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Tuesday, April 19, 2016

Steve Keen educates a Nobel laureate

The inability to account for debt and the total failure to understand the relationship between banks and loan creation are two of the reason mainstream economics is so hapless with regards to producing functional models. The world's most important economist explains that his professional colleagues are simply ignoring one of capitalism's most pressing problems:
I like Joe Stiglitz, both professionally and personally. His Globalization and its Discontents was virtually the only work by a Nobel Laureate economist that I cited favourably in my Debunking Economics, because he had the courage to challenge the professional orthodoxy on the “Washington Consensus”. Far more than most in the economics mainstream—like Ken Rogoff for example—Joe is capable of thinking outside its box.

But Joe’s latest public contribution—“The Great Malaise Continues” on Project Syndicate—simply echoes the mainstream on a crucial point that explains why the US economy is at stall speed, which the mainstream simply doesn’t get.

Joe correctly notes that “the world faces a deficiency of aggregate demand”, and attributes this to both “growing inequality and a mindless wave of fiscal austerity”, neither of which I dispute. But then he adds that part of the problem is that “our banks … are not fit to fulfill their purpose” because “they have failed in their essential function of intermediation”:

    Between long-term savers (for example, sovereign wealth funds and those saving for retirement) and long-term investment in infrastructure stands our short-sighted and dysfunctional financial sector…

    Former US Federal Reserve Board Chairman Ben Bernanke once said that the world is suffering from a “savings glut.” That might have been the case had the best use of the world’s savings been investing in shoddy homes in the Nevada desert. But in the real world, there is a shortage of funds; even projects with high social returns often can’t get financing.


I’m the last one to defend banks, but here Joe is quite wrong: the banks have very good reasons not to “fulfill their purpose” today, because that purpose is not what Joe thinks it is. Banks don’t “intermediate loans”, they “originate loans”, and they have every reason not to originate right now.

In effect, Joe is complaining that banks aren’t doing what economics textbooks say they should do. But those textbooks are profoundly wrong about the actual functioning of banks, and until the economics profession gets its head around this and why it matters, then the economy will be stuck in the Great Malaise that Joe is hoping to lift us out of.

The argument that banks merely intermediate between savers and investors leads the mainstream to a manifestly false conclusion: that the level of private debt today is too low, because too little private debt is being created right now. In reality, the level of private debt is way too high, and that’s why so little lending is occurring.
I don't agree with Keen on everything, but he is the most important, most revolutionary economist in the world today. And he is dead-on with regards to both the problem of private debt as well as the way in which banks originate, not only loans, but credit money itself.

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106 Comments:

Blogger dc.sunsets April 19, 2016 8:51 AM  

It used to be that banks wanted deposits because (ostensibly) they borrowed short and lent long (with a large multiple involved, so they were in the business of expanding the money supply.)

Banks no longer want deposits. Their source of funds has nothing to do with them. The Fed has for all practical purposes eliminated the need for reserves (via overnight sweeps of demand deposits) so banks create their loanable funds almost exclusively out of prior loans then deposited. Today's banks operate on essentially infinite leverage (zero or negative reserve balances.)

All your banker wants is borrowers, not depositors.

Blogger dc.sunsets April 19, 2016 8:59 AM  

I'm not a gold or silver bug, but it is clear that the period 1964-1971 was an inflection point in debt growth. Removing silver and gold as fixed measuring sticks made it easier to rationalize the otherwise absurd feedback loop of the last 50 years whereby IOU-money became a dominant form of wealth, whose growth led to asset market demand, raising prices, driving more borrowing, raising the size of the Debt Ocean, perceived as rising wealth, catalyzing more asset market demand....

Credit growth, unrestrained by any sort of "sanity check," led to the perception that an accommodating central bank could pyramid wealth to the sky, then orbit, then outward to the planets.

For 50 years we've had the Roaring '20's, but no 1929 where irrational exuberance reached the limit of credulity's stretch.

We now have most "wealth" resting on nothing but mass psychology-trust of IOU's (IOU-dollars, mostly) whose value is supported by nothing but more IOU's.

Blogger Derek Kite April 19, 2016 9:00 AM  

This is as obvious as the fact that housing prices had out paced incomes in the mid 2000's. The brilliant minds in Washington and New York missed that one too.

Blogger Shimshon April 19, 2016 9:10 AM  

This should disabuse economists of the notion that debt is irrelevant. But as you said regarding convergence at Mizzou, "It won't, but it should." MPAI, including Nobel Prize winners.

Anonymous Rolf April 19, 2016 9:19 AM  

How's the saying go? A man will never understand something when he gets paid to not understand it. Or something like that.

Bankers are riding a gravy-train, and they want the train to continue being fine. They don't want to get off it, or change its direction, or alter their methods, they just want everyone else to continue the same self-destructive things (borrow too much) that they have done for decades, so the gravy-train ride can continue providing bankers with the lifestyle to which they have become accustomed.

But the train is NOT fine.

Blogger Salt April 19, 2016 9:21 AM  

There's an old saying, "As General Motors goes, so goes the Nation." I hold that to still be axiomatically true. The auto industry is in zero down mode with a good default rate. The debt ceiling has been breached.

Anonymous Slowpoke April 19, 2016 9:32 AM  

Interesting that Keen Points out that Stephanie Kelton, a mainstream economist that is advising Bernie Sanders, understands this.

Blogger Mr.MantraMan April 19, 2016 9:34 AM  

I want to know when the leverage chain breaks so I can short. Last week Denninger looked at the snake bones and predicted 1700 on the S&P, today it looks like all time highs, perhaps his time frame was off.

Probably if a person knows well enough a bank VP at some level that person could tell you when the regulators are squeezing a sector thru regulatory means versus the old interest rate raising.

Take farmland, people are telling me that the banks they talk to require 40% versus 30% a few years ago for the downstroke, regulators in action. So farmland is easing off in price, for now. I keep a line of credit out for the purpose of prediction, if my lender gets ansty something is in the water, be careful

Blogger Anchorman April 19, 2016 9:37 AM  

Side note: I was going to pick up a copy of "Debunking Economics" to give it a read.

Then, I noticed it's a "textbook." That means, it's far overpriced for content that appears in other non-textbooks at a significantly lower price.

Lost the sale.

Blogger Nate April 19, 2016 9:45 AM  

Agreed Vox. Mad respect for Keen.

Blogger Thomas Davidsmeier April 19, 2016 9:49 AM  

Vox,

Aren't loans that aren't backed directly and completely by deposits the definition of the "credit" part of "credit-money"?

Blogger dc.sunsets April 19, 2016 9:53 AM  

http://bigcharts.marketwatch.com/kaavio.Webhost/charts/big.chart?nosettings=1&symb=comp&uf=0&type=2&size=3&sid=3291&style=320&freq=1&entitlementtoken=0c33378313484ba9b46b8e24ded87dd6&startdate=1/4/1998&enddate=12/31/2003&rand=1054118647&compidx=aaaaa%3a0&ma=5&maval=13&lf=4&lf2=32&lf3=256&height=820&width=720&mocktick=1

So is today's market analogous to being in June'99, Jan'99 or March'99? Or something else entirely?

