Money. Doing it Right this Time.

Inno, if you want the private sector creating money instead of the government or banks, then you have money simply created through forgery. How is that better?

Oh, if money has to be created I'm all for a public monopoly on money creation. Which would be quite easy to do without significant changes to the existing institutional framework: just make all banking be state-owned, always. As it is now banks are private while they make a profit and then become public as soon as their reckless lending catches up with them and they get in trouble, only to be privatized again as soon as they once more become profitable. It's a racket even by the capitalist standards.
 
@Monsterzuma: The demand for money is dependent upon a variety of factors and taxation is only one of them.

Well, that proposition by itself (that some of money demand is due to taxation) is a bit controversial, so here's a two-line argument. The fiscal authorities demand payment in fiat currency. Everyone has to pay taxes. Hence they must pay taxes in fiat currency, so some of the demand for currency is due to "taxation" or the need to pay taxes.

However, I'd see the transmission mechanism from taxation to inflation in quite a different light. (Changes in) taxation affect consumption/investment decisions and hence affect aggregate demand, which in turn affects inflation and output. The split between inflation/output for a given increase in AD is determined by supply-side factors. Well, ignoring Ricardian Equivalence and other such technicalities. RE says, basically, that holding the government's spending stream constant there is no effect of a change in taxation today on AD; today's tax cut is implicitly tomorrow's tax increase. This can fail in a lot of fun ways.
 
Taxing and spending don't alter the amount of money in the economy. Just the use to which it is put. Borrowing and spending can alter the amount of money, if the borrowing comes from abroad or the central bank buys the debt and increases the money supply. In a closed system, where no borrowing was from abroad and the central bank did not increase the money, than borrowing and spending also wouldn't affect the total money in the economy. And without affecting the money, it doesn't really matter as far as inflation is concerned.
 
@Monsterzuma: The demand for money is dependent upon a variety of factors and taxation is only one of them.

Well, that proposition by itself (that some of money demand is due to taxation) is a bit controversial, so here's a two-line argument. The fiscal authorities demand payment in fiat currency. Everyone has to pay taxes. Hence they must pay taxes in fiat currency, so some of the demand for currency is due to "taxation" or the need to pay taxes.

However, I'd see the transmission mechanism from taxation to inflation in quite a different light. (Changes in) taxation affect consumption/investment decisions and hence affect aggregate demand, which in turn affects inflation and output. The split between inflation/output for a given increase in AD is determined by supply-side factors. Well, ignoring Ricardian Equivalence and other such technicalities. RE says, basically, that holding the government's spending stream constant there is no effect of a change in taxation today on AD; today's tax cut is implicitly tomorrow's tax increase. This can fail in a lot of fun ways.

The categorical statement that "demand for money is generated by taxation" is one I heard from an MMT advocate that I hadn't spent much time critically thinking about. It may not be quite as settled a matter as said person implied.

I'm curious about one thing though: in an economy where a government mandates the use of the national fiat currency for the settling of transactions without engaging in taxation (a theoretical case where government incurs no costs), what would determine the initial price level of things? It seems to me that any price level is possible given that the money velocity can any arbitrary rate, right?

Could you perhaps elaborate on what you view as the whole range of sources of demand for money?
 
Ama, we endorse the Federal Reserve because it provides far greater stability to the economy.
Like the 1920s and the Great Depression? Like the 1970s? Like today?

As for ridiculous charge of redistributing wealth, most of the wealth that exists in the world only exists because financial system supports the creation of it. And that includes both central banks and fractional reserve banking. Eliminate those and you eliminate most of the world's wealth. Those fortunes you want to protect simply would not exist without banking.
You are confusing loan banking and depository banking. Loans would have to come from real, invested money, not just plundering the accounts of bank depositors and issuing phony receipts.

Central banks and fractional reserve banking do no redistribute wealth at all. Much less unjustly. They make the creation of wealth possible. Gold, on the other hand, does unjustly redistribute wealth, because it causes periodic bouts of deflation.
It is wealth redistribution; new money enters the market unevenly and before the price level has a chance to catch up. Taking Rothbard's example from The Mystery of Banking, if the amount of money in existence magically doubled overnight, would some people not benefit at the expense of others? Those that spent their new money immediately would be able to buy at the current price level, whereas the thrifty would see their purchasing power diminished.
 
