Welcome to the new version of European Tribune. It's just a new layout, so everything should work as before - please report bugs here.

Why Printing Money Makes Sense

by das monde Wed Oct 13th, 2010 at 07:51:04 AM EST

Dean Baker, one of the economists that foresaw the US housing bubble and the financial crisis, wrote an article with the same title, "Why Printing Money Makes Sense", in the Guardian:

For the tens of millions of people who are unemployed, underemployed or have given up looking for work altogether, we are in a crisis. The economy is an absolute disaster, ruining their lives and also jeopardising the futures of their children and grandchildren.

But that is not the way that the people paid to contemplate economic policy in Washington see things. This gang is busy congratulating themselves because things could have been worse. They point out that if they had been even more incompetent that we could be in a second Great Depression with unemployment staying in the double digits for a decade.

Instead of worrying about the millions of unemployed workers today, they are worried about their deficit projections for the years 2018, 2020 or even 2025. This crew, which could not even see the $8tn housing bubble that was about to wreck the economy, wants the whole country to genuflect before their projections of deficits for 10-15 years into the future ....


To better understand [the] demand problem, suppose that we had a super-effective counterfeiter: someone who could make near perfect copies of $50 or $100 bills. Suppose this person printed up $2tn of counterfeit money and began to spend it on all sorts of items. Our counterfeiter buys up houses and cars. They pay for incredibly lavish parties and trips. They hire all sorts of servants, groundskeepers and investment advisers.

What would be the effect of this counterfeiting scam on the economy?

In the current situation, it would provide an enormous boost to GDP and create millions of jobs. After all, everyone thinks the money is real. It is no different whether the counterfeiter and his underlings spend $2tn of counterfeit money or if firms suddenly start investing their hoards of cash or households begin to spend again as though the housing bubble had never collapsed.

That may sound troubling, but this is because the current economic situation is so extraordinary. In normal times, the economy is, at least partially, supply-constrained. Collectively, we want more goods and services than the economy is capable of producing. If our counterfeiter manufactured his $2tn in normal times, it likely would cause a serious problem of inflation ....

In our demand-constrained economy, however, there is no problem of inflation. The economy can produce more of almost anything right now. The reason that we are not doing it is simply the lack of demand.

This is an interesting way to present the problem that Keynessians are fixating on: we have goods but no money to exchange them, because of massive cash hoarding.

But the interesting part of the counterfeiter story is that his $2tn of phony money will not create problems even in the long run, assuming that he is eventually shut down. Suppose that the counterfeiter's lavish spending gets the economy back towards full employment around 2012, at which point he gets nailed by the FBI who finally figure out how to recognise the dud notes.

At that point, the $2tn will be grabbed out of circulation and destroyed. Assuming that the economy is strong enough at this point to remain near full employment even as this counterfeit wealth disappears, then there would be no lasting damage from the episode. The fictional wealth had generated demand when the economy needed it, but then was pulled out of circulation at the point when it could have generated inflation and "competed away" goods and services from others.

Except that the people holding the dud notes at the discovery moment would be suckers of the magic. Nice?

While it is unlikely we will see a successful counterfeiter on this scale, the government and the Federal Reserve Board can imitate the counterfeiter's actions. This is the story of fiscal stimulus: safe, fun and legal. Instead of putting people to work filling the counterfeiter's frivolous whims, we could have them work to build up the economy and meet important needs. The list of necessary tasks is long and well-known.

As is the case with the counterfeiter's illicit stash, the stimulus spending need not even create any long-term debt burden. The Fed could simply buy and hold the bonds issued to finance the spending. When the economy returns to more normal levels of employment, the Fed would raise interest rates, as it always does, to prevent inflation from posing a serious risk.

Well, the title is then misleading - Baker is not talking about paying for the important needs by fresh banknotes without any "financing" through debt. And he pretends that Fed shareholders would gladly hold dud bonds... Is that "symmetrical" process with raising interest rates clear at all?

But the "naive" suggestion of just printing money and crediting workers with it already leaked in our discussions. That leads us back to basic analysis what the money is. To give an advanced start to a routine debate, I turn to the comment section of the Guardian article:

neilwilson: The tax bill from HM Revenue and Customs gives Sterling value. Unless you give them Sterling, you go to jail.

