In this context banks exist as an officer/executive class that chooses which projects are 'valuable' and kills those that aren't.

In other words, banks decide policy according to standard economic criteria.

The problem is that those criteria are inherently political. So leaving banks to decide project viability is also inherently political.

Alternatives are possible, but they would require some thought and debate about values and viability, and the creation of an explicit agreement - let's call it a constitution - with clearly stated social aims and values.

As a culture I don't think we're ready to have that debate yet.

In the meantime, banks continue to run things because we have an implicit set of (capitalist) goals.

The results are often criticised, but the aims rarely are.

By limiting the ability of private banks to create money, I mean something a bit more drastic.  Right now, every bank loan creates new money.  That money does not come from savings (fractional reserve myth), but is created anew.

Should private banks have that ability, or should all currency creation be handled directly by the Treasury?

a natural mechanism for ensuring that people who should not be making judgment calls are purged when enough of their judgment calls blow up in their face.

And currently we have the opposite - government that rewards those who make judgement calls which blow up in their face.

In fact this is the key problem. Take away all the economic nonsense (and tradition) about debt, credit, profit, bonds, CDOs, derivatives, and the rest, and the only question that matters is - who makes the important decisions?

In Rational World, people who make good predictions and useful decisions would be rewarded.

In Econo-World, the opposite happens. People who can monopolise and game the system are allowed to make decisions, driving out those who have useful predictive and creative talent.

It's a kind of intellectual Gresham's Law - the dead-handed rule of the useless.

And given the (unstated) rules of politics and economics, this state of affairs is inevitable.

I suspect that all systems reduce to two actors - the mature, who have a practical interest in useful collective outcomes, and the sociopathic, who are only interested in benefiting themselves.

No political or economic system can work while the latter are given any more than very limited power.

This is not fundamentally an economic problem. It's not even a political problem in the usual sense.

It's more the political equivalent of discovering that germs and viruses make you ill, therefore basic standards of cleanliness and hygiene are necessary for health.

Private bank money is completely indistinguishable from central bank money. The distinction between high powered and low powered money is illusory - a canard.

Less than 3% (ante QE) of money in circulation has been central bank money  - ie notes and coin. It follows that the vast bulk of taxation is settled with private bank money.

Taxation destroys central bank money AND private bank money and it is pretty much the only thing that does.

Repayment of or default in respect of private bank loans cancels/terminates the debt but the money remains in existence.

Treasury debt is in fact dated Treasury credit, whereas fiat currency is undated Treasury credit created by the Central Bank as the Treasury's fiscal agent, and by private banks as look-alike or counterfeit (choose your language) fiat currency.

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

"Let me issue and control a nation's money and I care not who writes the laws." Mayer Amschel Rothschild (1744-1812), founder of the House of Rothschild.

All of these desiderata assume that money creation is done by people acting in the interests of all. The problem is to create a system that reasonably insures that outcome and to do so starting from a situation where those who are effectively in charge of creating money are doing so in the interests of a very small group of wealth holders who have used that wealth to grab control of the various countries comprising the global economy - effectively dozens of Mayer Rothschilds. And they also control the world's media.

Bringing about a situation where in even one major country the money supply is placed under the control of democratically accountable institutions and people and utilized to further the public good is a nontrivial task. The basic terms of discussion have been deliberately formulated to make such a development difficult and have to be undermined and challenged. L. Randall Wray at New Economic Perspectives, for instance, has been conducting ongoing discussions on the practicalities of a Job Guarantee program.

Perhaps a set of basic principles by which the money supply could be regulated could be formulated in such a way as to be fairly readily comprehended by most who will even venture to consider that some alternative to the present system is necessary. Having ready answers to such basic questions would seem helpful.

"It is not necessary to have hope in order to persevere."

My guess? Not a lot.

- Jake

Friends come and go. Enemies accumulate.

What is the purpose of Treasury Bonds?  They are certainly not funding the government - so what are the doing?  Could they be dispensed with entirely?

When your national currency is not a global reserve currency or you're a Euro member state you need issue state debt backed by your future power of taxation in order to access hard currency.

So what is Government Debt? Is it the Common Wealth, or the Common Burden? What obligations does it put on governments and nations?

So what is Government Debt? Is it the Common Wealth, or the Common Burden? What obligations does it put on governments and nations?

Government debt in other people's currencies works just like Swabian Housewife Economics tells you it does: You have to pay it back by selling real stuff to real people who may or may not want to buy your stuff.

Money is a token of state power. When a non-US country's government borrows US$, it borrows a representation of the ability of the US to visit extreme violence upon somebody. When it doesn't pay the US back, the somebody the US visits extreme violence upon is the government in question.

When the US prints US$ or T-bills, it essentially says "at some future point in time, I will come to someone and demand that they hand over US$ (which I will pay for T-bills), and if they do not have US$ to hand over, I will visit extreme violence upon them." This makes people want to have US$, because the US government is very good at inflicting violence and most people would therefore rather it did not do so upon them.

