This is not just a matter of markets requiring a system of enforced property rights, which presupposes government, at least in rudimentary form. In monetary economies, functioning markets also require a viable currency, one that is generally accepted in exchange. Government ensures a currency’s acceptance when it imposes and effectively enforces taxes that are payable only in that particular currency. This is true not only of exogenous taxes but of taxes on consumption, income and wealth so long as these are assessed in the government’s chosen unit of account....Markets are institutional and as such are embedded socially, legally and also financially, especially in a monetary production economy — think banking.
The fact that banks are chartered public-private institutions that have privileges and responsibilities in creating currency through credit extension and having access to the central bank as lender of last resort, as well as an international banking system for clearing trade balances in different currencies.
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Markets exist with or without government. Efficient markets require regulations and enforcement. Early traders between California and Boston, during the chaos between Spanish and Mexican rule were able to mark up prices on shoes and clothing 200-300%, and similar for leather hides. going both directions. That's no where close to the 500% Apple or Nike command on their consumer products vs direct pricing on Alibaba. To get those sorts of profits in markets, you need government.
....banks are chartered public-private institutions that have privileges and responsibilities in creating currency...”.
I suggest the real distortion or “privilege” here is that banks are money lenders, and there is no good reason, come a need for more money to be created (i.e. when stimulus is needed) for money lenders to be induced to create and lend out more money, than for the population as a whole to be simply given more money, e.g. via extra public spending or tax cuts.
Put another way, there is no obvious reason why, given a recession, the cause is market failure in the form of interest rates failing to fall and thus for it being necessary to artificially cut interest rates. i.e. there is no obvious reason why, given that there are hundreds of lenders out there, and millions of potential borrowers, the going rate of interest is not a genuine free market rate. The real cause of recessions is much more likely to be excess saving or (much the same thing) inadequate consumer or business confidence, or a fall in exports.
...banks are money lenders
Banks do not lend money, nor do they create money. Banks are in the business of purchasing securities.
If banks could create money, they wouldn't need bailouts. They would create money and bail themselves out.
Prof. Werner brilliantly explains how the banking system and financial sector really work.
When banks lend, they credit a customer account (bank liability, customer asset) offset by a loan (bank asset, customer liability). Although this transaction nets to zero, the customer deposit created by the loan adds to MI money supply, and this is what it means to say that banks have the power to create money denominated in the unit of account.
Banks also have the privilege of borrowing from the central bank to ensure clearing, so that have access to the currency, although they cannot create it themselves and must obtain it.
The point I was making is that the money creation takes place further back in the chain when bank customers sign those loan documents, which the bank then purchases. So in that sense, the bank facilitates credit creation.
banks have the power to create money denominated in the unit of account
Anyone can do that. Take the example of a Vendor Take-Back Mortgage. It creates a stream of payments denominated in the unit of account, and the payments spend just as well as if they came from a bank, though it doesn't show up in the money supply figures. Most sellers however prefer to use a bank because they can get a lump sum payment instead, and the bank takes care of things like liens, dealing with lawyers, pooling the risk of non-payment, etc.
Then you have the whole shadow banking system, which also expands credit, though the credit expansion doesn't show up in the money supply figures either, but affects the economy just the same. As the graph in the link below shows, the shadow banking system was at one time larger than the regulated banking system.
Is Shadow Banking Really Banking?
Take the example of a Vendor Take-Back Mortgage. It creates a stream of payments denominated in the unit of account, and the payments spend just as well as if they came from a bank,
That "money" is not created by the extension of credit like a bank deposit is. Those pay down that loan use bank deposits, not credits from the vender.
Because banks are linked in the financial system, the funds created in deposit accounts are fungible as currency in that the government stands behind the financial system as we saw in the financial crisis. Vendor credit is not the same.
The shadow banking system is a case it point. It is not legally backed up by the government as was also showed in the GFC. Lehman Bros. was left to go belly up to "prove capitalism works." Then the shit hit the fan and the government got involved on a massive scale to save the global economy even through there was no legal basis. This generated more moral hazard than was previously in the system and which was a contributing factor to the crisis. Recall Ben B. initially refusing the request for the Fed to step in, and US Treasury Sec Hank the Hammer excusing himself from the room to go out and puke.
Collapse of shadow banking was behind the Asian financial crisis, too.
The Fed was created to prevent this happening to the chartered banking system, and the Fed did step in to prevent the banks becoming insolvent, a condition for which the law requires nationalization.
The US government did nationalize GM although that was extra-legal and had to be permitted.
I fall back on Minsky here.
