Two interesting articles on the nature of fiat currencies today.

First, Stephanie Kelton has an op-ed in the NYT titled How We Think About the Deficit Is Mostly Wrong.

Second, J.D. Alt notes that Italy is dipping its feet into MMT territory.

ECB Research Bulletin:

In an economy with its own fiat currency, the monetary authority and the fiscal authority can ensure that public debt denominated in the national fiat currency is non-defaultable, i.e. maturing government bonds are convertible into currency at par. With this arrangement in place, fiscal policy can focus on business cycle stabilisation when monetary policy hits the lower bound constraint. However, the fiscal authorities of the euro area countries have given up the ability to issue non-defaultable debt. As a consequence, effective macroeconomic stabilisation has been difficult to achieve.

Translation:
- all members of the eurozone effectively use a foreign currency
- they can default, because they do not and cannot issue debt in their currency
- fiscal policy has thus been completely neutered

Ergo, national parliaments have a significantly smaller policy space compared to countries with their own currency. Our parliaments intentionally surrender power to unelected technocrats, even control of the national budget, which is the primary power available to any parliament anywhere.

"Sorry, lad. We cannot pay for healthcare/pension/infrastructure/education/wages/X, we have to maintain a balanced budget to appease the market." Yet it is still illegal to call for the guillotine...

Meanwhile, Japan doesn't give a fuck. The BoJ has been vacuuming up outstanding debt like there's no tomorrow. It currently holds in excess of 40% of all government debt, effectively canceling it. It's just book-keeping. The Treasury issues the debt, the CB buys the debt. Both are part of the consolidated government sector, ergo no debt. "Hyperinflation!", they scream. Can you hear them? Except Japan has been fighting deflation for two decades, with no end in sight.

Yet the inflation-hawks are still treated as persons of authority. Flat-earthers, the lot of 'em.

And my country wants the rest of Europe to sign on to the most moronic law in German history: the "Schuldenbremse", which makes running a deficit illegal at the constitutional level (except for undefined "emergencies"). They are either a) brainwashed, b) idiots, or c) straight up evil. And I'm not sure which one I prefer.

Thou shalt kneel before thine *religion of statism and follow thine Commandments, which include, but are not limited to:

1) Thou shalt kill and/or pay for the killing of anyone who the state deigns deserving of murder, regardless of their "crime" or innocence;
2) Thou shalt make enemies of thine friends, relatives, and neighbors so as to divide thine families and communities for the sake of vying for state-granted "privileges" at everyone else's expense;
3) Thou shalt work for the state and receive just enough "freedom" to sustain the illusion of being "free-range" chattel;
4) Thou shalt seek loopholes within the laws while aiming to restrict others within them;
5) Thou shalt only seek to create laws, but never repeal them;
6) Thou shalt vote for cronies who pursue their own self-interest (and those of their financial interests) while claiming to "represent" you;
7) Thou shalt only use fiat currency, which can be -- and frequently is -- arbitrarily inflated and devalued, at will, by those in the central bank known as thine Federal Reserve;
8. Thou shalt keep the idea of government holy, and never take the name of its offices in vain;
9) Thou shalt remember thine mafia-like extortions known as taxes, and always pay on time;
10) Thou shalt honor thine state-imposed educators and regulators and give up thine rights whenever police officers and other authorities deem it convenient for you to do so.

Thou shalt not think for oneself.

If you don't believe money exists, then you should have no problem giving me all of your money. I will give you 1000 angels and an invisible unicorn in return. Deal of a lifetime. PM me for my paypal address.

(In all seriousness, you should read up on economics. It sounds like Ron Paul has warped your understanding of economics.) >> ^vaire2ube:

im not watching because as i understand it, the debt only exists if you believe money really exists, and i dont think money as we are told exists really exists... they can put you in debtors prison but cant get blood from a stone... and as i understand it, the fiat currency we accept is totally unbacked by anything other than faith... and thats only good for making "bubbles"
yea i still pay my bills my cabin in the woods isnt built yet, whats your plan!

im not watching because as i understand it, the debt only exists if you believe money really exists, and i dont think money as we are told exists really exists... they can put you in debtors prison but cant get blood from a stone... and as i understand it, the fiat currency we accept is totally unbacked by anything other than faith... and thats only good for making "bubbles"

yea i still pay my bills my cabin in the woods isnt built yet, whats your plan!

