Tuesday, September 29, 2015

Michael Hudson — My Education as an Economist: How I Learned to Reject the Market Dogma That Dominates the Profession


Excerpt from MH's new book, Killing the Host.

Alternet
My Education as an Economist: How I Learned to Reject the Market Dogma That Dominates the Profession
Michael Hudson

87 comments:

Matt Franko said...

"It took me until 1984 to reconstruct how interest-bearing debt first came into being – in the temples and palaces, not among individuals bartering. Most debts were owed to these large public institutions or their collectors, which is why rulers were able to cancel debts so frequently: They were cancelling debts owed to themselves, to prevent disruption of their economies."

One can see today the dark forces behind ISIS still working to obliterate the material record of that system...

I still dont think "debt forgiveness" is a good way to operate the system... I liken it to repairing a collapsed bridge by putting it back exactly the way it was... why would you lend out in the first place if you knew it would not be paid back? something here is not making sense..

I've read some views of the Hebrew Scriptures book of Daniel as chronicling the 70 year exile of Israel from the land as the total time of 490 years of sabbatical (every 7th year) years that Israel never complied with ... so in effect they "owed" God 70 years for this transgression... and He eventually collected...

Of course all of this is now changed and it is not the same deal today...

Unknown said...

I'm a little confused by the part in the article about how the USA got a "financial free-ride" because the money that left the US via net imports was recycled back into the US economy through TSY CD purchases by foreign CBs thereby "funding the US deficit ad infinituum".

All govt deficits self fund their TSY CD issuance as thats the only place on Earth those reserves can go. Being the biggest global reserve currency and being a net importer is irrelevant. Even if you have perfectly balanced trade and every dollar deficit spent by the Govt went and stayed only in the domestic private sector, Govt deficits and TSY CD sales would still be necessarily self funding as thats the way the system works. In fact because the whole artifice is a closed system consisting only of the monopolists' IOUs, there is literally no other way for the system to work.

Thats right Kervick, the concept of taxpayers and TSY CD purchasers "funding" the Govt is not just totally wrong, in fact its impossible.

Matt Franko said...

Auburn I think he like Stiglitz would advocate for "debt forgiveness" too as a solution to the present chaos...

Its a view where the system is operated as "borrow > default > forgive > borrow > default > forgive > borrow ...."

We perhaps look at it as "issue > redeem > issue > redeem > issue .... "

BIG differences in how the world is being viewed within mankind...

Matt Franko said...

(I meant Hudson not Dan ;)

Unknown said...

Matt-

The importance of debt forgiveness is for entities that must repay their own financial liabilities using their own financial assets (Someone else's IOUs). Thats a completely separate concept then the Govt, which uses only its own financial liabilities to pay off its own financial liabilities. Its like the difference between gravity and quantum mechanics. They're both true, they just operate concurrently in different circles of abstraction, the very small and the very large. Issuers and Users are totally different concepts, and as such, different rules, theories, and understanding are required. The confusion in economics comes from the fact that out of paradigm people confuse the two systems, or think they operate the same way.

Bob said...

So when a building becomes infested with termites, we should try and save it?
(Of course this a bad analogy since termites have sense enough to consume a building in a way that does not lead to its immediate collapse)
Debt forgiveness resolves the lack of prevention in the private sector.

A said...

Auburn,

let's say you want to buy goods from me but you want to pay with an IOU.

By choosing to accept your IOU, and by choosing to hold your IOU, I am funding your deficit.

People who accept and hold government IOUs are funding the government's deficit.

Matt Franko said...

Bob it might help short term yes but it leaves the system open to further dysfunction in time...

What I dont see out of a Hudson or a Stiglitz is how do modify the system to prevent the dysfunction in the first place... they seem comfortable with the system malfunctioning periodically and then just doing like a re-set...

I f-ing hated the days of having to reboot Windows all the time..

Matt Franko said...

Auburn even the people who are always going all around with US "default!" warnings (Stockman, R&R, Walker, various Peterson morons...) are operating within the "borrow > default > forgive > borrow > default > forgive > borrow ...." paradigm...

They look at the default mode as possible... I would say we do not...

Unknown said...

Phillipe

That's completely backwards for the govt. The reason govt ious are accepted in the first case is because of tax liabilities. So in reality, the govt funds the taxpayers not the other way around. Govt ious do not and in fact cannot come from the taxpayers. Just like Google ious can't come from the markets.

The only possible way the system can be viewed as taxpayers funding the govt is on the real side. By forcing the private sector to relinquish some of its demand via taxation, the govt makes available to itself the real activity that would be caused to occur if taxpayers spent that money instead.

NeilW said...

"let's say you want to buy goods from me but you want to pay with an IOU.

How are you going to sell any goods unless you accept an IOU?

We all sell and buy things by incurring debts and then 'settle' by swapping them around for other debts. That's how it works.

A said...
This comment has been removed by the author.
A said...

Auburn,

"The reason govt ious are accepted in the first case is because of tax liabilities. So in reality, the govt funds the taxpayers not the other way around."

but the government spends more than it taxes. That deficit is funded by those who accept and hold its liabilities (either base money or bonds).

"Govt ious do not and in fact cannot come from the taxpayers."

I didn't say that they do. Maybe you didn't get my point. If you go into a shop and give the shopkeeper a piece of paper with "IOU $10" written on it, in exchange for goods from his shop, the shopkeeper is funding your deficit by accepting and holding your IOU.

A said...

"So in reality, the govt funds the taxpayers not the other way around."

That doesn't make sense.

That's like saying that a landlord funds his tenants by spending IOUs which they can then use to pay their rent.

Tom Hickey said...

The confusion in economics comes from the fact that out of paradigm people confuse the two systems, or think they operate the same way.

Right. The most effective way I have found to deal with this is by explaining how there are two sets of books in modern monetary economy — the consolidated non-government books of currency users and the consolidated books of the government as currency issuer. Currency issuers make entires on their set of books and currency users make entries on their sets of books. The government balance and the nongovernment balance must sum to zero for both sets of books in that currency zone to balance when they are consolidated.This is just the way the rules of double-entry accounting work.

Then you go ahead and answer questions by showing the entries for different transactions with the banks acting as the interface through the payments system run by the central bank. It quickly becomes clear that all the entries that cross the line between the two sets of books are using liabilities that only the government can issuer, being the monopoly provider of its currency.

