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Friday Lay Day – Canadian central bank governor bucks the mainstream Groupthink

It’s Friday again, my blog Lay Day, which means I fast track the blog entry in favour of other writing tasks. But one thing that is worth noting today (and I’m sort of catching up on recent events in my reading of them), is a speech that the Governor of the bank of Canada (its central bank) gave to the Empire Club of Canada in Toronto on December 8, 2015. The speech – Prudent Preparation: The Evolution of Unconventional Monetary Policies – was somewhat of a revelation given that it was coming from a central banker. Essentially, he admitted that monetary policy in the current situation was relatively ineffective and that expanding fiscal policy was the appropriate government strategy to address the cyclical downturn in non-government spending. He also disabused his audience of the notion that the current low growth environment was of a ‘structural’ nature. He said that the slow non-government spending growth was cyclical and reflected the reality of precarious private balance sheets and low confidence in the future. He channelled the writing of John Maynard Keynes, explicitly, which in itself, was a significant public recognition, especially by a central bank governor. So Canada has now elected a new government that is promised to increase the fiscal deficit to stimulate job creation and economic growth. It also has a central bank governor that implicitly is urging the government to use its fiscal policy capacities in that way. What a refreshing change!

As an aside, the Empire Club of Canada appears to be one of those anachronistic creations of the elite in Canada and it boasts “a membership comprised of some of Canada’s most influential leaders from the professions, business, labour, education and government”.

To hammer homeit’s past, its homepage advertisers its past speakers with a photo of none other than Winston Churchill, which I found most curious for a Canadian institution. Anyway, that’s not the topic of the blog today.

The Canadian central bank governor began by reminding the audience that:

A prominent Harvard University economics professor once suggested that the U.S. economy was headed for what he called “secular stagnation.” Extended periods of strong economic growth were no longer likely, he said, because of a chronic shortfall in demand.

I’m not referring to Harvard’s Professor Lawrence Summers, who holds this secular stagnation view today. Rather, I’m talking about Professor Alvin Hansen, who coined the phrase “secular stagnation” in 1938, during the Great Depression.

I thought that was interesting because I was working on my next book yesterday and was musing about the ridiculous Martin Feldstein (Harvard) and he is ‘expert’ prediction that Japan was about to experience rapidly increasing interest rates as a consequence of the on-going fiscal deficits. See below.

Anyway, back to the Governor’s speech.

He noted that Alvin Hansen was wrong for a number of reasons, but:

… an important ingredient was the revival of what John Maynard Keynes famously described as “animal spirits.” During the Depression, consumer and business pessimism was pervasive. Once confidence revived, pent-up demand was unleashed and self-sustaining growth returned.

I thought the reference to John Maynard Keynes was very pointed because for the last, maybe, three decades, prior to the GFC, his name mud.

In his 1999 book – Hard Heads, Soft Hearts: Tough-minded Economics For A Just Society – Alan Blinder said that by:

… about 1980, it was hard to find an American macroeconomist under the age of 40 who professed to be a Keynesian. That was an astonishing turnabout in less than a decade, an intellectual revolution for sure.

The academic departments had more or less purged the Keynesians from their ranks as Monetarism emerged dominant and evolved into more extreme free-market variations. I was still a student in 1980 and found very few opportunities to work my way into the Academy once I had graduated. Somehow, a path was made but, as now, there were very few non-orthodox young economists coming through. That is the topic for another blog though.

The Governor suggested that “the global situation today” is, in many ways, similar to the situation that policymakers confronted in the 1930s.

He said that just as recovery from the Great Depression was a lengthy process, “recovering from a shock like the global financial crisis can be a long drawn-out process”.

He said that recovery required that “consumers and businesses repair their balance sheets and rebuild their confidence in the future”.

Please read my blog – Balance sheet recessions and democracy – for more discussion on this point.

In that sense, he concluded that the problem is “a cyclical issue, not a secular one, although the cycle is proving to be longer than usual”.

That is also a significant statement to make given that the mainstream emphasis is always on so-called ‘structural reform’, which is a convenient smokescreen to avoid mainstream economists facing the reality that when non-government spending growth is insufficient, the only solution is for fiscal deficits to increase to support overall spending and growth.