@NetRunner

How bout you just admit that "democrat" and "republican" are both bullshit titles that don't convey any real meaning.

Obama ordered the assassination of a U.S. Citizen WITHOUT A TRIAL OR CHARGES, even.

Doesn't that strike at the very core of all your democratic rule of law, Dems are marginally, if not unequivocally, better than Repubs malarkey?

You've already lost this disagreement.
When Obama failed to close Gitmo and expanded rendition, you lost.
When Obama continued and expanded warrant-less wiretapping, you lost.
When Obama extended the Trillion Bush Tax Cuts for the 1%, you lost.

The individuals who assume the title "Democrat" might have more liberal leaning mindsets, might have flexible acceptance of different groups, might have a more progressive focus for the future of their communities.

That doesn't change the fact that the system in which they work.. is rigged.
The outcome is predetermined.

Chris Hedges said it best. "There's no way to vote against the banks."

Bankers, speculators and usurers rule the modern world.

Their fiat currency, derivative trading, two-party election rigging world will be the only with any relevance as long as pig-monkeys like @NetRunner and @quantumushroom buy into their wholesale bullshit and let it be.

Cut free. Establish your own voluntary hive-mind. Occupy the Universe.
[there's enough space for all of us. trust me]

Okay, explain how this magical fixed money system works? What would be used to fix the money supply? How could we ensure that people don't decide to keep their money in banks, where the banks can issue "bank notes" which people then use as surrogates for your fixed money supply? When we had a specie backed currency, these problems still existed.

Also, yes, the derivative securities market is the largest driver of inflation out there at the moment. Many estimates put the value of all these unregulated securities (that's right, poof, I have money, securities) at around $600 Trillion dollars. Makes our debt seem kinda trite doesn't it?

>> ^davidraine:

First, to my original point, a fixed money supply does not allow for fractional reserve banking -- By definition, fractional reserve banking varies the supply of money. Second, I don't remember massive inflation caused by the sale of unregulated securities, though I do remember a massive speculative bubble bursting and an economic crash.
>> ^bmacs27:

Fractional reserve banking has nothing to do with the medium of exchange. Banks have engaged in fractional reserve banking since long before the abolition of the gold standard. A better argument is that the securitization of debt (deregulation of finance) has caused massive inflation by encouraging the underwriting of bad debt by allowing the risk to be sold off.

First, I'm not proposing anything -- I was just pointing out that inflation and speculative bubbles could be largely mitigated making the supply of money fixed. Second, a fixed money supply does not presuppose (or require) price fixing, so you can still use various property as a value store.
>> ^bmacs27:
Further, the video doesn't seem to explain that in our current system I can use my wages to purchase gold at market, and can thus use it as a store of value (if I actually believed it to be fairly valued against e.g. wages or real estate). In the government price fixing system you are proposing that wouldn't be possible, and the value of my gold would be subject to systemic risk (bad policy) just like currency is today.
>> ^davidraine:
I don't think they're calling for anything -- Simply explaining. Also, the point is that everything they point out is not true for any medium of exchange. The hallmark of fiat currency that makes it true is banks' ability to conjure money out of nowhere, which starts the inflationary and speculative balls rolling. With a fixed money supply, this can't happen.

@mgittle okay, it sounds like we were mostly misunderstanding each other then. I pretty much agree with everything you said in the last post.

The only thing I'd point out is that the quote you cite from Modern Money Mechanics is right, but you're leaving out what happens after that in the process:

The lending banks, however, do not expect to retain the deposits they create through their loan operations. Borrowers write checks that probably will be deposited in other banks. As these checks move through the collection process, the Federal Reserve Banks debit the reserve accounts of the paying banks (Stage 1 banks) and credit those of the receiving banks.

