What is Money?

[DonQuixote99]

It's a good video for the consumer, but it doesn't really address the central problem. He said a strange thing:

Aside from the unusual comparison, the banks don't lend savings, and they are the ones issuing the credit, they don't have 'debt'. The 'debt' they hold is an asset. It's of no real worry to them if the interest rate is just above zero, they only care about being paid back after a loan is extended.

What he misses in that video is what government should be doing to address rectifying the hit to supplies. And whilst some of this is out of their hands (Russia/Ukraine) and will require better organisation by some individuals, it does involve expenditure to fix long-standing problems like housing insulation, which has been left fallow for many of those those not able to pay for it themselves. Another is solar energy take-up, which again is only exploited by people with the means (and private home) to make use of it.

Money is scarce for users, not for issuers.

I assume first of all that the presenter was talking about consumer and business banks, not central banks that issue currency. I assume in the context, 'debt interest rate' means the interest paid to the banks by their debtors, the people they loan to. Savings interest rate means the rate paid by the banks to people who loan to them, their savings account customers. Savings accounts are, to the bank, debt that they owe. The interest rate behavior described seems accurate to me.

It's a good video for the consumer, but it doesn't really address the central problem. He said a strange thing:

Aside from the unusual comparison, the banks don't lend savings, and they are the ones issuing the credit, they don't have 'debt'. The 'debt' they hold is an asset. It's of no real worry to them if the interest rate is just above zero, they only care about being paid back after a loan is extended.

What he misses in that video is what government should be doing to address rectifying the hit to supplies. And whilst some of this is out of their hands (Russia/Ukraine) and will require better organisation by some individuals, it does involve expenditure to fix long-standing problems like housing insulation, which has been left fallow for many of those those not able to pay for it themselves. Another is solar energy take-up, which again is only exploited by people with the means (and private home) to make use of it.

Money is scarce for users, not for issuers.

Banks do have debt, basically, it's their obligation to pay back to depositors the amount they deposit, plus interest. This debt is a liability of the bank, not an asset. The asset in the transaction is the cash deposited. I assume the point being made in the video is that from the consumer's point of view, the cost of credit is shooting up, while the return they can get for extending credit to the bank, by depositing money, is low and stangnant.

 

[Le Baron]

I assume first of all that the presenter was talking about consumer and business banks, not central banks that issue currency. I assume in the context, 'debt interest rate' means the interest paid to the banks by their debtors, the people they loan to. Savings interest rate means the rate paid by the banks to people who loan to them, their savings account customers. Savings accounts are, to the bank, debt that they owe. The interest rate behavior described seems accurate to me.

Yes that is what he is referring to. Though people putting money in the bank don't really 'loan' the bank any deposits - they don't loan out deposits - though they do pay interest on deposits, which is interesting to keep in mind because it is very similar to the notion of one function of bonds. Since the banks (private/business banks) all have their own accounts at the BoE, it is a CB question at the end of the day.

The cost of credit is why the interest rate should be zero or just above. The banks don't have a problem loaning, they don't loan reserves, but they do need to know they can be paid back.

 

[DonQuixote99]

I thought maybe it was worth another go?

I just had a conversation where someone asked about Scandinavian countries having high taxes and 'therefore' higher spending. The implication being: the taxes....therefore the spending. And also, something which has turned up in other posts here, 'if taxes aren't funding then, why aren't taxes just eliminated?' They're legit questions to ask.

Taxation and spending do have a relationship, but it is not one where the taxation 'funds' the spending. The taxation level in e.g. Sweden points merely to the level of taxation, not what its function is. It is money cancellation, so if they redeem more, more gets cancelled. Which means more 'fiscal space'.

As for the 'cutting taxes to the bone'... Let's say that govt spending in Sweden represents 30% and that tax redemption (the money drain) is 28%. The net injection of gov spending is then 2% of GDP. If you cut out all the taxes the net injection of spending is now 30%, which is a massive rise in aggregate demand and if maintained as such will lead to inflation. If they stop spending to reduce it, the monetary economy ends.

