[HN Gopher] Money creation in the modern economy (2014) [pdf]
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Money creation in the modern economy (2014) [pdf]
Author : porterde
Score : 62 points
Date : 2021-09-09 19:43 UTC (3 hours ago)
(HTM) web link (www.bankofengland.co.uk)
(TXT) w3m dump (www.bankofengland.co.uk)
| nabla9 wrote:
| This is outdated. Maybe Bank of England still operates like this?
|
| Major central banks like US Fed, European ECB or Bank of Japan
| don't generate money using fractional reserve banking anymore.
|
| They use open market operations or quantitative easing instead.
| In other words, they buy debt, like treasuries with money.
| stephen_g wrote:
| One implication of what the article is talking about, in fact,
| is that fractional reserve banking isn't really a thing, and
| has only ever been an inaccurate model for how banks really
| work.
|
| A large proportion of money in modern economies is generated
| (along with private debt) in the private banking system. It is
| true that central banks can also create money (and in fact can
| do it without creating debt, unlike private banks), and can use
| this money for quantitive easing, but it's not an either or -
| both are happening.
| [deleted]
| kccqzy wrote:
| The article doesn't talk about fractional reserve. It talks
| about commercial banks creating money by extending loans. It
| also talks about QE as another way of creating money by the
| central bank, when commercials banks aren't creating enough
| money.
| nabla9 wrote:
| That's not what quantitative easing is.
|
| Central banks are passing private banks in their money
| creation.
| divbzero wrote:
| I don't think the article is outdated: US, Europe, and Japan
| all still use fractional reserve banking to create money. The
| central bank controls the base money supply using tools like
| open market operations or quantitative easing, but the broad
| money supply is some multiple of the base money supply. That
| multiple is determined by what fraction of deposits is lent out
| by commercial banks in the banking system.
| mandelbrotwurst wrote:
| The Fed actually completely eliminated the reserve
| requirement in March of last year (1). Unsurprisingly, this
| hasn't gotten a lot of attention from the corporate media.
|
| 1 -
| https://www.federalreserve.gov/monetarypolicy/reservereq.htm
| stephen_g wrote:
| Lots of countries have no reserve requirement. It actually
| doesn't change much, just the asset mix banks hold.
|
| How much a bank can lend is basically entirely determined
| by the amount of paid-up capital, not reserves anyway. The
| maximum ratios are fairly strictly regulated (e.g. Basel
| rules).
| mandelbrotwurst wrote:
| So, I'd been interpreting this change as meaning that
| they're no longer required to carry some minimum amount
| of cash.
|
| I would be more confident in banks if they were required
| to carry some minimum fraction of their balances in cash
| in order to guarantee availability of funds.
|
| That said, I'm re-reading the page that I linked a bit
| more closely and realizing that it doesn't just say
| "reserve requirements must be satisfied by holding vault
| cash" , it says "reserve requirements must be satisfied
| by holding vault cash and, if vault cash is insufficient,
| by maintaining a balance in an account at a Federal
| Reserve Bank".
|
| It's not clear to me whether that "balance" at a Fed bank
| must be in cash, but even if it is, I'm realizing that
| the requirement I was hoping existed may not have existed
| even prior to this change.
|
| TL;DR - Requirement for strong, local, cash reserves
| would be better than weaker requirements is better than
| no requirements. I'm not sure how close to the good end
| of that spectrum we've ever been, but where we are now
| certainly doesn't seem too good.
|
| Note: Please do explain if there is some nuance that I'm
| missing here
| NovemberWhiskey wrote:
| I'd be interested to hear why you think this is newsworthy.
| It's not like reserve requirements were an effective
| monetary policy implement for the past several years -
| banks have been holding hugely in excess of the required
| reserves for a while now.
| nabla9 wrote:
| Fed's reserve requirement is currently zero percent. Multiple
| of zero is zero.
| dogma1138 wrote:
| Banks don't lend out deposits to they create money that is
| then eliminated when the debt is paid back.
|
| To create money banks need a certain amount of capital this
| is governed by capital requirements most of which come from
| the capital invested into the bank through share purchases.
|
| Many countries have no reserve requirements at all, BOE
| specifically doesn't even issue them any longer.
| ChrisLomont wrote:
| >Banks don't lend out deposits
|
| Banks do lend out deposits, which is why when they fall
| below capital reserves as a result, they use the overnight
| lending facility of the Fed [1] (or similar processes in
| most countries) to maintain mandatory capital reserves. It
| leads to data like this [2] which shows the actual amount
| held by banks versus deposits.
|
| [1] https://www.newyorkfed.org/markets/reference-rates/obfr
|
| [2] https://fred.stlouisfed.org/series/M14060USM156NNBR
| rahimnathwani wrote:
| Some of the content is in this short video:
| https://www.youtube.com/watch?v=CvRAqR2pAgw
|
| Money is created by both the central bank and retail banks.
