Positive Money : A Fallacy Built on a Little Known Truth. (Part 4)

The proponents of a theory called Positive Money often get their knickers in something of a twist over the ways the banks , as they see it, create money. As the well known economist Minsky said “Anyone can create money. The problem is getting it accepted”.

If I ( or a bank or anyone else)  issue a loan in $ ( or £ ) I’m creating assets for someone denominated in $. But I also have a liability in $ which I have to be able to guarantee by providing $ on demand. Or lose my credibility. So am I (or the bank or anyone else) really creating $ ? In a way yes.

If I (or a bank or anyone else) issue a loan in ounces of gold, I’m creating assets for someone denominated in ounces of gold. But I also have a liability in ounces of gold which I have to be able to guarantee by providing ounces of gold on demand. Or lose my credibility.So am I (or the bank or anyone else) really creating ounces of gold ? In a way yes.

But we wouldn’t have discovered the secret of alchemy any more than we’d discovered a way to create dollars in the way Positive Money suggest is possible!

9 responses to “Positive Money : A Fallacy Built on a Little Known Truth. (Part 4)

  1. New money is created ex nihilo (out of nothing), as electronic bank IOUs, i.e. promises to pay in notes and coins, by banks every time they grant a loan. For a typical mortgage loan, in exchange for signing a contract whereby the bank promises to pay say $500,000, and credits the borrower’s account with the bank the sum of $500,000, a borrower promises to repay the bank (i.e. the contract legalises both the borrower’s IOU to the bank and the bank’s IOU to the borrower). In our collective ignorance, we the people, and our government, choose to make these electronic bank IOUs spendable money – making payments using our EFTPOS and credit cards, and direct credits through on-line banking – and we almost all accept them as being far more convenient to use than central bank notes and coins – even to buy a cup of coffee! We do this in our almost universal ignorance of the deleterious effects of this private, debt-based monetary system on the wellbeing of our society. It is the single biggest driver of growing inequality.

    When a loan principal or part thereof is repaid, the bank cancels the borrower’s IOU, in effect making the electronic money disappear back into the nothing from whence it came, thus destroying it.

    EFTPOS technology has caused a continuing decline in the use of notes and coins and they now constitute only 2% to 3% of the money in circulation (the money supply). The interest paid to banks to ‘rent’ our money supply is a cost that is built-in to the prices of everything we buy.

    This is surely ridiculous, as our state-owned central bank could have easily created all of our electronic money, at a rate just sufficient to match economic growth so as to keep the long-term inflation rate at an average of zero, free of debt and free of interest, for next to nothing, and gifted it to the government for spending according to its democratic mandate, into permanent circulation, with a corresponding reduction in the total take. New legislation could easily prevent banks’ IOU’s from being passed around as money, effectively ending the banks’ rort.

    Readers may learn more about how such a Sovereign Money banking and monetary system would work at the website of professor Joseph Huber: http://www.sovereignmoney.org.eu

    By the way, in a paper on that website, Prof. Huber demolishes MMT.

    Perhaps you as an MMT proponent may wish to respond to Prof. Huber’s paper with a suitable refutation?

    • PJM,

      I don’t know how I can put it any simpler than I did in my post. But, you are still incapable of understanding.

      You’ll never grasp how the monetary system works unless you accept the principle of the sectoral balances as developed by Wynne Godley at Cambridge Uni in the 70’s and later. And the sectoral balances do require that money issued is a debt and a liability to the issuer. It can’t be debt-free.

      • Thanks, Peter, for being so ‘forthwrong.”
        Presumably, now that it has been proven that sovereign money is not debt, it is also proven that Wynne Godley’s “principle of sectoral balances” is flawed.

      • Money is a liability of government. They issue it and they are liable for it. Who else can be? Govts need to ensure it has a value which they do by imposing taxes which are required to be paid in that currency

        It’s really not that difficult. I can’t see why you have a problem. But maybe its like dyslexia? Unless we happen to suffer from that then we can’t understand why anyone else would have a problem with letters and words!

    • What you fail to integrate in your thinking is that when a transaction involves 2 parties with different banks, reserves (government money) change hands.

      So the bank of the purchaser must either have those reserves on hand or borrow them from the central bank to settle with the bank of the vendor.

      Reserves are the electronic version of the notes and coins. In fact notes and coins are issued as reserves to the banks.

      • No, jag3777, reserves are not “the electronic version of note and coins”.
        If reserves were “the electronic version of note and coins”, then “we the people” would be able to use them in conducting our daily business, without the need for banks to be involved in the payments system, just as “we the people” can conduct our daily business with notes and coins, without any involvement from banks.

        In a Sovereign Money system as espoused by Positive Money, there would be no such thing as central bank reserves. Central bank created electronic cash would be the electronic version of notes and coins, and banks would be forced to become the financial intermediaries that all students of economics are falsely taught that they are, and practically all economics textbooks falsely state that they are.

      • @PJM

        To resolve this type of problem you just need to ask yourself the question:

        “Who has written out the IOU”?

        The central bank can issue IOUs as notes and coins and it can also issue IOUs electronically which is how banks store their reserves in their accounts at the central bank. They are functionally identical.

      • No, central bank reserves are not functionally identical to notes and coins, because neither you nor I have access to central bank reserves!

      • It doesn’t matter. The central bank can choose to issue paper IOUs to everyone who holds them, but can limit its digital IOUs to only those to whom it chooses to give accounts.

        They are still functionally identical.

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