paper money. It is a true payment, though it is not material."
???????
I could not understand what this means in a million years... was Knapp's stuff translated into English from a different language I wonder?
rsp,
When a private bank credits an account in lending, it is lending against its assets.Tom Hickey
When a private bank credits an account in lending, it is lending against its assets.Tom Hickey
Not quite. The so-called "private" bank is obtaining an asset, a promise to repay, often backed by real collateral, in exchange for a liability that it most often need not redeem in even nominal terms because government deposit insurance insures that most of liabilities created remain in the banking system. And should the banking system as a whole need reserves, the CB stands ready to create them thereby making a mockery of a bank's liabilities in real terms.
That is is true, but it doesn't change the general statement that a bank is risking it assets when it lends. As far as govt guarantee goes, it is relying on the govt to stand proxy for it in case of insolvency should its assets be insufficient, so that depositors don't lose out. Of course, govt can step in front of that, too, but only at the risk of creating much more moral hazard.
As far as collateral goes, that depends on the collateral. In the Ponzi stage of finance, the collateral may have been greatly overvalued, as actually did happen recently.
In the final analysis, bank equity holders are on the hook.
Scott, I think that y's point about Knapp is that Knapp is arguing that in the legal sense, money and debt are two different matters in that debt involves an obligation to repay and convertible money involves an obligation to convert. Lacking such obligation, fiat is not "debt" in the legal sense.
However, in a fiat system money is created by crediting accounts, so in the accounting sense a credit must be offset with a corresponding debit, i.e., all assets are someone else's liability.
What does the "liability" of the govt involve, using "liability" in the sense of obligation? Accepting its own credits as liabilities in satisfaction of liabilities it imposes on others, i.e., taxes, fees and fines.
So there are two senses of debt coming into play here, the legal sense and the accounting sense, and the technical meanings are different. The legal sense accords with ordinary usage more than the accounting sense, so I can see why someone interested primarily in rhetorical effect in order to shape policy would prefer it.
But I am presuming that the above is the correct legal sense, since I have seen others "in the know" use it. But perhaps a lawyer could clarify it for us.
@ Ramanan at 10:06.
Agree. Well stated.
"...instead of saying banks should have 100% reserve backing and so on."
Ramanan, that's just your fear and ignorance talking. :o)
The Chicago Plan Revisited is more like a 100% reserve + discount window plan. Banks can only loan equity and money issued by the discount window (unlike Chicago Plan 1.0, it targets rate, not supply). This new money is what's lent to borrowers, increasing, as loans do, reserves).
Every loan, long or short would have an embedded tax on every loan for whatever the discount is (like mortgage rates, the discount rate could be be adjustable or fixed). Since Fed net earnings go back to Tsy, the Chicago Revisted paln would make higher interest rates a revenue source for Tsy, instead the current revenue drain. Don't tell JKH this, but it looks like something RSJ would come up with.
Also, just kidding about "fear and ignorance, upthread I'd written, "The next time someone says the IMF paper was about a 100% reserve plan, please tell them, "that's just your fear and ignorance talking." You will still be seated at the right hand of the Father.
beowulf, do overdrafts automatically incur loans, so that "deposits create reserves," making money endogenous. Or is money scarcity imposed exogenously by the cb controlling how much is lent at the discount window.
From what I can glean from what you have written — I haven't read the plan yet — it seems that the the cb's control lever would be through price (discount rate) rather than quantity of liquidity provided. So it would still be an endogenous system with a tighter leash held by policy makers.
Ramanan,
"Don't really plan to read the IMF's Chicago plan revisited."
Perhaps you should, so that at the very least you could claim to know that which you are supposedly talking about?
rsp,
Matt,
"I could not understand what this means in a million years"
Perhaps you should start from the beginning of the text. (the state theory of money).
socserv.mcmaster.ca/econ/ugcm/3ll3/knapp/StateTheoryMoney.pdf.
I think Knapp actually shares a lot of your views.
Tom,
"debt involves an obligation to repay and convertible money involves an obligation to convert. Lacking such obligation, fiat is not "debt" in the legal sense.
However, in a fiat system money is created by crediting accounts, so in the accounting sense a credit must be offset with a corresponding debit, i.e., all assets are someone else's liability.
What does the "liability" of the govt involve, using "liability" in the sense of obligation? Accepting its own credits as liabilities in satisfaction of liabilities it imposes on others, i.e., taxes, fees and fines."
