Modern Monetary Theory explained by Associate Professor of Economics Dr. Stephanie Kelton (UM-KC)

Discussion in 'Politics, Religion, Social Issues' started by R.Perez, Sep 27, 2017.

  1. R.Perez macrumors 6502

    R.Perez

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    #1
    There was some discussion about this on earlier thread and I thought I'd post this video which provides a simplified overview of Modern Monetary Theory and how it works. Feel free to ignore the rest of Sam's partisan babbling if that isn't your thing. Starts at 13:16

     
  2. satcomer macrumors 603

    satcomer

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    #2
    If your just learning about money this late in Life then I feel there is something wrong in your education system! I learned about Nixon taking us off the Gold Standard during the Vietnam War! I learned about this in Eighth Class back in the day! Those Baby Boomers really railed against that decision and raised against right through the Eighties!
     
  3. DearthnVader, Sep 27, 2017
    Last edited: Sep 27, 2017

    DearthnVader macrumors 6502a

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    Sorry, couldn't watch the entire thing, but it seems to fallow flawed logic. The Government only gets money from the Fed, in exchange for Government Securities. The Fed creates the money to by these securities out of thin air, and it is reflected in the Fed's Reserve Bank Credit( $4.424810 Trillion ). These securities become the Fed's assets, and the Government must pay the Fed for these securities over time. As the Government pays the Fed, the money that is diverted to pay the principal reduces the Fed's Reserve Bank Credit, it ceases to exist, the Fed created it from nothing, and it must return to nothing.

    The interest payed to the Fed on these Government securities is paid back to the US Treasury, less the Fed's operating expenses.

    However, the Fed is not the only buyer of US government securities, it's really just the leader of last resort. The Fed only buys government securities when it wants to manipulate the interest rates, pull them down. Government securities are sold at auction to the Primary Dealers, and the Fed is prohibited from taking part in a Primary Auction, but the Fed buying US Securities in the secondary markets affects the interest rate at the primary auctions.

    Also, the Fed can reduce inflation by selling it's government securities. Let's say the Fed decided to sell $500 Billion in government securities, that would reduce the Fed's Reserve Bank Credit to around $3.9 Trillion, and $500 USD would cease to exist, thus less money driving down inflation.

    BUT that is not the only way money is created, the Fed is a bank, and other banks create money when they make loans, much the same way the Fed does. When you have a Credit Card, it is issued by a bank, and when you use it to barrow, you are helping to expand the money supply. As you pay down the principal on the Credit Card, the money the bank created to loan to you ceases to exist, thus contracting the money supply. The interest you pay on that credit card is the banks profit.

    Any loan you take, from any bank, increases the money supply. Your debt becomes the banks asset, the same way government securities are the Fed's asset.

    http://www.bankofengland.co.uk/publ...lletin/2014/qb14q1prereleasemoneycreation.pdf
     
  4. R.Perez thread starter macrumors 6502

    R.Perez

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    #4
    They address basically all of this in the 2nd half of the discussion.
     
  5. DearthnVader macrumors 6502a

    DearthnVader

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    Ok, I didn't get that far, I already know how it works, there isn't a whole lot more I can learn from it, so I really wasn't motived to spend 2 hrs watching it.

    Thanks for posting it, the more people learn that money is really just proof of interest bearing debt, and that it is the commercial banks creating that debt, not governments, by and large, the better off we'll all be.

    It's the biggest con game ever conceived, private banks creating virtually all the money, for every nation on Earth, at virtually no cost to them, and then being able to charge interest on money they created from nothing.

    It would be the same thing as the bank digging a hole, and the dirt it takes from that hole being legal money. You take a loan, the bank digs a hole, it gives you the dirt, and you buy what you want with it. As you repay the loan, the bank puts the principal dirt back in the hole, and keeps the interest for profits less operating costs. When the loan is repaid, all the dirt the bank took is back in the hole, it ceases to be legal money, until the bank needs to make a new loan.

    Of course the interest( dirt ), that you pay on you loan, is never created, or the bank never digs the interest from the hole. As all money is just proof of interest bearing debt, there is never enough to repay all the the debt that exists. Your dirt you spend on the things you want to buy, thus it circulates in the economy, and it there for you, and everyone else to compete for to repay debt+interest. The profits the bank makes are paid out to investors, and spent by the bank to cover it's expenses. So this money too is circulating in the economy, and is there for everyone to compete for, to repay their bank loans.

    One of the troubles is, banks must continue to make more and more loans, to keep enough money circulating to repay the old loans+interest. Otherwise everyone is competing for less money, driving up demand, and making each dollar worth more, because there is more demand for it( deflation ).

