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New Currency Theory (NCT)

Cullen, I found an interesting paper on internet. The author puts different perspective on MMT based on concept so-called "New Currency Theory (NCT)". Do you think this one is closer to Monetary Realism ?

Link: https://www.researchgate.net/publication/312496026_Modern_Money_and_Sovereign_Currency

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I am not familiar with that theory. Want to give me a brief summary?

"Pragmatic Capitalism is the best website on the Internet. Just trust me. Please?" - Cullen Roche

Wow - you're in for a treat 🙂 NCT is not a "theory" despite the name.  It is a facet of an national and international movement to reform our failed monetary system. Its not "new" either, the Colonies employed it (until England tried to stop it - leading to the Revolutionary War) and Lincoln used it to successfully fund and win the Civil War using government-created Greenbacks.  The leading economists (Irving Fisher, Frank Knight, Henry Simons, etc) of the 1920's and 30's promoted variations on the concept.

Virtually all money in the economy is created by private commercial banks when they lend.  The ramifacations to society have been devastataing: gross instability, wealth inequality, failed social system.  In the US the Kucinich/Conyers 2012 bill HR2990 did three things:

1)Forbade the creation of money by banks

2) Restored the Constitutional prerogative  of the Federal Government to be the creator and issuer of money

3) Incorporate the Federal Reserve into the Treasury Dept.

All new money would be spent into the private economy.  Over time, all public debt would be extinguished.  Banks would act as intermediaries between saver/investors and borrowers as people mistakenly believe they do now.  Checking accounts would be fully backed by government money - no reserves or FDIC required. Money creation levels would be determined by a new Monetary Agency so as to minimize inflation or deflation and Congress would restrict spending to fall within that determination while still prioritizing spending through the budget process as it does now.

The advantage to business as well as society in general are enourmous.  See:









Ahhh. I see. So all new "money" is a creation of the state.

I don't see how this solves anything. Think about this rationally. Let's say the govt issues $100 in money to the economy and the demand for money in that year is $200. Consumers will go to the govt to get that extra $100 so the govt turns into a big bank issuing another $100. You end up with the same situation that we currently have except the govt is operating like the bank.

What did we solve here? Nothing. Except for one important detail - you got rid of the private creditworthiness process. Yes, the demand for money might be $200, but do those consumers all deserve to have that $200? Can they be trusted to be given that $200? In many cases the answer is no and private banks do a pretty good job of making sure that there isn't too much money floating around whereas govt's do a generally poor job of controlling the money supply because they have a conflict of interest to issue as much money as the population (voters) want.

"Pragmatic Capitalism is the best website on the Internet. Just trust me. Please?" - Cullen Roche

Cullen -

I can see why a cursory view of sovereign monetary reform (MR) might lead one to that conclusion.  First, banks don't "issue", they create and lend.   Under MR the gov doesn't "issue" money into the economy, it spends it on public purpose projects, implemented by the private sector, for programs the private sector won't and can't invest in.

Regarding the private creditworthiness process - just the opposite.  Banks' main function would continue to be to underwrite and determine creditworthiness before lending investors' (not bank-created as now) money.  Its called skin in the game.  Why did you assume otherwise?

Seems that you're first glance at this was to assume its a government hand out or some universal basic income concept - that is incorrect.  Your fictitious "undeserving" consumer isn't any more likely to obtain money for nothing under MR than now.  In fact, there are millions of "deserving" citizens who have been closed off from receiving the money they need to survive under the current system.

Some of the greatest minds in economics understood that this is what a functional monetary system requires, so don't dismiss it so quickly.  Its actually quite pro-business as well as pro-society.

The thing that most of these new theories misunderstand is that "issuing" money and "spending money into existence" are the same functional thing. If the govt creates new money by spending it into existence they are issuing an asset that requires a willing counterparty at a real price. The govt is required to find someone who will "finance" that spending at a real price. The same basic fact is true when I walk into a bank and ask for a loan. I need a counterparty at a real price.

So, in the end, all money creation undergoes the same basic financing process. The difference is that the govt doesn't generally have a problem finding counterparties in nominal terms because there are always people who have a strong demand for money regardless of the real terms of trade. Banks are different because they're profit motivated. They can't afford to just issue money to anyone because they rely on making a real profit.

The reason that there are zero state run money systems is because they don't last. They all fail because there's no process by which the govt is required to maintain a sound money issuing process. The reason why privately controlled credit systems work is because they cannot just issue money to anyone who is deemed to be "deserving".

"Pragmatic Capitalism is the best website on the Internet. Just trust me. Please?" - Cullen Roche

Just so we're on the same page:

"The thing that most of these new theories"  This is not "new" (almost 100 years) nor is it a "theory" (Existed twice in US history)

" issuing an asset that requires a willing counterparty at a real price".  If by willing counterparty you mean a borrower then, no, they are hardly equivalent.  The counterpart in the case of Monetary Reform is  private business who now has a vast new market available.  The "willing" part is inherent to the market.

