We live in a dangerous time when the FT promotes a form of hardline, and deeply undemocratic monetarism.
It's dangerous that some on the left have bought into Positive Money's ideas.
The battle for money has begun. It is essential that it is won.Tax Research UK
The battle for money has begun
Richard Murphy
55 comments:
Let me first say what the truth is not. It's not, as Wolf puts it, that we need to:
...make the system safer [by] strip[ping] banks of the power to create money, by turning their liquid deposits into “state” or “sovereign” money. That is the idea backed by the Vollgeld initiative. Richard Murphy
Rather, let's make the liabilities for fiat that the commercial banks, credit unions, etc. create ("Bank loans create deposits/liabilities for fiat") toward the non-bank private sector GENUINE liabilities and not largely the sham they are today.
Bank liabilities toward the non-bank private sector are largely a sham because:
1) The non-bank private sector may not even use fiat except for unsanitary, unsafe, totally inadequate for modern commerce PHYSICAL fiat, aka "cash."
2) Other privileges for the banks such as government insurance (both explicit and implicit) of bank liabilities.
So let's:
1) Let the non-bank private sector safely and effectively use fiat via inherently risk-free debit/checking accounts of their own at the Central Bank.
2) Abolish all other privileges for banks, credit unions, etc.
And the token money that the Swiss proposal would create would be exactly the same: they would be a fake currency because there would be no debt, in the process the value of this money would be undermined, or even destroyed. Richard Murphy
I agree that fiat should be backed by the debt of the monetary sovereign but who says that debt should have non-negative yields/interest?
If fiat is the creation/property of the monetary sovereign or its central bank then why may not the monetary sovereign and its central bank charge rent* (i.e. negative yields/interest) for its possession/use? Especially for large users?
*Except from individual citizens up to, say $250,000, since some fiat saving is legitimate for the purpose of initial capital formation and adequate liquidity.
That the Bank of England can create funds in this way has been proven by the quantitative easing programme that has been in existence since 2009. £435 billion of new funds have been created by that programme without any cost to the taxpayer simply by the operation of double entry bookkeeping. Richard Murphy quoting himself
Except the Central Bank should not create fiat for anyone other than its monetary sovereign to avoid violating equal protection under the law.
Richard Murphy (often referred to by Tim Worstall as “Murphaloon”) is clueless. He lists five objections to Vollgeld / Sovereign Money (V/SM), and all five are rubbish.
The first is that it “puts inflation at the core of economic policy”. Well it already is at the “core”: central banks decide how much stimulus to implement depending on what the inflation outlook is!!!
Second, he claims that money which is not debt based is not money. That’s BS. Gold, cowrie shells and other commodity based currencies have nothing to do with debt. Those holding British “sovereign” gold coins between 100 and 200 years ago owed nothing to anyone, and no one owed them anything.
Third, he says there is a “very real danger is that a central bank would underestimate the amount of money needed in an economy because their perpetual concern would be the risk of inflation meaning that they would always are on the side of caution.” Well that problem arises under the existing system: sometimes central banks and governments pitch demand too low. Indeed they were doing that BIG TIME during the recent crisis!!!!! What planet has Murphy been living on for the last ten years???
Fourth he says “Give central bankers control of the money supply, and you can forget democratic control of the economy for evermore.” What – so the electorate cannot vote to have government collect more in tax and spend more on health, education etc (or simply print money and spend on health and education)? BS again.
Fifth, he asys “since central bankers would also then control the ability of the government create money to spend on its own programs guarantee that this would also mean perpetual austerity, and enforced government balanced-budget, with all the crushing implications that this has the public services.”
Had Murphaloon actually read Positive Money’s proposals (and the proposals of other V/SM advocates) he’d have discovered that under a PM system, the central bank creates whatever amount of money per year it thinks is needed to keep the economy at capacity and give us the 2% inflation target, with government then spending that money (and/or cutting taxes). In fact Ben Bernanke gave his blessing to that idea: see para starting “A possible arrangement…” here:
http://fortune.com/2016/04/12/bernanke-helicopter-money/
Haha...the fact that the Swiss are having this referendum to begin with must be puzzling the hell out of Paul Krugman
MMT: Richard Murphy’s battle-for-money hoax
Comment on Richard Murphy on ‘The battle for money has begun’*
The battle Richard Murphy refers to is about the institutional design of a better money order. The discussion, though, suffers from the odd fact that economists have until this day no scientifically valid theory of money. But this has never hampered the enthusiasm of economists. After all, they are in the political business and not really in the science business.
So, Richard Murphy argues: “… in the process Wolf, and those who promote this idea show that they have no idea what money is. Money is debt. It is only created by government spending and bank lending. It is literally the double entry that surrounds those two processes that create money: there has to be a debt and a creditor accepting obligation to each other for money to have value.”
This is what all MMTers sermonize from their soapboxes and it is provably false. Fact is that MMTers have no idea how the monetary economy works.
To get economics right, it has to be consistently reconstructed from scratch. As the correct analytical starting point, the elementary production-consumption economy is defined with this set of macroeconomic axioms: (A0) The objectively given and most elementary configuration of the economy consists of the household and the business sector which in turn consists initially of one giant fully integrated firm. (A1) Yw=WL wage income Yw is equal to wage rate W times working hours. L, (A2) O=RL output O is equal to productivity R times working hours L, (A3) C=PX consumption expenditure C is equal to price P times quantity bought/sold X.
Under the conditions of market clearing X=O and budget balancing C=Yw in each period the price is given by P=W/R (1), i.e. the market clearing price is equal to unit wage costs. This is the most elementary form of the macroeconomic Law of Supply and Demand.
