The economist John Kenneth
Galbraith once quipped that the answers economists give to the question “what is money?” are
usually incoherent. So in this blog we turn to law for some answers. Debate about the nature of money
has been renewed by recent financial crises and the rise of digital currencies (Ali
et al 2014; Desan
Ryan-Collins et al 2014;
Martin 2013). This was the focus of a panel session at the Bank’s recent annual conference on
Monetary and Financial Law, which brought together lawyers and economists to develop interdisciplinary
perspectives on topics such as money. It prompted us to think more deeply about how law does and
does not constitute ‘it.’
Common legal attributes of money
Anything can function as money. And many things have: cattle; cowry shells; even cigarettes. But
as Minsky once said, while “everyone
can create money, the problem is to get it accepted.”
While in theory anything can be money, the reality is few things are. Monies produced by the Royal
Mint and the Bank of England (BoE) are the ultimate means of payment, followed by private sector
claims, in order of how immediate they provide for full convertibility into these.
So if we want to explain why state issued tokens and claims, and promises of immediate conversion
into them, are monies, legal tender laws seem less important than other legal attributes that make
them trusted and give people comfort they can get someone else to accept them.
In the past, when gold and silver were monies, economists often explained this reality by reference
to these metals’ physical attributes such as portability, uniformity and durability. Today these
physical attributes of metal monies have legal analogues.
Think of a
Three legal attributes make it money.
First, a fiver is portable because it is legally negotiable: it can be transferred to
others without each time gaining consent from the BoE (the fiver’s issuer), and, once transferred,
it’s free and clear of any claims being brought by those who previously possessed it provided it
was taken in good faith (Geva
Second, fivers are uniform because they are fungible: each can substitute for another.
This is because the rights and obligations they confer are the same.
While all monies share hues of negotiability, fungibility, and instant par redemption, each type
of money also has unique legal features. Ordinarily, these legal differences don’t matter because
one type of money is easily convertible into another.
Qualitative differences in the legal construction of monies appear, if at all, merely as quantitative
differences in their rate of financial return. For example, in ordinary times, although term
bank deposits accrue interest and BoE notes do not, they are treated by most people as equivalents.
However, during financial crises, qualitative differences reassert themselves and, in the extreme,
parity breaks down. In classic bank runs, for example, individuals seek to convert bank balances
into cash because the difference between having a claim on a private counterparty that can go bust,
versus a public counterparty like
central banks that can operate
even on negative capital, acquires greater salience.
Consequently legal differences between monies sometimes matter. So we note some below. Here our
analysis chimes with research in sociology and behavioural economics showing that money is not singular
but plural (Dodd 2014).
However, while those studies focus on how money is imbued with different meanings by individuals
once in circulation, for example, depending on its source (e.g. whether it’s from wages or inheritance),
our point is that monies are plural from the start, in the nature of their legal construction.
Legally, notes represent debt obligations of the Bank. Originally they could be redeemed in gold.
However, since 1931, the Bank
pays out gold against its notes. BoE notes were first issued in the seventeenth century but did
not acquire legal tender status in England and Wales until 1833. They are not legal tender in Scotland
or Northern Ireland.
Seven banks in Scotland and Northern Ireland issue their own notes which are these banks’ debt
obligations. These notes are not legal tender even in Scotland and Northern Ireland. Rather, they
circulate by convention, underscoring our thesis about the importance of other legal attributes besides
legal tender legislation in conferring ‘money-ness.’ As a result of the
Act 2009, these notes are backed in full by a combination of Royal Mint coins, BoE notes and
reserve account balances.
Accounts with banks and mutual organisations
Banks and mutual organisations offer current and other types of spendable accounts used for payments.
On the one hand, these accounts are unsecured debt obligations of private organisations. On the other
hand, many are backed up to certain limits by
guarantees. Today the value of transactions involving these accounts greatly exceeds the value
of transactions involving legal tender. And growth in these accounts’ balances is mainly driven by
additional loans that create equal and opposite accounting entries.
Economists and lawyers often approach the topic of money differently because they have different
philosophies underpinning their professions. Economics is basically a branch of
meaning that the consequences of actions are the basis for judging their rightness or wrongness.
Hence many problems in economics are about optimization and involve cost-benefit analysis. By contrast,
law is derived from
deontology, meaning some actions are intrinsically right or wrong according to normative rules.
Hence legal decisions are typically justified by history and notions of justice.
These philosophical differences mean economists and lawyers often think about money differently.
For example, many economists think money arose as a transaction cost reducing, utility enhancing
device to overcome the absence of a double coincidence of wants that hampers barter, while many lawyers
and institutionally minded economists think the origins of money is the state (Goodhart
1998). Economists mostly think of
money as a medium of exchange (Kiyotaki
and Wright 1989) because this function relates to trade and commerce, while law emphasises money
as a means of payment (Proctor
2012): whether one party has discharged their obligation to another. In emphasising the settlement
of obligations, law draws attention to money’s role in non-commercial transactions such
as taxation and transfers. And while economists treat money mainly as an indicator or intermediate
target for influencing real, macroeconomic variables, lawyers typically think about money in the
context of individual cases and adhere to the
doctrine of nominalism.
Despite these different points of emphasis, this blog has tried to show that understanding money
requires joining legal with economic perspectives. For example, while for a long time lawyers saw
bank deposits simply as loans, economists much earlier appreciated their wider bearing on inflation
and output. However, if economists want to explain why certain claims like bank deposits are money,
while others are not, they must look at their legal attributes and socio-legal history. Recent research
on money by Bank staff has been informed by both law and economics (McLeay
et al. 2014;
Bholat 2013). Here are a couple paths on which further interdisciplinary research might advance:
How is the money demand for a claim impacted by changes in its legal constitution, for example,
after a major structural break like the conferring of legal tender status on BoE notes or abolition
of their gold convertibility?
Besides negotiability, fungibility and instant par redemption, what other legal features make
claims suitable to be money?
David Bholat works in the Bank’s Advanced Analytics Division, Jonathan Grant works
in the Bank’s Legal Directorate and Ryland Thomas works in the Bank’s Monetary Assessment and Strategy
Bank Underground is a blog for Bank of England staff to share views that challenge
– or support – prevailing policy orthodoxies. The views expressed here are those of the authors,
and are not necessarily those of the Bank of England, or its policy committees.
Now I just read an article by some guy with the typical quantitative easing is bad because it
just dilutes everyones wealth , debases the currency value and and all that
This is nonsense
It implies that it is money supply that contributes to inflation. However it is not money
supply that contributes to inflation it is income. That is money times the velocity of money
and in fact it is not income that contributes to inflation it is income times the propensity
to consume of that income
money in bonds is not really actively involved in income except for the interest it's earning
so when the central bank "prints money" and then uses that money to buy bonds all the central
bank is doing is exchanging one form of inactive wealth with another form of inactive wealth
that is neither the value of the bond nor the value of the money that the fed printed by the
bond were actively involved in income anyway, except for the interest earned
therefore they do not affect inflation
in fact the value that bond at this point wasn't about to be used for consumption anyway, it
was just being held
after the fed purchases the bond, that the former bondholder now has cash that is no longer
getting a return, (as now the fed is getting the return)
which will prompt the former bondholder to look for a place to put that money
the idea is that the former bondholder will invest the money, that that money will find its
way into funding ventures that cause increased employment, income and production
and it is that investment that will stimulate the economy
like maybe buy other bonds and the issuer of the bond gets that money and can invest in their
business, creating jobs and income and production for their employees.
Which then will have the usual multiplier effect if we are at less than full employment
and at any point the fed can sell back the bond reducing the money supply
in the meantime we might have been able to keep the economy functioning at a high level, keep
more people from being excluded from the benefits, and not lose all that production that is so
essential to increasing our quality of life
I would say precious metals are subject to tighter physical
constraints (first of all, availability) than most of what
have been considered "fiat" currencies.
"fiat" coin has been produced from cheaper metals, e.g. iron,
aluminum, or brass. Forgery-resistant paper currency is not
cheap, but probably still cheaper than precious metals.
All that is beside the point - today's currencies are only
virtual accounting entries (though with a not so cheap
supervision and auditing infrastructure attached to enforce
scarcity, or rather limit issuance to approved parties).
Gold and silver prices are
determined by labor costs of production.
Cartels act to limit global supply to push prices above
labor costs, but even the Cartels have trouble resisting
selling into the market when the price far exceeds labor cost
of the marginal unit of production.
In today's political economy, the barrier to entry is rule
of law which requires paying workers to produce without
causing harm to others. The lowest cost new gold production
is all criminal, involving theft of gold from land the miners
have no property rights, done by causing harm and death to
bystanders, with protection of the criminal operations coming
from criminals who capture most of the profit from the
Estimates vary, but some believe 90% of all gold mined in
5000 years is still held by humans as property. If a method
of extracting gold from sea water at a labor cost of $300 an
ounce, the "destruction of wealth" would be many trillions of
All that's needed is a method of processing sea water that
could be built for $300 per ounce of lifetime asset life. A
$300 million in labor cost processing ship that kept working
for 30 years producing over that 30 years a million ounces of
gold would quickly drive the price of gold to $350-400. If it
doesn't, a thousand ships would be quickly built that would
add a billion ounces to the global supply in 30 years
representing 1/6th global supply after 5000 years.
Unless gold suddenly gained new uses, say dresses that
every upper middle class women had to have, and that cost
more than $300 an ounce to return to industrial gold, such
production would force the price of gold to or below labor
However, a dollar coin plated one atom thick in 3 cents of
gold will always have a value of a dollar's worth of labor.
The number of minutes of labor or the skills required for
each second of labor can change, but as long as the dollar
buys labor, it will have a dollar of value.
If robots do all the work, then a dollar becomes
meaningless. A theoretical economy of robots doing all the
work means a car can be priced at a dollar or a gigadollars,
but the customers must be given that dollar or that
gigadollars, or the robots will produce absolutely nothing.
Robots producing a million cars a month which no one has the
money to buy means the cars cost zero. To simply produce cars
that are never sold means the marginal cost is zero.
Money is a rationing mechanism to control the use and
distribution of scarce economic resources. Labor (of various
specializations) is a scarce resource, or the scarcest
resource commanding the highest price, only if other
resources are more plentiful.
There are many cases where
labor, even specialized labor, is not the critical
bottleneck, and is not the majority part of the price. E.g.
in the case of patents where the owner can charge what the
market will bear due to intellectual property enforcement. Or
any other part of actual or figurative "toll collection" with
ownership or control of critical economic means or
infrastructure. That's pure rent extraction.
Some things cost a lot *not* because of the labor involved
- a lot of labor (not spent on producing the actual good) can
be involved because the obtainable price can pay for it.
The initial allure of bitcoin has been "anonymity", until
people figured out that all transactions are publicly
recorded with a certain amount of metadata. This can be
partially defeated by "mixing services", i.e. systematic
laundering. There have also been alleged frauds (complete
with arrests) that got a lot of press in the scene, where
bitcoin "safekeeping services" (I don't quite want to say
"banks") "lost" currency or in any case couldn't return
deposits to depositors. No deposit insurance, not much in the
way of contract enforcement, etc.
Then there were stories
about computer viruses and malware targeted at stealing
account credentials or "wallet files".
FWIW, I regard bitcoin as a colossal folly intended to appeal
to crazed libertarian idiots, goldbug nutters, and criminals
and has little utility or real value. Investing in bubble gum
cards makes more sense.
April 25, 2017
Yves here. The article makes a comment in passing
that bears teasing out. The inflation that started
in the later 1960s was substantially if not entirely
the result of Lyndon Johnson refusing to raise taxes
because it would be perceived to be to pay for the
unpopular Vietnam War. Richard Nixon followed that
By Michael Bordo, Professor
of Economics, Rutgers University. Originally
Scholars and policymakers interested in the
reform of the international financial system have
always looked back to the Bretton Woods system as an
example of a man-made system that brought both
exemplary and stable economic performance to the
world in the 1950s and 1960s. Yet Bretton Woods was
short-lived, undone by both flaws in its basic
structure and the unwillingness of key sovereign
members to follow its rules. Many commentators hark
back to the lessons of Bretton Woods as an example
to possibly restore greater order and stability to
the present international monetary system. In a
recent paper, I revisit these issues from over a
half century ago (Bordo 2017).
The Bretton Woods system was created by the 1944
Articles of Agreement at a global conference
organised by the US Treasury at the Mount Washington
Hotel in Bretton Woods, New Hampshire, at the height
of WWII. It was established to design a new
international monetary order for the post war, and
to avoid the perceived problems of the interwar
period: protectionism, beggar-thy-neighbour
devaluations, hot money flows, and unstable exchange
rates. It also sought to provide a framework of
monetary and financial stability to foster global
economic growth and the growth of international
The system was a compromise between the fixed
exchange rates of the gold standard, seen as
conducive to rebuilding the network of global trade
and finance, and the greater flexibility to which
countries had resorted in the 1930s to restore and
maintain domestic economic and financial stability.
The Articles represented a compromise between the
American plan of Harry Dexter White and the British
plan of John Maynard Keynes. The compromise created
an adjustable peg system based on the US dollar
convertible into gold at $35 per ounce along with
capital controls. The compromise gave members both
exchange rate stability and the independence for
their monetary authorities to maintain full
employment. The IMF, based on the principle of a
credit union, whereby members could withdraw more
than their original gold quotas, was established to
provide relief for temporary current account
It took close to 15 years to get the Bretton
Woods system fully operating. As it evolved into a
gold dollar standard, the three big problems of the
interwar gold exchange standard re-emerged:
adjustment, confidence, and liquidity problems.
problem in Bretton Woods
reflected downward rigidity in wages and prices
which prevented the normal price adjustment of the
gold standard price specie flow mechanism to
operate. Consequently, payment deficits would be
associated with rising unemployment and recessions.
This was the problem faced by the UK, which
alternated between expansionary monetary and fiscal
policy, and then in the face of a currency crisis,
austerity – a policy referred to as 'stop-go'. For
countries in surplus, inflationary pressure would
ensure, which they would try to block by
sterilisation and capital controls.
A second aspect of the adjustment problem was
asymmetric adjustment between the US and the rest of
the world. In the pegged exchange rate system, the
US served as central reserve country and did not
have to adjust to its balance of payments deficit.
It was the
currency in the system of
currencies (Mundell 1969). This asymmetry
of adjustment was resented by the Europeans.
The US monetary authorities began to worry about
the balance of payments deficit because of its
. As official dollar
liabilities held abroad mounted with successive
deficits, the likelihood increased that these
dollars would be converted into gold and that the US
monetary gold stock would eventually reach a point
low enough to trigger a run. Indeed by 1959, the US
monetary gold stock equalled total external dollar
liabilities, and the rest of the world's monetary
gold stock exceeded that of the US. By 1964,
official dollar liabilities held by foreign monetary
authorities exceeded that of the US monetary gold
stock (Figure 1).
US gold stock and
external liabilities, 1951-1975
: Banking and Monetary
Statistics 1941‐1970, Washington DC Board of
Governors of the Federal Reserve System, September
1976, Table 14.1, 15.1.
A second source of concern was the dollar's role
to the rest of the
world. Elimination of the US balance of payments
deficits (as the French and Germans were urging)
could create a global liquidity shortage. There was
much concern through the 1960s as to how to provide
Robert Triffin (1960) captured the problems in
his famous dilemma. Because the Bretton Woods
parities, which were declared in the 1940s, had
undervalued the price of gold, gold production would
be insufficient to provide the resources to finance
the growth of global trade. The shortfall would be
met by capital outflows from the US, manifest in its
balance of payments deficit. Triffin posited that as
outstanding US dollar liabilities mounted, they
would increase the likelihood of a classic bank run
when the rest of the world's monetary authorities
would convert their dollar holdings into gold
(Garber 1993). According to Triffin when the tipping
point occurred, the US monetary authorities would
tighten monetary policy and this would lead to
global deflationary pressure. Triffin's solution was
to create a form of global liquidity like Keynes'
(1943) bancor to act as a substitute for US dollars
in international reserves.
Policies to Shore Up the System
The problems of the Bretton Woods system were
dealt with by the IMF, the G10 plus Switzerland, and
by US monetary authorities. The remedies that
followed often worked in the short run but not in
the long run. The main threat to the system as a
whole was the Triffin problem, which was exacerbated
after 1965 by expansionary US monetary and fiscal
policy which led to rising inflation.
After a spike in the London price of gold to
$40.50 in October 1960 – based on fears that John F
Kennedy, if elected, would pursue inflationary
policies – led the Treasury to develop policies to
discourage Europeans from conversing dollars into
gold. These included:
Moral suasion on Germany with the threat of
pulling out US troops;
The creation of the Gold Pool in 1961, in
which eight central banks pooled their gold
reserves in order to keep the London price of
gold close to the $35 per ounce parity price;
The issue of Roosa bonds (foreign currency
The General Arrangements to Borrow in 1961,
which was an IMF facility large enough to offer
substantial credit to the US;
Operation Twist in 1962, in which the US
Treasury bought long term debt to lower long
term interest rates and encourage investment,
while the Federal Reserve simultaneously sold
short-term Treasury bills to raise short-term
rates and attract capital inflows; and
The Interest Equalization Tax in 1963, which
imposed a tax on capital outflows.
The US Treasury, aided by the Federal Reserve,
also engaged in sterilised exchange market
The main instrument used by the Fed to protect
the gold stock was the swap network. It was designed
to protect the US gold stock by temporarily
providing an alternative to foreign central bank
conversion of their dollar holdings into gold. In a
typical swap transaction, the Federal Reserve and a
foreign central bank would undertake simultaneous
and offsetting spot and forward exchange
transactions, typically at the same exchange rate
and equal interest rate. The Federal Reserve swap
line increased from $900 million to $11.2 billion
between March 1962 and the closing of the gold
window in August 1971 (see Figure 2 and Bordo et al.
Federal Reserve swap
lines, 1962 –1973
: Federal Reserve System.
The swaps and ancillary Treasury policies
protected the US gold reserves until the mid-1960s,
and were viewed at the time as a successful policy.
The Breakdown of Bretton Woods, 1968 to 1971
A key force that led to the breakdown of Bretton
Woods was the rise in inflation in the US that began
in 1965. Until that year, the Federal Reserve
Chairman, William McChesney Martin, had maintained
low inflation. The Fed also attached high importance
to the balance of payments deficit and the US
monetary gold stock in its deliberations (Bordo and
Eichengreen 2013). Beginning in 1965 the Martin Fed
shifted to an inflationary policy which continued
until the early 1980s, and in the 1970s became known
as the Great Inflation (see figure 3).
. Inflation rates
: US Bureau of Labor
Statistics, IMF (various issues).
The shift in policy mirrored the accommodation of
fiscal deficits reflecting the increasing expense of
the Vietnam War and Lyndon Johnson's Great Society.
The Federal Reserve shifted its stance in the
mid-1960s away from monetary orthodoxy in response
to the growing influence of Keynesian economics in
the Kennedy and Johnson administrations, with its
emphasis on the primary objective of full employment
and the belief that the Fed could manage the
Phillips Curve trade-off between inflation and
unemployment (Meltzer 2010).
Increasing US monetary growth led to rising
inflation, which spread to the rest of the world
through growing US balance of payments deficits.
This led to growing balance of payments surpluses in
Germany and other countries. The German monetary
authorities (and other surplus countries) attempted
to sterilise the inflows but were eventually
unsuccessful, leading to growing inflationary
pressure (Darby et al. 1983).
After the devaluation of sterling in November
1967, pressure mounted against the dollar via the
London gold market. In the face of this pressure,
the Gold Pool was disbanded on 17 March 1968 and a
two-tier arrangement put in its place. In the
following three years, the US put considerable
pressure on other monetary authorities to refrain
from converting their dollars into gold.
The decision to suspend gold convertibility by
President Richard Nixon on 15 August 1971 was
triggered by French and British intentions to
convert dollars into gold in early August. The US
decision to suspend gold convertibility ended a key
aspect of the Bretton Woods system. The remaining
part of the System, the adjustable peg disappeared
by March 1973.
A key reason for Bretton Woods' collapse was the
inflationary monetary policy that was inappropriate
for the key currency country of the system. The
Bretton Woods system was based on rules, the most
important of which was to follow monetary and fiscal
policies consistent with the official peg. The US
violated this rule after 1965 (Bordo 1993).
The collapse of the Bretton Woods system between
1971 and 1973 led to the general adoption by
advanced countries of a managed floating exchange
rate system, which is still with us. Yet this
outcome (at least at the time) was not inevitable.
As was argued by Despres et al. (1966) in
contradistinction to Triffin, the ongoing US balance
of payments deficit was not really a problem. The
rest of the world voluntarily held dollar balances
because of their valuable service flow – the deficit
was demand-determined. In their view, the Bretton
Woods system could have continued indefinitely. This
of course was not the case, but although the par
value system ended in 1973 the dollar standard
without gold is still with us, as McKinnon (1969,
1988, 2014) has long argued.
The dollar standard was resented by the French in
the 1960s and referred to as conferring "the
exorbitant privilege" on the US, and the same
argument was made in 2010 by the Governor of the
Central Bank of China. However, the likelihood that
the dollar will be replaced as the dominant
international currency in the foreseeable future
remains remote. The dollar standard and the legacy
of the Bretton Woods system will be with us for a
'Because the Bretton Woods parities, which
were declared in the 1940s, had undervalued the
price of gold, gold production would be insufficient
to provide the resources to finance the growth of
Twenty years on from Britain's "lost decade" of
the 1920s - caused by repegging sterling to gold at
the pre-World War I parity - the same mistake was
repeated at Bretton Woods. (The US had made the
identical error in 1871, which required 25 years of
relentless deflation to sweat out Civil War
Even as the Bretton Woods conference was underway
in 1944, it went unnoticed that the US Federal
Reserve had embarked on a vast buying spree of US
Treasuries. This was done to peg their yield at 2.5%
or below, in order to finance WW II at negative real
yields. By 1945, US Treasuries (shown in blue and
orange on this chart) loomed larger in the Fed's
balance sheet than gold (shown in chartreuse):
Obviously a fixed gold price is utterly
incompatible with a central bank expanding its
balance sheet with government debt, reducing its
gold holdings to the tiny residual that they
Bretton Woods might have worked by limiting
central banks' ability to monetize gov't securities.
Or it might have worked with the gold price allowed
to float with expanding central bank assets,
according to a formula.
What was lost with Bretton Woods was fixed
exchange rates, which are conducive to trade. Armies
of traders seeking to extract rents from
fluctuations between fiat currencies are a pure
deadweight loss to the global economy.
In North America, sharp depreciations of the
Mexican and Canadian currencies against the USD are
fanning US protectionism, in forms ranging from a
proposed border wall to countervailing duties on
Canadian lumber and dairy products. What a mess.
Irredeemable fiat currencies are a tribulation
visited on humanity. When the central bank blown
Bubble III explodes in our fool faces, this insight
will be more widely appreciated.
Fiat currency is a tribulation visited on
capitalist trade advocates and their financial
International trade, which is hobbled by fiat
currencies as you say, was a rounding error in
most peoples lives until the Thatcher/Reagan
Since then that rounding error has rounded
away most of the distributive properties of the
economic systems so distorted to facilitate
capital profits through long distance trade that
they are impoverishing enough people that Brits
vote Brexit, Yanks vote Trump and French vote Le
missing from the article is the decision to
raise the price of oil in order to put most of
the 3rd world into debt slavery. This
exasperated the inflation mentioned, caused by
US deficits. Because the US was still a
manufacturing leader and the Unions were strong
– we had the wage price stagflation of the
70's,. The elites solution – Nixon went to China
– not to open up a market of a billion people
but to make use of a disciplined labor force
that would work for cheap – breaking the power
of the unions with globalisation aided by
computers. The Republicans in the US and
Thatcher in England broke the unions in the
80s.Clinton went along in the 90s. Was that plan
a factor in the decision to leave the gold
This was most interesting for its lack of regret
for losing a dollar pegged to $35 oz. gold. It is
almost a rationale for letting inflation and deficit
spending occur because in the end the system using a
reserve currency works as good as anything. I do
think the expense of the Vietnam war and the obvious
policy that it was necessary to allow inflation
(from the 70s onward) was incomplete, looking at
everything today, because it was based on an
assumption that we humans could just aggressively
keep growing our way into the future like we had
always done. Already in 1970 there were
environmental concerns, well-reasoned ones, and
global warming was being anticipated. If it had been
possible to use a hard gold standard we might not be
in this ecological disaster today, but there would
have been some serious poverty, etc. The obvious
policy today is to put our money into the
environment and fix it and by doing that put people
to work for a good and urgent cause. As opposed to
bombing North Korea; building a Wall to nowhere;
giving money to corporations which do not contribute
to repairing the planet; and impoverishing people
unnecessarily, etc. Money, in the end, is only as
valuable as the things it accomplishes.
Wrong on your poverty concept. It is the
inflation associated with a reckless fiat
monetary system that causes much of the poverty.
Prior the fiat era there was minimal inflation.
As Keynes explained in his prophetic criticism
of the Treaty of Versailles, The Economic
Consequences of the Peace, when he called
attention to Lenin, of all people:
"By a continuing process of inflation,
governments can confiscate, secretly and
unobserved, an important part of the wealth of
their citizens. By this method, they not only
confiscate, but they confiscate arbitrarily;
and, while the process impoverishes many, it
actually enriches some. The sight of this
arbitrary rearrangement of riches strikes not
only at security, but at confidence in the
equity of the existing distribution of wealth.
Those to whom the system brings windfalls . . .
become 'profiteers', who are the object of the
hatred of the bourgeoisie, whom the inflationism
has impoverished not less than the proletariat.
As the inflation proceeds . . . all permanent
relations between debtors and creditors, which
form the ultimate foundation of capitalism,
become so utterly disordered as to be almost
Lenin was certainly right. There is no
subtler, nor surer means of overturning the
existing basis of society that to debauch the
currency. The process engages all the hidden
forces of economic law on the side of
destruction, and does it in a manner which not
one man in a million is able to diagnose."
The core problem with hard currency is
the power asymmetry of the fixed interest
contract in whatever form.
Because costs are constant and growing
under such contracts, income requirements
become "sticky": in a market reverse, wage
earners, renters, mortgage holders etc are
obligated by these contracts and cannot
accept a cut in their wage unless they have
adequate financial reserves. Recessions soak
these reserves from debtors to creditors
despite the loose underwriting of creditors
in the speculative and ponzi phases of the
Minsky cycle being the root cause of the
business cycle, not profligacy or
irresponsibility by wage earners and small
business people. In a depression, this
liquidationist dynamic starts working its
way up the the industrial supply chain,
dismantling the actual means of production.
The main potential public benefit of fiat
currency is that in such conditions it costs
the state nothing to preserve the wealth of
those not implicated in causing the collapse
and to preserve those means of production.
Unfortunately, what we saw in 2008 was
Bush/Obama using the innocent victims of the
business cycle to "foam the runway" for the
institutions that caused it.
Poverty is a simple result of being cut
off from possible income sources. To the
extent that inflation is managed with what
Keynes called "a reserve army of the
unemployed", high levels of poverty are
assured. In the high wage, high cost era of
the New Deal, the intent was take what
burden of financial risk could be taken off
of workers and small producers and to
provide good paying opportunities for one
cycle's economic losers to get back on their
feet in the next cycle. But this only works
with full employment where labor has the
power to bid for a share of the overall
returns on investments.
I found this fascinating and quite
But unless you can posit the existence
of a state that will reliably act to
"preserve the wealth of those not
implicated in causing the collapse and
to preserve those means of production"
it is just a useless academic exercise.
I do not see any such state anywhere in
view, with the possible exception of the
Chinese, who seem to understand
"preserving the means of production" as
a state priority. For the West however
that idea is a real howler.
At what point would China, for example, be able
to assert more of a reserve currency, or at least
alternative, role based on its economic and trade
power and build-up of hard and financial assets? Or
is their near-term internal surplus recycling
through uneconomic lending enough to keep them
off-balance for quite a while on the world financial
stage? Many in the West are watching the development
of the One Belt/One Road infrastructure and shifting
country linkages and alliances with grave concern.
The key to reserve status is large external
holdings of your monetary instruments: for
foreigners to transact in your currency they
must have it. China, thus far, fails profoundly
on this count, no one has its currency.
The inverse of this is that the best way for
the US to end the dollars reserve status is to
eliminate the "National Debt", which is in fact
nothing other than the inventory if dollar
instruments the rest of the world holds in order
to be able to spend dollars into our system:
eliminate that inventory and the dollar will no
longer be a reserve currency.
This raises the large question of whether
"reserve status" is actually beneficial.
Apparently it consists largely of being
enormously in debt – and in fact, it's been
a way for Japanese and Chinese to buy up
large chunks of our "means of production."
The prosperity of my original home town,
Columbus, IN, rests on Japanese
"investment." It does mean some good
Japanese restaurants in town.
To me the question is, who benefits
from it? It has been of great benefit to
a very particular set of people here in
the US and quite destructive since the
70s to most everyone else.
It is a power relationship that has
been used for imperial aims rather than
for the good of citizens. It needn't be
that way, but as US power has become
increasingly unaccountable its abuse of
this particular tool has grown.
The concept of a reserve currency came
about from resolution 9 of the Genoa
Monetary Conference of 1922. The idea was
that any currency that was convertible to
gold was de facto equivalent to gold and
therefore an acceptable central bank reserve
asset. In other words there is really no
such thing as an international reserve
currency without gold in the system
according to the very reasoning that
established the idea. The U.S. pulled off
the greatest bait and switch in history when
it "suspended" the gold window in 1971. The
whole system because an enormous debt based
Ponzi scheme after that and we are now
dealing with the consequences.
And yes the key to reserve status: is
large external holdings of your monetary
instruments for foreigners to transact in".
But what incentive do they have to hold such
a currency and transact in it? Remember they
don't need it since they generally run trade
surpluses. The answer was, because that
currency was convertible to gold. What about
now when it is not tied to gold? Why hold
the currency of profligate debtor nation?
Answer provided in post below.
And anyone who thinks that running large
trade and budget deficits is the secret to
reserve currency status is a moron.
Argentina or Paraguay could just as easily
produce the necessary surplus liquidity
under that logic.
yes, but why would the central
bank endlessly collect another
And you inadvertently point out
one of the key frauds in the system.
The dollar supports a double pyramid
of credit, one domestic and the
other foreign. There is also a third
pyramid of credit, the euro dollar
market, which is built on top of the
U.S. domestic pyramid of credit, but
lets ignore that for now.
So "they" give us real stuff made
of raw material and labor inputs and
we give them wampum!!! Greatest scam
"The dollar supports a double
pyramid of credit, one domestic
and the other foreign. "
Except the PBoC prints the
Many Yuan to buy dollars from
the Chinese banking system. The
value of the Many Yuan is backed
by sales of exports, in that
case. A tiny little subset where
MMT (The imaginary version) is
actually in force. Then the PBoC
buys our debt with these foreign
reserves, which we wisely spend
on our country and citizens.
Next, the Chinese banking
system, thru the power of The
Money Multiplier, uses that base
money to make loans and expand
credit to Chinese.
" The value of the Many
Yuan is backed by sales of
exports, in that case."
WTF? The value the "Many
Yuan" is backed by the sale
of exports which yields
wampum, uh I mean dollars,
and they purchase the
dollars with the many yuan
they created. The PBoC
expands its balance sheet to
buy those dollars with yuan
created from nothing, hence
the double pyramid of
credit. The dollars get lent
back to us in the form of
U.S. government securities
because we issue the word's
And yes you can run a
system like this; for how
long? That is the big
And you have misunderstood
what those reserves are for. The
Fed also can't spend all of
those US assets it holds on its
balance sheet either, now can
The use of foreign currency
reserves is to defend the
currency and keep the IMF away.
Having a currency depreciate
rapidly leads to a big inflation
spike (unless you are close to
being an autarky) due to the
prices of foreign goods, in
particular commodities, going up
in your currency.
China is not self sufficient
in a whole bunch of things,
including in particular energy.
It had a spell last year when
it was running through its FX
reserves at such a rate that it
would have breached the IMF
trouble level for an economy of
its size if it had persisted for
4-6 months more.
A chemist, a physicist and
economist are ship wrecked on a
deserted island with only some
canned goods for food. They sit down
to figure out how they are going to
open the cans. To which the
economist says: "assume we have a
Three MMT Economists are
stranded on a desert island.
They say, "WTF's a can
opener? That sounds like work!"
and live 3 months and are then
rescued by Skipper, Gillian,
Mary Ann and the Perfesser too,
on an Easter Break Tour. Ginger
and Mr. Howe are downstairs busy
downstairs knocking up.
They are living happily ever
after in Kansas City, Mo.
The euro isn't one due to the mess its
banking system is in. Japan doesn't want the
job and in any event is a military
protectorate of the US.
China is a minimum of 20 years away. Even
though it would like the status of being the
reserve currency, it most decidedly does not
want the attendant obligations, which are
running ongoing trade deficits, which is
tantamount to exporting jobs. Maintaining
high levels of employment and wage growth
are the paramount goals for China's leaders.
There are underreported riots pretty much
all the time in China due to dissatisfaction
over labor conditions now. The officialdom
is not going to commit political suicide.
Domestic needs always trump foreign goals.
Just getting around to reading Piketty's
doorstopper and was struck by his argument that
prior to WWI there had been very little inflation
worldwide for centuries. It was the need to pay off
all the war debt that shook things up.
Graeber's book on debt also makes the argument
that money as physical circulating metal currency
came about because of the need to pay for wars.
Something similar seems to have been going on
with the Bretton Woods agreement.
I know it's crazy but I'm just going to throw it
out there – maybe if we'd like a more stable economy
we could try starting fewer very destabilizing,
extremely expensive wars???
That is exactly my thought. There is a
disturbing cycle of war, monetary expansion to
pay for the war, post-war deflation leading to
political instability, leading to a repeat of
the cycle, at least in Europe and the U.S.
One can see this even in the period between
the creation of the Bank of England through the
end of the Napoleonic wars.
It is evident as well in the United States
pre- and post-Civil war.
Deficit hawks never seem to have a problem
with war-time deficit spending, only general
welfare deficit spending.
We could have a system where the fiscal power
of the state is fully harnessed for the general
welfare, but that would threaten the current
system which allows a small minority to
overwhelmingly reap the benefits of the money
creation power of the state and private banks.
This renders the issue a political one more
than a purely economic one. If history is any
guide, we will continue to have the kind of
political uncertainty we've experienced until
there has been enough war spending to start the
cycle over again. :(
" The inflation that started in the later 1960s
was substantially if not entirely the result of
Lyndon Johnson refusing to raise taxes "
I'm almost afraid to ask, but how does this make
sense? Any increase in taxes will be passed on to
the consumer to increase prices even more. If you
doubt this, watch what Trump's import taxes do to
No, you have been propagandized by the right
wing anti tax people.
Taxes drains demand from the economy. Lower
demand means more slack, more merchants having
to compete with each other, some headcount cuts,
By deficit spending in an economy that was
already at full employment, Johnson basically
guaranteed inflation. Both his own former
economist, Walter Heller, and Milton Friedman
warned against it. But because Heller was a Dem
and an outlier (most Dems weren't gonna
challenge their own party's policies), it was
Friedman's warnings that were publicized.
Another subject that is relevant to the current
post 2008 collapse and FED shenanigans to save the
day. i.e. save their cronies. And what it is
completely missing in this piece written by the
insiders is exactly that Bretton Woods; Cui
Bono:namely US ruling elite and new world order
Bretton Woods was a monetary session of the
overall conference 1944-1945 of new world order
namely a formal switch from British empire global
dominance system into American global dominance
system and trade/monetary policies were just an
important but small part of overall new global
political and military arrangement.
Global pound was killed, global dollar has been
created and blessed by western sphere of influence
and defended by supposedly the most powerful US
militarily in the world, [as was British navy
before] US military of global reach via US navy and
The political symbolism of Bretton Woods
conference correlated with invasion of Normandy in
June 1944, the last step in defeating Nazism in
Europe cannot be understated.
Also the dominance of two figures of White and
Keynes in this conference is an exemplification of
closing era of British empire as a world [decaying
at that time] leader which was accelerated by the
role of Japanese and German/Italian aggression in
colonial Asia, Africa [also helped by French
surrender to Nazis that spurred western support for
independent French colony of Algeria] and ME boosted
up the anti-colonial movements and political
parties, which like in Vietnam even US supported
Little known fact is that Nazis championed
themselves as anti-colonial force in ME while they
attempted to colonize eastern Europe.The many Arabs
fell for this propaganda siding with Nazis against
British colonialism in Palestine setting themselves
against Jews vehemently anti Nazi at that time.
In other words Bretton Woods was a consequence of
the fact that British empire was collapsing fast
ironically with the help of its allies and that
Included Soviets. Also helped that British were
broke and all the British Gold was already in the US
as a payment for bankrolling British defenses in
Europe since 1940 and elsewhere, so were Soviet gold
payments for military technology and materiel they
received from US and allies.
The political void had to be filled or it would
have been filled by Soviets, and hence the Bretton
Woods system was not based on unfettered
exploitation of slaves of newly expanded US empire
what US Oligarchy would have liked and was freely
practicing before 1929, but for ideological reason
was aimed for economic improvements in order to stem
massive anti-capitalist, communist and anti-colonist
movements that threatened western hegemony over the
world and hence the dreaded anti-capitalist words
used by in Bretton Woods system like fixed exchange
rate or blasphemous capital controls, things the
would crucify you if you utter them today during a
seminar in any Ivy league economy department.
Bretton Woods was primarily a tool into an
ideological war west and Soviets knew they would
have to fight, cold or hot.
This [economic dominance] war ended in mid
nineteen sixties when seeds of collapse of Soviet
Union and betrayal of leftist ideals and
socialist/communists movements all over the world
were sawed and hence Bretton Woods was no longer
needed and brutality of unfettered capitalist could
begin to return starting with Kennedy tax cut
freeing capital in private hands and then FED going
full fiat in later 1960-ties, capital flow
deregulation, free floating currencies, all that for
benefit of oligarchic class and of colossal
detriment to American workers, devastating result of
which we are experiencing now.
One of the great ironies of Bretton Woods is
that Harry Dexter White, the US rep at the talks
was in fact a Soviet agent. I wonder if he
understood monetary economics enough to hope
that the Bretton Woods gold standard system, as
opposed to Keynes bancor proposal, would self
immolate with a run on US gold stocks and take
the West down with it.
Let's think of "root causes", both Keynes
and White were big fans of Soviet-style
command and control top-down planned
economies ("I have seen the future and it
works!"). So that's what they divined and
devised for money: a top-down price-fixing
So while people would laugh themselves
silly if you told them we were going to
price things the way the Soviets did ("we'll
raise X number of cows because we'll need Y
quantity of shoe leather"), we somehow
accept central planning for the price of the
most important item of all: money itself.
The supreme geniuses at the Fed et al, with
their supreme formulae, can divine at any
moment precisely what the price of money
should be. This, of course, is folly.
And people should understand that the
gold standard (not the gold-exchange
standard it is often confused with) was not
designed, was not somehow imposed, and was
not agreed upon by some collective body. It
simply arose organically because time and
again through painful experience throughout
history it was shown that any system where
people can simply vote themselves more money
ends in tears. Not usually, but always.
You'd think that a 100% historical failure
rate would clue people in to rethink the
And as Dr. Haygood points out above,
"everything floating against everything
else" is nothing but a colossal waste of
time and money. You wouldn't attempt to
build or make something without an agreed
and immutable unit of measure.
Keynes ran the UK treasury twice more
or less along classical lines: in favor
of industrial capitalism and against
financial rents. Not top down, not
Soviet. Its not clear where you get your
facts, fiat systems have lasted hundreds
of years many times. They tend to arise
in empires with secure borders. They
depend on the productive relations of
their societies for the value of their
money rather than a commodity hedge.
Warfare favors the commodity hedge
because the productive relations in a
society are frequently destroyed by war.
Because of the stickyness of wages, hard
currency tends to choke economic growth
because a fixed money supply has to be
spread increasingly thin as more real
wealth is created to be denominated with
a fixed quantity of specie, requiring
wages to drop because there is more
stuff to purchase.
Each has benefits and costs, both are
tools and while the one favors growth
and the other war, neither must be used
for either. A representative system will
use either as its constituencies direct,
an authoritarian one according to the
intent of the authority. It isn't tools
that make the problems, though some are
better for some purposes than others. It
is the intent of the powerful that is
expressed and from which others suffer.
@jsn " fiat systems have lasted
hundreds of years many times."
what? can you please back that
statement up. Only major fiat system
in history that I have ever seen
written about is the one that
existed in China several hundred
years ago. If there were others you
need to give some examples.
I think you objected to my
comments without actually refuting
1. We have a top-down price fixing
2. Keynes and White were a big fans
of Soviet central planning (see The
Battle for Bretton Woods for chapter
3. And I've never understood the
"fixed quantity of specie" argument.
Surely it's about price, not
physical quantity. You could easily
run the world economy on 100 tons of
gold if it was priced accordingly.
Michael Hudson's book Superimperialism, published
astonishingly in 1972, nailed it. Details some great
history of FDR's economic diplomacy during the late
Depression and WW2 period that preceded the Bretton
Woods settlement. Worth a read.
"However, the likelihood that the dollar will be
replaced as the dominant international currency in
the foreseeable future remains remote. The dollar
standard and the legacy of the Bretton Woods system
will be with us for a long time."
That is the BIG question and the answer remains
to be seen. I for one don't believe it will continue
much longer, but then again nobody knows. Bordo also
leaves out a critical part of the narrative, i.e.,
the U.S. secret deal with Saudi Arabia in 1974 to
officially tie the dollar to oil. See link below for
details. Without this secret arrangement the dollar
would have never survived as the international
reserve currency. The Saudis reportedly pushed for
greater use of the SDR, but the U.S. made them a
deal they couldn't refuse and the Saudi royal family
realized that if they didn't go along with U.S.
demands the CIA would find some other branch of the
family that would.
The system is a mess and it is retarded to allow
one country's currency to serve as the main reserve
asset for the system. That is the ultimate free
lunch and the equivalent to believing in a perpetual
motion machine. It is hard to believe in can
continue much longer despite of Bordo's view that it
will. It has reached a point where it has created
massive problems that can not continue.
It is almost a gift from heaven when fixing a
single problem offers the chance to fix a whole
bunch of them. This IMHO is very possibly one of
those gifts. Without this "ultimate free lunch"
the globalization scam of allowing this
country's and the world's 1% to keep adding
zeros to their bank accounts ("to keep score" as
Pres. Trump puts it) would not have been
possible. Without countries like Saudi Arabia
willing to keep accepting more "debt that can't
be repaid (and) won't be", the US military
industrial complex would not be able to keep
increasing its threat to world peace and
threatening the survival of humanity. Without
the Saudi stranglehold over politics and US
Middle Eastern policy the US could stop killing
Muslims in its bogus 'war on terror'. It could
get busy replacing its fossil fuel energy
sources with renewable ones and its oil-powered
transportation system with an electrified one
(yes, maybe even a few EVs)
It is hard to believe in can continue
much longer despite of Bordo's view that it
And yet where is the dollar's replacement?
If you'd told me ten years that the
petrodollar as an institution enforcing
compliance w. the dollar as global reserve
currency could end and yet the dollar would
continue with that status, I'd have laughed at
you. However, that increasingly looks like it
Yes, yes, I know - we await the basket of
currencies solution pushed by China and Russia,
and others sick of the situation. We've been
waiting for a while now.
I'm thinking globalization has something
to do with the dollar's longevity. Strip a
country of the ability to support itself by
exporting its jobs and it's people become
dependent on a strong military to insure
it's money continues to be "accepted" even
when it's people no longer have anything to
trade for what they really need.
@Moneta, these numbers are
roughly correct. The U.S. defense
budget is about $600 billion, the
trade deficit is about $600 billion
and last year we issued $1.4
trillion in incremental debt.
Foreigners own about 40% of U.S.
debt. 40% of of $1.4 trillion is
$560 billion so yes there is a
pretty strong correlation. Massive
defense budget wouldn't be possible
without reserve currency scam.
Canada which was one of the founding members of
Bretton Woods pulled out as early as 1949 in order
to move to a floating exchange rate and full capital
mobility. Bretton Woods was dead before it ever
If the Federal Reserve can create trillions of dollars with a single keystroke, and the Fed
is the government's bank, then why does President Obama claim we've "run out" of money?
Why have Democrats and so-called progressives supported job-killing budget cuts in the name
of "shared sacrifice"? Why are we throwing away the equivalent of $9.8 billion in lost output
every single day? Why don't we do something about our $2.2 trillion infrastructure deficit, 25
million underemployed and unemployed Americans, 100 million Americans in or very near poverty,
and so on?
The answer is simple. Most of us don't understand the monetary system. Instead of deciding
how the government should wield its power over the dollar, we live in fear of the ratings agencies,
the Chinese, the bond market vigilantes and other imaginary evils. And this holds all of us back.
Unused resources abound, human needs go unmet, and the vast majority of Americans believe that
'There Is No Alternative' (TINA). Or, as Warren Mosler says, "Because we fear becoming the next
Greece, we're turning ourselves into the next Japan."
There is an alternative. And it begins with an understanding of the monetary system. The cat
is already out of the bag. Chairman Bernanke confirms it. Money is no object.
the people here have been brainwashed and can not think for themselves. If it has not been approved
by their favorite academic, it is a crank theory. they'd rather believe in fairy tales like NGDP
level targeting - the fed will wish it into reality. Rather than pay attention to the MMT that
you and I subscribe to.
Moreover it is logical for them to stick to the "the Fed is omnipotent" as it bids up asset prices
and maintains the status quo. It vests more power in the institutions that benefit the people
you see here.
Blame the right, blame the deregulators, blame the tax cutters, blame the liberatarians, etc.
that is the how they maintain the status quo. And Mosler is right on - Bernanke turned us into
Japan trying to save us from that fate. And he is sliding down the rabbit hole - "I should have
doubled down on my failed strategy"
why? because he was able to bid up the stock market? I bet you everyone of the Fed worshippers
here benefit personally from the asset price binges that the stupid Fed has gotten us addicted
Per Rubin and his cronies in the Wall Street banking cartel, the Fed is fine as it is...serving
the interests of the Wall Street banking cartel. The cartel has a good think going...why disrupt
it by taking into account the public good?
Has Rubin ever done anything in the interest of the public?
China and Currency Values: Fast Growing Countries Run
I don't generally comment on pieces that reference me, but
Jordan Weissman has given me such a beautiful teachable
moment that I can't resist. Weissman wrote * about Donald
Trump's reversal on his campaign pledge to declare China a
currency manipulator. Weissman assures us that Trump was
completely wrong in his campaign rhetoric and that China does
not in fact try to depress the value of its currency.
"It's pretty hard to argue with that. Far from devaluing
its currency, China has actually spent more than $1 trillion
of its vaunted foreign reserves over the past couple of years
trying to prop up the value of the yuan as investors have
funneled money overseas. There are some on the left, like
economist Dean Baker, who will argue that Beijing is still
effectively suppressing the redback's value by refusing to
unwind its dollar reserves more quickly. But if China were
really keeping its currency severely underpriced, you'd
expect it to still have a big current account surplus,
reminiscent of 10 years ago, which it doesn't anymore."
Okay, to start with, I hate the word "manipulation" in
this context. China isn't doing anything in the dark of the
night that we are trying to catch them at. The country pretty
explicitly manages the value of its currency against the
dollar, that is why it holds more than $3 trillion in
reserves. So let's just use the word "manage," in reference
to its currency. It is more neutral and more accurate.
It also allows us to get away from the idea that China is
somehow a villain and that we here in the good old US of A
are the victims. There are plenty of large U.S. corporations
that hugely benefit from having an under-valued Chinese
currency. For example Walmart has developed a low cost supply
chain that depends largely on goods manufactured in China. It
is not anxious for the price of the items it imports rise by
15-30 percent because of a rise in the value of the yuan
against the dollar.
The same applies to big manufacturers like GE that have
moved much of their production to China and other developing
countries. These companies do not "lose" because China is
running a large trade surplus with the United States, they
were in fact big winners.
Okay, but getting back to the issue at hand, I'm going to
throw the textbook at Weissman. It is not true that we should
expect China "to still have big current account surplus" if
it were deliberately keeping its currency below market
China is a developing country with an annual growth rate
of close to 7.0 percent. The U.S. is a rich country with
growth averaging less than 2.0 percent in last five years.
Europe is growing at just a 1.0 percent rate, and Japan even
more slowly. Contrary to what Weissman tells us, we should
expect that capital would flow from slow growing rich
countries to fast growing developing countries. This is
because capital will generally get a better return in an
economy growing at a 7.0 percent rate than the 1-2 percent
rate in the rich countries.
If capital flows from rich countries to poor countries,
this means they are running current account surpluses. The
capital flows are financing imports in developing countries.
These imports allow developing countries to sustain the
living standards of their populations even as they build up
their infrastructure and capital stock. In other words, if
China was not depressing the value of its currency we should
it expect it to be running a large trade deficit.
This is actually the way the world worked way back in the
1990s, a period apparently beyond the memory of most
economics reporters. The countries of East Asia enjoyed
extremely rapid growth, ** while running large trade
deficits. This all changed following the East Asian financial
crisis and the disastrous bailout arranged by Secretary of
Treasury Robert Rubin and friends. *** Developing countries
became huge exporters of capital as they held down the value
of their currencies in order to run large trade surpluses and
build up massive amounts of reserves.
But Weissman is right that China is no longer buying up
reserves, but the issue is its huge stock of reserves. As I
explained in a blogpost **** a couple of days ago:
"Porter is right that China is no longer buying reserves,
but it still holds over $3 trillion in reserves. This figure
goes to well over $4 trillion if we include its sovereign
wealth fund. Is there a planet where we don't think this
affects the value of the dollar relative to the yuan?
"To help people's thought process, the Federal Reserve
Board holds over $3 trillion in assets as a result of its
quantitative easing program. I don't know an economist
anywhere who doesn't think the Fed's holding of assets is
still keeping interest rates down, as compared to a scenario
in which it had a more typical $500 billion to $1 trillion in
"Currencies work the same way. If China offloaded $3
trillion in reserves and sovereign wealth holdings, it would
increase the supply of dollars in the world. And, as Karl
Marx says, when the supply of something increases, its price
falls. In other words, if China had a more normal amount of
reserve holdings, the value of the dollar would fall,
increasing the competitiveness of U.S. goods and services,
thereby reducing the trade deficit."
So, there really are no mysteries here. China is holding
down the value of its currency, which is making the U.S.
trade deficit worse. It is often claimed that they want their
currency to rise. That may well be true, which suggests an
obvious opportunity for cooperation. If the U.S. and China
announce a joint commitment to raise the value of the yuan
over the next 2-3 years then we can be fairly certain of
accomplishing this goal.
This should be a very simple win-win for both countries.