The categorical statement that "demand for money is generated by taxation" is one I heard from an MMT advocate that I hadn't spent much time critically thinking about. It may not be quite as settled a matter as said person implied.

I'm curious about one thing though: in an economy where a government mandates the use of the national fiat currency for the settling of transactions without engaging in taxation (a theoretical case where government incurs no costs), what would determine the initial price level of things? It seems to me that any price level is possible given that the money velocity can any arbitrary rate, right?

Through the demand and supply of money (price levels are one way of balancing these). Velocity isn't just any arbitrary number, it is simply the value of transactions over the moeny supply. Of vourse, this makes it directly linked to the price level.
I don't see how raising the tax rate would stimulate money demand. It should lead to a decrease because it decreases the disposibe income and related consumption.


You are confusing loan banking and depository banking. Loans would have to come from real, invested money, not just plundering the accounts of bank depositors and issuing phony receipts.
The two are intricately linked. Very few people would use depository banking if costs weren't offset by banks loaning funds. If people aren't depositing their money there is very little available to loan.
Besides, if the bank loans you money you can do what you want with it so long as you meet the requirements of the laon (interest and principal repayment). Why should you treat funs that entities loan to banks differently?
 
So to avoid concentration of wealth, there either needs to be a redistribution mechanism or a limit to the interest rate than it cannot go higher than the growth rate. Now I guess that there is a limit to how much interest you can charge (let's assume it is an effective interest rate where risk has been factored out already) and the money supply and economic growth somewhat influence that limit. But I would guess that this limit is well above the growth rate and therefore concentration of wealth is an inevitable outcome in a free market. Is that so?
I have been toying with the same idea for sometime now, and you nailed one good way to provide a ceiling to the cost of borrowing money and, by side-effect, to the profits of financial speculation.

One other effect is that banks will be more selective with the recipient of their loans: If there is a "hard roof" on the interest they can charge then they may avoid the most risky recipients.
Banks have allowed a huge number of subprime loans (in include a lot of credit card debt here) because they could charge huge interested: those who were able to replay them covered the cost of the defaults (as long as there weren't too many of them).
 
Like the 1920s and the Great Depression? Like the 1970s? Like today?

You cherry pick incidents rather than look at the whole picture. Try looking at the whole picture.


You are confusing loan banking and depository banking. Loans would have to come from real, invested money, not just plundering the accounts of bank depositors and issuing phony receipts.


There is literally no such thing as "depository banking" in the absence of "loan banking". We've been over this in this thread and others. If you aren't even going to read the thread, then why are you in it?


It is wealth redistribution; new money enters the market unevenly and before the price level has a chance to catch up. Taking Rothbard's example from The Mystery of Banking, if the amount of money in existence magically doubled overnight, would some people not benefit at the expense of others? Those that spent their new money immediately would be able to buy at the current price level, whereas the thrifty would see their purchasing power diminished.

Just because Rothbard says something, doesn't make it true. The former user here who always used to quote Mises.org proved that. He never came up with anything from Rothbard that wasn't immediately proven false. The amount of money does not magically double overnight. That's a strawman. That type of hyperinflation may be possible without an independent central bank. But not with one. So you are arguing for the outcome that you think you are arguing against.

And you still haven't dealt with the main issue: The amount of wealth creation is immense. It is most of the wealth that exists in society. You are asking literally everyone to be far, far, poorer, just so that the handful of people on the top can have afar greater concentration of wealth and power without having to lift a finger to earn it. What you are not doing is asking for a world without inflation or deflation. You're just asking for a middle ages level of uniform poverty.

You cannot separate the absolute need of having fractional reserve banking from having a prosperous capitalist market economy. One does not exist without the other.
 
The categorical statement that "demand for money is generated by taxation" is one I heard from an MMT advocate that I hadn't spent much time critically thinking about. It may not be quite as settled a matter as said person implied.

I'm curious about one thing though: in an economy where a government mandates the use of the national fiat currency for the settling of transactions without engaging in taxation (a theoretical case where government incurs no costs), what would determine the initial price level of things? It seems to me that any price level is possible given that the money velocity can any arbitrary rate, right?

Could you perhaps elaborate on what you view as the whole range of sources of demand for money?


