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Bank money supply and its effect on currency and foreign exchange?

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Conventional economics textbooks state as a fact that if the government prints excess money it would devalue its currency with respect to another country’s. This seems to be the case for what happened in the Weimer Republic and Zimbabwe for example.

But if private banks supposedly control 97% of the money supply in the US (and other advanced economies) through the issuance of credit, how does this now effect the value of the currency? Bank credit metrics like M2 and M4 has been increasing for decades and this hasn’t had any effect on the value of the currency – practically no correlation whatsoever. Conventional wisdom would suggest this increase in the supply of money should devalue the US dollar, but obviously that is not the case. So whats going on here? How is it that we don’t have a Zimbabwe style hyperinflation in our hands with all the ever increasing bank credit?

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Posted by Incognito 7
Posted on 06/30/2017 4:30 AM
196 views
Private answer

Incog, It is not about “printing money”… the power of the underlying economy is what controls the value of the currency vs. the other currencies. In Zimbabwe, the banks of the world refused to accept their fiat currency and dumped it. Their economy was about making baskets etc. that nobody wanted. Much of their so-called money was actual currency from other countries that had value compared to theirs. I’ll tell you something…when banks don’t accept your currency, the value goes by-by.

In the USA 1780s, we had “Continentals”. This was pure fiat currency back by our land. “Fiat currency” has no inherent value; its utility is simply a “unit of exchange” prescribed by law. This worked fine until the British counterfeited million$ of continentals, passed them out to whoever, and this eventually lead to it not being a good “unit of exchange” anymore. Apparently, this was a tactic used by the British to defeat their enemies. Cullen has explained the reasons why certain fiat currencies have gone under. It’s never as simple of “printing money”. It’s aways something drastic that comes from an economy that goes bust, they lose a war, and the currency goes worthless because it is not a trustworthy unit of exanchange.

So what about “public banks” that create moolah for public projects? Will this cause a decrease in the value of our currency relative to other currencies via currency dilution? Not if our economy benefits and grows stronger! The value of our currency will increase because the capitalist industries and homeowners will be more efficient if the projects are well chosen.

BTW they are NOT well chosen these days because our legislators, like you, don’t understand where “money” comes from. They seem to want to end Uncle Sam’s over spending and then pay back to the banks and remove our so-called “national debt”.

https://www.thenation.com/article/what-if-people-owned-the-banks-instead-of-wall-street/

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Posted by Dennis
Answered on 06/30/2017 5:07 AM
    Private answer

    It’s better to think of things in terms of overall financial assets. The problem in Zimbabwe wasn’t that they had too much “money”. The problem was that they had too few productive assets relative to their financial assets. The thing about credit and bank money is that most of it is directly tied to houses. In other words, you have a tangible non-financial asset backing the value of the financial assets. So, in a weird way, bank issued money is inherently more stable than something like running the Zimbabwean printing press which is done just to enrich the govt and its leaders. Basically, it comes down to money issued to dig holes or money issued to dig holes that we put houses on top of. The latter is credit issued money and the prior is govt issued money. It’s not quite that simple because there’s a multiplier in govt spending that can spur the building of holes with houses, but you get the point hopefully.

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    Cullen Roche Posted by Cullen Roche
    Answered on 06/30/2017 1:13 PM
      Private answer

      I really dislike the way then term fiat money is used so widely. Strictly speaking, fiat simply means ‘by decree’ or ‘because I say so’. To me, fiat money is simply worthless tokens that are distributed (or spent) by a government, which then instructs the population that they should use the tokens as a medium of exchange. I see that form of government created money as being very different to money created by the private sector using the banking system. Even though both types of money use worthless tokens or book entries to record who has the money and they both are clearly not commodity or representative money backed by a fixed amount of a particular physical commodity, private sector money is backed by very real commitments made by very real people to provide very real goods and services in exchange for the private sector money that they themselves created by taking a loan from a bank in the first place (strictly speaking, accepting credit from a bank). If you have private sector created money, you will always find someone who will want to rewire your house, fix your car, or even remove tree-roots from your yard in exchange for that money, because they need it to extinguish their bank debts. No government will do those things for you in exchange for the tokens they issued. You won’t find Mr Trump or Mr Mugabe turning up at your house offering to clean your windows in exchange for your money in order to extinguish any debt. When private sector money is created, it is done so by the simultaneous creation of a new asset and new liability which offset. Nobody claims that private sector money creation adds any immediate value in the way of net assets. When a government spends tokens into existence, it IS trying to introduce just an asset, with no corresponding liability. It’s a very different situation.

