Cross posted from MikeTheMadBiologist.com
Because we’re being played off against food stamps by Republican congressmen:
We’re only asking for a 5 percent decrease [in SNAP] in a time of budgetary crisis, where this is being put up against funding the NIH for basic medical research, this is against putting money into defense.
But this is stupid, since it assumes the federal government can run out of money. It can’t, since it’s a currency issuer. Let’s work through a couple of thought experiments. First, the Mars rover (boldface added):
It’s a completely false tradeoff, and one scientists have to face all the time.To put it simply, our dollars are not “precious” because we have a fiat currency; we can spend the money. Being a currency issuer is very different than being a currency user. There is no reason to choose between Mars landing or fixing all our other problems if money is the only limiting ‘resource.’ Hell, we could afford to put a whole goddamn showroom of ATOMIC SPACE SCIENCE TANKS! WITH JETPACKS! on Mars.
Actually, that last part might not be true. Landing ATOMIC SPACE SCIENCE TANKS! WITH JETPACKS! seems to be a very intensive undertaking. We might not have enough mohawk-coiffed rocket scientists. Might need to rustle up a few more. We could run into resource limitations–maybe we want some of our engineers, computer whizzes, and mohawk-coiffed rocket scientists to do something else worthwhile (
figure out how to download porn faster!). Maybe making a bunch of ATOMIC SPACE SCIENCE TANKS! WITH JETPACKS! would cause shortages in making other fancy gizmos (dunno). It might cause inflation in the ‘send stuff into outer space’ sector. Or maybe we simply don’t want that many ATOMIC SPACE SCIENCE TANKS! WITH JETPACKS! But money is never a limiting resource when you have a fiat currency.
Let’s move on to the NIH (boldface added):
As I’ve noted before, this has ramifications for science funding too. If we wanted to, we could double NIH funding. Arguably, if we don’t change how and what the NIH fund, we could wind up right back where we are today, with too many investigators chasing too few dollars, just at a larger scale. So maybe we shouldn’t increase funding that much until we figure out how to do it better–but that’s a completely separate policydebate. Operationally, as long as we have enough scientists and scientific materiel, there’s no reason why we couldn’t double NIH funding (remember: could and should are different).
So let’s stop worrying about deficits and start worrying about real problems (here’s one you can worry about). Unemployment, underemployment, and stagnating wages, along with a decaying infrastructure, that’s what we should be worrying about, not federal deficits denominated in currency the U.S. government controls.
If scientists don’t start understanding that money by itself can not be a limiting resource, we’re going to end up being pitted against other worthwhile things–and what’s the point of improving human health through better medical interventions if we simultaneously weaken it by making children hungry? We can’t let conservatives divide and conquer based on some simplistic misunderstandings.
This economics stuff matters.
In understanding the science behind sovereign money, there needs be a basis of the thinking of the monetary scientists.
However, in discussing the ‘science’ around budgets and rules of government finance, it is important to differentiate between monetary system functions and funding for government administration of the public good.
Depending on the legal systems and structures of the monetary system in place, it is quite possible that one has nothing to do with the other.
The fact that a sovereign government cannot by definition run out of its currency, is far distant from the question of whether the government – meaning the Treasury of the United States as payer for governmental services – can run out of revenue from whatever sources, and thus lead to the impoverished struggle between food stamps and mental health services.
That struggle is the norm and very possible in a sovereign fiat money system where the government has delegated by implication of the law governing the money and banking system, the power over that national money system.
All the money the government needs is created as a debt by private bankers. It is getting in shorter supply to those who need it to pay their bills.
MMT’s effort to declare the legal status of the sovereign fiat money system as the tool to assure its use to provide for the plenty of public good must overcome the REALITY that under the present system, the only way for government to acquire revenues needed to pay its bills is through either taxation or borrowing from the private bankers.
Achieving our public purpose money system requires reforms to overcome our past mistakes of turning the national money system over to the private bankers.
The relationship between our public advancement and our system of money is well discussed in Soddy’s Lectures in Cartesian Economics – Titled : The Bearing of Physical Science Upon State Stewardship.
I would like to think that the discussion of money is rising to its proper role at the foundation of both political and socio-economic science, that will necessarily support progressive change.
Slowly.
And carefully.
Thanks.
“All the money the government needs is created as a debt by private bankers. ”
This is where you run off the rails.
The government could just as easily have the Fed credit its account with some money and then give it out as a tax rebate to the people. (Or buy stuff the government needs.) No debt involved. No private banks creating the money either.
The crediting of the Treasury General Account would be accomplished if the Treasury issued High Value Platinum Coins (HVPC), deposited them in the Public Enterprise Account at the Federal Reserve, and then swept that account for the seigniorage. Simple, clean, legal, and requiring no action by the do nothing Congress. It’s done all the time only on a smaller scale.
“It’s done all the time only on a smaller scale.”
True. And most of what has been written about the Platinum coin and coin seigniorage over the past few years is quite accurate, portending, to me, a certain showdown at the OK Corral. It might be about whether scale matters or not ( a few thousand?? a few trillion??), or about some pernicious tangent of legality or intent.
However, with regard to the sovereign fiat money system and the public’s power over the sovereign in a modern economic democracy, the more elemental truth that arises is whether, today, absent the platinum-coin legislation, the government has the power to create and issue the nation’s money on behalf of and for the betterment of that same public – without issuing debt.
It does so.
And it has spelled out in the Platinum Coin statute one manner in which this public money power could be exercised.
I do not necessarily agree that the manner here described, evading the Congress, really works for me.
The addition of purchasing power into the economy must be found on the actions needed to carry out the public policy agreed to by the government.
As such, the ‘money-creation’ should become functional within the government’s budgeting process, as a source of revenue that ends up in that TGA account.
It’s our money system.
But the private bankers completely control it and are renting it to The Restofus.
Understanding the sovereign fiat money system.
This is the right time for discussion of these ideas.
Thanks.
Hi Joe. I agree that the government has the power to crate and issue the nation’s money without debt. That is in the Constitution and should not be an issue for anyone who seriously studies the document. Congress, however, has turned that power over to the Federal Reserve to exercise on its behalf, and then has further limited the Treasury by requiring it to issue interest bearing notes to obtain the money created by the Fed. This Byzantine mechanism is what must be overcome in order to streamline the money creation and spending process and to remove interest payments from the formula.