The price is determined by the wage rate W, which takes the role of the nominal numéraire, and the productivity R. The quantity of money is NOT among the price determinants. This puts the commonplace Quantity Theory to rest. At this juncture, Friedman et al. are buried for good.
What is needed for a start is two things (i) a central bank which creates money on its balance sheet in the form of deposits, and (ii), a legal system which declares the central bank’s deposits as legal tender.
Deposit money, which is a generalized IOU, is needed by the business sector to pay the workers who receive the wage income Yw per period. The need is only temporary because the business sector gets the money back if the workers fully spend their income, i.e. if C=Yw.
Overdrafts are needed by the household sector for consumption expenditures if the households want to spend before they get their income. This time sequence is no problem for the central bank because the temporary overdrafts vanish with wage payments.
For the case of a balanced budget C=Yw, the idealized transaction sequence of deposits/overdrafts of the household sector at the central bank over the course of one period is shown in Figure 2.#2
The household sector’s deposits/overdrafts are zero at the beginning and end of the period. The business sector’s transaction pattern is the exact mirror image. Money, that is, deposits at the central bank, is continually created and destroyed during the period under consideration. There is NO such thing as a fixed quantity of money. The central bank plays an accommodative role and simply supports the autonomous market transactions between the household and the business sector.
From this follows the average stock of transaction money as M=kYw, with k determined by the transaction pattern. In other words, the average stock of money M is determined by the autonomous transactions of the household and business sector and created out of nothing by the central bank. The economy NEVER runs out of money.
See part 2
Part 2
The transaction equation reads M=kYw=kPX=kPRL (2) in the case of budget balancing and market clearing and this yields the commonplace correlation between the average stock of money M and price P for a given employment level L, except for the fact that M is the DEPENDENT variable. If employment is doubled the average stock of transaction money M doubles. Because the central bank plays an accommodative role there is, as a matter of principle, NO MONETARY obstacle to full employment in the elementary production-consumption economy.
As long as the central bank finances a growing wage bill Yw=WL with money creation out of thin air and with wage rate W and productivity R fixed, the price P does NOT move one iota according to (1). As a matter of principle, the average quantity of money M increases/decreases according to (2) but there is NO inflation/deflation.
This is the correct way of bringing money into the economy. However, this is NOT the MMT way. MMT injects money into the economy by government deficit spending. This has an immediate effect on macroeconomic profit.
Monetary profit for the economy as a whole is defined as Qm≡C−Yw and monetary saving as Sm≡Yw−C. It always holds Qm+Sm=0, or Qm=−Sm, in other words, the business sector’s surplus = profit equals the household sector’s deficit = dissaving. Vice versa, the business sector’s deficit = loss equals the household sector’s surplus = saving. This is the most elementary form of the macroeconomic Profit Law.
The complete Profit Law reads Qm=Yd+(I−Sm)+(G−T)+(X−M) and reduces to Qm=G−T for Yd, I, Sm, X, M = 0. Legend: Qm monetary profit/loss, G government spending, T taxes. In other words: Public Deficit = Private Profit. This way of money creation in NOT neutral with regard to distribution but is clearly for the benefit of the one-percenters.
Needless to say that Richard Murphy does not mention the profit effect once. Worse, MMTers regularly make this effect disappear.#4 It does not sit well with their image of social Progressives.
To sum up:
• MMT policy is NOT in the interest of the ninety-nine-percenters.
• MMT policy amounts to an abuse of the fiat money system with massive and virtually unlimited redistributive effects in the interest of the one-percenters.
• The profit effect of MMT money creation/deficit spending reinforces the transformation from democracy to oligarchy.
• Politically, MMT is a fraud and scientifically it is garbage.#5
Egmont Kakarot-Handtke
* Tax Research UK
http://www.taxresearch.org.uk/Blog/2018/06/06/the-battle-for-money-has-begun/
#1 Wikimedia, Elementary production-consumption economy
https://commons.wikimedia.org/wiki/File:AXEC31.png
#2 Wikimedia, Idealized transaction pattern, household sector, balanced budget
https://commons.wikimedia.org/wiki/File:AXEC98.png
#3 MMT: Just another political fraud
https://axecorg.blogspot.com/2018/04/mmt-just-another-political-fraud.html
#4 MMT and the magical profit disappearance
https://axecorg.blogspot.com/2017/08/mmt-and-magical-profit-disappearance.html
#5 For the full-spectrum refutation see cross-references MMT
http://axecorg.blogspot.de/2017/07/mmt-cross-references.html
“economists have until this day no scientifically valid theory of money.”
And they and anybody else never will... you can’t develop a scientific theory about a figure of speech...
Some readers may be confused by this statement of Richard Murphy …
“Money is debt. It is only created by government spending and bank lending. There has to be a debt and a creditor accepting obligation to each other for money to have value.”
Richard Murphy is correct. Most people are confused about this, because they think of “debt” only in terms of monetary loans.
This understanding is flawed. The correct understanding is that if I am in debt to you, then I owe you a recognition and acknowledgement of some claim by you.
EXAMPLE 1: You lend me a dollar, which I agree to pay back to you. In so agreeing, I am in debt to you for a dollar, which means that I acknowledge your claim on that dollar, and I agree to give the dollar back to you at an appointed time. By issuing a claim, you become a creditor. By acknowledging your claim, I become a debtor.
EXAMPLE 2: I leave my coat in a cloakroom, which gives me a token that I can use to retrieve my coat later. The token acknowledges that I have a claim to one coat. Since the cloakroom will honor my token, the cloakroom owes me my coat, and is in debt to me for one coat. I am a creditor for one coat, since I have a claim.
