Of Bitcoins and Balance Sheets: The Real Lesson From Bitcoin

The monetary systems of nations operate on two types of balance sheet expansion:

  1. National, where the government spends into the economy expanding a national balance sheet
  2. (The sum of) banks’ balance sheet expansions, where bank loans create deposits

The asset side of both of the above are traded around as “money”.

The national government creates the numeraire for the system (the “Dollar” in the US, the “Pound” in the UK etc.) and in addition to spending directly in to the economy in that numeraire, the government allows a public/private system (publicly regulated private banking system) to operate with the same numeraire. This creates a single system for the public but in fact arises from two separate but linked balance sheet expansions.

But why do the tokens from either of these balance sheet expansions have and maintain value?

The government maintains the value of its balance sheet tokens by demanding that some of its tokens, once a year, must be paid back to the government. This guarantees that everyone in that nation will accept and value the tokens from the national balance-sheet expansion.

The tokens that arise from the public/private bank balance-sheet expansion maintain their value analogously – by the obligation to repay bank loans.

Together, the obligation to pay taxes and the obligation to repay bank loans maintain the value of a currency. Note that both of these rest on the government/legal system of a nation.

An organized, effective government with a sound legal system that does not use foreign currencies can always maintain the value of its currency. (Hyperinflations are always the result of governments and their legal systems becoming corrupted or destroyed in some way, and never the result of runaway money creation).

What does this mean for Bitcoin and other cryptocurrencies?

Bitcoin is not the result of a balance sheet expansion. There is no inherent obligation for repayment of bitcoin to any government (taxes) or to extinguish private debt (banking system). There is no in-built demand for bitcoin (or any cryptocurrency).

Bitcoin is worth zero dollars (or Yen or Pounds etc).

National currencies will always do two things 1) extinguish tax obligations and 2) extinguish private debt obligations. Even if you have neither, there are always enough people with tax and bank debts that you can be sure that your money will be voraciously sought after by merchants of all types. Unless we are in Mad Max territory, they will give you a loaf of bread for it.

Bitcoin is not part of a balance sheet. It does not inherently extinguish debt of any kind – neither a tax obligation nor a bank debt. Nor do other cryptocurrencies. Once the fad for them subsides, the realization that you can’t pay taxes or repay a debt with them will become evident and their true value of 0 will become evident.

Because they don’t understand money or balance sheets, bitcoin collectors and cryptocurrency creators don’t understand why their tokens are inherently worthless. They won’t understand why, when the fad passes, no one will be willing to take their play tokens for real goods.

The only benefit from the bitcoin fad may be a better understanding of the balance-sheet nature of national economies, and the relationship of this to the real resources of a nation. This will prove to be the real lesson from bitcoin. The sooner it is learned the sooner nations can get on with the real work of using their national balance sheets and good legal environments to improve the real economy.

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P.S.  A common refrain is that yes, Bitcoin and cryptocurrencies are worthless, but Blockchain is really a big deal.

Well, not so much…

The blockchain paradox: Why distributed ledger technologies may do little to transform the economy

Ten years in, nobody has come up with a use for blockchain

As I have said before – blockchain is going to turn out to be the Wankel engine of the finance world. Interesting concept but not that useful in real life, never quite filling a real need.


Check out my new book “1000 Castaways: Fundamentals of Economics,” Aetiology Press. 

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Our one thousand castaways develop, before our eyes, a “perfect” economy, and demonstrate how the horizontal and vertical systems of money naturally emerge from even more fundamental organizational needs of a large society.

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MMT & Private Debt Dialogue PART II

[Part I here]

A. So, last time you discussed how understanding how money really works leads to insights that can help make the real economy perform better, and increase the real material well-being of a country. And all this talk about problems with a “national debt” is just non-sense. It seems only to serve the rich who would like to impose “austerity” on the rest of us. You focused on the national debt and how the household analogy is false, but still haven’t explained the crash of 2008. You said it was and still is about private debt.

B. Yes.

A. How?

B. Well, we talked about how all the so called “national debt” is mirrored exactly by the net financial assets of the private sector. So what is usually called the national debt should really be thought of as a good number that reflects the amount of assets the private sector holds. Government spending is what allows that accumulation in the private sector.

A.  Yes

B.  However, not all money is created through government bonds.

A. What do you mean?

B. The vast majority of money is created by banks out of thin air. When banks make loans, someone walks away with money, an asset, a plus in their account. Yet the bank also records that loan as an asset, a plus in their account. This increases the effective money supply (more or less what is known as M2 in the US), which in turn increases effective demand in the economy. This effect is large, with the vast majority of money actually being private bank-credit money, not money based on US bonds. [Note this has nothing to do with reserve requirements, which under the modern banking system are an anachronism, but with the ability of banks to make loans and get reserves later, which the central bank has to accommodate (bc it targets interest rates) and record the loans as pluses.]