It is a very powerful framework for understanding not only financial operations but also political economy. It's immediately clear that nongovernment as currency issuer cannot use its own liabilities to settlement transactions with a government that is the sole issuer of its liabilities as the sole means of settlement. It is also clear that a government that doesn't create obligations in anything but its own currency that it alone issues, there can be no lack of funding operationally.

The sole constraint is then availability of real resources wrt to price level, although political restraints can be imposed voluntarily by the monetary/fiscal authority. Political restraints that may be imposed in different jurisdictions are special cases that do not affect the general case regarding operations.

Tom Hickey said...

What I dont see out of a Hudson or a Stiglitz is how do modify the system to prevent the dysfunction in the first place... they seem comfortable with the system malfunctioning periodically and then just doing like a re-set..

Big difference between them. Stiglitz thinks the system can be fixed, while Hudson doesn't. In other words, Stiglitz thinks that capitalism can be reformed while Hudson thinks it needs to be replaced with socialism, although he also proposes temporary fixes that he warns are not permanent and will just kick the can down the road for a while.

John said...

Matt: "...why would you lend out in the first place if you knew it would not be paid back? something here is not making sense.."

Absolutely! I've never heard an adequate explanation of how this ancient debt jubilee system could possibly work.

Every seventh year (or year x) debts would be forgiven. Who on earth would lend out on the sixth year (or year x - 1)? And would that not either at the very least have a negative impact on the economy or have a domino effect on lending in the years previous to the sixth year (or year x -1)?

Anybody?

Tom Hickey said...

"To fund" is ambiguous. Technically it relates to sources and uses of funds in a cashflow statement.

In this sense, taxpayers"fund" government. Budgets are prepared based on sources and uses of funds, where sources of funding are taxes and debt issuance and uses are expenditure through exchange, transfer, and interest payments.

In the case of both taxes and debt issuance the sources of funding is exclusively in terms of liabilities that government alone is permitted by law to issue, that is, the currency as the unit of account in that currency zone, with transactions taking place only through the government bank.

So the sources of funding wrt flows is nongovernment, for whose use the government issues the currency in the first place. If there were no need to use it on the part of nongovernment,why would nongovernment accept it in return for transferring privately owned resources to public use?

But the ultimate source of funding system-wide is issuance of government liabilities. The funding that government uses is in the final analysis provided solely by government.

The system works by the government issuing its own liabilities on its own books as nongovernment assets and then accepting only these assets in settlement of transactions with government. Clearly, government must supply a surplus of its assets to nongovernment through spending or make them available as needed through lending to nongovernment, or the system breaks own for lack of funding.

The buy-in to this system is created by government through imposing sufficient obligations in its liabilities to create continuous demand for them.

It’s a very simple system conceptually, and it works fine based on the standard accounting rules.

Unknown said...

Phillipe.

Your example of the landlord is a perfect example of how the govt works. The landlord issues his on ious and because he requires you to pay Jim rent in his own ious, the tenants would trade the landlord ious around to settle their intra tenant transactions and then some of those ious would be saved. This becomes the stock of landlord debt over time and the deficit would be the net flow in any period.

Now swap landlord ious for govt reserved and you have the sovereign monetary system.

The landlord offering his tenants an interest bearing term deposit for their landlord iou surplus does not change anything. Its certainly not funding the landlord issuance of his own ious. Now swap landlord cd for try cd and you have sovereign "debt" issuance. Which is of course no debt at all in the way that term is used for currency users / tenants.

Tom Hickey said...

BTW, the Treasury and central banks are managing cash flow continuously, since funding from taxes is seldom the sole source of funding. When taxes revenue no longer supplies the needed funding for expenditure, the Treasury issues debt that the central bank brokers to nongovernment. In both these cases settlement is in the payments system in government liabilities. The cb then conducts OMO as necessary to manage the policy rate. All of this takes place solely in government issued liabilities that exist only in the government books, or as currency and securities held physically by nongovernment, which come only from government by exchanging settlement balances at the cb.

"The Lord giveth and the Lord taketh away. Blessed be the name of the Lord." — Job 1:21.

In the Great Chain of Being, the government is the proxy of the Lord. Economic anthropology suggests that this may actually have been relevant in creating the concept of money as an IOU.

Tom Hickey said...

@ Auburn

You beat me to it. And in light of my comment above, it is interesting that the landlord is called "lord." The history of the development of that concept is generally forgotten now but historians are well aware of it.

Matt Franko said...

"Lord giveth and the Lord taketh away."

Tom that's issue > redeem > issue > redeem > issue...

But I would point out that iirc Job was pre establishment of the house of Israel....

With that then it looks like the borrow > default > forgive > borrow .... came in

So this breaks down looks like right along certain OT/NT lines...

issue > redeem > issue > redeem..... is textbook Paul 101...

borrow > default > forgive > borrow .... looks like textbook Hebrew Temple 101....

These views then manifest in human cognitive biases which we can see at work here...

Matt Franko said...

John I think in the Mosaic Law it was written down that it had to happen at a fixed periodic interval...

Also, I dont think the Mosaic Law allowed lending either in silver or in state currencies in the first place it mandated like royalty deals... the tennant had to pay a % of real output... then perhaps the real product could be sold for silver or state currency by the person who had the land rights...

Looks like a pretty stable set-up imo....



Dan Kervick said...

All government IOUs are not created equally.

The IOU's that can be used for purchasing goods and services in the US are an IOU of a particular kind called "dollars". Almost all of these are issued in their fundamental "base" form by the central bank. But there are other kinds of government IOUs that are issued and sold by the US treasury, and are called "treasury securities".

Treasury securities are promises to make payments of dollars.

Since the US treasury does not issue dollars, and only dollars can be used to purchase goods and services, then to carry out spending and to fulfill its earlier promises to make dollar payments, the treasury must acquire those dollars in some other way than by issuing them.

It acquires those dollars in two main ways: by receiving them as tax revenues, or by issuing and selling treasury securities. (It can also sell other assets if necessary.)

Treasury spending results in a movement of dollars from the treasury's account at the Fed to private sector accounts at the Fed. But that is not the mechanism by which new dollars are created in private sector accounts, since all of those dollars were previously collected from the private sector via taxation or security sales. Treasury fiscal operations recirculate previously created dollars; they don't generate new dollars.

The total supply of dollars in both private sector and treasury accounts combined expands or contacts as a result of balance sheet operations conducted in the centralized banking system.

Since the central bank is a public-private partnership that is at least to a substantial degree part of the government, we can say that supply of dollars expands and contracts because the government is doing the expanding and contracting. But the treasury is not the branch of government that is doing that expansion and contraction.