No one ever knows in advance.

Anonymous DE-173/Code 19/Vox Nox April 19, 2016 9:54 AM  

"Joe correctly notes that “the world faces a deficiency of aggregate demand”

So, he's gone full Keynestard. You should never go full Keynestard.

Blogger dc.sunsets April 19, 2016 9:54 AM  

trying the link again. last one didn't work.
http://bigcharts.marketwatch.com/advchart/frames/frames.asp?show=&insttype=&symb=comp&x=25&y=10&time=100&startdate=1%2F4%2F1998&enddate=12%2F31%2F2003&freq=1&compidx=aaaaa%3A0&comptemptext=&comp=none&ma=5&maval=13&uf=0&lf=4&lf2=32&lf3=256&type=2&style=320&size=3&timeFrameToggle=false&compareToToggle=false&indicatorsToggle=false&chartStyleToggle=false&state=11

Blogger dc.sunsets April 19, 2016 9:59 AM  

Nothing makes much sense once your unit of measure, the dollar, loses all connection to reality. We've been in a "how high is up?" mode for more than a generation (two, actually.) No wonder rational people feel lost, it's like being sane in a land populated exclusively by lunatics (and their sentiment guides the markets.)

http://bigcharts.marketwatch.com/advchart/frames/frames.asp?show=&insttype=Index&symb=comp&x=43&y=10&time=100&startdate=1%2F4%2F1990&enddate=4%2F18%2F2016&freq=3&compidx=aaaaa%3A0&comptemptext=&comp=none&ma=5&maval=13&uf=0&lf=4&lf2=32&lf3=256&type=2&style=320&size=3&timeFrameToggle=false&compareToToggle=false&indicatorsToggle=false&chartStyleToggle=false&state=11

Blogger James Dixon April 19, 2016 10:02 AM  

> How's the saying go? A man will never understand something when he gets paid to not understand it.

“It is difficult to get a man to understand something, when his salary depends on his not understanding it.” ― Upton Sinclair

> I want to know when the leverage chain breaks so I can short.

So would many of us here. But, as another famous saying goes: "Markets can remain irrational a lot longer than you and I can remain solvent." - Often attributed to Keynes, but apparently actually by A. Gary Shilling.

This is fairly simple. Servicing debt requires an income stream. For any given income stream and interest rate, there is a maximum amount of debt that can be serviced. We passed our ability to service debt limit sometime in the early 2000's, even at effectively zero percent interest rates. Since incomes for most people have actually declined since then, debt levels haven't increased much since.

Blogger James Dixon April 19, 2016 10:12 AM  

> So is today's market analogous to being in June'99, Jan'99 or March'99? Or something else entirely?

Something else entirely. You need to take inflation, interest rates, normal business growth (remember that most exchange listed businesses actually do make money, and often successfully reinvest it into the business), and investor sentiment into account. Yes, the market probably is overvalued (I certainly haven't been able to find much worth buying in the past few months), but nothing compared to what it hit in 2000.

Blogger The Other Robot April 19, 2016 10:15 AM  

I have come to the conclusion that the function of most economists is obfuscation.

Meanwhile, there is more obfuscation on the 9/11 issue in the Observer.

Blogger dc.sunsets April 19, 2016 10:29 AM  

Reasoned analysis of markets, finance and the economy has failed me at every turn for 21 years, so I should shrug off Keen's apparent belief (similar to John Mauldin's) that this Great Malaise can be "muddled through" and the result will be another robust rally in the economy & asset markets.

What public policy can keep current (relatively manageable) conditions the same while working off the excess debt? Keen also focuses here on private debt. Does he ignore astronomical public debts and the potential for massive tax hikes soon to keep those IOU's solvent?

The only reasoned recommendation an economic adviser to a politician could make is, "don't be in charge when this one blows." I see no way to "grow" our way out of these debts, because the world's economy is addicted to excess demand fertilized by unprecedented credit growth.

Imagine there's a greenhouse complex growing roses in Fargo ND during February. A generator provide the heat and light and is fueled by borrowing, collateralized by a business plan devoting 2/3rds of the output of the greenhouse to debt service plus the operator builds in rolling over existing debt in perpetuity.

If demand fails, or credit conditions tighten and the debt can't be rolled over at the same vig, debts cannot be serviced and the bank cuts off funds for fuel.

The greenhouse loses heat & light, and the roses all wilt while all employees are laid off.

That's not "muddle through."

Anonymous Satan's Hamster April 19, 2016 10:34 AM  

"Since incomes for most people have actually declined since then, debt levels haven't increased much since."

It's not just that. For sane people to take on debt, they need to believe they'll be able to pay off that debt in the future. And when interest rates are zero or negative, it's a pretty damn clear sign that the economy is fucked, and they could lose their job tomorrow.

Governments are the problem, not the solution. Without them, we'd have had a crash years ago, and have recovered by now.

OpenID denektenorsk April 19, 2016 10:39 AM  

Negative interest rates are insanity. You will pay me money to spend all of my money and if I save any of it I am penalized? Something is very rotten at the core.

Blogger dc.sunsets April 19, 2016 10:42 AM  

Something else entirely. You need to take inflation, interest rates, normal business growth (remember that most exchange listed businesses actually do make money, and often successfully reinvest it into the business), and investor sentiment into account.

Inflation measured how? CPI is meaningless if expansion of credit flows into asset markets without much driving up food, fuel, etc. Asset inflation driven by credit inflation is a meaningless feedback loop promising a perpetual motion machine.

Interest rates are at or below zero, helping mask the danger of filling an Ocean with IOU-money. What happens to tens or hundreds of trillions of dollars of IOU capital value if rates rise even a tiny bit? The leverage involved is incalculable.

Normal business growth and profitability is very difficult to discern. It is hardly a new thing to use creative accounting to provide the illusion of profitability. The Baldwin United scandal occurred more than 30 years ago and a cottage industry for Forensic Accounting once existed, back when people were still a bit less credulous (i.e., before CNBC and the buy-side tout-masters.)

Investor sentiment has been pinning the needle to bullish ever since "Buy and Hold for the Long Term" became popular.

I disagree with you. The market has ramped higher because it did, just as it did in the 1920's. A graph of the DJIA since 1920 is quite informative, doubly so if it's price-adjusted for CPI.

Past performance really isn't a prediction of future performance, although that is the presumption of every model out there.

Blogger dc.sunsets April 19, 2016 10:50 AM  

I stand corrected.

Keen does a nice job of explaining a policy leading out of this trap.
http://www.debtdeflation.com/blogs/manifesto/

As a saver (I have no debt whatsoever) I am extremely averse to a simple debt jubilee. Rewarding the profligate makes me sick. But Keen addresses this in a way I could accept, I think.

I wonder if we'll ever get a chance to find out if it would work.