This seems fine when the economy is doing well. But it means the effective money supply is largely based on private debt. The debt ratchets up until a point where the non-financial private sector is deeply indebted to the finance private sector and cannot easily take on new debt. Eventually, with some slight downturn in the economy, there is a loss of creditworthy borrowers, so the system collapses and with it a great portion of the effective money supply.  Thus exactly when the economy needs a boost in demand, it instead suffers a sharp contraction. And the banks are the ones holding either the money or the ownership of assets that are defaulted on. The non-finance private sector loses greatly to the benefit of the finance private sector.

A. So what can be done about this?

B. Well, mainstream economists do not even recognize the factors that matter in this scenario. So they literally have nothing useful to say about fixing the economy in this situation. With their bad theory they are like monkeys with razor blades in an operating room – worse than useless.  Just one example:  they don’t understand the process where private bank-credit money is created only due to the demand for loans by the private sector. So they thought that essentially giving money to the banks, “quantitative easing”, would stimulate the economy. But with no creditworthy borrowers, that money just sits there. To really understand what is at the heart of this finance-based depression, you have to look to economists who understand the interactions of finance factors & the economy in the first place.

Among them there is one view that if both 1) the MMT policies we discussed in Part 1 were followed and 2) better banking practices followed, the economy would not fall into the trap just mentioned. Aggregate demand would be provided through intelligent fiscal policy, not widespread private debt. And the banking sector would be regulated in a way so as not to allow bad assets to back loans and to limit the many financial shenanigans the wealthy created to game the system. So the system would be more stable. Warren Mosler presents perhaps the best clear statement of the needed bank reforms, and regardless of any other changes discussed here, they should be implemented ASAP to stop much of the current harmful or downright corrupt practices in the current system.

A. Would this work?

B. Maybe. The worry is that the effective money supply is still created largely through private bank lending. This provides a huge incentive for the banks, which under this system are likely to be rich and influential, to always, little by little, manipulate regulations in their favor. This is known as “regulatory capture” and in turn leads to an unstable buildup of private debt and the finance sector gaining at the expense of everyone else. Remember, the banks gain no matter what under the current system – either they earn directly from their loans and dubious investment vehicles in the good times, or in a downturn, they earn from claiming the assets that the private sector used as collateral and by being propped up by the government because they are “too big to fail”. Privatized (finance sector) gains and socialized losses. The headlines in recent years that the 1% has done well by the crash of 2008 are sadly true.

A. Is there an alternative?

B. Possibly. It is possible to simply not allow banks to create private bank-credit money. Rather than banks being able to credit borrowers’ accounts with money out of thin air, they would have to lend already existing money, either that they already own, or that they have pooled from investors seeking interest on money they actually hold. A loan would not show as a plus on their balance sheets, but as a minus on someone’s balance sheet – real money that they or their investors have transferred to a borrower. And they would not be allowed to sell their loans, but would have to keep them on their own books. This incidentally would give them a large incentive to raise their scrutiny of borrowers, and thus increase the quality of loans in the first place.

A. Why is this important?

B. This would mean that banks would no longer in effect create new money. They would only be intermediaries, uniting willing investors actually transferring their existing money to borrowers, nothing more. Crucially, this means that the money supply would not collapse in an economic downturn, what is known as a “cascading liquidity crisis”. Lenders might lose money if borrowers did not pay them back, but the total amount of money in existence would remain the same, and so would effective demand. Also, banks would not be earning money through creating money out of thin air. The system would thus both be much simpler and tremendously more transparent, and additionally the banks would be less powerful to change rules in their favor. A crash like 2008 would simply not be possible under this system.

A. So are there any drawbacks to this system?

B. Well, some think that under this system the less wealthy would actually suffer.

A. Why?

B. Because under the current system, even the less wealthy, at least when the economy is good, are sometimes able to get loans and financing for projects. Under the new system, the less wealthy would depend on existing holders of money to finance them, argued by some to mean putting economic power even further into the hands of “the haves”.  And some seem to think that having a private system that can create money in response to private demand is good, a dynamic system that responds to the needs of the economy naturally.

A. What do you think?

B. We must balance the true, full cost of the proven inbuilt instability of the current system with the possible good and bad of an alternative system. The true costs of instability in the current bank-credit money system are seldom weighed as a whole, nor presented in a way the general public can understand. What is the true and total cost to the public of the crises of 1907, 1929, 2008, the many smaller crises such as S & L, the Japanese asset price bubble, LCTM, banking crises in Finland, Sweden, Asia, Russia, Mexico, Argentina, Ecuador, Uruguay, and throughout Europe, the dot.com and housing bubbles, the bailouts of AIG, Northern Rock etc.? The true cost of the current system to the non-finance private sector are probably much much greater than is commonly thought, if proper accounting standards were used to measure it.

