Saturday, 16 April 2016

Understanding money, a reply to a response :))

Someone in the Ars-Regendi forums had this to say in regard to the former entry's article, the one that dealt with Landau's fable.

The person states:

Yes, this is good argument in support of the complete abolishment of money.

My reply is this:

Your conclusion is a non-sequitur.
The money is the convention. The money is the IOU. A promise made & unfulfilled we call a debt. The loan appears on someone's ledger (denominated in something), after a good or service has been taken by the debtor (the one who makes the promise). By denominating it in money (in this case, a Gov's unit of account), rather than in a commodity or a particular favor, we overcome the limitations of barter in the narrow & broader society/economy. Someone's promise is money, but his promise (his IOU) is money of a lower hierarchy. The Government's unit of account becomes the universally accepted unit of account within the territory which it governs because everyone owes financial obligations to the state, extinguishable only in Gov currency. And the Government's money things (banknotes, coins, reserves, securities) sit at the top of that hierarchy.


  1. Money is a simulacrum as Baudrillard would say. For him it is not a real thing, hence it is nor respectable. In fact he misses the same point. Money is a convention, an agreement between the state that instated it and the world that corroborated it and the users who can do so many things with it even speculate. Money is extremely durable though not sustainable: it wears out with time (inflation) and the paper it is made of can decay, and the data it is reduced to in its virtual form can be hijacked, kidnapped, or whatever, by pirates and looters and you lose your money even if it was nothing but data.
    What is important is value and money is only the realization or realizing of this value, ,including the added value my work adds to the raw materials I am working with and on. And money can be devalued or revalued according to the economic situation it reflects at times very directly.
    Nothing to get crucified for on a cross made of wood, but something to work hard for because without it you cannot even get a loaf of bread.

    1. Indeed. Government ought to allow the fiscal deficit & debt to GDP ratios to fall where they may, so long as it achieves & maintains full employment & price stability. Nominal economic growth higher than inflation = positive real growth. GDP growth not seen in wage growth, shows up in profit growth. That Government which spends & taxes in its own free floating nonconvertible fiat currency can never miss a payment. It can issue net debits all it likes. It can run whatever negative equity it likes. The real issue of overspending is inflation. The size of the national debt (aka nongovernment sector savings) is not the problem; but the ownership of it. How much of that equity is owned by the 90%, and how much is owned by the super plutocrats. Government debt comes in 3 forms: cash & coins, reserve accounts at the central bank, securities accounts at the central bank. Unfortunately, a great portion of it represents a fancy form of corporate welfare. When all of it should represent net fiscal debits for public purpose accrued over time. Public utilities, R&D, hospitals, schools, railroads, renewable energy, etc.

  2. Is it that simple? When the Chinese have gotten rid of the flags of convenience on the maritime silk roads they will be dependent on super strong maritime companies and alliances that all have to invest in super big ships and tankers and have to buy them on credit from teh Chinese and the South Koreans because of their cost and they expect to make up for the credit by transporting goods for the Chinese. Without that credit, could they actually have the new super cargo ships? That will represent for Chinese goods the possibility to eliminate speculation on maritime ship transport and thus to deliver their goods in Europe at least 30% cheaper if not more. Will the Chinese lower their retailing prices in Europe? Will the European Community accept these lowered prices or impose taxes to prevent the competition against their own products? Will the WTO accept such huge taxes though they advocate everywhere in the world to at least reduce such taxes or tariffs? Or last solution, the Chinese will just keep the extra money and that will multiply by four or five their profit margin which will provide them with so much money that they will be able to buy the debt of all the European countries who would become their .... would slaves be a proper word in that case? The eastern African railroads from Mombassa to central and north-eastern Africa are being rebuilt on credit from the Chinese and when they are working a fair share of the proceeds will go to the Chinese to reimburse the loan. Same thing for the harbor of Mombassa with Japanese capital. Can we build modern infrastructures without loans and debts? What level of debt is acceptable for an economy? And what happens when a country steps over the limit that makes them bankrupted? I have heard the French Communists saying ever since I have been able to hear them and still today that what is important is to invest and that budget deficit is necessary to have that investment. Any business working like that will soon reach a point where it will just die. Isn't it the same thing with countries? Can we cancel the debts of countries every ten years and still have a healthy economy? Could Argentina stay out of the monetary system forever? isn't Argentina right now getting credit and loans to pay back the old loans that pushed Argentina into bankruptcy or non-solvency? I am afraid it is a vicious circle, and we might have to pay for it one day. I just dream of sustainability in such situations: produce your own development on your own resources produced by this very development. That is a virtuous circle but is it feasible? Can we reduce it to the French mutilated concept of durable development? That sounds like "after me the storm or the deluge or the flood or the end of it all, but let me die first, hence live as long as I can before bringing things down." That sounds like Hollande. that political cheese that only has a red skin on the outside and that red skin has to be discarded because it is not edible. What's left is as pale as death itself. Economic discussions frighten me. As some economists say: economics is not a science. They might be right.

