World Economic News (Thur 21st. Oct ’10)

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  • Snedmeister1

    These MMT topics are great for brain exercise MM…
    If you remember, a while ago, I was wondering why we bother with Bonds at all, if Gov’s can create their own money….
    Maybe the reason is in one of your statements in this vid…
    “Nobody fully understands MMT”, and least of all our elected polititians, as unpleasant a thought that may be…!!
    Hopefully, after reading these linked comments from your vid, I may understand it a bit more…
    Maybe David Cameron should, because if MMT is an accurate description, and workable model of modern economics, the cuts are unnecessary..!!
    Also, did you notice Mervyn King in the Telegraph today?? I was left thinking this is the complete opposite of the comments by Mr Bean a couple of weeks ago…. What is going on…???

    • http://overthepeak.com/wordpress/ Mystic

      Give the article and comments a go (if you are feeling brave), but remember it is what I call a `sun-set problem`.
      As in – It is like explaining a sun-set to someone with no knowledge of astronomy.
      In the end, after much explaining on your part, they come back with……..`That don’t change nuthin’. It still looks like a sun-set to me~!`

      • Snedmeister1

        Some of the comments seem to suggest Bonds are a bit like taxes, in that they are a way to bring back in the money in circulation, unless I’m reading it wrong… It is late…!
        It seems, Gov spends money into economy when it wants to, then to ensure not too much stays in circulation, they tax and issue Bonds, correct??
        I know what you mean with your sun-set analogy, but I can’t help myself asking why, it bothers me if I don’t understand….!!
        I’m weird like that..:)
        Bottom line to me seems to be, all is well in MMT, if the Gov is reponsable with the initial spending, and gets value for money, otherwise we would get inflation, or high taxation and Bond sales to claw some back in….
        Like I said, still learning but getting there slowly.:)

        • Adam Smith Fan

          There are two parts to MMT. First the government has to print and hand out cash to one group of people without borrowing. But second and just as important, the government has to tax a second group of people by the same amount as it handed out to the first group.

          • Snedmeister1

            I feel it would work well if….. And this is a big if….. All of the newley created money actually went into productive/ needed projects, AND value for money was obtained, thus actually benefiting the people who would be taxed to suck the money back in….
            Eg under Labour Gov’t, plenty of money was thrown at NHS in England to improve targets etc…
            All that happend was an explosion in the ammount of senior managers working there. No improvements ( overall ) to the service recieved, but no-one actually denies we need an NHS service…
            What to do? Who decides what is necessary, and the correct price to be paid for such services in a monopoly like this?
            The same problems exist for all Gov’t projects, ie Millitary, Schools, Councils etc etc….

  • Snedmeister1

    I have just read the link here…
    http://pragcap.com/mmt-101
    Very interesting,plenty of what you have said is repeated here, and it helps me understand MMT a bit more…
    I shall read it several more times tomorrow to really get my head around it, but if I am reading it right, UK Gov is painting us into a corner…!

    • http://overthepeak.com/wordpress/ Mystic

      Obviously there are many, many complications in this `brave new world`, but just on `basic accounting economics`……..yes, into the corner you go~! (although it must be said – being cornered is probably unavoidable anyway (MMT or not)).

  • Gravyten577

    This sort of thing has been going on for hundreds of years during the “gold standard” and I very much believe that the people who run the system understand it. This is how they continually rob from the populace

  • Gravyten577

    Ok I need to back up what I said so here are a couple of sources

    Notice that Adam Smith said that the British empire was just taking on more and more expense, meaning that governments were spending with no limit even on a “gold standard”

    And then read this from David Hume who said that public debts acted as money (maybe then it wasn’t really a gold standard)! Since people benifit so much for the existence of the national debt this must mean it was orchestrated on purpose so the people in charge can rob everyone else

    Adam Smith “The Wealth of Nations”

    http://books.google.com/books?id=70759KjSs0sC&pg=PA256#v=onepage&q&f=false

    “The whole burden of the debt contracted on account of the war would in this manner fall, as it always has done hitherto, upon Great Britain; upon a part of the empire, and not upon the whole empire. Great Britain is, perhaps, since the world began, the only state which, as it has extended its empire, has only increased its expense, without once augmenting its resources. Other states have generally disburdened themselves, upon their subject and subordinate provinces, of the most considerable part of the expense of defending the empire. Great Britain has hitherto suffered her subject and subordinate provinces to disburden themselves upon her of almost this whole expense.”

    David Hume in his essay “Of Public Credit”

    http://books.google.com/books?id=DyLXAAAAMAAJ&pg=PA363&dq=#v=onepage&q&f=false

    “In short, our national debts furnish merchants with a species of money, that is continually multiplying in their hands, and produces sure gain, besides the profits of their commerce. This must enable them to trade upon less profit. The small profit of the merchant renders the commodity cheaper, causes a greater consumption, quickens the labour of the common people, and helps to spread arts and industry throughout the whole society

    There are also, we may observe, in ENGLAND and in all states, which have both commerce and public debts, a set of men, who are half merchants, half stock-holders, and may be supposed willing to trade for small profits; because commerce is not their principal or sole support, and their revenues in the funds are a sure resource for themselves and their families. Were there no funds, great merchants would have no expedient for realizing or securing any part of their profit, but by making purchases of lands; and land has many disadvantages in comparison of funds. Requiring more care and inspection, it divides the time and attention of the merchant; upon any tempting offer or extraordinary accident in trade, it is not so easily converted into money ; and as it attracts too much, both by the many natural pleasures it affords, and the authority it gives, it soon converts the citizen into the country gentleman. More men, therefore, with large stocks and incomes, may naturally be supposed to continue in trade, where there are public debts; and this, it must be owned, is of some advantage to commerce, by diminishing its profits, promoting circulation, and encouraging industry.