Also, there are other very real costs from the inherent instability and uncertainty of the current system. These costs arise from the uncountable suboptimal (due to high uncertainty regarding inflation, interest rates, and possible recessions and depressions) decisions on investment, insurance, and allocation of resources made by big business, government, and private households alike. The alternative system would be much more stable on every front, and there would be real gains in efficiency from this increased stability.

A. So that is the main downside some see to an alternative system where banks cannot create private credit money?

B. Yes, it seems the main concern by some seems to be that the little guys won’t easily be able to get loans and the system will not provide enough financing in general for the private sector.

But there seem to be good ways to finance worthy needs without banks creating money. There are lots of investors willing to risk their existing money to earn interest on loans. Additionally, there are many tried-and-true alternative finance options, such as tontine-type mutual funds, pari-mutuel mutual funds, and other banking arrangements that would provide plenty of access to funding for the private sector without allowing banks to create private bank-credit money.

Overall, the huge gain in stability would help everyone, from big business down to individual households.

A. So why isn’t the change tried?

B. The banks would fight it tooth and nail for a start.

Also, although directly using government bonds has worked well in the past, there has never been a pure system of this type – the banks always managed to force governments to allow them to create private bank-credit money.
Notable successful examples include US greenbacks, and the 700 years that the English/UK government used tally sticks. As we know, this period of British economic history was overall highly successful. But tally sticks and greenbacks were only part of their respective systems. The modern proposal for systemic change would essentially make the entire system run purely on what are in effect tally sticks or greenbacks.

A. So people would be afraid to try a system that has never been tried in full it seems.

B. Yes.

But there has never been a system like the current mostly bank credit-money one that has NOT suffered crashes like 2008. It may make sense to finally try something new.

At any rate, the take-home message is that the crash of 2008 was about private bank-credit money and private debt. Any full understanding of the real economy must take into account the long history of bank-credit money recessions and depressions and of ratcheting private debt causing real trouble in the real economy, and the close empirical correlations between changes in private debt, private credit money, effective demand, financial regulatory capture, and recessions/occasional massive depressions.

In Part 1 we discussed how MMT insights show ways to raise the productivity of the real economy to its natural limit, and thus the material well-being of a country. The theoretical debates concerning MMT have largely been worked out, and it is just a matter of time before the logic of it is accepted by the mainstream.

However, the debate on the full scope of the impact of the private credit-money system on the real economy has only begun to be worked on again in earnest.

Maybe implementing better fiscal policy and more logical banking regulations, as many MMTers propose, is enough to stop crashes like 2008 from occurring, and the ongoing regulatory capture of the finance system by the very rich.

But it may make sense to also change the finance system to a system where circulating Treasury notes alone forms the money supply, and banks can only serve as intermediaries of this money, and not create private bank-credit money through escalating private sector debt that alters effective demand, causes socialized losses and privatized gains (only for the finance sector), and ultimately leads to massive busts for the non-finance private sector.

A. Yes, that may make sense.

[PART I of this dialogue]

Help on MMT related dialogue

[This is a VERY rough draft of a dialogue/narrated animation aimed at regular folks highlighting important misconceptions about the economy. I have to travel for a bit and rather than going back and researching every term and point made, I am throwing it on the web for help. (I imagine the folks at MikeNorman.com will have some pointed comments here or there).

Please be nice. Some MMTers will disagree on certain points, and I am happy to have those debates elsewhere. What I am mainly looking for now is to get the terms right (on bond and treasury operations etc), any gaps in the flow of the discussion, and a clear exposition of the points I am trying to make even if some points are different from any particular MMTers view.