|
| When the Bank of England buys an asset, it pays in newly-created
| pounds. These pounds are an obligation of the central bank, i.e.
| a debt owed by the bank. So these pounds are 'central bank
| money'.
|
| When a commercial or retail bank gives you a loan, you have two
| accounts at the bank that move in opposite directions:
|
| - current account is credited by $X (bank owes you money)
|
| - loan account is debited by $X (you owe the bank)
|
| So the net effect is zero (the sum of all your balances with the
| bank is still the same as before the loan was made). But now
| there's more money in your current account, so there's more money
| available for you to spend. Money has been created.
|
| Even though this new money isn't central bank money:
|
| - it's denominated in the same units as central bank money
| (pounds)
|
| - it's almost as safe from default (it's protected by a deposit
| guarantee scheme)
|
| - you can use it to pay for things (bank transfers are widely
| accepted as a means of payment)
|
| In practice, there are capital adequacy requirements that limit
| how much banks can lend. They are required to keep a buffer
| between assets and liabilities (equity capital). As the bank's
| balance sheet gets bigger, more equity capital is required.
| rich_sasha wrote:
| Since it's about Bank of England and money creation, this can't
| be missed:
| https://en.wikipedia.org/wiki/Bank_of_England_%C2%A3100,000,...
|
| Some banks in the UK can issue their own banknotes, but these
| must be backed up in cash with the BoE. And it's awkward
| dealing with millions in used fivers. Hence the 100 million
| notes and friends.
|
| You'd think other solutions exist in the 21st century but
| :shrug:
| andrepd wrote:
| So this begs the question: how come private banks can do this
| (create money + a matching liability, that is, with no
| interest), but private individuals can't? Why can't I, if I
| want to buy a car, not simply give myself 20,000EUR cash and
| register a 20,000EUR liability, which I will pay back in due
| course?
|
| The bank creates zero-cost virtual cash and then earns interest
| by loaning it as if it was real! This is already questionable
| ethically, but the fact that they can do it but I can't, I have
| to pay the tithe to them... That's just wrong.
|
| Correct me if I'm missing something :)
| dcolkitt wrote:
| Both you and the bank can create liabilities and use it to
| buy assets. The difference is the bank's liabilities (e.g.
| deposits in a checking account) are generally viewed as
| interchangeable with money. Whereas Steve's personal IOUs are
| not.
|
| This all comes down to how safe and liquid people view the
| liabilities. Steve's IOUs are at substantially higher risk of
| default than the banks checking account. There's also not an
| easy or liquid market or facility for easily converting those
| IOUs to other money assets. Whereas with a checking account,
| I can just go to the ATM or send a wire transfer to another
| bank. With instruments like money market funds, I can easily
| sell the assets at the push of a button.
|
| To a certain extent this is because the central bank
| guarantees the safety of the bank. Any gaps in a Wells Fargo
| checking account would just be made up by the Fed making the
| account holders whole with newly printed dollars.
|
| But even absent that guarantee, the senior liabilities and
| term deposits of banks are considered pretty damn money like.
| That's largely because banks as institutions bend over
| backwards to be as conservative and trustworthy as possible
| when it comes to their liabilities. A bank would never do the
| equivalent of spending a years income on a new car.
|
| For example Berkshire Hathaway isn't a bank and it's not
| backed by the central bank. But when they issue 30 day
| commercial paper, then it's treated as essentially equivalent
| to money. In fact there's probably some in your money market
| fund right now.
| whimsicalism wrote:
| Yes, there are plenty of powers that we limit to a subset of
| chartered organizations. If you want to have a share in this
| power, you can buy ownership in a bank - a share of JP Morgan
| is about $160.
|
| I disagree that it is intrinsically wrong that some people
| can do something that you cannot do.
| andrepd wrote:
| Well that's a very unsatisfactory answer. As to the 1st
| paragraph: what do you mean? That's not at all what I'm
| saying, buying shares in JPMorgan doesn't give me money
| creation privileges. As to the 2nd: if you restrict rights
| and privileges to one group of people you better have a
| good reason why! Just saying "it is so" is not a good
| reason :)
| majormajor wrote:
| You don't have to be a chartered bank to have this power.
|
| If your neighbor lent you a hundred bucks and you loan
| ninety bucks of it to a different neighbor, you've done the
| same sort of thing. Of course, if you do it at a small
| scale, you're at high risk of having empty pockets if that
| neighbor wants their hundred back at an unexpected time.
| But do it to a thousand neighbors on either side of the
| exchange, and you can probably get away with re-lending
| most of it for a long time.
