Money creation in a post-crisis world


As many of you know, I have spent much of the last seven years explaining to anyone who will listen that banks do not "lend out" deposits or reserves. Rather, they create both loan assets and matching deposit liabilities "from nothing" by means of double entry accounting entries. Creating money with a stroke of the pen (or a few taps on a computer keyboard) is what banks do.

But this does not mean that the money that banks create comes from nowhere. It doesn't. It is only created when they lend (or when they purchase assets, which is equivalent to lending). As Pontus Rendahl explains in a comment on my previous blogpost, what banks do is liquidity transformation - exchanging long-term illiquid assets for short-term liquid ones:
How do private banks create money? They create a deposit. A deposit is a Barclays-pound/Bank of America-dollar, or what not, that is traded and accepted as a means of payment at a one-to-one exchange rate with the underlying national currency. But as with currency pegs, such exchange rates can only be maintained if the bank has a healthy asset side on the balance sheet, and sufficient reserves.
But did the bank create this deposit out of nothing? No, it created the deposit out of an asset; a loan. That is not "out of nothing". In fact, it's very far from it; a more accurate description is that the bank converted an illiquid asset (the debtor's future ability to repay) into a liquid one. If the bank did not create the deposit out of an asset, it would end up in a asset<liabilities situation. It would be insolvent.
This is not creating money "from nothing". It is exchanging new money for assets. At the end of the lending transaction, there is an illiquid asset on the bank's balance sheet that wasn't there before, and an equivalent amount of new money in the customer's demand deposit account. We could call this commercial bank QE, if you like - except that for commercial banks, it is not in any sense "unconventional" policy, as it is for central banks. For commercial banks, it is their entire purpose. If they didn't do this liquidity transformation, they would not be banks.

All money that banks create is their own liability towards a third party - in other words, it is debt. This debt money is always backed by an equivalent claim on the income and, as a last resort, goods of a third party. The problem for banks is that the debt they owe to their customers as a consequence of lending is short-term and highly liquid, whereas the debt their customers owe to them as a consequence of lending is long-term and illiquid.

When the customer draws down a loan - or, for that matter, when a customer draws any money from their deposit account, whether or not it is created through lending - the bank must have sufficient cash, or liquid assets readily exchangeable for cash, to pay them. But banks don't keep much in the way of liquid assets: after all, if they had to hold sufficient liquid assets to enable everyone to draw down the contents of their deposit accounts on demand, they wouldn't be able to do much in the way of long-term illiquid lending. Therefore, although banks create money when they lend, they still need to borrow money when they make payments. It is bad accounting to assert that "banks create money when they lend" without recognising the funding problem caused by liquidity transformation.  Yes, lending creates deposits, but deposit drawdowns need to be funded with liquid assets - which for banks are by definition scarce.

So although we often say banks create money "from nothing", what we really mean is that they create money from lending. And the purpose of the lending is completely irrelevant. Money created for purposes that Zoe Williams in the Guardian dubs "unproductive", such as mortgage lending, is just as much money in circulation as money created for what she calls "productive" lending to corporations. Who are we to judge what is "productive" and "unproductive"? People who buy houses don't just create work for lawyers and estate agents, they spend a lot of money on doing up their houses - money that people who rent often either can't or don't want to spend. They also free up money for other people to spend. If what you want is demand, mortgage lending sounds like a good bet.

This is not to say that the dominance of real estate lending is necessarily a good thing. It has unfortunate distributive consequences, since it pushes up house prices, pricing younger and poorer people out of the market. But it is more than slightly unreasonable to bash banks for expanding mortgage lending when the prevailing political belief is that everyone wants to buy their own house, media constantly talk up the market (when did you ever see news of a fall in house prices portrayed as a good thing?) and government actively intervenes to help people buy houses they can't afford on their own. If government really wants banks to lend to businesses, it is sending entirely the wrong messages.

To my mind, the bigger problem is the extreme illiquidity of mortgage portfolios on bank balance sheets. Prior to the financial crisis, banks thought they had solved this problem, since securitising mortgages is another form of liquidity transformation. But the securitisation engine failed in 2007-8 and has never really revved itself up again. So banks are now stuck with large amounts of highly illiquid, long-dated assets on their balance sheets.

Of course, since the crisis regulators have worked hard to reduce the crippling illiquidity and constant risk of insolvency that arise from the nature of modern commercial banking. These days, banks have to keep more of their assets liquid, thus reducing the likelihood that a sudden run on their liabilities will force them either to tap central banks for emergency liquidity or sell assets at heavily discounted prices (fire sales) to raise liquid funds. And they also have to keep a larger gap between their assets and their liabilities, to reduce the likelihood of insolvency if the aforementioned fire sales, or a nasty drop in market prices, renders the market value of their assets insufficient to meet all the claims upon them. This gap is the "equity cushion" that is so often misreported in the media as "holding capital" or "setting money aside". It is nothing of the kind. Bank capital is "own funds" - shareholders' equity, retained earnings, debt convertible to equity. The whole idea is that the bank should be able to absorb a significant fall in asset values without defaulting on its obligations to its creditors. Whether these measures are sufficient to mitigate the extreme illiquidity and high insolvency risk of banks whose main activity is mortgage lending remains to be seen.

The central bank does for commercial banks what commercial banks do for their customers. It exchanges illiquid loans for newly created, highly liquid, risk-free money, which banks then use to pay their customers. It also acts as deposit-taker, accepting excess cash from banks that have more than they need to meet short-term payment obligations, and paying them interest on that money. And it is responsible for final settlement of payments cleared through commercial banks.

But if commercial banks can't create money unless it is backed by assets, can central banks? This is a matter of fierce debate.

At present, they don't. A central bank that creates money through open market operations is creating asset-backed money, since it is exchanging existing assets held by the private sector for newly created money. Similarly, the money created in QE is exchanged for existing assets held by the private sector, and is therefore also asset-backed. If a bank borrows reserves from the central bank, the accounting at the central bank is the same as if a commercial bank lends to a customer: new deposit in the commercial bank's reserve account balanced by a new loan asset to be repaid at an agreed date, with interest. Assets that the commercial bank pledges in support of the loan do not appear on the central bank's balance sheet, for exactly the same reason that the houses mortgagees pledge in support of their mortgages are off the commercial bank's balance sheet: they are not owned by the bank, but the bank has a first claim upon them in the event of default.

But in fact, a central bank can create money that is not explicitly backed by anything. Unlike commercial banks, they can genuinely create money "ex nihilo". The value of the money they create is maintained entirely by the credibility of the central bank/government combination.

Suppose our central bank decides to do "helicopter money", which is a simple transfer of newly-created funds to the private sector. No assets are purchased, and because this is a central bank transfer, no debt is created. When a currency is not asset-backed (as in a gold standard), the money created by the central bank is redeemable only as more of itself, and is therefore not "debt" in any ordinary sense of the word. So the balance sheet entries for a helicopter money transaction would look very odd: huge quantities of zero-coupon irredeemable liabilities, and no assets. The central bank would be technically insolvent. Would this matter?

Arguably, no. The implied asset backing for helicopter money is the net present value of future expected tax receipts (for the Eurozone, read this as the collective future tax receipts of all current and future Eurozone governments.) This doesn't mean that governments must always run primary surpluses: as central bank money is perpetual and irredeemable, and there is no interest to pay, the government could run sustained fiscal deficits far into the future without destroying the central bank's implied assets. As long as the government is credible, the central bank should be able to do helicopter drops without destroying the value of the money it is dropping.