I think HVPCS does that without requiring a complete overhaul of the Fed-Treasury system, and is a legal pathway because Congress has already approved it with the 1996 Platinum Coinage law. Joe Firestone has argued, and I agree, that HVPCS does not evade Congresses’ power because it would only fill the public purse with funds, but Congress would still have to appropriate any spending other than to pay off existing debt which Congress has already approved. You mention PCS as one manner in which to accomplish monetary sovereignty. Do you see another way that doesn’t involve getting our completely dysfunctional Congress to agree on a pathway? I don’t.
HPVC is certainly one way that what I am suggesting could happen.
Is there a Black Swan lurking in the shadows, though? I suspect that there is.
When the government gives it out as a tax rebate, the recipient’s deposit account at his/her bank is credited. That money is government issued IOU – debt. When the government buys stuffs, the manufacturer’s deposit account at its bank is credited. That money is, again, liability claims on the government. By the government giving out tax rebates or purchasing stuffs, money is created.
Well if you define debt as anything that makes your statement about debt true, then of course you are right.
Money is not a government debt. There is almost no obligation incurred by the government when it issues money. (Well, I guess it agrees to take that money back from you for you to pay your taxes. Presumably the taxes are much less than the amount of money issued. The money the government issues, but does not take back in taxes is not debt.)
Steven, according to Randall Wray this is exactly what money is, a government IOU acceptable for paying taxes. Government might not take all of your money as taxes, but that part you retain and spend with others is available for them to pay their tax liabilities. Generally the government doesn’t collect 100% of what it spends, but it can and on occasion has collected more than it spends; most recently during the last few years of the Clinton administration when the government ran budget surpluses. Think of it this way, if I give you an IOU for $100 but you never try to collect it from me, it’s still a debt I owe. You could sell or give it to someone and they could (try to) collect $100 from me.
When I issue an IOU, someone can come back to me with the IOU and demand what ever it is I said I owe.
Now take your dollar bill to the government and demand they pay you what?
SunBio
Hope this is OK.
First, on the Clinton surpluses.
They were bullsh*t surpluses.
The Dems try to convey the collection of taxes beyond expenditures, leaving normal people to declare, as you did :
“”(the government) on occasion has collected more than it spends; most recently during the last few years of the Clinton administration when the government ran budget surpluses.””
Nothing is further from the truth.
The ‘governmental “budgeting” constraint’ (GBC) says that public expenditures must be balanced by taxation revenue PLUS change in public debt as revenue PLUS ‘internal transfer’ revenues.
The latter is mainly the Fed’s annual transfer of its net-income to the Treasury.
However, ANY internal transfer counts.
Clinton raided the ‘trust-fund’ accounts of public agencies and transferred those confiscations as government revenues. Legally within the GBC.
That’s how we measured a ‘surplus’ of revenues over expenditures.
In fact, there was an issuance of $281 Billion of new public debt in the years of the Clinton ‘surpluses’. Just one of many factual takedowns here:
http://www.craigsteiner.us/articles/16
Second, despite Wray’s pronouncements, money is not any kind of a government IOU.
The currency, ‘denominated’ in the national unit-of-account (making it quasi-governmental) and issued by the private banks, is NEVER an IOU of the government, which would make it a debt of the government, as is every IOU outstanding.
THAT the government must accept this banker-money in payment of taxes is loosely constructed in the legal tender laws. That which made banknotes legal tender carries the same weight with modern bank-issued electronic credits as it does with those notes – legal for tender on all public debts OWED TO government.
With all the private money-creation, government owes you nothing.
Respectfully.
Thanks, Joe for the clarification of the Clinton “surpluses”. I guess the point still stands that the government could, in theory, collect more money in taxes than it spends; the so called reduce the debt budget. Transfers back into the public agency trust funds would presumably count as expenditures and would have to be made up either through taxation or some other money creation mechanism such as HVPCS or Greenbacks or ???.
As for money being a government IOU, I will step out of that line of fire and let you, Randall Ray and whoever else claims expertise take up the issue. I suspect that the outcome will be an agreement to disagree since there doesn’t appear to be an authoritative arbitrator or Scriptural revelation that can settle the matter to everyone’s satisfaction.
Sunflowerbio,
Do you have an answer to the question of what obligation the government took on when they gave you the dollar?
Don’t you think that if that dollar is government debt, you should be able to identify what is owed? Or what is the obligation the government took on when they gave you the dollar?
It shouldn’t take a scriptural revelation to make you wonder about your premise if you can’t answer this simple question.
Steven, the Website Monitor Gremlin must be working overtime. See my reply to your second post. Basically I am just repeating the assertion of L Randall Wray that government created dollars are government IOU’s good for one dollar’s credit toward your tax obligation. Any surplus you retain and spend is good for any other taxpayer’s tax obligation. According to Wray, this promise to accept the government’s issued money and cancel your tax obligation is all that is necessary and is suficient to give the government’s issued money value. As you can see from Joe’s responses, this is a contentious issue in money theory, and I am certainly not an expert in money theory; hence my deference to others. I believe Randall and Joe got into a lengthy discussion about this in the comments section of Randall’s primer on MMT which you can access on this website. I hope this helps, or at least doesn’t add to confusion.
Thanks, Sunflowerbio
Certainly the government could tax more than it spends, in retrospect, as a budget is only a budget.
Given a move to a real-(United States)money economy, in which the government does not issue any more debt, there would be deficits or surpluses in every year.
And, well-observed that these past budgeting shenanigans get their come-uppance, with the trust-re-funding of future years more likely being accompanied by the issuance of even more public debt.
So, the joke is on you, taxpayers.
A democratic government of a sovereign fiat monetary system should never have to borrow, as they have the money-creation power.
THAT they do borrow is all the evidence needed of the capitulation of the public money power over to private interests, known as the bankers school of money ‘science’.
And very right also that there is no final arbiter by which to settle the nature of money in its essence, a subject that needs to have much more attention than allowed in economics courses.
It is more oft said that the money is a liability of the government, though I am not even sure why that is true.
It is more a liability of the national economy as it represents a denominated claim on that economy.
But even being a liability on someone’s balance sheet does not make it a ‘debt’ at all.
The liability side includes both debts and equities.
Money that is directly issued by the sovereign government without debt is a permanent equity investment in the national economy, and it cannot be claimed that it is a debt for the reason that it is a liability of the government.
That is where stylizing becomes shoe-horning.
