Gumby wrote:Your example ignores where the money came from in the first place. You also don't take taxation and interest into account. You say that those initial dollars washed up on shore. But the fact is that the banknotes came into existence when they started off as electronic deficit dollars issued by the Treasury Department and they were used to purchase new Treasury bonds which were then swapped by the Fed for banknotes. And right away there are interest payments on those handful of Treasuries that will cause a larger deficit and more subsequent tax payments with every interest payment. With every tax payment requires more spending by the Treasury to replace those taxed dollars, but every single Treasury payment is taxed again and causes more interest payments, so that it requires an infinite loop of spending, interest, and taxation.stone wrote: Gumby, the same dollars can just circle round and round. In the desert island example I gave; Lone Wolf could issue $50 worth of bonds; we would buy them; he would buy stuff off us with the $50, then immediately issue another $50 worth of bonds. He could do that every five minutes. After a week, we could have immense amounts of Lone Wolf bonds with only the original $100 of greenbacks ever having been used. Lone Wolf clearly never spent before issuing bonds. He came to the island without a cent.
And every time Lone Wolf pays off the principal of the bonds, we would have to pay taxes on the interest payment. And every time we pay taxes it drains money from our private sector. So, every time the Treasury tries to replace that taxed money, it just causes new taxes to be withdrawn from the private sector. It never ends.
And if money isn't moving around fast enough, it just requires more base money to pay the interest off. You can pretend that we live in a world where there is no taxation and no interest, but it's just not our reality.
Do I owe this woman an apology?
Moderator: Global Moderator
Re: Do I owe this woman an apology?
Sorry, when I initially mentioned this I said that you, me, moda and Lone Wolf swam ashore. Lone Wolf was the only one who didn't have any money on him. He is the one issuing the bonds. Us three are buying the bonds. I did say he was paying interest. The money Lone Wolf gathers goes back out to us both from him buying stuff from us and as him paying interest to us. There is an exponential increase in the velocity of the $100 because Lone Wolf has to issue bonds at a faster and faster rate in order to get the money for the interest payments. If Lone Wolf could tax us then that would actually make his life even easier. As it is he is just accomodating our propensity to save.
"Good judgment comes from experience. Experience comes from bad judgment." - Mulla Nasrudin
Re: Do I owe this woman an apology?
Yes, but we're supposed to pay Federal taxes on his interest payments. So, when we pay our Federal taxes, the Treasury would need to issue more debt to keep our dollar supply from falling. But if they issue more debt, it's just going to cause more taxation and more debt issuance to pay the new Treasury interest payments to replace the money lost to taxation, and so on, and so on... It becomes a vicious cycle.stone wrote: Sorry, when I initially mentioned this I said that you, me, moda and Lone Wolf swam ashore. Lone Wolf was the only one who didn't have any money on him. He is the one issuing the bonds. Us three are buying the bonds. I did say he was paying interest. The money Lone Wolf gathers goes back out to us both from him buying stuff from us and as him paying interest to us. There is an exponential increase in the velocity of the $100 because Lone Wolf has to issue bonds at a faster and faster rate in order to get the money for the interest payments. If Lone Wolf could tax us then that would actually make his life even easier. As it is he is just accomodating our propensity to save.
Last edited by Gumby on Thu Jan 12, 2012 2:32 pm, edited 1 time in total.
Nothing I say should be construed as advice or expertise. I am only sharing opinions which may or may not be applicable in any given case.
Re: Do I owe this woman an apology?
The very idea of leveraging up at the cost of interest implies that a currency unit will grow in the future. Even people loaning gold back in the 1800's probably assumed that people would mine more as the economy grew. They didn't expect businesses to start failing and/or bartaring as gold became too little in amount to service debt. They simply expected the money supply to grow given the needs of the economy... since at some price someone's going to definitely be willing to move out west and pan for gold.
In a bartaring economy, this can be solved relatively easily if you have other assets/services of value with which you can bargain away debts.
In a money-based economy, it's much more difficult for people to get around their contractual terms and start accepting non-money items as payment. The bank taking assets in bankruptcy was never really what it wanted, and we can be sure it won't know how to run a business, but will want to sell it for money.