The risk arising from a central bank doing helicopter money while the government runs sustained fiscal deficits is inflation. Irresponsible money printing by an irresponsible central bank at the behest of an irresponsible government is rightly feared as a cause of hyperinflation. But there is a huge difference between an irresponsible fiscal authority mismanaging its finances and dominating the central bank, and a responsible fiscal authority and central bank that together choose a reflationary path that combines helicopter money and deficit funded investment. Of course, even if done by a responsible central bank, helicopter money should be inflationary, especially if accompanied by fiscal deficits: but that would be the whole point of doing it!

The combination of helicopter money with investment financed by large fiscal deficits should be extremely powerful. The helicopter money would provide a direct demand stimulus to the real economy, with money going to those who are most likely to spend it rather than to those who are rich enough to own assets, while deficit-funded fiscal investment would kickstart the supply side of the economy and prime the pump for private sector investors. Such an approach would force the central bank and government to cooperate while still preserving the distinctive remits of the central bank (demand management) and fiscal authority (supply side and distribution).

So why didn't we do this after the 2008 crash? Simple. Fear of inflation. We preferred to court deflation than risk resurgence of inflation. Because of this fear, we did not provide the really powerful stimulus that the economy needed after the crash. We provided a much weaker stimulus in the form of QE, and then weakened its effect still further by embarking on premature and ill-considered fiscal consolidation. Instead of allowing the public sector to plug the gap left by the withdrawal of a wounded private sector, we tried to kick damaged banks into lending and damaged businesses and households into borrowing. We completely failed to deal with the widening inequality that arose from the combination of QE with fiscal austerity, and the destruction of hope that arose from ten years of stagnation, in some countries accompanied by very high unemployment, especially among the young. The price we are now paying for this abject failure of public policy is widespread political unrest. Some might say it is surprising it has taken as long as ten years for people to lose patience with the broken political establishment.

I have proposed here that helicopter money should be the central bank instrument of choice after a severe financial crisis. But that does not mean that all money should be delivered by helicopter. Those who propose "sovereign money" to replace money creation through bank lending appear to be driven by an irrational, though perhaps understandable, fear of debt. And they also, to my mind, place far too much faith in central planners, as this comment from Zoe Williams shows:
The nature of centrally created money should itself be opened up for debate, whose starting point is: if we agree that commercially created money is skewing the economy, can we then agree that it should be created by a public authority, even if we don’t yet know what that authority would look like.
No, Zoe, we can't agree on that. Firstly, although I might agree that commercial bank lending can skew the economy (though you totally ignore the fact that government actively fosters this distortion) I don't agree that the associated money creation necessarily skews anything. To my mind, QE, which gives money to the rich to spend on things that only the rich want, is far more distortionary - and QE is publicly created money.

Secondly, I don't believe that any central authority is capable of deciding how much money the economy needs. Far better, in my view, to allow the amount of money in circulation to respond to private sector demand. The job of "central planners" is to regulate the bipolar swings characteristic of private sector money demand.

And finally - a warning. The "money tree" exists, but its fruit is not cost-free, no matter who creates it. We should be cautious about advocating completely unrestricted money creation by any institution, private or public.

Related reading:

Money creation in the modern economy - Bank of England
Sacred cows and the demand for loans

Money tree image from the BBC. 


Comments

  1. Jerred Seisyll, once again you attack me instead of discussing the post. Your comment is therefore deleted.

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  2. I find it slightly bizarre that pontus - after belittling these ideas two years ago on comments on my blog, now almost quotes me word for word and even using my term ;liquidity transformation' perhaps he has had an epiphany?

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    1. I couldn't possibly comment, Andrew.

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    2. though it is me who used the term "liquidity transformation", not Pontus.

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    3. Andrew:

      You do indeed like to flatter yourself!

      But your memory fails to serve you. It was actually five years ago, not two.

      And you never uttered the word "liquidity transformation" (here is the link: https://andrewlainton.wordpress.com/2012/12/06/some-notes-on-pontus-rendahls-review-of-keensian-economics/ please do a search), nor am I remotely close to quoting you word for word.

      You did, however, provide some other gems such as

      "DGSE simply cannot handle balance sheets and thus financial asset-liability pairs and hence any formulation including the fundamental equation of accounting (and of course double entry bookkeeping is dimensionally consistent), and any conception of debt, profit or loss, liquidity or solvency",

      which is wrong,

      or claiming that the derivative of a discontinuous function, D(t), exists. Which is also wrong.

      In any case, I have provided a link to my discussion of Keen's work back in 2012. Any reader of this blog can make up their own minds to which extent I have changed my mind on these matters:

      https://www.dropbox.com/s/7klvbgmrycmyiaz/Discussion_Keen.pdf?dl=0

      (PS. in the discussion I largely take the viewpoint of an individual bank, which actually do need to attract deposits after granting loans (and that is costly). In the previous discussion I viewed it as a banking system as a whole, which actually do need to attract reserves after granting loans (which is costly). These are not contradictory views in any way.)

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    4. Thank you, Rendahl. I did try to read your discussion of Keen's work but the link on Andrew's blog is broken.

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    7. you don't need a dropbox account to read a dropbox link. if you aren't a member, dropbox puts up an invitation to join, of course, but you can click past that.

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  4. Well said! I find myself explaining "money creation" by commercial banks so many times it is not funny any more.

    The distributed "creation" of money is actually more efficient than centralised creation of money followed by its distribution to needful ends. The incentives are aligned well and banks only "create" money when they are sure of their end. Those incentives do get corrupted and need to be set right. There is an issue of solvency of banks and the quantum of reserves which also needs to be understood.

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    1. Under a "state money only" system (i.e. full reserve banking) things are not vastly different: in particular, private banks only lend when they think the borrower is a viable proposition. So "incentives are aligned" under full reserve as well. The only difference is that under the existing system, money creation is tied to loans, or to put it another way, the profits from seigniorage subsidise the lending process, as explained by Prof Joseph Huber in his work "Creating New Money" (p.31, para starting "Allowing banks..). I do not see the excuse for subsidising private banks or the lending process.

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  5. In contrast to Francis’s claim that a “central authority” is not “capable of deciding how much money the economy needs” several Nobel laureate economists (including Milton Friedman) advocated a system where a central authority made that decision. And Positive Money is currently arguing the latter case. Plus one of those individuals, Maurice Allais argued that money creation by private banks amounted to counterfeiting, an argument I agree with for reasons I set out here:

    https://medium.com/@ralph_47183/most-money-is-counterfeit-725c1f7f98c6

    Also Francis claims that “The job of "central planners" is to regulate the bipolar swings characteristic of private sector money demand.” A slight inconsistency there, I think. That is, if the “central planners” are not “capable of deciding how much money the economy needs”, how come they’re qualified to pass judgement on whether, given a rise in demand for money, that the rise is excessive or not?

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    1. A few points, Ralph:

      1. Please refrain from appeals to authority. Argue your case on its merits, rather than invoking the great and the good. Not all Nobel Laureate economists agreed with the Chicago Plan, even at the time, and few do today. As for Milton Friedman, he was a flawed genius - right about many things, and fatally wrong on others.
      2. If bank lending is sanctioned by the state - and indeed supported by it, as I noted in the post - it is not in any sense "counterfeiting", which is a crime.
      3. No inconsistency whatsoever in my remark. There is a huge difference between managing the general trend of money demand and trying to determine ex ante the absolute amount of money the economy requires.

