What is money? A rabid free marketeer puts his foot in lots of notes

Several of you have asked for the skinny on what money actually is. So, here's the full fat Worstall take on cold, hard cash. Answer: It's a way of keeping score. Who has the right to call upon the resources of others in that same society? And that, other than a couple of footnotes which we'll deal with overleaf, is pretty …

[Mike Bell]

Moral dimension

There's a big moral dimension to this. Why is it seen as a good thing to help out a handful of rich – and let's face it – reckless bankers by gifting them tens of billions of freshly minted pounds, with the hope that they'll pass it on in the form of loans to stimulate the economy? They clearly haven't done that. Instead they've said 'thanks very much'.

And worse, that 97% of money you mention is more or less made on trees, conjured into existence by banks lending money that doesn't exist, even in their own coffers. The only way it can be sustained is for the money supply – and debt – to increase forever and a day.

I never want to hear a politician talk about 'prudence' ever again.

[Tim Worstal]

Re: Moral dimension

Umm, what was this gifting of tens of billions to bankers then?

There's been three things done:

1) Liqudity provision. During the crisis, banks were running short of readies (those lines at Northern Rock etc). So, the central bank issues as much money as anyone wants in return for a security. This is what a central bank is supposed to do. It's all been paid back plus interest. Yes, saved the banks and that's the purpose of it: but didn't make the banks money.

2) Funding for Lending or some such scheme. Not been very successful as not that many people want to borrow money (rather our basic problem at present). BoE creates money, banks bid on it to be able to provide cheap lending to companies.

3) What I think you're talking about, quantitative easing. This didn't go to the banks.

Before QE the BoE had a few gilts. The banks had less than none (they were short). The pension and insurance companies had lots.

Now, after QE, the banks have lots of gilts, the BoE has lots of gilts and the pension and insurance companies have many fewer. Thus the BoE didn't purchase the gilts from the banks. They bought them from the pension and insurance companies.

Which was the aim all along. Buy enough gilts to drive up the price/down the yield, so those investors (note, not banks!) will move out along the risk curve in order to get yield. This lowers long term interest rates. And it has worked as designed.

But QE was never about the banks and except for the actual dealing in them (done at margins of a basis point or two, 0.01% being one basis point) never did have anything to do with the banks.

[Dan 55]

Re: Moral dimension

What would have happened if NR were allowed to fold like any other business?

1. Some other bank or other banks would have bought up the mortgages.

2. The other banks would have been legally obliged to cough up and pay according to Savings Guarantee rules.

3. Other banks would have realised they're not going to get bailed out* at any cost so they'd better start being responsible.

4. Society wouldn't have ended.

5. The country would have been a better place. Instead of disabled people with one extra bedroom in their house than deemed necessary (the bedroom where the carer sleeps) and people at a similar level in society paying for austerity, the ball would have been in the banks' court, where it belongs.

* Or however you describe the debt-generating money merry-go-round which transfers bank debt to state debt and requires more bonds to be paid out at some future time than would otherwise have been.

[Tim Worstal]

Re: Moral dimension

NR was allowed to go bust as banks go bust. And it's the government (FSCS) which pays the savings compo. Which they charge the banks an insurance fee for.

And 5) doesn't follow from NR at all.

[Dan 55]

Re: Moral dimension

I thought NR was nationalised and then privatised at a loss to the taxpayer.

Sorry, was thinking of another country's scheme, but the end result is same.

After a state takes on bank debt, the state needs to make cutbacks or raise taxes or both. The government decides where to do that based on their economic policy/dogma.

Whilst I agree that benefits system needs trimming back a bit in many areas there are many areas where it doesn't. If the government didn't have austerity as an excuse they would have to use another one, so instead of "we're cutting back and taxing those areas which target the weakest in society because austerity" maybe it'd have to be "because we're a gang of sociopaths".

They could instead, for example, forget about HS2 and just invest on improving track signalling and mobile connectivity on Britain's railways which would be much more cheaper and effective. Now that everyone's got mobiles, a few trains arriving 15 minutes earlier per day barely adds any measurable improvement to the economy. Many more trains arriving on time and people having better mobile connectivity while they arrive would be much better.

[tiggity]

Re: Moral dimension

Ah NR, hey Tim, how about a few comments on the joys of building society demutualisation in the UK, a good while ago but the starting point (in the view of many) of the massive rise of reckless financial services in this country .

I recallthe "old" traditional building societies back in the day, with their quaint practices of careful "housekeeping" so boring for free marketeers, primarily just running savings accounts & providing mortgages, ensuring they were prudent about reserves, with respect to income and outgoings, a mysterious lack of CEOs paid obscene multipliers of what the cashier earned.

But hey, thank your deity (or none) of choice for the free market saving us from such dull institutions and giving us too big to fail, massively under regulated & over confident mega banks instead with financial services that are aimed at shareholder smiles (unlike the old mutuals) customers are no longer members, just cash cows.

[Tim Worstal]

Re: Moral dimension

Sure, let's talk about building societies. Two of which went bust at about the same time as Northern Rock. Dunfermline and, umm, Chelsea was it?

[DavCrav]

Re: Moral dimension

You start with a question:

"What would have happened if NR were allowed to fold like any other business?"

And then write some stuff that doesn't normally happen. You forgot stage 0:

0. Any slightly vulnerable-looking banks immediately fold from a bank run.

The entire reason all these bank bailouts, the FSCS, etc., were set up is because bank runs are horrible things, and entirely impossible to avoid for a bank as the only thing that can be 100% backed up by cash is a safety deposit box.

Let's continue:

"1. Some other bank or other banks would have bought up the mortgages."

Isn't that what the Government did? You might argue about the price paid, or whatever, but what you suggest was exactly what happened. Most people who go all swivel-eyed about banks also like the idea of government ownership of companies, so surely you would be happy about this outcome?

"2. The other banks would have been legally obliged to cough up and pay according to Savings Guarantee rules."

They do, every year, pay the government for this protection. It's an insurance scheme, and so it's the government that coughs up. Of course it is, because you cannot expects the banks to have enough money put aside to bail out a bank.

Let's skip down to 5:

"5. The country would have been a better place. Instead of disabled people with one extra bedroom in their house than deemed necessary (the bedroom where the carer sleeps) and people at a similar level in society paying for austerity, the ball would have been in the banks' court, where it belongs."

So the collapse of a few banks and the others vastly reducing and tightening their lending, causing a 5-10% recession, would have meant the Government would have had more money to spend and wouldn't have to choose between austerity and a sovereign debt crisis? Have you seen Greece?

[Anonymous Coward]

Re: Moral dimension

Yes, it would have been a good thing. There is going to be a crash, and thanks to the unnecessary bailout it's going to be far worse and far bigger than it would have been, and we have no money left to fix it because it was all spent the first time. And we have the addition of the moral hazard, because everyone now knows it doesn't matter how much you fuck up, the taxpayer will bail you out.

[Anonymous Coward]

Moral hazard

Flatpackhamster,

> And we have the addition of the moral hazard, because everyone now knows it doesn't matter how much you fuck up, the taxpayer will bail you out.

This was my main criticism of the bailouts at the ttime. But Ive spent the last few years in RBS working on risk restructuring, and can asssure you that this is not the case at all. The baliouts, quite rightly, came with strings. The banks absolutely do not want another bailout, or to be in the sort of position where they might need one.

Part of the problem with the bailout was that there was no effective division betweenn any bank's retail and investment arms, so the government simpyl couldn't bail out the former (which is what they needed to do) without also bailing out the latter. Banks are now legaly obliged to ringfence retail from investment, precisely so that, in the future, it will be possible to prevetn the collapse of the money supply and the loss of the public's savings by baiilng out the retail banks while letting their investment arms collapse.

[DavCrav]

Re: Moral hazard

"Part of the problem with the bailout was that there was no effective division betweenn any bank's retail and investment arms, so the government simpyl couldn't bail out the former (which is what they needed to do) without also bailing out the latter. Banks are now legaly obliged to ringfence retail from investment, precisely so that, in the future, it will be possible to prevetn the collapse of the money supply and the loss of the public's savings by baiilng out the retail banks while letting their investment arms collapse."

Except, as has been explained often, here and elsewhere, the three big banking collapses in the UK -- Northern Rock, RBS and HBoS -- either had no, or only very small investment banking arms, and these weren't the source of their collapse, but rather massive exposure on mortgages to poor people who couldn't pay them back.

[Tim Worstal]

Re: Moral hazard

NR wasn't that at all.

NR was a bank run pure and simple.

