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Why Can't the Government Create Money?

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Original post by cole-slaw
Great stuff, but nothing new. Its all stuff that any economics student would have learnt in their first year at uni.


If that were true you would furnish some evidence. But. given my extensive experience, that's not how you roll.

A few pages ago, you told me that this "stuff" is discredited by mainstream economics. You contradict yourself everywhere.
(edited 8 years ago)
Original post by Polymath0
If that were true you would furnish some evidence. But. given my extensive experience, that's not how you roll.

A few pages ago, you told me that this "stuff" is discredited by mainstream economics. You contradict yourself everywhere.


The arguments made in the post you just linked to ARE mainstream economics. This is macroeconomics 101. Expanding the money supply when output is below capacity does not necessarily cause inflation. No ****ing **** Sherlock. Every economics student here will know that. Its very basic stuff.


The nonsense comes when you start talking self-contradictory gibberish about debt-free money, and how the state plays no part in the expansion of the money supply, despite holding a note in your pocket that is expressly demarcated in state issued debt.
Original post by cole-slaw
The arguments made in the post you just linked to ARE mainstream economics. This is macroeconomics 101. Expanding the money supply when output is below capacity does not necessarily cause inflation. No ****ing **** Sherlock. Every economics student here will know that. Its very basic stuff.

The nonsense comes when you start talking self-contradictory gibberish about debt-free money, and how the state plays no part in the expansion of the money supply, despite holding a note in your pocket that is expressly demarcated in state issued debt.


I don't believe you actually realise that the post links to a Positive Money article. Positive Money is a think tank organisation and pressure group advocating debt-free money.
So the "gibberish" you think I am spouting is precisely that which the article is attempting to convey with use of concrete evidence.

I agree that the bank note in my pocket is state issued. However, cash and coin constitutes a minuscule fraction of the overall money supply, which is mainly electronic.
I was only able to withdraw this bank note when a commercial bank electronically created a new deposit in an account, which was then transferred to me either as a loan or in the form of a pay packet by my employer.

I am simply arguing that the electronic issuance of money should be performed by the state, just like cash and coin is.
At the moment the state can cause expansion of an already existing money supply through fiscal means, by means of borrowing it. The private banks cause expansion of the money supply by actually creating it.
Original post by Polymath0
I don't believe you actually realise that the post links to a Positive Money article. Positive Money is a think tank organisation and pressure group advocating debt-free money.
So the "gibberish" you think I am spouting is precisely that which the article is attempting to convey with use of concrete evidence.

I agree that the bank note in my pocket is state issued. However, cash and coin constitutes a minuscule fraction of the overall money supply, which is mainly electronic.
I was only able to withdraw this bank note when a commercial bank electronically created a new deposit in an account, which was then transferred to me either as a loan or in the form of a pay packet by my employer.

I am simply arguing that the electronic issuance of money should be performed by the state, just like cash and coin is.
At the moment the state can cause expansion of an already existing money supply through fiscal means, by means of borrowing it. The private banks cause expansion of the money supply by actually creating it.


That particular post was basic macro and was economically sound. That doesn't guarantee that the same group couldn't be confused and wrong about some other aspects of economics, such as the ultimate source of value of all money in an economy.

Positive Money, along with MMT advocates, get plenty of things right as well as plenty of things wrong.
Original post by cole-slaw
such as the ultimate source of value of all money in an economy.


What is its ultimate source of value according to you?
as someone for whom the Dismal Science is a mystery let me add my two pennorth.

money is a representation or token of value or worth generated by the people who use it. in itself money has no worth. printing extra money without generating extra value is futile. we the people create the value which money represents.

a child may try to buy sweets with monopoly money, but the shopkeeper will decline. the monopoly money does not represent worth.

as the great French philosopher Depardieu remarked

" L'argent pour moi, c'est de la merde."

:pierre:
Original post by Polymath0
What is its ultimate source of value according to you?


As every undergraduate knows, debt, obviously. All money is only worth something because it is a signifier that someone else owes you something - goods and services. That is what money is: an asset that has no intrinsic value, but has an extrinsic value because you can exchange it for something that does have intrinsic value. Its value comes from the debt - to you - that it represents.

The easier it is to exchange your asset for goods and services, the more liquid the asset and the more likely it is to be included in some notional calculation of the money supply (eg M0, M1, M2, M3, M4 etc)



I'm getting a strong sense of deja-vu here. Didn't I already explain this to you? Have you tried Mark Thoma's excellent lecture series on Monetary Economics? lecture 1 explains what money is, you might find it useful.
Original post by cole-slaw

I'm getting a strong sense of deja-vu here. Didn't I already explain this to you?