That is enough to get everybody in the UK to trade their labour and goods to obtain Sterling, and that kick starts the Sterling economy.

That, and the legal tender ability to pay off any debt with Sterling.

Of course if the government doesn't spend any Sterling, then you will go to jail anyway because no matter what you do and what you produce you can't get any Sterling from anywhere else.

With the fractional reserve banking, any credit issued by a bank adds its full amount to the Sterlings circulating around. Thus, as long as the total debt volume is on the rise (which is perhaps synonymous to economic growth to financial players), paying off taxes and debt is not particularly hard. But credit contraction indeed offers logically impossible problems.

... the notion of the currency issuer borrowing its own currency is a complete fabrication - left over from the gold standard era.

AleshaSoba: When a Government pays public sector workers, it is creating money. When a tax payment leaves the payers bank account, the money is destroyed forever along with its spending power.

The government and the Central Bank are separate institutions. One pours spirits, the other drinks... I mean, the Bank issues banknotes, while the government promises to pay back handsomely. Then the government may pay workers (but the money is already "created" by then). And the government takes taxes - but that is in no way "destroyed forever" money. Only if the Government pays its debt to the Central Bank (or perhaps other banks) this is so. Other than that, the government and its money is part of the economy.

Wolfstone: Only 3% of the money supply is actually printed. The other 97% is created out of thin air by bank lending or debt.

All money is debt, the rich own it and the poor owe it.

Not many people want to borrow money to invest in a legitimate business until there is an increase in demand. And there will be no increase in demand until the average consumer in the private sector earns more money. Of course this is an insoluble catch 22.

That's about right. A sovereign government could print out money without any strings attached (and that now would be as sensible as Baker describes), but that would piss off big "investors".  

As (more or less) all money is backed up by credit obligations, it is paying back debt that takes money out of the economy "forever". And debt has to be paid back with interest, so some people have to fail...

neilwilson:The problem is savings - people deferring consumption. Great for the individual, but at the macro level it is like taxation - it reduces demand. So the government (the currency issuer) has to fill the gap unless they want the economy to shrink.

Government spending = Taxation + increase in people's savings

At the moment, lots of people are saving - paying off the debts they incurred during the boom period. That desire to save has to be funded by government spending or the amount of transactions will shrink, sales fall off and people will lose their jobs.

Is this something ethically right, blaming people (see "Great for individual...") for something completely prudent? If such an elementary action as saving for your own basic interest causes great depressions, how smart is this financial system? What is this economic system worth if it depends heavily on people spending out stupidly?

If cash hoarding is the problem, then let's see whether there is no greater form of it than saving by people with nearly minimal income. What about so called investments, especially into credit derivatives? Cash hoarding is where the cash accumulates. Shouldn't the rich people be nicer in letting cash circulate?

gantlord: I think you [Baker] deserve a lot of credit for spotting the housing boom, predicting the recession and for opposing the moral-hazar-ridden bank bailouts, but you have to help me out here. How is printing money anything but a massive tax on the holders of money?

Here perhaps comes the crux of the problem. Deficit spending is not a sincere objection from the money holders: their descendants would be the ones collecting national debt payments from ours. Printing money as a sovereign would upset them indeed. Not because inflation would be inevitable and swift, but because they would be loosing the maximal financial and social power they have now. They could enjoy aristocratic freedom for generations, while less lucky masses would be working for living and giving tithes for old term debts. Tithes? No, at best they would be rather leaving a tithe (1/10) to themselves and giving the rest to anonymous investors.

Remember Baker's scenario of destroying counterfeit wealth just in time for strong enough economy, with FBI fishing out the dud notes? In the way the money works as the mirror of debt, the housing bubble created enormous amount of counterfeit wealth - credit issued with full anticipation of numerous defaults and skewed social power. What about FBI tracking down that counterfeit wealth?!