Walmart and GE might be unhappy, but almost everyone else
would be big winners, especially if we told them not to worry
about Pfizer's drug patent and Microsoft's copyright on
It is unfortunate that Donald Trump seems closer to the
mark on China and trade than many economists and people who
write on economic issues for major news outlets. Today,
Eduardo Porter gets things partly right in his column *
telling readers "Trump isn't wrong on China currency
manipulation just late." The thrust of the piece is that
China did in fact deliberately prop up the dollar against its
currency, thereby causing the U.S. trade deficit to explode.
However, he argues this is all history now and that China's
currency is properly valued.
Let's start with the first part of the story. It's hardly
a secret that China bought trillions of dollars of foreign
exchange in the last decade. The predicted and actual effect
of this action was to raise the value of the dollar against
the yuan. The result is that the price of U.S. exports were
inflated for people living in China and the price of imports
from China were held down.
Porter then asks why the Bush administration didn't do
anything when this trade deficit was exploding in the years
2002–2007. We get the answer from Eswar Prasad, a former
I.M.F. official who headed their oversight of China:
"'There were other dimensions of China's economic policies
that were seen as more important to U.S. economic and
business interests,' Eswar Prasad, who headed the China desk
at the International Monetary Fund and is now a professor at
Cornell, told me. These included 'greater market access,
better intellectual property rights protection, easier access
to investment opportunities, etc.'"
Okay, step back and absorb this one. Mr. Prasad is saying
that millions of manufacturing workers in the Midwest lost
their jobs and saw their communities decimated because the
Bush administration wanted to press China to enforce Pfizer's
patents on drugs, Microsoft's copyrights on Windows, and to
secure better access to China's financial markets for Goldman
This is not a new story, in fact I say it all the time.
But it's nice to have the story confirmed by the person who
occupied the International Monetary Fund's China desk at the
Porter then jumps in and gets his story completely 100
"At the end of the day, economists argued at the time,
Chinese exchange rate policies didn't cost the United States
much. After all, in 2007 the United States was operating at
full employment. The trade deficit was because of Americans'
dismal savings rate and supercharged consumption, not a cheap
renminbi. After all, if Americans wanted to consume more than
they created, they had to get it somewhere."
Sorry, this was the time when even very calm sensible
people like Federal Reserve Board Chair Ben Bernanke were
talking about a "savings glut." The U.S. and the world had
too much savings, which lead to a serious problem of
unemployment. Oh, we did eventually find a way to deal with
Anyone remember the housing bubble? The demand generated
by the bubble eventually pushed the labor market close to
full employment. (The employment rate of prime age workers
was still down by 2.0 percentage points in 2007 compared to
2000 - and the drop was for both men and women, so skip the
problem with men story.)
Yeah, that bubble didn't end too well. So much for
Porter's no big deal story.
But what about the present, are we all good now?
Porter is right that China is no longer buying reserves,
but it still holds over $3 trillion in reserves. This figure
goes to well over $4 trillion if we include its sovereign
wealth fund. Is there a planet where we don't think this
affects the value of the dollar relative to the yuan?
To help people's thought process, the Federal Reserve
Board holds over $3 trillion in assets as a result of its
quantitative easing program. I don't know an economist
anywhere who doesn't think the Fed's holding of assets is
still keeping interest rates down, as compared to a scenario
in which it had a more typical $500 billion to $1 trillion in
Currencies work the same way. If China offloaded $3
trillion in reserves and sovereign wealth holdings, it would
increase the supply of dollars in the world. And, as Karl
Marx says, when the supply of something increases, its price
falls. In other words, if China had a more normal amount of
reserve holdings, the value of the dollar would fall,
increasing the competitiveness of U.S. goods and services,
thereby reducing the trade deficit.
At the beginning of the piece, Porter discusses the
question of China's currency "manipulation." (I would much
prefer the more neutral and accurate term "currency
management." There is nothing very secret here.) He tells
"It would be hard, these days, to find an economist who
feels China fits the bill."
Perhaps. Of course it would have been difficult to find an
economist who recognized the $8 trillion housing bubble, the
collapse of which wrecked the economy. As the saying goes,
"economists are not very good at economics."
Dr Krugman ignored another wrinkle in France leaving the euro; the euro
While GB joined the EU, it retained the british pound. So, Brexit won't
affect it monetarily. France, on the other hand, did convert to the euro
(in hindsight, another enormous mistake). Each euro has an identifier, similar
to how we designate the origin by Fed Reserve, which designates it's country
So, should France leave the EU, would euros held by, say, someone in
Italy then become worthless? This isn't someone most people concern themselves
with. When was the last time someone on this blog check to see which dollars
in your wallet came from the Denver Fed? But, it may well be that the EU
would stop honoring French euros, should they leave.
Interesting conjecture, but a Euro printed in France belongs to the Euro
Area rather than to France in the same way that a dollar printed in Denver
belongs to the United States. There is by the way, to my understanding,
no treaty provision describing how any country in the Euro Area might leave.
"Start with the euro. The single currency was and is a flawed project, and
countries that never joined – Sweden, the UK, Iceland – have benefited from
the flexibility that comes from independent currencies. There is, however,
a huge difference between choosing not to join in the first place and leaving
Okay, but then the bank reserves
which are held at the Fed by law could be defined as part of "outside money", because they
aren't backed by anything in the private economy. Those reserves are established, or insisted
upon, by government fiat, in essence. We know those reserves are not really backed by a precious
metal or anything else but faith. So why are bank reserves held at the Fed not included in
the definition of "outside money"?
From the standpoint of the private
economy, reserves are 'outside money", because they circulate only within the Fed system. Currency
is inside money because it circulates within the private economy, although it also circulates
between government and private banks.
The monetary base is both currency and reserves.
So it takes a clear understanding of the purpose of the discussion and maybe even a Venn
JF, Sorry, I only meant that
the minimum reserves are established by the decree of the public-private partnership known
as the central bank. So I was using "fiat" in the sense of "law". I should not have written
that the bank reserves are established by gov't "fiat" in a discussion about money, because
that is confusing.
And the reason for this law is to make sure that banks can cover their
needs for cash, to prevent a run on the banking system.
But what this means, is that the ultimate foundation of part of the individual's trust in
the money that is used, is based upon the existence of the requirement for bank reserves. Otherwise,
people wouldn't trust the money supply. The trust is not based on any function more basic than
What else do people trust? Well of course people already trust paper notes and coins in
daily transactions: they automatically suppose that the gov't backs it up. Backs it up, with
what?, they do not know; but it works. And for checks and debits, they suppose that the bank
is good for the cash -- which ultimately is based on the reserve requirement. So therefore,
"trust" of money by the common folk is presently based upon 2 things, the existence of currency
and the (vaguely understood yet reassuring) existence of bank reserves.
Well, the "money base" is defined as reserves + cash & coin. However, this seems to me to
be the same definition as "outside money". So I am still wondering if there is another difference
between the definitions.
Certainly people think of gold & silver as money, but if that is the only difference between
"monetary base" and "outside money", I think it would be easy to alter the definition of "currency"
to include them.
"... Probably the biggest single factor was public employment was savagely cut during the Obama presidency which would have kept economic activity higher at a fairly cheap cost. ..."
"... the owning/lending class tends to dislike inflation for some reason... ..."
"... I think this is highly dependent on one's understanding of "equitable". Monetary policy can be used in a way that ensures safe income streams to those who already own many financial assets. Some people think that is how it should be and therefore "equitable". ..."
"The central bank remains important for useful tasks - the clearing of checks, the replacement of
worn and dirty banknotes, as a loan source of last resort. These tasks it performs well.
With other public agencies in the United States, it also supervises the subordinate commercial
banks. This is a job which it can do well and needs to do better. In recent years the regulatory
agencies, including the Federal reserve, have relaxed somewhat their vigilance. At the same time
numerous of the banks have been involved in another of the age-old spasms of optimism and feckless
expansion. The result could be a new round of failures. It is to such matters that the Federal Reserve
needs to give its attention.
These tasks apart, the reputation of central bankers will be the greater, the less responsibility
they assume. Perhaps they can lean against the wind - resist a little and increase rates when the
demand for loans is persistently great, reverse themselves when the reverse situation holds.
But, in the main, control must be - as it was in the United States during the war years and the
good years following - over the forces which cause firms and persons to seek loans and not over whether
they are given or not given the loans."
-From "Money: Whence it came,Where it went" 1975 - pgs 305,6.
[Mariner Eccles explained it
way back in the 1930's:]
"Pushing on a String: An Origin Story
There's a long-standing metaphor in monetary policy that the central bank "can't push on
a string." It means that while a central bank can certainly slow down an economy or even drive
an economy into recession with an ill-timed or too-large increase interest rates, the power
of monetary policy is not symmetric.
When a central bank reduces interest rates in an attempt to stimulate the economy, it may
not make much difference if banks don't think it's a good time to lend or firms and consumers
don't think it's a good time to borrow. In other words, monetary policy is like a string with
which a central bank can "pull" back the economy, but pushing on a string just crumples the
The "can't push on a string" metaphor appears in many intro-level economics texts.
It has also gotten a heavy work-out these last few years as people have sought to understand
why either economic output or inflation wasn't stimulated more greatly by having the Federal
Reserve's target interest rate (the "federal funds" rate) near zero percent for going on seven
years now, especially when combined with "forward guidance" promises that this policy would
continue into the future and a couple trillion dollars of direct Federal Reserve purchases
of Treasury debt and mortgage-backed securities.
The first use of "pushing on a string" in a monetary policy context may have occurred in
hearings before House Committee on Banking and Currency on March 18, 1935, concerning the proposed
Banking Act of 1935. Marriner Eccles, who was appointed Chairman of the Fed in 1934 and served
on the Board of Governors until 1951, was taking questions from Rep. Thomas Alan Goldsborough
(D-MD) and Prentiss M. Brown (D-MI). The hearings are here; the relevant exchange is on p.
377, during a discussion of what the Fed might be able to do to end deflation."
It is not that monetary policy
is entirely ineffective at stimulating demand, but that its effects are very limited according
to the very narrow channels in which its effects are most pronounced, intermediation risks,
widening the term spread or yield curve, and making short term business loans and related prime
rate small short term loans. It does next to nothing towards reducing credit rationing by financial
institutions after a shock, which would be highly stimulative compared to just lowering the
FFR. Purchase of the riskiest assets by the Fed was probably most effective at reducing credit
rationing since it lowered the risk of bank loan portfolios. Just buying up safe assets had
mixed results on lowering long term interest rates, but was more successful on that than reducing
Tight money means credit rationing.
Cheap money does not necessarily get looser. Yes, widening the term spread helps loosen, but
narrowing the term spread does not. Other forms of monetary policy such as government loan
guarantees on small business loans loosen money more than QE.
Because you're wrong and misleading.
The Fed does the minimal amount of experimental unconventional policy - always paranoid over
inflation - while Congress forces unprecedented fiscal austerity on the economy. I'd say monetary
policy works. Doesn't mean fiscal policy doesn't work better.
I don't think it is as simple
as you have outlined here. Debt as a percentage of GDP has doubled since 2009 so that has provided
Probably the biggest single factor was public employment was savagely cut
during the Obama presidency which would have kept economic activity higher at a fairly cheap
"Debt as a percentage of GDP
has doubled since 2009 so that has provided some relief."
The largest difference was there was little to no Federal aid to the states which had to
run balanced budgets.
We can all agree after the ARRA ran its course, there was massive, unprecedented austerity
forced on the economy by Republicans, just as in the UK and we see the results when central
banks didn't do enough unconventional policy to fully offset it.
A crappy recovery and the election of Trump/Brexit.
I think this is highly dependent
on one's understanding of "equitable". Monetary policy can be used in a way that ensures safe
income streams to those who already own many financial assets. Some people think that is how
it should be and therefore "equitable".
I have no idea how monetary policy with its currently defined policy tools can be used effectively,
by itself, to redistribute wealth in the other direction, which is probably most people's understanding
If it was, by itself, able to cause large jumps in inflation, that might feed back into
rapidly rising nominal wages and large losses to the current holders of financial assets like
bonds and loan books. That might be considered more "equitable" to some, but current limitations
on monetary policy prevent it from creating inflation all by itself.
"... When the Federal Reserve lowered interest rates to close to zero during the financial crisis, it was an extraordinary move. The central bank had hit the limits of conventional monetary policy, leaving the recovery to sputter along with less help than it needed ..."
"... A new study suggests that near-zero interest rates - accompanied by a lackluster recovery - may become a common occurrence. ..."
" When the Federal Reserve lowered interest rates to close to zero during the financial
crisis, it was an extraordinary move. The central bank had hit the limits of conventional monetary
policy, leaving the recovery to sputter along with less help than it needed ."
This is a huge lie. The Fed did not do what it could have done. It did the minimal amount possible,
always afraid of setting off inflation. The Fed said it delivered the recovery it wanted. It gave
the economy exactly the help the Fed thought it needed. Then why the dishonesty from Wulfers.
It's the kind we get from PGL the Facile.
Why did the Fed deliver a lame recovery is the question Wolfers should be asking, but it's
the kind of thing mainstream economists like him and PGL avoid. It's class war.
" A new study suggests that near-zero interest rates - accompanied by a lackluster recovery
- may become a common occurrence.
That's troubling for many reasons. If the Fed can't cut rates as much as required to fight
a slowing economy, then recessions will become more common and more painful. It suggests an urgent
need to reconsider how we will counter the next bout of bad economic news, preferably before it
arrives. If monetary policy won't be enough, perhaps fiscal policy will be. Certainly, this is
no time for complacency."
Yes fiscal policy would help deliver a better recovery as the Fed has repeatedly said, but
again Wolfers is misleading his readers. The Fed could do more. It's not out of bullets. It's
raising rates. Wolfers is really doing a disservice to his readers in an apparent attempt to talk
up fiscal policy in a dishonest way. WTF.
"But when normal interest rates are closer to 3 percent, the Fed can cut rates only a few times,
because rates can only go so low - perhaps as low as zero, maybe a tad lower. This means that
in even a typical downturn, the Fed may be unable to cut rates as much as it would like."
But then it turns to unconventional policy. Seriously. WTF.
"This dynamic can feed on itself. The less ammunition the Fed has to blast the economy out
of its malaise, the weaker and slower will be the recovery, making it more likely that the next
bad shock will require the Fed to cut rates more than is feasible."
It doesn't have less ammunition. Now Wolfers finally admits there's something called unconventional
"The Fed has already been experimenting with monetary policy, but it hasn't been enough. In
the wake of the financial crisis, for example, it bought bonds in a program known as quantitative
easing, cutting long-term interest rates once short-term rates were near zero. The resulting stimulus
was relatively small, reducing long-term rates by only a fraction of a percentage point, and the
program was politically unpopular.
The authors suggest an alternative approach in which the Fed makes up for "missing stimulus"
by promising to keep rates lower, for longer periods. In their view, the Fed needs to make up
for the interest rate cuts that it wishes it could have made, but couldn't. Promising this in
the depths of a downturn would offer businesses reason to be optimistic, they say, boosting the
recovery. The Fed would need to keep rates low, even as inflation overshot its target.
It's a promising approach, but would people really believe the Fed's promises? I know a lot
of central bankers, and I fear they are incapable of sitting still while inflation rises above
their stated target."
Wolfers admits that central bankers haven't pushed very hard on unconventional policy, shattering
his thesis. They're paranoid over inflation.
"Perhaps the answer lies outside the Fed. It may be time to revive a more active role for fiscal
policy - government spending and taxation - so that the government fills in for the missing stimulus
when the Fed can't cut rates any longer. Given political realities, this may be best achieved
by building in stronger automatic stabilizers, mechanisms to increase spending in bad times, without
requiring Congressional action."
That's a good idea no matter whether unconventional monetary policy works or not. But Republicans
are blocking it, so monetary policy is all we have. It doesn't help to say it doesn't work and
we must suffer long painful recoveries.
"The general distrust of fiscal policy may well have made sense; many economists are more likely
to trust the technocrats at the Fed to manage the business cycle than the election-driven politicians
on Capitol Hill. But in a world of low interest rates in which the Fed is frequently hamstrung,
we may not have that choice."
No the sidelining of fiscal policy never made any sense. But that doesn't mean we should sideline
monetary policy when fiscal policy isn't forthcoming.
Saturday, April 08, 2017 at 09:58 AM
RGC said in reply to yuan...
I think your statement is erroneous. Show me how "monetary
policy can redistribute capital in a more equitable manner."
and we could discuss it.
Saturday, April 08, 2017 at 10:41 AM
yuan said in reply to RGC...
the owning/lending class tends to dislike inflation for some
Saturday, April 08, 2017 at 11:11 AM
Jerry Brown said in reply to RGC...
I think this is highly dependent on one's understanding of
"equitable". Monetary policy can be used in a way that
ensures safe income streams to those who already own many
financial assets. Some people think that is how it should be
and therefore "equitable".
I have no idea how monetary policy with its currently
defined policy tools can be used effectively, by itself, to
redistribute wealth in the other direction, which is probably
most people's understanding of "equitable".
If it was, by itself, able to cause large jumps in
inflation, that might feed back into rapidly rising nominal
wages and large losses to the current holders of financial
assets like bonds and loan books. That might be considered
more "equitable" to some, but current limitations on monetary
policy prevent it from creating inflation all by itself.
Saturday, April 08, 2017 at 11:19 AM
RGC said in reply to Jerry Brown...
I like your understanding of "equitable" better.
Saturday, April 08, 2017 at 11:34 AM
Captain Renault: I'm shocked, shocked
to find that gambling is going on in here!
– From the classic scene in
made in 1942
The latest scandal du jour seems to be about what is now called
LIBORgate. But is it a scandal or is it really just business as
And if we don't know which it is, what does that say about how
we organize the financial world, in which $300-800 trillion, give
or take, is based on LIBOR?
This is actually just the second verse of the old song about
derivatives, which is a much larger market. Which of course is a
problem that was not solved by Dodd-Frank and that has the
potential to once again create true havoc with the markets, whereas
LIBOR can only cost a few billion here and there. (Sarcasm
The problem is the lack of transparency. Why would banks want to
reveal how much profit they are making? The last thing they want is
transparency. This week I offer a different take on LIBOR, one
which may annoy a few readers, but which I hope provokes some
thinking about how we should organize our financial world.
There Is Gambling in the House? I Am Shocked...
Let's quickly look at what LIBOR is. The initials stand for
London InterBank Offered Rate. It is the rate that is based on what
16 banks based in London (some are US banks) tell Thomson
they expect to pay for overnight loans (and other
longer loans). Thomson Reuters throws out the highest four numbers
and the lowest four numbers and then gives us an average of the
rest. Then that averaged number becomes about 150 other "rates,"
from overnight to one year and in different currencies. The key is
that the number is not what the banks actually paid for loans, it's
to pay. Also, please note that the
British Banking Association, on its official website, calls this a
Most of the time the number is probably pretty close to real, or
close enough for government work. But then, there are other times
when it is at best a guess and at worst manipulated.
Back in the banking and credit crisis panic of 2008 the
interbank market dried up. No bank was loaning other banks any
money at any price. Thus there was clearly no way for the LIBOR
number to be anything
fictitious. Anyone who was not
aware of this was simply not paying attention.
The regulators certainly knew on both sides of the Atlantic. All
along there were clear records, we now learn, that bankers were
telling the FSA (the Financial Services Authority) that they had
problems. Regulators were worried about what was happening but were
pointing out that there was a large hole in the ship that was
already admitting water, and they didn't want to make it any
bigger. Timothy Geithner, then President of the New York Federal
Reserve Bank (and now Secretary of the Treasury) wrote a rather
pointed letter to the FSA, suggesting the need for better
Some banks reported lower rates, to make it appear they were
better off than they were (since no one was actually lending to
them), and others might have given higher rates, for other reasons.
Remember, this was a British Banking Association number. Whether
you personally won or lost money on the probably wrong price
information depends on whether you were lending or borrowing and
whether you really wanted the entire market to appear worse than it
This was the equivalent of an open-book test where you got to
grade your own paper. And we are supposed to be shocked that there
might have been a few bad "expectations" here and there by bankers
acting in their own self-interest, with the knowledge of the
regulators? The more amazing proposition would be that in a time of
crisis the number had any close bearing on reality to begin with.
Call me skeptical, but I fail to see how we should be surprised.
The larger question that really needs to be asked is how in the
name of all that is holy did we get to a place where we base
hundreds of trillions of dollars of transactions worldwide on a
number whose provenance is not clearly transparent. Yes, I get that
the methodology of the creation of the number
banks call in their "expectations" is clear, but the process of
getting to that number was evidently not well understood and looks
to be even muddier than my rather cynical previous understanding of
It now seems that there will be a feeding frenzy as politicians
and regulators hammer the various banks for improper practices. And
they are pretty easy targets: there is just no way you can explain
this that does not sound bad.
You're a big banker. The world is falling down before your eyes.
No one trusts anyone. If you put out a bad number (whatever "bad"
means in a time of sheer utter blind panic) the markets will kill
you even more than they already are and you could lose your job.
You have got to come up with a number in ten minutes.
"Hey, Nigel, what do you think we
should tell Tommie [Thomson Reuters]?"
"I don't know, Winthorpe, maybe
Mortimer has an idea; let's ask him."
Simply fining a few bankers is not going to fix the larger
problem: the lack of transparency for arguably the most important
number in financial markets. A very clear methodology needs to be
developed, along with guidelines for what to do in times of crisis
when the interbank market is frozen and there really is no number.
Having no number might be worse than having a number that is a
guess. But having a number that can be fudged by banks for their
benefit is also clearly not in the public's interest.
The point of the rule of law is that it is supposed to level the
playing field. But the rule of law means having a very transparent
process with very clear rules and guidelines and penalties for
breaking the rules.
I had dinner with Dr. Woody Brock this evening in Rockport. We
were discussing this issue and he mentioned that he had done a
study based on analysis by an institution that looks at all sorts
of "fuzzy" data, like how easy it is to start a business in a
country, corporate taxes and business structures, levels of free
trade and free markets, and the legal system. It turned out that
the trait that was most positively correlated with GDP growth was
strength of the rule of law. It is also one of the major factors
cites in his book
reason for the ascendency of the West in the last 500 years, and a
factor that helps explain why China is rising again as it emerges
One of the very real problems we face is the growing feeling
that the system is rigged against regular people in favor of "the
bankers" or the 1%. And if we are honest with ourselves, we have to
admit there is reason for that feeling. Things like LIBOR are
structured with a very real potential for manipulation. When the
facts come out, there is just one more reason not to trust the
system. And if there is no trust, there is no system.
Opacity and Credit Default Swaps
Which brings me to my next point. We just went through a crisis
where derivatives were a major part of the problem, and
specifically the counterparty risk of over-the counter (OTC)
had to back-stop derivatives sold by banks (and
) that were clearly undercapitalized. That cost tens of
billions. Yet the commissions and bonuses paid for selling those
bad derivatives went on being paid. Congress held hearings and
expressed outrage, but in the end Dodd-Frank sold out.
"Efforts to create an exchange-traded futures contract tied to
credit-default swaps haven't yet gained traction after 18 months of
talks, but banks dealing in the private multitrillion-dollar market
for credit derivatives believe such contracts will eventually
appear for a simple reason: They should attract new players.
"Credit-default swaps function like insurance for bonds and
loans. Investors use them to hedge or speculate against changes in
a borrower's creditworthiness. If a borrower defaults, sellers of
the protection compensate buyers.
"The swaps – traded over the phone or on-screen, with prices
known only to trading partners – are the domain of asset managers
and hedge funds with the sophistication and financial wherewithal
to take on complex risks.
"Futures, by contrast, are more routine instruments used by
institutions and individual or "retail" investors. Futures prices
are displayed publicly on exchanges, and customers can trade them
directly with other customers – unlike in the swaps market, where a
dealer is on one side of every trade.
"Dealers have long been fiercely protective of keeping the
status quo in credit-default swaps or 'CDS' because they have
booked fat profits from customers not being able to see where other
customers are trading." (Market Watch)
And that is the issue. Bankers do not want transparency, because
it will seriously cut into their profits. And while I like everyone
to make a profit, the implicit partner in every trade is the
taxpayer and, last time I looked, we do not get a piece of that
trade. Derivatives traded on an exchange were not part of the
problem during the last credit crisis; OTC derivatives were.
An exchange makes it very clear where the counterparty risk is
and what the price mechanism is. It creates a transparent rule of
law and places the risk on the backs of those buying and selling
derivatives and not on the taxpayer. Exchange-traded derivatives do
not pose a potential threat to the economies of the world, while we
don't know the extent of the threat posed by OTC trades. JPMorgan
has lost around $6 billion on the trading of their "London Whale."
and the JPM board couldn't guarantee reasonable
corporate governance, then why should we assume that in another
crisis we won't find another AIG?
Dodd-Frank needs to be repealed and replaced. The last time, the
process was too clearly in the hands of those being regulated and
has contributed to their profits. Enough already.
Credit default swaps and any other derivative large enough to
put the system at risk must be moved to an exchange, to make clear
the counterparty risks.
This FT -- the most deep neoliberal swamp among mainstream newspaper. So they do not like any
critique of thier beloved neloneral world order with the dominance of reckless financial oligarchy
as one of the key components.
"... She argues that under our deregulated financial system "commercial bankers can create credit . . . effectively without limit, and with few regulatory constraints." She says that because the government and central banks impose no restrictions on what credit is used for, banks increasingly lend for speculative activities, rather than "sound, productive investment". ..."
"... The collateral for this borrowing is in the form of "promises to pay", which can "evaporate" and be defaulted upon - which risks dragging down the rest of the system. ..."
"... many of the remedies Pettifor recommends are, as she acknowledges, fairly mainstream: monitoring the evolution of credit relative to national income, limiting loan-to-value mortgage ratios more strictly, imposing stronger regulation on banks and issuing government debt at low interest rates across the maturity spectrum. ..."
"... Less mainstream are her calls for controls on international capital flows through a Tobin tax on financial transactions, and for central banks to "manage exchange rates over a specified range by buying and selling currency". ..."
"... its confrontational style - criticising financial market players, most economists, politicians and ideas from other left-leaning economists ..."
'The Production of Money', by Ann Pettifor - a financial education
16 HOURS AGO by: Review by Gemma Tetlow
Ann Pettifor's The Production of Money, is a work in three parts. It provides an explanation
of how money and credit are created in modern economies and of some of the problems that helped
foment the financial crisis. The author, an economist, then sets out her views on how these problems
should be fixed, including introducing controls on international capital flows. Finally, and less
obviously from the title, the book strays into a critique of fiscal austerity.
"Citizens," Pettifor argues, "were unprepared for the [financial] crisis, and remain on the
whole ignorant of the workings of the financial system." This is one reason why policymakers have
failed to address its failings. One of her objectives is to "simplify key concepts in relation
to money, finance and economics, and to make them accessible to a much wider audience".
Chapter two provides a clear, intuitive explanation of how money is created and how this can
facilitate economic growth. Money creation is a complex and intangible concept in a world where
it is no longer backed by gold bars held by the central bank, and Pettifor provides the most accessible
and thorough explanation I have seen.
In the rest of the book, the author sets out her diagnosis of the problems afflicting the world's
monetary system and her prescription for how they should be fixed. She argues that under our deregulated
financial system "commercial bankers can create credit . . . effectively without limit, and with
few regulatory constraints." She says that because the government and central banks impose no
restrictions on what credit is used for, banks increasingly lend for speculative activities, rather
than "sound, productive investment".
The collateral for this borrowing is in the form of "promises to pay", which can "evaporate"
and be defaulted upon - which risks dragging down the rest of the system.
The description is informative as far as it goes. However, it does not provide the sort of
compelling, insightful account of the problems before the crisis that is provided by, for example,
Michael Lewis in The Big Short.
She strikes a revolutionary tone when setting out the problem. But many of the remedies Pettifor
recommends are, as she acknowledges, fairly mainstream: monitoring the evolution of credit relative
to national income, limiting loan-to-value mortgage ratios more strictly, imposing stronger regulation
on banks and issuing government debt at low interest rates across the maturity spectrum.
Less mainstream are her calls for controls on international capital flows through a Tobin tax
on financial transactions, and for central banks to "manage exchange rates over a specified range
by buying and selling currency".
Her support for these measures is consistent with her belief - expressed throughout the book
- that everything was well until the global financial system began to liberalise following the
breakdown of the Bretton Woods system in 1971.
The evidence she provides to support her belief that policies in place during the Bretton Woods
era were superior to those operating now appears rather selective. She cites data presented in
Carmen Reinhart and Kenneth Rogoff's book, This Time is Different, as evidence that "financial
crises proliferated" after the 1970s. However, Reinhart and Rogoff's thesis was that we have been
here before in centuries past - and will be again.
The Production of Money presents one view of issues afflicting the world's financial systems
and how they should be dealt with, and will be useful to readers unfamiliar with these issues.
But in other places it provides a partial or rather confusing descriptions of aspects of the monetary
system. Saying the global economy "is once again at risk of slipping into recession" and faces
"deflation" are statements that have aged badly.
This book will help the public "develop a much greater understanding" of how banking and financial
systems work. However, its confrontational style - criticising financial market players, most
economists, politicians and ideas from other left-leaning economists - may put some readers off
before they get to the meat of the argument. The characterisations of these groups' views are
selective and her criticisms are at times not well supported by the evidence she presents.
How Money Made Us Modern
: About 9,500 years ago in the
Mesopotamian region of Sumer, ancient accountants kept track of
farmers' crops and livestock by stacking small pieces of baked
clay, almost like the tokens used in board games today. One piece
might signify a bushel of grain, while another with a different
shape might represent a farm animal or a jar of olive oil.
Those humble little
shapes might not seem have much in common with today's
$100 bill, whose high-tech anti-counterfeiting features include a
special security thread designed to turn pink when illuminated by
ultraviolet light, let alone with credit-card swipes and online
transactions that for many Americans are rapidly taking the place
But the roots of those modern modes of payment may lie in the
Sumerians' tokens. ...
The article is poorly researched. The author needs to read
Innes, Graeber, Ingham, Wray and Hudson on the history of
money from the perspective of credit instead of relying on
Davies, who emphasizes commodity money and doesn't
distinguish between bullion and chartal.
I was speaking specifically of the early history in my
comment, but the entire article was rather one-sided. The
debated on the history and nature of money is nuanced and
the author made it seem as through the article presents a
definitive version. The audience to which it is addressed
would not glean that from the article and would likely
come away with a one-sided and simplistic perspective on
the history and nature of money.
Michael Hudson offers a wonderful piece on the ancient
middle east, how they handled oppressive debt, and how, in
the Anglo-Saxon word, the biblical word for debt got
translated into 'sin.'
"From the actual people who study
cuneiform records, 90% of which are economic, what we have
surviving from Sumer and Babylonia, from about 2500 BC to
the time of Jesus, are mainly marriage contracts, dowries,
legal contracts, economic contracts, and loan contracts.
Above all, loans....
The rulers had what we would call an economic model.
They realized that every economy tended to become unstable
as a result of compound interest. We have the training
tablets that they trained scribal students with, around
1800 or 1900 BC. They had to calculate: How long does it
take debt to double its size, at what we'd call 20%
interest? The answer is 5 years. How does long it take to
multiply four-fold? The answer is 10 years. How much to
multiply 64 times? The answer is 30 years. Well you can
imagine how fast the debts grew.
So they knew how the tendency of every society was that
people would run up debts. Now when they ran up debts in
Sumer and Babylonia, and even in in Judea in Jesus' time,
they didn't borrow money from money lenders. People owed
debts because they were in arrears: They couldn't pay the
fees owed to the palace. We might call them taxes, but
they actually were fees for public services. And for beer,
for instance. The palace would supply beer and you would
run up a tab over the year, to be paid at harvest time on
the threshing floor. You also would pay for the boatmen,
if you needed to get your harvest delivered by boat. You
would pay for draught cattle if you needed them. You'd pay
for water. Cornelia Wunsch did one study and found that
75% of the debts, even in neo-Babylonian times around the
5th or 4th century BC, were arrears.
Sometimes the harvest failed. And when the harvest
failed, obviously they couldn't pay their fees and other
debts. Hammurabi canceled debts four or five times during
his reign. He did this because either the harvest failed
or there was a war and people couldn't pay.
What do you do if you're a ruler and people can't pay?
One reason they would cancel debts is that most debts were
owed to the palace or to the temples, which were under the
control of the palace. So you're canceling debts that are
owed to yourself.
Rulers had a good reason for doing this. If they didn't
cancel the debts, then people who owed money would become
bondservants to the tax collector or the wealthy
creditors, or whoever they owed money to. If they were
bondservants, they couldn't serve in the army. They
couldn't provide the corvée labor duties – the kind of tax
that people had to pay in the form of labor. Or they would
defect. If you wanted to win a war you had to have a
citizenry that had its own land, its own means of
"... Privilege: still exorbitant. Here's a nice analysis of the international role of the dollar. This is the same argument I tried to make in my Roosevelt Institute piece on trade policy last summer. The Economist* says it better: ..."
"... "Unlike other aspects of American hegemony, the dollar has grown more important as the world has globalised, not less. As economies opened their capital markets in the 1980s and 1990s, global capital flows surged. Yet most governments sought exchange-rate stability amid the sloshing tides of money. They managed their exchange rates using massive piles of foreign-exchange reserves Global reserves have grown from under $1trn in the 1980s to more than $10trn today. ..."
"... Dollar-denominated assets account for much of those reserves. Governments worry more about big swings in the dollar than in other currencies; trade is often conducted in dollar terms; and firms and governments owe roughly $10trn in dollar-denominated debt. the dollar is, on some measures, more central to the global system now than it was immediately after the second world war. ..."
"... America wields enormous financial power as a result. It can wreak havoc by withholding supplies of dollars in a crisis. When the Federal Reserve tweaks monetary policy, the effects ripple across the global economy. Hélène Rey of the London Business School argues that, despite their reserve holdings, many economies have lost full control over their domestic monetary policy, because of the effect of Fed policy on global appetite for risk. ..."
"... America's return on its foreign assets is markedly higher than the return foreign investors earn on their American assets That flow of investment income allows America to run persistent current-account deficits -- to buy more than it produces year after year, decade after decade." ..."
Privilege: still exorbitant. Here's a nice analysis of the international role of the dollar.
This is the same argument I tried to make in my Roosevelt Institute piece on trade policy last
summer. The Economist* says it better:
"Unlike other aspects of American hegemony, the dollar has grown more important as the
world has globalised, not less. As economies opened their capital markets in the 1980s and 1990s,
global capital flows surged. Yet most governments sought exchange-rate stability amid the sloshing
tides of money. They managed their exchange rates using massive piles of foreign-exchange reserves
Global reserves have grown from under $1trn in the 1980s to more than $10trn today.
Dollar-denominated assets account for much of those reserves. Governments worry more about
big swings in the dollar than in other currencies; trade is often conducted in dollar terms; and
firms and governments owe roughly $10trn in dollar-denominated debt. the dollar is, on some
measures, more central to the global system now than it was immediately after the second world
America wields enormous financial power as a result. It can wreak havoc by withholding
supplies of dollars in a crisis. When the Federal Reserve tweaks monetary policy, the effects
ripple across the global economy. Hélène Rey of the London Business School argues that, despite
their reserve holdings, many economies have lost full control over their domestic monetary policy,
because of the effect of Fed policy on global appetite for risk.
During the heyday of Bretton Woods, Valéry Giscard d'Estaing, a French finance minister (later
president), complained about the "exorbitant privilege" enjoyed by the issuer of the world's reserve
currency. America's return on its foreign assets is markedly higher than the return foreign
investors earn on their American assets That flow of investment income allows America to run
persistent current-account deficits -- to buy more than it produces year after year, decade after
Exactly right. You can have free capital mobility, or you can have a balanced trade for the
US. But you can't have both, as long as the world depends on dollar reserves."
By Scott Ferguson, Assistant Professor, University of South
Florida. He is also a Research Scholar at the Binzagr Institute for
Sustainable Prosperity. His current research and pedagogy focus on Modern
Monetary Theory and critiques of neoliberalism, aesthetic theory; the
history of digital animation and visual effects; and essayistic writing
across media platforms. Originally published at
This brings me to Modern Monetary Theory (MMT). Far from an "obscure
intellectual trend," MMT is a prominent heterodox school of political
economy that emerged from
and has lately influenced the economic platforms of
, and Spain's
. For MMT, money is not a private token that states amass and
hemorrhage. Rather, it is a boundless government instrument that can easily
serve the needs of the entire community. International monetary agreements
such the Eurozone's
may impose artificial limits on fiscal spending, but these are,
MMT argues, political constraints. They are not economically inevitable and
can immediately be dissolved. In truth, every sovereign polity can afford to
take care of its people; most governments simply choose not to provide for
everyone and feign that their hands are tied.
To be sure, Liberalism has debated the "designation and distribution of
rival goods," as Livingston explains. In doing so, however, it has
overlooked how macroeconomic governance conditions the production of these
goods in the first place. MMT, by contrast, stresses money's creative role
in enabling productive activity and places government's limitless spending
powers at the heart of this process.
In lieu of Liberal "redistribution" via taxation, MMT calls for a
politics of "
Redistributive politics mitigate wealth disparity by purportedly
transferring money from rich to poor. This is a false and deeply
metaphysical gesture, however, since it mistakes the monetary relation for a
finite resource instead of embracing government's actual spending
capacities. MMT's predistributive politics, meanwhile, insist that
government can never run out of money and that meaningful transformation
requires intervening directly in the institutions and laws that structure
economic activity. MMT does not imply a crude determinism in which
government immediately commands production and distribution. Rather, it
politicizes fiscal spending and the banking system, which together
underwrite the supposedly autonomous civil society that Livingston
MMT maintains, moreover, that because UBI is not sufficiently productive,
it is a passive and ultimately
to remedy our social and environmental problems. It thus recommends a
proactive and politicized commitment to public employment through a
. Federally funded yet operated by
such a system would fund communal and ecological projects that the private
sector refuses to pursue. It would stabilize prices by maintaining aggregate
productive activity during market downturns.
What is more, by eliminating forced unemployment, it would eradicate
systemic poverty, increase labor's bargaining power, and improve everyone's
working conditions. In this way, a Job Guarantee would function as a form
: In improving the lives of particular groups, such a
program would transform the whole of economic life from the bottom up.
Unlike the Job Guarantee, UBI carries no obligation to create or maintain
public infrastructures. It relinquishes capital-intensive projects to the
private sector. It banks on the hope that meager increases in purchasing
power will solve the
associated with un- and underemployment.
Let us, then, abandon UBI's "end of work" hysteria and confront the
problem of social provisioning head on. There is no escape from our broken
reality. We do better to seize present power structures and transform
collective participation, rather than to reduce politics to cartoonish
oppositions between liberty and tyranny, leisure and toil. Technology is
marvelous. It is no substitute, however, for governance. And while civil
society may be a site of creativity and struggle, it has limited spending
abilities and will always require external support.
It is essential, therefore, to construct an adequate welfare system. On
this matter, Livingston and I agree. But Livingston's retreat from
governance strikes me as both juvenile and self-sabotaging. Such thinking
distracts the left from advancing an effective political program and
building the robust public sector we need.
I can see it both ways. Most people see that as sarcasm but I have
more than a few friends whose jobs are probably the only thing keeping
them out of jail. Idle hands being the devil's plaything and all. For
instance, the last thing you want to give a recovering addict is a lot
of free time and money.
At no point in the "Job Guarantee" discussion did anyone advocate
forcing you to go to work. However, if you decide to get ambitious and
want a paid activity to do that helps make society a better place to
live, wouldn't it be nice to know that there'd be work available for you
Right now, that's not so easy to do without lots of effort searching
for available jobs and going through a cumbersome and dispiriting
application process that's designed to make you prove how much you
REALLY, REALLY want the job.
For me, the real silver bullet is the moral/political argument of a
Job Guarantee vs. Basic Income. Job Guarantee gives people a sense of
pride and accomplishment and those employed and their loved ones will
vigorously defend it against those who would attack them as 'moochers'.
Also, defenders can point to the completed projects as added ammunition.
Basic income recipients have no such moral/political defense.
It's a common 'argument' by people defending status quo. They claim
something is ridiculous and easily disproven and then leave it at
that. They avoid making argument that are specific enought to be
countered, because thay know they don't actually have a leg to stand
Sloppy language does not help so thank you. So the next question is
how do constraints (natural or other) affect spending power under MMT,
is it asymptotic, is there an optimum, discontinuities?
The other major issue is that although spending power is controlled
by legislatures it must be recognized that wealth creation starts with
the work of people and physical capital, not by the good graces of
gov't. MMT makes it sound as if money exists just because gov't wills
it to exist, which is true in the sense of printing pieces of paper
but not in the sense of actual economic production and wealth
creation. Taxes are not the manner in which gov't removes money but it
really is the cost of gov't sitting on top of the economic production
by people together with physical capital.
Help me understand your last sentence. So, if I'm a farmer, the
time I spend digging the field is economic production, but the time
I spend sitting at my desk planing what to plant and deciding which
stump to remove next and how best to do it, and the time I spend
making deals with the bank etc, these are all unproductive hours
that make no contribution to my economic production?
Yes, Jamie. And as you point out, Ferguson is giving us a
better definition of "productive". He is not saying productivity
produces profits – he is saying productive work fixes things and
makes them better. But some people never get past that road bump
"MMT makes it sound as if money exists just because gov't wills
it to exist "
No, this is inaccurate, MMT says that the government must SPEND
money into existence, not just issue a legal fiat. Collecting taxes
in the currency creates a need for the currency. This is
historically accurate and can be traced from British colonial
history. They imposed taxes on the colonies in pound sterling, that
compelled the colonies to find something to export to Britain in
order to generate the foreign exchange to pay the taxes.
The debate is over how to get the currency in people's hands.
Should the govt just cut checks and let citizens spend as they see
fit? Or should the government directly employ resources to improve
society where the private sector isn't interested?
Regarding user Jamie's point, I hope I can add to it by saying
that someone is going to do the planning, whether it's the public
sector or the private sector, planning must be done. When
government does the planning, then it's decided democratically (at
least in theory). If the government doesn't do the planning, then
the private sector is left to do it on its own. This gets chaotic
if the private sector doesn't coordinate, or can get parasitic if
the private sector colludes against public interest.
I don't think there's anything wrong with calling money a
"boundless government instrument". The problem here comes from
confounding a potentially infinite resource (money) with the
inherently limited application of that resource. Sovereign money
really is limitless, what one can do with it is not. The distinction
needs to be clarified and emphasized, not glossed over.
"Limitless" is a pretty good word for some arguments. Look what you
get with "limited": every year congress up and says, "Hey dudes,
dudettes, we know you expected some governing from us, but we've
decided not to do that, because we've decided that the money we've
spent has taken us past the Debt Limit. So we're gonna stop now."
They're jerking you around. The rules of fiat money that they're using
don't work that way. In fact, Richard Nixon took the U.S. into a full
fiat money system so he could keep governing without having to worry
about running out of money to do it with.
International monetary agreements such the Eurozone's Maastricht
Treaty may impose artificial limits on fiscal spending, but these are,
MMT argues, political constraints. They are not economically
inevitable and can immediately be dissolved.
So no, not limitless. Rather, the limitations are political ones, not
economic. As long as the sovereignty of the currency is not in threat,
the money supply can be increased.
The author is making some assumptions, and then goes and takes them
apart. It's possilble (I didn't read the article he refers to), that the
assumptions he responds to directly are made by the article, but that
doesn't make them universal assumptions about UBI.
UBI is not a single exact prescription – and in the same way, JG is not a
single exact prescription. The devil, in both cases, is in details. In fact,
there is not reason why JG and UBI should be mutually exclusive as a number
of people are trying to tell us.
and if we talk about governance – well, the super-strong governance that
JG requires to function properly is my reason why I'd prefer a strong UBI to
Now and then we get a failed UBI example study – I'm not going to look at
that. But the socialist regimes of late 20th century are a prime example of
failed JG. Unlike most visitor or writers here, I had the "privilege" to
experience them first hand, and thanks but no thanks. Under the socialist
regimes you had to have a job (IIRC, the consitutions stated you had "duty"
to work). But that become an instrument of control. What job you could have
was pretty tightly controlled. Or, even worse, you could be refused any job,
which pretty much automatically sent you to prison as "not working
I don't expect that most people who support JG have anything even
remotely similar in mind, but the governance problems still stay. That is,
who decides what jobs should be created? Who decides who should get what
job, especially if not all jobs are equal (and I don't mean just equal pay)?
Can you be firedt from your JG job if you go there just to collect your
salary? (The joke in the socialist block was "the government pretends to pay
us, we pretend to work"). Etc. etc.
All of the above would have to be decided by people, and if we should
know something, then we should know that any system run by people will be,
sooner or later, corrupted. The more complex it is, the easier it is to
Which is why I support (meaningfull, meaning you can actually live on it,
not just barely survive) Basic Income over JG. The question for me is more
whether we can actually afford a meaningful one, because getting a "bare
survival one" does more damage than good.
That's why any JG would have to be filtered through local governments
or, more ideally, non-profit community organizations, and not a
centralized government. New York City's
Summer Youth Employment Program
offers a good model for this. Block
grants of money are delivered to a wide range of community organizations,
thus ensuring no one group has a monopoly, and then individual
businesses, other community groups, schools, non-profits, etc., apply to
the community organizations for an "employee" who works for them, but the
payment actually comes from the block grant. The government serves as the
deliverer of funds, and provides regulatory oversight to make sure no
abuses are taking place, but does not pick and choose the jobs/employers
I don't see it as either/or. Provide a UBI and a job guarantee. The job
would pay over and above the UBI bit, if for some reason, you don't want to
work or cannot, you still have your Universal BASIC Income as the floor
through which you cannot fall.
Private employers will have to offer better conditions and pay to
convince people getting UBI to work for them. They wouldn't be able to
mistreat workers because they could simply bolt because they will not fall
into poverty if they quit. The dirtbags needing workers won't be able to
overpay themselves at the expense of workers because they feel completely
free to leave if you are a self worshipping douche.
Was going to be my response as well, why such absolute yes or no
thinking? The benefit of the UBI is that is recognizes that we have been
increasing productivity for oh the last couple millenia for a REASON! To
have more leisure time! Giving everyone the opportunity to work more and
slave away isn't much of a consolation. We basically have a jobs
guarantee/floor right now, its called McDonalds, and no one wants it.
Labor needs a TON of leverage, to get us back to a reasonable
Scandinavian/Aussie standard of living. Much more time off, much better
benefits, higher wages in general. UBI provides this, it says screw you
employers unless you are willing to offer reasonable conditions we are
going to stay home.
Why the Job Guarantee versus Universal Basic Income is not about work,
BUT ABOUT GOVERNANCE!
Yep, agree 100%.
We live in a capitalist society which is dependent on a (wage) slave
UBI? Are you mad?
I for one am mad, give me UBI!
Time to end the insanity of U.S. capitalism
I'm curious to know if either of these systems work if there is no
guarantee of "free" access to healthcare through single-payer or a national
insurance? I'm only marginally informed about UBI or MMT, and haven't found
adequate information regarding either as to how healthcare is addressed. It
seems clear that neither could work in the US, specifically for the reason
that any UBI would have to be high enough to pay insane insurance premiums,
and cover catastrophic illnesses without pushing someone into bankruptcy.
Can anyone clarify, or point me in the direction of useful information on
I think they're basically separate issues although MMT provides a way
of thinking that federal single payer is possible.
MMT is basically anti-austerity and in favor of 'smart' deficits ie
not deficits for no reason but deficits that can improve the economy and
the overall social structure such as single payer, affordable education,
job guarantee program.
Stephanie Kelton has commented that MMT has no real problem with a UBI
if it is done in conjunction with a good job guarantee program. She is
well aware of the dangers of a UBI if it eliminates most other social
I think that a job guarantee at a living wage would provide a much
better standard for private employment than a UBI which could just work
as a supplement allowing private industry to pay lower wages. As a
supplement to a job guarantee a UBI could help address issues such as
payment for reproductive type work.
There are different flavors of UBI, most don't mention healthcare at
all. Milton Friedman's UBI flavor prefers that it replace all government
spending on social welfare to reduce the government's overall burden. MMT
says there is no sense in not having single payer.
My thought on the last thread of this nature is that if UBI were ever
enacted in the U.S., healthcare access would become restricted to those
with jobs (and the self-employeed with enough spare income to pay for
it). You don't have to be healthy to collect a subsistence payment from
to the government.
Here in Canada we have universal healthcare, as well as a basic income
guarantee for low income families with children and seniors. There is a
movement to extend that as well,
details of one plan here
In theory, I think it could be possible for the JG to build and staff
hospitals and clinics on a non-profit basis or at least price-controlled
basis, if so directed (*huge* question, of course - by what agency? govt?
local councils?). Ditto housing, schools, infrastructure, all kinds of
socially useful and pleasant stuff. However, the way the US tends to do
things, I would expect instead that a BIG or a JG would, as others have
pointed out, simply enable employers to pay less, and furthermore,
subsidize the consumption of overpriced goods and services. IOW, a repeat
of the ACA, just a pump to get more $$ to the top.
The problem is not the money, but that the Americans govern themselves
so poorly. No idea what the cure could be for that.
Fixing worker pay is actually VERY easy. It's purely a political
issue. You tie corporate taxes to worker compensation. More
specifically, you set the maximum compensation for CEOs at NO MORE
than (say) 50x average worker pay in their corporation (INCLUDING
temps AND off-shored workers IN US DOLLARS no passing the buck to Temp
Agencies or claiming that $10/day in hellhole country x is equivalent
to $50k in the US. NO, it is $10/day or $3650/yr, period). At 50x,
corporate taxation is at the minimum (say something like 17%). The
corporation is free to pay their top exec more than 50x but doing so
will increase the corporate tax to 25%. You could make it step-wise:
51-60x average worker pay = 25% corporate tax, 61-80x = 33% corporate
It is time to recognize that CEO pay is NOT natural or earned at
stratospheric levels. THE best economic times in the US were between
the 50s to early 70s when top tax rates were much higher AND the
average CEO took home maybe 30x their average worker pay. We CAN go
back to something like that with policy. Also, REQUIRE that labor have
reps on the Board of Directors, change the rules of incorporation so
it is NOT mainly focused on "maximizing profit or shareholder value".
It must include returning a social good to the local communities
within which corporations reside. Profits and maximizing shareholder
value must be last (after also minimizing social/environmental harm).
Violate the rules and you lose your corporate charter.
There is no right to be a corporation. Incorporation is a privilege
that is extended by government. The Founders barred any corporate
interference in politics, and if a corporation broke the law, it lost
its charter and the corporate officers were directly held responsible
for THEIR actions. Corporations don't do anything, people in charge of
corporations make the decisions and carry out the actions so NO MORE
LLCs. If you kill people due to lax environmental protections or
worker safety, etc, then the corporate officers are DIRECTLY and
personally responsible for it. THEY made it happen, not some ethereal
Durned hippys imagine an IRON boot stamping on a once human face –
forever. OK, now everybody back to the BIG house. Massa wanna reed yew sum
Bible verses. We're going to be slaves to the machines, ya big silly!