|
| They aren't granted special money-making abilities; more
| the reverse: they are under regulations to _prevent_ this
| power - which is, in happy times, very good for the economy
| - from being abused. We can argue about if those
| regulations are strong enough or not, but I think the
| "money is bullshit cause banks print it out of thin air"
| arguments are intentionally misleading from opponents of a
| system that otherwise isn't actually terribly complicated.
| rich_sasha wrote:
| Banks are regulated through the nose (in most places at most
| times) to make sure they don't mess it up. The money creation
| is a carefully choreographed juggling act where balls can't
| fall on the ground.
|
| The extra money created is effectively money someone doesn't
| need right now (deposit) that can be temporarily used, and
| returned eventually, by someone else. When it works, it works
| very well, but when it doesn't, banks go bankrupt and someone
| generally loses money (deposits are insured but then the
| insurance scheme loses).
|
| It's not a bad thing overall, our capitalist world would be
| impossible without it, but this money creation craziness is a
| necessary component.
| andrepd wrote:
| > Banks are regulated through the nose (in most places at
| most times) to make sure they don't mess it up.
|
| Eehhhhhhh........ Sounds like that isn't working out so
| well is it? x) With the only difference of course that if
| _I_ fail my obligations I don't get a taxpayer-funded
| bailout financed by cuts to people's salaries and pensions,
| instead my house gets reposessed and I go live with my kids
| to a homeless shelter.
|
| But anyways. So give me similar rules: asset/liability
| ratios, cash flow minimums, the works!, to determine how
| much I can create by this mechanism.
|
| > The extra money created is effectively money someone
| doesn't need right now (deposit) that can be temporarily
| used, and returned eventually, by someone else.
|
| That's not true in fractional reserve banking, and we're
| actually well last that, we're into no-reserve banking now.
| rich_sasha wrote:
| Yeah, we'll, the credit crunch was an enormous fuck up. I
| kind of blame the regulators for letting the wolves self-
| regulate sheep herding, though of course it was
| ultimately a team effort. But that was all a textbook
| example of regulating banks the wrong way.
|
| > That's not true in fractional reserve banking, and
| we're actually well last that, we're into no-reserve
| banking now.
|
| How so? In Europe at least, banks lend from their own
| loans (a mix of deposits, bonds and commercial papers),
| plus need capital at a fraction of assets (ie loans
| made).
| majormajor wrote:
| Why do you think you COULDN'T start a bank?
|
| (And if starting a bank was a magic money-printing
| machine, no bank could ever need bailing out! They could
| bail themselves out! By definition!)
|
| And can you go into more of why you don't think that
| applies to fractional or no-reserve banking? If I'm
| required to hold all my deposits in cash, I'd have to
| fund my loans through a different mechanism. Isn't lower
| reserve requirements precisely the means through which
| "money someone doesn't need right now" can be
| "temporarily used, and returned eventually, by someone
| else"?
| vkou wrote:
| > Eehhhhhhh........ Sounds like that isn't working out so
| well is it? x)
|
| Over the past 88 years, not a single penny of FDIC-
| insured money has ever been lost in a bank collapse...
| And when a bank collapses, non-FDIC-insured money also
| finds a way to not evaporate. The biggest bank bust in
| history - Washington Mutual, with $300 billion under
| management collapsed in 2008. Not a penny of its
| depositor funds, insured or not, were lost.
|
| Meanwhile, in the three years prior to the establishment
| of the FDIC, over 9000 banks collapsed, collectively
| losing $140 billion dollars of depositor money.
|
| One of the most important jobs of the federal government
| is maintaining confidence in the banking sector, because
| without it, we'd all be living in a Mad Max hellscape,
| trading bottlecaps for ammunition.
| rahimnathwani wrote:
| "not simply give myself 20,000EUR cash"
|
| Only the ECB and national central banks can create EUR notes
| (by which I mean central bank cash money).
|
| Nothing is stopping you from creating your own notes
| denominated in EUR, but these would be obligations (IOUs)
| issued by andrepd. Just like bank deposits, these notes are
| private money, not central bank money.
|
| It might be tough for you to find a car dealer willing to
| accept these andrepd EUR notes, though.
|
| "The bank creates zero-cost virtual cash"
|
| Making loans changes banks' reserve requirements, so they're
| not zero-cost.
| andrepd wrote:
| But the point is that the money they create is 100%
| fungible with central bank banknotes! It is passed onto the
| economy as cash. It does not come with a tag saying
| "created by Santander" or whatever.
|
| > Making loans changes banks' reserve requirements, so
| they're not zero-cost.
|
| Okay! So give me similar requirements! Asset/liability
| ratios, reserve requirements, cash flow requirements, the
| works, to determine given my finances how much liabilities
| I can create.
| rahimnathwani wrote:
| Sure, go ahead. Instructions here:
| https://www.bankofengland.co.uk/prudential-
| regulation/new-ba...
| IncRnd wrote:
| You can do this, but the car owner likely won't accept your
| paper as having monetary value.