So deep down, the economic issue is a moral one. Money is already the determinant of social privilege, personal freedom and future entitlements. Crediting working people now would only be a first sign of respect to labour, after years of Randian justice fantasies. Is insistence on paying back debt, however arbitrary incurred, the best fairness priority we can think of? Why do we allow (or give) enormous privileges and freedoms to ones, while others (increasingly many, in fact) have to work and sacrifice hell of their lives for very little in return? Is this gonna be a decent global society, incomparable to feudalism or slavery?

The dilemma of turning runaway social or economic norms is not a new one. For example, Henry George considered a similar land ownership dilemma in "Progress and Poverty". We went far ahead ignoring moral complexity of land ownership. How far ahead is left from here?

Display:
... shareholders agree to buy the bonds?

Either because (1) they want to or (2) because they have no choice.

The Federal Open Market Committee is made up of the 7 members of the Federal Reserve Board of Governors, and 5 of the 12 Federal Reserve Bank Presidents. So if the entire Board is determined, it will happen. If any of the Board are opposed, at least some of the FRB Bank Presidents, shareholder elected, have to be OK with it.

If the Federal Open Market Committee elects to buy Treasury bonds at whatever interest rate, the Federal Reserve Banks will buy them. And since Federal Reserve Banks return all income above operating costs to the Treasury account and presently hold more than enough Treasury bonds to cover their costs, the interest rate does not matter ~ there is no net interest cost to the Treasury.

Regarding

Baker is not talking about paying for the important needs by fresh banknotes without any "financing" through debt.
When the Fed buys the bonds directly from the Treasury ~ which would be a change to current policy but not unprecedented ~ it actually is the government paying for important needs without financing through debt. One arm of the government "owes" interest to another arm of the government that is required to hand the interest right back again ... which is quite obviously not actual debt finance.

Any discussion as if the Federal Reserve is a private institution is just a means to cloak the responsibility of the government nominated and approved Federal Board of Governors. Pretending that democratically elected representatives have no say in how a Reserve Bank is run is an effective ruse for conning people into not demanding that the elected representatives select a Board of Governors willing to run the Reserve Bank in the public interest.


I've been accused of being a Marxist, yet while Harpo's my favourite, it's Groucho I'm always quoting. Odd, that.

by BruceMcF (agila61 at netscape dot net) on Wed Oct 13th, 2010 at 07:32:35 PM EST
I could agree with the last part.

...since Federal Reserve Banks return all income above operating costs to the Treasury account and presently hold more than enough Treasury bonds to cover their costs, the interest rate does not matter...

When the Fed buys the bonds directly from the Treasury ~ which would be a change to current policy but not unprecedented ~ it actually is the government paying for important needs without financing through debt. One arm of the government "owes" interest to another arm of the government that is required to hand the interest right back again ...

Could you elaborate here further? Who decides the operating costs, in what paper are they paid? If the interest rate does not matter, why it is there?

Do you mean, the Fed is a government arm without profit interests? What is the current policy?

by das monde on Thu Oct 14th, 2010 at 06:06:41 AM EST
[ Parent ]
As in any bank, operating costs are essentially fixed costs -- what it costs to manage the buildings, shredders, salaries of employees, security, overhead, etc., just like in any other business or government office.  It costs only trivially more to have a portfolio of $1 billion than it does to have a portfolio of $1 trillion, so this means that operating costs are not a relevant consideration for determining the size of a central bank's portfolio.

The Fed is a government arm which earns interest on its portfolio, but it is required to hand over all of its net profits to its real "owner," the US Treasury, so when the Fed owns government debt, regardless of how the Fed ended up with that debt in its portfolio, it is really just the US Treasury owing itself debt and paying itself interest.

That the Federal Reserve Banks technically have "shareholders" is not in any way similar to the way private corporations have shareholders.  The shareholding in the Fed refers to how banks are equitably charged (aka taxed) for the services of being regulated by the Fed and for having access to Fed lending, not to any "shares" in profits or to control over monetary policy in any way. National banks must pay the Fed, partly through a through a membership fee system, in order to be regulated by the Fed.