    1. Economics is indeed not a science. Orthodox economics is zombie economic theology (debunked ideas which refuse to die).
      Governments spending & taxing in their own free floating nonconvertible fiat currency are NOT like households. Unlike a firm or household, they can run negative equity without any threat of bankruptcy.
      Only the Government is able to create or destroy net financial assets denominated in its own currency. These are called vertical transactions. It happens when the Government spends more money in the economy than it taxes out of it. Horizontal transactions, however, (endogenous money creation & destruction) always balance to zero. Someone's debt is another's savings. Someone's spending is another's income. Someone's debit is another's credit.
      All Government debt in the world represents worldwide private sector financial savings (or equity).
      Certainly, those governments who have fixed exchange rates, metal standards, or who use foreign currency as legal tender are constrained by what funds they can loan and tax.
      Now on the matter of trade. Geopolitics plays a major role, and everyone is seeking returns on investments. Every net exporter of goods is a net importer of aggregate demand - and vice-versa. Aggregate demand is income + the change in private debt. Loans create deposits; it's an operation in endogenous money which leads to the creation of zero new net assets. The private credit structure of any country, it's sustainability, is determined by the amount of Government debt (aka nongovernment sector equity), by the nongovernment sector's desire to spend (money velocity), and by the actual demand for loans.
      The reason why China acted as the world's slave producer so many years was out of pure geopolitics. China wanted access to technology & strategic resources. It could not acquire them with yuans - it had need of foreign currency for that. And what do global markets universally accept? USD.
      By running trade surpluses against the US, China is net saving in dollars. China has a bunch of options, once it obtains those dollars. It can spend them (make purchases with them of goods & services etc), it can leave them at the FED in their reserve account. Or it can purchase US interest bearing bonds (i.e. move their funds from their reserve account at the FED to a securities account at the FED - which earns them interest).
      A reserve account is a checking account.
      A securities account is a savings account.
      (G-T)= -(I-S) -(X-M)
      (G-T)= Government spending - Government taxation
      (I-S)= Investment - Savings
      (X-M)= Exports - Imports
      The last two sectors, the domestic private & foreign sectors, can be thought of together as the nongovernment sector: representing households & firms, domestic & foreign.
      This is not ideology or opinion. It is double-entry bookkeeping. Every balance sheet has 2 halves, and you'll always hear the establishment speaking only of 1 half, that of the budget deficit, and never bother to mention the corresponding half of opposite sign, that of the nongovernment financial surplus.
      Orthodox economics is based on fallacious theory & models. It describes an alternate reality - not the one we're living in.
      Excessive private debt is the problem (private debt deflation which lowers Aggregate Demand), which fuels inequality & so-called secular stagnation.
      When you have the time, look up Modern Monetary Theory or Chartalism. Here is a short intro:

    2. Also, before I mention Argentina, I must address the issue of hyperinflation. A careful study of all hyperinflations throughout history lists the following causes:
      -collapse in output
      -loss of a war
      -political instability
      -brazen corruption
      -the end of a fixed exchange rate with a strong currency
      Argentina falls into a lot of the aforementioned. Pretty much every country on earth, with a few exceptions, is entertaining great amounts of excess idle capacity. This is due to weak Aggregate Demand. The establishment, after it dropped Post-war Keynesian full employment, used & still uses the NAIRU (non-acceleration inflation rate of unemployment), which is just data fudge, to keep a certain % of the population in a state of permanent & involuntary unemployment. They claim this is the way to effectively combat high inflation. In fact, it is a crime against humanity, it entertains a nr of social ills associated with poverty & permanent & involuntary unemployment, and it decreases labor's bargaining power. Don't like the pay & the conditions? Then get out, there's a 1000 more like you waiting to have this job. They don't like it reversed. Are you going to hire me? Because there are 100 more firms just waiting for me to come in.