Finance Politics

Itching for a scrap with something that can’t fight back, here I am going to combat some of Daniel Neilson’s substack posts (Soon Parted ). Not because I disagree, but because I find Daniel’s blog informative, but lacking an MMT lens. But he gets a lot right, and is a student of Mehrling’s, so he understands balance sheets and whatnot. So with Daniel Nielson we are not dealing with some unhinged libertarian or Austrian School fantasist.

As we mentioned on the MMT Macro Trader livestream (Jan 4, 2023) it is good to have dissension in a field of knowledge that is uncertain. This is not because of some warped analogy to darwinism, but rather more explicit. We know political economy is generated by imperfect human beings, and so we know it is not probably ever going to be a settled body of theory like, say, physics.

Finance Politics

Politics is the art of governing, and economics is the fair distribution of output, while finance is the study of using a currency system (records of credits and debits) to achieve the fair distribution.

The phrase “political economy of finance ” in Daniel’s Morocco substack post series , merges these three concepts. This is hazardous, because of several contradictions when the theory is exposed to the real world. I will talk about a few of these.

Finance is corruptible

Because the power of who governs is a source of corruption, and the governors of the financial system are open to corruption, “finance politics” must address not just the reality of MMT, but also the way the monetary system is abused.

The result of such abuses is a breakdown of the goal of fair distribution (the economics). The abuse almost always originates from the politics. To complete a bit of a circle: the means to abuse the politics most often resides in financial assets, and the more unfairly they are distributed, the more the tendency towards corruption.

One source of corruption is failure to recognize that we do not live in a pure capitalist system. All major nations today have a currency monopoly, and it is the public monopoly, the government as the issuer of the currency.

This is something Nielson does not lead with, maybe deliberately, I cannot tell, but it is poor pedagogy. Nielson begins instead with pure capitalism (a gross idealization) and the phrase: “A business that specializes in credit we can call a bank.” True. But the government also specializes in credit — tax credit — and is called a Parliament or Congress, not a bank. the government will however create a special type of bank, the central bank, which has the principle function of regulating the payments system for currency in the state’s unit of account.

In fact, the government is so powerful the “banks” end up asking for licences from the state to use the state’s tax credits for their credit.

The Sequence is vital to understand, and is similar to Warren Mosler’s Sequence . The sequence here is first the state issues tax liabilities, then second they issue currency which functions as tax credit, “that which can be redeemed for extinguishing tax liabilities.” Governments are not all stupid, they retain the monopoly on issuance (exogenous currency injections), and allow private banks only the capacity to extend credit (endogenous currency injections).

((Once idiots get voted into parliaments, who do not understand this system, even then the Sequence stays the same, the monetary system is highly robust against idiots running it, but unfortunately the justice system and fair distribution are not so robust.))

Being licenced by the state, these private banks are effectively doing the bidding of the state: issuing private credit to fuel entrepreneurs who need finance capital to start or expand businesses prior to having sales streams.

This sounds like an important function of “capitalism,” but this is not capitalism qua Marx. A socialist system can also have banks issuing private expansion credit — but to whom, if business owners no longer exist? To worker cooperatives. So this is myth No.1 needing busting. The function of private credit expansion has nothing intrinsically to do with the class system of (I) owners of firms (first class citizens) versus (II) workers (second class citizens).

Balance Sheets

In the third part of the lectures notes Nielson describes how balance sheets are used to run the credit system. The description is good. To bolster our Myth 1 bust, we note Nielson’s high level view of the balance sheets and T-accounts, does not mention the class system.

Is there really a “borrower”

Tell me if this is too pedantic. On Nielson’s explanations of balance sheets, we see a “lender” a bank" and “borrower”. The credit borrowed is recorded on each entities balance sheet. What’s wrong here?

It is a macroeconomic perspective, I think — it is missing. The banking system as a whole needs to be referenced in a macro analysis. When the “borrower” takes the credit it almost instantly (transactions delays permitting) becomes a liability of the banking system — a deposit.