Minsky always argued that “anyone can create money” but “the problem lies in getting it accepted.” —L. Randall Wray (Why Minsky Matters: An Introduction to the Work of a Maverick Economist)
(I'm doing an "appeal to authority" by throwing Wray's name in there, too.)
So that VTB mortage that I mentioned is money because the house seller accepted it as money. The phrase "getting it accepted" means it was created outside the banking system, which is the case here.
As for shadow banking, it hasn't gone away. Here's a quote about rehypothecation of collateral:
The Elephant In The Room
For every US Treasury security outstanding, roughly three parties believe they own it. That’s right. Multiple parties report that they own the very same asset, when only one of them truly does. To wit, the IMF has estimated that the same collateral was reused 2.2 times in 2018, which means both the original owner plus 2.2 subsequent re-users believe they own the same collateral (often a US Treasury security).
This is why US Treasuries aren’t risk-free—they’re the most rehypothecated asset in financial markets, and the big banks know this. Auditors can’t catch this because GAAP accounting standards obfuscate it, as I’ll explain later. What it all means is that, while each bank’s financial statements show the bank is solvent, the financial system as a whole isn’t. And no one really knows how much double-, triple-, quadruple-, etc. counting of US Treasuries takes place. US Treasuries are the core asset used by every financial institution to satisfy its capital and liquidity requirements—which means that no one really knows how big the hole is at a system-wide level.
This is the real reason why the repo market periodically seizes up. It’s akin to musical chairs—no one knows how many players will be without a chair until the music stops. Every player knows there aren’t enough chairs. Everyone knows someone will eventually lose. —Forbes
Again it comes down to the meaning of "money." Monopoly money is "money" in a game.
What does rehypothecation have to do with this? It concerns securities and securities not considered "money" as a liquid form of payment. What is being rehypothecated is various securities as collateral.
There are only two ways the the M1 money supply is affected, by government spending and taxation, and by banks creating deposits through lending and repayment of loans with interest.
Was that actually "money"? In the end, the courts decide who the actually owner of the treasury is, that is, who owns the time deposit at the cb, and the others are out of pocket. That "money" goes poof. (The derivative market is estimated to be reckoned in the quadrillions and it is possible it could blow up through a domino effect.)
"Money" other than in the sense of MI or MW money supply comes from other lending and the borrower has to obtain funds for repayment. If the loan is denominated in the currency, then the currency has to be obtained from the existing money supply. Unless the lender accepts some other form of payment like crypto. Crypto is the wild card here.
Is crypto "money"? The degree it is accepted as payment for settlement I would say it is form of money. If the loan is denominated in the currency and the lender accepts cryto, then a rate of exchange comes into play, like using foreign currency. Crypto is interesting in that the "currency" zone is international, allowing for instantaneous settlement across borders.
The case of crypto, the borrower has to obtain the necessary crypto from others, or mine it. It is possible that an economy could switch to non-government created crypto and the government could choose to accept it. El Salvador?
Anyway, presently monetary production economies run largely on MI and vendor credit denominated in the currency, which is generally repaid from MI generally using electronic transfers. I have not seen evidence of crypto becoming much of a factor yet, other than as a speculative vehicle and new "asset class."
Is crypto "money"?
No. Money serves three functions: a store of value, a unit of account, and a medium of exchange. Crypto fails on all three counts.
As for store of value, crypto can't decide whether it wants to be a currency or an appreciating asset. The two are mutually exclusive. A currency shouldn't depreciate greatly to be a store of value, but it also shouldn't appreciate, otherwise, Gresham's Law kicks in (bad money drives out good).
"The more attractive Bitcoin is as an asset, the less useful it is as money – and vice versa. —Chris Dillow
Cryptocurrency serves some useful purposes. But there are some pretty wild speculations going around. One of the more fundamental problems is that crypto assets can be either useful hedges, or useful forms of payment — but not easily both. —Tyler Cowen
The Fair Price of a Bitcoin is Zero —Eric Tymoigne
As for a unit of account, it's too volatile.
As for medium of exchange, crypto doesn't scale. This is known as the "Bitcoin scalability problem". Bitcoin can do 4.6 transactions per second (tps), Visa can do 1,700 tps, and can apparently scale to 24,000 tps in tests they've done.