So why would we ever trust a money-based system if we have this problem?? Answer: The growth of the common currency via mining (gold) or expansion via fiat currency (US$).
So imagining another island scenario... nobody in their right mind would enter a contract to loan somebody 100 gold coins at interest denominated in gold if there is no reason to believe more than 100 exist on the island. The islanders might demand something else of value to be paid in interest, but demanding 105 gold coins back is like demanding 24 hours of sunlight... it's just not possible.
So, really, once a monetary base has been established, (non-gold), instead of future mining being the expectation of the economy, they expect future base money to be issued. Problem is, if we go through a massive deleveraging, that base money is not only going to pay interest, but it's going to pay off credit... this is going to demand MUCH more of the base money system than previously expected in the short-term, simply to keep things solvent. If there's $1,000 in base money, and $1,000 in loans at 5%, then at the very least the private sector expected both the economic output and the money supply to grow, and gov't expected to have to expand the money supply at a moderate pace. Well what if all of a sudden the private sector decides to deleverage? Now we've got $1,000 in money to pay off $1,050 in debt... all while people are hoarding the money. Hoarded money + deleveraging means bankruptcy, and bankruptcy means that now banks are tring to run failing businesses. It all sounds like a real mess without some counterbalancing in the system of base money. What used to be a necessary 5% trickle is now a much greater amount.
Simply put, the mere existence of private debt denominated in a currency (at interest) is the expectation that the currency will expand, whether by mining or by printing. It also implies a collective expectation of economic productive growth, which is the reason for issuing more base money to begin with.
In a bartaring economy, this can be solved relatively easily if you have other assets/services of value with which you can bargain away debts.
In a money-based economy, it's much more difficult for people to get around their contractual terms and start accepting non-money items as payment. The bank taking assets in bankruptcy was never really what it wanted, and we can be sure it won't know how to run a business, but will want to sell it for money.
So why would we ever trust a money-based system if we have this problem?? Answer: The growth of the common currency via mining (gold) or expansion via fiat currency (US$).
So imagining another island scenario... nobody in their right mind would enter a contract to loan somebody 100 gold coins at interest denominated in gold if there is no reason to believe more than 100 exist on the island. The islanders might demand something else of value to be paid in interest, but demanding 105 gold coins back is like demanding 24 hours of sunlight... it's just not possible.
So, really, once a monetary base has been established, (non-gold), instead of future mining being the expectation of the economy, they expect future base money to be issued. Problem is, if we go through a massive deleveraging, that base money is not only going to pay interest, but it's going to pay off credit... this is going to demand MUCH more of the base money system than previously expected in the short-term, simply to keep things solvent. If there's $1,000 in base money, and $1,000 in loans at 5%, then at the very least the private sector expected both the economic output and the money supply to grow, and gov't expected to have to expand the money supply at a moderate pace. Well what if all of a sudden the private sector decides to deleverage? Now we've got $1,000 in money to pay off $1,050 in debt... all while people are hoarding the money. Hoarded money + deleveraging means bankruptcy, and bankruptcy means that now banks are tring to run failing businesses. It all sounds like a real mess without some counterbalancing in the system of base money. What used to be a necessary 5% trickle is now a much greater amount.
Simply put, the mere existence of private debt denominated in a currency (at interest) is the expectation that the currency will expand, whether by mining or by printing. It also implies a collective expectation of economic productive growth, which is the reason for issuing more base money to begin with.
Last edited by moda0306 on Thu Jan 12, 2012 3:15 pm, edited 1 time in total.
"Men did not make the earth. It is the value of the improvements only, and not the earth itself, that is individual property. Every proprietor owes to the community a ground rent for the land which he holds."
- Thomas Paine
- Thomas Paine
Re: Do I owe this woman an apology?
I think it is critical to realize that increasing velocity of the monetary base can entirely make up for the fact that the amount of monetary base isn't growing. After all, Gumby keeps linking to those Fed charts that show that the recent massive increases in the monetary base have simply led to decreasing velocity. So you can either have $100 being spent every day or $1000 spent every ten days -same difference.