    But, in opposition to these two favourable circumstances, perhaps of no very great importance, weigh the many disadvantages which attend our public debts, in the whole interior economy of the state : You will find no comparison between the ill and the good which result from them”

  • Richard

    I’ll start by saying I haven’t read the Bloomberg MMT article yet – it’s late so maybe I’ll read it in the morning. I think I have a good enough grasp of what MMT is, yet what puzzles me is when people claim (with a straight face) that we’re living in an MMT world. In other words, I understand what it is, I just don’t think we’re doing it yet. Issuing bonds and attempting to reduce deficit spending and government debt might well be legacy practices from the gold standard days, but we still doing these things – which leads me to think we’re not (entirely) in an MMT world. And the idea the Fed was created as an independent corporation to make sure the President didn’t just spend his MMT money like a mad man is also suspect – for almost the first 60 years of the Fed the US was running on a gold standard system. So what gives? Why has Osbourne just announced all these cuts instead of just spending new MMT money and perhaps raising taxes to take some of the extra money out of the system?

    • http://overthepeak.com/wordpress/ Mystic

      It would be a brave experiment to explain MMT to the market~!
      Imagine explaining it to the people~!!
      To the trade union leaders~!!!

      • Richard

        This something I was contemplating last night. I can imagine that if the people and the unions knew about it they’d be first in line with their begging bowls at the ready. They’d be a nightmare to work with because they’d always be demanding more and wouldn’t understand why it’s not possible to give it to them. No?

        This morning I finished reading the article and all the comments on PragCap (not sure why I said Bloomberg in my previous post). Anyways, I’m still puzzled by the fact nobody seems to acknowledge MMTs existence – by nobody I mean the government primarily, but also the likes of CNBC or Bloomberg etc. Off the top of my head I can think of these reasons:

        1) The government isn’t aware or has little understanding of MMT. This I can believe to some degree, but what stikes me as odd is that nobody ever talks about MMT. Most people I’ve met from government have been clueless, but there must be at least one star performer amongst them who knows about MMT (if MMT is in fact real). I was watching the Parliament channel yesterday when Osbourne made his spending review announcement and what was interesting was Alan Johnson’s (shadow chancellor) speech to the house. He said he agreed there needed to be cuts, but he didn’t agree with the ones the Tories were making. All day on the news the two sides were arguing over the cuts yet both sides agreed the deficits needed to be cut. Surely, somebody in the opposition wouldn’t be able to resist the idea of using MMT as the perfect baseball bat to the Tories austerity plans? And if not from the opposition, somebody would be appearing as a talking head on Newsnight or whatever to champion the idea cuts are entirely unnecessary? It can’t just be a bunch of YouTubers and bloggers that know about MMT.

        2) MMT is known and understood, but is deliberately kept quiet. I guess falls in to the bracket of “conspiracy theory” – the idea the government is keeping everybody in the dark about the true nature of how money is created. Not only keeping us in the dark, but deliberately misleading us when they band around the figure of £120m in daily interest payments they claim we need to reduce. Governments do lie, but to keep this conspiracy going for 40 years through a series of opposing governments seems unlikely to me. Not impossible – but unlikely.

        3) MMT is not real – it’s just a clever idea shared by a group of nerdy economists or those who want the government to spend more liberally. Clearly, we’re not on the gold standard anymore, and I would agree that MMT is feasible and certainly a plausible explanation of money creation, but I’m struggling to be convinced that it’s actually how things are working. I could be (and quite possibly am) wrong, but the impression / gut feeling I get is the MMT’ers have come up with this new fiat system to explain how they’d like the currency to work and then set about finding plausible (but not entirely perfect) explanations of how the legacy practices such as issuing bonds fit in to this new fiat system. It’s the back-peddling to explain these legacy practices that makes MMT appear much more complicated – the idea of issuing currency from nothing and reigning it back in through taxes is easy to explain.

        Personally, I’m not against MMT – I think it is preferable to a commodity backed currency. I had a brief discussion with Bill Still who convinced me that government issuing currency is much better than the banks doing it. For me, it comes down to the lesser of two evils, or put another way the most preferable choice between one greedy group and one incompetent group.

        • Snedmeister1

          “Surely, somebody in the opposition wouldn’t be able to resist the idea of using MMT as the perfect baseball bat to the Tories austerity plans? And if not from the opposition, somebody would be appearing as a talking head on Newsnight or whatever to champion the idea cuts are entirely unnecessary? It can’t just be a bunch of YouTubers and bloggers that know about MMT.”

          This has crossed my mind Richard, I am of the opinion that we could be in limbo…. Between Gold standard and MMT….
          It is very hard to make informed decisions when I do not understand it all yet, but yes, why are there no MMT commentators in the political arena???

    • Snedmeister1

      Exactly, Why cut..???!!!
      I felt like i didn’t understand this point of MMT, maybe Osbourne doesn’t…!!!

    • Snedmeister1

      Very good point about other uses for Bonds, eg investment tools for our pension funds etc….
      It seems to also give credibilty to the currency, in that demand is created for the currency the Bonds ae issued in….

  • Stevo

    The bond market is surely still the means by which the market prices government policies and sets interest rates. In a world short of private investment opportunities, the bond market is the only reliable source of income to pension funds and insurance companies. Replace interest bearing bonds with non-interest bearing cash and many financial organisations cease to exist.

    I cannot recommend the book Lords Of Finance sufficiently enough. It details the efforts of the four main central bankers efforts, and ultimate failure. to return to the gold standard after the end of WW1. For me it leads to several ultimate conclsuions;

    1. The central bankers were unable to control the economy.

    2. Attempts at retaining the gold standard resulted in the US stock market bubble and crash of 1929.

    3. Personalities overwhelm the logic of policies.

    4. The Germans never repayed their WW1 reparations.

    • http://overthepeak.com/wordpress/ Mystic

      I nod approvingly at 1. and 3. (ignorance stops me nodding at 2. and 4.)

    • Snedmeister1

      Very good point made about Bonds being used as investment tools for pension funs, maybe that is their primary use now, and to keep demand for a given currency??