| OscarCunningham wrote:
| When banks create money with a matching liability, they face
| the risk that the customer will try to take the money out in
| cash, or transfer it to an account at a different bank. In
| order to accommodate this they actually have to have the cash
| on hand, or borrow it from another bank with interest.
|
| Likewise if you have 20,000EUR on hand, or can borrow it from
| somewhere, you can use it to buy a car. You can then keep a
| mental note that you 'owe yourself' this money, but doing so
| makes no real difference.
| kgwgk wrote:
| > they face the risk that the customer will try to take the
| money out in cash, or transfer it to an account at a
| different bank
|
| "They face the risk" seems a huge understatement. It would
| be quite unusual for someone to take a loan from a bank and
| leave the money sitting there at the bank.
| NovemberWhiskey wrote:
| Almost the entire business of a bank is to profit from
| maturity mismatch by borrowing short, lending long and
| taking the interest margin.
| codeulike wrote:
| You could buy a lawn mower and keep it in your garage. Then
| you go and knock on the door of ten other houses on your
| street, and say "I've bought you a lawnmower for Christmas!
| You just need to keep it in my garage though, rather than
| your own. Come and use it whenever you like! Please put it
| back afterwards". And then, hey presto, you have created 10
| lawnmowers out of nothing. Unless of course, there's a run on
| lawnmowers and two of your neighbours need to use it at the
| same time.
| majormajor wrote:
| It sounds like "creating money out of thin air" here more
| specifically means "increasing the amount of currency in
| circulation by exchanging it for liens or other obligations
| for payback." Not just printing money in a vaccum.
|
| I don't think a bank without deposits would get very far
| issuing loans.
|
| My understanding: The bank isn't required to hold 100% of the
| money you deposit in cash, though. It can lend it out up to
| certain limits. So if everyone tries to cash out all at once,
| shit will go sideways. But it's not because the money didn't
| exist before: the bank has a claim to a lot of assets to
| still attempt to balance it out in the case of collateralized
| loans.
|
| If the bank wasn't there, we'd have to P2P all our lending.
| The bank just acts as a bigger, hopefully-more-efficient
| middleman, with a bunch of government regulation trying to
| balance out the risk/reward. If you, as an individual lender,
| chose the wrong person to lend to, your money would be at
| risk - similarly to if you choose a bank that massively fucks
| it up. But the deposit bank would have to fuck up way worse,
| under normal circumstances.
| rahimnathwani wrote:
| "I don't think a bank without deposits would get very far
| issuing loans."
|
| When a bank issues you a loan, it creates a deposit for
| exactly the same amount in your account. So what you said
| is true, almost by definition.
|
| But many loans are issued by entities other than banks. You
| can lend profitably without being a bank. (google 'nonbank
| lenders')
| majormajor wrote:
| I mean that if you created a new bank, and never accepted
| any customer deposits, you are going to run into problems
| if you simply offer a bunch of loans.
|
| If your loan customer wants cash, or wants to move some
| of that loaned money into another institution... whatcha
| gonna do?
|
| Your nonbank credit card company would run into similar
| problems if they didn't have any income and simply were
| letting people buy products with magic printed money, but
| "credit cards create money out of thin air" doesn't get
| tossed around in the same way as it does for banks.
|
| (Also, your claim about the deposit is entirely false for
| many loans. Every car loan I've had, for instance, has
| been either paper or electronic checks for delivery to
| the dealer, I've never had that money in my own deposit
| accounts. It goes straight to a deposit account at
| (usually) another institution, where it would damn well
| be noticed if the lending bank couldn't actually make
| good on the funds.)
| rahimnathwani wrote:
| "I mean that if you created a new bank, and never
| accepted any customer deposits, you are going to run into
| problems if you simply offer a bunch of loans."
|
| 'Deposit-taking institution' is pretty much the original
| definition of a bank (see 'Banking Act 1979'). But,
| putting that aside...
|
| "If your loan customer wants cash, or wants to move some
| of that loaned money into another institution... whatcha
| gonna do?"
|
| The same thing you do every night: borrow money overnight
| in the interbank market. If this becomes a regular thing,
| liquidate some assets.
|
| "Your nonbank credit card company would run into similar
| problems if they didn't have any income and simply were
| letting people buy products with magic printed money"
|
| When a nonbank lender grants a loan, it cannot create
| money in the same way that a bank can. It can't disburse
| the loan without having the money on hand already. By 'on
| hand', I mean 'in an account at a bank'. The source of
| that money could be:
|
| - (equity) investors
|
| - interest earned from other loans
|
| - wholesale funding (money borrowed from other lenders)
|
| - proceeds from selling loans to other parties (directly
| or via securitization)
| IncRnd wrote:
| > I don't think a bank without deposits would get very far
| issuing loans.