 PART 2 will deal with some further issues regarding private credit money and the crash of 2008, and address some of the points MMTers may disagree with.] 

~~~~~~~~~~~~~~~~~~~~~~~~~~~

A.  [An Average American, although this discussion applies to any sovereign country that, asserting its sovereignty, has a free-floating non-convertible fiat currency. Note that Eurozone nations such as Greece have voluntarily ceded this sovereign ability].

A. “There do not seem to be clear explanations for the 2008 crash, and thus no fixes to the economy since then. All I hear on TV is that we are in trouble because of the national debt. I’ve heard MMT has a different take. What is different and why is it important?”

B. Well, the media focuses largely on the so called “national debt” and presents it as somehow the problem. Yet the crash of 2007/8 was largely due to problems with private debt. So to start with, they are dealing with the wrong kind of debt. This is partly because they wrongly portray the nation as like a household – a household in deep debt is clearly in trouble (as the crash of 2008 showed). But a nation with what they call a “national debt” is not in trouble at all. This is the household analogy, and it is false.

A. Why?

B. Because a Sovereign government is not like a household.

A. Why not?

B. Because it creates its own money. It can always create more to buy what it wants and pay any debts denominated in its currency. The debt held by foreign governments is not a problem. It is held in Dollars. [transaction thing with the fed here, as Mosler describes it]

A. Is it really so simple?

B. It looks complicated, but actually sovereign governments fund themselves by printing bonds. To simplify for a moment, just think of those bonds as money, which at times they directly have been, such as with Greenbacks. There is no need to have bonds run through the Federal Reserve to “make” money. We can come back to this, but for the moment, just think of Treasury Bonds as money.

A. Ok. So let’s imagine US money just as bonds printed by the government. Now what?

B. Well, first, that foreign debt. If China wants to “cash in” on their bonds, as the News channels try to worry us about, the US just credits their account with that many dollars. Done. They can then continue to sit on it, or buy things wherever dollars are accepted, including, of course, in the US. They own about 1.3 Trillion dollars in bonds. If they want to go on a trillion dollar international shopping spree, good for them. It would be harmless, even good for many who would prefer to have those dollars rather than their current assets.[Note Ralph Musgrave’s useful comment here]. Trust me, in the global economy, a trillion dollars is doing no one any harm. The same holds with the other big holders of US bonds (Japan, Brazil, Europe, Russia). If they want to go on a shopping spree, like the Japanese were feared for doing in the 1980s, fine. When the Japanese bought Rockefeller center, they didn’t cart it back to Japan. They just managed it like any other owner would.

A. OK, so there is no problem “paying” even the largest international holders of US debt. And if they did cash in, they would just be changing bonds to dollars and spending into the international or national economy. How does this all work IN the United States though?

B. The government also prints money into existence through bonds. It can fund anything we think is good for the public. Health care, roads, bridges, the military, the coast guard, NASA, pure research.

A. Weimar! Zimbabwe! Crowding out!

B. Are you ok? Sounds like you are having an attack of some kind.

A. Those are the terrible things that will happen if the government prints all the money it wants. Gold Standard! Hyperinflation! National Debt!

B. There you go again!

A. But it will! We will have hyperinflation! We should have sound money, the gold standard! And the government will “crowd out” the private sector!

B. Slow down there. Let’s look at these things one by one.

B. First let’s look at the so called “national debt”. Now, as we saw, the government prints bond money out of thin air. So it is not “owed” in the conventional sense of the word to anyone. Now here is a curious fact – all that “debt” you always hear about is mirrored exactly by the private sector – you, me, Joe Sixpack, small and large companies, as private “net financial assets”. That money printed out of thin air is what allows all of us in the private sector to accumulate assets and save money without the economy stopping. It could better be called the numerator for “net private assets”. Sounds a lot better, doesn’t it?

A. So if the government did not have this “national debt” or “national private assets” we could not all accumulate wealth at the same time?

B. Exactly. This can be shown historically. EVERY SINGLE DEPRESSION in US history was marked by a falling “national debt”. A low national debt has always meant greater, not less poverty for the private sector. The private sector needs and wants a huge so called national “debt”.

A. I can’t wrap my head around this. So – when the government creates more of this national debt, better called national private savings, then everyone in the private sector is able to accumulate more assets and money? That sort of makes sense.

B. You got it. The smaller the so called “national debt”, the less assets and money the private sector – you and me – can hold. We want and need the “national debt” – it is a good thing. Which is why it should be thought of as net national private assets.

A. Ok, that seems logical. But wait – don’t we run the risk of becoming Weimar or Zimbabwe? If the government prints more and more money, its money will become devalued and eventually worthless.

B. Good question. First of all, situations like Weimar Germany and modern Zimbabwe were cases of massively failed states in special situations. Their whole society was destroyed, and Weimar was not even truly sovereign monetarily. The failure of their money was because of the collapse of the capacity of their government to govern. Think about it – I would happily accept Swiss Francs or Norwegian Krone for payment, because they have strong effective governments that I trust will back their money, and well organized productive societies that I trust will be able to back up their Krone and Swiss Francs with real economic productivity. I would not make the same bet with Somalian money, or Liberian money. Not because it is paper money, but because their governments are not effective, and their economies are not productive and well organized.

A. But still, it is simple supply and demand. If you keep on printing money, even US dollars, then there will be inflation.