  • Gravyten577

    @Richard there was fractional reserve lending with gold. While gold was at $20 an ounce a bank could loan out much more than whatever gold they had in reserves.

    In fact during bank runs money withdrawn from banks would destroy money in the system because dollars in deposits back up several more dollars.

    See this documentary from Milton Friedman. Notice that money was created through accounting which is very similar to digital money today

  • http://pulse.yahoo.com/_TCPWTRMO5N7MB2MGRXCHNM24HY Mark
    • Stevo

      This video is nonsense. The fed Reserve Board wanted to reduced the supply of leverage to the stock market whereas the New York Fed wanted to merely increase the money supply. Freedman is just advocating inflation.

  • Stevo

    Having watched all 21 videos of Chris Martesons crash course, it is simple to come to the conclusion that high grade carbon deposits and mineral deposits on planet Earth are like you and me receiving a free inheritance we never had to work for.

  • Stevo

    Money is just a human conversation.

    • http://overthepeak.com/wordpress/ Mystic

      We know what coal is.
      We know what energy is.
      But money~!? WTF~?

      • Anonymous

        I’m no expert, but in my experience if something is made deliberately complicated its a scam. Given a natural system certain levels of complexity arise. Can money be explained by the laws of the universe or does it all boil down to human emotions and manipulation? I think we will probably only really understand what money was once it has gone away and been replaced by something simpler which we can compare it to. I mean, if money is ultimately based on faith and that faith is lost one has to start all over with something everyone involved can understand, otherwise they won’t trust it.

        PS: Thanks for the video :)

        • http://overthepeak.com/wordpress/ Mystic

          It has not been so much `made deliberately` complicated.
          It has just DEVELOPED into something that IS complicated.

  • Anonymous

    Geez. If this is a real picture of how things actually operate, I can’t stand how obscure it is. There’s something godawful in that alone… for no one that’s supposed to be “in charge” of this stuff is making any of it remotely clear, just the opposite, in fact. And because it’s a humanly constructed system, if it is indeed how things are actually operating, then clearly some people must understand it in order to be operating it in this way… it’s not just happening organically… some folks on the operational level have to be looking at our monetary system in this way and acting accordingly in order to make it a reality.

    So if this is truly the way things are being done, then the way that the “monetary reform” folks are describing things is very different and is apparently not discussing what’s actually happening. (Too bad, for that way of describing things *is* beginning to make a lot of sense to me… and it goes along with how others talk about how things are working… it coincides with all the discussions about the troubles with debt, etc…. and it makes very clear how it would go about resolving the problem if given the chance, how, for example, in Canada, a few decades ago, what they propose has already been a successfully functioning monetary system and on a nation-wide basis … it seems at this point like a kind of “cry in the wilderness” solution, one that is relegated to the hinterlands, yet one that sure is a lot easier to understand, and would entail transparency, etc. for effective implementation. And then, coupled with what Bernard Lietaer has to say about workable (and already operational) complementary systems, it’s all just so much easier for me to *get*). That way of looking at things and that way of wanting the system to actually work (even if it never sees the light of day – sigh) sure seems like a breath of fresh air compared to the way things apparently are now in all their obscurities (if the MMTers have it right).

    But this stuff… it’s supposed to be what’s actually operational now, and yet the economy is discussed in such different terms by so many “official” sources… frankly, all of that just pisses me off more than anything at this point, ;-).

    And what place does conventional expectation play? The usual way things are mostly discussed by “official sources,” etc., are what most people go by in making their investment choices, etc.. And as you’re talking about it, it seems very few professional financial planners work with the MMT description in mind… so how does that impact things overall?

    And even the MMTers that I’ve been reading haven’t been bringing up what the impacts of resource depletion will mean, such as the impact of declining affordable liquid fuels.

    Maybe such real resources are the more accurate means – more accurate means than the old formal “gold standard” – by which our money has been and still is “tied” to something else, afterall; maybe it’s been that way since the rise of the use of coal and onwards…

    Anyway, I’m liking what folks like Bernard Lietaer are discussing as ways for communities to begin resolving some of the employment challenges, especially if things begin to get worse, as they most likely will; specifically, his discussion of the use of complementary currency systems in relation to whatever is happening on the national level…

    http://www.youtube.com/watch?v=nORI8r3JIyw

    (Apparently, even though he brings up Chartilism (sp?) – isn’t that another term for MMT? or am I wrong on that – in his longer talk elsewhere… the way MMT is being discussed here, then he, too, is not understanding it correctly, including the fact that it is in full operation in the US at this time… Ay, this is awfully confusing by how obscure it is, even, apparently, to some folks whose primary interest is monetary systems… )

    Basically, I wish I could get some straight, transparent answers and illustrations from folks we should naturally be able to hold accountable… I mean it’s almost like how various religions describe what God is at this point… But this shouldn’t be so obscure… we should be able to *know* what’s going on with our monetary system…

    (Yeah, my building frustration with this overall subject is showing, isn’t it? ;-))

    Linda G

    • http://overthepeak.com/wordpress/ Mystic

      You say – “……… in fact. And because it’s a humanly constructed system, if it is indeed how things are actually operating, then clearly some people must understand it in order to be operating it in this way.”
      I say – Sorry, but that ain’t necessarily so.

      It is hard to talk about `how the system is`, because as I just said, it strangely is not necessary that anyone understands `all the system` for it to work.
      When Nixon closed the gold window in `71, no one could possibly know what that implied. (I don’t think they do now). People could go on `as if nothing had happened`, and everything seemingly worked as it did before. They could operate in ignorance of the new possibilities (and probably do).

      It is like someone took a `limiter` off the engine in ’71, but no one has pushed the car to the new limits.
      They operate the system (drive the car) like they did before.

      So, when you say, “MMT is in full operation at this time”……..what do you mean~?

      The possibility is there, but it is not being used.