    In banking, and in our economy, deflation is the enemy. If a dollar buys more tomorrow than it does today, then the cost of goods and service goes down, thus those selling those goods and services are paid less money, and their employees are paid less money, but they have bank loans, and the bank can't take less money in return, so everyone's debt does not deflate to reflect the new value of a dollar. If deflation keeps expanding, then people are getting payed less, they can't make the payments on their bank loans.

    The government and the central bank step in, the government issues more debt, the central bank creates money to by this debt, and the government spends this money into the economy for everyone to compete for to repay their loans. The hope is, that the private banks will be able to take over normal operations in lending again, lending more and more, creating more and more money, and at some point the central bank can stop creating money without deflation.

    If inflation sets in, their is more money in circulation than their are people needing to compete for it, then the central bank can sell the assets it created money to buy, and fill the hole it dug to buy them. Thus less money in circulation.

    Tho this does cause interest rates to go up. That can open a whole new can of worms, especially for governments that must continue to roll over their debt, as they must divert more of the money they take in to interest on that debt, and the central bank is paying less money back to the government, because it is selling the debt of the government, and the interest( profits ) are no longer returning to the government general fund( treasury ).

    It's a delicate balance, and the more debt that government issue, and the more of that debt they need to roll over, the more we will find ourselves trapped if inflation sets the need for our central banks to deleverage. On the one hand there is inflation, and the central bank needs to sell government securities, driving interest rates up, easing inflation, but on the other hand government need to roll over that debt, at a higher interest rate. Government will be forced to cut spending and or raise taxes, and both things hurt the economy.

    An intersting problem for more of the western world, I'm watching to see how governments and central bank handle it if inflation sets in on us.
     
  6. R.Perez thread starter macrumors 6502

    R.Perez

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    #6

    Most of what you're saying is supported by MMT. But MMT economists basically argue that deficits do not cause inflation at all. Recent history seems to support that fact. We basically printed money for the bailouts and it had zero impact on inflation.

    Fiat currency is basically unlimited.
     
  7. DearthnVader, Sep 27, 2017
    Last edited: Sep 27, 2017

    DearthnVader macrumors 6502a

    DearthnVader

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    #7
    Quantitive Easing kept us for entering into a downward deflationary spiral, because the central bank was creating the money that private banks were not creating. Banks had virtually stopped lending putting downward deflationary pressure on the economy.

    So, to avoid deflation, the Fed "threw money from a helicopter", but what happens if inflation sets in?

    We're trapped because of the high balance of government debt, the Fed can't really deleverage by selling government debt, because government needs to issue more debt to repay old debt.

    We could find ourselves in an upward inflationary spiral, if we really are not in one already. I don't buy into the way the Central Banks and Governments calculate inflation, I can tell you that the cost of virtually everything I buy has skyrocketed sense the Fed and other central banks entered into QE.
    --- Post Merged, Sep 27, 2017 ---
    Anyway, the people that are really benefiting from our economic and banking system are the same people that have always benefited from any system, the uber wealthy, senior bond holders in banks, and the people that loan governments the money they borrow.

    The masses get screwed, but that is not the way things need to be. Private banks do not need to create our nations money, at the expense of the many, for the benefit of the few.

    The Fed is owned by it's member banks, not the people, thus the Fed does what is in the interests of it's shareholder, not what is in the interests of the people. Government is a puppet show, all politicians care about is doing what is in the interests of the few people that buy the debt they want to issue.

    If we nationalize the Fed, and the Fed loans the money it creates directly to the people, then we have no need for the private banking system to create our nations money. The Fed can create it, for the benefit of all the people, not just the few. 98% of all money just exists in a computer, it is an entry in a banks ledger book.

    It costs virtually nothing to create and maintain an entry in an electronic ledger book. You need a loan, the Fed just creates the money by creating a debt balance in it's computer, and crediting you account with the funds. When you repay the loan, the money ceases to exist. It is non-inflationary.

    If the Fed charges interest, that money is diverted to it's operating costs and excesses are paid back to the US Treasury. Thus giving the government more funds, reducing the need to issue debt, or mandate tax.

    Obviously there is inherent danger in this system, if the Fed were to become political, those who found themselves out of political favor may not be able to get a loan or may have to pay some exorbitant amount of interest. However we must ask ourselves if that danger is greater than letting the system go on as it has. In our Republic the interests of government should be the interests of the people, all the people, not just the few that can afford to loan money to the government or own senior bonds in banks.

    What is the public trust in a properly functioning democracy, it's is, in the end of the day, that they government is interested with creating the only and all legal money, for the benefit of all of the people of the nation.