You haven't understood Knapp's theory. You are in Innes land.
y You haven't understood Knapp's theory. You are in Innes land.
How so? And please don't just tell me to go read Knapp.
Beowulf,
The Chicago plans and things like that comes from Milton Friedman's followers and predecessors.
Look at this from the IMF paper's abstract:
"Much better control of a major source of business cycle fluctuations, sudden
increases and contractions of bank credit and of the supply of bank-created money"
"Dramatic reduction of private debt, as money creation no longer requires simultaneous
debt creation"
Its the same old Monetarist/Quantity Theory of Money/Neoclassical "intuitions" backing the plan.
100% reserve backing is useless.
As you rightly said, the Fed would have to provide the reserves the banking system needs.
It can only be applied to transactional deposits and not to all deposits>6m duration or something of the sort. If I were a bank I would call all deposits as time deposits and impose minimal of penalties on customers to transact.
The Fed has tried many things both under the pressure of Monetarists and due to internal "experiments" but it all failed.
It is based on experiences such as this that central banks in countries such as Cananda, NZ, Australia, Sweden, UK etc have now zero reserve requirements.
As about seigniorage to the Treasury, the plan is useless because banks will have a higher markup in their lending.
the Fed would have to provide the reserves the banking system needs
Yes sir, the Fed would provide them, no problem at all.
The government deficits spends.
After this spending the Fed BS is Assets: t-bills Liabilities: bank deposits. The commercial banks' BS is Assets: reserves Liabilities: private sector (household/firm) deposits. The interest rate falls to zero.
The "debt free money" types add to this process an interdiction on lending. The commercial banks become simple "piggy banks".
Can it work in practice - capitalism with no credit creation? Likely, not.
But at least it doesn't seem to be logically inconsistent.
And it damn sure would break the power of the banks.
Politically explosive, if it gets traction, I would say.
Can it work in practice - capitalism with no credit creation? Likely, not.
It could be made to work if govt created enough savings, but it would look a lot different from what we call "capitalism" today. It would likely reduce volatility of the financial cycle, but it would also likely reduce nominal growth. But real growth is what we are interested in and I am not sure how that would be affected.
The issue really is whether govt understand its role and get policy right. I have my doubts.
"And it damn sure would break the power of the banks."
Don't underestimate capitalism.
Don't underestimate capitalism
I don't.
I just can't help laughing at the idea of a capitalism where the likes of Blankfein and Dimon would be condemned to everlasting holidays, maybe even having to join the ranks of the unemployed.
Amusing prospect, isn't it?
"Can it work in practice - capitalism with no credit creation?"
Credit creation re business investment is necessary and it would be difficult without it.
Credit re consumption by households is a time bomb and completely un-necessary…in fact bad money management for most…some are capable of using it properly (leverage).
Households pay all interest at the end of the day.
The average dude doesn't know how to spell leverage or balance a checkbook.
Credit creation re business investment is necessary and it would be difficult without it.
Banks would be pure intermediaries, brokering savings and profiting from the rate spread. So there would still be commercial and mortgage lending.
"mortgage lending…"
Mortage lending requires stable income growth and low unemployment.
Today a home purchased with a 15-year mortgage will cost you 60+% more than the loan amount, a huge reduction in effective income. The only thing that can save you is inflation (coupled with leverage). :-)
If profits accrued to wages more fairly many people would not need a mortgage, or at least not an 80% - 95% mortgage.
"capitalism with no credit creation? Likely, not."
no, the idea presented in that paper is to separate money and credit, not to eliminate credit.
Take the time to read it.
Tom,
Chartal money is not a debt of the government.
I'm tired so I'll have to leave this subject until tomorrow.
no, the idea presented in that paper is to separate money and credit
"That paper" is but one among several versions of "debt-free money" being proposed.
If you take a look at the Positive Money chaps in the UK, they do have versions where credit will likely be purged out of the system..
I agree with this, and therefore disagree with MMT:
“money and debt are two different things, that’s why we have different words for them. We pay our debts with money.”
“Money’s essence (apart from whatever is used to signify it) is an abstract social power, embodied in law, as an unconditional means of payment.”
Furthermore, we HAVE had, and HAVE,debt-free money. We've had debt-free money in coins since the coinage act of 1792, and we've had debt-free money in paper bills since 1862 (Lincoln) - 1972, not fully phased out until 1996.