      MMTers, who erroneously believe that the US and UK governments do actually distribute state money by spending it into existence (they don’t) maintain that the money is given value by the knowledge that it will have to be returned to the government by way of taxation in order to be extinguished at some point. If there were a monetary system where the government did simply spend tokens into existence, there comes a point that it has to start taxing out of existence roughly the same amount of tokens that it introduces (actually slightly less if it wants the money supply to grow steadily). Even though such a system doesn’t (officially) exist, there is no reason why such a system couldn’t exist, although I would question if a population would be happier knowing their money had value because the government were going to tax it out of existence or because a real person is going to extinguish it by doing some real work for a holder of money in order to obtain it to repay his bank debt. I think I know the answer……

      I say no such state money system OFFICIALLY exists, because I suspect that Zimbabwe might actually be a country where the government, being fairly corrupt, does actually simply spend money into existence. The problem is that because they spend money in the form of paper tokens into existence, they lose track of the money and are unable to tax it back . The money supply, in the form of an asset with no offsetting liability, thus continues to grow, feeding inflation, which means the government have to spend even more into existence etc etc etc. As Cullen says, the Zimbabwean government are spending these tokens into existence in order to enrich its members, so they don’t really care too much about controlling the amount in existence, with the very obvious and very predictable results.

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      Posted by Robert Pearson
      Answered on 06/30/2017 6:04 PM
        Private answer

        Robert that’s complete nonsense.

        See this private money and public money debate it helps no one. For the love of god the state issues a licence so that commercail banks can issue the states money. It all comes from the same place and is written on every note. The commercial bank system would collapse if the central bank did not provide the reserves needed as it clears and keeps the liquidity running smoothly.

        Let’s get Zimbabwe straight from the off before we start dancing around the issue. Mugabe wanted to reward his freedom fighters and he did so by giving them the farms. Now farming in zimbabwe was the best and most effecient in Africa.

        So what happens when you give a bunch of soldiers a bunch of farms ? Production dropped by 60% overnight. So you ended up with way too much money chasing fewer goods = inflation.

        That’s the key here and always has been it does not matter if the private sector or the government spend money or spending is done by borrowing each and everyone carries an inflation risk.

        It is crazy to suggest that somehow private spending is immune from this because an ideology based on free markets from a right spectrum says so. After all it was this ideology who caused the financial crash that was only saved by the other type of spending they hate so much. How quickly these ideologues forget that.

        So all types of spending carry an inflation risk. It’s never about the quantity of spending when you determine the exchange rate it is always about the price. Who is the price setter ??

        The key is whoever is doing the spending has to make sure there are enough skills and resources to absorb that spending.

        Case in point… Trumps infrastructure policy.

        If the private sector was given this task yes there would be an inflation risk.

        If the US government was given this task yes there would be an inflation risk.

        If it is a public and private partnership yes there would be an inflation risk.

        So no matter which path is taken they have to make sure there are

        a) Enough companies to carry out the work

        b) Enough skills and people available

        c) Enough training and R&D being done to fill the skills gap

        Etc.etc,etc

        This takes years of planning and you’ll be lucky if it is even started by the time he leaves office. If they don’t have these above and just throw money at the problem then you are going to get inflation.

        Remember same applies to healthcare, armed forces, education, farming, the list is endless.

        So in short inflation mainly depends on how you allocate your skills and resources as a country. You can run out of skills and resources very quickly as Trump is about to find out but you can never run out of currency.

        Smart people call it government buying rather than government spending.

        https://medium.com/modern-money-matters/smart-people-talk-about-government-buying-f805c18c4d31

        Which would be my option for Trumps infrastructure project( yes i’m a capitalist)because a public, private partnership is the same as allowing burger king and KFC to build you a $million kitchen of your dreams in your house for free. Then charging you rent to use it for the next 70 years.

        Please see PFI’s in the UK for details and how they are destroying the UK health service.

        I’m nearly 50 years old and sick to the back teeth of this false arguement of public or private money. It is nothing more than a left or right arguement or private sector good, public sector bad debates mainly based on ideology and not the actual accounting. Depending on how you were brought up and your political leanings.

        If people all on all sides of the debate were truely honest with themselves ( that’ll be the day) then two words caused this false premise and this arguement that holds everyone back and those two words were

        Job Guarentee.