It's worth mentioning that calling dollars "IOUs" in the first place is a more-or-less honorary title. If you hold a dollar, the central bank doesn't really owe you anything. All you can claim from them is an even swap of dollars for dollars. I would submit that in any system of credit where the hierarchy of promises terminates in some instrument that is issued by a specific agency, and represents a promise only for another instrument of exactly the same kind, then that instrument is not really an IOU, and does not really represent a genuine liability of the agency.

Dan Kervick said...

You certainly wouldn't want to set up a system in which debts are routinely and periodically forgiven in an unpredictable fashion. All that would do is make ordinary lending more risky than it already is. Much of the risk premium would be passed onto the borrowers anyway, and would be a drag on economic activity and investment.

However, if an economy gets itself into very deep trouble due to an excess and over-leveraging of private debt, then a broad-based clearing of some debts can be a good way to go in exceptional circumstances.

Random said...

"It's worth mentioning that calling dollars "IOUs" in the first place is a more-or-less honorary title. If you hold a dollar, the central bank doesn't really owe you anything."
Cash is a receipt for central bank liabilities.

Matt Franko said...

John,

"Every seventh year (or year x) debts would be forgiven."

I think outside Israel it looks like IF it worked that way, it was more ad hoc.... perhaps the authorities would use judgement as they viewed how things were going... this is what Hudson seems to be implying...

BUT, in the Mosaic Law intervals were fixed and mandated... also, you couldnt lend in the first place it was to be structured like a royalty deal... so you could do a deal in the 6th year no worries it would perhaps be renegotiated a year later for the next 7 year term .... and I think both sides in the royalty deal had an opt out clause any year...

It allowed a lot of flexibility but within certain fixed parameters/rules... (ie it was a well regulated activity)



Unknown said...

Dan

The govt owes you or the banks depending on who holds the govt ious in reserve form credit for your tax liability and also any govt produced goods and services like passports entry into parks and govt buildings that charge a fee.

Who cares that tsy must acquire its govt agency counterpart's (the fed) ious first before tax can spend. Its irrelevant. Pretending that is some important constraint is ridiculous. As eccles told the senate banking committee it does not matter, the feds job is to generate the conditions in the reserve market to facilitate that spending. Nobody can say no to a congressional appropriation of spending. Its the law.

Iow if congress passes a spending bill, the fed and tsy have no choice but to make it happen. All the reserve accounting mechanics are secondary and as such not fundamental

Dan Kervick said...

Who cares that tsy must acquire its govt agency counterpart's (the fed) ious first before tax can spend. Its irrelevant.

It's irrelevant from a general point of view concerning the powers and potential powers of government. But it is not irrelevant to this specific question: "How, under our current monetary system, are dollars created?"

MMTers have routinely asserted that dollars are created in our system as a result of the treasury "spending them into" the non-government sector. And that is false. MMTers have also claimed that both the base dollar quantity and "net financial assets" of the private sector can't grow unless the treasury deficit spends. And that's false too. (Even more important, it's not obviously significant - since there is no reason to think that "net non-government financial assets" refers to macroeconomically important quantity.)

Iow if congress passes a spending bill, the fed and tsy have no choice but to make it happen.

If that is true, all that means is that the Treasury has to do the spending, and the Fed has to give the treasury an overdraft. But an overdraft is just a loan from the Fed. And the Treasury then has an additional debt to the Fed.

Unknown said...

"It's irrelevant from a general point of view concerning the powers and potential powers of government. But it is not irrelevant to this specific question: "How, under our current monetary system, are dollars created?

MMTers have routinely asserted that dollars are created in our system as a result of the treasury "spending them into" the non-government sector. And that is false."

And MMTers are 100% with this statement as long as you define Govt money correctly.

The correct definition of Govt money includes both reserve and securities accounts. As TSY securities are nothing but Govt CDs. All Govt spending involves crediting reserves (spending them into the non-Govt sector). And when you buy TSY CDs, all you are doing is transferring money from your commercial checking account to a Govt term deposit account, you lose nothing. Just like I lost nothing last month when I bought a 12-mo Chase CD. So it is quite accurate to say that deficit spending adds money to the economy, specifically Govt currency.

The reason people like yourself dont view it that way is because you have two sets of definitions for money. When commercial banks offer term deposits in exchange for checking deposits, you would include that in a monetary aggregate (M2) and yet for some strange reason when the Govt does the exact same thing, TSY term deposits are not included in the M2 aggregate. This is objective wrong.

"And that is false. MMTers have also claimed that both the base dollar quantity and "net financial assets" of the private sector can't grow unless the treasury deficit spends."

It was mostly true before the Fed paid IOR (excluding Fed dividends), although this notion is still tricky since Fed payments reduce dollar for dollar Fed remittance back to the TSY. So in one sense, this comment is still true.

" (Even more important, it's not obviously significant - since there is no reason to think that "net non-government financial assets" refers to macroeconomically important quantity.)"

The only way you could say this is to be willfully ignorant of the way that MMTers use this concept. Adding NFAs is simply a way of saying that the Govt needs to add to demand, since all fiscal policy expansion adds NFAs and demand.

"If that is true, all that means is that the Treasury has to do the spending, and the Fed has to give the treasury an overdraft. But an overdraft is just a loan from the Fed. And the Treasury then has an additional debt to the Fed."

This comment is irrelevant to our discussion.

A said...

Auburn,

government money is an IOU. Government money is a debt. Remember?

A said...

Tom Hickey

"The funding that government uses is in the final analysis provided solely by government."

That doesn't make sense according to the sources and uses of funds you described. Government money issuance is a 'source of funds'.

Unknown said...

Here is the relevant paragraph from the honorable Fed Chairman Eccles:

"Mr. ECCLES. Well, as I remember the discussion—and I have referred
to it in this statement—there was a feeling that this left the
door wide open to the Government to borrow directly from the Federal
Reserve bank all that was necessary to finance the Government deficit,
and that took off any restraint toward getting a balanced budget.
Of course, in my opinion, that really had no relationship to budgetary
deficits, for the reason that it is the Congress which decides on the
deficits or the surpluses, and not the Treasury. If Congress appropriates
more money than Congress levies taxes to pay, then, there is
naturally a deficit, and the Treasury is obligated to borrow. The
fact that they cannot go directly to the Federal Reserve bank to borrow
does not mean that they cannot go indirectly to the Federal
Reserve bank, for the very reason that there is no limit to the amount
that the Federal Reserve System can buy in the market. That is
the way the war was financed.
Therefore, if the Treasury has to finance a heavy deficit, the Reserve
System creates the condition in the money market to enable the borrowing
to be done, so that, in effect, the Reserve System indirectly
finances the Treasury through the money market, and that is how the
interest rates were stabilized as they were during the war, and as
they will have to continue to be in the future.
So it is an illusion to think that to eliminate or to restrict the direct borrowing
privilege reduces the amount of deficit financing. Or that
the market controls the interest rate. Neither is true. "

https://fraser.stlouisfed.org/docs/historical/house/1947hr_directpurchgov.pdf

So if you think MMT is wrong Dan, dont argue with us. The burden is on you to explain why the man who developed and ran the system at its inception is wrong. All we are doing is following in the Great Man's footsteps.