Hopefully we can clarify the relationship between “money”, for what it really is, and “debt”, for what it really is.
That is a discussion that I think is very worth having.
Thanks.
Thanks Joe. This has been informative. Let me take up this part of the discussion.
It is more oft said that the money is a liability of the government, though I am not even sure why that is true.
It is more a liability of the national economy as it represents a denominated claim on that economy.
But even being a liability on someone’s balance sheet does not make it a ‘debt’ at all.
The liability side includes both debts and equities.
Could that portion of the government’s liabilities (issued money) that is collected back as taxes be considered as government IOU s (debt) redeemable as tax credits, and the balance of the issued money be the government’s equity in the economy? If this is a valid way to characterize the issue, it might help unravel some of the mystery of government issued money.
Thanks, SunBio
Hmmmm,
It could be thought of that way, but this is very hard to answer for this reason.
MMT constructs the national economy into private-public-current*account accounting balances, the result being that the central bank becomes, by accounting identity, part of the public sector.
But no part of the private central bank-US and the banking system, as to ANY accounting balance, is part of the public sector. The regional Feds(private bankcorporations (read their charters and Articles)) and all thousands of commercial banks are private sector entities.
So, to my view, in contrast to the MMT view, the private banks are the issuers of the currency. IOW, our sovereign fiat money system has been privatized. Again, please read Huber’s explanation of our bankers-school money system.
https://sovereignmoney.eu/modern-money-and-sovereign-currency/
The end result is that it is the Fed and not the government that hold the balance sheet that includes the privately-issued money supply that is used to pay the government’s taxes.
WERE the GUV actually issuing the money supply, and the CB-US a public entity, then ALL of the monies issued would be equity-liabilities on the CB-GUVUS balance sheet.
Sorry if I have made this more complicated, in my attempt at clarification.
Thanks.
I don’t see my earlier reply here.
When someone presents my IOU for payment to me, then I must gice that person what the IOU promises.
When you take you dollar bill to the government what is it that they promised you that they now have to give you?
One dollar’s credit toward your tax liability. That’s all.
Maybe Taleb should write a book, “Fooled by Accounting”
The basic accounting equation is
Assets = Liabilities + Capital
Just because liabilities and capital are on the same side of the equation does not mean they are the same thing.
One could also rearrange the equation to be equally true
Assets – Liabilities = Capital
This way of saying it would make more sense in everyday English to everyday concerns for most people except accountants. Which side of the equation you put these things depends on what you are solving for. Moving something from one side of the equation to the other does not change its fundamental nature.
Assets are what you have to work with. Capital is what you have to work with that you own. Liabilities are what you have to work with that you must eventually pay back (a debt). Putting money on the same side of the equation as capital and liabilities is not enough to tell you which one of the two it is.
Capital is also known as shareholders’ or owners’ equity. This means the part of your assets that remains after you pay down the debts.
Just thinking about all the “money” that is in circulation in the economy, and then looking at the Government balance sheet, it is not clear to me that most of the “money” even belongs on this balance sheet.
Steve,
Please be careful.
You are coming close to an understanding, based on un-stylized logic, that ‘money’ is not a debt (a.k.a. an IOU) of the sovereign government.
Soon following, I fear, is an un-stylized logical conclusion that, therefore, money, itself, is not debt.
However, as ‘money’ is today issued by the private banks “as a debt”, what money is in this modern bankers’ school system of money, is indeed an IOU repayable to those bankers. All money in circulation today(c.e.) is a private IOU that has nothing to do with government. The exception being that sovereign governments ‘legalize’ that IOU as national exchange media, making it a legal means for tender of a payment for all $US-denominated debt, public and private, thus implicitly creating the government’s associated agreement to accept that exchange media in payment of taxes. Which, of course, it does.
This discussion should be viewed as the classic historical monetary-science debate between the currency and bankers’ schools, well explained recently by German economist Dr. Joseph Huber, Chair of Economic Sociology Emeritus at Martin Luther University, here:
http://www.monetary.org/wp-content/uploads/2013/09/Huber-Modern-Money-Paper.pdf
The money system is part of our Commons.
We need to take it back from the bankers.
Thanks.
In starting to read Huber’s paper, I noticed one glaring missing aspect. I do not see mention of the shadow banking system.
When a person does a naked short sale of a stock, that person is creatin shares of a stock with no authority of the issuer of the stock. While technically illegal, the volume of naked short sales is huge. There have even been many cases where the number of shorted shares is greater than the number of shares issued by the company.
As long as we are on the subject, what about the idea of counterfeit money and plain old fraud? If you have an economic theory that pretends these things do not exist, then you don’t have much of a theory at all.
Having spent years modelling physical systems, I have come to accept that a model is only a simplification of reality that helps us make predictions and calculations about reality. When pushed to the limits of its area of applicability the model fails.
As in quantum mechanics, there has been the argument that something is either matter or a wave. Then people realized that things are both matter and waves depending on what you are measuring. I believe that matter and waves are simplified models of reality, and that so far it is beyond out capability of figuring out in words what things really are in all situations.
From this discussion, I think that money is also just a model of reality. It has many aspects, some of which come to the fore in one situation while others come forward in other situations. A single real item of “money” can be different model things in different contexts. The sooner we realize this, the sooner may may be able to get out of trying to force “money” to always have to be only one of the aspects we are able to describe in words (equations).
Steven, thanks.
First, I hope you kept your nose to the grindstone at the bottom of page 1.
Second: Recalling, we are here having a discussion of the import of understanding a sovereign fiat monetary system, notably to me the flow of power and interest among the stakeholders of the system.
Then: I’m sure you’re correct that Dr. Huber’s work does not include either shadow banking, or its earmark tools of fraud and counterfeiting, or any other illegal activities. That such represents a glaring missing aspect of any economic theory must be in the eye of the beholder of an economic theory that includes them for study. I’m all ears for your explanation of how anyone either has, or could, advance monetary science, especially regarding the sovereign fiat money system, through such discussions.
In understanding the public sovereign money system, shadow banking and its various schemes of greed and fraud through beyond-obscene leveraging could simply not exist. Such activities, being definitionally illegal, would be a focus of the legal authorities, and not of the economists.
What evidence is there of any ‘pretense’ that these things do not exist?
Why do you bring them up?
What significance can they have in advancing this particular money-science discussion?