I'm sceptical whether a guaranteed job policy would actually work in
reality. There are plenty of historical precedents – for example, during the
Irish potato famine because of an ideological resistence to providing direct
aid, there were many 'make work' schemes. You can still see the results all
along the west coast of Ireland – little harbours that nobody has ever used,
massive drainage schemes for tiny amounts of land, roads to nowhere. It
certainly helped many families survive, but it also meant that those
incapacitated by starvation died as they couldn't work. It was no panacea.
There are numerous practical issues with make work schemes. Do you create
a sort of 2-layer public service – with one level permanent jobs, the other
a variety of 'temporary' jobs according to need? And if so, how do you deal
with issues like:
1. The person on a make work scheme who doesn't bother turning up till 11
am and goes home at 2.
2. Regional imbalances where propering region 1 is desperately short of
workers while neighbouring region 2 has thousands of surplus people sweeping
streets and planting trees.
3. What effect will this have on business and artistic innovation?
Countries with strong welfare systems such as Sweden also tend to have a
very high number of start ups because people can quit their jobs and devote
themselves to a couple of years to develop that business idea they always
had, or to start a band, or try to make a name as a painter.
4. How do you manage the transition from 'make-work' to permanent jobs
when the economy is on the up, but people decide they prefer working in
their local area sweeping the street?
I can see just as many practical problems with a job guarantee as with
universal income. Neither solution is perfect – in reality, some sort of mix
would be the only way I think it could be done effectively.
To provide some context for passers-by, this seemingly too-heated
debate is occurring in the context of the upcoming Podemos policy meeting
in Spain, Feb 10-12.. Podemos seems to have been unaware of MMT, and has
subscribed to sovereign-economy-as-household policies. Ferguson, along
with elements of the modern left, has been trying to win Podemos over to
MMT-based policies like a Jobs Guarantee rather than the Basic Income
scheme they have heretofore adopted rather uncritically.
(Of course Spain is far from "sovereign", but that's another matter
1) Fire them
2) Prospering region 1 isn't "short on workers" they just all have
3) What a good argument to also have single payer healthcare and some
sort of BIG as well as the JG
4) private companies must offer a better compensation package. One of the
benefits of the JG is that it essentially sets the minimum wage.
Yeah, those are pretty good answers right off the bat. (Obviously I
guess for #1 they can reapply in six months or something.)
Plutonium- I feel like true progress is trading shitty problems for
less shitty ones. I can't see any of the major proponents like Kelton,
Wray or Mitchell ever suggesting that the JG won't come with it's own
new sets of challenges. On the overly optimistic side though: you
could look at that as just necessitating more meaningful JG jobs
addressing those issues.
I was writing that on my phone this morning. Didn't have time to
go into great detail. Still, I wanted to point out that just
because there will be additional complexities with a JG, doesn't
mean there aren't reasonable answers.
1. If you fire them its not a jobs guarantee. Many people have
psychological/social issues which make them unsuitable for regular
hours jobs. If you don't have a universal basic income, and you don't
have an absolute jobs guarantee, then you condemn them and their
families to poverty.
2. The area is 'short on workers' if it is relying on a surplus
public employee base for doing things like keeping the streets clean
and helping out in old folks homes. It is implicit in the use of
government as a source of jobs of last resort that if there is no
spare labour, then you will have nobody to do all the non-basic works
and you will have no justification for additional infrastructure
3. You miss the point. A basic income allows people time and
freedom to be creative if they choose. When the Conservatives in the
early 1990's in the UK restricted social welfare to under 25's, Noel
Gallagher of Oasis predicted that it would destroy working class rock
n roll, and leave the future only to music made by rich kids. He was
proven right, which is why we have to listen to Coldplay every time we
switch on the radio.
4. This ignores the reality that jobs are never spread evenly
across regions. One of the biggest problems in the US labour market is
that the unemployed often just can't afford to move to where the jobs
are available. A guaranteed job scheme organised on local govenment
basis doesn't address this, if anything it can exacerbate the problem.
And the simplest and easiest way to have a minimum wage is to have a
1) Kelton always talks about a JG being for people "willing and
able to work." If you are not willing I don't really have much
sympathy for you. If you are not able due to psychological factors
or disability, then we can talk about how you get on welfare or the
BIG/UBI. The JG can't work in a vacuum. It can't be the only social
2) Seems unrealistic. You are just searching to find something
wrong. If there is zero public employment, that means private
employment is meeting all labor demands.
3) I have no idea what you are going on about. I'm in a band. I
also have a full-time job. I go see local music acts all the time.
There are a few that play music and don't work because they have
rich parents, but that's the minority. Most artists I know manage
to make art despite working full time. I give zero shits what
corporate rock is these days. If you don't like what's on the radio
turn it off. There are thousands of bands you've never heard of. Go
4) Again, you are just searching for What-If reasons to crap on
the JG. You try to keep the jobs local. Or you figure out free
transportation. There are these large vehicles called busses which
can transport many people at once.
Yes these are all valid logistical problems to solve, but you
present them like there are no possible solutions. I can come up
with several in less than 5 minutes.
Which of these tools do you posess:
( ) Machete, pick-axe, big old hemp bag
( ) Scattergun, hound, mirrored shades
( ) Short-shorts, bandeau top, knee pads
( ) RealTree camo ACUs, FLIR scope
( ) ephedrine, pseudoephedrine, fast car
A JG would begin to rebuild the trust and cooperation needed to have a
society based on justice instead of might makes right. Human life is based
on obligations- we are all responsible to one another for the social system
to work. The problem is always about how to deal with cheaters and shirkers.
This problem is best solved by peer pressure and shaming- along with a
properly functioning legal system.
I get a kick out of the "make work" argument against a JG. With planned
obsolescence as the foundation of our economic system, it's just a more
sophisticated way of digging holes and filling them in again. Bring on
robotic automation, and the capitalist utopia is reached. Soul crushing,
pointless labor can be sidelined and replaced with an unthinking and
unfeeling machine in order to generate profits. The one problem is people
have no money to buy the cheep products. To solve that dilemma, use the
sovereign governments power to provide spending credits in the form of a
UBI. Capitalism is saved from is own contradictions- the can is kicked
farther down the road.
The obligations we have to one another must be defined before any system
organization can take place. Right now, the elite are trying to have their
cake and eat it too.
I agree with those who see a need for both programs. I think the critique
of UBI here is a good one, that raises many valid points. But I have trouble
with a portion of it. For instance:
by eliminating forced unemployment, it would eradicate systemic
treats 'poverty' as an absolute when it is a relative. No matter what
programs are in place, there will always be a bottom tier in our
hierarchical society and those who constitute it will always be
'impoverished' compared to those in higher tiers. This is the nature of the
beast. Which is why I prefer to talk about subsistence level income and
degrees above subsistence. The cost of living may not be absolutely fixed
over time, but it seems to me to be more meaningful and stable than the term
'poverty'. On the other hand, in a rent seeking economy, giving people an
income will not lift them out of poverty because rents will simply be
adjusted to meet the rise in resources. So UBI without rent control is
Another point is that swapping forced unemployment for forced employment
seems to me to avoid some core issues surrounding how society provides for
all its members. Proponents of the JG are always careful to stress that no
one is forced to work under the JG. They say things like, "jobs for everyone
who wants one". But this fails to address the element of coercion that
underlies the system. If one has no means to provide for oneself (i.e. we
are no longer a frontier with boundless land that anyone can have for cheap
upon which they may strike out and choose the amount of labor they
contribute to procure the quality of life they prefer-if ever was such the
case), then jobs for "everyone who wants one" is simply disingenuous. There
is a critical "needs" versus "wants" discussion that doesn't generally come
up when discussing JG. It's in there, of course, but it is postponed until
the idea is accepted to the point where setting an actual wage becomes an
issue. But even then, the wage set will bear on the needs versus wants of
the employed, but leaves out those foolish enough to not "want" a job.
Whereas, in discussing UBI, that discussion is front and center (since even
before accepting the proposal people will ask, how much?, and proper reasons
must be given to support a particular amount-which again brings us to
discussing subsistence and degrees above it-the discussion of subsistence or
better is "baked in" to the discussion about UBI in a way that it is not
when discussing the JG).
While UBI interests me as a possible route to a non-"means of
production"-based economy, the problem I see with it is that it could easily
reduce the populace to living to consume. Given enough funds to provide for
the basics of living, but not enough to make any gains within society, or
affect change. It's growth for growth's sake, not as to serve society.
Something is needed to make sure people aren't just provided for, but have
the ability to shape the direction of their society and communities.
Where I work @3/4 of the staff already receives social security and yet
it is not enough seems to me human satisfaction is boundless and providing
a relative minimum paper floor for everyone is just. Yet the way our market
is set up, this paper floor would be gobbled back up by the rentier class
anyway. So unless there is a miraculous change in our economic rent capture
policies, we are screwed
So yes, just describe to people precisely what it is – a 'paper' floor
not something that has firm footing yet acknowledges inequities inherent in
our current currency distribution methods. And of course couple this with a
jobs guarantee. I have met way too many people in my life that 'fall through
the cracks' .
why is no one bemoaning the rabid over-consumption of the complainers who
suck up much more than they will ever need, hoarding and complaining about
people who do not have enough? the real problem is rampant out of control
But Ferguson should also adknowledge that Livingston has some points.
Why on earth we politically put limits to, for instance, public
earning-spending while do not put any limit to the net amount that one
person can earn, spend and own?
Upward redistribution is what occurs in the neoliberal framework. UBI is
distribution. Bear in mind that even in the best employment conditions, not
everybody can earn a salary. 100% employment is unrealistic.
The people marketing UBI and MMT have hundreds of years of attempted
social engineereing to overcome. I referring to the " why people want what
they want and why do they believe what they believe." Why?
The only suggestion I have is that, since everybody has a different
relationship to the concept of work, the populations involved need to be
smaller. Not necessarily fewer people, but more regions or nation states
that are actually allowed to try their ideas without being attacked by any
existing "empire" or "wanna be empire" via sanctions or militarily.
It is going to take many differerent regions, operating a variety of
economic systems (not the globalized private banking extraction method
pushed down every one's throat whether they like it or not) that people can
gravitate in and out of freely.
People would have the choice to settle in the region that has rules and
regulations that work most for their lives and belief systems (which can
change over time).
Looking at it from the perspective that there can be only one system that
300 million plus people (like the USA) or the world must be under is the
MAIN problem of social engineering. There needs to be space carved out for
these many experiments.
First, congratulations to everyone who managed to read this all the way
through. IMO both this (and the guy he's responding to), seem like someone
making fun of academic writing. Perhaps with the aid of a program that spits
out random long words.
FWIW, when I lived in Japan, they had a HUGE, construction-based
make-work program there, and it was the worst of both worlds: hard physical
labor which even the laborers knew served no purpose, PLUS constant street
obstruction/noise for the people in the neighborhoods of these make-work
projects. Not to mention entire beautiful mountains literally concreted over
in the name of 'jawbs'.
Different thought: I'm not sold on UBI either, but wouldn't it mess up
the prostitution/sex trafficking game, almost as a side effect? Has anyone
heard UBI fans promote it on that basis?
The sound and fury of disagreement is drowning out what both authors
agree on: guaranteed material standards of living and reduced working time.
If that's the true goal, we should say so explicitly and hammer out the
details of the best way to attain it.
Interesting read society has become so corrupt at every level from
personal up through municipal, regional and federal governments that it cant
even identify the problem, let alone a solution
all forms of government and their corresponding programs will fail until
that government is free from the monetary influences of individuals /
corporations and military establishments, whether it be from donations to a
political establishment or kick backs to politicians and legislators or
government spending directed to buddies and cohorts
I don't pretend to understand the arguments at the level to which they
are written, but at the basic level of true governance it must but open and
honest, this would allow the economy to function and be evaluated, and then
at that point we could offer up some ideas on how to enhance areas as needed
or scale back areas that were out of control or not adding value to society
as a whole
We stand at a place that has hundreds of years of built in corruption
into the model, capable so far of funneling money to the top regardless of
the program implemented by the left or the right sides of society
first step is to remove all corruption and influence from governance at
every level until then all the toils toward improvement are pointless as no
person has witnessed a "free market " in a couple hundred years, all
economic policy has been slanted by influence and corruption
we can not fix it until we actually observe it working, and it will never
work until it is free of bias / influence
no idea how we get there . our justice system is the first step in
repairing any society
"instead they've had difficulty even getting inflation high enough to
hit their inflation target. Maybe the problem is the way the FED is counting
Ah, but they did stop deflation. Which was all they really cared about.
Everything else was theater. Bottom line, Federal Reserve is the
counterparty to all the private interests naked shorting the US dollar.
Which always works unless that counterfeiting process starts to go into
reverse. Just like naked shorting in the stock market can go into reverse
and put a big deal of hurt on the naked shorters. But with naked shorting in
the stock market, the party that is doing the counterfeiting of stock
doesn't have a way to prevent the play from going into reverse. In contrast,
the Federal Reserve does, through QE and whatever else they can do. Believe
you me, if things got bad enough, they would have done a true helicopter
drop. Whatever it takes to get their "liquidity pump" working again.
And they got their liquidity pump working again and stopped deflation.
(So hey they were heros, yay! /sarc) And along the way, dollars (either
newly borrowed or already in the economy) ended up in assets. And those
assets keep going up through more inflation. So while they may not have
"levitated the economy", they did levitate the demand for their liquidity
pump. (What's not to love? /sarc)
It just hasn't reached high inflation because main street isn't a player.
Otherwise, if main street was a player too, like they were for the dot com
bubble and housing bubble, well then look out. But everybody on main street
is just trying to survive. As far as the Federal Reserve is concerned that's
a perfect "wall of worry" to provide them all the cover they need to make
sure inflation doesn't get out of hand. To use the words of Adam Smith,
"it's a virtuous cycle". Assets go up, the plebs aren't at the party yet, so
no need to take away the punch bowl.
(And hey look at all the temp jobs that main street has now. Who says the
magic of the Federal Reserve isn't doing good things? /sarc)
Ah yes, "stopping deflation", what a disaster it would be if rent,
food, health care cost less. The horror: people might be able to put a
little away as "savings" and maybe even "invest". Can't have that now can
So we have a system where the Fed controls interest rates (domestic
policy) and Treasury worries about exchange rates (trade and
international). Their objectives align probably 20% of the time.
Meantime "bank underwriting" is a distant memory, just sign the deal, get
your bonus, if/when it goes south Papa (Momma) CB will just smash the
value of the scrip some more
yes djrichard that is a nice synopsis of how this all works but where
does it end? How long can it go on? It is the world's biggest Ponzi
scheme and it almost ended in 2008 when the plebes could no longer take
on the increasing amounts of debt to keep it going. A normal Ponzi scheme
ends when it runs out of fools to fleece but this one is different
because it involves central banks which can step in to keep it all going
once mainstream is tapped out. That's where we are now; they ginned up
massive amounts of base money that was used to prop up asset prices on
behalf of the elites. This whole thing has to be the biggest fraud and
crime in human history but it is so esoteric that most people can't see
it. The masses get buried under inflated costs associated with the asset
bubble, inflation and interest payments while a small sliver at the top
lives in a rentiers paradise.
They have added massive debt to the system since the 2008 debt crisis
and things are now fine? Low interest rates mask the burden but at some
point this must and will end. Once they stripped the gold out of the
system in 1971 they set the groundwork for an explosion of debt. It's a
very scary situation.
Are you suggesting that the U.S. monetary system is healthy and
Completely agree that the creation of unproductive debt is the
real problem in any economy. Michael Hudson has written brilliantly
on that issue. Most debt/money creation should be closely tied to
As for private debt to GDP, I have no basis to comment on
whether it higher or lower than pre-crisis levels without doing a
lot of work. Those types of figures are fraught with complexity
based on source data, assumptions and methodology. Would love to
see those figures by sector, student loan, credit card, auto loan,
mortgage, corporate, municipal, etc. In any case it is unambiguous
that government debt has increased by nearly $10,000,000,000,000.00
since 2008. Does anyone think that is a good thing? And that
excludes retirement and medical costs which dwarf the funded debt.
Federal deficit went up by $1.4 last year, 9/30/16 year-end, after
a 7 year supposed recovery when tax revenues should be peaking.
What's up with that?
The U.S. may be able to borrow in its own currency but because
of its current account deficit it is dependent on foreigners to
play along. How long is that going to last?
Any thoughts on the 1974 deal whereby the Saudis agreed to
secretly support the dollar. What happens to dollar hegemony
without those kinds of deals.
What is going on with Russia right now, why the new cold war?
Russia runs a pipeline through Ukraine and is the leading supplier
of natural gas to western Europe. It's not dollar based. Qatar sits
on the world's largest supplies of natural gas and wants to run
pipeline North through Syria. Asssad said no. U.S. then unleashed a
proxy war to unseat Assad. Qatar is a U.S. client state, like Saudi
Arabia, and they allowed U.S. to build massive air base outside of
Doha. Qatar plays along with U.S. and in return the Al Thani family
remains in power.
I am afraid this is all a bit more complicated and fragile than
meets the eye.
What is your definition of printing money? Is there no such
thing in your mind? Does a central bank ever print money in your
view of the system other than when they ask the U.S. Treasury's
Bureau of Engraving and Printing to create some federal reserve
I have read two of Randall Wray's books on MMT and Warren
Mossler's Seven Deadly Innocent Frauds. I am fairly well
acquainted with MMT. As for Mossler I wish he had a good
editor because his stuff could read much better. As for
Wray's TWINTOPT ("that which is needed to pay taxes")
definition of money, you can also argue for TWINTOPP ("that
which is needed to purchase petroleum") as a definition of
money. Pricing the world's most important commodity in
"something" is an even more effective of way of causing that
something to be used as money.
As for MMT I like some of the ideas but it seems to suffer
from the same fundamental problems that the current system
does. If the government has a monopoly on producing money, it
is a given that they will overdo it at some point just like
what happens with the current private system where the banks
over did it. You end up with the same rudimentary
questions/problems under MMT or the current type system:
1) what are the rules governing its creation?
2) and who is in charge and gets to decide?
Either system can work if it is intelligently and honesty
run but of course that is asking a lot. Unfortunately men can
not be trusted to run an honest system for any length of time
because creating money is the world's greatest privilege and
it will always be abused at some point; war, greed,
stupidity, it doesn't matter, at some point discipline is
lost. That in summary is the entire history of money.
There's a lot of history behind the MMT conception.
David Graeber, in
Debt the First 5000 Years
describes kings creating money in order to pay the army,
and creating impersonal markets (pp. 226-227) where money
was good in order to feed the army without
a) trundling huge convoys of grain all over the country
all day, every day, or
b) letting the army feed itself, and stripping the country
The way this had to be done without impersonal markets
is described by
Pierre Loti in Au Maroc
(not sure where to find a
version in English.) Loti was part of a French diplomatic
mission to the depths of Morocco. To feed the mission, the
Sultan sent word in advance to the people near each
nightly stop, ordering them to provide a sufficiently larg
feast. Without the modern features of civilisation, that
was the only way.
One of Gandhi's early campaigns was against a move by
the British governmennt in India to licence all mango
trees. The situation had been that there were feral mango
trees growing all over India, and anyone who was going by
such a tree, and felt like a snack, could pick a mango and
eat it. This scheme provided no role for the government.
The plan was for each tree to be licenced, for a fee, and
to destroy any un-owned, unlicenced tree. Then everybody
would be obliged to pay rupees for their snacks. The
government's control of society through the impersonal
market would be strengthened. Pity that people would get
less to eat. ISTR Gandhi won that one.
I could entertain the doubt that without pre-existing
money and a global impersonal market there would even be
petroleum to buy. Who would drill down to the petroleum,
pump it out of the ground, and ship it halfway around the
world to where you happen to be in the hope that you even
exist, and, if you exist, that you even want petroleum and
have something worthwhile to give in exchange? It takes a
global impersonal market to aggregate personal whims and
accidents into something that we call demand, and find we
can count on in making far-reaching decisions on what to
do. I wonder, could we even have industry without it?
History shows abuse of the money supply primarily comes
from two places: 1) true illegal counterfeiting by outside
parties, 2) true legal counterfeiting (ahem borrowing) by
inside parties who are simply shorting the currency when
the economy is publicly biased towards increased private
debt (think Wiemar Republic or Venezuela).
In contrast, Fed Gov fiat (MMT) is not based on a
fractional reserve system. At least not the ones I hear
people talk about. So the magnitude of
debasement/debauchery is a lot less compared to
fractional-based currencies. Plus the monetary base can
always be shrunk by issuing bonds if the will power to tax
Thanks for stepping in, Yves. But I have a minor quibble with
that Private Debt to GDP graphic you linked. Because the graph's
Y-origin begins at 195%, the 7.5% reduction since 2008
a 500% decrease. Bottom line – private debt to GDP
remains very high and the economy is much weaker than it was in 08.
Unless GDP picks up quickly (less the Ponzi-esque growth in
equities), our financial future does not appear strong.
Is it OK if I hope (against my better judgement) that Trump is
serious about improving U.S. infrastructure through deficit
spending and the loony conservatives in Congress go along?
If this ends, the only way it does so is through deflation. But the
Fed Reserve is always on hand to do "whatever it takes" to prevent
If the Federal Reserve loses that fight (and it's hard to think of
a scenario where they could ostensibly lose), then deflation would
take out everybody who is in debt. Which is pretty much everybody,
except people who have no debt and are holding cash. The Fed Gov would
certainly have to step in to provide 3 hots and a cot.
Instead, we have an outcome where the deflation monster is kept at
bay, but everybody is up to their eyeballs in debt (I'm speaking
private debt here. By the way, notice how private debt forgiveness
never enters into the conversation). Except for the elite, they're not
in debt to their eyeballs because the height of their eyeballs can
keep getting higher and higher. The elite know if the wall-of-worry
disappears, forcing the Fed Reserve to raise rates, they'll be caught
with their pants down. But they also know they'll be rescued again
(the ol deflation monster must be defeated once again. We do this for
you little people don't you know). So that's where the economy is
thriving – for the elite.
In aggregate terms the elites hold the other side of all the
debt that was created, that is why they won't tolerate deflation,
everything implodes under such a scenario. The masses are buried
under the debt, while a small minority holds the asset side of it.
Therefore everything will be done to stave off deflation. System is
very fragile, teetering between deflation and potential hyper
inflation. They have threaded a needle so far to keep it stable but
things are not normal. It will be some time before we know how this
The issue isn't monetary policy, i.e increasing or decreasing the supply
of money, the issue is that the way we've decided to do it is by increasing
and decreasing interests rates. So we end up in this bazzarro world where,
Stop! I know the answer!
Fed Chief Mariner Eccles explained that long ago – "pushing on a string
Keynes explains it in English – This doesn't work when in a "liquidity
Our current Fed are Monetary_keynesians working in the Mariner Eccles
"If we accept that only the Federal Government, through spending and
taxing, can increase or decrease the supply of dollars"
the vast majority of dollars in the economy are actually created by banks
in the form of deposits generated by making loans. The central bank (Federal
Govt.) seeks to control the level of reserves in the interbank market and
has very limited control over the the supply of money in the economy as a
whole. banks do not lend reserves, which is why there can be reserves
sloshing all around the system without causing inflation. As long as there
are idle resources in the economy the danger of inflation is overblown.
Just follow the money. How does monetary policy influence influence the
average person's finances? They don't have access to the discount window.
Business investment is at an all-time low. Just witness the famously large cash
hoards currently collecting dust in the Fortune 500 and companies like Uber
setting billions of dollars on fire trying to get into new markets instead of
developing new products. Instead they're using cheap debt to buy competitors
and fire all their employees. Small businesses are disappearing and there are
fewer new ones to replace them - nobody has collateral.
Until financial policy starts seriously considering "helicopter money" the
economy is just going to sit there spinning its wheels, going nowhere on the
backs of a vast underclass with no money to spend. Government contracts are and
remain the only way the average person might even catch a glimpse of the world
of finance, a fact that must seem appalling to any financial conservative.
Inflation is hidden in plain sight for many consumers. Just take a trip to
the grocery store, or a home improvement big box, or any number of other
personal, anecdotal, small-sample, and otherwise qualified
, retailers held prices low until the election and then
started to raise them. That will add some pop to their fourth quarter earnings,
while people adjust budgets accordingly.
This is not correct and I hate to tell you but your comments on
this topic are very confused, and worse, you are terribly self
confident about your erroneous beliefs.
A fiat currency issuer can deficit spend without creating debt
instruments. You do not take your dollar bills in a fiat regime to the
Treasury and get them redeemed for something material. The only use
you can make of currency with the Treasury is to extinguish your tax
The Fed can only 'lend' fiat. They don't 'spend' fiat, unless
Congress authorizes the purchase (e.g. Tarp). But note that even
foreign currency purchases of the Fed have to be cleared by Treasury
(which happens behind closed doors and no one notices). So no, the Fed
does not bypass Congress.
And if you mean that Fed offers deposit insurance on deposits
(created via private lending) but that's still an authority given to
it by Congress when FDIC was created. And the FDIC has a 'line of
credit' with the Treasury, not the Fed, so again Congress is not
bypassed. In fact, the credibility of the FDIC only exists because of
that line of credit from the Treasury, since it means they are de
facto linked to the currency issuing entity directly.
The Fed NEVER creates fiat for the private sector. It exchanges
green paper money for bank reserve balances–$ for $ exchange. There is
no cost to the Fed or the govt. Not to mention that the Fed's overall
operations are a cash cow for the federal govt (due to its profits via
interest income on securities owned vs. costs of its liabilities and
salaries, etc.), so it never needs Congressional appropriations. As an
MMT expert said of your BTW "This question in the first place shows
that this guy has no idea how any of this works."
Evidently the "EM" band in green is dominated by China, which accumulated
over $4 trillion in forex (primarily US Treasuries) through 2013. Now it's
having to sell Treasuries to prop up the yuan exchange rate.
But Haruhiko "Mad Dog" Kuroda at the Bank of Japan is picking up the slack
from China with a ferocious buying binge, as Mario "Whatever It Takes" Draghi
closely pursues him.
Common sense would tell you that expanding central bank assets at many
multiples of economic growth is neither sustainable nor even sensible. Central
banksters are giving ol' John Law a run for the money. With any luck they
should be able to produce an epic calamity, since their bubble blowing is
global rather than confined to one country.
Actually, the Fed is just laundering crap from our TBTFs and supporting
the purchasing power of the dollar:
The grey is crap being invisibly written down at taxpayers expense (actually
holding a very small percentage of its face value, but embarrassing for
Jamie and Lloyd if admitted in public), the baby blue is keeping the imports
made abroad by our multinationals "affordable" without them having to re-patriate
I'm pretty sure "grey" is the "good" MBS. They swore up and down it
was Fannie&Freddie MBS they were buying as part of QE – these are
supposed to be the high quality end of mortgage instruments and I think
it really did turn out that way.
The drek mopped up from Bears and others is called "Maiden", and is
the nearly imperceptible dark blue on this chart. If they properly wrote
them down immediately, then they wouldn't show up on a current chart!
This is why "audit" sounds cool. Then we could have a completely
different chart showing how much they did give away to their buddies.
"Common sense would tell you that expanding central bank assets at many
multiples of economic growth is neither sustainable nor even sensible.
Central banksters are giving ol' John Law a run for the money. With any luck
they should be able to produce an epic calamity, since their bubble blowing
is global rather than confined to one country."
It's inevitable and will make John Law look like a rank amateur when this
thing comes apart.
Yay! This article and its comments exemplifies why I spend far longer on NC
than on any other site on the Web. Not only had it never before occured to me
that The Wizard of Oz was an allegory of anything – tho' it's obvious even to
the dim-witted like me once pointed out – it helped me understand the concepts
and relationships that underlie 'money'. In short, how a pound note can be, as
it says, "worth one pound".
The author's critique of modern central banking seems dead on, the fallacy of pushing on a string
etc, but he seems to think their response was a mistake because what we really lack is fiscal
stimulus. Pardon me if I am confused but didn't the government just engage in the biggest fiscal
stimulus in the history of the world as evidenced by its massive deficit spending to the tune of ten
trillion dollars. Was that not a fiscal stimulus? What is the author's point? That we need even more
of this! If Mr. Ferguson would clarify that would be great.
I happen to think everything they have done is mistake and that what we need is a debt jubilee
which is what William White, one of the world's foremost monetary theorists and former chief
economist of the BIS also thinks.
No, the bailouts were not fiscal spending. They were done mainly by
special facilities and those loans were paid back. QE is also not fiscal
The US engaged in only about $800 billion of fiscal spending. China did
the most, IIRC about $2 trillion.
William White was very good in the runup to the crisis in identifying the
housing bubbles but is really clueless about the debt of fiat currency
issuers v. that of non-fiat issuers, like US states and countries in the
There is a slight upside to the frightful monetary policy we have been
obliged to pursue – by creating military mayhem all over the world we have
attracted savings to the US economy for fear it might be lost any where else.
Even UK has proved unsafe and western media is making the EU look dodgy too.
So regardless of the reality of a dormant national economy the money keeps
Don't forget the tax havens either – they invest in New York.
But look at the poem that's repeated in there. It's fairly clear that
Frank Baum had opinions on currency. Now that particular poem is a peon to
Mckinley and "honest money". Which would make one think that Baum was a hard
money advocate, as McKinley and "honest money" was the counter William
Jennings Bryan (WJB) arguing against the "cross of gold". But WJB's campaign
for silver had the same failings as gold, they were both banker's money.
Perhaps Baum saw the disadvantages either way.
In any case, Bill Still provides what I think is the better currency
allegory from Frank Baum's story, in that it's an advocation against both
silver (the silver shoes) and gold (the yellow brick road) and was for
"paper money" issued by the Fed Gov (the emerald city). See
. Now this is purely Bill's
interpretation, just like the refutation you're linking to was admitted to
be an interpretation too. I happen to think Bill's allegory works better and
there's strong reason to think that this is where Baum's head was at (given
he was opinionated on currency and an advocate of the farmer's
vulnerabilities to issues related to currencies).
Littlefield himself wrote to The New York Times letters to the editor
section spelling out that his theory had no basis in fact, but that his
original point was "not to label Baum, or to lessen any of his magic, but
rather, as a history teacher at Mount Vernon High School, to invest
turn-of-the-century America with the imagery and wonder I have always found
in his stories."
Biographers report that Baum had been a political activist in the
1890s with a special interest in the money question of gold and silver,
and the illustrator Denslow was a full-time editorial cartoonist for a
major daily newspaper. For the 1901 Broadway production Baum inserted
explicit references to prominent political characters such as President
Theodore Roosevelt .
Littlefield's knowledge of the 1890s was thin, and he made numerous
errors, but since his article was published, scholars in history,
political science and economics have asserted that the images and
characters used by Baum closely resemble political images that were well
known in the 1890s. Quentin Taylor, for example, claimed that many of the
events and characters of the book resemble the actual political
personalities, events and ideas of the 1890s. Dorothy-naïve, young
and simple-represents the American people. She is Everyman, led astray
and seeking the way back home. Moreover, following the road of gold
leads eventually only to the Emerald City, which may symbolize the
fraudulent world of greenback paper money that only pretends to have
value. It is ruled by a scheming politician (the Wizard) who uses
publicity devices and tricks to fool the people (and even the Good
Witches) into believing he is benevolent, wise, and powerful when really
he is a selfish, evil humbug. He sends Dorothy into severe danger hoping
she will rid him of his enemy the Wicked Witch of the West. He is
powerless and, as he admits to Dorothy, "I'm a very bad Wizard."
Historian Quentin Taylor sees additional metaphors, including:
The Scarecrow as a representation of American farmers and their
troubles in the late 19th century
The Tin Man representing the industrial workers, especially those of
American steel industries
The Cowardly Lion as a metaphor for William Jennings Bryan
In it, there is some discussion of who Frank Baum really was. And other
stuff, like how Yip's song, "Brother Can You Spare a Dime," was regarded:
"Roosevelt and the Democratic Party really wanted to tone it down and keep
it off the radio,"
And why the songs stop in the film:
"on their way to the wicked witch, when all the songs stopped, because they
wouldn't let them do anymore. OK? You'll notice then the chase begins, you
see, in the movie.
Why wouldn't they let them do anymore?
Because they didn't understand what he was doing, and they wanted a chase
Barron's investment weekly has published a "Get Ready for Dow 20,000" cover today. Is
that a problem for stocks, from a contrarian point of view?
Not necessarily. Paul Macrae Montgomery, who first articulated the concept of fading the always-wrong
MSM, stipulated that it's widely-circulated, general-interest publications that are the best mirrors
of popular sentiment.
So far, they are largely silent on the twin asset bubbles - stocks and house prices - rising
ominously beneath our feet. Looks like it's gonna be awhile before we reach the supreme silliness
of Time magazine's fatuous June 2005 cover "Home $weet Home: Why We're Going Gaga Over
That one actually scored double points, for the MSM's presumptuous habit of invoking the cozy
"we" formulation to tell readers what they think. (That's why "we" hate the MSM.)
With Time reportedly on the block, maybe a sensational "Dow 36,000" cover could goose
the sale price up to five dollars instead of one. It's worth a try, lads!
Jim, odd snippet from something I heard last night struck me as being right up your alley.
The guy who founded Princeton Review is now some kind of investment guru. He was talking about
last years announced rate hikes, and that he told his clients they weren't going up but might
reach record lows. He based that on metals traders (gold, silver etc). He says they have never
been wrong about the direction of rates. (I got interrupted so if he explained the signals he
was seeing from them I missed it). It should be part of a pod cast from Tim Ferriss if you want
to check it out, but I really did think it was one of those things you would have in your arsenal
for market prediction.
His other big advice was treat investing like a poker game, don't bet on the cards bet on the
players – look for their tells. And he hasn't figured out that Uber has some real issues to deal
with before its 'profits' are real, so take everything with a grain of salt.
TIPS didn't exist before 1997. But real Treasury yields (proxied by subtracting the trailing
12-month CPI change from nominal Treasury yields) went negative in 1974 and 1979 too, during the
epic gold spikes of that era.
So this seems to be an enduring anticorrelation. However, I use the yield curve in my bond
model rather than gold. The pronounced serial correlation in Fed-controlled short rates is highly
non-random, signaling what the cockeyed commissars are up to.
"... "And even though neoliberals and international banks would have you believe otherwise, a fall in these money movements is entirely a good thing. As Ken Rogoff and Carmen Reinhart found in their study of 800 years of financial crises, high levels of international capital flows are correlated with more frequent and severe financial crises. Similarly, a 2010 Bank of International Settlements study by Claudio Borio and Petit Disyatat ascertained that cross border capital flows were over 60 times trade flows, meaning they had almost nothing to do with them. " ..."
"... I think it is apparent that the entire edifice of finance has been jiggered to benefit, Davos man and NO ONE ELSE. ..."
"... hy shouldn't Davos man want it to continue – the aftermath was set right for the 0.1% remarkably fast in the aftermath of the Great Recession – by HUGE infusions of government money, guarantees, credit, forbearance, etcetera – which for some reason can NEVER be made available to the 90% ..."
"... This is probably the most salient reason Hillary lost, but it can never, ever be proffered as a reason for it would reveal that ALL our problems are due to the rich . ..."
"... I've often wondered how "The Multiplier Effect" of money, [not] circulating and recirculating in our local economies, at the consumer level, is affected by money sent out of the country by "immigrants"? ..."
"... Is this such a small amount as not to be considered part of "cross border capital flows"? How does it affect local economies that are more important to us than what happens on Wall Street? ..."
m'kay so kind of like robbing peter (emerging markets with growth potential) to pay paul (goldman
et.al.) until peter goes broke (asset bubble collapse) so paul can't be paid until he "natural"
growth potential of emerging markets recovers (peters growth potential recovers from the asset
bubble/debt overhang with best performance to those with more flexible currency) so that paying
paul (new grifts, oops financial innovations) can be foisted on them again leading to, in hindsight
only of course, and notably after paul has been paid, another collapse? rinse and repeat .is there
any sense to this postulation?
Why do you use the term 'capital' when referring to credit/lending that is not related to economically
real outputs. The rest of the article tells this story but the lead groups it all as 'capital'
This is an editorial suggestion really one that does not conflate or mislead when treating
credit creation used for financial asset trading as if it were the same general thing as FDI,
that is, direct investment.
We have seen the financial system react to the crisis by recognizing their own unhinged behavior,
and doing much less of it for good reasons. They know their credit creating behavior was nit coverting
Savings into Investment, they know it was not 'capital' – so editors, let us help our writers
to bring more clarity.
"And even though neoliberals and international banks would have you believe otherwise, a fall
in these money movements is entirely a good thing. As Ken Rogoff and Carmen Reinhart found in
their study of 800 years of financial crises, high levels of international capital flows are correlated
with more frequent and severe financial crises. Similarly, a 2010 Bank of International Settlements
study by Claudio Borio and Petit Disyatat ascertained that cross border capital flows were over
60 times trade flows, meaning they had almost nothing to do with them. "
This is probably something that not one in 10,000 people understand (I don't really either) –
but I think it is apparent that the entire edifice of finance has been jiggered to benefit, Davos
man and NO ONE ELSE. And why shouldn't Davos man want it to continue – the aftermath was set right
for the 0.1% remarkably fast in the aftermath of the Great Recession – by HUGE infusions of government
money, guarantees, credit, forbearance, etcetera – which for some reason can NEVER be made available
to the 90%
This is probably the most salient reason Hillary lost, but it can never, ever be proffered
as a reason for it would reveal that ALL our problems are due to the rich .
I've often wondered how "The Multiplier Effect" of money, [not] circulating and recirculating
in our local economies, at the consumer level, is affected by money sent out of the country by
Is this such a small amount as not to be considered part of "cross border capital flows"?
How does it affect local economies that are more important to us than what happens on Wall Street?
Years of low interest rates and quantitative easing have not restored
growth to developed countries, and many observers lately have been calling on central banks to
inject stimulus into economies directly. But do the rewards of "helicopter money" outweigh the
ZURICH – The world has been on pins and needles since Donald Trump's upset victory over
Hillary Clinton in the United States' presidential election last week. No one – including,
perhaps, the president-elect himself – quite knows what shape the next US administration will
take, or what its policy priorities will be.
Compounding this uncertainty is the fact that, around the world, geopolitical tensions are
rising, with developed economies continuing to experience tepid growth, even after years of
record-low interest rates. For Trump to stimulate enough activity in the US economy to satisfy
his zealous base, he will have to find the right balance between fiscal measures and
Whether Trump continues the post-1945 US tradition of international leadership, or instead
chooses an "America first" approach, he will not be alone in his quest for growth: Japan and
eurozone countries are also struggling to bring about sustainable recoveries and meet central
banks' inflation targets. Project Syndicate commentators have been at the forefront of the
ongoing debate about what policymakers can do to achieve these goals. In particular, while Trump
and policymakers elsewhere are embracing fiscal activism, how far they are willing or able to go
remains uncertain, raising the question of what more central banks could do to stimulate demand
and boost growth.
Spinning in Circles
The recent shift toward fiscal expansion reflects widespread agreement that policymakers are
running out of stimulus options. Central banks can no longer rely on "forward guidance," such as
half-promises that interest rates will remain low indefinitely. And quantitative easing (QE) is
quickly losing its potency, perhaps because it is inherently more effective as a crisis-response
mechanism than as a long-term fix.
"... ""This analysis raises a host of questions: If the unsecured credit lines that make the payments system function smoothly are liquidity, then are these credit lines also money? Should they be money? If these credit lines that are so important to the operation of the payments system are not money, then what is the point of defining money at all? I am still puzzling over these questions so I only ask them and don't pretend to answer them here."" ..."
"... Sissoko acknowledges the role that sovereign governments play in establishing money systems but I think gives too much credit :) to private bank credit creation. ..."
"... If money grew on trees it would be worth very little (Wray 2004) ..."
"... Money is the result of the struggle between debtors' demand for money and creditors' belief that the state can service its debt, which in turn depends on tax revenues. And it is the need to work for a taxable income that gives it value. (Ingham) ..."
"... Taxes don't finance spending but are necessary for money to have state backed value. They are also an important way for the state to transfer resources whether for bank bailouts, wars, social security, health care or whatever the state deems important. ..."
Carolyn Sissoko has an interesting new paper out,
, in which she takes on the nature of money problem.
I think her concluding paragraph is interesting
""This analysis raises a host of questions: If the unsecured credit lines that make the payments
system function smoothly are liquidity, then are these credit lines also money? Should they be money?
If these credit lines that are so important to the operation of the payments system are not money, then
what is the point of defining money at all? I am still puzzling over these questions so I only ask them
and don't pretend to answer them here.""
As a derivatives expert she takes on the interesting question of how these complex sources of credit
function, they provide credit but are they really money.
I think Ingham makes a great point relevant to this, "all money is credit but not all credit is money"
Sissoko acknowledges the role that sovereign governments play in establishing money systems but I
think gives too much credit :) to private bank credit creation.
If money grew on trees it would be worth very little (Wray 2004)
Money is the result of the struggle between debtors' demand for money and creditors' belief that
the state can service its debt, which in turn depends on tax revenues. And it is the need to work for
a taxable income that gives it value. (Ingham)
Taxes don't finance spending but are necessary for money to have state backed value. They are also
an important way for the state to transfer resources whether for bank bailouts, wars, social security,
health care or whatever the state deems important.
If money grew on trees it would be worth very little (Wray 2004)
That would depend on the rate of growth and, assuming every citizen had an equal number and quality
of such trees, be an ethical means to create fiat apart from normal deficit spending for the general
Of course there are no such trees but equal fiat distributions to all adult citizens could have
the same effect.
You know that money that your bank lent you to
buy your new house? Well, I want to let you in on a little
secret: That wasn't the bank's money they lent you. And it
wasn't some billionaire's money either. It was some of your
own money, along with a little bit of mine and Tom's and
Susie's and everybody else in this country. Can you imagine
It's a fact. It's why Henry Ford supposedly said that "if
people understood our banking and monetary system, I believe
there would be a revolution before tomorrow morning".(1)
When the bank lent you that money it took your promise to
pay them back (a promissory note and title to the house as
collateral) and in exchange it punched some numbers into a
computer, creating your deposit account and thereby creating
the money it lent to you.(2)
But how can that be, you say. How can the bank just invent
money like that? Well they do "just invent money" and they
can do it because our government agrees with them that they
can do it.
But don't they have to pay for that money, you say. No,
they don't. But they do have to be a depository institution (
a place you can keep your money on deposit) and there is some
expense for them to that.
But they are charging me interest on that money, you say.
Yes indeed, they are charging you interest on your own money,
and mine, and Tom's, and Susie's, etc.
But that bank is a private business, and banks make a lot
of profit, why should we pay them to loan us our own money,
you say. Good question.
"But don't they have to pay for that money, you say. No, they
don't. But they do have to be a depository institution ( a
place you can keep your money on deposit) and there is some
expense for them to that."
Again? Take a look at the income
statement of any bank. There is interest expense for them on
those deposits. OK, it is low but then there are those
subsidized services which is why noninterest expenses exceed
noninterest income. Again - no exactly a total expense of 5%
but mortgage rates today are not exactly 6% either.
We all do. But I see you waste no time doing actual financial
economics. If you did, you might realize how to capture
monopoly profits. Look at the average return to equity
compared to what you'd predict from a CAPM model. When I do
this for health insurance companies, their average return is
3 times what they would be from a competitive market. When I
do this for major banks, the average return to equity = the
CAPM prediction. Estimated monopoly profits = 0.
you have no idea what any of this means as all you know is
He does but what is the percentage of JPM's total assets? Do
you even know? You might need a microscope to see it. And no
- I am not defending banks. But your word salad is not
getting at the real issues. And yet you persist.
In finance, the capital asset pricing model (CAPM) is a model
used to determine a theoretically appropriate required rate
of return of an asset, to make decisions about adding assets
to a well-diversified portfolio.
Let's do this for a bank. Expected return to assets =
risk-free rate (1%) plus a 1% premium for bearing operational
risk. But then the equity to asset ratio for banks is only
10% so the expected return to equity includes a 10% premium
for bearing both operational risk and leverage risk. As such,
the expected return to equity = 11% for these highly levered
firms. And on average that is their actual return to equity.
For a great application of these thoughts - see that paper by
Sarin and Summers. You may not remember when I put it up
weeks ago but my internet stalker put up a link to it just
yesterday. Of course this was PeterK's childish way of
attacking someone who actually contributes to this blog. I
said he should read it. So should RGC. They might learn
LOL! pgl assumes that banks' investors have a god-given right
to a risk premium of 10%.
Of course, risk premiums are more
in the range 4-5%, far below pgl's banker-coddling
"Some economists argue that, although certain markets in
certain time periods may display a considerable equity risk
premium, it is not in fact a generalizable concept. They
argue that too much focus on specific cases – e.g. the U.S.
stock market in the last century – has made a statistical
peculiarity seem like an economic law."
As for the economic concept of the time value of money,
whereby savers get rewarded for setting money aside...the
longer the time, the greater the reward, well, central banks
have pretty well destroyed that with negative interest rates.
Time value of money: RIP. Nonetheless investors are still
supposed to reap their extravagant risk premiums!!!
He ignores basic finance. But then so does PeterK as actual
thinking just gets him all angry. Which means you and I are
tagged "liar". This is the intellectual garbage that is
ruining this place.
RGC -> EMichael...
"Money creation in practice differs from some popular
misconceptions - banks do not act simply as intermediaries,
lending out deposits that savers place with them, and nor do
they 'multiply up' central bank money to create new loans and
"... I'm increasingly interested in the metaphors around banking, which seem to still come out of early 19th c invention of engines, all of which used ' fuel ' as a central tenet: 'the money supply fuels the economy'. Economics seems drenched in outdated, antiquated metaphors where ' fuel ' is always and everywhere a good thing, with no polluting externalities, and no downside costs. ..."
"... Fuels don't lie, cheat, or steal - continuing to use fuel as a central metaphor enables banks, economists, and central bankers to put their fingers in their ears and howl "La! La! La! Using metaphors shaped by sail-powered whaling ships hunting for blubber is working just great for us!!" After all, calculus had been invented by the 1820s - so math + moneyAsEngineSpeak = economics. ..."
"... If money were more widely regarded as a social tool: recognized as a tool that requires communication, social networks, and flourishes within civil society, then Haldane's observations would be met with "Doh, you betcha!" ..."
"... Then, also, Bill Black's observations that crime actually does exist, and often looks exceptionally respectable, would be impossible to ignore. ..."
"... I interpreted Brexit as a 'tea leaf' that the banks could no longer be made fine-proof without triggering social unrest. ..."
"... The way that I read this, contemporary economics and finance leads to utter, unmanageable disaster from which there is absolutely no way out. The engine 'melts down', so to speak. I feel as if I have spent the past 8 years watching systems nearly implode, be saved by extraordinary (lunatic) measures, and in the end the systems of thinking that created these problems are precisely the mental pathways that keep people stuck in a labyrinth of dysfunction. ..."
"... It's hard to work out how "1. Implode, not too violently" could give rise to anything other than lethal shortages, especially in urban environments, and how this could lead to anything but "2. blow up, social unrest" anyway. ..."
"... Money is social relations, power relations, if Gold is law then the powerful will grab the gold. If not, they'll grab the money creating buttons in various spreadsheets, unless opposed by all. ..."
"... Maybe there is a way to make the vulnerability that the central banks and banksters and CorpoStates like GE and Cigna and Goldman Sux nd the rest impose on the vast rest of us into a mutual exposure? ..."
"... There is nothing wrong with interest, as long as the rate is reasonable. It is a service charge for someone handing you money now to buy what you want now instead of waiting to save up the money. Interest does not make an economic system unstable. It's the same as a massage or other service you buy. You just need enough income to cover it, and the principal payment of course. ..."
"... "As noted in the article [money is] a concept created by human beings and should be considered a very malleable tool that we can use to do pretty much whatever we as a society decide we want to with it. If we truly wanted to create a more equitable society there is nothing stopping us from doing so except the greed of the few." ..."
"... The Big Lie that the federal government needs tax revenue in order to operate, so we "can't afford" the social benefits that help the non-rich, must be constantly debunked and rejected. ..."
"... The terminology of finance is designed to hide predatory and extractive activities behind a curtain of beneficial-sounding words. These terms are deeply embedded, and serve both to put some friendly makeup on the business, and allow the "consumers" to feel better about their capitulation. The process is akin to the way politicians wrap themselves in the flag while they sell out the citizenry. We know deep down that they are lying, but we prefer the false patriotism because it serves the lies we prefer to tell ourselves. We bitch and moan, but we play our part, because not doing so leads to trouble. It is the way most of us live our lives. ..."
"... Most people go along the big lie because of hope. ..."
"... Money is nutrition, not a snack. It's food and fertilizer. It makes things grow. You have to share it with other life like bacteria and worms: without these organisms in your gut ecology, you get sick (autism, diabetes, obesity, M.S.). Idiots try to convince us these organisms are parasites instead of symbionts just like Monsanto thinks bees are disposable or Donald Trump likes to think of pregnant women as drags on business profits. ..."
"... If you think altruism is for suckers, your Ayn Rand economy collapses because you confuse parasites with symbionts and symbionts with parasites. You can't distinguish between compensation for earned and unearned income. What's a tax and what's theft? Try living without bacteria making butyrate in your gut. Wells Fargo can no more survive without little people like airport janitors to scrub out the TB and Ebola stains than our cells can breathe without mitochondria. Yet who gets their pay driven down in corporate America? ..."
Clive, FWIW, I'm increasingly interested in the metaphors around banking, which seem to still
come out of early 19th c invention of engines, all of which used ' fuel ' as a central tenet:
'the money supply fuels the economy'. Economics seems drenched in outdated, antiquated metaphors
where ' fuel ' is always and everywhere a good thing, with no polluting externalities, and
no downside costs.
Hence, what matters is 'efficiency': it's moneyAsEngineSpeak, so to speak.
Lordy, it's all petrochemical: from a time when chemical and mechanical engineering (and physics)
were in their relative infancies and whaling schooners were sailing out of Nantucket.
Fuels don't lie, cheat, or steal - continuing to use fuel as a central metaphor
enables banks, economists, and central bankers to put their fingers in their ears and howl "La! La!
La! Using metaphors shaped by sail-powered whaling ships hunting for blubber is working just great
for us!!" After all, calculus had been invented by the 1820s - so math + moneyAsEngineSpeak
In that paradigm, Bill Black is a mere scold, an oddball, a scruffy prophet in the wastelands,
so to speak.
If money were more widely regarded as a social tool: recognized as a tool that requires communication,
social networks, and flourishes within civil society, then Haldane's observations would be met with
"Doh, you betcha!"