Whether Stage 1 banks actually do lose the deposits to other banks or whether any or all of the borrowers' checks are redeposited in these same banks makes no difference in the expansion process. If the lending banks expect to lose these deposits - and an equal amount of reserves - as the borrowers' checks are paid, they will not lend more than their excess reserves.

Which is what I was getting at. A single bank that gets a $10,000 deposit, can't turn around and make $100,000 in loans itself. It loans out $9,000, and when that principal gets deposited in another bank, it can loan out $8,100, and so on and so forth.

With enough loan/deposit iterations, it can end up being as much as $100,000 in additional money in circulation, but like you said repaying the principal destroys that money again.

I'd also point out that all of the above would create money even if your currency is on a full gold standard.

But I guess before we go down that road, I probably should just ask you to elaborate a bit on your thoughts about the relationship between growth and fiat currency.

Like, what do you mean by "growth"? Increase in GDP? If GDP falls, how does that threaten the existence of fiat currency?

By my reading of economics, a shrinking economy is called a "recession", and that's exactly when modern economics says we should take advantage of the fact that we have fiat currency and use it to increase the money supply to spur growth.

@NetRunner

I think the difference in our concept of what's going on is that my understanding is that commercial banks can make a reserve deposit at any Fed branch and then make loans against that. From what I can tell, there isn't any math done like you're describing. Maybe if you want to make a new bank or long ago when some of these banks were created there was math like that, but there isn't anymore. There is simply a minimum number required to have on reserve deposit or in vault cash compared to how much you have loaned out. This is all not to mention that there are types of deposits which have exceptions to the reserve requirement. That alone makes sure banks are loaning more than they have (if they want to take the increased risk).

http://en.wikipedia.org/wiki/Reserve_requirement#United_States

I mean, if putting $100 in a Fed reserve bank and loaning out $900 based on someone's promise to pay isn't creating money, I don't know what is. You don't have to start out with $1000 to make the $900 loan once you're already a commercial bank. That's the point. If you make money on some investment, you can make loans and collect interest against your increased profits. You don't have to have the money and then hold 10% back. (Glass-Steagall, anyone?)

Plus, the money that comes in as interest is money that never existed in the money supply before the loan was created. Someone else has to borrow money to pay you in order for you to be able to pay your interest. This is why growth is required to pay interest and avoid foreclosure and default. If the money supply does not increase and more people aren't promising to pay interest, other people won't be able to fulfill their promises to repay. That's why the system requires growth to function well.

Legal tender law and fiat currency make sure that everyone must participate in the system at some point, or your contracts won't be protected by the courts and you won't be able to pay your taxes, since both only deal in dollars.

>> ^mgittle:

If the bank in your latest example can't satisfy withdrawal demands, it probably borrows money from a commercial bank, which can request money from the Fed to cover the difference.

Change the word "request" to the word "borrow" and that's correct.

>> ^mgittle:
So, yes, the bank is not literally creating the money on its own, but it seems to me that banks granting loans for more money than they possess at any given time is the most significant reason for the Fed to have the ability to increase the money supply.

Again, banks aren't granting loans for more money than they posses. In the example above, they have $1,000, they can loan out $900, because they're legally required to hold 10% reserves.

Now, their balance sheet shows the following:

+$100 cash on hand as reserves
-$1000 owed to depositor
+$900 in debt owed to them by borrower
+$X in interest on debt owed to them by borrower

Which nets out to +$X interest in net worth.

There are two big risks with this arrangement:

#1: The depositor wants to close his account before the loan matures. The bank doesn't have the money to cover the withdrawl, and will need to borrow funds from another bank. If the borrowing costs are higher than the expected return from its loan, the bank is insolvent, and is gonna die. On conventional banks, the government will step in and cover the depositor's accounts up to some arbitrary dollar amount (I think it's still $250k), but the bank owners will be fired, and they'll seek out someone else to buy the bank and take over future operations.