    Of course State control of all credit creation is one of the main tenants of communism, but just because there are other things in communism that are unwise, doesn't mean we should throw out the baby with the bathwater.

    There is nothing wrong with people with money loaning that money out at interest, and profiting from that investment, but there is something fundamentally wrong with the using that money to invest in a bank that has the power to leverage that money to create our nations money for their benefit alone.
     
  8. Raid macrumors 68020

    Raid

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    Can't watch the video at work, but this analogy is incorrect.

    The bank doesn't start by digging a hole; it's starts with asking their customers to pile their dirt on their property and guarantees that when the customer needs it back they can get it. Not going further into the analogy that that, but the banks figure that the customers will not want to withdraw all of their assets from the bank in one go but the hold a certain percentage (say 10%) of everyone's account in reserve. When a person requires a loan, the bank doesn't create that money, it takes it from the excess pile it figures will not be needed by customers daily transactions. The bank makes interest on the loan, and gives the customer a small (some say minuscule) amount of interest on the balance of their account.
     
  9. DearthnVader macrumors 6502a

    DearthnVader

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    #9
    So, do tell, if the Fed is not creating any new money, and right now it's not, and the government is not creating any new money other than actual cash( 2% or so of the total money supply ), then where is the new money coming from?

    Is it flying out of a unicorns ass, or what?
     
  10. Raid macrumors 68020

    Raid

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    The rabbit hole (or Unicorn's ass if you will) goes deep... it has to do with fractional reserve banking which is very common in today's financial markets. Ugh it really is better if you look up the monetary base, fractional reserve banking (and Money Creation) and then finally the various definitions of money supply.

    Still not sure what the video is all about, but it's my guess it's about fractional reserve banking and the bank's practice of taking their interest earned and loaning those dollars out (that have no reserve requirement on them)... it has a snowball effect but doesn't mean they are creating 'new money' in isolation to the central bank... it's just that the central bank has less options in that part of the money supply.
     
  11. DearthnVader macrumors 6502a

    DearthnVader

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    #11

     
  12. Raid macrumors 68020

    Raid

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  13. DearthnVader, Sep 27, 2017
    Last edited: Sep 27, 2017

    DearthnVader macrumors 6502a

    DearthnVader

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    #13
    - John Kenneth Galbraith, Money: Whence it Came, Where it Went, 1975

    Most people read the things I post about how banks create, and destroy money, and they say, " That can't be"( The mind is repelled ). Then they go down the rabbit holes, looking for the deeper mystery. It's all just smoke and mirrors, the Fed, fractional reserve lending, money multiplier, capital requirements, Basel I/II/III, government money printing and coining.

    It's all just there to confuse you, to evade truth, not to reveal it.

    The pain truth of it is, it happens just the way I said it does, and you, or anyone else that says it doesn't can't really explain how it works, you'll just point to a bunch of complexities, either in the hopes that people will get lost in the smoke and mirrors, or because you can't grasp how simple it really is, because your mind is repelled.
     
  14. DearthnVader macrumors 6502a

    DearthnVader

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    #14
    Introduction

    ‘Money in the modern economy: an introduction’, a companion piece to this article, provides an overview of what is meant by money and the different types of money that exist in a modern economy, briefly touching upon how each type of money is created. This article explores money creation in the modern economy in more detail.

    The article begins by outlining two common misconceptions about money creation, and explaining how, in the modern economy, money is largely created by commercial banks makingloans.(1) Thearticlethendiscussesthelimitstothe banking system’s ability to create money and the important role for central bank policies in ensuring that credit and money growth are consistent with monetary and financial stability in the economy. The final section discusses the role of money in the monetary transmission mechanism during periods of quantitative easing (QE), and dispels some myths surrounding money creation and QE. A short video explains some of the key topics covered in this article.(2)

    Two misconceptions about money creation

    The vast majority of money held by the public takes the form of bank deposits. But where the stock of bank deposits comes from is often misunderstood. One common misconception is that banks act simply as intermediaries, lending out the deposits that savers place with them. In this view deposits are typically ‘created’ by the saving decisions of households, and banks then ‘lend out’ those existing deposits to borrowers, for example to companies looking to finance investment or individuals wanting to purchase houses.