B. Well, first I wanted to deal with hyperinflation. Hyperinflation just does not happen in non war-torn countries or countries not dominated by corruption or ruled by crazy people. But yes, you should of course be worried about normal inflation.

A. So
?

B. Normal inflation is controlled by reducing spending and/or taking enough dollars back out of circulation to keep things in equilibrium. This is done in modern economies by fiscal policy and taxation.

A. But taxes are levied so we can pay for government, not to control inflation!

B. No. Remember – the government can issue all the Treasury money it wants to spend on anything it wants. If it is the effective government of a productive society its money will be accepted. It taxes not to pay for things, but to drain any money that might lead to inflation back out of the economy. It can easily do this at just the right rate to keep inflation at any level it wants. Including zero.

A. This is crazy! This is not what the textbooks say!

B. It is simply the way the system works in practice. The textbooks are wrong.

A. Ok, let’s assume for a minute you are right. The government can create and spend any money it wants as long as it balances it in a way to avoid inflation. Why don’t we spend less and have less taxes?

B. We can. That is a political choice. How many good roads and bridges, good research programs like NASA and medical research, good public healthcare and how strong a military do you want?

A. So we can have zero inflation and choose to have whatever level and quality of public goods we want?

B. Yes. With one more qualifier – it has to be within the bounds of the real economy.

A. What do you mean by “real economy”?

B. Well, every country has an upper limit on how much they can actually produce at any given time based on the overall quality of organization and technology. That is a real limit, not an abstract numerical limit. The US probably came close to that limit in the Second World War. The thing to notice, though, is that that limit was vastly, incredibly greater than what anyone would have guessed in the 1930s during the Great Depression.

A. So we need a war?

B. No. Not at all. We could mobilize in much the same way, but instead of modifying Detroit auto lines to make tanks, we could mobilize to fix our infrastructure, provide universal Medicare, fund NASA and pure research more, pay teachers more, and make sure our military and coast guard maintain their quality. Oh, and take much much better care of our veterans, disabled, and elderly. For example.

A. And all this new spending wouldn’t be inflationary?

B. Not in our present state. We are like the US was in the 1930s. The US is performing far below its true productive capacity. We could get much closer to the real capabilities of the economy, which incidentally would lead to something close to full employment as well. No nation is truly performing at its optimal real productivity when there are loads of idle but willing workers.

A. So why don’t we do this?

B. Mainly because people, including most prominent economists and virtually all politicians, believe that a government is like a household. They don’t understand that the way money works in a sovereign nation is not at all like a household. And they believe that the so called “national debt” is a problem. They don’t understand that that number actually reflects the net private assets of the people, and that it is a good thing.

A. But wait – this is mathematically impossible. What about all those interest payments on our debt? I know about compound interest – it will quickly become unsustainable.

B. Remember, we don’t have to sell bonds to make money – the bonds themselves can be money. And we don’t have to pay interest on bonds. We choose to.

A. What?! Loans always carry an interest burden. Impossible!.

B. This is the household analogy again. Bonds released by a sovereign government are special. People want them because they pay taxes in them. They can be circulated just as Treasury notes, with no interest at all. And thus our national “debt” need not pay any interest at all.

A. But then all those bond buyers in the private sector and abroad won’t buy dollars, so how will we get money?

B. First, they will hold enough to buy dollar denominated goods. But regardless – so what? The US does not need anyone to buy bonds to make dollars. Remember, a sovereign nation makes bonds out of thin air, and people want them so they can pay taxes, which then makes them acceptable to everyone else in an economy. People were just as desirous of a Treasury Note, a greenback, as for any other dollar. That is because dollars, like Krone and Swiss Francs, come from a clearly politically stable, effective government of a productive society. If Norway and Switzerland went to interest free Treasury notes tomorrow, I would gladly still accept a payment in Krone or Swiss Francs. The Norwegian and Swiss governments, like the US, are clearly able to maintain highly productive societies and effective governments, and as long as they do so, their money will be valued both in those countries and abroad.

A. OK, so this seems like a way for nations to become or stay wealthy, by maximizing the real economy, thus raising the material well-being of the country. Sounds like a good idea.

B. It is.

END PART ONE

PART TWO HERE

Can Full Reserve Banking actually even stop credit-money creation? The Chicago Plan v. Positive Money

[This is a comment from a previous post on Post Keynesianism, MMT, & 100% Reserves Project, Post No. 2. It is in answer to the question “Do Full Reserves actually even stop credit-money creation?” Scott Fullwiler at one point said full reserves could not, as well as some other commenters.]

Andrew Jackson, December 25th, 2012

“Does full reserve stop banks being able to create money out of thin air.

Quick disclaimer, I work for Positive Money.

It’s interesting that you mentioned us alongside the Chicago plan in the first post. The Positive Money (PM) proposals do indeed have the same goal as the Chicago plan/full reserve/100% reserve proposals, that is to stop banks creating money in the process of making loans (or buying assets),. However, the method is different. In the case of Chicago plan they do it by forcing banks to hold reserves against their deposits. As some people have pointed out, this doesn’t necessarily stop banks creating money – that is it is quite possible for there to be money creation by the banking sector with 100% reserves (incidentally for exactly for the same reasons a 10% reserve ratio doesn’t constrain deposit creation, although it does require the central bank to play along).