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        Posted by Derek Henry
        Answered on 07/01/2017 8:41 AM
          Private answer

          As adults we have already seen what would have happened if there was no public money ( lender of last resort) to help private money ( commercial banks)in 2007.

          This debate should be over.

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          Posted by Derek Henry
          Answered on 07/01/2017 8:53 AM
            Private answer

            Derek: “Smart people call it government buying rather than government spending.” Exactly. Since this is the case I’m going to beat this drum that I’ve been beating for over a year now like a sad broken record. Why do we add these purchases to our so-called National Debt? They are sitting right here in our country and are true assets. Just subtract that “value” from our so-called “National Debt” and we wold be in the black rather than the red and NOBODY would worry about it anymore.

            Cullen and MMT have said that Uncle Sam issues bonds as a public service that does not actually “fund” the government, so Uncle can just do what it wants instead of having the fake battle about the so-called “debt limit”. Sorry Robert, but you do not understand where fiat money comes from.

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            Posted by Dennis
            Answered on 07/01/2017 3:05 PM
              Private answer

              If the infrastructure spending were carried out by a National Public Bank, or State Public Banks, they would have an asset on their books and that could be “confiscated” /”repossessed” by the Nation or State if the public didn’t pay the moolah back to the Public Banks. In the meantime, the Public gets to keep the interest payments.

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              Posted by Dennis
              Answered on 07/01/2017 3:12 PM
                Private answer
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                Posted by Dennis
                Answered on 07/01/2017 3:17 PM
                  Private answer

                  Derek,

                  Much of what you say is misleading. Specifically:

                  “The commercial bank system would collapse if the central bank did not provide the reserves needed as it clears and keeps the liquidity running smoothly.”

                  This is 100% false. Banks don’t need a central clearing system and have operated private clearing sytems on their own for a long time. The CB helps during times of crisis, but it is not a requirement. Yes, it stabilizes the overall economy, but banks themselves would not collapse without a CB.

                  It’s also wrong to imply that private spending and public spending are the same thing. Private spending has a disinfltionary bias because it is based on a profit motive. That is, when corporations spend money they must be efficient or they go out of business. When the govt spends inefficiently this can continue in perpetuity whether it is productive or not. It shouldn’t be controversial to say that private spending has a tendency to be more efficient because it is constrained by a specific solvency constraint.

                  Lastly, the idea that a Job Guarantee is the fix to all the world’s problems is just completely unproven. Now, some of you MMT advocates like to argue that I am against the JG and that that’s why I dislike MMT. This was ALWAYS a dishonest position that you people use to misconstrue my views and bolster your own views. I have always maintained that I am open minded to a JG, but I would like to see that it can actually work the way MMTers claim it would. Thus far there is zero evidence that it works.

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                  Cullen Roche Posted by Cullen Roche
                  Answered on 07/01/2017 3:26 PM
                    Private answer

                    “Cullen and MMT have said that Uncle Sam issues bonds as a public service that does not actually “fund” the government, so Uncle can just do what it wants instead of having the fake battle about the so-called “debt limit”. “

                    This is not what I say. This is what MMT says. The US govt has to fund its spending BY LAW. In THEORY (or alternative realities like MMT) the govt can just spend at will. This is not the way the US govt is constructed at present. The US govt cannot just spend without financing its spending.

                    In any case, the idea of funding is always based on the willingness of someone to hold your liabilities. Whether you have your own bank or not (like the US govt) is irrelevant. If the private sector doesn’t wan to hold T-Bonds then the US govt can’t fund its spending whether it prints to the moon and back.

                    We should be very clear about this. Anyone can create financial assets. We call some of those financial assets “money” because they are used at the point of purchase. But that’s a misleading term. Corporations create money like financial assets, households create them and govt’s create them. All of these instruments are important in different ways. I am surprised regular readers are still confused by some of these matters…..

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                    Cullen Roche Posted by Cullen Roche
                    Answered on 07/01/2017 3:30 PM
                      Private answer

                      Yes I know that Cullen.

                      In normal operation, at the end of clearing all the commercial banks lend to each other and the central bank is out of the loop. The central bank provides liquidity during the day, but looks to drop out of the loop overnight.

                      It’s only in times of stress that the CB gets involved as ‘lender of last resort’. But we’ve been in banking stress so long now it is starting to look normal.