|
| Really? That's what banks do now.
| k2enemy wrote:
| When banks "create money" there is a matching liability
| already in place -- the claim that some depositor has on that
| money. The bank isn't "richer" by having made that loan.
|
| An imperfect analogy is if you buy a car for 20,000EUR using
| a credit card. You haven't paid any real money, but now you
| have a liability that the credit card company will eventually
| claim.
| luca3v wrote:
| This is not exactly how fractional reserve banking works. I
| think that there is a misconception that if, for example,
| there is a bank regulation that allows 10% fractional reserve
| banking, then if a bank has $1 million in deposits (of actual
| cash that people gave to the bank to put in their checking
| accounts) the bank can make $10 million in loans, with $9
| million being "created out of thin hair". In fact, if a bank
| has $1 million in deposits it can make only $900k in loans.
|
| Indeed, suppose you are a bank and you have $1 mil in
| deposits, which you keep as reserve with the central bank.
| Now someone asks for a $900k loan. Now you have $1.9 mil in
| deposits ($1.9 mil liabilities), and you have $1 mil kept
| with the central bank in cash, and $900k owed from the guy
| with the loan (total $1.9 mil in assets, it checks out).
|
| Now the guy with the loan withdraws his $900k to pay for his
| house or whatever; the bank gives him the $900k from the cash
| account it has at the central bank. Now the bank has $1 mil
| in liabilities (the checking accounts of the depositors),
| $100k in cash with the central bank, and $900k owed from the
| guy with the loan. Everything still checks out, but now the
| cash on hand is just $10% of the assets. The bank has reached
| the fractional reserve limit, and it is not allowed to make
| any more loans.
| louloulou wrote:
| You should read the article, because it seems you're the
| one with the misconception.
|
| how it works -> "if a bank has $1 million in deposits (of
| actual cash that people gave to the bank to put in their
| checking accounts) the bank can make $10 million in loans"
|
| not how it works -> "if a bank has $1 million in deposits
| it can make only $900k in loans"
| kgwgk wrote:
| What the article says is that to lend out more than $900k
| it has to increase it reserves (maybe borrowing from
| other banks). Not that it can lend out $10m with just $1m
| in deposits.
|
| "By attracting new deposits, the bank can increase its
| lending without running down its reserves, as shown in
| the third row of Figure 2. Alternatively, a bank can
| borrow from other banks or attract other forms of
| liabilities, at least temporarily. But whether through
| deposits or other liabilities, the bank would need to
| make sure it was attracting and retaining some kind of
| funds in order to keep expanding lending."
| NovemberWhiskey wrote:
| This is right, but then the house seller now has $0.9mm in
| cash. When she deposits it in her bank, that bank can make
| another loan but only for $0.81mm and so on and so on.
|
| The geometric sum to infinity ends up being
| 1/reserve_ratio; so if that's 10% in this example, the
| theoretical money creation is 10x.
| [deleted]
| luca3v wrote:
| Yes, this is correct! But some people, and perhaps not
| the grandparent comment, understand the "money creation"
| point as that money can be replicated infinitely, that is
| a bank get $1 mil deposit and makes $10 mil loans, and
| those loans, if deposited, could lead to $100 mil loans
| and so on
| ubercow13 wrote:
| >and it is not allowed to make any more loans.
|
| No. From the paper
|
| >In reality, neither are reserves a binding constraint on
| lending, nor does the central bank fix the amount of
| reserves that are available.
| IncRnd wrote:
| That's just randomly quoting sentences out of context.
| What you quoted is from the standpoint of a _particular
| central bank_ , not from the standpoint of an _arbitrary
| lending bank_. Absolutely, many lending banks have
| reserve requirements imposed upon them, just not in the
| particular country of this paper!
| ubercow13 wrote:
| Well yes, this article is about the UK. But the paper is
| quite clear that in practice, it is not any reserve
| requirement that effectively determines how many loans a
| bank will create. I am guessing this applies equally to
| other modern economies even if they have such a limit?
|
| It's one sentence but the context is that the whole paper
| is arguing against the textbook explanation of fractional
| reserve banking GP stated - the "two common
| misconceptions" stated in the introduction.
| soVeryTired wrote:
| In most counties in the west, reserve requirements don't
| constrain lending. For example, Canada, the UK, and
| Australia have a reserve requirement of zero. Fractional
| reserve banking doesn't really exist anymore outside of
| economics textbooks.
|
| Capital requirements are what constrain lending in the
| west (I think the Chinese government does try to control
| lending in part via a reserve requirement). For example,
| the "Core Tier 1 Capital Ratio" [0] is extremely
| important in this regard.
|
| https://www.investopedia.com/terms/t/tier-1-capital-
| ratio.as...
