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New Currency Theory (NCT)

Note "Net Position" shows on the right column below "liabilities",( Wordpress wrapped to the left)

I asked  you not to use a coin example, but that’s fine.

Now do the appropriation part and show the flow of funds to the household sector.

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

I find it useful to conceptualize all financial assets, including money,  via Thermodynamics.  It has zero real value.  It can't by the First Law.  Financial assets are always future (t >= 0) claims on real capital and real labor.

In this case there is somehow a disagreement over the semantics/mechanics of a financial system.    It's important to remember that financial assets are not real.  The system we have constructed is no different, conceptually, from a board game.   The rules in Cullen's board game are the rules we play by in our current world.   In this world balance sheets balance.

NCT is a board game played by different rules.   In many ways it appears NCT is essentially just Monopoly rules.   $200 every time you pass Go, no offsetting liability.   The Bank is not running double entry accounting but the players are with each other.

Now since we have two board game models we recognize they are just models.   Cullen's model is based on a high level operational understanding of how things are.  NCT is based on a different hypothetical model.  It's a different game.  But I can write down valid mathematical models of real economics using either model.

Ultimately, because financial assets have zero real value, everything is determined by the current and future stock of real capital and real labor.   It's an inherently unstable system because humans exist so far from the true equilibrium condition of sustenance level existence.   The moneyness of your financial assets is completely dependent on the strength of contractual law and enforcement, and the underlying real components connected to the other side of the contract at every point in time.

(related:  NCT is a crappy model for many reasons.  What provides the feedback on spending/appropriations?  How does the system respond to a large scale change in 1.) population; 2.) productivity 3.) store of real capital? )  Free markets don't always work, but one could argue that the higher exchange flux in a market the closer it is to equilibrium (most of nature works that way), and the better the market is.   Currency market volumes are huge and thus it appears currency markets are efficient markets.   I suppose one could construct a model with the NCT framework where currency markets provide the needed feedback for the issuance of "coinage".

 

 

Now Cullen is challenging Paul to show the appropriate flow of funds. If Paul can show it, then I think it would be the true monetary reform. As of now, it is still hypothetical though. But we'll see whether the challenge can be accepted or not.

It’s not whether Paul CAN show the accounting. The point I am getting at is that once Paul shows the accounting he’ll recognize that it doesn’t achieve what he thinks it does.

Here’s the thing - Paul showed the first step where the govt has created an asset for itself from thin air. But the second step is that it must credit it to a private bank account. Once this happens the bank has a liability and the household has an asset. The balance sheets balance. Yes, the govt doesn’t technically have “debt”, but all we did was move the obligation onto a private bank. This isn’t “sovereign” money. It is bank money.

What does this accomplish? Nothing really. Yes, it allows the govt to spend the money into the economy as it wishes, but this creates its own problems such as the need to match the private sector’s credit needs. For instance, if the private sector needs $500MM of new debt every year then the govt has to spend this money out into the economy every year. What does this accomplish other than creating bottlenecks in the private credit system? Our govt already has the ability to spend money into the economy as it wishes so why would we bottleneck the private credit system for no reason? All because we THINK we’re creating debt free money when we’re not? It makes no sense. It accomplishes nothing.

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

Its a bit difficult to describe monetary reform when 1) People have chosen not to read HR2990 from 2011 and 2) people impart there own personal presumptions as to what MR is.

Despite Cullen's unfounded accusation that I am promoting a coin-based economy, I am using the coin as a prototypical example of how a fully sovereign money system would operate.  Under MR ALL money would first be created by government as an asset, just as coins are today.  When the government spends, that asset balance on the ledger is reduced accordingly, the vendor's account at the bank's asset balance raises accordingly.  This is first-grade arithmatic.  Do I really need to draw a diagram with lines saying, "asset", "liabilities", "equity"?

Under the current system, money is  a liability of the bank to the customer.  This is bank-money.  The account holder gives up ownership of the money he deposits in the bank to the bank (hence FDIC). The bank replaces that deposit with an IOU, a liability, a promise to pay on demand.  Rarely is that demand ever excercised.  When the customer pays another party, that IOU is transferred to the recipient's bank and that paying bank's liability is extinguished.  What a crazy construct!