Their business model was: issue those mortgages, funding them with a bit from deposits and lots from the wholesale money markets in short term (overnight even) money. Then every now and a bit issue bonds with about the same maturity as the mortgage book and pay down the wholesale money borrowed from the market.

Continue to rinse and repeat. Those bonds didn't go bust at all (called, umm, Granite I think?).

However, NR got caught when it had less than a "now and a bit" number of mortgages agreed, paid out to, and funded by overnight money, but before they had enough to issue another tranche of those granite bonds. They couldn't then fund that loan book as no one would lend them money in the interbank market: a wholesale bank run.

As far as I've seen the mortgages are just fine.

[Anonymous Coward]

Re: Moral hazard

Yep Granite was the NR securitisation program. They're still steadily paying away and although the call date is long passed the expectation is that they'll pay down in full, at least for anything other than the Z tranche.

[DavCrav]

Re: Moral hazard

"As far as I've seen the mortgages are just fine."

Really? I remember them giving out 125% mortgages as late as 2007. I know prices are back on the up and up, unfortunately, but the plateau period, together with recession, must have screwed them over a fair bit. Or did they tighten their lending criteria in the run up to the crash?

Northern Rock also got bank runned on both ends though, with people also cashing out as fast as they could as things looked serious. I wonder if the long turnaround time on the FSCS (some people were saying six weeks in the media), together with the fact that until that time very few people were familiar with the FSCS and that they would get their money back at all, contributed to the retail run, rather than the wholesale run, which might be at least survivable if they stopped issuing new mortgages and dropped the bonds on the market as quickly as they could.

But yes, I agree, Northern Rock was not floored by defaults on mortgages, and I take back what I said above about them.

[Anonymous Coward]

Re: Moral hazard

@ DavCrav

> Except, as has been explained often, here and elsewhere, the three big banking collapses in the UK -- Northern Rock, RBS and HBoS -- either had no, or only very small investment banking arms ...

NR and HBoS, OK, but RBS? Are you kidding? Their investment bankign arm was huge. Theyve made it a lot smaller over hte last few years, but it's still big.

> ... and these weren't the source of their collapse, but rather massive exposure on mortgages to poor people who couldn't pay them back.

What I actally said was that banks are now legally obliged to ring-fence their retail and investement arms, which they are, and that the reason for this is so that future governments will have the option of bailign out just the retail banks while letting investment banks fail. I DIDN'T say that politicians enacted that legislation in response to an accurate understandnig of thwe situation. I mean, come on, that's crazy talk.

To be fair, the parliametnary inquiry's conclusion that the problem was mortgages came long afterr the bailout. Also to be fair, it's still the right thign to do, even if it was noticed by politciians for the wrong reason.

Personally, I find it quite amusing that banks are being forced to rignfence their two arms in orderr to protect the poor wee innocent fluffy retail baqnkers from evil rapacious investment bankers, when in fact the effect will be to protect the responsible intelligent incvestment bankers from feckless retail bankers. If there evr is another baiolout, the cognitive dissonance will be hilarious.

[Dan 55]

Re: Moral dimension

The entire reason all these bank bailouts, the FSCS, etc., were set up is because bank runs are horrible things, and entirely impossible to avoid for a bank as the only thing that can be 100% backed up by cash is a safety deposit box.

Presumably, in a transparent market economy where the consumer is able to find out enough information about the products they purchase, money would naturally flow to the least-exposed banks?

Isn't that what the Government did? You might argue about the price paid, or whatever, but what you suggest was exactly what happened. Most people who go all swivel-eyed about banks also like the idea of government ownership of companies, so surely you would be happy about this outcome?

Not if that means that the state has taken on more debt. There is always profit to be had in a mortgage, so someone, somewhere in the private sector would buy them up anyway.

So the collapse of a few banks and the others vastly reducing and tightening their lending, causing a 5-10% recession, would have meant the Government would have had more money to spend and wouldn't have to choose between austerity and a sovereign debt crisis? Have you seen Greece?

Isn't a sovereign debt crisis what happens when a state cannot pay out what it has to pay out when the bonds it has sold mature? If a state doesn't gratuitously take on debt, it won't have that problem.

[Anonymous Coward]

Re: Moral dimension

"Presumably, in a transparent market economy where the consumer is able to find out enough information about the products they purchase, money would naturally flow to the least-exposed banks?"

You didn't specify what 'they' should be the least exposed TO, but lets imagine its high interest yielding (potentially) bad debt. Such banks with high exposure would be the ones offering the highest interest rates for deposits (simplification on the verge of inaccuracy).

"People" don't seem keen on seeking out the banks with the lowest savings rates and highest lending rates, just because that makes them more stable and 'less-exposed'.

"Not if that means that the state has taken on more debt. There is always profit to be had in a mortgage, so someone, somewhere in the private sector would buy them up anyway."

Indeed, have you been to Detroit recently?

[auburnman]

Re: Moral dimension

"There is always profit to be had in a mortgage"

This is the kind of wishful thinking that caused the economic crash in the first place.

[Squander Two]

Re: Moral dimension

Dan55,

> the debt-generating money merry-go-round which transfers bank debt to state debt and requires more bonds to be paid out at some future time than would otherwise have been.

...

> After a state takes on bank debt, the state needs to make cutbacks or raise taxes or both.

...

> Isn't a sovereign debt crisis what happens when a state cannot pay out what it has to pay out when the bonds it has sold mature? If a state doesn't gratuitously take on debt, it won't have that problem.

Perhaps I've missed something in your reasoning here, but you appear to be treating borrowing and lending as the same. You've used the phrase "take on debt" to describe both issuing bonds (debt) and nationalising mortgages and other bank loans (credit). You then describe the consequences of too much debt and assume that they are also the consequences of too much credit -- easy to do when you're using the same words to describe each. But no. If a government "takes on debt" by nationalising a bank, it has purchased an asset, which it can sell and which will probably provide an income before the government sells it -- because it is not in fact taking on debt; it is taking on credit. If a government "takes on debt" by issuing bonds, it is simply borrowing money that it will eventually have to pay back. So you're right when you say "If a state doesn't gratuitously take on debt, it won't have that problem." But you're wrong when you imply that the phrase "take on debt" in that sentence can refer to buying a bank. They're opposites.

[Jason Hindle]

Re: Moral dimension

"What would have happened if NR were allowed to fold like any other business?"

NR was, relatively speaking, small potatoes. The bigger question is why, around the world, a great many more banks were bailed out. To answer that question, you need to start by consider what happens when the finance system collapses.

The problem with banks is, I think, that we can't afford to treat them like any other business.

[graeme leggett]

short and largely to the point

Well, I followed it anyway.

[WibbleMe]

Its a very old argument; what if you Hitler and have 1 Billion thanks to your parents and what if you Jesus and have nothing

[DavCrav]

"Its a very old argument; what if you Hitler and have 1 Billion thanks to your parents and what if you Jesus and have nothing"

I think I speak for everyone here when I say, "what?"

Also, *It's, *are, *billion, *are (I think).

[dotdavid]

"Also, *It's, *are, *billion, *are (I think)."

Maybe it's some kind of slang; "you Hitler" when you're being mean and "you Jesus" when you're being nice.

[Bruce Hoult]

cash is not the only money

I fear that Tim has got a bit confused about things such as gold and bitcoin.

They are not the only kind of money, they are only the cash. Both still allow the creation of money via entries in ledgers.

Tim is correct that as we get richer we need more cash -- or at least a greater *value* of cash. Both gold and bitcoin can increase in value arbitrarily so that even though there is a fixed amount of each, the value of that amount can increase.

For this to work, the cash has to be infinitely divisible, so that the smallest unit of cash can still buy one cheeseburger, not 1000 cheeseburgers as a minimum.

Gold is in theory infinitely divisible, but it could get a bit impractical when you need an electron microscope to count your cash to buy a cheeseburger.

Bitcoin is in actual fact infinitely and conveniently divisible.

Note: the Satoshi is 1/100,000,000th of a bitcoin, and is currently the smallest unit. That in itself will last us a very very long time of expansion of the value of bitcoins before it become a problem. But if it ever does become a problem, all that is needed to fix it is a simple software update of the bitcoin protocol.

[Tim Worstal]

Re: cash is not the only money

Well, yes:

"Both gold and bitcoin can increase in value arbitrarily so that even though there is a fixed amount of each, the value of that amount can increase."

We have a name for that. Deflation. Which is what we're doing all this QE to try and avoid because we don't think deflation is a good idea.

[Bruce Hoult]

Re: cash is not the only money

WHY is very slow deflation -- at a rate matching the general increase in wealth and productivity -- a bad thing?