Unknown said...

Phillipe:

I personally reserve the term debt to refer to entities that must acquire financial assets to pay off their financial liabilities.

This is not true of the Govt as the Govt only ever uses its own financial liabilities to pay off its financial liabilities.

Dont you see the fundamental difference?

Unknown said...

This was was figured out and understood 70 F#$%^ing years ago. Its not our fault that political ideology has twisted and warped so badly what is a rather simple and straightforward concept.

That the funds used to pay taxes and buy Govt CDs can only come from the Govt itself.

And that acknowledging this basic fact about reality changes everything.

I honestly cant understand why this is controversial other than ignorance and ideology.

A said...

Dan,

If I gave you a $1M government bond, would your wealth have increased? Yes, you would now be $1M wealthier than before.

Dan Kervick said...

Auburn, why would I disagree with that? Eccles is arguing that the Treasury finances whatever it needs by borrowing in the money market, and that the Reserve System creates the conditions for that borrowing by buying up whatever quantity of debt it has to. And it can keep the treasury's borrowing rate at whatever level it wants to.

His main point is that by eliminating treasury direct borrowing from the central bank, that does nothing to eliminate treasury's indirect borrowing from the Fed. If the Treasury can't sell debt to the Fed, they can sell it to the private sector and the private sector can then sell it onto the Fed, if the Fed is buying.

Dan Kervick said...

Philippe, yes I would be. But if the US treasury prints that bond and gives it to me, it now has an additional $1 million debt. It will pay that debt by collecting more taxes or selling more debt, both of which drain dollars from the private sector.

And here you are talking about only a local operation affecting one person. Clearly the government can't reliably make the private sector richer in real terms simply by giving away bonds. If the US government issued and mailed everybody a $1 million dollar bond tomorrow, then - assuming that the issuance was credible and everyone was convinced the government would make the $1 million dollar payments - then nominal private sector wealth would increase. But the result would be an expectation of massive inflation, which may or may not stimulate any real growth.

A said...

Auburn

"the Govt only ever uses its own financial liabilities to pay off its financial liabilities"

if it pays off one type of liability by issuing another type of liability then it hasn't really paid off its liabilities overall.. The way it pays off its liabilities overall is by taxing more than it spends.

Unknown said...

Dan-

You have got to be kidding me.

All of your arguments for months here have been that MMTers have it all wrong by saying that the Govt is necessarily self-funding. MMters are lazy scholars, MMTers are delusional, MMTers are misleading, blah blah blah. All MMT has ever said is what Eccles says in the provided quote. So if you agree with Eccles, you agree with MMTers, and then what in the world are you constantly badgering us about?

A said...

Dan.

selling government debt doesn't drain dollars from the private sector.

A said...

Dan,

"Clearly the government can't reliably make the private sector richer in real terms simply by giving away bonds. If the US government issued and mailed everybody a $1 million dollar bond tomorrow, then - assuming that the issuance was credible and everyone was convinced the government would make the $1 million dollar payments - then nominal private sector wealth would increase. But the result would be an expectation of massive inflation"

so how is any of that different to if the government mailed everybody $1M in cash?

Unknown said...

Phillippe,

Yes. And we were talking about me and MMTers not considering TSY CDs "debt" in any meaningful sense. Which is why MMTers were not worried about the inflationary prospects of QE, it doesnt change the number of outstanding Govt liabilities aka NET financial assets aka wealth of the non-govt, and that the ratio of reserve IOUs to securities IOUs is largely to irrelevant macro outcomes. Which is why monetary policy is largely ineffective at moderating the economy and therefore fiscal policy is king and the deficits are king (increasing Govt financial liabilities which are wealth and income to the private sector in any form).

This is all standard, basic MMT 101

Dan Kervick said...

"selling government debt doesn't drain dollars from the private sector."

Of course it does Philippe. The government doesn't give its securities away. It sells them. If you buy one, you now have a government security, but fewer dollars. The dollars you used to make the purchase have been transferred from your account to the government's account.

Unknown said...

Dan-

Is the private sector drained of dollars when Chase sells 12-MO Cds?

Of course not, the number of dollars is the same.

And if its not true for the private sector, why would it be true of the Govt?

Of course not, the number dollars is the same.

So when are new dollars created then?

When the TSY spends, thereby crediting the banking system with reserves and thus commercial deposit accounts.

A said...

Dan,

what you said was:

"if the US treasury prints that bond and gives it to me, it now has an additional $1 million debt. It will pay that debt by collecting more taxes or selling more debt, both of which drain dollars from the private sector."

you're saying that rolling over debt (by issuing new bonds to pay off old ones) drains dollars from the private sector in the same way that running a surplus to pay off debt drains dollars from the private sector. That is incorrect. Rolling over debt does not drain dollars from the private sector.

A said...

Auburn,

"me and MMTers not considering TSY CDs "debt" in any meaningful sense"

I don't see how everything you write after that logically follows from you deciding to not call treasury bonds 'debt'.

Matt Franko said...

"This was was figured out and understood 70 F#$%^ing years ago."

It was figured out thousands of years ago.....

Unknown said...

Phillipe

Why are reserves considered money and tsy cds considered debt?

There is no oobjective reason. Either they are both debt or they are both money because they are both liabilities of the govt. Mmt ers consider them both money by and large. All the following mmt points i elucidated in the comment above logically follow from this statement

A said...

Auburn,

in this comment:

"Is the private sector drained of dollars when Chase sells 12-MO Cds? Of course not, the number of dollars is the same. And if its not true for the private sector, why would it be true of the Govt? Of course not, the number dollars is the same. So when are new dollars created then? When the TSY spends, thereby crediting the banking system with reserves and thus commercial deposit accounts."

are you counting bonds as 'dollars'?

