Thursday, September 20, 2018

Christopher Kent — Money – Born of Credit?

As I mentioned earlier, the vast bulk of broad money consists of bank deposits. These banking liabilities are created when an Australian household or business has funds credited to their deposit account at an Australian bank. One way this can occur, for example, is when a business deposits currency it has earned with its bank. Again, such transactions add to deposits but do not create money because the bank customer is simply exchanging one type of money (currency) for another (a deposit).
Money can be created, however, when financial intermediaries make loans. Accordingly, the concepts of money and credit are closely linked in a modern economy, albeit not one for one. When a bank extends a loan, it makes money available to the borrower, for example, to buy a car, a house or equipment for a business. The bank may credit the deposit account of the borrower, who withdraws the funds to make their purchase. Alternatively, the bank may directly credit the deposit account of the seller on behalf of the borrower. In either case, the loaned funds will tend to find their way into a deposit somewhere in the banking system. This process adds to the supply of money.
If I stopped here, you might be left with the impression that the process of lending allows the banking system to create endless quantities of money at no cost. However, the process of money creation is constrained in numerous ways and depends on the behaviour of borrowers, banks and regulators, as well as the stance of monetary policy....
His accounting gets somewhat funky.
A single bank may make loans by drawing on its liquid assets, yet not receive the corresponding deposits created in return. Before extending further loans, that bank would need to raise funds in other ways – for example, by issuing debt or equity securities or by waiting for its deposits and liquid assets to rise via other means.
Customer deposits are bank liabilities, not assets.

Reserve Bank of Australia
Christopher Kent | Assistant Governor (Financial Markets)
Remarks at the Reserve Bank's Topical Talks Event for Educators
Sydney – 19 September 2018


Konrad said...

“Customer deposits are bank liabilities, not assets.”

Customer deposits are bank liabilities and assets.

Deposits are liabilities because deposits are debts -- i.e. the customer lends his money to the bank, which must give it back on demand. Deposits are also assets, since the bank uses depositors’ money for various purposes other than making loans.

This is why pundits, professors, and politicians get away with lying about the so-called “national debt.” The $21 trillion “national debt” is money that various parties (including U.S. government agencies) have deposited into Fed savings accounts. That $21 trillion is on loan to the Fed. It is a debt, but it is also an asset for the Fed. All banks, including the Fed, are in debt to their depositors.

None of this has anything to do with the U.S. government’s ability to create its spending money out of thin air.

From the article:

“Not all bank deposits are equally liquid – for instance, it can take some time to gain access to funds in a term deposit.”

Not necessarily. A “term deposit” means you leave an agreed-to amount of money in a bank for an agreed-to-time, in return for an agreed-to rate of interest. You can get your money out early, but you lose all the interest.

“How Is Money ‘Created’? Australia's banknotes are produced by the Reserve Bank of Australia and account for most (about 95 per cent) of the value of Australian currency. The rest is accounted for by coins produced by the Royal Australian Mint.”

Damn -- I stopped reading right here. At first the article correctly says that only 3% of the money in Australia consists of coins and currency notes. Now the article says that Australian banknotes “account for 95% of the value of Australian currency.”

In addition to this contradiction, the author suffers from acute EBS (Ellen Brown Syndrome), a brain malady which makes victims claim that there is no such thing as government spending, and that all money is created by banks as loans.

Bankers love to spread this lie, since it makes bankers seem omnipotent.

Andrew Anderson said...

Customer deposits are bank liabilities and assets. Konrad

That's only true if the customer deposits fiat; either physical fiat, aka "cash", or a check that draws on the monetary sovereign (e.g. US Treasury) or on its Central Bank. Then the bank acquires new reserves (fiat), 1-for-1 with the new deposit, as a 100% liquid asset.

Otherwise, "Bank loans create bank deposits (liabilities for fiat) but not any additional reserves." Likewise with a deposit from another bank or from one of its depositors, no new reserves are added but merely transfered from one bank to another.

Tom Hickey pointed this out some time ago (ruffled feathers smoothing).

Matt Franko said...

“EBS (Ellen Brown Syndrome)“

Ok that one is not bad....

Matt Franko said...

“Bankers love to spread this lie, ”

There is no evidence he is lying....

But this again fits the pattern where when you dialectic guys stumble upon a scientific falsehood, you say the other person is lying....

Ryan Harris said...

Okay MMT peeps, You've studied MMT for years now. You're an expert and it's time to put your knowledge to the test. What policy presciption would an MMT inspired economist provide to Ghanian government? This is where they are today:

Ghana's government pulls planned five-year local currency bond. Interest rates are too high to issue local currency bonds in Ghana. Markets wanted 21% yield for 5yr bonds in local currency. What financial and economic levers should politicians pull to ensure they are maximizing economic output in their nation?

GDP Growth: 6.8%
Interest rate: 17%
Inflation: 9.9%
Unemployment: 2.4%
Current Account: -4.8% gdp
Gov Budget: -4.5% gdp

Matt Franko said...

They’d probably tell them to “stop lying!”.... “stop it with all of your neoliberal lies!!!!!”

Ryan Harris said...