Richard Murphy says, “There has to be a debt and a creditor accepting obligation to each other for money to have value.”
Correct, just as there has to be a coat in the cloakroom for my token to have value.
So if all money is debt, and I find a dollar in the street, then who owes that dollar to who? No one, since the dollar is not part of a loan.
But if all money is debt, and I find a dollar in the street, then who is the creditor? I am, since the dollar is a token that represents my claim for one dollar’s worth of goods or services. Since I have a claim, I am a creditor. The debtor is everyone who acknowledges my claim for one dollar’s worth of goods or services.
The dollar bill in my hand is a Federal Reserve note, meaning a note of credit. The dollar bill makes me a creditor, since it bestows on me a claim for one dollar’s worth of goods or services. The debtor is everyone who acknowledges my claim.
The dollar bill is not money; it is a token. However tokens can be traded and spent like money, just as a car title or a land deed can be traded like money.
Therefore, all money is both a debt and a credit. However, debts and credits do not always involve loans.
Then Richard Murphy writes this…
“The token money that the Swiss proposal would create would be a fake currency because there would be no debt, in the process the value of this money would be undermined, or even destroyed.”
Huh? This needs a lot of clarification. Richard Murphy is referring to this Sunday’s referendum in Switzerland, which, if it passes (which it won’t) would allow only Switzerland’s central bank to create money. Commercial banks could no longer create money as loans. This would supposedly prevent banks from perpetrating their frauds and scams.
It seems to me that proper regulation would do the same thing (if it was actually enforced).
M=kYw=kPX=kPRL (2) R fixed, the price P does NOT move one iota Qm≡C%−Yw and monetary saving as Sm≡Yw−C. It always holds Qm+S/m=0, or Qm=−Sm,Qm=Yd+(I−Sm)+(G−T)+(X−M) and reduces to *Qm=G−T for Yd, I, Sm, X,@ ?[^]M = 0. Legend: Qm monetary profit/loss
...my apologies. I temporarily lost my ability to reason logically and write clearly.
But for a second there, I was "brilliant."
It seems to me that proper regulation would do the same thing (if it was actually enforced). Konrad
Unless banks are 100% private with 100% voluntary depositors they are engaged in legalized theft from the less so-called credit worthy, typically the poor, to the more so-called credit worthy, typically the rich, and to themselves.
So how does one regulate theft, Konrad? And why would anyone decent want to be an accomplice to theft thereby?
Good post Konrad re: Money is debt.
I would also add that governments are under a legal duty to provide services and supervision etc in relation to money. So in this sense, if I find a $1 bill on the street, I deem this to be both a claim against goods and services, and a claim against the government for its promise to enforce contracts I may enter into with this $1. In this sense, whether money is fiat or a commodity, the same 'promise' and 'liability' against the government always exists. Without this backing by government to enforce agreements entered into involving a unit of account, all so-called money would be useless.
Egmont,
I have followed your work for nearly two years now and it makes more sense than just about anyone else's. However, it took a lot of going over to reach this point.
Having said this, you do not allow comments on your blog. It would make learning and understanding your material easier if there was some form of feedback for questions, and at the same time questions from learners can help to refine how it is presented to make it easier to understand. I myself also find it helpful to learn what you present by then trying to teach it others. The so-called 'paying it forward'.
Any particular reason why you don't allow comments?
Murphy: "the very real danger is that a central bank would underestimate the amount of money needed in an economy "
The very real danger is rather that the CB will OVER estimate the "amount of money needed!" and do asset purchases thus spiking Reserve Asset levels at the depositories and eliminate depository's authority to increase lending against risk assets... like happened in late 2008... that's the REAL danger...
ANC DRIVER WRITES: I would also add that governments are under a legal duty to provide services and supervision etc in relation to money. So in this sense, if I find a $1 bill on the street, I deem this to be both a claim against goods and services, and a claim against the government for its promise to enforce contracts I may enter into with this $1.
Exactly. Thanks for filling that out. This is why a U.S. currency note says it is “legal tender for all debts, public and private.” That is, a U.S. dollar is legally authorized to pay all U.S. creditors, and satisfy their claims.
Some people say that a currency note is only a claim against the U.S. government. I say it is a claim against everyone (government or otherwise) who chooses to acknowledge my claim by agreeing that my dollar is worth a dollar.
Some people say that all dollars [all] are created by banks as loans. They are flat wrong.
Incidentally money and commodities are two different things. A commodity may be valued in money, but no commodity itself has ever been money. A commodity is physical, and in many cases is limited. By contrast, money is a strictly mental concept with no physical existence, and is therefore unlimited.
It’s like points in a football game, or like the number “2.” We can use symbols and tokens to represent money, points, and numbers, but the symbols themselves only represent money, points, and numbers. Likewise a currency note is not technically money. It represents money, and can be used as money.
ANC DRIVER WRITES: Without this backing by government to enforce agreements entered into involving a unit of account, all so-called money would be useless.
Yes, what backs fiat is government laws, plus government willingness to enforce those laws, plus social convention. After people become accustomed to using a currency, the government laws rarely need to be enforced, except in cases of counterfeiting.
MMT people claim that “taxes drive money,” by which they mean that it is government taxation which gives value to money, since the government decides what currency its taxes shall be paid in. I disagree. I say that even if taxes fell to zero, people would still value and use dollars, because of federal laws and social customs. The U.S. government did not impose a federal withholding tax until World War II. Some countries have no income tax and no sales tax, yet their currencies work fine.
However the MMT cultists will not budge. They have their "taxes drive money" mantra and that’s that.
