7 responses to ““Positive Money” : A Fallacy Built on a Little Known Truth. (Part 3)

  1. Peter, why are you so fixated on the fallacy that the money that Positive Money proposes is an IOU of government? It is proposed that it be created debt-free and interest-free and spent by the government, in lieu of taxation, into more or less permanent circulation.

    • PJM, This is a subject I addressed in part 2. The idea that government can issue currency without it being a debt, or a liability, is a fallacy. If the government give you a tax rebate of $10 their debt rises by that amount. If they give you a tax bill for $10 their debt falls.

      It is not a debt in the normal sense that it has to be repaid. If you and I were isolated on a desert island one of us has to be in debt, for the other to be in credit. It is just a matter of accountancy. There is a link under “Videos” on the right hand column which explains the concept. Three sectors financial balances.

  2. “If that bank was well capitalised, and their issued IOUs were credible then no sensible person or organisation would refuse to accept them.”

    They would, because they wouldn’t be able to be transferred within the Sterling payment system.

    For a liability to be Sterling it would have to be transferable within the Transaction account area of the Bank of England, or convertible to notes issued by the Bank of England. There are only two ways that can happen – by being a regulated entity able to operate Transaction Accounts, or by holding a Transaction account via a regulated entity yourself.

    If an offshore institution was caught using an account via a UK regulated entity for the purposes of operating fractional reserve deposit taking in Sterling, the Bank of England would just direct the regulated entity to terminate and freeze all accounts for that offshore institution – for operating illegal deposit taking activities in Sterling.

    Sterling is a monopoly. Never forget that.

    • I must say I hadn’t considered this difficulty! (I have added a note to the main text). There is such a thing as a a Eurodollar which is a pseudo currency time deposit originally created by European banks and guaranteed by them to be a 1:1 swap with a US dollar. Would they need any real dollars to offer these or just the financial ability to back up their guarantees? So I was thinking there could be a “Europound” too but you are saying not? I accept that it may be a bit harder to get around such imposition of a FRB requirement than suggested but the banks would try if it were causing them problems.
      I’d say the chances of that happening are pretty close to zero anyway. The question is whether a FRB system would be even theoretically desirable and I think we both agree that it wouldn’t.

      • Eurodollars have the same issue. They are fractional ‘shadow banking’ deposits, and require real dollars to allow them to be transferred out.

        Europounds exist as well, and under a Full Reserve system the institution would need a Transaction account at the Bank of England to do the transfer. If the BoE found it was being used for that, it would just close it and those people with ‘Europoounds’ would suddenly find that their ‘Europound’ were floating in value against real Pounds.

        Price equality is enforced by convertibility. Remove the convertibility and the price floats.

  3. “They have relied far too much, for far too long, on it to keep their economies growing and forgotten they have fiscal policy at their disposal too.”

    The whole debt free issuing nonsense that you get from full reservists is just using fiscal policy – as MMT has long advocated.

    In the UK we can already do that. The government has a ‘Ways and Means’ account at the Bank of England, which is essentially an unlimited overdraft, and the legislation is already in place allowing the government use that for whatever it wants to.

    So we could stop government gilt issues tomorrow and just use the Ways and Means account. If you like theatre and appearances you could go through the ritual of the Bank of England topping the account up to some arbitrary positive number via an internal transfer from the Issue department to the Banking Department. This is, of course, little more than a conjuring trick for those who are hard of accounting.

    And we could remove the Financial Compensation Scheme from Banks and Building Societies, which would cause insured deposits to move to National Savings. Those deposits would then be replaced at the commercial banks by an overdraft with the Bank of England via the various discount schemes. The commercial banks would then pay the Bank of England, and any remaining customers with ‘bailed-in’ deposits.

    Here in the UK we have a very effective clearing system which is run via a set of centrally managed companies under the auspices of UKPA. To make clearing go even faster we could uplift current accounts to that central company, and require the commercial banks to operate them on an agency basis. That would allow the UK to have near instant clearing on any transaction – removing any remaining payment friction from the payments system. It just needs government to put their foot down and insist on it.

    So really the only reason to bang on about full reserve is to hide the changes you actually want to make to the banking system. Because we can already do all of them with the existing infrastructure if we want to.

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