A cyclical issue means that it is a spending problem rather than a unit cost or skills mismatch problem. It also means that the unemployment is of an involuntary nature and the unemployed are largely powerless to improve their situation.

The Governor said that recovery will only come at “such time as Keynes’s animal spirits, which have been crushed over the past seven years, revive”.

Again, a significant statement.

As a matter of context, he noted that the Canadian economy was beset with “excess capacity” and declining growth. It was undergoing a difficult transition – “a complex and lengthy adjustment to lower resource prices” – which requires a rebalancing so that “the non-resource economy” can take over as the growth engine.

In that sense, much of what he says is also relevant, specifically to Australia. But of course, as you will see, his comments really are relevant to all nations at present.

He went on to address the issue – again one of these mainstream narratives – that if “the economy was hit with another major negative shock” that policymakers would have “very little room to manoeuvre”, given that central bank policy rates are near zero (at the “effective lower bound”).

The mainstream economists have been mounting this case for some time now to push their claim that government policy interventions can no longer be of benefit to the economy unless they take the form of increased deregulation of the financial and labour market and massive cuts in government spending.

Of course, they exclude any government spending from the cuts that might be of benefit to themselves or the corporate interests that they take succour from.

The Governor outlined a series of non-interest-rate policy levers that the central bank has at its disposal to manipulate spending in the economy when interest rates are at their effective lower bound.

It was here that things became interesting.

He said that:

Another lesson we’ve learned from the global experience is that while unconventional monetary policies can help stimulate the economy, there may be limits to their impact … so we can’t be cavalier about how much more room to manoeuvre we have. Further, there is evidence that consumers and businesses respond less to interest rate declines when interest rates are already very low. And there is evidence that their responsiveness is also lower when confidence is low and they are trying to reduce debt. I expect that few of us find this to be surprising.

And then he said it:

Fundamentally, economists have long been aware that the effectiveness of monetary policy has its limits once interest rates reach very low levels. As Keynes noted as he watched the Great Depression unfold, fiscal policy tends to be a more powerful tool than monetary policy in such extreme circumstances. It may sound ironic, but the circumstances under which it may be appropriate to consider unconventional monetary policies are also those under which fiscal policy tends to be most effective.

As a central banker, he couldn’t really take this any further, lest he be accused of making overtly political statements. I know that principle hasn’t stopped other central bankers from interfering with the policy design of democratically elected governments, particularly in Europe.

But as a general principle, central bankers make cryptic comments when they are treading on the political terrain.

Given that cautionary bias, it is clear that the Canadian central bank governor was providing support to the newly-elected Canadian government to expand fiscal policy (as a cyclical intervention) and use the government’s currency-issuing capacity to rebuild non-government sector confidence and help the economy transition from the collapse in global commodity prices.

It seems like it will be a good time ahead for Canadians. They have elected a Liberal government which is openly stated as part of their campaign promises that they will increase the fiscal deficit over the next several years to improve Canada’s public infrastructure and to support faster job creation.

They also seem to have a central bank governor who understands that monetary policy, especially now, is relatively ineffective – relative to fiscal policy.

And, that governor is not afraid to publicly state that fiscal policy is an appropriate and effective counter-stabilisation tool for governments to use when non-government spending is weak.

The Canadians, at least, that is a major and refreshing break through amidst all of the misinformation that comes out of the mainstream academic economists and the financial press that act as their mouthpieces.

Feldstein makes a fool of himself

I last specifically wrote about this economist in this blog – Martin Feldstein should be ignored.

On January 17, 2013, he published an Op Ed article on the Project Syndicate home page – The Wrong Growth Strategy for Japan. The fact that this organisation chooses to publish the likes of Feldstein tells you a lot about it, but that is another story.

In the 2013 Op Ed in question, Feldstein wrote that:

Japan’s new government, led by Prime Minister Shinzo Abe, could be about to shoot itself in the foot. Seeking to boost economic growth, the authorities may soon destroy their one great advantage: the low rate of interest on government debt and private borrowing. If that happens, Japanese conditions will most likely be worse at the end of Abe’s term than they are today.