STUFF gets slowly cheaper. What's wrong with that?

[Tim Worstal]

Re: cash is not the only money

We're absolutely delighted when things get cheaper: it really is just fabulous that enough wheat calories to keep us alive now costs 10 or 20 minutes of labour a day rather than 12 hours of it as was.

However, we're not entirely happy with the general price level declining. Not in a debt based economy we're not. Because the nominal value of the debt remains constant (in the absence of negative interest rates that is) while the value of what is being produced from having contracted that debt is falling. Everyone eventually goes bust in that world.

We could, perhaps, get away with 1-2% deflation, around and about the level of total factor productivity each year. But more than that would be a problem.

Another way of putting this is that we're just delighted that things get ever cheaper in real terms: we are 100 x or whatever it is richer than our forefathers because everything has got cheaper in terms of the labour we must perform to get it. But having things get cheaper in nominal terms, fewer tokens that represent that control of labour, has some problems.

[Yet Another Anonymous coward]

Re: cash is not the only money

Having a fixed maximum number of bitcoins isn't deflationary precisely because they are divisible.

It's like regarding the unit of the US$ as simply a fraction of the US GDP.

The GDP goes up and US minimum wage is now now 1.2x10-12 GDP units rather than 1.1x10-12 units

[DavCrav]

Re: cash is not the only money

"Having a fixed maximum number of bitcoins isn't deflationary precisely because they are divisible."

What? If there is 1 tonne of gold in circulation, and the value of all gold goes up, then just because you can chop your bars in half doesn't mean you don't have deflation. For example, suppose that the prices of all goods in the UK halved overnight. That's deflation, whether or not you re-introduce the halfpenny.

[Sorry that handle is already taken.]

Re: cash is not the only money

As a thought experiment, run a hypothetical economy on bitcoins. If you need to increase the money supply above the fixed (and decreasing) rate at which new ones are created, your only recourse is to (somehow) increase the value of a bitcoin.

Any good or service that you could buy with one bitcoin now costs less than one bitcoin, and it had nothing at all to do with improvements in the production of that good or rendering of that service. Hence deflation.

Goldbugs and bitcoin pumpers want this to happen because they hold gold or bitcoins, and they think it will make them rich.

[Mage]

Re: cash is not the only money

Bitcoin isn't money or cash. It's tulips. It's used too for transactions, but IBAN does that better with a chance of getting it back if there is fraud. Unlike cash, IBAN (or plastic debit card) isn't anonymous, but I suspect some flaw will be found in Bitcoin to allow tracing of buyer and seller. But really Bitcoin is a ponzi scheme / speculation system. It also unlike IBAN or plastic card doesn't scale. Even with hardly anyone using it it barely works (in terms of latency).

Gold is only an exchange token ultimately, just like bank notes, if it's working, when it doesn't work it's a tulip and gets hoarded. Hoarding money is bad.

[Charles Manning]

Re: cash is not the only money

The problem with bitcoin is that it is not tied to any value.

A nation's currency is linked to the value and size of the nation's economy. Essentially you have the goods and services of the nation on one side and the cash on the other. Or as Tim put it, you have an IOU for part of the pig.

A fiscally responsible government will only be printing money at about the rate that the goods and services are increasing in value, thus preserving the currency value.

Even M4 money is somewhat linked to value: M4 is linked to the borrower's future labours, so it is still an IOU for something.

With bitcoin there is no pig - not in the present or the future. There are no services There is no IOU.

[Yet Another Anonymous coward]

Re: cash is not the only money

A nation's currency is linked to the demand for the nation's exports, The Canadian $ is down 25% in the last 2years because China doesn't want coal, copper, iron ore or oil.

If Google charge 1/millionth of a bitcoin for viewing pages and people start using bitcoin for micro-payments then bitcoin will rise. If they make their own currency or find a way of charging 0.01c without any fees then bitcoin will drop

[Anonymous Coward]

"If there are hundreds of billions in profit to be had from credit creation, then where the hell is it? The banks certainly don't make that sort of sum and they are doing 97 per cent of that credit creation."

According to a (Corbyn-supporting friend) bankers are making precisely those billions and spending it on themselves. They are also taking it directly from the pockets of the "deserving poor" for no motive other than all bankers are evil. On the other hand,same person wonders from time to time why he should work simply to lose so much in tax on a low salary (sub £15k) when others around him don't work at all yet get (London) housing provided and always seem to have more cash to spend at the end of the week. The scary thing is that this combination of views seems to be increasingly common.

“When the people find that they can vote themselves money that will herald the end of the republic.”

[DavCrav]

Did you ever point out to your friend (is that friend as in "my friend has a question", meaning you?) that if HSBC's global turnover was only around £40bn/year, even if they had no costs whatsoever, it still wouldn't come to hundreds of billions. If bankers, and there aren't too many of them, spent hundreds of billions each year on themselves, what did they actually buy with that money? Of course, we know it isn't the cashiers in branches these lunatics are talking about, it's senior bankers, of which there are about 10000 or so (order of magnitude). In which case, if there is £100bn of poor-people's money stolen by bankers, they are spending, every year, ten million pounds on themselves without anything really to show for it. That's tough.

[J.G.Harston]

He's probably one of those people who thinks that the banks' customers' money in the banks' "coffers" are the banks' money. £40bn of turnover? Yes, but they've got £950bn of deposits! That means they've really got £1trillion! slobber foam drool.

[Doctor Syntax]

"what did they actually buy with that money?"

And when they spent it all where it the money go?

[Anonymous Coward]

I suspect they added up those hundreds of billions

By looking at the amount of credit and average interest rate, and ignored pesky stuff like expenses, salaries, reserves for bad debt, etc.

Obviously banking is profitable, this is just arguing about how profitable. The idea is "if the government is the bank then the government gets that profit". Well, that's nice but as Tim says you have the little problem of the government deciding who gets loans - do you really want a situation where someone gets a $100 million loan to build a skyscraper based on being the friend of a politician in charge, rather than because he's got credit / business plan / whatever that a bank thinks will be profitable for them?

Maybe a school chum gets to be a high government official, so even though I have no experience with such things, I've got a big loan and am paying myself $1 million a year to be CEO of a corporation building a skyscraper. I don't care if the corporation fails and the building is never finished, or is finished but never gets any tenants because it was built in the wrong place, because I'm still making $1 million/yr for a few years before that failure becomes apparent! This sort of thing has been happening all over China, because that's how a lot of loans get done over there.

You can capture some of that profit via taxes. If you want a bigger share, you can have higher taxes on banks, but you will cause there to be fewer banks and less credit being issued because the bar for profitability goes up when taxes get higher. Most people don't think that's a good idea (or at least they don't think its a good idea if it means their access to credit becomes more difficult)

[DaveDaveDave]

"According to a (Corbyn-supporting friend) bankers are making precisely those billions and spending it on themselves. They are also taking it directly from the pockets of the "deserving poor" for no motive other than all bankers are evil. On the other hand,same person wonders from time to time why he should work simply to lose so much in tax on a low salary (sub £15k) when others around him don't work at all yet get (London) housing provided and always seem to have more cash to spend at the end of the week. "

And that's where camp guards came from...

[dcluley]

Smoke and Mirrors

Economics is one of those fairyland concepts that is so flexible you can make it whatever you want. It can't even measure anything sensibly. Take this example affecting GNP.

A company importing meat from Argentina and packaging it and selling it as pet food. Assume for the sake of this example that its turnover was £100 000pa. Entrepreneur buys the company (call it A); forms a new company (B). Now A does the import and sells the raw import to B for £90 000pa and B packages the goods and sells for £100 000pa as before. Result: the same physical activity now split between two companies had raised the share of GNP from £100 000 to £190 000. I.e. it has almost doubled it using smoke and mirrors.

[Anonymous Coward]

Re: Smoke and Mirrors

Conversely, this is why Jeep is a registered trademark of FCA (or whatever). It means that Chrysler (who make Jeep) must pay Chrysler (who own the Jeep trademark) for licensing when they make a Jeep.

[Tim Worstal]

Re: Smoke and Mirrors

Err, no.

GDP is a measure of value added, not of turnover.

In both cases the addition to GDP is £10k.

Imports are a negative number in GDP. Final sales to consumers we do count in one of the methods of working it out. So, in scenario 1) GDP is final sales minus imports, £10k, in scenario 2) GDP is final sales minus imports: £10k.

This becomes very important indeed when we start talking about the difference between a VAT (or sales tax) and a transactions tax.