While money itself is not a physical system, its economic use has an important relationship to our physical resources and the sciences thereof. I suggest here a read of Nobelist Dr. Frederick Soddy’s Lectures in Cartesian Economics titled: The Bearing of Physical Science Upon State Stewardship for what I consider the most advanced perception of this field, which is now called Ecological Economics.
As to the extent that macroeconomic modeling can provide insight into the workings of a money system as advanced by Dr. Huber in a real economy, please have a read of the IMF Research Paper No. 12/202 by Drs. Benes and Kumhof titled : “The Chicago Plan Revisited”.
You may well be correct in your postulations about ‘money’’s many and situational aspects. As it has many functions in the economy, so it provides differing resulting aspects based on those functions and situations. Indeed.
I am unaware of your claim that some are “”trying to force “money” to always have to be only one of the aspects we are able to describe in words….””
I have no idea what you’re talking about there. Or, again, why it would be relevant to this discussion.
Thanks.
“But this is stupid, since it assumes the federal government can run out of money. It can’t…”
Mike,
This drives me crazy to see this stupidity too. Its extremely ‘offensive’ to me.
Thanks for this I was beginning to think I was the only one… rsp,
Sure, but what about all the housekeepers for all those extra NIH researchers? It’s not simply a matter of saying we should just spend more because we have no shortage of money (we don’t). Gov’t also sets prices through the scale of its payments, grants, wages, etc. The prices the gov’t sets ripple through the entire economy and impacts all other prices. That change in prices changes the distribution of income.
At some point, if the trillions sitting idle in corporations and in wealthy people’s bond and cash investments were suddenly put into play, we might get to a point where inflation would rage.
The fact that the money sits idle is the real problem to solve before we put more new liquidity into the system.
Tax the idle money away, and use it to do the things that it is claimed we do not have enough money for.
No more debt and no more potentially inflationary liquidity added to the economy needed to get the economy moving and get society’s needs met..
I think MMT-ers need to consider the effects of too much money in the system as a limiting parameter regardless of the unlimited production possibilities. This means a reduction in spending or a competition for funds, when spent without an offsetting compensating tax or government service rendered.
Most MMT writers recognize the potential for inflation in a resource constrained environment where gov’t attempts to purchase more goods and services than are available. They also point out that the current environment is, in most respects, not resource constrained.
Devin: Money is not a limited resource but it is a method of accounting for limited resources. We can spend way more without taxing more right now because we are way below full employment. If we were at full employment then we would not be able to do that because it would just cause inflation. At that point if you want to increase government expenditures you need corresponding tax increases to reduce private sector consumption. Even if you understand that yourself it’s important to make the distinction clear in all posts because a lot of people read MMT stuff and go off thinking that governments can do unlimited spending without taxation.
Chaz, Excellent response. For the people who might take our explanations as something cast in stone, we should always remind people that a call for action applies in the current circumstances. In other circumstances, the exact opposite action might be required.
Of course, when you explain Keynesian Economics and the part where the Government needs to run a surplus, people may not take that part of the theory seriously. They might say, “Sure the theory says that, but the government will never follow that part of the prescription.” Unfortunately, George Bush did poison the well by giving credence to that doubt.
Like all economic theories that would work if only people would do the right thing, I do have to wonder if we will ever get to a place politically where we can even think about applying some rational economic prescriptions for our economic ills.
Joe, Thanks for giving me the opportunity to explain.
The reason why I bring up the shadow banking system is that it is an example of an entity in the economy that seems to be creating money all by itself. If we are discussing what money is, I would think that bringing up an entity that makes money in violation of what a scientific theory of money creation says ought to be possible, then this ought to be an existence proof that there is something that the theory is missing.
If a theory is proposing to replace one system of creating money with another system of creating money, then it is worthwhile to think about what could possibly go wrong that would, in reality, upend the theoretically neat system. If the theoretical system is easily torpedoed, then it shows you the weakness in the theory. To think that we can charter one entity to create the money, and that no other entity will create money because it doesn’t have a charter is to deny reality. Naked short selling is but one example of people creating money without a charter. If you try hard, I bet you an think of many other examples, some of them completely legal.
I bring up the physical analogy to highlight the fact that models, all models, whether in the physical realm or the social realm are just simplifications that make it easier to work the problem. By necessity, a model leaves something out that exists in reality. If we were able to make calculations without the simplification of a model, then we could just use reality instead of a model. When we take the dangerous leap into simplification, we must consider how to guard against what could go wrong when we enter the area where the simplification no longer holds.
As I recall my reading of the Huber paper, he offers theory on why creating more money by the FED has not stimulated the economy. However, there seems to be a simpler and more obvious example. When you put liquidity into the system, but there is no good, useful place to invest the liquidity, then it will be hoarded or put to use in creating asset bubbles. Just because one creates enough liquidity to make it possible to invest in goods creation, if there is no demand for the goods then it would be foolish to invest in making more goods. If you can sell that liquidity back to the government by purchasing interest paying bonds and make more profit than investing in a factory that will sit idle and lose money, you would be a fool not to take advantage of the opportunity presented to you. Likewise with investing in stock that is rising because of a bubble rather than because of increasing sales at a profit.
Stephen, not having read the Huber paper, I cannot comment of his theory, but I think you have nailed the reason that FED easing has failed to stimulate the economy. I would just add one more feature to your analysis: by purchasing Treasuries and MBS s, the FED has kept interest rates low. These low interest rates have reduced the income of retirees and middle class investors who otherwise counted on interest income to meet at least part of their living expenses, thus creating a drag rather than a stimulus on the economy.
SunBio
Again, hope this is OK.
While it is true that there is somewhat of a wealth transfer with many of the Fed’s policy operations, the cause and effect of these may ultimately not be how you described.
On the lower interest rate environment, the Fed implements this by first producing humongous quantities of bank financial assets that exchange between banks and the Fed (non-cash reserves), and then begins a policy of paying a very low rate of interest thereon. While excess reserves are not money, they are financial media for bankers, and under this policy the GUV controls both the quantity and price for this media. As a result, ZIRP has become the preferred interest rate policy of this central bank.
One of the first-order changes in the flow of funds that results from the CB purchasing interest-bearing debt is to reduce the payments to the private sector, and increase the payments to the Fed, from where it accounts for contributions to the Fed’s net income, which are transferred to the Treasury budget, so as to reduce the amounts needed from Treasury borrowing and taxation.
