The Financial Economy

August 8th, 2012
in Op Ed, syndication

by Derryl Hermanutz

Banksters-cartoonSMALLIn, “A Copernican Turn in Macro”, I discussed the emerging understanding of the role of the money system in our macro economies. This is not new knowledge. The ancients were aware of the arithmetic necessity of periodic “clean slates” and “debt jubilees” in order to restore a distributional balance to their credit-debt systems so that an “economy” could function. During the last global monetary system failure, The Great Depression of the 1930s, clear thinkers like Irving Fisher (“The Debt Deflation Theory of Great Depressions”) and CH Douglas (“Social Credit”) laid bare the fatally flawed arithmetic of our bank-debt money systems, and proposed solutions. Douglas' "Money and the Price System" is a particularly clear exposition.

Follow up:

Subsequent scholars, notably Hyman Minsky with his “Financial Instability Hypothesis”, refined this understanding. “Rogue economists” like Michael Hudson laid out the real world and historical national and global consequences of the way private bankers operate the world’s national money systems.

After the Japanese collapse of 1989 Richard Koo emerged as the macro visionary with his concept of a “balance sheet recession” built upon Wynne Godley’s now standard “sectoral analysis” method of national balance sheet accounting:

GDP = C + I + G + X

Koo, like Keynes before him, advocates that G increase during the balance sheet recession, in order to add money into the national accounting equation to bail out the private sectors (C and I) and the national banking system.

In “A Copernican Turn” I argued that under current operation of our money systems governments have to borrow all the money they deficit spend, so adding to G via deficit spending is not an arithmetically viable solution over the long term, and we have arrived at “the long term”. The problem is that our money systems are zero sum balance sheet equations whereas our economies need to earn positive sum monetary “profits” on the money they invest and our banking systems need to earn positive sum “interest” on the money they create. We have superimposed a zero sum money system over a positive sum economy and banking system.

Distributional Imbalance

That is the root cause of “financial crises”, though distributional imbalances of money (held as savings by one group of people) and debt (owed to banks by borrowers-spenders, who are a different group than the earners-savers) among a nation’s population and between nations is the proximate cause that illuminates the zero sum nature of the problem and precipitates the resulting financial-cum-economic collapse.

Australian economist Steve Keen, of “Debunking Economics” fame (cheerfully exposing the absurd fallacies of mainstream neoclassical economic modeling that currently ‘informs’ academic economics and economic policy making), is the emerging champion of this new macro monetary understanding, based on his insight that change in the speed as well as direction of “debt growth” is the factor that drives the changes in GDP growth. Mainstream macroeconomics, which doesn’t include the banking system (that which creates all our money on its balance sheet as credits-debts) in its models of the economy, is completely blind to the effects of debt, which is why academics and policy makers can’t understand and can’t figure out viable solutions to our current macro problems and failed to forecast that it was going to occur.

The Economy Exists in a Sieve

A further complication, and in recent decades a major destination of monetary “leakage” out of the real economy’s borrowing-spending-earning-repaying cycle, is the now gargantuan “financial economy”. As an indication of how large this leakage has become, today the US financial industry captures 40% of ALL profits earned by the major corporations found in the S&P 500, even while big bank lending to the real economy is declining precipitously. There is a sieve leaking 40% of all American corporate profit earned today that is not financing things or producing things in the real economy where corporate costs become worker and supplier incomes in the process of producing real goods and services. The 40% essentially leaks into gambling and speculating on price movements in the financial casino economy. This casino is systematically “rigged” in favor of the house - the global banking cartel - as recent LIBOR and other financial crimes revelation is making clear.

None of the money that has ascended into this financial stratosphere is available for Joe Sixpack to earn in the real economy to pay his living and repay his debts. The money has “leaked” (more accurately, it has been “siphoned”) into the financial economy.

Schumpeter: Malinvestment

If ever there was a throbbing beacon illuminating a Schumpeterian “malinvestment” (where the investment produces no new wealth but merely redistributes financial claims on existing wealth) that is woefully overdue for a good dose of “creative destruction”, the financial economy stands clearly in that light.