Secondly the elimination of tax as a 'liability' - as something which forces you to need the currency - also extinguishes the only driver of currency acceptance and therefore its value.
There was a facet of the question linking the word 'income' as tax being 'income' for the government. Unfortunately this term is standard in economics, so clashes with the general notion of 'income' (or private sector 'saving'). Income for you (me, Joe Bloggs) is something you have to acquire, because you can't issue currency. For the sovereign government it isn't. We know this because practically everyone knows now that the government can issue fiat money at will. So the problem for government is not or never 'getting' money, but how to get rid of it out of the system once it is issued. That is what taxation does, one of its major functions. It is not their source, their source is the central bank's computer.

So yes, higher taxes, or better levied taxes, often means a government can spend more freely, but not because they use this as 'income' (since it is always above taxation and their source is self-created), but because more space is cleared.

And they then sell bonds to clear even more space?

And all involved tell consistent and detailed stories about the need to raise cash with taxes and bonds to fund operations, because the populace wouldn't understand anything like the true explanation? Tell me, do the banks and government agencies run 'secret colleges' where the true facts of money are taught to those of their staffs who need to understand them? The true facts you represent are not what is taught in regular universities....

 

[Le Baron]

And they then sell bonds to clear even more space?

And all involved tell consistent and detailed stories about the need to raise cash with taxes and bonds to fund operations, because the populace wouldn't understand anything like the true explanation? Tell me, do the banks and government agencies run 'secret colleges' where the true facts of money are taught to those of their staffs who need to understand them? The true facts you represent are not what is taught in regular universities....

There's no secret Beelzebub there, but the mechanisms are complex and indeed were put in place for a reason around the 70s. Using some mechanisms already in place whose functions have changed entirely. It's not far-fetched to say some people take things on trust. In complex systems there is very often doubt about what each part does and sometimes no questions asked.

Indeed bonds are sold to clear space, to temporarily (life of the bond) eliminate potential competition for spending in exchange for the interest payment on the asset. Though the spending mechanisms involves both the buying of bonds, then the sale of bonds, which would be an unusual tactic for a government which 'needed money' rather than space.

 

[DonQuixote99]

Yes that is what he is referring to. Though people putting money in the bank don't really 'loan' the bank any deposits - they don't loan out deposits - though they do pay interest on deposits, which is interesting to keep in mind because it is very similar to the notion of one function of bonds. Since the banks (private/business banks) all have their own accounts at the BoE, it is a CB question at the end of the day.

The cost of credit is why the interest rate should be zero or just above. The banks don't have a problem loaning, they don't loan reserves, but they do need to know they can be paid back.

Hold on. Whether the back really 'loans' the proceeds from deposits or not (let that go for a minute), I am loaning the bank money when I deposit it. They get the asset, the cash, and they have an obligation to give it back, with interest. Giving cash to another, under a contract where they have to pay it back with interest is called 'loaning.'

Just have to keep the terminology nailed down, every step of the way, or there's no hope of sorting things out....

 

[Le Baron]

Hold on. Whether the back really 'loans' the proceeds from deposits or not (let that go for a minute), I am loaning the bank money when I deposit it. They get the asset, the cash, and they have an obligation to give it back, with interest. Giving cash to another, under a contract where they have to pay it back with interest is called 'loaning.'

Yes the banks get that 'asset' which is better for the final balance sheet of national accounting than you having it in commodity money form in a sock under the bed (assuming you don't spend it). It's not really 'loaned' to them though. It's 'noted' and if and when you need it they just invent the credit and deduct from the balance sheet. Of course they do need to keep that within reason.

Seems like splitting hairs, but that's what happens.

 

[DonQuixote99]

There's no secret Beelzebub there, but the mechanisms are complex and indeed were put in place for a reason around the 70s. Using some mechanisms already in place whose functions have changed entirely. It's not far-fetched to say some people take things on trust. In complex systems there is very often doubt about what each part does and sometimes no questions asked.

Indeed bonds are sold to clear space, to temporarily (life of the bond) eliminate potential competition for spending in exchange for the interest payment on the asset. Though the spending mechanisms involves both the buying of bonds, then the sale of bonds, which would be an unusual tactic for a government which 'needed money' rather than space.

Right, calling it 'secret Beelzebub' does not really dispose of my point. Presumably there are at least some individuals briefed into how things really work, it can't all be people working with tunnel vision and no understanding. Do we have documents outlining such understanding? Do we have any individuals who, with insider insight, have 'talked?'