A said...

Auburn,

"All the following mmt points i elucidated in the comment above logically follow from this statement"

no, not necessarily. If you call both treasury bonds and reserves 'money', they still have different characteristics. So if they're money they're still not identical forms of money. In order for your arguments to be true you have to show that the differences between them are unimportant. You don't prove that by just calling them both money.

Unknown said...

Qe shows that the differences between them are unimportant. Its no longer a theoretical question. Trillions and trillions in Qe globally with no discernible macro impact

Unknown said...

Yes m2 and tsy cds are virtually indistinguishable . Why are private sector term deposits money and govt term deposits not money?

Dan Kervick said...

Auburn, how many times do I have to repeat myself? Going back to over the past several threads on this same topic, I have argued that the private sector doesn't get its dollars because the treasury spends those dollars into the economy; and I have argued that the treasury does not need to run a deficit for either dollars or net financial assets to increase. I have argued that the treasury funds its spending by selling securities and taxing.

Eccles is not saying that the Fed "self-funds" the government's spending by just giving the treasury the money it spends. All Eccles is saying is that, one way or another, the central bank will create the conditions necessary for the Treasury to borrow what it needs to borrow to finance deficits. It can even borrow from the central bank itself indirectly, if the central bank purchases debt that is initially sold to the private sector.

The Fed is the part of the government that conducts monetary policy - not the treasury. But the fact that the banking system that the Fed heads is responsible for creating the dollars that the treasury spends tells us little about the processes that are involved. For the most part, banks - the central bank included - are not just creating dollars and giving them away. Dollars are mainly issued as part of the process of making loans, and loans are secured by the real assets of the entities that are doing the borrowing. It doesn't matter whether there is a single central bank making all the loans, or a two-layered system like the one we have in which commercial banks loan to households and businesses and the central bank loans to the commercial banks. Ultimately, those are just two ways of carrying out the same process. The banking system is constantly loaning money into the economy, and the money getting loaned in is used to pay off earlier rounds of loans. In the interim, all of that circulating money is financing the further development of the real economy and the creation of real wealth. That's were all the main economic action is: the real assets. The money is just an instrument for real exchanges and real productive processes. Bank liabilities are emitted, exchanged, and extinguished - and the real economy grows.

Under our current governing procedures, the treasury is required to obtain the money it wants for its spending by acquiring it from those private sector money stocks, stocks that are created by the Fed working with the banking system it runs. It gets this money either by taking it outright via taxes, or by selling debt. We could certainly have a different system - but we don't. It has been set up that way deliberately.

Fed credit to the treasury - whether by direct loans, which currently are not permitted, or by indirect lending through the secondary market for treasury debt - is just that: credit. Suppose the Fed were making no profit from the private sector via its portfolio of private sector assets. Now suppose the Fed buys a $1 million dollar 6 month security at 0% interest from the treasury (indirectly, via the secondary market in the current system). That is a Fed expense. The treasury gets $1 million. 6 months later, the treasury pays the Fed the $1 million back. That's Fed revenue. The revenue minus the expense is $0. The Fed thus has no net positive income. So nothing is distributed to the treasury. The treasury borrowed from the Fed, and then paid it back.

Dan Kervick said...


The other things I have criticized MMT for have not been part of the current discussion, but are the larger macroeconomic claims MMT sometimes makes about the causes of unemployment and the relation of employment to the size of the deficit.

It's fine to call the Fed part of the government. But it's the part of the government that wears the pants as far as monetary policy is concerned, and it conducts that policy with various goals in mind - currency and price stability above all. Congress set it up this way because it doesn't trust itself: so it established a quasi independent agency within the government to be the monetary grownup and prevent the government from funding itself via inflationary monetization of deficits.

A said...

auburn,

say inflation is 2% or higher. Would your rather hold your savings in the form of cash or a bond which pays interest?

A said...

Dan,

"the treasury does not need to run a deficit for either dollars or net financial assets to increase"

yes it does, for the domestic private sector as a whole - unless there is a current account surplus.

"The money is just an instrument for real exchanges and real productive processes."

money is not just a neutral veil over barter. Money, or rather financial wealth in general, is something which people want in itself for the utility it provides (such as security), and it has real effects both in the short and long term.

Veronica said...

@ Matt and Tom

Re:I still dont think "debt forgiveness" is a good way to operate the system... I liken it to repairing a collapsed bridge by putting it back exactly the way it was... why would you lend out in the first place if you knew it would not be paid back? something here is not making sense..

Can you please explain what you would propose instead? Is the basic problem having to pay interest on loans, which compounds and thus grows faster than the economy, as Hudson explains? So is the solution abolishing interest payments on loans, except for investment loans that lead to the creation of value-added assets (as in the Gospel, where Christ is angry towards the man who simply buried the money and did not invest it productively), and in which the lender participates in the risk/reward, rather than charging interest while he remains in the "safe" position of a rentier?

Thanks in advance for any reply!

Anonymous said...

So, are you saying DanK – that if the Govt. decided to hand you $100K, as brand new $money (not paid out from its savings or borrowed from nongovt) somehow on my proviso you use it to look after your human needs in a manner that does no harm to anyone else or the environment – you would refuse the gift?

A said...

Dan,

"That is a Fed expense"

it's a loan. It's not counted as an expense. And only the interest received on the loan is counted as revenue.

"The treasury borrowed from the Fed, and then paid it back."

The money issued by the Fed is a liability of the Fed. So in effect the Fed is borrowing from whoever is holding its liabilities, including the treasury.

Tom Hickey said...

Tom Hickey

"The funding that government uses is in the final analysis provided solely by government."

That doesn't make sense according to the sources and uses of funds you described. Government money issuance is a 'source of funds'.


Government supplies the funding that is used to pay taxes and purchase government securities either by spending or lending, which are the only way for nongovernment to get the funding it provides government through taxes and bond purchases.

It's in the flows. Settlement balances flow to government by government crediting nongovernment accounts by spending and lending. Those credits then flow back to government as the funding that government has provided.

There is no beginingless-endless circle or infinite regress involved in the circuit of flows. There is a starting point for both endogenous money created by bank lending and government currency emission through spending and lending. The ending point of endogenous money is loan repayment that destroys deposits, and government obligations that destroys settlement balances in the payments system or cash tendered at government payment offices.

Endogenous money is funded in the process of money creation. The deposits that are created by extending loans fund the loans.

Similarly, the currency that government emits funds the withdrawal in the final analysis, but on the accounting statement, spending is funded by taxes and securities issuance.