| dang wrote:
| Some past threads:
|
| _Money Creation in the Modern Economy_ -
| https://news.ycombinator.com/item?id=25885849 - Jan 2021 (1
| comment)
|
| _Money Creation in the modern economy [pdf]_ -
| https://news.ycombinator.com/item?id=22923785 - April 2020 (1
| comment)
|
| _Money Creation in the Modern Economy_ -
| https://news.ycombinator.com/item?id=20875899 - Sept 2019 (1
| comment)
|
| _Money creation in the modern economy (2014) [pdf]_ -
| https://news.ycombinator.com/item?id=16604251 - March 2018 (123
| comments)
|
| _Money Creation in the Modern Economy (2014) [pdf]_ -
| https://news.ycombinator.com/item?id=11374907 - March 2016 (97
| comments)
| aazaa wrote:
| From the conclusion:
|
| > This article has discussed how money is created in the modern
| economy. Most of the money in circulation is created, not by the
| printing presses of the Bank of England, but by the commercial
| banks themselves: banks create money whenever they lend to
| someone in the economy or buy an asset from consumers. And in
| contrast to descriptions found in some textbooks, the Bank of
| England does not directly control the quantity of either base or
| broad money. The Bank of England is nevertheless still able to
| influence the amount of money in the economy. It does so in
| normal times by setting monetary policy -- through the interest
| rate that it pays on reserves held by commercial banks with the
| Bank of England. More recently, though, with Bank Rate
| constrained by the effective lower bound, the Bank of England's
| asset purchase programme has sought to raise the quantity of
| broad money in circulation. This in turn affects the prices and
| quantities of a range of assets in the economy, including money.
|
| The discussion seems incomplete without mentioning government
| deficit spending. This is, after all, the premise of Modern
| Monetary Theory: that unlike households, currency issuers like
| the US federal government aren't under the same balanced budget
| constraints as households. Currency issuers can create money by
| spending it into being.
|
| Budget deficits can be financed through the issuance of bonds,
| which look a lot like loans. But they can also be financed by
| just printing the money. The end result is the same, money into
| the pockets of people, but the implications are very different.
|
| The MMT perspective is gaining ground, especially as the world's
| governments find it increasingly difficult to avoid deficit
| spending. A leading proponent (Kelton) proposes ditching deficit
| targets altogether in favor of inflation targets.
| [deleted]
| kodah wrote:
| I'm curious how we'll clear the hurdle of instrumenting the
| economy enough to meaningfully measure inflation. This seems to
| be the big hold up with proponents of MMT, nobody wants to
| guess anymore.
| pessimizer wrote:
| > This is, after all, the premise of Modern Monetary Theory:
| that unlike households, currency issuers like the US federal
| government aren't under the same balanced budget constraints as
| households. Currency issuers can create money by spending it
| into being.
|
| It's central to MMT, but it's really just a factual
| observation, and the theory about it is orthodox Keynesian
| economics.
|
| It's the Chicago School types that have to constantly come up
| with magical tripwires that deficits supposedly cause.
| jollybean wrote:
| 1) The other 'missing giant' is credit. Credit is a couple of
| orders bigger than currency in circulation and it's really what
| makes the world go around. We probably should start talking
| about credit when we talk about currency.
|
| 2) " especially as the world's governments find it increasingly
| difficult to avoid deficit spending" - this has _always_ been
| the case.
|
| a) Raise taxes, b) Raise debt c) Print money.
|
| Option 'c' is generally not on the table.
|
| And so 'Governments' are 'constrained' by the realities of
| economics, which is kind of what we want them to be constrained
| by.
|
| It's worth noting the pretty scary nature of MMT proposals,
| which 'from a different perspective' amount to 'very loose
| monetary policy bordering on printing money to pay for stuff'
| and irrespective of the underlying theoretical ideals of MMT,
| the practical reality is that the money printing press is the
| 'Absolute Power' that can hardly not corrupt anyone with the
| power to use it, even under the cover of some intellectually
| grounded idea.
|
| All government fights are, at the end of the day, really about
| money, the rest is mostly a distraction. It's a giant war over
| budgets and spending, it always is.
|
| To give one party the magical power to do as they please
| without severe constraints is scary. It's even scary what we
| have today with the Fed (I think QE and artificially low rates
| to bail out home owners is really bad). I have much less faith
| in politicians.
|
| I believe for MMT to work, it has to have a framework around it
| even more rigid than the rules we apply to Central Banks
| because if there's a gap that can be exploited, it will be.
| praxulus wrote:
| The central bank is the part of the government that can issue
| money, and it's included in the explanation.
|
| With regard to its effect on the money supply, the rest of the
| government is no different than any other borrower since it
| can't (or at least doesn't) directly issue currency.
| bko wrote:
| > Budget deficits can be financed through the issuance of
| bonds, which look a lot like loans. But they can also be
| financed by just printing the money. The end result is the
| same, money into the pockets of people, but the implications
| are very different.