Andrew Anderson makes the strange claim that “Unless banks are 100% private with 100% voluntary depositors they are engaged in legalized theft from the less so-called credit worthy, typically the poor, to the more so-called credit worthy, typically the rich, and to themselves.”
So riddle me this. When a central bank creates $X and government spends it and it ends up in the pocket of persons A,B,C… who deposit it at some central bank run or government run savings bank, in what way are A,B,C, etc being robbed? I’m baffled.
ANC Driver,
Re Egmont not allowing comments on his blog, that’s better than the people, like Richard Murphy who claim to allow comments on their blogs, but ban people who disagree in too direct a manner with their ideas.
Economists by and large have no idea what money, how it is created and how it is destroyed. Whilst Musgrave contends that gold and cowrie shells have been used as money in the past this is neither here nor there. In the 21st Century in the UK, US in particular all money is debt . It cannot be anything else simply because it is not backed by anything and in order to have value credits and debits have to balance . As Einstein pointed out it's very hard to be simple; it takes courage. It's apparent that so many of the commenters above are merely supporting a position ( for reasons best known to themselves ) rather than accepting reality . Or perhaps they just don't understand.
John Hope,
Central bank created money (base money) is supposedly a liability of a central bank: it appears on the liability side of the CB's balance sheet. But if you go along to the Fed with a $100 bill and demand that they pay you the $100 they allegedly owe you, you'll be told to shove off. So in what sense is base money a debt?
As Warren Mosler said, base money is like points awarded by a tennis umpire: those points are assets as viewed by the players, but they are not liabilities as far as the umpire is concerned.
Ralph, the liability is the fact that the umpire has to exist in the first place.
JOHN HOPE WRITES: “In the 21st Century in the UK, US in particular all money is debt.”
As I explained in my comments above, all money is both a debt and a credit. But (contrary to some people’s belief) this does not mean that all money is created as a loan, or exists as a loan.
A credit is a claim. A debt is an acknowledgement of that claim. This may or may not involve a loan, depending on the situation.
JOHN HOPE WRITES: “It cannot be anything else simply because it is not backed by anything and in order to have value credits and debits have to balance.”
Fiat money is backed by human agreement, which occurs as laws, plus the government’s willingness to enforce those laws, plus social habit and convention.
When the government spends any money whether it be on welfare benefits , school building , or whatever else it wants to do, it does so by using the 'overdraft' it has at the Bank of England . The overdraft is ' repaid ' by receipts from tax and if those are insufficient to repay the overdraft in full it doesn't matter - hence the much dreaded, but not to be feared , deficit. If Warren Mosler was correct then the currency would be worthless .
Richard Murphy
You say: “This is so ridiculous I can dismiss it in seconds. There is apparently no government in your model. And no overseas sector.*
Obviously, you cannot read.
I clearly stated: “The complete Profit Law reads Qm=Yd+(I−Sm)+(G−T)+(X−M) and reduces to Qm=G−T for Yd, I, Sm, X, M = 0. Legend: Qm monetary profit/loss, G government spending, T taxes. In other words: Public Deficit = Private Profit. This way of money creation is NOT neutral with regard to distribution but is clearly for the benefit of the one-percenters.”#1
It is all there, government deficit/surplus (G−T) and the trade surplus/deficit (X−M).
Because of Public Deficit = Private Profit MMT policy amounts to an abuse of the fiat money system with massive and virtually unlimited redistributive effects in the interest of the one-percenters.
Your assertion: “Money is debt. It is only created by government spending and bank lending.” is provably false. Money is in the most elementary case created by the central bank financing the wage bill Yw.
MMT’s money-creation/deficit-spending is profit making for the one-percenters.#2 Politically, MMT is a fraud and scientifically it is garbage.
Egmont Kakarot-Handtke
* Tax Research UK
http://www.taxresearch.org.uk/Blog/2018/06/06/the-battle-for-money-has-begun/comment-page-1/#comment-807847
#1 MMT: Richard Murphy’s battle-for-money hoax
https://axecorg.blogspot.com/2018/06/mmt-richard-murphys-battle-for-money.html
#2 For the full-spectrum refutation of MMT see cross-references MMT
http://axecorg.blogspot.com/2017/07/mmt-cross-references.html
"backed by human agreement, which occurs as laws, plus the government’s willingness to enforce those laws, plus social habit and convention."
This is good from Egmont... sends libertarians immediately into cognitive dissonance...
JOHN HOPE WRITES: “When the government spends any money whether it be on welfare benefits, school building, or whatever else it wants to do, it does so by using the 'overdraft' it has at the Bank of England . The overdraft is ' repaid ' by receipts from tax and if those are insufficient to repay the overdraft in full it doesn't matter. Hence the much dreaded, but not to be feared, deficit.”
Reality is simpler than that. When the government spends any money, whether it be on welfare benefits, school building, or whatever else it wants to do, there is always a recipient of the government’s money. To pay money to the recipient, the government instructs the recipient’s bank to credit the recipient’s account.
For example, if you receive a monthly welfare benefit, then the government instructs your bank each month to credit your personal bank account by the amount of the welfare benefit. The government instructs your bank to simply change the numbers in your account.
In this way the government creates money out of thin air, just as we create points out of thin air by changing the numbers on a scoreboard.
Taxation is irrelevant to this. The U.S. and U.K. government have no need for tax revenue, and they effectively destroy tax revenue upon receipt. Again, it’s just like creating and destroying points on a scoreboard. We do it by changing the numbers.
Points, like money, are not physical. Points, like money, are strictly mental concepts. Points, like money, words, and numbers, only exist in the human mind, but we can represent them with tokens, and with written symbols.
So, when you send a tax check to the government, the government instructs your bank to debit your personal bank account by the amount written on the check. The money debited from your is not physical, and hence it does not “go” anywhere.