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    2. 1. Re "argue your case on its merits" I wrote a book on the subject and numerous articles. The book is here:

      https://www.yumpu.com/en/document/view/57025889/fulresbk179senttocrspto

      Re appeals to authority, I don't see any harm in mentioning the fact that several Nobel laureates back an idea. And if someone wants to mention the fact that several Nobel laureates specifically oppose the same idea, that's OK by me.

      2. As to exactly what "counterfeiting" is, obviously we're into definitions and semantics here. As I explain in the above Medium article, the dictionary definition of counterfeit contains two crucial elements: 1, making something in imitation of something valuable, and 2, an attempt to defraud. I argue that both those elements are present in private money creation. Re the idea that the fact of the state sanctioning a particular instance of counterfeiting means it is no longer counterfeiting, I don't agree with that. To illustrate if I'm a banker and turn out illicit £10 notes and bribe politicians so as induce them to let me do that, that does not stop the counterfeiting being counterfeiting. Indeed, I'd argue that that's pretty much what actually goes on. Certainly banksters do not make "generous donations" to politicians election expenses for altruistic reasons.

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  6. Would this public money creator Zoe has in mind also be a fractional reserve bank that creates money by lending, but which must finance balance sheet expansion by attracting depositors or borrowing from elsewhere? If so, why is the money creation aspect better than the status quo? Ok, we may all think that we'd be better off if banks changed their lending criteria or whatnot, but if that's the goal then focus on that. Why mention money creation?

    Or maybe Zoe is guilty of what Rendhal supposes

    Incidentally Frances, I think your phrasing here risks being interpreted:

    "To my mind, QE, which gives money to the rich to spend on things that only the rich want"

    Purchasing something (a bond) is not the same as giving some one money. The only sense in which it is, is by causing asset prices to rise. We know who mostly sold bonds during QE and it was pension funds and insurers, not the rich deciding to cash in their bonds (which they could do anytime they wanted in any case )

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    1. Luis, it's such a confused article that I doubt if she has thought about what that public money creator would look like. However, when I looked at Barnes & Kumhof's proposal for nationalisation of money creation (the "Chicago Plan Revisited"), I concluded that it wasn't possible to have a full reserve public money creator unless you eliminated almost all debt in the economy, and what lending remained would have to be either done by the public money creator or authorised by it, since money would have to be created in advance of lending. Although she says that banks create money when they lend, and links to the Bank of England's paper, I suspect she has not begun to understand the implications of nationalising this in full.

      Really, though, Zoe's article is a sister to Owen Jones's article calling for nationalisation of the banks and creation of a German-style public banking network, which I took apart on Forbes the other day. I think a follow-up on Forbes would be appropriate.

      Fair point about my QE comment. It was an afterthought, and badly worded. QE isn't "giving" money to anyone. It's an asset swap, as I had already said further up the piece. The point is that the effect of QE primarily benefits the asset-rich - and yes, I know this includes pension funds, but the principal beneficiaries of pension funds are those who have substantial pension investments. QE disproportionately benefits the rich (see the Bank of England's paper on this).

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    2. Thanks Frances. It seems I should start following you on Forbes!

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    3. Louis,

      Why pay any attention to Zoe Williams? She knows next to nothing about this subject. If you want to learn about the reasons for a "public money only" system, read up the material written by those who have devoted thousands of hours to the subject. For example Positive Money and the New Economics Foundation plus Richard Werner argued the case here:

      http://b.3cdn.net/nefoundation/3a4f0c195967cb202b_p2m6beqpy.pdf

      Milton Friedman argue the case in his book "A Program for Monetary Stability", 2nd half of Ch3 in particular. But there is loads of other material out there which I cannot possibly list here.

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  7. The difference between the money created in the present and the assumed value assigned to it is in the future is either future liquidity problems or future inflation problems

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    1. Or money created out of thin air because it was assigned the wrong value for the work the current created money is capable of creating as actual value in the future! ie Tax havens create bubbles by those who can take out loans but by those who can't having to back those loans back if the money isn't but to work or crosses the equation for work to pay it back!

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    1. It is not your job to criticise the structure of my post, still less to mark it as if it is a school essay.

      This entire post is a development of the discussion on the previous one, and it started with a summary of that discussion.

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    4. I don't regard myself as a teacher.

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  9. Hi Francis - good article, but when you say banks create money when they purchase an asset, what assets do you mean specifically.

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    1. It doesn't matter what they purchase. Mostly it is financial assets, but it could be fixed assets, property, gold.....the accounting is the same in each case. The asset does not have to be debt, but the liability the bank creates is ALWAYS debt.

      I'd suggest reading the Bank of England's paper on money creation - I've provided a link to it in the Related Reading area at the end of the post.

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    2. OK thanks I understand the bookkeeping, but the cost of the shareholders equity and the cost of holding depositors funds more or less determines that the asset purchased must generally be income producing.

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    3. The vast majority of assets purchased by banks are income producing. But even banks have to have fixed assets.

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  10. It never ceases to amaze me how something as ubiquitous as money is so hard to explain, I think Steve Keen does as good a job as anyone with BOMD (Bank Originated Debt Money) which I will link to for those interested.
    I also think that Zoe Williams and the guys over at Positive Money are onto something about the purpose of money creation, certainly for the state, I'd say it was the maintainence of Full Employment, but then again I would!

    https://www.patreon.com/posts/9585333

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  11. "Therefore, although banks create money when they lend, they still need to borrow money when they make payments."

    One of the problems with discussions about money is that we use the term to mean different things in different contexts and these various meanings often get confused. When economists say that banks create money, they are using a definition of money which covers certain types of instruments issued by banks and held by non-banks. This is not the same way the term "money" is used in common parlance. It is fine to talk about banks needing to borrow money to make payments, but not if you are using the definition under which banks create money. Banks cannot borrow such money, because by definition they can never be in possession of it.

    "But if commercial banks can't create money unless it is backed by assets, can central banks?"

    Commercial banks do create money without it being backed by assets. For example, when a bank pays its staff salaries, it credits their accounts thereby creating money , but the corresponding debit is to p&l not to any asset. Obviously, it is more limited in its ability to create money this way than by creating assets.

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    1. umm no, this is simply a transfer on the liabilities side of the balance sheet, from shareholders to staff.

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    3. It depends whose perspective you take. Customers' money, including money lent to them by the bank, is entirely on the funding (liability) side. The asset side includes the bank's money (cash reserves), which it needs to settle payments on behalf of customers.

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    5. "umm no, this is simply a transfer on the liabilities side of the balance sheet, from shareholders to staff."

      It is certainly a transfer of value from shareholders to staff. On the balance sheet, there is an increase in deposits (belonging to staff), and a reduction in shareholder funds. Deposits are included in broad monetary aggregates, but shareholder funds are not, so the quantity of money is increased.

      "Customers' money, including money lent to them by the bank, is entirely on the funding (liability) side. The asset side includes the bank's money (cash reserves), which it needs to settle payments on behalf of customers."

      This is the same problem with definitions. If you are talking about money as something that is created by bank lending, then you can't talk about banks lending money and you can't talk about "the bank's money". A bank can certainly hold cash and reserves but, as long as we are talking about banks creating money, then those cash and reserves are not money. Broad money aggregates do not include instruments held by a bank.

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    6. Part of the problem is how we measure "money". You are absolutely right that shareholders' funds don't appear in measures of "money", whereas customer deposits do. This is perhaps an anomaly.

      However, I think you are ignoring the opportunity cost element of staff wage payments. If the money were not transferred to staff deposit accounts, it would eventually be transferred to shareholder deposit accounts as a dividend payment, or to supplier deposit accounts when the bank invests. It is therefore not really correct to call wage payments money creation. It is simply a distribution from equity.