|
| Actually, its worse than that. The treasuries are created, sold
| to bank and the bank immediately sells it to the Fed for cash
| for a nice little profit (at least in the US)
|
| From the Fed:
|
| > The Federal Reserve purchases Treasury securities held by the
| public through a competitive bidding process. The Federal
| Reserve does not purchase new Treasury securities directly from
| the U.S. Treasury, and Federal Reserve purchases of Treasury
| securities from the public are not a means of financing the
| federal deficit.
|
| https://www.federalreserve.gov/faqs/how-does-the-federal-res...
| jonny_eh wrote:
| Kelton has a whole chapter on this in her book The Deficit
| Myth.
|
| https://www.amazon.com/Deficit-Myth-Monetary-Peoples-
| Economy...
| jollybean wrote:
| This is true but misleading because it represents a narrow
| aspect of what is going on. The Fed owns a small share of
| public debt. Social Securities, other Funds, and foreign
| actors own the bulk of it.
|
| There's some very worthy reality in what you're speaking of,
| but it needs to be contextualized.
| pphysch wrote:
| Key subquote:
|
| > More recently, though, with Bank Rate constrained by the
| effective lower bound, the Bank of England's asset purchase
| programme has sought to raise the quantity of broad money in
| circulation.
|
| In other words: "The interest rates are already at the bottom,
| but we need them to be lower, so we are going to make them
| effectively _negative_ through QE ".
|
| The end result: the financial sector will eventually pop and
| flood the rest of the economy with endless amounts of worthless
| money, i.e. massive inflation.
| n8cpdx wrote:
| I was predicting hyperinflation from 2008 and for years
| after, but the evidence just isn't there.
|
| Maybe things will eventually pop. The actual happenings of
| the economy (people buying and selling) are insulated from
| financial markets enough that a huge rally can happen without
| affecting lived reality for people. Maybe a pop in the
| financial sector can happen without actually affecting the
| economy? I don't see why the fed can't just make that money
| go away if it really needs to.
| vkou wrote:
| I would like to point out that in order to put the economy
| into hyperinflation (50% month to month inflation), it
| would require the Fed to print and parachute somewhere
| between 50 and 200 trillion dollars in one year.
|
| It's not very likely to happen.
| jollybean wrote:
| "but the evidence just isn't there."
|
| 1) The _average_ home price in Canada increased in value
| more than the _average_ workers income.
|
| Just digest that for a second: buying a home and doing
| nothing, is 'more productive' than literally working.
|
| That's a devastating situation to be in.
|
| 2) Equities are valued quite highly.
|
| 3) Esp. after COVID we are now starting to see very real
| inflation, we're not sure how much of it is from COVID etc.
|
| 4) There's a labour shortage, partly due to workers getting
| support from gov. (at least in Canada) - but a huge signal
| of inflation.
|
| I believe we are seeing considerable inflation of every
| kind except the narrow version that the economists
| traditionally like to use.
|
| Things don't have to 'pop' they can just realign slow or
| fast, but I believe they are realigning in ways that are
| going to be difficult to recover from without significant
| change.
|
| If you think 'raising taxes on the rich' is a controversial
| idea, how about 'putting a damper on home increases'.
|
| It's the most politically toxic thing imaginable, because
| it's not like those 'narrow issues' like 'gun control' that
| hit a narrow group with an ideology - it hits the entire
| middle and upper class in the pocket book.
|
| Home affordability is a fairly existential issue, and right
| now in Canada there's an election and not much talking
| about it because it's a 'no win' for most of the parties,
| even if they do have some policy things in the background.
|
| So we're already in a 'Funny Money' situation thanks to
| Toxic Assets from 2008 on the Fed Balance sheet, QE after
| that, and then 'Wartime Level Debt Spending' as a result of
| COVID.
|
| It's an odd time.
| n8cpdx wrote:
| Completely agree with everything you've said.
|
| I think I've divorced housing prices from the concept of
| inflation because I spend so much time thinking about the
| underlying causes (zoning, NIMBY's, environmental
| reviews, etc). But the crazy price increases are enabled
| by the financial sector and all the money lying around.
|
| It seems the more financialized the sector (housing,
| higher Ed) the worse the inflation is.
|
| I don't know that my thinking on the boundary between
| finance-driven inflation and fundamentals-driven
| inflation is as clear as it should be.
| carnitine wrote:
| You don't understand hyperinflation if you think you can
| print your way into it. Hyperinflation has only ever
| occurred due to real problems in the country, a total
| breakdown of normal operation.
| pphysch wrote:
| Believe it or not, Beijing propped up the global financial
| system in the immediate wake of 2008 by pledging to spend
| trillions on infrastructure, including $568B in the short
| term [1]. Beijing _also_ accelerated purchases of US
| treasuries during this crisis, with their holdings reaching
| a peak (over $1T total) in 2013. These surges of spending
| from China aligned with the burst of asset purchases (~$1T)
| by the US Fed.
