Transition to a public monetary system

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We need a serious public and political debate on the pros and cons of the current monetary system, the alternative of public money creation, and on how system change might happen. In particular, because many experts tell us the next crisis is already in the making. The consequences of such a crisis will be even more severe than those of the 2008 crisis. On the one hand because the latter is far from over, on the other because under the present monetary system governments will no longer have the means to limit the fall-out of such a collapse. Political parties but also civil society – trade unions, environmental organizations, associations representing the interests of small and medium enterprises – should insist on such a debate. The media should play an important role in facilitating such a discussion. Economists who are willing to think and work on developing alternatives can play a key role. Economists unable to push themselves beyond the out-of-hand rejection of system change and blocking an open discussion should, after being heard, be ignored.

Discussion based on arguments

We, ordinary citizens, should not allow ourselves to be excluded from the debate by people pretending to have all the answers, even if they are high-ranking academics, officials or otherwise enjoy high status and prestige. We will have to part from the premise that economists, although very intelligent and clever, are so deformed by their training and profession that rather than practicing science they proclaim a faith: the belief that the market will put things right. We cannot hinge decision making on our monetary system, our economy, our society and our future on the tenets and dogmas of a science with such serious shortcomings.

The analogy with power generation comes to the fore once more. We don’t leave decision making on whether or not to use nuclear power to nuclear physicists but, after intense public and political debate, decide ourselves, democratically and based on a thorough assessment of the advantages and disadvantages of this form of energy and its alternatives. Even though we do not understand exactly how a nuclear reactor works, we do note the outcomes of this form of energy generation, compare it to other forms, and arrive at a decision.

Actually this analogy applies only partially. When deciding on nuclear energy we give, if we are prudent, significant weight to the opinions of nuclear physicists, engineers, and other energy experts. But unlike economists nuclear scientists have developed adequate knowledge: nuclear power plants work. Economists, as a result of the shortcomings of their science, their distorted picture of reality, theories based less on reality than on faith, and the unrealistic assumptions needed to make their mathematical models work have much less relevant knowledge on the economy.

The above does not mean that, if they manage to put aside those mathematical models and use their intellectual capacities for a thorough analysis of past and present, economists cannot contribute hugely to the discussion. So we should listen, but reject all that which derives from mainstream economic belief and its dogmas. In other words, we should accept and follow up on the opinions of the alleged experts only if it is supported by well-balanced arguments and factual analysis.

An uphill battle

The fight against economic dogma and thus the current economic order is likely to be fiercer than the fight anti-nuclear activists engage in against the nuclear lobby. This is partly because the battle is not fought against engineers and scientists but against the faithful. And also, because economic faith is not only espoused by economists but also by most of our political elite and the media.

Money isn’t difficult

Most important is that we should not let ourselves be discouraged by the argument that money and money creation are complex issues that even many experts don’t understand well. Because no matter how complicated economists and other financial experts make it, the simple fact is that after all is said and done, money is something very simple, a symbol that works as long as we have faith in it and of which, within limits, we can make as much as we deem necessary. That’s the simple but correct starting point of the discussion we must engage in.

Target group: our politicians

That discussion should be sought in particular with those who represent us and are uniquely responsible for the public interest: the political elite. Getting the topic of money creation and our monetary system on the agenda will require broad public support from all those who have in mind both their own interests and those of others: those still suffering from the 2008 crisis, the poor in North and South, those who have no access to proper education and health care, those whose health is suffering under environmental pollution, and above all, future generations.

The transition: planning ahead

The faster the transition to a public monetary system takes place, the better. Realistically speaking, though, it can take a long time before such major change is achieved. It will probably require a new crisis, even worse than the 2008 one – a crisis which according to many experts is close to inevitable.

Maybe we can learn something from the famous economist Milton Friedman, proponent of the Chicago Plan but later in life also a far-right economist with a strong aversion to anything remotely resembling government and state intervention. For several decades Friedman laid the foundations for the policies that were implemented in the early 1980s in the United States and Britain under the Ronald Reagan and Margaret Thatcher administrations. He described the way of bringing about major change as follows:

“Only a crisis – actual or perceived – produces real change. When that crisis occurs, the actions that are taken depend on the ideas that are lying around. That, I believe, is our basic function: to develop alternatives to existing policies, to keep them alive and available until the politically impossible becomes the politically inevitable.”

Friedman wrote this more than twenty years before Reagan and Thatcher brought his ideas into practice.

The lesson we can learn from Friedman is that if the opportunity arises to move from private to public money creation the plans to do so should be ready. For Great Britain and the United States significant efforts have already been made by such organizations as Positive Money and the American Monetary Institute. The plans these organizations developed are probably also applicable for other countries and possibly, monetary unions such as the Eurozone. For each country or group of countries detailed, well worked out plans and draft bills should be prepared and be ready to use. [1]

A role for economists?