      (I am not qualified to point out the differences between the different `sects` (MMT/Chartalism etc.) of this religion)

      • Anonymous

        See, now is an excellent time to be a stereotypical woman… I think I’m going to take some time and simply cry about all of this, ;-) – a great tension reliever – truly it is…

        As awful as looking at all of this in terms of a “debt-money” system, which is currently in the hands of the private sector (the banks)… my goodness! That’s *so much* easier to understand… along with the proposed solutions (at least to understand, even if the solutions proposed would be currently a far cry from politically possible, etc. at this time)…

        So you’re saying that this could actually be operating in the way that MMTers say it is, yet not even those making it function in that way know that it is? That’s really getting tough to compute, ;-).

        (Oh… yep, that in itself is worth a good cry… ;-))

        And I thought that 5-part lecture by Bernard Lietaer was getting me a lot closer to getting a better handle on our monetary system. (Man, I like what he said a lot better too – again, at least it was understandable; even the *whys* of the “blind spots” were understandable…)

        But this…

        Linda G

        • Anonymous

          I guess mainly what gets me now is that if this monetary system is already in place, then it already has the basics of what the “monetary reform” folks are striving for… money can be created and put directly to use for the public good… but it can’t really effectively do that at this point… what an awful trap – to actually have the means already in place for what’s needed, yet because the system is so obscure to the public, we don’t even have an option of supporting it… and just the opposite is happening, in fact, which will likely render the real potential use of it even more ineffective.

          I know that at least one aspect of MMT proposals is not actually in place… the “full employment” aspect… which is a big factor within MMT for price stability as well as being an employment backstop for the nation. That isn’t possible at this point either…

          So even though some aspects may actually been in use now, I certainly wouldn’t say it’s fully operational at this time…

          And it doesn’t help me feel much more secure with some of the challenges (especially some of the “over the peak” challenges) it seems we’ve got coming to meet us soon…

          Linda G

          • http://overthepeak.com/wordpress/ Mystic

            If Ireland (for example) tried to leave the EU and go all MMT it would be a disaster~!
            But if the US said it was going to go MMT (no one to pay taxes and Treasuries issued `for fun`) and Washington said it had `A Big Plan` to change all infrastructure to `non carbon blah blah`……..they might get away with it (money wise).

            (but ultimately, you can print energy~!)

            • Anonymous

              oh, it’s late for me… I can’t help but giggle at your statement “but ultimately, you *can* print energy!” I know, I know, you meant, “you can’t…” But hey, I’m going to take the giggles when I can find them at this point, ;-).

              Ah, now I had better get to bed, at least for a little while…

        • http://overthepeak.com/wordpress/ Mystic

          I do NOT want to put my self forward as someone who understands this (and know that I will be trapped in the firing line of those that think MMT is total tosh and the people who say they understand it)………..but -
          They talk of `vertical` money creation (by the central bank).
          And `horizontal` money creation (by the banks).
          Vertical is from nothing and can `hang out there forever`.
          Horizontal is from loans, so will be paid back and therefore `zeros out` (is forever disappearing itself).

          So, it is only the Central Bank that plays the MMT game.
          It is also important to `get` that the Central Bank is a branch of Government (many get stuck on the `Private Fed` shit)

          And once more…….Yes, it is possible to run a system and not understand either how it works or what its limits are (your mobile phone for example~?). (In fact, I would say it is normal)

          • Anonymous

            Yes, those do seem to be a couple of differences to note… the two kinds of money creation (the bank one, though, there is that conundrum of interest… which goes beyond what is initially created… which does seem to indicate a kind of system that continues to feed on itself… but then, perhaps that’s not taking into account the other way that money is created and entered into the overall system… a lot of folks have that concern… but it’s not something I have much of a grasp of yet… so… )

            And yes, there is that way of seeing the Central Bank.

            I’m not sure about that mobile phone example, though, ;-). I mean, I at least know what it is I intend to do with it… I know what it’s for… If I do this, then I know to look for that to happen… that kind of thing… it starts getting wierd when I use something with a pretty good idea of what it’s for, or at least what I think it’s for… but something very different actually happens. (yeah, this part of it is something I’ll continue to “muddle through” with for a while… it’s not registering at this point… it’s awfully late/early here in Texas for me… no big deal, ;-))

            Still, that “debt-money system” way of seeing things… that’s so appealing because it can be stated so clearly (such as in those video interviews), and their striving to make it publically acceptable, to be put in place by the public demanding it to be so, etc. So nice to think of all that transparency, etc. But it’s clearly not the same thing as the MMT framework… (I didn’t have a clear idea of some of the distinct differences, but there really are some critical differences I can see now… I need to be careful with this, too, however, for there’s a lot more I’d like to learn about that too… for example, there’s that Japanese professor working on his modelling, the person Joe interviewed, all of which seemed very promising… not sure exactly what his work points to in terms of these systems just yet )… and, as described, much of the MMT framework is already in place and not awaiting the OK, or any kind of mandate, to make it so… although without that, it does seem to be quite hampered in what’s possible with it, however.

            And yes, the obscurity of it all really does drive me nuts. My guess is that it wouldn’t be so hard to understand if it didn’t have all of those other voices about what’s what with our monetary system standing in front of it, so to speak…

            Oh well…

            Linda G

          • Anonymous

            The following description from Warren Mosler distinguishing between that vertical/horizontal “money creation” that occurs at the govt. level vs. the private banking level comes by way of Pragmatic Capitalism http://pragcap.com/mmt-101

            I’ve been reading from Warren Mosler’s book, “Seven Deadly Frauds of Economic Policy,” which really has been a big help to me in better understanding much of the “rest” of MMT’s description of how our monetary system actually works, but this part of it, probably the crux of it, and, at least to me, the “toughest nut to crack,” was still foggy for me. It wasn’t described thoroughly in the book, not as thoroughly as it is here. So the following is a further help to me.

