[bit.do/wwmmt] In a rapidly changing world, ways of thinking which served us well in other eras, become obstacles to understanding, and reacting appropriately to change. Traditional economic theories, currently being taught all around the world,blinded economists to the possibility of the global financial crisis.The Queen of England went to London School of Economics to ask why “no one saw it coming?”.The US Congress appointed a committee to study why economic theories “dismissed the notion that a financial crisis was possible”. At the heart of this failure arewrong ideas about the role of money in the economy. All major schools of macroeconomics currently being taught around the globe teach that the quantity of money only affects the prices, and does not have any other effects on the real economy. Economists write that “money is a veil” – it hides the workings of the real economy, but does not play any role in it. Economists were blindsided by the crisis because models currently in use for policy making do not have a role for money, credit, banking, and debt, even though these were the factors responsible for the Global financial crisis.
The crisis made clear to all and sundry the vital role of money in the economy. Surprisingly, the mainstream economics profession has been extremely resistant to change. The same textbooks, theories and models which failed so drastically, continue to be used in teaching and policy making throughout the world. However, the space for unorthodoxy has expanded substantially, and a lot of new theories of money have emerged to challenge mainstream views. Among these, Modern Monetary Theory, which provides a radically different perspective on money, has emerged as a strong contender. This article aims to summarize some of the key insights of MMT, which creates new ways of looking at the world of fiat money that we live in today.
The starting point of MMT is that our thinking about money is conditioned by the view that money is based on gold, which leads us to ignore the radical differences between gold-backed money and “fiat” money, which comes into existence by government decree, and does not require any backing. With a gold-backed currency, the concept of a government deficit makes sense – the government must have gold, in order to spend it. However, with a fiat currency, a deficit must always be self-imposed; the government chooses not to print money in order to pay its obligations.The idea that the government does not have money to fund social welfare or investment is wrong, because the government creates money by sovereign fiat, and can always print as much money as it likes. MMT raises the question of why the government should impose taxes on citizens to generate revenue – why not just print the money instead? Readers who have been conditioned by economic theories will eagerly proffer the standard answer: because this will lead to inflation! But this answer is neither sufficient, nor satisfactory.
Based on his experiences as Governor of the New York Federal Reserve Bank, Daniel Tarullo has written that at present we do not have a working theory of inflation. Similarly, Joseph Stiglitz has written that the stable relationship between money and inflation broke down in the 1980’s, leaving us with no reliable guide to monetary policy. The Quantitative Easing program that was adopted in major world economies after the Global Financial Crisis involved printing huge amounts of money. However, to the surprise of economists, no inflation resulted, in conflict with standard theories of inflation. So, the idea that if the government prints money, inflation will necessarily result is not credible.
As experience of the past few decades has shown, there is no automatic relationship between printing money and inflation. A more sophisticated analysis is needed. MMT provides rather different answers to when and whether governments should print money, as well as the why of taxation. First let us consider the printing of money. Whether or not it is inflationary depends on how the printed money is used. For instance, if it is deposited in the accounts of billionaires and adds to their financial wealth, without being used for any other purpose, then it will not have any inflationary effect. If the money is used to purchase goods in a sector where the economy has excess capacity for production, then the demand stimulus will create an expansion, with increase in employment and in production. This is the Keynesian phenomenon – in a recession, where economy is below it peak production capacity, a monetary stimulus can create increases in employment without inflation. If the money is used to buy goods in sectors where economy is at peak productive capacity, then it will create inflation in the short run. What happens in the long run depends on whether the industry can expand to meet the excess demand.
Against this Keynesian possibility where printing money increases production and employment, there are many possible ways that money creation can harm the economy.If money is spent on land and stocks, this will lead to inflation in their prices. Money can also be used for purchase of luxury foreign goods, or transferred abroad in various forms. In such cases, increased demand for dollars would lead to depreciation of the exchange rates. Keynesian economists have suggested that dropping money from helicopters would be a useful policy to reduce unemployment in recessions. Modern Monetary Theory tells us that we need to be more discriminating in targeting the printing and distribution of money. If money goes to sectors of the economy where there is excess capacity, it will stimulate production and employment, without causing inflation. If it goes to domestic sectors operating at peak capacity, it will lead to domestic inflation. If it is exchanged for dollars and flows out of the country, it will lead to depreciation.