As already mentioned there are many economists who are critical of the perspectives, outlook, theory and practice of mainstream economics, and who can think outside the box. That’s a good thing because we cannot do without their help. Such economists will be indispensable, in the first instance to overcome the barriers thrown up, consciously or unconsciously, by mainstream economists in defence of banks and the financial industry. And secondly, when that barrier is torn down they will be indispensable in the fight against the interests that draw so much benefit from our present monetary system.

Dutch economist and monetary expert Roelf Haan, an early monetary reformer, sees an especially important role for academic economists, as they can be more independent in their thinking than their fellow economists in government and industry.[2] Haan sees it as a task for university teachers and researchers to educate the public and policy makers – also when running the risk of their advice being rejected.

Let’s hope that academic and other economists accept the challenge of Haan and start contributing to convincing our politicians that reform of our monetary system is not only possible but necessary. Likewise politicians will have to abandon the beaten track. In line with Friedman, Haan suggests that politics should be seen not only as the art of the possible but even more so, as the art of making possible tomorrow what seems impossible today.

 

[1] In 2011 US Congressman Dennis Kucinich of Ohio presented a bill to the US House of Representatives, the “National Emergency Employment Defence (NEED) Act”. This proposal, developed with the support of the American Monetary Institute, was based in part on the monetary reform proposed in the 1930s Chicago Plan.

[2] In “The relationship between the financial sector and the real economy” (Dutch De relatie tussen de financiële sector en de reële economie), 2012, https://docs.google.com/file/d/0B7iNQWnaw2FBUmxXWGdBdVI0bXM/edit, Haan cites from statements from the 1970s by the well-known Belgian-American authority in international monetary economics Robert Triffin, professor at Yale University. It should be noted, however, that since then times have changed: unfortunately, over the past decades academic independence has been compromised increasingly by governments encouraging ever closer links between universities and industry, directly and by forcing public universities to generate more income by working for private enterprise.

 

——–

This was the 9th chapter of the booklet “Our Money” by Frans Doorman. This booklet explains, in plain English, what money is and how our current monetary system came about. It discusses the problems inherent to the present system and proposes an alternative.

It also explains how the current monetary system restrains us in addressing our economic, social and environmental problems, and even worsens them. It discusses the transition to a system that would work better, the main traits of that system, and the reasons why such a better alternative is hardly considered at present. 
 
This booklet is intended for a broad audience: anyone with an interest in the solution of society’s social, environmental and economic challenges. People who are concerned about the continuing impact of the economic crisis that started in 2008 and about its aftermath: growing economic insecurity, inequality, and poverty. And people who are distressed about the environmental problems our global society is facing: the degradation of ecosystems and the environment in general, the depletion of natural resources, climate change, loss of agricultural land, and looming fresh water shortages. People who, even though they do not expect to be affected by these problems directly themselves are concerned about the future of their children and in general, of future generations.

Free Download – PDF format A5

 

 

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  • http://www.jamesmurraylaw.com/about/who-is-jim-murray/ James Murray

    Well.
    This extract certainly pulls no punches when predicting the likely resistance from mainstream
    economics academia to new ideas about money.

    Of course, this resistance is natural and therefore understandable – it is part of the human condition, initially, to resist the new and different.

    And this is so, even in universities where the culture should be a readiness to throw off old ideas when better concepts and evidence come along.

    It is so important that these objections are met head on.
    That is why I have asked PM that, right at the top of the website, there should be a further tag ‘Objections’
    This would be where every sensible academic, who have published their misgivings, are welcomed, given space, and their objections dealt with.

    Frank van Leaven has done a wonderful job of summarising ‘Common Critiques’ counter to those of PM, and then, with links and evidence, and demolishing those counter arguments.
    http://positivemoney.org/our-proposals/sovereign-money-common-critiques/

    Regretfully, his page is not thrust to the fore and is hard to find under the FAQs tab.

    I know also that Ben et al have spent some time reproducing academic arguments and answering them point by point.

    Again, it is difficult to get to these pages.

    And yet, I believe, airing the anti-arguments from the many traditional economists is far too important not to have them headlined and dealt with quickly.

    As above, there are tabs at the top of every page:

    The Issues – How Money Works – Our Proposals – Join In

    I suggest these should be extended thus:

    The Issues – How Money Works – Our Proposals – Common Objections – Join In

    The media, and many others, will love having PM’s pros and cons easily accessible.

    • bankster01

      Agreed. One objection is “it would cause inflation”. A good counter to this is that the commercial banks created huge amounts of money to cause massive house price inflation. Another objection is from the likes of Ann Pettifor. “There would not be enough credit so the economy would be in recession, if the commercial banks were not allowed to create money”. This is the reverse of the first objection and is easily countered because the Bank of England would monitor the money supply and create enough money (or not) as required.