What is worse, not only is the financial casino economy a zero sum equation where winners win by taking the money from losers, but this sector is now creating its own ‘money’ via rehypothecation. This is a process of creating loans of shadow bank money against the same collateral over and over again; if the borrower fails to repay the loan a whole gang of diverse global creditors claim ‘ownership’ of the poor little solitary collateral asset that this entire pile of junk money is sitting on. In addition, derivatives like interest rate swaps, are wholly manipulated for bankster fun and profit, as the LIBOR scandal exposed. Systemic price fixing IS the interest rate swaps “system”.

Who Burnt My House Down?

And then there is also the no insurable interest travesty that has destroyed the realm of credit default swaps, as discussed recently by Tom Armistead.

CDS are supposed to function as “insurance” that the insurer who sold the swaps (insurers like AIG, and we all saw how THAT story ended) will pay out on in the event that the underlying borrower fails to repay the underlying loan.

But because the derivatives industry has successfully resisted regulation it is unlike ‘real’ insurance in that the insurers hold vastly inadequate capital (i.e. their own money to cover their own bets) to actually pay out on any large scale insurance event. The sales job was that derivatives distributed risk in such clever ways that systemic default events were “impossible”. The reality is that systemic events are not just possible but are the arithmetically INEVITABLE consequence of our zero sum money system.

And you don’t have to “own” an asset in order to take out insurance against it in this marvelous insurance market. That is, you don’t have to be the party who made the underlying loan and to whom repayment is owed, with this debt being your “asset” - remember, from the perspective of the banking system and shadow banking system where money/loans/debt are originated, other people’s interest bearing debts are your “assets”. So if a borrower fails to repay then the insurer is on the hook for making good not just to the party who lent the money but to every other opportunist who took out insurance against that default.

A gang of neighborhood “modern day capitalists” each buys fire insurance on my house, then they burn my house down and EACH OF THEM collects the insurance. Because I had also bought insurance I collect the insurance too, theoretically, but under this scheme no insurer can actually make the multiple payouts, so it’s first come first collect before the insurer goes under. The “market participants” KNOW when they are going to burn my house down so they are waiting on the insurer’s doorstep the next morning to “collect”. By the time I get there at noon to make my claim all the money is gone and the insurer is bankrupt.

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8 comments

  1. Dig Deep says :
    *****

    Excellent follow up article. I'll need to 'dig deeper' into your work - intriguing viewpoints....thanks

  2. roger erickson says :

    Great article, but not sure this isn't missing one point entirely?


    "under current operation of our money systems governments have to borrow all the money they deficit spend, so adding to G via deficit spending is not an arithmetically viable solution over the long term, and we have arrived at “the long term”. The problem is that our money systems are zero sum balance sheet equations whereas our economies need to earn positive sum monetary “profits” on the money they invest and our banking systems need to earn positive sum “interest” on the money they create. We have superimposed a zero sum money system over a positive sum economy and banking system."

    1) voluntarily paying a small fiat interest to Treasury Bond holders is not a debt, it's a policy decision;
    (and never of consequence to a fiat currency issuer)
    (just a way to drain banking reserves, fund the banking sector, and now also to placate [& manage] those exporting to the USA [or other hosts] & running up Fx reserves)

    2) not viable on a gold-std, but perfectly viable in a fiat system
    (only problem is the ignorance of Deficit Terrorists)

    3) agree that the confusion stems from injecting real growth into a double-entry accounting system;
    (that's a policy problem, not a real accounting or banking problem)

    4) seems more direct to say that we're imposing gold-std policy paradigms on a fiat-currency system?
    (easily fixed, within a month, as Warren Mosler keeps saying)
    (just come out & admit we're on a fiat system; post that, all the details are incidental)

    5) agree on the rampant fraud allowed in the finance industry, under the guise of "innovation"
    (blame Greenspan for systematically putting finance policy up for sale)

    6) Under the old “legacy” banking system, banks made loans and funded those loans with deposit liabilities.
    (?? pure gold-std thinking! totally false since 1933)
    (it is correct, however, that unregulated fraud is straining banking operations)

    7) "banks create our money by lending it to us"
    (that's a gross oversimplification; banks create our currency by denominating a transaction between buyer/seller, and get paid an interest for [supposedly] regulating credibility & liquidity; banks are NOT needed for anyone willing to simply swap assets)

    8) True, draining bank reserves from our current system requires [not allows] banks to buy unlimited Treasury Bonds, but any link between that and individual income taxes is ENTIRELY a voluntary policy choice, and carries no accounting requirement whatsoever. Any relation between the two is always and only the product of policy confusion.