This means that US federal debt held by the Fed is really not debt at all.  The Fed could just declare that the debt no longer existed and nothing would happen. (And the reportedly high US debt to GDP ratio would fall from something over 90% to around 60%. Another word for this is "monetizing" the debt.) The reason the Fed doesn't do this is the belief that it needs an institutional means independent of Treasury or Congress to quickly take cash out of the financial system if inflation becomes a problem, and it does that by selling its federal debt holdings to the public in exchange for the public's cash, which is simply shredded when it arrives at Fed branches.  (Don't worry, they'll just print more if a bank needs more notes and sells Federal securities back to the Fed in exchange for cash.)

by santiago on Thu Oct 14th, 2010 at 12:46:09 PM EST
[ Parent ]
I didn't realise that Treasuries held by the Fed counted towards the sovereign debt. Does it work that way in all OECD countries, or are some places more sensible about aggregating the public sector?

- Jake

Austerity can only be implemented in the shadow of a concentration camp.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Thu Oct 14th, 2010 at 01:43:54 PM EST
[ Parent ]
That's a good question. I recently asked a Swedish banker if that was the case in Sweden or other European countries, and he didn't think it was.
by santiago on Fri Oct 15th, 2010 at 02:33:40 PM EST
[ Parent ]
I checked the page of the national debt office (Riksgälden) that handles the swedish national debt.

In the measurement of the unconsolidated debt, debt owned by government agencies is counted as debt, while in the measurement consolidated debt, debt owned by other government agencies is not counted as debt.

From that page, the international comparisons within the EU is based on the consolidated debt of the public sector, ie the consolidated debt of local, regional and national government.

A vote for PES is a vote for EPP! A vote for EPP is a vote for PES! Support the coalition, vote EPP-PES in 2009!

by A swedish kind of death on Fri Oct 15th, 2010 at 04:20:54 PM EST
[ Parent ]
That sounds like the situation in the USA between Federal public debt, state public debt and municipal public debt. But all of these appear to be dwarfed by private sector debt, and most of the holders of debt don't have the same options as the Treasury and Fed. So if states, municipalities, corporations, private companies and individuals are to get out of debt they can only do so if either the Federal debt expands or they can export at a profit.

But debt that was based on counterfeit assets should be considered to be counterfeit debt and should be written down in a default like resolution. Even with such debt write-down, which had largely occurred during the Great Depression of the 1930 in the USA by 1933, government spending was still all that kept the system going -- really until after WWII.

Social perception and solidarity combined with government coercion via rationing and price controls during the war led to a large savings due to War Bonds and huge pent up demand that spurred a recovery that lasted until the wind-down from Viet Nam. And that recovery worked in the context of a quasi-gold standard, but the USA had the only large, intact economy left after the war.

This time the US Government has done all that it can to prevent the write down of bogus debt and devoted all efforts to propping up the vampire financial sector that is currently extracting ~$700 billion/yr from the productive and consumer economy, thanks to policies and regulatory forbearance, such as the Zero Interest Rate Policy or ZIRP combined with voracious interest rates and fees on individuals by the banking sector and the ability of TBTFs to borrow at zero and "invest" at whatever.

Were that $700 billion/yr injected into the base of the economy via infrastructure projects, increased benefits to retirees and unemployed, etc. And were policies, regulations and tax laws revised to favor domestic manufacturing, the real economy could start to recover.

Neither will the economy will recover with steadily rising energy costs, so investments in renewable energy would make possible a future in an environment of >$120/bl oil prices, which seems assured in any but a global collapse scenario. So renewable energy generation and both goods and passenger transportation via renewable energy both would help the economy recover from collapse and make a future possible in a post peak oil world.

The problems are more political than technical or resource constrained. Resource constraints can be dealt with if the power of economic incumbents can be overcome.    

As the Dutch said while fighting the Spanish: "It is not necessary to have hope in order to persevere."

by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Sat Oct 16th, 2010 at 01:27:48 PM EST
[ Parent ]
... not for profit chartered banks. Their shareholders are their member banks (as the owners of a credit union are the credit union members).

Under their charter, substantial elements of their operations are under the governance of the Federal Reserve Board of Governors, who are nominated by the President and in an earlier, more innocent age confirmed by the Senate for seven year terms, one appointed each year.