[DavCrav]

Re: Smoke and Mirrors

"Err, no."

How long do you put aside each day for correcting people who say wrong things on the Internet?

[Tim Worstal]

Re: Smoke and Mirrors

A little bit for the comments to pieces which an editor has paid me to write. Part of the job description these days really.

[Chris Miller]

Re: Smoke and Mirrors

And thanks for doing that, Tim - not all columnists are so punctilious. You're (obviously) right about the GDP issue, but would you agree that GDP is a pretty lousy way of judging the output of an economy? It works (reasonably) well with the car factory, but less well with a primary school or hospital.

I half-remember a quote that the person making the greatest contribution to GDP is someone lying in a hospital bed dying from cancer, while simultaneously divorcing his wife (or something along those lines). GDP is chosen as a measure because it's relatively easy to calculate, not because it's an ideal indicator of economic success.

[Tim Worstal]

Re: Smoke and Mirrors

Hmm, I think a proper "what the hell is GDP?" might be a future subject.

You're generally right. It doesn't measure distribution, doesn't measure unpaid work, Just assumes that government output is worth what we spend upon government and has all sorts of other problems with it.

But we do know how to measure it.

[Squander Two]

Re: Smoke and Mirrors

GDP may contain all sorts of crappy assumptions, but it at least contains the same crappy assumptions wherever we measure it. So, whilst it may not be a great absolute measure of an economy, it is quite a good way of comparing economies to each other. Ish.

[Any mouse Cow turd]

Re: Smoke and Mirrors

I read somewhere that the cleanup and re-build following Hurricane Katrina added a few points to the US GDP number but I can't honestly believe that it was considered "Value-added".

Is this an urban myth or would something of this sort increase a nation's GDP?

[DaveDaveDave]

Re: Smoke and Mirrors

"Is this an urban myth or would something of this sort increase a nation's GDP?"

https://en.wikipedia.org/wiki/Parable_of_the_broken_window

It's not quite one or the other. One of the widely acknowledged problems with GDP is as you say: cleaning up some disaster can technically add to GDP in the short term. In the longer term, though, the economy is going to suffer the effects of having put that effort into clean-up where otherwise the effort could have been invested in something new/useful, so GDP will be lower.

[Anonymous Coward]

Re: Smoke and Mirrors

"Err, no."

Quite, and a very succinct explanation of where the fallacy lies. Arguments like the above are a great example of the perpetual motion machine.

Even though you *can* conjure monetary units out of thin air (create credit - banks, print money - govts) you *can't* somehow fix the value of those units. I think that is where many people get unstuck when commenting on economics: they get confused about what money actually represents. That's quite easy to do when you have a wallet with cash in it that seems to somehow magically turn into "stuff" (beer, fags, food or whatever.) It seems that the cash itself has a tangible value rather than being part of a bloody complicated negotiation system.

Now, if you don't even know what money is, then GDP is unlikely to be your forte either.

[dcluley]

Re: Smoke and Mirrors

"Now, if you don't even know what money is, then GDP is unlikely to be your forte either."

Well certain it is that economists can't actually agree on it either; otherwise they wouldn't need so many different measures for it.

[dcluley]

Re: Smoke and Mirrors

"So, in scenario 1) GDP is final sales minus imports, £10k, in scenario 2) GDP is final sales minus imports: £10k."

No - if your arithmetic method is right the only available figure for scenario 1 was £100k which, by your reckoning must be the GDP figure. And did you not understand what the G in GDP stands for. Gross product not Net

[Tim Worstal]

Re: Smoke and Mirrors

The reason we're subtracting the imports is the "domestic" bit.

[John Savard]

Discipline

The gold standard did have the virtue that it prevented the sort of thing Zimbabwe or Weimar Germany did - whereas fiat money, even when handled carefully, did not inspire confidence, hence the failure of the Continental Currency and the Assignats.

Some people have a thing about how banks are allowed to create money when they make loans. But they forget that it is licensed and supervised check-kiting. Yes, the banks are making up money - but they have to get collateral covering every cent of the money they lend (as well as having fractional reserves of deposits so that the proportion of their loans that actually gets spent as physical currency at any one time causes no problems).

So the system should work perfectly; but the collateral is often real estate, and real estate values can collapse for various reasons. Thus, a house in Russia or China costs less than one in Sweden or the United States... because of where people would rather live. And then there are problems with unwise mortgage loans.

If banks are properly regulated, though, they allow the country's currency to be backed not just by gold bullion, but by all the valuable assets in the nation that can be used as collateral for a bank loan. The ideal would be for the value of a dollar or a pound to be as constant as the mass of a kilogram or the length of a metre - that goal, though, has only been approached when the gold standard was in effect.

But unemployment wastes potential productivity. Can another way be found to maintain full employment at all times, regardless of economic conditions, without reckless inflation? How about a second currency, in which people who would otherwise be unemployed are given work paid in that second currency? (The landlords would probably be the ones to end up badly under such a scheme, as they'd likely be required to accept the badly managed currency at par.)

[Mage]

Re: Discipline

French reparation etc imposed on Germans after WWI was real cause of German banking / Currency collapse and then this caused the US depression. The US President Wilson knew the French were wrong, but was able to intervene.

[Tim Worstal]

Re: Discipline

Germn banking collapse was 1923/4. US Depression was 1930 onwards. And got really bad in 1931.....about the time of the collapse of the *Austrian* bank, Creditanstalt

[Mage]

Re: Discipline

Well, it wasn't instant. It takes time to suck the value out of an economy, or for the effects to ripple through. I don't see how the French asset stripping (railway rolling stock) and punitive reparations wasn't the root of it. Obviously other stupidities compounded it. Today global interactions are faster. After WWII there was a different approach.

Certainly Germany / Austria / USA involved more than one issue. It's supposed to have started in USA 1929, but people seem to have many reasons / explanations as to why it happened.

Monetarists claim caused by the banking crisis that caused 1/3 of all banks to vanish, starting with failure of the "New York Bank of the United States" Why did these banks fail? Was any factor bad debts in Europe? Was the Gold Standard the reason the Feds didn't intervene?

Was the "free market" believers (esp Austrians) position really that intervention was evil and the "depression" would be good for the market?

Or were the debts that caused the initial banks in USA to fail purely domestic? (nearly 1000 USA banks failed in first 18 months?).

Certainly 2008 in Ireland was a mix of unsustainable property speculation, the Anglo Irish Bank, a Ponzi scheme getting nod from Regulator and thus other banks copying their unsustainable lending, I don't know how much USA Sub prime debt reselling was involved. Irish Nationwide was worst offender after Anglo Irish. It seems incredible that the Irish Government at first was only going to guarantee the Anglo Irish and Irish Nationwide, that would have destroyed all the "better" banks. As it was it should have been the other way round, rather than including them.

[Neil Barnes]

...the right to call upon the resources...

And by logical extension, since every resource is in the end the manipulation and control of energy, we should be paid in megawatt-hours.

[graeme leggett]

Re: ...the right to call upon the resources...

Or given the author's description of money, "obligations"

'how much did it cost you to repair your car ?'

'250 obligations'

Sharp intake of breath

[Yet Another Anonymous coward]

Re: ...the right to call upon the resources...

Lots of science fiction writers, but very few economists, have written about what happens to money if you have essentially unlimited free energy

[Tim Worstal]

Re: ...the right to call upon the resources...

Dunno really. Marx's idea of true communism was pretty much "unlimited free energy". He's assuming the end of scarcity at least, which is consistent with the free energy bit.

And if you really, really, pressed an economist he'd probably tell you that unlimited free energy would mean the end of economics. Because there would be no scarcity and economics is about the allocation of scarce resources.

[Squander Two]

Re: ...the right to call upon the resources...

> And if you really, really, pressed an economist he'd probably tell you that unlimited free energy would mean the end of economics. Because there would be no scarcity and economics is about the allocation of scarce resources.

I can't agree with that. I don't believe that, given unlimited free energy, everyone will be content to just go on using all the already existing technology as much as they want forever. People will want new things that work in new ways. Which means that ingenuity will still be required, and ingenuity is a scarce resource. Also, one of the reasons that people will want new tech is that they will want to be able to do the same things more quickly. And that is because time is a scarce resource.

[auburnman]

Re: ...the right to call upon the resources...

Pretty much what squander two said. Land, food (possibly only high quality delicacies), Labour, experiences etc. would still all be scarce resources that someone somewhere will chase.

Unlimited Free Energy would open up tons of opportunities that people would throw money at - e.g. California could build desalination plants like there's no tomorrow and run them at full tilt. That's construction, design and plant maintenance jobs (and associated economic stuff) right there.

