An economics, investment, trading and policy blog with a focus on Modern Monetary Theory (MMT). We seek the truth, avoid the mainstream and are virulently anti-neoliberalism.
Wray’s argument is that because base money is redeemed, that means base money is a debt owed by the currency issuer because it is normal for debts to be redeemed, and he cites American Colonial Currency as an example. The first problem there is that the base money issued by every advanced country since WWII just hasn't been redeemed: quite the reverse. It’s grown constantly almost year after year. I.e. Wray is simply choosing a historical example to suit his argument.
Second, it’s bizarre to claim that redemption via tax bears any resemblance to redeeming a normal debt. In the case of a normal debt, the debtor eventually “redeems the debt” i.e. repays the creditor because the debtor owes the creditor something. That’s all very common sense.
But tax is backed by the threat of brute force. That is, if a chunk of base money is redeemed via tax, that’s a case of the state saying to the private sector “Give us $X else you go to prison.” That’s a completely different kettle of fish.
"But tax is backed by the threat of brute force. That is, if a chunk of base money is redeemed via tax, that’s a case of the state saying to the private sector “Give us $X else you go to prison.” That’s a completely different kettle of fish."
Lulz.
Ah yes of course unlike normal debt where there is never any collection or use of force.
"Second, it’s bizarre to claim that redemption via tax bears any resemblance to redeeming a normal debt."
Notes are redeemed when you pay them into a bank. Outside the bank they are worth £10. Inside the bank once they are 'deposited' (i.e. the liabilities at the BoE they represent are transferred to the bank's reserve account) they are just pieces of paper sat in a vault.
When the bank notes are issued again by a bank (i.e. the BoE liabilities in the bank's reserve account are transferred out again) then the note becomes worth £10 once more.
Similarly the tax bill issues is a liability imposed on an individual. That tax bill is redeemed by providing HM Treasury with some credits to the equivalent amount at the Bank of England. That's the redemption of a debt the same as any invoice or loan.
If the government is in austerity mode then an amount of Gilts that are redeemed will not be reissued. Again a form of money that is simply 'deleted' due to tax collection.
Or it could be used to reduce the Government's 'Ways and means' overdraft - repaying the debt in the same manner as any other bank loan.
What people forget is that if the Treasury is issuing state money to pay its bills, then it will run a large overdraft at the central bank. Which is a bank loan.
"That's the redemption of a debt the same as any invoice or loan. "
I agree with Neil here...
But Neil I dont get this then: " it will run a large overdraft at the central bank. Which is a bank loan."
Its not a loan of currency they use reserves which are a different accounting abstraction from currency which is issued ... hence Wray's "DEBT FREE money"...
His problems crop up because he insists on trying to narrowly define a metonym "money" and then people of course try to argue with him as any metonym is by definition NOT a narrow definition its a figure of speech ... so a nation for example could have "debt based money" or gold or silver or whatever... in addition to what we have now under our current numismatic system which is "debt free money" to bring in the figure of speech...
He is getting caught up in the language and not applying the concept of terminology correctly...
So we have two problems with these top-ender MMT people at least at this point, 1 a lack of adequate empiricism and 2 improper application of terminology via a controlled vocabulary....
"The first problem there is that the base money issued by every advanced country since WWII just hasn't been redeemed: quite the reverse. It’s grown constantly almost year after year."
So has debt as a rule. Can't we call it debt because governments never repay it, it is rolled over?
The way tax credits saved as government securities are redeemed is by using them to pay taxes. Unless the government runs big enough surpluses to force redemption of those credits held by non-government, some of those credits will not be redeemed and will continue to be saved.
The central bank purchases and sells government securities to manage liquidity in order to hit its policy rate after reserves injected by government spending have been drained into government securities.
Governments and banks also exchange promissory notes in base money. As Eric Tymoigne points out, this is not borrowing and lending in the technical sense in that mutual liabilities are exchanged whereas borrowing and lending involves an asset and a liability.
You claim, as I understand you, that because force is sometimes used to collect a normal debt that therefor a normal debt is the same as a debt owed by a taxpayer to the state, because force is also used there in the last resort. Actually there is a difference.
When the state collects tax, it doesn’t necessarily offer ANYTHING in return to taxpayers. E.g. some taxes are aimed mainly at redistribution. To that extent, rich taxpayers get nothing in exchange for their money. And before someone says I’m arguing against redistribution, I’m not.
In contrast, in the case of normal commercial debt, mortgage, etc, the debtor nearly always gets something in exchange for going into debt. The debtor wouldn’t run into debt otherwise.
A second example of where the state offers no goods or services in return for money it has grabbed off taxpayers is where the state does a sort of “Abba Lerner” and collects tax simply to cool down an economy which is overheating.