                      And it’s important to note that the CB doesn’t really lend. It is always a repo – a ‘repurchase’ operation. So the CB is actually buying things with government money, and that falls into undemocratic territory when those things become mortgages or mortgage securities created by the private banks.

                      I’m not one of those.

                      I’m approaching 50 and just sick to the back teeth of different groups who know how it works dancing on a pin head. Because that’s what it is in my own view. When what we all should be doing is coming up with solutions to the recognised problems.

                      I followed the debates for years and this one post sums it for me if you read the comments section.

                      https://mikenormaneconomics.blogspot.co.uk/2013/11/guest-post-ralph-musgrave-physical-cash.html

                      There’s a consensus there all standing on the same pin head. It’s no use throwing our arms up in the air and saying there is nothing we can do because the whole system is corrupt.

                      There’s enough of us to come up with some real problem solvers and there’s nothing wrong with tweaking our posistions to get there.

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                      Posted by Derek Henry
                      Answered on 07/01/2017 5:00 PM
                        Private answer

                        Dennis,

                        I like idea that you don’t issue bonds at all and just use the ways and means account instead.

                        The Ways and Means Account is just an infinite overdraft with the Central Bank, and it grows over time to balance the net-savings of the non-government sector just as the Gilt stock does now.

                        HM Treasury simply doesn’t issue any Gilts any more. Any funding of private pensions in payment should be done by offering annuities at National Savings, which would also have the neat side effect of ‘confiscating’ net savings and making the deficit go down.

                        It’s irrelevant what interest BoE charges on the ‘Ways and Means’ account since any profit the BoE makes from it goes back to HM treasury anyway. So it can 50% if that gives the necessary level of satisfaction to mainstream economists.

                        What you have is a standard intra-group loan account between a principal entity (HM Treasury) and its wholly-owned subsidiary. Normally those sort of loans are interest free for the fairly obvious reason that interest charging is utterly pointless, and they are perpetual for the same reason. Rolling over is totally pointless.

                        Any term money can then be issued to the commercial banks directly by the Bank of England – up to three month Sterling bills.

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                        Posted by Derek Henry
                        Answered on 07/01/2017 5:04 PM
                          Private answer

                          Derek,

                          That thread proves where MMT people get this all wrong. They actually believe that bank liabilities are promises to convert to “the real stuff” (state money). That’s just completely and demonstrably wrong. Banks do not want to convert you deposits to state money. In fact, they can’t even convert much of their liabilities to state money because it would be the equivalent of a run on the banking system. I mean, our system is literally designed so that the banks CANNOT convert your money into cash in the aggregate. So this whole idea that bank liabilities only exist to give you access to the “real stuff” is BS. Bank money is the the real stuff. We’ve outsourced the whole system to private banks. We’ve put them at the top of the hierarchy by allowing them to orchestrate the legislation that made it that way.

                          Look, I like MMT. But there is some stuff in MMT that is pretty obviously wrong once you get it. And yes, they have a Marxian style confidence in the ability of the state to do what’s in the best interest of the private sector. It’s a little disturbing. I am by no means against govt spending and govt intervention in the economy. In fact, as you well know, I think it’s necessary. I wish we were running bigger deficits right now and taxing rich people more to reduce inequality. But there’s no need to go overboard with these ideas and go full blown MMT and start throwing around the idea that there is no alternative aside from an unproven Job Guarantee.

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                          Cullen Roche Posted by Cullen Roche
                          Answered on 07/01/2017 5:25 PM
                            Private answer

                            Cullen,

                            My view is very similar to Tom Hickey’s view in the comments piece of the link I gave you.

                            We know what the issues are we know what corruption exists. We need to build some sort of platform that fixes and sorts out these issues. Using everybody’s knowledge to get there.

                            Bill Mitchell is on record as in leaning strongly toward nationalizing the banking system. He feels, as you suggest, that it is not only impractical to rein in the banks using legislation and regulation but also likely impossible, since they will do everything in their power to skirt regulation, change legislation, and in the end the big banks will do what they please and challenge the authorities to do anything about it by threatening to crash the system.

                            As you know, Warren disagrees and thinks that better legislation, regulation and oversight is sufficient, and he has put forward a plan to that effect. However, I think that they all agree that if existing law and regulation were followed, oversight was up to par, and accountability imposed, most of the egregious excesses could be eliminated.

                            The problem is not so much economic or financial as it is political. As Sen Durbin famously said, “The banks own the place (Congress). A look at presidential appointments generally reveals the same wrt the executive, with some many bankers serving in high places and the revolving door wide open.