|
| Needless to say, this is not going to happen again. China
| is no longer interested in propping up the USD. Instead, it
| is rapidly insulating its economy from toxic USD
| financialization, from its "dual circulation" domestic
| policy to its successful launching of the largest "USD-
| free" trade agreement ever in Nov 2020 [2].
|
| 2008 was already a crisis that could not be managed without
| global cooperation. By the numbers, 2020-2021 is far worse.
| The $3T surge of Fed asset purchases in 2020 has been
| extended by ~$1.5T in regular QE policy, with no end in
| sight. And there is no mega economy across the ocean that
| is going to sacrifice itself for the USD.
|
| Best case scenario, the global elite are conspiring to let
| the global USD have a nice gentle death and we won't even
| notice. Otherwise, we are looking at a massive crash and
| inflation.
|
| Do you really think this monstrosity
| (https://fred.stlouisfed.org/graph/?g=GFV3) can continue
| forever?
|
| [1] - https://www.nytimes.com/2008/11/10/world/asia/10iht-1
| 0china....
|
| [2] - https://en.wikipedia.org/wiki/Regional_Comprehensive_
| Economi...
|
| [3] - https://fred.stlouisfed.org/graph/?g=GFV3
| gigatexal wrote:
| Cogent take.
|
| Waiting for the crypto crowd to come in screaming about
| inflation or the like.
| IncRnd wrote:
| In today's environment it seems more apt to say stagflation.
| I'm sure there is a coin for that.
| zja wrote:
| I remember David Graeber mentioned this report in "Against
| Economics"[1]. It's a pretty interesting read if you like reading
| about MMT. [1] https://theanarchistlibrary.org/library/david-
| graeber-agains...
| andy_ppp wrote:
| I sometimes wonder how anything about economics can be tested
| when the world's manufacturing has been outsourced to China. All
| of these theories rest on the fact inflation has been largely
| under control in the west, not because of a lack of gold standard
| but because almost all physical items have had zero or negative
| inflation for 30 years or so. All the things not "Made in China"
| I would say have been massively inflated. If we were to start
| having to produce say plumbing supplies locally (say due to
| Climate change) will these theoretical money creation mechanisms
| still work?
| dcolkitt wrote:
| The US is a net exporter of food, and yet the price of food has
| significantly undershot headline inflation over 30 years.
| andy_ppp wrote:
| Interesting! I don't know enough about the US agricultural
| system but I suspect technology plays a big part in that
| reduction in cost... I found this amazing raspberry picker
| for example! https://www.youtube.com/watch?v=3iXJFDoKEvI&ab_c
| hannel=OxboI...
|
| Maybe you're right and everything would just be made with
| machines in the West if China wasn't cheap to source things
| from. But then we come back round to what do you do with the
| bottom half of workers...
| SkyMarshal wrote:
| I think Richard Werner's empirical research on how banks create
| money is probably better than anything put out by the banking
| system itself, including the central banks.
|
| https://www.researchgate.net/publication/265909749_Can_Banks...
|
| https://www.researchgate.net/publication/283907413_Do_banks_...
|
| His work made realize that not even the banking system fully
| understands the banking system.
|
| (Werner is the economist that coined the term Quantitative
| Easing, originally created to describe Japanese post-WWII
| economic re-development monetary policy, research that later
| informed the US Fed's response to the GFC, among other things)
| whimsicalism wrote:
| I think we give far too much credence to term coiners.
|
| I'm unsurprised to see him recommended here, as HN seems to
| veer heavily towards inflation trutherism, anti-central
| banking, and libertarianism, even if most commentators probably
| wouldn't share Werner's antivaxx beliefs.
| 1vuio0pswjnm7 wrote:
| "Let us never forget this fundamental truth: the State has no
| source of money other than money which people earn themselves. If
| the State wishes to spend more it can do so only by borrowing
| your savings or by taxing you more. It is no good thinking that
| someone else will pay-that "someone else" is you. There is no
| such thing as public money; there is only taxpayers' money."
|
| https://web.archive.org/web/20110606031420/http://www.margar...
|
| In England, sometimes we need to explain to us where money comes
| from, just in case anyone forgets. :)
| danielschonfeld wrote:
| The comments in this thread prove yet again that economics is a
| far cry from any science. Nobody really understands why this
| system of credit actually works as well as it does and even more
| troubling is what will be it's next iteration given that it's
| starting to crumble.
|
| Unfortunately for most of us though it appears as though the
| adage that 'cash is trash' is starting to become a very real
| problem even in the west and necessitates that all of us
| transition to holding yield producing assets with risk. In other
| words, even grandma is an investor (aka gambler) now by force.
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