The Blockchain Scalability Problem & the Race for Visa-Like Transaction Speed
Here's another problem:
He thinks the mechanism may “break down altogether” once Bitcoin hits the hard cap of 21m coins. The seigniorage incentive for verification by “miners” then evaporates, transactions slow to a snail’s pace, and the regime becomes vulnerable to a “majority attack”. No doubt crypto enthusiasts will dispute that this is an Achilles heel. —Ambrose Evans-Pritchard
Further to my comment,
KFC Canada's 'bitcoin bucket' attempts to cash in on cryptocurrency craze
(bold mine)
On Friday, the average bitcoin transaction fee was as high as $35. The bitcoin bucket cost $20. The transaction time is also a problem, with transactions taking anywhere from minutes to hours. And both the fee and the time change depending on the amount of traffic on the bitcoin network.
Purchasing a bucket of chicken with bitcoin also triggers a taxable event that Canada Revenue Agency expects you to keep track of.
Guide for cryptocurrency users and tax professionals
The CRA generally treats cryptocurrency like a commodity for purposes of the Income Tax Act. Any income from transactions involving cryptocurrency is generally treated as business income or as a capital gain, depending on the circumstances. Similarly, if earnings qualify as business income or as a capital gain then any losses are treated as business losses or capital losses.
Taxpayers have to establish if a cryptocurrency activity results in income or capital because this affects the way the revenue is treated for income tax purposes. Not all taxpayers who buy and sell cryptocurrency are carrying on business activity.
When you use cryptocurrency to pay for goods or services, the CRA treats it as a barter transaction for income tax purposes. A barter transaction occurs when two parties exchange goods or services and carry out that exchange without using legal currency. For more information, please review our archived content on barter transactions.
To figure out the value of a cryptocurrency transaction where a direct value cannot be determined, you must use a reasonable method. Keep records to show how you figured out the value. Generally, the CRA’s position is that the fair market value is the highest price, expressed in dollars that a willing buyer and a willing seller who are both knowledgeable, informed and prudent, and who are acting independently of each other, would agree to in an open and unrestricted market. For example, you could choose an exchange rate taken from the same exchange broker you are using or an average of midday values across a number of high-volume exchange brokers. Whichever method you choose, use it consistently.
If you hold more than one type of cryptocurrency in a digital wallet, each type of cryptocurrency is considered to be a separate digital asset and must be valued separately. For example, a Bitcoin is valued separately from a Litecoin.
Ditto for the US (bold mine):
In 2014, the IRS issued Notice 2014-21, 2014-16 I.R.B. 938, explaining that virtual currency is treated as property for Federal income tax purposes and providing examples of how longstanding tax principles applicable to transactions involving property apply to virtual currency.
The Internal Revenue Code and regulations require taxpayers to maintain records that are sufficient to establish the positions taken on tax returns. You should therefore maintain, for example, records documenting receipts, sales, exchanges, or other dispositions of virtual currency and the fair market value of the virtual currency.
Well, so much for the convenience factor of crypto.
Now that crypto is an "asset class" promoted by Wall Street it potentially has a future. Too early to tell, and certainly Bitcoin is not the final word on it.
The big threat is that governments will get in the way, as China is already doing (capital controls). But the US may have a more difficult time with Goldman etc involved. You know, the people that run the show.
Time will tell. I think that governments will try to get a leash on it but they tried that with dope too, and now the drug business is a burgeoning new economic sector. So much for that.
Crypto is likely to replace "benjamins" as the "money" of choice of the "informal economy," although the big banks will not appreciate the end of the days of laundering for a fee.
Thinking about it now, I wish now I had bought Bitcoin back when some of my friends were. Turned out pretty awesome for them.
"informal economy"
No, not good for that either.
When Bitcoin burst onto the scene in 2009, fans heralded the cryptocurrency as a secure, decentralized and anonymous way to conduct transactions outside the traditional financial system.
Criminals, often operating in hidden reaches of the internet, flocked to Bitcoin to do illicit business without revealing their names or locations. The digital currency quickly became as popular with drug dealers and tax evaders as it was with contrarian libertarians.
But this week’s revelation that federal officials had recovered most of the Bitcoin ransom paid in the recent Colonial Pipeline ransomware attack exposed a fundamental misconception about cryptocurrencies: They are not as hard to track as cybercriminals think.
On Monday, the Justice Department announced it had traced 63.7 of the 75 Bitcoins — some $2.3 million of the $4.3 million — that Colonial Pipeline had paid to the hackers as the ransomware attack shut down the company’s computer systems, prompting fuel shortages and a spike in gasoline prices. Officials have since declined to provide more details about how exactly they recouped the Bitcoin, which has fluctuated in value.
Yet for the growing community of cryptocurrency enthusiasts and investors, the fact that federal investigators had tracked the ransom as it moved through at least 23 different electronic accounts belonging to DarkSide, the hacking collective, before accessing one account showed that law enforcement was growing along with the industry.