The interest rates on Treasury bonds matter when the bonds are held by the public or the finance sector. At that point, the interest is in effect a transfer payment to the wealthy because they are wealthy.

The interest rates on Treasury bonds do not matter for those bonds held by the Federal Reserve Banks, since they are not-for-profit under their charters, and so a higher interest rate just results in a paper transaction of reserves from the Treasury account being transferred to the Fed operating account and then rebated directly back.

That's why the Fed buying newly issued bonds is referred to as monetising the debt.

I've been accused of being a Marxist, yet while Harpo's my favourite, it's Groucho I'm always quoting. Odd, that.

by BruceMcF (agila61 at netscape dot net) on Thu Oct 14th, 2010 at 06:31:37 PM EST
[ Parent ]
Thank you and Santiago for explanations. Still confusing, those smooth phrases: what is the sense of earning a profit on government securities and returning it to taxpayers? What kind of debt is that? What is exactly monetized? What can the big bankers like Rothschilds say to the Fed?

Isn't it amazing how many ways or levels of understanding of the monetary system are there for "aha" grabs, vaguely suggested by various sources. How many are supposed to know that in all respects? Can't the public be informed better and more uniformly?

by das monde on Fri Oct 15th, 2010 at 06:11:13 AM EST
[ Parent ]
what is the sense of earning a profit on government securities and returning it to taxpayers?

It's a vestigial structure left over from the evolution of modern reserve banking. Back in the bad old days before modern central banks, private banks would band together on an ad hoc basis to guarantee liquidity and thereby prevent bank runs. Back in those days, the reserve banks (plural) were private institutions with their own balance sheets and membership criteria. Of course that didn't quite work, and after a couple of nasty banking panics with associated general industrial depressions, the sovereign clamped down and nationalised the reserve banks, creating the modern central bank system.

The institutions were never really streamlined, in no small part because obfuscation of the fact that the central bank is a part of the public sector makes regulatory capture easier for the people the central bank is supposed to regulate.

What kind of debt is that?

One that is operationally meaningless but politically useful for certain parties.

What is exactly monetized?

"Monetising sovereign debt" is just bankerspeak for issuing money directly in the form of legal tender, as opposed to issuing money in the form of sovereign bonds.

It's another vestigial term, from back in the bad old days of the gold standard, where governments had to borrow to fund deficit spending. When they borrowed from their central bank, they were said to monetise their debts.

What can the big bankers like Rothschilds say to the Fed?

In principle, nothing. In the real world, "when you retire from the Fed, we may have a lucrative consultancy for you that will not unduly strain your mental capacity. Assuming we can still afford to pay for lucrative sinecures when you leave office <wink, wink; nudge, nudge>."

How many are supposed to know that in all respects?

One might expect central bankers to understand modern central banking. One would be wrong, though - central banks the world over are stuck in the conventional wisdom of the gold standard. Economists are supposed to understand central banking too, but of course most of the people who style themselves economists prefer to model a magic Ricardian pony world that contains neither money nor banks.

Can't the public be informed better and more uniformly?

Historical experience suggests that the answer to that question is "no."

- Jake

Austerity can only be implemented in the shadow of a concentration camp.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Fri Oct 15th, 2010 at 07:38:45 AM EST
[ Parent ]
At this point I would be very interested in seeing the UK's full accounts, and discovering who has a claim on all of the alleged borrowing that we're supposed to dutifully pay down with the Worst Cuts Evah™.
by ThatBritGuy (thatbritguy (at) googlemail.com) on Fri Oct 15th, 2010 at 08:01:56 AM EST
[ Parent ]
Perhaps it is a composition comparable to the one provided by Guido Fawkes, for Anglo-Irish Bank, courtesy of Coleman.

As the Dutch said while fighting the Spanish: "It is not necessary to have hope in order to persevere."
by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Sat Oct 16th, 2010 at 03:02:06 PM EST
[ Parent ]
Diary

By laying out pros and cons we risk inducing people to join the debate, and losing control of a process that only we fully understand. - Alan Greenspan
by Migeru (migeru at eurotrib dot com) on Fri Oct 15th, 2010 at 08:49:13 AM EST
[ Parent ]
after a couple of nasty banking panics with associated general industrial depressions, the sovereign clamped down and nationalised the reserve banks, creating the modern central bank system.