Prior to the modern system, where specie was the money, not everyone had specie. If the government demanded taxes be paid in specie, then that represented the potential for extreme hardship for anyone to pay their taxes who was not holding specie. Because first they would have to acquire the specie. By mandating that taxes could be paid in fiat money, those that were living an essentially non money life (pretty common in the 19th century US, and some LDCs today) had much easier time with the transactions.

The price level in your hypothetical would be determined in the same way it is now. Supply and demand. If people think a fiat dollar is worth a loaf of bread, then that's what it's worth. So long as the money is not rapidly changing, the market sorts that out quickly and adjusts as necessary.


Velocity is not arbitrary. It is derived. That is, the velocity with which money moves through the economy depends on the aggregate of how quickly people choose to spend their money.

The government has no ability to choose the velocity of money. The market as a whole does so. And the government does not know what that velocity is, but rather derives the value from analysis of the other variables. So when V changes, the central bank can be caught by surprise and will have to adjust M to compensate. This is what happened in 2008-9, when the Fed immensely increased money in response to the financial crisis. The value of V collapsed, and so they changed M to compensate. That is why there was no inflationary pressure from the large increase in M.
 
Like the 1920s and the Great Depression? Like the 1970s? Like today?

Which as a group are without question not as bad as the "Panics" of 1873, 1893, 1896, and 1907.

There is a reason we stopped calling them "Panics," and that reason is the creation of the Federal Reserve.

Ama, do you truly oppose the existence of the Federal Reserve and think fractional reserve banking should not be legal?
 
The categorical statement that "demand for money is generated by taxation" is one I heard from an MMT advocate that I hadn't spent much time critically thinking about. It may not be quite as settled a matter as said person implied.

I'm curious about one thing though: in an economy where a government mandates the use of the national fiat currency for the settling of transactions without engaging in taxation (a theoretical case where government incurs no costs), what would determine the initial price level of things? It seems to me that any price level is possible given that the money velocity can any arbitrary rate, right?

Could you perhaps elaborate on what you view as the whole range of sources of demand for money?

I'll take the two in reverse order.

The demand for money
There are three basic reasons to hold currency
1. To diversify your portfolio
2. To overcome barter
3. Precautionary savings (edit: in the form of "currency under the mattress")

Focus on (2), the "transactions demand for money". You hold money in your wallet because anyone, anywhere, will accept the little green pieces of paper and give you goods and services. That's where the main demand for physical currency comes from. Things get a touch more complicated with credit cards and other highly liquid financial instruments, but not excessively so.

Money is unique because there is no "money market". Every market is a "money market" because every transaction consists of trading goods for money or money for goods. If there are n goods in the economy, standard economics says there are n(n-1)/2 markets, one for each pair. But in a monetary exchange economy, if there are n goods then there are n-1 markets. In each of those markets one good is traded for money.

Money is special: you can trade it for anything. That's where the demand for money comes from.

The demand for apples comes from the fact that you have to eat. Preferences and budget constraints. The demand for money is fundamentally different: it's basically useless so it's not in the utility function* but you demand it because it provides valuable services to you.

Price level determination
There is no "money market" so it's a bit disingenuous to draw aggregate "supply' and "demand" curves for money. Do it anyway. If the money supply is fixed, then the initial price level is entirely determined by money demand. There are better explanations but that's a nice easy view.

Start simple. There are two goods, apples and money. Everyone grows a differentiated kind of apple, and everyone wants to eat a balanced basket of apples. Rule out barter somehow so that you have to use monetary exchange. Then the initial price level is just 1/the initial transactions value of money, or equivalently from equilibrium between the transactions demand for money and the initial money stock.

Clear as mud? I haven't read my Modeling Monetary Economies recently, but this is discussed extensively in the first chapter of that book. I'm flying a little blind on this post. :)


*Well, you could have money in your utility function if you intrinsically like looking at stacks of dollar bills, but the interesting case is where you demand money despite not really wanting it per se. Empirical claims, yadda yadda.

edit: yes, there's a long queue for answers. Blame finals. I will PM the relevant members when I've finally written something worthwhile. :undecide:
 
A couple of other notes on inflation.

There are a lot of different definitions on what constitutes what level of inflation. Some would call "high" inflation 20% per year or more. Inflation below that might still be uncomfortably high, but not high by overall standards. Hyperinflation, that dreadfully overused word:

Definitions used vary from one provided by the International Accounting Standards Board, which describes it as "a cumulative inflation rate over three years approaching 100% (26% per annum compounded for three years in a row)", to Cagan's (1956) "inflation exceeding 50% a month."