            But, boy, it also helps me to understand how folks, such as those working so hard on “monetary reform,” would have some real “blindspots” regarding this aspect of how MMT describes how our system *actually* works. I mean you have to get your head around the fact that there are “accounting identities” such as “liabilities,” etc. used between Treasury and The Fed, but that that’s “fictional,” that it’s not “true debt” between them, as it is within the rest of the banking system and the public… Whew!

            Yeah, Warren Mosler, I think, is a real help in all of this, as his intention in running as an independent for office, now even as an independent candidate for President, is precisely to bring this stuff to light, to help in allowing the public to better understand and discuss how the system actually works, so that we can then actually much better consider the options that such a system allows… which we can’t really even consider applying until we better understand the system… for at this point, not only the general public, but even policy makers themselves have little understanding of that actual way in which the system operates (right here and now). And policy makers do best when the policies they apply are something that at least a portion of the public asks them to apply.

            Anyway, I’ll be keeping the following around (and no doubt rereading it, along with his little book, several times) as a reference tool for better understanding MMT (and better understanding the “blindspots” of those who don’t yet see that this is how our system actually works)…

            “MMT is a description of the way in which a modern government creates, destroys and utilizes its monetary unit. The name MMT is a bit of a misnomer as it is really just a way of describing how modern monetary systems work and not necessarily a theory. The theory is all in its application. Some believe government should be highly involved in the economy and others believe it should be involved to a lesser extent. Learning MMT can take some significant time as it turns most of modern economics on its head, but I think that understanding MMT is vital in comprehending how the modern monetary system works and is particularly important at this juncture as many of its most controversial elements have been proven correct during the most recent recession.

            MMT is based on a horizontal and vertical view of money. This is important in differentiating between the public and private sector and how each impacts the money supply. The following comes courtesy of Warren Mosler:

            ‘When the government “spends,” the Treasury disburses the funds by crediting bank account’s. Settlement involves transferring reserves from the Treasury’s account at the Fed to the recipient’s bank. The resulting increase in the recipient’s deposit account has no corresponding liability in the banking system. This creation is called “vertical,” or exogenous to the banking system. Since there is no corresponding liability in the banking system, this results in an increase of non-government net financial assets.

            When banks create money by extending credit (loans create deposits), this occurs completely within the banking system and results in a liability for the bank (the deposit) and a corresponding asset (the loan). The customer has an asset (the deposit) and a corresponding liability (the loan). This nets to zero.

            Thus vertical money created by the government affects net financial assets and horizontal money created by banks does not, although its use in the economy as productive capital can increase real assets.

            The mistake that is usually made is comparing what happens in the horizontal system with what happens at the level of government accounting. At the horizontal level, debt is the basis for horizontal money creation. Therefore, it is often assumed that debt must be the basis for the creation of money by government currency issuance. This is not the case.

            Reserve accounting uses the standard accounting identities, but the meaning of “liability” is not “debt.” The husband-wife analogy for Central Bank-Treasury accounting relationships is apt. Since a husband and wife are responsible for each others debts, neither can be indebted to the other. That is to say, reserve accounting is a fiction that does not represent real relationships, such as exist between a creditor and debtor in the horizontal system.

            Moreover, government debt is not true debt either. At the macro level, the reserves that are transferred to banks through government disbursement are used to buy Treasury’s. That is, when a Treasury is bought, this involves a transfer of reserves from the buyer’s bank’s reserve account at the Fed to the government’s account (consolidating Central Bank and Treasury as “government”).

            When the Treasury’s are sold or redeemed, the reserves that were “stored” at interest are simply switched back, creating a deposit again. It’s pretty much the same as buying and redeeming a CD. It’s just a switch from demand to time back to demand in a bank account, and a switch between reserves and securities at the government level. That is to say, the government doesn’t have to draw on revenue, borrow, or sell assets to cover its “debt,” as households and firms do. It’s just a matter of crediting and debiting accounts on the (consolidated) government books, even though it may appear that there is a financial relationship occurring between the CB and Treasury due to the accounting. However, it’s just a fiction.

            Therefore, the key to understanding Modern Monetary Theory is this vertical-horizontal relationship. When one understands this, then Abba Lerner’s principles of functional finance become obvious. (1) Currency issuance through government disbursement is used to increase non-government net financial assets, and taxation withdraws net financial assets from non-government. (2) Debt issuance by the Treasury is a monetary operation for draining reserves to permit the Central Bank to hit its target rate.

            These principles are then applied to Y+C+I+G+NX to balance nominal aggregate demand with real output capacity in order to achieve full capacity utilization, hence, full employment, along with price stability. This is based not on theory requiring assumptions but on operational reality that can be represented using data, standard accounting identities, and stock-flow consistent macro models.’”

            • Anonymous

              And I must say that his short book works hard to put things in layman’s terms, not assuming any background in economics, finance, etc… so much about the book is written in a way that’s easier to understand for layfolks like me than the above description, which assumes a bit more background knowledge. I just wish the book delved further into the difference between verticle and horizontal “money creation” as the above is intending to do, for if in the book, Mosler would be working to further break it down for folks like me.

              Still, the above is at least a start for me, and with the “rest” that’s described in his book also now in mind for me, even the description above “clicks” better for me than it would have had I not read the book…

              Linda G

        • Snedmeister1

          Oh how I smiled reading this…. Trust me Linda, your mind will be going in circles from now on…. Just when you think you have it sussed, another question springs to mind….
          Just remember one comforting thought ( or not so comforting, depending on perspective ), given to us by MM, it seems nobody in charge fully understands MMT either, you are not alone…!! :)

          • Anonymous

            (lots of chuckling… and crying, ;-))

  • Sturch

    at 9:10 minutes you said about the monetary system: “you and I certainly do not understand it and if we are going to be making big bets on it I think we are being very foolish”.

    I agree but unfortunately anything that is we do is a decision. Whether it is to hold cash, buy gold, buy shares, buy bonds, take on debt or spend ourselves into oblivion are all decisions. So by your definition anything we do is to going to be foolish.