      • PJM

        “If it was an engineering equivalent we would still be using horses for transport, or using leeches in medical treatment.”

        That’s because engineering is applied science, whereas economics is more akin to the dogma of religion and is almost devoid of real science. Trust Prof. Steve Keen on that!

        • RJ

          Sorry. But Keen is STILL confused about this topic.

          • http://www.jamesmurraylaw.com/about/who-is-jim-murray/ James Murray

            RJ

            Is this idiot contribution of yours talking about, Steve Keen, Professor and Head of the School of Economics, History and Politics at Kingston University, London -who is also a Fellow at the Centre for Policy Development???

            Arrogant RJ, and towards your betters…

          • bankster01

            I know who is confused it is not Keen

  • RJ

    “The faster the transition to a public monetary system takes place, the better.”

    If you are referring to throwing out our money as bank credit and replacing our money () with BoE reserves? This will not be done quickly. A minimum of 10 years and possible much longer. It would be a massive change with huge implications. The world uses a three level approach and has done for some time. Level 1 is the banks and treasuries money (reserves). Level 2 is our money (bank credit) . Level 3 is notes and coins (token’s for bank credit).

    Cutting out level 2 will be a change that will cost a fortune and if not done carefully will be controlled by the ruling elite and set up for just for their benefit. As the Euro has been for example. I’m still not sure why you need to do this as opposed to just nationalizing the banks. All these sorts of issues would need to be discussed and explained. Just this starting process will take forever.

    • PJM

      RJ, it’s not often that you’re absolutely wrong, but this time, IMHO, you are!

      In the Sovereign Money system proposed by Positive Money, there would be no BoE reserves, as there would be no need for them. By your definition, the only forms of money would all be “Level 3″.

      Notes and coins would be unchanged, but bank money would be superseded by electronic cash created ex nihilo by the Bank of England and gifted to the government for it to spend, according to its democratic mandate, into permanent circulation in the ‘real’ economy.

      It would be illegal for banks to create bank money. Banks would have to be true financial intermediaries, earning honest profits from the margins between their borrowings and their lendings.

      If you haven’t yet read the book “Modernising Money”, I suggest that you do so.

      If you have already read the book “Modernising Money”, I suggest that you read it again.

      • RJ

        This is part of the issue. Even follower of PM haven’t a clue. They always just fall back on criticizing me and then pointing to their book. Its like saying I’m wrong and just read the bible “Modernising Money” again.

        I’m right. Or explain in simple terms why I’m not

        “Modernising Money”

        T
        HE
        P
        ROPOSAL
        IN
        BRIEF
        The following is a brief overview of the proposals.
        The power to create all money, both cash and electronic, would be restricted to the state via
        the central bank (such as the Bank of England or European Central Bank). Changes to the rules
        governing how banks operate would still permit them to make loans, but would make it impos
        -sible for them to create new money in the process

        • http://www.jamesmurraylaw.com/about/who-is-jim-murray/ James Murray

          Again RJ you witter on about reserves and do all you can to try to confuse readers to this blog.

          Your ‘contributions’ over the last year or so show that you are in the thrall (or in the pay) of the banking industry who are terrified of their money-tree being takn away from them.

          Hence your nonsense comments.

          PJM is quite right. Point to any page in the larger explanation of the PM movement in “Modernising Money” and give your critique of it with your logic, evidence and any links that back you up.

          Go on.

          Or don’t bother us.

          • RJ

            My extract above is from the Positive Money proposal. So I supply an extract from a PM document. And you … nothing at all as always. No substance at all. How does PM ever hope to get anywhere when their team can not answer even the most basic questions?

            Just chanting “sovereign money …” will not do out there.

        • PJM

          RJ, I’ve had a gutsful of you, you arrogant prick, telling me and others that we “haven’t a clue. You are the one who is ignorant as to just what a Sovereign Money banking and monetary system is and how it would work. Before you make any more comments on this blog, please visit http://www.sovereignmoney.eu and read all that Prof. Joseph Huber has written on it, including his devastating critique of MMT, which explains why MMT is wrong and Sovereign Money is right.

          The present debt-based monetary and banking system has shown itself time and time again to be systemically unstable, whereas a Sovereign Money system would be systemically stable, providing a better life for all, including those working in the banking industry (but most likely not for bank shareholders).

          • RJ

            So what is this comment then PJM. You started it yet drop to another level when I respond likewise

            “RJ, it’s not often that you’re absolutely wrong, but this time, IMHO, you are!”

            And you still haven’t replied again to my challenge. Instead just referring me to another of these magic documents that contain all the answers. This one I have recently read and it’s a poorly written, third rate, joke of an article. I could demolish it as could any MMT economist (and as I have said before I’m not linked in any way to MMT).