It should be noted that this led directly to the first great "financialization" of the US economy, which crashed in '29, was reformed in '33 only to see those reforms dismantled in the '80s and '90s. It should also be noted that the Era of Private Banks came about because of the success of Andrew Jackson in preventing the renewal of the charter of the Second Bank of the United States, which was a glorified private bank. Jackson's constituents largely were and saw themselves as the victims of developing "financialization" which was operating to the benefit of the private owners of the Second Bank. We never really have devised a long term solution to provide a safe, socially beneficial banking system in the USA.

As the Dutch said while fighting the Spanish: "It is not necessary to have hope in order to persevere."

by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Fri Oct 15th, 2010 at 01:39:49 PM EST
[ Parent ]
Historical experience suggests that the answer to that question is "no."

Is there historic evidence of a serious educational attempt? Or wouldn't the knowledge be too valueable to be shared with everyone?  

by das monde on Mon Oct 18th, 2010 at 03:55:12 AM EST
[ Parent ]
It's hard enough to get people to understand the fairly straightforward concept of countercyclical spending (something that works even under a gold standard, and even under most of the less crazy marginalist models). People seem to believe that when the sovereign takes in a lot of money, it can afford to spend a lot of money, and when the sovereign takes in little money, it cannot afford to spend a lot of money... irrespective of the fact that these states are more often than not correlated to a bubble in the private sector and a significant underutilisation of economic capacity, respectively.

- Jake

Austerity can only be implemented in the shadow of a concentration camp.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Mon Oct 18th, 2010 at 05:27:11 AM EST
[ Parent ]
I would not be surprised if there has been (and still there is) more aggregate effort to obscure these issues than explain. The Foxnews heads just have more explanatory authority than us.

Even when it come to education in general, forceful regression is almost non-controversial.

by das monde on Mon Oct 18th, 2010 at 06:05:02 AM EST
[ Parent ]
... is that the Fed buys and sells Treasury securities on the secondary market to inject or drain reserves from the system and regulate the cash rate (cost of funds to banks), and the interest is what makes the private market for the Treasury securities.

The interest is handed back when the Treasury securities are in the hands of Fed. That is called "monetising" the debt because when when the Fed acquires additional Treasury securities, that is accounted as an asset, and the FRB can increase its liabilities by an equal amount, which is the creation of new Federal Reserves. So the debt basically goes back inside the fourth, oddly organized, branch of government and is replaced by high power money that can circulate as cash or be leveraged by commercial banks into ten to twenty times as much bank account money.

I've been accused of being a Marxist, yet while Harpo's my favourite, it's Groucho I'm always quoting. Odd, that.

by BruceMcF (agila61 at netscape dot net) on Fri Oct 15th, 2010 at 10:34:18 AM EST
[ Parent ]
The fundamental problem is not money but property rights. The deficit basis of money is important all right, but is ancillary to the principal problem, which is the completely unsustainable imbalance in ownership of productive assets - particularly land - which form the basis of the creation of money.

There's nothing new about this. The combination of compounding debt and private property in land has for thousands of years led to unsustainable concentrations of wealth. It is this imbalance of wealth that underpins the dearth of purchasing power and hence the lack of demand.

Contrary to Wolfstone above, all money is NOT debt, but credit, and while it is true that a great deal of this came about as claims over debt (interest-bearing loans), much of it came about when banks pay staff; management; suppliers; shareholder dividends; and buy productive assets.

This spending by banks creates demand deposits in the hands of the recipient in exactly the same way as the credit created as an interest-bearing loan.

If a private bank can spend money on productive people and assets in this way then there is no reason at all why a public bank should not do the same as an agent for the Treasury.

The bottom line is that printing money/QE solves nothing - it simply exchanges one asset for another. The only solution to our current plight is systemic fiscal reform, and by this I do not mean the Voodoo economics we are getting in spades, but rather the taxation of unearned income from privileged property rights, coupled with massive fiscal stimulus through spending on productive assets.

ie professionally managed spending on/investment in affordable housing; renewable energy and energy saving projects; a new generation of infrastructure, and above all in the training and education of domestic workforces capable of delivering these.