 

[Le Baron]

Right, calling it 'secret Beelzebub' does not really dispose of my point. Presumably there are at least some individuals briefed into how things really work, it can't all be people working with tunnel vision and no understanding. Do we have documents outlining such understanding? Do we have any individuals who, with insider insight, have 'talked?'

Well when some economists have done the direct thing and asked e.g. Fed reserve employees about operations, they've said what they do, but even then not really analysed this within context of the entire operations. Since it's not them running every last operation. So they know what they're doing in terms of their functions. It's like when Alan Greenspan (or maybe Bernanke) simply contradicted Obama's claim that the U.S. would 'run out of money' and Greenspan said, 'no we won't'. He knows the mechanism, knows how it works. Yet also believes (or believed) in the concept of controlling money supply. You hear them say things which contradict the official public version.

 

[DonQuixote99]

Yes the banks get that 'asset' which is better for the final balance sheet of national accounting than you having it in commodity money form in a sock under the bed (assuming you don't spend it). It's not really 'loaned' to them though. It's 'noted' and if and when you need it they just invent the credit and deduct from the balance sheet. Of course they do need to keep that within reason.

Seems like splitting hairs, but that's what happens.

Why do you insist it's not loaned to them? I give them an asset, they have an obligation to replace it, with interest. Isn't that the definition of a loan? What may be done outside of that doesn't seem to me to affect the nature of my transaction with the bank.

Also, I note the 'quotes' around asset. Why is cash I give the bank not an asset? If instead of giving it to the central bank to burn or whatever, they took it and bought pizza for the staff's lunch, it would function as a valuable asset, would it not?

 

[DonQuixote99]

Well when some economists have done the direct thing and asked e.g. Fed reserve employees about operations, they've said what they do, but even then not really analysed this within context of the entire operations. Since it's not them running every last operation. So they know what they're doing in terms of their functions. It's like when Alan Greenspan (or maybe Bernanke) simply contradicted Obama's claim that the U.S. would 'run out of money' and Greenspan said, 'no we won't'. He knows the mechanism, knows how it works. Yet also believes (or believed) in the concept of controlling money supply. You hear them say things which contradict the official public version.

Any politician referring to the government 'running out of money' is at best speaking loosely. Someone contradicting that does not imply MMT.

 

[Le Baron]

Why do you insist it's not loaned to them? I give them an asset, they have an obligation to replace it, with interest. Isn't that the definition of a loan? What may be done outside of that doesn't seem to me to affect the nature of my transaction with the bank.

Also, I note the 'quotes' around asset. Why is cash I give the bank not an asset? If instead of giving it to the central bank to burn or whatever, they took it and bought pizza for the staff's lunch, it would function as a valuable asset, would it not?

You don't give them any cash. Your money is paid direct to the bank. They 'get' it first deducted from a balance sheet running back to the CB. You just get the promise that on request they'll give you some (or all).

 

[Le Baron]

Ah well. I thought it would be just interesting and relevant to the discussion to relate that conversation I had. I'm not forcing you to accept anything, though it's hard to really move against heavy scepticism. I'm familiar with both the general orthodox and the heterodox analyses, I'm just laying-out the heterodox analysis and how it tallies with operational facts.

 

[DonQuixote99]

OK, here's a high level simplified concept of how I now think you are saying things work (with notional numbers for illustration, in billions). I hope you will feel very free to correct any wrong impressions, from your view, expressed here.

In a fiscal year:
Taxes collected: $800
New bonds sold (in excess of refinancing): $800
Money cancelled: $1600

Demands for Treasury expenditure: $1600
Money created: $1600

Note there is no strong connection between money cancelled and money created, so the government gains some level of flexibility there. Beyond that, why did the government move, in the 70s as you say, from ordinary taxing for revenue and spending said revenue, to this program of massive cancellation and massive creation?

 

[DonQuixote99]

You don't give them any cash. Your money is paid direct to the bank. They 'get' it first deducted from a balance sheet running back to the CB. You just get the promise that on request they'll give you some (or all).