                            Can this be surmounted? So far, no, even though the need for it has been recognized at the highest levels. The big banks still have too much clout politically and they are not reticent about throwing their weight around.

                            Randy analyzes the problem in terms of managerialism and Bill Black in terms of control fraud. This arises from the corporate model of banking with limited liability and perverse incentives for top management that replaced the partnership model. It could be reversed by going back to the partnership model with unlimited personal liability for the partners. I would favor this approach, at least as a start.

                            Ralph Musgrave and the positive money crowd prefers a full reserve banking system in which only outside money is lent, e.g, Laurence Kotlikoff’s mutual fund banking model.

                            Everybody is mucking in trying to find answers to the problems faced. What would be a breath of fresh air for this site is some ideas by yourself and the readers of the site. Highlighting new ideas and fresh approaches to these issues.

                            It would benefit everybody and I was hoping that the Monetary Realism site was going to add those types of things to the mix.

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                            Posted by Derek Henry
                            Answered on 07/01/2017 5:30 PM
                              Private answer

                              Derek,

                              I’m probably closer to Warren on this matter. But we’re always going to be chasing our tail to some degree. I mena, we can’t stop speculation. We can try to control it, but we’ll never extinguish it. And at the end of the day we have to realize that crises like 2008 are about more than just bad banks. That bubble was a speculative frenzy in housing. The banks were complicit in enabling the bad actors and they exacerbated it all by leveraging everything through securitization but it’s silly to think that regulation would have stopped the housing bubble from occurring. I’ve been on record saying that I’d be in favor of a mandatory 20% down law on all housing purchases. But I know that wouldn’t have stopped a housing bubble. You can get perfectly creditworthy people who speculate and get in too deep. That’s the story of Wall Street forever – rich people chasing asset price increases. It’s as old as markets. But the fact that bubbles and crises can occur even with good regulations is not a reason to go crazy and start saying we need to nationalize the banks and suffocate these institutions to the point where they can’t even operate efficiently….

                              I think this is part of the problem with the MMT view. MMTers actually believe the state can stop all of this stuff because they have some sort of wizard-like powers of control over the whole thing. I just don’t buy that and I think we need a more balanced and nuanced perspective of how things actually work.

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                              Cullen Roche Posted by Cullen Roche
                              Answered on 07/01/2017 5:40 PM
                                Private answer

                                Cullen,

                                Who’s going full blown your last sentence mis represents what I’m saying.

                                I’ve posted what my view is above.

                                You don’t even know if I agree with the job guarentee or not as I’ve never told you.

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                                Posted by Derek Henry
                                Answered on 07/01/2017 5:42 PM
                                  Private answer

                                  Derek, I am not referring to you personally. I am referring to MMT more generally. I think they go overboard in some of their views. The JG is the perfect example. They basically say the state controls the net issuance of financial assets, therefore unemployment is caused by the govt therefore a JG is the only way to solve the problem. This starts with a flawed premise which creates the illusion that the cause is the govt which leads to the illogical conclusion that the only fix is the govt because they pull the magical lever of NFA. This is such an extreme conclusion based on such a flawed premise that it discredits the theory. There’s no need for this rhetorical, theoretical and operational overreach.

                                  I don’t know what you prefer and I am sorry if I am implied as much.

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                                  Cullen Roche Posted by Cullen Roche
                                  Answered on 07/01/2017 5:45 PM
                                    Private answer

                                    Yes I Totally agree.

                                    We can all agree this would be a good starting point.

                                    I say let’s get on with it and stop this dancing on a pin head it is pointless.

                                    Nobody said it was going to be easy 🙂

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                                    Posted by Derek Henry
                                    Answered on 07/01/2017 5:46 PM
                                      Private answer

                                      I’m studying the JG at the moment and I’m studying historic data from when we were at war and what full employment looked like.

                                      I’m also reading papers that highlight the difference between effective demand and aggregate demand.

                                      Effective demand is somewhat complicated: https://www.levy.org/pubs/wp_542.pdf

                                      And reading Beveridge’s book “Full Employment in a Free Society”.

                                      So I’m just getting a grounding in it. However, I must admit I do like this garden anology.

                                      So let’s start in a depression era, and assume I’ve been away from home for a few days and it’s been really hot and sunny (in Manchester no less!). All my plants are dry and gasping for water, so I can whack the sprinkler on across the whole garden, immediately providing a much needed boost in aggregate water levels.