At the time the “interest rate on Japan’s ten-year government bonds … [was] … less than 1% – the lowest in the world, despite a very high level of government debt and annual budget deficits”. Which should have told him something but it didn’t.

He claimed that:

Japan’s government is able to pay such a low rate of interest because domestic prices have been falling for more than a decade, while the yen has been strengthening against other major currencies. Domestic deflation means that the real interest rate on Japanese bonds is higher than the nominal rate. The yen’s rising value raises the yield on Japanese bonds relative to the yield on bonds denominated in other currencies.

But because the Abe governemnt had “demanded that the Bank of Japan pursue a quantitative-easing strategy”, Feldstein predicted that inflation would accelerate because the yen would depreciate and drive up import prices.

His second prediction was that the Japanese government would only be able to continue selling bonds “if their nominal yield is significantly higher than it has been in the past”.

In turn, this would “increase the budget deficit and the rate of growth of government debt”, which would tempt the government “to rely on rapid inflation to try to reduce the real value of its debt”.


Fear of that strategy could cause investors to demand even higher real interest rates.

The combination of exploding debt and rising interest rates is a recipe for economic disaster.

So is pretty clear that Feldstein expected bond yields to rise significantly along with inflation and declining exchange rate.

The facts are as follows:

1. The fiscal deficit in Japan continues to rise.

2. The yield on 10-year Japanese government bonds has fallen well below 1 per cent since Feldstein wrote his article. They are now around 0.3 per cent, and have been falling consistently since 2006.

3. Inflation in Japan remains low and stable.

4. The yen has depreciated but has had zero effect on bond yields.

Music – Perfidia

This is what I have been listening to this morning while I have been working. Tomorrow night my band has been hired for a private xmas function in Melbourne and the organisers asked us if we would do requests.

Accepting requests for a working band is always a dangerous venture, if the songs are not on your normal sets. In this case, to limit the prospect of being caught out, we have an advance list of about 15 numbers that we have never played which we will whip up tomorrow evening. They are all well-known songs (standards in other words) and I was told when I was younger that if you wanted to be a competent musician then you had to know all the standards and be able to wheel them out at any time. Like tomorrow night.

Here is one of the requests – the famous song – Perfidia – originally published in 1939 and made a hit for the first time in 1940 by the Cuban singer and bandleader Xavier Cugat, who was a great artist in his own right.

The song is about human weakness and infidelity. Cugat was married five times and his first band was called ‘The Gigolos’!

To you, my heart cries out Perfidia
For I found you, the love my life
In somebody else’s arms

With a sad lament my dreams
Have faded like a broken melody
While the Gods of love look down and laugh
At what romantic fools, we mortals be

[and so it goes]

Given that we are a rocksteady/reggae/dub band, we will not be doing the original Latin style version of the song. Rather, we will play this version, which is from – Phyllis Dillon – sometimes referred to as the Queen of Reggae, but, strictly speaking, she was dominant as a rocksteady artist.

She was a major recording artist for Duke Reid on his Treasure Isle label. His first fame came from his sound system in the 1950s (Duke Reid – The Trojan King of Sounds), which was one of the most popular mobile music systems (outdoor discothèques) in Kingston, Jamaica.

The name Trojan King of Sounds came from his British-built Trojan truck, which carted his sound system around the streets.

As an aside, Duke Reid’s sound system, led to the development of Trojan Records in Britain in 1968, which became a major distributor of ska, rocksteady, reggae and dub, all of the most wonderful music in the world.

As another aside, the releases from Trojan Records were popular across all of the so-called use sub-cultures in Britain (mods, skinheads and suede heads), which is interesting in itself and I have been researching an issue for some time and may write a book about it one day when I get sick of economics. I have a lot of material dating back to the early 50s on the topic.

All that is relevant because Phyllis Dillon recorded this version of Perfidia in 1967 and it was later released on a Trojan Records compilation.

As an aside, Phyllis Dillon’s connection to economics is that she took time out from her recording career to build a career as a banker, but we won’t hold that against her.

Here is a great interview with Phyllis Dillon from April 23, 1998.

Anyway, you can just rock back and forward, gently, all day listening to this stuff – rocksteady, beautiful.