Pipeline Investigation Upends Idea That Bitcoin Is Untraceable
Thinking about it now, I wish now I had bought Bitcoin back when some of my friends were. Turned out pretty awesome for them.
It's important to keep focused on our own goals and not get distracted by what others are doing. I'm reminded of this saying by Benjamin Graham.
“To be an intelligent investor, you must also refuse to judge your financial success by how a bunch of total strangers are doing. You’re not one penny poorer if someone in Dubuque or Dallas or Denver beats the S & P 500 and you don’t. No one’s gravestone reads “HE BEAT THE MARKET.” I once interviewed a group of retirees in Boca Raton, one of Florida’s wealthiest retirement communities. I asked these people—mostly in their seventies—if they had beaten the market over their investing lifetimes. Some said yes, some said no; most weren’t sure. Then one man said, “Who cares? All I know is, my investments earned enough for me to end up in Boca.” Could there be a more perfect answer? After all, the whole point of investing is not to earn more money than average, but to earn enough money to meet your own needs. The best way to measure your investing success is not by whether you’re beating the market but by whether you’ve put in place a financial plan and a behavioral discipline that are likely to get you where you want to go. In the end, what matters isn’t crossing the finish line before anybody else but just making sure that you do cross it.”
― Benjamin Graham, The Intelligent Investor
Then there's also the riches you have in your mind. I love this quote by Ralph Waldo Emerson:
Wit makes its own welcome, and levels all distinction. No dignity, no learning, no force of character, can make any stand against good wit. It is like ice, on which no beauty of form, no majesty of carriage, can plead any immunity; they must walk gingerly, according to the laws of ice, or down they must go, dignity and all.
Ralph Waldo Emerson
The bitcoin craze will end in tears for the many. We've seen this many times in the past.
Don't we have enough speculative instruments?
Yet for the growing community of cryptocurrency enthusiasts and investors, the fact that federal investigators had tracked the ransom as it moved through at least 23 different electronic accounts belonging to DarkSide, the hacking collective, before accessing one account showed that law enforcement was growing along with the industry.
Yes, the sine qua non of making crypto work as an alternative payments system is sufficiently strong encryption. It is also the sine qua non of the privacy that is required for freedom. And the push of authority is and will continue to be toward eliminating any level encryption that the authorities do not control.
This is going to be a huge issue going forward as the world becomes much more authoritarian governmentally by legal imposition and culturally through narrative control. The liberal era appears to be winding down.
But that is just a phase in the historical dialectic, too. It could last quite awhile though.
Progressives thinkers prefer centralized regulation to systems of individuals. Markets for anything, whether a local farmers market, Alibaba, Crypto or Treasury bonds allow individuals to exercise power and exchange their labor for currency. In so doing they can easily undermine and arbitrage away carefully designed regulation. Be it agricultural, pharmaceutical, labor, currency. Sanctions, taxes, excises and the various attempts at engineering ideologies into the cost structure of any item or good can quickly and profitably be undone in markets.
For this reason, it makes clear 🐔. The convoluted logic, motivated reasoning and obviously ludicrous redefinitions create an absurd framing. Markets for real and financial goods thrive in places like East Africa where regulation is lax, governments weak or non existent, currencies are a joke. Modern shadow finance companies built on phone apps developed FIRST in east Africa and then slowly moved into developed government regulated markets over a decade or two. From hailing/lending/payments/banking even equitiesn, you name it, the entire concept of original apps allowed people to escape their national currency and allowed their labor, capital and business to use other currencies.
You can't engage in discussions with people who adopt frames that clearly disabuse themselves of facts and history. Financial and real market in the US were thriving before the nation had a currency. All business is chartered by government and is embedded in social legal and financial systems. You can see clearly what happens though when progressives regulate: Look at TBTF institutions, they can now do whatever they want so long as they meet racial hiring quotas. Sell vol? Fine tell us your branch openings poor neighborhood. Need an exemption to a leverage ratio?/ no problem Jamie, how many people of color will you hire in exchange. Meanwhile, alipay and PayPal and cashapp grow and take more deposits than big banks in a year and consumer lending by fintechs? Up 1500% and in any fx or cypto, whatever is most convenient based currency you are earning. Better wake up, MMTers the world has moved on and your old framing since 2006 makes you look like Generals fighting the last war. New problems, similar to past, but your old frames and solutions didn't work and were corrupted by your ideological blindness and ypur leaders ready to enrich themselves because they know you have no clue.
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