In the USA, when your bank debits your account, your bank simultaneously credits a “Treasury Tax and Lien” account, but ultimately the money vanishes back into the nothing from when it came. Ultimately the tax money is “zeroed out,” just as loan money is “zeroed out” when a loan is repaid. (Banks create loan money out of thin air, and that loan money is destroyed as the loan is paid bank. That money is the principle of the loan. Banks make their profit from the interest that is paid in addition to the principal.)
None of this involves “overdrafts” at the Federal Reserve or the Bank of England. Reality is simpler than that.
Much of what we need to know about money we can learn from playing the board game “Monopoly,” which has been around since 1935. We play “Monopoly” with paper notes, and if we run out of notes, we can create more notes by scribbling on pieces of paper. However “Monopoly” can be played with no notes at all. The player who oversees the bank can write on a piece of paper a column for each player (i.e. create an account for each player). Each column (i.e. each player account) can be added to (i.e. credited) or subtracted from (i.e. debited) by simply changing the numbers in each account on the piece of paper. In this way, “Monopoly” money is created and destroyed by simply changing numbers, just as occurs in real life.
QUESTION: If the U.S. and U.K. government “have no need for tax revenue, and they effectively destroy tax revenue upon receipt,” then why do they tax?
ANSWER: Taxation is one means (among several) to control inflation. More importantly, taxation is about power and authority. Ultimately a sovereign government’s power and authority resides in the sovereign government’s ability to tax. The ability to tax is backed by the government’s army and other forms of enforcement.
So riddle me this. When a central bank creates $X and government spends it and it ends up in the pocket of persons A,B,C… who deposit it at some central bank run or government run savings bank, in what way are A,B,C, etc being robbed? I’m baffled. Ralph
I was speaking of government-privileged private banks, not the central bank, which is, or should be, entirely owned by the monetary sovereign.
You have repeated what I have just said, but you are quite wrong about tax and this is the bit you clearly don't understand. As the system exists tax is essential to give value to the currency. The government could just create all the money itself and put most of it
out and keep some back for itself . No tax needed . But as you say the power to tax gives the government authority and also allows the government to ameliorate what it deems to be unacceptable activity - smoking, eating sugar etc.
Andrew . If you ' deposit ' money in a bank, whether it be a government owned one , or a commercial one , it makes no difference it is NOT a deposit . It is a loan to the bank . It becomes part of the bank's working capital. That's why the government is prepared to
back your ' deposit ' up to £75,000 ( currently ) . There is a notice to this effect in every bank branch in the land.
"It is a loan to the bank . It becomes part of the bank's working capital."
Capital and Liabilities are separate categories on the RHS... take an Accounting course..
Andrew . If you ' deposit ' money in a bank, whether it be a government owned one , or a commercial one , it makes no difference it is NOT a deposit . It is a loan to the bank . John Hope
I was speaking of this : "Bank loans create deposits/liabilities for fiat".
Now this would be true even with entirely private banks with entirely voluntary depositors but add government privileges and then bank lending has become legalized theft from the less so-called credit worthy, typically the poor, to the more so-called credit worthy, typically the rich, and to themselves.
Note: You would do well to stop using the word "money" and instead use "fiat" for government/central bank liabilities and "bank credit" for private bank, credit union, etc. liabilities.
Ralph Musgrave
You say: “Central bank created money (base money) is supposedly a liability of a central bank: it appears on the liability side of the CB’s balance sheet. But if you go along to the Fed with a $100 bill and demand that they pay you the $100 they allegedly owe you, you’ll be told to shove off. So in what sense is base money a debt?”
The subject matter of economics is, as Keynes said, the ‘monetary theory of production’. This sets the frame for the theory of money.
So, how comes money into existence in the elementary production-consumption economy with pure fiat money? Schematically as follows:
(i) The workers work for some time L in the fully integrated mega-firm = business sector.
(ii) The firm owes the workers the amount Yw=WL. The wage rate W is given.
(iii) The firm could hand out IOUs to the workers but instead turns to the central bank.
(iv) The central bank creates money by lengthening its balance sheet, i.e. by entering an overdraft for the firm on the asset side and a deposit of equal amount on the debit side.
(v) The firm transfers the deposits = Yw to the workers. Thus it discharges its liabilities vis-a-vis the workers. The firm has now a liability vis-a-vis the central bank.
(vi) The workers spend their whole income C=Yw and buy the total output X=O. The workers’ deposits are fully transferred back to the firm.
(vii) The firm’s overdrafts and deposits are exactly equal and are canceled against each other. Money is fully destroyed. The central bank’s balance sheet shrinks to zero = initial state.
(viii) The money creation-destruction cycle starts again.
Money is not a thing, money is not a fixed stock, money is information. The information is stored on a medium, e.g. magnetic data carrier, clay tablet, paper, coin, etcetera).
Money = deposits at the central bank is accepted (i) by the workers as wage payment, and (ii) by the firm as payment for handing over the consumption good. There is NO state and NO taxes needed to enforce the acceptance. Central bank deposits are defined a legal tender, they discharge all kinds of liabilities/IOUs.
The central bank is tasked to support the autonomous transactions between the firm and the workers. In other words, the central bank creates exactly that amount of money that is needed to pay the wage bill which steadily increases with growing employment and a constant wage rate.
The point is that there is NO such thing as a monetary policy or an inflation target. In the elementary production-consumption economy, the central bank simply supplies the means of transaction = money = deposits. Nothing more, nothing less. The central bank does not interfere with the autonomous transactions.