                                      However, as I get near to the point of correctly watering all the plants, some start to saturate and waterlog. In some perfect theoretical construct of a garden, this would not occur – a combination of gravity and osmosis would ensure that as long as the aggregate volume of water was correct, water would disperse from the overwatered areas to the dry areas and everything would get just what it needs.

                                      Unfortunately in the real world, this won’t happen. Some parts of my garden drain much better than others (damn Cheshire clay), some dry quicker depending how much shade they have, while some of my plants are much more susceptible to drying out than others – my tomatoes need water every day while fruiting, whereas the potatoes can survive days without.

                                      The mainstream obsesses over the problem of waterlogging, and determines that it is vital that I turn the sprinkler off the second I sense any plant getting too much water. It posits that unfortunately there is a necessary trade-off between that and some plants dying of too little water, and suggests that in this scenario, any specific interventions I make in the garden will lead to disaster, and all I can do is encourage flexibility in the vegetable market.

                                      Perhaps I can retrain my tomatoes to behave more like potatoes, or suggest they move from their nice sunny spot by the fence, to the shady spot behind the runner beans where there’s no shortage of water.

                                      Meanwhile, academic vegeconomists all over the world spend thousands of fruitless hours devising ever more complex models to compute the absolute amount of water I should use, taking in to account their predictions of the weather (which they can never get right), the mix of vegetables (which changes from year to year and depends on the random germination of seeds – which they never get right) and the composition of the soil (which depends on the compost I’ve used this year – which they never get right). Despite the complexity of these models, all they ever come up with a slight variations as to how much I should leave the sprinkler tap on.

                                      After that, my poor old tomatoes are left to their own devices. C’mon, I’ve incentivised you to be a potato!

                                      But MMT/the targeted demand approach says we can do much better than that. It deals with the fact tomatoes are and always will be tomatoes and need the sunny patch by the fence to grow.

                                      It still uses the sprinkler, and set at a level where waterlogging shouldn’t occur. But then rather than worrying about measuring the amount of water used, and comparing this to some notional target, it checks each plant individually to see if is getting enough water. If it isn’t, it tells me to pick up the watering can, and specifically water that plant. Happy tomatoes!

                                      What’s more, if for any reason the run-off from my specific watering flows elsewhere in the garden, causing too much water in aggregate and I notice any saturation, I can always turn the sprinkler down a notch, safe in the knowledge if some other plants now lack water as a result, my targeting watering can will deal with the situation. Happy broad beans!

                                      What’s more, because my garden is now much more stable, my vegetable growing is at maximum productive output and I’ve discovered making specific interventions in the garden isn’t the disaster the mainstream assured me it would be, and I can consider longer term structural changes. Perhaps building a run-off towards the tomatoes so they’re less likely to require the watering can intervention, or improving the drainage by the rhubarb so they won’t waterlog so quickly.

                                      And of course, the garden never reaches a permanently stable equilibrium – there’ll always be jobs to do, and I’ll always need the watering can occasionally – but hey, it’s a lot better than the mainstream system and it gets me out the house.

                                      Beveridge puts it best in his book “Full Employment in a Free Society”. The problem is the “Free Society” bit – which doesn’t really exist in war time.

                                      “Firstly … government may change … The machinery of government, while responsive to general changes of opinion, must be resistant to lobbies”

                                      “Secondly, Freedom of association for industrial purposes raises the issue of wage determination. Under conditions of full employment can a rising spiral of wages and prices be prevented if collective bargaining, with the right to strike, remains absolutely free?”

                                      “Third, freedom in choice of occupations makes it harder to ensure that all men at all times are occupied productively. … neither the Essential Work Order nor the powers of industrial directions which have been found necessary during the water should be continued after the war is over”

                                      “Fourth, freedom in the management of personal incomes complicates the problem of full employment from another side. If men cannot be forced to buy just what has been produced, that means the demands for labour and its products cannot be forcibly fitted to supply. … There may also be changes in quantity. For freedom in the management of personal income includes the freedom to decide between spending now and saving so as to have the power of spending later.”

                                      ” In all the respect names, and possibly some others, the problems of maintaining full employment is more complicated in a free society that it would be under a totalitarian regime”

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                                      Posted by Derek Henry
                                      Answered on 07/01/2017 5:58 PM
                                        Private answer

                                        At this time the Ways and means account is no longer used and is being wound down, government balances on a daily basis are cleared using ‘market instruments’ Quote from the UK DMO.