IN the case of both banks and the government, the funding that they provide is in their own liabilities which are later destroyed by settlement of accounts.

This is all an illusion of something real happening. It's just a matter of bookkeeping. What's real is the stuff that is exchange using "money" as a unit of account.

Most economists mistake this as money being merely veil over barter, so that money is neutral, They over look the fact that the velocity of money (rate of flow) is variable and varies based on changing saving desire for many reasons, economic and financial, social and political, and real, such as the degree of confidence-uncertainty that affect liquidity preference and propensity to consume.

Keynes figured this out, for example, and pointed out that money is non-neutral and affects the real economy based on shifts in saving desire, liquidity preference, propensity to consume versus invest based on expectations in the face of changing degrees of risk and uncertainty.

A said...

"spending is funded by taxes and securities issuance"

money is a liability - a type of 'security' like a bond (except it has no maturity and usually pays no interest - although reserve deposits do currently pay interest).

Money issuance is a 'source of funds' just like bond issuance is a 'source of funds'. Government spending is a 'use of funds'.

Tom Hickey said...

Is the basic problem having to pay interest on loans, which compounds and thus grows faster than the economy, as Hudson explains? So is the solution abolishing interest payments on loans, except for investment loans that lead to the creation of value-added assets

There would still be a problem is loans are made imprudently to those not in a position to repay them at some point. Then both lenders and borrowers can face insolvency if they cannot meet cash flow requirements.

A government that issues its own currency and doesn't undertake obligations in either a currency it doesn't control or commit to exchange real goods (like gold or silver) can't have either a liquidity or solvency problem.

Just as the government made the financial institutions good, it could do the same of non-bank borrowers. No need for debt forgiveness.

Tom Hickey said...

Money issuance is a 'source of funds' just like bond issuance is a 'source of funds'. Government spending is a 'use of funds'.

Correct

And taxes and securities issue are sources of funds, too, as part of the flow of funds that the government alone creates. It would be different if government accepted bank liabilities in settlement but it doesn't. Taxpayers pay taxes using deposit account that are bank liabilities and banks have to obtain settlement balances that only originate with government to clear drafts drawn on them.

There is no consistency is taxes and securities issuance fund government spending and government originating the funding in its spending and lending that initiates the flow from government and back to government with many parties hold it in the circuit from emission to withdrawal.

Tom Hickey said...

Let's assume that Fed adopts Warren Mosler's proposal to set the policy rate permanently to zero and for the Treasury not to issue securities of longer than 3mo duration, making that happen in consultation with Treasury.

Then government securities pay a very slight interest premium over holding cash, which holders of large sums will prefer to no interest at all.

So all government securities become essentially cash substitutes after maturing securities are rolled over for T-bills.

What changes?

Veronica said...

Re: Just as the government made the financial institutions good, it could do the same of non-bank borrowers. No need for debt forgiveness.

I realize that the gov't has unlimited funds at its disposal. Does that really solve the systemic problem that Matt pointed out?

Ok, so a given investor invests badly and he suffers a loss of his capital--since the assumption is that he charges no interest. That is a private, not a systemic, problem. If I understood Matt correctly, it was the government that constantly had to bail our its borrowers. It obviously had the funds in some sense, but the illogical part was that it knew in advance it would be bailing them out.

Are you saying that gov't should always be ready to bail out failed investors,since it has unlimited funds to do so? That doesn't seem to make any sense either, any more than it made sense to bail out banksters, just because the gov't could issue the funds.

It seems to me that if you just remove the interest that solves the problem. The exception could be--as in the ancient kingdoms--when forces of nature were responsible for the loss, such as crop failures due to hail, rather than failures due to incompetence. Insurance companies are well aware of such distinctions. One doesn't want to support negligence or incompetence or crookery, but only failures truly outside the control of humans.

I imagine this sort of thinking is behind Islamic finance as well as the ancient prohibition against usury but not investment risk taking, and also Aristotle's view that interest assumes that money per se is fruitful and that this is unjust--again, exception made for loans that finance productive, not rentier, activity and thus future earned income that actually adds to the economy.

Does all this make sense? I'm not an economist, just an interested citizen.

Tom Hickey said...

The Fed did not bailout the banks but provided unlimited liquidity so that they didn't develop cashflow issues. The government could do the same for others without actually giving them new assets.

The effect this would have had would have been to contain the financial crisis so that it didn't go viral and infect the real economy which was doing OK at the time.

Then there needed to be reform of financial practice, eliminating the causes of the arising from "imprudent" lending. This was a problem that the financial sector created. Obviously, the government had to act prop up the system but it didn't go far enough in letting it spread to the real economy.

Much of this could have been accomplished by liquidity provision alone to make space for loan repayment in an orderly way.

Veronica said...

By liquidity you mean credit? Doesn't that amount to an asset on the borrower's books? Money was lost. That should be a problem, and a punishable one if there is criminality involved, as William K. Black has made very clear. In effect, Paulson and co. threatened the gov't, and some economists, like Bill Mitchell don't agree that they had to be saved--or "bailed out." The real economy is still indebted. It seems to me, that you are perhaps simplifying too much, or I just fail to understand, since you make it sound like everything is just working out fine.

After all, the money power is a very great one, and potentially, since power corrupts, a very dangerous power.

Tom Hickey said...

A lot of the problem was that firms and individuals could not meet current liabilities because they could not borrow to do so. This froze the system and it quickly affected the rest of the economy, which meant that people who were liquid enough to meet their obligations on time no longer were able to do so. This began a spiral of default that began in the housing market and quickly spread.

The banks didn't go under because the Fed provided enough liquidity, over 30 trillion in roll-overs to keep the financial system going. In the end, those loans were repaid and very few financial institutions went under.

The same could have been done for homeowners who could not meet their payments on time. Liquidity provision doesn't cancel the loan. It just provides further lending to meet payments at low interest. That way, fewer defaults emerge and they are spread out over time avoiding a crisis that paralyzes the economy.

This could have been done rather easily out of the central bank, which has unlimited ability to provide liquidity. It would have been no big deal and minimized the financial crisis and prevented it from going viral.

It would have cost almost nothing in comparison with the hit the entire economy took and which it hasn't recovered from yet. Minus trillions that is not recapturable.

Veronica said...

Yes, I see, thanks. I guess the issue of the criminality of the banks and their sandwiching of crap paper and the countless liars loans is a separate problem (I'm not being sarcastic). Is that what you're saying?

Dan Kervick said...