[LucreLout]

Re: ...the right to call upon the resources...

@Tim

And if you really, really, pressed an economist he'd probably tell you that unlimited free energy would mean the end of economics.

Reducing this to a very base level, how much unlimited free energy would it require to persuade a young lass looking like Taylor Swift to hop in the sack, on demand, with a fat man twice her age, say Johnny Vegas? I think, perhaps, while free energy would be a game changer, it'd not be the final whistle for economics.

[Mage]

Money: 2nd Oldest thing.

As soon as you have agriculture, you have villages and towns. Trading between farmers. You then have specialisation (potters, bakers, millers, fletchers, butchers, weavers, cordwainers, whatever and later smiths. The weaver, (or prostitute) may not want to be paid in goat and what would the change be? So money and then writing and book keepers are invented as soon as you have villages and towns. No surprise the oldest surviving clay tablets are accounts. Unlike later papyrus, parchment or paper the air dried tablets become preserved when the town is inevitably burn down (by bandits, stupidity/accident or due to insurance?)

Thanks for another good article, Tim.

[Trollslayer]

The British economy is not an island

So if our economy goes through high inflation and we need to borrow money (e.g. government bonds/gilts) what rate will lenders/investors charge?

Or I could say the economy doesn't exist in a bubble yet Corbyn seems to.

[Chris Miller]

@Arnaut

"the EU imposes tariffs"

You've heard of the WTO, I assume? And if Europe wanted to start a trade war following a Brexit (cutting off your nose to spite your face being a long-standing French tradition, admittedly), given the current balance of trade, German car manufacturers are going to find themselves with a lot of unsellable product.

I think it may be possible that Nigel Lawson understands more about such matters than you do.

[Yet Another Anonymous coward]

Re: @Arnaut

Is Britain going to be in a position to impose tarrifs?

Helo mr car worker, you are now unemployed because Nissan shut down their factory now that we can't export to europe - but we have made it up to you by making that new VW cost 30k by adding our own 50% duty

[Squander Two]

Re: The British economy is not an island

One of the things I find odd about the EU's enthusiasts is their conviction that the EU is the only possible set of international treaties available to European countries. If the UK were to leave the EU, both sides would immediately set about negotiating a bunch of treaties. OBVIOUSLY. I mean, what bizarre universe do you need to live in not to realise that?

Even Schengen wasn't an EU agreement at the start. A bunch of member states just negotiated their own treaty on their own accord, without the EU's help, and the EU later adopted it. This was not a strange event. It's what countries do.

[Yet Another Anonymous coward]

Re: The British economy is not an island

Yes Britain would be free to negotiate with each european country separately

But it would be up to France to allow the free movement of goods and people through its country on the way to the UK.

Fortunately we can rely on the historical mutual love and respect between France and the UK, to prevent France deciding on Visas for English truck drivers using the tunnel or a duty on Dutchy Oatcakes passing through France on their way to the Anglophile cookie eaters of Europe

[Squander Two]

Re: The British economy is not an island

> Fortunately we can rely on the historical mutual love and respect between France and the UK

Well, I suppose we could try that. Or we could be cynical and use the fact that London is now something like the third-largest French city as a bargaining chip.

Nice diaspora you've got there. Shame if something were to happen to it. Like if it suddenly all went home.

[Yet Another Anonymous coward]

Re: The British economy is not an island

It isn't. It was a textbook example of a tabloid blowing up a story from an incorrect statistic - "more or less" did an entire episode on it.

[DaveDaveDave]

Re: The British economy is not an island

"One of the things I find odd about the EU's enthusiasts is their conviction that the EU is the only possible set of international treaties available to European countries."

One of the things I find odd about this whole debate is that it seems like just about everybody agrees that we should have some kind of European union, and also that the EU is a monstrosity, and yet we're still arguing.

[rob miller]

So what will you do about it?

Pardon my utopian fantasy that follows, but my engineering approach is to imagine what the optimal solution looks like and then work out how to get there.

I find that the people I hang out with don't actually do what they do for money. They work for positive feedback from improving their corner of the world, fundamentally some kind of geeky 'flow' thing that comes from making things work better. As a software developer it's the most simplistic: to elegantly do more in fewer lines, and see it work. At a higher level there's some coolness that others enjoy using the software, and more ephemeral than that is if it can put some 0s in my ledger. For the others it's perhaps harder to quantify than LOC, but they say "I love my job". You may think I work for a salary, but in reality that just keeps my family off my back while I get on and do something I love.

Clearly there are jobs people do not love. You can't pay me enough to work on Windows nowadays, although I may decide to do so if it's an unavoidable part of a bigger problem that takes my interest. Garbage collection and rush work in hot, sweaty shops and kitchens seem like unpleasant examples (perhaps as bad as dealing with your boss), but I suspect most still take some pleasure in 'a job well done'. Not sure what solution works in this space, short of robotics.

The problem now is that we use the count of 'who gets to ask for what' as an end in itself, and use this to drive the allocation of resources. Changing the 0s in Larry and Sergey's ledgers won't affect their daily lives any more, and Bill's biggest problem is reallocating his 0s in the time he has left (barring life extension and nanotech armour). We scientists are perfectly happy working on new antibiotics, but the drug companies won't allocate us to that project because the accountants say the doctors won't prescribe capsules that cost £100 each for the 10 day course, and in the end I can't buy the petrol to get to work to do the job I love. Guess I work on more Viagra and Lipitor instead then.

So how can we keep the 'invisible hand' mechanism, but get off the hedonic treadmill of working for 'stuff' and allocate our resources more intelligently? Just askin'...

[DropBear]

Re: So what will you do about it?

If you can do work you actually enjoy then you are vastly more fortunate than most and if you can afford to treat 0s in your income so chivalrously then you clearly aren't affected by the more gruesome ways money makes the world go round for people who can barely afford to pay for their continued existence even when they do still have a job. And no, you don't have to go to Asia or Africa to find armies of them. One could argue you seem to be ill-equipped to try solving their financial problems I'd say...

[rob miller]

Re: So what will you do about it?

I live in Tanzania now; I see the poverty you are talking about every day. This is one of the many fucked up things that the current system is not fixing, and does not look like it will fix any time soon. Instead we continue shifting 0s to a tiny fraction of the population that are completely desensitised to the benefit by now. You have no idea what has affected me to the point that no amount of money can solve my problems.

I don't claim to be able to solve anything; I am exploring alternatives to, and variations on, the mechanism which has powered progress and generated so much for so long, but now seems to have evolved into (or simply achieved a logical outcome as) some sort of greed machine.

And indeed you are missing my point entirely when you frame these problems as 'financial'.

[Yet Another Anonymous coward]

Re: So what will you do about it?

Somebody already thought about it and came up with a solution.

You take all the money, and factories and farms away from the rich people.

You then put the people who scored highest marks in debating class in charge of the farms and move all the people from the cities out to work on them.

Then if you are a bad guy - you kill the majority of the people for being the wrong tribe, singing the party song wrong or looking like they might be better at debating class than you.

Or if you are a good guy - create a famine by putting the person who produces the best revolutionary poetry in charge of the irrigation system, wait for the majority to starve and survive on aid.

[rob miller]

Re: So what will you do about it?

Yes, there was a crap solution imposed some time ago which purported to address some of the issues I am exploring. It does not follow that all solutions in this space are crap; thank you for playing.

[Chris Miller]

@rob

You live in Tanzania and I don't, so it's hard to argue with the local system you see. But globally, the stats tell us that the proportion of mankind living in real poverty (less than $1.25 a day) has fallen drastically over the last 50 years - in large part due to that system of moving 0s about. If some people become ludicrously wealthy as a result, that seems like a price worth paying; and it makes no difference to my life how many superyachts Sergey Brin chooses to buy.

We're now at the point where we can meaningfully talk about creating a world in which no-one has to be dirt poor - and that would arguably be one of the greatest human achievements ever, given that just a few centuries ago almost everyone was dirt poor except for a tiny number of local warlords.

[rob miller]

Re: @rob

Yes, this is exactly my point about the mechanism that has created so much. We are now getting truly global though, and the money equation is instead allocating some of our best compute minds and resources to faster financial transactions. My research passion is protein folding, a 'funding black hole' as one advisor put it. Arguably the most significant result in the field in the last decade was made by D. Shaw, who apparently made enough money in financial markets to subsequently be able to 'do what he wants' now.

