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New Currency Theory (NCT)

Paul, his point wasn't really a trickle-down theory... his point is that regardless of how the money is created -> it can be used by the government for its purposes. They can issue attractive treasuries, or they can tax it. Either way, the government pays its bills, and at the same time we have the strongest currency in existence. <- Don't take that last point for granted.

There are two things that stand out to me: 1. The Idea that bank-based monetary systems don't work. Complete nonsense -> show me a fully modern economy that isnt largely based on these systems...

and Two: That in general governments can be trusted not to abuse the role you are trying to assign them... and again, there literally has never been a government with the unlimited power to print that hasn't abused it at some point. Adding zeros to the bills and trying to spend that "debt-free money" has gone stunningly badly for almost everyone who tried, Zimbabwe, Venezuela, Post War Germany... all of them had "reasons" to spend more, but the monetary trick you want to play just killed the currency instead. Many of those countries had debt that wasn't denominated in their currency, and adding zeros will never fix that. Now, in fairness, the US is in a different situation... but we would end up with big problems as well.

Big picture you are arguing for printing some trillion dollar bills, and then letting the government "spend" that. It would drastically reduce the demand for dollars, especially abroad, and potentially kick an inflationary cycle into gear that is very hard to stop. Everyone would react to the change -> knowing full well that relying on the "Maturity" of someone like Trump (or any self-motivated politician) not to abuse it is really bad strategy.  Inflation expectations would kick up, and my god what would happen to the bonds and other obligations of the banking sector. Big ass recessionary disaster. The Dollar didn't end up the reserve currency by accident. It's because we manage the currency fairly well, and a lot is transacted with it. Remove one of those and the US would be committing some stunning self-sabotage, all for the nearly empty promise of completely political spending/funding policy. In the end, we don't accomplish much, while taking some potentially existential risks.

Endogenous bank loans -> credit based monetary systems have worked stunningly well for increasing standards of living. Once you step away from that that average standard of living falls off a cliff... and that isnt some sort of random correlation. The more autocratic a government, the more they want to implement what you are suggesting.

Do you really think Trump is better at managing the currency? Really Really?

You can't fully trust politicians with this power, because when faced with reelection and killing the currency, they happily will. After all, how can you fix it if you aren't in power? Maduro asks himself this question every day... And somehow every day he comes to the conclusion that his staying in power is more important than the Bolivar. 

I've been meaning to respond to Cullen's assertions.

1) The government does not have access to the bank created money it requires to keep the country functioning.  I used the failed infrastructure as just one, somewhat apolitical example.  We have a third-world quality of life for many Americans.  When Europeans come here they are amazed at some of the squalor.  So the thought that money would trickle down from the private sector, through taxes and bonds sales, to the public sector is prima facie wrong - its not happening.  Politically we can never raise taxes high enough to accomplish that.  (Under MR, corporate taxes could be eliminated.)

2) The constant stream of recessions and depressions is often shrugged off as just part of the "business cycle".  In reality, as Hyman Minsky and many others point out, the business cycle is a misnomer.  Sound business should be stable under a functioning economy - we just accept the dysfunction as somehow "normal".   Minsky points out that the banking sector, with its control of the money supply is "pro" cyclical, creating too much money to fund booms and starving the economy when money is needed most during busts.  So no, the dollar is not managed well at all.  Its just that US holds all the card at the moment and has the luxury of screwing up big time and the rest of the world has to suck it up.

3)  You can either have banks "printing money" or a democratically elected government printing money.  I agree that the political system is utterly corrupt now - Senators spend half their waking hours on the phone fund raising.  But I haven't given up on the possiblity of restoring democracy to the US gov.  Have you?

4) Its not up to Trump where the money would go under monetary reform (government-created money) Its completely and constitutionally up to congress to make those decisions - no change at all.  The only way Trump can decide where the money goes is by breaking the law and stealing from the military and disaster relief funds for his political purposes.  We let him do it.

5) Its pretty well understood that the isolated examples of hypeinflation you point  to are not the result of printing money, but just the opposite - external factors destroy a nation's currency and the government desparately tries to play catch-up by devaluing the currency.  The US is astronomically far from that sitation. There is so much unused capacity in the US that it would take trillions and trillions to cause inflation.  So again, printing money is not a solution to a failed currency, but is a solution in a country where that dire situation does not exist.

 

I guess im going to give up haha, I dont think I have the time to address everything here. Point 2 is academic non-sense. Booms and busts are part of life, even down to algae. Sound policy can limit them, but groups of people will always get too excited about something and take excessive risk, regardless of government or bank funding.

The only thing you've proved is that you've never been to a third world country. The notion that large portions of the US are "Thrid world - like" is complete non-sense that is exclusively advocated by people who don't know what they are talking about. If you earn more than 40k a year you are in the GLOBAL 1% in income. Most of the US earns more than 40k. Median household income (Not mean) is 59k.  By the way, those Europeans you cited actually do have some experience below that threshold. The average European is below that. Not Norway, but most of the EU.

" So the thought that money would trickle down from the private sector, through taxes and bonds sales, to the public sector is prima facie wrong - its not happening."

Yikes! It is literally the only thing that happens hahaha. The government is not constrained by anything other than the budgets or CR's that congress passes. The amount of money the government uses is up to the government, not some type of trickle down amount of cash that somehow magically winds up the the treasury's account... Every dollar in the treasury was decided by congress to end up there. Not sure how that's debatable... The government taxes and borrows as much as it wants to, the funding source has nothing to do with why infrastructure isn't great here. The only practical limitation is inflation, or higher rates on the bonds (the fed has a monster effect here, but that's another story). But no matter what the total amount of spending is, the US government can tax or borrow enough to pay for it.

