You probably won’t see Profs Mitchell and Wray on the Mainstream Media anytime soon. Even the BBC with its reputation for being on the liberal/left hasn’t shown any real interest in explaining how the Economy really works. Instead the BBC’s ‘expert’ economists trot out the usual line without explaining what really goes on.
The BBC have Professors like Brian Cox who jump around the world with amazing speed talking about distant Galaxies and Quasars etc but if you’re interested in Economics and are looking for an explanation of, say, why the 2008 crash occurred you can forget it. All you’ll get is that there was a big party beforehand and when it finished everyone had a hangover and had to clear up the mess. Is that the best they can do?
So the question is if Profs Mitchell and Wray are talking nonsense, or the kind of sense that gives the game away. You can decide. There’s a series of 3-4minute talks on youtube of which these are the first 5.
If only it were true that all money was issued by government! The reality, however, is that about 98% of the money in circulation is electronic money issued as interest-bearing debt, created ex nihilo by commercial banks when they make loans, especially mortgages. This is why the prices of houses have been bid up at a rate of increase several times the rate of increase in wages and salaries, with the result that more and more of our young people are finding it well-nigh impossible to buy their first house.
It is entirely possible to change the law so that banks could not create new money but would have to become financial intermediaries (which is what they have always held themselves out to be), competing in the market to borrow money from savers and on-lend it to borrowers, at a fair margin. All new money, with which we expand the economy, would be created ex nihilo by the government-owned reserve bank, at a rate just sufficient to keep inflation at a long-term average of zero, and gifted as an asset to the government for spending according to its democratic mandate, with a consequent reduction in taxation. Taxpayers would be free to save or spend more of their incomes and a greater percentage of them could become capitalists, thereby allowing people’s capitalism to thrive!
Here’s the URL for an interesting comparison of Modern Money Theory and New Currency Theory by economist Professor Joseph Huber: http://www.paecon.net/PAEReview/issue66/Huber66.pdf
If only it were true that all money was issued by government!
It all depends on what you mean by money. There are various definitions M0, M1, M2 etc which include some forms of money and exclude others. MMT is that all money is debt or an IOU. Anyone can create money. A casino can create money in the form of gambling chips. The post office can create money in the form of stamps. If you need to send someone a few $ then a stamp is often acceptable. I can create money by writing out an IOU. Its getting it widely accepted that is sometimes the problem. But these IOUs aren’t the same as base money or Govt money. That’s the MM theory.
Joseph Huber isn’t quite right when he says (of the MMT position) “The creation of money includes the creation of interest-bearing debt, and extinction of the money upon redemption”.
Yes the creation of money by Govt is an IOU like any other. The Govt keeps the liability and the recipient keeps the asset. So Govts have always to be technically is debt. But there doesn’t have to be any interest payable. The natural rate of interest is considered to be zero. Governments usually choose to not have zero and set the floor by the mechanism of the overnight rate. You can argue they should choose either a higher or a lower rate than they do, but it is all set by Govt choice. Its nothing to do with supply and demand.
Even if they choose to have a finite interest rate on the overnight rate and via the issuance of bonds, they can still choose to print extra currency at zero interest. The Greenback dollars and Bradbury pounds were early examples of governments doing just that to finance war efforts.
There is an understanding in the Positive Money group that there is something not quite right about the way modern economies function or dis-function and you’re right to think that. But is going to ban the issuing of all IOUs by banks, building societies, casinos, the post office, private individuals going to fix things? I can’t see how. The big problem is that the effect of allowing banks to write out IOUs isn’t fully understood by politicians. Those on the right seem to think that bank IOUs are OK because they originate in the private sector, whereas govt IOUs are inflationary. Both are equally inflationary of course and bank IOUs tend to be generated or not generated according to whether it suits them. That process can be controlled by adjusting interest rates if it was better understood.
Right now interest rates need to be higher and govt deficits need to be higher too, to compensate, IMO.
I like to keep things very simple, right down to basics. IMHO, the best definition of money is “If you can pay income tax with it, it’s money — if you can’t, it’s not!” IMHO, that rules out all IOUs except those issued by banks, which 99.99% of the population uses as money, transferring it electronically.
Peter, have you actually read Prof. Huber’s paper comparing Modern Money Theory and New Currency Theory? In it, he clearly demonstrates that government-created, i.e. sovereign, money need not be created as debt.
Years ago, Stephen Zarlenga of the American Monetary Institute wrote a paper saying much the same thing: http://www.monetary.org/mmtevaluation
Have you read it?
Peter, you wrote: “The big problem is that the effect of allowing banks to write out IOUs isn’t fully understood by politicians. Those on the right seem to think that bank IOUs are OK because they originate in the private sector, whereas govt IOUs are inflationary. Both are equally inflationary of course and bank IOUs tend to be generated or not generated according to whether it suits them. That process can be controlled by adjusting interest rates if it was better understood.”