From this change, (interest) income ultimately flows from bondholders – who may or may not invest that income in the real economy – to taxpayers, as a circular substitute to required taxation and debt service payments – where it will definitely count from its use in the real economy by The Restofus.
Reducing the tax burden of The Restofus is oft cited as a preferred fiscal policy by MMT enthusiasts.
But only until that tax reduction is funded by a concurrent reduction in income to the issuers and holders of monetary assets. It’s a wealth transfer, indeed.
And, the problem is …………..?
Thanks.
I think I am following your reasoning, Joe. If, however, the CB’s purchase of interest bearing debt ultimately ends up at the Treasury and the Treasury uses the income to pay down the existing debt rather than reduce taxes or borrow less, wouldn’t that have the same net effect on spending as I briefly described, i.e. reduce the income of those who depend on interest income for current expenses? In other words, the mechanism is more complex, but the outcome is the same for those types of investors.
SunBio
Thanks. Yes, of course.
Any reduction in the amount of financial assets in the pool reduces the income of the pool of financial asset holders. It’s rather axiomatic.
But the theme of the present theorists does not relate to reducing the quantity of financial assets in the pool, just who is holding them. At that point, it can readily be described as a transfer of income – purchasing power – wealth from those who willingly sold their assets to the CB (and that ain’t The Restofus, Sunbio) over to the taxpaying public.
Any holder of a Treasury-financial asset who does not wish to participate in this wealth transfer should merely refuse to sell his or her holdings to the central bank. It ends right there. In other words, I do not see it as an issue that harms those who depend upon interest income to pay current expenses. Why would they sell, in an open market sale, the source of their income?
Thanks.
All kinds of financial assets have their interest rates tied to Treasury interest rates either directly or indirectly. I was thinking of CD s, municipal bonds, even savings accounts that are either rolled over, expire, or change periodically. I personally know some retirees who relied on the interest income form these types of instruments for part of their living expenses and have seen that income evaporate.
SunBio
OK very good point. I am one of them, too. But are we mixing here the two policy initiatives – one of ZIRP and one of QE? ZIRP is holding interest rates near zero.
If the GUV is going to set interest rate policy – it should be set as needed by the economy, and not even our tail-end of the investor class. (The GUV should NOT set interest rate policy.)
CDs and Muni’s usually have a fixed coupon dividend until rollover time. Heads up !
Holding any type of financial asset carries risk. With Treasuries, there is a counter ‘value’ increase with reduced interest payment. What can/should we do about that?
In an imperfect debt-based monetary economy, these risk-reward tradeoffs are scammed upon all types of ‘financial’ holders by market makers on a daily basis.
I’m aware that I can get more or less income from a TSY holding, depending on both real economic and public policy actions. Ahhhhhh, capitalism. Is ANYTHING without risk beyond your mattress?
The original shot at the QE policy was removal of interest-bearing holdings from the private sector. As I said, nobody had to sell, and there is a wealth transfer among income classes that ain’t all bad.
If people are not satisfied with the combination of income and stability that comes with holding Treasuries – or any other financial asset – they can sell their holding and place themselves further along the risk-reward curve.
Sorry, as this is pretty far removed from our money-creation discussions, though a socio-economic reality.
Thanks.
Thanks Joe. Aren’t both policies (ZIRP and QE) having the same effect of keeping interest rates low, one as a direct policy and the other as an indirect result of propping up prices and thus reducing yields? I would think that QE alone would exert downward pressure on interest rates on at least Treasuries and MBS though they might not go as low if ZIRP were not in effect. Parsing out the contribution of each policy on interest rates might take quite a bit of experimentation even in a more or less steady state economy.
SunBio
Yes, I totally agree.
And this is not to argue your point at all.
ZIRP intends to reduce rates as a matter of policy.
QE intends to build confidence for growth, as a matter of policy.
The QE swap by the CB is a transaction that creates demand for TSYs that drives up the price which reduces the return.
Again, the original complaint against QE was that it took the revenue from TSYs away from the private sector investors – I say “and used it to reduce taxpayer obligations”.
So, that policy has positive social effects.
Hope this ain’t parsing, but…
If the policy critique is reducing interest income to we lower-income retirees, then ZIRP is the culprit, with or without QE.
Thanks.
Again, thanks Steven for that clear explanation of what is desperately wrong with the global shadow banking system. Nobody’s in charge of that.
Totally agree that the beyond-bankcorps sector has been readily creating claims on OUR economy in the form of ($US)monetary assets that mix in rather perfectly with the ($US)monetary assets we use as money.
Those latter assets are in the commercial banking sector, where, under HR 2990, all new money enters the economy. Upon transition to that real money system(HR 2990) there will be no such thing as leveraging, by creating new money’ claims, the assets of the commercial banks. Once monetary reform is achieved, shadow banking becomes the circular firing range that awaits the first shot. The “great financial re-settlement” will be under way, in a free-marketeer wringing of the shadow-banking poison from our national money system.
Investment banks will have access to real money deposits for lending, but NOBODY will be creating new monetized claims on the national economy. There’s really not a lot to be discussed about the shadow bankers once monetary reform is accomplished.
On the matter of the lack of progress in economic restoration from QE, there are many links. But I much agree with Dr. Huber’s explanation – there is the lack of monetary transmission. The bankers’ debt-based money system cannot advance economic growth in times of a balance sheet recession.
My Dad used to say, this form of capitalism doesn’t work in reverse.
People don’t want new debt, they want new money.
And if the Fed’s QE pumping meets your definition of monetary liquidity, then we need to take another look at the money supply.
Advancing excess reserves that only count as balances between the central bank and its members, and between members, can only be putting bankers back to work. It cannot enter the real economy, except by being used to ‘reserve’ a real loan that is made. With $Trilliions in “excess” reserves, that cannot be viewed as viable monetary liquidity.
Thanks.
Joe,
Your comment “My Dad used to say, this form of capitalism doesn’t work in reverse.” is exactly what I was trying to explain.
“With $Trilliions in “excess” reserves, that cannot be viewed as viable monetary liquidity.” is also exactly
what I was trying to explain.
As far as shadow banking being brought under control, it is only the formalized shadow banking that is being controlled. There are myriad forms of informal shadow banking, the naked short seller is but one example. Then we have hedge funds. Put them in whatever category you want. Also the sellers of derivatives and derivatives of derivatives. The notional value of the investment in these products is several times larger than the Gross Global Product, or it was before the crash.