Re your second comment, it’s true that base money is redeemed in the sense that the state grabs INDIVIDUAL CHUNKS of money off sundry taxpayers (and then, as you say, spends other chunks back into the private sector). However Randall Wray was talking about redemption IN THE AGGREGATE: that is, all that colonial paper money was eventually redeemed. It’s no longer in circulation, is it? My answer to that is that IN THE AGGREGATE, the base money issued by most countries since WWII has never been redeemed and almost certainly never will be. So to that extent, that base money is not a debt in the normal sense of the word.
I set out several other criticisms of Wray’s articles at the link below, in addition to some criticisms of one of the groups that backs the “debt based” money idea, i.e. Positive Money.
With our current type of numismatic system, the taxes are best not looked at as a debt or other form of legal liability... which may lead to an enforcement action for collection if the taxes are not paid... to 'run the currency' thats not how it was done before this is where Wray is getting caught up in the metonymy of "money"... iow Wray is trying to assert that all "money" is 'driven' by taxes but that is not how a numismatic system is supposed to operate... its a unique system that does not share this feature with other forms of "money" (catch-all figure of speech) like metals or sticks or whatever...
Last prior to going over to the metals, the ancient Greek scriptural manuscripts refer to words translated into English as "tribute" and "poll tax" or in Greek 'kensou' where we get our 'census'...
In the case of 'tribute' it was redeemed to honor the local magistrate (Herodians in Judea) in drachma iow acknowledge that person's local authority, in the case of kensou or 'poll tax' that was redeemed to the higher level magistrate in denarii 'to be counted' iow to demonstrate your allegiance to Rome as a citizen...
They didnt collect the tributes and kensous to 'drive the currency' the currencies were imposed. If you didnt pay it you were then considered an enemy of the state and probably THEN a dissenter would be punished (killed?) or perhaps banished or galley slaves or whatever....
In the Greek scriptures, Rome imposed the denarius and Judea imposed the drachma under Rome... similar to Federal and State systems...
Wray will often say something like "try to drive money without taxes" well that is easy if the people dont accept it you kill them or banish them... they'll use it.
If you say "govt needs taxes to drive the currency!" then you are lost right there as this statement ADMITS that the "govt NEEDS the money!"... govt doesnt "need" it at all operating a numismatic system... if they dont use it/pay the tax you simply punish/kill them NOT because they didnt pay and the govt coffers are drying up, BUT rather because they would not exhibit their subjection by accepting it/redeeming it...
libertarians have a hard time understanding this system....
"But Neil I dont get this then: " it will run a large overdraft at the central bank. Which is a bank loan.""
If Treasury spends more than it gets back in taxes it will run an overdraft at the central bank. That's how the accounting works.
Is see no difference between reserves which are receipts for liabilities at the central bank or notes which are receipts for liabilities at the central bank. Both are loan assets.
"For example a major flaw in Wray’s argument is thus.
When a bank grants a loan of $X, it sets up TWO $X debts, not one. There’s the $X debt the bank owes the borrower and which is credited to the borrower’s account. That debt is commonly known as “money”. Second, there’s an obligation on the borrower to repay $X to the bank at some stage.
Now what Positive Money objects to is the SECOND of those debts."
I don't get Ralph. Yes there is two debts, one is the debt thay bank owes to its customer in a form of bank deposit, the other is the debt that customer owes to the bank in a form of loan contract. It is double entry bookkeeping. Debts and assets are created at the same time.
"Now what Positive Money objects to is the SECOND of those debts."
does positive money want to get rid of double entry bookkeeping?
In rolling over, one credit is redeemed and another created to replace it. It's just shifting the credits from one account to another. The credit is not finally redeemed until the debt is paid with the credit.
"rich taxpayers get nothing in exchange for their money"
That's a bit like saying when rich people save they get "nothing in exchange for their money." So what's the difference. Money out of circulation can be treated as though it doesn't exist.
Nobody gets anything "in exchange for their money." Money does not grow on wonderful rich people. People receive money from the currency issuer initially.
"My answer to that is that IN THE AGGREGATE, the base money issued by most countries since WWII has never been redeemed and almost certainly never will be. So to that extent, that base money is not a debt in the normal sense of the word."
Lots of private debts for example to large corporations or high leveraged property speculators are not either.
21 comments:
Wray’s argument is that because base money is redeemed, that means base money is a debt owed by the currency issuer because it is normal for debts to be redeemed, and he cites American Colonial Currency as an example. The first problem there is that the base money issued by every advanced country since WWII just hasn't been redeemed: quite the reverse. It’s grown constantly almost year after year. I.e. Wray is simply choosing a historical example to suit his argument.
Second, it’s bizarre to claim that redemption via tax bears any resemblance to redeeming a normal debt. In the case of a normal debt, the debtor eventually “redeems the debt” i.e. repays the creditor because the debtor owes the creditor something. That’s all very common sense.