One of the key resulting insights is that the “deficit” numbers by themselves – whether in percentages of GNP or in absolute quantitative terms – are meaningless. The government can “sustain” any amount of deficit by printing money to pay its obligations. Of course, this is not a license for irresponsible spending. Creation of money, and its utilization in ways which do not enhance productive capacity of the domestic economy are sure to cause harm to the economy. Rather, MMT provides us with a license for responsible spending. If there are worthwhile projects which will utilize resources currently lying idle, then there is no need to be scared of the deficit numbers in spending on these projects. Viewed in this light, the project of building a million houses is not constrained by the budget of the government. Rather it is constrained by the availability of resources which are required for this purpose. If there is idle productive capacity in terms of labor, land, and materials, spending is this area will utilize them to the maximum. If the capacity does not exist, then a carefully balanced spending strategy, which builds capacity in a way coordinated with the increasing demand for utilization of this capacity, can be funded by deficit financing, without causing harm to the economy. Of course, it goes without saying that this requires skillful management and planning.
POSTSCRIPT: Linked Video below provide more detailed explanations of some key aspects of MMT. There is a lot more excellent expository material available on the internet.
See videos by Stephanie Kelton, linked in the following post: Everything you wanted to know about Modern Monetary Theory. For an alternative route to understanding MMT, looking the history of Central Banking leads to deep insights. For the history of the Bank of England, see “Origins of Central Banking“. From this history, we learn how Central Banks can create money out of nothing, and how the Bank of England took this right away from King William III. A more theoretical explanation of the technical trick involved in this method of money-creation, see an explanation of this historical episode in more abstract and theoretical terms: “Monetization, Maturity Transformation, and MMT“
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“The Quantitative Easing program that was adopted in major world economies after the Global Financial Crisis involved printing huge amounts of money. However, to the surprise of economists, no inflation resulted, in conflict with standard theories of inflation. So, the idea that if the government prints money, inflation will necessarily result is not credible.”
“To the surprise of economists” the unprecedented increase in central bank reserves did not result in consumer price inflation. Why would it? There is absolutely no reason it should have. If the economists are surprised it is due to their utter FAILURE to understand their own subject.
In the USA, the Fed created huge amounts of central bank RESERVES that never left the Fed for the general economy because Main Street borrowers did not increase their borrowing. Thus inflation of consumer goods prices did not happen because the Main Street economy saw NO increase in the money supply. Instead, these reserves have enabled the creation of massive amounts of short term bank credit by Wall Street speculators that has fuelled the explosive rise of the stock market which is where HUGE PRICE INFLATION has taken place.
Excellent analysis. So you can talk about things other than recursive re-lending. I am pleasantly surprised.
Thank you Professor. My analysis which you like arises from understanding how banking actually is structured as informed by the central banks themselves. I am sure you are familiar with Money Creation in the Modern Economy (2014) by the Bank of England, published 8 years after my movie Money as Debt communicated the same truth to millions around the world. If you haven’t read it cover to cover I suggest you do. Economists are chastised for teaching misinformation on several pages.
https://www.bankofengland.co.uk/quarterly-bulletin/2014/q1/money-creation-in-the-modern-economy
In turn, I have chastised the authors of Money Creation in the Modern Economy for their glaring omission, namely the recursive re-lending that obviously occurs in the real world but is entirely absent from any economist’s or banker’s picture of how the world works. Once added in, the money system becomes a Ponzi scheme always requiring the creation of ever more debt to banks to avoid collapse in mass default as happened in 2008. All debt of bank credit contracts are therefore impossible in the aggregate and thus invalid as “fraud in the inducement”. It’s all here:
Click to access DiggingDeeper_Grignon2017.pdf
Digging Deeper into Debt-Money
The Bank of England’s confessional isn’t the whole story
“… just consider what might happen if mortgage holders realised the money the bank lent them is part of an invisible trap, a game of musical chairs designed by the bankers in which losers are mathematically predetermined to default whenever the creation of new debt to banks slows down, for any reason. The only way to keep the music playing is for all of us as a whole to go further and further into debt to banks forever.”
Asad,
May I ask you a question (and you can answer this personally as well if you want)? Who do you think is the intended audience for all economists out there, and what is their main objective when writing and selling books?
Typical economists are trained in esoteric ways of thinking and so normally they only talk to one another. However, a few have decided to explain things to general public — most importantly Hayek, Friedman and the gang, but Krugman, and many others as well Why do you ask?
Asad,
If you notice that every individual out there who ever studies or follows economics, that one of two things occurs with the individual, either they seek to ‘change’ what they see, or they seek to monetize any knowledge they have.
As for the latter, this is something I noticed with a lot of those who were predicting the GFC – they took that opportunity to sell books and make money through other channels based on their apparent predictive powers. The question I have for these people is if any of these individuals understood the true nature of our monetary economy and were able to predict the GFC as a result of this understanding, then why are not any of them educating those in society who have to deal with those who suffer as a result of economic downturns? Who do they expect is going to buy their books? No unemployed, poor, or homeless person, nor any of the millions of charities or human rights advocates who have to help these people (all of whom are still stuck in an old paradigm and understanding of the money economy) are going to buy their books, yet, it is these people who need this information more than anyone! The only people going to buy their books are those wish to take advantage of that knowledge, which will do nothing but help contribute to the next crisis.