Steven, Great!
Sounds like we totally agree on, and thus why I thanked you for the great explanation about, the problem of shadow banking, however defined (the beyond-bankcorps).
I have no doubt you are correct on the scale of the potential damage that remains to be wreaked from all that poison working its way through the financial system, portending possible chaos in our real economy.
This is all the more reason for the systemic and structural reforms of the sovereign fiat money system that go well beyond the understandings advanced by MM Theory.
Were we to reform the money system along the lines of true sovereignty and autonomy of the state in monetary matters, then we will have protected the real economy from the fallout of what I term “The Great Resettlement of Accounts” among all of those shadow banking players.
They hold crap worth 15 – 20 cents on the dollar and when it settles ALL of their numbers will be brought down to earth, especially the participation listing of the players.
We have established a monolith of financial lies and deceit and we call it the shadow banking system. When it falls, it can hurt The Restofus because the post-crisis financial and banking markets restructuring has put more commercial bank deposit money at risk.
But mere banking and financial system reform and regulation will not save the day.
Only reform to our system of creating and issuing our money can do that, protecting The Restofus from the toppling monolith.
The recent proposals of Lord Adair Turner, former head of the UK’s Financial Services authority, go a long way to effecting a transition toward such monetary-fiscal policy reform.
http://www.group30.org/images/PDF/ReportPDFs/OP%2087.pdf
Thanks.
Please read the post on this blog,
Bank Failures are “Inconceivable” under the Latest Neoclassical Fantasy
by William K. Black
http://neweconomicperspectives.org/2013/10/bank-failures-inconceivable-latest-neoclassical-fantasy.html
William Black knows better than almost anyone else why you need to worry about fraud in
any economic theory.
Joe,
How does the selling of futures contracts, and puts, and calls fit into the monetary theory? MMT, NCT, or classical.
Steven, thanks for the ‘monetary theory’ query.
Most of the angles advanced here have nothing to do with fiat-currency and monetary system operations.
I suggest a read of Alexander Del Mar’s “A History of Monetary Systems” for a more clear foundation of understanding the real monetary-finance-economic framework of national economies.
Under the present debt-based, bankers’ school system of money, all of those legalized gambling shenanigans fit in as unnecessary, destabilizing and potentially destructive forces that must become uber-regulated in order to make any near-stable economic progress. Rather, they are mostly self-regulated and thus become the lynchpin of financial chaos.
All of those banker-school monetary economic theories pretend to have the regulatory ‘fix’ – in most cases today restoring some semblance of Glass-Steagall restrictions, which are always great for putting finance lawyers back at full employment, awaiting another cycle of deregulation.
In the public-money and currency school theories of money, all money is created by the state, there being no opportunity for ‘leveraging’ that money into additional money-claims by private entities. However, those mechanisms can still be used in commodity markets, by players betting their own monies on price-value movements.
In other words, Steven, they are financial(capital) market phenomena that have nothing to do with real monetary system policy which is pretty much limited to the creation and issuance of the money supply, which if properly done can leave ‘regulating the value thereof’ to minimally regulated markets.
Thanks.
Joe,
What troubles me about NCT is your statement, “In the public-money and currency school theories of money, all money is created by the state, there being no opportunity for ‘leveraging’ that money into additional money-claims by private entities.”
My examples of “money” created by other entities are meant to show that it will be impossible to prevent other people from creating “money”.
You further said, “However, those mechanisms can still be used in commodity markets, by players betting their own monies on price-value movements. ” Are you trying to differentiate between “their own monies” and government created monies? Money is fungible. Nobody can tell if the money that they think they have is from the government or from some other source.
Steven, thanks and good point.
If you follow the conversations between Simons, Fisher, Hayek and others, this was one of the main stumbling blocks from advancement – the threat of non-monies and near-monies, ALL of which have come into fruition under financial deregulation and shadow-banking, etc.
But the problem has been, and I believe you made exactly this point early-on, this is all LEGAL under the existing bankers-school system of money.
I use the Kucinich Bill (H.R. 2990) as the manifestation of the American Monetary Institute’s proposal for reform to the money system.
http://www.govtrack.us/congress/bills/112/hr2990/text
All I can say is, as proposed in 2990, all of that would be ILLEGAL. There is a fine and jail term awaiting anyone who creates money-claims through any form of financial manufacture of what attempts to serve as United States Money. Will there be attempts made? Of course. Counterfeiting currency happens now, but it’s getting harder.
As I said, the supply of these faux-monies that you mention will have to ‘settle out’ over time and achieve exchange value with digital $USM.
No, I was trying to differentiate the fact that once money-leverage through financialization is outlawed, ‘futures’, ‘swaps’, etc transactions can only happen using real money, meaning the casino will be cash-operated. No margins, no naked shorts, and no taking down the economy.
Thanks.
Joe,
I’ll track down that link to the Kucinich bill as soon as I stop getting the “Bad Gateway” message when I try it.
You don’t suppose I am having Government shutdown problems, do you? 🙂
Steven,
It just worked for me, perhaps because I have it bookmarked and visited previously.
Here is another version from AMI.
http://www.monetary.org/wp-content/uploads/2013/01/HR-2990.pdf
A little harder to read, but better than waiting for the GUV to re-open.
Thanks.
I think HR 2990 could do for money what Prohibition did for alcohol.
If loansharking by organized crime is profitable now, imagine if only organized crime can do fractional reserve banking, and futures, and puts, and calls.
I’d be willing to bet (illegally through organized crime) that organized crime would
just love a law like this.
If there is ever serious consideration of such a bill, I hope Congress would consult with Forensic Economists like William Black to see if he can imagine fraudulent schemes that the professors in academia never could. Greg Palast might also be someone to ask.
I admit that I do not have the depth of knowledge or experience to pass judgment on this, but I just mentioned above the red flags that immediately come to my novice’s mind
Sorry, Steve
I can hardly engage such a comment.
It provides a deeper insight to your lack of understanding of monetary science, coupled with an apparent fascination with fraud and gamesmanship.
I am far too busy for such a waste of time.
To be sure, we would all be glad to hear from Dr. Black or Greg Palast on HR 2990.
Dr. Black has been at AMI conferences where these policy proposals have been advanced – and I know he was invited again this year.
