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Unified Monetary Theory (?)


That's a couple things, here are my arguments for the example:

Why shouldn't someone be allowed to borrow a million dollars to buy cupcakes if they want to?

To buy existing cupcakes, they should be able to borrow if they wish, but not from banks.

Cupcakes might make a lot of people happy and help employ a cupcake making firm that adds to incomes and domestic investment in various ways.

This is business investment, not simply buying existing cupcakes, different story. To borrow to create a cupcake making firm so it can buy cupcake making equipment, hire people, buy cupcake ingredients that will be turned into cupcakes: this is purchase of things to produce new stuff with added value, not simply to consume them or warehouse them, ie. new production. This is a prime example of what bank credit should be for.

I think your example highlights precisely the difference: borrowing to produce the cupcakes vs. borrowing to buy them once they are ready. Bank credit is OK for the former (to produce them), and it is not OK for the latter (to buy them once they are made).

EDIT: I know what you're trying to say, that it could be complex, but I (for now) tend to lean toward that it is not that difficult. Also, that is why I said precisely: deny for demonstrably non-productive. So allow by default, and deny only if it can be demonstrated that it is not productive. That is very different than deny by default and allow after proving that it is productive.

For the sake of arguing against myself, I'll carry your example further.

One could argue that the cupcakes bought from that million dollars will be used to make big "cupcake cakes", and sold at a profit. So in this case, it can be argued that the cupcakes can be bought both for direct consumption, or producing something new from them.

I'd deny bank credit for the consumption case, but allow it for the producing something new case.

Now along those lines one could also argue that buying financial derivatives on credit, so you can repackage and re-slice them as new derivatives is similar to the cupcake example above, hence has added value, I would tend to disagree with that 🙂

Balage: The only problem I have with banks is government's insurance of their deposits (FDIC) while allowing them to lend. No one else in business has a guarantee against loss. Personally I'd like to see the deposit function moved to the central bank (& I'd willingly accept zero interest in exchange for the enhanced & unlimited safety). There would be no big deal technologically in doing that. And make lending a real hands-off business with only investors bearing the risk. MMT says banks are the money creators, but it's really the government via the banks relatively unrestricted access to the central bank. And if you think of money as coupons (as MMT seems to), I make a helluva lot more coupons from my investments than I ever did (or will) from a bank.

Cullen: I don't know that there is an objective definition of "productive".  Productivity is the ratio of output over input, so anything whose output exceeds its input is productive. Typically expressed as a ratio (eg, sales dollars to labor hours), reducing it to a number requires that both be in the same units, leading to largely meaningless numbers like sales dollars to wage dollars. In that sense, I find just plain buying & selling as productive - the sellers' output (in sales dollars) exceeds their costs - or they won't be selling for long. That's why it appears to me that even if business doesn't provide enough income to households to satisfy their needs, there's no problem with government transferring enough coupons to them to make up the difference (& I also have yet to see any problem with whether the goods/services households end up buying are or aren't imported - so long as that buying/selling continues, that an economy could be judged as other than healthy).

I too am biased - not anti-finance, but simply believing the world would not come to an end if that whole industry didn't exist. I've had one loan in my life - a mortgage on my first home (which I paid off quickly). I bootstrapped a high-tech manufacturing business in 1980 with no outside capital (by focusing on building & maintaining a customer set rather than looking for investment). I ran that business for almost 20 years, peaking at $40-50 million sales in today's dollars & continued to preach the bootstrap approach for another 20 years. In the early 2000s, U.S. entrepreneurs had lost interest in bootstrapping - with the rise in venture capital, their only interest was where do I find it. I continued another for 10 years helping foreign entrepreneurs before finally giving up.

I do feel the nation lost a great deal with the growth of venture capital (as well as the parallel tightening of patent & non-enforcement of anti-trust laws).  We have a great many bright, creative young people, whose options are now largely limited to slaving for the FANG (or going into politics, which seems to be

where the money is today).


The problem is that consumption and investment are directly related. The more cupcakes we consume the more funding the firm has and the more they can invest in the future of more cupcake production. It’s sort of a chicken/egg situation.

Repackaging financial products is similar. The reason financial firms repackage loans is to earn a profit so they can then roll that profit into more investment funding, lending, etc.

So this is all a lot more interconnected than we tend to think....

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


I think that’s very very wrong. Venture Capital has helped to finance some of the most important technological advancements in human history. It’s not just silly internet companies like Facebook.

Liquid financial markets are essential to the buildout of any developing economy. The financial markets in places like Japan, Europe and the USA are what make these economies different from places like emerging markets.

The mainstream media tends to take sloppy examples from the crisis and extrapolate it out to making the entire industry out to be bad and unproductive. This is a bad generalization. I think you can make the argument that the finance industry is too big, but to say it’s not a productive part of the economy is a sloppy generalization. After all, the liquid funding of investment that exists in places like the USA is why so many start-up firms get the funding they need to grow and that’s arguably the most important aspect of the entire economy.

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

Umm, one significant way the government is different from househoulds is it engages in unlawful but legalized coercion (and many would argue fraud also).  So while it doesn't have infinite credit, it does have the ability to engage in theft via taxation which is definitely a special power and any operational reality will be in service to that.  Government is a lot like religion in that it doesn't hold up under close scrutiny, but we all just close our eyes and pretend it de facto works so that it does via reflexivity.