It seems to me that we could imagine an entire desert island monetary system starting from scratch without state money. Imagine Lone Wolf, moda, Gumby and me all swim ashore without a cent between us but all of us feel the need to use money (as we do here and now). Gumby catches a fish and I want to buy it. Moda says he is a bank. He makes a loan of $100 to me and I use it to buy Gumby's fish with Gumby depositing the "money" in the Moda bank. These transactions are done "by wire" since there is no paper cash. Lone Wolf also needs to eat and also doesn't know how to catch fish so he decides to be a treasury. Lone Wolf issues bonds that bank Moda buys from him using the money Gumby deposits. The whole system has interest payments that similarly get spent immediately either buying bonds or fish. Only Gumby ever catches fish. All of us only eat fish caught by Gumby and sold to us. Lone Wolf and Moda also pay themselves salaries that they save in the form of Lone Wolf treasury bonds. I become increasingly indebted with a big bank overdraft. Lone Wolf is responsible for lots of treasury debt but as we know that doesn't matter because it is net financial assets.
If we want to add tax into the mix, then we can say that Lone Wolf levies a tax and matches what he taxes with spending on unemployment benefit to me that I use to pay the interest on my bank loans from moda. BUT we don't need tax in the system unless Gumby requires reassurance that tax revenue is increasing in line with the interest payments (ie Gumby is a "deficit terrorist" in MMT terms).
Isn't the above scenario basically how the banking system started up? States were on the whole ushered into the monetary arrangements they have by professional bankers. It is not as though politicians decided what sort of monetary system to have and designed it for public purpose.
It is also important that in the above system, everything is voluntary. The "financial services industry" provides a way for Gumby to avoid underemployment and be financially rewarded. It may seem odd for Gumby to want a bond portfolio on a desert island but why is it any less odd for wealthy people here and now to be concerned about becoming more wealthy when they already don't spend what they have? Capitalism does what it does because the appetite for money is open ended. Also much of the "status consumption" we do have amounts to little more than having a bond portfolio on a desert island. Andy Warhol prints or vintage wines or central London mansions are much like displayed bond portfolios IMO. I suppose, over the sweep of human existence, gift economies have been more prevalent and long lasting than trade economies. Trade has traditionally just been something to conduct with outside communities. The potlac ceremony was a way to formalize a gift economy.
It seems to me that we could imagine an entire desert island monetary system starting from scratch without state money. Imagine Lone Wolf, moda, Gumby and me all swim ashore without a cent between us but all of us feel the need to use money (as we do here and now). Gumby catches a fish and I want to buy it. Moda says he is a bank. He makes a loan of $100 to me and I use it to buy Gumby's fish with Gumby depositing the "money" in the Moda bank. These transactions are done "by wire" since there is no paper cash. Lone Wolf also needs to eat and also doesn't know how to catch fish so he decides to be a treasury. Lone Wolf issues bonds that bank Moda buys from him using the money Gumby deposits. The whole system has interest payments that similarly get spent immediately either buying bonds or fish. Only Gumby ever catches fish. All of us only eat fish caught by Gumby and sold to us. Lone Wolf and Moda also pay themselves salaries that they save in the form of Lone Wolf treasury bonds. I become increasingly indebted with a big bank overdraft. Lone Wolf is responsible for lots of treasury debt but as we know that doesn't matter because it is net financial assets.
If we want to add tax into the mix, then we can say that Lone Wolf levies a tax and matches what he taxes with spending on unemployment benefit to me that I use to pay the interest on my bank loans from moda. BUT we don't need tax in the system unless Gumby requires reassurance that tax revenue is increasing in line with the interest payments (ie Gumby is a "deficit terrorist" in MMT terms).
Isn't the above scenario basically how the banking system started up? States were on the whole ushered into the monetary arrangements they have by professional bankers. It is not as though politicians decided what sort of monetary system to have and designed it for public purpose.