There is NO government deficit-spending needed to bring money into existence and NO taxation in order to enforce acceptance. The MMT money creation story, i.e. government deficits and taxes drive money, is a myth just like the barter and goldsmith stories.#1, #2
Egmont Kakarot-Handtke
#1 The Third Way: Towards the happy zero-tax economy
https://axecorg.blogspot.com/2018/06/the-third-way-towards-happy-zero-tax.html
#2 The objective value of money
https://axecorg.blogspot.com/2018/03/the-objective-value-of-money.html
and "bank credit" for private bank, credit union, etc. liabilities. aa
Or "private bank deposits".
Matt, you are being obtuse . Strictly speaking a bank doesn't have working capital, but that's how your ' deposit ' functions . It enables the bank to run its business.
Andrew, I am well aware that government licensed banks create money ' out of thin air ' and expect to earn a profit from this
activity and because we have all been taught to believe, erroneously , that it is our ' deposits' that are loaned out and we get to keep some of the bank's profit by being paid interest on these deposits we accept this nonsense. Frankly I think it is less than useful to call any of what you refer to as ' fiat' and ' bank credit ' anything other than money. If you can buy stuff with it it's money .
David Mamet in his screenplay for the movie ' Heist' had it exactly right ' Everyone needs money, that's why they call it money ' .
"In the USA, when your bank debits your account, your bank simultaneously credits a “Treasury Tax and Lien” account, but ultimately the money vanishes back into the nothing from when it came. "
Afraid not...
Here is yesterday's DTS report:
https://www.fms.treas.gov/fmsweb/viewDTSFiles?dir=w&fname=18060700.pdf
Show me where any USD balances were transferred into or out of TTL accounts... for the entire FY while your at it.. and last year too... and the year before that...Ill save you a few clicks there arent any....
Its all being deposited to and withdrawn from the TGA... this is what was (prior to passage of recent bank regulatory reform legislation) creating all the volatility in non-risk Reserve Assets for the depositories and then resultant chaos in risk asset values and exchange rates as regulated depositories must maintain a near constant ratio of Capital/Total Assets...
Recent reforms in both the US and iirc UK have perhaps eliminated this problem for their depositories and should reduce or perhaps even eliminate the possibility of any future banking crisis like those nations experienced in 2008 due to an extreme and fast increase in Reserve Assets by the CB ... have not seen this from either Japan or EZ yet though so Japan still has the zombie banks and EZ EURs are piling up at perennial surplus nation Germany's Deutchebank bringing that bank down the toilet now looking to merge with other sinking ship Commerzbank...
US and iirc UK have eliminated this problem for their depositories... its bullish imo...
Frankly I think it is less than useful to call any of what you refer to as ' fiat' and ' bank credit ' anything other than money. If you can buy stuff with it it's money . John Hope
If you care about equal protection under the law then it is important to note that only banks, credit unions, etc. may effectively and safely use a Nation's fiat when ALL citizens should be allowed to use their Nation's fiat.
Instead, citizens are forced to work through a government-privileged usury cartel and use bank deposits/credit/liabilities instead of their Nation's fiat except for mere physical fiat, aka "cash".
So yes, the distinction is vital if one cares about justice.
"Matt, you are being obtuse . Strictly speaking a bank doesn't have working capital,"
It has to have regulatory capital.. and it is on the RHS separate from Liabilities like a non-bank "working capital"...
https://www.thirdway.org/memo/capital-requirements-and-bank-balance-sheets-reviewing-the-basics
AA,
In your Old Testament, if one Israelite male head of household had say 8 children, BUT another male, try as he might, only could produce 2 children, would the 8 child house have to transfer the additional 3 children over to the household that had the 2 ??????
If not... in your prayers, you may want to tell God that His laws for Israel were all f-ed up.....
What if one sheep herder's sheep produced more offspring than another's sheep?
Would the one with the more sheep have to transfer some sheep over to the one with the less?
What about goats? Did they raise chickens?
Or the feedstock farmers... what if it rained more on the one wheat farmer's land than anothers? Did they have to send some wheat over to the other to even it out????
Andrew, Simplicity does NOT imply inaccuracy and whilst I am no lover of the banks if we want change we have to say it like it is not how we would like it to be . Its hard enough for the average person ( no such thing I know ) to understand anything at all where money is concerned . Just try explaining fiat money to even a small group of intelligent people; that money is created out of thin air, electronically, on a computer - you choose the term - and see what reaction , and I mean reaction , not response , you get. If you had said ' I'm coming to steal your money ' it could scarcely be less fierce .
Andrew, Simplicity does NOT imply inaccuracy John Hope
In every field of inquiry, it is true that all things should be made as simple as possible – but no simpler. (And for every problem that is muddled by over-complexity, a dozen are muddled by over-simplifying) from https://quoteinvestigator.com/2011/05/13/einstein-simple/ [bold added]
John those people are not adequately trained in the skill of Abstraction...
https://en.wikipedia.org/wiki/Abstraction_(mathematics)
You need at least a 4 year degree in a discipline that requires 2 years of basic Mathematics and then 2 more years of Applied Mathematics in a technical discipline...
Otherwise you get something like "doughnut economics!" all of a sudden being promoted as some sort of advanced level of thinking as if it is admirable...
You need at least a 4 year degree in a discipline that requires 2 years of basic Mathematics and then 2 more years of Applied Mathematics in a technical discipline...
And some of those people need to be able to explain policy to voters simply in terms they can understand or it won't happen politically, that is, institutionally. It will remain abstract ideas. No one in the West is dong this, presumably because they are not able to do it, or leas they are using their knowledge to profit their networks at the expense of the rest.
Or the system has to be run by technocrats, like China, most of whose leaders have engineering degrees.