    9) The Basel accords are making an original sin, by trying to apply one regulatory approach to a mixture of gold-std (e.g., euro) & fiat-std currency systems (everyone else).

    10) It's true that distribution of liquidity is a necessary but not sufficient requirement for any organized system. Quality of distributed decision-making follows adequate distribution of liquidity allowing innovative decisions. However, in our monetary system, that translates to maintaining adequately distributed incomes. Maintaining adequately distributed incomes is primarily a function of public spending and taxing. The impact of interest rates declines as the size of the economy increases, as quantity of currency circulating (access) trumps the price for using it. To repeat, on a fiat currency system, there is no relation between ability to spend and accounting - except a policy choice on how to gracefully expand a double-entry accounting system.

    11) Our problems are NOT with debt. That is an accounting-based outlook. Ultimately, people with debts quit making transactions, and can eventually die. The result is that all unpaid debts are eventually written off. That is NOT our key problem. Our key problem is that our growing population and growing capabilities are NOT being expressed as economic growth, through adequate distribution of the liquidity that the populace, not just the banks, need.
    We've already established that success follows quality of distributed decision-making, which follows distributed liquidity, which follows distributed income, which follows distributed public spending. Ergo, the only problem left in any fiat currency system is lack of adequately distributed public spending, as a policy choice. (We seem to agree on this point, but state it in quite different ways, with differing implications.)

  3. DrBernard says :

    "today the US financial industry captures 40% of ALL profits earned"

    The use of the term "profits earned" is grossly misleading, within today's frame of the degenerate "Gaming Economics System" you call the "Financial Economics"--for, within this corrupt System, the Principles take no losses. All losses are outsourced to "the losing side" SYSTEMATICALLY--whether to "clients" of the Principals with the highest speed and closest proximity to the "trading source," or to strangers left holding the bag, or to the "public."

    In a legitimate "Economic System" it is guaranteed that both "profit and loss" redound to the Principles, even those at the tip-top of the pecking order. In the "Gaming" or "Financial" Economic System, the top-tier Principles CAUSE others to eat their losses.

    As Michael Hudson has made clear, the "Gains" of the Principles today are "Rents" extracted from the System every which way. They are NOT "Profits" in the classical sense of the word used in Standard Accounting Practice--the standard honored by LEGITIMATE Economic Systems, based on double-entry bookkeeping (with one set of books), time out of mind. They are "Profits" only "Casino-wise."

    The bed-rock Standard Accounting Practice was first skewed, then eviscerated, by the Gaming Principles at the top of the "Gaming/Financial Economics" System: the Top Dogs red in tooth and claw. It is a travesty to call their gains "profits" so long as persons have living memory of Standard Accounting Practice--the SYSTEM OF BALANCE within every LEGITIMATE Economic Systems, the core of which is the CRUX of "profit and loss."

    Has it not been demonstrated that "RENTS" ("GAIN") EXTRACTED from the High Speed Electronic GAMING of the "Zero Sum System" through use of "compound derivates" stacked in tiers (or agglomerated in sets) EXPONENTIALLY, is the main cause of the "Great Y Pythagorean Diversion" between Income from "Capital/Real Equity" and income from "Rents" by any name?

    Why do you honor this "Gaming Economics System" at all, by "analyzing" it with an eye toward "correction" or "improvement" or change?

    When it comes to stark reality in grounded economics, Michael Hudson is the Lead Seer and Soothsayer. It's past time to cut to the chase. Without the Revolution in Economics that Michael Hudson envisages, we are headed to Doomsday.

    Michael Hudson is the one GENIUS PREPARED, by dint of history, experience, personality, and total knowledge in depth, to LEAD the Revolution in Economics for C.21. Michael Hudson is the real Alpha Male now.

  4. DrBernard says :

    Splendid commentary by Roger Ericson, a pro.

    Since I'm a duffer, please allow me to correct my errors in my post above:

    By "Principles" I mean "Principals." Shame on me.

    By "outsourced losses" I mean "externalized losses."

