Peter May — Paul Mason demonstrates all too clearly why much of Labour don’t ‘get’ money

I confess I expected better. Paul Mason misses the fact that it is not ‘hit and hope’ it is actually the way money IS created – the neoliberal deceit is the ‘fact’ that we tax and spend.

The Treasury has after all, admitted as much as, indeed, have the Bank of England in September 2017: “Regarding whether taxation is necessarily required to finance government spending the answer is no, it is not. Along with raising money by taxation, governments can borrow money and they can create money outright.”…

Actually, money is created outright as credit. Banks extend loans that create deposits by crediting deposit accounts. Governments that are currency issuers create tax credits denominated in the currency as the unit of account and use them to credit nongovernment accounts, nowadays usually through the central bank as the government's fiscal agent.

According to the "law of reflux" money returns to its source. Credits that banks create through lending are used to pay down loans, which destroys the funds created by the deposit. Payment of tax credits to the government in payment of tax obligations destroys the funds created by the initial issuance. Of course, this is in aggregate, taking flows over time into account.

Spending and taxing are separate different fiscal operations for a currency issuer. Spending must logically precede taxation. Taxation, as well as payment of fees, fines and tariffs, destroy funds created through issuance, which occurs through government spending including transfers.

Spending is therefore offset by taxation and, in terms of "funds" spending with respect to sources and uses, but taxation is not used operationally to "pay for" spending. Spending and taxation are a separate fiscal operations, and tax policy is separate from spending policy. Taxes don't "pay for" spending — ever — under any circumstances.

Hence, it makes no sense to say that taxes are needed to "afford" spending, or that spending without offsetting taxes is "living beyond our means," or that liabilities are "unfunded." In terms of accounting statements, funding is simply a matter of accounting entries ("keystrokes on spreadsheets") that balance the books.

For a full explanation of the MMT POV on money and banking and finance, see Eric Tymoigne's book draft, The Financial System and the Economy.

Progressive Pulse
Paul Mason demonstrates all too clearly why much of Labour don’t ‘get’ money

Peter May

Pierre Ortlieb — Central Banks and the Folk Tales of Money

On the other hand, a number of central banks have taken the dangerous approach of simply tailoring their message based on their audience: when speaking to technical experts, say one thing, and when speaking to the public, say another. The janus-faced SNB is a case in point. This rhetorical duplicity is important as it allows central banks to both assuage popular concerns over the stability of money, by fostering the illusion that they maintain control over price stability and monetary conditions, while similarly soothing markets with the impression that they possess a nuanced and empirically accurate framework of how credit creation works. For both audiences, this produces a sense of institutional commitment which sustains both public and market trust in money under conditions of uncertainty.

Yet this newfound duplicity in central bank communications is perilous, and risks further undermining public trust in money should they not succeed in straddling this fine line. Continuing to play into folk theories of money as these drift further and further away from the reality of credit creation will inevitably have unsettling ramifications. For example, it might lead to the election of politicians keen to exploit and pressure central banks, or the production of crises in the form of bank runs.

Economic Questions

Central Banks and the Folk Tales of Money

Pierre Ortlieb

John T. Harvey — But Can The Government Afford It?

We’ve been hearing that a lot lately, being asked about things like the proposed US-Mexico border wall, the possibility of universal health care, and even regarding existing programs like Social Security. It’s a relevant question, to be sure, but 99 times out of 100 (or maybe 999 out of 1000), the context in which it is placed is completely wrong.
I say this because the question is almost always asked regarding whether or not we have enough money. If there is one place where the economics discipline has most substantially let down the general public, it’s in explaining how the financial sector works.

Long story short: money is not a scarce resource. Labor is, oil is, clean water is. Money is not.

Money can be and is created with a keystroke, just as easily as I am typing these words. This is true in both the public and private sectors....

Forbes — Pragmatic Economics

But Can The Government Afford It?
John T. Harvey | Professor of Economics, Texas Christian University

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

Money – Born of Credit?

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

Peter Cooper — A Simple Modern Money Tale – Buckwell Island Establishes a Currency

Pass it on.

heteconomist
A Simple Modern Money Tale – Buckwell Island Establishes a Currency
Peter Cooper

The Economics Novice

Weekend reading. There are only three entries. Easy read.