Money is not taxes either, and indeed, you could have money issued without collecting it back in taxes, and if you did it modestly enough, it wouldn't even be inflationary, because it would be eaten up by true wealth creation, e.g. infrastructure, and population growth. There are other reasons to have taxes, like controlling resource monopolies, but you don't need taxes to raise revenues.
AMI is closer to the truth than MMT. MMT is closer to the truth than the current mainstream Keynesians. Keynesians are closer to the truth than Austerians (who are just plain wrong).
MMT fails to recognize that the Central Bank is a private body acting (supposedly) in the public interest (OK, stop laughing now...). It is NOT part of governemnt, no matter how many times Wray or Mosler say it is. If we owe money on Treasuries, we are not truly monetarily sovereign. When we don't owe money, like we don't for coins, or U.S. Notes, then we will be monetarily sovereign and all sorts of good things will happen.
Bills HR 1452 (LaHood, 1999), and HR2990 (Kucinich, 2012) attempt to introduce new U.S. Notes back in the economy, debt-free. You know they will work by the opposition to them from the banking elite.
Chartal money is not a debt of the government.
Where does it appear on the balance sheet?
@ Scott the Dot
“Money’s essence (apart from whatever is used to signify it) is an abstract social power, embodied in law, as an unconditional means of payment
That's a theory of money that has to be developed and defended.
I'd start with money is a social construct, that is an idea rather than a thing or stuff, instead of "abstract social power" which is goobledy-gook as it stands. I wouldn't want to have to defend it.
Furthermore, we HAVE had, and HAVE,debt-free money. We've had debt-free money in coins since the coinage act of 1792, and we've had debt-free money in paper bills since 1862 (Lincoln) - 1972, not fully phased out until 1996.
We have had "interest-free money" that is money issued without interest obligation. But all money shows up on the issuer's balance sheet on the LHS.
Money is not taxes either, and indeed, you could have money issued without collecting it back in taxes, and if you did it modestly enough, it wouldn't even be inflationary, because it would be eaten up by true wealth creation, e.g. infrastructure, and population growth. There are other reasons to have taxes, like controlling resource monopolies, but you don't need taxes to raise revenues.
MMT says none of that. It simply says that state (chartal) money gains value from its being a tax credit.
MMT fails to recognize that the Central Bank is a private body acting (supposedly) in the public interest (OK, stop laughing now...).
ROFL
When we don't owe money, like we don't for coins, or U.S. Notes, then we will be monetarily sovereign and all sorts of good things will happen.
We will go to heaven?
Perhaps it's time for Y to read some MMT to better understand how everything quoted thus far from Knapp has already been covered and integrated into MMT. There's no contradiction. It's all in Randy's book.
"MMT fails to recognize that the Central Bank is a private body acting (supposedly) in the public interest (OK, stop laughing now...). "
Yes, right up there with all the other private bodies for which the (a) government appoints the CEO and board of directors for, (b) govt requires to report to Congress at least twice a year, (c) turns over virtually all of its profits to the govt, (d) has been required to target particular rates of interest for the govt's bonds or provide overdrafts to the govt in the past when the govt felt it was in its own interest, and (e) cannot pay interest on its liabilities unless the govt says it can.
Suggesting the Fed has not acted in the public interest and suggesting that the Fed is a private body like any other are two very different things. The latter is false. The former is true because the govt has allowed it, and mostly there because the economics profession has argued forcefully in favor of central bank independence. The very fact that we're taolking about changing the monetary system and/or ending the Fed is proof on its own that the Fed is not a "private body." Good luck convincing the Supreme Court that the Fed is a person like other corporations.
"Furthermore, we HAVE had, and HAVE,debt-free money. We've had debt-free money in coins since the coinage act of 1792, and we've had debt-free money in paper bills since 1862 (Lincoln) - 1972, not fully phased out until 1996."
Ever seen a balance sheet for a currency-issuing govt? If you have you didn't understand it.
Tom,
All good, but I think you mean to say the right-hand side of the balance sheet for the govt.
Tom,
Did my post from this morning get lost? I don't see it, but it appears you responded to it.
Ooops, did I say that? Yikes! Yes, I did. Thanks for setting that aright, Scott. Should be RHS (liability side) rather than LHS (asset side).
STF said...
Tom, Did my post from this morning get lost? I don't see it, but it appears you responded to it
It got shunted into the spam filter for some unknown reason. I just fished it out. It's here.
"We've had debt-free money in coins since the coinage act of 1792, and we've had debt-free money in paper bills since 1862 (Lincoln) - 1972, not fully phased out until 1996."