But tax is backed by the threat of brute force. That is, if a chunk of base money is redeemed via tax, that’s a case of the state saying to the private sector “Give us $X else you go to prison.” That’s a completely different kettle of fish.
"But tax is backed by the threat of brute force. That is, if a chunk of base money is redeemed via tax, that’s a case of the state saying to the private sector “Give us $X else you go to prison.” That’s a completely different kettle of fish."
Lulz.
Ah yes of course unlike normal debt where there is never any collection or use of force.
"The first problem there is that the base money issued by every advanced country since WWII just hasn't been redeemed: quite the reverse."
Have a look at graphs of private debt levels.
It is, it is just being created as well. The only way it is redeemed is via tax.
"Second, it’s bizarre to claim that redemption via tax bears any resemblance to redeeming a normal debt."
Notes are redeemed when you pay them into a bank. Outside the bank they are worth £10. Inside the bank once they are 'deposited' (i.e. the liabilities at the BoE they represent are transferred to the bank's reserve account) they are just pieces of paper sat in a vault.
When the bank notes are issued again by a bank (i.e. the BoE liabilities in the bank's reserve account are transferred out again) then the note becomes worth £10 once more.
That's issue and redemption by agent.
Similarly the tax bill issues is a liability imposed on an individual. That tax bill is redeemed by providing HM Treasury with some credits to the equivalent amount at the Bank of England. That's the redemption of a debt the same as any invoice or loan.
If the government is in austerity mode then an amount of Gilts that are redeemed will not be reissued. Again a form of money that is simply 'deleted' due to tax collection.
Or it could be used to reduce the Government's 'Ways and means' overdraft - repaying the debt in the same manner as any other bank loan.
What people forget is that if the Treasury is issuing state money to pay its bills, then it will run a large overdraft at the central bank. Which is a bank loan.
"That's the redemption of a debt the same as any invoice or loan. "
I agree with Neil here...
But Neil I dont get this then: " it will run a large overdraft at the central bank. Which is a bank loan."
Its not a loan of currency they use reserves which are a different accounting abstraction from currency which is issued ... hence Wray's "DEBT FREE money"...
His problems crop up because he insists on trying to narrowly define a metonym "money" and then people of course try to argue with him as any metonym is by definition NOT a narrow definition its a figure of speech ... so a nation for example could have "debt based money" or gold or silver or whatever... in addition to what we have now under our current numismatic system which is "debt free money" to bring in the figure of speech...
He is getting caught up in the language and not applying the concept of terminology correctly...
So we have two problems with these top-ender MMT people at least at this point, 1 a lack of adequate empiricism and 2 improper application of terminology via a controlled vocabulary....
https://en.wikipedia.org/wiki/Controlled_vocabulary
Hence getting nowhere....
"The first problem there is that the base money issued by every advanced country since WWII just hasn't been redeemed: quite the reverse. It’s grown constantly almost year after year."
So has debt as a rule. Can't we call it debt because governments never repay it, it is rolled over?
The way tax credits saved as government securities are redeemed is by using them to pay taxes. Unless the government runs big enough surpluses to force redemption of those credits held by non-government, some of those credits will not be redeemed and will continue to be saved.
The central bank purchases and sells government securities to manage liquidity in order to hit its policy rate after reserves injected by government spending have been drained into government securities.
Governments and banks also exchange promissory notes in base money. As Eric Tymoigne points out, this is not borrowing and lending in the technical sense in that mutual liabilities are exchanged whereas borrowing and lending involves an asset and a liability.
K, they redeem govt securities every day.... they don't "roll them over"...
They redeem the ones that are at the redemption date and issue new ones with new numbers and new dates....
If you eat well on a day and also take a shit that day its not like you are starving.....
Random,
You claim, as I understand you, that because force is sometimes used to collect a normal debt that therefor a normal debt is the same as a debt owed by a taxpayer to the state, because force is also used there in the last resort. Actually there is a difference.
When the state collects tax, it doesn’t necessarily offer ANYTHING in return to taxpayers. E.g. some taxes are aimed mainly at redistribution. To that extent, rich taxpayers get nothing in exchange for their money. And before someone says I’m arguing against redistribution, I’m not.
In contrast, in the case of normal commercial debt, mortgage, etc, the debtor nearly always gets something in exchange for going into debt. The debtor wouldn’t run into debt otherwise.
A second example of where the state offers no goods or services in return for money it has grabbed off taxpayers is where the state does a sort of “Abba Lerner” and collects tax simply to cool down an economy which is overheating.
Re your second comment, it’s true that base money is redeemed in the sense that the state grabs INDIVIDUAL CHUNKS of money off sundry taxpayers (and then, as you say, spends other chunks back into the private sector). However Randall Wray was talking about redemption IN THE AGGREGATE: that is, all that colonial paper money was eventually redeemed. It’s no longer in circulation, is it? My answer to that is that IN THE AGGREGATE, the base money issued by most countries since WWII has never been redeemed and almost certainly never will be. So to that extent, that base money is not a debt in the normal sense of the word.