Then, also, Bill Black's observations that crime actually does exist, and often looks exceptionally
respectable, would be impossible to ignore.
Timmy Geithner is probably not a fan of: (a) Bill Black or (b) the idea of money as inherently
social. Fuel is an emotionally sterile construct to work within; it enables one to avoid moral
qualms, or any sense of personal responsibility when ' engines blow up', or when they 'run
out of fuel '.
The fact that Haldane's observations and analysis are not more widely embraced suggests that somehow
the business schools, economics departments, and bankers all still use thought processes shaped in
the era of whalers seeking blubber for lanterns and lamps. Also, they probably still receive endowments
from the Kochs, Exxon, and other fuel obsessed interests.
Until the metaphors move to biology, with a concomitant recognition that some kinds of ' fuel
' (aka Coke, Fritos, Doritos, donuts) work for short-term energy bursts, but carry extremely
negative longer term costs, I doubt that even the best attempts to muddle through will get us out
of this mess. Without amendment, this system is going to do one of two things: (1) implode (not too
violently) or else (2) blow up (social unrest).
I have no idea what the banker equivalent of 'chard, lettuce, and celery' would be, but some bright
mind ought to be thinking about it. (You distinguish yourself as such a mind; I hope that my metaphor
is not too offensive…)
I interpreted Brexit as a 'tea leaf' that the banks could no longer be made fine-proof without
triggering social unrest. Then I read your comment, esp:
the U.K. government is stuck with its vast holding in RBS. The only way it could ever be rid
of the RBS albatross is for RBS to have some vague hope of (eventually) earning its way back to
being something other than a complete basket case.
Apart from, ironically, the central banks' own ZIRP policy, the biggest threat to this is endless
redress for wrongdoing.
The way that I read this, contemporary economics and finance leads to utter, unmanageable
disaster from which there is absolutely no way out. The engine 'melts down', so to speak. I feel
as if I have spent the past 8 years watching systems nearly implode, be saved by extraordinary (lunatic)
measures, and in the end the systems of thinking that created these problems are precisely the mental
pathways that keep people stuck in a labyrinth of dysfunction.
Banking needs to be completely rethought, using the social sciences, which include the realities
of criminal conduct corroding the system to such a degree that it is threatening to implode. I'm
moving toward being agnostic as to whether this is a good thing, or not. Either way, the present
systems as I've read you describe them do not seem even remotely sustainable.
The metaphor I think applies is that we use money as both medium of exchange and store of value.
While the first is inherently dynamic, the second is static, so a good analogy is that in the
body, the medium is blood, while the store is fat. The trick has been how to store extreme amounts
of notional wealth and that is largely by having the government borrow it back out and spend in
ways which support the private sector, but don't compete with it in the hunt for profits. So are
all those pallets of money going to fund our wars really about war, or is it about keeping that
money flowing in one end and out the other? Consider all those super secure US savings bonds are
mostly just being poured down various rat holes, rather then building a sustainable society.
This probably goes back to Roosevelt, who borrowed a lot of unemployed capital to put a lot
of unemployed workers back to work.
Money is not a commodity to be mined or manufactured, whether gold or bitcoin, but a contract.
Every asset is the other side of an obligation. It allows a large economy to function, but it
also reduces community reciprocity, creating atomized societies.
Like blood, the economy needs very regulated amounts of money, as it functions as a voucher
system and storing lots of excess vouchers eventually causes the system to collapse, when everyone
tries to dump them at once. If government threatened to tax excess out, people would have to find
other ways to store value, like in stronger communities and healthier environments, aka the commons.
Most people save for the same general reasons, housing, healthcare, retirement, etc, which are
ultimately community functions anyway.
Finance as a public utility doesn't have to be subservient to government. Much as government
is analogous to the central nervous system, finance is to the circulatory system and the head
and heart are separate organs.
Government started out as a private business, institutionalized as monarchy, before becoming
a public utility. Now is the time to do the same with finance.
I'm leaning strongly to the idea that money is information . More specifically, it's
information about general claims on national commerce. That gold coin in your hand is a bidding
right . The obligation isn't to any one person, but your possession of it means that there's
one less gold coin's bidding power throughout the rest of the economy.
I'm still sorting out my thoughts on this, but Frederick Soddy, the Technocrats (a short-lived
1920s – 1930s US movement), and the ecological economists (Georgescu-Roegen, Daly, Boulding, etc.)
seem to make more sense to me.
The more I read of traditional / classical / neoclassical / post-Keynesian monetary theory
the more I suspect nobody has much of a clue.
Excellent and original points that make a tremendous amount of sense. Thank you.
One tiny quibble. It's hard to work out how "1. Implode, not too violently" could give
rise to anything other than lethal shortages, especially in urban environments, and how this could
lead to anything but "2. blow up, social unrest" anyway.
US Grant rode in a horse-drawn carriage from his inauguration to a White House lit with coal-gas,
while oil or candles. Medicine, sanitation, and agriculture was hardly different than it was in
Roman times. The railroad and the telegraph represented technological progress.
A little more than 30 years later McKinley rode in an automobile to a White House lit with
electric lamps, that had running water and sewage. Steel framed buildings could rise more the
3-4 stories off the ground. The causes of many diseases were known and somewhat preventable. The
first radio transmission was months away, and the first powered flight was 3 years away. The standard
of living of an average American doubled during that period. And it was all done under the gold
DGP per capita of the US peaked in 1973, the same time Bretton Woods formally ended. A dollar
today buys what 3 cents could buy when the Fed was formed. Do these FACTS escape the Krugmans
of the world or are they merely inconvenient and in conflict with what seems to be the true nature
of academic economics, to provide pseudo-science cover to political policy?
By all means let's go back to worshipping a dumb, shiny metal rather than, for instance, removing
all priviledges for the banks. And let's replace theft by inflation and deflation with theft by
And let's confuse correlation with cause since the massive gold and silver strikes during that
period greatly increased the money supply and indeed, in some places, caused huge price inflation.
And let's forget that it is the government's authority to tax that gives value to fiat and give
gold owners a huge bonanza by making fiat needlessly expensive.
Setting aside your implied straw man, that it's a binary choice between unconstrained credit
creation, and "worshipping" gold, would you argue that today's society is better or worse than
that of 1970, just before the final (golden) constraint was broken?
Does the answer to this question answer the question? Money is social relations, power
relations, if Gold is law then the powerful will grab the gold. If not, they'll grab the money
creating buttons in various spreadsheets, unless opposed by all.
just before the final (golden) constraint was broken? Tinky
The central bank should not be allowed to create fiat for the private sector (e.g. Open Market
Purchases) AT ALL so no constraint is needed there other than absolute prohibition.
As for the monetary sovereign, price inflation is a restraint wrt fiat creation since the voters
Also, please note that the demand for fiat is greatly reduced via other privileges for the
banks. Eliminate those and the demand for fiat shall greatly increase – greatly increasing the
amount of new fiat that can created without significant price inflation. This will be especially
the case when government provided deposit insurance is properly abolished since a huge amount
of new fiat should be required*.
*For the xfer of at least some currently insured deposits to inherently risk-free accounts
at a Postal Checking Service or equivalent.
How much of that fiat creation gets done via electronic means? Maybe there is a way to
make the vulnerability that the central banks and banksters and CorpoStates like GE and Cigna
and Goldman Sux nd the rest impose on the vast rest of us into a mutual exposure?
I mean, "they" can leverage and disappear and derivatize "capital" and ZIRP and NIRP with impunity,
and steal people's homes and garnish and change contract terms on personal accounts unilaterally.
Is there a turnabout, or are "we" so terrified of "instability" (where no "stability" really
exists, "disruption " and all that, not to act? As well demonstrated in many posts in this very
blog, it's not like the Fortress of FIRE's walls are any stronger than the foundations it is "coded"
@scott 2 – "A dollar today buys what 3 cents could buy when the Fed was formed."
That something is true does not make it relevant; it can also be misleading. The real (domestic)
purchasing power of a dollar is determined by the amount of labor it takes to earn that dollar.
With the gains in labor productivity since 1913, it takes much less labor to earn today's dollar
than it took to earn that 3 cents 103 years ago. Comparing the nominal cost of a loaf of bread
in 1913 with its nominal cost today tells us nothing useful.
Agricultural productivity rises so food costs less; industrial productivity rises so goods
cost less; and these are what is known as "progress". Increasing productivity is what raises our
standard of living.
But ah, there's a fly in the ointment, we have a debt-based money creation system. Problem
1.): Banks can print the principal but they can't print the interest. This leads to
2.): people borrow either because they think they can grow money faster than the debt service,
or because they are desperate and have no other choice.
Problem 2 (a) is that debt pulls demand from the future to the present, and when enough demand
is pulled forward people will no longer feel they should borrow for future growth because there
is none in sight. This leaves only desperate people borrowing to service existing outstanding
debt and that prophecy fulfills itself.
We are told this is somehow a "steady state" system but that is mathematically and obviously
incorrect. Even with unnatural acts like interest rates below zero (how can time preference be
below zero, and what does that say for the prospects for growth?) the system winds down and needs
to be completely reset.
The percentage of times that debt-based currency systems have failed in the past and gone to
zero = 100…leave it to alchemists economists to insist they can pull it off though.
Like the Soviet Union we now live in an era of centrally-planned price fixing for the most
important price of all in the economy: the price of money.
It's true that in eras where the price of money fluctuated wildly there were also wild fluctutaions
in the economy, booms and busts.
But someone made the statement: "The Fed makes the economy more stable. But I do not think
that word means what you think it does".
So no more busts…and no more booms, either. So put the periods of fastest economic growth and
fastest rises in the standard of living out of your mind, those are history. And given the mathematics
of "unlimited" debt creation, we'll get the bust anyway.
There is nothing wrong with interest, as long as the rate is reasonable. It is a service
charge for someone handing you money now to buy what you want now instead of waiting to save up
the money. Interest does not make an economic system unstable. It's the same as a massage or other
service you buy. You just need enough income to cover it, and the principal payment of course.
Some people seem to have this idea that x amount of money was created to buy a car, but none
was made to pay the interest. This causes the world to end. Not so. Money circulates and we know
that around a trillion or so in circulation seems to be enough to support our $18 T in annual
GDP. What is does mean is to pay off the 5 year car loan, you spent 4 years paying off the car
and another year paying the interest.
A benefit of interest is it may allow people to live past retirement age – but there there
is little economic focus on this phenomena.
There is nothing wrong with interest, as long as the rate is reasonable.
In principle this is true, but it leads to a paradox in an economy in which money is based
on debt. You start your second paragraph with an acknowledgement of this, but then you back down.
In such an economy, money is created when it is loaned - this money is the principal of the loan.
When the money is paid back, the money disappears.
But wait - the debtor must also pay back more than the principal of the loan; he or she must
also pay back the interest. How is the interest created? The same way as the principal, but it
is created by someone else's loan. So in a debt based economy, the amount of money in existence
is less than the total amount of people's debts.
If everyone is thrifty, and pays back their loans promptly, some people will never be able
to get the money to pay their interest. It's a game of musical chairs.
Pretty close, but consider this. The loan got paid back, the "money" disappeared, but the bank
gained it as new loan capacity. The bank makes a new loan. So far I think I'm repeating what you
stated. One minor problem is you say money is less than debt – it will be – debt is the contract
for the entire amount. But not everyone pays it all off at once – we just need the liquidity to
be there so the payor's personal bank account, or the one of their employer, doesn't run dry.
So at this point it's a matter of the banking system and the Fed managing liquidity. But the
size of the Fed balance sheet and reserves steadily increases over the years to account for growth
and any other liquidity needs the banks may have. It's either done directly with banks – buying
treasury bond assets or loans to banks, or they buy Treasuries in the market, the money goes somewhere,
then there is interbank lending to make it go where it's needed. (all in theory, of course. But
the theory seems sound, when uncorrupted.)
You make it sound like a steady state system, but it's not, debt is *always* issued in excess
of people's capacity to pay whether for political, psychological, or other reasons. The Fed knows
this. So they desperately want to reduce the total indebtedness by inflating it away, and this
puts everyone on a giant rat race treadmill, working two jobs trying to outrun the rise in prices.
Given the rise in productivity we're all supposed to be living like the Jetsons by now but Oh
No gatta keep running to stay in one place.
The Fed has forgotten that there is another way to reduce serial overindebtedness and that is
B-A-N-K-R-U-P-T-C-Y. It has the added advantage of being an actual capitalistic endeavor, and
not the inverted hyper-socialism we have today.The Fed keeps putting out brush fires so the dead
wood keeps building up, eventually there is an unholy crowning conflagration that takes the whole
forest with it.
Firstly, I said there is nothing wrong with interest . If you want to shift to "could
something go wrong with principal_plus_interest in a fractional reserve central banking system",
then, why yes! Plenty!
No, the system is by no means steady state – the economy has ups and downs and there are those
occasional "credit crunch" periods where banks get spooked over some such thing and stop lending
completely and then it seems like all the money disappeared. But that's why we have the Fed and
everyone furiously managing liquidity.
Since we're on a terminology thread (and my grandfather was a whaler), the whaling vessels
out of Nantucket tended to be square-rigged - barques, brigs, etc. Schooners were coastal vessels
used by fishermen more often than by whalers, who travelled long distances to launch their hunts.
Great post - I want to puke every time I hear Wall Street referred to as an "economic engine."
More like "social engineering" - of fraud schemes.
A couple of generations ago most people lived on farms. Many would trade grain to pay the miller.
In essence, hard cash was needed for goods at the general store.
Debt was used to finance big projects that were based on hard assets, land, commodities.
Fast forward to today…. banks still favour collateral based on hard assets yet services are
a much bigger part of our economy. I would venture to say that banks lend on soft collateral when
it is fed by sectors that have hard asset collateral or with a government guarantee.
IMO, get government out of everything and watch the economy drop to an economy of sustenance
based on hard asset collateral which will get increasingly constrained with world population going
from 7 to 9B. Exactly what rentiers LOVE!
Debt was used to finance increases in productivity. Unless you have a sweat shop in your basement,
a house is not a productive asset. It's a slowly appreciating consumer of capital, real and financial
(utilities, maintainance, and taxes). In distorted markets like California, it can make a lucky
few a lot of money while turning the area into a feudal system of land owners and serfs.
A side effect of financialization has been to turn the US economy into one that lives, temporarily,
on housing speculation. When people realize that spending $2 million on a bungalow that should
only cost $40K is the TRUE mis-allocation of capital, let's hope they don't realize that all at
A couple generations ago land in many places was still relatively cheap. Asked my father once
how our family of dairy farmers managed to have as much land as we do and was told that my grandfather
often received land as payment. He'd give someone an animal or a side of beef and they'd give
him an acre they owned abutting his property that they weren't using for anything anyway. I've
seen some of the old ledgers found in his attic and as you noted, cash was not just in essence
but in fact used for goods at the general store. The barn itself was built with the help of the
community although I'm not sure how that was paid for but I'd wager that any financing was minimal.
The economy was a few steps above just sustenance but the population was a lot less and there
weren't nearly as many rich people from the city coming in looking for second (or 3rd or 4th)
homes in the country driving up the cost of real estate. Two generations later land is much more
dear to the point where our family likely wouldn't be able to afford to purchase property if they
needed extra acreage.
There are far too many economists who seem to think that money actually does grow on trees
in the sense that it's a naturally occurring resource that human beings can't control – it's all
determined by markets. In that sense I'd describe money not so much as a fuel but as a weapon.
I believe Jon Perkins had a similar description in his Confessions of an Economic Hitman. Weaponized
war is no longer the first option among advanced economies – first they'll try to bleed other
countries dry with economics. It's only when the victims won't cave that the bombs start dropping
But money does not occur naturally and it should not be considered a fuel or a weapon. As noted
in the article it's a concept created by human beings and should be considered a very malleable
tool that we can use to do pretty much whatever we as a society decide we want to with it. If
we truly wanted to create a more equitable society there is nothing stopping us from doing so
except the greed of the few.
@lyman alpha bob – "As noted in the article [money is] a concept created by human beings
and should be considered a very malleable tool that we can use to do pretty much whatever we
as a society decide we want to with it. If we truly wanted to create a more equitable society
there is nothing stopping us from doing so except the greed of the few."
Adding: The Big Lie that the federal government needs tax revenue in order to operate,
so we "can't afford" the social benefits that help the non-rich, must be constantly debunked and
Weaponizing money. That's a valuable concept. It reminds me of the end of David E. Martin's
(true-story-called-fiction-to-avoid-lawsuits) book "The Apostles of Power". And this was the reason
he wrote the book, actually–to fend off a major play to steal all the electronically-stored reserves
of the Fed into their own accounts, and destroy the evidence of their actions by triggering a
nuclear explosion of the precise nuclear power station that provided the power to the NYC/NJ computers
that stored the data. By telling enough about the plan in process (only the minor, human-created
fake "earthquake" at the Santa Ana reactor occurred, as the charges had been set before the book
was published; the book predicts the "earthquake"), a nuclear disaster and major financial theft
Martin spoke about this, and the other real events described in the book, in a number of radio
interviews he gave in 2012, the year the book was published.
"Here's the [Machine] trick: Design the machine that will produce the result your analysis
indicates occurs routinely in the situation you have studied. Make sure you have included all
the parts – all the social gears, cranks, belts, buttons, and other widgets – and all the specifications
of materials and their qualities necessary to get the desired result."
Well, great! That part of the great discourse has been decoded and unpacked and all that, I
feel much better for the personal increase in awareness of how fokked things are.
Now, how are "we" going to get billions of other humans to the same state of awareness, to
stop talking about "fuel" when talking (using a gazillion other "terms of art" and memes and tropes
that are similarly opaque and whitewash and FUD-laden) about "the economy" and "economics" and
while generating ever more momentum for those same deadly (but profitable for the few) terms,
tropes, memes and shorthands? "Profitable" being one of them, "profit" being part of the disease
process, because after all, for the individual or the firm s/he belongs to, "profit" (ignoring
externalities, of course) is the summum bonum that lets you buy stuff and experiences galore?
Other Juggernaut words, just a very few: "bonus", "healthcare", "entitlement", "MArket", "free
trade," and a personal favorite, "donor" meaning very simply "BRIBER/corrupter" but hey, those
very few squillionaires who own everything including the "political process" are described millions
of times a DAY on the intertubes as "donors," "donors" to political candidates and PACs and "think
tanks" (??another fave). Giving a kidney to a person with terminal kidney failure, "donating"
one's corneas and body parts or those of deeply loved ones suddenly deceased, those are ""donations."
Not Koch or Adelman or Soros or Gates etc. billions to "Foundations" or operas or art museums.
"We," who are Aware, perceive some of this, often argue and debate and cavil over nitty bits
of those perceptions. That is so very effective, isn't it, the few hundreds or thousands of "us"
who participate in or observe the Flow in NCspace, in bringing about any kind of regression to
a mean that is hardly defined or maybe undefinable, a mean that might actually be "kind" and "decent"
and "fair" and "just" (whatever those terms are taken to mean)?
What is to be done about it? "We" ain't either powerful or certain enough to do something like
a "global search and replace" across the entire internet, with a burning of all the books and
papers, and a quarantine of all the GeithnerDimonGreenspanKrugmans and their myriad of citers
and followers and extenders, that carry the infection forward into the label minds of future "policy
makers" who like most humans who (I am assured by others) are wired to seek dominance and pleasure
and reproductive success? And who obviously are the dominant, successful vector and segment of
the "political economy?"
The plagues that Pandora was tricked into loosing on "humanity" have been out there probably
too long to be re-packaged. Nice effort for those who try, try and try again, but that effort
seems to me mostly pissing into the wind…
TINA. Sadly it's true, we appear somewhat stuck in this mode of what's working. I personally
appreciate the credit union / co-op model of accomplishing financial intermediation but that is
also a continuation of what we have.
Biggest problem in the US, no one competing with the FED.
"some of the recent coinages, like "sharing economy" are downright Orwellian". Yes, but that
phrase can be and is easily replaced in casual conversation with "the sharecropper economy".
(Be prepared to deliver a short explanation what a sharecropper is to the youg 'uns.)
Another valid word out of the past is "the man," as in the giver of overpriced credit to the
sharecropper who often ended up with zero profits and thus was kept in perpetual debt. Central
Everybody talks about "thought leaders" but no one ever talks about "thought followers," much
less actually claims to be one. But without "thought followers" how can you have "thought leaders"?
And anyway, wouldn't "thought leader" be applicable to anybody whose thinking ends up being
followed by others, for good or ill? Wouldn't Charles Manson be a "thought leader"? He certainly
was for the Manson Family….just a thought…
I always thought the exhortation to be thought leaders was a ruse for encouraging people to
speak up and try to act as thought leaders. That way those who worked us could identify the taller
daisies and thereby identify which flowers to top.
Seems like some combination of Frederick Soddy and Michael Hudson is called for here. Soddy
is apparently a tough slog even for otherwise intelligent people. So at the risk of over-simplification
here is my attempt to convey his ideas about money and wealth:
Money is not wealth. It is a claim on wealth, i.e. debt.
Wealth. Soddy provides both a practical and a more abstract definition of (the ingredients
"But economics, in a national sense, is concerned with wealth as what is produced by human
beings to maintain their lives.
Discovery, Natural Energy and Diligence, the Three Ingredients of Wealth
For Discovery, think research and development (R&D) and of course education so R&D is even
possible. For Natural Energy, think, for most of the Industrial Revolution (IR), fossil fuels.
(Pretty obviously we need to do something different if we want to keep the machine the IR built
functioning, sustainably producing the wealth which sustains our civilization.)
One of my favorite passages from Soddy's "Wealth, Virtual Wealth and Debt" is:
"As Ruskin said, a logical definition of wealth is absolutely needed for the basis of economics
if it is to be a science."
But without a science-based definition of wealth, i.e. continuing to use profit and money as
a measure of 'productivity', just 'printing' more money (even Hudson's MMT) will solve nothing.
Put these observations together and you get an idea what should 'back' money – wealth not gold
or as Hudson puts it "Debts that can't be repaid (and) won't be."
Hudson's 'clean slate' provides the other part of the solution. As Hudson notes, the 'miracle
of compound interest' is not sustainable – particularly when the West's 'financial engineers'
are busy cranking out money (as debt) at rates well in excess of going interest rates. Just continuing
to use profit and money as a measure of 'productivity', 'printing' more money (even Hudson's MMT)
will solve nothing. Probably by the middle of the 20th century, the West had 'enough' wealth its
people could begin to find other purposes in life than creating ever more of it (to make ever
more money, i.e. acquire ever more debt to be paid by someone – the unborn?). Again from Soddy
/ Ruskin – real "Wealth rots." That's what's happening to the West's 'culture' as its ruling classes
mindlessly attempt to acquire ever more money.
It isn't just the 1% who are going to have to take their lumps, to stop playing games with
the world's future so they can, as candidate Trump put it, 'run up a bigger score' with money
for which they have no immediate need. It is those of us in the 99% who do not possess the skills
and aptitudes required for the genuine creation of wealth, wealth the world needs and can sustainably
afford. Those numbers are going to grow as the Industrial Revolution succeeds, with human labor
and rote intelligence replaced more and more by machines powered by "natural energy". But, even
if we can't find our niche, I take it as a given that we are all born with a right to life.
Wealth is hard to define because what we view as wealth might be a money pit that guarantees
For example, instead of injecting money directly in the faculty of medicine, a university might
have decided to fund a football team to attract the capital and end up building a stadium… Instead
of just funding the faculty.
All these activities related to the sports team contribute to GDP. The bankers might have been
productive and efficient in raising capital, the coach might be productive and make a winning
team, the builders of the stadium might have been very productive building a fine structure but
all these activities sucked up resources and energy that could have been used by other sectors
to better serve the future of the country. Maybe these activities are totally unsustainable. They
might appear as wealth currently but will lead to poverty over time.
Since ou basic needs have been met, we have been investing in a forever greater number of non-essential
resource intensive activities which show how disconnected we have become from the earth supporting
The terminology of finance is designed to hide predatory and extractive activities behind
a curtain of beneficial-sounding words. These terms are deeply embedded, and serve both to put
some friendly makeup on the business, and allow the "consumers" to feel better about their capitulation.
The process is akin to the way politicians wrap themselves in the flag while they sell out the
citizenry. We know deep down that they are lying, but we prefer the false patriotism because it
serves the lies we prefer to tell ourselves. We bitch and moan, but we play our part, because
not doing so leads to trouble. It is the way most of us live our lives.
One of the biggest problems people face in discussing matters financial, is that the very terminology
of the system undercuts the critiques. Just as criticizing the wars invokes in some the specter
of failing to support the troops and the specter of criticizing America, criticizing Wall Street's
predatory aspects invokes in many the specter of criticizing institutions we have been led to
believe represent the essence of American freedom. Doing so makes you at least a malcontent or
troublemaker, and maybe even some sort of subversive pinko. Either way, you're rocking a boat
many do not want rocked.
Using analogies and metaphors to discuss such matters can outflank the loaded-terminology question
to a significant degree. You can cut through a lot of the fog of jargon by describing the activities
in other terms. (E.g., Dave's "sharecropping" for "sharing economy.")
We are in an era in which the financial world is being downsized and consolidated, the giant
speculative bubble which dominated most of our lives is being deflated and wound down before our
eyes. There is still speculative activity, to be sure, but there is also a rise in the use of
rentier income. This downsizing process involves shifting losses wherever possible down the food
chain, including to institutions which previously were integral parts of the system. Insiders
are finding themselves outsiders, jettisoned by other insiders.
This reminds me of the situation of a pack of wolves, grown large in an era of plentiful food,
but now finding that food supply dwindling. The pack must shrink to survive, the excess members
culled in often brutal ways. The strongest eat the most, the rest are left with the scraps, or
nothing at all. The financial system is similar, a pack in which the herd is being culled. Individual
institutions, even important ones like Barings or Lehman, are ephemeral. They come and they go,
just like individual wolves in the pack. But the pack lives on, and so does the financial system.
To the wolves, the pecking order, who lives and who dies, is very important. But for the creatures
the pack eats, such concerns are irrelevant.
Either way, you're rocking a boat many do not want rocked.
Perhaps. Or perhaps the alternatives to our ruling narratives and power mechanisms have been
ruthlessly dismantled and extinguished. For example, I would love to join a union. But I live
in a right-to-work state.
I would love to have representation at my workplace and have some degree of bargaining power.
I guess there's always the complaint box. Or the "freedom" to hit the bricks.
Luckily, I went to school when it was affordable, so I don't have student loan debt. I rent,
and although rents continue to rise every year, I don't have a mortgage hanging over my head.
My younger colleagues are saddled with outrageous student loan debt that they will never likely
repay. Unfortunately many/most of them bought into the housing market. How likely are they to
even entertain the idea of speaking truth to power?
I'm past 50, and you know what that means to my prospects of finding another job. Young and
old, we just keep our mouths shut and do what we're told.
The US represents 5% of world population but consumes a much larger share of world energy and
resources. The 99% are concerned about fairness but if they truly cared, they'd understand that
the global economy needs to shrink their share of resources to 5%. And the leveling is getting
stronger by the day. Most people go along the big lie because of hope.
Question about your numbers - I think our share of resources needs to shrink but I'm not sure
5% is the right number. Are some of the resources in that 5% dedicated to our Industry? Is our
industry productive? and who gets the stuff? It may be we need to shrink our use of resources
to 4%. And what about the who uses how much of what resources? How do you count the resources
used to support our car, bus, and truck industries while deliberately stifling mass transit. I
only make these quibbles to avoid your logic of proportions. Clearly we must take/steal less from
the rest of the world and share what we have. I believe there is enough to go around - once a
few (quite a few) problems here and there are taken care of.
I'm not sure how much hope continues to hold up the big lie. I think the supports for the big
lie need a lot of maintenance to keep it from falling. Maybe we can simply stop using that road.
I don't know what the number is but from my vantage point , it looks like the western work
is heading for a world of pain. Americans want America to be great again but it's based on materialism.
To be great again would mean a different kind of greatness where the economy is based on a
reduction of it share of resources.
But the population is still very far away from the fact that its way of life depends on an
unfair distribution of world resources which will probably lead to a big world struggle meaning
a focus on the military.
This is not what I want by what I see in the horizon.
There's a reason money and fuel are in the same sentence. It's because the a nation's power
depends on energy.
It might seem trite, but if an American is patriotic, he or she will try to reduce the nation's
energy use by using energy efficiently. Whether it's transportation, home heating, home cooling,
or nighttime illumination, one should use the energy efficiently. Aside from the immorality of
using so much more than many other people in the world, it's a way to reduce pollution and to
avoid sending money to the Wahhabi nut jobs in Saudi Arabia. Plus, energy efficiency saves money!
Our country has the capacity to help the world get through the crises of Global Warming and
the end of oil. Our country has responsibility as one of the guilty parties - one of the most
most guilty in taking more than our share and sharing less than we are able or should share. The
meaning of riches is best enjoyed through the sharing of those riches. In ancient times - at least
in some places - that was the privilege and obligation of the rich.
I would feel deep shame for our country if it is to be remembered in the future for what it
has done so far.
Great comment, ROTL! Accords very well with my understanding of the power of metaphors, to
bring into being the world stage on which we strut our stuff.
Many here at NC often comment on the quasi-religious nature of economics. I'm always struck
by the conflation of the organic/natural world with mechanics. Wrongly conceiving of market forces
as natural forces and so on. I think you've struck a blow against this wrong-headed mythos at
its weakest point. If the metaphors that bring into being this world of pain we're living in themselves
are discredited, the whole edifice could come crashing down in no time.
If anyone's interested in a little exercise, trying paying attention to the metaphors one uses
for organic systems, and society at large. Even though I'm aware of their inappropriateness, it's
hard not to think in mechanistic terms. And not just mechanistic, but weaponized, at that. You
can't even listen to a baseball game without hearing metaphors of war all the damn time. Then
there are "Twitter wars" and "Facebook wars" ad nauseaum.
Money is nutrition, not a snack. It's food and fertilizer. It makes things grow. You have
to share it with other life like bacteria and worms: without these organisms in your gut ecology,
you get sick (autism, diabetes, obesity, M.S.). Idiots try to convince us these organisms are
parasites instead of symbionts just like Monsanto thinks bees are disposable or Donald Trump likes
to think of pregnant women as drags on business profits.
Where does he propose business find future workers if not in wombs? From where will his future
Perhaps in sharing economy of future America, companies will have to share their dwindling
customers and make do with less?
If you think altruism is for suckers, your Ayn Rand economy collapses because you confuse
parasites with symbionts and symbionts with parasites. You can't distinguish between compensation
for earned and unearned income. What's a tax and what's theft? Try living without bacteria making
butyrate in your gut. Wells Fargo can no more survive without little people like airport janitors
to scrub out the TB and Ebola stains than our cells can breathe without mitochondria. Yet who
gets their pay driven down in corporate America?
Money weaves a supporting web of trust, a mutual network of obligations and payments – and
what happens biologically when that web inside us is broken and friends become enemies and we
treat enemies as friends? Is fraud any different than autoimmunity or cancer?
Well, I was gobsmacked to see this show up when I finally logged on to the Internet today.
Many heartfelt thanks to all who commented so thoughtfully and insightfully; and also to the remarkable
NC crew (Yves, Lambert, Jerri-Lynn, the IT folks), as well of course to Clive.
I think that we are all rooting for the time when Haldane's insights are met with 'Doh', and
when we celebrate Bill Black as a Nobel in Economics ;-)
First, as Harvard's Robert Barro says: there has been no recovery since 2010.
The unemployment rate here in the U.S. has come down, yes. But the unemployment rate has come
down primarily because people who were unemployed have given up and dropped out of the labor force.
Shrinkage in the share of people unemployed has been a distinctly secondary factor. Moreover, the
small increase in the share of people with jobs has been neutralized, as far as its effects on how
prosperous we are, by much slower productivity growth since 2010 than America had previously seen,
had good reason to anticipate, and deserves.
The only bright spot is a relative one: things in other rich countries are even worse.
I thought Krugman and Furman were bragging about Obama's tenure.
"Now note that back in 1936 [John Maynard Keynes had disagreed]:
"The State will have to exercise a guiding influence... partly by fixing the rate of interest,
and partly, perhaps, in other ways.... It seems unlikely that the influence of banking policy on
the rate of interest will be sufficient by itself.... I conceive, therefore, that a somewhat comprehensive
socialisation of investment will prove the only means of securing an approximation to full employment;
though this need not exclude all manner of compromises and of devices by which public authority will
co-operate with private initiative..."
By the 1980s, however, for Keynes himself the long run had come, and he was dead. The Great Moderation
of the business cycle from 1984-2007 was a rich enough pudding to be proof, for the rough consensus
of mainstream economists at least, that Keynes had been wrong and Friedman had been right.
But in the aftermath of 2007 it became very clear that they-or, rather, we, for I am certainly
one of the mainstream economists in the roughly consensus-were very, tragically, dismally and grossly
DeLong sounds very much left rather than center-left. His reasons for supporting Hillary over
Sanders eludes me.
Hillary's $275 billion over 5 years is substantially too small as center-leftist Krugman put it.
Now we face a choice:
Do we accept economic performance that all of our predecessors would have characterized as grossly
subpar-having assigned the Federal Reserve and other independent central banks a mission and then
kept from them the policy tools they need to successfully accomplish it?
Do we return the task of managing the business cycle to the political branches of government-so
that they don't just occasionally joggle the elbows of the technocratic professionals but actually
take on a co-leading or a leading role?
Or do we extend the Federal Reserve's toolkit in a structured way to give it the tools it needs?
Helicopter money is an attempt to choose door number (3). Our intellectual adversaries mostly
seek to choose door number (1)-and then to tell us that the "cold douche", as Schumpeter put it,
of unemployment will in the long run turn out to be good medicine, for some reason or other. And
our intellectual adversaries mostly seek to argue that in reality there is no door number (3)-that
attempts to go through it will rob central banks of their independence and wind up with us going
through door number (2), which we know ends badly..."
Some commenters believe more fiscal policy via Congress is politically more realistic than helicopter
I don't know, maybe they're right. I do know Hillary's proposals are too small. And her aversion
to government debt and deficit is wrong given the economic context and market demand for safe assets.
"Moreover, the small increase in the share of people with jobs has been neutralized, as far as
its effects on how prosperous we are, by much slower productivity growth since 2010 than America
had previously seen, had good reason to anticipate, and deserves."
?????? The rate of (measured) productivity growth is not all that important. What has happened
to real median income.
And why are quoting from Robert Barro who is basically a freshwater economist. Couldn't you
find somebody sensible?
Barro wants us to believe we have been at full employment all along. Of course that would mean
any increase in aggregate demand would only cause inflation. Of course many of us think Barro
lost it years ago.
These little distinctions are alas lost on PeterK.
 Do we accept economic performance that all of our predecessors would have characterized
as grossly subpar-having assigned the Federal Reserve and other independent central banks a mission
and then kept from them the policy tools they need to successfully accomplish it?
 Do we return the task of managing the business cycle to the political branches of government-so
that they don't just occasionally joggle the elbows of the technocratic professionals but actually
take on a co-leading or a leading role?
 Or do we extend the Federal Reserve's toolkit in a structured way to give it the tools
Helicopter money is an attempt to choose door number (3). Our intellectual adversaries mostly
seek to choose door number (1)-and then to tell us that the "cold douche", as Schumpeter put it,
of unemployment will in the long run turn out to be good medicine, for some reason or other. And
our intellectual adversaries mostly seek to argue that in reality there is no door number (3)-that
attempts to go through it will rob central banks of their independence and wind up with us going
through door number (2), which we know ends badly...""
Conservatives want 1 and 2 ends badly, so 3 is the only choice.
So I was peacefully drinking my coffee this morning, and was accosted by someone waving the latest
Wall Street Journal editorial on the dollar * in my face, demanding my reaction. Um, this is not cool.
Also, with apologies to Brad DeLong, when reading WSJ editorials you need to bear two things in mind:
1. The WSJ editorial page is wrong about everything.
2. If you think the WSJ editorial page is right about something, see rule #1.
After all, here's what you would have believed if you listened to that page over the years: Clinton's
tax hike will destroy the economy, you really should check out those people suggesting that Clinton
was a drug smuggler, Dow 36000, the Bush tax cuts will bring surging prosperity, Saddam is backing Al
Qaeda and has WMD, there isn't any housing bubble, US households have a high savings rate if you measure
it right. I'm sure I missed another couple of dozen high points.
Today's editorial was in the grand tradition. A few months ago falling stock prices showed Obama's
failure - never mind, we meant the falling dollar. And just to provide extra spice, the editorial cited
David Malpass ** as the wise expert on all this.
But more specifically, you need to see the Journal's fear of a weak dollar in terms of its long-term
gold-bug position. The Journal has always maintained that changes in exchange rates play no useful role,
that stable exchange rates - preferably enforced by some barbarous relic like the gold standard - are
the essence of sound policy.
I explained why this is all wrong a long time ago. *** But it's especially important to understand
the wrongness of this view right now. If there's one overwhelming lesson from the Great Depression,
it is that putting a higher priority on stabilizing your currency than on domestic recovery is utterly
disastrous. Barry Eichengreen **** pointed out years ago that major economies went off gold in the following
order: Japan, Britain, Germany, US, France. And here's what happened to their industrial output:
[Slowest to leave the gold standard, slowest to recover.
All that glitters went off gold.]
The WSJ may not realize it, but it wants us to be France in the 1930s. Let's not.
The legend of King Midas has been generally misunderstood. Most people think the curse that turned
everything the old miser touched into gold, leaving him unable to eat or drink, was a lesson in the
perils of avarice. But Midas' true sin was his failure to understand monetary economics. What the gods
were really telling him is that gold is just a metal. If it sometimes seems to be more, that is only
because society has found it convenient to use gold as a medium of exchange--a bridge between other,
truly desirable, objects. There are other possible mediums of exchange, and it is silly to imagine that
this pretty, but only moderately useful, substance has some irreplaceable significance.
But there are many people--nearly all of them ardent conservatives--who reject that lesson. While
Jack Kemp, Steve Forbes, and Wall Street Journal editor Robert Bartley are best known for their promotion
of supply-side economics, they are equally dedicated to the belief that the key to prosperity is a return
to the gold standard, which John Maynard Keynes pronounced a "barbarous relic" more than 60 years ago.
With any luck, these latter-day Midases will never lay a finger on actual monetary policy. Nonetheless,
these are influential people--they are one of the factions now struggling for the Republican Party's
soul--and the passionate arguments they make for a gold standard are a useful window on how they think.
There is a case to be made for a return to the gold standard. It is not a very good case, and most
sensible economists reject it, but the idea is not completely crazy. On the other hand, the ideas of
our modern gold bugs are completely crazy. Their belief in gold is, it turns out, not pragmatic but
The current world monetary system assigns no special role to gold; indeed, the Federal Reserve is
not obliged to tie the dollar to anything. It can print as much or as little money as it deems appropriate.
There are powerful advantages to such an unconstrained system. Above all, the Fed is free to respond
to actual or threatened recessions by pumping in money. To take only one example, that flexibility is
the reason the stock market crash of 1987--which started out every bit as frightening as that of 1929--did
not cause a slump in the real economy.
While a freely floating national money has advantages, however, it also has risks. For one thing,
it can create uncertainties for international traders and investors. Over the past five years, the dollar
has been worth as much as 120 yen and as little as 80. The costs of this volatility are hard to measure
(partly because sophisticated financial markets allow businesses to hedge much of that risk), but they
must be significant. Furthermore, a system that leaves monetary managers free to do good also leaves
them free to be irresponsible--and, in some countries, they have been quick to take the opportunity.
That is why countries with a history of runaway inflation, like Argentina, often come to the conclusion
that monetary independence is a poisoned chalice. (Argentine law now requires that one peso be worth
exactly one U.S. dollar, and that every peso in circulation be backed by a dollar in reserves.)
So, there is no obvious answer to the question of whether or not to tie a nation's currency to some
external standard. By establishing a fixed rate of exchange between currencies--or even adopting a common
currency--nations can eliminate the uncertainties of fluctuating exchange rates; and a country with
a history of irresponsible policies may be able to gain credibility by association. (The Italian government
wants to join a European Monetary Union largely because it hopes to refinance its massive debts at German
interest rates.) On the other hand, what happens if two nations have joined their currencies, and one
finds itself experiencing an inflationary boom while the other is in a deflationary recession? (This
is exactly what happened to Europe in the early 1990s, when western Germany boomed while the rest of
Europe slid into double-digit unemployment.) Then the monetary policy that is appropriate for one is
exactly wrong for the other. These ambiguities explain why economists are divided over the wisdom of
Europe's attempt to create a common currency. I personally think that it will lead, on average, to somewhat
higher European unemployment rates; but many sensible economists disagree.
"... Minsky famously quipped that everyone can create new money; the problem is to get it accepted as such by others. ..."
"... But even money-proper is not the same for everyone. Central banks create the money in which banks pay each other, while private banks create money for households and firms. Money is hierarchical , and moneyness is a question of immediate convertibility without loss of value (at par exchange, on demand). ..."
"... To convert shadow money into settlement money in case of default, repo lenders sell collateral. An intricate collateral valuation regime, consisting of haircuts, mark-to-market, and margin calls, maintains collateral's exchange rate into (central) bank money. ..."
"... What makes repos money – at par exchange between "cash" and collateral – is what makes finance more fragile in a Minskyan sense. ..."
"... Liquid markets become more fragile, he argued, by giving investors the "illusion" that they can exit before prices turn against them. This is a crucial insight for crises of shadow money. ..."
"... Criminality and corruption is embedded at the top of the financial food chain, by law. ..."
"... Motion seconded: Government sanctioned counterfeiting. ..."
"... …and does anyone remember the triumph of the desk slaves of the Crimson Permanent Assurance? Monty Python understood something about political economies and how one might achieve more fairness in outcomes… https://vimeo.com/111458975 ..."
"... Shadow money sounds to me like fictional capital by another name. And contractual based deposits sounds like counterfeiting. With the distinction that the man with counterfeit printing press robs the train, while the man who runs the Wall St Investment bank repo trading desk robs the whole railroad. ..."
"... Therefore, Money becomes a victim of the ontological argument for God by St Anselm. If God does not exist, an all powerful, all knowing, all present infinitely great in all categories of Supreme Being could not be written or spoken about, lacking the quality of existence. The fact that we CAN speak about an Omnipotent Supreme Deity means that one in fact exists, due to existence is part and parcel of Omnipotence. But of course, because we can talk or write about something, does not make it real. ..."
"... It can become socially acceptable as in the case of shadow money, but it is fictional capital, a shadow of the real thing. Time to get out of the cave of finance with its shadows dancing from the light of the fires and walk eyes wide open in the bright light of sunshine! ..."
"... Money is actually the easiest thing to write about, because it's formless energy. It's not that the phenomenon is shadow money, it's shadow assets. ..."
"... You have to be able to separate in your mind the ideas of 1) Quantity and 2) Form. That's why economics is a mental disorder, because it doesn't separate quantity and form. If you can't or don't, then yes, it's diabolically hard to write about because you're writing about two different things simultaneously without realizing it. Money is a quantity that is infinite and continuous, but form is an idea that is discontinuous and finite. People do what the forms tell them to do. The money is just like electricity that powers the animation of the forms. Repo is a form it's not money. It's existence results in a certain ordering of social relations, that's also a form. But money is just the energy that makes the forms potent. ..."
"... I guess that's why they used to call it "political economy" before the mental disorder fully usurped the power of perception and reasoning. ..."
"... Marx failed to acknowledge that supposedly hard-headed Capitalism is actually all about living beyond your means and mortgaging the future. ..."
"... It was designed from the Fuggars' and the Medici's to be about debt and fractional reserves and interest. A system based on a finite supply of money is going to grow not much faster, at best, than the money available allows. ..."
"... Capitalism allows explosive growth by supplying explosive amounts of credit. All this shadow banking activity is designed to get around reserve requirements; nothing else I can see calls all this complexity into existence. The banks always need more, because lending is how they make their money, so they want an infinite amount to lend in order to drive their profits towards the infinite. ..."
"... This article I think defines shadow money alright as starting where bank deposits leave off but as the above comments suggest seems to miss some key points. I think a major problem with the article is seeing central banks as separate from the state rather than seeing the central bank along with the Treasury as the state itself. ..."
"... The article gets Treasury debt wrong by seeing it as the central bank funding the state rather than as actually coming from the state. This leads to wrong policy choices such as this state money being used to bail out useless financial transactions and asset appreciation rather than the public purpose. I think crazyman has it right. We left behind the power of perception and reasoning by not realizing the importance of political economy . ..."
"... This is reminscent of Gramsci's idea that the state and civil society are to be distinguished only for purposes of exposition. ..."
By Daniela Gabor, associate professor in economics at the University of the West of England,
Bristol, and Jakob Vestergaard, senior researcher at the Danish Institute for International Studies.
Originally published at the Institute for New Economic Thinking
Struggles over shadow money today echo 19th century struggles over bank deposits.
Money, James Buchan once
noted , "is diabolically hard to write about." It has been described as a promise to pay, a social
desire , memory, and fiction. Less daunted, Hyman Minsky was interested by promises of unknown
. "Shadow" promises would have
fascinated him. Indeed, Perry Mehrling, Zoltan
Pozsar , and
others argue that in shadow banking, money begins where bank deposits end. Their insights are
the starting point for the first paper of our Institute for New Economic Thinking
project on shadow money. The footprint of shadow money, we argue,* extends well beyond opaque
shadow banking, reaching into government bond markets and regulated banks. It radically changes central
banking and the state's relationship to money-issuing institutions.
Minsky famously quipped that everyone can create new money; the problem is to get it accepted
as such by others.
General acceptability relies on the strength of promises to exchange for proper money, money
that settles debts. Banks' special role in money creation, Victoria Chick
reminds us, was sealed
by states' commitment that bank deposits would convert into state money (cash) at par. This social
contract of convertibility materialized in bank regulation, lender of last resort, and deposit guarantees.
But even money-proper is not the same for everyone. Central banks create the money in which
banks pay each other, while private banks create money for households and firms. Money is
hierarchical , and moneyness is a question of immediate convertibility without loss of value
(at par exchange, on demand).
Using a money hierarchy lens, we define shadow money as repurchase agreements (repos), promises
to pay backed by tradable collateral. It is the presence of collateral that confers shadow money
its distinctiveness. Our approach advances the debate in several ways.
First, it allows us to establish a clear picture of modern money hierarchies. Repos are nearest
to money-proper, stronger in their moneyness claims than other short-term shadow
liabilities . Repos rose in money hierarchies as finance sidestepped the state, developing its
own convertibility rules over the past 20 years. To convert shadow money into settlement money
in case of default, repo lenders sell collateral. An intricate collateral valuation regime, consisting
of haircuts, mark-to-market, and margin calls, maintains collateral's exchange rate into (central)
Second, we put banks at the center of shadow-money creation. The growing shadow-money literature,
however original in its insights, downplays banks' activities in the shadows because its empirical
terrain is U.S. shadow banking with its institutional peculiarities. There, hedge funds issue shadow
money to institutional cash pools via the balance sheet of securities dealers. In
China , it's also banks issuing shadow money to other banks to fund capital market activities.
LCH Clearnet SA, a pure shadow bank, offers a glimpse into this world. Like a bank, it backs money
issuance with central bank (Banque de France) money. Unlike a bank, LCH Clearnet only issues shadow
Third, we explore the critical role of the state beyond simple guarantor of convertibility. Like
bank money, shadow money relies on sovereign structures of authority and credit worthiness. Shadow
money is mostly issued against government bond collateral, because liquid securities make repo convertibility
easier and cheaper. The legal right to re-use (re-hypothecate) collateral allows various (shadow)
banks to issue shadow money against the same government bond, which becomes akin to a
base asset with "velocity." Limits to velocity place demands on the state to issue debt, not
because it needs cash but because shadow money issuers need collateral.
With finance ministries unresponsive to such demands, we note two points in the historical development
of shadow money in the early 2000s. In the United States, persuasive lobbying exploited concerns
that U.S. Treasury debt would fall to dangerously
to relax regulation on repos collateralized with asset and mortgage-backed
. In Europe, the ECB used the mechanics of monetary policy implementation to the same end. When
it lent reserves to banks via repos, the ECB used its collateral valuation practices to generate
base-asset privileges for "periphery" government bonds, treating these as
perfect substitutes for German
government bonds, with the
intention of powering market liquidity.
Fourth, we introduce fundamental uncertainty in modern money creation. What makes repos money
– at par exchange between "cash" and collateral – is what makes finance more fragile in a
Minskyan sense. Knightian uncertainty bites harder and faster because convertibility depends
on collateral-market liquidity.
The collateral valuation regime that makes repos increasingly acceptable ties securities-market
liquidity into appetite for leverage. Here, Keynes' concerns with the social benefits of private
liquidity become relevant. Keynes voiced strong doubts about the idea of "the more liquidity the
better" in stock markets (concerns now routinely
voiced by central banks for securities markets). Liquid markets become more fragile, he argued,
by giving investors the "illusion" that they can exit before prices turn against them. This is a
crucial insight for crises of shadow money.
A promise backed by tradable collateral remains acceptable as long as lenders trust that collateral
can be converted into settlement money at the agreed exchange rate. The need for liquidity may become
systemic once collateral falls in market value, as repo issuers must provide additional collateral
or cash to maintain at par. If forced to sell assets, collateral prices sink lower, creating a liquidity
. Converting shadow money is akin to climbing a ladder that is gradually sinking: The faster
one climbs, the more it sinks.
Note that sovereign collateral does not always stop the sinking, outside the liquid world of U.S.
Treasuries. Rather, states can be dragged down with their shadow-money issuing institutions. As Bank
showed , when LCH Clearnet tightened the terms on which it would hold shadow money backed with
Irish and Portuguese sovereign collateral, it made the sovereign debt crisis worse. Europe had its
of shadow money, less visible than the Lehman Brothers demise, but no less painful. "Whatever
it takes" was a
to save the "shadow" euro with a credible commitment to support sovereign collateral values.
Shadow money also constrains the macroeconomic policy options available to the state. That's because
what makes shadow liabilities money also greatly complicates its stabilization: it requires a radical
re-think of many powerful ideas about money and central banking. The first point, persuasively made
Mehrling , and more recently by
Bank of England , is that central banks need a (well-designed) framework to backstop markets
, not only institutions . Collateralized debt relationships can withstand a systemic need
for liquidity if holders of shadow money are confident that collateral values will not drop sharply,
forcing margin calls and fire sales. Yet such overt interventions raise
serious moral hazard issues.
Less well understood is that central banks need to rethink lender of last resort. Their collateral
framework can perversely destabilize shadow money. Central banks cannot mitigate convertibility
risk for shadow money
when they use the same fragile convertibility practices. Rather, central banks should lend unsecured
without seeking to preserve collateral parity.