Blogger lorenzstransky April 19, 2016 10:55 AM  

One thing should be noted: there is no Nobel Prize in Economics and Joe Stiglitz does not hold a Nobel Prize in anything. Correctly named the Sveriges Riksbank Prize in Economic Sciences in Memory of Alfred Nobel it is deliberately referred to as the Nobel Prize in Economics. It is a blatant attempt to legitimize economic pseudo-science by conflating it with the legitimate prize over the objection of many scientists and the Nobel family. Even some economists have suggested its abolition including some of the prize's recipients.

Blogger James Dixon April 19, 2016 11:04 AM  

> Inflation measured how? ... Interest rates are at or below zero ... Normal business growth and profitability is very difficult to discern.

Aye, that's the rub. All of these things are very difficult to determine (save interest rates). They still need to be taken into account in any analysis though. We have had inflation since 1999, and much more than the CPI shows. Overall, companies have made money over that time. And investor sentiment has waxed and waned.

> Investor sentiment has been pinning the needle to bullish ever since "Buy and Hold for the Long Term" became popular.

I honestly think the average investor had that washed out by the 2000 and 2008 crashes, where the declines were on the order of 50%. I think the current run up is largely fueled by the banks needing a place to park their money.

> I disagree with you.

That's fine. It's not like I'm right all the time. And we're not disagreeing a much as you seem to think. We're past due for a major correction (though I've seen arguments that we just had one). I just don't think valuations are as bad as they were in 2000.

Blogger Josh April 19, 2016 11:14 AM  

One thing should be noted: there is no Nobel Prize in Economics and Joe Stiglitz does not hold a Nobel Prize in anything. Correctly named the Sveriges Riksbank Prize in Economic Sciences in Memory of Alfred Nobel it is deliberately referred to as the Nobel Prize in Economics. It is a blatant attempt to legitimize economic pseudo-science by conflating it with the legitimate prize over the objection of many scientists and the Nobel family. Even some economists have suggested its abolition including some of the prize's recipients.

SPERG SPERG SPERG SPERG SPERG SPERG

Anonymous User April 19, 2016 11:15 AM  

Sometimes I wonder if most economists don't even understand double-entry bookkeeping.

Then again lots of people are shocked to learn that if you pay your taxes in currency, you get issued a receipt and, after spending some time in a lockbox, the bills mostly get shredded since that's cheaper than paying for an armored car.

Anonymous Daedalus Mugged April 19, 2016 11:18 AM  

Still exploring Dr. Keen, he has his Jubilee prescription for public policy, but seems to understand the low likelihood of it being implemented. Does he have a recommendation for individual investors as how to best carry value through the seemingly inevitable reset?

Anonymous BGKB April 19, 2016 11:21 AM  

But in the real world, there is a shortage of funds; even projects with high social returns often can’t get financing

What does he mean by high social returns? Subsidized housing & subsidized mass transit?

Anonymous Pol Mordreth April 19, 2016 11:25 AM  

BGKB wrote:But in the real world, there is a shortage of funds; even projects with high social returns often can’t get financing

What does he mean by high social returns? Subsidized housing & subsidized mass transit?


No, High social returns generally mean things like expansion of the available jobs, creation of subsidiary industries to service the primary project, etc. forex, the invention of the mass produced automobile was a project with high social return.

Anonymous Genericviews April 19, 2016 11:31 AM  

My alternative opinion, based on lukewarm air, is that banks cannot loan money if borrowers are unwilling to participate in the transaction.

While there are plenty of cases of willing borrowers being turned away and thus being counted statistically, no one is counting the market of people who don't want to borrow money in the current market. Most rational people realize that borrowed money must be paid back. If they are pessimistic about their economic fruitfulness with the borrowed money, and fear not being able to pay it back, and further fear the loss of their collateral, they simply abstain from the market. The proof of this would be in looking at the total private and non-government corporate debt rates.

So... there isn't a shortage of funds but the effect is the same.

Anonymous Ominous Cowherd April 19, 2016 11:33 AM  

``... people are shocked to learn that if you pay your taxes in currency ... the bills mostly get shredded ...''

A lot of people think that currency is valuable; that printing money creates resources.

``Sometimes I wonder if most economists don't even understand double-entry bookkeeping.''

Many of us know little or nothing about accounting. But the basic idea behind double-entry is pretty simple.

Blogger Nate April 19, 2016 11:51 AM  

"Aren't loans that aren't backed directly and completely by deposits the definition of the "credit" part of "credit-money"?"

Credit money is money created by leaveraging... or at least it was. Eventually they stopped bothering with even pretending to leverage deposits at all. Now... credit money is just money created from thin air and lent out.

There is a bunch of handwaving to pretend it isn't created out of thin air... but never the less... it is.

Loans do not comes from deposits. Deposits come from loans.

Blogger Nate April 19, 2016 11:53 AM  

"My alternative opinion, based on lukewarm air, is that banks cannot loan money if borrowers are unwilling to participate in the transaction. "

yes. That is Vox's primary argument. That you can print money but you can't print borrowers.

The counter to that is that borrowers are still plenty willing... they just aren't qualified.

The other solution of course... is to dump money into the economy other ways... like through government spending.

Blogger dc.sunsets April 19, 2016 11:54 AM  

My alternative opinion, based on lukewarm air, is that banks cannot loan money if borrowers are unwilling to participate in the transaction.

Prechter wrote of this some time ago.

What is the interest rate but the price of monetary demand? If I really, really, really want money right now, I'll be willing to pay a higher "r." If I have very little need for more money than I have right now, I won't pay much for additional money in terms of "r."

So ZIRP is an open admission that demand for new money is essentially zero. They can't GIVE away money to borrowers. NIRP is even worse! It's like telling people, "I'm so desperate to lend to you that if you borrow my money, you don't even have to pay it all back...ever."

Economists seem to forget that the value of all things is set at the margin. Too much credit availability and the price of credit falls to zero, then below zero.

This is where credit stops behaving exactly like money. If the bank was handing out banknotes we'd all line up (each additional banknote would reduce the buying power of all prior units.) But the bank is offering credit, which has to be PAID BACK. In its money-guise, credit dilutes the value of prior money, creating inflation in goods/services (CPI) or assets (like the last 30 years.) But at the margin, its not money because it has to be paid back.

Credit today is like short-selling. A short-seller who opens a position doesn't profit until he buys back to close that position. A borrower is in the same boat, and if he can't pay back, the transaction will close anyway...leaving him in default.

Blogger James Dixon April 19, 2016 11:57 AM  

> The other solution of course... is to dump money into the economy other ways... like through government spending.

The problem with that is we have a long history showing that it largely doesn't work.

The government simply giving the money to people to save/spend as they see fit seems to work, but even it probably has a point of diminishing returns.

Blogger dc.sunsets April 19, 2016 12:00 PM  

The other solution of course... is to dump money into the economy other ways... like through government spending.

And politicians don't have to worry about paying back that which is borrowed. This is why the last entity to stop borrowing will be "government." In theory, I suppose Uncle Sam could borrow at zero interest rate, the Fed could monetize the debt and this gig could go on forever.