Compare China's economic progress with India, where the political leadership is made up chiefly of career politicians.
Andrew and Matt, In 2008 some very clever people blew up the financial world resulting in chaos and loss for millions . Even within the institutions in which they worked senior managers had little understanding of what was going on . Derivatives is the shorthand for what Warren Buffet called at the time ' Financial weapons of mass destruction ' I have made it my business to try and understand what the hell went on and what continues to go on , but I fully expect to be in a tiny minority so I try to disseminate the knowledge I have in a form that my fellow man / woman can understand. It is no easy task, but I consider it a duty . It won't stop another financial crisis, but at least I can say ' you were warned ' .
JOHN HOPELESS WRITES: “You have repeated what I have just said, but you are quite wrong about tax and this is the bit you clearly don't understand.
No I did NOT repeat what you said. You blathered about some idiotic notion you called an “overdraft” at the central bank. I explained that your nonsense has nothing whatsoever to do with taxation, nor with a sovereign government’s ability to create its currency.
I tried to help you, but you insist on clinging to your little dream world.
So be it. Have fun.
Accounting and operations are interactive, but different.
Accounting is an ex post record of individual transactions recorded in journals and transferred to general ledgers from which aggregated reports are generated. Stocks and flows are reflected from this, and also financial ratios. This is essentially to business, money & banking, and finance. It also interfaces with economics, which is about production, distribution and consumption of real goods, through market exchange based on value as price.
However, operations precede accounting, since operations are the foundation on which transactions are generated. Operations cannot be deduced from accounting, since substantially the same accounting records can be generated by different operations, e.g, different monetary systems. This makes comparison of different entities with somewhat different operations and accounting rules error-prone without comparing operations. For example, comparing countries historically without taking different monetary systems into account, and presently where the norm is floating rates but some countries use fixed rates.
It also lies at the root of many controversies in financial economics, either from failure to understand accounting practice, or attempting to deduce operations from the accounting alone, without reference to the operations involved at the foundational level.
For example, from the sources and uses statement, it would appear that taxes and public debt fund public expenditure. But operational analysis shows how that is not the case under current conventions with respect to currency issuers. The confusion results from conflating the meaning of "funding" in the accounting sense with "are needed to pay for" operationally, which in turn involves the failure to distinguish between currency issuers and users of the currency.
Unfortunately, those not trained in rigorous thinking don't seem to be able to get this. Nor those wearing ideological blinders.
Konrad, I don't understand why you have to resort to abuse . What you've described is the theoretical basis of MMT . I have no issue with that at all. What I have described is how that translates to the real world.
John,
"Matt, In 2008 some very clever people blew up the financial world"
They are NOT clever, this is the true problem...
This is a response to some sort of dissonant thinking on your part... its like you dont want to think these people could be so stupid, so then this is causing you some sort of cognitive dissonance in your mind when confronted by the reality that yes I'm afraid they actually are that stupid ... you dont allow yourself to believe what is really going on..
and you are going all conspiracy theory here its a textbook human reaction to such dissonance in your thinking... Scott Adams terms it 'mind reader mode' when you are asserting that you can read the mind of these people and know that they did this "on purpose" to somehow benefit by crashing the whole thing down...
Nothing works that way.
They were saying all along incorrectly that "banks lend out the reserves!" so when things got a bit dicey in 2008 the CB did large scale asset purchases in September and spiked non-risk Reserve Assets at the depositories and the depositories had no choice but to fix the amount of risk assets in response and the credit system shut down...
there was no conspiracy... just incompetence as usual...
Richard Murphy
You say: “You have not shown there is a thing wrong with MMT, which is wholly familiar with and uses (I use in my theoretical work) the type of analysis you are doing.”*
Actually, this is the case:
(i) MMT is built upon this macroeconomic balances equation (X−M)+(G−T)+(I−S)=0 which is shown at any MMT presentation and is to be found all over the econoblogosphere including Wikipedia.#1
(ii) The MMT balances equation (i) is provably false. The axiomatically correct balances equation reads (X−M)+(G−T)+(I−S)−(Q−Yd)=0.#2
(iii) The MMT balances equation is false because MMTers are too stupid to understand the elementary mathematics of macroeconomic accounting and do not know how the monetary economy works.
(iv) Because the foundational equation is false the whole analytical superstructure is false. By consequence, MMT policy proposals have NO sound scientific foundations.
(v) The main defect of the MMT policy of money creation/deficit spending is that it produces a distribution that is generally regarded as socially unacceptable.#3
So, MMT is scientific junk and political fraud.#4 That’s what is wrong with MMT!
Richard Murphy and the rest of the MMT crowd (Kelton, Mitchell, Mosler, Tcherneva, Wray, Fullwiler, Forstater, Kaboub, Pettifor, Keen, Tymoigne, Willingham, Grumbine, Ehnts, Hickey, etcetera) are snake-oil sellers.#5
Egmont Kakarot-Handtke
* Tax Research UK
http://www.taxresearch.org.uk/Blog/2018/06/06/the-battle-for-money-has-begun/comment-page-1/#comment-807847
#1 Down with idiocy!
https://axecorg.blogspot.com/2017/12/down-with-idiocy.html
#2 Rectification of MMT macro accounting
https://axecorg.blogspot.com/2017/09/rectification-of-mmt-macro-accounting.html
#3 Keynes, Lerner, MMT, Trump and exploding profit
https://axecorg.blogspot.com/2017/12/keynes-lerner-mmt-trump-and-exploding.html
#4 For the full-spectrum refutation of MMT see cross-references MMT
http://axecorg.blogspot.com/2017/07/mmt-cross-references.html
#5 MMT: academic snake oil for the people
https://axecorg.blogspot.com/2018/02/mmt-academic-snake-oil-for-people.html
John hope said: " I have made it my business to try and understand what the hell went on and what continues to go on"
I am on a similar path; mine started after my parents won the lottery in 1998 only to end up bankrupt 4 years later - I then found out that this occurs to 19 out of 20 lottery winners. I then find statistics saying 19 out of 20 businesses ultimately fail, 19 out of 20 people retire needing govt support, 19 out of 20 struggle paycheck to paycheck. In a nutshell, 19 out of 20 are either insolvent (i.e. are debtors), or do not have any permanent access to sufficient resources necessary to obey all laws (for example, are homeless or can't send their children to school etc).