...yes it does, for the domestic private sector as a whole - unless there is a current account surplus.

No it doesn't Phillipe. Both the quantity of money and the private sector's net financial asset position can change purely as a result of central bank balance sheet changes, even if the treasury runs a balanced budget.

Anonymous said...

What an investment's current value is depends on the window of time/accounting period you're looking through. If you look at valuations in '07, then again at the bottom of the market in '09, then again in 2013, you can see how QE1 worked as a shock absorber. The Fed could have relaxed collateral requirements, but we got QE1 instead. It was a way of stopping "collateral damage", really.

Veronica said...

I forgot to add:

Do you disagree with Hudon's remark, therefore would argue that compound interest growth in relation to economic growth is not a problem?

Tom Hickey said...

I guess the issue of the criminality of the banks and their sandwiching of crap paper and the countless liars loans is a separate problem (I'm not being sarcastic). Is that what you're saying?

Yes. The government could not let the financial system succumb to systemic risk that no one know the extent of. It could have brought down the entire global economy, which would have rightly been blamed in large measure in the US.

At the same time, there should have been accountability. Instead the perps were told not to worry about personal retribution for past crimes, nor should they be overly concerned with present ones, recognizing that the US has to lead the world financially and is competing with the City for the crookedest place to do business.

As MMT'ers and Hudson pointed out at the time, what should have happened instead is that government follow the law, put the insolvent institutions in resolution and operating them while new management was installed, cramming down the bond holders to equity. That's how capitalism is structured. Banks go under all the time. They are put into resolution on Friday close and reopen under new management on Monday. The government had no problem with dealing with GM, for example, which it couldn't let go completely under either. Or AIG.

This brings up the issue about whether an institution that is too big to fail is too big and should be broken up, like ATT and Standard Oil were long previously under anti-trust.

Tom Hickey said...

Do you disagree with Hudon's remark, therefore would argue that compound interest growth in relation to economic growth is not a problem?

Compound interest is not the problem that Hudson makes it out to be presently. Is profit a problem? Not if it is not based on rent extraction. Interest is not necessarily rent extraction any more than profit. Banks make a profit through the spread they charge on loans. With genuine competition that spread will be narrow enough to preclude rent extraction.

The interest that banks receive doesn't go down some black hole. As the earnings of the bank it gets spend on operations and fixed expenses and what's left as profit goes to the equity holder, who then use it to spend on consumption or save. There is no reason to think that bank earnings are much different from other firm earnings. So goes to saving and some gets spent. That's how the system works.

The real issue is reducing economic rents and rent-seeking and there is a lot of that in finance, as Hudson has pointed out.

Veronica said...

Many thanks,Tom! I really think you should write a non-academic intro. finance economics text that covers these kind of questions and the others that have come up on this post.

Anonymous said...

"The real issue is reducing economic rents and rent-seeking and there is a lot of that in finance, as Hudson has pointed out."

Brought on by squeezing out competition, Tom? Monopolies that escape prosecution via legislative corruption?

Tom Hickey said...

The reason there is no rent in neoclassical models is the assumption of perfect competition.

There are various reasons that rent extraction becomes possible through imperfect competition arising. One is, of course, government capture. Another is economies of scale. Another is capital intensity. Modern economies tend to domination by large firms not only owing to government, as Peter F. Drucker points out in predicting the permanence of large corporate dominance owing to increased efficiencies. The it becomes tempting to charge what the market will bear unless government steps in with legislation and regulation in the public interest.

Another big source of rent extraction is land rent and that isn't necessarily brought about chiefly by government either, although it can be.

Anonymous said...

"Another big source of rent extraction is land rent and that isn't necessarily brought about chiefly by government either, although it can be."

My guess is this one starts out with rising wages and the quality of bank assets, the quality of what landlords are offering being unchanged.

Matt Franko said...

Veronica the problems Hudson often talks about are these USD loans issued to foreign entities... the foreign entities often default and then folks like Hudson think the solution is to just forgive them...

These foreign entities should be denied the ability to either borrow or establish USD loans in the first place it is an affront to US authority...

iow you ask someone like a Hudson "Is it appropriate for Mexico to borrow USDs?"

Then Hudson would say: "Well the US borrows USDs too so who are we to tell a foreign nation that they cant borrow USDs? Both govts are in line borrowing USDs..."

He is in the "borrow > default > forgive ...." paradigm...

He is one of these OT oriented people who just dont understand authority and where it comes from... its the same for many OT oriented people in nominal Christendom... listen to John Hagee sometime: "the US is going bankrupt!" ... LOL

To really get it, someone like a Hudson or a Stiglitz would have to more or less convert to Christianity (or at least spend a lot of time reading the Gospels/Acts/Paul) and someone like a Hagee or the Pope would have to reach a level of maturity in Christ that Paul talks about here:

"we should all attain to the unity of the faith and of the realization of the son of God, to a mature man, to the measure of the stature of the complement of the Christ,
that we may by no means still be minors, surging hither and thither and being carried about by every wind of teaching," Eph 4

So I'll stay with Paul's terms of minors and maturity here...

A lot of these people are just still very immature in faith, minors as Paul would term them.

Tom timely cited an OT verse above: "The Lord giveth, and the Lord taketh away."

One has to made very comfortable when one reads this... to the extent that one is not comfortable reading this, or this statement would bother one, then I think that person is going to remain in the "borrow > default > forgive" paradigm... what Jesus would often term a person "scant of faith"...

As far as interest on loans goes I think Tom handles the technical aspect pretty well above for now...

But longer term, until our current leadership class reaches a mature level in faith, policy is probably going to continue to be really screwed up like we can see now (these people literally think they are borrowing our own currency and/or "out of money!" they are minors... AT BEST! and many are indeed morons...) ... once they reach a level of maturity, then I think we would see MANY policy changes that would lead to much better economic justice not just for what/how we do lending/loans, but many other areas of economic outcomes too... there would be MANY reforms...

Tom Hickey said...

I didn't want to suggest above that compound interest is irrelevant. Hudson is right about the effect of compound interest when borrowers get behind. As interest compounds some can never dig out. If this is more than a few borrowers, there can be a cascading effect that spreads to the rest of the economy.

This is now happening to some degree in the US through student loans. When individual borrowers get behind, it can ruin their future. However, if they becomes chronic its effect "compounds." This can wipe out the prospects of an entire generation. It's a really stupid policy decision to permit this in the first place and dumber to continue it in the face of increasing consequences.

Random said...