Actually, given that some of that "money" would flow overseas, eventually the export-mercantilist countries would use their "dollars" to buy up every asset in the USA including the kitchen sink, and Americans would be fully dispossessed from the country their ancestors built, all due to their blind avarice.

Blogger VD April 19, 2016 12:16 PM  

That is Vox's primary argument. That you can print money but you can't print borrowers. The counter to that is that borrowers are still plenty willing... they just aren't qualified.

I would also add that you can't print qualified borrowers.

Anonymous Ominous Cowherd April 19, 2016 12:52 PM  

If you are still a qualified borrower, it's because you have sense enough not to borrow.

The Fed not only can't print borrowers, they can't print stuff for their currency to buy. Ultimately, that's why we can't print our way out of this: there is a limit to what you can accomplish by counterfeiting.

Anonymous Freestater April 19, 2016 12:53 PM  

" Now... credit money is just money created from thin air and lent out."

Nate most people don't realize how easily credit money is created. I work in an accounting department for a company that averages 12 million a year in sales. Whenever a customer is over their credit limit for the year and still wants to buy product I don't even conduct a credit check or do any analysis at all, I simply create more credit for them and often extend terms from 30 days to 45 or 60. I think if most Americans knew I and others created credit just by the click of a button on my accounting software while listening to youtube videos at work, they would start to understand how economic bubbles work. It's impossible not to create more credit too because you know your boss wants to increase sales and net income so you simply do whatever gets those results and the economy expands, one accounting entry from thin air at a time.

OpenID basementhomebrewer April 19, 2016 1:00 PM  

The root of the problem is that there needs to be a reset to jettison the businesses that do not work and it has not been allowed to happen. Instead the central banks/ monetary policy has been used to add more cards to try and brace the leaning house of cards. As more cards have been added it requires more of the elite's skin to be added to the game. The whole scheme is going to collapse it's just a question of when and what happens afterwards.

Blogger James Dixon April 19, 2016 1:03 PM  

> The root of the problem is that there needs to be a reset to jettison the businesses that do not work and it has not been allowed to happen. Instead the central banks/ monetary policy has been used to add more cards to try and brace the leaning house of cards.

When it's the banks that need to fail, and it's the bankers making the decisions, what do you expect to happen?

Anonymous #8601 Jean Valjean April 19, 2016 1:21 PM  

@7 Slowpoke "Interesting that Keen Points out that Stephanie Kelton, a mainstream economist that is advising Bernie Sanders, understands this."

Stephanie Kelton is actually an MMTer, which is about as far from mainstream as one can get! Of course, MMT likes to say they describe reality.

I'd like to see Bernie win just to see if MMT works, although I'm pretty sure it won't.

Blogger Spiritsplice April 19, 2016 1:22 PM  

You have to laugh when accuracy is described as "revolutionary".

Blogger B.J. April 19, 2016 1:23 PM  

I had a discussion about this with a friend of mine who works in banking. I pointed out that banks engage in classic rent-seeking behavior by trying to rope everyone into debt and encourage borrowing to purchase unnecessary assets, often with predatory "get rich quick" and money-for-nothing sales pitches. His response was to point out that the entire economy relies on banks to make loans for business purchases, from cargo containers to cow pens. I wonder how true that really is? After an initial startup loan, how much credit does a business actually need to function day-to-day?

Blogger dc.sunsets April 19, 2016 1:24 PM  

A side effect of endless credit availability is that well-managed firms can't prosper because their poorly-managed competitors can remain in the business, even sustaining continuous losses. How do you earn rightful profits when some clown forces you to keep prices near break-even (or below) because his banks (or suppliers) keep extending their terms?

A credit bubble embeds VAST capital into unproductive, unprofitable, wasteful uses. This is why I note that the true effect of a debt-based boom is to enable vast over-consumption of capital (which is what future payment streams depend upon.)

Self-reinforcing debt dynamics cause an "I can have my cake and eat it too" economy. Reason says this can't go on forever, but I'd have said that 21 years ago and here we are.

Blogger dc.sunsets April 19, 2016 1:33 PM  

@ BJ,
His response was to point out that the entire economy relies on banks to make loans for business purchases, from cargo containers to cow pens. I wonder how true that really is? After an initial startup loan, how much credit does a business actually need to function day-to-day?

Google "Real Bills Doctrine" for how credit (which is an essential element of a functioning economy) can be produced and extinguished, properly, without banking as an intermediary at all. Lower-order goods suppliers can extend credit to purchasers, the credit collateralized by the goods themselves and the credit is extinguished as those goods move on to their next place in the structure of production (or are retailed.)

Economic growth would be organic, and much more likely to hew close to a larger, common trend, presumably avoiding much of the otherwise inevitable boom/bust where credit is proffered willy-nilly based on the vagaries of collective mood.

This would also have the benefit of making MONEY equivalent to the value of goods that can be profitably sold in a market, which is really what money is supposed to represent, productive value-added.

Anonymous Freestater April 19, 2016 1:34 PM  

"How do you earn rightful profits when some clown forces you to keep prices near break-even (or below) because his banks (or suppliers) keep extending their terms?"

If you want an object lesson in how companies and their banking and credit enablers will keep them alive for years while they suffer losses just look at J.C. Penney, and Chesapeake Energy. I think both companies have recently pledged all their assets for bank loans simply to stay in business after suffering years of losses.

Blogger James Dixon April 19, 2016 1:39 PM  

> After an initial startup loan, how much credit does a business actually need to function day-to-day?

We had that very discussion here a couple of years ago now. One business owner pointed out that he had a single quarter each year where he made money, and had to use debt to cover his expenses the rest of the year (he made enough in that one quarter to be profitable for the year). I pointed out that he was in fact already bankrupt and merely waiting on events to make that obvious. All it takes is one time of not being able to borrow, and his business goes under. This appeared to have sobering effect on him, but I have no idea if he actually made plans to have a years worth of expenses saved or not.

So it looks like a lot of businesses actually do really heavily on debt to function (a perusal of corporate debt to equity levels at any good financial site is enlightening). Whether they need to or not is another matter.

Anonymous Freestater April 19, 2016 1:43 PM  

" After an initial startup loan, how much credit does a business actually need to function day-to-day?
"

It needs as much as its sales and cash flow flow demand, sometimes sales are increasing faster than you have cash to meet demand so you get more credit. Last year I had several customers go beyond their credit limits in the 4th quarter. They had strong sales and needed to buy more goods from our company and I'm not going to stop anyone from increasing our sales so I extended them an extra 50,000 in credit. Notice that until I changed the credit terms on our accounting software this 50,000 didn't even exist, they didn't have, nor did I, no bank was involved, I simply entered it on my computer and that is it, the economy has 50,000 in new spending money.

Blogger dc.sunsets April 19, 2016 1:48 PM  

All it takes is one time of not being able to borrow, and his business goes under.

Didn't you just describe 60% of Americans?

I'm not going to stop anyone from increasing our sales so I extended them an extra 50,000 in credit.