    Roger Ericson bites the meat of the nut: policy v. accounting in "Economics" by fiat.

    The "decision by fiat" of Pyramid Top Principals to "internalize gains" and "externalize losses" is a POLICY decision expressing itself in Casino Accounting: books cooked.

    Thanks for indulging a duffer who cares.

  5. Derryl Hermanutz says :

    Hi Roger,
    I'll reply to some of your points within the text below.


    On 9-Aug-12, at 6:26 AM, Roger Erickson wrote:

    left as a comment

    ---------- Forwarded message ----------
    From: Roger Erickson

    "under current operation of our money systems governments have to borrow all the money they deficit spend, so adding to G via deficit spending is not an arithmetically viable solution over the long term, and we have arrived at “the long term”. The problem is that our money systems are zero sum balance sheet equations whereas our economies need to earn positive sum monetary “profits” on the money they invest and our banking systems need to earn positive sum “interest” on the money they create. We have superimposed a zero sum money system over a positive sum economy and banking system."
    http://econintersect.com/b2evolution/blog2.php/2012/08/08/the-financial-economy#more3721


    {1) voluntarily paying a small fiat interest to bondholders is not a debt, it's a policy decision;
    (and never of consequence to a fiat currency issuer) }


    Tell that to the Florentine 'government' in the era of the Medici bond merchants; or the early American governments who were doing battle with the Rothschild banking interests over the right to issue US$ money; or to Hitler who was determined to free Germany from the stranglehold of "international finance"; or to all the Latin nations who were effectively bankrupted and stolen when their short term US$ funding got hit by Volcker's 20% interest. In each case the 'governments' lost and the money men won. Money is the behind the scenes ruling power of this world. The power to create money provides the bond merchants the power to rule the world. Yes Roger, this is a problem. It is not merely an issue of 'semantics' or "paying a small interest". "Small interest" is the hook. The borrower is the fish. When the time comes to reel him in he will find that his "small interest" has become very large indeed. Paying interest on bond debt is only a policy "decision" if it is in fact possible to decide "not to" borrow from banks and pay interest. Lincoln and Kennedy tried issuing their own money, but those "policy choices" were very rapidly reversed with extreme prejudice.

    I am aware that MMT minimizes this realpolitick aspect of the money situation and theorizes as if governments have a real choice about how they operate their money systems. But the historical fact that ALL governments either choose to 'voluntarily' transfer the money-issuing power to private bankers, and so saddle their citizens with permanent inescapable debt and interest, or the governments get killed and replaced, is pretty strong evidence that governments have no power to issue their own money (China is the only nation I know of that actually exercises its monetary sovereignty by owning and operating its national banking system). They have a theoretical 'right' to issue their own money, but they are in fact PREVENTED from ever "exercising" that right. A right that cannot be exercised is a hope or a wish or a fantasy but it is not a feature of the "real" world and it is certainly not a 'right' in any meaningful sense of the word. Power that is exercised in the real world creates the reality that exists. Impotence imagines while power creates. Governments do not exercise the money power. Private banking interests exercise the money power. Any paradigm that assumes governments exercise the money power is a counterfactual fantasy, not an accurate mental model of the actual workings of the real world. I advocate government money issuance as a critically needed and constitutionally authorized "reform" of the current money system. MMT acts as if governments already issue their own money so no reform is needed. Here I part ways with MMT, because I say without monetary reform MMT is a fantasy world in which debt doesn't matter, not a theory of the real world in which debt is a central feature of the power structure.
    {(just a way to drain banking reserves, fund the banking sector, and now to placate [& manage] those exporting to the USA [or other hosts] & running up Fx reserves)}


    {2) not viable on a gold-std, but perfectly viable in a fiat system
    (only problem is the ignorance of Deficit Terrorists)}


    You're lost in a frozen forest. Eventually you sit down and die. Unbeknownst to you, there is a town with food and warmth just half a mile away over a hill, an easy walk for you. But because you didn't know that your salvation existed in that particular direction you failed to move in that direction. Your "ignorance" killed you. Are you trying to tell me that "ignorance" somehow doesn't count in the real world? That decisions made in ignorance are somehow exempted from the real world consequences of making mistakes? "The ignorance of deficit terrorists" may very well impose austerity policies that throw America into depression and debt default. Yes, default by a monetary sovereign is "voluntary". But voluntary "counts", if the ignorant volunteers are convinced it's the right thing to do, and if they in fact do it.