#2: The borrower defaults on his loan. Since we're talking about only 1 depositor and 1 borrower, this single failure is the equivalent of 100% of the bank's borrowers defaulting at once. This too will result in the government stepping in, covering depositor's accounts, and restructuring the bank and selling them off.

What happened with the US financial crash was that a big, non-insured bank (Lehman Brothers) got hit by scenario #2, and since it was not a traditional, FDIC-insured bank, they just let it go bankrupt, and let the investor accounts get wiped out.

That started a panic, and led to lots of people pulling money out of other similar banks, leading to widespread cases of #1 happening, which had the effect of making banks default on loans they'd taken out with other banks, starting a new wave of #2...

That's why this system is fragile, and none of this has anything to do with monetary policy yet. This is all fiscal and regulatory policy.

What happened was that even after TARP stopped that domino effect of #2 leading to #1 leading to #2 again, banks were worried that all debt was much risker than they'd formerly believed, and so they raised the costs of borrowing (the interest rate) to sky-high levels, which severely curtailed the amount of people borrowing money to invest in real-world business activity.

That drop in investment led to a drop in production, which led to a drop in employment, which led to a drop in consumer demand, which led to a drop in production...

So now, the Fed is stepping in with monetary policy, and trying every trick in the book to stuff the banks with reserves, so they'll lower interest rates. They've had some success, but it isn't really doing the whole job, because unemployment is already so high, and consumer spending is so low, nobody wants to invest in expanding their business, no matter how cheap borrowing costs are...

That's what monetary policy is really about, stabilizing the interest rates and the overall flow of goods and services in the economy. When the economy slows, the Fed pumps money into the economy to try to make it go again. When it starts overheating (and leading to inflation), it siphons money out of the system to slow it down a bit.

Fiat currency doesn't really depend on growth -- if anything, growth depends on fiat currency, and the application of good monetary policy.

>> ^NetRunner:

>> ^mgittle:
The problem with fractional reserve systems using fiat currency is their reliance on growth.
I haven't watched the documentary you linked, but the only part of what you said I'd really contest is this part.
How is fiat currency reliant on growth?
Perhaps you meant it the other way around -- that fiat currency is just one more tool that's used to cajole the human race into participating in this "growth" whose value has become increasingly dubious?
That's how I see it, at least on the days when I see the face and not the vase. Most days I still see markets and capitalism as a positive net influence on the welfare of the human race, but their most fervent advocates sure do work hard at making me think otherwise.


Yeah, well put rearding the "fervent advocates". I did kind of mean it the other way around. Thank you for actually taking a second to understand my meaning rather than arguing literal points only (the literal-only thing being my definition for nerdiness).

It's not fiat currency alone that makes our economy reliant on growth. I should have been more specific, but such is life when you have to get to sleep...haha. Fiat currency just a part of the whole Fractional Reserve banking + legal tender law + fiat currency system. In my mind, the growth thing is probably tied most to the fractional reserve system. Hopefully none of this sounds condescending because I'm not sure how much of this you already know, but here's my understanding:

Because the money supply is variable and dependent on debt, an expanding economy is extremely good and a contracting one is extremely bad. Because banks are allowed to loan more money than they possess *and* charge interest, you run into a problem. Where do individuals get the money needed to pay the interest on their loan if it was created from nothing? You have to get it from the overall money supply, which is made up of money created by banks from other peoples' promises to pay.

Thus, with every new credit card swipe, mortgage signing, etc, more money is owed to banks than actually exists at any given time. It's only the time lag between borrowing and repayment that keeps the entire system from collapsing. This means that unless the total amount of debt continually increases at a sufficient rate, it's impossible for everyone to succeed in paying back their loans...there must be foreclosures. This is why people constantly get offers of new credit, *and* why recessions are such a bitch. It's very hard to get things growing again after the money supply decreases.

The system is also one in which individuals paying off debts have more money (less income goes to paying interest), but everyone paying off their debts leaves society with no money. Therefore, anyone who pays off their debt to increase their own personal financial security actually hurts the overall economy. It makes no sense for markets to rely on rational individuals' decisions if their individual decisions are bad for the economy in aggregate. For this reason alone, the system is extremely fragile.