    • http://overthepeak.com/wordpress/ Mystic

      Yes…….that is about normal (the way I look at things).

  • timemastro

    You keep saying that there is no hope because of peak oil and that there is no technology out there that can replace fossil fuels. I will give you one example why this will not happen. Firstly yes, cheap oil is running out but that means through the human mind we will be get the oil which is not cheap such as the Canadian tar sand and other examples. Another coming revolution in the couple of years is solar energy.

    This as of now useless. But if you look at how this technology is progressing its gaining real momentum. I will till you how. In the 1990′s when the human gene project starts and half way through the time line only 1% of the gene are matched but with only 10 years the whole human gene map was created which will lead to a new industrial revolution which most people wont see coming through biotechnology

    . Any ways this is what will happen is and happing to solar power. It does not have limitation. The technology has limitation. But the technology is racing away. you know Moore’s law, that states that computers will double their processing power every 18 months, this is a very powerful exponent. The analogy is if i gave you a cent on the first of the month, then 2 the next, then 4 the next, by the end of the month you would have over 10 million dollars, solar panels have have their own equivalent, and we’re only 7 “doublings” away from them meeting 100% of our needs, and they double their performance every 2 years or so. Meaning solar power will meet 100% of our energy needs by about 2025 at the least , forgetting the doubling we are facing in wind and other free energy technologies we are facing? Dont believe me?

    You will when you understand that are science maths and all our knowledge is DOUBLING every 2 years. Meaning what we have learnt so far ever in the human race will double in 2012. U simply dont know bright the future is. Unless we destroy our selves through war or military or economic war type conflicts.

    • http://overthepeak.com/wordpress/ Mystic

      2+2=4, equals good science.

      “science maths and all our knowledge is DOUBLING every 2 years” = “solar power will meet 100% of our energy needs by about 2025 at the least”, equals bollocks.

      • timemastro

        Why is bollocks? Do you honestly believe that there isn’t going to be free energy source in the next 15-20 years. Trust me mystic you may have some grasp of economics ( i dont) but i do know what i am talking about here. Nanotechnology combined with solar energy to convert the suns energy WILL fill our needs of the future. Cheers up man. Read up a bit.

    • Snedmeister1

      Your point about peak “cheap” oil, not necessarily peak oil, is something I was talking about yesterday on the “Peak oil” forum….
      Although I agree in principle, I am not sure if I just want it to be true, or if the figures about the amount of oil in the tar sands are correct…
      People will always believe the more convenient theory, even if deep down we know it’s a lie….
      Why we do this I do not know..??

      • http://overthepeak.com/wordpress/ Mystic

        If you have been messing with strange people on Peak Oil forums…….I don’t need to tell you that anyone who talks of `the amount of oil in the tar sands` is a bit short of the relevant knowledge.

        • Snedmeister1

          Phew that was close…. I almost went over to the dark side…. And wrote a letter to Santa Clause while I was there…!!!

          • http://overthepeak.com/wordpress/ Mystic

            I think the most rational bit of knowledge to get a good handle on is – Energy Return on Energy Invested.
            Armed with that, it is safe to go into dark corners of the interwebs.

            • Snedmeister1

              I see where your going with this, eventually, cost will not be the issue….
              Our problem will be the amount of energy required to get oil, ie, using far more energy in the process than we get out….
              I admit, I had over looked this point, as obvious as it seems now….
              I assume you also mean that although that much proven oil reserves exists in tar sands, it will never be viable to retrieve it all…??

              • http://overthepeak.com/wordpress/ Mystic

                Getting usable oil from tar sands is a horrible environmental mess.
                And yes, have a look at the process and how much energy goes into it~!

              • Anonymous

                …further “flow rates” are important. There may be huge amts. of potential synthetically derived “liquid fuels” we can get from the tar sands, etc overall…. but along with several other key factors, there is the factor of how much can we convert *at any one time*… and there would have to be quite a “scaling up” indeed from the “tar sands” of the world to make up for the high flow rates of conventionally extracted oil worldwide as those supplies decline.

                Linda G

                • Snedmeister1

                  Nothing like a good dose or “reality” to chear you up….:)
                  We seem to be facing the same problems with all our sources of energy now, ie how to efficiently capture it, and use it….
                  This does not even attempt to address the problems of overpopulation etc…. We all know, that the only limit to our population growth will be limits to energy ie Food, Oil etc etc….

        • timemastro

          Not true. What makes the mystic so much of a expert and prove to me that there arent technologies in place to get these tar sands and turn them into good oil. Prove that.

          • http://overthepeak.com/wordpress/ Mystic

            Why would they bother to “get these tar sands and turn them into good oil” when
            (according to you) –
            “solar power will meet 100% of our energy needs by about 2025″
            and – “nanotechnology combined with solar energy to convert the suns energy WILL fill our needs of the future” and – “there is going to be a “free energy source in the next 15-20 years”~!?

  • Rudm316

    You really need to do a video on wtf is going in France Mr. Mystic..a military take over; no gas stations open..are these just rumors?

    • http://overthepeak.com/wordpress/ Mystic

      On Tuesday, when I went to the big city, there was no fuel to be had anywhere.

      I have just been shopping in the local town today and there is `petrol` but no `diesel`.

      No worries.

      • Richard

        I’ve got just enough petrol to get me to Calais next week, so I’m not venturing out until I know for sure I can get more petrol. Not sure what the chap means by “military takeover” – unless it’s the parrot movement spinning it all out of proportion over in the US.

  • noncents

    One duty of government is to encourage persons to buy and possess as inhabitants in communities, which creates a great strength, honor and advantage, to the whole land of which can be taxed to balance the symbiotic dependence upon the aggregate system of order. To be a resident within this matrix and territory within this defined boundary of my government who protects me, requires subverting my will to the governments power and control over me.

    • http://overthepeak.com/wordpress/ Mystic

      I have no idea what you are trying to say~!?

      • noncents

        Stump the Mystic … funny that.