It is also important that in the above system, everything is voluntary. The "financial services industry" provides a way for Gumby to avoid underemployment and be financially rewarded. It may seem odd for Gumby to want a bond portfolio on a desert island but why is it any less odd for wealthy people here and now to be concerned about becoming more wealthy when they already don't spend what they have? Capitalism does what it does because the appetite for money is open ended. Also much of the "status consumption" we do have amounts to little more than having a bond portfolio on a desert island. Andy Warhol prints or vintage wines or central London mansions are much like displayed bond portfolios IMO. I suppose, over the sweep of human existence, gift economies have been more prevalent and long lasting than trade economies. Trade has traditionally just been something to conduct with outside communities. The potlac ceremony was a way to formalize a gift economy.
Last edited by stone on Fri Jan 13, 2012 6:05 am, edited 1 time in total.
"Good judgment comes from experience. Experience comes from bad judgment." - Mulla Nasrudin
Re: Do I owe this woman an apology?
But, in the real world, a bank can't just create its own money without a reserve to back it. What is Moda backing his loan with? The full faith and credit of Moda?? This example is not applicable to the world we live in. You need something to back these loans.stone wrote:It seems to me that we could imagine an entire desert island monetary system starting from scratch without state money. Imagine Lone Wolf, moda, Gumby and me all swim ashore without a cent between us but all of us feel the need to use money (as we do here and now). Gumby catches a fish and I want to buy it. Moda says he is a bank. He makes a loan of $100 to me and I use it to buy Gumby's fish with Gumby depositing the "money" in the Moda bank.
Nope. Moda's bank money wouldn't be accepted by the Treasury since Moda doesn't have anything backing his loan. Not to mention that Moda bucks aren't even compatible with the money that the Treasury is issuing. Moda would need money from the Treasury first in order to have base money to back his initial loan. Or he would need the exact same backing that the Treasury was using — such as exact amounts of Silver or Gold, for instance. In which case the Treasury would hand Moda a certificate for his Silver or Gold that he could use to back his Treasury-compatible bank loans with.stone wrote: These transactions are done "by wire" since there is no paper cash. Lone Wolf also needs to eat and also doesn't know how to catch fish so he decides to be a treasury. Lone Wolf issues bonds that bank Moda buys from him using the money Gumby deposits.
No. Originally, paper money was backed by something — other Silver-backed state money, for instance.stone wrote:Isn't the above scenario basically how the banking system started up? States were on the whole ushered into the monetary arrangements they have by professional bankers. It is not as though politicians decided what sort of monetary system to have and designed it for public purpose.
From Wikipedia:
Stone, I'm having trouble understanding the point of this island-based exercise. It doesn't seem to represent our reality or our history as far as I can tell.By the American Revolution, Spanish dollars gained significance because they backed paper money authorized by the individual colonies and the Continental Congress. Common in the Thirteen Colonies, Spanish dollars were even legal tender in one colony, Virginia.
Source: http://en.wikipedia.org/wiki/Dollar#Ado ... ted_States
Last edited by Gumby on Fri Jan 13, 2012 7:35 am, edited 1 time in total.
Nothing I say should be construed as advice or expertise. I am only sharing opinions which may or may not be applicable in any given case.
Re: Do I owe this woman an apology?
Stone... this is supposedly how it all started:
These days the Treasury has to spend first so that the Primary Dealers actually have the reserves in advance to buy Treasury bonds, so that the Fed can then swap its own paper for the Treasury bonds from the Primary Dealers. The Treasury spends first.
And to this day, the Fed is still holding the Treasury's gold certificates on its balance sheet. As the Fed explains:Gold certificates are very much like the world's first-ever paper bank notes.
Starting in the 17th century, gold certificates were issued by goldsmiths in London and Amsterdam to customers depositing gold bullion into their safe-keeping. These gold certificates then acted as proof of gold ownership. In time, the certificates were passed from hand to hand just like cash payments, without the hassle of having to move the gold bullion itself.
In the mid-19th century, the US Treasury began to issue gold certificates that could be exchanged for gold from its vaults. These gold certificates circulated as money until 1933, when the US government banned private gold ownership inside the United States.