This is basically a Real Bills arrangement. The "new money" is retired as soon as the customer pays its bills. This is perfectly natural, and delimits any folly on the part of the supplier to the supplier itself (and its creditors, I suppose.) Central banking simply gives us a focal point for Stupid Ideas to be enlarged to the size of Planet Earth, akin to putting us all on our very own Poseidon Adventure.

Anonymous Freestater April 19, 2016 1:50 PM  

"So it looks like a lot of businesses actually do really heavily on debt to function (a perusal of corporate debt to equity levels at any good financial site is enlightening). Whether they need to or not is another matter."

Oh man you have no idea. If it wasn't for short term debt most business would contract to probably half of what they are.

Blogger James Dixon April 19, 2016 1:53 PM  

> Didn't you just describe 60% of Americans?

That sounds about right, yes. I'm not sure what the exact figure is though.

> Oh man you have no idea.

A slight glimmering perhaps, but no real grasp of the details, no.

Blogger Josh April 19, 2016 2:24 PM  

After an initial startup loan, how much credit does a business actually need to function day-to-day?

Depends on the cash flow

Blogger Josh April 19, 2016 2:25 PM  

One business owner pointed out that he had a single quarter each year where he made money, and had to use debt to cover his expenses the rest of the year (he made enough in that one quarter to be profitable for the year).

Many business are seasonal.

Blogger Josh April 19, 2016 2:31 PM  

Oh man you have no idea. If it wasn't for short term debt most business would contract to probably half of what they are.


I concur

Blogger praetorian April 19, 2016 2:42 PM  

THE SHOAH *AND* KEEN ON THE SAME DAY?

STOP.

Blogger Old Ez April 19, 2016 2:42 PM  

Around 2009 or so when I was first made aware of the "money multiplier effect" and the deposit-creation process, I was incredulous. "It's can't be this simple/evil" I thought. Alas it is. Without a clear understanding of what credit is and how it is administered in the West, pretty much any practical talk about economics is going to be severely distorted at the least.

Blogger James Dixon April 19, 2016 2:48 PM  

> Many business are seasonal.

Yes. Agriculture in particular. That doesn't change the fact that if you don't have a years worth of expenses available, you're bankrupt the day you can't borrow.

Anonymous Hoppes #9 April 19, 2016 2:53 PM  

Not to fear - replacing Andy Jackson's mug with a woman on the $20 will fix everything.

Anonymous Freestater April 19, 2016 3:04 PM  

"Around 2009 or so when I was first made aware of the "money multiplier effect" and the deposit-creation process, I was incredulous. "

And that is only the initial step in the credit expansion boom. It gets much bigger as it filters throughout the economy.

Blogger pyrrhus April 19, 2016 3:05 PM  

So Keen and Stiglitz still think that banks, in the era of partial reserve (often 30-1) banking are intermediaries between savers and lenders? No, bank are intermediaries between lenders and various gambling positions and taxpayers, who get to foot the bill when things go wrong.....

Blogger pyrrhus April 19, 2016 3:07 PM  

Taleb comments repeatedly in The Black Swan and Anti-Fragile that the banking industry, which is constantly on the wrong end of the risk curve, has lost far more money than it has made over the last 700 years.....

Anonymous Freestater April 19, 2016 3:09 PM  

"Yes. Agriculture in particular. That doesn't change the fact that if you don't have a years worth of expenses available, you're bankrupt the day you can't borrow."

I had a Professor in undergrad business school who was a former CEO of a ski resort. He often brought real life examples from that job into our classes. The ski resort business is brutal on cash flows. You get 2 quarters that generate 90 percent or more of all sales, then 2 quarters of next to nothing. If you have no line of credit for the 2 quarters where no money comes in, paying salaries and fixed expenses is impossible. And if it is a year with little to no snow it is basically game over.

Anonymous Daniel H April 19, 2016 3:16 PM  

Vox,

I am not grasping this create money out of thin air thing, so, if you will bear with me, maybe you can explain how it works, referencing the following simple example.

Say I open a bank on Monday. I invest $10 million of my own money as equity. My accounts are balanced. I have $10 million of Assets on the left side and $10 million of Equity on the right side. On Tuesday, when I open the doors, before I have taken a penny in deposits, a real estate developer comes by and asks to borrow $20 million for a worthy project. Although I have no assets other than my $10 million balanced by my initial equity at this point, can I just “lend” him this $20 million? If so, where do I get the other $10 million cash? Can I just go the the Fed and borrow this amount, or just click a button on my computer and create it out of thin air? And at this point My accounts cannot be balanced. I now have $20 million of Assets on the left side, with zero equity (had to give the developer $10 million of my initial cash equity) and $10 million of liabilities on the right side. How can this be?

Thanks for any elucidation.

Anonymous Ossie April 19, 2016 3:18 PM  

Steve Keen is one of the heterodox economists making waves now. Forbes engaged him as a columnist. Keen had a well-publicized take-down of Paul Krugman in a debate that is available on YouTube, so gets kudos just for that!

I recommend also following Bill Black (Assoc Prof at UMKC) as he has a lot to say about the dysfunction in the bank regulatory world.

Anonymous #8601 Jean Valjean April 19, 2016 3:33 PM  

The Fed has tried every trick in the book to try and ignite the economy. Nothing has worked because the money supply is created almost entirely by banks. The Fed is actually quite impotent. The Emperor has not clothes.

Blogger praetorian April 19, 2016 3:38 PM  

OK, OK, OK. I've got myself under control here. OK.

So, Ilk, I have an econ theory and no one to talk to it about, so you all are it:

Reserve ratio does not matter. What matters, rather, is duration mismatch. A given monetary unit can be relent an infinite number of times, so long as, at every point it is being lent, the bank is lending the monetary unit for a shorter amount of time than it has the right to that unit. Banks must borrow long (say a CD of 10 years) and lend short (at, say, five years) rather than todays system which is exactly the opposite.

No bank runs are possible because no double counting of monetary unit ownership at a given time point occurs.

OK, Ilk, explain to me why that's stupid and I should oven myself.

Blogger dc.sunsets April 19, 2016 3:44 PM  

For a long time, the path to wealth was obtain a bank charter. You charged interest on wealth you created from nothing.

What. A. Deal.

Now, however, lots of credit-money is created (and extinguished) outside the banking system entirely (hence 2008's little problem when the commercial paper market froze up overnight.)

Central bankers are like men handcuffed to a tow-rope on a ski boat sporting 200hp twin outboards, where people keep adding another motor. They smile and wave to avoid distracting the driver, but know that one bobble and they're face-down in the water with no hope whatsoever for recovery.

Anonymous #8601 Jean Valjean April 19, 2016 3:47 PM  

@65 Daniel H.

It's all double entry accounting. When the bank makes a $20mm loan, its assets increase by $20mm and its liabilities also increase by $20mm in the form of the deposit. Loans create deposits.

Capital (or equity) remains the same at $10mm but, of course, the leverage has increased.

Blogger dc.sunsets April 19, 2016 3:49 PM  

@68, get banks out of the business entirely. In the modern era we have firms like "Lending Club" that match people with capital willing to risk it with people who want capital.