Anyway, I have about 15 songs that I haven’t played for years to remember again for tomorrow night! The fun of it all.

Saturday Quiz

The Saturday Quiz will be back again tomorrow. It will be of an appropriate order of difficulty (-:

That is enough for today!

(c) Copyright 2015 William Mitchell. All Rights Reserved.

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    This Post Has 29 Comments
    1. “…….. support to the newly-elected Canadian government to expand fiscal policy (as a cyclical intervention) and use the government’s currency-issuing capacity to rebuild non-government sector confidence …….”

      I hope you’re right. But cofidence will only be rebuilt if the audience has confidence that confidence will be rebuilt (by expanding fiscal policy as a cyclical policy). If they don’t it surely won’t. I guess animal spirits are stimulated much more by new opportunities for work rather than talk of running large fiscal deficits. Can Canada quickly crank up worthwhile government work schemes, avoiding the frustrations of ‘bridges to nowhere’ and pink batts? Is the underlying problem better viewed as a lack of demand for workers rather than a lack of demand for stuff?

    2. Unfortunately the new government is still committed to the idea that they must return to “balance” after a few years of “stimulus” so that by the end of their mandate they will magically be able to violate the laws of arithmetic.

      Even more unfortunately the nominally further left N. D. P. which started the election with a lead in the polls promised balanced budgets all the way – and Trudeau who promised “modest” deficits left them in the dust of third place largely because, I think, of their irrational commitment to “balanced books”.

      I even heard my local N.D.P. candidate (the incumbent M.P. who is a good decent human being) in a radio commercial railing against leaving the “debt caused by budget deficits” as a “burden upon our children and grandchildren”. It was very painful to listen to, but he did get my vote and a hundred buck donation because, as I said, he is a good person and a good M.P. except for the delusional attitude to economics, and the other local possibilities were worse anyway and all shared the same economic delusions.

      In Canada the Overton Window for economics is almost entirely limited to minor variations of neoliberalism.

    3. A cautionary note about the fiscal policy of the new Liberal government. While they have been courageous enough to run deficits, they have also pledged to reduce the debt-to-GDP ratio every year, and to balance the budget in the fourth year of their mandate (carved in stone!). Here is a letter I sent to one of our newspapers:

      Re: Canadians come around to deficits – to a point, Adam Radwanski, Dec. 14, 2015

      Since our currency is no longer backed by gold, most money today is created by computer entry either through the central or commercial banks. For the government, the most practical limit to spending is the amount of resources unused by the private sector beyond which lies inflation.

      One of our most important unused resources is labour – we have 1.3 million unemployed Canadians. The federal government should creatively target spending so that anyone who wants a job can get one. Then it must close the purse to prevent prices from rising, or must increase taxes to reduce demand.

      For a sovereign country like Canada with federal debts denominated in its own currency, the budget balance and the debt-to-GDP ratio are of little concern because the central bank can never run out of Canadian money. Never!


      1. L. Randall Wray, Ph.D. is Professor of Economics at the University of Missouri-Kansas City

      “The danger of spending too much money is inflation; there might also be an impact on exchange rates. The solution to the first problem is to avoid spending more once full employment is reached; and to carefully target spending even before full employment to avoid bottlenecks. The solution to the second is to float the currency.”

      2. William Mitchell is a Professor in Economics and Director of the Centre of Full Employment and Equity (CofFEE), at the University of Newcastle
      > “The public debt level relative to GDP is not a matter of economic concern ever if the government in question issues its own currency and only issues debt in that currency.
      > Under those circumstances the government can always service its nominal liabilities and the public debt ratio is an irrelevant focus of attention.

    4. Maybe ‘secular stagnation’ would have been the outcome in the thirties if
      it was not for WW2 .Was it war which allowed the political will to flourish
      to enable such a large and international fiscal stimulus?
      I am currently reading Perfidia the James Elroy book derived from the same song.

    5. Bill: “Hard Heads, Soft Hearts: Tough-minded Economics For A Just Society” I think you forgot to credit the book to Alan S BLinder; on Amazon its publication date is given as 1988 (if that’s right). There’s a copy for 8pence in the UK, so I might read it as it’s an early critique of the Keynes/neo-lib divide.