The PM proposal, on the other hand, does not suffer from this problem. Instead of backing deposits with reserves, we give people access to the state created means of payment itself. Thus, unlike in the current system where two types of money circulate separately – central bank created reserves which are only used by the banking sector, and commercial bank created deposit money which is used by everyone else – in the PM system there is no longer a split circulation of money, just one integrated quantity of money circulating among banks and non-banks alike.

This is achieved by removing the sight [on call] deposits from banks balance sheets and placing them onto the central bank’s balance sheet (which will be called transaction accounts). The private banks then obtain a new liability of the same size to the central bank, and correspondingly the central bank an asset from the banks. This banks’ liability to the Central Bank is to be repaid as their assets mature, with the money repaid in this way to be recycled back into the economy by the central bank granting money to government to be spent into circulation.

In effect, the central bank has ‘extinguished’ the banks’ demand liabilities to their customers by creating new state-issued electronic currency and transferring ownership of that currency to the customers in question. In a sense everyone starts baking at the central bank (although we would hire the banks to administer our accounts for us).

Lending occurs in this system when people move their money from their transaction account (held at the central bank) to an ‘investment account’. This will be broadly similar to a time deposit today – there will be minimum notice periods, however, unlike today they will also carry some risk (i.e. if the underlying assets go bad they may lose some of their money). The money transferred to the banks will then be transferred to a borrower. So in this system lending by banks merely transfers money around the system, no new money or purchasing power is created when loans are made. Because in this system because all money is held on the central bank’s balance sheet any bank can be allowed to fail, without any effect on the money supply.

So with the PM system it is possible to achieve the aims of the Chicago plan, whilst retaining double entry bookkeeping. The question is then not if it is possible, but if it is desirable. Obviously you have covered the boom bust cycle, financial crisis etc. and the unemployment and high house prices that go along with it. However there are also other issues, such as higher taxes, the effects on individual debt levels, inequality (interest transfers money upwards), subsidies and the too big to fail problem etc.”

[Andrew Jackson works for PositiveMoney, their homepage is here]

Post Keynesianism, MMT, & 100% Reserves Project, Post No. 2

Bank of England

Taken from the comments on my last post on MMT/Chicago Plan/FRB & several similar pages the Questions below seem to be the central questions/objections between FullRB & MMT (or Post Keynesian, or MR).

QUESTIONS

  1. Would Post Keynesians and/or Modern Monetary Theorists favor the elimination of endogenous money (bank credit-money creation)?
  2. If so, by what means (FullRB or other)?
  3. If not, why not? What positive or necessary purpose does endogenous money serve?
  4. Do Full Reserves actually even stop credit-money creation? [Scott Fullwiler writes “(Aside from the fact that 100% reserves doesn’t eliminate banks’ abilities to create deposits out of thin air–but save that for another time after they’ve at least come to grips with accounting)”]
  5. Does stopping credit-money creation have serous negative effects which outweigh the positive effects Benes & Kumhof, positivemoney.org etc. claim? 

SOME OBSERVATIONS ON POST No. 1:

  •  Pro-Full Reserve people. You would do well to abandon trying to claim money is not debt. It is not a needed argument, and not a winnable one. (I’m looking at you, Zarlenga/AMI).
  • [Update-After a comment by Musgrave—I am not referring to FullRB criticism of endogenous money being debt, more or less the raison d’ĂȘtre of AMI etc.; I am referring to criticisms of AMI & similar groups that they seem to think the government can somehow issue {exogenous} money that is not debt]

“(STF) If they would just say “govt money only” or “pvt debt free money” they wouldnt sound like they have no clue what they are talking about.”  And “(“all they’d have to do is just have to stop saying “debt-free money.” What they want is a world of fiat money only and 100% reserves–is that so hard to just say?”

  • But MMT people, I think it is fair to recognize that under the system Full Reserve proposals call for, money would indeed act differently than what we usually think of as debt. Basically, the debt claim would hit a wall with the Government (or “the people”). In effect saying “we have created a common good by fiat and declare it to function not like debt” (and yes, this is do-able). Now, technically, ultimately it is a debt (and Zarlenga wrong), but that would only ever become evident if the (let’s say U.S.) Government became so weak (war, revolution, whatever) that it could no longer back up its claim that the circulating greenbacks had value simply “because-we-say-so-end-of-story” [& the power to tax of course, which amounts to the same thing]. As I pointed out before, Fullwiler likes the way the platinum coin resolution to the Fiscal Cliff highlights a basic MMT point about  money. But I also think it highlights a basic Full Reserve point – we can essentially have the last word on debt by the Gov/people bound up in a symbolic platinum coin (to be clear, I am not advocating a “platinum standard”. The platinum coin is a just a somewhat hilarious loophole Beowulf taught us all about that technically would work, but could be achieved more directly by just letting Treasury issue notes). “The Buck Debt Stops Here” in way, somewhat literally. Technically that platinum coin is a claim of trillions of dollars against the U.S. people, but in practice it represents the end of the line on debt claims for the greenbacks it would represent.

So on debt, I do think the two sides are talking past each other– yes money is always debt  but yes a system can be made where fiat money acts as if it is the end of the line on debt claims and acts as if it were a token and can function as a token in a banking system. Indeed, Full Reserve people are saying that is what we need to have a stable, fair system.

Beowulf writes “It would make life simpler if Tsy issued consols [consolidated stock]— the lack of a guarantee to repay principal would seem to put outside the debt ceiling– which is nothing more or less than a cap on total amount of principal guaranteed repayment.

However, aside from political framing, it doesn’t really make a difference whether you call outstanding Treasuries “equity”, “debt” or (as banks are wont to do) “deposits”.”