      • noncents

        For the sake of clarity, you are 100% correct Nick; there is nonsense verbiage contained within my post. To try and comprehend my post is like a dissection of MMT. Either MMT is real and has a defined set of rules, or it is bollocks. TPC seems to agree MMT is a not a Theory. And without proofs, is not a science; then is, only suggestive economic thought. This is only my opinion .

        • http://overthepeak.com/wordpress/ Mystic

          No economics is a science (not a `real` science).

          `Set of rules` falls under the same problem.

          (there is still a chance it’s bollocks though)

  • timemastro

    175-315 Billion barrels of oil are recoverable at $15 a barrel in the Oil Sands of Alberta, Canada. With a remaining potential of 1.7-2.5 Trillion barrels using advanced recovery techniques. Who knows what they’ll discover tomorrow, but we know today, that in Canada’s oil sands alone, the supplies will last over 100 years.

  • timemastro

    HE BOTTOMLESS WELL: Are We Running out of Energy?

    http://www.youtube.com/watch?v=T0ulWxBRqHc

    Many petroleum experts predict that world oil production will peak by the end of the decade. Will the United States soon be entering a period of worsening energy shortages and soaring energy costs? And, if so, what should the government to do about it? Or will the ever-improving technological efficiencies of the free market provide access to virtually endless sources of new energy? Peter Robinson speaks with Peter Huber and Jonathan Koomey.

  • timemastro

    http://www.moneyweek.com/investments/commodities/are-canadian-tar-sands-the-answer-to-our-oil-needs.aspx

    This article states it its uneconomical etc. But i still to my point ,we have challenges yes, but not something we cant overcome. We arent running out of oil We are running out of cheap oil which is easy to deliver. But the planets has huge hydrocarbon reserves, we need TECHNOLOGY TO EXTRACT THEM. AND YES we will find a way to do it. We will not die as a civilization as mr mystic has suggested.

  • Anonymous

    For what it’s worth, here’s one person, Warren Mosler, running for Senate in the U.S., who explicitly puts forward MMT as the primary aspect of his platform (interesting):

    http://moslerforsenate.com/?page_id=22

    And here are some videos of his talking about it (see below, in the attachments, for direct access to the videos):

    http://www.youtube.com/user/MoslerEconomics#p/u/4/wH-lnn1mICA (part 4)

    http://www.youtube.com/user/MoslerEconomics#p/u/3/-0p_5g_EKX0 (part 3)

    http://www.youtube.com/user/MoslerEconomics#p/u/5/fA7U42FGtwk (part 2)

    http://www.youtube.com/user/MoslerEconomics#p/u/7/tCVgBTC2ySE (part 1)

    Linda G

    • Anonymous

      Hmmm. That series of videos didn’t show up in an “attachment section” – at least not right away.

      Oh, well… those links will get you to his talk from youtube (in 4 parts)

      Linda G

      • Anonymous

        just experimenting with a different set of links within youtube to see if these show up in the attachment section (not directly from his youtube channel):

        http://www.youtube.com/watch?v=wH-lnn1mICA (part 4)

        http://www.youtube.com/watch?v=-0p_5g_EKX0 (part 3)

        http://www.youtube.com/watch?v=fA7U42FGtwk (part 2)

        http://www.youtube.com/watch?v=tCVgBTC2ySE (part 1)

        Linda G

        • Anonymous

          Ah, and I’ve now found a channel with some audio presentations (w/some illustrations) in which Mosler describes single topics within the MMT framework, such as employment, how taxes work, etc. each in pretty simple terms (such that someone like me might be able to understand them, ;-)). This is part of what is apparently an independent run for President, 2012.

          Anyway, I found this series of several short, focused audio interviews quite helpful… (again, for what it’s worth…)

          http://www.youtube.com/user/DKPA1967#p/u/4/UFH-Md4XsKA

          • Anonymous

            Okay, I think I might have a shot at better understanding MMT through the work of this guy, Warren Mosler. I’m going to give his book a try (which I’ve found as a pdf file online). He’s been the most helpful to me so far in helping me to understand more about MMT, and so, I’m hoping getting into something more comprehensive by him will be a further help. His book is entitled *Seven Deadly Frauds of Economic Policy*, which sets out to describe 7 key “myths,” which continue to act as the basis by which the U.S. runs its economic policies…

            http://moslereconomics.com/2009/12/10/7-deadly-innocent-frauds/

            If anybody can help me to get a better handle on the MMT perspective, I think it might be this guy. A portion of the forward to his book describes his work in this way:

            “Many economists value complexity for its own sake. A
            glance at any modern economics journal confirms this. A
            truly incomprehensible argument can bring a lot of prestige!
            The problem, though, is that when an argument appears
            incomprehensible, that often means the person making
            it doesn’t understand it either. (I was just at a meeting
            of European central bankers and international monetary
            economists in Helsinki, Finland. After one paper, I asked a
            very distinguished economist from Sweden how many people
            he thought had followed the math. He said, “Zero.”) Warren’s
            gift is transparent lucidity. He thinks things through as simply
            as he can. (And he puts a lot of work into this – true simplicity
            is hard.) He favors the familiar metaphor, and the homely
            example. You can explain his reasoning to most children (at
            least to mine), to any college student and to any player in
            the financial markets. Only economists, with their powerful
            loyalty to fixed ideas, have trouble with it. Politicians, of
            course, often do understand, but rarely feel free to speak their
            own minds.”

            Well, with that, I figure I’ll give it a shot. It’s a fairly short read (63 pp in this pdf file – 2 book pages per pdf page, so it would be 126 pp in book form).