      I am wondering if we are getting too hung up on liabilities and not looking closely enough at what happens on the asset side of the balance sheet. When banks lend, or purchase existing assets, the balance sheet is grossed up. In the case of lending, both the liability and the associated asset are newly created. In the case of asset purchases, only the liability side is newly created: the balance sheet is still grossed up, but there is an equivalent reduction in the seller's asset base, so the net change in assets is zero: this is more obvious if you account for an asset purchase as quadruple entry accounting rather than double entry. When banks pay staff from earnings, no asset is either created or purchased: there is no change in the size of the balance sheet, only in its composition - hence paying staff is really a change in the distribution of money, even though it appears to result in money creation. I hope this makes sense.



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    7. What is needed is to take the cost accounting datums of any going concern and compare their totals with the payments to individuals simultaneously produced. As incomes paid is only a subset of total costs paid by any firm in any period of time it can be determined that the rate of flow of total costs inherently exceeds the rate of flow of total individual incomes required to liquidate those costs. And that means the only way to equilibrate the system is to distribute a costless gift to the individual.

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    8. I'm certainly not opposed to deciphering the truth, however rather than slogging along defining/nit picking about the exact definitions and processes of the problem (Debt Deflation/the monopoly paradigms of Finance/the fact that A will not pay for A + B when B is more than 0 combined with the truth that Austrian economists mistake for a solution, namely that: "There ain't no free lunch." The fact is that statement is actually a succinct description of the ACTUAL problem)

      So the free and costless monetary Gift is both the individual and systemic solution. And crafting policies that are aware of and reflect the ongoing process reality of the temporal universe (Starting, Changing and Stopping) and that saturate the economy with the new monetary paradigm of Gifting instead of the old paradigm of Debt ONLY...are the forthright and intelligent route to freedom instead of fiddling while western civilization disintegrates until a rhyming war occurs with modern weaponry after which the Banks will be pleased to lend the relatively few survivors the money to re-build.

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    9. When the bank buys the asset (I'm going to call this a bond to avoid confusion here) it credits the seller's account, creating for the seller a new deposit. The seller has swapped one asset (the bond) for another asset (the deposit). Its assets are unchanged. But I agree this is different to a bank loan where the borrower has an increase in assets (the new deposit) and an increase in liabilities (the loan). In general.

      There are plenty more anomalies here. For example, neither the government nor non-residents are usually counted as money holders in broad money measures, so lending to the government or non-residents does not create money, even though it looks the same. Also the boundary between money issuers and money holders is somewhat arbitrary. When UK building societies were reclassified as monetary financial institutions for the purposes of money supply statistics, their lending became money creation, even though nothing changed in their actual operating procedure.

      The point here is that bank lending creating money is to some extent just an artifact of the way we measure money. Economists' definition of money is just a measure of the size of bank balance sheets. Bank lending expands those balance sheets. That's fine, but the problem is when that is combined with the much more general concepts that we associate with the idea of money.

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    10. when banks pay staff, or contractors, or make a distribution to shareholders, they are usually re-creating previously destroyed broad money, rather than creating new broad money

      Bank capital is usually formed by destroying deposits in one way or another - either by issuing new shares or from retained profits from net interest earned. When the bank later makes a distribution of its capital in some way, it's really just re-creating the broad money that had been previously destroyed.

      I suppose if a bank recognised a capital gain on its fixed assets and decided to share this gain out by paying a bonus to staff, you could argue that the resultant bank deposits would represent completely new money.

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  12. For those interested, this is small sample of the literature on this subject. Note that not all the authors below advocate a “ban private money” system specifically. Some of them advocate that system mainly because of other merits in that system, e.g. that it obviates bank runs, bank collapses and taxpayer funded support for banks.

    http://www.hoover.org/news/daily-report/150171

    http://www.bloomberg.com/news/2013-03-27/the-best-way-to-save-banking-is-to-kill-it.html

    http://www.uexpress.com/an-economists-guide-to-money/2017/7/16/lets-limit-the-banks
    http://b.3cdn.net/nefoundation/3a4f0c195967cb202b_p2m6beqpy.pdf

    https://papers.ssrn.com/sol3/papers.cfm?abstract_id=160532

    http://www.jamesrobertson.com/book/creatingnewmoney.pdf

    Milton Friedman. See under the heading “The Proposal”, p.2 here:
    https://miltonfriedman.hoover.org/friedman_images/Collections/2016c21/AEA-AER_06_01_1948.pdf
    and his book “A Program for Monetary Stability” 2nd half of Ch3.


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  13. As you know, when a private bank loans for your mortgage for example, they take the Deed to your property. A Deed of Reconveyance is issued and recorded when the loan is repaid. "A deed or reconveyance is a document issued by a mortgage holder indicating that the borrower is released from the mortgage debt and transfers the property title from the lender, also called the beneficiary, to the borrower, also called the trustor."

    Question, what happens when the borrower pays down on the mortgage for 25 years of the 30 year loan, and then something happens and borrower doesn't pay anymore? The Deed stays with the bank and is sold for cold hard cash. Would that be "money creation" to extent that the loan principal was paid off?

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    1. In the UK, we don't have 30 year mortgages. We also have rules about repossession which protect people who have paid off the majority of their mortgage. If someone defaulted on their mortgage after 20 years of paying for a 25 year mortgage, they would not lose their home.

      But suppose someone only pays off 5 years of a 25 year loan, then defaults. The house is repossessed by the bank, then sold at auction at a discount. Is money creation involved? The answer is yes, but there is also money destruction. Let's walk this through.

      Paying off a loan reduces the money supply, since the money is paid from the customer's deposit account. However, writing off a defaulted uncollateralised loan reduces equity, which as Nick Edmonds points out, does not appear in monetary aggregates. If the defaulter has already paid down 5 years of the principal, then the money supply has already been reduced by 1/5 of the loan amount. The remaining 4/5 comes from writing down equity. The bank's profits take a hit and its distribution to shareholders is reduced. At that point, the money is effectively destroyed.

      However, if a loan is collateralised, seizing the collateral changes the accounting. When the bank takes possession of the house, it acquires an asset. Because of double entry accounting, taking that asset on to the balance sheet should create money equal to the market value of the house, exactly as if the bank had bought the house. However, because the bank did not buy the house but acquired it due to a loan default, the liability entry goes to equity (which otherwise would be reduced by the amount of the defaulted loan), not customer deposits. The market value of the house replaces the defaulted loan on the asset side of the balance sheet. At this point, the market value is unrealised.

      When the bank sells the house, the unrealised market value becomes the real sale price, the house is replaced on the asset side of the balance sheet with the cash received from the sale, and any difference between the unrealised market value and the sale price is taken to profit & loss. There is no new money creation by the bank, though there would be by the purchaser's bank if the purchaser has taken out a new mortgage to buy the property.

      At the end of these three steps, the loan is fully discharged and an equivalent amount of money has disappeared from the money supply.

      I hope I've got the accounting right here!

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  14. "No, it created the deposit out of an asset; a loan."

    The fraud by The Banks in this case is that the "asset's" value is essentially 0 dallars/pounds/etc.

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  15. Which of course means that in reality they are creating money out of the nothingness of 0 value.

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  16. Thanks for this! It helped me to connect the dots between commercial banks and the central bank, as well as to the government sector itself.

    The next port of call would be the international sector: how does this money creation story develop in an open economy? How should countries behave when they hold a powerful currency (USD and its "exorbitant privilege") versus a weaker one? Or when they are part of a monetary union?