I kind of know what he's talking about. Its like he took a convo Ramaman, Tom and I would have in days past, translated it to Polish and then re-translated it back to English.
The trick about coinage is that Tsy can sell them at face value to the Federal Reserve. Its an asset swap to Tsy but for the Fed, its a form of debt issuance. Its promising to honor the dollars it created to purchase the coinage.
Here's the absurd truth, the US Government has a debt limit yet the Fed, an agency of the US Government but has no debt limit. The entire point of using jumbo coins is to transfer debt from the constrained whole to the unconstrained part. Its not really "debt-free money".
Great comments from Ramanan and Beowulf here! Thank you.
Thanks, Tom!
Definitely Tom you should read it. Its sort of disconcerting how everyone is misreading it (or perhaps, not actually reading it in the first place). They cite Michael Hudson for crying out loud. :o)
"The deposit multiplier is simply, in the words of Kydland and Prescott (1990), a myth... switching to full government funding of credit can maximize the fiscal benefits of the Chicago Plan. This gives the government budgetary space to reduce tax distortions, which stimulates the economy..."
----
"about seigniorage to the Treasury, the plan is useless because banks will have a higher markup in their lending."
The banks own Congress so practically speaking you're right. But for that master/slave relationship, the markup could be capped (heck just set the lending tax as 50% of the markup) or, the govt could simply do more direct loans (student loans are now issued by the Dept of Education directly). Considering that 70% of bank loans are mortgages and the US Government is now backing over 95% of new mortgages, perhaps Tsy should be profiting from good loans instead of just eating the bad ones.
Beowulf,
There are a lot of authors who know that the money multiplier story is wrong but nonetheless end up getting the story wrong.
The Chicago plan was backed by Fisher who was the creator of the modern version of the Quantity Theory of Money.
Milton Friedman came close to understanding that money is endogenous, causality is reverse and so on but still wanted the central bank to control the supply of money.
The IMF paper is along those lines.
It is quite explicit that this plan will control the amount of money in the preface itself (which won't happen in practice, given the Fed's experience).
Here is from the inside:
"This means that banks cannot lend by creating new deposits. Rather, their loan portfolio now has to be backed by a combination of their own equity and non-monetary liabilities ft. For the reasons discussed in section II.B, we assume that this funding ft is supplied exclusively by the government treasury, with private agents limited to holding either bank equity or monetary instruments dt that do not fund any lending."
This is strange. If the economy goes into crisis, banks will face serious issues in lending or else everything will be funded by the government/cb. But it will force the government to fund the banks without having to accept any collateral!
Then it says:
"Under this funding scheme the government separately controls the aggregate volume of credit and the money supply"
Nope. The government simply wouldn't be able to.
anyway, why does the government need to control the money supply?
It has to regulate but that is a slightly different matter.
Neoclassical economics and its cousins are based on the scarcity of money. When they realize that the actual world doesn't really have monetary scarcity, they propose to make it work like they want.
It may be true that Zarlenga and co. have neoclassical language and concepts embedded to a certain degree in their proposals and the way they talk about economic matters, but who doesn't? They are in fact taking on the quintessential neo-classical idea that an economy must be run on private debt, with some financial manager taking a cut at every step. The public is bamboozled into thinking the government is subject to the same constraints that they are and must borrow their money from banks or "China." This is by design. It's such a carefully constructed propaganda edifice that it's difficult to even discuss economics without unconsciously invoking neoclassical dogma. AMI builds its
"original sin" story on "fractional reserve banking" which, as we sophisticates know, is not the way modern banking works. Another neo-classical myth. Pointing that out, however, is no great insight. The system as it "actually works" is still very pro-cyclical, isn't it. It still creates booms on pyramids of private debt. When it fails, the chronically impoverished government must step in to save the banks. After the government has done that (who knows how) it must don the penitent's hair-shirt, because it was the gov.'s fault all along. Great system.
The present system is a nice system
For whom? "Endogenous money" for the average Joe means that he must go into debt to have a place to live, to have a means of transportation or livelihood, etc. And he is indeed "on the hook" for all of that. When he loses his job the bank gets to take it all away. But at least the banks aren't "reserve constrained" in their lending. How nice. It's true that everyone seems to like it in the boom phase, but then the house of cards falls and guys like me are screwed. It could be better with more regulation or with the counter-cyclical measures Bill Mitchell recommends. Fine. MMT seeks to integrate chartalism and the elaborate rental extraction system known as "the financial industry." Wonderful. But are we any closer to that than to AMI's reforms, whatever you may think of them?
anyway, why does the government need to control the money supply?