Hope all that makes some sort of sense. Maybe I'm wrong in parts. I'm partially regurgitating the videos I linked earlier while adding in stuff I've learned from other sources. I've nor heard anyone refute the premise of the video, but I'm sure it's not infallible in its interpretation. I'd love to hear what other people think. It got sifted long ago but there was little discussion.

As for your comments about markets being a net positive, I don't disagree with you at all. It's when people rely on markets to solve every problem (including moral ones) and don't realize that there are some places markets ought not go that there becomes a problem. (Should courts enforce a custody contract between an infertile couple and a surrogate mother? ...and and endless list of other similar questions)

>> ^mgittle:

The problem with fractional reserve systems using fiat currency is their reliance on growth.

I haven't watched the documentary you linked, but the only part of what you said I'd really contest is this part.

How is fiat currency reliant on growth?

Perhaps you meant it the other way around -- that fiat currency is just one more tool that's used to cajole the human race into participating in this "growth" whose value has become increasingly dubious?

That's how I see it, at least on the days when I see the face and not the vase. Most days I still see markets and capitalism as a positive net influence on the welfare of the human race, but their most fervent advocates sure do work hard at making me think otherwise.

@marbles

I agree with your assessment of fiat currency, I guess I think the problem runs deeper because I'd rather not just gamble and assume technology will save us from ourselves.

There are quite a few problems with going back to a fixed-supply currency. Maybe I'm not studied up on all the current real-world solutions for moving back to the gold standard or whatever other flavor one might advocate, but gold can be debased, bars can be shaved, currency can be hoarded...the list is fairly long.

That's why we need a value-based monetary system rather than a debt-based one.

>> ^mgittle:
The problem with fractional reserve systems using fiat currency is their reliance on growth. It should be obvious even to children that "growth" cannot be sustained indefinitely in a closed system (the planet Earth). You can argue technology will fix our problems before nature fixes them for us, but that's gambling, IMO.
The biggest problem with growth, IMO, is a moral and philosophical one reflected by its influence on our culture. People talk about growth and progress as being some sort of universally good thing. cough AynRandobjectivism cough Growth needs to be a means to an end, not an end in itself. The problem with growth and progress being an end in itself is that we cannot have a conversation about what we're growing into or why we're even bothering to grow in the first place.


You're talking about economic growth. I don't see the planet Earth being a limit like you're describing. That's more of a close-minded assumption. We've always been able to invent and innovate with the opportunity. Putting a limit on that, is denying ourselves that opportunity. Surely a 100 years ago, people never envisioned our present world. And a 100 years from now, I hope people can say the same about us.

The problem with fractional reserve systems using fiat currency is that it's fiat. Even if you could match inflation with economic growth (which you can't), you would still have an elite class collecting interest from loans of magically created cash.

@davidraine @NetRunner @marbles

I think these videos explains it better:
http://www.youtube.com/watch?v=Dc3sKwwAaCU
http://www.youtube.com/watch?v=rCu3fpg83TY&feature=related

They're much longer and the animation is terrible, but they have better content, IMO.

As for banking without a fractional reserve system...you could have a system that utilized self-issued credit traded on an exchange. Money and credit could be based on the amount of valuable goods and services you (or a company) can provide rather than based on promises to pay back debt.

Yeah, it's the same guy's video, but you can learn about the idea here:
http://www.digitalcoin.info/

The problem with fractional reserve systems using fiat currency is their reliance on growth. It should be obvious even to children that "growth" cannot be sustained indefinitely in a closed system (the planet Earth). You can argue technology will fix our problems before nature fixes them for us, but that's gambling, IMO.

The biggest problem with growth, IMO, is a moral and philosophical one reflected by its influence on our culture. People talk about growth and progress as being some sort of universally good thing. *cough*AynRandobjectivism*cough* Growth needs to be a means to an end, not an end in itself. The problem with growth and progress being an end in itself is that we cannot have a conversation about what we're growing into or why we're even bothering to grow in the first place.