    6. There was a very interesting discussion on the BBC World Service’s Business Daily programme a few night’s ago. An Indian woman economist, an Australian business journalist and the English presenter were discussing Janet Yellen’s decision to raise interest rates. Essentially, they were marvelling at how none of the things that they had expected from mainstream economic approaches had happened. In particular, the lack of relationship between employment and inflation… and in fact, the lack of inflation full stop. It indicated just how the cracks in mainstream thinking are beginning to widen.

    7. More fiscal spending is needed of course but let’s not forget the danger of the banks blowing more bubbles when the economy shows signs of recovery (banks are basically cowards when it comes to lending, come to think of it). Then actual limits on the AMOUNT, not the price of credit should be considered since speculators are undeterred by high interest rates so long as the spread between what they borrow at and rising prices is favorable.

      The danger then is that the resulting price inflation will be blamed on the new fiscal spending rather than on the banking cartel, the true culprit*.

      *If the banks create over 90% of the money supply then why aren’t they held responsible for over 90% of price inflation?

    8. Now we have a BOC governor who understands that MMT is the rule, but a finance minister who is still obsessing with debt to GDP ratio and achieving a balanced budget before the current mandate ends.
      Certainly it can be argued that misleading the public about the nature of money creation is an innocent fraud, provided the politicians honestly don’t know the reality, but the message of MMT has been put out there directly to our politicians now.

      At what point does a “Deadly innocent fraud” just become a fraud plain and simple?

      Yesterday on the CBC program “Power and Politics”, conservative commentator and former reform party leadership candidate Stockwell Day made a remark to the effect that Canadian provincial governments have indebted themselves significantly in foreign funds obligations, mostly US dollar denominated.

      This was the first time that I have heard that type of statement. In fact when my concerns about just this were expressed to a past member of parliament about two and a half years ago, the response was that he “believed” we were in a good position with respect to foreign denominated debt obligations.

      So it would seem that neo liberalism induced blindness to reality at the federal level HAS generated conditions favorable to foreign bondholders were provinces have chosen to borrow from foreign private sources in a foreign currency because our federal governments austerity generating malpractice prevents provinces meeting their needs using Canadian dollars. Or is it malfeasance?

      It’s great that we have central bank governors who seem to understand MMT now, but this has just brought us to the next problem.

    9. Hey Ben,

      Where do I say create money? I said “money supply.” Last I read bank deposits (“bank loans create deposits”) are part of the money supply (eg. M1). Disagree, do you?

      Moreover, central banks DO create money (fiat, aka legal tender) and not just for the general welfare as should be done but for private interests (the banks and so-called creditworthy).

    10. J Christensen- here in the UK we have an illiterate corporate stooge Government that keep banging on about ‘living beyond our means’ and is happy to see Government as a household but this forces real household to be heavily in debt as if the real households WEREN’T households! The neo-libs want their cake and eat it (they’ve certainly got nearly all the pie and with financial engineering you can eat the pie and have it, it appears).

    11. Roger Ericson I thought MMT’s monetary policy was a belief in zero
      percent being the natural rate ,not sure if that is a coordinated ,fiscal,monetary and
      tax policy.

    12. “I thought MMT’s monetary policy was a belief in zero
      percent being the natural rate ” Kevin Harding

      Which raises the question in my mind of how there can even be a natural interest rate with government subsidized* banks (or a free market for that matter or ultimately democracy and a peaceful society)?

      There can’t be such except in the minds of those who find government privileges for the banks to be “natural” ie. those who have been cognitively captured by the banks.

      *eq. government deposit insurance instead of a risk-free Postal Savings Service for the storage of and transactions with fiat, ie. a central banks for ALL fiat users except it would make no loans or otherwise create fiat, leaving that to the proper monetary sovereign (eg. US Treasury in the case of the US).

    13. Benedict@Large – ‘Banks do not create money… Only the federal government creates money.’

      The Bank of England appears to disagree with you. The following extract from their Quarterly Bulletin (2014, Q1).