" Banks are different because they're profit motivated. They can't afford to just issue money to anyone because they rely on making a real profit."  Absolutely! Which precludes primary money creation for public purpose.  It also preferentially biases money creation toward the creditworthy (i.e. the wealthy) - the root cause of wealth inequality.  In addition, as Minsky shows, it is the banks' pro cyclical money creation that is at the root of instability - hence the GFC of 2008.

"The reason that there are zero state run money systems is because they don't last"  This is completely unsubstantiated.  The Greenback was suppressed due to intense pressure from the banking interests in the late 1800's (they are still officially legal tender).  You can't be so unaware of the vast power of the banking industry - (Do you think "too big to fail" is just a myth?)  In addition to that, most people and most economists blindly accept the status quo as some sort of natural law.  In fact the current system is an artificial, man made creation of the 1913 Federal Reserve Act which was drawn up as a cooperative by the banking industry in an attempt to protect itself.

Lots of history to brush up on.  I would suggest you at least look into some of the websites I linked - I believe you might find there is much to appreciate.

Also see: https://www.imf.org/external/pubs/ft/wp/2012/wp12202.pdf for some interesting historical background.



I am actually VERY familiar with these theories. The name NCT is new to me as these various theories seem to have numerous different names....Joseph Huber has emailed me personally for 10+ years about his work. And I've done a huge amount of research on the Chicago Plan and full reserve banking.

The bottom line is that these theories (and yes, they are theories) do not understand how banking works. A "full reserve" system is not really fully reserved as it MUST adapt to the demands of the private sector's needs. For instance, if you have $100 issued by the Central Bank and the public demands $200 then the Central Bank MUST issue $100 more to optimize economic growth. This isn't fully reserving anything. It is exactly how banks operate today.

You can call Central Bank issued money "spending" or "lending". It doesn't really matter. When the CB issues that interest free money it is every bit the sovereign liability that a modern day bank deposit issued by JP Morgan is. The only difference is that in today's system we play this charade where we pretend the govt won't fully support JPM's deposits when in fact they absolutely will and do.

Anyhow, they're interesting ideas, but mostly flawed. "Sovereign money" or NCT or Positive Money QE for the people - they're all the same and based on misunderstandings of how modern banking actually works and the fact that ALL money issuance is a form of credit creation whether it is interest bearing or not.

"Pragmatic Capitalism is the best website on the Internet. Just trust me. Please?" - Cullen Roche

Well so you've been holding out.  FRB is a hold over from fractional reserve banking that has led to the model concept of Sovereign Money - Huber, Kumhof, etc promote the natural extension of FRB in that it is understood that reserves have no meaning and are an artifact.  (Unless you can demonstrate some fundamental need for them).Under monetary reform, there is no "central bank" that fulfills the demands of the banking industry.  Its not a misunderstanding of how modern banking works, its an understanding that modern banking has failed and needs to be revamped.

Not only does the absurd need for government borrowing disappear, but the need for government lending under MR is either minimal, transitional and ultimately, non-existent.  Under the current system, bank money is created as a liability to the bank, not as an asset.  Under sovereign money, money is created as an asset to the Treasury (go look up the Treasury website on how coins are accounted for -  completely differently than bank-money. A coin is the only medium of exchange created as an asset.)  You may think money is money -  asset, liability, who cares.  You loosely use the term "sovereign liability" as if an asset and a liability are equivalent.

You are absolutely right, under the current system, JPM creates the money and the Fed makes sure there are reserves to meet legal requirements.  To say the government supports that is also correct - a private company receives the full faith and credit of the US Government, we the people, no matter how irresponsible or destructive its actions are.  You may be happy with that brand of corporate welfare but I'm not.  The act of creation and the decision where that created money goes is completely up to JPM.  Do your really believe that private money creation power is benign or even desirable?  What other industry are you aware of that can create a vital resource out of nothing and then collect rent on it as income?  And why do you assume that in order for an institution to lend it also must have the power to create?  You know that is false.

Sovereign asset money is utterly different, it is an asset of the people that is distributed based upon the priorities of society.  The market is still the arbiter of which producer of many competing producers receive that money.  Under the current system, money received is a liability and money borrowed carries a huge price tag in interest that distorts the economy - the people, through taxes, have to pay the wealthier bond-holders interest in a failed attempt to pay for the needs of society.

Private enterprise still flourishes without bank-money because investors will continue to want to risk their money in order to receive a return.  The only difference is that the money is theirs to lose. What a concept! Its financial cowardice not to have skin in the game.

If you are completely comfortable with the preferential distribution of our medium of exchange to the wealthy - that's where we differ.  Extreme wealth inequality is the harbinger of a self-destructing society.  And do you see JPM jumping to invest in infrastructure, education, health care or mitigating the effects climate change?

"The govt is required to find someone who will "finance" that spending at a real price."

If government spends to provide provide food, housing, healthcare, education to those who cannot provide their own, why must that be "financed"? It looks like it simply flows through the financial system showing up as increased household expenditure in GDP.