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  17. Basically all economies need to resolve their deepest problem which is that the rate of flow of total costs and so total prices exceeds the rate of flow of total individual incomes simultaneously produced. The way to do that is implement the policies of a universal dividend and a price deflationary discount to prices....and then let "animal spirits" guide their development.

    For undeveloped economies they might need to implement tariffs etc. exactly like every other developed economy did. It is also more complicated than this politically, culturally etc. of course, but history is history and when the primary problem of a system is resolved all manner of attending irrational problems tend to dissipate. So it is with human neurotic behavior, so it is with human systems.

    For countries in a monetary union the decision is first should they join or stay depending upon the awareness of their leaders regarding the 5000 year old dominance of the business model of Finance and of the above policies. Frankly, I favor the concept of subsidiarity over republicanism because ethically self sufficiency trumps power, and its always problematic exiting a political agreement as Britain has discovered. (Despite this, Brexit is the correct move because the EU cannot and will not survive.)

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  18. Hi Frances. Thanks for a great article.
    I am an engineer with a good technical background. For years I have always wondered what it is that makes money tick.
    Now my family has grown up I read a couple of books on the subject. I found Mervin Kings book a real eye opener.
    Once you realise how money is created you start to realise how artificial our world is. Its amazing to think how people will kill for money. If they new how money is controlled and created I wonder if they would be so evil for something so artificial.
    I wish the media would try harder to explain the idea of money as I feel sure people would not get so hung up about it.
    The information that is available is so poor you have little chance of understanding and challenging without an economic background.
    Keep up the good work!
    Mpc.

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  19. RE mortgage loans,
    I have made available an archive of information related to the Danish mortgage system at www.absalonproject.com It covers the period of the financial crisis during which Danish mortgage bonds traded normally while European collateralized bonds froze and junior tiers of US mortgage bond structures stopped trading for prolonged periods for lots of rekasons (operational error, lack of information for valuation, thin market). Denmark skirted this by applying the following rules to their fixed income real estate lending:
    1) loans had to be made by mortgage institutes
    2) institutes were owned by a large bank or cooperatively by up to 300 small banks
    3) mortgage institutes validated appraisals, qualified loans, validated accurate documentation, distributed funds and received/applied loan payments, and kept the books regarding loan balances. They conformed to legal requirements and were regulated separately from banks and in accordance with their own law.
    4) mortgages were all funded by increments to bond pools (such as 20year 2.5% bonds for mortgages issued between 2013 to 2015 and supported by xyz bank. A couple of notes on the bonds are 1) they are for 1 cent each and always for 1 cent, 2) some of then are redeemed when loan principal is repaid by supporting banks, 3) when the loan is made the associated bonds are given to the supporting institution and sold into the secondary markets when the bank's treasury department wishes, 4) there are market makers which make it easy to trade the bonds, 5)the bonds are owned internationally, 5)redemption is by lottery so each quarter an investor would be advised that a certain amount of her bonds were now trading with a new ID which can be traded independently and will convert to cash at the next redemption period.
    5) Institutions who support the mortgage institute's loans keep the mortgage loans current so mortgage bonds don't default and stay cheap. When the government does not guarantee the bonds but does transfer the mortgage loan responsibility of sponsorship if it closes a bank to a new owner.
    6) Bond loans cannot be restructured and can either be paid off by purchasing and applying the related bonds or by providing cash.
    7) Is borrowers don't promptly pay the loans the supporting bank pays the mortgage bond loan in their behalf so it remains current until the problem is resolved. Banks are regulated and provide liquidity/capital to keep everything working. On the other hand, banks charge their borrowers if they have to restructure and can set the price for their original loan as much above the bond rate as they wish. The mortgage institutes do their jobs inexpensively.


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  20. Chris Papadopoullos31 October 2017 at 19:19

    Here's a slight problem. If banks are unable to expand their balance sheets - lets say they are trying to achieve higher capital-to-asset ratios but can't raise capital - broad money will be not be able to increase much. These new deposits that are created will replace the creation of money that would otherwise have been created, with little overall difference. Or some other liability will have to make room, but how much room can it offer?

    So the policy may work now, when banks are looking to expand their balance sheets, but perhaps not in 2008, when they were heavily constrained by Mr Brown's cap:asset ratios, or at other times when there is an overall balance sheet constraint. In which case, capital ratios would need to be relaxed, or people be allowed to have individual accounts at the Bank of England, or something along those lines would be needed.


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    1. They certainly weren't constrained in 2008. Capital ratios were low, especially for "safe assets" (which turned out not to be safe at all), and could easily be gamed. Capital ratios are much higher now, and there is also a leverage ratio and liquidity requirement.

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  21. You are getting warmer. Just eliminate the private banks, or commercial banks, or whatever other banks you may think of, and keep only a Universal National Bank. (UNI). The UNI performs all of the duties that the old banks did, but it adds one more service. "Helicopter Money" is a little inflammatory, so I won't use it. I will call it Social Security Lifetime Supplement (SSLS). This bank will give money to citizens by means of monthly regular deposits into their UNI accounts: one for all legal payments, one for savings at a guaranteed interest rate, and one into the UniLife account which is to be used by the citizen to spend on things that are good for society and good for the citizen. There is no debt anywhere. I can't give the whole thing away other than to say there are ample safeguards against inflation, hyper or regular, and there is a way to drain excess money from the system. The money is issued by a few clicks of a computer keyboard. There are a couple of other wrinkles that help us track down illegal drug sellers and other criminals and let us control illegal immigration as well as people who overstay their visas. Just let your mind run free. Say "Yes" to the future. No debt, no Interest, and more. But through this process, you will find that our national assets will grow faster than anyone ever thought possible.

    The opening half of this comment was so hard for me to read. It actually hurt.

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  22. This is the best explanation for private credit creation I've read. Thank you.

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  23. I don't see the way banks create money as the problem. As a society we need to get it from somewhere, so we do need somewhere. Difficult to see how banks can justify the interest though, given the lack of any need for compensation for opportunity cost and any risk they run being a matter of accounting. Why not just use different accounting? There was a time in the world before double-entry bookkeeping, perhaps now is the time for after it. If the banks do indeed cease to be banks, I'm good with that. Why not introduce licensed money creation shops/houses/palaces, where your personal pledge of payment (the asset) can be exchanged for government approved assets (notes, formerly banknotes) for a flat fee, itself to be paid in installments over time?

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    1. you appear to have just invented what might be called a banking system

      Delete
    2. Big Bill,

      Banking/Money creation cannot be fully entrusted to either private finance or the government as mere regulation that can be manipulated by vested interests. A third constitutionally arms length protected money creating institution with specifically mandated policies (universal dividend and "retail product" discount) is necessary if we are to be serious about resolving the money system's problems.

      Double entry bookkeeping is one of the greatest innovations humanity has come up with ranking right up there with the computer and agriculture. Utilizing its digital format and crafting monetary policies around it could "knee cap" private finance's monopoly on credit creation and reverse the continual build up of Debt that results from its enforced paradigm of Debt Only.

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    3. Rob, the difference being my banking system doesn't relentlessly extract the wealth from everyone else in the culture. It still does extract it by asking for more than it gives,, but not so fast as demanding interest, often compound, would. So, it's an improvement. We wouldn't be farmed quite the way we are now. Work in progress :-) Steve, you are from Babylon and I claim my five pounds :-) I didn't get your last paragraph at all, I'm afraid, I'd need to see examples.