    {3) agree that the confusion stems from injecting real growth into a double-entry accounting system;
    (that's a policy problem, not a real accounting or banking problem)}


    I don't see how you can correct this "policy" without addressing the accounting system and banking system that implement the current policy by their very operation, which is a zero sum accounting equation. My point is that we are trying to squeeze the real world into an arbitrary system of monetary accounting, and this is the root cause of practically all of our 'economic' problems. Any policy solution will necessarily involve reforms to the operations of the accounting/banking systems that currently create all our money on their zero sum balance sheets.


    {4) seems more direct to say that we're imposing gold-std policy paradigms on a fiat-currency system?
    (easily fixed, within a month, as Warren Mosler keeps saying)
    (just come out & admit we're on a fiat system; post that, all the details are incidental)}


    I've been writing about this continuously for nearly 4 years now, and writing about it sporadically for 30 years. I try every possible angle to get people to see outside their gold standard/barter economy mental prison. As a point of epistemological fact, truth is not compulsive. Just because you hold up the truth in front of somebody's face and shine a strong light on it so it's very clearly visible, then beat them over the head with it, does not mean they are ever going to accept that truth into their mind and "believe it". People are free to believe whatever deluded bullshit serves their interests, or, more accurately, what they believe to be their interests. Most people make their choices in life from motives OTHER THAN the desire to fill their mind with the truth, the whole truth, and nothing but the truth. You show them the truth and they say, So what? What use is that to me? So they ignore you and your truths and they go on believing in whatever falsehoods suit them. People are ignorant, and stupid, and easily manipulated to believe in things that are not really in their interest and that are not really true except in the arbitrary sense that when you make people believe things and act on those beliefs, those actions are creating reality, and it becomes the case that it is "true" that that is the reality. I've tried showing people that zero sum money is a throwback to gold standard days, but I find that merely introduces a red herring that obscures, not clarifies, their ability to see and accept what I'm trying to show them. Yes, it's easily fixed within a month, if you can convince people that it's the right thing to do. Therein lies the problem. Powerful interests benefit from the current system, and they will never give that up without a war. Meanwhile they propagandize the masses with monetary bullshit, which the masses believe, which makes it impossible to get the masses to accept policies that appear to them to produce bad effects like 'hyperinflation'. Bogey men, yes. But the ignorant babes are easily manipulated by bogeymen; whereas they cannot be reached by logical argument because their beliefs were not developed by a logical process. Their beliefs were provided for them and sold to them by creators of beliefs. And the people bought them and they now believe them. That's what you're up against on the epistemological/political front.


    {5) agree on the rampant fraud allowed in the finance industry, under the guise of "innovation"
    (blame Greenspan for systematically putting finance policy up for sale)}


    Greenspan enjoyed being the maestro. In Road to Serfdom Hayek explained how positions of power attract the "wrong" kinds of people. Plato's solution was to force the "right" kinds of people (who quite rationally avoid public service as the personal sacrifice that it is, if you do it for the public good and not for your own ego and greed) to assume their proper positions as rulers. Lord Acton observes that "power corrupts". In mass society there must be positions of power. Greed and egos will be attracted to these positions. Competence and virtue will avoid these positions, and avoid competing for these positions with weasels and scoundrels and every form of evil human being. Hayek failed to notice that positions of power exist in private sector corporatist bodies exactly as they exist in public sector corporatisms, so Hayek and the Austrian school focus on the evils of "big government" but are blind to the identical evils that exist in "big business". You get the occasional virtuous public servant, like B of C governor Mark Carney. But for the most part Plato and Hayek are right: power attracts people who are incapable of wielding it beneficially. So we are "ruled" by greed and ego, not "governed" by competent servants of the public good.