As for the former, this is something that has become so obvious that it has rendered economics as 100% politics and lacking any science at all. Every person I have ever met, read, or engaged in who has learned and observed anything about economics (whether it be actual economists or readers of blogs who post comments) has said that something about what they have observed needs changing. Do you know of any economist or blog poster out there who has studied the monetary economy and has not imported some form of politics into their writing?
Of course, there are now many economists out there who now openly admit that economics is not a science and is purely political, because, as they say, it has to be this way. If we look at politics today, it is almost 100% focused on economics. Therefore, the term economics and the term politics essentially mean the same thing.
By understanding that economics and politics are essentially the same thing it becomes easier to see the inherent issue facing the problems of trying to solve such things as unemployment, inequality, etc, because it is all based on competing interests, and anything based on competition means there must be losers. There is nothing in politics that is ever 100% agreed upon by everyone.
There are many in society who believe that we need poor people because, as they claim, it is out of poverty and suffering that some of the greatest individuals and human achievements rise; then there are others who completely disagree with this and will say such things as, it is not fair for 99 out of every hundred to suffer on the hope that 1 out of every hundred might achieve something monumental. The problem is not that either side is right or wrong or moral or immoral – the problem is that they have taken their beliefs and made them political by wanting to impose them on everyone.
Ironically, for me personally, it was economic theories such as MMT which supported what I was observing in myself as an economic agent and which helped to reinforce my desire to find a way to personally and individually abandon the whole money based system completely and to do it in a moral and ethical way (i.e. to do it so that it does not burden any other – which is a project I call the Economists Challenge). What’s more, whilst MMT showed me that I was right about how the monetary economy works, at the same time due to its high level of politics created an even higher desire in me to find a way to fulfill my goals in a non-political way. In other words, MMT showed me how much I hate both money and politics and the idea of imposing my will on others.
If MMT was true to its purpose, it would cease trying to do anything through the political sphere and start educating those who actually have to deal with those who suffer in the world, because these people have far more humanity and energy in them than politicians do. But I do not think MMT has this purpose at all. MMT’s policies will only increase the wealth of the 1%. Further, and I am telling you this based on my own self-observations, that if a JG program was instituted, and I knew I was guaranteed an income for life, I would take every spare penny I had after paying my bills and pile it into the financial markets until I reached the point where I was earning sufficient passive income and I could live without working a job. Now put yourself in a politicians shoes and ask yourself, how many folks out there would attempt to do the same thing, and how many more people would set up shops/websites teaching people how to take their guaranteed income from the government and invest/trade it in the financial markets and become rich?
I think we need to change the term ‘economics’ to something else if we are ever seeking to treat it as purely a science. What’s more, I do not think it is possible for anyone to truly grasp economics unless they take the time to observe themselves objectively every time they make an economic decision. It is only then one can see that the whole economic/political superstructure is based on fear and insecurity, and completely opposite to the concepts of trust.
if a JG program was instituted, and I knew I was guaranteed an income for life, I would take every spare penny I had after paying my bills and pile it into the financial markets until I reached the point where I was earning sufficient passive income and I could live without working a job.
A JG in itself doesn’t guarantee income for life, only while you are working, like any job. Basically nobody would do what you suggest, because the point would not come for a long time if ever and it would be a lot of investment with little and delayed reward.
There is a great deal of experience with full employment and the JG is just a magnified, complete case of full employment. The experience is the opposite. Why: In any developed country there is a state retirement system, like Social Security. This is much more efficient and provides greater and more secure returns than the financial sector (gambling casino, racetrack) The effect of such a system, especially when combined with secure, full employment is to decrease savings and flow to the financial sector, especially if you only consider the volitional investments you suggest and not pension plans. This diminution of savings helps a modern, demand constrained economy. Keynes himself, contrary to many Keynesians, didn’t think that the Great Depression would return after the war, partly because of this effect, and he was right.
an even higher desire in me to find a way to fulfill my goals in a non-political way. In other words, MMT showed me how much I hate both money and politics and the idea of imposing my will on others.
You’re just not using the word “politics” in the normal way, more like its antonym. Like anybody else’s, your proposed solution is political. The idea that you can fulfill your intrinsically political goals in a non-political way is a contradiction in terms. Using the word “political” in the normal way, there is no non-political solution conceivable. Might I note that it is rare for the would-be problem-solver to see the tyranny implicit in his “solution”. Merely because it is his “solution” – that is, because he is the tyrant. MMT & the JG are focused on decreasing the tyranny in one very important and crucial way. It is a simple and direct solution to unemployment – the only solution really. Like most important and political and economic things is not “based on competing interests”.