Source: http://gold.bullionvault.com/How/GoldCertificate
It's very clear that the Treasury issued its own paper notes first — as gold certificates — and deposited those gold certificates in its account at the Fed to back the Fed's ability to issue paper. When miners delivered newly mined gold to the Treasury, the Treasury would give them gold certificates in exchange for their gold. The Treasury spends first.Gold certificate account: The gold certificate account reflects the receipts issued to the Reserve Banks by the Treasury against its gold holdings. In return, the Reserve Banks issue an equal value of credits to the general account of the Treasury, computed at the statutory price of $42.22 per troy ounce. Because nearly all of the gold held by the Treasury has been monetized in this fashion, the Federal Reserve Banks' gold certificate account of $11 billion represents the nation's entire official gold stock
Source: http://www.federalreserve.gov/monetaryp ... 0popup.htm
These days the Treasury has to spend first so that the Primary Dealers actually have the reserves in advance to buy Treasury bonds, so that the Fed can then swap its own paper for the Treasury bonds from the Primary Dealers. The Treasury spends first.
Last edited by Gumby on Fri Jan 13, 2012 9:14 am, edited 1 time in total.
Nothing I say should be construed as advice or expertise. I am only sharing opinions which may or may not be applicable in any given case.
Re: Do I owe this woman an apology?
Gumby, it simply isn't true that there has always been a commodity backing for bank money at the outset. Bullionvault etc love to make out that precious metals have been instrumental to money but in reality most money through history has not been precious metal based. Precious metals are typically used in times of war when credit money systems become disrupted. The Bank of England started off with tally sticks being used to buy the initial shares. The current Fed is the latest in a series of US central banks. The fact that the current Fed holds gold certificates is more a quirk of the fact that in the 1800s the USA was a massive gold producer. Latin American silver coins did become a global currency but again that was simply a result of massive amounts being mined at that time. Precious metals as money are easy to understand so people latch onto those historical examples far more than reality.
In the desert island example, Lone Wolf is the treasury and could decide on any reserve or capital requirements for moda he so wished. BIS has ZERO reserve requirements as an international standard. Canada and UK have ZERO reserve requirements. Bank capital requirements can and are entirely met with government and commercial debt. I think all your objections to the desert island could actually be applied to how most money is and has been in the real world.
http://en.wikipedia.org/wiki/Credit_money
"Credit money is at least as old as banking, namely about 5,000 years. In ancient Babylon (3rd Millennium BC), temples often acted as banks. Banks have for centuries served as the main creators of the money supply. This also has given them powers to allocate credit. Prominent banking systems with flourishing credit money supplies include ancient Egypt, Greece and Rome.[6]"
In the desert island example, Lone Wolf is the treasury and could decide on any reserve or capital requirements for moda he so wished. BIS has ZERO reserve requirements as an international standard. Canada and UK have ZERO reserve requirements. Bank capital requirements can and are entirely met with government and commercial debt. I think all your objections to the desert island could actually be applied to how most money is and has been in the real world.
http://en.wikipedia.org/wiki/Credit_money
"Credit money is at least as old as banking, namely about 5,000 years. In ancient Babylon (3rd Millennium BC), temples often acted as banks. Banks have for centuries served as the main creators of the money supply. This also has given them powers to allocate credit. Prominent banking systems with flourishing credit money supplies include ancient Egypt, Greece and Rome.[6]"
Last edited by stone on Fri Jan 13, 2012 9:23 am, edited 1 time in total.
"Good judgment comes from experience. Experience comes from bad judgment." - Mulla Nasrudin
Re: Do I owe this woman an apology?
There is a load of stuff about the history of money in:
http://michael-hudson.com/2003/03/the-c ... rspective/
http://michael-hudson.com/2003/03/the-c ... rspective/
"Good judgment comes from experience. Experience comes from bad judgment." - Mulla Nasrudin
Re: Do I owe this woman an apology?
The article you reference says:
Anyway, let's say tally sticks and private credit existed before taxes. Yipee! Stone, what exactly is the point that you're trying to make? Are you trying to prove that you can build a mythical society that's only based on private credit? And if so, it sounds like the only way you can keep the money supply steady is if the money is moving around fast enough — over and over again from creditor, back to debtor — which is pretty unrealistic. Not to mention that the increased speed of credit issuance/payment just causes more taxation.