It is not necessarily inflationary for banks, nor for governments, to create and issue money ex nihilo. Provided the rate of creation of new money (the sum total of what all the banks and the government create – if indeed the government is creating any) does not exceed the rate at which commercial banks’ ‘loans’ are being repaid (money is destroyed when banks’ ‘loans’ are repaid), then the money supply won’t be increasing and inflation will be unlikely. Provided all banks are expanding their ‘loan’ portfolios at the same rate, the changing of the OCR by the reserve bank makes no difference to banks’ rate of money creation, as no bank would need to borrow reserve bank reserves when settling with other banks each day. The rate of expansion of the money supply depends first and foremost on the confidence of borrowers that they can meet the repayments and in the case of business borrowers that they can make an acceptable profit as a result of their borrowing, and the confidence of bankers that the proportion of their loan book that turns ‘bad’ does not exceed their own estimates as to what proportion is acceptable without causing them to get too close to insolvency.
1. Ryan-Collins, Josh / Greenham, Tony / Werner, Richard / Jackson, Andrew 2012: Where Does Money Come From? A guide to the UK monetary and banking system, 2nd edition, London: New Economics Foundation.
2. Jackson, Andrew / Dyson, Ben 2013: Modernising Money. Why our monetary system is broken and how it can be fixed, London: Positive Money.
3. Jackson, Andrew 2013: Sovereign Money, ed. by Ben Dyson, London: Positive Money, http://www.positivemoney.org
” In it, he clearly demonstrates that government-created, i.e. sovereign, money need not be created as debt.”
Except we wouldn’t agree about that. If you have a commodity based money like a lump of gold, or even a packet of cigarettes or a bar of chocolate, then I would agree that money need not be considered as debt. But once you replace the commodity by a piece of paper , even if the piece of paper is backed up by a commodity, then that’s different and money has to be considered as debt. Otherwise a piece of paper would have no value at all.
“If you can pay income tax with it, it’s money — if you can’t, it’s not! IMHO, that rules out all IOUs except those issued by banks”. Well you can’t pay your tax with a bank IOU per se. If you give a bank cheque to the taxman he’ll only accept that as paid once the bank cheque has cleared ie once the bank has given up some of its reserves (of real government money) to the tax office. If I pay your tax I can write out an IOU in the form of my own personal cheque. The taxman will accept that with the same proviso as the bank cheque. So ultimately the taxman will accept any form of IOU but only so long as it’s cleared and he gets government money in the end.
OCR = Official cash rate?
I’m not sure I fully understand what you are getting at there but I agree that the creation of new money isn’t necessarily inflationary, but if it is it doesn’t make any difference if it was issued by a private bank or the govt.
Sorry, Peter, you are dead wrong — again!
A piece of plastic film issued by the RBA or RBNZ with the words printed on it “This note is legal tender for …….” has value because everybody accepts it in payment of debts or in exchange for objects or services of value. Whether the piece of plastic film is issued as a debt or as an asset is absolutely irrelevant to the fact that everybody accepts it in payment of debts or in exchange for objects of value! The rest is mere semantics!
Let’s just agree that MMT and New Currency Theory have much more in common than they have in their differences.
Really, we should all be working together to enlighten the likes of Tony Abbott and John Key that they have yet to understand that sovereign governments do not have to operate as does a business or an individual.
So you’re saying that a dollar has a value because the Govt says it is worth something? You’ll take my dollar because you know that someone else will take it and they know that the next person will take it too?
That’s the infinite regression argument. How about that the Govt issue their currency which is an IOU. Like all IOUs they have to take them back as payment. ie in fees and taxes. Its just the same as if I issue an IOU for $5. I have to take it back as payment or my credit is deemed unreliable by the market. And that’s the last thing the Govt would want.
Yes I’m happy to work with anyone of like mind to try to enlighten anyone else about the way the economy works. It would be better if we were all singing from the same hymn sheet though.
Well I’ve just read Stephen Zarlenga and he doesn’t make anywhere near as much sense as Randall Wray. Quite a bit of his thinking depends on his claim that the Fed is somehow independent from Treasury and Government. This is just a pretence which one would be naive to accept.
Ben Bernanke, the chairman of the US Fed says “We are the agent of the Treasury, and it’s our job to do whatever they tell us to do.”
“Well I’ve just read Stephen Zarlenga and he doesn’t make anywhere near as much sense as Randall Wray.”
Peter, IMHO there are two words missing from your statement. They are “to” and “me”.
IMHO, what you should have written is: “Well I’ve just read Stephen Zarlenga and he doesn’t make anywhere near as much sense to me as Randall Wray.”
IMHO, Randall Wray does not make anywhere near as much sense as Joseph Huber, Josh Ryan-Collins, Tony Greenham, Richard Werner, Andrew Jackson, Ben Dyson or Stephen Zarlenga.
Your contention that Stephen Zarlenga’s claim that the Fed is somehow independent from Treasury and Government is just a pretence which one would be naive to accept, backed up by quoting Ben Bernanke’s statement “We are the agent of the Treasury, and it’s our job to do whatever they tell us to do.” completely ignores the facts, which show that Bernanke is bullshitting. The Fed is a joint stock corporation and the US government does not own any of the stock. The Fed was set up by subterfuge and the fact that the US president appoints the Fed’s chairman is part of the subterfuge to give the impression that the Fed is controlled by the US government. The truth is that it’s mostly the Fed that controls the US government. You may read Stephen Zarlenga’s article on this subject at http://www.monetary.org/is-the-federal-reserve-system-a-governmental-or-a-privately-controlled-organization/2008/02
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