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Open Thread 2015-35
News & views …
(A warning -again- to all. Refrain from attacking fellow commentators. Facts can be sourced and proven, opinions can be discussed. There is no need to denigrate or insult someone for having this or that view of an issue.
I will aggressively ban those who can not accept such basic decency and will delete all their comments.)
Basho @ 72 in the “Snuff” article
Your comment to
Nemo, Penelope, Chipnik, tom, paulmeli:
Re gold, money, credit etc
You say, “because the borrower’s spending generates new deposits in the system new “money” equal to the credit extended has been created in the process. (I put “money” in quotes here because for all practical purposes the holder of a deposit in a financial institution views it – entirely understandably – as money, even though it is in fact simply a claim on “real money”).”
I think your inference is that the borrowed money doesn’t become money until it is deposited back into a bank acct. Actually it is money from the moment of its creation by the lending institution; this creation of new money is accomplished by entering numbers in your bank account (previously manually, now by computer keyboard), which counts as a deposit.
When you repay the loan to the lending bank this “money” ceases to be an asset of the lender, but it keeps most of the interest (Part of the interest is remitted to the Fed, although I’m not sure at what point this occurs.) Because financial institutions make interest on a “product” created from nothing, nearly all the very seriously rich people got it from the financial industry. Gates is the only exception I can think of.
Modern Monetary Theory (MMT)– promulgated by Michael Hudson, Randolph Wray, others at University of Missouri, Ellen Brown– includes the provision of State-created money. That is, like prior to WWII, each govt creates its own interest-free currency, rather than paying interest to private bankers to lend it into existence. The middle eastern countries attacked by the US continued this practice, didn’t belong to IMF, WTO, etc. Plus, as a religious commitment didn’t charge interest. Can anyone explain how this is possible?
A further injustice committed by international bankers is the following: Banks are compensated for the “risk” of lending by the interest they charge. But recently they have begun to insist that they be compensated by govts for any “losses”, so that they now are insulated from any risk as well as making interest on money created from nothing.
Example 1: In the US, banks received a “bailout” when their derivatives-based speculations caused losses. The bailout money was “created” like the other, but I am unsure whether this was only a loan, as there are conflicting reports. The US has ever since been “monetizing” the debt (printing money, otherwise known as quantitative easing).
Example 2: Officially when banks lend to a foreign govt the bank must accept the burden of any default. However the banks get around this by having their own govt purchase the worthless defaulted debt (toxic paper), often on the grounds that the bank is too big to fail, will bring down the system– thereby transferring the debt to the govt or taxpayer.
Example 3: The IMF often fulfills the function of saving the big banks from their (purposely) unsound loans to a govt like Greece. First they impose “conditionalities” that cause the economy to shrink.
Typical conditionalities: 1. let the currency float against the others, always resulting in devaluation since the economy’s in trouble. The loan’s always repayable in either dollars, euros or pounds, so devaluation means that even MORE of one’s own currency must be allocated to repayment. 2. cut public employees wages & pensions & lay some off 3. Cut all aspects of safety net: healthcare, unemployment compensation, food stamps, etc. In short, reduce all govt spending so that more is available to repay the loan, but the economy shrinks so that the loan is even more difficult to repay.
In Many cases the country is unable to make a payment. IMF/foreign lender says “That’s OK; we will lend you the money to make the payment or the interest on the debt.” Now, why would they do this? Obviously there’s a default coming. Answer, once the IMF is involved different rules apply so that now the country’s assets can be seized at bargain prices. The IMF thus acts as a collection agency for the big banks.
There is no accepted procedure for a state to declare bankruptcy & the big banks/IMF are only pretending to develop one. Sometimes states simply declare a default and stop paying. Venezuela is an example.
In the above, I don’t understand exactly how the IMF gets into the picture when the govt has only borrowed from banks. Can someone explain?