                                        Iconito7 s question makes a very good point, anyone who sees modern money as commodity with quantity restrained value has the wrong picture in mind.
                                        As Cullen and Robert have said bank deposits are backed by real obligation he to provide coresponding goods and services to deposit holders , the credibility of that undertaking overseen on an individual basis dollar for dollar by a qualified bank loan officer.

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                                        Posted by Dinero
                                        Answered on 07/02/2017 5:40 AM
                                          Private answer

                                          Sorry, Cullen I still had this write-up stuck in my head from you in 2011, know it is a bit off:

                                          “What role does the bond market play in all of this?
                                          “In terms of the bond market, the issuance of bonds does not serve the same purpose it did under the gold
                                          standard. We actually issued bonds because we were revenue constrained (not enough gold reserves at all
                                          times to fund spending without creating inflation). In the modern monetary system bonds fund nothing.
                                          Bond issuance is a relic of the gold standard that serves only to help the Fed hit its target interest rate (a
                                          pure monetary operation to control the Fed Funds Target Rate). It can also be thought of as another form of
                                          government spending because a treasury bond is basically a savings account. Disbursements in the form of
                                          interest on US government bonds add to the budget deficit. People think this is government “debt” because
                                          Congress mandates the issuance of bonds (this is primarily due to misconception and the need for
                                          accountability).”

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                                          Posted by Dennis
                                          Answered on 07/02/2017 3:53 PM
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                                            TBH I wasn’t expecting such a vehement response to what I wrote!

                                            I wasn’t trying to make a point about the pros and cons of left vs right or public vs private, I was simply suggesting that it might be worthwhile, when discussing money, (explicitly fiat money), to make a distinction between privately created fiat and publicly created fiat. The first is backed by, as I call it, real promises from real people to provide real goods and services. The second is backed by the promise of the government that they will accept that money in payment of your taxes. Both types of money are equally valid, they are both ‘backed’ by something, despite what the goldbugs say and, as we know, they can both exist side by side.

                                            Where I fundamentally disagree with PM is that they believe private money being created from debt is what is wrong with our current system, whereas I see it as the great strength of our current system I don’t think anyone would fundamentally disagree with a basic premise of trade, which is ‘if I supply something, I expect something in return and if I receive something, I should provide something in return’. It’s pretty fundamental and has been accepted for many thousands of years. I very much like one of Dinero’s lines – that money allows barter to happen (which is the most basic form of trade), shifted in both time and space. Credit is what allows a barter trade to happen shifted in time (I supply something now and you provide me with something in the future and you give me a token to indicate you owe me something). The ability to standardise the tokens allows barter trade to happen shifted in space – that is I can provide something to one person and receive something in return from another.

                                            The private money system, utilising these tokens issued through a central clearing house (the banking system) allows trade to happen shifted in time and space. When it works, it works really well. When it doesn’t work so well, improvements need to be made to the checks and balances. What it doesn’t need is being dismantled and replaced by an untried and untested system.

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                                            Posted by Robert Pearson
                                            Answered on 07/02/2017 3:58 PM
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                                              Dinero.

                                              All you need to do is snap your fingers and the ways and means account can come back and then these is no need to issue bonds at all.

                                              It’s how the UK done it for decades. Without any problems at all.

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                                              Posted by Derek Henry
                                              Answered on 07/02/2017 5:34 PM
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                                                Sorry Robert,

                                                I didn’t mean to come across that way. I’m just sick of it. We have the brains and the numbers to make a joint effort to help find solutions to the things we see as wrong. We know it is corrput we know it will be hard to stop but some things are worth fighting for. They win by dividing people.

                                                Let’s face it the establishments in most countries have got away with day light robbery it’s a disgrace.

                                                They were going to take money off disabled people in the UK at one point. All on the lie that the UK can run out of money.

                                                Who would do that unless you are pyscopath. It needs to be challenged everywhere and stopped before they do anymore harm.

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                                                Posted by Derek Henry
                                                Answered on 07/02/2017 5:44 PM
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                                                  Derek – any idea what the typical balance of the ways and means account was before it was frozen and then reduced from 2000? I don’t see it ever being much above £20bn, which is a pretty trivial amount given the total size of government transactions.

                                                  Re-activating the ways and means account and keeping it to a level that the UK has done for decades is hardly going to obviate the need to issue bonds.

