MMT can either address operational realities, or analyze a chartalist system. But it cannot do both, because the operational reality is that we do not have a true fiat currency and are not operating in a true chartalist environment.
There may be moves away from this operational reality that lead to full employment, a more just economic system, and greater price stability. There is good evidence that a highly useful move would be to change to a true fiat currency system.Clint Balinger
MMT can address operational realities or analyze a Chartalist system. But it cannot do both.
Seems that Clint is confused about this. MMT describes the existing fiat system and shows policy makers how to take advantage of the policy space it affords in order to harmonize the trifecta of growth (production and productivity), employment and price stability.
Regrettably I think Clint has moved into the 'I believe this and I'm going to prove that I'm right to believe it' mode - rather than keeping a sceptical open mind.
ReplyDeleteUnfortunately in the social sciences evidence can only ever suggest. It can never be completely conclusive.
And that means being wrong is an occupational hazard.
That's why Keynes said when the facts change he changes his mind.
Here is a question for those who seem to be obsessed with the role of bank money and the money supply in our system, and are convinced that banks "create" money, and so we don't have a true chartalist system.
ReplyDeleteSuppose the government assesses a $1 million tax on a bank. Is it the position of this camp that the bank can create an account for itself, credit the $1 million to the account, and thereby extinguish its tax obligation with money the bank created from thin air?
A moment's thought shows this is not true. A bank deposit balance is an IOU of that bank. It is a claim against the bank's assets. Some of those assets come in the form of reserve balances and currency - the government's money. All payments in our economy carried out by the tendering of an IOU are ultimately settled by the transfer of the government's IOUs. That's what all bank IOUs are ultimately IOUs for. And ultimately, that is all the government will accept in order to extinguish a tax obligation. If a bank pays its taxes with an IOU it issued itself, the payment is settled and cleared by a transfer of bank reserve assets to a government account.
We have a hierarchical system in which the government's nominal "IOUs" are the final means of payment, and in which other moneylike things are just IOUs for the government IOUs. That is, there is a base financial asset, and all other financial assets are IOUs piled on top of IOUs, all leading back ultimately to the base or foundational financial asset.
The only thing the bank has created here is an IOU for the government-issued money, no different in kind from an IOU that any one of us can create. When the bank "creates money" in making a loan is issue an IOU to the borrower - payable on demand - in exchange for a promissory note from the borrower for a somewhat larger amount payable at some point in the future. It is an exchange of an IOU for an IOU.
The only difference is that since banks are in the business of issuing, exchanging and redeeming these IOUs routinely, and are generally perceived as being less likely to default on their IOU than an ordinary individual, their IOUs are more generally accepted. If I want to buy a rib roast, I might not be able to get the grocer to accept my IOU for it. But he likely will accept the bank's IOU. That's why we all like to acquire these bank IOUs, which we obtain in exchange for work or by borrowing them.
A bank deposit is a promise to pay state money on demand.
ReplyDeletemy mainstream economics textbook says:
"Deposit money is defined as money held by the public in the form of deposits in commercial banks that can be withdrawn on demand. Cheques, unlike banknotes, do not circulate freely from hand to hand; thus cheques themselves are not currency. However, a balance in a current account deposit is money; the cheque simply transfers that money from one person to another. Because cheques are easily drawn and deposited, and because they are relatively safe from theft, they have been widely used. New technology has recently replaced many cheque transactions by computer transfer. Plastic cards such as Visa, Mastercard and Switch enable holders of bank accounts to transfer money to another person's account in new ways. The principle is the same, however: the balance in the bank account is the money that is to be transferred between customers - not the cheque or the plastic card.
When commercial banks lost the right to issue notes of their own, the form of bank money changed, but the substance did not. Today banks have money in their vaults (or on deposit with the central bank) just as they always did. Once it was gold; today it is the legal tender of the times - fiat money. It is true today, just as in the past, that most of the banks customers are content to pay their bills by passing among themselves the banks' promises to pay money on demand. Only a small proportion of the value of the transactions made by the banks' customers involves the use of cash.
Bank deposits are money. Today, just as in the past, banks can create money by issuing more promises to pay (deposits) than they have cash reserves available to pay out."
"Economics" Lipsey and Chrystal p.487
Oxford University Press
I don't know why some people struggle to understand this most simple of things. I guess he must be stupid. (I don't mean you Clint).
[Reply to Neil Wilson’s January 3, 2013 10:33 AM comment; I just saw it as I am behind the Chinese Firewall]
ReplyDeleteHello Neil,
First of all, I think your work to conciliate double entry & Steve Keen’s work is one of the more important contributions to economics in a while. Can’t say enough good about it.
And sorry if my writing came across as strident or terse. Just trying to get difficult concepts on paper as simply as possible.