Posted by: Penelope | Oct 4 2015 16:55 utc | 16
Penelope @ 16
“your inference is that the borrowed money doesn’t become money until it is deposited back into a bank acct. Actually it is money from the moment of its creation by the lending institution”
This is technically true but money borrowed and not spent doesn’t matter…it may as well not exist.
It isn’t money per se that matters to an economy, it’s spending, which is how we define an economy (GDP). Most spending is a result of money-printing (government spending or as I prefer investment) or the anticipation of income and profits from the spending it produces.
“When you repay the loan to the lending bank this “money” ceases to be an asset of the lender, but it keeps most of the interest”
Further, banks don’t create the funds necessary to pay the interest. That has to come from another source. Even though dollars are fungible, each dollar is unique in that it can only be held in one account at a time. Interest represents a steady flow of savings from the bottom to the top of the income spectrum. We have to acquire our dollars from elsewhere to pay the interest.
Another common claim is that 95% of all money in existence was created by banks. If we’re talking about accounting, that either presumes off-balance-sheet reserves, which are invisible to the economy (it’s just liquidity that exists in the banking system) or an accounting ‘trick’ whereby taxes only accrue against government spending in National Accounting, even though it is absurd to think that income generated by business investment or private borrowing somehow avoids being taxed. Over history, much more money (if we’re talking about spending) has been created by government than by private banks (like 60% of it).
its the spending that matters. The quantity of money doesn’t drive spending, it’s the money creation (spending) that increases the money supply and drives the economy while doing it.
“Modern Monetary Theory (MMT)……includes the provision of State-created money”
MMT recognizes that the unit of account (Dollars) is all state money, whether created in the banking system or by government spending. It does not consider that the Fed or private banks create money. Functionally speaking all money is created by Congress, either when it appropriates funding in a spending bill or when it created the Federal Reserve Banking System, which carried an explicit guarantee that the the banks would only loan money to people that could/would pay it back. It’s the People’s Money™ either way, but with banks we just get to rent it.
It was after WWI (1918) when Congress began issuing bonds dollar-for-dollar with deficits. Before that dollars were created directly without issuing ‘debt’.
I have a problem with calling state-issued bonds ‘debt’, because these bonds are functionally dollars that earn interest, they add net financial assets to the non-government, increasing aggregate income, and the interest is not a burden to the government because as you say it just marks up bank accounts and could pay interest in unlimited amounts (which should never be a problem since obviously the Fed controls interest rates not the market). Further, bonds are state money, which are created by the government and no one else. Banks cannot create bonds (Treasuries, T-bills, etc.) they can only buy, hold or sell them.
Bonds are functionally equivalent to savings accounts without the $250K limit of FDIC insurance.
That said, I don’t think we should reward rich people just for being rich, so we need to come up with a more equitable system.
Posted by: paulmeli | Oct 4 2015 19:08 utc | 41
@fairleft@45
No, obviously it’s quite easy to overstate, vastly overstate, the significance of what is going on ‘here’. What is happening is a shift in the ME balance of power that was inevitable when Bush overthrew Iraq in 2003. BUT that doesn’t mean Iran seeks to “displace Saudi Arabia as the regional power broker.” Instead it much more likely means that Iran wants its post-2003 protection/power be acknowledged and accomodated in the three countries across the top of the ME, Lebanon, Syria, and Iraq. Saudi paranoia aside, for example, Iran has made no effort to assert power in Yemen, or anywhere else in the ME other than in those three countries, all of which have substantial or majority Shia populations.
As for now, Iran doesn’t have much space to wiggle, given the recent nuclear agreement, waiting for sanctions to be lifted, in the middle of a diplomatic offensive post-sanction period, with a view to get the country’s economy back on track. Hence their restraint in Yemen/Iraq/Syria, their moves purely defensive. US whorehouse (congress) is waiting for the minimum mistake to prey on Iran nuclear agreement.