      ‘Whenever a bank makes a loan, it simultaneously creates a matching deposit in the borrower’s bank account, thereby creating new money. The reality of how money is created today differs from the
      description found in some economics textbooks:
      • Rather than banks receiving deposits when households save and then lending them out, bank lending creates deposits.’

    14. Banks create their own IOUs called deposits. These come in two types – demand deposits and time deposits.
      Anyone can create their own IOUs. For example, this comment is now an IOU for £1. Print it out and you shall recieve £1 if you give it to me.

      However in most countries Bank IOUs are as accepted as Govt IOUs due to deposit insurance, although some places only take cash.

    15. @kweladave, commercial banks create credit when they lend, not money. There is a difference, and that is what MMT is about.
      The money to repay the loans only ever comes from government whether directly or indirectly.
      Anybody other than government creating the money of the land is called a counterfeiter and goes straight to jail for it!

    16. @J Christensen

      I believe you have the ‘wrong end of the stick’. Read the B of E quarterly bulletin as above. As for counterfeiting, of course the commercial banks do NOT print 5 pound notes etc – no need, it’s done electronically. You borrow, say £100,000, your account goes up by £100,000. You buy a house with that money, the seller’s bank account increases by £100,000. No cash is needed. No need for your bank to have cash or deposits backing that loan. The created ‘money’ just keeps being transferred electronically between bank accounts within the banking system.

      In the UK I think something like 90% of the money supply is created by the banks. Obviously one of the reasons why banking can be such a profitable activity.

    17. @Kweladave, Of course when we talk about money we are not only talking about cash. If you try to create the cash and you are not government or authorized by government, you are a counterfeiter. If you are not the government and you say you can extinguish a mortgage debt without supplying deposits made possible by government spending it’s issue then you would either be lying or engaged in some kind of bank fraud.

      Before you can burn the mortgage contract that *100,000 plus all of the interest has to come from some were, and that somewhere is your earned share of government spending. The credit tokens you “borrowed” from the bank and more must all be re-payed by deposits which are ultimately sourced by government “spending” it’s issue into existence by crediting private bank accounts.

      Government spends by instructing the central bank to credit commercial bank accounts. This part of the process is something most of the public are never exposed to. It’s that invisibility of the process, combined with cleverly crafted neo liberal mythology which exploits it, that confuses so many people.

      When analyzing any statement, start by reminding yourself of the fact that only government spending can extinguish any private debt. Since money is always debt, only government debt can extinguish private debt. In terms frequently used by MMT’rs Government debt equals private sector assets.

      Private credit does not equal money except in the imagination.

    18. @J Christensen ‘Private credit does not equal money except in the imagination.’

      When I borrowed that £100,000 from the bank, the total amount of money held in UK bank private accounts increased by £100,000.
      It was not necessarily the mere transfer of a saver’s deposits. The loaned money stays within the ‘system’, transferred electronically between accounts. A bank does not need deposits from savers in order to lend. Therefore, the bank has created money

    19. “The loaned money stays within the ‘system’,”

      Exactly (except for petty cash withdrawals), which is why we need a fiat storage and transaction service outside the system* and to CANCEL government deposit insurance. Of course this would cause a massive run on the banks so we also need a Steve Keen-like** fiat distribution first to provide the necessary reserves.

      *The service (eg. a Postal Savings Service) would pay no interest and make no loans, leaving lending to the discretion of account holders.

      ** His “A Modern Jubilee”

    20. “The loaned money stays within the system”. No ” money” was ever transacted in the initial step involved in lending,just as no money is ever “created” by commercial banks; only the creation of new accounting positions within a “pyramid of liabilities”, which is topped by the central bank, which is directly answerable to government.

      Commercial banks are extended permission by government to function as it’s agents, performing the types of transaction described using the sovereign currency unit; however, they are never the controlling “issuers” of a sovereign currency by any description. Interest rates are controlled by the central bank (monetary policy) and fiscal policy ( taxation and money issuance or “spending into existence”) is always the responsibility of, and remains within the control of government. That’s were the term “sovereign currency” comes from in the first place. The amount available, distribution, and value of a currency is set by whomever has the power to issue and tax it. Commercial banks do not possess that power, although, they do appear to be able to convince many people that they do, intentionally or not.