We suggest that the state, as base-asset issuer, becomes a de facto shadow central bank.
Its fiscal policy stance and debt management matter for the pace of (shadow) credit expansion and
for financial stability. Yet, unlike the central bank, the state has no means to stabilize shadow
money or protect itself from its fragility. It has to rely on its central bank, caught in turn between
independence and shadow money (in)stability, which may require direct interventions in government
The bigger task that follows from our analysis, is to define the social contract between the three
key institutions involved in shadow money: the state as base collateral issuer, the central bank,
and private finance. In the new
or Basel III provisions, we
are witnessing a struggle over shadow money with many echoes from the long struggle over bank money.
The more radical options, such as disentangling sovereign collateral from shadow money, were never
contemplated in regulatory circles. Even a partial disentanglement has proven
because states depend on repo markets to support
liquidity in government bond markets. Our next step, then, will be to map how the crisis has
altered the contours of the state's relation to the shadow money supply, comparing the cases of the
U.S., the Eurozone, and China.
Financial anarchy is my interpretation of shadow banking.
. . . The legal right to re-use (re-hypothecate) collateral allows various (shadow) banks
to issue shadow money against the same government bond , which becomes akin to a base asset
with "velocity." Limits to velocity place demands on the state to issue debt, not because it
needs cash but because shadow money issuers need collateral .
---- The bigger task that follows from our analysis, is to define the social contract between the
three key institutions involved in shadow money: the state as base collateral issuer, the central
bank, and private finance .
Who does shadow banking serve? It is so far from capitalism, it should be illegal.
Bernie Sanders: The business of Wall Street is fraud and greed.
Well…yes and no. There is real "need" for some shadow banking services. However, the idea of
having Central Banks (issuers of money, or whatever) loaning based on … nothing?
Less well understood is that central banks need to rethink lender of last resort. Their
collateral framework can perversely destabilize shadow money. Central banks cannot mitigate
convertibility risk for shadow money when they use the same fragile convertibility practices.
Rather, central banks should lend unsecured or without seeking to preserve collateral parity.
"Europe had its crisis of shadow money, less visible than the Lehman Brothers demise, but
no less painful. "Whatever it takes" was a promise to save the "shadow" euro with a credible
commitment to support sovereign collateral values."
Yes, but Lehman was not a taxing authority (although to be fair, Ireland et.al. were not money-issuing
I am having a hard time understanding all of this–but as far as I can tell, the authors are
basically suggesting that sovereign governments should be backing up the shadow banking system.
However, I have not seen them suggest any reason for it except that the entire house of cards
could come falling down. Boo hoo for the banksters–tell them to do things out of the "shadows".
Why is there a need for 'shadow money' in the first place?
Afaik, banks create money when they loan and central banks(especially the Fed) issues the most
secure assets, their securities, which are used as collateral.
Thanks Yves for sharing Gabor…what a Mess! towards the end of 2012 the US shadow banking was
said to be around
67 Trillion …did something get baked-in? 2014 the IMF has a much smaller 'account'…(Japan
being the worst laughing stock). the gaps are no small detail:
The IMF's latest Global Financial Stability Report analyzes the growth in shadow banking in
recent years in both advanced and emerging market economies and the risks involved.
According to the report, shadow banking amounts to between 15 and 25 trillion dollars in the
United States, between 13.5 and 22.5 trillion in the euro area, and between 2.5 and 6 trillion
in Japan-depending on the measure- and around 7 trillion in emerging markets. In emerging markets,
its growth is outpacing that of the traditional banking system.
That sure seems a Rx for destabilizing the world currencies to precipitate a collapse. Track
and publicize the visits of Congressmen and Senators to the BIS and COL to start. Why are they
making these visits under cover? Who are they meeting with? Are they being prepared as to what
to expect a deliberate world currency crash? . Our political elite are so beholden to the bankers
to allow for the theft of the wealth of nations for unattainable expanding growth and skimming
of millions. Is it possible in regard the corporate banks to have the strings attached on the
use of shadow money at time of chartering or in the case of the do over at time of bankruptcy?.
How is this done? I'd also like to know a good proposal for the private investment boutique banks.
Have any bills at state and federal levels been proposed and if not, why not? What would the main
sections of such a bill look like. Thanks.
A derivative promise made by a Wall Street prostitute, ultimately contingent upon the ability
to liquidate the very users of the instrument, with currency debasement, and war to restock.
Paying people to buy stuff from others being paid to buy stuff, with the full faith and credit
of dependent seniors in a collapsing actuarial ponzi, with nothing more than made for TV mercenaries,
isn't likely to end well.
Craps, the bank moves to the next suckers, with nothing more than the promise of an exotic
vacation, billed to someone else.
– Limits to velocity place demands on the state to issue debt, not because it needs cash but
because shadow money issuers need collateral.
There's a dirty linchpin. Even if the diabolical multiplier from cnchal's quote were removed,
and the dollar was hard-pinned to a pound of silver to pay the sheriff with, infinite debt issuance
can step in to the feed the hungry beast.
Promises to pay kept mercenaries in line during the city-states. If you didn't win you didn't
get paid. Unless you turned around and took your employers gold instead. Which is a bit like capturing
the central banks.
Still, debt can be put to good uses. Infrastructure, maybe. Basic necessities and health. 'When
the people are strong, the nation is strong.' Instead, the gearing seem like the machine in Princess
Bride, sucking time from peoples lives.
Ask any highway patrolman, the faster the speed limit, the worse the accidents.
On the famed autobahns of Europe, the no speed limit means that when an accident occurs, the
results are likely to be catastrophic.
And I really love the observation that central banks need a mechanism to backstop the market.
Reminds me of the main problem with the famous Vincent Black Shadow motorcycle, it could attain
speeds close to 200 mph, but brake designs at the time didn't work at those speeds, so as Hunter
S. Thompson remarked;
"If you rode the Black Shadow at top speed for any length of time, you would almost certainly
Wall $treet wants to go fast, the faster the better, but they haven't got any brakes, and worse
than that, we're all along for the ride whether we like it or not.
The Bernanke and J-Yel witnessed the header that Greenspan took on that bike, and decided to
leave it standing against the wall. When you consider the fact that neither of them could reach
the pedals, let alone mount the thing and ride, that was probably a good idea.
When did the central banks' framework to backstop markets morph into an organized effort to
push the value of repo collateral relentlessly upward forever?…
What about increasing the relentless decline in the Velocity of Money by gradually increasing
interest rates? Yes, that might be a catalyst to trigger a "liquidity spiral". So what? We now
have moral hazard in spades and at some point will have to cross the Rubicon, whether willingly
i am reading one of the
links from the post titled "Regulating money creation after the crisis", and it's even worse
than government approved fraud. I am only part way through it, but here is a gem.
On page 10
. . . Instead, OLA was designed to preserve the value of the assets of failed financial
firms until they are liquidated, a worthy aim, but a very different one. At the same time,
the Dodd-Frank Act has imposed significant new limitations on the government's freestanding
panic-fighting tools . These limitations, absent future congressional action, would render
next to impossible the kind of aggressive government rescue operation that was staged
during the recent crisis.
Criminality and corruption is embedded at the top of the financial food chain, by law.
Before we complicate the issue, it is fairly obvious no one understands conventional money
and it is one of the best kept secrets on the planet.
Learn how normal money works and how its mismanagement has led to many of today's problems.
Banks create money out of nothing to allow you to buy things with loans and mortgages (fractional
After years of lobbying the reserve required is often as good as nothing. Mortgages can be
obtained with the reserve contained in the fee.
After the financial crisis there were found to be £1.25 in reserves for every £100 issued on
credit in the UK.
Having no reserve shouldn't be a problem with prudent lending.
Creating money out of nothing is the service they really provide to let you spend your own
future income now.
They charge interest to cover their costs, for the risk involved and the service they provide.
Your repayments in the future, pay back the money they created out of nothing.
The asset bought covers them if you default, they will repossess it and sell it to recover
the rest of the debt unpaid.
At the end all is back to square one.
The bank has received the interest for its service.
You have paid for the asset you have bought plus the interest to the bank for its service of
letting you use your own money from the future.
Today's massive debt load is all money borrowed from the future for things already bought.
It can also go wrong another way, when banks lend into asset bubbles that collapse very quickly.
The repossessed asset doesn't cover the outstanding debt and money gets destroyed on the banks
When banks lend in large amounts, on margin, into stock markets, the bust shreds their balance
When banks lend in large amounts on mortgages into housing markets, the bust shreds their balance
If banks don't lend prudently you are in trouble.
Then they developed securitisation …… oh dear (no need to lend prudently now).
Housing booms and busts around the world …… oh dear.
All that money borrowed from the future and already spent …… oh dear.
This is so interesting. It seems to be approaching the subject that Wray speculated about a
while back – that we should give central banks fiscal responsibility. Because otherwise a sovereign
state has no control over its sovereign money? It seems to me that money itself becomes a rehypothecated
asset by virtue of being invested over and over again – if it is well allocated and under good
fiscal control all is well. If not we get the Great Recession.
So let the state become the defacto shadow central bank so it had direct control of its own
money. Instead of hanging on to the old gold standard mindset of top down management, why not
think of people, not collateral, as the root of the system – the grass roots. How much money does
a system – a sovereign country – need per person. And then establish a sovereign central bank
to deal directly, bringing the shadows into the sunlight of fiscal control.
…and does anyone remember the triumph of the desk slaves of the Crimson Permanent Assurance?
Monty Python understood something about political economies and how one might achieve more fairness
in outcomes… https://vimeo.com/111458975
Moneyness, like doggitas, you just can't scratch behind its ears. If shadow money is distinguished
by its relationship to collateral, as opposed to money issued by the state, with the entire human
enterprise of civilization as its basis, it still seems to me that at the top of the money hierarchy
is fiat money, the real money by the real social order empowered by the social forms of power
that sustain human life in all of its aspects, not just the financial conveniences. Shadow
money sounds to me like fictional capital by another name. And contractual based deposits sounds
like counterfeiting. With the distinction that the man with counterfeit printing press robs the
train, while the man who runs the Wall St Investment bank repo trading desk robs the whole railroad.
Am I right or Am I right. What a bunch of Losers!!!
And if there is any doubt about the fictional quality of $Trillions and $ Trillions of dollars,
physicists can not find anything naturally occurring in the universe beyond billions and billions.
Money, simply a numbered record, a counting or cardinal number, transforms into money in name
only, MINO, when it refers to fictional amount that can only appear contractually as words, and
do not count how much economic activity or output has been produced.
Therefore, Money becomes a victim of the ontological argument for God by St Anselm. If
God does not exist, an all powerful, all knowing, all present infinitely great in all categories
of Supreme Being could not be written or spoken about, lacking the quality of existence. The fact
that we CAN speak about an Omnipotent Supreme Deity means that one in fact exists, due to existence
is part and parcel of Omnipotence. But of course, because we can talk or write about something,
does not make it real.
It can become socially acceptable as in the case of shadow money, but it is fictional capital,
a shadow of the real thing. Time to get out of the cave of finance with its shadows dancing from
the light of the fires and walk eyes wide open in the bright light of sunshine!
I don't know about this one. It seems to me to be some pretty queasy thinking. It kind of wanders
around in circles of confusion. "my existence led by confusion boats, mutiny from stern to bow".
That's pretty funny somebody would say that money is diabolically hard to write about. That's
Money is actually the easiest thing to write about, because it's formless energy. It's
not that the phenomenon is shadow money, it's shadow assets.
You have to be able to separate in your mind the ideas of 1) Quantity and 2) Form. That's
why economics is a mental disorder, because it doesn't separate quantity and form. If you can't
or don't, then yes, it's diabolically hard to write about because you're writing about two different
things simultaneously without realizing it. Money is a quantity that is infinite and continuous,
but form is an idea that is discontinuous and finite. People do what the forms tell them to do.
The money is just like electricity that powers the animation of the forms. Repo is a form it's
not money. It's existence results in a certain ordering of social relations, that's also a form.
But money is just the energy that makes the forms potent.
The primary challenge is to come up with an ordered way of thinking about the forms themselves.
That's frankly not easy. The ideal would be to understand them in the manner in which Euclid understood
geometrical ideas. If you can get the vision, then you can see all the possibilities for structure
and ordered relationships. there's really no triangle in reality and there's no point and there's
no line and there's no plane. They just made them up to approximate physical reality. Then they
thought to themselves "Holy shit! These ideas interrelated in an astounding range of symmetries
and causations." Then they became a lens or a framework through which physical reality was interpreted.
But they didn't confuse the idea of "number" with the idea of "triangle" or "circle".
Certainly in math the algebraic interpretation doesn't rely completely on the geometrical interpretation.
But if there is no geometrical interpretation and it's only algebra, then so much is missing,
so much is lost. I guess that's why they used to call it "political economy" before the mental
disorder fully usurped the power of perception and reasoning.
Certainly in math the algebraic interpretation doesn't rely completely on the geometrical
interpretation. But if there is no geometrical interpretation and it's only algebra, then so
much is missing, so much is lost.
With that firmly in mind, I think it's necessary to mention the fact that the " study
" of "economics" relies on calculus, wherein we are introduced to the notion of change over
time, volume, motion, acceleration, rates of change, vectors, etc.
Algebra and geometry are, as you point out, obvious abstractions, but once you add volume motion,
and rates of change, the models become very seductive, and it's easy to see how one can be convinced
that they are approaching an understanding of 'reality'.
The trouble is of course, that the egg-heads busy trying to describe economic "reality" with
calculus, are, for the most part in the employ of savages who will forever cling to a simple arithmetic
where their only interest is in "having it all".
Genius employed to make excuses for demented indifference.
It should however be pointed out that the idea of shadow banking is not remotely new. The
concept was presaged well over a century ago by Walter Bagehot, the legendary English banker,
essayist, and theorist. In 1873, Bagehot wrote Lombard Street: A Description of the Money Market,
his canonical work on the money market and central banking. In it, he observed that the great
London banks were accompanied by a parallel set of financial firms, known as "bill brokers," which
in many ways resembled modern-day securities dealers. Like today's dealers, these bill-brokers
financed themselves with borrowings that, Bagehot informs us, were "repayable at demand, or at
very short notice."
Formally speaking these firms were not banks but to Bagehot they might as well be. "The London
bill brokers," he observes, "do much the same [as banks]. Indeed, they are only a special sort
of bankers who allow daily interest on deposits, and who for most of their money give security
[i.e., collateral]. But we have no concern now with these differences of detail." At times, Bagehot
is careful to note that the short-term obligations of bill-brokers were not technically deposits;
he observes that the maturing of these liabilities "is not indeed a direct withdrawal of money
on deposit," although "its principal effect is identical."
Other times, however, Bagehot dispenses even with this distinction: "It was also most natural
that the bill-brokers should become, more or less, bankers too, and should receive money on deposit
without giving any security for it." Here we have an unambiguous identification of the shadow
banking phenomenon about 140 years ago .
I would posit that there are two types of money
A – money of the 0.001% – if they walk into a casino, real estate transaction, or any asset for
that matter they can NOMINALLY lose money – in fact the 0.001% NEVER lose any of THEIR money,
they just lose your money. All winnings, of anybody doing anything anywhere, belong to them.
B – money of everybody else – this money nominally is yours to do with as you see fit, but it
ALL belongs to the 0.001%. The collateral that backs it up is everything you earn and own and
when necessary your, and your family's, internal organs…
"The nation [England] was not a penny poorer by the bursting of these soap bubbles of nominal
money capital. All these securities actually represent nothing but accumulated claims, legal titles
to future production. Their money or capital value either does not represent capital at all …
or is determined independently of the real capital value they represent."
Banking Capital's Component Parts
Capital: Volume Three
James Levy , April 17, 2016 at 6:07 am
Marx failed to acknowledge that supposedly hard-headed Capitalism is actually all about
living beyond your means and mortgaging the future.
It was designed from the Fuggars' and the Medici's to be about debt and fractional reserves
and interest. A system based on a finite supply of money is going to grow not much faster, at
best, than the money available allows.
Capitalism allows explosive growth by supplying explosive amounts of credit. All this shadow
banking activity is designed to get around reserve requirements; nothing else I can see calls
all this complexity into existence. The banks always need more, because lending is how they make
their money, so they want an infinite amount to lend in order to drive their profits towards the
A sovereign can create its own currency, but theoretically couldn't it create any currency?
Couldn't Greece for example click a few key boards put some ones and zeros in and say, "oh our
account with $1,000,000 US is actually $10,000,000,000 US?
This article I think defines shadow money alright as starting where bank deposits leave
off but as the above comments suggest seems to miss some key points. I think a major problem with
the article is seeing central banks as separate from the state rather than seeing the central
bank along with the Treasury as the state itself.
The article gets Treasury debt wrong by seeing it as the central bank funding the state
rather than as actually coming from the state. This leads to wrong policy choices such as this
state money being used to bail out useless financial transactions and asset appreciation rather
than the public purpose. I think crazyman has it right. We left behind the power of perception
and reasoning by not realizing the importance of political economy.
Some issues with the piece and questions for the authors (and fellow NCers):
I really wish such analyses would use the more-precise term "credit-money" in reference to
money creation by banks, to distinguish it from government money creation, which similarly may
have repayment requirements attached (bonds), but need not be so. The "need not be so" may occur
via outright fiat emission, but more commonly appears in form of a public debt stock which continually
increases with time, at least in nominal terms.
The legal right to re-use (re-hypothecate) collateral allows various (shadow) banks to
issue shadow money against the same government bond, which becomes akin to a base asset with
Fine, but what about that other crucial element of modern bank credit-money creation, leverage?
Are there any practical limits on shadow banks' issuance of multiple units of shadow money against
the same government-bond money unit? If so, how are they enforced (if at all)? Note also the key
concept of "implied leverage" inherent in such schemes, where the leverage ratio may fluctuate
drastically with the mark-to-market valuation of the collateral. Banks play endless games with
"fictional reserves"; it would be naive to imagine that non-bank shadow lenders don't do similarly
with their alleged collateral.
The first point, persuasively made by Perry Mehrling, and more recently by Bank of England,
is that central banks need a (well-designed) framework to backstop markets, not only institutions.
Erm, markets are the *only* thing the government should be committed to ensuring functioning
of - we have overwhelming evidences from multiple boom-bust-crisis episodes over the last 3 decades
of the toxic results of governments backstopping hyperleveraged fraud-riddled institutions and
the crooks running same.
Resurgence of voodoo science is typical during crisis periods. "Deficits does not matter" voodoo
does not work in a world were there are strong economic competitors to the USA and where euro and
Yuan exists. The idea of deficit spending which
Jamrisko discusses actually came from Keynesian economics, not from MMT.
"... Bridgewater's Ray Dalio, head of the world's biggest hedge fund, and Janus Capital's Bill Gross say policy makers are cornered and will have to resort to bigger deficits. ..."
"... "I have no problem with deficit spending," said Aneta Markowska, chief U.S. economist at Societe Generale in New York. "But this idea of the government printing money -- unlimited amounts of money -- and running unlimited, infinite deficits, that could become unhinged pretty quickly." ..."
"... Many more agree that it's precisely when households are cutting back that governments should do the opposite, to prevent a slump in demand. ..."
"... Most economists don't expect an imminent U.S. recession. But financial-market turmoil and America's political upheaval have added to a sense that nobody has figured out a cure for the economy's malaise. ..."
In an American election season
that's turned into a bonfire of the orthodoxies, one taboo survives pretty much intact: Budget deficits
are dangerous. A school of dissident economists wants to toss that one onto the flames, too.
It's a propitious time to make the case, and not just in the U.S. Whether it's negative interest
Calls for governments to take over the relief effort are
growing louder. Plenty of economists have joined in, and so have top money managers. Bridgewater's
Ray Dalio, head of the world's biggest hedge fund, and Janus Capital's Bill Gross say policy makers
cornered and will have to resort to bigger deficits.
"There's an acknowledgment, even in the investor community, that monetary policy is kind of running
out of ammo," said Thomas Costerg, economist at Standard Chartered Bank in New York. "The focus is
now shifting to fiscal policy."
That's where it should have been all along, according to Modern Money Theory. The 20-something-year-old
doctrine, on the fringes of economic thought, is getting a hearing with an unconventional take on
government spending in nations with their own currency.
Such countries, the MMTers argue, face no risk of fiscal crisis. They may owe debts in, say, dollars
or yen -- but they're also the monopoly creators of dollars or yen, so can always meet their obligations.
For the same reason, they don't need to finance spending by collecting taxes, or even selling bonds.
The long-run implication of that approach has many economists worried.
"I have no problem with deficit spending," said Aneta Markowska, chief U.S. economist at Societe
Generale in New York. "But this idea of the government printing money -- unlimited amounts of money
-- and running unlimited, infinite deficits, that could become unhinged pretty quickly."
To which MMT replies: No one's saying there are no limits. Real resources can be a constraint
-- how much labor is available to build that road? Taxes are an essential tool, to ensure demand
for the currency and cool the economy if it overheats. But the MMTers argue there's plenty of room
to spend without triggering inflation.
The U.S. did dramatically loosen the purse strings after the 2008 crisis, posting a deficit of
more than 10 percent of gross domestic product the next year. That's since been trimmed to 2.6 percent
of GDP, or $439 billion, last year.
... ... ...
Those who push back sometimes argue that money-printing puts countries on a path that eventually
leads, in a worst-case scenario, to Zimbabwe -- where money-printing debased the currency so badly
that all the zeros could barely fit on banknotes. Or
Venezuela, whose spending spree helped push inflation to 180 percent last year. Japan's a more
mixed picture: years of deficits haven't scared off borrowers or unleashed inflation, but haven't
produced much growth, either.
There's also a peculiarly American enthusiasm for balanced budgets, according to Jim Savage, a
political science professor at the University of Virginia. He's traced it to the earliest days of
the U.S., rooted in a "longstanding fear of centralized political power, going back to England."
Wray says there are episodes in American history when a different understanding prevailed. During
World War II, he says, U.S. authorities learned a lesson that's since been forgotten -- that "we've
always got unemployed resources, including labor, and so we can put them to work."
Savage says Americans have historically tended to conflate household and government debts. That
category error is alive and well.
"Small businesses and families are tightening their belts," President Barack Obama said in 2010
as he announced a pay freeze for government workers. "Their government should, too."
It's not just MMT economists who winced at the comment. Many more agree that it's precisely when
households are cutting back that governments should do the opposite, to prevent a slump in demand.
That argument doesn't carry much sway in Congress, though. That's one reason the Fed has had to
shoulder so much of the burden of keeping the recovery alive, Societe Generale's Markowska says.
"When it comes to deciding on monetary easing, it's a handful of people in the room," she said.
"It's going to take more pain to build that political consensus around the fiscal stimulus."
Wray says he'd expected attitudes to start shifting after the last downturn, just as the Great
Depression gave rise to Keynesian economics and the New Deal, but "it really didn't change anything,
as far as the policy makers go."
"I think it did change things as far as the population goes," he said, citing the anti-establishment
campaigns of Sanders and Republican Donald Trump. It might take another crash to change minds, Wray
Most economists don't expect an imminent U.S. recession. But financial-market turmoil and America's
political upheaval have added to a sense that nobody has figured out a cure for the economy's malaise.
Bill Hoagland, a Republican who's senior vice president of the Bipartisan Policy Center, has helped
shape U.S. fiscal policy over four decades at the Congressional Budget Office and Senate Budget Committee.
He says a farm upbringing in Indiana helped him understand why "it's engrained in a number of
Americans outside the Beltway that you equate your expenditures with your revenue." He also acknowledges
that government deficits are different, and could be larger now to support demand, so long as there's
balance in the longer term.
Most of all, Hoagland says he sees profound change under way. The "catastrophic event" of the
2008 crash may be reshaping American politics in a way that's only happened a handful of times before.
And economic orthodoxy has taken a hit too.
"We're going through a very strange period where all economic theories are being tested," he said.
"... By Perry Mehrling, a professor of economics at Barnard College. Originally published at his website . ..."
"... Yes, the money creation process has been a big lie for a long time. In any case the Bank of England came clean a couple of years ago and admitted that standard story of money creation was false. They even acknowledge that it is not properly explained in most money and banking textbooks, which is a staggering admission. ..."
"... Paul Krugman wrote a column a couple of months ago where he claimed that banks take in savings from depositors and lend them out to borrowers which tells you either: 1) he doesnt know how banking works or 2) he is part of the conspiracy to keep the public in the dark. ..."
"... The truth right from the mouth of the worldss oldest central bank. http://www.bankofengland.co.uk/publications/Documents/quarterlybulletin/2014/qb14q102.pdf ..."
"... Yeah, I saw that. It is amazing that a supposedly foremost Princeton Nobel winning economist apparently doesnt understand where money comes from… ..."
"... There is evidence that Krugman seems to have great difficulty admitting he was wrong. ..."
"... And what he writes makes me think he doesnt know how banking works. I find it difficult to believe he is part of any conspiracy. But I may be wrong. ..."
"... My take is that the fractional reserve and intermediation models are just ways of obfuscating the way banking actually works and the credit creation model is the accurate one. I have some advice for anyone who is struggling with the concepts which is as follows: always merge all the banks in the banking system into one bank in your mind. Assuming multiple banks as the author above does is irrelevant to the analysis and only serves to add confusion. ..."
"... I enjoyed the article very much. And it does seem to me that money creation is made to seem very, very, complex. Now maybe Im just too stupid, but it always strikes me that when people simply describe something, they either really dont know, or they are trying to bamboozle you… ..."
By Perry Mehrling, a professor of economics at Barnard College. Originally published
his website .
In his recent paper, "A Lost Century
in Economics: Three Theories of banking and the conclusive evidence" , Richard Werner argues
that the old "credit creation theory" of money is true (empirically "accurate"), while both the newer
"fractional reserve theory" and the presently dominant "debt intermediation theory" are false. For
him, this matters mainly because the false theories are guiding current bank regulation and development
policy, leading down a blind alley.
But it matters also simply because we need correct understanding of how the economy actually works,
"we" meaning not just economists but also the general public. "Today, the vast majority of the public
is not aware that the money supply is created by banks, that banks do not lend money, and that each
bank creates new money."
Why is the public ignorant of the truth? Much of Werner's paper is devoted to an account of how
the correct theory was pushed out of the conversation, first in the 1930s by the fractional reserve
theory, and then after WWII by the debt intermediation theory. One culprit was a shift toward deductive
and away from inductive methods. Another culprit, he suggests, was the self-interested "information
management" by central banks, i.e. direct suppression of truth in their own publications. And in
this suppression, he further suggests, Keynesian academics were at the very least complicit: "attempts
were made to obfuscate, as if authors were at times wilfully trying to confuse their audience and
lead them away from the important insight that each individual bank creates new money when it extends
In this history, Werner gives special attention to Keynes himself since Keynes seems to have held
each of the three theories in succession throughout his life. Keynes' own intellectual trajectory
thus foreshadows the subsequent evolution of monetary thought, and so probably is partly responsible
for leading successive generations astray. Just so, one apparent legacy of Keynes is that the Bank
of England is currently holding all three theories at the same time! "Since each theory implies very
different approaches to banking policy, monetary policy and bank regulation, the Bank of England's
credibility is at stake." BoE credibility is thus a third reason that all of this matters.
But is it really true, as Werner claims, that these three theories are "mutually exclusive"?
He is at considerable pains to show that they are mutually exclusive, by using a succession of
stylized balance sheet examples. The credit creation theory says that banks make loans by creating
deposits, essentially expanding their balance sheets on both sides by the same amount. (The borrower
of course also expands his own balance sheet, the loan being his liability and the deposits being
his asset. In my own "money view", I call this a swap of IOUs.) In this way, money (bank deposits)
is created that was not there before.
By contrast, the debt intermediation view says that banks make loans by lending reserves that
they are already holding, essentially swapping one asset for another, these reserves having previously
been obtained by someone's deposit. The balance sheet expands when the deposit is made, not when
the loan is made. Banks merely intermediate between savers and borrowers, and do not create money.
In between these two views, the fractional reserve view says that individual banks make loans
by lending reserves, but that the banking system as a whole can and does create money, up to a multiple
of reserve holdings. The banking system does create money, but only after and as a consequence of
the central bank increasing reserves–this is the famous "money multiplier".
So the difference between the theories seems clear, and it also seems like that difference should
be testable empirically simply by watching actual bank balance sheets and seeing what happens when
a loan is made. Does the balance sheet expand or does it not? With the cooperation of an actual bank,
Werner books a dummy loan and finds that the balance sheet of the bank does in fact expand. This
he takes to be scientific proof that the credit creation theory is correct and the others are false.
Not so fast. Let's look a bit closer.
Let me begin by admitting my sympathy for Werner (as I have already hinted by mentioning my own
"money view" as a version of the credit creation view). In fact, Werner's heroes–H.D. McLeod and
Joseph Schumpeter–are my own heroes as well, and I suspect that graduate school exposure to these
authors sent him off on his own intellectual journey just as it did me. Even more, thirty years after
that initial exposure, I find Werner's (co-authored) money and banking textbook
"Where Does Money
Come From?" one of the best introductions to the subject. Last fall I assigned Chapters 2 and
4 in the first two weeks of "Economics of Money and Banking" which I teach at Barnard College, Columbia
University. I'm sympathetic.
But I don't think these three theories are quite as mutually exclusive as he makes them out to
Let us suppose, with Werner, that Citibank makes a mortgage loan to me of $200,000, simply by
swapping IOUs. I then transfer my new asset (the new Citibank deposit) to you, and you transfer your
house to me. As my payment clears, you have a new deposit in your own bank (let's say Chase, to make
it interesting), Citibank has a "due to" at the clearinghouse, and Chase has a "due from". Again,
to make it interesting, let's suppose that Citibank has no reserves, so it enters the interbank market
to borrow some, from Chase. At the end of the day, what we see is that the Citibank balance sheet
is still expanded, so is Chase's, and so is mine. Only your balance sheet stays the same size, since
you have swapped one asset (your house) for another (money). That's the payments perspective.
What about the funding perspective? If we follow the balance sheets through, it is clear that
your money holding is the ultimate source of funds for my borrowing. (You lend to Chase, which lends
to Citi, which lends to me.) In this sense, we can think of both Chase and Citibank as intermediaries,
channeling funds from one place in the economy to another. But, in this example, there is no saving
and there is no investment. The sale of the house adds nothing to GDP, it is just a transfer of ownership.
The expansion of the banking system has facilitated that transfer of ownership by creating a liability
(the deposit) that you apparently prefer to your house, at the same time acquiring an equivalent
asset of its own (the loan). Citibank collects the spread between the mortgage rate and the interbank
rate; Chase collects the spread between the interbank rate and the deposit rate.
But all of that is only what happens right at the moment of payment. What happens afterwards depends
on the further adjustment of all of these balance sheets. One way this could all work out is that
Citibank packages my mortgage with others to create a mortgage backed security, and that you spend
your Chase deposit to acquire a mortgage backed security (perhaps indirectly through a mutual fund
that stands in the middle). In this scenario, the newly created money is newly destroyed, the balance
sheets of both Citi and Chase contract back to their original size, and the end result is that you
are funding my loan directly. But again, no saving and no investment, just a change in your asset
allocation, away from money toward fixed income investment.
Obviously this final scenario is a limiting case on one side. The limiting case on the other side
is that you (or whoever you transfer your money to) are willing to hold the newly created money balances
as an asset, so you continue to fund my loan indirectly. Now when Citibank securitizes and sells,
it is able to repay its interbank liability to Chase, and for simplicity let's say that Chase uses
that payment to acquire a different money market asset. One way this could all work out is that a
shadow bank–money market funding of capital market lending–acquires the security and uses it as collateral
for wholesale money market borrowing from Chase. Again, no saving and no investment, but the new
money stays in circulation and is not destroyed.
These are the limiting cases, and obviously anything in between is also possible, depending on
the portfolio decisions of Citibank, Chase, and you. But in all the cases, the debt intermediation
view of banking is perfectly consistent with the credit creation view of banking. One focuses on
the ultimate funding, while the other focuses on the initial payment.
That said, I have to agree with Werner that the credit creation process is all too commonly left
out of the story–most modern courses never even mention the payments system–and it is a real (and
important) question how this came to be so. It is a further real (and important) question why the
intellectual memory of how the process actually works was left to marginalized sections of academia–Werner
mentions specifically the Austrians and post-Keynesians. I'm not so sure that it was a central bank
plot, though I do think that the shift in academic fashion toward studying equilibrium of a system
of simultaneous equations played a role in obscuring the kind of dynamic balance sheet interactions
that are the essence of the story.
What I would emphasize however is not the negative but the positive. The fact of the matter is
that today the credit creation view is out of the shadows, and no longer the exclusive property
of the marginalized . In evidence of this, I would direct your attention to the two Bank
of England papers that Werner himself cites:
here . But I would add to that also the most recent report coming out of the Group of 30
of Central Banking, Lessons from the Crisis" . On page 3 you will find the following:
"In a barter economy, there can rarely be investment without prior saving. However, in a world
where a private bank's liabilities are widely accepted as a medium of exchange, banks can and do
create both credit and money. They do this by making loans, or purchasing some other asset, and simply
writing up both sides of their balance sheet."
That's the truth that Werner wants central banks to admit, and now it appears that they have admitted
it. The next question is what difference it makes, and that's a question for next time. Already it
should be clear that progress toward answering that question will require us to be more careful about
issues of payment versus funding.
P.S. BTW, the title of this post [at Merhling's site, which is "Great and mighty things which
thou knowest not" [?]] is taken from Jeremiah 33:3 which Werner references in a footnote to his title:
"should grains of wisdom be found in this article, the author wishes to attribute them to the source
of all wisdom." Werner is apparently listening to powers higher than just McLeod and Schumpeter!
I think another aspect that should be considered is the preservation of surplus money through
For example, Volcker is credited with curing inflation through higher interest rates, but that
slowed the economy as well and so reduced the need for money. It wasn't until Reagan had increased
the deficit to 200 billion in 82 that inflation seemed to come under control enough that they
could lower rates.
Now one way to create higher rates is for the Fed to sell debt it bought to create the money
in the first place. So what is the difference between the Fed selling debt it is holding and the
Treasury issuing fresh debt, other than the Fed destroys its money and the Treasury spends it
on public works, thus Keynsian pump priming.
So who buys this debt, but those wealthy enough to have surplus money. Which suggests that
if there is a surplus of money in the system, causing inflation, the easiest place to remove it
is from those with a surplus of money.
Now money really does function as an enormous, glorified voucher system and what is more destructive
of such a system, than enormous amounts of surplus vouchers?
So given that those with lots of such excess vouchers consequently have leverage over the rest
of the system, what way to better preserve this wealth, than to have the public borrow it back
and pay interest, even if much of what it gets spent on doesn't produce sufficient income to pay
that interest, if not actually lost?
Eventually though even the public can't afford to keep this up, so what is the alternative?
Now most people save for predictable reasons, from raising children, housing, healthcare, to
retirement and funerals. So what if the government, i.e., the public, were to threaten to tax
excess money back out of the system, rather than just borrow it? Necessarily people would quickly
find means to invest into these future needs directly, rather than trying to save up notational
value. The problem is that we don't know exactly what we will need for what, which would mean
we would have to invest into community and public projects, rather than save for our own specific
While this might seem onerous, consider that we currently live in a highly atomized society,
that is largely mediated by that failing financial mechanism. So if we had to start functioning
as a more holistic group, with more organic interactions and public spaces and commons, people
might have to come out of their shells a little more and deal with lots of other social and personal
issues, which might not be a bad thing.
Basically we treat money as both medium of exchange and store of value, but these are different
functions, as a medium is dynamic and a store is static. For instance, in the body, blood is the
medium and fat is the store. Try storing fat in the arteries and you get clogged arteries, poor
circulation and high blood pressure to compensate, which is analogous to our financial issues,
with a clogged banking system, poor circulation to the rest of the economy and quantitive easing
While the brain might need more blood than the feet, it does neither any good for the feet
to rot and die from lack of circulation, nor does it do the brain any good to have excess blood.
Similarly we need a stronger social structure and a leaner, more efficient economic medium, in
which the excess is stored as the muscle of a stronger society and a healthier environment, rather
than just treating them as stores of wealth to be monetized and siphoned away.
Yes, the money creation process has been a big lie for a long time. In any case the Bank of England came clean a couple of years ago and admitted that standard
story of money creation was false. They even acknowledge that it is not properly explained in
most money and banking textbooks, which is a staggering admission.
Paul Krugman wrote a column a couple of months ago where he claimed that banks take in savings
from depositors and lend them out to borrowers which tells you either: 1) he doesn't' know how
banking works or 2) he is part of the conspiracy to keep the public in the dark.
There is evidence that Krugman seems to have great difficulty admitting he was wrong. He even
contends that using IS-LM is a good too for introducing students to the macroeconomy, even when
they must unlearn it when they delve deeper in to the workings of the macroeconomy, and this is
after Hicks himself rejected it as being an inaccurate depiction of the macroeconomy later in
his life. I can't say what Krugman is thinking, but then I don't have to. I can go just by what
he writes. And what he writes makes me think he doesn't know how banking works. I find it difficult
to believe he is part of any conspiracy. But I may be wrong.
Yes it's hard to believe that Krugman might not know how money/banking works but he is a very
ideological guy. I happen to be sympathetic to many of his ideological views but any one who is
intensely ideological is rarely a critical and independent minded thinker. Ideology is way of
simplifying complex things and making your self more comfortable, and doesn't lead to knowledge.
I am no expert on money and banking but I have read ten books on the subject over the last four
years and numerous papers. I am pretty sure I understand it now. I think this guy Werner is right.
It seems probable that there was an orchestrated campaign to obfuscate how banking and money creation
work and one can imagine why that might have happened. Banking is quite literally a pyramid scheme
under even the most conservative circumstances! Such a system can work and makes sense if it is
prudently managed, regulated and limited in scope.
My take is that the fractional reserve and intermediation models are just ways of obfuscating
the way banking actually works and the credit creation model is the accurate one. I have some
advice for anyone who is struggling with the concepts which is as follows: always merge all the
banks in the banking system into one bank in your mind. Assuming multiple banks as the author
above does is irrelevant to the analysis and only serves to add confusion.
I enjoyed the article very much. And it does seem to me that money creation is made to seem
very, very, complex. Now maybe I'm just too stupid, but it always strikes me that when people
simply describe something, they either really don't know, or they are trying to bamboozle you…
I think the article would have been more enlightening though if the example had been for a
house that was TO BE BUILT.
Using that as an example, it seems to me that money is LOANED into existence – the person who
wants the home loan has a good reputation, but the whole point of the loan is that they don't
have nearly enough money to buy the house.
The carpenters and other workers don't get paid until they have done work (they loan their
work to their employer), i.e., produced a house (or some portion of it). The money in the loan
becomes real because a house that didn't exist now exists. There is more stuff in the world, and
there is more money. And I think it explains something important – not any loan is useful. A house
worth 100K that is sold for 1000K but than is foreclosed upon – somebody has to take a real loss
– either the person who got the home loan, and to the extent that they can't pay the loan back,
a builder or the bank takes the loss (if the foreclosed value is less than the original loan value)
So, is that correct?
Again, thanks for the article and I am looking forward to the next one!
Pick any year post WWII (because the data is readily accessible).
Compare the levels of federal spending and credit expansion.
Federal spending created more money every year except for the years 1998 thru 2007, where it
was about even, and for 2006 and 2007 credit expansion was some 50% higher.
Then we got the mother of all credit crises.
Over that post WWII period federal spending created ~$78T while credit created ~$46T.
The common refrain is that federal taxes subtract from federal spending so it ends up being
Except in what universe do income taxes accrue only against income resulting from federal spending?
It's nonsense and should be derided as such. It's an accounting convenience that does not reflect
what is actually happening.
It may make sense for National Accounting (and to keep banksters in the drivers seat) but it
makes zero sense in a rational analysis of a real-world system. That is the only way banks could
be touted as the source of most of our money.
Despite an otherwise sound argument this article perpetuates the myth.
The banksters apparently have a hold on everyone, including the so-called 'good guys'.
Some justification based on the level of bank reserves or some other convoluted argument in
Very interesting and I'm looking forward to your next installment.
I'm especially interested in the transfer of reserves from Chase to Citi and as you further
point out 'Chase possibly using its reserves to acquire a different money market asset. One way
this could all work out is that a shadow bank–money market funding of capital market lending–acquires
the security and uses it as collateral for wholesale money market borrowing from Chase.'
This seems to be a transmission mechanism for asset appreciation as Eric Tymoigne is getting
into is his excellent series:
"post 7 will start the private-bank posts) on monetary policy and the QE -asset price channel
will be explained. But here is a short answer:
No bank's don't use cash to buy assets. If they deal with non-bank agents they just credit bank
accounts, if banks deal with a fed account holder they debit their reserve balances to make payments.
The link works through interest rate, arbitrage, search for yield, and the fact that QE reduces
the quantity of securities available in the market."
"the issue is how they would transfer the funds to make the purchase? They could buy securities
if they find a fed account holder willing to sell them securities: Treasury is one, GSE is another
one. Non-financial institutions no."
All they do is talk about how the parts of the machine move - which is itself an amazing problem
of conceptual collinearity - but not the phenomenon of the machine itself.
More and more you just say "Why not go to Youtube and check out a Rhianna video, rather than
read another one of these essays."
Eventually maybe they'll get it. But when they study economics their whole adult life - and
nothing else - it makes it hard. It's not like they're dumb or that they lack mental ability.
In fact, they're all intelligent individuals who are quite capable in most areas of thinking.
It's just that the conceptual language they need to use in order to perceive the phenomenon itself
is a language they do not know. And so they look at reality and they try to make sense of it using
the language they do know, and because words themselves and the ideas in the words catalyze perception,
their limited language is not fully adequate, and they don't see or know that. What can you do?
Everybody has to see it for themselves.
At any rate, you'd think by now it wouldn't be so hard. But most people aren't interested in
this sort of thing so progress is really slow. Most people just go right to Youtube.
Adenosine triphosphate. The example several years ago in the comments, by a biologist, that
it would be an extinction event for a colony of amoeba if a few of them decided to short amoeba
futures and just hoard all the adenosine triphosphate – the one chemical every amoeba must have
to transfer energy. Wish it had been an analogy to symbolic ADP which had usurped the real stuff
and was being hoarded to make sure it maintained its value.
You assured me susan was a bona ride adjunct professor of theosophical studies at the University
of Magonia. I want, nay, I demand my tuition fee, which apparently I had to pay in advance because
otherwise 42 other Chinese applicants would be in line for my place, back.
Dunno why they have all these theories. It's simple. The Fed lowers interest rates, the mark
to market value of bank assets go up, which greatly improves cap ratios, then banks don't need
liabilities anymore. They just can make endogenous money and give it out to borrowers' banks.(it's
all done electronically and fast so no one notices) All the Big Guy econ types know that.
All the rest of it is just details banks go thru just for show. Plus they can securitize and
sell any assets they think may drop in value. They're smart people.
Now, the other thing all the Big Guy econ dudes always say is once us little folk figure it
out, something wonderful is supposed to happen. Maybe I missed it, but what thing is that???
Let us suppose, with Werner, that Citibank makes a mortgage loan to me of $200,000, simply
by swapping IOUs. I then transfer my new asset (the new Citibank deposit) to you, and you transfer
your house to me. As my payment clears, you have a new deposit in your own bank (let's say Chase,
to make it interesting), Citibank has a "due to" at the clearinghouse, and Chase has a "due from".
Again, to make it interesting, let's suppose that Citibank has no reserves, so it enters the interbank
market to borrow some, from Chase. At the end of the day, what we see is that the Citibank balance
sheet is still expanded, so is Chase's, and so is mine. Only your balance sheet stays the same
size, since you have swapped one asset (your house) for another (money). That's the payments perspective.
Is the house owned free and clear? If not, the exchange eliminates that original liability/asset
on someone else's balance sheet so everything is now at a net zero as far as new money circulating
in the economy. Banks did not create anything new. They only exchanged one Asset/Liability
for another Asset/Liability. Even if the house was paid off 20 years ago, there is no new money
created from this transaction. The only way "new money" is created would be through interest
paid on Treasuries, and direct deficit spending by federal government.
As the commenters on the post at Prof. Mehrling's site have observed, his argument is logically
flawed. He concludes: "But in all the cases, the debt intermediation view of banking is perfectly
consistent with the credit creation view of banking."
The intermediation view of banking "says that banks make loans by lending reserves that they
are already holding," as he explains at the beginning of his piece. In his example, the deposit
that is created by the banking system funds the loan. Of course, in both case intermediation takes
place but the nature of the intermediation is not comparable.
In the first case, banks have no special status in the economy. After all any of us who has
a balance of $100 can lend out that balance of $100. In the second case, the only reason the bank
can make the loan is because of a social norm in which the public trusts the banking system and
is willing to keep its money in banks. This fact has always been a fundamental component of the
credit creation theory of money - it is founded on the public's trust in the banking system. This
trust allows banks to expand the money supply - at the potential expense of the public.
While I have great respect for Prof. Mehrling, it is far from clear that he has a good understanding
of the credit creation view of money.
When I looked into the data about 5 years ago, it appeared that only a few large banks were
actually operating on a credit-creation basis. Most banks (meaning your local, independent banks
and credit unions) appeared to be operating on an intermediation model. Deposits are always the
cheapest way to fund a loan, and for small banks, that looks like pretty much the only way they
do it – iirc, loans were 60-80% of deposits in most banks. However, at JPM, BofA, etc, their loans
were well over 100% of their deposits…like waaaay over. So it looked to me like just a few big
players were driving endogenous money creation, while most banks actually were doing, essentially,
what fractional-reserve theory says they do.
That's my understanding, but I don't claim to be an expert.
Banks no longer keep their loans on balance sheet, so a simple static analysis of their balance
sheet doesn't tell us much about how much credit creation they are doing. To study the degree
to which banks create money you have to look at the role they play in the shadow banking system
Too some degree… my concerns about the shadow sector vastly out weigh the traditional sector
e.g. has the traditional sector become [increasingly] just a front house op to generate velocity
for the shadow sector, and the latter just needs a – store of – when the economy gets a black
Therein lies the rub e.g. some fixate on one component of a veritable galaxy of operational
scope, so at this juncture on can surmise that new universes of credit are created and inserted
into the multiverse to survive on their own [inhabitants luck of the draw]. Maybe theoretical
physics would be a better methodology of describing credit activity's at this juncture than thermodynamics,
ideology, or socio-economic-political optics…
There's a confusion here. Suppose a bank with reserves R and corresponding deposits X, in addition
to other balance-sheet items, has
at the top of its balance sheet. It makes loan L, which creates new deposit D to obtain balance
L D *
The borrower/deposit-holder transfers her deposit to another bank, so the original bank's balance
sheet drops down to
while the new bank gains this on its balance sheet:
So the sequence is (1) create new deposit D and (2) transfer the deposit to the new bank. This
is the money-creation model in action. It is correct.
When we imagine that reserves are being loaned instead, we are actually skipping the balance
sheet marked * above. Comparing the balance sheet before and after the skipped one, we come to
believe that reserves have been turned into a loan. This is incorrect. The newly created deposit
is simply in a different bank. To see what is really going on, we have to consider the loan and
Can anyone tell me where that $100 came from? Or the $200,000 to buy that archetypical house?
We got lots of "blind philosophers feeling their part of the elephant and pronouncing its essence"
but where does "wealth" originate, as opposed to money and "assets?"
"In the first case, banks have no special status in the economy. After all any of us who has
a balance of $100 can lend out that balance of $100"
yes you can lend it out, but the bank is 1) at the top of collectors line 2) has backing from
the FDIC. When you loan 100$ to someone, you dont have that money anymore. When you lend 100$
to the bank, you still have that money, and about 10 other people have it as well.
I'm sure it must be obvious to brighter and more subtle folks than me, but where does that
$100 that's referenced here come from?
I have an antique wood-bodied block plane (the woodworking kind) made by my great-grandfather
( except for the perfect cast iron blade and two nails). He used tools he made or bought to carve
the body and chisel out the throat and make the wedge. I was offered $100 for it recently. Where
does the wealth or value that my ancestor's plane, now mine by inheritance and survival, come
from? Or all the other $100s that make up " the economy" that the MorgulBankers are conjuring
derivatives out of?
A. Easily: "the false theories are guiding current bank regulation and development policy,
leading down a blind alley." If correct understanding would lead to a correct regulation, then
those whose interests would no be served by correct regulation will obfuscate correct understanding.
Baby yoga for kids living in the forest, who never go outside alone; the highest real mortality
rate in the US; and the prototype for Family Law feeding Obamacare in the big city – does it get
any dumber than that?
The psychologists are just smart enough to get the majority killed. The markets are an exercise
in control, a game, and nothing more, until Little Johnny jumps off Science Building and shorts
the insanity all together. Did you see that last impulse, transferring wealth to the Soros clan,
now demanding another bailout?
The assumption of emotion-based decisions, lest one be a robot, is ludicrous, but that is the
basis of empire marketing. The majority short-circuits itself, with the false assumptions presented
by empire media broad band, the frequency it chooses to occupy, to mirror itself, and obsessive-compulsive
behavior begets itself. The brain stem is a geared Archimedes Screw.
Because the body is grounded to earth, the dc side of the brain is self-obsessed, and LSD offsets
the signal into the noise of the clutch, is no reason to hand your life over to a psychologist
printing money. Because the predicitive subconscious exists in a feedback loop with adaptation
doesn't mean that everyone is sick, stuck on an empire frequency, and mentally ill if they don't
seek diagnosis. Money is not reality, except for those who choose it.
Wall Street sells mortgages with increasing duration, Madison Avenue produces crap for compliance
at increasing cost, and the majority indentures future generations with bonds, until they can't.
Global finance simply liquidates natural resources and moves, in planetary rotation. Relative
to unincorporated farming, the land is largely fallow, but the participants have TV, cardboard
and gadgets, dependent upon empire for a battery.
Net, populations vacillate between denial and depression, with growing impulses of anger, in
a market for psychologists who see others as a reflection of themselves. Married people raising
independent children cannot afford to be quite so stupid. And without such children, the economy
can only implode, reflecting the psychologists' own self-obsession.
Do you remember that story about the natives not seeing Christopher's ship, until the shaman
pointed it out, when the natives were slaughtered by war, disease and poverty?
Females can breed on equal rights for a thousand years, with males providing the technology,
but they will just end up a thousand years behind the curve. Women are bred to think in linear
time, and men to think in frequency, because that is what children need. One is the counterweight
and the other is the cab.
The majority, focused on self, rides the counterweight to floors on one side, all dead ends,
and is jealous of children exiting on the other side. The choice at the crossroad is always the
same, investment or consumption. The majority is not experiencing falling living standards and
increasing income inequality because some banker provided the money, an excuse, for multicultural
Retired people generally prefer a Fred and Wilma economy, city kids generally prefer a rat
race, and once separated for the purpose, the police are generally dispatched to slice and dice
families into sausage to feed the former, by authorities always pleading ignorance, majority vote.