Ed Zimmer is an engineer and has only recently encountered economics.

But I had now picked up an interest in macroeconomics — and started seriously reading many of the economists' blogs and papers. But the more I read, the more disillusioned I became. Having no previous introduction to economics, I initially assumed economists were scientists (and that was reinforced by the math I was seeing). But as I read their blogs and papers and worked through many of their mathematical models, I came to realize they're not scientists at all — but philosophers. A model reflecting reality simply CANNOT be built from variables that cannot be precisely defined and accurately measured — so their models are essentially useless. They may give insights (for readers to test with their own logic), but any notion that they're offering "truths" is just simplistic.

And to compound that weakness, most economists' papers share the academic weakness of trying more to disprove other economists' work than offer viable solutions to real-world problems. So much of what is found in today's economics textbooks and blogs is simply false — the real-world truth often being the exact opposite of what is written. Economics is not that complicated — little more than the disiplined logic every human is capable of.

So that's how this site has become The Economic Novice. It gives me a platform to lay out my solutions (admittedly novice, but hopefully clear and logical) to societal problems resulting from technological change. I'm doing this as a webpage (rather than a blog) simply because I don't want arguments mucking up the presentation. I'll point to this site as applicable in others' Comments sections and that's where arguments will occur. If anyone wants to argue via email, you'll find me at edzimmer@zimmer-foundation.org.

• About us
• The "No Free Lunch" Myth
• A Job Guarantee Program

The Economics Novice

Jonah Ho — TheBitcoin Fallacy-Back to the Gold Standard

MMT.

Makes Mogul
TheBitcoin Fallacy-Back to the Gold Standard
Jonah Ho

Michael Hudson — Origins of Money and Interest: Palatial Credit, not Barter

Neolithic and Bronze Age economies operated mainly on credit. Because of the time gap between planting and harvesting, few payments were made at the time of purchase. When Babylonians went to the local alehouse, they did not pay by carrying grain around in their pockets. They ran up a tab to be settled at harvest time on the threshing floor. The ale women who ran these “pubs” would then pay most of this grain to the palace for consignments advanced to them during the crop year. These payments were financial in character, not on-the-spot barter-type exchange.

As a means of payment, the early use of monetized grain and silver was mainly to settle such debts. This monetization was not physical; it was administrative and fiscal. The paradigmatic payments involved the palace or temples, which regulated the weights, measures and purity standards necessary for money to be accepted. Their accountants that developed money as an administrative tool for forward planning and resource allocation, and for transactions with the rest of the economy to collect land rent and assign values to trade consignments, which were paid in silver at the end of each seafaring or caravan cycle....

Naked Capitalism
Michael Hudson: Origins of Money and Interest: Palatial Credit, not Barter

See also

Michael Hudson — On Finance, Real Estate And The Powers Of Neoliberalism
High Cost Economy

There’s an idea – deregulate the banks!

Michael Hudson | President of The Institute for the Study of Long-Term Economic Trends (ISLET), a Wall Street Financial Analyst, Distinguished Research Professor of Economics at the University of Missouri, Kansas City, and Guest Professor at Peking University

David Andolfatto and Andrew Spewak — Debt Monetization: Then and Now

Upping their game. However, I think that the explanatory narrative needs some work. Are these the controlling factors?

FRBSL — On the Economy
Debt Monetization: Then and Now
David Andolfatto, Vice President and Economist, and Andrew Spewak, Senior Research Associate

See also

Over-building as a factor?

FRBNY — Liberty Strteet
Quantities and Prices during the Housing Bust

Sonia Gilbukh and Paul Goldsmith-Pinkham

Bill Mitchell — Where do we get the funds from to pay our taxes and buy government debt?

Bill addresses a major objection to MMT.

Note: I am reading the post from the RSS feed. I am getting a database error message in trying to connect with Bill's site.