I'm just having trouble understanding what you're trying to prove with a full private-credit society.
Sounds like the start of metal-backed money to me, but maybe I'm missing something. The way I see it, people exchanged gold and silver for wheat and barley until one day the Treasury decided to issue someone paper certificates in exchange for their gold.Thousands of years before coinage was developed, weighed silver was used to keep accounts in Mesopotamia’s large public institutions. Under normal conditions the prices administered for internal record-keeping and forward planning were adopted for transactions with the community at large, often by royal decrees of varying effectiveness. The laws of Eshnunna (c. 2000 BC) proclaimed a royal schedule of prices headed by the parity of 1 gur of barley with 1 shekel of silver (also equal to 3 quarts of oil, 6 minas of wool, etc.). The laws of Hammurapi established a similar equivalency of barley and silver. Karl Polanyi has called such systems based on centrally administered prices “redistributive economies."
Source: http://michael-hudson.com/2003/03/the-c ... rspective/
Anyway, let's say tally sticks and private credit existed before taxes. Yipee! Stone, what exactly is the point that you're trying to make? Are you trying to prove that you can build a mythical society that's only based on private credit? And if so, it sounds like the only way you can keep the money supply steady is if the money is moving around fast enough — over and over again from creditor, back to debtor — which is pretty unrealistic. Not to mention that the increased speed of credit issuance/payment just causes more taxation.
I'm just having trouble understanding what you're trying to prove with a full private-credit society.
Last edited by Gumby on Fri Jan 13, 2012 10:33 am, edited 1 time in total.
Nothing I say should be construed as advice or expertise. I am only sharing opinions which may or may not be applicable in any given case.
Re: Do I owe this woman an apology?
Gumby, what I was trying to get to the bottom of was whether a purely fiat currency such as we have might be explainable in some way other than by state money/MMT. Basically trying to get my head around what Lone Wolf was proposing as his non-MMT interpretation of what we have now.
"Good judgment comes from experience. Experience comes from bad judgment." - Mulla Nasrudin
Re: Do I owe this woman an apology?
Since you can't buy government bonds with private credit, I don't see how it's possible to not have state money backing all of the loans.
Nothing I say should be construed as advice or expertise. I am only sharing opinions which may or may not be applicable in any given case.
Re: Do I owe this woman an apology?
Is it actually true that you can't buy government bonds with private credit? I thought bank created USD could be used for everything, paying taxes, buying treasuries etc etc. The only difference was that the corresponding liability was held by someone who wasn't the government. The Fed will issue reserves to cover any shortfall. Reserves don't just come from government spending. Let's say I get a bank loan and use it to buy treasuries and pay my tax. If that results in reserves running down, the Fed will just summon them up. In effect that means that bank created money is just as good at buying treasuries as anything else. Am I in a muddle with this?
"Good judgment comes from experience. Experience comes from bad judgment." - Mulla Nasrudin
Re: Do I owe this woman an apology?
To build on what stone said, if I took out my $10k line of credit, I could either pay taxes or buy treasuries with that...
That said, the fed creating reserves without pulling treasuries out, I think, is usually a very small part of their monetary policy...
That said, the fed creating reserves without pulling treasuries out, I think, is usually a very small part of their monetary policy...
"Men did not make the earth. It is the value of the improvements only, and not the earth itself, that is individual property. Every proprietor owes to the community a ground rent for the land which he holds."
- Thomas Paine
- Thomas Paine
Re: Do I owe this woman an apology?
The bank can't lend out dollars unless it has dollar reserves in the first place. That's what fractional-reserve banking is! So, how did those dollars get there? They had to come from government spending. The Treasury spends first and issues the bonds later.stone wrote: Is it actually true that you can't buy government bonds with private credit? I thought bank created USD could be used for everything, paying taxes, buying treasuries etc etc. The only difference was that the corresponding liability was held by someone who wasn't the government.