"But if the US treasury prints that bond and gives it to me, it now has an additional $1 million debt. It will pay that debt by collecting more taxes or selling more debt, both of which drain dollars from the private sector."
This is circular logic, "selling more debt drain dollars from the private sector." Why? Because when the debt is "payed off" it drains dollars.
What if the debt is NEVER paid off. Hilbert's Hotel :)

Roger Erickson said...

Auburn,

"the govt funds the taxpayers" ?

By strict definition, yes. Yet more generally, THE AGGREGATE FUNDS & provisions IT'S COMPONENTS (citizens).

And yes, Philippe, a GROWING aggregate, by definition, invests more than it taxes back from the coordinated activity of it's component citizens.

Surviving governments do NOT (for long) extract net resources from their citizens, any more than you extract net resources from all the cells in your body (especially while growing up). Rather, aggregate cooperation (government) directs evolving patterns of cooperation, so as to be able to explore additional options.

The intelligence of any aggregate is held in the body of discourse between components, NOT in the components themselves.

And aggregate resiliency is the greatest value of all, as proven by our own, evolutionary history.

Wake me up when we reform the US Treasury as a National Resiliency Bank. Any lesser forms of wealth accounting are just boring distractions until we pay attention to that simple fact.

Calgacus said...

John:Absolutely! I've never heard an adequate explanation of how this ancient debt jubilee system could possibly work.

Good question. Two points - the interest rate, while fixed for centuries, was quite high by modern standards, so debts would quickly become unpayable. But who was the ultimate creditor? The temple, the state, the authorities (the opposite to the modern system where the state becomes the great debtor). So the state could centrally forgive debts due it, without grossly distorting internal credit relations - effectively a modern megadeficit spending spree that provided the liquidity to make the system work on its short, by modern standards, financial cycle.

Modern comparisons - The USA & effectively the whole world lived financially off the financial stability stemming from WWII high deficits / national debt "explosion" / jubilee until the GFC. (Similar for the UK & the Napoleonic Wars) Lower interest, much longer debt/jubilee cycles.

Unknown said...

@Matt Franko
Michael Hudson does not advocate borrowing in a foreign currency for any economy.


"Neither neoclassical trade theorists nor Chicago School monetarists get the fact that when public or private debts are denominated in a foreign (hard) currency, devaluation devastates the economy."

"I still dont think "debt forgiveness" is a good way to operate the system... I liken it to repairing a collapsed bridge by putting it back exactly the way it was... why would you lend out in the first place if you knew it would not be paid back? "

the rationale behind debt forgiveness is that is erases the debt overhang from the Finance,realestate and insurance sectors which diverts consumer spending away from goods and service and imposes burdensome costs on productive businesses(diverting spending away from investment)

Michael Hudson advocates more structural shifts apart from debt jubilee to prevent the build up of private debt and debt deflation.These include a land value tax to prevent bank credit fuelled asset price inflation and growing interest costs on households(created by the banks ability to collaterise rent from land/property).Ending tax exemption for mortages and borrowing costs.And Public option for banking,higher taxes on capitl gains.As well as many others,I highly recommend his book the bubble and beyond.(I need to re -red it aswell)


@Tom Hickey.the issue is that earnt interest has a lower propensity to be spent as it is the wealthies 10% who recieve that cash flow.They also lend it back it out to help finance the purchasing more claims on productive wealth (land,property,bonds,stocks).

Unknown said...

As for your points to Veronica about compopund interest growth compared to real economic growth ,I've just come across this.

"The Financial system exists in a symbosis with the "real" economy .Each system has its own set of growth dynamics .Financial systems tend to grow exponentially at compound interest.The cumulative value of savings grows through a dynamic Keynes had little reason to analyse in the 1930's -what Richard price described as the "geomatric" growth of a penny invested at 5 percent at the time of Jesus's birth,gorwing to a solid sphere of gold extending from the Sun out beyond the orbit of jupiter by his day (1776).He contrasted the "geometric"growth of savings invested at compund interest to the merely "arithmetic" growth of a similiar sum invested at simple interest.This was the metaphor that malthus adopted to describe the growth of human population in contrast to the means of subsistence.
Mnay people saved money back in the time of jesus.But nobody has obtained savings amountaining to anywhere near a solid sphere of gold.The reason is that savings that are invested in debt tend to stifle economies ,causing down turns that wipe out the debts and saving s together in convulsion of bankruptcy.This is what happened to the Roman EMpire ,and on a smaller scale it has characterised business cycles for the past two centuries.Yet this dynamic rarely has been related to the bankruptcy phenomenon although it is a key factor countering the growth of savings.Economies do grow faster that "arthimetically" but not "geomentrically".Their typical growth pattern is that of a S-curve ,tapering off over the course of the business cycle .The exponential growth of savings and debt thus tends chronically to exceed that of the real economy.Unless interest rates decline,the debt burden will divert income away from spending on goods and services,turnning the economy downward.
The General Theory recognised saving as arising out of current income ,not as growing through the compounding of interest ,doubling and redoubling at compound interest by their own inertia.They accrue interest independently of the courese of income when invested in bonds or left in saving accounts ,as well as accruing dividends if invested in stocks ,or rental income if invested in property.This is espeically true of "forced savings" in the form of paycheck witholding for social secrity ,pension and retirements accounts,along with insurance policies segrated in a way that makes them unavailable for current spending.

Not being limited by the course of income or the ability to pay,the exponential growth of savings tends to exceed growth of the real economy.This is what occurs when economies are loads down with debts ,which could equally well be thought of a as the savings overhead that is lent out.Rising savings on the asset side of the balance sheet connote a rising debt overhead on the liabilities side.in this case saving does not necessarily reflect an increase in productive powers and the mean of production,nor does it tend to employ labour.Rather ,the debt service that results from lending out savings tends to shrink markets and employment.

It should be noted that while finacial sector represents itself as providing credit to consumers and producers ,it also aborbs by charging interest,in amounts that are as large as the entire loan principle every doubling period-seven years at 10 percent interest,13 years at 5 persent.Ulitmately the financial sector extracts revenue from the economy.That is why it is in business,after all:to "make money from money"

Unknown said...

Money cannot be made from money of course,it is itself sterile,as Aristotle noted long ago.But it can charge interest from the rest of the economy that does perform work.Levying interest,rent and other property and financial charges is not to be confused with making money through labour or captial investment.The perception of classical economics that property and financial system is different has been lost in today's economic thought".

@VERONICA ,There is actually a group which advocate the elimination of interest.