I agree with your assessment, I don’t think Iran is looking to “displace” anyone as a power-broker, instead, Iran looks to reassert its vital space in the region. Iran needs space to breath, it’s been choked up for long time. “Reassertion” is not the same as “displacement.” However, there is a law of unintended consequences, and nobody at this point knows how these latest tectonic moves are going to end. I think Darden is right about the level of opposition Russia/Iran/China/Iraq/Lebanon/Hezbollah are going to get. Their recent moves, for sure, won’t go unopposed.
As for Russia, Darden’s conjecture is even more far-fetched. No, Russia does not look “to supplant the US as the superpower puppet master.” Russian policymakers operate in the real world. They know Russia has 1/12th the military power of the US/NATO, for example. What Russia is doing is asserting and protecting, for the emerging Eurasian Century, Iranian and Russian influence in Iraq/Syria/Lebanon. It doesn’t do this as lone cowboy act of a new ‘superpower puppet master’, but primarily — and with military force because that’s the only thing the West ‘respects’ — to mark the border of the China-Russia-Iran-Iraq-SCO coalition.
Bingo! I couldn’t agree more with your assessment. Still, how far Russia/Iran can go out of their protective umbrella will be determined, again, by that old law of physics, “every action has a reaction…” And we can already hear the noise from the usual quarters.
BTW, thanks for the Bhadrakumar link, along with Pepe Escobar, he’s one of my favorites. Today, you beat me to it, I was busy with okie farmer’s long article on Israel’s realism. Worth the time, BTW.
Posted by: Lone Wolf | Oct 4 2015 21:16 utc | 62
“Nope, most spending is by check, by direct-deposit & by credit card.”
I think someone misunderstood my statement, or worse.
In 2014 the federal government spent nearly $4T. With the spending multiplier of 2 that accounts for $8T of spending which is 44% of 2014 GDP. The GFC resulted in a 2% contraction in GDP. What do you think 44% contraction would do?
The spending you are describing is what happens if you have income. How much spending (and thus income, spending=income) do you think would occur if the government ceased to spend?
if you have no income you aren’t likely to be writing many checks, since most people don’t have any savings either. Without government spending we little people would have a tiny fraction of the income we now have.
“I have no idea why you have decided to re-define money so that it only “counts” when it is spent.”
I didn’t redefine anything, I made a statement… the functional reality of money…until or unless someone spends it…it doesn’t DO anything. This has nothing to do with the definition of money, it’s an observation. We don’t measure the economy by how much money is in it, we measure spending.
How effective would it be to print $20T and send it to the Moon? It is estimated there is currently at least $32T off-shore. How effective is that money?
“ALL money is created by banks since the Fed was started in 1913”
This is crazy talk. Can Treasury create money and spend it if Congress doesn’t pass spending bills and instruct it to write the checks? Can the Fed spend money into the economy?
No and no.
The Fed can’t spend, so it can’t add net financial assets to the system. The Fed is limited to buying existing securities, exchanging dollars for dollars that pay interest (and back again if it chooses). That changes the composition of financial assets but not the level. It should be obvious by now after 7 years that the Fed, no matter how hard it tries, cannot increase spending.
And. in case you missed it, the Fed turns every penny it ‘earns’ over to Treasury less operating expenses.
Logically speaking, The Fed and Treasury are little more than accounting systems, as dumb as a computer that does nothing unless the operator, in this case Congress, tells them to do it (in the case of the Fed, it’s instructions are laid out in a mandate by Congress in it’s charter…price stability and maintaining employment (which the Fed is ignoring, and we should be screaming, but America is apparently half-populated by self-loathing individuals).
Anyway, based on your logic, the paymaster at Apple Computer is paying the employees not Apple because the paymaster writes the checks. Whose money is getting spent? On whose authority?
Is the Fed above the Body that created it in the hierarchy of power? Article I Section 8 of the Constiution says no. Only Congress is given the power to create money or to delegate, if it wishes, which it does with the FRBS. And Congress made the law that Congress has to pay interest.
There is a great injustice done the American people that their currency comes into being indebted w interest that they must pay.”