Just to be clear, HR 2990 attempts to ‘expand ‘ the use of money in society, by decoupling it from debt, rather than to ‘prohibit’ its use.
???
Joe,
I am trying to see your side of the argument. It would be nice if you could attempt to see my side.
But, it’s ok if you don’t have the time or inclination.
Unintended consequences can kill the best of plans. It is dangerous enough to fail to predict the unintended consequences. It is worse to barge ahead even when you know what the unintended consequences are likely to be.
Yes, Bill Black was at the AMI conference. The 8 part video that I skimmed had him talking about the frauds that he uncovered as a regulator. I never saw him mention anything about NCT. I am still looking for a “trusted” expert not part of AMI. that will make some analysis of what AMI is proposing. Finding none so far, I am forced to make my own analysis.
Steve,
Not sure what NCT is here.
Is that Huber’s New Currency Theory?
I never meant to imply that Bill Black conversed on that or even the AMI proposal.
Just that he was there and knows all about it.
The fact that he didn’t mention any ‘fraud and illegality’ concerns with reference to what is today HR 2990 is more an indication of the lack of connectedness that you seem to be trying to make.
I’ve already said that we must always be concerned about these things.
But having the government create all the money eliminates a great deal of pernicious opportunity in the banking and finance sectors.
Thanks.
Always remember that accounting is a model of reality; it is not reality.
On the books, there are entries which purport to tell you the value of some holding. Value is such a slippery concept, that you really cannot put a lot of trust in it.
Just think of valuing inventory. Is every instance of a type of item I hold in inventory worth the same. If I try to liquidate the inventory in a way to reap the most money, wouldn’t I get more money for the first few instances than I would get for the last ones that have to be discounted to get rid of them?
What is the value of my stock investments? Is it the number I get when I mark to market? The market number comes from the last trade of a trivial fraction of the outstanding shares of a company. Are we saying that two jokers who decide to trade some shares get to decide the value of an entire company?
So here we are trying to decide what is money. Let’s have a little humility, and recognize the impossibility of a complete definition that is correct in every instance for every bookkeeping entry that tracks money.
Steven
“”So here we are trying to decide what is money. Let’s have a little humility, and recognize the impossibility of a complete definition that is correct in every instance for every bookkeeping entry that tracks money.””
Yeah, we could always be wrong. Some Trump Card of money science.
Regardless, having a definition that remains correct for every instance of its USE is exactly what we want our definition, of what money IS, to do.
As for accounting and D/E bookkeeping, they are merely changing rules and norms concerned with the unit of account money function. Again, they matter to finance, and not to money.
Thanks.
Joe,
I am trying to make the point that we cannot even decide on things like value of a stock or value of a physical item such as inventory, yet you think you can decide what money is. It sounds like a simple concept until you look at the ramifications of any definition. No matter what definition you decide on, I think you can find examples where the definition makes no sense. I am not saying that you should not have a definition of money that suits a certain purpose, but don’t get fooled into thinking that that definition is good for every purpose.
As in accounting, I get frustrated when people make decisions that seem obviously wrong just because a definition says that this is the way it must be. Maybe what seems obvious IS wrong, but just maybe the definition is not suitable in this case.
Steven, thanks.
I agree that the Financial ‘values’ of things must change, and thus we keep books thereon, denominated in the unit of account of the national money system, based on current accounting rules and norms.
This has nothing to do with money.
You and I do not need to agree on the definition of money – again, of what “money” is.
But our definitions do need to conform to the functional and legal aspects of money as they exist today.
Thanks.
Here are some excerpts from the Kucinich bull HR 2990
——————————————
(b) Purposes- The purposes of this Act are as follows:
(3) To abolish the creation of money, or purchasing power, by private persons through lending against deposits, by means of fractional reserve banking, or by any other means.
SEC. 102. UNLAWFUL FOR PERSONS TO CREATE MONEY.
Any person who creates or originates United States money by lending against deposits, through so-called fractional reserve banking, or by any other means, after the effective date shall be fined under title 18, United States Code, imprisoned for not more than 5 years, or both.
—————————————————
So I am thinking of forming a company that will take investor’s money and lend it to people, charging them interest. Some of the profits from the business will go back to the investors as dividends. Would this be legal under HR2990.
Let us think of the ways this differs from a bank that is using fractional reserve banking.
1. The business model for this company is open and above board. It does not pretend that your “deposits” are in the “bank” when in fact only a small fraction (reserves) are in the “bank”.
2. Instead of withdrawing your money from the bank, you just sell your shares in this company.
3. The business makes no pretense at preserving your capital under all circumstances.
4. If the bank does try to preserve your capital (like a money market fund keeping its share price at $1), then you have pretty much the same thing as a bank, except without insurance. We know how well banks without insurance did during the depression.
The fact that this company lends money just makes itsa similarity to a bank more obvious. In fact, any company that sells shares to the public, and then tries to make a profitable business with the pooled resources is “creating money.”
It may be worth considering making the Government the only creator of official money, but I do not think there can be success at preventing other entities from engaging in money creating like behaviors.
Steven,
Recalling that we’re discussing our understanding of the sovereign fiat money system.
“Would this be legal under HR2990?”
If it would be legal without 2990, then it would be legal with 2990.
“In fact, any company that sells shares to the public, and then tries to make a profitable business with the pooled resources is “creating money.”;”
Any company can do that now, and they do. Not sure if this relates to the Kucininch Bill. Perhaps “creating money” is something that we should discuss first. And whether the ‘selling shares’ or ‘pooling the resources’ or ‘making a profitable business’ is the money-creating part.
“”It may be worth considering making the Government the only creator of official money, but I do not think there can be success at preventing other entities from engaging in money creating like behaviors.””
Well, that’s what it does. It makes United States Money the official money and then says only the government can create and issue that official United States Money. Any alternative currency legal now would not change.You can’t counterfeit your own money.
There is such a thing as a sovereign fiat money system in this country. And this is the only one we’re concerned about.
Thanks.
Joe,
Let me compress a sentence from the Kucinich bill so that you can see what concerns me.
“(3) To abolish the creation of money, or purchasing power, … by any other means.”
What does it mean to abolish the creation of money, or purchasing power by any other means? Can you consider the broad implications of such a prohibition? You seem to be so focused on what you want the bill to accomplish that you do not seem to be able to see the obvious flaw. If you still don’t see any problem, then I will stop my efforts to try to clarify what my issue is. I’ve tried my best.