You did, and then you proceeded to ignore my response, below.

Original post by Polymath0
You have it the wrong way round. If productive work gives value to money, then the laundry service gives value to the £5 note since it represents value for a service rendered.Similarly, if the government paid for all of the resources required for a construction project, the project will deliver value in its output for the economy.


While you are correct in stating that money has no intrinsic value, the problem is that you source its value in an arbitrary means of exchange, which isn't logical.

If I want to sell an item and it is bought at the price I stipulate, the value of the money given up would clearly be reflected in the item sold per se. There is no debt or obligation involved at all; it's irrelevant to the notion of value.
Original post by Polymath0
You did, and then you proceeded to ignore my response, below.



While you are correct in stating that money has no intrinsic value, the problem is that you source its value in an arbitrary means of exchange, which isn't logical.

If I want to sell an item and it is bought at the price I stipulate, the value of the money given up would clearly be reflected in the item sold per se. There is no debt or obligation involved at all; it's irrelevant to the notion of value.


Why isn't it logical?

Of course there is debt involved. If your item is worth £30 and he pays in cash, then he giving you £30 worth of goods and services that is OWED by the government to the holder of the cash. We have a word for something that is owed from one party to another: debt.

If he pays you with his credit card, then he now OWES his credit card £30 and you are now OWED £30 by his credit card company. They probably won't pay you in cash, instead they will pay it to the bank who will add it to the sum of money they already OWE you.

You see, its ALL about debt. Every financial transaction is simply the transfer of debt.
Original post by cole-slaw

Of course there is debt involved. If your item is worth £30 and he pays in cash, then he giving you £30 worth of goods and services that is OWED by the government to the holder of the cash. We have a word for something that is owed from one party to another: debt.

If he pays you with his credit card, then he now OWES his credit card £30 and you are now OWED £30 by his credit card company. They probably won't pay you in cash, instead they will pay it to the bank who will add it to the sum of money they already OWE you.


In my previous post I was picking apart the philosophical incoherence in your notion about the value of money being rooted in its very function. The practical use of money you have described is self-evident, and it would not be any different in a debt-free monetary system. To ensure that you have understood properly this alternative system that I explained extensively in the previous pages, can you explain how it wouldn't be possible to "owe" within a debt-free system?

If your response is something to the effect of "how can you owe money to a seller in exchange for an item in the absence of debt?" it will illustrate that you understood absolutely nothing of what I described.

Also, just to confirm that you understand how the current system works, for what purpose does the government create and issue cash and coins, and where does it go specifically?
Original post by cole-slaw

You keep talking about a "debt free system". But without debt, there can be no money, so you are talking about bartering again. I've already explained how bartering is inefficient.


As I suspected, you have imagined a system other than what I have been describing.

In a debt-free system, loans would still exist. The difference is that the loan would be taken from existing savings, not created out of nothing. The former is debt-free, the latter is debt-based.

If you are reducing debt semantically to the term "owe," even in bartering one "owes" an item in exchange for another.


The government issues cash and coins because people find it convenient as a quick and efficient (and anonymous) means of payment. It could easily just create money electronically, many people think we are moving in that direction.


I have been arguing the entire time that the government ought to have control over the money that is created electronically by private banks. Previously, you were telling me that this is impossible because it would involve the government creating and issuing the entire money supply free of debt.

You've simply been wasting my time with your inattentive disposition. I won't continue further with you.


How much money do you have, right now? You can lie if you like, just give me a break down of what you have.


How is this relevant? Mind your own business.
Original post by Polymath0
As I suspected, you have imagined a system other than what I have been describing.

In a debt-free system, loans would still exist. The difference is that the loan would be taken from existing savings, not created out of nothing. The former is debt-free, the latter is debt-based.

If you are reducing debt semantically to the term "owe," even in bartering one "owes" an item in exchange for another.

.

No, in a bartering system one good is repaid with another good. There is no transfer of third party debt as there is in a monetary system.Consider the following three methods of transaction:

A person wish to buy good X. He gives the seller good Y in exchange, and they swap. This is bartering. No debt is involved at all.

Alternately, the good could be paid for with an IOU note written by the purchaser. This is 1st party debt.


Alternately, the good could be paid for with a transferable IOU note written by someone else. This is 3rd party debt, or what we commonly call MONEY.

This is what money is: 3rd party debt. A "debt-free monetary system" is money without money. Its a logical absurdity.




I have been arguing the entire time that the government ought to have control over the money that is created electronically by private banks. Previously, you were telling me that this is impossible because it would involve the government creating and issuing the entire money supply free of debt.

.