The Fed can't issue any dollars until the Treasury empowers it with an asset deposit from the Treasury.stone wrote:The Fed will issue reserves to cover any shortfall
The dollar reserves necessary to back dollar loans must come from government spending. There is no other possible way for those dollar reserves to have existed in advance. Treasury spending empowers future credit.stone wrote:Reserves don't just come from government spending.
Sorry, but the bank wouldn't be able to issue you credit unless it had dollar reserves to begin with. That's fractional-reserve banking.stone wrote:Let's say I get a bank loan and use it to buy treasuries and pay my tax.
You're forgetting that the only way the Fed can conjure up money is if the Primary Dealers have acquired the Treasuries in advance (or if the Treasury deposits an asset, such as gold certificates, into the Fed's account). The only way the Primary Dealers can acquire the Treasuries in advance is if they have the dollar reserves to do so. The only way for the Primary Dealers to have the dollar reserves in advance of the bond auction is if the Treasury spent the money first. That's what happens. The government spends reserves into existence first.stone wrote:If that results in reserves running down, the Fed will just summon them up. In effect that means that bank created money is just as good at buying treasuries as anything else. Am I in a muddle with this?
The reserves to take our your line of credit had to have existed before the Treasuries were issued or the taxes were paid. There's no other way to create dollars.moda0306 wrote: To build on what stone said, if I took out my $10k line of credit, I could either pay taxes or buy treasuries with that...
Last edited by Gumby on Fri Jan 13, 2012 12:05 pm, edited 1 time in total.
Nothing I say should be construed as advice or expertise. I am only sharing opinions which may or may not be applicable in any given case.
Re: Do I owe this woman an apology?
You guys... this is pretty straightforward. Over the next few months, there will easily be $10 Trillion of US Debt issued. Believe me when I tell you that $10 Trillion in private credit is not going to be issued to pay for those Treasury Bonds. That wouldn't make any sense, and it would bankrupt the economy if that's what did happen. The Treasury is spending the money, plus interest, into existence first. That's how it works. It's not rocket science.
Last edited by Gumby on Fri Jan 13, 2012 12:10 pm, edited 1 time in total.
Nothing I say should be construed as advice or expertise. I am only sharing opinions which may or may not be applicable in any given case.
Re: Do I owe this woman an apology?
Gumby, it is not true that a bank needs reserves in order to lend. The USA does stipulate a reserve requirement. So does China. The UK does not. Canada does not. Basel III does not have ANY reserve requirement. A key tenet of MMT is "loans create deposits".
"Good judgment comes from experience. Experience comes from bad judgment." - Mulla Nasrudin
Re: Do I owe this woman an apology?
I'm really thinking Lone Wolf might have a point about MMT being overly dogmatic about a chicken before the egg type distinction 
"Good judgment comes from experience. Experience comes from bad judgment." - Mulla Nasrudin
Re: Do I owe this woman an apology?
Are you suggesting that there are banks that don't have any reserves?stone wrote: Gumby, it is not true that a bank needs reserves in order to lend. The USA does stipulate a reserve requirement. So does China. The UK does not. Canada does not. Basel III does not have ANY reserve requirement. A key tenet of MMT is "loans create deposits".
Nothing I say should be construed as advice or expertise. I am only sharing opinions which may or may not be applicable in any given case.
Re: Do I owe this woman an apology?
Stone, I'm surprised that you think that you can start a bank without any monetary assets on its balance sheet.stone wrote: I'm really thinking Lone Wolf might have a point about MMT being overly dogmatic about a chicken before the egg type distinction
Nothing I say should be construed as advice or expertise. I am only sharing opinions which may or may not be applicable in any given case.
Re: Do I owe this woman an apology?
http://en.wikipedia.org/wiki/Endogenous_money
In economics, endogenous money refers to the theory that money comes into existence driven by the requirements of the real economy and that banking system reserves expand or contract as needed to accommodate loan demand at prevailing interest rates. It forms part of Post-Keynesian economics. This theory is based on three main claims:
* 'Loans create deposits': for the banking system as a whole, drawing down a bank loan by a non-bank borrower creates new deposits (and the repayment of a bank loan destroys deposits). So while the quantity of bank loans may not equal deposits in an economy, a deposit is the logical concomitant of a loan – banks do not need to increase deposits prior to extending a loan.