~~~

Overall, I still don’t see where the split is once the details are looked at between much MMT and the smarter Full Reserve People (unless it is political – yes, Full Reserve people do want to smash the power of the banks, to make that clear, and it seems that at least some MMT people do not).

On MMT and FRB getting along – Scott Fullwiler writes in a comment “AMI’s policy proposals–as Neil points out above–could only work as they want them to in the context of monetary operations that MMT’ers have actually been arguing in favor of for some time.” 

So what is the problem?

Every time I look closely at FullRB and MMT, it seems to me like they reinforce each other, not contradict each other. FullRB creates a simpler, more direct system to achieve MMT functioning; MMT principles fill-in the missing details of FullRB proposals.

A note on Post Keynesian/Steve Keen on FullRB

As far as Post Keynesian and/or Steve Keen’s position, I think it is worth emphasizing Keen’s position:

“There are many other proposals for reforming finance, most of which focus on changing the nature of the monetary system itself. The best of these focus on instituting a system that removes the capacity of the banking system to create money via “Full Reserve Banking”…

The former could be done by removing the capacity of the private banking system to create money.

Technically, [AMI and Positivemoney] proposals would work.”

Keen then goes on to list some objections that I think are pretty weak (that is for another post), I also agree with Ralph Musgrave on the weakness of those objections.

Post Keynesianism, MMT, & 100% Reserves Project: Question #1

I HAVE DISTILLED THE KEY POINTS IN THIS POST TO A SET OF QUESTIONS IN POST No. 2 HERE (Also the thread here is long; easier to comment there)

US Treasury

[This is part of an ongoing effort to understand and explain differences and points of agreement between Modern Monetary Theory, Full Reserve Banking, Post Keynesianism, Steve Keen’s work, and related approaches in as simple of terms as possible (difficult, as the debates hinge on complex and subtle concepts at times, but I will try). The goal is to create a resource for the general public to better understand these areas of study and why neoclassical economics fails, and to foster clearer communication between MMT, FullRB, and PK proponents.]

Ever since the Financial crisis of ~2008, there has been a real opening for improving economic theory & the financial system.

An ongoing project here is to better understand (for myself) and help put into clear language (to help effect change and to help the public better understand economics in general) important areas of economic advancement.

Two important strands of economic understanding have been waxing lately, which is a very good thing. These are Modern Monetary Theory (MMT) and Full Reserve Banking (FRB).

A simple Google search will suffice to find numerous good MMT resources.

FullRB is a little more tricky.

There are innumerable monetary crackpots out there, especially in the blogosphere, and it can be difficult for the novice to judge the quality of discussions of our monetary system. This is of course true of the net in general. But it is especially a problem with any discussion of money.

Also, a significant number of informed people interested in economics have been dismissive of FullRB for a variety of reasons in the past.

However, there has been a marked trend towards more serious discussion of Full Reserve Banking. And recognition that FRB has long been highly regarded by very well-respected economists. It is important to note that these have spanned the ideological range of economics, from those with “progressive” views concerned with equitable distribution to arch- free-marketers (I think this is a hint that there is indeed something to FRB.) At any rate, the work associated with Laurence Kotlikoff (Boston U.), Richard Werner (Southampton), Jaromir Benes (IMF), Michael Kumhof (Modeling Division, IMF) and others, and recently the buzz-creating “The Chicago Plan Revisited” released under the auspices of the I.M.F. (almost shockingly to some, a “magic wand”), has helped put Full Reserve Banking back into respectable conversation.

In the future I will begin to outline this project from first principles for anyone to read. For the moment, however, I am going to jump right in.