I clearly wouldn't have said that, because as I have maintained throughout, the notion of a "money supply free of debt" is a logical impossibility.

Why should the government have control over other people's loans? That's absurd. They're not the ones taking on the risk, why should they have any say whatsoever? A stupid, illogical idea.

Are you suggesting that the government bans all private loans between individuals? So if I lend my girlfriend a tenner, I'm breaking the law?


.



How is this relevant? Mind your own business.


It was for discursive purposes only. I quite clearly said you could lie if you liked.
Original post by cole-slaw
No, in a bartering system one good is repaid with another good. There is no transfer of third party debt as there is in a monetary system.


Incorrect. As per definition, a repayment occurs only in the context of third party debt when a loan is taken out. In a system of barter there is nothing to repay; in other words, there is nothing to settle in a future period as the transaction occurs in an instant. In an immediate exchange of physical goods, the actors "owe" each other. It is logically inaccurate to use the term "repay" here.


This is what money is: 3rd party debt. A "debt-free monetary system" is money without money. Its a logical absurdity.


The only absurdity here would be to continue fruitlessly with someone who wilfully ignores the fact that debt would still exist in a debt-free monetary system. The reason why you can't wrap your head around this is because you are a literalist. The handicap in your reasoning is that you are simply unable to make a distinction between the sum total of a system and its constituent parts.

The way you conceptualise a debt-free system is one literally devoid of debt, despite it being conveyed repeatedly that debt still remains in the system. It's just that you dogmatically choose not to engage when the detail is provided as to how a debt-free system operates alongside debt.



Why should the government have control over other people's loans? That's absurd. They're not the ones taking on the risk, why should they have any say whatsoever? A stupid, illogical idea.


The government wouldn't have control over private loans, nor would they be taking any risk or be intimately involved in the intermediation of borrowers and savers. This is a role exclusively for commercial banks.

You are just reinforcing my point that you have understood squat.
It is up to you whether or not you recognise that you are deeply misinformed by your preconceptions.
I cast doubt that you are sufficiently informed about the interrelation between fiscal and monetary operations to begin with.


Are you suggesting that the government bans all private loans between individuals? So if I lend my girlfriend a tenner, I'm breaking the law?


No. I made it quite clear from the beginning that private sector loan making would function as per usual.

It is abundantly clear, however, that you haven't understood at all the internal reform that would take place within the institutions that create these loans ex nihlo.


It was for discursive purposes only. I quite clearly said you could lie if you liked.


To ask how much money I have in my wallet isn't particularly necessary so as to convey your discursive point. It is your responsibility to create such a simple scenario.
Original post by Polymath0
Incorrect. As per definition, a repayment occurs only in the context of third party debt when a loan is taken out. In a system of barter there is nothing to repay; in other words, there is nothing to settle in a future period as the transaction occurs in an instant. In an immediate exchange of physical goods, the actors "owe" each other. It is logically inaccurate to use the term "repay" here.

.

Yes you're quite right here, I meant to say paid, not repaid. It was lazy of me to use inaccurate terminology like that. You will observe I am fully willing to admit my mistake when I have made one..


The only absurdity here would be to continue fruitlessly with someone who wilfully ignores the fact that debt would still exist in a debt-free monetary system. The reason why you can't wrap your head around this is because you are a literalist. The handicap in your reasoning is that you are simply unable to make a distinction between the sum total of a system and its constituent parts.

The way you conceptualise a debt-free system is one literally devoid of debt, despite it being conveyed repeatedly that debt still remains in the system. It's just that you dogmatically choose not to engage when the detail is provided as to how a debt-free system operates alongside debt.
.



Mate, if its not actually a debt-free system, then stop using the words "debt-free system". You can't have a debt free system that isn't free of debt. That's a logical self-contradiction.

Do you agree, finally, that money IS transferrable third party debt? Or are you still confused about that?

I have to say, this admission seems like an extremely bizarre and unlikely attempt to desperately backtrack to save face.

.


The government wouldn't have control over private loans, nor would they be taking any risk or be intimately involved in the intermediation of borrowers and savers. This is a role exclusively for commercial banks.

You are just reinforcing my point that you have understood squat.
It is up to you whether or not you recognise that you are deeply misinformed by your preconceptions.
I cast doubt that you are sufficiently informed about the interrelation between fiscal and monetary operations to begin with.


No. I made it quite clear from the beginning that private sector loan making would function as per usual.

It is abundantly clear, however, that you haven't understood at all the internal reform that would take place within the institutions that create these loans ex nihlo.