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    4. Big Bill, You suggest that having commercial banks creating money is not a problem. I suggest it is, and for a reason set out by Joseph Huber in his work “Creating New Money” (p.31, para starting “Allowing banks…”) which I referred to above. The problem is that creating money is by definition a way of obtaining money which is cheaper (well near costless) compared to earning it or borrowing it. That after all is the big attraction of turning out your own £10 notes. In short, letting commercial banks create money is a subsidy of the lending business: it results in artificially low rates of interest and artificially high levels of debt.

      Of course having central banks / governments create money is a subsidy of governments as well, but the profit simply goes towards the things we all agree need subsidising: education, health, etc. So that doesn't matter.

      Steve Hummel, You advocate a “constitutionally arms length protected money creating institution with specifically mandated policies..”. That’s exactly what Positive Money advocates. However, central banks would actually fulfil that purpose: they are about as “arms length” as we’ll ever get. And the various fiscal responsibility committees springing up around the World are fairly arms length as well.

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    5. The key is a third institution. Thirdness is the signature not only of true alternatives but of integration which is the very process of Wisdom. What we need is to awaken to the pinnacle concept of Wisdom as it applies to economics and money systems because the pinnacle of integration would be both thirdness and greater unity, wholeness and oneness thereof.

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  24. Sure Bill. The pricing system and money system are both digital, that is $10 applied to the principle of a loan reduces it by $10 and $10 paid for a product or service liquidates $10 in prices. Hence, a 40% discount to prices that is rebated back to the merchant granting it to their consumers enables the enterprise to sell their product at 40% below their best competitive price...and yet get their full price because their discounts are rebated back to them by the third monetary authority I referenced. This policy was originally masterminded by C. H. Douglas and his theory of Social Credit almost 100 years ago. However, he suggested it only at the very end of the economic process at retail sale. My insight is that any point of sale throughout and within the entire economic process is completely analogous to retail sale in that it is a point of summing and momentary stopping of costs and prices. My innovation is applying Douglas's discount policy to every sale of every business model to their "retail customer" hence broadening and extending the policy and at the same time saturating the entire commercial economy with the the reciprocal part of the new monetary and economic paradigm of Direct and Reciprocal Monetary Gifting. The effect is to enable enterprise to sell their product at a 40% discount thus increasing their volume of sales which translates into higher profitability. It also gives every individual an immediate 40% raise because their purchasing power has just been increased by 40%. When was the last time any economist or politician ever accomplished that much for the individual? Fast answer: NEVER.

    And finally, the real problem with the current money system is it forces continual borrowing in order to "survive". However, continuous borrowing is eventually debt deflationary as even at 0% interest if an individual or enterprise has debt service that outstrips their income....they're bankrupt. My Wisdomics-Gracenomics universal dividend and extended discount policies eliminate the systemic necessity to borrow in order to limpingly survive for a period...and then still fail.

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  25. Here's an excerpt from the NY Fed site:

    "The Federal Reserve conducts open market operations with primary dealers...This structure works because the primary dealers have accounts at clearing banks, which are depository institutions. So when the Fed sends and receives funds from the dealer's account at its clearing bank, this action adds or drains reserves to the banking system."

    This is consistent with a Chicago Fed document ("Modern Money Mechanics") that many rely on. It assumes that the Fed's QE counterparties are BDs that don't hold reserves at the Fed (many sources confirm that BDs don't hold reserves at the Fed), and therefore, get paid for the bonds they sell to the Fed through their commercial bank accounts.

    When people say that the Fed "prints money," I interpret that as deposits=money and QE increases deposits (the dealers' deposits at their commercial banks) so therefore QE increases money.

    Any thoughts?

    BTW, I linked both the NY and Chicago materials from this article that looks at net lending data during, between, and after QE periods:
    http://nevinsresearch.com/blog/qes-untold-story-a-chart-that-fed-correspondents-should-investigate/

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    1. I came back to this to see if you had replied, reread your article more closely, and I see that you didn’t actually question that central banks create money, you just didn’t fully explain the process.

      Where you say, “It [the central bank] exchanges illiquid loans for newly created, highly liquid, risk-free money, which banks then use to pay their customers,” what’s really happening is that the central bank buys a bond from a BD and then instructs a commercial bank to increase the BD’s bank account at the same time that it increases the commercial bank’s reserve account.

      (At least that’s how the Fed operates. The Fed can certainly transact directly with a bank, but for POMOs that’s much less common than dealing with BDs, which is why its materials describe open market operations as a three-party process, not just between the central bank and a bank.)

      Given that process, I don’t know why you would say that banks “use” central bank–created money to “pay their customers.” Presumably you’re talking about reserves, but the statement isn’t really true as far as the Fed operates. Banks redistribute reserves among themselves but they don’t use them to pay customers. As you know, that’s why reserves aren’t included in M1 or M2.

      That may not affect your other conclusions, but there seem to be a few different semantic debates running through your posts on this topic. (I read your INET post also). Maybe I’m wrong, but I doubt that very many people who say that banks create money “out of thin air” or “out of nothing” fail to understand that the money being created is in exchange for a loan or an asset. Those people are merely pointing out that banks don’t need any assets on hand (notwithstanding their capital requirements, which are small and don’t offer much of a constraint) to deliver some form of money purchasing power to their loan customers. Why is it so important to contradict those people when most of them are saying the same thing you are?

      Maybe I'm missing something, or maybe the semantic debates are useful for attracting readers, and I guess that's fine if that's what you're after. But I would say the far bigger problem is the macro theories, models, and empirical studies that rely on the fallacy that deposits come before loans. I don’t think it’s an exaggeration to say that this fallacy invalidates orthodox macro, and that seems a bigger problem than whether it’s okay to say “out of nothing” for a transaction that even in your first paragraph you acknowledge is “from nothing.”

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    2. Daniel, how the Fed chooses to do things is not my concern here. I am speaking generally. The Fed chooses to complicate things by using broker dealers, yes, though most of these are themselves banks or subsidiaries of banks (look at the list: https://www.newyorkfed.org/markets/primarydealers). But other central banks don't. I really wish Americans would look beyond their own back yards.

      Banks do use reserves to make payments. Without reserves, banks cannot make payments on behalf of customers.

      You clearly were not party to the debate that sparked this post, or you would not say people understand that banks creating money "out of thin air" nevertheless means the money is fully asset backed. Can I suggest that you read the comments section on the INET post, since it is discussion there that sparked this post?

      No doubt you would like me to have written a different post. But as I have for some years now been loudly and clearly proclaiming that "loans precede deposits", and complaining about economists who fail to model this correctly, I did not see any need to do that in this post.

      In response to your previous comment: yes, QE that purchases assets from non-banks does increase broad money. Specifically, it increases M1 deposits. That is true not only for the Fed but for other central banks that do QE. The Bank of England explains how this works in the piece I have linked at the end of my post. The ECB's monthly Monetary Developments in the Eurozone shows the increase from QE statistically.

      I'm really not sure what substantial point you wish to raise, other than to suggest that a) I have got the accounting wrong (no I haven't) b) I don't understand how the Fed works (yes I do) c) I don't understand how QE works (ditto) d) you would like me to have written a different post (tough).

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    3. The "banks or subsidiaries of banks" on the primary dealer list are predominantly SEC-regulated BDs situated within bank holding companies. So, while you may think the inclusion of, say, JP Morgan Securities and Goldman Sach & Co. on the primary dealer list invalidates the points I raised above, they’re actually BDs. They don't hold reserves at the Fed. You can check this by going down the list and looking at 10Ks or other publicly available documents. Or you can trust the documentation I linked earlier – the Fed wouldn’t describe QE as it does if it wasn’t dealing mostly with BDs.