We need more real examples and less fantasy from MMT. The political decisions are way more complicated and interesting than the mmt model and accounting identities in real world applications.

The idea that fiscal space is this enormous underutilized resource, is great, in theory. But when it comes time to raise taxes or cut medicare-for-all or mothball the new aircraft carrier or scuttle the traffic reduction project? What are the policy options that maximize real output? Or do we just keep pretending aggregates matter while sectors don't>

Matt Franko said...

Ryan in the Ghana case the risk-free rate is perhaps too high at 17%... UE seems pretty low...

Ryan Harris said...

Agree. I think it was raised to address currency weakness, which doesn't work. I'd make real rates 3 or 4% and see what happens to credit growth. If it increase use of domestic currency credit instead of USD credit, might be a problem since their infrastructure development requires significant use of imported dollar based commodities. Not sure.

Andrew Anderson said...

If it increase use of domestic currency credit instead of USD credit, might be a problem since their infrastructure development requires significant use of imported dollar based commodities. Ryan Harris

Borrowing in a foreign currency is a recipe for disaster. Why not instead do everything possible to increase the demand for the local currency and thus reduce its inflation potential?

1) Allowing all citizens to use it in account form at the Central Bank.
2) Abolishing all privileges for the banks.
3) Charging the banks negative interest on their reserves to drive up their costs so that they can't afford to pay interest on deposits. This will insure that citizens use their accounts at the CB.

Privileges for the banks is the root problem, I'll hazrd. In fact, the very word "privilege" is extremely suspect but not wrt the banks for some strange reason.

"There are a thousand hacking at the branches of evil to one who is striking at the root." - Henry David Thoreau

Andrew Anderson said...

to drive up their costs aa

But only if they, the banks, choose to hold reserves instead of acting as pure loan brokers between those who wish to lend fiat and those who wish to borrow it.

Ryan Harris said...

Ghanaian Cedi loans create Cedi. But Ghana needs machines, steel and cement and have to pay US dollars for it. If interest rates for Cedi loans are as low as USD loans, more Cedi are created and more Cedi are exchanged for USD which lowers the exchange rate of Cedi and increases the current account deficit. Ultimately government will have to issue sovereign debt in USD to stabilize currency. MMT does a poor job of explaining these relationships. Needs improvement.

Andrew Anderson said...

Ultimately government will have to issue sovereign debt in USD to stabilize currency. RH

It's government privileges for banks and other depository institutions that destabilize the currency by allowing them, for example, to front-run fiscal spending and increase prices via speculation.

Let's have honest fiat and credit creation and then we can have honest trade.

Why is it that honesty is the best policy except wrt to fiat and credit creation? Who orders that?

Ryan Harris said...

Credit creation within regulated banks is always preferable to non regulated institutions for the same reason that credit creation in government fiat is preferable to foreign currency. Government controls it! Any one that extends credit to another person "creates" money. Banks don't have any special privilege except the government guarantees they will back the bank from bank runs so long as the bank follows regulatory requirements. You can create credit money just as recklessly as a bank and borrow against the assets and lend out more. You can even incorporate as a bank after having done so. Anyone can.

Andrew Anderson said...

Banks don't have any special privilege except the government guarantees they will back the bank from bank runs so long as the bank follows regulatory requirements. RH

Hence the liabilities of banks toward the non-bank private sector are not genuine, but a sham.

And you think we can have an honest system with sham accounting?

And that we can have a stable system with sham negative feedback?

Anyone can. RH

Then you should have no objection to all citizens may have accounts at the Central Bank. And since those accounts are inherently risk-free, that all privileges for the banks be abolished, including government-provided deposit insurance.

You're trying to defend the indefensible, morally speaking, not to mention that government privileged banks have been a source of tragedy as recently as WWII, if not 2008.

André said...

"What policy presciption would an MMT inspired economist provide to Ghanian government"

I don't know anything about Ghana (really, anything), but I think those things are the usual good policies:
1) if Ghana doesn't have its own currency, it should create one
2) it should not peg its currency to any other currency
3) it should not have foreign debt, or have just very little foreign debt. If there is some outstanding foreign debt, it should make some kind of mutual agreement to convert it to the local currency. If it is impossible, Ghana would have the option of unilaterally converting the debt
4) Fiscal policy should be adequately managed. The government should choose wisely how to employ all its resources (including human and natural resources) to achieve self sustainment and good quality life standards for its population. Ghana should not waste resources with unemployment, but it should also not spend excess currency in sectors of the economy that are already booming. It should implement a fair tax policy.
5) Corruption, incompetence, lack of planning and etc are problems with no easy solution but that should be faced. Don't know how to do that. I'm searching for an answer for decades now. If you find some solution, please tell me. Foreign threats are also a big problem.
6) Ghana could pay zero or low real short term interest rates on public debt. It doesn't need to issue long term debt.
7) If Ghana depends too much on foreign markets to buy things it need, it needs to change. Dependence on other countries should be reduced and thought strategically. International trade may be good or bad to a country depending on how it is managed...

I don't know, that's how I think, but again, I don't know much about Ghana. Also I'm obviously being somewhat superficial here...