    {6) "Under the old “legacy” banking system, banks made loans and funded those loans with deposit liabilities."
    (?? pure gold-std thinking! totally false since 1933) }


    Actually Mehrling and I are correct about how banks "fund" their loans. A bank makes a loan by creating a deposit in the borrower's bank account. The bank deposit functions as the "money" that "funds" the loan. Those deposits are the bank's "liability", insofar as the deposit money has to be convertible into "cash" which is a form of money that the bank cannot create for itself but has to get from someone else, its central bank. But central banks today provide all the cash their commercial banks ask for so this is not really any kind of constraining "liability" in a real sense, other than the fact that banking regulators demand that banks keep their balance sheets balanced so that their deposits remain equal to their liabilities. Mehrling is stating the simple fact that banks create the money that they lend out, and they create that money in the form of bank deposits which are recorded on the liability side of a bank's balance sheet, while the unpaid loan balance is recorded on the asset side of the balance sheet.
    { (it is correct, however, that unregulated fraud is straining banking operations)}


    {7) "banks create our money by lending it to us"
    (that's a gross oversimplification; banks create our currency by denominating a transaction between buyer/seller, and get paid an interest for [supposedly] regulating credibility & liquidity; banks are NOT needed for anyone willing to simply swap assets)}


    No Roger, I am not "grossly oversimplifying". You are grossly overcomplicating, in addition to misusing terminology. Of course a barter economy that "swaps assets" doesn't need money. But since there are not and never have been any barter economies that point is wholly irrelevant in a discussion of the actual money system that we use in our real economies, which are money economies, not barter economies. Steve Keen, me and others have been working to get people's minds out of the barter economy paradigm that has occluded those minds since at least the days of Adam Smith. Barter economics is the wool that is pulled over people's eyes so they can't see the plain fact that banks create all our money as loans and this causes pretty much all of our 'economic' problems.

    As a point of terminology, banks do not create our "currency". Government printers print the currency and sell it to our central banks who lend it to their commercial banking systems. As I noted above, banks must be able to convert their customers' deposit balances into "cash", which is "currency", but the commercial banks are not the creators of the currency. This is a throwback to the gold days when bank deposit money was theoretically backed by stores of gold held in the bank's vault, but now paper banknotes issued by the central bank function as the "cash money", the "real money", the final most liquid form of money. Banks create our money supply by making loans of bank deposits. We convert a small fraction of our bank deposit money into cash money, but that doesn't change the fact that money is issued to the economy and to the government by the commercial banking system, which issues that money every time it makes a loan to a private sector debtor or buys a government security (bond, bill, note: a government debt). MMT and others have got themselves so confused in the central banking house of mirrors that they have lost sight of the basic fact that private banks create all of our money as loans of credit/debt.


    {8) True, draining bank reserves from our current system requires [not allows] banks to buy unlimited Treasury Bonds, but any link between that and individual income taxes is ENTIRELY a voluntary policy choice, and carries no accounting requirement whatsoever. Any relation between the two is always and only the product of policy confusion.}

    Yes Roger, I am aware that in MMT's alternate epistemological universe governments don't tax to "fund" their spending, and governments don't sell bonds to fund their deficit spending. Now if you can convince a majority of the other 99.99999999999999999% of humanity to join you in that universe, I will agree that bonds and taxes are merely "voluntary" monetary policy mechanisms, and that government and central bank fiscal and monetary policy makers are doing their level best to operate those mechanisms in ways that optimize the democratic public interest of their majority populations. Try telling Americans that it's in their interest to pay half a trillion dollars a year in interest on federal government debt, and additional trillions in interest on other public and private debts. They will vote you off the island and tell you it is in their interest that governments create their own money debt and interest free. And they will be correct that interest is a curse not a blessing to them, and you will be wrong to try to convince them otherwise.

    How many humans understand and believe in MMT? And inhabit the MMT universe? 1000? 3000? Maybe. In the epistemological universe that is inhabited by EVERYBODY ELSE, taxes and bond sales provide the money that governments need to fund their spending. Because everybody acts like this is the case, it is the case, in the real world where actions create realities.