      While I used the Fed as an example, my comments, too, were "general" - they apply in many other countries. That said, I'll gladly admit to not being an expert on every country's banking system. Are you?

      You've changed your language from banks using reserves "to pay their customers" (in your article) to banks using reserves to make payments "on behalf of" customers (in your comment). Those are two completely different statements. In the first case, the customer receives the payment, and in the second case, the customer makes the payment. "On behalf of" is fine. Presumably, you've recognized that distinction or else you wouldn’t have made the change. And presumably, you understand that reserves can only travel between institutions that hold reserves at a central bank - not from those institutions to anyone else. Saying that reserves are used “to pay their customers" is similar to saying that banks "lend out reserves” to the public, which you pointed out as a fallacy somewhere in your last two articles.

      I sometimes say that banks “create money from nothing.” You argue that I’m wrong because, in fact, “banks create money from nothing in the process of making a loan.” As I see it, that’s a semantic argument, and it really doesn’t matter what you wrote in your previous comment threads. In fact, I did look at the last comment thread and saw other arguments that I would consider semantic. That’s just an observation - you’re welcome to continue arguing as you prefer to argue and I’m sure you will.

      I wouldn’t sum up my “substantial point” with any of your four choices. Your blog has a comment section and I thought I’d add a comment. At best, maybe one of your readers will appreciate my perspective, or maybe you’ll strenuously object to my comments but internalize them, as in the change in language noted above. At worst, I exercised my mind on topics I occasionally write about. I wasn’t trying to pick a fight.

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    4. BTW, I could have easily referenced the 2014 B of E report instead of the Fed docs and my comments would have been unchanged. From the B of E report:

      “QE is intended to boost the amount of money in the economy directly by purchasing assets, mainly from non-bank financial companies. QE initially increases the amount of bank deposits those companies hold (in place of the assets they sell)... As a by-product of QE, new central bank reserves are created. But these are not an important part of the transmission mechanism.”

      Replace BDs in my comments above with “non-bank financial companies” and you get the same thing. In other words, I would argue that the Fed’s QE is no more “complicated” than many other central banks’ QEs.

      In the relevant sections of my book (see nevinsresearch.com), I refer primarily to the B of E report, not Fed materials. I also source the BIS on similar topics. It’s your blog, though, and if you’d like to stereotype me as an inward-looking American that’s your prerogative. Just know that you could have written “Americans looking beyond their own gardens” and I would have understood - having lived and worked many years in London, I’m careful about saying “back yards.”

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    5. As I'm not discussing QE in this piece, your comment is off topic.

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    6. Also, as I explained clearly elsewhere in the piece how bank payments work, it should have been obvious that "pay their customers" was a reference to the payments mechanism. I agree it is ambiguously worded, but in context it is not difficult to understand.

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    7. Well, I'd have to disagree and say my comment is "on" topic. It not only responds directly to your reply above but it also relates directly to money creation, with QE as an example, just as your article is about money creation with discussion of QE as an example (and I did scroll up to make sure I wasn't imagining that you discussed QE.)

      As above, though, it's your blog.

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    8. As far you having "explained clearly elsewhere in the piece how bank payments work," banks don't normally "need to borrow money when they make payments" as you claim. You might want to double check your description on how payments are settled. Just a thought.

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    9. Daniel Nevins, banks do need to borrow money if they don't have sufficient liquidity to make payments. Central banks provide liquidity intraday, often interest-free, to ensure that payments can be made. As an example, see the Bank of England's explanation: http://www.bankofengland.co.uk/markets/Documents/paymentsystems/boesettlementaccounts.pdf

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    10. Daniel Nevins, nowhere in this piece did I discuss how QE works. I mentioned it in passing as an example of asset-backed money created by the central bank, that is all. This piece is about creation of asset-backed money by commercial banks, and about creation of helicopter money (without asset backing) by central banks. Your comment is therefore wildly off topic.

      I am happy to discuss either or both of the subjects covered in this piece. I'm not prepared to spend time and energy here discussing a subject that is deliberately not covered in this post because I have written about it many, many times before.

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    11. But again that's completely different language. When you write that banks "still need to borrow money when they make payments," and you don't attach a conditional clause to that claim, it can only be interpreted as "every payment requires borrowed money," which isn't even close to being true.

      Also, you linked the "need" for borrowing to your assertion that banks don't keep enough liquid assets on hand to meet payments. But most of the time, banks have plenty of liquid assets to meet payments - they use their reserve balances to transfer money to other banks, and they use their vault cash to pay out currencies. Plus, they have payments both coming in and going out. And when the gap between outgoings and receipts becomes so large that their reserves fall too low, they can readily borrow from other banks that are happy to lend reserves.

      But now you're talking about CB intraday liquidity provisions, which don't really connect to your proposed shortage of commercial bank "liquid assets" (reserves and vault cash) - they only exist to fill very short-term gaps in the settlement process. Nor do they connect to later statements you make about central-bank money.

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    12. Just to clarify, my comment above refers to your comment on CB intraday liquidity provisions. I have nothing more to add to your claim that my discussion of money creation with some reference to QE is "wildly off topic" your discussion of money creation with some reference to QE.

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    13. Daniel Nivins, I suggest you read my comments much more carefully. I did in fact attach a conditional clause to my observation about banks borrowing to make payments. In no way could my comment reasonably be interpreted as meaning that every payment is made with borrowed money.

      You also claim that I said all banks are short of liquid assets for payments. I said no such thing. As I said, please read more carefully.

      Your next comment is plain ridiculous. After disagreeing with my observation that banks may need to borrow reserves to make payments, you then say that if banks are short of reserves they can borrow from other banks. Which is exactly what I said.

      And finally, if you don't understand the link between intra-day and overnight liquidity, you don't know much about either payments or banking.

      You don't seem to want to discuss the topics raised in the post. As far as I can see, all you want to do is nit pick about semantics. I'm not sure why you are so determined to prove that I don't know what I'm talking about, but I've had enough of it. You haven't got anything constructive to say, so this conversation is now closed.

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  26. I've been gone, but I do get your posts and comments in my email, and I always look forward to reading them. As I read your exchanges, it occurred to me that you are defending the current banking systems all over the world, but mostly the one in your nation and sometimes the one in my nation. I wonder why you do this because these systems, at least since the beginning of the 20th century, have failed to provide an economic system that will enable each of us to have the rights, resources, opportunities, and protections we need to have a fair and honest chance to go as far as our talents and efforts can take us, and so we will have a fair and honest chance to build long lives that are worth living for ourselves and our loved ones. Neither your system nor mine over here provide those chances. Your system and mine are failures. They need to be replaced. But I am pretty sure that you do not agree with me. You seem to think that they, with a few rough spots here and there, are running smoothly.

    "Loans precede deposits," seems to be a hard position in your thinking, and I have no objection to it except when it gets in the way of providing ordinary people, from birth, equal access to the rights, resources, opportunities, and protections, that I just mentioned. You do concede, I think, that governments create money, but you insist that that the act of creation also, of necessity, creates loans, and loans are necessary before the beneficiary of that money can gain access to his deposit. But that makes no human sense. It makes sense in a universe that protects bankers and economists and scholars, but that universe is a closed universe. We know this is true because we left the gold standard years and years and years and years ago, and Abraham Lincoln tried to leave it years before that. He, not an academic, not an economist, not a banker, understood that money is to serve the needs of human beings, not just the needs of bankers.

    So, there is no use in defending the current systems because they are built and operated for the benefit of bankers.