* While banks can be capital-constrained, in most countries a solvent bank is never reserve-constrained or funding-constrained: it can always obtain reserves or funding either from the interbank market or from the central bank.
* Banks rationally pursue any profitable lending opportunities that they can identify up to the level consistent with their level of capital, treating reserve requirements and funding issues as matters to be addressed later – or rather, at an aggregate level.
In economics, endogenous money refers to the theory that money comes into existence driven by the requirements of the real economy and that banking system reserves expand or contract as needed to accommodate loan demand at prevailing interest rates. It forms part of Post-Keynesian economics. This theory is based on three main claims:
* 'Loans create deposits': for the banking system as a whole, drawing down a bank loan by a non-bank borrower creates new deposits (and the repayment of a bank loan destroys deposits). So while the quantity of bank loans may not equal deposits in an economy, a deposit is the logical concomitant of a loan – banks do not need to increase deposits prior to extending a loan.
* While banks can be capital-constrained, in most countries a solvent bank is never reserve-constrained or funding-constrained: it can always obtain reserves or funding either from the interbank market or from the central bank.
* Banks rationally pursue any profitable lending opportunities that they can identify up to the level consistent with their level of capital, treating reserve requirements and funding issues as matters to be addressed later – or rather, at an aggregate level.
"Good judgment comes from experience. Experience comes from bad judgment." - Mulla Nasrudin
Re: Do I owe this woman an apology?
Right... and if you scroll down, it says:
It's like you're trying to create a society that has no high-powered money! That's not the world we live in.
High-powered money exists. High-powered money is what backs loans.
In other words, banks aren't ever reserve constrained because they just go out and find the reserves when they need them. But the first reserves had to have to originated from high-powered money.Mainstream (New Keynesian) economic theory states that the quantity of broad money is a function of the quantity of "high-powered money" or "government money" (notes, coins and bank reserves), and the money multiplier (the inverse of the reserve ratio).
New Keynesian economists believe that when a bank has no excess reserves, new credits can only be granted if banks increase deposits, which occurs when the central bank purchases government bonds (from banks or public) on the open market, thereby changing the amount of excess reserves.
Source: http://en.wikipedia.org/wiki/Endogenous_money
It's like you're trying to create a society that has no high-powered money! That's not the world we live in.
High-powered money exists. High-powered money is what backs loans.
Nothing I say should be construed as advice or expertise. I am only sharing opinions which may or may not be applicable in any given case.
Re: Do I owe this woman an apology?
Gumby, a key thing that Bill Mitchel is always banging on about is that the loan department at a bank never enquires about what the reserves are. If the loan is made to someone who spends it on something from a vendor who banks with the same bank; no reserves are ever used for the entire process. Banks have interbank lending to match up net flows every few days but the vast bulk of what they do nets out. Clearly on our desert island moda had a monopoly position and so everything netted out for him. UK banks were very reliant on international interbank lending in the run up to 2008. That was a big part of why they collapsed when the credit crunch stopped those international flows.
"Good judgment comes from experience. Experience comes from bad judgment." - Mulla Nasrudin
Re: Do I owe this woman an apology?
Stone, let's make this simple...
Do you think that the private sector can exist without any high-powered money?
Do you think that the private sector can exist without any high-powered money?
Nothing I say should be construed as advice or expertise. I am only sharing opinions which may or may not be applicable in any given case.
Re: Do I owe this woman an apology?
Governments have received loans from private banks in history. "High powered money" could have originated from credit creation by private banks couldn't it? All that "high powered money" means is that the debt on the other side of it is treasury debt
"Good judgment comes from experience. Experience comes from bad judgment." - Mulla Nasrudin
Re: Do I owe this woman an apology?
Gumby, yes I do think the private sector can exist without high powered money. The state tally stick system was an adoption by the state of a private method of individuals making debts to each other and then trading those debt obligations with third parties. Afterall what is a state? It is just a collection of people. Any group of people can start up a money system built on credit if they so wish.
"Good judgment comes from experience. Experience comes from bad judgment." - Mulla Nasrudin