Money and Banking Lec2-2

I will be writing the odd blog post over the next month commenting on highlights from Perry Mehrling’s MOOC on Money and Banking - online from INET .

Today it’s a comment on when Mehrling starts out by alerting his students that he is going to talk about the ECB “as if” it were a private entity, and then only in later lectures talk about money as a creation of the state.

I thought this is completely the wrong emphasis. The euro is an MMT system, but very weirdly structured so as to look and function like a private or endogenous currency system. But that is one of the veils of money.

It is easy to make a state currency system (MMT) look like a private currency.

Just listen to all the lunatics who claim the US FED is a private bank! They obviously all believe the US dollar is created by the FED and not by Congress. They are complete nutters. But it is easy to forgive them, because Congress also acts like the FED is a hands-off private entity. So it is a little unfair to blame the nutters for their warped views. Those in power controlling the USA MMT system share a lot of those warped views.

((What is weird here is that in the USA at least, some of the EU, the nutters also tend to hate government, and yet are following the government narrative. However, this weirdness can be explained: those same nutters are often the ones getting elected into government. Yeah. People who hate government are running governments. And why not? From their perspective, the best way to destroy something truly well is often from the inside. This is why we gotta stop electing them.))

If enough people playing a baseball game think it is cricket, what you will observe is a cricket game played with catching mitts and awkwardly rounded bats. You see the duality? What does not change are the field, the mitts, the ball, and the bats, but what is weird is how people use that equipment, the result is a terrible game of cricket, or a worse game of baseball. (One of those is analogous to the USA, the other to the EU, perhaps? I am not sure which is more appropriate a mapping.)

But how is Mehrling any different to the nutters?

I think Mehrling understands the basics of MMT, but if you do, then I think the moral obligation is to talk about the true account of currency monopoly first, which means the state theory of money has to go first, because it is primary. Pedagogically order matters.

Aside: You can tell bad teachers from the good ones by the order in which they teach topics. I’ve had this in physics. The best way to teach quantum mechanics is to tell the truth first, before the mathematical formalism, which is that:

We have no clue what the ontological basis for quantum mechanics is, so everything to follow is pure descriptive formalism. The wavefunction is not ontology. So don’t try to construct an ontology based on the properties of the wavefunction.

((An even better physics teacher might add: although we do not think the wavefunction is ontology, it could be ontology. The point is we do not know, so do not second guess nature. It is ok to conjecture an ontology then test it.))

However, the ECB certainly does function a lot like a private currency endogenous money system, but that is only because that is the way the governments seem to wish it to be. And here by “the governments” we really mean those in power. And those in power in Europe are wannabe oligarchs, so yeah, they are highly prone to abusing the state currency system and treating it like a private currency system. This is a major source of the mess in euroland.

Hierarchy of Money

Here is the relvant bit from the lecture . On this I commented:

All well and good to “treat” the ECB as a “bankers bank” if indeed that is what it is, but it is not, it is a creation of the EU, so is a creation of government(s) the problem being that is a plural, so only the more powerful members of the EU (Germany, France, Belgium) really have what is akin to monopoly currency issuing capacity. Contrast with the USA where Congress has all the monopoly, since they can fire the FED Board with a vote. The nuance that should be put up-front is that these governments are de facto owned by the bankers and oligarchs, through distortion of democracy. So legalistically Mehrling is wrong to claim the central banks are private institutions, but functionally he is kind of right, but only because the demos keep electing neoliberal governments who actively want to be beholden to private oligarch interests (most neolib politicians aspire to be members of the oligarchy).

OK.

But the fact the monetary system gets abused in several ways makes Mehrling’s point about the hierarchy of financial instruments a reality, and a seriously big f-ing problem.

For social stability we need like things and production equivalences to remain rough equivalences, as in trade parity principles. The predatory financial speculators and merchants of financial ponzi schemes, tariffs, and other banking corruptions, mess this up.

One nation’s tariffs become another’s subsidies. You cannot expect a people who get squeezed by unfair prices to not fight back, and if they are lucky their government will fight back for them.

I guess to be fair to Mehrling, if the aim is to learn how to think like a central banker, then he has a fair point in leading with the ECB as “a bankers bank.” What I am saying is why the F would any student want to learn how to think like a central banker first? First is a bias.

So first you want students to think like expertly informed workers, who understand the (MMT) system, and understand the abuse of it. Then later it is fine to teach them how central bankers view the system, and why the central bankers are wrong.

Credit is not money?

About 2 minutes into the lecture segment Mehrling seems to take pains to claim “Money is not credit.”

Here he is just plain wrong, at least in language framing.

He starts with one view of his hierarchy of money: with “gold is the ultimate money”. Which is cringe. Gold has never been money. A gold standard is not a regime where gold is money, it is a regime where temporarily (as long as trust in gold supply lasts) a government or other currency issuer promises to redeem for gold. When the gold runs out (or is known to be running out) they always get off the gold standard until some later time when gold reserves are grabbed back. It is a charade. No one ever uses the gold for purchasing, it is just a place-holder, just like grain weights of wheat, corn or barley were used in ancient times, they are just placeholders for the currency unit. People (who are not fetishists) do not want or need gold, they want the credits. They need to eat, so they want bread, not gold. The metal form of the currency is irrelevant.

All money is an I.O.U of the issuer. So all money is someone’s credit (whoever receives the IOU) and all money is equally someone’s debt (the debt of the issuer). But you might think I am being pedantic?

It was almost too cringe to listen to the rest of this lecture segment. Mehrling claims money is how the credit is repaid. True, but that just means money is the credit. Because in a single currency system all credits and debits are in the same units. It is all the same money form.