    But their arithmetic is flawed, it can't work. And the arithmetic is simple enough that I hope to be able to illuminate a few minds by taking the arithmetic approach to presenting the nature of the problem. You will never get more than a handful of people to believe that the purpose of taxes and government debts is NOT to fund government spending. The main reason people won't believe this is because it's not true. I will state that the purpose of taxes and bonds IS to fund government spending, because in the real world governments have no other ways of getting money. They "could" issue their own money, but they don't. They get money by taxing and borrowing. Just like private sector actors get money by earning and borrowing. In the real world only banks "issue" money. I went over all this in my "Copernican Turn" article, as well as many previous articles. After you show me some governments issuing their own money instead of getting their money from taxes and bond sales, then I will agree that MMT is describing the real world. Meanwhile MMT is describing an alternate universe where governments do what they "could" do, not what they "do" do. Ray Bradbury and others wrote good science fiction stories of alternate worlds that could be. But the authors of fictional stories about worlds that could be did not try to pass them off as reality (except Orson Welles and his War of the Worlds radio broadcast). I think MMT would be much more credible and thus effective if it acknowledged that before its models become reality we have to reform the monetary system so that governments actually do issue their own money free of debt and interest, making our money system positive sum rather than the zero sum credit-debt balance sheet equation that it is. But rather than admit reality, MMT demands that we simply reform our minds, as if our monetary problems are NOT caused by the real world workings of the actual system, but merely by the way we "conceive" that system. MMT insists that the problems are epistemological (mental) not ontological (real). MMT is wrong about this. So I will not join you in trying to twist my mind to see up as down and left as right. Up is up and right is right. Banks issue money. Governments are money users, not money issuers, in real world planet here on Earth.


    {9) The Basel accords are making an original sin, by trying to apply one regulatory approach to a mixture of gold-std (e.g., euro) & fiat-std currency systems (everyone else).}

    The BIS sitting on its sovereign soil in the midst of the city of Basel, is the seat of the one world government. By ruling money it rules the world. Except the world is really ruled by human failings like greed and ego, so all attempts to impose global 'government' are doomed to failure by opposing self-interest that simply ignores or circumvents rules that don't suit its immediate short term desires.


    {10) It's true that distribution of liquidity is a necessary but not sufficient requirement for any organized system. Quality of distributed decision-making follows adequate distribution of liquidity allowing innovative decisions. However, in our monetary system, that translates to maintaining adequately distributed incomes. Maintaining adequately distributed incomes is primarily a function of public spending and taxing. The impact of interest rates declines as the size of the economy increases, as quantity of currency circulating (access) trumps the price for using it. To repeat, on a fiat currency system, there is no relation between ability to spend and accounting - except a policy choice on how to gracefully expand a double-entry accounting system. }

    Again, Roger, you write as if the solutions will be "easy", when in fact centuries of effort have failed to make these 'simple' changes. In fact the ability to spend is a direct function of accounting, in the real world that continues to exist despite centuries of effort to implement an alternate government-controlled monetary system. The "policy choice" is to either accept that you are owned and operated by the money issuing private bankers; or you choose to go to war against them to recover government's ability to issue its own money and thereby sever the knotted noose that binds in its death grip the accounting of money and the ability to spend money. You are assuming that we live in a world that has a government controlled fiat currency system. We don't. We have a banker controlled fiat currency system, the diametric opposite reality. In your world the guards rule over the prisoners. In the real world the prisoners rule over the guards. Things don't turn out quite so well in the real world that is ruled by power driven by greed and ego, as they do in the alternate universe that is governed by reason motivated by virtue.


    {11) Our problems are NOT with debt. That is an accounting-based outlook. Ultimately, people with debts quit making transactions, and can eventually die. The result is that all unpaid debts are eventually written off.}

    No, unpaid debts are not "written off". Banks have to make these unpaid payments out of their current profits, or loan loss reserves, or ultimately out of their capital. If they can't do it THEN the bank is dissolved and the bank's assets are sold to another bank and the losses are written off. It used to be said, "All loans are repaid, either by the borrower or by the lender". In the era of prebailout banking this was more or less true.
    {That is NOT our key problem. Our key problem is that our growing population and growing capabilities are NOT being expressed as economic growth, through adequate distribution of the liquidity that the populace, not just the banks, need.
    We've already established that success follows quality of distributed decision-making, which follows distributed liquidity, which follows distributed income, which follows distributed public spending. Ergo, the only problem left in any fiat currency system is lack of adequately distributed public spending, as a policy choice. (We seem to agree on this point, but state it in quite different ways, with differing implications.)}