It is only then one can see that the whole economic/political superstructure is based on fear and insecurity, and completely opposite to the concepts of trust.
The complete opposite of the truth. Seeing only superficial “competing interests”, fear & insecurity and not seeing the omnipresent and greater trust, the only thing that could make it all possible … Well fish can’t see the water they are swimming in either.
But I do not think MMT has this purpose at all. MMT’s policies will only increase the wealth of the 1%.
That’s Egmont’s nonsense. Right wingers have been making this ridiculous objection forever. They take an obvious, well-known observation and jump to completely unjustified conclusions from it. But most reactionaries know/knew it is the opposite of the truth – they’re just lying. Again, look at experience. MMT policies in action throughout the world produced the greatest flattening of wealth and income distribution ever. The right wing/EKH theory flagrantly disagrees with experiment – about as much as a theory that gravity causes heavy objects to repel each other. It’s very, very obviously wrong.
Calgacus,
You make me laugh. Everything I ever post you judge. But that is fine, and I accept that I do not fully understand some of MMTs politics but at the end of the day I really don’t care. I merely post up on these blogs to see if anyone will take the time to click on my name link and take on my Economists Challenge.
MMT understands fiat money mechanics, but it is an incomplete theory because it still retains elements of the old monetary paradigm and its fallacies, and also because it does not understand how to implement the new paradigm. Economists are some of the most intelligent and intellectual people on the planet, but because they do not have paradigm perception they end up being erudite dunces. Smarts are not enough. Deep discernment is necessary.
Since I am actively engaged in teaching MMT, I woulld be very happy to learn more CONCRETELY about the problems. So far, I have examined carefully, and have not found any issues or problems with what I am reading in the textbook and teaching to my classes.
Asad. As a retired computer engineer and entrepreneur who discovered the essence of MMT before discovering the school itself, you might find the short writeups on my website – TENonline.org – useful. I believe they convey the essence of MMT with simple logic and common sense.
Hi Asad,
you already know these problems with MMT as you have mentioned them in one of your previous posts/replies:
MMT does not resolve the main issue about WHO controls the creation of money in the economy.
Clearly this is the commercial banks aided by an accommodating central bank.
However, the insistence of MMT on cancelling out the private sector assets/liabilities and not considering the commercial banks role in the creation of private money is one of its biggest deficiencies.
This is a fundamental issue!
This is exactly what people like Joseph Huber and the New currency Theory are trying to emphasize.
Thanks for mentioning this. I have decided to learn MMT, by teaching the Wray, Mitchell, Watts text. I want to understand what they have to say before thinking about critique. You have correctly pointed out that I have suspicions, but I have put them aside to learn the perspective of MMT from the inside. I try to walk for a mile in the MMT moccasins before judging faults. So far, the concepts seems crisp and clean, and also illuminating, which is far different from conventional macro. Even if there are flaws, I think there is enough systematic structure to build on that it would be worthwhile and possible to do an internal critique, rather than rejection the whole thing.
This criticism could not be more off-target. MMT DOESN’T do the things it is accused of. It DOES do the things that it is accused of not doing. It doesn’t “insist” on cancelling out private sector liabilities, except when the question is asked: What do things look like when we cancel them out? Should this question be taboo?
MMT considers “the commercial banks role in the creation of private money” in exhaustive detail, more exhaustive than any other school of thought, building on classical work, PostKeynesian endogenous money theory (which was just a rediscovery of that classical work) etc.
So this criticism makes as much sense as saying “Hey Albert – why don’t you come up with a theory of relativity?”
MMT correctly identifies monetary mechanics, but it deals almost entirely with the “problem” of government debt and so does not deal sufficiently with the much larger problem of the currently necessary continual build up of private individual and corporate debt.
It’s “solution” of a job guarantee resides entirely within the mindset/paradigm of Debt Only and current fallacies about the quantity theory of money and its causes of inflation. A job guarantee could obviously be an adjunct program within the new paradigm of monetary gifting for those people having difficulty finding purpose without putting in their 40 hours per week.
It does not see the monetary and economic significances of the quadruple power point of final retail sale namely:
1) It is the terminal ending point of the entire legitimate economic/productive process,
2) the terminal summing point of all costs [including profit and the costs of capital goods] and so prices for every consumer item in the economy
3) the terminal expression point for all forms of inflation
4) Along with the above three points it does not recognize the significance of the fact that the money, pricing and accounting systems are all digital in nature and hence the power of a digital monetary policy at the point of retail sale.