As for Trump's influence, it's a simple example. Trump or any other leader has a LOT of influence on what congress passes. Details will get ignored, but the big picture stuff gets done if the leader is competent. But the point I was making literally couldn't be more true. Making all funding a political decision entrusts a group of people that by nature will never elevate the currency over reelection. Everrrrrr.

Yep - that's exactly what we've been brainwashed to believe - booms and busts are just natural phenomena - like the winds and tides.   You think the 2008 GRC was just a "natural" cycle.

Trump only has influence because of his Republican congress.  Look how hard Obama had to struggle to get anything passed.

The government taxes and borrows only what congress will allow.  Taxes are hugely unpopular -ain't gonna happen and remember the governemt shutdowns?  Somehow borrowing and taxing weren't forthcoming.

American's are very good at avoiding the America they don't want to admit exists.  I can't force you to Google "poverty rate in the US".

Inflation in the US is not cause by the money supply - too young to remember "StagFlation"? Or the gas crisis?  Zero to do with excess dollars.  Its a high school economics myth regarding the impact of money creation.  Germans with wheelbarrows of money makes for an intersting photo in a 9th grade textbook though.

But here's something I'm sure you'll dismiss but this is how infrastructure is paid for with boring academic details and stats:

Front Page

"I guess im going to give up haha, I dont think I have the time to address everything here. Point 2 is academic non-sense. Booms and busts are part of life, even down to algae. Sound policy can limit them, but groups of people will always get too excited about something and take excessive risk, regardless of government or bank funding."

Exactly, AM. Exactly right. The business cycle and the markets move in large part because humans are imperfect creatures imperfectly trying to assess things they cannot possibly understand entirely. There is uncertainty everywhere and that's reflected in our economy. There is no escaping this reality. In fact, it's good because the ebb and flow of the business cycle helps to keep a certain order to things. The good get flushed out by the bad and creative destruction does its thing. It's like the cycle of life. We can try to slow it, but we can't eliminate it.

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

I agree that the business cycle is due to human nature - of course!  But AMTrader went way too far in implying it is somehow the natural state of affairs under the current bank-created money system.  The economy is a dynamic system, just like a pendulum.  If you know anything about electric circuits, taking some of the output and feeding it back to the input will cause massive runaway oscillations.  This is what is meant by the term, "pro cyclic".  This is precisely how the banking system disrupts the normal business fluctuations.  Banks were lending like crazy  leading up to the GFC.  Their irresponsible underwriting practices pumped money into an already expanding bubble causing it to burst.  The "natural" business cycle would have occurred if a loan officer looked at income-to-loan ratios, and denied half the mortgages they approved.  The corrections you feel are so beneficial, were overridden and they continue to be.  This is only one of several distortions introduced by the current system that allows banks to just print money willy nilly.

 

This is prof. R.A. Werner's view.

" 30:21 that's why we're back in the same spot

 

30:23 they continue to create credit for

 

30:26 financial transactions that's how you

 

30:28 prevent getting into this situation the

 

30:30 first place of banks being unstable

 

30:32 because banks create money you have to

 

30:36 split the stream of credit creation from

 

30:38 banks into two for the real economy

 

30:41 and for financial transactions because

 

30:44 they are not part of the real economy

 

30:45 and if banks create credit for financial

 

30:48 transactions you are creating an asset

 

30:51 bubble which is always unsustainable and

 

30:53 will always lead to a banking crisis "

 

https://www.youtube.com/watch?v=8FT-zyTX2nE&lc=z23dxvchbqzixx0rh04t1aokg5flnl0yyhzfwwshwgkubk0h00410.1540380500211044&feature=em-comments

 

 

"Banks were lending like crazy  leading up to the GFC."

They were also totally incompetent?

 

As Axel Weber remarked, afterwards:
I asked the typical macro question: who are the twenty biggest suppliers of securitization products, and who are the twenty biggest buyers. I got a paper, and they were both the same set of institutions…. The industry was not aware at the time that while its treasury department was reporting that it bought all these products its credit department was reporting that it had sold off all the risk because they had securitized them…” 1h. 10m. in.

 

http://www.lse.ac.uk/lse-player?id=1856

 

The root problem of 2008 was a failure to recognize that the highly leveraged money center banks had used derivatives not to distribute subprime mortgage risk to the broad risk bearing capacity of the market as a whole but, rather, to concentrate it in themselves.”

 

https://equitablegrowth.org/misdiagnosis-of-2008-and-the-fed-inflation-targeting-was-not-the-problem-an-unwillingness-to-vaporize-asset-values-was-not-the-problem/

 

 

As you can see here, some folks don't acknowledge that our current finacial system is a man-made, contrived creation.  So they will look at the "business cycle" as a fact of nature.  The Federal Reserve didn't even exist until 1913 and was designed by the banking industry in an attempt to protect itself from naturally self-destructive behavior.

I don't understand the reluctance to think outside the box we're in right now - to at least entertain the idea that there are other versions of a financial and monetary system that might benefit society more, be more stable and require far less regulation.

It's not that people aren't willing to think outside the box. It's that NCT doesn't solve what you think it solves. The govt has access to plenty of money. It makes no difference whether they created it or the banks created it. They can access it any time they want by taxing us and selling bonds. So what is the point? What are we accomplishing here with this "new theory"?

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