I have no idea what you are talking about here. You are repeatedly contradicting yourself. First you said "I have been arguing the entire time that the government ought to have control over the money that is created electronically by private banks"
now you say:

"The government wouldn't have control over private loans"

How exactly do you think private banks create money, if not by making private loans?
Let's say there is 100 pounds in the economy and the bank prints another 10% to make 110 pounds.

If 100 pounds used to get you $200 dollars, then now 110 will get you $200. If an apple costed 1 pound it'll now cost 1.10, Everything goes up with inflation. This isn't exactly true percentage for percentage, but you get the gist.

It would basically achieve nothing other than having to spend 20 pounds for a loaf of bread which would equate to todays cost, everything would just inflate.
Original post by Clomper
Let's say there is 100 pounds in the economy and the bank prints another 10% to make 110 pounds.

If 100 pounds used to get you $200 dollars, then now 110 will get you $200. If an apple costed 1 pound it'll now cost 1.10, Everything goes up with inflation. This isn't exactly true percentage for percentage, but you get the gist.

It would basically achieve nothing other than having to spend 20 pounds for a loaf of bread which would equate to todays cost, everything would just inflate.


Not necessarily. If the extra £10 is used to employ someone who was previously sitting on their arse to pick apples, then the increased supply of applies will hold the price down at £1.
Original post by cole-slaw
Not necessarily. If the extra £10 is used to employ someone who was previously sitting on their arse to pick apples, then the increased supply of applies will hold the price down at £1.

Assuming there are an infinite supply of apples and the restriction was from there being not enough manual labor, equally there would need to be the demand for the extra apples on the market (Stores aren't going to purchase 100 apples per week if they have only been selling 60-80 per week)

I think with most things today the issue is not man power, for technology is replacing man, but rather quantifiable limitations such as land size, growth rates etc (In an agricultural sense)
Original post by Clomper
Assuming there are an infinite supply of apples and the restriction was from there being not enough manual labor, equally there would need to be the demand for the extra apples on the market (Stores aren't going to purchase 100 apples per week if they have only been selling 60-80 per week)

I think with most things today the issue is not man power, for technology is replacing man, but rather quantifiable limitations such as land size, growth rates etc (In an agricultural sense)


The point is, increasing the money supply tends to have one of two effects: it either stimulates growth in the real economy, or it causes inflation.

Which one it does depends on the exact economic circumstances and how the newly generated money is used.

In situations where there is clear spare capacity in the economy (eg a time of mass unemployment or chronic underinvestment), then it is a sensible policy for the government to directly expand the money supply and use the newly created money to provide employment and/or capital investment in the sectors where it is most required. If done carefully, there is no reason to believe why this should cause inflation.
Original post by the bear
as someone for whom the Dismal Science is a mystery let me add my two pennorth.

money is a representation or token of value or worth generated by the people who use it. in itself money has no worth. printing extra money without generating extra value is futile. we the people create the value which money represents.

a child may try to buy sweets with monopoly money, but the shopkeeper will decline. the monopoly money does not represent worth.

as the great French philosopher Depardieu remarked

" L'argent pour moi, c'est de la merde."

:pierre:



I would say the value is generated by the party that backs the money (ie guarantees it) rather than the person who uses it.

eg, a pound coin is backed by the government, it has value because the government promises to always accept it as payment as goods and services, and we trust them that a) they won't change their mind, and b) they will always be able to provide us with something we want.
Original post by cole-slaw

Do you agree, finally, that money IS transferrable third party debt? Or are you still confused about that?


It is, but it doesn't have to be. Why is it that you have no comprehension issues in recognising that physical cash and coin can be created and issued by the state in the absence of debt, but find it difficult conceptually to include electronically created money within that category?


I have no idea what you are talking about here. You are repeatedly contradicting yourself. First you said "I have been arguing the entire time that the government ought to have control over the money that is created electronically by private banks"
now you say:

"The government wouldn't have control over private loans"

How exactly do you think private banks create money, if not by making private loans?


There is no contradiction. I was correct in my suspicion that you haven't even begun to properly understand how the current monetary system is designed. You truly have no idea about the extent of your cluelessness.

The answer to your question can be found in your question. The loan is the money. The money is the loan. If you cannot understand this you will not understand the remaining summary.
In the new monetary design I advocate, the private banks would no longer have the power to create the loan. Instead, the government would create the money which would be used by banks to provide loans, i.e. the loan would be brought about by existing savings.
The money used for on-lending by private banks would first be created by the government for public spending / investment, and the growth that ensues from such investments would be channeled to the banks in the form of savings to be lent to the private sector.

Hopefully you can now understand exactly how the government would be in control of money creation and not loan making: the two functions would be entirely separated, not concentrated simultaneously in the banking system.

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