The promise is ordinarily reliable, and it is what constitutes a debt obligation for the bank. Demand deposits are functionally cash and my use of the term includes them, as is ordinary. Note that the bank can get pizza with them. I can of course get currency and deposit it. Money is a way to hold and transmit value, in an economically functional way. Demand deposits qualify. Again, I transfer value to my bank, the bank promises to give it back with more value added. That's a loan.

 

[DonQuixote99]

Ah well. I thought it would be just interesting and relevant to the discussion to relate that conversation I had. I'm not forcing you to accept anything, though it's hard to really move against heavy scepticism. I'm familiar with both the general orthodox and the heterodox analyses, I'm just laying-out the heterodox analysis and how it tallies with operational facts.

Thanks, it's been fun.

And I'm trying to discuss reasonably, not engage in 'heavy skepticism.' I think the points I raise are just sensible questions. If you can make your POV make sense to me, I'm open to it.

 

[TheDecameron]

This is a fair, good, and valid question. Klassik is on another forum similar to this one. A couple of years ago, Klassik realized that Klassik's posts, especially ones pertaining to policy and economics, were often being misconstrued by those who clearly didn't read what Klassik had written. This was when Klassik wrote posts in the traditional first-person. The unfocused replies Klassik was getting were hindering good conversation. Klassik noticed other users were having the same problem.

Even in the first-person, Klassik knows Klassik's posts/replies are not the easiest to read. They're often rather long and contain multiple points. Beyond that, Klassik is one who questions many commonly held beliefs...especially those held by what constitutes 'the left' in modern times...since the 1980s or 1990s at least. This is not because Klassik is some right-winger, even if that's what those who didn't read Klassik's posts thoroughly thought, it's quite to the contrary. In fact, it's been mentioned to Klassik that some people have a very difficult time even handling the idea of an anti-right-wing Texan.

The thought came to Klassik's mind to post as an illeist. This adds an additional layer of difficulty to Klassik's posts for many people. Illeism will certainly annoy those easily annoyed, but Klassik came to the conclusion that people who are easily annoyed are a hindrance to good conversation, not a benefit. Klassik's illeist posts might be harder to read, but those willing to take on the challenge might well be the ones who read a post carefully, consider what is written, and then reply in a thoughtful manner.

Klassik didn't know if that would actually happen, but sure enough, that's exactly what happened! After much protestations initially, things settled down. Those who were quickly annoyed by Klassik's illeism just ignored Klassik's posts. Klassik is fine with that. Those who were willing to put in the effort to read Klassik's posts did so, and there were/are many of them, and the level of discourse was/is much, much improved. The success of this strategy has surprised even Klassik! This is not to say that the people who read Klassik's posts always agree with Klassik, but at least there is good discussion more often than not.

To put things in a Hi-Fi context, it's like signal-to-noise ratio. Klassik's illeism has eliminated a lot of the noise in typical social media political discussions. More signal, less noise.



Since Le Baron is over yonder and has been for a while, Le Baron surely knows how much the quality of conversations has improved. Klassik likes to post a lot about US foreign policy, for example, and what Klassik writes is often a significant challenge to those who hold 'mainstream', pro-state beliefs about foreign policy. Even with that, Klassik believes the conversation has been productive and respectful. That most certainly was not the case before when there was a lot more noise than signal.

I had an interesting gut feeling reading your explanation. Initially my nostrils were inundated with the profundity and it certainly has plausibility, bushels of plausibility but then another odour came through- artifice. A name popped into my head which initially surprised me- Pat Robertson.
As I say it’s only a gut feeling and can anyone rely on their gut in these days of internet communication?

 

[ks.234]

I had an interesting gut feeling reading your explanation. Initially the nostrils are inundated with the profundity and it certainly has plausibility, bushels of plausibility but then another odour came through- artifice. A name popped into my head which initially surprised me- Pat Robertson.
As I say it’s only a gut feeling and can anyone rely on their gut in these days of internet communication?

You were one complaining about MMT not long ago, yet here you yet again, offering nothing by sarcasm to a perfectly reasonable post. Don’t complain about the tone or content of MMTers when you post like this.

 

[TheDecameron]

You were one complaining about MMT not long ago, yet here you yet again, offering nothing by sarcasm to a perfectly reasonable post. Don’t complain about the tone or content of MMTers when you post like this.

That’s not sarcasm, it means what it says.