In essence, like every other economic theory except Wisdomics-Gracenomics which integrates and extends the relevant insights of virtually every progressive heterodox theory AND most importantly brings awareness to how to implement the policies of the new paradigm of Direct and Reciprocal Monetary Gifting, it is incomplete because it has both empirical and mental/paradigmatic shortcomings.
As for MMT, it also fails to recognize recursive re-lending creating multiple concurrent principal debts of the same money. What is wrong with you people? Most of the persons in the street I have taught verbally get it within 2 minutes
I start just like this: “Did you know money is created when you promise to pay it back to a bank? It is. You promise the bank $100,000 over time and in exchange the bank promises you $100,000 in legal tender right now. The bank’s promise is the borrower’s bank account which is then used as money itself and, if in existence for up to 30 years like most mortgage-created money, it will be earned, saved and replaced via a bank or re-lent by the owner directly.
Either way, the same debt-created dollar will be effectively re-lent multiple times as existing money creating MULTIPLE CONCURRENT PRINCIPAL DEBTS OF THE SAME MONEY, a situation IMPOSSIBLE TO ESCAPE EXCEPT BY DEFAULT. The charts of M2 and M1 PROVE this to be the case, but economists don’t perceive the statistics correctly.
M2 is TOTAL PRINCIPAL DEBT to banks. It is NOT part of the “money supply” which is M1 only. Money in savings isn’t spent and won’t be “money” unless it is spent. In the USA M2 is typically 4 times M1. At the Crash of 2008 that ratio was an unprecedented 5.26:1. It is currently at 3.5:1.
This “impossible aggregate principal debt to banks” also makes the payment of current debt entirely dependent on the rate of creation of new principal debt to banks never slowing to less than the required rate of principal repayment. Thus we are committed by the design of the money system itself to endless exponential growth or collapse – a recipe for PLANETARY SUICIDE. Pretty simple eh? Can you believe economists know NONE of this, which is why the Crash of 2008 surprised them?”
I invited Stephanie Kelton, one of MMTs leading lights to debate the issue with me. When she found out I was out to demonstrate the errors in their thinking with the simplest of facts and logic she got angry and flatly refused to engage in any conversation with me. Conclusion? ALL economists belong to a variety of irrelevant religions in a fact-free universe and that’s the way they want it to stay.
Your concern over recursive re-lending is based on a concept of money as a “thing” that is multiplied by that process. How about thinking of money as merely a token of a contract which can legitimately be multiplied during the multiplication of the contracts. If that contracts are all fulfilled, all is well. If not, there are orderly procedures provided by the law.
I don’t think Pail Grignon understands double entry book-keeping and is terrifying himself with spectres. M2 is not principal debt to banks it is the debt of the banks, i.e. their liabilities. Their assets are the loans they made that generated much of the M2. If the loans are sound, the liabilities are safe. If they are not sound and some borrowers default, other people’s deposits are at risk..The state can guarantee the deposits but it cannot create real resources.
Is that a Ponzi scheme? Not necessarily. In a Ponzi scheme, such as a chain letter, there are no real resources or assets to back the financial asset, The holder relies on a greater fool to realise the financial asset.. In a reasonably functioning economy banks, have made loans for activities generating real returns, in which case there is no Ponzi scheme. Crashes result only when Bank lending becomes speculative, as in Minsky’s exposition. The tendency of lenders to get over excited leads to the occasional crises that Minsky describes. Bank lending can be curbed in such circumstances, imperfectly and only if action is early enough, by the State’s ability to squeeze bank reserves and increase the cost of credit.
Perhaps Paul Grignon is concerned that lending at interest requires growth in incomes for the loans to be repaid so a credit economy requires economic growth. It is true that modern credit economies exhibit growth but that is not necessary for safe credit transactions to occur. I might decide to buy a suit this month that will last for years. I can borrow to buy the suit and repay it from my stable income in the periods when I am not buying a suit. If I have budgeted properly the bank can lend and earn interest. The suit-makers’ deposit is safe in the bank because I will repay. Empirically, it is true modern credit institutions exist in a world where economic growth is an expectation, reinforced by the experience of 300 years.
People getting excited about the fact that banks create money are like people who have just been told that oxygen is essential to combustion and is poisonous in high concentrations. Then they run around in a panic when .they discover the air is 20 per cent oxygen. Yes, yes, we know it can cause fires but try living without it.
This thread clearly illustrates the the problem I (as an engineer) have with economists – 13 posts about “money” with no one bothering to define the word. Is it purchasing power or currency or wealth or … that’s being talked about? I suspect most of the differences here stem from individual differences in definition and nuance. Who but the government “created” the SSA dollars that shows up in my bank account each month? Who but the financial market created that $50K that my mutual fund just wired into my bank account? Who but the credit card company created the $50 purchase I just put on my credit card?