    In fact, when households choose to save more money in bank accounts, those deposits come simply at the expense of deposits that would have otherwise gone to companies in payment for goods and services. Saving does not by itself increase the deposits or ‘funds available’ for banks to lend. Indeed, viewing banks simply as intermediaries ignores the fact that, in reality in the modern economy, commercial banks are the creators of deposit money. This article explains how, rather than banks lending out deposits that are placed with them, the act of lending creates deposits — the reverse of the sequence typically described in textbooks.(3)

    Another common misconception is that the central bank determines the quantity of loans and deposits in the economy by controlling the quantity of central bank money — the so-called ‘money multiplier’ approach. In that view, central banks implement monetary policy by choosing a quantity of reserves. And, because there is assumed to be a constant ratio of broad money to base money, these reserves are then ‘multiplied up’ to a much greater change in bank loans and deposits. For the theory to hold, the amount of reserves must be a binding constraint on lending, and the central bank must directly determine the amount of reserves. While the money multiplier theory can be a useful way of introducing money and banking in economic textbooks, it is not an accurate description of how money is created in reality. Rather than controlling the quantity of reserves, central banks today typically implement monetary policy by setting the price of reserves — that is, interest rates.

    In reality, neither are reserves a binding constraint on lending, nor does the central bank fix the amount of reserves that are available. As with the relationship between deposits and loans, the relationship between reserves and loans typically operates in the reverse way to that described in some economics textbooks. Banks first decide how much to lend depending on the profitable lending opportunities available to them — which will, crucially, depend on the interest rate set by the Bank of England. It is these lending decisions that determine how many bank deposits are created by the banking system. The amount of bank deposits in turn influences how much central bank money banks want to hold in reserve (to meet withdrawals by the public, make payments to other banks, or meet regulatory liquidity requirements), which is then, in normal times, supplied on demand by the Bank of England. The rest of this article discusses these practices in more detail.

    Money creation in reality

    Lending creates deposits — broad money determination at the aggregate level
    As explained in ‘Money in the modern economy: an introduction’, broad money is a measure of the total amount of money held by households and companies in the economy. Broad money is made up of bank deposits — which are essentially IOUs from commercial banks to households and companies — and currency — mostly IOUs from the central bank.(4)(5) Ofthetwotypesofbroadmoney,bankdeposits make up the vast majority — 97% of the amount currently in circulation.(6) Andinthemoderneconomy,thosebank deposits are mostly created by commercial banks themselves.

    Commercial banks create money, in the form of bank deposits, by making new loans. When a bank makes a loan, for example to someone taking out a mortgage to buy a house, it does not typically do so by giving them thousands of pounds worth of banknotes. Instead, it credits their bank account with a bank deposit of the size of the mortgage. At that moment, new money is created. For this reason, some economists have referred to bank deposits as ‘fountain pen money’, created at the stroke of bankers’ pens when they approve loans.(1)

    This process is illustrated in Figure 1, which shows how new lending affects the balance sheets of different sectors of the economy (similar balance sheet diagrams are introduced in ‘Money in the modern economy: an introduction’). As shown in the third row of Figure 1, the new deposits increase the assets of the consumer (here taken to represent households and companies) — the extra red bars — and the new loan increases their liabilities — the extra white bars. New broad money has been created. Similarly, both sides of the commercial banking sector’s balance sheet increase as new money and loans are created. It is important to note that although the simplified diagram of Figure 1 shows the amount of new money created as being identical to the amount of new lending, in practice there will be several factors that may subsequently cause the amount of deposits to be different from the amount of lending. These are discussed in detail in the next section.

    While new broad money has been created on the consumer’s balance sheet, the first row of Figure 1 shows that this is without — in the first instance, at least — any change in the amount of central bank money or ‘base money’. As discussed earlier, the higher stock of deposits may mean that banks want, or are required, to hold more central bank money in order to meet withdrawals by the public or make payments to other banks. And reserves are, in normal times, supplied ‘on demand’ by the Bank of England to commercial banks in exchange for other assets on their balance sheets. In no way does the aggregate quantity of reserves directly constrain the amount of bank lending or deposit creation.

    This description of money creation contrasts with the notion that banks can only lend out pre-existing money, outlined in the previous section. Bank deposits are simply a record of how much the bank itself owes its customers. So they are a liability of the bank, not an asset that could be lent out. A related misconception is that banks can lend out their reserves. Reserves can only be lent between banks, since consumers do not have access to reserves accounts at the Bank of England.(2)

    Other ways of creating and destroying deposits

    Just as taking out a new loan creates money, the repayment of bankloansdestroysmoney.(3) Forexample,supposea consumer has spent money in the supermarket throughout the month by using a credit card. Each purchase made using the credit card will have increased the outstanding loans on the consumer’s balance sheet and the deposits on the supermarket’s balance sheet (in a similar way to that shown in Figure 1). If the consumer were then to pay their credit card bill in full at the end of the month, its bank would reduce the amount of deposits in the consumer’s account by the value of the credit card bill, thus destroying all of the newly created money.

    Banks making loans and consumers repaying them are the most significant ways in which bank deposits are created and destroyed in the modern economy.



     

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13 September 27, 2017