Once you see those cops, promoting gang awareness, it's time to go. At empire cycle begin, you
have plenty of time; now you have none.
When I began writing this, I had no idea where the focus would be, but I do have a pattern
database and a linear time translator, such as it is. My wife can tell you the weather 25 years,
3 months and 10 days ago. Choose a wife that enjoys living in the moment, and a husband that enjoys
an independent frequency, compliments capable of trust in an untrustworthy world.
My mind is a steel trap, my wife's is Disneyland, and we live in the feminist capital of the
world, as you might suspect with an ac mind. Your perspective is your own, if you choose to have
one, and we all go through phases, climbing and descending the ladder of consciousness. I am simply
sharing, after decades of listening and saying not a damn word, in the empire, on the eve of WWIII.
From the perspective of legacy, which has no clue what is in those libraries, the Internet
was designed to extend linear thinking, to nowhere. From the perspective of labor, the Internet
was designed to demonstrate the fallacy of limiting yourself to linear thinking. Contrary to popular
mythology, choice is not about the color of your tennis shoes made in China.
If it's not anonymous cash, it cannot store value, because independent children are reared
beyond empire's grasp, the physical manifestation of intellectual self-obsession, which Sweden
is now learning, way to late, a slave to Germany, and Austria in particular. Knowing what needs
to be done and doing it are two different things. The psychologists in New Hampshire produce drug
addiction, their solution is drug rehab, and Iowa is supposed to be nuts.
You didn't think Keynes sprang from nothing did you?
Thanks. The wife likes to keep track of water. She's like a human testing machine. Best water
I had was up at bay of fungi, big moose. That document on Ford's car made of hemp and plastic
was pretty cool, before he was told he would be making cars out of steel, finance.
Always thought I would end up in Australia, but like the doctor thing, the critters have to
destroy everything they touch.
"Contradictions, of which money is merely the palpable manifestation, are then to
be transcended by means of all kinds of artificial monetary
manipulations. It is no less clear that many revolutionary
operations with money can be carried out, in so far as an attack on
it appears only to rectify it while leaving everything else
unchanged. We then beat the sack on the donkey's back, while
aiming at the donkey. But so long as the donkey does not feel the
blows, one actually beats only the sack, not the donkey;
contrariwise, if he does feel the blows, we are beating him and not
At the end of the day, what ultimately needs to be impacted is not the pieces of paper.
All we can ever do with those is hand people claims against future production.
And when the theory of "managing" an economy stops at the control of aggregate numbers as its
only allowable tool to influence the process, it can never accomplish the objective of avoiding
"... The US empire is one of Multi-National corporations and International Trade Deals. ..."
"... Im intrigued by that assertion, especially if this comes from a more libertarian perspective and an author who actually mentions NATO. Of course corporate welfare in various forms is a key part of what is happening, but the core issue is a literal military empire, not some vague commercial facsimile of one. ..."
"... The direct imperial threats include economic warfare, as displayed by the IMF and ECB. As demonstrated in Greece, Ukraine, and before Greece Ireland. ..."
"... By 1978, US inflation had risen to 9% while inflation in the rest of the world slowed dramatically by comparison. Both the Carter administration and the Fed did everything in their power to control dollar devaluation, but it was clear by this time that without the assistance from foreign governments the dollar would not be able to survive . … Over the course of the next six years the dollar experienced a meteoric rise in value. ..."
The US empire is one of Multi-National corporations and International Trade Deals.
I'm intrigued by that assertion, especially if this comes from a more libertarian perspective
and an author who actually mentions NATO. Of course corporate welfare in various forms is a key
part of what is happening, but the core issue is a literal military empire, not some vague commercial
facsimile of one.
One of the most successful Big Lies in our domestic political discourse
is to blame convenient corporate villains instead of the public officials who are responsible
for decision-making and implementation.
This isn't the 1980s anymore. The global financial system (post Bretton Woods) collapsed somewhere
there in the 1990s. Today, things are held together by direct imperial threats, not corporate
"By 1978, US inflation had risen to 9% while inflation in the rest of the world slowed
dramatically by comparison. Both the Carter administration and the Fed did everything in their
power to control dollar devaluation, but it was clear by this time that without the assistance
from foreign governments
the dollar would not be able to survive
." … "Over the
course of the next six years the dollar experienced a meteoric rise in value."
Maybe not central to the main argument but I found this claim (in bold) implausible.
"Republicans unhappy with the Federal Reserve are circulating an idea that long ago
lost currency with most economists: a gold standard….But economic historians describe
this as nostalgia for a time that never was. Proponents of the gold standard
generally overstate the benefits of putting golden handcuffs on a central bank,
historians say, and the costs of that reduced flexibility are considerable…In 2012,
the University of Chicago asked 40 leading economists whether a gold standard would
improve the lives of average Americans. All 40 said no. "You can do a lot better than
a gold standard," said Michael Bordo, an economist and director of the Center for
Monetary and Financial History at Rutgers University. He described the political
interest in the precious metal as "pretty crazy."… Economists generally regard a gold
standard as a crude and outdated method of inflation control. There is nothing
inherently stable about the value of gold. It fluctuates, like the value of
everything else, as more is extracted from the ground and as demand waxes and wanes.
The bigger problem, however, is that economic conditions are unstable. And during
recessions, printing money can help revive economic activity."
Great discussion. And nice picture of William Jennings Bryan whose "Cross of Gold"
speech in 1896 won him the Democratic nomination for president. This is the best
expression of the progressive agenda ever.
But wait for it – our gold bug troll JohnH will later wake up drunk again to tell
us how evil the FED is and how awesome the period of the gold standard was. After all
trolls nothing about history and less about economics.
"...Real median weekly earnings have grown 8.6% since 1985. Nonfarm output per hour is up 79% over
that time. Yet the instant that there is even a glimmer of hope that labor might get an upper hand,
the Federal Reserve looks to hold the line on wage growth. It still appears that the Fed's top priority
is making sure the cards remain stacked against wage and salary earners." . ".When you recruit from the banksters, as the Fed does, you have to expect that their interests
align with the kleptocratic rentiers." . "...Notice that the labor share of business income has declined by 10.6% since 2000, while real
after-tax corporate profits have increased by 143.5%."
Some argue there must be excessive slack in labor markets if wage rates are not accelerating.
But real wages are tied to productivity growth, and productivity growth has been slow for several
years now. Wage growth in real terms has at least kept pace with productivity increases over
that time period, which is perfectly consistent with an economy from which labor market slack
has largely dissipated.
Real wage growth is consistent with productivity, thus there is no excess slack in the labor
market. If you think this is some crazy hawk-talk, think again.
Fed Chair Janet Yellen in July:
The growth rate of output per hour worked in the business sector has averaged about 1‑1/4 percent
per year since the recession began in late 2007 and has been essentially flat over the past
year. In contrast, annual productivity gains averaged 2-3/4 percent over the decade preceding
the Great Recession. I mentioned earlier the sluggish pace of wage gains in recent years, and
while I do think that this is evidence of some persisting labor market slack, it also may reflect,
at least in part, fairly weak productivity growth.
For more than three decades, the pace of productivity growth has exceed that of real compensation:
Another view from real median weekly earnings:
Real median weekly earnings have grown 8.6% since 1985. Nonfarm output per hour is up 79% over
that time. Yet the instant that there is even a glimmer of hope that labor might get an upper
hand, the Federal Reserve looks to hold the line on wage growth. It still appears that the Fed's
top priority is making sure the cards remain stacked against wage and salary earners.
"But real wages are tied to productivity growth, and productivity growth has been slow for
several years now."
Productivity by definition is output per worker. So when a recession lowers output, it lowers
measured productivity. So much for this garbage circular "reasoning".
Oh and the canard that JohnH does a lot - look at only what has happened of late:
"Wage growth in real terms has at least kept pace with productivity increases over that time
period, which is perfectly consistent with an economy from which labor market slack has largely
Tim Duy has already exposed this fallacy by looking at this over a longer period of time.
pgl -> Paine ...
Dude - this is a whole literature on this. Recessions do lower output by more than it lowers
employment but this is not exactly because firms are nice. Recessions are bad news for everyone.
Wages do not keep up with what is even limited inflation - again firms are not exactly nice. So
recessions sort of screw firms but unbelievably screw workers. Eventually the economy gets back
to full employment but workers never fully recovery.
This is why recessions are bad for everyone in the short fun but especially bad for workers
short-run and long-run.
Which brings me to why I did not go after Yellen. It seems she and hubbie Akerlof have written
some of the best papers on this topic.
Paine - stop being an arrogant lazy ass and actually check up on this literature.
Now if your point is that the FED borg (I coined this term) is about to take over Yellen's
mind, I fear this too. It seems to have taken over Stan Fischer's mind and he used to be brilliant.
ilsm -> Paine ...
The fed hawks are like pentagon version hawks since 1946.....
we cannot have any more pearl harbors
When you recruit from the banksters, as the Fed does, you have to expect that their interests
align with the kleptocratic rentiers.
Domestic US wage rates have been flat. In the graph, the lines cross between 1975 and 1985.
During those years, international competition increased in the tradable goods sector, IMO due
to the recovery of Japanese and European industrial economies from the destruction suffered in
WWII. The divergence between the curves expands more rapidly as more free trade agreements come
on line in the 90s (e.g. NAFTA in 1992 and PNTR for China in 1999).
It may be that intensifying competition in the tradable goods sector has slowed wage gains
in the US by a supply and demand imbalance for labor. The increasing wage premium to education
over the past 40 years and the capture of the domestic political system, and thus capture of the
government, by the very rich, has made it impossible for the political system to make adjustments
to the change in international competition that would benefit the unskilled or semiskilled worker.
Mike Sparrow -> mrrunangun...
The trade agreements are vastly overrated in terms of competition and instead, they are what
help surge productivity. The US began to have offshoring in the 1950's, especially after the Korean
war era boom. Companies began to bail as the US had developed a consumer base. This is very typical
of capitalism. It happened in Europe in the 19th century because of the same reason.
Keeping a strong consumer base and industrial base would liquidate capitalist positions and
turn the economy into laborism.
Mike Sparrow :
I would argue productivity is too high, still. Real productivity really zoomed from the mid-90's
and really never came back down. The late 00's recession made it worse.
Persistently high productivity causes real wages to struggle to keep up. I think many hobbyists
have it backwards with wages including myself. Yes, real wages rose rapidly between 1997-2000,
but that was only because productivity surged. The long run problem of that was wage stagnation
due to the previous high productivity, which has been there since the 80's. Real wage acceleration
coupled with correcting productivity is a good sign and the Fed doesn't like it because they want
high productivity all the time.
The Rage -> Peter K....
I think what he is trying to say, reading through his posts: technology is driving down the
need for labor investment and the information/computer/plastic/whatever you want to call it revolution
really drove that point home to the end.
So productivity is high, creating profits from reduced pace of hiring and keeping pipelines
of credit open for future output. However, productivity is slowing lately and real wages have
accelerated implicating that near term output will be higher than while future output will be
lower. Yeah, that part is a bit confusing, but the drift is that productivity/real wages need
to track together closer or you get problems. When they come unglued, the offender, this case
productivity, needs to come down for wages to catch up. Real wages were to high before 1980 and
productivity should run a bit higher than wages. So by 1995, the problems that helped spur the
great inflation had ebbed, but a new problem started: rapid productivity growth.
I read this in 2009 believe it or not in a article. Their belief was if productivity stayed
high and growing, the economy would be in permanent recession. They believed to maintain stability,
productivity had to decline for the next decade. Mercy, I wish I could remember where I read that
from. 6+ years leaves a large gap. I do think the chart shows the "panic" over slowed productivity
is pure noise. Between 95-00 it when "boom boom". Notice the pre-95 trend and the post-95 trend.
To the productivity must decline squad, a decline in productivity will help real wages rise boosting
real incomes and reducing nominal debt, creating a more stable economy.
We are still in a slave labor economy. The whole world is looking for the next labor market
to enslave. Nike in Vietnam, Apple in China, and China looks poised to take over Africa.
If you can't get your slaves shipped to you, go to your slaves!
pgl -> Dickeylee...
China looks poised to take over Africa? I guess the Chinese capitalists hate paying $3 an hour
and so will pay Africans less. If you check - multinationals are in Africa and they are mainly
US and European based companies. It seems we beat the Chinese to this.
ilsm -> pgl...
Pentagon deploying to keep the peace in Africa for the job creators........
Lafayette -> pgl...
The plight of Africa is that it has been plundered by both Europe and America over the past
two centuries. By America principally for cheap labor brought over on slave-ships.
Do not overlook the fact that damn few African countries can seem to develop a leadership that
does not plunder its country's assets for their own personal profit.
This plague of profiteering has existed since time immemorial and China is just the newest
entrant to the game ...
DrDick -> pgl...
China has been making significant inroads there for over a decade and are currently the largest
single player there.
Your comment actually has some merit in two senses. China has recognized that its habit of
investing in government bonds of other nations (e.g. US) is giving them a lower return than what
foreign direct investment offers. And Africa is attracting a lot of foreign direct investment.
I went searching for who the big players are and this gave an interesting list:
But it shows the BRIC nations (C for China) has been doing FDI in Africa for a while.
If multinationals are going global, maybe the labor movement should do the same. Workers of
the world unite!
Rasputin explained why the Fed must raise rates before the next recession, so it can lower
"Certainly our Savior and Holy Fathers have denounced sin, since it is the work of the Evil
But how can you drive out evil except by sincere repentance?
And how can you sincerely repent if you have not sinned?"
"...Much of Macro is still operating under the Friedman myth of Monetary policy domination. Monetary
policy can have strong effects, but at other time Fiscal and Regulatory Policy are much stronger and
needed for the best economic outcomes. . A problem with the US Fed is limited powers to set monetary and regulatory policy and it can be
totally uncoordinated from fiscal and regulatory policy that are under control of Congress and the Executive.
In the mid 1990s, the Fed and Clinton administration were using the same playbook and cajoled a reluctant
Congress. Do the Fed an Executive even try to coordinate policy now? This Congress is the anti-Fed and
operates on a playbook from the gamma quadrant. Total lack of policy coordination " . "...1) Real asset prices have gone up a lot as a result of QE. Now they are headed down as QE
is done with no real hope of another round.
2) Nominal and Real GDP are on the way up.
3) Inflation will be the last to respond. Waiting for inflation to show up is a mistake.
4) That still does not tell us the timing of getting off the zero bound. As I have said before, the
Fed has let asset prices go up too much (much has been said including Shiller's recent analysis).
The stock prices are now coming down. The fact that Netflix (which has zero exposure to China) is down
25% should give pause to anyone who believes parts of the market are not in a bubble. Add to that crashing
commodity prices and growth overseas in important economies. I think the Fed needs to wait and see how
it shakes out. It = asset prices, commodity prices, EM growth and finally, how all this impacts US growth."
[Actually Carmen Reinhart deserves a better pitchman here than the little comment pgl posted
above. Carmen presents a expressly well written and concise picture. Since it is international
then the same focus on core CPI that we get for domestic inflation is not referenced nor implied.
She includes commodities in the inflation. The full text following the short excerpt given by
pgl is below:]
Most of the other half are not doing badly, either. In the period following the oil shocks of
the 1970s until the early 1980s, almost two-thirds of the countries recorded inflation rates above
10%. According to the latest data, which runs through July or August for most countries, there
are "only" 14 cases of high inflation (the red line in the figure). Venezuela (which has not published
official inflation statistics this year) and Argentina (which has not released reliable inflation
data for several years) figure prominently in this group. Iran, Russia, Syria, Ukraine, and a
handful of African countries comprise the rest.
The share of countries recording outright deflation in consumer prices (the green line) is
higher in 2015 than that of countries experiencing double-digit inflation (7% of the total). Whatever
nasty surprises may lurk in the future, the global inflation environment is the tamest since the
Indeed, the risk for the world economy is actually tilted toward deflation for the 23 advanced
economies in the sample, even eight years after the onset of the global financial crisis. For
this group, the median inflation rate is 0.2% – the lowest since 1933. The only advanced economy
with an inflation rate above 2% is Iceland (where the latest 12-month reading is 2.2%).
While we do not know what might have happened were policies different, one can easily imagine
that, absent quantitative easing in the United States, Europe, and Japan, those economies would
have been mired in a deflationary post-crisis landscape akin to that of the 1930s. Early in that
terrible decade, deflation became a reality for nearly all countries and for all of the advanced
economies. In the last two years, at least six of the advanced economies – and as many as eight
– have been coping with deflation.
Falling prices mean a rise in the real value of existing debts and an increase in the debt-service
burden, owing to higher real interest rates. As a result, defaults, bankruptcies, and economic
decline become more likely, putting further downward pressures on prices.
Irving Fisher's prescient warning in 1933 about such a debt-deflation spiral resonates strongly
today, given that public and private debt levels are at or near historic highs in many countries.
Especially instructive is the 2.2% price decline in Greece for the 12 months ending in July –
the most severe example of ongoing deflation in the advanced countries and counterproductive to
an orderly solution to the country's problems.
Median inflation rates for emerging-market and developing economies, which were in double digits
through the mid-1990s, are now around 2.5% and falling. The sharp declines in oil and commodity
prices during the latest supercycle have helped mitigate inflationary pressures, while the generalized
slowdown in economic activity in the emerging world may have contributed as well.
But it is too early to conclude that inflation is a problem of the past, because other external
factors are working in the opposite direction. As Rodrigo Vergara, Governor of the Central Bank
of Chile, observed in his prepared remarks at Jackson Hole, large currency depreciations in many
emerging markets (most notably some oil and commodity producers) since the spring of 2013 have
been associated with a rise in inflationary pressures in the face of wider output gaps.
The analysis presented by Gita Gopinath, which establishes a connection between the price pass-through
to prices from exchange-rate changes and the currency in which trade is invoiced, speaks plainly
to this issue. Given that most emerging-market countries' trade is conducted in dollars, currency
depreciation should push up import prices almost one for one.
At the end of the day, the US Federal Reserve will base its interest-rate decisions primarily
on domestic considerations. While there is more than the usual degree of uncertainty regarding
the magnitude of America's output gap since the financial crisis, there is comparatively less
ambiguity now that domestic inflation is subdued. The rest of the world shares that benign inflation
As the Fed prepares for its September meeting, its policymakers would do well not to ignore
what was overlooked in Jackson Hole: the need to place domestic trends in global and historical
context. For now, such a perspective favors policy gradualism.
Friday, September 04, 2015 at 02:44 AM
bakho said in reply to RC AKA Darryl, Ron...
Here conclusion was weak with a vague take home message.
Much of Macro is still operating
under the Friedman myth of Monetary policy domination.
Monetary policy can have strong effects, but at other time Fiscal and Regulatory Policy are
much stronger and needed for the best economic outcomes.
A problem with the US Fed is limited powers to set monetary and regulatory policy and it can be
totally uncoordinated from fiscal and regulatory policy that are under control of Congress and
the Executive. In the mid 1990s, the Fed and Clinton administration were using the same playbook
and cajoled a reluctant Congress. Do the Fed an Executive even try to coordinate policy now? This
Congress is the anti-Fed and operates on a playbook from the gamma quadrant. Total lack of policy
pgl said in reply to bakho...
My take was that she was advocating more aggressive aggregate demand stimulus in general. And
you are right - we need the fiscal side to step up to the plate.
Story in NYC as how bad just
the subway stops are. The rails suck as well and we need to expand the system. But at the rate
this is going this decaying stops which are very dangerous will not be fixed until 2065. Why?
Lack of funding is the stated reason. No one in this stupid nation can say - well provide more
funding? We are ruled by idiots.
RC AKA Darryl, Ron said in reply to bakho...
[Well, yeah but that would have diverged a long way from her topic:]
"Inflation – its causes
and its connection to monetary policy and financial crises – was the theme of this year's international
conference of central bankers and academics in Jackson Hole, Wyoming. But, while policymakers'
desire to be prepared for potential future risks to price stability is understandable, they did
not place these concerns in the context of recent inflation developments at the global level –
or within historical perspective..."
[She stuck with just inflation and monetary policy because that is what she chose to write
about at this time. However, Carmen is the other intellectual half of Rogoff of the debt limit
for economic growth flameout. So, we should not depend upon her for fiscal policy recommendations.
That even someone this popular with the establishment Republican elite can understand monetary
policy is notable in contrast to the inflationistas.
Peter K. said in reply to RC AKA Darryl, Ron...
Yes she did the 90 percent government debt cutoff with Rogoff that Krugman attacked.
vaguely righwing blogger from the St. Louis Fed, Andolfatto or something, recently had link where
they said inflation wasn't a problem and the Fed shouldn't raise rates until inflation is apparent.
Peter K. said in reply to bakho...
"In the mid 1990s, the Fed and Clinton administration were using the same playbook and cajoled
a reluctant Congress. "
I thought Clinton cut the deficit and the tech stock bubble helped balance
the budget so they had surpluses. Some people say those surpluses were a problem because of a
lack of safe assets. That drove money to seek safe returns in mortgage backed securities for instance.
Peter K. said in reply to Peter K....
Maybe he didn't cut the deficit - I think Dean Baker argues that - but at the beginning of his
Presidency, Clinton dropped his middle class spending bill in a deal with Greenspan who said he'd
keep interest rates low in return.
Peter K. said in reply to bakho...
"This Congress is the anti-Fed and operates on a playbook from the gamma quadrant."
The Fed regularly complained about fiscal "headwinds."
1 is key to understanding the rough timing. In the US and UK, we are a little past the dashed
vertical line (impact phase). UK has had a little more success importing inflation.
1) Real asset prices have gone up a lot as a result of QE. Now they are headed down as
QE is done with no real hope of another round.
2) Nominal and Real GDP are on the way up.
3) Inflation will be the last to respond. Waiting for inflation to show up is a mistake.
4) That still does not tell us the timing of getting off the zero bound. As I have said before,
the Fed has let asset prices go up too much (much has been said including Shiller's recent analysis).
The stock prices are now coming down. The fact that Netflix (which has zero exposure to China)
is down 25% should give pause to anyone who believes parts of the market are not in a bubble.
Add to that crashing commodity prices and growth overseas in important economies. I think the
Fed needs to wait and see how it shakes out. It = asset prices, commodity prices, EM growth and
finally, how all this impacts US growth.
"...Friedman and Schwartz were wrong about the cause and the cure of the Great Depression. Those
who learned monetarism as the "new truth" are having a difficult time unlearning it. We need re-education
courses for older economists and a new curriculum for younger ones." . "...I don't have the neo-classical faith in the "natural" healing powers of the economy as some
people do. Seems more likely that the economy would settle in to a lower equilibrium given enough
fiscal austerity." . "...But what if the FED is a rational captain of corporate capitalism.
Better then the opportunistic demagogues in the congress.
But still dedicated to wage stag " . "..."if wage increases for the business sector as a whole lag behind productivity increases deflation
The summary "Deflation and money" by Hiroshi Yoshikawa, Hideaki Aoyama, Yoshi Fujiwara, and Hiroshi
Deflation and money,
Vox EU: Deflation is a threat to the macroeconomy. Japan had suffered from deflation for more
than a decade, and now, Europe is facing it. To combat deflation under the zero interest bound,
the Bank of Japan and the European Central Bank have resorted to quantitative easing, or increasing
the money supply. This column explores its effectiveness, through the application of novel methods
to distinguish signals from noises.
...all in all, the results we obtained have confirmed that aggregate prices significantly change,
either upward or downward, as the level of real output changes. The correlation between aggregate
prices and money, on the other hand, is not significant. The major factors affecting aggregate
prices other than the level of real economic activity are the exchange rate and the prices of
raw materials represented by the price of oil. Japan suffered from deflation for more than a decade
beginning at the end of the last century. More recently, Europe faces a threat of deflation. Our
analysis suggests that it is difficult to combat deflation only by expanding the money supply
bakho said in reply to pgl...
Monetary policy weak is at the ZLB. Fiscal and regulatory can have much stronger effects and
complete swamp monetary like a tidal wave to a ripple.
Exchange rates and other economic shocks have more effect than monetary policy at the ZLB.
Friedman and Schwartz were wrong about the cause and the cure of the Great Depression. Those
who learned monetarism as the "new truth" are having a difficult time unlearning it. We need re-education
courses for older economists and a new curriculum for younger ones.
bakho said in reply to pgl...
Efficiency standards backed by a carbon tax would be much more effective that a carbon tax
Efficiency standards work for electric appliances and prevent a races to the bottom.
pgl said in reply to bakho...
True. It seems Carly and Jeb! do not want to regulate but rather to encourage innovation by
giving subsidies to rich people. Not only is this Republican reverse Robin Hoodism on steroids
- it will not has as much effect as a tax combined with regulations.
Simply put - conservatives should not be listened to as their agenda is not economic efficiency
but rather making the Koch Brothers ever richer.
Peter K. said...
As a thought experiment I would wonder what bakho's re-education course would look like.
There is this paper, but could it be it says the same thing as those graphs which show the
large increases in the monetary base would just sit there with at the Zero Lower Bound because
of the liquidity trap?
The inflationistas were wrong that all of that monetary policy would cause runaway inflation.
But considering what needed to be done to move long-term interest rates, was it really large
David Beckworth's blogpost in today's links suggests the Fed did what they wanted to do.
"The inflationistas were wrong that all of that monetary policy would cause runaway inflation."
When confronted they always say that once the economy normalized, all of those reserves will
go rushing out into the economy causing inflation.
But the Fed says it will use Interest on Excess Reserves to manage that outflow.
Peter K. said in reply to Peter K....
"If monetary policy supposedly didn't move prices, I found it surprising that austerity didn't
give us deflation as it did in Europe."
I don't have the neo-classical faith in the "natural" healing powers of the economy as some
people do. Seems more likely that the economy would settle in to a lower equilibrium given enough
Paine said in reply to Peter K....
Very agreeably presented
But what if the FED is a rational captain of corporate capitalism.
Better then the opportunistic demagogues in the congress.
But still dedicated to wage stag
Deflation? Uupps, price theory, too, is wrong
Comment on 'Deflation and Money'
The current economic situation is a clear refutation
of both commonplace employment and quantity theory. The
core of the unemployment/deflation problem is that the
price mechanism does not work as standard economics
Roughly, the formula says that the consumer price
index declines if (i) the average expenditure ratio
falls, (ii) the wage rate falls, (iii) the productivity
increases, and (iv) the employment in the investment
good industry shrinks relative to the employment in the
consumption goods industry. The formula follows from
(2014, Sec. 5).
The crucial message is that the wage rate is the
numéraire of the price system. If at all, the quantity
of money plays an indirect role via the expenditure
ratio and the employment relation of the investment
good and the consumption good industry.
The rule of thumb says: if wage increases for the
business sector as a whole lag behind productivity
increases deflation occurs (the rest of the formula
For the rectification of the naive quantity theory
see (2011) (I)/(II).
"...In stumbling to this outcome, Nixon's advisors were strikingly oblivious to the monetary
disorder they were unleashing. The passivity of the "religious floaters" club in the White House was
owing to their reflexive adherence to the profoundly erroneous monetarist doctrines of Milton Friedman." . "...The four decades since Camp David also show that the Friedmanite régime of floating
money is dynamically unstable. Each business cycle recovery since 1971 has amplified the ratio of credit
to income in the system, causing the daisy chains of debt upon debt to become ever more distended and
fragile." . "..."It is ludicrous to think that foreign exchange can be entrusted to a bunch of pork belly
crapshooters,"" . "..."When currency exchange rates were firmly fixed and some or all of the main ones were redeemable
in a defined weight of gold", With, then as now, less than an ounce of gold per person on Earth,
a third grader had arithmetic skills enough to know this was a ridiculous claim."
"I held in my hand the Holy Grail for the Chicago Mercantile Exchange. The most influential
economic mind of the twentieth century provided the CME with the intellectual foundation upon
which to build its financial superstructure."
Nixon's estimable free market advisors who gathered at the Camp David weekend were to an astonishing
degree clueless as to the consequences of their recommendation to close the gold window and float
the dollar. In their wildest imaginations they did not foresee that this would unhinge the
monetary and financial nervous system of capitalism. They had no premonition at all that
it would pave the way for a forty-year storm of financialization and a debt-besotted symbiosis between
central bankers possessed by delusions of grandeur and private gamblers intoxicated with visions
of delirious wealth.
In fact, when Nixon announced on August 15, 1971, that the dollar was no longer convertible to
gold at $35 per ounce, his advisors had barely a scratch pad's worth of ideas as to what should come
Its first attempted solution was a Burns-Connally hybrid known as the Smithsonian Agreement of
December 1971. The United States needed precisely a $13 billion favorable swing in its balance of
trade. This was not to be achieved the honest way-by domestic belt tightening and thereby a reduction
of swollen US imports that were being funded by borrowing from foreigners. Instead, America's trading
partners were to revalue their currencies upward by about 15 percent against the dollar.
Connally's blatant mercantilist offensive was cut short in late November 1971, however, when the
initially jubilant stock market started heading rapidly south on fears that a global trade war was
in the offing.
As it turned out, a few weeks later Connally's protectionist gauntlet ended in an amicable paint-by-the-numbers
exercise in diplomatic pettifoggery. The United States agreed to drop the 10 percent import surtax
and raise the price of gold by 9 percent to $38 per ounce.
Quite simply, the United States had made no commitment whatsoever to redeem paper dollars for
gold at the new $38 price or to defend the gold parity in any other manner. At bottom, the
Smithsonian Agreement attempted the futile task of perpetuating the Bretton Woods gold exchange standard
without any role for gold.
During the next eight months, further international negotiations attempted to rescue the Smithsonian
Agreement with more baling wire and bubble gum. But the die was already cast and the monetary oxymoron
which had prevailed in the interim, a gold standard system without monetary gold, was officially
dropped in favor of pure floating currencies in March 1973.
Now, for the first time in modern history, all of the world's major nations would operate their
economies on the basis of what old-fashioned economists called "fiduciary money." In practical
terms, it amounted to a promise that currencies would retain as much, or as little, purchasing power
as central bankers determined to be expedient.
In stumbling to this outcome, Nixon's advisors were strikingly oblivious to the monetary disorder
they were unleashing. The passivity of the "religious floaters" club in the White House was owing
to their reflexive adherence to the profoundly erroneous monetarist doctrines of Milton Friedman.
A Friedmanite Fed would keep the money growth dial set strictly at 3 percent, year in and year
out, ever steady as she goes.
Friedman's pre-1971 writings nowhere give an account of the massive hedging industry that
would flourish under a régime of floating paper money. This omission occurred for good reason:
Friedman didn't think there would be much volatility to hedge if his Chicago-trained central bankers
stuck to the monetarist rulebook.
Most certainly, Friedman did not see that an unshackled central bank would eventually transform
his beloved free markets into gambling halls and venues of uneconomic speculative finance.
It thus happened that Leo Melamed, a small-time pork-belly (i.e., bacon) trader who kept
his modest office near the Chicago Mercantile Exchange trading floor stocked with generous supplies
of Tums and Camels, found his opening and hired Professor Friedman.
THE PORK-BELLY PITS: WHERE THE AGE OF SPECULATIVE FINANCE STARTED
Leo Melamed was the genius founder of the financial futures market and presided over its explosive
growth on the Chicago "Merc" during the last three decades of the twentieth century.
At the time of the Camp David weekend that changed the world, the Chicago Merc was still a backwater
outpost of the farm commodity futures business.
The next chapters in the tale of Melamed and the Merc are downright astonishing. In 1970, Melamed
made an intensive inquiry into currency and other financial markets about which he knew very little,
in a desperate search for something to replace the Merc's rapidly dwindling eggs contract. The latter
was the core of its legacy business and was then perhaps $50 million per year in annual turnover.
Four decades later, Leo Melamed's study program had mushroomed into a vast menu of futures
and options contracts-covering currencies, commodities, fixed-income, and equities, which trade twenty-four
hours per day on immense computerized platforms. The entire annual volume of the old eggs
contract is now exceeded in literally the blink of an eye.
The reason futures contracts on D-marks and T-bills took off like rocket ships is that
the fundamental nature of money and finance was turned upside down at Camp David. In effect, Professor
Friedman's floating money contraption created a massive market for hedging that did not have any
reason for existence in the gold standard world of Bretton Woods, and most especially under its more
robust pre-1914 antecedents.
When currency exchange rates were firmly fixed and some or all of the main ones were redeemable
in a defined weight of gold, exporters and importers had no need to hedge future purchases or deliveries
denominated in foreign currencies. The spot and forward exchange rates, save for technical differentials,
were always the same.
Even more importantly, the newly emergent need of corporations and investors to hedge against
currency and interest rate risk caused other fateful developments in financial markets; namely, the
accumulation of capital and trading resources by firms which became specialized in the intermediation
of financial hedges. Purely an artifact of an unstable monetary régime, this new industry
resulted in prodigious and wasteful consumption of capital, technology, and labor resources.
The four decades since Camp David also show that the Friedmanite régime of floating
money is dynamically unstable. Each business cycle recovery since 1971 has amplified the ratio of
credit to income in the system, causing the daisy chains of debt upon debt to become ever more distended
Currently, the daily volume of foreign exchange hedging activity in global futures and options
markets, for example, is estimated at $4 trillion, compared to daily merchandise trade of only $40
billion. This 100:1 ratio of hedging volume to the underlying activity rate does not exist because
the currency managers at exporters like Toyota re-trade their hedges over and over all day; that
is, every fourteen minutes.
Due to the dead-weight losses to society from this massive churning, the hedging casinos are a
profound deformation of capitalism, not its crowning innovation. They consume vast resources without
adding to society's output or wealth, and flush income and net worth to the very top rungs of the
economic ladder-rarefied redoubts of opulence which are currently occupied by the most aggressive
and adept speculators. The talented Leo Melamed thus did not spend forty years doing God's
work, as he believed. He was just an adroit gambler in the devil's financial workshop-the great hedging
venues-necessitated by Professor Friedman's contraption of floating, untethered money.
THE LUNCH AT THE WALDORF-ASTORIA THAT OPENED THE FUTURES
According to Melamed's later telling, by 1970 he had "become a committed and ardent disciple in
the army that was forming around Milton Friedman's ideas. He had become our hero, our teacher, our
Thus inspired, Melamed sought to establish a short position against the pound, but after visiting
all of the great Loop banks in Chicago he soon discovered they weren't much interested in pure speculators:
"if you didn't have any commercial reasons, the banks weren't likely to be very helpful."
The banking system was not in the business of financing currency speculators, and for good reason.
In a fixed exchange rate régime the currency departments of the great international banks were purely
service operations which deployed no capital and conducted their operations out of hushed dealing
rooms, not noisy cavernous trading floors. The foreign currency business was no different than trusts
and estates. Even Melamed had wondered at the time whether "foreign currency instruments could succeed"
within the strictures designed for soybeans and eggs, and pretended to answer his own question: "Perhaps
there was some fundamental economic reason why no one had before successfully applied financial instruments
In point of fact, yes, there was a huge reason and it suggests that while Melamed might have audited
Milton Friedman's course, he had evidently not actually passed it. There were no currency
futures contracts because there was no opportunity for speculative profit in forward exchange transactions
as long as the fixed-rate monetary régime remained reasonably stable.
Indeed, this reality was evident in a rebuke from an unnamed New York banker which Melamed recalled
having received in response to his entreaties shortly before the Smithsonian Agreement was announced.
"It is ludicrous to think that foreign exchange can be entrusted to a bunch of pork belly crapshooters,"
the banker had allegedly sniffed.
Whether apocryphal or not, this anecdote captures the essence of what happened at Camp
David in August 1971. There a motley crew of economic nationalists, Friedman acolytes, and political
cynics supinely embraced Richard Nixon's monetary madness. In so doing, they opened the financial
system to a forty-year swarm of "crapshooters" who eventually engulfed capitalism itself in endless
waves of speculation and fevered gambling, activities which redistributed the income upward but did
not expand the economic pie.
As it happened, Melamed did not waste any time getting an audience with the wizard behind the
White House screen. At a luncheon meeting with Professor Friedman at the New York Waldorf-Astoria
on November 13, 1971, which Melamed later described as his "moment of truth," he laid out his case.
After asking Friedman "not to laugh," Melamed described his scheme: "I held my breath as I put
forth the idea of a futures market in foreign currency. The great man did not hesitate."
"It's a wonderful idea," Friedman told him. "You must do it!"
Melamed then suggested that his colleagues in the pork-belly pits might be more reassured about
the venture if Friedman would put his endorsement in writing. At that, Friedman famously replied,
"You know I am a capitalist?"
He was apparently a pretty timid capitalist, however. In consideration of the aforementioned
$7,500, Melamed got an eleven-page paper that launched the greatest trading casino in world history.
It made Melamed extremely wealthy and also millionaires out of countless other recycled eggs and
bacon traders that Friedman never even met.
Modestly entitled "The Need for a Futures Market in Currencies," the paper today reads like so
much free market eyewash. But back then it played a decisive role in conveying Friedman's imprimatur.
In describing the paper's impact, Melamed did not spare the superlatives: "I held in my hand the
Holy Grail for the Chicago Mercantile Exchange. The most influential economic mind of the twentieth
century provided the CME with the intellectual foundation upon which to build its financial superstructure."
Hahaha, for the FIRST time I see a post here on ZH where the "profoundly erroneous monetarist
doctrine" of Milton Friedman gets blamed for what follows : the greatest monetary sin of the West
gold exchange standard according to Jacques Rueff).
The Friedmanite floating rate regime is what started the instability in the world monetary
casino and yes the
futures market did the rest.
Yipeeee, we have it right there. The monetary SIN laid out here at ZH and it had NOTHING to
do with Keynesian plays. The
Casino was a PURE product of the CHICAGO school so dear to Hayek. Who approved the supply
side "liberalisation" of Reaganomics that followed.
ZH has vindicated that very important piece of the puzzle in the global financial time line
of our present age.
Now Keynes's ghost can rest in piece. Monetarism will have to carry its own Cross on its Golgothan
The Delicate Genius
I think there may be a middle you're excluding...
May be a middle called Nixonian petrodollar anchoring. But that did not change the Casino mantra.
It just anchored "our money your problem" to Saud's Oil guzzler.
All that did was to suck the Oil into the fiat bonanza world.
Something the Sauds don't appreciate anymore as the Fiat pile is making Pax Americana fragile
and it cannot zero hedge its support of Sunni Saudi hubris. It has to HEDGE with IRAN...now having
showed its resilience after 40 years of confronting the USA.
C'mon Genius don't just mumble in your libertarian beard, put up or shut up.
Not all monetarists
are chicagoan. They became book cookers for Keynesian discretionary policy... Hence NK's, New
Classicals, "market monetarists," et cetera. Friedman's been reduced to the guy in the back room,
wearing a green visor and rigging up Keynes' insane monetary system.
Agreed, but only because you know more than I do when it comes to Economics, and because I
always thought that cocksucker Freidman, and the Chicago School, were crooked snakes-in-the-grass
all along. And frankly, Z/H does kind of beat on Keynes a bit too much sometimes, but the SOB
is dead, so who cares anyhow. Historiography has a nothing to do with reality in this day and
1946 Keynes dies. 1965 De Gaulle starts talking about "exorbitant privilege" and US hubris.
At the end of the 60s the London Gold club that tries to bridge French concerns about US spending
profiglacy (Vietnam war, great society) and US balance of
trade deterioration, collapses. Harold Wilson caves in to "gnomes of Zurich" and London loses
pivotal role with a devalued £.
By 1969 the French have put the fear of God up Nixon when a french gunboat arrives reclaiming
French gold deposited in NY. SO...1971 and Nixon makes the plunge.
You can say what you like about Keynes. He had nothing to do with Nixon/Johnson's spending
spree which made gold revoke inevitable. It was not his
philosophy which was à la mode in 1969 but the Chicago school.
MASTER OF UNIVERSE
From what I have read about Keynes he was appropriately characterized as 'brilliant'. Of course,
no amount of Keynesian Stimulus could have shut down the Bear Stearns bear raid, or the Lehman
Bros. Chapter 11. Ergo, the downfall of Freidman's orthodoxy was bound to occur as soon as Glass-Steagall
deregulation provided the leverage via the FCC. Since the exemption on leverage for Bear Stearns
it took five years to melt down to a systemic Worldwide intractable problem. Keynes was right
about CB intervention, but he had no way of knowing that certain fundamentals would be altered
beyond logic of failsafe.
p.s. thanks for going into detail on history. I always appreciate historical background given
my background in Experimental Psychology/Personality/Biography/Historiography and Sociology.
Nixon's estimable free market advisors who gathered at the Camp David weekend were to an
astonishing degree clueless as to the consequences of their recommendation to close the gold window
and float the dollar.
Oh really? What would you have done ... with the street price of gold at over $70, the official
price at $35, and the French choosing to be compensated in gold rather than dollars, as they were
supposedly the same thing.
What would you have done?
Another reason the Chitown Loop banks were not supportive of Melamed's currency futures
ideas was that the Harris primarily was at the time "the" Bulge Bracket Big Swinging US Based
Dick of the cash and forward 4X markets as well as one of the largest financers of the futures
businesses on the CME and CBoT. They saw Leo not as a product extension, but a threat to their
When currency exchange rates were firmly fixed and some or all of the main ones were redeemable
in a defined weight of gold,
With, then as now, less than an ounce of gold per person on Earth, a third grader had arithmetic
skills enough to know this was a ridiculous claim.
Everybody acts like Nixon closing the gold window was the beginning of something. It wasn't.
It was the end. At that point the US had been spending money like water overseas for everything
from the Marshall Plan, Volkswagens and Japanese transistor radios to the Korean and Vietnam wars.
There was a net inflow of gold during the depression and WW2, but after that there was a steady
outflow all through the fifties and sixties.
The whole world wanted American dollars, and a lot of it got turned in for American gold. The
gold was nearly gone. At the rate it was going, the last ounce would leave Fort Knox in less than
two years. They had no choice but to end the convertability of gold - sooner or later. Nixon's
only choice was to take action and make a smooth transition or let everything go to hell at once.
Great Deformation by David Stockman" ... This is the most remarkable treatise on economic
history ever written. If you haven't read it you are still in the dark.You will continue to see
many excerpts from this book on ZH ... and well deserved.
David Stockman should be given a Nobel Prize for Economics ... for exposing Economics as the
insanity it is and fully captive to politics.
"Gold is looking like the dog that just did not bark -- but not uniquely so. Most safe-haven assets
are looking distinctly lackluster, including the VIX index. Either 5,000 years of safe-haven buying
has just become bunk, or there is a desire to portray what is evidently a financial and economic
crisis as nothing to be concerned about."
Ross Norman, Sharps Pixley
"In keeping silent about evil, in burying it so deep within us that no sign of it appears on the
surface, we are implanting it, and it will rise up a thousand fold in the future. When we neither
punish nor reproach evildoers, we are not simply protecting their trivial old age, we are thereby
ripping the foundations of justice from beneath new generations."
Aleksandr Solzhenitsyn, The Gulag Archipelago
At least in my judgement, the precious metal markets are being consistently rigged.
I believe the
reason that they are being rigged is that the financiers have convinced the political class that
this is a necessary action in order to prevent a panic, a run on the dollar and the bonds, and a
seepage of critical funds into an unproductive investment as compared to equities for example.
We are just defending what is ours, right? And what is ours is the global dollar hegemony.
This is really just another excuse for looting, picking both the global public pockets and the
This sort of thing seems to happen periodically, at least once per generation, and the system
generally has to get washed out badly, and then reform may come. You can see a clear trend back to
the early Reagan years for this particular dalliance with the overreach and madness of the moneyed
Protracted market rigging tend to distort supply profoundly. And there should be no doubt that
the distortions and excesses of our current round of economic quackery have caused an historic imbalance
of wealth and power. And the rigging of the gold and silver markets have badly affected the
ability of supply to meet demand.
Yves here. This post is elegant in the way it challenges the standard (sloppy) definitions of
money. Even if you don't agree, it will force you to think and articulate why you don't agree (hopefully
in a rigorous manner).
Many people try to attribute a solidity to money (I suspect German has better words that correspond
to "thing-ness" for this sort of ideation) that it lacks. The desire to have money be concrete seems
to be linked in many cases to the enthusiasm for gold or gold-currencies. But gold's value isn't
enduring or fixed in any way; it's value depends on the structure of social relations. For instance,
in Vietnam, women typically get a necklace of gold beads in their youth. It's a dowry of sorts. When
conditions became desperate during the war, some women would try trading these beads for food or
medicine, or as a way to buy off a possible rapist. The beads, when they were accepted, went for
much less than the metal value.
The standard definition of money is given in terms of its three functions:
1: Money is a medium of exchange.
2: Money is a measure of value.
3: Money is a store of value.
Number 1 is at best misleading. Numbers 2 and 3 are simply wrong, and these things are easy to
show. It is also easy to show that this is important.
First, the actual definition of money:
1: Money is a token, or instrument, of demand, which is exchanged for goods or services. Or
simply: Money is demand.
2: Money is a measure of demand.
3: Money is a store of demand.
In the standard definition, Number 3 cannot possibly be true. Were Number 3 true, money would
have value of itself. The value of money would be independent of what ever else an economy produced.
But consider, the best monies are those instruments which have no intrinsic value whatever. How can
any amount of something which has no value, be a store of value? Even where commodities have been
used for money, (and this may be the origin of the error,) they have tended to be those commodities,
precious metals, for instance, which, because of their properties, were of only limited economic
use. The reason for this is known and simple: These commodities had to be more valuable as money
than they were valuable as commodities. If they were more valuable as commodities, they would be
consumed, and so their use as money would disappear. But this implies that the value of these commodities,
as money, over their value as a commodity, is not intrinsic, but as with plain fiat money, purely
a matter of other factors. That is, the value of the commodity as money is not based on any intrinsic
value of the commodity to the economy.
So fiat money has no intrinsic value, and therefore cannot be a store of value. If the economy
produced only money, that money would have no value. It does not have value as, say, a refrigerator
full of food has value, or a tank filled with gasoline. But, what the third function of money actually
is is as a store of demand. If you have $100 in the bank, or in your pocket, you have a store of
demand, which you can keep as long as you want, and when you choose to, you can spend it. You can
demand something which is offered for sale, to the amount of $100.
Then you can take your $100 of tokens of demand and you can go to the grocery store and with it
buy $100 worth of food. This shows that money is also a measure of demand: You have as much demand
for food, or anything else, as $100 will purchase. If you have more money, you have more demand.
If you have less money, you have less demand. If you have no money, you have no demand.
Money is not a store of value. Can it reliably be a measure of value? Economically worthless things
may be in much demand, and therefore command a price beyond their value. Yachts, for instance. Economically
valuable things may be in little demand, or supplied at prices below their value. Water, for instance.
With money, you have demand for these things, at the prices they are offered. But their prices do
not reflect their economic value, only the amount of demand, the amount of money, which must be exchanged
This counters the claim that the only value a thing has is that set and measured by the market:
The toys of the wealthy are much in demand, but of little value. The goods needed by the poor are
to them of great value, but it may be that those poor are only able to demand a meager portion of
them. Markets only measure demand. They need not measure value. This is the primary inadequacy of
So because money is demand, or more exactly a token or instrument of demand, it serves as a 'medium'
of exchange: Because money is not demand for any particular good or service, but is demand for any
offered good or service, it may be exchanged for any offered good or service. Money is a medium not
in the sense of being an environment for exchange, but in the sense of being a generalized instrument.
It is an abstract good, which is offered in exchange for other goods and services. The individual
who exchanges his good or service for money then himself has equal demand on others for different
goods or services. Money thus flows opposite to the flow of goods and services, not to the degree
of the value of these goods and services, but according to the demand for these goods and services
that are offered.
Goods or services are thus exchanged for an equal demand on other goods or services. Money, then,
is an instrument for comparing the demand for dissimilar objects. However, we have shown it is not
reliable for comparing the value of dissimilar objects.
By mistaking demand for value, the standard definition of money thus implicitly fails to distinguish
between the value of an object, and the demand for that object. In an informal sense, this results
in the failure to distinguish between the needs of an economy, and its wants.To provide another example,
the economy 'needs' streetlights in Highland Park, Mi. It 'wants' yachts in Newport, RI.
If we regard the economy as like a tree, money cannot distinguish between the fruits of a tree,
and its roots.
There is a larger issue. The standard definition of money goes back, essentially unchanged, to
1875. See eg. Wikipedia. It is, implicitly, a key part of the foundations of the entire field of
economics. That it is in error calls into question the soundness of the entire economics project.
Yves here. Over the years, we've regularly criticized economists like Bernanke and Krugman, who rely
on the so-called loanable funds model, which sees banks as conduits of funds from savers to borrowers.
Despite the fact that many central banks, such as the Bank of England, have stressed that that's
not how banks actually work (banks create loans, which then produce the related deposit), central
banks still cling to their hoary old framework. For instance, when I saw Janet Yellen speak at an
Institute of New Economic Thinking conference in May, she cringe-makingly mentioned how banks channel
scarce savings to investments.
Even worse, the macroeconomic models used by central banks incorporate
the loanable funds point of view. This article describes what happens when you use a more realistic
model of the financial system. Even though the paper is a bit stuffy, the results are clear: economies
aren't self-correcting as the traditional view would have you believe but have boom/bust cycles (the
term of art is "procyclical") and banks show the effects of policy changes much more rapidly.
Other economists who have been working to develop models that reflect the workings of the financial
sector more accurately, like Steve Keen, have come to similar conclusions: that the current mainstream
models, which serve as the basis for policy, present a fairy-tale story of economies that right themselves
on their own, when in fact loans play a major, direct role in creating instability. It's not an exaggeration
to depict the continued reliance on known-to-be-fatally-flawed tools as malpractice.
By Zoltan Jakab, Senior Economist at the Research Department, IMF, and Michael Kumhof,
Senior Research Advisor at the Research Hub, Bank of England. Originally published at
Problems in the banking sector played a seriously damaging role in the Great Recession. In fact,
they continue to. This column argues that macroeconomic models were unable to explain the interaction
between banks and the macro economy. The problem lies with thinking that banks create loans out of
existing resources. Instead, they create new money in the form of loans. Macroeconomists need to
reflect this in their models.
Problems in the banking sector played a critical role in triggering and prolonging the Great Recession.
Unfortunately, macroeconomic models were initially not ready to provide much support in thinking
about the interaction of banks with the macro economy. This has now changed.
However, there remain many unresolved issues (Adrian et al. 2013) including:
• The reasons for the extremely large changes to (and co-movements of) bank assets and bank
debt;• • The extent to which the banking sector triggers or amplifies financial and business cycles;
• The extent to which monetary and macro-prudential policies should lean against the wind in financial
In our new work, we argue that many of these unresolved issues can be traced back to the fact
that virtually all of the newly developed models are based on the highly misleading 'intermediation
of loanable funds' theory of banking (Jakab and Kumhof 2015). We argue instead that the correct framework
is 'money creation' theory.