And of course I think I am right or I wouldn’t bother ;)
But I am also sure I make mistakes or am unclear at times, as anyone writing on complex and contested ideas.
I am very open to counterarguments with evidence - that’s why I post these, to get intelligent criticism. And I am indeed skeptical - of the idea MMT has got it just right regarding the role and importance of private credit-money in a state money system.
Actually, I believe we are quite close on this. You write elsewhere:
“…although it is easy to add credit potential to a system, it is somewhat more difficult (and may even be impossible in practice) to get rid of it again as it embeds itself deeply into the dynamic structure of the system.”
(http://www.debtdeflation.com/blogs/2012/01/11/guest-post-a-double-entry-view-on-the-keen-circuit-model/ )
This is largely my concern as well, perhaps I have somehow not been clear enough.
On the particular comment from you I responded to on MikeNorman (I believe on the “Fiat” post), and one other comment by you on the Chicago Plan v. Positive Money …
( http://clintballinger.edublogs.org/2012/12/28/mmt-full-reserve-banking-connected-by-fiat/#comment-90 )
… I was talking an upgrade to fuel injection and you were going on about butterfly valves.
What I mean is, my (and on the other post, Ralph’s and Andrew Jackson’s) comments were about some fundamental changes to the system, a new system (yes prescriptive not descriptive).
They are changes that would preclude the various operational objections you then raised.
In other words, in both cases your replies gave every indication you were either not reading or not understanding the original arguments. This is of course frustrating.
Before seeing your comment I had already posted an attempt at clarification. Perhaps it will show a little more of where I am coming from:
Small c chartalism, sovereign money, & public policy space v. private profit space
Kind regards,
Clint Ballinger
Clint Ballinger: On good urbanism, sane economics, & problems in the social sciences
Neil, Dan, etc.
ReplyDeleteWhile I wasn't able to comment on a blogger site (China blocks a lot) for some reason I can (obviously) maintain the other site I have, and "y'" has provided some excellent discussion that I wish I could have had here with ya'll as well (yes, I am from Texas). At any rate, it is here http://clintballinger.edublogs.org/2013/01/03/mmt-can-address-operational-realities-or-analyze-a-chartalist-system-but-it-cannot-do-both/#comments
Dan, I will have to look at your comment later (I had seen Neil's in a Bing.com cached version of this earlier, but it didn't have your comment - I can see cached pages sometimes, about a week behind though)
PPS "I guess he must be stupid. (I don't mean you Clint)."
ReplyDeleteThanks! ;)
(Sorry about string of posts, but I have access now for a moment so have to take advantage)
ReplyDeleteDan, The thing is, the benign role of banks and bank credit-money, and private debt that you posit is exactly what Minsky and Keen theorize is incorrect; their accounting in turn backed up by MMT (including Neil). e.g.,(Keen)
"The key issue here was my assertion that “aggregate demand equals income plus the change in debt” and the MMT focus upon sectoral balances in which “the sum of all sectoral balances is zero”: were they irreconcilable perspectives (with at least one being necessarily wrong), or could they be reconciled?
Just days before the seminar, Matheus Grasselli (who is Deputy Director of the Fields Institute–which is one of the world’s premiere centers for applied mathematics) suggested that we try to derive my proposition from national income identities–which we duly did. The two views, which may superficially appear in conflict, are in fact consistent"
http://www.debtdeflation.com/blogs/2012/09/16/fields-institute-mmt-mct-seminar/
Do you (or any readers here) think those involved, Keen, Neil Wilson, and others (Stephanie Kelton, Scott Fullwiler, Michael Hudson) are wrong somehow? If so, in what way?
"I was talking an upgrade to fuel injection and you were going on about butterfly valves."
ReplyDeleteThe problem is that is a delusion.
It's more like fitting a wide exhaust because that makes it sound like you're going faster when actually you've not changed anything fundamental.
There is no operational difference between a capital restricted system and a system where the accounting is passed through to the central bank.
So there is no magic there.
You need to do more than take interest away from depositors.
Nice on on the wide exhaust ;) So, you think this doesn't make a difference? (Maybe it doesn't, I really want your opinion, just with details why not): "Lending occurs in this system when people move their money from their transaction account (held at the central bank) to an ‘investment account’. This will be broadly similar to a time deposit today – there will be minimum notice periods, however, unlike today they will also carry some risk (i.e. if the underlying assets go bad they may lose some of their money). The money transferred to the banks will then be transferred to a borrower. So in this system lending by banks merely transfers money around the system, no new money or purchasing power is created when loans are made. Because in this system because all money is held on the central bank’s balance sheet any bank can be allowed to fail, without any effect on the money supply."
ReplyDeletehttp://clintballinger.edublogs.org/2012/12/25/can-full-reserve-banking-actually-even-stop-credit-money-creation-the-chicago-plan-v-positive-money/