I think that most of the people reading these pages are no longer working for money. Are you aware of any daily impact whatsoever from your 2% inflation matching raise last year? Would you shovel shit outside for the same salary but a shorter commute? Do you hardcode everything in quick-to-deliver brittle code without caring that it will break next year after your part is signed off? Would you -really- rather be an Eloi and surf the web all day?

While not in the article, someone once defined money to me as 'a mechanism for allocating resources'. The question I pose, with no answer, is how can we harness the contributions that people no longer working for subsistence want to make? Money / capitalism / whatever has indeed worked very well for us up to this point, but I now suspect that its efficiency is declining with our global networks.

Put another way: whom should we be rewarding and supporting more -- teachers or bankers?

[DaveDaveDave]

Re: @rob

"Put another way: whom should we be rewarding and supporting more -- teachers or bankers?"

I think the fundamental problem here is that you don't understand what bankers actually do, so you can't see why they're getting more money than teachers. The 'moving zeros around' you refer to above isn't actually that at all: they're (among other things) using abstract concepts to transport physical, real objects* through time to where they're needed.

*Not via a time portal, obviously. Often not the same physical objects, but ones which are fungible.

It's probably easiest to understand on a very small scale. Imagine Ug the caveman has a pot of mastodon soup today, far more than he can eat, and Og, the occupant of the cave just down the ravine, has been busy chipping out some odd stone disc with a hole in the middle and has no food. Ug gives Og a bowl of soup, in exchange for a promise to get a bowl of soup back tomorrow. The next day, Og goes hunting and pays his debt.

From Ug's perspective, he's moved a bowl of soup through time from today to tomorrow, from a time of excess to a time of scarcity. Og's done the same thing, but the other way around. Oh, and by working together, they've used their time more efficiently and now have time to notice that Og's round rock is much easier to move if you roll it along the ground than if you carry it.

Banks are largely just doing that kind of thing, but on a much bigger, vastly more complex scale.

[Squander Two]

Re: @rob

> whom should we be rewarding and supporting more -- teachers or bankers?

Humanity keeps getting richer and education standards plummet. Is that a trick question?

[Ken Hagan]

Whose fiat?

Government may be able to print more of their own money whenever it suits them, but they can't print anyone else's and sooner or later have to buy stuff from overseas. So your fears about modern monetary theory surely only apply once we have a World Government.

And then ... Nature typically has pretty rigid ideas about the cost of doing something and all sorts of activities (even those confined within a single currency zone) have to deal with her, so we're back to money being a measure of how much work you are owed. (On which note, I applaud Neil Barnes sentiment, but would point out that debt obligations are generally accepted to fade away with time (is that inflation?) whereas the good lady Emmy Noether tells us that the failure of physical laws to do so results in the conservation of the quantity measured in MWh.)

[Nick Kew]

Re: Whose fiat?

Um, they can print someone else's. Google for "Operation Bernhard". Or consider regular forgery.

As for world government, we have dollar hegemony distorting the modern world economy. But that's a whole nother argument.

[Nick Kew]

The Devil's Work

In Goethe's Faust (published 1831), one sub-plot is about the emperor's troubles with the economy. Mephistopheles saves the day with promissary notes on future wealth. Result: big boom, leading to bigger bust when people realise there simply isn't the wealth to meet the promises.

For the classic example affecting us today - pension promises from 1945 to the Equitable bust in 2000.

Corbyn's "peoples QE" is another manifestation of that. But then, so was its predecessor PFI, especially when taken to vast excess by NuLab. If you're the government and can print yourself money for free, it's not long before you yield to temptation to upgrade the palace to marble and solid gold, and use real diamonds for the chandeliers. Regardless of good intentions, jobs administering such pots of money are naturally huge corruption-magnets.

Applies also when the private sector is given licence to print. Hence what's happened in the banks, and doubly so when underwritten by taxpayers.

[Nick Kew]

Flawed Premise

Your very first premise is flawed. Money in the real world is a medium of exchange, but can only ever be a short-term store of value. In the medium to longer term, debasement means you can save more yet buy less.

I use "debasement" rather than "inflation" here, because the latter word has itself been corrupted by association with meaningless price indexes, and esoteric arguments over different but equally-meaningless indexes. In a world where the only Big Thing you expect to save up for is a house, the kind of massive debasement we saw in about 2000-2005 or 1983-89 (and apparently right now in London) simply robs you of those savings and hands them to people richer than you, while not even showing up in the price indexes.

[Frenchie Lad]

Gold Standard

Looks to me like an apology for bringing in the Gold Standard. We would be able to see at a glance how prudent governments are.

[Paul Crawford]

Re: Gold Standard

Sensibly used fiat money allows for better management of the economy as Tim points out, but if gov are stupid then gold is a buffer to stop that.

So what is best? Maybe if we stopped any index-linking of politicians pensions, or better still linked them to the economy as a whole, we would see a bit more prudence...

[Turtle]

Money Is...

I often think of "money" as general-purpose, freely-transferable ration coupons.

[Tim Worstal]

Re: Money Is...

Nice analogy, might well steal it.

[Turtle]

@Tim Worstal Re: Money Is...

"Nice analogy, might well steal it."

Makes me burst with pride!

[LucreLout]

Re: Money Is...

@Turtle

general-purpose, freely-transferable ration coupons

General-purpose, freely-transferable beer coupons, and we'd be in agreement.

[Anonymous Coward]

On the subject of money, It seems to me that as we have an ever increasing pot, who actually has it?

It's a bit like every country being in debt, which planet do we owe it to? and also who controls it? Some institution must have some control over it otherwise it would just spiral into madness or is that the plan? Are we going to let everyone get into extreme easy debt and ramp up interest rates so everyone loses their houses like the 80's? Right to buy is a ploy to get people that can't afford houses to buy them so they get in debt and lose the houses.

Call me cynical and you would be right, lets see how this all plays out and in a few years I'll be happy to post on here and either eat my hat or stand triumphant.

[Nick Kew]

Claims

Methinks we're straying off the topic, but the big debts that matter are claims.

The big one for all of us is our claim to a state pension one day (or even many years, if you're lucky). That alone is worth quarter of a million in today's market. Arguably much more, if you treat the state's promise as better security (and therefore worth more) than an equivalent promise from a private-sector provider like the Equitable.

You have other entitlements, which will depend more on your circumstances. Which ones involve a chunk of someone's debt can be left as an exercise.

[Tim Worstal]

"It's a bit like every country being in debt"

Sure. Every country is in debt. Or rather, the government of every country is in debt. Who to? Peeps, that's who. Sometimes it's to the peeps of that country (largely so for Italy and Japan), sometimes it's to other governments (Greece) and sometimes it's to foreign private people (some portion of everyone).

We're not "all in debt" because that's impossible. In the end, all of that debt is held by some humans, owed to some humans. Might be as individuals, might be as their pension fund, to their government, to a company that they own stock in, but all the debt is owed to peeps.

The government sector is in a net debt position because that's just what politicians do, spend the shit out of the tax revenues and borrow more. But the world ain't in a net debt position.

[BoldMan]

Most of the holders of that debt are us - people who have pensions!

[LucreLout]

@AC

On the subject of money, It seems to me that as we have an ever increasing pot, who actually has it?

Your granny, mostly. Well, not yours specifically, but the elderly - its tied up in houses, pensions, etc. That's not a criticism, it's what you'd expect if people save/invest some of their income every year, then those with the most years will typically have the most assets.

Are we going to let everyone get into extreme easy debt and ramp up interest rates so everyone loses their houses like the 80's?

No. All governments since the 80s have actively worked to prevent that at pretty much all costs, because there are simply no votes in it. Homeless families have generationally long memories.

Debt, much like pain killers, can be a wonderful tool when used sensibly and in moderation. Used for kicks or in vast quantities, and it can do a lot of damage. I'm in debt, I owe well into 6 figures. But the house the debt was used to buy nets off against that. Sure, prices may fall for a while, but with a 2% inflation target, the chances are good the house will be worth the sum of the repayments over the medium term and more than that over the long term (it will still accrue about 2-3% per year once the mortgage is finished).

[G Mac]

Some quibbles...

So lets start at the top.

With respect to your pig debt analogy, there is no anthropological evidence in pre-history that that is how a village operated. If you owed 5 chickens for my pig, I know you are good for it, along with everyone else in the village. Debts did not have to be maintained.

Certainly there was barter between groups, using whatever means of equivalency for exchange, like gold, amber, etc. etc. But debt didn't really come into this since the groups were not formally linked (you have to see a group again/regularly to pay/receive debt service).