In the intermediation of loanable funds model, bank loans represent the intermediation of real
savings, or loanable funds, between non-bank savers and non-bank borrowers;
Lending starts with banks collecting deposits of real resources from savers and ends with the
lending of those resources to borrowers. The problem with this view is that, in the real world, there
are no pre-existing loanable funds, and intermediation of loanable funds-type institutions – which
really amount to barter intermediaries in this approach – do not exist.
The key function of banks is the provision of financing, meaning the creation of new monetary
purchasing power through loans, for a single agent that is both borrower and depositor.
Specifically, whenever a bank makes a new loan to a non-bank ('customer X'), it creates a new
loan entry in the name of customer X on the asset side of its balance sheet, and it simultaneously
creates a new and equal-sized deposit entry, also in the name of customer X, on the liability side
of its balance sheet.
The bank therefore creates its own funding, deposits, through lending. It does so through a pure
bookkeeping transaction that involves no real resources, and that acquires its economic significance
through the fact that bank deposits are any modern economy's generally accepted medium of exchange.
The real challenge
This money creation function of banks has been repeatedly described in publications of the world's
leading central banks (see McLeay et al. 2014a for an excellent summary). Our paper provides a comprehensive
list of supporting citations and detailed explanations based on real-world balance sheet mechanics
as to why intermediation of loanable funds-type institutions cannot possibly exist in the real world.
What has been much more challenging, however, is the incorporation of these insights into macroeconomic
Our paper therefore builds examples of dynamic stochastic general equilibrium models with money
creation banks, and then contrasts their predictions with those of otherwise identical money creation
models. Figure 1 shows the simplest possible case of a money creation model, where banks interact
with a single representative household. More elaborate money creation model setups with multiple
agents are possible, and one of them is studied in the paper.
The main reason for using money creation models is therefore that they correctly represent the
function of banks. But in addition, the empirical predictions of the money creation model are qualitatively
much more in line with the data than those of the intermediation of loanable funds model. The data,
as documented in our paper, show large jumps in bank lending, pro- or acyclical bank leverage, and
quantity rationing of credit during downturns. The model simulations in our paper show that, compared
to intermediation of loanable funds models, and following identical shocks, money creation models
predict changes in bank lending that are far larger, happen much faster, and have much larger effects
on the real economy. Compared to intermediation of loanable funds models, money creation models also
predict pro- or acyclical rather than countercyclical bank leverage, and an important role for quantity
rationing of credit, rather than an almost exclusive reliance on price rationing, in response to
The fundamental reason for these differences is that savings in the intermediation of loanable
funds model of banking need to be accumulated through a process of either producing additional resources
or foregoing consumption of existing resources, a physical process that by its very nature is gradual
and slow. On the other hand, money creation banks that create purchasing power can technically do
so instantaneously, because the process does not involve physical resources, but rather the creation
of money through the simultaneous expansion of both sides of banks' balance sheets. While money is
essential to facilitating purchases and sales of real resources outside the banking system, it is
not itself a physical resource, and can be created at near zero cost.
The fact that banks technically face no limits to instantaneously increasing the stocks of loans
and deposits does not, of course, mean that they do not face other limits to doing so. But the most
important limit, especially during the boom periods of financial cycles when all banks simultaneously
decide to lend more, is their own assessment of the implications of new lending for their profitability
and solvency. By contrast, and contrary to the deposit multiplier view of banking, the availability
of central bank reserves does not constitute a limit to lending and deposit creation. This, again,
has been repeatedly stated in publications of the world's leading central banks.
Another potential limit is that the agents that receive payment using the newly created money
may wish to use it to repay an outstanding bank loan, thereby quickly extinguishing the money and
the loan. This point goes back to Tobin (1963). The model-based analysis in our paper shows that
there are several fallacies in Tobin's argument. Most importantly, higher money balances created
for one set of agents tend to stimulate greater aggregate economic activity, which in turn increases
the money demand of all households.
Figure 2 shows impulse responses for a shock whereby, in a single quarter, the standard deviation
of borrower riskiness increases by 25%. This is the same shock that is prominent in the work of Christiano
et al. (2014). Banks' profitability immediately following this shock is significantly worse at their
existing balance sheet and pricing structure. They therefore respond through a combination of higher
lending spreads and lower lending volumes. However, intermediation of loanable funds banks and money
creation banks choose very different combinations.
Figure 2. Credit crash due to higher borrower riskiness
Intermediation of loanable funds banks cannot quickly change their lending volume. Because deposits
are savings, and the stock of savings is a predetermined variable, deposits can only decline gradually
over time, mainly by depositors increasing their consumption or reducing their labour supply. Banks
therefore keep lending to borrowers that have become much riskier, and to compensate for this they
increase their lending spread, by over 400 basis points on impact.
Money creation banks on the other hand can instantaneously and massively change their lending
volume, because in this model the stocks of deposits and loans are jump variables. In Figure 2 we
observe a large and discrete drop in the size of banks' balance sheet, of around 8% on impact in
a single quarter (with almost no initial change in the intermediation of loanable funds model), as
deposits and loans shrink simultaneously. Because, everything remaining the same, this cutback in
lending reduces borrowers' loan-to-value ratios and therefore the riskiness of the remaining loans,
banks only increase their lending spread by around 200 basis points on impact. A large part of their
response, consistent with the data for many economies, is therefore in the form of quantity rationing
rather than changes in spreads. This is also evident in the behaviour of bank leverage. In the intermediation
of loanable funds model leverage increases on impact because immediate net worth losses dominate
the gradual decrease in loans. In the money creation model leverage remains constant (and for smaller
shocks it drops significantly), because the rapid decrease in lending matches (and for smaller shocks
more than matches) the change in net worth. In other words, in the money creation model bank leverage
is acyclical (or procyclical), while in the intermediation of loanable funds model it is countercyclical.
As for the effects on the real economy, the contraction in GDP in the money creation model is
more than twice as large as in the intermediation of loanable funds model, as investment drops more
strongly than in the intermediation of loanable funds model, and consumption decreases, while it
increases in the intermediation of loanable funds model.
Banks are Not Intermediaries of Real Loanable Funds
To summarise, the key insight is that banks are not intermediaries of real loanable funds. Instead
they provide financing through the creation of new monetary purchasing power for their borrowers.
This involves the expansion or contraction of gross bookkeeping positions on bank balance sheets,
rather than the channelling of real resources through banks. Replacing intermediation of loanable
funds models with money creation models is therefore necessary simply in order to correctly represent
the macroeconomic function of banks. But it also addresses several of the empirical problems of existing
This opens up an urgent and rich research agenda, including a reinvestigation of the contribution
of financial shocks to business cycles, and of the quantitative effects of macroprudential policies.
Disclaimer: The views expressed here are those of the authors and do not necessarily represent
those of the institutions with which they are affiliated.
craazyboy, June 19, 2015 at 11:35 am
Actually, the concepts of the money multiplier [hence the related concept of "bank money"]
and loanable funds both existed simultaneously in my econ 101 book in college. But they were in
The money multiplier, a consequence of fractional banking, does have a mathematical limit and
it depends on the reserve ratio. Of course since banks are in the middle, they have control over
whether they lend to the limit or not, if loan demand is there. If no loan demand, they would
be "pushing on string", which was in yet another chapter in my econ 101 book.
A common layman misinterpretation of the money multiplier is that banks have their own printing
press. That is not true – the banking system a whole creates bank money. When a loan is made,
the bank now has an "asset" on it's balance sheet. That where "capital ratios" come into play
limiting an individual bank.
craazyboy, June 19, 2015 at 11:07 am
Capital ratios, depending on how many SIVs you have. But if you get limited there, those numbers
can be fudged. Or if you don't like faking complicated financial statements, you can always say,
"faakit, I don't wanna be a bank. I'll be a CDO mill instead. Then maybe expand into insurance
with CDS. That sounds better."
But economists are hopeless. They spend 50 years arguing over whether the sky is blue or green,
then one comes along and says it's blue-green.
susan the other, June 19, 2015 at 11:32 am
Yes. Big ones. So big that it became necessary to start writing up more derivative contracts
than loan contracts. This post explains derivatives better than anything I have read and it doesn't
mention them once! But really, why else would Greenspin love them so much. Because it was the
perfect way for banks to have all the cake and eat all the cake.
As long as banks' balance sheets were OK, they were OK, except that they could crash the entire
world economy and then, oops, they weren't OK any more.
So enter derivatives to ensure their own balance sheets. Problem solved.
Banks create money when they issue loans to others: they obviously can't issue a loan
to themselves should they find themselves in a liquidity/solvency crunch. Hence the need for bailouts
by somebody else.
Nathan Tankus, June 19, 2015 at 2:26 pm
This is the problem with using imprecise language like money.
Banks create deposits which are money to non-bank businesses, individuals, state and local governments
and sometimes foreign governments. Deposits are however, not money to other banks. Settlement
balances (money in essentially bank's checking accounts at the central bank) are money to them
(in the sense that they can use them to settle their liabilities). A bank needs these to clear
payments with other banks and the government.
Normally the central bank makes sure there are enough settlement balances in the system to
clear payments between banks and those balances are distributed through the banking system when
banks make daily unsecured loans to each other. In the crisis however, since all these loans were
unsecured, banks stopped lending to each other. The government then had to guarantee interbank
loans in the trillions to get the payments system functioning again.
Bailouts serve to make people believe the financial system is stabilized and to increase their
official capital levels (capital levels matter because regulators are supposed to take over and
resolve banks that are under-capitalized or even have negative equity). They are however, not
essential to keep these banks going.
Letting banks lie about the value of their assets (which happened on a widespread level after
the financial crisis) is just as effective as keeping these banks running as official bailouts.
The dirty little secret is that as long as the central bank makes sure that banks can borrow
on the inter-bank loan market (or directly lend to them) and regulators all agree to lie (or not
check) about the net worth and capital levels of a bank, they can stay in business. This is the
nature of accounting control frauds in the modern age.
washunate, June 19, 2015 at 3:25 pm
So that leaves my original question. What is the policy value of the semantics?
In your description, banks are still constrained in their ability to lend. In order to loan
more, to create new money, government has to make sure the bank IOUs are interchangeable with
the national currency.
Nathan Tankus, June 19, 2015 at 3:45 pm
a) this is not true. in payment systems where bank liabilities don't trade at par (like antebellum
united states) what adjusts is the value of the liabilities, not the banks ability to issue liabilities.
b) the definition of a modern currency is making sure that insured deposits in the same country
equal each other in value. The most important Central Bank mandate is to preserve the integrity
of the payments system. not putting enough settlement balances into the banking system means making
interest rates explode and the payments system freeze. If you think that banks are at all constrained
in lending by the threat of the central bank deliberately blowing up the payments system country
wide, I have some penny stocks i would like you to invest in. What's interesting about Europe
right now is that they don't have a "federal" (as in europe wide) insured deposit system and thus
there is no such thing as insured deposits in the normal sense. as a result the ECB has blown
up the payments system in cyprus and seems to be contemplating doing the same in Greece and wrote
down deposits (in many ways like the antebellum banking system). Note that even in this case lending
hasn't been constrained, the resulting liabilities have just been written down and may be written
down in the future.
C) saying that banks are "constrained in lending" when this "constraint" is something that doesn't
exist in the real world ie the United States and most central banks in the world refusing to provide
the necessary amount of settlement balances to clear payments between banks at par is much more
of a semantic game with no value for understanding policy than the reverse.
washunate, June 19, 2015 at 4:02 pm
I hear what you are saying. What you are saying is that there is no alternative.
The public must bail out the banksters.
Ben Johannson, June 19, 2015 at 2:37 pm
They can't create money for the payments system. U.S. banks don't make dollars. British banks
don't make pounds sterling. They make bank IOUs for the deposit system.
Code Name D, June 19, 2015 at 3:32 pm
I am not sure this is completely true. The point of secularization is to sell these assets
into the shadow markets. So not the markets hold the assets just created by the banks while the
bank takes their money in exchange.
To create more money, all they have to do is find more loans to underwrite, then secularize the
Ben Johannson, June 19, 2015 at 3:49 pm
Banks can create money denominated in the government's currency but they can't create that
currency. If you get a bank loan for $10,000 you're being given a bank IOU with a value of $10,000
- which means the bank isn't actually loaning you anything at all. They're agreeing to clear a
payment through the reserve system in exchange for a series of small payments from you in the
Actual dollars can only exist in a reserve account or as cash.
OpenThePodBayDoorsHAL, June 19, 2015 at 4:22 pm
So far no one is mentioning the elephant in the room: why are money and credit necessarily
We could certainly have money, produced in a quantity that matched underlying economic activity
or population growth or something. On top of that we could have savings, investment, fractional
Instead we have a system where every banking crisis is also a monetary crisis.
Milton Friedman suggested a desktop computer that created 2% more money each year.
Then there are those who suggest using some rare, shiny substance that is materially difficult
Instead when we get a banking crisis (year 7 and counting) the only possible response is to
flood the system with scrip, with predictable results (runaway inflation, this time in financial
assets, last time in housing, the time before in commodities). Everybody moaning about the plunge
in oil prices, but nobody seems to ask how/why they got to $140/bbl in the first place. Excess
capacity everywhere you look, from Chinese steel to US college grads.
So let's have a real debate, not just argue how many angels are on the head of our current
washunate, June 19, 2015 at 3:33 pm
Yeah, we very much agree here. Banks can create bank IOUs. Just like I can create wash IOUs.
I, wash, do solemnly and seriously promise to give you a trillion dollars next week.
Now, gimme a trillion dollars today!
If the government backs my $1 trillion promise, then the government created the money, not
me. If the government doesn't back my promise, then it ain't worth jack squat in payments systems.
I couldn't even buy a coffee at Starbucks with it, nevermind a car or a house or something.
craazyman, June 19, 2015 at 4:32 pm
How does a dude driving a car with a gas gauge run out of gas?
If you fkk things up so bad you can't pay for your money making machine to make money then you
can't make money. But it's not cause you can't make money, it's because you can't pay for your
money making machine to crank it out1
How do all these boneheads get so rich if they can't make money? They could never get that
rich if they just loaned money that was already there. No way.
They don't get rich linearly. They get rich exponentially. that's inconsistent with Not making
money whenever they want. Loanable funds is linear. Making is exponential.
Where does the money come from if they dont make money? The first bank had to have money to start.
where did that come from? It might have come from the govermint. But the govermint had to borrow
it from people. They probably got it from a bank someplace that cooked it up. There was probably
a bank in the Garden of Eden. That's probably what the snake was. A Banker. hahahahahahah. The
apple was a loan. Then reality set it when Adam and Eve realized they had to hit the mall to buy
some clothes so they could look for jawbs to pay it off.
June 19, 2015 at 4:45 pm
You read that in David Graeber's book, didn't you?
susan the other, June 19, 2015 at 11:37 am
They can create money as long as there is someone to loan it to. Bec. they have to mind their
own assets and liabilities to be legit.
But the trick is that they don't have to pay attention to reality as long as their books balance.
It is such a clever fiction.
Theoretically it could work to smooth the bumps in an economy, except that it causes such precipitous
crashes nobody can recover. One small detail.
washunate, June 19, 2015 at 12:32 pm
How can an entity that can create money ever have unbalanced books?
todde, June 19, 2015 at 12:43 pm
When the economy starts to shrink, earning potential goes down as do asset prices.
This prevents banks from making new loans. Banks loans are a function of past and future earnings.
At the same time the ability of the debtor to repay loans on the books is also curtailed.
This leads to a bailout.
cripes, June 19, 2015 at 3:37 pm
Now you're being obtuse. Deliberately?
It's clear they can create asset-money by loaning asset-money to borrowers.
We're not talking about paper bills here, which are a very small part of circulating "money."
washunate, June 19, 2015 at 3:44 pm
No, this is very important. A currency issuer can issue unlimited amounts of currency.
An entity that is not a currency issuer cannot. They are constrained by the existing resources.
human, June 19, 2015 at 11:41 am
Of course banks don't _need_ bailouts. They get them because they are able to coerce the populace
through the great circle jerk of the Loanable Funds model!
washunate, June 19, 2015 at 12:30 pm
What do you mean banks don't need bailouts?
human, June 19, 2015 at 12:53 pm
Bailouts are used to bolster the publics' perception of the Feds' regulatory authority and
responsibility and spread some more wealth around. Look at what happened to AIG!
washunate, June 19, 2015 at 1:01 pm
Exactly, look at what happened. Goldman Sachs would have ceased to exist without government
support. The smartest bank on the planet was incapable of creating money.
human, June 19, 2015 at 1:39 pm
"ceased to exist" I find that very hard to believe. They might have had to cut bonuses…maybe.
washunate, June 19, 2015 at 3:40 pm
Well sure, we can't prove something that didn't happen. But we can point to how desperate actors
behaved at the time. For example:
In light of the unusual and exigent circumstances affecting the financial markets, and all
other facts and circumstances, the Board has determined that emergency conditions exist that
justify expeditious action on this proposal
Unusual, exigent, emergency, and expeditious. In just one sentence.
If banks could create new money, they wouldn't need government bailouts.
Also, If banks could create new money, they wouldn't need to borrow depositors' money.
And, If banks could create new money, you wouldn't need depositors' insurance.
All of these speak to the "banks create money" idea as nonsense. Banks create credit.
However, the "loanable funds" idea is still nonsense. Loans are both made from and deposited to
loanable funds, for a net of zero. This is critical, because it completely nullifies the idea
that government borrowing affects interest rates by creating a shortage of funds.
Government spending does not slow other financial activity in the economy, which means
the entire conservative paradigm in macroeconomics is garbage.
washunate, June 19, 2015 at 3:59 pm
Well said, it's all nonsense.
Personally I would tweak "banks create credit" to more specifically say that banks convert
borrower credit into government credit. It's a transformation, an exchange, not an act of
It's the borrower, not the bank, that supplies the credit. Indeed, a bank that systematically
makes loans exceeding their borrower's ability to repay quite predictably goes out of business.
Vatch, June 19, 2015 at 4:08 pm
As Sardonic and Susan the Other have both pointed out, banks create money only when they issue
loans to others. They aren't able to create money in any other ways. If there aren't borrowers,
then the banks can't create money.
And when someone fully repays her or his bank loan, the money that was created by that bank
loan is destroyed.
But of course the bankers have a multitude of ways to game the system.
fledermaus, June 19, 2015 at 10:57 am
It's easy to make money when you can lend the same $100 to ten different people.
sardonic, June 19, 2015 at 11:14 am
Money is credit, so your statement does not make sense. What is happening in the scenario you
imagine is you are creating ten different loans. These dollars are no more "same" than are numbers
in different banks demand deposit accounts.
todde, June 19, 2015 at 11:02 am
Since we run massive trade deficits there are.always dollars.offshore that can be lent to banks
to meet any reserve requirements.
So banks ability to make.loans and create money would be a function of society's ability to repay.
Another point, banks don't create money out of thin air, they create money based on prior earnings
(secured loans) or future earnings (unsecured loans).
Ben Johannson, June 19, 2015 at 2:41 pm
Bank loans aren't derived from cash flow, they are entries on the balance sheet. They come
from nowhere and go back to nowhere when a loan is paid back.
Also, all dollar deposits exist within the computers of the Federal Reserve so there's nothing
"offshore" to bring back.
todde, June 19, 2015 at 2:51 pm
Not all dollar reserves are sitting in the federal reserve , although many are.
And cash flow of the borrower matters.
Ben Johannson, June 19, 2015 at 3:08 pm
All dollar deposits exist on computers at the Federal Reserve. Anyone at the Fed, Treasury
and CBO can tell you this.
Cash flow of the borrower is a matter of underwriting standards, not capacity to extend a loan.
Jesse, June 19, 2015 at 11:14 am
Are all 'banks' the same?
In a regime where the banking authority imposes a strict 50% reserves requirements and eliminates
the gimmickry of overnight sweeps to gimmick the base of assets and liabilities, and stresses
certain types of higher quality reserves and a conservative valuation, are the 'banks' the same
as a regime where reserve requirements are minimal and easily financialized?
Is an economy where loans are intimately tied to organic growth through 'real' economic activity
and a high velocity of money (sorry Austrians but it does mean something) different from one in
which the banks are largely preoccupied with speculating with their own trading books and money
supplied by the central banking authority monetizing debt?
A model that fits a particular circumstance which is itself is rather distorted from the historical
norm is just that. An example of a particular circumstance and not a general model for a range
susan the other, June 19, 2015 at 11:53 am
This post was killer. It left us all with the question, Well just how do we change our financial
behavior to fit the real model, the money creation model. Because we all went blithely on our
way for decades thinking things were balancing out when in fact they weren't.
It sounds a little Minsky, in that the good times always crash but nobody knows what to do
about it. So at least Minsky had an inkling of this. And there were plenty of crashes when banks
really did intermediate loans, but they were recoverable.
When did loan intermediation end? 1913 and with the creation of the Federal Reserve? If so
it is amazing it was mythologized for so long. One way to begin to get real would be to analyze
the value of money, and its creation, by what it accomplishes. So, that's after the fact and hard
to do in a "free market" but the FM is also another myth. MMT looks at this very clearly. We don't
need loans to run the sovereign business of the country. That takes care of a large chunk of the
mess right off the top.
susan the other , June 19, 2015 at 2:12 pm
yes. it's scary. Mistakes are easier to make than progress. But we have much better analytics
now… maybe we can estimate what will happen and actually maintain a steady course. I'd like to
Synoia, June 19, 2015 at 12:08 pm
Step 1. When did loan intermediation end? 1913 and with the creation of the Federal Reserve?
Step 2. Getting off the gold standard in 1972.
Min, June 19, 2015 at 12:26 pm
Back in the free banking era of the 19th century, there was a bank in Rhode Island that issued
$600,000 in bank notes backed by 7 bits ($0.875 in coins) in the vault. ;)
Source: A talk on CSPAN book TV a few years ago. Sorry I can't be more definite.
craazyboy, June 19, 2015 at 1:06 pm
That was back when we/Europe were still trying to decide if we should do fractional gold banking,
or if banking based on the banker's reputation was adequate. 'Course bankers found that cheating
on fractional gold banking was very profitable as well.
Adam1, June 19, 2015 at 1:12 pm
The basis of loans create deposits has been around since shortly after the creation of double-entry
bookkeeping. The FED's existence only stabilizes and standardizes the interbank clearing process
and has little to do with loans create deposits. The gold standard only fixed foreign exchange
rates and floated domestic rates, it had little impact on loans create deposits.
Larry Headlund, June 19, 2015 at 12:53 pm
When did loan intermediation end?
According to Lombard Street (1873) by Walter Bagehot lending as a function of 'banks' preceded
their accepting of deposits by some years.
Min, June 19, 2015 at 12:21 pm
Can't we all agree that banks create money? Fractional reserve banking makes no sense unless
banks create money. I learned that in high school, fer crissakes!
washunate, June 19, 2015 at 12:58 pm
No, we can't.
But seriously, it's important to understand why there are differences of opinion. The monetarists
(of all stripes, this is not a left/right thing) want people to think that money (as in currency)
is created by banks because that obfuscates the real actor – the government.
When the government accepts the bank IOU as exchangeable 1:1 with the national currency, then
it is the government that has created more currency units, not the bank. But if people can be
convinced to ignore that little step, it looks like banks create the currency units themselves.
And once you accept those bank IOUs as legitimate currency units in the boom times, well, you've
committed to a policy of bailing out criminal and/or insolvent management teams during the bust
Banks don't create money. You were taught wrong. The model used where banks create money does
not match the accounting a bank uses. There is no money multiplier.
[Note that several first world countries have reserve requirements of zero percent. They do not
suffer hyperinflation, as the money multiplier would suggest. Even Ben Bernanke said that the
reserve percentage only affected the cost of money, and that he would have preferred the US also
move to a zero percent reserve.]
craazyboy, June 19, 2015 at 4:21 pm
Banks create credit, but common usage sometimes interchanges money and credit when the distinction
isn't relevant to the narrow context of the discussion.
There is a money multiplier. No one made it up – if you have fractional banking it is there.
Math says it can happen. You could call it a credit multiplier if you prefer, but I try and limit
how many new words I make up.
The reserve ratio limits the money multiplier to a non-infinite number. The reason we have
bank reserves is so in theory banks have some cash on hand to satisfy deposit withdrawals.
Capital ratios are used by regulators to monitor bank solvency. Some counties have zero reserve
requirements. I guess the CBs there will FedEx your money to you. Who knows. I'll take the FDIC
Canada has a 0 reserve requirement. Canada has a housing bubble. So does Oz. The EU has even
more lax capital ratio requirements than the US. The EU is now a basket case. The US has asset
Bernanke is an a-hole.
nothing but the truth, June 19, 2015 at 1:30 pm
when Y is talking about investment / saving, she is talking about the real side of the picture.
when you are talking about the loan-> deposit causality, this is from the technicality of the
both are correct because they are talking about apples and oranges.
the money multiplier story is something that economists have spread and they are _so_ surprised
to find out that it is not the (complete) truth. partly this story comes from history because
that is how banks started. That is because gold is a real resource – you cannot just create it
fictionally and lend it. Now that money is nothing, there cannot be a shortage of nothing, unless
it is to keep the "people in their place". When the likes of Goldman have a shortage of money,
it is produced out of nothing.
The view of money multiplier is correct, except for the causality part. loans create deposits,
but those deposits belong to someone.
From the operational side of things, there is not much difference. Whether the bank creates loans
and then deposits, or deposits first and then loans, the fact remains that the bank is on the
hook for the loan (to its capital reserves) if it defaults, so the bank has to be careful whom
to lend to. Reckless lending can even lead to jail time for the lender (or it used to).
so long store short, there is not much to see in this technical view of things. Yes under the
hood the car is very complicated, has 80+ microprocessors and so on. The function of the car is
to be driven. To obsess about spark plugs is to forget the function of the car – transport.
This is the real question – what is the function of money in the real economy, who is benefiting
from the legalized frauds, and how to stop this and bring finance to serve the real economy, not
vice versa. This is political economy, not really finance. Yes to fix something you have to understand
it. But it should be understood that we diagnose in order to prescribe.
DolleyMadison, June 19, 2015 at 2:01 pm
Wow – A few days ago Maxine Waters wrote an op-ed about the 2-tier justice system when it comes
to bankers – surprisingly printed by American Banker. So I try to click on it and the link is
DEAD. So I search for the article and found it cross posted on 3 other sites – and on each one
the link was broken. WOW. And we wonder how the "2-tier justice system" became that way…
See dead links below:
Big Banks and America's Broken, Two- Tiered …
Jun 16, 2015 · In February, federal prosecutors began a 90-day examination to determine whether
to bring cases against individuals for their role in the 2008 financial …
Big Banks and America's Broken, Two- Tiered …
America, American, Bank, Banker, Banks, Big, Bond, Broken, Buyer, Justice, Mortgage, National,
News, PaymentsSource, System, The, Think, Tiered, Two, and
Big Banks and America's Broken, Two- Tiered …
Jun 16, 2015 · … Two-Tiered Justice System By American Banker | June 17, 2015. SHARE Read Article.
Lambert Strether, June 19, 2015 at 3:07 pm
Adding epicycles to dynamic stochastic general equilibrium models, because markets (I would
argue) do not equilibriate (though they may be equilibriated, as with LIBOR).
Trying to make a "like a fish needs an epicycle" joke here, but gotta run….
pcle, June 19, 2015 at 3:23 pm
"Figure 2 shows impulse responses for a shock whereby, in a single quarter, the standard deviation
of borrower riskiness increases by 25%."
So it looks like in this model "shocks" just come from outer space. There is no sense in which
the system itself generates crisis as part of its very working ? And where's the fraud parameter
June 19, 2015 at 4:00 pm
Some central bankers believe that banks create money.
Some central bankers believe that financial markets can self-regulate.
Given the above facts about central bankers, can we conclude if central bankers always know what
they are talking about (even when it comes to monetary policy)?
June 19, 2015 at 4:05 pm
ok, so I understand that loans create deposits, but…im confused about the reverse.
I have this crazy exercise i try to do.
I try to visualize the thought experiment of all loans and govt deficits being paid back so that
there are 0 us dollars in existence. (kind of like an economic version of reimagining the big bang
Leaving aside for the moment the fact that there is not enough money in existence to make all interest
payments… (is this even true?)
how does the money get destroyed when a loan is paid back? You will say "the balance sheets are simply
adjusted, a deposit and a loan simply disappear."
i can visualize this, but i dont understand it.
So what is the difference, for the bank, between a paid back loan and a default on the loan?
and what happens to the interest payments (when they are made)? they move from deposits to reserves
(or equity or whatever)… how are they seperated from the deposits that simply "disappear?"
I would really like to understand this…
Nathan Tankus, June 19, 2015 at 4:25 pm
"So what is the difference, for the bank, between a paid back loan and a default on the
when a person makes a principal payment on a loan their account is debited and the value of
their debt (an asset to the bank) is decreased. when a person defaults on a loan the value of
their debt ( again an asset to the bank) becomes zero (well actually more like pennies on the
dollar since it will likely get sold to a debt collector). In other words, one shrinks the bank's
balance sheet while keeping it's net worth the same while the other decreases the bank's net worth
"and what happens to the interest payments (when they are made)? they move from deposits
to reserves (or equity or whatever)… how are they seperated from the deposits that simply "disappear?""
interest is paid in the same process ie debiting the borrower's account. the difference is
that interest payments increase the bank's net worth since they have less liabilities ( ie less
deposits) without decreasing the value of their asset (the borrower's debt).
In short, banks lend to increase their net worth.
horostam, June 19, 2015 at 4:49 pm
In other words, one shrinks the bank's balance sheet while keeping it's net worth the same
while the other decreases the bank's net worth
do you mean "the banking system's net worth?"
if (in both cases) the loan asset value goes down, the only way net worth stays the same is if
deposits decrease proportionately.
What if your deposit account is at another bank? What is the difference, to an individual bank,
if its a default or principal payment?
Their liability side doesnt change…
Clearly i am missing something…
craazyboy, June 19, 2015 at 4:27 pm
"So what is the difference, for the bank, between a paid back loan and a default on the
In the case of default, the bank puts your house on it's balance sheet and it is then house
Interest is tricky. It comes from future years 31 thru 33.
Nathan Tankus, June 19, 2015 at 4:31 pm
yes i abstracted from collateral to make the basic point.
if the loan is collateralized than the fall in the bank's net worth from a default is equal
to the value of the loan minus the value of the collateral.
This is part of why so many people were so cavalier about lending in the housing market because
people assumed that rising capital gains would keep these loans profitable even if the rate of
Of course when housing prices fell and people started to take capital losses…. and here we
The influence of the U.S. in financial flows extends far outside national
study by Robert N.McCauley, Patrick McGuire and Vladyslav Sushko of the Bank for International Settlements
estimated that the amount of dollar-denominated credit received by non-financial borrowers outside
the U.S. totaled $9 trillion by mid-2014. Over two-thirds of the credit originated outside the U.S.,
with about $3.7 trillion coming from banks and $2.7 from bond investors. The report's authors found
that dollar credit extended to non-U.S. borrowers grew much more rapidly than did credit within the
U.S. during the post-global financial crisis period.
Almost half of this amount went to borrowers
in emerging markets, particularly China ($1.1 trillion), Brazil ($300 billion), and India ($125 billion).
In the case of Brazil, most of the funds were raised through the issuance of bonds, while bank lending
accounted for the largest proportion of credit received by borrowers in China. Much of this credit
was routed through the subsidiaries of firms outside their home countries, and balance of payments
data would not capture these flows.
The study's authors attributed the rise in borrowing in emerging markets to their higher interest
rates. Consequently, any rise in U.S. interest rates will have global repercussions. The growth in
dollar-denominated credit outside the U.S. should slow. But there may be other, less constructive
consequences. Borrowers will face higher funding costs, and loans or bonds that looked safe at one
interest rate may be less so at another. This situation is worsened by an appreciating dollar if
the earnings of the borrowers are not also denominated in dollars. The rise in the value of the dollar
has already prompted
reassessments of financial fragility outside the U.S.
All this puts U.S. monetary policymakers in a delicate position.
Ms. Yellen has made it clear that the Fed is in no hurry to raise interest rates. The Federal
Reserve wants to see what happens to prices and wages as well as unemployment before it moves. The
appreciation of the dollar pushes that date further into the future by keeping inflation rates depressed
while cutting into the profitability of U.S. firms. While the impact of higher rates on credit markets
outside the U.S. most likely has a relatively low place on the Fed's list of concerns, Fed policymakers
certainly are aware of the potential for collateral damage.
All this demonstrates the discrepancy between the diplomatic and financial power of the U.S. On
the one hand, the U.S. must deal with countries that are eager to claim their places in global governance.
dominance of the U.S. and other G7 nations in international institutions is a relic of a world
that came to an end with the global financial crisis. On the other hand, the dollar is still the
predominant international currency, and will hold that place for many years to come. The use of the
renminbi is slowly growing but it will be a long time before it can serve as an alternative to the
dollar. Consequently, the actions of the Federal Reserve may have more international repercussions
than those of U.S. policymakers unable to cope with the shifting landscape of financial diplomacy.
... Among her most influential work is the research she did with Gourinchas when she was at Princeton
on the role of the United States in a globalized financial system. Blanchard says it "changed
the discussion on the current account deficit in the United States."
Before the recent global financial crisis, when economists and politicians were concerned about
the ballooning U.S. current account deficit, Gourinchas and Rey showed that the U.S. position
was not as bad as it looked because of the country's role as the center of the international financial
"Although the U.S. was running a big trade deficit, economists were not taking into account the
large amounts the U.S. was earning on the financial side from capital gains and changes in the
value of the dollar," Gourinchas told F&D.
"For example, almost all U.S. foreign liabilities are in dollars, whereas approximately 70 percent
of U.S. foreign assets are in other currencies. So a 10 percent depreciation of the dollar increases
the value of foreign assets and represents a transfer of about 5.9 percent of U.S. GDP from the
rest of the world to the United States. For comparison, the trade deficit on goods and services
in 2004 was 5.3 percent of GDP. So these capital gains can be very large."
As Gourinchas and Rey (2005) pointed out,
a depreciation of the U.S. dollar has two beneficial effects on the external position of the United
States. It helps boost net exports and increases the dollar value of U.S. assets.
Gourinchas and Rey said that the U.S. position at the center of the system gave it what they called
an "exorbitant privilege"... The exorbitant privilege, Rey and Gourinchas explained, came about
because the United States could borrow at a discount on world financial markets and get high yields
on its external assets. They tracked how the United States had gradually taken on riskier overseas
"Then we pushed these ideas further, by pointing out that the key role of the United States makes
it also look very much like an insurer for the rest of the world," Rey explains. ...
Gourinchas said Washington has become more like the world's venture capitalist since the 1990s.
"During the whole period, U.S. assets have shifted more and more out of long-term bank loans toward
foreign direct investment (FDI) and, since the 1990s, toward FDI and equity. At the same time,
its liabilities have remained dominated by bank loans, trade credit, and debt-that is, low-yield
"Hence, the U.S. balance sheet resembled increasingly one of a venture capitalist with high-return
risky investments on the asset side. Furthermore, its leverage ratio has increased sizably over
Rey says they expanded on this research during the global financial crisis, finding that the United
States had reversed its role by channeling resources to the rest of the world through its external
portfolio-on a large scale. "Our estimate is 13 to 14 percent of U.S. GDP in 2008 alone. So that
was very significant."
The United States was providing "some sort of global insurance to the world economy and the rest
of the world-earning the equivalent of an insurance premium in good times and paying out in bad
times. And that's exactly what we see in the data."
"While the United States enjoys an exorbitant privilege on one side," says Rey, "it also, as global
insurer, has an exorbitant duty in time of crisis on the other."
George H. Blackford said...
"For example, almost all U.S. foreign liabilities are in dollars, whereas approximately
70 percent of U.S. foreign assets are in other currencies. So a 10 percent depreciation of the
dollar increases the value of foreign assets and represents a transfer of about 5.9 percent of
U.S. GDP from the rest of the world to the United States. For comparison, the trade deficit on
goods and services in 2004 was 5.3 percent of GDP. So these capital gains can be very large."
My problem is that, in the process, they closed all of the factory complexes in Flint, Michigan
except one, and I don't own any of the foreign assets that are going to appreciate if and when
the dollar depreciates.
Stock valuations are based not only on actual assets, but future growth
and earnings potential. If I buy company X, it's because I think company X has a good product,
business plan, and management and is going to be able to grow faster than inflation and faster
than their competitors. I certainly don't want them to liquidate their current assets and give
me my money back.
Precious metals are only worth something because other people want them. Because
they think the metals are worth something because other people want the metals because
they think they're worth something because... They're pretty, they're partly lasting
and they're rare. Until they're not: aluminum used to be a valuable metal. Now I coat
my armpits with it every morning, and half the metal objects I own are aluminum.
If you're expecting a big crash, you're better off purchasing items of utility or
improving your land for raising food.
Never mind that gold and silver were used as money for thousands of years
before the printing press made it possible to issue fiat currency.
Nonsense. Gold and silver can be "fiat" currency just as paper money can
be. Fiat currency just means that a currency derives part of its value from
the government's declaration that it shall function as a currency.
For example, the U.S. government says that the "dollar" must be used to pay
taxes. It could equally say that "gold" must be used to pay taxes, in which
case gold's price would probably go up, since it would be more useful to pay
for things with. That addition in value due to the government'
The volatility of precious metals is known since the Ancient times. Precious metals
have never been a good storage for monetary value, their main advantage was their
ability to be measured easily (either by weighing them or by counting minted coins),
and to be carried around easily - advantages you also have with paper money or with
the numbers on a banking account.
Compare for instance the prices for platinum and gold, two precious metals with
very similar properties: Same frequency of occurrence in the Earth crust, same properties
(density between 19-20 g per cubic centimeter, does not oxydate easily, can be cast
and cold formed), same usages (mainly jewelry, some industrial usage, some coined
or cast into bars to be stored as assets). Their prices have been so volatile recently,
that platinum was about twice the price of gold, and vice versa within just a decade.
Compared with that, the dollar/euro exchange rate is an example of long time stability.
All those things used to be "the conventional wisdom", but nowadays all of those
things have been proven to be quite volatile.
I never believed in "making money from money"... I guess that's called "financial
engineering" nowadays? That kinda insults me as an engineer, since we generally abide
by physical laws. With financial laws, you're pretty much playing games using other
Other people who profess to love money above all else, and play the game to generate
more money out of "nothing", and if you would just give them some of your money to
play with, they'll help you "grow" your money too for a cut of the "take".
But they don't add any value to the economy... they "multiply" it. And then they
can just take "a little bit off the top", because no one will notice.
I'd love to invest in actual production... you know, things that add value and
subtract costs instead of just "multiply" monopoly money. What options are there for
that kind of thing?
How is Q different than the usual Price-to-Book ratio, which formally has the same english
definition of the share price to the per-share Asset value of the company? The price-to-book
value doesn't go below 1 usually because a leveraged buyout of the company could fund it self
by selling off the pieces. The Q-value seems to define assets as replacement value which is
unclear. Is replacement value to be taken as what the assets would trade for in their used
shape, or what they would cost to buy new.
Stock valuations are based not only on actual assets, but future growth and earnings
potential. If I buy company X, it's because I think company X has a good product, business
plan, and management and is going to be able to grow faster than inflation and faster than
their competitors. I certainly don't want them to liquidate their current assets and give
me my money back.
You've missed an important detail. They're not comparing the stock valuation to the assets
alone. They're comparing the stock valuation to what the company would sell for if
purchased. When you sell a company, you're also selling the "good will" and other value inertia
things like brand familiarity, the value that will come from having the company in the future,
all of its own PCs. If that manufacturing asset is private, it won't show up in the totals. If it
is public it will show up in the totals, but may be valued lower due to location or other factors.
And finally, the efficiency of the asset to deliver more for less is not factored in. We should expect
the trend to continue as lo
Re: Does not understand the market, obviously. (Score:5, Insightful)
by DrLang21 (900992) on Monday May 18, 2015 @02:38PM (#49720425)
When you sell a company, you're also selling the "good will" and other value inertia
things like brand familiarity, the value that will come from having the company in the future,
These days it is often far dumber than that. Unless a company is paying a dividend, the only
value you have is what someone else is willing to pay for it. In the age of worshiping the Almighty
Growth, dividend payouts are more scarce than they once were and you can't expect a fledgling
company will ever pay out. Stocks like that are little more than trading cards. It's just a popularity
contest slightly regulated by supply. Actual earnings reports in these cases are only meaningful
in the sense that people make buying decisions based on them, but with them having no direct impact
on actual value.
Re:Does not understand the market, obviously. (Score:4, Insightful)
by Marginal Coward (3557951) on Monday May 18, 2015 @11:40AM (#49718719)
Right. It's been rare in recent decades for even individual companies to sell for less than
their asset value, for precisely the reason you mention: that nearly any functioning business
is worth more than the sum of its assets. The canonical example is Coca-Cola (KO), which Yahoo
Finance indicates is currently selling for a price-to-book ratio of 6.28 [yahoo.com]. Should we
expect something like the Coca-Cola company, which has had a strong business for over a hundred
years consisting of a brand name known worldwide, a worldwide distribution system, and of course
its famous "secret formuler" to sell for just the price of its property, plant, and equipment?
Of course, Coke is an extreme example, but it illustrates a point that could be made less emphatically
for nearly any successful business.
Although I don't disagree that the market is fully valued or even over-valued at the moment, this
single q statistic isn't any reason to panic. As indicated in TFS, it's attributable in large
part to near-zero interest rates. With nowhere else to go to earn money, investors flock to the
stock market. That certainly has some potential for inducing a bubble, but I don't think we're
there yet. These extremely low interest rates can't last forever, but since they're controlled
by policymakers who are keenly aware of the implication of raising them, no interest-hike-induced
stock market panic is likely to ensue. So, move along Citizens.
Re:Print some bucks (Score:4, Interesting)
by jfengel (409917) on Monday May 18, 2015 @12:23PM (#49719071) Homepage Journal
Effectively, they have been. The Federal Reserve has been keeping interest rates at levels
that should be causing significant inflation. The goal is to prevent a deflationary spiral by
pumping up the money supply: when you can borrow lower than inflation, people should borrow and
pay it back with tomorrow's less-valuable dollars.
They've been doing that for nearly a decade now, and it has successfully prevented the deflation,
but it's a little baffling that it hasn't touched off more inflation than it has. The consumer
confidence is hovering around 100, which should be a decent level for a stable economy. Unemployment
is still higher than we'd like but it's well off the bust years.
My hypothesis is that people have gotten too used to boom economies. If people aren't getting
triple-digit returns they don't want to invest. What we've got is a very stable economy, exactly
the kind that people should be able to take risks in, but without a real estate boom or dotcom
boom or other scheme to get people to dump their whole life savings and then borrow on margin,
they just don't bother.
Stability means that those who have been left behind continue to be left behind. That's the worst
thing that can be said about the economy. There just isn't an engine of growth.
There are a lot of other factors, I'm sure. Europe went mostly for less aggressive measures, and
their economies haven't come out as well, meaning fewer markets there. China's growth has ceased
to be ridiculous. Oil prices should have sparked some kind of boom, and I've got a nasty cynical
feeling that Wall Street is ideologically predisposed not to invest in the emerging energies as
much as they should.
But a lot of it is the catch-22 you mentioned. Consumers and investors each seem to be waiting
for the other to go first. We've been technically out of recession for more than five years, and
it's gotten past the point where the recovery could be called mere accounting. It's real. But
America just hasn't gotten its feet back under it in the way that it usually does.
The following is adapted from an
by Dawn Bennett, host of the radio show "Financial Myth Busting," with the editor of The New
York Sun, Seth Lipsky. The broadcast aired March 8:
* * *
Ms. Bennett: Seth Lipsky is the author of a book titled "The
Floating Kilogram and Other Editorials on Money from The New York Sun." Before the Sun, he spent
20 years at the Wall Street Journal where he served on the editorial board and helped launch the
Asian Wall Street Journal as well as the Wall Street Journal Europe. Recently, Seth authored a column
in the New York Post titled "Why does the Federal Reserve Fear a Real Audit," which is a question
much on my mind. Seth, welcome.
Mr. Lipsky: Thanks, Dawn. It's nice to be with you.
Ms. Bennett: To put it charitably, Janet Yellen appears to be very alarmed that some members
of Congress want to conduct a comprehensive audit of the Federal Reserve for the first time since
it was created. If the Federal Reserve is doing everything correctly, why should Mrs. Yellen be alarmed
and what does she have to hide?
Mr. Lipsky: Well, that's a great question. The Federal Reserve is already audited, in the
sense that an accountant comes in and goes over its books. But what the Congress is talking about
is a much broader look by the Governmental Accountability Office of how the central bank forms our
monetary policy and what its relations are with foreign banks. The Fed has been fighting this tooth
and nail as an intrusion on its independence. What Congress knows is that the Constitution gave the
monetary power precisely to Congress.
Congress has a constitutional obligation and power to establish the American monetary system and
regulate it, to coin money, regulate its value and that of foreign coinage. This has become a big
issue where we have not taken a really systematic look at how the Fed operates in the hundred years
that it's been in existence. We're starting the second century, and there is growing sentiment in
the Congress to take a look at this. The audit of the Fed measure passed the House as recently as
of September by a vote of 333 to 92, with 109 Democrats joining the Republicans. So the Fed is certainly
Ms. Bennett: The only reason Janet Yellen has the power to coin money is because Congress
delegated its own power to the Federal Reserve in 1913. Isn't congressional oversight of that power
something that should be considered commonsensical by the Federal Reserve?
Mr. Lipsky: The Fed was created in 1913. The Coinage power was first acted on in 1792,
and coinage was given not to any Federal Reserve but to the United States Mint. When the second central
bank came up to the Supreme Court it was really the tax and the borrowing power that the courts were
looking at when they okayed the authority of the central bank.
Ms. Bennett: We are all accountable to someone or something, so what is wrong about the
Federal Reserve being accountable to Congress?
Mr. Lipsky: Nothing whatsoever. Even Chairman Yellen acknowledges that Congress has the
power. She's just pleading and warning that it not interfere. Why is Congress growing concerned about
this in the first place? It's because the Great Recession has lasted six years and we still do not
feel like we've recovered. What is the Fed's role in this? Could the reason that the Great Recession
lasted so long be attributable to monetary policy? The value of the dollar has been allowed to collapse
below one 1,100th of an ounce of gold. It was a 265th of an ounce of gold when George W. Bush was
sworn in. These are huge questions, and somebody needs to ask them.
Ms. Bennett: It is quite clear to me that the Federal Reserve doesn't want the rest of
us to actually be able to see what they really up to. If we did know what they're doing, do you think
most Americans would just want it shut down? To your point, since 1913, the dollar has actually lost
over 97% of its purchasing power. And of course, the economy has been subjected to one painful depression
and a series of what I call Fed-created recessions. Despite the poor track record, we continue to
support them. At the end of the day, does it matter if we even have a Federal Reserve?
Mr. Lipsky: I think the monetary questions do matter to every American in all positions.
My favorite statistic is that between 1947 and 1971 the average unemployment rate was below 5%. From
1971 until today it was above 6%. What happened in 1971, when the unemployment rate began souring?
What happened is we abandoned the Bretton Woods Gold Exchange System, under which the dollar was
linked to gold, and the money began flowing not in the productive enterprises, but into the money
markets and hedge funds and all these sorts of things and not so much into the kind of investment
that created the great industrial base in America.
Ms. Bennett: Let's talk about that type of investment. According to a government report
I've read, the Federal Reserve made $16.1 trillion in loans to big banks during that financial crisis.
In my opinion, [it once] created the dotcom bubble and the housing bubble. Now, I think it has created
the financial bubble that our markets are experiencing.
Mr. Lipsky: Asset inflation. The debate over inflation is one of the most important debates
in the country. The left wing likes to say there is no inflation, but the dollar is worth only a
tiny amount of the constitutional specie, which is gold and silver, compared to what it used to be
worth. This is what people feel when they hear the government say there's no inflation but they try
to go to the grocery store and they spend $50 or $100 on a tiny plastic bag with a few items in it.
Ms. Bennett: Yes, I know shelf inflation is huge, but I want to talk about commodities
for a bit. The Department of Justice has recently said again that they're going after the big banks
that have been, on an ongoing and continuous basis, manipulating gold and silver. What are your thoughts
on that? Will it work this time? And, if so, is there a simple solution to stop them from doing this?
They seem to get their hands slapped, apologize, and then come back and do it again, and again.
Mr. Lipsky: The news that the Justice Department is looking at something like ten or twelve
major banks for possibly rigging the price of gold broke the same week that Mrs. Yellen was up on
Capitol Hill testifying against an audit of the Fed.
Ms. Bennett: That's right.
Mr. Lipsky: One of the questions that The New York Sun raised is what is she afraid of
then? Is it the danger that the Fed has been meddling in the gold market the way the Justice Department
is alleging commercial banks have been doing it? It's the Fed that regulates commercial banks after
all. I don't want to carry that argument too far. I asked it then in an editorial more in the nature
of a question. But there is a movement in Congress to open up what is called a Centennial Monetary
Commission that after the first hundred years of the Fed, would just take a look at how the whole
system is working.
We've been in a period of fiat money, meaning dollars that have no connection in law to any gold
or silver or other constitutional money. We've been in a fiat system since 1971. Previously, our
dollars were always defined in terms of gold and silver, suddenly they're not. The unemployment average
is much higher; the bankruptcy rate is much higher; the inequality rate has been much higher since
the mid 1970's. Could this be related to the fact that we abandoned sound money in the mid 1970s?
Ms. Bennett: De-dollarization has been going on now for the last few years, and I think
it's because the dollar is continuing to get weaker. Our political system and economic system aren't
what they used to be. Do you think it's possible that if China, for example, standardizes the renminbi
it will start taking power away from the U.S. dollar?
Mr. Lipsky: The abandonment of sound money by the U.S. has brought forth a whole chain
of foreign governments that are alarmed and wonder whether a new system should be set up. China.
There is talk of Russia going on a gold standard; the European Union is having its own catastrophe
with the Euro, and it's wondering whether the dollar ought to be replaced as the international reserve.
The United Nations, for crying out loud, has gotten involved in this.
One of my favorite moments happened in 1965, when the President of France, Charles de Gaulle,
called a thousand reporters into the presidential palace sat them down and addressed them on the
importance of restoring gold as the international standard. His argument was that it puts all countries
on the same basis: America, France, England, China, little countries, and it takes a lot of the partisanship
out of the monetary question internationally, or it takes the politics out of money. It's ironic
that Fed loves to talk about how we shouldn't politicize the monetary system. If one really wants
to de-politicize the monetary system, restoring a gold standard or something like it is exactly the
way to do it.
Ms. Bennett: Mrs. Yellen claims that opening the Fed to an outside audit would "politicize"
- her word - monetary policy.