Each man becomes his own lending officer, explicitly knows the risks, spreads his risk across a number of loans, and can market some or all of his portfolio in the secondary market in the even he wants to cash out before maturity.

Duration mismatch becomes impossible. Society as a whole is not blindly dragged into moral hazard, either, and no political or commercial entity is given the semi-monopoly power to manipulate interest rates.

Anonymous Freestater April 19, 2016 3:52 PM  

"Say I open a bank on Monday. I invest $10 million of my own money as equity. My accounts are balanced. I have $10 million of Assets on the left side and $10 million of Equity on the right side. On Tuesday, when I open the doors, before I have taken a penny in deposits, a real estate developer comes by and asks to borrow $20 million for a worthy project. "

Not Vox, but I'll tell you how I would do it.

Assets = Liabilities + Owners Equity

10 Million = 0 + 10 Million

Next Step after 20 million loan, make it

30 Million = 0 + 30 Million

The equation balances. You now have a 20 Million Accounts Receivable plus, 10 million Cash on the left and technically 10 Million Equity, plus 20 Million Sales Revenues on the right, which would flow into Equity and make it 30 million Equity after the loan is repaid, all other things being equal.

Of course that is beyond risky to pledge a loan that large beyond your cash and actual equity.

Anonymous A Paradigm Is More Than Twenty Cents April 19, 2016 3:55 PM  

dc.sunsets
Reasoned analysis of markets, finance and the economy has failed me at every turn for 21 years,

1995 appears to be the year when Alan Greenspan decided there should not be a recession in the next election year, so he Did Something about that, similar to the papering-over of the 1987 market crash.

And since that worked so well at getting an incumbent re-elected, it was repeated in 2003-2004. And since that worked so well, nothing bad happened in 2008…oh, oopsie.

Anyway, it's not just you, it's the Fed.

Anonymous Freestater April 19, 2016 3:55 PM  

Daniel H --- I know it seems absolutely absurd that I can create money out of thin air but I assure you I actually really do it in real life for customers about 2-3 times a month, albeit for much much smaller sums than 20 million.

Blogger dc.sunsets April 19, 2016 4:01 PM  

@73 A Paradigm,
No, it's me. My experience is the source of my firm conviction that we often can't tell when we're being misled by our own bimodal cognition.

When you jump because a spider crosses your hand, or capitulate on an investment when the pain of losses gets too large, your actions are driven by a primitive cognitive path we all share.

It's even worse when you learn to recognize the signs and still can't change your behavior, can't override the impulses. This is my problem. It's maddening.

Anonymous A Paradigm Is More Than Twenty Cents April 19, 2016 4:02 PM  

Many of us know little or nothing about accounting. But the basic idea behind double-entry is pretty simple.

The original double-entry bookkeepers worked with quill pens by candle light for Venetian merchant princes over 500 years ago, when they weren't doing sums in their head next to boats unloading at the Lido.

It's not calculus, it's not even algebra, it's basically arithmetic. The figures don't lie, so it's not popular, plus liars can figure, too.

Blogger James Dixon April 19, 2016 4:06 PM  

> Reasoned analysis of markets, finance and the economy has failed me at every turn for 21 years,

Are you trying to analyze the entire market, or just individual stocks? The entire market is beyond anyone's ability to analyze.

Anonymous #8601 Jean Valjean April 19, 2016 4:07 PM  

Yes, banks can create money out of thin air but that doesn't mean there aren't certain constraints. The most important being quality borrowers. As VD says, you can't print borrowers.

A second constraint, and somewhat related, is capital requirements. Banks must adhere to strict capital requirements as stipulated by the regulator. If a bank lends too much, their leverage will become too high, and they will be forced to increase capital by, say, issuing equity or selling assets.

Anonymous A Paradigm Is More Than Twenty Cents April 19, 2016 4:08 PM  

After an initial startup loan, how much credit does a business actually need to function day-to-day?

The agribiz sector totally relies on credit over a year to multi-year cycle. Those are the people that convert oil and natural gas to food for the rest of us. Does everyone have a copy of Grow or Die yet?

Blogger Rusty Fife April 19, 2016 4:34 PM  

denektenorsk wrote:Negative interest rates are insanity. You will pay me money to spend all of my money and if I save any of it I am penalized? Something is very rotten at the core.



My understanding is that paying off a debt is considered 'saving' in econ-speak.

If they will tax your pile of cash and you are feeling under the gun; the next obvious place to 'save' is pay off secured debts (car note first, house note second). Then if you have to default all that is left is unsecured debt.

Credit cards might be useful when they limit your ability to get money out of the bank. The Greek and Cyprus debacle allowed you to pay bills online and use both credit and debit cards.

http://www.bloomberg.com/news/articles/2015-06-29/what-you-can-and-can-t-do-under-greece-s-capital-controls

Blogger James Dixon April 19, 2016 4:47 PM  

> The agribiz sector totally relies on credit over a year to multi-year cycle.

And the instability that creates is why there are now so comparatively few family farms. :(

Of course, if they weren't reliant on fertilizers and hybrid seeds, they wouldn't have that problem.

Anonymous WaterBoy April 19, 2016 5:03 PM  

praetorian: "OK, Ilk, explain to me why that's stupid"

Not stupid, per se, but it has its shortcomings:

1. It would be nearly impossible to make certain types of loans, such as a 30-year-mortgage, given that it would involve the commitment of money on the high end longer than that to fund them.

2. On the other side, on-demand accounts such as savings and checking would be ineligible for use as loans since those funds could technically only be available for a day (or less). Guaranteed timed investments, like the CDs you mentioned, would be the only reliable funds from which you could lend -- and then only if there were no allowances for early withdrawal.

3. The shorter time span on the low end does no good if the borrowers default, so the potential bank run problem theoretically still exists since those funds are possibly lost. The loans on the low end would need to be very low risk to minimize this risk.

There may be more problems, but these are the ones that immediately popeed up.

Blogger pyrrhus April 19, 2016 5:10 PM  

@68 Duration mismatch is exactly why banks make money for awhile and then go bust....But it would be unprofitable to borrow long and lend for the same period, since the interest rate differential wouldn't be very large unless the bank was accepting a lot of risk. But you could still have runs on the bank--if people thought your loans were going under, they would cash in their CDs early, and the bank wouldn't be able to cover the demand.

OpenID aew51183 April 19, 2016 5:53 PM  

Keen is quite impressive.

After reading his blog I'm stupefied most economists have not been properly taking debt into account.

This is basic common-sense. I did my senior undergrad project running predictive analysis on the rate of debit card overdrafts in spring 2006: the thing was a freaking asymptote. My project ended in a question: "how much more stress can the consuming public take before the economy collapses?"

At least someone is developing models which actually incorporate ground-level financial stress. Now I'll have to read up on it.

Anonymous Daniel H April 19, 2016 5:54 PM  

@70
>>t's all double entry accounting. When the bank makes a $20mm loan, its assets increase by $20mm and its liabilities also increase by $20mm in the form of the deposit. Loans create deposits.