            Linda G

            • Anonymous

              Yep. I’m on page 17 of the pdf mentioned above, and I’m actually beginning to get a little excited, ;-), like I’m beginning to learn, really learn about this. This guy *is* good at explaining this – at least that’s my experience so far… I’m starting to much better understand the MMT position regarding how a govt. using its own currency will always be solvent, will always be able to pay for what it needs to pay for (e.g., social security, etc.)… That much is becoming resolved for me… even while it’s also made clear that that does *NOT* mean that the govt. can spend all it wants without consequence (but that’s to be further discussed as we get further along). But I really like how he’s explained things so far, which does indeed make the following conclusion clear to me (but it’s how he gets there that’s beginning to “click” for me):

              The fact that government spending is in no case
              operationally constrained by revenues means there is no
              “solvency risk.” In other words, the federal government
              can always make any and all payments in its own
              currency, no matter how large the deficit is, or how few
              taxes it collects. [This has been well explained by page 17, ;-).]

              This, however, does NOT mean that the government
              can spend all it wants without consequence. Over-spending
              can drive up prices and fuel inflation.
              [At this point, p. 17, this is only a statement, yet to be discussed.]

              I’m actually enjoying reading this (can you tell? ;-))…

              And yep, at least from my experience so far, I would highly recommend it to others who want to at least get a better idea of what this MMT stuff is about…

              Linda G.

  • Jijikos

    Inflation is multi-dimensional. The cause of China’s inflation is demand led.

    1864 Abraham Lincoln (Politician) “The great advantage of citizens being creditors as well as debtors, with relation to the public debt, is obvious. Men can readily perceive that they cannot be much oppressed by a debt which they owe to themselves.” true, false, reality ?

    Why isn’t the cost of Gov(interest expenditures/taxes) a part of the CPI ? the answer lies in “all things are avoidable except death and taxes”.
    The solution is determined solely by the definition of the problem, or point of view.

  • Bigcollapso

    I think that you are making the monetary system out to be more than it is. What do you find to be so complicated about it? You are looking for logical answers in a system that is primarily emotional and faith based. The failure point of the entire system was crossed long ago. We have abused the system to the point that it cannot recover and we are waiting for the end of the faith, and the emotion to swing against it. As we wait for the inevitable fall that comes to all exponential/ponzi systems some are misled that we have control. We don’t at this point. Really we are reduced to waiting, and considering what type of government will follow.

    • http://twitter.com/looseal22 LB

      Are we waiting for a new type of government or a new type of accounting system?

  • Bigcollapso

    I get frustrated when I try to explain why the economy is collapsing and people start in with money talk. I try to explain that money has nothing to do with it, and is merely an accounting tool. Money has a very dangerous property of being able to connect with primitive survival mode areas of the human brain. This is a very interesting situation because money did not exist when this part of the brain evolved. That mean that money is connecting with some primitive lower brain survival functionality. This part of our brain is not logical at all. So if you look at these, you have a situation where people have created a hugely complex technical situation that people try to handle with parts of the brain that cannot handle technical functions.
    Have the best day you can.
    BC

    • http://overthepeak.com/wordpress/ Mystic

      I think that “nothing to do with it” is a bit strong (and wrong).
      If there was plenty of energy, there would still be a money problem.

      Basing it all on energy may be right (but it may also be wrong).

      There is a money crisis and an energy crisis.
      Solving the money crisis (if it was possible (and I don’t think it is)) would not solve the energy crisis.
      Solving the energy crisis (if it was possible (and I don’t think it is)) would not solve the money crisis.

      We will see the results more in money terms than energy terms, so we may as well be open to talk about both.

      Eh~!?

  • http://pulse.yahoo.com/_TCPWTRMO5N7MB2MGRXCHNM24HY Mark

    Milton Freedman is the last kind of guy who would advocate inflation, he is like the Adam Smith of the 20th century.

    Also noticed that other banks refused to make loans to that bank I’m pretty sure it was part of a conspiracy to cause the Great Depression

  • http://pulse.yahoo.com/_TCPWTRMO5N7MB2MGRXCHNM24HY Mark

    The United States has put tariffs on ethanol imports from places like Brazil, and Brazil is actually upset about this. This means the people who control the United States are deliberately making energy more scarce so they can profit from it.

    Any energy or monetary crisis that occurs will be done on purpose.

    And there definitely is no world food shortage because food has been imported into countries at prices below the cost of production, where these very same countries are perfectly capable of feeding their own people and exporting. Haiti was food self sufficient and Zimbabwe was a food exporter under Mugabe until they had free and cheap food dumped on them, people became unemployed and thus starved despite cheap food.

    Look at Mexico. With corn dumped into Mexico at prices below the cost of production people become unemployed and Mexicans go north to find work. And then elite in the United States can use this as an issue to their own advantage even though the whole situation was created by the elite with their corn subsidies in the first place.

    This is all on purpose man

  • http://pulse.yahoo.com/_TCPWTRMO5N7MB2MGRXCHNM24HY Mark

    For example for a baker if there is less bread on the market the price of bread goes

    Adam Smith:

    http://books.google.com/books?id=70759KjSs0sC&pg=PA253#v=onepage&q&f=false

    “It is thus that the single advantage which the monopoly procures to a single order of men, is in many different ways hurtful to the general interest of the country.

    To found a great empire for the sole purpose of raising up a people of customers, may at first sight, ‘appear a project fit only for a nation of shopkeepers. It is, however, a project altogether unfit for a nation of shopkeepers, but extremely fit for a nation whose government is influenced by shopkeepers”

    http://books.google.com/books?id=70759KjSs0sC&pg=PA274#v=onepage&q&f=false

    “It cannot be very difficult to determine who have been the contrivers of the whole mercantile system; not the consumers, we may believe, whose interest has been entirely neglected; but the producers, whose interest has been so carefully attended to; and among the latter class, our merchants and manufactuers have been by far the principal architects. In the mercantile regulations which have been taken notice of in this chapter, the interest of our manufacturers has been most peculiarly attended to; and the interest, no so much of the consumers, as that of some other sets of producers, has been sacrificed to it.”

  • http://pulse.yahoo.com/_TCPWTRMO5N7MB2MGRXCHNM24HY Mark

    @Stevo [Moderator] Did you watch part one through three of the video? Do you really think he was advocating inflation???