QUESTION (for MMT & FRB proponents):

In a 2009 post by Scott Fullwiler (leading expert on the details of our banking system, something mainstream economists ignored at all of our peril, and one of the leading MMTists) is answering a number of questions about FRB (The main relevant previous comments are by “RebelEconomist” and “RSJ”)

Fullwiler,  in the comments section, writes:

“Sorry for the delay responding, RSJ (and I’ll get to the others as time allows . . . apologies).1. Regarding 100% reserves, like Ramanan, I’m very skeptical that they will be able to constrain anything. Certainly under current operating procedures, they wouldn’t have any effect aside from the usual “tax effect” of RR, as the Fed provides reserves at stated rates. A much more constrained regime that required banks to only hold Tsy’s on the asset side would be different, but then you’ve just moved the endogenous creation of loans and their corresponding liabilities outside the banking system. The question there becomes who provides these latter institutions with overdrafts as they settle payments daily. If either banks or the Fed do, then you haven’t changed much, aside from regulatory structure. If nobody does, then you’ve set yourself up for a payments crisis at some point in the near future”

Fullwiler’s first point, so extemporaneous, seems worrisome for any FRB proponent. Does he have some argument that FRB just wouldn’t achieve what most view as its primary purpose, stopping the creation of vast pools of credit-money (that lead to asset inflation and instability among other problems?)

He then discusses a “much more constrained regime”. I think this shows what many see as a problem with some MMTists. Its followers rightly criticize mainstream economists for ignoring how the banking system works. MMT focuses on the real-world details because 1. they know they matter, and 2. because mainstream economists have neglected this critical area in the extreme. But sometimes MMT seems to fall in love so much with how the system actually is, and MMTists so tired of mainstream economists’ imaginary (delusional?) world, that they view negatively any imagined economy, even when, unlike mainstream economics, these possible economies are being designed on sound principles for good purposes. There is a big difference between the strange imaginary world of mainstream economists and the desire to change the Rube Goldberg dysfunctional system we have now. Back to FullRB –  Of course the point is to make money creation no longer endogenous, i.e., to move the credit-money creating power out of the banking system  That is where the benefit is! Fullwiler seems reluctant to move to it, I guess for the reason I mentioned, but I can’t imagine what he thinks Full Reserve s about  if not that.

So, let us imagine we have changed to a system where banks are not creating their own (endogenous) money. An agency of the gov spends it into the economy, with the legal mandate to target inflation, which without endogenous money creation it can very effectively do. Taxes and spending work in MMT prescribed ways.

Fullwiler then writes “The question
becomes who provides these latter institutions with overdrafts as they settle payments daily. If either banks or the Fed do, then you haven’t changed much, aside from regulatory structure. If nobody does, then you’ve set yourself up for a payments crisis at some point in the near future”.

Now, I am pretty certain that The Chicago Plan (even the old versions like Fisher 1935 or  Milton Friedman’s work {?} or Werner or others by 2009) have addressed these issues.

I am not sure, but I think part of the answer is that the part of the banking system that would be allowed to loan would operate separately, and with money largely obtained by others foregoing its use, so no “credit-money” is created. There is enough “play” in such a system as long as there are multiple entities that daily settlement is possible with no net credit-money creation (I know, “money like” instruments are always a problem, more on that later). So you have indeed “changed much” – radically much, a vastly more stable system, less risk of asset bubbles, and greatly facilitating the government’s ability to carry out other MMT approaches and keep inflation as close to zero as desired (basically, Milton Friedman’s monetarism actually works under a Full Reserve system – here we have the progressives and the free marketers happily combined). So as far as I can see, MMT and FRB get along just fine here.

At any rate, the question is:

Can pro- Full Reserve Banking people explain this better than I?

And/or, can Fullwiler or other Modern Monetary Theory proponents explain where the 2012 Chicago Plan or similar plans by Werner etc. are in error as Fullwiler 2009 believes above?

Cheers,

Clint Ballinger

UPDATE I have to note that the MR paper Cullen Roche suggests (this is from comments below) concludes “The Chicago Plan and Mosler/MMT both prescribe massive reserve funding of the negative state equity position. The difference is that the Chicago Plan focuses on the negative equity that has been created by the debt jubilee. The MMT plan focuses on the more typical balance sheet component created by deficit spending. Those two pieces are complementary and additive…” 

Review: “Why Nations Fail” (Acemoglu&Robinson) by Peer Vries

I was happy to run across this just now –  I have long been a fan of Peer Vries, so I was glad to see I am cited in his review.  Off for a day hike but as soon as I get back I will be reading this closely. (The mention is in footnote 14 and the page it is on).

Does wealth entirely depend on inclusive institutions and pluralist politics? Peer Vries, University of Vienna, July 2012.

A review of: Daron Acemoglu and James A. Robinson, Why nations fail. The origins of  power, prosperity and poverty Profile Books (London 2012).

Working Papers in Technology Governance and Economic Dynamics no. 43. Forthcoming in TSEG – Tijdschrift voor Sociale en Economische Geschiedenis.

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