Ed,
Try these:
https://www.bankofengland.co.uk/-/media/boe/files/quarterly-bulletin/2014/money-in-the-modern-economy-an-introduction.pdf?la=en
https://www.bankofengland.co.uk/-/media/boe/files/quarterly-bulletin/2014/money-creation-in-the-modern-economy.pdf?la=en&hash=9A8788FD44A62D8BB927123544205CE476E01654
I’ve read those papers, but do not find them credible. They see money as a commodity – effectively trying to create a balance sheet for a national government – which I see as complete nonsense. I see money as a flow – not as a stock. I see it as totally valueless (in absolute terms) – dependent solely on users perceptions, ie, having only use value. I see the NIPA accounts as being useful – equivalent to the business earnings statement – and what should be used to manage national governments. So I’m afraid those papers violate my logic and common sense.
“I’ve read those papers, but do not find them credible. They see money as a commodity – effectively trying to create a balance sheet for a national government – which I see as complete nonsense. I see money as a flow – not as a stock. I see it as totally valueless (in absolute terms) – dependent solely on users perceptions, ie, having only use value. I see the NIPA accounts as being useful – equivalent to the business earnings statement – and what should be used to manage national governments. So I’m afraid those papers violate my logic and common sense.”
Ed,
That’s the beauty of living in a political world, every individual can think, feel, see, sense and believe whatever they want about whatever they want. That of course is also the downside of living in a political world; there never has been agreement and there never will be agreement between how people see things from a ‘political’ perspective. I have yet to have any economist (or student) respond to my economists challenge without their political hat on – it is quite revealing!
Oh and Ed, if you decide to respond to my Economists Challenge (and as an engineer you have more chance of approaching it objectively) you will notice we rely on flow of funds models
Ed wrote: ” I see money as a flow – not as a stock.”
In that case, please show me a river flowing without water and wind blowing in a vacuum.
The Economists Challenge: How do I respond to your Economists Challenge? It sounds interesting but google doesn’t point me to it (that I can find).
Ed,
Just click on my name link ‘The Economists Challenge’ to the left of the post. Should go straight to the site. Cheers
Ed Zimmer claims that the 13 previous posts didn’t define money despite the effective definition being provided in my post immediately above his. “Did you know money is created when you promise to pay it back to a bank? ”
Almost all money is someone’s Principal debt to a Bank. Cash is principal debt owed to the central bank by the national taxpayer on which only the interest is paid … so the cash remains in existence. Bank credit, the vast majority of money, is comprised of someone’s principal debt to a retail bank to be repaid and extinguished on time.
Some money is created by banks purchasing assets like real estate and stocks that don’t obligate repayment. This money is not principal debt to a bank. However, like the principal debt money, it is a promise of legal tender (taxpayer principal debt) on demand.
The document Money Creation in the Modern Economy (B of E 2014) is the FIRST time since Modern Money Mechanics (Chicago Fed 1961) that the banking system has explained itself, 8 years after I exposed it in my mega-viral movie Money as Debt (2006). It is 100% logical and credible, except for its glaring OMISSIONS that would reveal our money system to be a Ponzi Scheme, a structural fraud upon the entire public.
Click to access DiggingDeeper_Grignon2017.pdf
Digging Deeper into Debt-Money
The Bank of England’s confessional isn’t the whole story
“… just consider what might happen if mortgage holders realised the money the bank lent them is part of an invisible trap, a game of musical chairs designed by the bankers in which losers are mathematically predetermined to default whenever the creation of new debt to banks slows down, for any reason. The only way to keep the music playing is for all of us as a whole to go further and further into debt to banks forever.”
Ed wrote: ” I see money as a flow – not as a stock.”
In that case, please show me a river flowing without water and wind blowing in a vacuum.
Paul: If that’s intended as argument, it escapes me. If one accepts NIPA accounts as fairly representing a national economy, than GDI = GDP (ie, total national income equals total national expense), leaving no net-profit to contribute to a balance sheet.
The point Ed is that there is no flow of wind in a vacuum and there is no flow of money without money being a stock. Exactly what is the stock?
Almost all “money” is a promise to pay it back to a bank as a principal payment. This has been verified by the Bank of England. The process of creating money as principal debt to a bank and then re-lending it multiple times within the repayment period of the money creation “loan” (recursive re-lending) creates multiple concurrent principal debts of the same money, a situation that can never be escaped except by default and which must result in periodic waves of default whenever the supply of new bank credit (principal debt to banks) slows down for any reason.
Thus the “stock” in our money system is the aggregate borrowers’ PRINCIPAL DEBT to BANKS that is, in the aggregate, IMPOSSIBLE to PAY, several times over.