      So given that commercial banks are agents of government, licensed to manage day to day transactions (a for profit business enterprise) involving the sovereign currency, it’s not surprising that it appears as though they “create” 90% of the money. This does not make them “issuers” of a sovereign currency (to use the MMT phrase) or cognizant duly elected managers of national economies; a responsibility that falls upon government but does not seem to be taken seriously enough.

    21. “So given that commercial banks are agents of government, licensed to manage day to day transactions (a for profit business enterprise) involving the sovereign currency, it’s not surprising that it appears as though they “create” 90% of the money. ” J Christensen

      Bank credit spends just like fiat (why use the loose term “Money” when precise terms like “fiat” and “reserves” exist?) so what’s the difference? That bank credit must be repaid by the private sector? And so, on average over time (goes the theory), the banks don’t create net purchasing power? But that drives the private sector into increasing debt instead since bank loans do not provide the necessary interest except as more debt. And creates the dangerous boom-bust cycle. And more troubles besides, no doubt (eg the Great Depression was a major cause of WWII).

      Is there no alternative to government-subsidized private credit creation for the creation of endogenous “money”? Fiat is necessarily a liability of the issuing government (it must be accepted back for the payment of taxes and fees) but there is no requirement that private money must be debt (much less interest-bearing debt). Shares in equity (common stock) are by definition* debt-free. Nor do they require government privileges**. Nor must the supply of them ever decrease so no boom-bust cycle is inherent in them. Nor must interest be transferred to a creditor class.

      The question then is why we choose to provide government subsidies for private credit/debt creation when a private money form that shares wealth and power exists?

      *Equity = Assets – Liabilities.
      ** Eg. government deposit insurance instead of a risk-free fiat storage and transaction service for ALL private fiat uses and not just the banks.

    22. F.Beard, The point I take away from MMT is that all money (that which can settle ALL debts private and public) is the instrument of sovereign government. It is governments baby ,not the private banks, which are more like paid baby sitters (managers).

      If the government issued no money and permitted barter instead, the banks would be out of business, but the public would have lost a valuable tool for trade facilitation, and the services provided by a sovereign and elected state in promotion of the common good would not be possible.

      Private banks cannot lend money unless they are assured the government will issue enough to them collectively to allow all the borrowers to pay the loans back, without creating chaos in the system.

      Were private banks able to issue money by fiat and collect taxes, they would become the government.

      On the point of debt free money, I suggest reading through L. Randall Wrays most recent blog and his replies to various comments over at new economic perspectives .org. Money will always be debt no matter whether public or private banks “create” it. It serves little purpose otherwise.

      The real issue as I see it arises when the sovereign fiat currency is “borrowed” from private banks at interest so that states, provinces, territories and municipalities, who must tax to extinguish liabilities incurred by necessarily spending, pay interest to private parties to do so.

      A second point of issue is that members of the public pay interest on loans of their sovereign currency which they require to purchase a home, go to school or buy a car etc.

      Perhaps the interest rate should be zero and banks just get paid by the number of error free transactions they conduct.

    23. “The point I take away from MMT is that all money (that which can settle ALL debts private and public) is the instrument of sovereign government.” J Christensen

      That narrow definition of money is the very root of the problem since it ignores some fundamental realities such as:

      1) We have and should have both government and private sectors. Government is force therefore it is imperative that it operate justly, for the general welfare ONLY and not for special interests such as credit extenders and the rich, the most so-called credit worthy. Government’s proper money, therefore, is inexpensive fiat, issued for the general welfare only, not to exclude welfare for the needy. Otoh, the private sector is or should be voluntary cooperation only (not to exclude contract enforcement by government). Therefore, if the private sector desires to create money, let it do so without government privileges such as government deposit insurance.

      2) Fiat is necessarily a liability (the issuing government must accept it back for taxes and fees or be guilty of fraud) but there is no need that private money be a liability. Indeed, private money can include both liabilities (eg. bank credit) and shares in Equity (common stock) if backing by assets is a defining characteristic of money.

      Therefore, a proper definition of money should include both credit (including fiat, a tax credit) and shares in Equity (common stock).