If people are talking about hyperinflation for the risk of a couple of points of inflation that people thought might happen with Quantitative Easing, then that's either hyperbole or ignorance.

Inflation is mainly considered a phenomena of fiat money. But that isn't really true. Though hyperinflation is really only possible with fiat money. But without it, you still have possibilities of inflation. It is possible for money to outgrow output. Not really likely, but it can happen. Further, you cannot ignore inflation by another name. Namely debasement.

Debasement is what happened many times when specie was used as money. The government would reduce the silver or gold content of the coins. They would instead alloy the metal with other metals to fool people. Eventually people always caught on and the purchasing power of the coinage was reduced. But for a time it could benefit the government.

Why bring this up now? Because when you look at the possibilities of non government money, you see the same thing, whether it is specie, representative money, or fiat money. In all these cases if the private sector is making the money instead of the government, they have both more incentive to debase the money, and in fact more opportunity to do so.

If you consider as a comparison the period in the US from the time of Jackson's veto of the Second Bank of the US until the monetary reforms during the Civil War, much of the money floating around the US was in fact privately created money. Any bank could issue money. And that money didn't have to be backed by anything at all. It wasn't even fiat money. Fiat assumes the government passes a law to call something legal tender. This was less than that. It was simply bank notes. Now in theory those bank notes should have been backed by gold. In practice, it often wasn't. Or not in the same numbers that the bank claimed. Or often not even backed by a bank. The long distances and poor communications of the era allowed anyone to print something and call it money, and no one else the wiser. It was private sector fraud run rampant.

Because, you know, for the most part it was impossible to check. And there were simply so many different moneys that knowing the true value of any given one wasn't really possible. There was some discounting of unknown money. But that both raised transactions costs, and still did not reflect an accurate knowledge of what any given money was worth. It was all just guesswork.

***

So now going forward some people want to abolish government money and replace it with private money. 10s of 1000s of different private money. With no knowing what, if anything, backs any of that private money. With no knowing what the relative values of each of the many moneys are. With no way of preventing or even reducing counterfeiting. With no knowing if any gold backing it even exists, or has been debased. With greatly increased transactions costs to try to keep track of it all.

In other words, it's not just an invitation to massive fraud, it virtually demands fraud on unprecedented scales.
 
So, my intention to read this thread fully and participate has not been going well so far, let's try and fix that. On Cutlass's suggestion from the Republican Farcical Candidates thread, let's take a look at this:

I also question whether each state having its own paper currency or "state reserve" instead of one currency and the Fed is actually more efficient. Or desirable.

The question is a deceptively simple one: what is the optimal size for a single-currency zone?
 
So now going forward some people want to abolish government money and replace it with private money. 10s of 1000s of different private money. With no knowing what, if anything, backs any of that private money. With no knowing what the relative values of each of the many moneys are. With no way of preventing or even reducing counterfeiting. With no knowing if any gold backing it even exists, or has been debased. With greatly increased transactions costs to try to keep track of it all.

In other words, it's not just an invitation to massive fraud, it virtually demands fraud on unprecedented scales.

It is already private money! You already have massive fraud! Private banks are the ones creating money, now as then. The government just grantees it. Money is not the notes in circulation, it's the massive debts in balance sheets around the world, and it's been growing exponentially, past any sustainability, any reason. Which banks create at will, under the radar of public notice. When it was a con done through bank notes it was at least detectable reasonably quickly. Now? The fraud remains, it's just better hidden from the public. Which, as which any well-played con, just allows it to grow much larger before the whole thing collapses.

That's why my position is that absolutely no private money creation should be endorsed by a state, no private finance allowed. Make the whole realm of finance a publicly owned one and then, and only then, you can expect that states assume and carry the responsibility of controlling it.
 
It is already private money! You already have massive fraud! Private banks are the ones creating money, now as then. The government just grantees it. Money is not the notes in circulation, it's the massive debts in balance sheets around the world, and it's been growing exponentially, past any sustainability, any reason. When it was a con done through bank notes it was at least detectable reasonably quickly. Now? The fraud remains, it's just better hidden from the public. Which, as which any well-played con, just allows it to grow much larger before the whole thing collapses.