A good question.
I think that everyone, on all sides, agrees that under a nominal IR target, the money supply is (by definition) endogenous. On the other hand, at least in principle, it should be possible (and to an extent equivalent) to target the supply of money. But why would anyone want to?
One important issue is the use of instrument rules that leave the price level indeterminate. Obviously, if you're a central bank, this is bad.
So one argument goes like this: If the central bank supplies whatever level of nominal money is demanded, the nominal money supply will vary in proportion to the price level (since the demand is for real balances). Yet the price level itself is determined by the money supply. Therefore, both the nominal stock of money and the price level will be indeterminate.
And various monetarist prescriptions follow from this argument.
"MMT seeks to integrate chartalism and the elaborate rental extraction system known as "the financial industry.""
What on earth are you talking about?????? You might want to actually read some MMT on the financial industry before saying something so completely ridiculous. Recognizing that credit money happens whether you like it or not and that fiat money is not "debt-free" is nowhere near being in favor of the "elaborate extraction system." You have to understand the system--which AMI doesn't--before you can propose solutions
Vimothy,
"I think that everyone, on all sides, agrees that under a nominal IR target, the money supply is (by definition) endogenous. On the other hand, at least in principle, it should be possible (and to an extent equivalent) to target the supply of money. "
Failed miserably in the Volcker experiment and the Thatcher experiment in the United Kingdom. It was a "Scourge".
"Yet the price level itself is determined by the money supply. "
The price level is not determined by the stock of money.
Also, I'd like to mention that even though people claim that money is endogenous in their description, it isn't.
It is so in Taylor's book (the Taylor of the Taylor rule) who in one place assumes that it is endogenous and in the next chapter goes on to describe the money multiplier process!
Ramanan,
Failed miserably in the Volcker experiment and the Thatcher experiment in the United Kingdom. It was a "Scourge".
That may be so, but if you want to know why anyone would choose to target the money supply, price level determinacy is one reason.
The price level is not determined by the stock of money.
Well, if the price level is determined by the stock of money, as under the QTM, then...
On the other hand, it is possible to write models where the price level is determinate even though the CB targets a nominal IR, or there is no money supply. But this is quite a controversial area of research.
I know we've discussed this before, but I've never really understood: what does, in your view, determine the price level?
It is so in Taylor's book... who in one place assumes that it is endogenous and in the next chapter goes on to describe the money multiplier process!
I've not read Taylor's book, but I don't think that the money multiplier is inconsistent with money supply endogeneity. Money supply endogeneity follows from the CB's instrument choice. Even if the money multiplier held in a stable mechanical form, and whatever one thinks of it as a useful model, if the CB targeted a NIR, the money supply, however defined, would be endogenous. As far as I can see, at any rate.
When it fails, the chronically impoverished government must step in to save the banks. After the government has done that (who knows how) it must don the penitent's hair-shirt, because it was the gov.'s fault all along. Great system.
Not quite true, as Bill Black points out. This crisis resulted from criminality rather than credit, although credit enabled the fraud, along with other things like low interest rates, rating agency complicity, lack of oversight and lax enforcement of the law, to cite some of the many factors. While the criminals are chiefly responsible for creating the crisis, they could not have pulled it off without government complicity.
Black points out that according to law, regulators are required to put insolvent banks into resolution. What this involves is "nationalization" in the sense the equity holders lose their stake and management is replaced as govt takes over, sorts things out, and then puts the firm up for sale. Generally this is done over a weekend and the bank opens Monday morning under new ownership and management. That did not happen with the TBTF's for crony political reasons. The law was simply shelved. The escuse was given that TBTF's were just too big for resolution, they weren't really insolvent, etc. Black makes mincemeat of those excuses to fool the rubes.
BIll argues convincingly that this was not a problem with credit leading to malinvestment. It was a carefully engineered crime spree orchestrated at the top with govt calling off the regulators and then not only not prosecuting the criminals but enabling them and giving them more power to do it again.
We don't need to change the monetary system to fix this. What we as a country have to do is get rid of the corruption that is causing the rot. That means exacting accountability by enforcing existing laws and strengthening the penalties to disuade organized crime from taking over the financial sector again. Take a look at Black's documentation and see Warren Mosler's proposals for monetary reform.
Vimothy,
Yes I agree that the reason someone wants to control the money supply is because they think it determines the price level.