As for Graeber, note that this really starts round the agricultural revolution, particularly in the fertile crescent. It wasn't so much private debt being recorded, but debt to the temple and/or monarch. There is also the concept of the Jubilee Year, mentioned in Biblical regulations, which has been argued about by modern economists since it is anathema to modern capitalism. A Jubilee was (apart from other actions) the wiping out of debt owed. Since it was owed to the temple/monarch it was not a problem to do so, and was seen to rebalance the economy.

Next, it's nice that you now see MMT as valid, but you failed to mention a crucial aspect of the MMTers view that the government can spend freely. So instead of your statement here:

"It can, and should, just make as much as it needs and then go spend it on whatever it wants."

It is in fact:

"It can, and should, just make as much as it needs and then go spend it on whatever it *needs as long as whatever it spends it on is not resource constrained*."

MMTers are very aware of inflation, and know that the government cannot simply spend cash on things that are resource constrained. I am sure this has been pointed out to you before, but you should get a refresher from the MMTers.

Also, taxation is the way of making a fiat currency worthwhile for folks to desire. It doesn't have to 'pay' for anything (within constraints of a fiat currency that the government issues, free floating exchange rate and debts issued by the government are denominated in that currency). As such, taxation can be used to smooth high growth/low growth cycles by increasing/decreasing taxes.

Finally, the examples of the Weimar Germany (and Zimbabwe for a similar reason) is spurious. Germany had reparation debts denominated in foreign currency, along with losing the Saarland to France as a commodity (and cash) resource. Keynes recognised this and called it for what it was - a disaster in the making. For Zimbabwe, it was Mugabe's land 'reforms' that effectively wiped out a resource.

[Naselus]

Re: Some quibbles...

It's also worth noting the Brad DeLong's 'corrections' are largely a matter of ideological difference; he picks up the occasional factual inaccuracy (often by citing work that didn't exist when Graeber wrote his book, which is essentially accusing him of poor scholarship for being incapable of seeing the future) but for the most part says nothing to dispute the actual point of Graeber's work. It's a quibbling nitpick website, rather than a real, serious critique.

Of course, DeLong is also one of the principle theoretical architects of the deregulation that lead to the financial crisis of 2008, so one might question whether his ideological ground is a particularly firm point to argue from (and also opens him up to the same poor scholarship accusations he's levelling at Graeber, since he should have seen what would happen 17 years after he advised it - though in this case, he really SHOULD have seen it, since it was pathetically obvious that unregulated banks will increase systemic risk).

[DaveDaveDave]

Re: Some quibbles...

What a load of bollocks you write.

"It wasn't so much private debt being recorded, but debt to the temple and/or monarch."

Absolutely not. It's abundantly clear from the biblical evidence that there was an extensive network of private debts and transactions.

"There is also the concept of the Jubilee Year, mentioned in Biblical regulations, which has been argued about by modern economists since it is anathema to modern capitalism."

No, it's not anathema at all. We have adopted many of those principles into law, giving us things like bankruptcy.

"A Jubilee was (apart from other actions) the wiping out of debt owed. Since it was owed to the temple/monarch it was not a problem to do so"

But since that contention about who the debt was owed to is wrong, so is that answer to why it wasn't a problem.

""It can, and should, just make as much as it needs and then go spend it on whatever it *needs as long as whatever it spends it on is not resource constrained*.""

Do you have the faintest idea what that actually means? The 'resource constraint' in question is whether you've rounded up all the Jews yet and taken their money, or if there's still more to steal.

I find the term _modern_ monetary theory to be absolutely laughable. It's not modern at all, it's just a rehash of some very old antisemitic claptrap.

Clue for you: there is no magic money tree, the Jews aren't stealing the fruit, and so gassing them won't actually help everyone else pig out on the fruit instead.

[G Mac]

Re: Some quibbles...

You will find the writing of time recording debts to temple and the monarch. Please show the extensive records of private debt *not* to those.

As for bankruptcy, it is something that can be used only under pretty extreme measures, at least in the US. Multiple laws have gone into effect to restrict bankruptcy for student loans, credit cards and even personal. What is more, the law doesn't allow for expunging of debt by decree, which is what a Jubilee Year is. Please show me the law allowing debts being wiped by decree. Ah yes there is one for sovereigns, but that isn't private, is it?

"Do you have the faintest idea what that actually means? The 'resource constraint' in question is whether you've rounded up all the Jews yet and taken their money, or if there's still more to steal.

I find the term _modern_ monetary theory to be absolutely laughable. It's not modern at all, it's just a rehash of some very old antisemitic claptrap.

Clue for you: there is no magic money tree, the Jews aren't stealing the fruit, and so gassing them won't actually help everyone else pig out on the fruit instead."

Do you actually know what MMT is? Please provide a link where you got the above idea...

[Steve Davies 3]

Cash is....

what you use to buy stuff when you don't want to be tracked and or taxed (used notes only)

by 'The Man/Google/Credit Card Companies/Banks/Ad Agencies/just about everyone else including Uncle Tom Cobbly...'

[Ben Liddicott]

No, supply of labour is limited.

If the government confiscates wages, and spends to hire staff, this does not bid up the price of labour because the spending is offset by the confiscation (workers have less spending power). If they print money to spend, this bids up the price of labour. You can do a little of this but you cannot do a lot and certainly not nearly enough to cover the amount of spending a modern government likes to do. It will still mostly have to be financed by taxation.

[Yet Another Anonymous coward]

Why are government in the money business?

Blessed St Margaret and Holy Tony both believed that government shouldn't be in the coal, steel, car making or telecoms business because that was the job of capitalism. So why are governments trying to make, buy and sell money?

Why not let the banks handle the whole fiat currency bit?

In theory I get paid in $ but I really get paid in numbers at HSBC. I spend in $ but really I spend in "Visa". Both HSBC and Visa could have their own currency - and effectively do.

There could be bargain banks that would have to offer better rates to make up for the fact that few stores would accept their notes - in the same way that discount stores don't take Visa.

And there could be highly insured, low leveraged, prestige banks that could charge me higher fees because a RoyalBankofXYZ note is accepted everywhere.

The government could demand that my taxes are paid in their official notes and there woudl be a free market rate for these in all the other day-day currency

[BobRocket]

Profit in Money Creation

If there are 100 widgets and 100 units of currency, each unit represents 1 widget.

If I 'need' 10 widgets but don't have any units I can go to a bank and borrow the 10 units I require.

The bank will charge me a risk premium plus an opportunity cost, say a widget for each. I give the bank a promise to repay the unit value of 12 widgets (the collateral)

The bank uses the collateral (my promise) to create 10 units so I can aquire the 10 widgets, no problem.

Except - There are now 110 units in existence and still only 100 widgets, the market doesn't yet know about these extra units but once the acounting is done it will be seen that each widget now has a true market value of 1.1 units.

The total repayment of the loan is not the 12 units but 13.2 units simply because banks create units from thin air but require repayment in tangible items (widgets)

[DaveDaveDave]

Re: Profit in Money Creation

"The bank uses the collateral (my promise) to create 10 units so I can aquire the 10 widgets, no problem."

That's the bit that's not true. In the real world, at least, that bank has to borrow the 10 units it just lent you, in order to balance its books.

[BobRocket]

Re: Profit in Money Creation

@DaveDaveDave

No, the books balance just fine.

When I borrow the units, the bank creates two entries in my name, one is a credit in my favour of 10 units the other is a negative credit so I have two entries, +10 and - 10 (EB)

From the banks point of view they have collateral (my promise to pay) of +10 and -10 units in their account so their books balance as well.

As I spend the +units my account goes out of balance (in the red) , this is offset by the receivers of my units depositing them in their accounts (in the black).

Balances are cleared through the central bank at the close of each day, with the central bank creating deposits for those banks that are in credit and loans for those that aren't.

[DaveDaveDave]

Re: Profit in Money Creation

As you agree, by the end of the clearing period, the bank has to net off all the transactions and either lend or borrow money to match the net difference.

"As I spend the +units my account goes out of balance (in the red) , this is offset by the receivers of my units depositing them in their accounts (in the black)."

Which is likely to be a different bank.

[BobRocket]

Re: Profit in Money Creation

'Which is likely to be a different bank.'

It is also likely that other banks customers will spend units with my banks customers who will then deposit with my bank, in the grand scheme of things the nett movement in and out is only a small proportion of the whole. (it probably never varies more than 3% either way)

[martinusher]

Couple of Observations....