Capital (or equity) remains the same at $10mm but, of course, the leverage has increased.<<

But where is the deposit in this simple example. I have given the customer $20 million in cash (loan for his project), but only had $10 million in equity and assets. I had to come up with another $10 million in cash somehow. Where does it come from? From the Fed (who lends it to me)? If I am understanding Vox’s point correctly, banks make loans without having the cash assets and balancing equity to cover the loan. For a large bank, with lots of cash sloshing through their system, I can see how they can get away with this for a time, but in my simple example, unless they can get cash in exchange for a their new $20 million loan asset, they won’t even be able to make the loan. I’m guessing that a simple example does not elucidate the phenomenon.

Blogger rtp April 19, 2016 6:15 PM  

Steve Keen believes in aggregate demand - otherwise known as diving by zero.

Demand is by definition a relative term and cannot be aggregated. Any attempt to do so will lead to absurd (divide by zero type) results.

I get that Keen has good stuff to say about debt and the like but the fact is if you believe in aggregate demand you simply cannot say anything useful from that point on about economics.

Blogger rtp April 19, 2016 6:17 PM  

Sorry I realise I just contradicted myself.

I mean if you believe in aggregate demand, anything you get right about economics will be purely a matter of luck rather than coherent reasoning.

Blogger praetorian April 19, 2016 6:19 PM  

since the interest rate differential wouldn't be very large unless the bank was accepting a lot of risk

I don't agree with that. The banks would have to mark up the loan rates vs the savings rates, for sure, but that's the case right now: interest rate curves would still be naturally sloped for bank borrowing and bank lending, consumers would eat the spread.

they would cash in their CDs early, and the bank wouldn't be able to cover the demand.

They wouldn't be able to. That's the whole point of this system: they have no right to their monetary units now. They could certainly sell their future monetary claims, if they wanted to, but they have no legal recourse to the bank.

I have autistically convinced myself that this is the crux of the issue: introducing multiple claims on the same monetary unit at the same time, as opposed to the re-lending mechanism that I focused on when I was younger.

It would be nearly impossible to make certain types of loans, such as a 30-year-mortgage, given that it would involve the commitment of money on the high end longer than that to fund them.

Maybe, but then we are lying to ourselves that that's a way we are willing to loan for housing.

What I like about my made up system is that no one is lying about what money they have, even though something like a money multiplier still exists as people decide they don't need money and release it into the system for a specific duration. It better expresses societies time preferences, and makes everyone live up to that. (I would expect a secondary market, of course, and maybe I'm just pushing the crisis off to that spot.)

. On the other side, on-demand accounts such as savings and checking would be ineligible for use as loans since those funds could technically only be available for a day (or less).

Absolutely. Any money you can demand immediately is yours. Fuck off, you can't lend it. And also fuck off, you will probably have to pay the bank to hold it for you, in ATM fees at least.

The shorter time span on the low end does no good if the borrowers default,

That's always a risk of lending, and capital would have to be pledged against losses. As God Emperor, I would demand that banks publish a public curve over time of all loans and deposit commitments, and never let that curve go net negative.

Praetoristan is going to be perfect. I just know it.

Where I get lost is, where does the money to pay the interest come from? I don't see a theoretical limit to relending money in this system, so I'm tempted to think it might work out, but also I'm stupid.

Anonymous Freestater April 19, 2016 6:31 PM  

"But where is the deposit in this simple example. I have given the customer $20 million in cash (loan for his project), but only had $10 million in equity and assets. I had to come up with another $10 million in cash somehow."

In the normal banking world you are supposed to lend out to the extent of reserve requirements, so if you were a bank with 100 dollars and the reserve requirement by law was 10 percent, you would keep 10 in the bank and lend out 90 and earn interest and principal on that, and when the 90 is deposited at the next bank they do the same thing, and the money supply expands. In your example however you could still create that 20 million loan from nothing, you would not actually need the cash. In the age of digital entries you could just create the 20 million on your books and in his account,it would be a rather insane thing to do, but you could.

Blogger Kona Commuter April 19, 2016 6:34 PM  

Debt Jubilee would be nice

Anonymous Mr. Rational April 19, 2016 7:29 PM  

Freestater wrote:I know it seems absolutely absurd that I can create money out of thin air but I assure you I actually really do it in real life for customers about 2-3 times a month, albeit for much much smaller sums than 20 million.
You're not "creating" money, you're allowing your customer access to your own equity or credit line in your inventory (plus whatever credit the shipper will allow the two of you to have).  If you don't have $50,000 in inventory or raw materials or credit, you can't advance your customer that much.

Anonymous #8601 Jean Valjean April 19, 2016 8:29 PM  

I had to come up with another $10 million in cash somehow. Where does it come from?

It was created out of thin air by the bank, which simply marked up the customer's account.

Anonymous A Paradigm Is More Than Twenty Cents April 19, 2016 8:31 PM  

Debt Jubilee would be nice

Have you ever house-trained a dog?

Rewarding bad behavior results in:

A. No more bad behavior.
B. More bad behavior.

Your answer is A or B?

Blogger Patrick Wilson April 19, 2016 8:41 PM  

Usury/debt is not inherently deleterious to the economy, the notion developed over time that debt is necessary to promote economic growth is naive. Money loaned that is backed by assets of value promote repayment, thus a working system. Loans that are not asset backed represent do nothing but create deadbeat debtors. People with mountains of 20-30 % credit card debt or hundreds of thousands of debt borrowed to finance a degree in "underwater bb stacking or star wars costuming" are nothing but a drag on the economy.The first group conned by credit card/banking industry the second by the educational industrial complex, both selling things of little or no value. Trillions of dollars of created money loaned to dupes of leftist economics. But maybe with a hope and a prayer maybe enough inflation? When Did inflation,wishful thinking and high energy prices become a good thing.

Blogger Thucydides April 19, 2016 11:25 PM  

Zerohedge (I believe) had it right. You can always "create" more credit, but you cannot create more creditworthy borrowers. Since the number of productive people is limited (and the education system and various bureaucracies are working hard to reduce that number), then the actual amount of credit which can be deployed for various projects is also limited.

Sure, you can pour money into "investments" like GM or Solyndra, but since no creditworthy people are involved in running these sorts of enterprises, or actually providing the investment funding for them to operate, it would be more efficient and less damaging to the economy and investors to simply create a massive pile of banknotes and set them on fire in the middle of the desert. Keynesian economics pretty much advocates for that anyway.

IF anyone is really interested in why the global economy is tanking, look up F.A Hayek's understanding of the effects of credit bubbles in "Prices and Production" for example. A humorous quick lesson can also be found in the song "Fear the Boom and Bust" : https://www.youtube.com/watch?v=d0nERTFo-Sk.

Anonymous Jack Amok April 20, 2016 12:07 AM  

a mindless wave of fiscal austerity

Austerity is not a policy choice. It's a consequence of running out of resources. Calling it "mindless" is like saying "mindlessly hitting the ground after you fall out of a window." The mindless part was falling out of the window. Everything else is more or less automatic.