This is proven by the fact that, in the USA for excel, M2 is a multiple of M1. This 2 minute cartoon illustrates.
http://paulgrignon.netfirms.com/MoneyasDebt/MAD2016/economists_play.htm
Paul: Afraid I don’t see money as an IOU, not do I consider the various M’s as anything other than irrelevant noise. I see it as a convenient measure (unit of account) having value determined by and limited by users perceptions. Nice while it’s here – but in a Trump world, don’t count on it.
The debate on what is the true meaning of money is political – it serves no real purpose to debate over it because no side will ever budge on their beliefs and even if one side was to win and have policy changed to reflect their beliefs, the other side will always hold a grudge and declare their intention to change it if they ever get in. In politics it does not matter what is fact, all that matters is what can be sold, which means very little to those at the low end of the class spectrum.
So whilst some may argue that the publications by the Bank of England do not reflect their own feelings on what money is, if I was having my human and common law rights denied me because of policies that were based on a false understanding of money (such as austerity policies etc) and I wanted to sue the government (who is representative of the voting public) for violation of these rights, then one would rely on publications such as those by the Bank of England (not to mention Banking Acts and Reserve Banking Acts), not because they believe what they are saying, but because they would contribute to evidence on what money is and on how money is created and that this evidence points to the fact that there is no financial or physical constraint on a government (nor would it cause economic loss to the voting public) to fund those who suffer from lack of needs except by self imposed policies (policies voted in by an ignorant voting public) and the courts would accept these as evidence. One could not rely on books or blog posts/comments written by economists whose primary motivation is either political or commercial.
Paul: I have no problem with any of that. I just would not want to be the plaintiff in such a suit.
Either would I if I had no legal background, nor the energy or passion to see it through
When I advanced my argument to one economics professor he DISMISSED me as being “reality based” for the same reasons you have. Logically, that makes both of you FANTASY-BASED. By ignoring the facts as stated by the horse’s mouth, you make any useful analysis impossible. In other words, you are covering for the bankers’ crimes.
Money is created when it is “borrowed” from a bank. That was the message of my 2006 mega-viral movie Money as Debt watched by millions in at least 26 languages. I first learned it from a real estate developer (1993) and later (2002) from a forensic economist. and finally by exhaustively searching the websites of several central banks for confirmation. Now the Bank of England has verified everything I presented in Money as Debt all in one easily read document. It is the TRUTH as far as it goes. It just does’t go far enough as their description omits savings and re-lending by non-banks both of which turn the system into a Ponzi scheme.
Money is created when it is “borrowed” from a bank. All else flows perfectly logically from that one simple fact. The M numbers are reported facts that, when understood PROPERLY plainly show the recursive re-lending that creates the impossible aggregate principal debt that periodically erupts as a default crisis (1981, 1991, 2001, 2008).
But economists don’t understand that M2 is NOT the total money supply, it is only the total principal debt on which borrowers must make principal and interest payments while 3/4 of all the bank credit money ever created is perpetually UNAVAILABLE to the borrowers that need it. In my view, Such astonishing ignorance on the part of professional economists is nothing short of CRIMINAL NEGLIGENCE.
The animation linked to below demonstrates causation that correlates 100% with the real world evidence.
Mr. IMF and the Mystery of the Thirsty Swans (13:18)
Why the design of banking is, itself, the root cause of money system instability.
Inspired by a conversation with a senior economist and central banker
who has worked at the highest levels of the IMF, and consulted for the World Bank and the Federal Reserve.
Paul,
The ironic thing is, is that the courts (especially the higher courts) know better than most economists how money is created…but people would rather form their own view so they can exercise their subjective juices and be part of the political/drama wave sweeping over this world this last couple of centuries
http://www.austlii.edu.au/cgi-bin/sinodisp/au/cases/vic/VSC/2004/36.html?
http://www.austlii.edu.au/cgi-bin/sinodisp/au/cases/vic/VSC/2009/429.html?
http://www.austlii.edu.au/cgi-bin/sinodisp/au/cases/sa/SASC/2013/27.html?
In my experience every economist I have challenged, including Asad, refuses to acknowledge the seriousness of recursive re-lending and either shuts down or offers absurdities and irrelevancies as distractions. Not one has ever answered a straight question with a straight answer. To try to get straight answers always requires setting true or false questions as I posed to the authors of Money Creation in the Modern Economy. At that point, like those authors, every “brilliant intellectual economist” I have challenged to prove me wrong REFUSED to answer simple true-or-false arithmetic questions worthy of a grade school test. More than 150 economists quashed publication of this analysis in a science journal. It’s more than “subjectivity”. It’s a cover up. It’s CRIMINAL NEGLIGENCE.
Thanks for the court cases. What complexity of argument goes into comprehending the simple truth.
“banks can create as much money as we can borrow”. Money as Debt ( 2006)
Thanks for the court cases. It is remarkable – so many words!!!