Indebting governments does look like a convenient way to rob nations. You let one dictators to borrow and buy military toys, and that "loan" will give you interest later from all subsequent good or bad governments. The IMF and troika will force that state first to default on its social obligations rather than to you.

One should be a little careful about the causality here: It is not necessarily true that by not accepting such loans your government will not be subjected to colonial aggression. It may be that your cabinet ministers will start suffering unfortunate accidents until you do accept such loans. Making a serious effort to avoid dollar loans used to be a significant risk factor for plane crashes among Latin American government officials.

Or what about privatization, so massive in the 90s? Governments there supposedly give away some public wealth for some money - does that money "disappear" like taxation?

Or is it all just a mind game, lasting while enough suckers accept told rules without much questioning? Or just a power game, steered by those who can enforce or escape any agreements or consensus?

- Jake

Friends come and go. Enemies accumulate.

In practice what happens is that even if you consider taxation as revenue, the revenue is often spent on corporate welfare and not on directly useful social welfare.

Even when the alleged social welfare budget is huge - as with the UK's NHS - much of the money is wasted because of corporate profiteering and faked up private-style management, which enforces 'competition' that actually just diverts resources back to the same old shareholders and investors who profit from the private sector.

Useful social investment is very much the exception and not the rule. And of course it's considered anathema and heresy by the Serious People, who doubt its very existence as an article of free-market faith.

Of course taxes could be used as a justification for social investment, and they certainly were in the past. Although it remains debatable whether they're actually needed, or whether they're merely a very indirect and rather rhetorical form of fiscal control.

To the extent that real resources, such as human hours of time, physical space constraints, and finite mineral resources, are limited, the trick to money is to get it to match as closely as possible the real resources limitations.  Taxation effectively forces people to provide real resources, particularly their own time, to community ends instead of private satiation of wants and needs.

If taxes were being paid in kind, such as labor corvee or tribute in goods, then this would be true.  But they're not, they're paid in value tokens.

The key difference, I think, between what I've been arguing (apparently derived from my secondhand understanding of MMT picked up at this site) and what you're arguing here is at least partly and empirical question.

Are the physical and material resources of society stretched to their outer limits by the existing private economy, so that any action by government must be funded by the destruction of the ability of private actors to call upon those material resources?  Is the economy so stretched that unfunded government spending would actually be inflationary?

It seems as if this is a question which could be answered through a proper program of econometric research.

That said, my gut intuition is that our economy is nowhere near that level of mobilization in numerous key fields.  If the industrial economy is facing a constant and severe crisis of insufficient demand, and there are masses of the unemployed sitting around doing nothing, then no, unfunded government spending is not going to cause inflation.

There needs to be a balance, clearly, between government spending and taxation.  When the private economy is truly stretched to its limit, that is the time when taxation should be used more aggressively to destroy value, and when spending must be reigned in.  But when the private economy is suffering contraction and collapse, or even just the doldrums of blah stagnation, then a different story should be told.

Not only is there no reason to engage in a program of austerity, there is no reason to rack up debt in order to do otherwise.

One of the more confusing things the MMTers assert is that taxation doesn't fund anything but rather only retires cash from circulation in the economy, similar to the way a central bank raising interest rates by selling securities would retire cash from the economy. This just isn't correct.

To the extent that real resources, such as human hours of time, physical space constraints, and finite mineral resources, are limited, the trick to money is to get it to match as closely as possible the real resources limitations. Taxation effectively forces people to provide real resources, particularly their own time, to community ends instead of private satiation of wants and needs.

Taxing forces people to not use real resources. It does not in any way, shape or form ensure that those resources will be provided to the public. Public spending is what forces people to provide them to the community. And the crucial Keynesian insight (which is quietly done away with in the Hicks-Samuelson general equilibrium fairy tale) is that the majority of these real resources - particularly people's time - cannot be saved up. The public and private sector taken together can spend enough at any given time to use the full capacity of the economy, or it can watch the unused capacity go to waste.

The public cannot hoard man-hours against the day the elderly retire; in the real world there are no little gray men running a time-savings bank. The public cannot hoard assembly line days; there are no factory-goblins that will save up the hours that the assembly line stands idle and use them to retroactively produce goods at some future date. The public can hoard steel and grain and other commodities (and frequently does), but this is accomplished by spending money into existence, not by taxing it out of existence.

These distinctions are important, because the highlight that what policymakers need to focus on are the flows (nominal GDP, employment, rate of change of prices, etc.). Then the stocks (national wealth, population, price levels, etc.) will take care of themselves.

- Jake

Friends come and go. Enemies accumulate.

Taxation in the form of requiring people to pay the government in units of currency is an effective, albeit imperfect, means of conserving real, physical resources for public use instead of private use.  That's why you can't just print more money and spend it endlessly without inflation appearing.  So, taxation really does fund defense, public welfare, and other governance activities because it really does keep people from using resources for other ends.

It'd be a lot of work, though.

- Jake

Friends come and go. Enemies accumulate.