I think Terry Pratchett's Discworld story "Making Money" very succinctly describes what money is, how its created and so on. It doesn't talk about how its destroyed because his untimely death prevented him from writing a tale about tax collection. (You're supposed to keep creation and destruction in rough balance -- contrary to popular sentiment taxes don't go into a big piggy bank to directly fund government expenses, it just looks like it.)

Someone mentioned Zimbabwe as an example of hyper inflation. This country has apparently been using US dollars for common currency for years, it only prints its megamoney for tourists.

[Quip]

in sum

So, putting this together:

"what is money is that it's a way of keeping score."

" government can indeed just go and print all the money it wants to spend … And a truly scary thought it is that they are, too … Because there's just nothing to constrain those drunken sailors if they have bottomless wallets."

With fiat money we have to trust the government to be an honest scorer. In other words one of the ways in which a government must perform its essential function of providing a framework of law in which contracts can be enforced.

[John Tserkezis]

Don't forget about sex, the oldest currency known to mankind.

I want to go completely off the grid and away from money altogether.

I had my arse botoxed recently, so it's good, however, the rest of me looks like my butt used to - which is bad.

Nothing a bit of plastic sugergy can't fix. Gotta spend money to make money, right?

No wait...

[OzBob]

So, what's the next step?

I love the doom and gloom merchants on the financial crisis earlier in this forum. As I recall, economists have predicted eleven of the past three recessions.

Here in NZ, we have the Green Party happy-clapping "Quan-ta-tive Ease-ing" on the news, and this coming from co-leaders with a doctorate in politics and a former MP for the legalize cannabis party.

The true value of money would be the confidence in and likelihood of getting full reimbursement. (Not necessarily the same things). So long as we have the churn of deposits in / withdrawals out, the system is stable. If the zombie apocalypse actually comes, then food and weapons will become the currency in barter or in extreme circumstances, violence and theft will be the new fiscal practice. Reminder, buy more ammunition this weekend.

[Nick Kew]

Re: So, what's the next step?

Sorry, mate. If you want to survive into that kind of bunker, you want serious money.

Your personal bodyguards won't come cheap in the intermediate ("somalia") phase, when society has broken down but dollars or gold are still the widely-accepted currency.

[Anonymous Coward]

Hmph!

The truly awful thing about printed money is that it works just well enough to enslave everyone to the worst of society--politicians. Central Banking has given governments access to an endless sea of credit just as Tim Worstall point out. The great thing about a commodity based currency is that it places an upper limit on the amount of mischief a government can get into. Like wars for instance. War is not possible without great heaps of currency, is it?

If we do not do something about limiting the amount of money available to our sundry governments, we are dead certain to destroy ourselves--or let our governors destroy us.

You see, psychopaths just naturally gravitate to positions of power. Once they are in power, they have no compunctions about killing or maiming others. They have the means to do people serious harm along with the means to cover their tracks. I advise caution about how your respond to this statement. It really is capable of harming you in more ways than one.

[druck]

Re: Hmph!

Billy, don't worry the ambulance is coming.

[Anonymous Coward]

Here's how I think it should work...

Each person would be allowed to decide how much money they have, once per year. Their current account would have an editable balance field on 'money day' and once they'd made their edit, the balance would be read-only again.

Now here's the clever bit: each year, before money day, the government would decide, but not publish, what the acceptable total for money day was, and there'd be a very clever formula to scale each person's request so the total amount of money would match up. The scaling would be determined by a number of factors, including how much they'd asked for before, how much tax they'd agreed to pay in the previous year, how much their immediate neighbors had asked for and paid, how well they'd guessed the scale factor, and finally the weight and overall health of the individual over the last year.

Providing the formula was fair (and admittedly I am still working on this part), everything would just work. Problem solved.

[LucreLout]

Re: Here's how I think it should work...

@ephemeral

Or, and I know this will sound like radical thinking... You can keep the output of your own efforts, and I'll keep the output of mine.

For things we can't organise individually, like national defence, the road network etc, we'll have The State, which we could fund fairly by dividing the cost between each of us, which after all, is how we divide the benefits.

[DeliberatusFreeman]

pithy thinking, I want more, with beef gravy, and popovers on the sideplease

I like how this fellow thinks; I want more think pieces out of him.

[codejunky]

Tim

Enjoyed the article

[David Roberts]

On the subject of money, Tim

Came across this the other week in the Grauniad,

http://www.theguardian.com/business/2015/sep/18/interest-rates-rise-bank-of-england-chief-economist-andy-haldane

" Indeed, Haldane believes the Bank may have to do more than that. As emerging economies slow down, sucking demand out of the global economy and depressing commodity prices, what Albert Edwards of investment bank Société Générale has called a “tidal wave of deflation” could yet be unleashed.

With interest rates already at a record low of 0.5%, the Bank has little ammunition left. So Haldane believes it may eventually have to think much more radically – perhaps even levying a negative interest rate. He says that this might be made possible if central banks could harness similar technology to that used in the virtual currency Bitcoin. Instead of grubby notes and coins, consumers would pay and be paid using electronic deposits on their phones or computers – and their banks could then penalise them for failing to spend that money."

Is it just me, or is this really scary stuff?

Redefining money (sorry, cash) from the mainstay of the black economy and a support for sagging mattresses to a government controlled electronic token system which can be taken away again if not spent? So many things wrong with this - at the moment it seems to me to be more like the tokens mines used to pay miners and which were not freely tradeable, being only redeemable at the company store.

Big question - would this still count as money i.e. freely tradeable tokens for keeping score?

[Tim Worstal]

Re: On the subject of money, Tim

Haldane's a bit odd, even by central banker standards.

Negative interest rates, yes, these can happen. Not hugely negative, but we might put up with -0.75% or so: what would be the worry and insurance cost of having your money in cash under the bed? -2% maybe? But not fiercely negative.

Moving entirely over to electronic money though won't quite mean what Haldane thinks it will. He thinks that it's the government that creates money. And it ain't: it's as in this piece, a way of keeping score. And if people won't accept what the government is providing as a way of keeping score then they'll go off and use something else. Anything else. Tide detergent is used as "money" in some US drug deals for example.

The real aim of having all electronic money would be taxation, for everything would be trackable. And for that very reason not everyone would use it.

[Anonymous Coward]

Re: On the subject of money, Tim

When I was selling drugs, I'd have probably laughed at someone trying to give me tide for some green or white. They may have even gotten a free nug or bump just for being funny, but I appreciate ingenuity. Thats seriously gotta be an urban legend, no dealer's hurting to wash his or her threads that bad to accept detergent in lieu of payment.

I do know dealers that'll take food with a little cash though, as a lot of them are young men who can't cook for shit, and Ramen noodles get really old after enough time or enough trips to jail.

Quarters for laundry or tolls I'd always take though. They come in handy.

[DragonLord]

Re: On the subject of money, Tim

I think it was used at a higher level, where you're dealing in pallet loads of Tide rather than individual boxes.

To me it makes sense as it's effectively cleaning the money and removing the paper trail.

[LucreLout]

Re: On the subject of money, Tim

@Tim

we might put up with -0.75% or so: what would be the worry and insurance cost of having your money in cash under the bed? -2% maybe?

I'm not sure I would. Unless I'm also being paid the same amount on any debt I carry, like the mortgage. Otherwise I'd just withdraw my cash and pay it over to the building society. The excess cash I'd either use to buy physical gold, sports cars (yup, check prices over 5 and 10 years), or some other not automatically depreciating asset.

Or more radically still, US Dollars held in a dollar account with an American institution, where our central bank, the government, and the taxman can do nought but gaze upon it.

People, central banks, economics, and money don't work the way Mr Haldane seems to think they work, which is a tad worrying given his position.

[Anonymous Coward]

"governments are generally crap at allocating credit"

Banks have proven to be worse.

[Zolko]

you forgot to mention interests

Mr Worstal, nice article overall, thank-you.

But you forgot to mention that when money is created when taking a credit, the corresponding debt is actually higher that the amount of money created in the process, because of the interests: the assets are the principal of the credit, but the debt is the principal plus the interests, meaning that there is more debt than assets in the world, and this difference is increasing because of the interest on the interests.

As long as the economy expanded, the expanding amount of money was not a problem, even a feature, but now that the economy is stabilizing – because of limited resources and a stabilizing demography – the pyramid scheme implodes.

[Martlark]

Surprisingly, Zimbabwe 100 Trillion Dollar notes are now worth much more than the paper and ink. See: http://www.ebay.com/itm/Zimbabwe-100-Trillion-Dollars-Banknotes-AA-2008-UNC-50-100-Trillion-Series-/281789318269?hash=item419bf3c47d , where the asking price is almost $25USD.