"The future is already here -- it's just not very evenly distributed" William Gibson

by ChrisCook (cojockathotmaildotcom) on Wed Oct 13th, 2010 at 07:57:28 PM EST
If a private bank can spend money on productive people and assets in this way then there is no reason at all why a public bank should not do the same as an agent for the Treasury.

Except that public entities have cooties.

By laying out pros and cons we risk inducing people to join the debate, and losing control of a process that only we fully understand. - Alan Greenspan

by Migeru (migeru at eurotrib dot com) on Wed Oct 13th, 2010 at 08:20:20 PM EST
[ Parent ]
and the private ones don't... oh wait.

seems like the game will be:

let's all inflate, as gently and imperceptibly as we can, together, and maybe it won't hurt too bad. we'll be together, right?

big of them, to include us in the big society, when they have incurred titanic losses. sharing is good, folks.

they can't look the future they are creating in the eye, so it's 'how can we spin this harder till it's black as snow?'

the debt cantilever is tilting the building, do not adjust your sets...

"We can all be prosperous but we can't all be rich." Ian Welsh

by melo (melometa4(at)gmail.com) on Thu Oct 14th, 2010 at 03:54:10 AM EST
[ Parent ]
all money is NOT debt, but credit, and while it is true that a great deal of this came about as claims over debt (interest-bearing loans), much of it came about when banks pay staff; management; suppliers; shareholder dividends; and buy productive assets.

How much are banks away from counterfeiting the money with their (seemingly liberal) crediting as any "payment"? If they are even buying productive assets by crediting out of thin air, who wants to be a counterfeiter then? Don't they have to offer any assets for all of that? Or if everything is all right, couldn't we then stimulate bank crediting enough to produce enough demand in the way Baker suggests?!

If a private bank can spend money on productive people and assets in this way then there is no reason at all why a public bank should not do the same as an agent for the Treasury.

Ok, where are public banks?

The bottom line is that printing money/QE solves nothing - it simply exchanges one asset for another.

If we are just crediting workers for building a road, what do we exchange?

by das monde on Thu Oct 14th, 2010 at 06:18:36 AM EST
[ Parent ]
das monde:
How much are banks away from counterfeiting the money with their (seemingly liberal) crediting as any "payment"?
As Galbraith said, the process by which banks create money is so simple that the mind is repelled...

By laying out pros and cons we risk inducing people to join the debate, and losing control of a process that only we fully understand. - Alan Greenspan
by Migeru (migeru at eurotrib dot com) on Thu Oct 14th, 2010 at 06:45:42 AM EST
[ Parent ]
The actual economic value provided by a bank as a credit intermediary is to guarantee the credit of a trade buyer (who presents the bank's IOU to the seller instead of his own) or to guarantee the credit of a borrower, where the other side of the transaction which the bank intermediates is a depositor.

Banks support this implicit guarantee with a base of proprietary capital at levels set by the Bank of International Settlements (BIS) in Basel.

I outlined the process here

I would argue that it is only the profit element of the banking service which is worthless, and in fact this - like all profit - is by definition inflationary.

das monde:

Ok, where are public banks?

Good question. Public banks won't happen, because the entire financial system is based upon the absolute necessity of creation of credit by private banks and the absolute impossibility of doing anything else.

That is because everyone knows (like they knew property prices can only go up ) that public credit creation is inflationary - whereas private credit creation, with an additional burden of managerial fatcat costs, and dividends to rentier shareholders - is not.

das monde:

If we are just crediting workers for building a road, what do we exchange?

We give workers our Treasury IOU in return for their Labour. They may then exchange that IOU with whoever will accept it, and the reason that everyone will accept it, is that we - the Treasury - will accept our IOUs back from workers and businesses alike in payment of taxes.

"The future is already here -- it's just not very evenly distributed" William Gibson

by ChrisCook (cojockathotmaildotcom) on Thu Oct 14th, 2010 at 08:57:15 AM EST
[ Parent ]
ChrisCook:
I would argue that it is only the profit element of the banking service which is worthless
Not only that, it is the root of bad practice.