I set out several other criticisms of Wray’s articles at the link below, in addition to some criticisms of one of the groups that backs the “debt based” money idea, i.e. Positive Money.
http://ralphanomics.blogspot.co.uk/2016/02/randall-wray-versus-positive-money.html
With our current type of numismatic system, the taxes are best not looked at as a debt or other form of legal liability... which may lead to an enforcement action for collection if the taxes are not paid... to 'run the currency' thats not how it was done before this is where Wray is getting caught up in the metonymy of "money"... iow Wray is trying to assert that all "money" is 'driven' by taxes but that is not how a numismatic system is supposed to operate... its a unique system that does not share this feature with other forms of "money" (catch-all figure of speech) like metals or sticks or whatever...
Last prior to going over to the metals, the ancient Greek scriptural manuscripts refer to words translated into English as "tribute" and "poll tax" or in Greek 'kensou' where we get our 'census'...
In the case of 'tribute' it was redeemed to honor the local magistrate (Herodians in Judea) in drachma iow acknowledge that person's local authority, in the case of kensou or 'poll tax' that was redeemed to the higher level magistrate in denarii 'to be counted' iow to demonstrate your allegiance to Rome as a citizen...
They didnt collect the tributes and kensous to 'drive the currency' the currencies were imposed. If you didnt pay it you were then considered an enemy of the state and probably THEN a dissenter would be punished (killed?) or perhaps banished or galley slaves or whatever....
In the Greek scriptures, Rome imposed the denarius and Judea imposed the drachma under Rome... similar to Federal and State systems...
Wray will often say something like "try to drive money without taxes" well that is easy if the people dont accept it you kill them or banish them... they'll use it.
If you say "govt needs taxes to drive the currency!" then you are lost right there as this statement ADMITS that the "govt NEEDS the money!"... govt doesnt "need" it at all operating a numismatic system... if they dont use it/pay the tax you simply punish/kill them NOT because they didnt pay and the govt coffers are drying up, BUT rather because they would not exhibit their subjection by accepting it/redeeming it...
libertarians have a hard time understanding this system....
"K, they redeem govt securities every day.... they don't "roll them over"..."
What do you call rolling over?
Perhaps the following?
"They redeem the ones that are at the redemption date and issue new ones with new numbers and new dates...."
"But Neil I dont get this then: " it will run a large overdraft at the central bank. Which is a bank loan.""
If Treasury spends more than it gets back in taxes it will run an overdraft at the central bank. That's how the accounting works.
Is see no difference between reserves which are receipts for liabilities at the central bank or notes which are receipts for liabilities at the central bank. Both are loan assets.
"For example a major flaw in Wray’s argument is thus.
When a bank grants a loan of $X, it sets up TWO $X debts, not one. There’s the $X debt the bank owes the borrower and which is credited to the borrower’s account. That debt is commonly known as “money”. Second, there’s an obligation on the borrower to repay $X to the bank at some stage.
Now what Positive Money objects to is the SECOND of those debts."
I don't get Ralph. Yes there is two debts, one is the debt thay bank owes to its customer in a form of bank deposit, the other is the debt that customer owes to the bank in a form of loan contract. It is double entry bookkeeping. Debts and assets are created at the same time.
"Now what Positive Money objects to is the SECOND of those debts."
does positive money want to get rid of double entry bookkeeping?
"When the state collects tax, it doesn’t necessarily offer ANYTHING in return to taxpayers."
Go ask Ken Dodd what he got when he paid his taxes.
You'll find the answer is "out of jail".
Taxes maintain your freedom. That's the deal.
What do you call rolling over?
In rolling over, one credit is redeemed and another created to replace it. It's just shifting the credits from one account to another. The credit is not finally redeemed until the debt is paid with the credit.
"rich taxpayers get nothing in exchange for their money"
That's a bit like saying when rich people save they get "nothing in exchange for their money." So what's the difference. Money out of circulation can be treated as though it doesn't exist.
Nobody gets anything "in exchange for their money." Money does not grow on wonderful rich people. People receive money from the currency issuer initially.
"My answer to that is that IN THE AGGREGATE, the base money issued by most countries since WWII has never been redeemed and almost certainly never will be. So to that extent, that base money is not a debt in the normal sense of the word."
Lots of private debts for example to large corporations or high leveraged property speculators are not either.
If all all base money to be redeemed at once, the MB would to go to zero, meaning no liquidity in the payments system. Never gonna happen.
Eric Lonergan wades into the debate here:
http://www.philosophyofmoney.net/debt-free-money-a-brief-reply-to-randall-wray/
Thanks, Ralph. Promoted to a post
Post a Comment