What Mehrling is getting at is a subtler point, which is that when you have positive digits in your bank account, or coins or notes in your pocket, then these are unique IOU’s, because they are the only IOU’s on Earth that you can redeem for tax liability extinction. That is why state money seems different to bank credit, but if they are denominated in the same units then there is no difference, both forms are tax credits, operationally and legally. The difference is in the process of how you get them into your bank account, or wallet.

But when the government says by fiat that their tax credit redeems for gold, they are not thereby making the gold the money. They are making gold the buffer stock. I do not think Mehrling understands this, but it is a critical thing to understand.

What else Mehrling really means is that commercial bank credit (endogenous money) is not the same as state currency (exogenous money).

This is in agreement with MMT, and in agreement with all legal and operational reality in most nations, outside those who use a foreign currency as their tax credits.

The difference of course is stark, so I am not being pedantic. There are painful realities to taking on bank debt. You get the credit initially, along with signing an explicit or one-time (credit card) agreement to repay. Then you spend, or why else use a credit card? So your credit gets moved into someone else’s bank account, they are now in credit to the bank, and you are in debt, equally, at least until the interest charges accrue.

But when the interest charges accrue the bank gains more credit upon you, and you gain more in debt, dollar for dollar. So sure enough, endogenously, all credit is debt.

However, it holds exogenous as well, but in an entirely different way, with profoundly different consequences, and this is the MMT account of state currency. The state issues their currency by fiat, not by credit. You do not really need to pay it back. However, someone has to pay some fraction of it back, due to imposed tax liabilities. But these are generalized arrangements, and can be arranged so that the poorest people need pay no tax return. That is the difference.

Whether you are poor or rich, if you receive bank debt you must repay, or lose your house, or file for bankruptcy. But if you receive government currency you do not have to repay — so, for instance, if you are unfortunately poor then someone else will have to pay some fraction of the state’s currency back to the state. The need to repay the government’s currency is thus not because the receiver (a public sector worker, or welfare beneficiary, or contractor) has taken upon a debt burden, in fact it is the opposite, the government has the debt burden.

It is only society as a whole that has the tax liability burden, and that is by design, so that, in principle, the operation of the fiat currency can work without the poorest shouldering the burden. Since taxation is what drives the demand for the state currency someone has to have the tax liability imposed upon them, and so more justly that should be those who accumulate the most, by failing to spend and circulate their income, they aught to bear most of the tax return burden — if we have a well designed system.

But once bank credit goes into someone else’s wallet, they cannot distinguish it from government currency, because it is the same unit. A kilogram is a kilogram whether it is a chicken being weighed or a brick. It is only macroeconomically that the distinction between the issuing operations gets fully noticed: in the ratio of private debt to government issue (or the ratio of private debt to GDP).

If private debt is too much higher than government fiat issue, and is growing faster, then we have a severe recessionary bias, and totally needlessly.

Also — and maybe this is something Mehrling gets wrong later on (I am not yet sure) — the bank credit money is only as in demand as the government fiat currency, since the government licences the banks, and the bank money to any creditors is equivalent to government issue, since this currency unit is the same unit.

When I say, “as in demand as” I mean generally, in the macro. Obviously people would prefer being given the currency for selling goods or their labour time rather than having to take the bank credit themselves. So it is not the bank credit that is just as much in demand, it is the currency, freely floating, that is in demand. Once you get a tax credit you don’t care where it came from. Unless you are a macroeconomist that is, then you do care. Steve Keen’s Minksy models show you why you should care. Bank credit sources produce instability, government issue does not.

However, when a chap like Mehrling comes along and says credit is not money he muddies the waters. It might even be poisoning the well. Because if you see “money” as a standalone “thing” that is no other entity’s obligation or debt, then you are both crazy and privileging people who can “mine” that stuff out of the ground or on a computer or pirate the stuff.

Partly this is semantics, but in a society the semantics are incredibly important, and if we all have a common misunderstanding that “money” equals “some scarce stuff that everyone just agrees can settle payments” then you are down the cryptocurrency dead-end road, allowing all sorts of scams and frauds. Whereas if you take the MMT semantics, that all money is an IOU of the issuer — a promise to redeem — then you have at least the possibility of a just society in the payments layer. the possibility, because justice still needs to be fought for and protected, and MMT is only an intellectual weapon in that on-going spiritual war or jihad.

Why I say the semantics matters is because it makes a difference. You can easily pirate gold or crytocurrency (the latter is called cracking (not hacking) or a software back-door). But you cannot pirate records on a secured public ledger, at least not very easily, you have to own the ledger. Private bank deposit accounts are extremely secure in most nations. To the extent they are insecure they become pirate-able. People are tight-assed about their bank accounts, and will soon let the police or serious fraud office know if their account gets tampered with. To the extent bankers are at bare minimum trusted at least not to fiddle too much with the numbers in your bank account then the banking system prevents piracy. History shows empirically it works. It just works. Except when the thieves own the banks. 2008 GFC style. (Read William Black’s book, 'The Best Way to Rob a Bank is to Own One' .)

But even in the lead-up to the 2008 GFC, no bankers were fiddling with the numbers in your bank account. They do not need to. They need to fiddle with the numbers in their own bank account, mark them ones up my dudes! I admit this matters if done on a large scale, because the ratio of the bank account numbers is what matters for social equity and justice, if a million bankers can just mark-up their accounts by ten times that of everyone else, using a keyboard, they gain relatively more purchasing power, regardless of what “stuff” you think “the money” happens to be, fool.

It is the social consequences of which issuer you get the currency from that matters. It is better to get it as a creditor (work for government, or sell to someone) rather than as a debtor. You ideally, at the macro level, want the government to be the principle debtor, because they cannot run out of their won currency. This is the thinking behind the Positive Money movement, which unfortunately also suffers from insanity, so I should write about that some time.