    Now, about “loans must precede deposits.” That is true, apparently, in the systems you defend which are built for the benefit of bankers but not for the benefit of people. A system that creates money in ways that will benefit the people will never create loans when it makes deposits. It just won’t do it because, at bottom, all that does is benefit bankers. Now, some have argued that bankers are providing a service and should get a profit for that service. And that is true except that there is no competition among bankers. There are territorial monopolies which work against the people.

    So, in a system that works for the people the government will create money and put into an account for each citizen. That money will be enough to pay for the basic necessities of life, and for other things such as schooling through college, to buy or rent a place to live, health care, etc. etc. and the recipient has to make no promises to pay the money back. He will naturally do what he is inclined to do and some of what he does will benefit society. So, society should use money directly to give its citizens the money to buy the things they need to have access to rights, resources, opportunities, and protections that will enable them to build long lives worth living for themselves and their loved ones. Society gets better and better and much of our inequality goes away and everyone will be happy, that is, except the bankers. But in my world there is no requirement, and no need, for bankers to exist.

    So, again, why do you defend a system that works against the people for the benefit of the bankers? Why don’t you argue for my system, in fact why don’t you take my start at a system and turn it into something wonderful—there is a Nobel Prize in it for someone.

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    1. I have not, in this post or any other, defended the present system. I have described it.

      Why should I argue for your system? Do you not think I have ideas of my own?

      Delete
    2. Fair enough. Why don't you stop describing the current system and describe the system that would result if your ideas were implemented? What would you call it? What effects would it have on the world? I would love to see someone somewhere start preaching the same gospel that I try to preach--which is that our current systems of government and economics work against the common good. They favor seven groups: white, male, heterosexual, Christian, well-to-do, native-born and the able. And they hate seven groups: not white, not male, not heterosexual, not Christian, not well-to-do, foreign born, and the disabled. Don't dole it out in dribbles. Give us a book, or at least forty or fifty posts here that would form an integrated whole. Someone has to save the world and I hope it is you.

      You might start with telling us how your integrated system would deal with the categories identified by two British epidemiologists, Richard Wilkinson and Kate Pickett, who published "The Spirit Level, Why Greater Equality Makes Societies Stronger." As you no doubt recall, the authors looked at the effects of inequality in many of the most advanced nations, including the United States. They observed that the nations in which individual economic inequality was great there was also inequality in the distribution of health and social problems. They looked at the following categories:

      • Level of trust
      • Mental illness (including drug and alcohol addiction)
      • Life expectancy and infant mortality
      • Obesity
      • Children’s educational performance
      • Teenage births
      • Homicides
      • Imprisonment rates
      • Social mobility

      How would your integrated system reduce these inequalities and make the nations of the world stronger? Would you raise the minimum wage or give everyone a basic income? Would you raise interest rates or do away with them? Would you provide a Social Security Lifetime Supplement of $36,000 per person per year for life? Would you make all health care free? Would you eliminate paper currency and stick with bits and bytes? How would you distribute your SSLS? If you gave everyone an SSLS would you treat it as a loan and make them sign a promise to repay and failure to keep that promise would result in forfeiture of assets? Would you do away with income taxes? property taxes? sales taxes? death taxes? How would you prevent inflation? If your ideas do not address any of these elements of our economic lives then where do they fit how in? What would be the best outcome they might produce?

      I can't wait to hear from you.

      Delete
    3. And don't forget funding the war against global warming...

      Delete
    4. I don't have to accept your terms of reference, either. They are a thinly disguised attempt to get me to promote your agenda, which I've already said I won't do.

      I have already written about many of the issues you raise, not once but many times, both here and in other places. I've been a vocal advocate for Universal Basic Income for several years now. I'm frankly amazed that you have managed to miss this.

      I've previously outlined the major reforms I would like to see in this piece on Open Democracy: https://www.opendemocracy.net/uk/austerity-media/frances-coppola/inequality-nexus-of-wealth-and-debt.

      And today I have called for a specific reform to the banking system that I think is essential. That piece is also on Open Democracy: https://www.opendemocracy.net/neweconomics/payments-system-vital-public-service-dont-run-like-one/

      Delete
    5. So, if you have written a description of your system over the course of x posts over y months or years I am glad to hear it. But if you really want your ideas to be taken seriously as a whole then you need to bring them together as a whole. I can't find the ones you claim to have written and I am not going to look for them, because if you haven't already integrated them yourself then you probably can't integrate them. I have noticed that you are consistent in some areas, but you have never defined or described a whole in writing. When you are designing systems coherency and integration are the first two tests that your design must pass before you can go on. You don't have such a model that I can find, if you do then you should be able to give me a single link to one or more posts that show the totality of an economic system that will solve the problems that all developed nations face. because all of them have systems that favor bankers at the expense of the people. And that system is the one you defend. it is just not fair of you to say that you do not defend them when you clearly do.

      So, don't ask me to do your work for you. If you don't yet have an integrated plan then I will leave you alone, because there is nothing to gain here. I have to say that you are not alone. Other blogs hosted by economists and by actuaries take the same position as you--they know they have the answer to our problems but they just can't explain it and they get angry when pushed.

      Delete
    6. I have provided you with links. If you can't be bothered to read them, there is nothing more I can do.

      I remind you that this is a free blog that I write in my spare time. As I have to earn my living, I don't have the time to produce the "integrated plan" you demand. That would be a book, not a blog.

      Where is your "integrated plan"? Have you written one? Or do you just troll blogs like mine complaining that I haven't taken on board your ideas and produced your integrated plan for you?

      Delete
  27. Theory Alignment vs Policy Alignment: Which Is The One That Will Make The Breakthrough To Paradigm Perception Complete?

    It's Policy. First, policy is where the "economic rubber hits the road" of temporal reality. Second, the tendency of every policy of cutting edge heterodox, inconoclastic, anti-financial dominance and disequilibrium  theory is aligned with the paradigms of monetary abundance, dynamic ratio, directness, reciprocality and gifting, and yet these same policy recommendations are fragmentary, incomplete and/or un-integrated and so lacking in full consciousness and insight as to the exact complementary policies that will achieve the breakthrough to complete micro-foundational integration of the new paradigm and the consequent observation and perception of  the new paradigm and the depth of its effects.

    Examples:

    Modern Debt Jubilee/UBI/QE For The Individual.....aligns with monetary abundance, directness and gifting, but does not appear to be fully conscious of dynamic ratio or reciprocality

    MMT/Job Guarantee....aligns with monetary abundance and directness, but insufficiently  with dynamic ratio and reciprocality, not at all with gifting

    Disequilibrium/Minsky Instability....aligns with abundance, dynamic ratio (disequilibrium), but insufficiently with directness, reciprocality and gifting

    Social Credit/Dividend and Discount....aligns with dynamic ratio, directness, reciprocality and gifting, but not necessarily with monetary abundance as it tends to have a slight bias toward general equilibrium theory)

    Understanding a new paradigm requires that one thinks thoroughly past the old and thoroughly into the new. This does not mean that we have to completely abandon aspects of the old. For instance the current/old paradigm is Debt Only. Debt will still be a part of the new economy, it's just the Onlyness that is deleted.

    ReplyDelete
  28. I am closing comments on this post because the discussion is being dominated by a few people who have evident personal agendas.

    This blog is free to read, and I encourage and enjoy constructive debate. I do not tolerate rudeness or persistently off topic remarks. And if I judge that a comment stream is degenerating into unconstructive nit picking, I reserve the right to close it.

    I would also like to make it clear that if your only purpose in commenting here is to grandstand your own ideas or promote your own book or website, you are not welcome. I have worked very hard to build up the readership of this blog. It is not right to freeload on my efforts.

    ReplyDelete

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