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                                                  Posted by Robert Pearson
                                                  Answered on 07/02/2017 5:51 PM
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                                                    It can grow to whatever size you like.

                                                    It is just an infinite overdraft with the Central Bank, and it grows over time to balance the net-savings of the non-government sector just as the Gilt stock does now.

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                                                    Posted by Derek Henry
                                                    Answered on 07/02/2017 8:06 PM
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                                                      Gilt Issues Considered Harmful

                                                      https://www.3spoken.co.uk/search/label/Gilts

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                                                      Posted by Derek Henry
                                                      Answered on 07/02/2017 8:15 PM
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                                                        Ways and Means advances have been in place since William Pitt’s time. I suppose that is ‘recent’ in in that it happened in the 1790s whereas the Bank of England came about in 1694.

                                                        In recent times the Ways and Means account was in use on a regular basis until Gordon Brown swallowed the neoliberal Kool-aid and changed the Bank of England regime in 1997. Since then the Debt Management Office has done the jiggery pokery using standard commercial Treasury techniques. All good for fee earning in the financial sector.

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                                                        Posted by Derek Henry
                                                        Answered on 07/02/2017 8:23 PM
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                                                          Most consider the W&M to be part of the Paymaster General’s set of accounts through which they conduct government expenditure.

                                                          Gory details, including useful picture, here: https://www.publications.parliament.uk/pa/cm200102/cmselect/cmpubacc/349/349ap02.htm

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                                                          Posted by Derek Henry
                                                          Answered on 07/02/2017 8:28 PM
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                                                            Alright this thread is going off topic into a debate about MMT…

                                                            My original question still hasn’t been answered yet about why increases in bank credit quantity do not affect FX by as much.

                                                            Say if you have 2 countries A and B. A has the privilege of having a reserve currency. B has set its exchange rate to 100 to 1 in order to trade with A.

                                                            What would happen to the exchange rates if A or B increase their credit quantity? I’m thinking if B increases credit by x2 times, the exchange rate would fall to 50 to 1 as consumers spend more.

                                                            But if A increases credit, their exchange rate would fall and the rate would be 200 to 1 instead of 100 to 1.

                                                            If both countries increase credit by the same amount the rate would stay the same at 100 to 1.

                                                            Now lets come back to the real world. China has increased their bank credit enormously (compared to the USA) over the years to fuel high growth and spending. But the exchange rate has barely moved from the 6 CNY : 1 USD range.

                                                            What is going on here?

                                                            Why hasn’t the increase in bank credit affected FX?

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                                                            Posted by Incognito 7
                                                            Answered on 07/06/2017 4:56 AM
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                                                              Unless there has been price inflation there is no reason to expect that the quantity of the currency would effect the exchange rate. The value of the currency is what it can buy, if that is not changed there is no reason there for the exchange rate to change.

                                                              In your scenario of A and B there was a change in the quantity but not the value of the currency in the domestic market and so likewise in the international market, no change either.

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                                                              Posted by Dinero
                                                              Answered on 07/06/2017 7:18 AM
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                                                                Yes Dinero is correct and as I said above it’s never about the quantity it’s all about the price.

                                                                All other things are never equal.

                                                                John T Harvey in “Currencies, Capital Flows and Crises” takes 16 pages to specify an open economy model to explain the move in exchange rates, and even that has some questionable assumptions in it brought about by it being written rather than simulated on a computer.

                                                                Changing any of the variables creates non-linear feedback events that alter the other variables that then re-alter the initial variable. They are not independent and they are not independent of time or path dependency over time.

                                                                It all depends on the reaction of the actors over time. That’s why there is no authoritative theory of exchange rates that stands up to the test of time.

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                                                                Posted by Derek Henry
                                                                Answered on 07/06/2017 7:50 PM
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                                                                  All those pages and still not a clear, definitive answer? Amazing.

                                                                  Hyperinflation is caused by a collapse in productivity. Nothing more, nothing less. Friedman was wrong as he was about many things. Please stop worshipping the dead guy!

                                                                  If you want quantitative proof, then run a correlaton on the rate government spending vs the rate of inflation. You’ll see it. I suppose you could also tease it out in non-government spending but that would be like looking for a needle in a haystack.

                                                                  In my ideal world, the government doesn’t do anything but pure transfer payments.

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                                                                  Posted by MachineGhost
                                                                  Answered on 07/14/2017 8:09 PM
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