This deposit “came from nowhere” — which is flowery rhetoric for the fact the bank just created it on a balance sheet, nothing was printed by government, no gold supply was raided, no tax payer was shafted. It is the endogenous money story. The loan created the deposit.

There really is no “borrower” in the commonsense meaning of the word, since nothing was borrowed. What happened is that a credit–debt set of records was created.

It is a relationship between three parties, not two. A customer of the bank (buyer) the bank, and a seller of goods (also a customer of some bank, usually, absent drug lords etc).

1. Customer (a buyer) got credit (they can spend = asset, but have to repay = liability).
2. Bank got a promise to repay (bank asset), but also a deposit (the seller of goods banked the payment).
3. Seller got rid of assets (real assets) and gained credit (the deposit).

Those are six balance sheet entries, minimum (the central bank has not get got involved in our story, but are in the background adding two more balance sheet entries regarding movements of reserves at the end of a settlement period). It is as Randall Wray and now Steve Keen would recognize, not just quadruple entry book-keeping, but octuple. Octuple that is, if we follow the whole credit-spend cycle. Just a single transaction (just the credit issue) remains quadruple entry, until the central bank clearing gets computed, but that’s usually a few hours later (used to be weeks later).

Pure borrowers and lenders do exist, but they do not involve banks. Savings & loans firms, savings cooperatives, and shadow banks all operate without endogenous money, they “circulate and hold” only, no new money gets created. However, to fuel a monetary production system the circulation of the currency is critical. So these non-bank quasi-bank institutions can serve a useful purpose, they allow circulation of savings. Banks do not. Banks gum things up for a monetary economy, but when they issue credit they fuel the economy, it is a dual purpose and it pays to understand both functions. Credit issuance is a demand add, savings a demand drain.

Did Steve Keen’s Minksy model “prove” this? Not really, unless you have a very liberal notion of “proof”. But I will talk about that in another article another day.

Beware the Ideals — capitalism is not capitalism

The final statement for the first in the Moroccan series is,

“The purpose of this course is to help us understand the system of credit relationships, and by doing so, to better understand capitalism itself.”

As I said, Nielson is a smart dude and teaches well. But here he is teaching folks about a system that does not exist. If we only focus on endogenous money operations we ignore the most important institution in the whole system, the monopoly issuer, the government.

Time to repeat Warren Mosler’s pithy definition of MMT:

MMT is recognizing the currency as a public monopoly and the implications thereof.

Libertarians and anarchists might not like this knowledge, but too bad, it is the system we face today. The question is whether or not justice for the oppressed can be found within such a system, or with a similar but reformed system, or whether all government needs to be torn down and begun again from grass roots? If the latter is your proposal, you face serious questions about how to achieve it non-violently.

Securing Justice

I will now be generous and optimistic: If you are prepared to tolerate intellectual violence, I think the nature and function of democratic government is both reformable and can be revolutionized in many ways, without physical violence. With intellectual warfare and spiritual warfare — the nature of which is not analogous to physical war. The weapons of spiritual war are love and kindness, not hate and intolerance.

This is stuff Neilson and most other writers on macroeconomics leave out of almost all their analysis. It makes their efforts all the weaker.

When you prepare and go into such war, choose your weapons wisely. Pissing people off for the sake of it is not a good weapon. Gaining allies is. How do you do that? (I will deliberately leave that one dangling.)

If you take up a social media trolling tool (called a keyboard) my advice is to not troll the neoliberals. You really want them to stop and think, not unfollow you. So give them something to chew on, in the vicinity of a cognitive dissonance.

This is what Douglas (hopelessly materialistic nice guy) over at MMT Macro Trader is trying to do, and we need soldiers in this army to help. Which is why I am helping Douglas to explore MMT implications at the mesoeconomic level. Any intellectual fuel I can provide to mind-bomb the neoliberals is fuel worth the effort of producing.