By laying out pros and cons we risk inducing people to join the debate, and losing control of a process that only we fully understand. - Alan Greenspan
by Migeru (migeru at eurotrib dot com) on Thu Oct 14th, 2010 at 09:04:27 AM EST
[ Parent ]
The profit motive = Greed

"The future is already here -- it's just not very evenly distributed" William Gibson
by ChrisCook (cojockathotmaildotcom) on Thu Oct 14th, 2010 at 09:22:42 AM EST
[ Parent ]
<gecko>Greed is good</gecko>

By laying out pros and cons we risk inducing people to join the debate, and losing control of a process that only we fully understand. - Alan Greenspan
by Migeru (migeru at eurotrib dot com) on Thu Oct 14th, 2010 at 09:26:07 AM EST
[ Parent ]
The bottom line is that printing money/QE solves nothing - it simply exchanges one asset for another. The only solution to our current plight is systemic fiscal reform, and by this I do not mean the Voodoo economics we are getting in spades, but rather the taxation of unearned income from privileged property rights, coupled with massive fiscal stimulus through spending on productive assets.

ie professionally managed spending on/investment in affordable housing; renewable energy and energy saving projects; a new generation of infrastructure, and above all in the training and education of domestic workforces capable of delivering these.

Bingo! And it matters more on what money is spent than on how much money is spent, though both matter. Money spent "saving the banks" is actually preventing recovery to the exclusion of spending money on projects that would help a recovery. But a true recovery will not come until and unless the banking sector is reformed.

As the Dutch said while fighting the Spanish: "It is not necessary to have hope in order to persevere."

by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Thu Oct 14th, 2010 at 12:05:25 PM EST
[ Parent ]
This is the reason I liken the current situation to that of the subjects of some benighted kingdom being held in thrall to an evil wizard by the wizard's evil spell. Several ingredients of that spell are Randian in derivation.

As the Dutch said while fighting the Spanish: "It is not necessary to have hope in order to persevere."
by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Wed Oct 13th, 2010 at 11:55:44 PM EST
The economists and financial analysts are just like wizards, magi or high priests, if that is not an insult to actual wizards, etc. They just come out, tell that it will rain all summer inflitaion will be this, GDP will be that, unemployment will drop - and we just have to believe.
by das monde on Thu Oct 14th, 2010 at 06:22:46 AM EST
[ Parent ]
... are the Chamber of Commerce, National Association of Manufacturers, American Petroleum Institute, the National Mining Institute, the National Restaurant Association, and I forget the sixth of the Dirty Six.

I've been accused of being a Marxist, yet while Harpo's my favourite, it's Groucho I'm always quoting. Odd, that.
by BruceMcF (agila61 at netscape dot net) on Thu Oct 14th, 2010 at 06:47:13 PM EST
[ Parent ]
He, I have been thinking along similar lines, but more adapted to the fall of the Soviet Union. One of the oft-mentioned reasons for the collapse, was the downfall of central planning.

As it grew, it became more complex, making it harder for anyone to have an over-view. As rewards were coupled to delivering the right numbers, the right numbers were delivered from the units of production, without them properly representing any actual increase in production or quality. Central command was then left with a lot of faulty signals. Adding to this, environmental and social problems grew and was not captured at all in the numbers delivered to central command, except when tipping ecological or social balances to the point of dramatically disturbing the numbers reported.

I think the resemblance with our current crises is striking. The monetary systems signals are fudged by the banks funny money, the planned economies are run for the glory of the CEO, and ecological disasters are counted as net gains by causing a higher price-tag on remaining resources.

A vote for PES is a vote for EPP! A vote for EPP is a vote for PES! Support the coalition, vote EPP-PES in 2009!

by A swedish kind of death on Fri Oct 15th, 2010 at 11:49:41 AM EST
[ Parent ]
Que Orlov.

As the Dutch said while fighting the Spanish: "It is not necessary to have hope in order to persevere."
by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Fri Oct 15th, 2010 at 01:52:11 PM EST
[ Parent ]


Display:
Go to: [ European Tribune Homepage : Top of page : Top of comments ]