That's why my position is that absolutely no private money creation should be endorsed by a state, no private finance allowed. Make the whole realm of finance a publicly owned one and then, and only then, you can expect that states assume and carry the responsibility of controlling it.


All that "bank created money" has real assets backing it.
 
Private banks are the ones creating money
No they aren't. They leverage money created by the central bank. Without the central bank creating money banks cannot do much of anything.
 
It's amazing how you can still believe that after what we're seeing!

Look, banks create money by granting loans and crediting a certain amount of new money in the borrower's account. There is no asset backing it. Only a double entry in the banks books - you can call a claim on a debt an "asset", but it's plainly a new one created just for accounting purposes. It's not an "hard" asset. Even if the borrower then goes to to, say, buy a house with it, that asset he buys is not backing the new money because it already existed prior to the creation of the money.

Only this way could lending have grown exponentially over the past decades. Each act of creating new money by the commercial banks is not matched by the creation of any new asset. Only accidentally can the money creation happen to match, on average, the actual production of new assets by mankind's labors. And it most certainly hasn't matched in for many years now!

Also, private banks do not simply leverage money created by a central bank. Private banks create money prior to a central bank intervening to back that money. The evidence of that is plain the the recent central bank intervention precisely to desperately try to back the excessive debt (money!) created by commercial banks. If banks truly were limited by central bank money creation they could never have possibly "over-leveraged" and would never have needed emergency backing.
 
Also, private banks do not simply leverage money created by a central bank. Private banks create money prior to a central bank intervening to back that money.
Unless they are operating above the reserve requirement, a commercial bank needs more money deposited in order to leverage it and increse the money supply.
If there was too much money available to be given out as loans, then it is the Central Bank having too high a money supply. They decrease that and banks have to follow.

it is funny how this is apparently a problem in the US, which has the highest rewerve requirement in the developed world. Canada has zero reserve requirements and has the Central Bank has actively pushed for minimal reserves and faced no banking crisis in 2008. The problem in the US was largely that banks took on a stupid amount of risk.
 
So, my intention to read this thread fully and participate has not been going well so far, let's try and fix that. On Cutlass's suggestion from the Republican Farcical Candidates thread, let's take a look at this:



The question is a deceptively simple one: what is the optimal size for a single-currency zone?


Let's start by reviewing what money is and what it is used for. Essentially it is a medium of exchange and a method of accounting. A single money has lower transactions costs than multiple moneys. This is because the work needed to exchange money is eliminated. And so it is easier to know the costs of purchases, and easier to make those purchases. So one money is, from that end, always easier than multiple moneys. Further, with one money it is much easier to understand what the value of it is. With multiple moneys you lose all of that. Disadvantage after disadvantage. You have to exchange many different moneys. You have to track the purchasing power of a bunch of them. It all adds to the costs of transactions. And it is all what in economics is called a dead weight loss. You are destroying wealth by eating it up in the costs of the transactions rather than the purchase itself.

Then you get to the problem of monetary policy and inflations. If you think that one monetary policy and one inflation rate is bad, then how can you possibly think that 50 would be better?

50 central banks means 50 times as much of a chance of political interference, incompetence, or just honest mistakes.

I'm trying to wrap my head around this Paul "sound money" concept, but I can't really make heads or tale out of what they mean by it or why they assume it would work. And the best that I can make out, it's pure reactionary stuff. That is, they dislike/distrust one thing, and rather than understanding the issue, they just assume that the opposite must be "good", because what they dislike is "bad".

But the reality is that they simply do not comprehend what they are talking about.

So what we get is that one money over the broadest economic area is simply more efficient than multiple moneys. The bigger the currency area, the better. That is what facilitates the creation of wealth the best. Now the limits of this are shown in the Eurozone crisis. In essence, the European Central Bank is just too focused on the good of Germany, and maybe France, and the rest don't matter to policy. They also made the crushing mistake of explicitly saying that controlling inflation is the primary responsibility of the ECB, and that fundamentally designs the bank to be the causes of crisises.

Does that mean that the Eurozone is a mistake? No, but it has limits because of national sovereignty. And it has limits because it is dominated by a group that does not take the good of the whole into account.

So the optimal size for a currency zone? Big. But possibly not crossing national borders. Not unless those economies essentially function as one. And not unless those governments are all well run and acting in concert.
 
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