    No Roger, the basic problem really is the debt. The accounting-based outlook is what you see when you open your eyes to the real world we are living in, rather than choosing to see an alternate reality where accounting has no real power. In the real world it is the opposite. Accounting has ALL the power, and your democratic ideal of distributed decision making has no power at all. The world is not being run in the interest of the democratic majority. It is being run in the interest of the powers who rule the world. The fundamental source of their power is their ownership of the money issuing system. Governments can only get money by taxing, which has natural limits; and by borrowing from the money issuers. So the powers control government by controlling government's ability to spend money. Denis Kucinich recognized the need for monetary reform, and they ran his ass out of office. You are not up against simple ignorance, Roger. Illuminating their minds with the truth is not going to "change their minds". More likely, they will change your mind, by separating your head from your body. They rule in the interest of their personal greed and ego and whatever other unreconstructed animal motives drive their behavior. They are not children of enlightened reason. They are children of power. They respond to self-interest, not to "common good". So as a "policy choice" they choose to serve themselves at everybody else's expense. That's how you become powerful in their animal kingdom and that's how you exercise your power once you have it. You make others serve you.

    The people of the world rightfully fear ever rising debt and eventual ruinous high interest rates, so MMT's idea that more deficit spending is needed runs up against the fact people have very good reasons to not accept it. But in our zero sum monetary world either debt-money keeps getting larger, or you get deflationary collapse. Austrians welcome collapse to kill off all the malinvestment and restore us to sound footings with a vastly reduced population and a vastly lower price structure. Social Darwinism is an inescapable implication of the Austrian program. So that's one way we could go. MMT and Keynesians advocate ever rising public debt, which I am convinced is a political non-starter. People believe we have arrived at the end of that road and it's time to stop adding to our total debts. It's time to change course. I agree. More of the same debt-medicine that is causing our ailment is not going to suddenly start curing us. I know MMT claims, as Keynes did before, that a time will come for gov't to take money "out" rather than keep adding it "in", but the history and the arithmetic do not support that faith and I don't believe MMT's infinite debt path is a workable solution.

    So if it's not Austrian collapse or MMT infinite debt, the alternative is for governments to issue their own debt-free money to add positive numbers into our balance sheet equations to make our money systems positive sum, which allows people to repay their debts WITHOUT having to first get that money back from the people who earned and saved it, and without adding constantly increasing additional debt. You can claim with MMT that government bond debt is not "debt", but nobody is going to believe that upside-down perspective and more repayable interest bearing bond debt is not going to be part of any workable solution. I have sometimes advocated that governments get their debt free money by issuing zero interest perpetual bonds that are bought and held by their central banks. Being "perpetual" the bond holder can NEVER demand principal repayment (only the bond issuer can choose to repay a perpetual bond). And being zero interest there is no perpetual inescapable annual interest cost to getting money by issuing bond-debt by way of zero interest perpetual bonds. But regular, repayable, interest bearing bond debt is just "debt" and more zero sum balance sheet debt will not resolve our debt crisis. Only the addition of positive money numbers into our national monetary equations can solve the problems.


  6. DrBernard says :

    Charles Hugh Smith at Of Two Minds: lucid reality posted at his site and at ZH today.

    Clearly, it's time for Michael Hudson and Charles Hugh Smith to "do lunch" -- "a giant step for Humankind."

  7. DrBernard says :

    "I think MMT would be much more credible and thus effective if it acknowledged that before its models become reality we have to reform the monetary system so that governments actually do issue their own money free of debt and interest, making our money system positive sum rather than the zero sum credit-debt balance sheet equation that it is. But rather than admit reality, MMT demands that we simply reform our minds, as if our monetary problems are NOT caused by the real world workings of the actual system, but merely by the way we "conceive" that system. MMT insists that the problems are epistemological (mental) not ontological (real). MMT is wrong about this."

    No, MMT is right about this. The best MMTers are lions. Michael Hudson is king of the jungle. Let him roar. Let him and his pride "bring it on." This radical change must come, on the ground. The Medici Model be damned.

  8. Admin (Member) Email says :

    Comment submitted by e-mail.

    @DrBernard: I like your style and spirit, DrBernard! I am also a fan of the old dog with the large and thoroughly informed brain, Michael Hudson. "Debts that can't be paid, won't be." Acknowledging simple reality is the beginning of wisdom, and the beginning of workable policy prescriptions that can intelligently solve our problems.

    Derryl





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