I have been (involuntarily) copied into a rather lengthy Twitter exchange in the last week or so where a person who says he is ‘all over MMT’ (meaning I presume, that he understands its basic principles and levels of abstraction and subtlety) has been arguing ad nauseum that Modern Monetary Theory (MMT) proponents are a laughing stock when they claim that taxes and debt-issuance do not fund the spending of a currency-issuing government. He points to the existing institutional structures in the US whereby tax receipts apparently go into a specific account at the central bank and governments are prevented from spending unless the account balance is positive. Also implicated, apparently, is the on-going sham about the ‘debt ceiling’, which according to the argument presented on Twitter is testament to the ‘fact’ that government deficits are funded by borrowings obtained from debt issuance. I received many E-mails about this issue in the last week from readers of my blog wondering what the veracity of these claims were – given they thought (in general) they sounded ‘convincing’. Were the original MMT proponents really overstating the matter and were these accounting arrangements evidence that in reality the government has to raise both tax revenue and funds from borrowing in order to deficit spend? Confusion reigns supreme it seems. Once one understands the underlying nature of the financial flows associated with government spending and taxation, it will become obvious that the argument presented above is superficial at best and fails to come to terms with the basic questions: where do the funds come from that we use to pay our taxes and buy government debt? Once we dig down to that level, the matter resolves quickly.

Bill Mitchell – billy blog
Where do we get the funds from to pay our taxes and buy government debt?
Bill Mitchell | Professor in Economics and Director of the Centre of Full Employment and Equity (CofFEE), at University of Newcastle, NSW, Australia

Lars P. Syll — How money is created

David Graeber and the Bank of England.

Lars P. Syll’s Blog
How money is created
Lars P. Syll | Professor, Malmo University

J. D. Alt — A Comfortable Betrayal

It would be a shocking scandal if it came to light that the professions of medical science had, for decades, known about an easy to treat, underlying cause of cancer—but conspired to obfuscate and suppress the information to protect their participation in a medical industry raking in hundreds of billions a year to treat the disease. Professional standings, tenures, licenses would be in tatters. Lawsuits would abound. Outrage would march on every city hospital and medical college in the nation—would it not?

Such a betrayal is not humanly possible, right? Yet is it not the case that the professions of economics, journalism and politics are guilty of something very like this kind of betrayal?…

I would make the lede a story of betrayal by companies that knew that smoking caused cancer and denied and concealed it.

Isn't the noble lie of "experts about money creation a similar betrayal of public trust? Even Alan Greenspan admitted in congressional testimony that government is not limited in the amount of currency it can issue.

Ordinarily, this is suppressed however. Bernard Lietaer revealed it as a taboo.

Real Progressives
A Comfortable Betrayal

J. D. Alt

Crossposted at New Economic Perspectives

Nathan McDonald — Bitcoin Proves You Cannot Have Your Digital Cake and Eat it Too

Read the comments, too. Just like most economists, Bitcoin fans overlooked transaction costs.

Wolf Street
Bitcoin Proves You Cannot Have Your Digital Cake and Eat it Too
Nathan McDonald, Sprott Money

also

The EU is targeting bitcoin anonymity, saying the measure is needed to tackle tax evasion and other crimes. Anonymity of the cryptocurrency holders is a built-in feature that the EU hopes to undermine.

The new rules concerning cryptocurrency passed on Friday by the European Parliament and the European Council are part of a larger package, which also target prepaid cards and trust funds. The agreement is meant to be enshrined in legislation within 18 months by EU members.

Once they become law, the rules will require cryptocurrency exchange platforms and wallet providers to identify their clients. Identifying individuals and entities holding bitcoin and other digital currencies will presumably help to prevent tax evasion, money laundering and financing of terrorism.

As Yves Smith has said, "prosecution futures."

RT
Crypto-crackdown: EU agrees on new rules to curb bitcoin anonymity

Zoe Williams — How the actual magic money tree works

Shock data shows that most MPs do not know how money is created. Responding to a survey commissioned by Positive Money just before the June election, 85% were unaware that new money was created every time a commercial bank extended a loan, while 70% thought that only the government had the power to create new money.

The results are only a shock if you didn’t see the last poll of MPs on exactly this topic, in 2014, revealing broadly the same level of ignorance. Indeed, the real shock is that MPs still, without embarrassment, answer surveys.

Yet almost all our hot-button political issues, from social security to housing, relate back to the meaning and creation of money; so if the people making those choices don’t have a clue, that isn’t without consequence....

