12 responses to ““Positive Money” : A Fallacy Built on a Little Known Truth. (Part 1)

  1. A couple of mistakes in the above article.

    First re the idea that government gradually withdraws newly created commercial bank money, government does not accept that sort of money in payment of taxes: it only accepts central bank or base money.

    Second, even if government did accept commercial bank money, governments only collect money in order to spend it (assuming government is not deliberately running a surplus or deficit) so there’s no net withdrawal.

    • Hi Ralph, Thanks for dropping by.

      I don’t think we are in disagreement on the point you raise. I agree that government does want its own money back for tax payments. Governments won’t accept bank created money , or bank IOUs. That doesn’t mean that we ourselves can’t use bank created money to pay those taxes though. It doesn’t mean that when we buy a item with bank created money we are excused government taxes.

      Most people would just write a cheque for their tax or make a transfer without giving it a second thought. They just expect it will happen.

      The banks have to be able to convert their issued their IOUs to government IOUs as the requirement arises and they have to make withdrawals from their reserves to do that. So effectively , by swapping one kind of IOU for another the government does take back that newly created money. So maybe there is a slight disagreement after all?

    • 2 certainties in life, Death and Taxes. “Colma is a small incorporated town in San Mateo County, California, near the northern end of the San Francisco Peninsula in the San Francisco Bay Area. The population was 1,792 at the 2010 census. Yet over 1 million people are buried there.

      Who would have thought that the dead raise more new monies than the living, with people even selling on their relatives burial grounds/plots, the deathly real estate drivers.

      Of course the banks and governments will be collecting through these initiatives, the banks will print and borrow and the government will take it’s taxes.If there is a source or need people will pay for then printing new money and taken tax is a definite!

  2. At the same time it edits my bank account downward so eliminating the newly created “money”. I still owe the bank £1000.

    The bank still has the asset (your loan) and you still have the liability (on your loan a/c) so I wouldn’t say the newly created money had been eliminated.

    It has simply been credited to the recipient’s bank’s reserve account via the payer’s bank’s reserve account at the central bank. It’s a feature of our monetary system that broad money and base money circulate as equivalents (except for payments of taxes of course).

    Banks can only become illiquid (unable to cash cheques) if the inward flow of deposits dries up or the central bank refuses to supply reserves.

    For better or worse I think those days are gone.

    • John,

      I think the point I’m trying to make is that bank money (bank IOUs) is eliminated when it is used to pay taxes (or other government fees) or to buy bonds. The govt won’t accept bank IOUs.

      On the other hand, if I’d used that £1000 to buy a car it probably wouldn’t have been eliminated. The seller would have happily accepted bank IOUs. In both cases (tax and car), the bank has its asset and I have the liability in both cases (tax and car) too, So that doesn’t prove the continued existence of the bank IOUs.

      Look at this this way. The government won’t take bank IOUs. I certainly have not got them after I’ve paid my tax. And bank IOUs don’t mean anything when they are in the bank’s own possession.

      • Peter,

        I think you’ve overlooked the fact that governments don’t just sit on the money that they collect via taxes. They spend it. So following this to the logical conclusion:

        “The banks have to be able to convert their issued their IOUs to government IOUs as the requirement arises and they have to make withdrawals from their reserves to do that. So effectively , by swapping one kind of IOU for another the government does take back that newly created money. ”

        So when transfers are made by banks to the government, it can destroy bank-deposit money. But these bank deposits are re-created as soon as the government makes a transfer back to banks (i.e. when it spends). These two will cancel each other out, meaning that this effect of ‘taking back newly created money’ is insignificant.

        Thanks for the mention! Looking forward to part 2…

      • “I think you’ve overlooked the fact that governments don’t just sit on the money that they collect via taxes. They spend it.”

        I think you’ve overlooked those countries where the government runs a surplus – and frankly those where it runs a deficit.

        Which shows you in no uncertain terms that government spending and government taxation are *not* operationally connected in any way.

        Big mistake in thinking there.

      • Neil – that’s doesn’t affect the point I made:

        1. If they run a surplus, then they will buy back government bonds from the market (i.e. pay down the national debt). In which case, taxation will destroy deposits, and buying back the debt will re-create deposits.

        2. If they run a deficit, then when pension funds etc buy bonds, deposits will disappear. They will be re-created when government spends back into the economy.

        Point being, whatever government does that remove deposits from the system, it will shortly after do something re-creates them. Peter’s point therefore doesn’t have any significant implications.

      • Hi Ben,

        Yes I agree with Neil. Government spending and taxation can’t be considered as the former following on from the latter.

        I’m planning to develop this concept in Part2 (when I get time. I still have my main job to do!), but just to give you a preview, I did start to think about how credit bubbles affect sectoral balances when I first came across the idea, less than a year ago. Its just assumed that credit bubbles are bad things in themselves but just why is less well known. The reason is that they force government deficits to be less than they should be, and can even force them into surplus, and so impoverish the private sector. Because Positive Money believes in the concept of debt-free money, when issued by govt, it does mean that PM doesn’t allow for the concept in sectoral balances. That’s another big deficiency in PM BTW.

        If you look at this graph:

        You can see the sectoral balances for the USA over the last half century or so . Neil has done a very good job compiling sectoral balances for the UK if you are interested in those. See his website:

        http://www.3spoken.co.uk

        The normal state of affairs is that the US Government is in deficit. That’s fine, except the neo-liberals in their wisdom have decided that government deficits are a bad thing. The one time things weren’t normal was just before the turn of the century when the Clinton Administration managed to turn deficit into surplus. That surplus was the start of the GFC.

        So how come Clinton managed to show a surplus when he didn’t raise taxes or cut spending that much? The answer is he allowed and encouraged the private banks to run a credit bubble based on the share market. As credit was issued taxes flowed into the government’s coffers in the way I’ve described in the post. So everyone was happy – but only for a time. The crunch came when the stock market bubble burst and the banks stopped lending. By this time President Bush was in office and his solution was simple enough. Start another bubble in the housing market.

        Three sector balance analysis is a very powerful tool. It’s high time that the PM group took it on.

        I’d just add that I think those who do support the PM idea have their hearts in the right place. But the campaign for 100% reserve banking is a distraction from the real issue which is neo-liberal, or austerity, economics.

        PS “Buying back the debt”, or governments reducing their debt, doesn’t recreate deposits. It removes them. When governments increase their debt they increase the financial assets of the non-government sector. You’ve got it the wrong way around. That’s very easily seen once you’ve decided to accept the idea of sectoral balances.

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  4. “Buying back the debt, or governments reducing their debt, doesn’t recreate deposits. It removes them. When governments increase their debt they increase the financial assets of the non-government sector.”

    How does debt reduction by governments/buying back debt not recreate deposits? With what do governments reduce their debt?

    • “Buying back the debt” was Ben Dyson’s phrase. If we consider that both cash and bonds are IOUs of government then buying back the debt is just a swap of one type of IOU for another and so doesn’t mean much. The problem is that some types of debt aren’t actually counted as debt (which can be confusing) but all liabilities of govt including cash should be included.

      In the USA they don’t count coins as debt. But they should. At present the USA can theoretically eliminate its entire National Debt by striking 18 x trillion dollar coins. (You might want to Google that!)

      Government’s reduce their debt when they run a surplus. ie They receive more in taxes than they spend. The tendency is to think of a surplus as a sort of profit. But whereas company profits can be spent by investing in new plant and machinery etc surpluses can’t be spent. If they were they wouldn’t be surpluses any longer.

      So Governments can only reduce their debt by destroying money. Govt debt is everyone else’s asset. No debts = No assets.

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