I’ve already demonstrated that the interest is paid TO us not BY us, but accounting seems to escape you. The interest of which you speak is adding to our wealth. Anyone can own Treasuries, they’re just greedy so they gamble in the stock market instead.
How can the people be paying the interest, since taxes don’t fund spending? First, the government spends, then we have income, then we pay taxes. The money has already been spent, so taxes could not have funded it. Look up the Arrow of Time. Learn something about cause and effect.
The landing cannot come before the jump.
”You are attempting to blithely change the definition of the very substance of economics — money — and you expect everyone to follow you from there?
You’ve misunderstood and mischaracterized everything I’ve written so I don’t see how you’re qualified to say what I’m attempting to do.
What’s worse is that you don’t seem capable of parsing simple logic and arithmetic.
And you’re patronizing (I’m being nice here), so I’m pleased that you will be ignoring me.
Posted by: paulmeli | Oct 5 2015 0:53 utc | 73
Penelope (#16),
“Actually it is money from the moment of its creation by the lending institution . . . “
Agreed. I phrased it as I did because the process of “money” creation is more formally complete once the borrower has spent the money and the lending bank has had to settle its obligations.
“When you repay the loan to the lending bank this “money” ceases to be an asset of the lender, but it keeps most of the interest . . . “
The repayment of a loan reverses the process and the money that had been created goes to money heaven. So yes, at that point the loan ceases to be “an asset of the lender”; instead (unless the borrower defaulted) the bank is left with cash.
As to how much of the interest paid over the course of the loan the bank keeps, there’s no simple answer. In gross terms, the bank receives all of the interest. In net terms, it’s impossible to say since any answer depends how you measure the cost of funds it lent. I know that seems to contradict the fact that in making a loan a bank simply credits the customer’s account with a few keystrokes, but in order to ensure it continues to receive a workable share of all the fresh deposits resulting from the spending of loans throughout the banking system, it must be competitive. The results of its attempts constitute its average cost of funds, a constantly shifting figure depending, for the most part, on the macroeconomic environment and the competitiveness of the financial system.
“Modern Monetary Theory (MMT)– promulgated by Michael Hudson, Randolph Wray, others at University of Missouri, Ellen Brown– includes the provision of State-created money.”
In my original piece, I started by saying “First off, all monetary systems are built on some form of “real money”. One of the alternatives, as I mentioned, is “Federal Reserve banknotes and excess reserves [held at the Fed]”. That’s a form of “State created money”, mediated by the Fed, which despite its private ownership is for all practical purposes government instrumentality (for example, whatever profits the Fed makes each year is remitted to the Treasury).
Governments with their own currency can create money in whatever fashion they wish, including simply spending it into existence. For now at least, however, they all (as far as I know) choose to create it via the mediation of a central bank which creates the money by purchasing assets (generally government securities). Central banks, unlike private banks (which have to settle their payments by transferring reserves held at the Fed), really do create money ex nihilo. Only central banks can create “money” itself, as opposed to claims to money.
In broad terms, I heartily agree with your complaints about the many implicit and explicit subsidies and bailouts given to financial institutions by governments, central banks and other official bodies. It’s not only grossly unfair and divisive, it’s terribly inefficient and destructive in economic terms. Protecting creditors at (almost) all costs during and after the crisis was, in my view, a fatal error.
The same thing applies to countries getting in over their head. Resolving these dilemmas is a complex subject, but in principle, once debt has been allowed to reach untenable levels, the reality of that ought to be accepted and plans made accordingly. Instead, the tendency has been to prevaricate, postpone and pretend, all of which ensures that the problem will be even more daunting down the road.
“I don’t understand exactly how the IMF gets into the picture when the govt has only borrowed from banks. Can someone explain?”
The IMF’s remit is, amongst other things, concerned with international financial stability and hence taking part in bailouts of this sort is standard procedure.
Posted by: Basho | Oct 5 2015 4:44 utc | 78
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