The real crux of the matter is Cullen's second concern, which is his speculation.  He feels that the true needs of the economy will not be met if the government takes the power to distribute newly created money away from banks.  He feels there will be bottlenecks - a business will want to build an office building and money will be tied up on government sponsored infrastructure projects instead.   In fact, yes and no. Yes, because as a society we are unhappy with the choices bank's make with our money - we want to fix our failed infrastructure (just one example)  And No, under HR2990 the government can provide funds for banks to on-lend to open up any bottlenecks.  And No, because investors will be happy to reap returns on things such as mortgage-backed mutual funds using real sovereign money they've earned.  If you don't believe that then you have no faith in benefits of capitalism and investement.

The government does NOT have the "the ability to spend money into the economy as it wishes".  How can you say that with a straight face?!  We have debt ceilings, money tied up in interest payments to bond-holders and a virulent anti-tax sentiment among the majority of elected public officials.  The borrow-and-spend paradigm would end under MR.  The need for taxes would be greatly diminished - eliminate corporate taxes if that floats your boat.

When the government spends, it creates jobs, it creates new industries and raises demand for the fruits of industry. Under MR, there would be huge influx of money to satisfy the needs of the economy.

Paul,

There’s a reason why you’re not answering the question I asked - because it exposes the fact that the accounting is virtually identical to the existing system. In your “new” system the govt would have to credit a private bank account. All this does is result in a bank having a deposit liability and the household having a bank deposit asset. You haven’t accomplished anything here. All you’ve done is turned the “sovereign money” into a bank deposit, ie, bank money. You’ve literally created a private money system. That’s all. It’s not even a sovereign money system.

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

The reason I couldn't respond to the question you asked is because under monetary reform, the bank's balance sheet is completely different than now.  The bank becomes a custodial institution whose only role is to manage a depositor's account.  There really is no "bank's balance sheet" any longer.  Banks could exist as essentially government contractors to handle money transfers.  They are in charge of keeping track of and certifying a depositor's assets as if they were gold bars in a safety deposit box.  The bank does not own the asset of the depositor as they do now and there is no need for a counterbalancing IOU or liability of the bank.  They are custodians.  To ask for bank's balance sheet under MR is like asking them to put the cash in their safety deposit boxes on their books.

People have asked, why not just give citizens accounts at the Treasury?- it just may not be something that government wants to take on and would prefer to farm it out to local depository institutions.  They would be part of a digital clearing network. On the other hand, there is a lot of interest in digital currency among central banks.

Financial institutions, on the other hand, would take depositors' assets and invest in vehicles that depend upon the risk the depositor is comfortable with.  These could be mortgage-backed securities, mutual funds, etc. No different than now.  They would build their reputations based upon their risks assessement and underwriting skills.

Exactly. You just don’t understand how banks work. Even if the bank is just a govt custodian then they still operate under the same basic laws of double entry bookkeeping. They have obligations (liabilities) that are customer assets. When the customer wants to spend money the bank has an obligation to transfer those liabilities as spent. Whether this custodian bank is a private bank or a govt bank does not matter. It still has liabilities that correspond to customer assets.

You’re trying to fudge the laws of accounting. It doesn’t make sense. That’s why this “new” system sounds like a nice narrative, but really makes no sense in reality.

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

@john-Daschbach

I probably agree with much of what you say  regarding financial assets and future claims on capital and labor.  In fact, monetary reform or NCT or sovereign money or debt-free money, whatever you want to call it, has be cast meticulously in a double-entry bookkeeping model, I believe by Dr. Yamaguchi.

There is still hidden presumptions in some of what you say, similar to Cullen, that the 2012 legislation (HR2990) does not provide for the unpredictable fluctuations in a real economy.

one could argue that the higher exchange flux in a market the closer it is to equilibrium (most of nature works that way), and the better the market is. 

First, your are asserting the exchange flux under MR would be lower. No basis for that that I can see.  If so, your should promote ending the Fed. MR does a better job than the current pushing-on-a-string strategy used by the Fed.  Money supply is only one, though important, factor in managing inflation.  The Fed can't even do that directly.  Its a myth that somehow the economy is magically self-organizing.  Laissez faire doesn't work for capitalism and it doesn't work for a money system.