      “It is governments baby ,not the private banks, …”

      Then what need for a central bank with the power to create fiat for special interests such as the banks and exporters (via currency swaps)?

      “…which are more like paid baby sitters (managers).”

      Sovereign treasuries (eg. US Treasury) should be fully capable of the necessary accounting in fiat. As for fiat creation, that should be for the general welfare only, not for special interests. Let the private sector issue its own liabilities or shares in equity if it desires.

      “If the government issued no money and permitted barter instead, the banks would be out of business, but the public would have lost a valuable tool for trade facilitation, and the services provided by a sovereign and elected state in promotion of the common good would not be possible.”

      Who’s arguing for the elimination of fiat? Not I, for sure. Government is proper and so is inexpensive fiat, its proper money form.

      “Private banks cannot lend money unless they are assured the government will issue enough to them collectively to allow all the borrowers to pay the loans back, without creating chaos in the system.”

      That’s the banks’ problem; borrowing short to lend long is a gamble. Should we, as a society, subsidize gambling?

      “Were private banks able to issue money by fiat and collect taxes, they would become the government.”

      Agreed and I’m not arguing for that at all.

      “On the point of debt free money, I suggest reading through L. Randall Wrays most recent blog and his replies to various comments over at new economic perspectives .org. Money will always be debt no matter whether public or private banks “create” it. It serves little purpose otherwise.”

      Assets = Liabilities + Equity. Thus both Liabilities and Equity are backed by assets. Thus transferable shares in Equity (common stock) is just as valid as transferable liabilities (eg. fiat and bank credit) as a money form. Insisting that all money must be debt ignores or distorts fundamental accounting (Equity = Assets – Liabilities). Indeed, some are now claiming that Equity is a (residual) Liability of the company! In the case of a single business owner, it is readily seen that that is sheer nonsense, ie, does a business owner owe himself the equity in his business or does he already legally own and possess that equity by default? The latter, of course. Then why is the case of multiple owners, ie. share owners any different? It isn’t. Share owners are not owed the equity in their company; they already legally own that equity and possess it by default.

      Is this distinction significant or much ado over nothing? I believe the former because 1) It is fundamental accounting which should not be trivialized and 2) the difference between Liabilities and Equity is huge since the former often requires the payment of interest with all sorts of attendant problems, well documented throughout history, while the latter does not. Therefore, why not emphasize that Equity requires no interest (nor dividends for that matter)?

      “The real issue as I see it arises when the sovereign fiat currency is “borrowed” from private banks at interest so that states, provinces, territories and municipalities, who must tax to extinguish liabilities incurred by necessarily spending, pay interest to private parties to do so.”

      Yes, that’s a problem. Instead we should have grants and/or zero interest loans from the monetary sovereign for public purposes; if needy a grant, if non-needy a zero interest loan if the project is otherwise worthy of the publics’ credit. If not worthy, then the loan should not be made PERIOD, regardless of what interest rate it might command, since lending by the monetary sovereign = fiat creation, however temporary. But fiat creation is a form of taxation and should be for the general welfare only, not to share profits with dubious private interests. Eg. Would loans by the monetary sovereign to tobacco businesses be justified even if they commanded a high interest rate?

      “A second point of issue is that members of the public pay interest on loans of their sovereign currency which they require to purchase a home, go to school or buy a car etc.”

      Given grossly unjust (because of the legacy money system, including paying interest on the national debt and government subsidies for private credit creation) wealth and income inequality, grants for education, transportation, first time home purchases and other basic needs are easily justified since theft requires restitution. Beyond the need for restitution for injustice (and to help the needy, if necessary) via grants, zero interest loans to individuals that will serve the public interest (eg. opening a medical or dental practice) are justifiable too, imo.

      “Perhaps the interest rate should be zero and banks just get paid by the number of error free transactions they conduct.”

      Banks should be 100% private with 100% voluntary depositors otherwise we are subsidizing gamblers and the rich at the expense of social justice and the general welfare. Besides, shares in Equity (common stock) is an endogenous money form that shares wealth and power rather than legally steal and concentrate them.

      Thanks for your thoughtful reply.

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