It is deeply ingrained.
The general price I believe in is that one can divide the sectors in primary and secondary sectors where raw agricultural output and commodities belong to the first and manufactured products to the second. There is also the tertiary sector - services both non-financial and financial.
The primary sector products are traded freely and its prices are determined in the markets. The secondary products pricing is decided by firms who markup on the costs such as raw materials and labour (and leave some for the shareholders on expected sales). Every industry has a leader who has powers to set the price and others follow.
So prices are determined by demand in the primary sector and costs in the secondary sector.
Actually within mainstream Alan Blinder has some research on cost based pricing. ("Asking about prices: a new approach to understanding price stickiness").
About money-multiplier and money endogeneity, I don't quite get how they are consistent - they are quite the opposite.
What on earth are you talking about?????? You might want to actually read some MMT on the financial industry before saying something so completely ridiculous
I have, thanks. I've slogged through the requisite 777 Bill Mitchell posts and various other MMT literature for about 3 years now. If I haven't "got it" by now, I guess I won't. Maybe you missed it, but my "ridiculous post" was heavily sarcastic. I was exaggerating for effect. I was responding to what I felt was the overly dismissive tone of some of the comments. Along with MMT I've read some of the people that a particular commenter was dismissing without having bothered to read because he knows beforehand that they're "not even wrong." I think some of them have interesting ideas even if their analysis of how the system works leaves something to be desired. A fine grained analyses of how the payment system works seems to be MMT's particular strength. AMI should be learning from that and not engaging in premature criticism. In the larger context of the whole political economic situation, I do think it still comes down to the power relationship between the public and private sectors and how institutions are structured and which purposes they serve. You can say, for example, the president appoints the Federal Reserve board and that therefore the government has the upper hand. But we all know presidential candidates are well vetted by the "money men" and the list of candidates from which they may pick board members is similarly vetted. How many Keynesians versus monetarists to out and out Randians get appointed?Basically, my point is MMT, as I understand it, doesn't see anything fundamentally wrong with the institutional structure that we have. I have my doubts, but I hope you are right.
(OK, third time trying this--hope I get it right this time.)
Hi David,
Perhaps reading all the MMT stuff you've missed it when we've called for abolishing the Fed as we know it (Wray says this fairly often--only need to manage the pmts sytem), downsizing the financial system by 2/3 at least, and completely rethinking financial regulation (not to mention prosecuting what Black and Wray refer to as rampant fraud in the financial system). MMTers constantly argue that the financial system should be structured to serve public purpose. Note also the 0 rate proposal--not enough on its own, obviously, but it's partly at least a result of the MMT perspective (and also that of PK more broadly) that the central bank's interest rate target is about income/wealth distribution and not as much about managing the macroeconomy.
I also specifically pointed out above that currently, largely because of neoclassical ideology, the Fed is allowed to not act in the public interest, so there's no illusion here on our part that the current institutional structure works necessarily---I was merely pointing out in response to another commenter that it is not legally a "private body." That doesn't mean the current structure's desirable--two different things (to not address the latter in a comment is not the same thing as saying I'm in favor of it).
At any rate, feel free to disagree with MMT's views on how institutional structure should change or to suggest it doesn't go far enough (as Tom does, for instance), but to suggest we just blindly accept the current institutional structure is a total misrepresentation.
David,
"that a particular commenter was dismissing without having bothered to read because he knows beforehand that they're "not even wrong.""
If that was referring to me ...
The paper can be easily dismissed. While it seems to understand that loans make deposits, it argues at one place that:
"This means that banks cannot lend by creating new deposits"
which is totally wrong because even if we assume that if somehow the plan is implemented, loans create deposits by accounting!
The plan totally changes the balance sheet structure of banks and would simply making loan rates highly fluctuating and high which is not what we want.
Finally, low interest rates are good for the economy. Just because asset bubbles can be created is not a full justification for having ultra-high rates. These are to be controlled directly by more regulation of banks and the financial sector (e.g., securitization) and not by some silly plan of "controlling the money supply".
The comments in this post are fascinating, really gets to the core of some POVs on Full Reserve Banking, endogenous money etc. I have used some comments from this page on my ongoing discussion of MMT and Full Reserve Banking here http://clintballinger.edublogs.org/2012/12/22/post-keynesianism-mmt-100-reserves-project-post-no-2/
if anyone has read this far in these comments they must be interested and informed, so would love to hear their take on this topic. Cheers, Clint
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