I have come to the conclusion that the function of most economists is obfuscation.

Nah, they're more like astrologists, shamans or witch doctors, telling you what you have to do next time so the solar eclipse doesn't happen - because next time the sky monster might not cough up the sun again and we'll have permanent night.

Blogger Timothy MEEHAN April 20, 2016 12:21 AM  

@24 The Castalia House Science Fiction Prize in memory of Alfred Nobel would be dynamite.

Anonymous Freestater April 20, 2016 12:35 AM  

"You're not "creating" money, you're allowing your customer access to your own equity or credit line in your inventory (plus whatever credit the shipper will allow the two of you to have). If you don't have $50,000 in inventory or raw materials or credit, you can't advance your customer that much."

Well yes and no. The credit line from our supplier is also money created out of thin air, then we turn around and sell that to our customer for a much higher amount of money created out of thin air. If they give us 30,000 of short term credit of supplies and I then sell it for 50,000 of short term credit, we have crated 80,000 of short term money from nowhere secured by goods that self terminates, and permanently created 30,000 of profit credit money from nowhere,and thus the economy expands.

Anonymous A Paradigm Is More Than Twenty Cents April 20, 2016 12:51 AM  

Speaking of debt, Saudi Arabia takes out $10 billion in bank loans. Probably has nothing to do with oil prices. Or the cost of keeping up a horde of useless princelings.

Blogger Timothy MEEHAN April 20, 2016 12:56 AM  

@88
That's the whole point of this system: they have no right to their monetary units now. They could certainly sell their future monetary claims, if they wanted to, but they have no legal recourse to the bank.

Coming soon: the reverse mortgage for children of homeowners. 60% vig, of course.

I wish I was joking.

Anonymous Mr. Rational April 20, 2016 2:39 AM  

Freestater wrote:Well yes and no. The credit line from our supplier is also money created out of thin air, then we turn around and sell that to our customer for a much higher amount of money created out of thin air.
In other words, you're not the one doing the majority of it... and the labor you have to commit to the product (which you must pay whether or not the customer pays) is another limiting factor on how much "money" you can "create" this way.

I'm not saying it's BS, but I am saying I don't see precisely how it isn't.

Blogger James Dixon April 20, 2016 5:10 AM  

> The Castalia House Science Fiction Prize in memory of Alfred Nobel would be dynamite.

Unfortunately, given his age and recent stroke, I would expect it to be the Jerry Pournelle memorial award by the time they get around to creating it.

Anonymous Ominous Cowherd April 20, 2016 9:29 AM  

@ Freestater: You are not creating currency, you are lending your resources, as Mr. Rational said. Your unit of account is dollars, but it is goods and services you extend to the customer, not newly created credit, unless you have a banking license. Banks jealously guard their licenses to counterfeit.

Anonymous Freestater April 20, 2016 11:30 AM  

"@ Freestater: You are not creating currency, you are lending your resources, as Mr. Rational said. Your unit of account is dollars, but it is goods and services you extend to the customer, not newly created credit,"

It absolutely is newly created credit. I'm not saying it is currency, but it is most certainly a medium of exchange, credit- exchanged for goods. It is no different than Macy's, J.C. Penney, or Amazon giving you 2,000 or 3,000 dollars of credit on store cards, that is real money, that you can use.

Anonymous Mr. Rational April 21, 2016 1:16 AM  

Freestater wrote:It absolutely is newly created credit. I'm not saying it is currency, but it is most certainly a medium of exchange, credit- exchanged for goods.
Can you expand it without limit, just by putting numbers in your computer?  Or are you limited by physical realities, like only being able to advance so much before you run out of raw materials?

You can create multiple claims to the same amount of physical capital, but actually settling on those claims is another matter.  Try advancing an extra $50,000 to 10 customers when you only have enough material on hand for $200,000 of product, and tell me how that works.

Blogger Dwain Dibley September 30, 2016 2:56 PM  

Freestater wrote:
"In the normal banking world you are supposed to lend out to the extent of reserve requirements, so if you were a bank with 100 dollars and the reserve requirement by law was 10 percent, you would keep 10 in the bank and lend out 90 and earn interest and principal on that, and when the 90 is deposited at the next bank they do the same thing, and the money supply expands. In your example however you could still create that 20 million loan from nothing, you would not actually need the cash. In the age of digital entries you could just create the 20 million on your books and in his account,it would be a rather insane thing to do, but you could."

That's not how banking works, at all. The "money multiplier", which forms the basis of your argument, is a 100% proven fiction.

The Bank of England Corrects a Widespread Myth
https://billtotten.wordpress.com/2014/04/04/the-bank-of-england-corrects-a-widespread-myth/
Does the Money Multiplier Exist?
http://www.federalreserve.gov/pubs/feds/2010/201041/201041pap.pdf

Banks generate pseudo-loans in the form of pseudo-deposits and meet reserve requirements on the pseudo-deposits, second. In other words, reserves are not required for, or a limiting factor upon, a bank's ability to generate debt based private credit (banks are limited by capital requirements, not reserve requirements). Also, there are several asset classes that qualify and can be used to meet reserve requirements, other than the legal tender.

While your explanation of debt based private credit and its use as a means to acquire goods and services is well written, and wrong (debt is not money, period), it is immaterial to the 'money' vs. 'credit' issue. You see, ours is a Legal Tender Monetary System, this means that our money is defined by law and nowhere in law will you find the debt based private credit generated by either the Federal Reserve or the banking system designated or even acknowledged as being a 'legal tender' or a 'money' or a 'currency' or even as a 'medium of exchange'. The only legal acknowledgement associated with their debt based private credit, resides in the debts incurred with its use. All credit is someone else's debt, it cannot exist otherwise, and that's where Steve Keen gets his 'money/debt analysis' wrong.

I can tell you exactly how much money is in every deposit account of every type (checkable deposits and savings) within the U.S. banking system, to the penny. And anyone who understands the U.S. legal tender monetary system and fractional reserve banking, knows the amount as well, it's an easy amount to remember as it never changes, and that amount is $0.00. In other words, all deposit accounts are credited accounts, they are all bank debt, and what they owe you by law, is the legal tender money, either upon demand or over time.

This is not unique to U.S. banking, this applies to all of westernized banking and it's been that way for at least 600 years. Deposit accounts are simply bookkeeping entries denoting the amounts of money in the bank's vault belonging to each account holder. Fractional reserve banking, perfected some 300 years ago in Scotland, means that the banks only keep a fraction of the money they hold in their vaults for the account holders and loan out the rest (fractional reserve banking gave birth to capitalism). Modern fractional reserve banking works in the opposite, creating the pseudo-loans first and fractionally reserving the pseudo demand deposits second.

98% of all commerce is conducted in bankster generated credit, not money. There are $1.46-Trillion in U.S. legal tender money in circulation around the globe, and estimated $280-Billion of that is circulating or in bank vaults within the U.S. And that, is the mean to which the entirety of the U.S. banking system and Wall Street is attempting to revert to as I write this.

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