Mr. Lipsky: Right.
Ms. Bennett: Isn't it political when Senator Schumer, for example, tells her to keep rates
low every time she testifies before the Senate Banking Committee? Isn't it already happening?
Mr. Lipsky: You're exactly right. Why is it always the conservatives that are doing the
politicizing and not the liberals? The big politicization of monetary policy happened in 1978 with
the passage of Humphrey-Hawkins, which said that the Fed has to have a second mandate of increasing
the employment rate or decreasing unemployment, in addition to affecting the value of our dollar.
That opened the door to an enormous political interference in monetary policy.
Ms. Bennett: I know you're not a gold trader or silver trader...
Mr. Lipsky: I'm a newspaperman.
Ms. Bennett: There you go. But I'm certain you follow the markets. What do you think would
be a simple solution to fix the ongoing and continuous manipulation of gold and silver so that we
can get more stability? It does seem, whether it's a Federal Reserve or some other central bank,
that they're interfering with it in order to make the fiat currency look stronger than it really
Mr. Lipsky: I favor a definition by law, enacted by Congress under its constitutional powers
to coin money and regulate its value, and fix the standards of weights and measures - a law passed
by Congress defining the dollar as a fixed amount of gold or silver. Silver was the main specie used
in early years of our republic. The debate over whether gold or silver was better went on through
the 19th century, and we basically decided in 1900, with the passage of the Gold Standard Act, to
make gold the true national money. I think that would go a long way toward solving this problem.
There are a lot of questions as to exactly how to do it, whether there should be a system like Bretton
Woods, which said dollars had to be redeemed in gold if they were held by foreign governments.
Ms. Bennett: In physical gold, not paper gold. In physical gold.
Mr. Lipsky: Right.
Ms. Bennett: There's a big difference there.
Mr. Lipsky: Therefore the price at which one fixes the dollar, the value, the amount of
gold, has to be carefully worked out. But the gold standard is not some flaky thing. This was believed
in by George Washington, Thomas Jefferson, James Madison, Alexander Hamilton, and almost every president
since, up until Richard Nixon. John Kennedy, Woodrow Wilson, Grover Cleveland - they all believed
Mr. Lipsky: The New York Sun is an online newspaper that I edit. We published in print
until several years ago. It's a leading voice in journalism for a sound dollar. It supports a sound
dollar, limited government, and a restoration of constitutional dollar based on gold or silver. This
is the first radio interview about the book.
Ms. Bennett: Thank you.
Mr. Lipsky: This book contains on this issue 130 editorials that have been issued in the
Sun in recent years. Steve Forbes calls them "brilliant," "irrefutable," and "the Federalist Papers
for the gold standard." James Grant calls the book both "persuasive" and "unfailingly entertaining."
It's a book for every person, not just the experts, and it's available on Amazon.com, the online
bookstore, and you'll have a copy in a day or two if you place your order. "Pure gold" is the way
the economist Judy Shelton described this book. The title, Dawn, comes from the discovery that the
kilogram, which is the last metric weight measure based on a physical object, has been losing mass
- atom by atom. The Sun in one of its editorials said, "Why don't we float the kilogram just like
we float the dollar?" That's from where the title of the book comes.
Ms. Bennett: If President Obama, or our next president, were to become motivated to make
reforms, what do you think the takeaway from this book would to be? Definitely a gold standard?
Mr. Lipsky: So I think the takeaway is going to be that in our monetary system at some
point, the dollar has to be defined in terms of something real rather than just another dollar. At
the moment, if you take your dollar to the central bank to redeem it, they'll give you another dollar.
There's no reference to anything real and no classical measure of value. We have what Jim Grant likes
to call the Ph.D. standard, and I think we need to move away from that to the kind of standard that
sustained our country during its periods of greatest growth and strongest employment.
Ms. Bennett: We always seem to make changes in the United States when things break down,
but not beforehand. What is going to be the instigator to standardize our currency?
Mr. Lipsky: People say things could become a disaster. The last six years have been a disaster.
Ms. Bennett: Exactly.
Mr. Lipsky: Huge amounts of unemployment, not just for a short period, but for six years.
It's consumed almost the entire Obama presidency. People are still trying to figure out their homes,
still trying to figure out how the price of college got more than halfway to $100,000 a year - you
know, all these things. We've been living through this, and I think events have energized Congress
to start looking at this. The Sound Dollar Act, or Centennial Monetary Commission Act, or Audit the
Fed Act, or Free Competition in Currency Act. This is why Janet Yellen - to bring it back to where
we came in - is fighting so hard against the Congress doing this. We're in a constitutional moment
here where Congress is going to take a look at this, I predict.
Ms. Bennett: Do you think they're going to have the guts to do it?
Mr. Lipsky: I think the American people have a lot of guts.
Ms. Bennett: Me, too.
Mr. Lipsky: And at the end of the day, the Congress has to listen to the American people.
Below is an excerpt from a much longer article which you can read in its entirety
It is an interpretation told from a certain perspective, but overall does a fairly decent job
of laying out the general boundaries for the currency war that has been brewing in the background
since 1971 with the collapse of Bretton Woods.
It is more visible to us now because it started manifesting more overtly in the 1990's and since
then has slowly been gaining momentum.
If an analyst does not understand this, even if they do not agree with this particular interpretation,
then they have a poor grasp of the major trends that are driving so much financial and political
activity in the world today.
And fortunately or unfortunately, gold and silver are deeply involved as the traditional supra-national
To put the entire thing in a nutshell, in 1971 the US arbitrarily ended the Bretton Woods Agreement
by closing the 'gold window,' and placed the world on an entirely fiat reserve currency which the
US controlled. Since the US is making monetary policy to suit its own domestic agenda, and increasingly
so over the past twenty years, the stresses that this creates in the world have become unacceptable
to many other countries, some of which are in a position to push back against this.
This tension between the dollar and the rest of the world is either going to end in an acceptable
and workable compromise, or will result in a split of the world into regions of power and financial
influence, most likely three or four. This will be accompanied by conflict on all the usual levels:
diplomatic, economic, and military. We are seeing this today.
Compromise is being thwarted by a neo-conservative, militaristic and nationalistic group in the
States, with clients in other countries, that view an American hegemony as the natural and highly
desirable outcome of the end of the Cold War. However, this is a patriotic cover story for
what is essentially a bid for more money and power for a privileged few who have no patriotism and
little decency, who serve only themselves and their patrons. To quote Edward Abbey, their motives
are 'old as Babylon and evil as hell.'
Whether you agree with this or not does not matter so much, because it is very obvious to those
in countries like the BRICs that this is the situation, and they are acting on this, and the US is
reacting in response. But from reading the literature of the neoliberal economists and neoconservative
politicians, it seems hard to come to any other conclusion based on facts and specific actions which
have been taken by the US, the UK, Canada, Germany and Japan.
I do not think it is too much to say that we are experiencing a type of 'world war.' This seems
to be the type of settling of differences and adjustments that follow major economics shifts, as
we had seen in the first half of the 20th century.
"The Fed effectively acts as the world's central bank, but sets monetary policy only in its own
interest. Under the pressure and the orders of financial oligopolies, it fixes interest rates
and prints money to suit itself, sending economies across the globe into tailspins...
policies aren't enacted with the express goal of kicking the global South in the stomach, but
this outcome is a necessary and predictable result of the domination of the global financial order
by a sole country whose interest is to keep its hegemonic status. Other measures are taken precisely
toward this end. This latest round of financial warfare has to be seen in the context of financial
imperialism in general. Countries struggling for sovereignty are also being hit by sanctions,
speculative currency attacks, commodity price manipulation, biased evaluations from US ratings
agencies, massive fines on some banks for what the US has deemed inappropriate practices, and
the prohibition of certain banks from participating in the international banking system...
Not only does the dollar enable the US empire, but also protecting the dollar's status is a
major reason for US imperial wars. American financial and military strength is based upon the
fact that the dollar is the world's reserve and international trade currency, creating a global
demand for dollars which allows the US to print as many greenbacks as it likes. It then pumps
them into the overbloated finance capital system and uses them to fund its criminal wars...
Without this international demand for dollars, the dollar would "correct," and US hegemony
would eventually, inevitably, come to an end. Therefore the US pressures and attacks countries
that attempt to free themselves from the dollar's yoke, not only because they're guilty of lese
majesty, but in order to force the world to maintain the status of the dollar and thus preserve
Although it has so far been unsuccessful, the idea of rebalancing the world monetary system
is extremely threatening to the US, and goes a long way toward explaining recent US wars and warmongering,
which may otherwise seem irrational...
The dollar is rallying less because of any supposed US recovery than because of higher global
demand for dollars due to investors' risk aversion, in the wake of the Fed pulling the plug on
QE. Parenthetically, the US economy is definitely not recovering...
While a stronger dollar will not hurt the consumption-based US economy, the rising dollar and
US monetary tightening are about to give the developing world a severe blow..."
"Plunderers of the world, when nothing remains on the lands to which they have laid waste by
wanton thievery, they search out across the seas. The wealth of another region excites their
greed; and if it is weak, their lust for power as well.
Nothing from the rising to the setting of the sun is enough for them. Among all others only
they are compelled to attack the poor as well as the rich. Robbery, rape, and slaughter they
falsely call empire; and where they make a desert, they call it peace."
With the Fed's credibility terminally smeared across the windshield of
the Marriner Eccles-mobile, courtesy of the
latest "dots" projection which proved yet again - and beyond any
doubt - that the FOMC members are just a pack of chimps throwing darts,
and perhaps feces, at a fed funds dart board, we can now honestly say
that the one Fed (ex) member who was 100% accurate (if only in this
case), and who saw the writing on the wall early on and got the hell out
of Marriner Eccles while he could, is Ben Bernanke.
"At least one guest left a New York restaurant with the impression
Bernanke, 60, does not expect the federal funds rate, the
Fed's main benchmark interest rate, to rise back to its long-term
average of around 4 percent in Bernanke's lifetime. "Shocking
when he said this," the guest scribbled in his notes. "Is that
really true?" he scribbled at another point, according to the
notes reviewed by Reuters."
Today… the second of the speech about the end of the world we recently gave at Doug Casey's La Estancia
de Cafayate. (You can catch up on the first part here.) As Yogi Berra would say, America is going
to come to a fork in the road… and it's going to take it.
Right now, the Fed isn't as aggressive as the European Central Bank (which is set to pump €1.2 trillion
into the financial markets by way of its QE program) or as innovative as the Bank of Japan (which
is buying stock market funds as well as bonds by way of its QE).
Valuations are at extreme highs on Wall Street. Take Warren Buffett's favorite measure – market
cap to GDP. With an eight-month exception at the height of the dot-com boom (and you know what happened
next), the value of all outstanding S&P 500 shares is the highest it has been relative to US GDP
in the last 100 years.
Meanwhile, Deutsche Bank is warning that S&P 500 earnings per share will be flat this year when compared
with 2014. Retail sales are down about 9% on an annual basis over the past three months. And the
US GDP has slowed to an annual rate of just over 1%… with the possibility of a surprise recession
on the horizon. Besides, crashes and bear markets happen. This seems as good a time as any.
Market cap to GDP a.k.a. the "Buffett Indicator", via Doug Short/Advisor Perspectives. Yes, the market
does appear to be slightly overvalued … click to enlarge.
Deeper into the Heart of Darkness
When the next crisis comes, the fork in the road will be a choice. The Fed can either admit its policies
have not worked… chuck them out… let interest rates settle where the market wants them to settle
and let the free market do its work.
Or it can follow the Europeans and Japanese toward more aggressive intervention – including massive
QE and direct stock buying. I don't think there's any doubt about what it will do: It will go deeper
into that heart of darkness.
In fact, I believe central banks and central governments now have revealed the full madness of their
intentions. Well, maybe not the full madness. They haven't thrown money from helicopters yet … but
that will come.
Here's what's in the cards for central banks:
•They will set interest rates at preposterously low levels for years and years
•They will finance 100% of government deficits – forever, if it comes to that – with printing-press
•They will also pump up the stock market with this same money-from-nowhere by directly buying equities
ETFs (as the Bank of Japan is already doing).
You'd have to be brain-dead (or a modern economist) not to be staggered by the audacity… the ballsy
mendacity … and the incredibly big lie that undergirds the entire charade: that you can create money
out of nothing and use it to pay for wars, schools, highways, and salaries for bureaucrats … and
also to acquire real businesses.
We're with Lenin …
I recall Lenin's quote: "The capitalists will sell us the rope with which we will hang them."
Today, of course, the capitalists don't even sell the rope; they give it away, for nothing. But what's
not to like? Stock investors are getting rich. Bondholders are making money. The government can spend
as much as it likes. And the voters are bamboozled by it; they think it helps make the economy work
This is going to be a hard habit to break. So, here's the gist of my conclusion: Governments won't
break the habit of getting something for nothing. It will break them. But how?
It looks as though they've got the perfect hustle going. They create money to buy their own debt.
But this doesn't cause consumer prices to rise (at least how they're officially measured). Everybody's
Obviously, that won't work forever. I don't care how many knobs you turn or how many levers you pull.
It doesn't work that way. Ultimately, you're putting rusty nails on the ground… and you're going
to step on them How? When?
Nobody knows. But I'm going to take a guess …
Rope comes for free these days … or at least the money to pay for it does.
Photo via twitter.com, source unknown
The Weakest Link
And here I'm no longer using my powers of observation to tell you what is going on. I'm using my
intuition and guessing. The weakest link in the central bank chain, I believe, is credit. So
let's look at how this link might break.
In our modern economy, when we talk about "money" what we are really talking about is credit. Banks
create this credit ex nihilo (out of nothing) when they make a loan. It exists, for the most part,
as a digital record on a computer network somewhere…
And unlike even traditional paper money, this credit can vanish as quickly and easily as it got here
in the first place.
Because it is purely digital in nature, you can't hoard credit. You can't put it in your safe. You
can't take a wheelbarrow full of it to the grocery store for a loaf of bread. Credit depends on trust.
(The word "credit" comes from the Latin "credere" – to believe or trust.)
So, when our financial system implodes – which is what always happens when there is too much debt
– the machinery of borrowing and lending will seize up. No one will trust that he will get paid.
Credit will simply disappear – trillions of dollars of it – overnight.
This is, of course, not the end of the world. Nor even the beginning of the end. But it will be the
end of the beginning of the paper money world President Nixon unwittingly created in 1971. Then the
end can begin…
The USA's grip on Europe, against all odds, is loosening. Who would have thought it would be over
money, considering it went meekly along hand-in-hand with Washington in imposing sanctions which had
an immediate and deleterious effect on its bottom line? I mean, isn't that money, too?
"The UK insisted
it would insist on the bank's adherence to strict banking and oversight procedures. 'We think that
it's in the UK's national interest,' Mr Cameron's spokesperson added." Hahahahahahahahahahahahahahah…Oh,
'pon my word, yes, m'lud. The UK would be everyone's first choice to monitor strict adherence to banking
and oversight procedures, after the
£2.7 Billion in fines handed the Bank of England for currency rigging – which also resulted in
the dismissal of its senior foreign exchange dealer – just a few months ago. Or the
Payment Protection Insurance (PPI)
scam, in which banks greedy for more profit conspired to rig the deck so that insurance which
cost more and more stood less and less chance of ever having a successful claim levied against it.
And let's not even mention Libor.
I don't think there's too much about crooked banking the Chinese will be able to teach the British.
He reminds us what could have been if Putin's vision for creating a huge harmonized economic area
stretching from Lisbon to Vladivostok had been realized. (George Friedman has already explained why
this could not be allowed.)
I don't think that anyone has mentioned an earlier article by Sobell that appeared as his contribution
on the experts' panel on us-russia.org, His is the last contribution.
Only problem is, this was written in February. And without regard for Poroshenko.
The weapons withdrawals
were more or less done. Nothing else was. The Special Status law proposal was based on September lines
and not discussed with the Republics so is unacceptable to them. Not only was there no improvement
of humanitarian access, but it has been tightened up, to the extent that virtually no medicines are
getting through, and no food at all. Travel to and from the Republics involves permits that take 3
weeks to get. The gas got cut off once. No social payments have been made and no wages back-paid.
All this is in Minsk2 and Kiev's actually gone backwards on these clauses.
The reality is, Minsk2 will not succeed, because Kiev (and their masters) don't want it to. Poroshenko
is carrying in like he can set conditions, as if HE HAD WON when in fact HE LOST.
From memory, I think that Sobell would agree with your penultimate sentence- I don't think that he
was very optimistic about Minsk2. (On the positive side, the gap between Europe and the US seems to
"As a delaying tactic, U.S. foreign exchange operations were often successful. They raised the
potential costs of speculation and provided cover for unwanted, temporary, and ultimately reversible
dollar flows. They delayed the drain of the U.S. gold stock. But to the extent that these devises
substituted for more fundamental and necessary adjustments and postponed the inevitable collapse
of Bretton Woods, they were a failure."
When I said, and it already seems so long ago, that we had broken out with a higher high a
few weeks ago, I cautioned that the markets had not suddenly become honest and transparent. and
so caution was still advised.
And indeed, the breakout was stuffed, by the usual routine of dumping large amount of futures
contracts at the market in thin trading hours, often on the open of the NY trading.
This is the currency war. This is the struggle we are seeing for the nations of the world to find
a new way of arranging their international trading relationships. This is the fruit of Triffin's
Dilemma, which suggests that at some point if a single country manages the world's reserve currency,
eventually they will come to an impasse between their domestic interests and the interests of the
rest of the world.
And after the failure of Bretton Woods, and the slowly destabilization of Bretton
Woods II, we are now at a time of reckoning.
Some mistakenly think the dollar is rising now because of Triffin's dilemma. This is really
not the case, but rather a temporary policy choice by the US to allow the dollar to appreciate against
the euro and the yen. Remembering that the US Dollar DX index is weighted to a certain group
of currencies that reflects how things were earlier in the last century.
The US is fostering the myth that it is already past the worst of the financial crisis.
A crisis, I might add, which its Banks largely promoted through their frauds, and the abuse of the
dollar's reserve currency status with the cooperation of the Federal Reserve and acquiescence of
This transition is not going to be short, nor easy. And as for the precious metals,
I have rarely seen so many who are so discouraged. They hear and see so many conflicting things that
they do not know what to believe.
And losing money hurts, ESPECIALLY if you are using leverage and are overextended. Mining companies
are levered plays on the precious metals, and the smaller the cap, the greater the leverage.
Timeframes also matter. I have been in this metals trade for a long time, but not because I
like gold for itself. When I was looking seriously into international money issues and global
trade, which was related to the communications business I was in, I came to believe that we were
approaching a currency wars scenario.
seemed pretty clear that the Dollar regime could not be sustained without the establishment of a
very unipolar, de facto world governance, with perhaps two or three cooperating spheres of control.
I had written a paper about this in B-School in 1991 (ok I was a late bloomer but as an classically
educated engineering type pure business management course were not my thing). But my thinking
really did not become firm enough to take action until around 2001.
And there is clearly a movement in the direction of a unipolar world, from the neo-cons and
their associates. Money is power, and power is the new god of the marketplace in the West,
if not everywhere.
I remember, quite vividly, gold being at $280 and silver at $4.70 and the prevailing wisdom amongst
almost all the traders I knew was that the precious metals were 'dead money.' Seriously.
You could barely find a buyer less than 20 years ago.
The truly big changes catch people flat-footed, because they run against the grain of what we
knew yesterday. Most people are focused on the short term and the markets especially have come to
take a very short term speculative bias.
I do not know what will happen in the future, and do not think for a minute that I do. We
are all in God's hands. But I am looking for any signs, based on my understanding of how certain
things work, and over a 20 year timeframe it is pretty much on track.
Don't be overly worried about these things that are beyond your control, or
that you become preoccupied and distracted from your responsibilities and a righteous path.
Rather, spend more of your time on things that you can control, and the things that will, in your
waning days, loom most heavily on your conscience.
the imf is a front for western banks giving loans to countries that typically can't pay the
money back! what is there for western, mostly wall st banks to not like about that! they especially
like the gaurantees that come with these imf rbber stamped loans! it is about lending mone, the
great ponzi scheme of the fiat system… don't pay it back, just keep these interest fees or usury
fees flowing endlessly!
"The Wall Street Journal and the New York Time's eurozone reporters, who share the same unshakable
devotion to TINA and austerity as the Murdochized WSJ news staff have been thrown into a panic
by Syriza's electoral successes in Greece.
Both papers are freaked out, as are the Germans, about the potential for Greece to spark a
wave of rejections of the troika's infliction of austerity in a manner similar to how the infliction
of self-destructive austerity programs pursuant to the Washington Consensus' demands led to the
"lost decade" and the democratic election of what is now over a dozen Latin American candidates
running on anti-austerity platforms. The Washington Consensus was drafted and named by an economist
at Pete Peterson's International Institute. Peterson is a Wall Street billionaire whose mission
is causing debt and deficit hysteria and plugging the joys of austerity and unraveling the safety
nets. His greatest goal is privatizing Social Security – producing hundreds of billions in additional
fees for Wall Street."
It's actually kind of funny. Everyone seriously engaged with the Eurozone crisis agrees that
austerity hasn't worked but the one thing that terrifies them most is ending it. All bow down
before that display of European deep thinking.
Where I'd disagree with you is this: I don't think that these are attributes of "fiat" money
per se. Within an individual economy fiat money has the enormous and – I think – key advantage
of allowing for counter-cyclical fiscal policy. It gets a little more complicated when you are
talking about a community of economies and trade, but the basic dynamic is the same: the hallmark
of a true capitalist economy is credit cycles creating booms and busts. The only practical monetary
system is one that can counteract the busts, lest they be (needlessly) fatal. And the only system
that meets that description is fiat currency.
FWIW under a fiat regime it's impossible to "pay" all the debt back. The reason is kind of
depressingly simple: because if we did there wouldn't be any money in circulation. Suggests to
me that we need some new word to describe government debt to indicate that there is NO effective
similarity between a household "budget" and the budget of a sovereign government that issues its
I agree with Oddlots in that the problem is not the currency being a fiat one. The problem
is that the fiat currency is issued by private bankers who regulate the amount of the money supply
to their own advantage creating endless cycles of boom and bust.
The simple but seemingly impossible answer is a representative government that issues their
own fiat currency and regulates it for the benefit of the general population and thus ensuring
steadily growing living standards. Mind you, govts that have done just that, such as Libya, Syria,
Iran, China and to some extent Russia, have found themselves facing invasions or threats of invasions.
"Austerity" is never designed to work as advertised. It is designed to impoverish people to
make them more malleable and controllable. Austerity defies basic economic principles and even
I don't hold out much hope for change with the new Greek govt. They have committed to remaining
in the EuroZone and will refinance the IMF loans which means more interest for nothing. This doesn't
sound at all radical to me.
More likely is that the Greek population has been conned again and the WSJ et al are playing
along with the faux opposition meme. We'll know soon enough.
One of the more significant things that I have seen so far this year is independent confirmation
from a credible source that there is price rigging in the silver markets, and that this knowledge
is being suppressed by the mainstream media in the US.
I think the fact, given all the rigging scandals from Madoff to LIBOR, that there are major mainstream
publications which will refuse to run an article showing evidence of rigging in the silver markets
from a credible source is probably as profound as the report itself might be. They know what
is happening, and they are afraid.
So what does this imply.
It implies that powerful financial interests are engaged in an attempt to manipulate the value
of certain precious metals to artificial targets. They frequently do this with certain things we
Dollars and bonds are amenable to this sort of financial engineering, because the financiers are
able to create enormous amounts of money using their balance sheets, and with it buy bonds and other
financial paper. So they can raise and lower interest rates and other benchmarks at will provided
that they can do it in secret and with plausible deniability.
They can rig LIBOR, and the ISDAFix, and any number of benchmarks, because these are creatures
of their system, without a hard reference or a firm anchor to anything in the real world. LIBOR and
the amount of money they have in their vaults can be almost whatever they wish them to be, as long
as the people believe.
Their nemesis, however, is when they foolishly tie themselves to something external, something
that is beyond their system. Their error is when they overreach, and try to extend the mythology
of their price fixing to things that are not completely under their control for any longer period
Gold and silver are two such things. Yes, they can engage in all sort of gimmickry on their own
exchanges where they make the rules and keep the records. Paper and paper money can symbolically
represent precious metals both in quantity and value. Tonnes of imaginary and hypothecated
ounces of bullion may be traded all day long, but without requiring a single physical ounce of gold
or silver having to change hands. The pricing has been divorced from the constraints
of supply and demand. As always, the devil is in the leverage.
Longer term of course there will be effects, very powerful effects. The amount of actual
gold and silver that is represented by their paper continues to dwindle, increasing leverage.
Physical bullion will flee their system, as it is doing already. That which is
unmined will be left in the ground. This is Gresham's Law in action. The 'bad money' will drive out
And they are foolish! There is no real civic need for them to have done this. What does it matter
if gold and silver are priced at 1200$ or 3200$ as long as the price increase is orderly and not
a panic? All sound economic theory suggests that as the price of gold and silver increase, economic
activity will increase to make more supply available. People might choose it as a store of
value, or not. It has its advantages and disadvantages, depending on the context of its environment.
You can say that this would cast doubts on the value of the financiers paper, but again, not in
any practical sense as long as supply of metal was not constrained and the supply of money was not
expanded recklessly without reference to the productive economy. Even Greenspan admitted this.
By aggressively seeking to manage the price of the metals, by continuing to press their leverage
and their perceived successes, the Banks have created a façade and blindly run to the precipice of
an inevitable reckoning, as the
London Gold Pool
had done in the early 1970's.
The BRICS see this hubris, like the traders who saw the folly of attempting to hold the British
Pound to an untenable valuation. And they will continue to keep pounding the Banks' positions with
their trades, accumulating more and more of their physical metals, until the trade is unwound, or
a failure comes to stand and deliver.
This is what I think is happening. I do not think a serious market failure is inevitable. But
a better outcome would require a level of humility, wisdom, and self-awareness of which our ruling
class may longer capable.
Wall Street has become maddened with greed. And by stifling all criticism and dissent, their enablers
have only enabled them to go further and further, until the point of no return is reached.
We observers are almost like Harry Markopolos, who wrote of his frustration in Madoff:
No One Would Listen. We are like those who warned of the growing housing bubble, and took
steps to protect ourselves from it.
We only need to abide, and if we can abide, then we will prevail. Their schemes
will eventually fail And in that failure there is both risk, and opportunity.
To buy, or not to buy? Allocated, unallocated, or exchange-traded, derivative, or nothing? That
is the question.
"Simply, antifragility is defined as a convex response to a stressor or source of harm
(for some range of variation), leading to a positive sensitivity to increase in volatility (or
variability, stress, dispersion of outcomes, or uncertainty, what is grouped under the designation
Likewise fragility is defined as a concave sensitivity to stressors, leading a negative
sensitivity to increase in volatility. The relation between fragility, convexity, and sensitivity
to disorder is mathematical, obtained by theorem, not derived from empirical data mining or some
historical narrative. It is a priori".
Yes, I know, there is a certain fiendish humour as Taleb introduces this quotation with 'simply'
and then goes on to use enough jargon to make the layperson's eye glaze over.
But what Taleb is describing here is a fundamental that many have forgotten. It is the corollary
to his more famous observation about 'black swans' and 'tail risks.'
What Taleb is basically saying is that a system or investment that is designed to accommodate infrequent
but outsized and somewhat unpredictable risks performs one way he calls anti-fragile. And other systems
and investments are designed so that they perform well under 'normal conditions' but tend to underperform,
and often badly, during the unexpected.
Here is my own picture of Taleb's concept of how investments react. It might not be exactly
what Taleb himself has in mind, but it something I had thought of for other types of information
systems in a prior occupation, and is how I remember it for my own purposes:
If you want to grossly oversimplify this principle, remember the saying, pick the right tool for
the right job, and remember that nothing comes for free. I used this in describing tradeoffs
in very complex products and networks, and while it may sound trite, it worked with a lot of upper
But what is the job itself? Well, the application defines it of course. But one must also take performance
criteria into account, and with performance there are environmental conditions and variabilities.
Would you like to have a network that can function for your casual use in your home, or a high performance
network that can survive arctic cold and desert heat.
Don't laugh. I used to drop networks into some of the more out of the way and volatile places around
the world, put electronic equipment in explosive environments, and met application criteria that
had many other product managers running out of the room screaming for momma. It was my particular
competitive edge. It only comes with experience, confidence, and a fanatical understanding of the
odds and how they can mount against you.
But you don't want to waste money and over engineer something either. That is a good way to go broke.
But you need to understand expected performance, and the risk profiles for just about anything that
is not merely incidental.
And if there is anything that I wish you to remember from this blog, after all these years, it is
the deadly trap of undisclosed risks and the tendency of some to understate those risks for their
own short term advantages. And how other people will go along with them. In a nutshell, this is the
story of our last couple of financial crises.
It is far too complicated to get into this afternoon, but lets just say that a number of mathematicians
and industry analysts, among them Taleb, Mandelbrot, Tavakoli, William Black, Yves Smith et al.,
that there was significant undisclosed risk in the system because models (Black-Scholes for example)
greatly simplified the risks, and assumed distributions of variability that were not real world realistic.
If you wish to read more about this in more detail Benoit Mandelbrot's book, The (Mis)Behaviour
of Markets, is readable enough while containing enough substance to chew on. I enjoyed
it because of the way he demolishes the efficient markets theory and other vain imagining, as I cannot
resist a bit of schadenfreude now and then.
There was a movement in finance to force normal distributions onto data that did not really justify
it. In order to achieve this, the risk models made certain assumptions, and thereby 'flattened' reality
in order to fit the model. What one ended up with was a mis-estimation of the risk probabilities.
And so we saw 'once in a hundred year events' happening with alarming frequency, despite the best
efforts of the financial planners to smooth them over with piles of bailout money.
Here is a picture of what such a discrepancy might look like:
So the financial system designer likes the normal distribution and makes their operational plans
based on that. But why is this? Are they diabolical fiends? Do they enjoy screwing up?
No, they are ordinary people for the most part, but following orders. And the orders are sometimes
to take the faux normal approach because it costs less to implement, allows for greater
leverage, and fattens profits, at least in the short term. Many a compliance officer
and systems engineer has fallen into this trap.
Careerism's second law is if you are wrong with everyone else, no one can blame you. And so many
financial myths have thereby obtained extended lives, because they provided a fig leaf for someone's
self serving ends. This is in some ways the story behind the failure of our regulatory systems,
often staffed by good people but who are underpaid, overworked, and subject to extraordinary political
pressure to turn a blind eye to what otherwise might provoke their action. Especially where
there is a lack of complete certainty, which is all too often the case in real life.
So what is the punch line. If you are buying an investment as a safe haven, something
that will perform well in a difficult and somewhat unpredictable circumstance, you will wish to take
your money into something that is highly transparent, robust made to endure the unexpected, given
too few assumptions, and perhaps even strongly guaranteed.
And if you are not, if you wish to invest in something with a decent return, but in your own estimation
performs adequately for your own time horizons and expectations, then pick the product in which you
have confidence, provided it meets your needs and provides some advantages in features and price.
I am not going to talk around this much more, since I am obviously talking about the pros and cons
of certain types of gold and silver investments versus others. And those pros and cons
are ALWAYS going to be affected by how you perceive the risks, and how that investment fits into
your plans. This is a given. And this is why I would never give anyone advice, because
I am not a financial advisor and do not have the 'big picture' of what they own particular situation,
their goals and time horizons, might be.
I will use myself as an example. I tend to gravitate a portion of my portfolio into very
certain gold and silver investments, where I have a very high confidence in them based on audits,
ownerships, and so forth. There is not much about them I do not know and have to assume.
Yes there are the really wide outliers like a meteor hitting the earth and bringing on Mad Max and
cyclist cannibals, and I might drop a dime or two on arms and infrastructure just for grins, but
by and large I think I can ignore that for now.
But for the most part a failure in the financial system that could be adverse to my wealth seems
a little more likely. And so part of my portfolio is in highly secure investments that will
benefit from disorder and give me a premium on return that will cover losses elsewhere.
And other parts of my portfolio are in investments that are more fragile as Taleb would
say. But they provide a nicer short term return with less expense. And there is nothing
wrong with this. Not at all.
By the way, and I hate to even bring it up, but gold and silver themselves suit slightly different
purposes. Silver is less 'anti-fragile' than gold in dire circumstances, generally. But it
offers some juicy upside in certain circumstances in compensation. And there are always special situations
to consider, and for this I read guys like Ted Butler who track imbalances that could provide opportunities
I do not consider one or the other better; they are different. And I own both,
and invest speculatively in both, at varying intensities depending on the changing context of the
I would certainly buy some other financial instrument or stock I consider less robust for a quick
flip or outsized return. The miners would fall into this sort of category. I am sure
some of my bank accounts would as well, depending on how high the risks, And physical property
is notoriously non-portable if you decide to take up roots and go to another place, which had been
in my longer term plans, which were thwarted by an act of God and other considerations.
So, as far as unallocated gold goes, there is nothing inherently wrong with it. It is
a very nice way to own gold with a reduction in expenses. I am sure not all providers of such
a service are equally reliable, and their representatives would do well to discuss their own advantages,
guarantees and superior performance as would any provider of products when faced with less reliable
I will say that deriding critics as loons and charlatans, and referring to a portion of your prospective
clients and client influencer base in a generally derogatory manner with a pejorative nickname promulgated
by economists who hate precious metals on principle, is probably not a high profile technique in
the salesperson's handbook for success. Answer with facts. Once you descend to name calling
you have lost. Just a word to the wise, and enough said about that.
Know why you are buying what you are buying, and how it fits into your overall scheme, and what assumptions
you are using. And do not be afraid to have contingency plans and change them if new data comes
I know it is hard, especially in times of currency wars, because the first victim in all war is the
truth. But don't go off the deep end either, and waste your money on over complex plans
or put all your eggs in an improbable basket. It's your call, and perhaps you need a professional
to help sort out exactly what your priorities are.
I keep a spreadsheet, and on it there is a summary of all my assets, and it fits them into a simple
risk portfolio so I can see how they are distributed by risk and by total value. Since the
prices of things change, you have to be aware of how that affects your overall portfolio. I have
to say that physical bullion has taken a much larger place in my overall profile since 2000.
But that is fine, I just need to be aware of not letting it become a risk, and to balance it as required.
Would I buy GLD as 'insurance?' Hell no. Maybe as a flip investment on a technical trade.
Would I buy some physical trust with strong outside auditing and redemption features? Probably,
because it covers a bit of both insurance and investment. But it lacks the leverage of a small
cap miner just for example. But it does not nearly have the risk.
Yes it is 'that simple.' Which is to say, it can be simple to understand but hard to implement.
But you have to start somewhere, and if you start all wrong, it gets worse as you go. Some
parts of my portfolio are for insurance, and other parts are for investment. They serve different
purposes. I had the damnedest time trying to convince a broker at a white shoe firm who was
managing my stock options portfolio of this. He thought I was schizoid. He only thought
in terms of good stocks and great stocks. So I got rid of him, as he was too focused on his
own goals, even when he feigned altruistic concern for my money.
And sad to say, for most people, their major task is just getting by day to day. And so the
pros and cons of various investment techniques is so much hoohah because their most ambitious
aspiration is to stay out of debt, especially usurious and fee laden debts, while putting a little
bit aside. And this is why I spend quite a bit of time writing about these abuses, because
I am not only a caterer to the elite, but to our little community which has a range of wonderful
souls in it.
As always, the devil is in the details, but it helps if you know the lay of the land, and where you
think you are heading, and why. And of course, you adjust for changing circumstances as they
"Here in New Zealand the Reserve Bank is moving to add an Open Bank Resolution Policy (OBR) to
tools it could potentially use in the event of a bank failure.
The implementation of OBR would see all unsecured liabilities that rank equally among themselves,
including deposits, having a portion frozen. The Reserve Bank says the OBR policy could
save taxpayers' more than NZ$1 billion regardless of whether there is a bank failure or not.
However, Norman points out that if a bank fails under OBR, all depositors will have their savings
reduced overnight to help fund the bank's bail out."
"If their bank fails, depositors have always needed to understand that deposits are not guaranteed.
What OBR does is facilitate a rapid and orderly resolution of a bank failure – it does not change
the fact that depositors and other creditor funds are at risk...
The New Zealand Government has looked hard at deposit insurance schemes and concluded that they
blunt the incentives for investors and banks to properly manage risks, and may even increase the
chance of bank failure."
One understands that in the event of a bank failure, pain will be apportioned to the shareholders
and depositors in New Zealand banks. And it must certainly be an extraordinarily transparent
financial system indeed so that depositors can properly assess risk, on a par with insiders.
But one might ask, in the event of a failure, what is the penalty for the politicians, the banking
management, and their regulators?
Oh that's right, there are no banking failures permitted in New Zealand. So perhaps it is a moot
question. But it does seem that the people of New Zealand have some concerns and questions
about this and, dare it be said, an imperfect confidence in their central bank?
Confidence, gentlemen, is the key. Oui?
And so we pray for the best, but prepare for the worst.
"Those entrapped by the herd instinct are drowned in the deluges of history. But there are always
the few who observe, reason, and take precautions, and thus escape the flood. For these few gold
has been the asset of last resort."
In a gold-based monetary system, every asset is ultimately backed by gold. This does not mean
that every debtor (including banks) keeps the full amount of its liability in gold coin just lying
around. Why would one bother to borrow if one did not need the money? It means that every asset generates
a gold income and every asset could be liquidated for gold, if necessary. If a debtor declares bankruptcy,
the creditor may take losses. But he can rely on the gold income stream for each asset or if need
be he can sell the asset for gold. In a gold-based monetary system, money is gold and gold is money.
Money cannot disappear; it does not go "poof".
Bad credit can be defaulted and must be written off. But money merely changes hands
Ok, we all know that anyone who says "this time it is different" is to be treated at best as misinformed,
at worst as a fool. "They are the five most dangerous words in the English language" etc. etc. But,
to repeat my question: "Are things always the same?" Mostly, yes. Modern housing bubbles are not
unlike 17th century Holland's Tulipmania, government debt crises have not changed all that much since
Henry VIII reduced the gold in coinage, greed, profligacy, irresponsible plutocracies are always
But in global finance there are some things happening that are genuinely different. Dangerously
so. It is becoming a hall of mirrors, money referring to itself in an infinite regress. Little wonder
that people are attracted to gold, because gold seems to be a tangible, solid measure of value, something
we can rest on in an environment where everything seems relative. Yet this, too, is an illusion.
The yellow metal only has value because it has a history of being deemed to have value. It is no
more an objective measure of value than the pieces of coloured plastic, notes, that make up legal
To explain what I mean, let's start with a definition of what money is. It is rules. Rules about
value and obligation. Those rules are usually based on legally enforced structures, although that
need not be the case. In the case of cross border capital markets, the enforcement is informal because
there is no supranational government to impose penalties. Disputes are resolved by a handful of law
firms, the main penalty is to be prevented from participating for a period.
Now if money is rules, then what does it mean to "de-regulate financial markets" as was claimed
in the 1990s? Can you de-regulate rules? Obviously not. So what happened? The place where rules were
Instead of government for the most part making the rules, the traders started making the rules.
The logic was, as Alan Greenspan argued, that because everyone was acting in their self interest
then nothing could possibly go wrong. Pricing would be accurate, the less formal self organisation
of the market would be superior to the formal oversight of governments (what would governments, which
are always bad, know?) and everyone would win. Free lunches as far as the eye can see.
So the rules proliferated, especially after the advent of the Black and Scholes pricing of risk,
a clever piece of maths based on what is probably circular argument, but one that is sufficiently
concealed to give traders the impression that they are handing off risk accurately. This led to the
explosion of derivatives and securities markets, including such instruments as collateralised debt
obligations, credit default swaps and endless hedging games (my personl favourite is a derivative
Now the point about rules is that they are based on agreement, and their creation can be without
any limit provided traders are prepared to agree, to trust each other enough to transact. They are
not finite in the way that, say, gold is. And so the rule making exploded. The global stock of derivatives
is $US600 trillion, about twice the capital stock of the world (all the shares, property, equities,
bonds and bank deposits). Far from deregulation making the rules of finance more more streamlined
and more efficient - as if the efficiency of money could be measured anyway, given that it would
mean measuring money with itself - the rule making expanded wildly. And we all know what happened
when the trust that underlies those rules collapsed. The Global Financial Crisis. We are lucky to
have a financial system left.
This era of meta-money, I submit, is different. It is "different this time". Some versions of
it have appeared on the margin before. Hedging has a long history, for instance. But meta-money has
never been the centre of the action before. In the past it has always been, for want of a better
phrase, "normal" money: bank debt, equities, bonds, property and so on.
The massive volume of meta money, the ever expanding hall of mirrors,
now dominates and distorts more conventional forms of money. For instance, the $3.8
trillion that is transacted every day in the US dollar makes the annual budget deficit of over $1
trillion look like chump change. About 8 hours trading. There will not be a crisis in demand for
US debt, causing an economic collapse, while there is such intense demand for US dollars in the foreign
What is happening instead is that the logics of "normal" money are being used by the meta traders
as a game (a game mainly of signs, semiotics) to try to make profits out of their exploitation of
the rules of meta money. If the US government looks like it will reduce its government debt, then
traders can make a play in the foreign exchange markets that the US dollar will rise. So the US dollar
rises. Not because an imbalance is being corrected, changing the dynamics
of supply and demand, but because a signal has been sent that an imbalance has been corrected, giving
the traders something they can exploit. The rules of normal money are being overridden by the rules
of meta money.
That is the world we are now in. It is why such huge distortions are appearing in areas like quantitative
easing, extremely low interest rates, an ailing cost of capital, the hankering after something solid
in precious metals like gold and silver, equity markets whose pricing seems strange. Governments
have given up oversight of the financial markets, handing it over to the traders. We must now
suffer the consequences as the traders try to outdo each other in an infinite game of pass the parcel.
Or, more accurately, taking out bets on who will pass the parcel to whom.
Eventually, I suspect, GFC version 2 will come along, and the rules will finally collapse. Governments
will have to come in and re-set them. There will be a huge re-regulation
backlash. But how is it that governments allowed it to get to this stage? What ever happened to governing?
Friends; "How is it that governments allowed it to get to this stage?" May I suggest that,
as your post points out, an inversion of values has occured. Money used to be a symbol, a proxy
if you will, for power in the society. Now the symbol is mistaken for the object it previously
represented. To be blunt, greed has overtaken the critical falcuties of the "elites." It is the
same old story, as people like Galbraith and Bacevitch have so amply demonstrated. I'm beginning
to understand a bit how the Stoics felt.
Yves is quite a ways ahead of other economic thinkers in her critique of Wall St. banksters
and their success in destroying this country, but whoever wrote this is dead wrong about gold.
The precise reason why gold is valuable and will continue to increase in value as all paper converges
into a singularity is BECAUSE it has had worth for millenia. Admittedly, its worth has waxed during
times of economic uncertainty (Fall of Rome, French Revolution, Weimar hyperinflation, 1970's
stagflation, etc.) and waned during times of economic certainty (1980-2000 most recently). But
given our current trajectory, which scenario do you think is the most likely in the coming decade?
I feel that the reason that so many people have trouble accepting gold's imminent eminence
over all things paper is because they were born into a world overflowing with technological, financial,
fiscal upside potential. Like the fat tails which were found to be present in centuries of cotton
price data, proving that markets do have memory and that the efficient market hypothesis is a
load of BS, these financial and economic types are afflicted by thinking which has been addled
by decades of Greenspan puts, $20/bbl oil, and Moore's law. Their synapses are fundamentally incapable
of processing a world of scarcity and stagflation/default, where the oft-ridiculed Malthusian
catastrophe hangs over us like the sword of damocles. I hate to sound like someone at the top
of a bubble, but this truly is a new paradigm. Is anyone developing a new iphone app to squeeze
more oil out of the depleting Ghawar field? If we close our eyes and click our heels together,
can we make all oil abiotic in nature and ensure a limitless supply in perpetuity. There are thermodynamic
limits on technology which, let me assure you, form a very hard wall. We as a society throw ourselves
against it at our own risk.
One thing I can never get my mind around when it comes to gold is that the value is always
expressed in terms of dollars–the currency that will become worthless over time. So, if you own
lots of gold that is tied to worthless dollars what do you really have? Is the supposed end game
that some day dollars will become worthless and gold will take over as an independent currency?
And if that occurs, how do you value the current worth of gold? Seems to me gold is just another
commodity that makes a few people rich in dollars on the trade. But what do I know, the only gold
I own is in my teeth.
It seems to me that it is precisely a scarcity of resources that
now makes gold untenable as a store of value. Government will step up and take
some action before it will pay 5k for a barrel of oil. For millenia gold has been accepted as
the most valuable medium of exchange. Sometimes irrationally so. But
never more irrationally than today. There isn't enough gold to help us let alone
save us. This is a new paradigm. Time was when time was money. Before we ran out of resources.
Is this the underlying cause for meta money? We've run out of things to buy and sell at a rational
pace so we are buying and selling time, better known as derivatives, and trying to profit by split
seconds. Can critical mass be far behind?
Gee Whizz Folks; If I didn't know better I'd think that I've fallen into a meeting of the "Renaissance
Faire Organizing Committee!" As the late lamented Dick Nixon so amply demonstrated, a government
can coopt any medium of exchange with ease in this modern world. Yes, Gold does have value; some
industrial processes and a huge amount of symbolic heft. Consider though, most ordinary people
don't have the resources to own gold, or the sequestration of productivity that entails. For the
'rest of us' the precious metal within reach is Silver. And look how far over the place it's been
lately. Alas, I'm afraid that Gold, with all its lustre, will remain a tool and symbol of the
elites. And, notice, due to its scarcity, one of its primary functions in the bad old 'good old
days' was to limit and channel economic activity. The precise beauty of fiat money is its 'magical'
ability to expand the horizons of economic activity, with an attendant rise in the general standards
of living. Gold has its place, after we've been fed, housed and clothed.
g kaiser :
I find the thinking in this piece refreshing, to a point, but the writer has not drawn the
conclusion, as the logic bites itself in the tail. Everything in here is the essence of why gold
is the only place of refuge. Gold is not somebody's liability, it is value without someone having
to make good on a promise. It is a parcel that does not have to be passed on, it cannot be created
at will, multiplicated ad infinitum. What might be left after this financial crisis has run its
course will be barter and gold. Many fiat currency will cease to exist. Gold won't. Any idiot
can see that deranged individuals paying themselves untold fortunes at the expense of countless
poor is not a tenable long term strategy.
The only time gold is more valuable than fiat currency is when
you have complete political collapse. In that case, our gold has value but you
have to have it in your physical possession (not in a vault someone else controls), and you have
to be able to protect it from bandits and tax collectors.
A lot of gold still remains buried in the ground for safety by someone who didn't live to come
back and dig it up again.
Gold and silver are speculation commodities, and around 1980 goldbugs
who believed the myth lost billions of dollars.
We're all pretty much at the mercy of the national and world economy.
The gold standard might give people an illusion of security, but it doesn't protect against
economic decline, and gold hoarding slows economic growth.
Food and shelter are what's valuable in a complete political collapse.
Circa 1974, one of Bruce Lee's student-instructors asked his students, "Where would you get
food without Safeway?"..
It doesn't take much leap of imagination to comprehend what such a rapid transformation as
valueless "money" would bring this society..
Agreed. In an anarchic society, what do you think has greater value: a roll of Krugerrands,
or a grass-fed feeder cow?
The faulty logic is that gold does not work at all well in economic collapse. Nothing does.
Women in Vietnam used gold much as Indian women do, as a store of wealth, often in necklaces of
gold beads. When Vietnam was war-torn, they'd trade their gold for far far less that it "ought"
to have been worth to obtain food and medicine. The idea that gold will have some sort of
stable, reliable value when an economy is reduced to barter is nuts.
The best protection against that outcome is to be a doctor, the general practitioner type.
George H. W. Bosch:
And as an additional bonus, the 1/4 million in student loans you take out won't be owed after
No doubt about that. However, how did they do with the folding type of money? Lit their fires,
stuffed their mattresses? because it had NO value, having seized to have any way before. Most
likely some food coupon or a tin of sardines could be more valuable.! If a drought, water is most
valuable, in a famine food is, in a case of governmental international fraud, gold is.
Let's compare apples with apples.
"There will be a huge re-regulation backlash."
Only in your dreams kemosabe. The current rules are there to cause the transition from republic
to empire, from capitalism to feudalism, from freedom to slavery, and to funnel all accumulated
wealth into the hands of the financiers.
only if the money grubbers can keep the whole thing from crashing-history shows us they can't..perhaps
especially in nano-second computerized transactions…
frances snoot :
"That is the world we are now in. It is why such huge distortions are appearing in areas like
quantitative easing, extremely low interest rates, an ailing cost of capital, the hankering after
something solid in precious metals like gold and silver, equity markets whose pricing seems strange.
Governments have given up oversight of the financial markets, handing it over to the traders.
We must now suffer the consequences as the traders try to outdo each other in an infinite game
of pass the parcel. Or, more accurately, taking out bets on who will pass the parcel to whom."
What is taking so long is the G20 expansion of sdr. A different world in October when banks
Every once in a while I begin to think that maybe, just maybe, the price of gold can't go any
higher after ten straight years of gains during which it has more than quadrupled. But, then I read
an article like
this one in Money Magazine that, once again, makes clear that, in the West, the metal is still
reviled by most writers in the mainstream financial media and it is loathed by most investment professionals
(even more so as the price goes higher each year).
Gold is a bubble – resist its charms
Can you tell when a boom has turned into a bubble? One clue: When pop culture starts paying
attention. The housing bubble, for example, brought both the TV show Flip This House and a rival
on another network, Flip That House.
So if you own a lot of gold, you might regard a recent episode of Saturday Night Live as your
first warning. In the opening skit, Bill Hader as China's President Hu Jintao declares that Glenn
Beck was right and that "my government should have bought gold. Unfortunately, all our assets
were tied up in U.S. Treasury bills."
Back in the real world, gold is trading at about $1,400 an ounce,
up from less than $500 five years ago. That's a 23% annualized return, far outstripping the gains
on stocks (1.1%) or bonds (6.1%). Fear is driving a lot of the rise.
You may be wondering whether you should be getting a piece of this action. This time last year,
MONEY argued that although gold prices could continue to climb in the short run, the case for
gold as an investment no longer made sense.
And that leads to another truth about bubbles: You'll almost never look smart trying to call
them, at least at the outset. The real estate bubble was six years in the making; the dotcom bubble
lasted five years before bursting.
The gold bubble could stay pumped up for a while. But that doesn't make gold less speculative
and risky than it was a year ago.
They go on to cite three reasons why you should be fearful of any investment in gold – none of
which were very convincing to me. The entire piece is worth reading as it provides the clearest indication
in weeks that the gold bull market still has a long way to go.