The Guardian
How the actual magic money tree works

Zoe Williams

J. D. Alt — The Great Italian Experiment (part 2)

As I said, Italy, is now experimenting with paying for public services with tax credits. Presumably, this is happening because Italy doesn’t possess enough Euros to pay its citizens to provide all the goods and services needed to maintain and run the public sector of its social economy. And Italy can’t “create” the additional Euros it needs because that prerogative is the exclusive right of the EU Central Bank which Italy, even as a sovereign member of the EU, has no control over. But, as the news article explains, Italy still needs to have the grass mowed and the weeds pulled in its public gardens. So it has decided (out of desperation, the article implies) to pay the gardeners with tax-credits. The gardeners are willing to do the work in exchange for the government’s tax-credits, because it means the Euros they earn (in other ways) can then be used to purchase goods and services rather than for paying their taxes. So, in practical terms, it is “just like” getting paid in Euros.

This, in fact, is way more interesting than it seems. In fact, it might even be mind-expanding! Here’s why:

Nice post that lays out a lot clearly in a few simple words. Well done.

Part 1.

New Economic Perspectives
The Great Italian Experiment (part 2)
J. D. Alt

Ellis Winningham — Federal Taxpayers Do Not Fund the Federal Government; The Federal Government Funds Federal Taxpayers

Another thing that the mainstream gets backwards.

Ellis Winningham — MMT and Modern Macroeconomics
Federal Taxpayers Do Not Fund the Federal Government; The Federal Government Funds Federal Taxpayers
Ellis Winningham

Lord Keynes — Larry White on the Origins of Coined Money: A Critique

The latest iteration in the controversy over theory of money, money creation, and historical origins of money use.

Social Democracy For The 21St Century: A Post Keynesian Perspective
Larry White on the Origins of Coined Money: A Critique
Lord Keynes

Peter Cooper — Short & Simple 13 – Private Credit Creation

We have seen that a national currency enters the economy when government spends, and that the recipients of the government spending can use the currency for various purposes, including to purchase goods and services. Government is therefore an original source of funds.

There is another original source of funds that gives people the ability to make purchases. This other source is private credit creation. Put simply, a household or firm can borrow from a bank or other financial institution and use the funds to spend....

The key for now is just to understand that our capacity to make purchases comes from two original sources – government spending and private credit creation.

heteconomist
Short & Simple 13 – Private Credit Creation
Peter Cooper

Peter Cooper — Short & Simple 12 – Government Money

We saw in part 2 that to establish a currency, government needs to do three things: 

1. Define a unit of account (e.g. dollar).

2. Impose taxes that can only be paid in that unit of account.

3. Spend or lend the currency into existence.

The most basic purpose of taxation (introduced in step 2 of the sequence) is to create a demand for the currency. Provided taxes are effectively enforced, we in the non-government will have a need to obtain the currency, because it is the only means of paying taxes.

Economists sometimes summarize this as “taxes drive money”....

heteconomist
Short & Simple 12 – Government Money
Peter Cooper

Peter Cooper — Self-Imposed Constraints as an Obfuscating Factor

From inception of a monetary economy with a government-issued currency, it is clear that government spending must come before tax payments or purchases of government debt. The order of requirements is basically: (i) government defines its monetary unit of account; (ii) government imposes taxes and other obligations that can only finally be settled in that currency; (iii) government spends (or lends) its currency into existence; (iv) non-government can now obtain the currency and, among other things, pay its taxes and purchase government debt. It is clear that government spending must logically come before tax payments or purchases of government debt because non-government must be able to get hold of the currency before it can do these things….

"Tax and spend is really "spend and tax" at the operationally level. The "tax and spend" illusion arises from optics that are created by failure of operational understanding.

It's the same with credit creation through bank lending. Loans create deposits. Deposits don't create loans and are not necessary for lending.

The government and banks create the unit of account simply be crediting accounts. But only the government can create entries in the payments system that is used for final settlement and settlement of obligations to the government, which are only redeemable using liabilities issued by government.

heteconomist
Self-Imposed Constraints as an Obfuscating Factor
Peter Cooper