“banks can create as much money as we can borrow” Money as Debt (2006)
Sorry Paul, was in a rush so didn’t have time to list the sections…hope you used the search function or something rather than have to wade through it all
You ask for a definition of money. Here is what I wrote in response to another entry:
US Dollars are notes, loans issued by the Federal Reserve and so are a type of contract and utterly depend on trust that the contract will be honored. Fortunately we have a robustly trustworthy financial system so it operates reliably.
So money can be seen as based on a store of wealth in the same way as the deed to real estate. Real estate is real wealth which is why it is called “real” estate. Compare that with US Dollars based not on anything tangible but on trust in the consensus of all of us participants in our monetary system.
That trust can be eroded as happens with inflation which is why that has been of such concern, traditionally.
But that is looking at money in a static sense. In the real world there is, usually, expansion of the traffic in Dollars requiring an expansion of the supply which the Federal Reserve feeds to the economy through the banks, to the enormous profit of banks. And that traffic is not only in the US but also worldwide since Dollars are the dominant reserve currency, thanks to oil being priced in dollars (and the US being so large and generally subject to law.)
I have yet to find an explanation why the trillion Dollars or so needed every year is not distributed to all of us participants in the economy as a dividend to us as owners of that economy, as upholders of the trust without which Dollars are so much pretty paper
Why do taxes exist and why does the state not pay it’s bills with newly created money? (You are asking for a theory of inflation: here is a proposal)
Why would anybody want to accept currency issued by the state as a method of payment? Scarcity is not derived from the amount of money existing in opposition to the goods traded (contrary to what Bitcoin owners believe). The inherent motivation of accepting payment in a certain currency is directly connected to the obligation to pay bills or more specifically the obligation to pay taxes in this currency. Without taxation the backing of currency will be gone and with it the need to change goods and services against payments this currency. This will lead to an inflation-spiral with a terminal value for the currency of 0.
This is even more true for countries with trade account deficits (USA anyone?). There will be no motivation to sell goods for local currencies, but all the more motivation to sell goods for currencies of imported goods.
Inflation is a function of the scarcity of money, and scarcity is a function of money created, trade deficit and tax rate.
I see inflation as a demand for goods and services exceeding supply – nothing more or different.
Economists and pundits can theorize and argue forever about money. However, only the implementation of the two policies of a monthly universal dividend and a high percentage (25-50%) discount/rebate at the point and time of retail sale….actually effects the necessary new monetary, financial and economic paradigm.
Economists and pundits can theorize and argue forever about money. However, only the implementation of the two policies of a monthly universal dividend and a high percentage (25-50%) discount/rebate at the point and time of retail sale….actually effects the necessary new monetary, financial and economic paradigm.
If money were really a flow not a stock it would be measured in dollars per minute. It isn’t. It’s just dollars. That makes it a stock. Economists talk about a velocity of circulation – that’s the value of transactions conducted in a given period with a given stock of money., a ratio rather than a flow. One can think of a flow of money to or from individuals as it changes hands because you can say X is earning (or spending) Z dollars a month. In itself that does not change the stock of money in the economy. And you can rest assured if you have $100 in the bank and you don’t spend it, it will be $100 tomorrow. It isn’t flowing anywhere.
Money is not the same thing, as wealth, capital or transactions, though wealth or capital may take the form of money and money is used in most transactions. Money is just the stuff the government and the law says is legal tender that is universally accepted in the settlement of any transaction. That means it is also the unit of account – the way we keep score. It can be pieces of paper or book-keeping entries, often digital these days. Don’t make a mystery of it.
The question remains is money still a store of wealth, the third of the three classic functions of money? US Dollars are notes, loans issued by the Federal Reserve and so are a type of contract and utterly depend on trust that the contract will be honored. Fortunately we have a robustly trustworthy financial system so it operates reliably.
So money can be seen as based on a store of wealth in the same way as the deed to real estate. Real estate is real wealth which is why it is called “real” estate. Compare that with US Dollars based not on anything tangible but on trust in the consensus of all of us participants in our monetary system.
That trust can be eroded as happens with inflation which is why that has been of such concern, traditionally.
But that is looking at money in a static sense. In the real world there is, usually, expansion of the traffic in Dollars requiring an expansion of the supply which the Federal Reserve feeds to the economy through the banks, to the enormous profit of banks. And that traffic is not only in the US but also worldwide since Dollars are the dominant reserve currency, thanks to oil being priced in dollars (and the US being so large and generally subject to law.)
I have yet to find an explanation why the trillion Dollars or so needed every year is not distributed to all of us participants in the economy as a dividend to us as owners of that economy, as upholders of the trust without which Dollars are so much pretty paper. .