Steven,
I honestly hope you will spend a little more time reading the Bill in the same spirit as you fear my self-interpretations.
I am very focused on what the Bill says and does, as it is the most revolutionary Bill introduced in the Congress in a hundred years for The Restofus.
From the Definitions Section of the Bill:
(6) MONEY- The term ‘money’ refers to United States Money, as established under title I.
TITLE I–ORIGINATION OF UNITED STATES MONEY
SEC. 101. EXERCISE OF CONSTITUTIONAL AUTHORITY TO CREATE MONEY.
(a) In General- Pursuant to the exercise by the Congress of the authority contained in the 5th clause of section 8 of Article I of the Constitution of the United States of America–
(1) the authority to create money within the United States shall hereafter reside exclusively with the Federal Government; and
(2) the money so created shall be known as United States Money and denominated and expressed as provided in section 5101 of title 31, United States Code.
(b) Exercise of Sovereign Power- The creation of United States Money under this Act is the legal expression of the sovereign power of the Nation and confers upon its bearer an unconditional means of payment.
(c) Limitation on Expression- Beginning on the effective date–
(1) only the coin, notes, or other forms of legal tender, including electronic currency, originated by the United States Treasury under the authority of this Act shall be deemed as United States money; and
(2) it shall be unlawful for any person to designate any credit, note, bond, script or other financial instrument as United States Money.
SEC. 102. UNLAWFUL FOR PERSONS TO CREATE MONEY.
Any person who creates or originates United States money by lending against deposits, through so-called fractional reserve banking, or by any other means, after the effective date shall be fined under title 18, United States Code, imprisoned for not more than 5 years, or both.
In sum, this is the basis for my earlier statements about what is United States Money, who can issue United States Money and the penalty for unauthorized creation and issuance of United States Money, and only United States Money.
Thanks.
Steven,
By way of explanation – in monetary science, ‘money’ is ‘purchasing power’ .
Creating credit or any form of business-bank–originating financial vehicle that mimics credit is not the same as creating money. It is rather ‘using’ the money for gain.
Money is the medium that conveys the purchasing power.
Once YOU have the money, you can use it to purchase something or you can lend it, thus extending credit by its use…. But you cannot CREATE the purchasing power that is engendered in the ‘money’.
Thus, this is merely a prohibition on creating the nation’s ‘money’ – as the government would be creating all the money that the nation needs. Creating the nation’s money is what Lincoln described as ‘the supreme prerogative of government’, a prerogative we gained only after our War for Independence.
Hang in there.
Thanks.
Joe,
I get what you are saying. What follows below are just some random thoughts that
are not meant to contradict your point in anyway. They are just thoughts that I
cannot keep bottled up.
In monetary science the words in the bill may have a certain meaning. By the time it gets to
the brilliant logicians at the Supreme Court, there is no telling what they will think it means.
When people realize that in the recent financial crash, trillions of dollars in equity in houses
and in the stock market disappeared, they have some conception of what this means. They think
of people taking wads of cash and hiding it away, or who knows what else based on how the
government “prints” money. When I try to explain that the money that existed before was only notional,
and that afterwards it just disappeared also notionally, I get stares of disbelief. I doubt that anybody
I explained this too, really bought what I was saying. They still believe that somebody has the missing
money. This appearance and disappearance is on the order of what the Fed did to compensate.
If the Treasury took back that responsibility from the Fed, I would hope that they could do at least as good a job, if not better. I suppose the creation and destruction of money by the central bank, whoever that is, in response to the behavior of the economy is fully comprehended and encapsulated by the monetary science. So maybe my concerns are unwarranted as long as politics doesn’t interfere with the job they must do. The delegation of this authority to the Fed may have been prompted by a desire to shield the necessary actions from political pressure. The trouble is that it frequently succumbs to pressure from the private banks.
Imagine what would have happened if the Republicans who stifled fiscal stimulus had also been successful at stifling the Fed’s monetary stimulus. Then we would have had a replay of the great depression.
I’d have to reread the Kucinich bill to see if there are adequate protections in it to prevent the kind of meddling that is motivated by ignorance of how economies truly work. So maybe I am just thinking that the bill would have to be better thought out. Of course, since it died in committee, so it had no chance of being improved. (Not that the committee process would necessarily have made it better rather than worse.)
Steven,
People are right to be concerned that any Supreme Court could interpret any law just exactly as it pleases. That a balance of power exists within the government along the lines of the duties of their respective bodies remains elusive, I would agree.
But I have spoken at length with the legal drafters of the Bill and feel confident that they have done a great job in its design, though certainly it’s not perfect.
Totally agree that the financially uninformed have no idea of the temporal nature of their 401K balances, and to me, nobody should be allowed to invest in any vehicle they don’t fully comprehend. But capital markets are capital markets, and the GUV’s MAJOR crime is in enabling the privateers to build the house of cards, using the bubble-assets (AAA-rated MBS ) of the uninformed, in the first place.
What the Fed did to compensate has been meaningless to the Main Streeters who lost it all. The Fed has no transmission mechanism in its policy initiatives that can be felt on Main Street. They are the bankers’ banker, and the only exchange media they ‘issue’ is that used either between banks or between the banks and the central bank.
Treasury’s role is different in that it “spends” money directly into the real economy where Main Streeters live and work and spend their incomes. What Treasury needs is a debt-free source of spending money(United States Money).
Government’s economic policy initiatives could thus become more holistic, with the use of the monetary policy tool to determine what level of money is needed, and the fiscal tool to determine where that money is first spent (Main Street). It’s a huge difference.
Whether the Committee process can improve the Bill or not remains to be seen. But just having the Bill discussed in Committee would go a long way towards informing the American people what a sovereign fiat money system is and how it could work. Please keep reading.
Thanks, as usual
The point of me bringing up the creation and destruction of value in the bubble and subsequent crash, is motivated by thinking of the wealth effect. People buy or don’t buy things based on how wealthy they think they are. So the notional value of what people think they have has real economic consequences.
Steve,
Totally agree.
That is important to the financial and economic well being of those players, and through their influence on the real economy – to all of us.
But the only connection to the ‘money system’ is our reliance on those ‘financial assets’, based on debt, to be the liquid that keeps the economy moving, and the Kucinich Bill would provide the liquidity with real money, so the financial and economic problems associated with liquidity preference do not percolate through the economy.
Thanks.