This was obviously no co-incidence and as I later found out, was not due to attitude either; it is a mathematical and economic certainty which I discovered from studying law of all things. Judges throughout history have known all along what money really is and that economics is a zero-sum game and theories on equilibrium etc are bogus. The GFC just so happen to solidify all of this.*
If I was to summarize the last 15 years of searching and study, I would say that it is not the pursuit of self-interest as such which causes things like homelessness, poverty, the GFC, etc, but rather the belief held by most that the 'only' way to fulfill the pursuit of self-interest is to subject every single resource to markets, irrespective of whether they be free or regulated, and then subject the whole population to one economic ideal (i.e. whichever political party wins). As some people are naturally competitive and great at selling and BSing people, and other people are naturally non-competitive, forcing everyone into one economic ideal will never work no matter what the ideal is. The homeless and poor exist today because they are generally non-competitive people and lack permanent access to resources and there is no one left willing to accept their liabilities. Many people in the lower and lower-middle classes are too naturally non-competitive and only accept the economic ideal because they are convinced its the only way to contribute to society.
If I was asked to present a solution as a result of all this research I would allow free-competition, commercial bank lending, capitalism etc to continue on as it has for centuries so the naturally competitive people can continue to exercise their right to individual autonomy, but give people (generally the non-competitive) the choice to operate outside of markets if they so choose under mutual trust relations (as opposed to welfare), and have government act as the go-between between the market sector and the non-market sector. Those in the non-market sector would not be allowed to own property nor engage in any economic/commercial activities which have legal effect - this would be the trade off for being in the non-market sector (they would be like non-profit households)#. The market sector would still provide goods and services to the non-market sector, but instead of doing it by taxing the market sector (as is the case today with welfare etc), all those businesses would receive tax-offsets instead (which is commonly done in the US and which are themselves marketable). The benefit to the market sector is also that there are now less people competing over the financial assets and this would mean less government regulation.%
This is the only solution I can see where everyone gets to pursue their self-interests (i.e to act in accordance with their human nature) and does not rely on forcing everyone under one political ideal. Of course, such an idea may mean many politicians will be without jobs!
notes in part 2...
* As a side note: I have also recently discovered in Australia for instance, that Australia's total savings held in Super is basically the same size as total household debt; meaning, the only savings Australians have at retirement is in their homes. Let's hope they don't all sell at once.
#. The types of people which may gravitate toward the non-market sector are economists, researchers, scientists, hobby farmers, hobby traders, preachers, authors, artists, public servants, doctors, nurses, and people who are from cultures which do not practice private property etc.
% Of course this a short summary and would need much more explaining, and to be quite frank, has had virtually no traction with anyone I have shared it with because everyone believes money is the only thing which can solve our problems.
Ralph Musgrave:As Warren Mosler said, base money is like points awarded by a tennis umpire: those points are assets as viewed by the players, but they are not liabilities as far as the umpire is concerned.
John Hope:If Warren Mosler was correct then the currency would be worthless.
John Hope is of course right. But I doubt Mosler ever said any such thing as the last clause; if he did it is very wrong, crazily wrong to suggest that there can be financial assets without liabilities. Financial assets = credits ARE financial liabilities = debts. They don't "correspond" or "balance" or whatever. They're all just different words for the same thing, that may depend on who is speaking.
It is like two people arguing on the meaning of "here" and "there".
A:I am here.
B:No, I am here, you are there.
A:You are crazy. Obviously, you are there, I am here.
etc ad infinitum, judging from such discussions.
The only thing dumber than such an argument is thinking that there can be a here that is not a there to someone else, and vice versa.
Or that there can be credits/(financial) assets that aren't debts/liabilities, debts/liabilities that aren't credits/assets.
Calgacus said "Financial assets = credits ARE financial liabilities = debts.....
The only thing dumber than such an argument is thinking that there can be a here that is not a there to someone else, and vice versa.
Or that there can be credits/(financial) assets that aren't debts/liabilities, debts/liabilities that aren't credits/assets."
Exactly, as the Bank of England said in 2014 'If everyone in the economy were to pool all of their assets and debts together as one, all of the financial assets and liabilities — including money — would cancel out'
PM just wants OMF (Overt Monetary Financing) with ZIRP and a very small horizontal money system. MMT analysis suggests OMF with ZIRP and a much more regulated horizontal system is needed. There is actually very little difference in their policy prescriptions. They just arrived at them from opposite sides of the track
OMFG, MMT & Positive Money Get Along
The big difference politically is that PM wants a board of unelected technocrats in charge, which as RM pointed out is a form of monetarism, while MMT wants it done through fiscal policy passed by the legislature.
which as RM pointed out is a form of monetarism Tom Hickey
More precisely "fiat-ism"?
And, of course, one reason "fiat-ism" cannot work is that the non-bank private sector may not even use their Nation's fiat except for unsanitary, unsafe, inadequate for modern commerce physical fiat aka "cash" but must instead work through a government-privileged usury cartel.
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