            I stand my my comment. PM have got a major issue on their hand. Franks articles are excellent but the PM team are as good as just ignoring them and continuing their sovereign money chant without having a clue what it all means.

          • solutrean

            You have already admitted on this site that you are not an expert on MMT RJ. This being the case how can you say that any MMT economist could demolish the contents of the PM article? To say this with any justification you would need to be an expert on MMT which by your own admission you are not.

  • http://www.jamesmurraylaw.com/about/who-is-jim-murray/ James Murray

    The latest from China and the World financial markets shows that we have a 2008-type financial crisis coming up again.

    This time it is unlikely the QE, as we understand it, will be effective – we still have too much money sloshing around in the asset spiral from last time.

    And anyway, as explained by PM, less than 10% of that ‘new’ money (effectively) given to the banks was passed on by them to the commercial sector for investment in plant and other growth- and wealth-creating.
    Most of the rest went into the deep pockets of those who had already reached plutocrat status.

    (But I recite this for new visitors to the blog and apologise to regular readers.)

    Yes, this is the time for PM and its fellow riders to show Osborne et al that the small creation of debt-free/non-redeemable Loan Bonds by the Treasury and bought by the Bank of England (AKA Sovereign Money Creation) would do the trick – painlessly.

    I am very optimistic that Osborne will learn, as will the rest of the World, that this is the only sure-fire way to take up the deflation slack that is threatening to engulf us…

    • RJ

      “And anyway, as explained by PM, less than 10% of that ‘new’ money (that
      was effectively) given to the banks was passed on by them to the
      commercial sector for investment in plant and other growth- and
      wealth-creating.Most of the rest went into the deep pockets of those who had already reached plutocrat status.”

      What does this mean James. Please explain because it seems like nonsense to me?

      QE is an asst swap where Govt bonds are swapped for reserves and cash. So instead of say a pension fund holding bond assets. They exchange these for bank credit. The banks JE is
      DEBIT BoE Reserves (new reserves created by the BoE from thin air)
      CREDIT Pensions funds bank account (bank liability /pension funds asset)

      So IT’S AN ASSET SWAP. Say £100 billion of bonds are swapped for £100 billion of bank credit. The main ones who MIGHT benefit from this are the banks who end with a new asset (BoE excess reserves) that they receive interest on. NB The actual BoE reserves cancel out with the bank credit. The BANKS might only benefit from the extra INTEREST.

      • http://www.jamesmurraylaw.com/about/who-is-jim-murray/ James Murray

        Bloody hell RJ.
        It has nothing to do with reserves and that is your perennial error.
        With SMC, when the B of E ‘buys’ the T Bonds that have been created by the Treasury, it does not use reserves of money it has to hand.
        It adds the amount of the T Bond total to the credit if the Treasury in the Treasury account it holds at the B of E.
        Then, the other side of the double accounting is a notional DR account to that amount – in other words, in exactly the same way as when the value of new notes and coins are supplied by the Royal Mint to the credit of the Treasury.

        • RJ

          “It is NOT an asset swap – it is new money.”

          It is an asset swap. And it is the creation of new money (bank credit) and also new reserves

          “But the wealthy gain from the actual new money.”
          True. But the “wealthy” lose another asset (the bond).

          “rich gain a fortune from the increase in these asset values”
          Apart from when they don’t. Like right now.

          • Crash

            RJ, your thinking only makes sense in a private 100% credit economy without central banks having the ability to create money. In such an economy every pound a bank lends out has a corresponding debt. So if for example Coca Cola uses their cash reserves to buy up bonds from Deutsche Bank, this is an asset swap for both parties. Ownership is transferred from Deutsche Bank to Coca Cola, while cash is transferred from Coca Cola to Deutsche Bank. In this case Deutsche Bank is profiting from having bought the bonds at 100 and having sold them off to Coca Cola for 160. That 60€ difference comes from someone who for simplicity’ sake went into debt to buy a house and used 60€ of that money to buy 60 bottles of Coca Cola.

            In the case of QE the asset/debt duality breaks down, because the Central Bank does not owe anybody the money it “prints”. Those digits have no corresponding value, just the people’s trust in the Pound’s value. Due to the Cantillon effect however, those with first access to new money get to enjoy seignorage before that money circulates through the system, inflating the money supply and lowering the currency’s value. The Central Bank is creating new money out of thin air, buying up bonds at inflated prices and credits the private banks’ reserve accounts with 160€. If Deutsche Bank bought those bonds for 100€ it now has 160€ in cash, making a nice 60€ in profit. Nobody else went into debt for this. The total money supply temporarily rose by 160€. Once Germany has to pay back the bond it pays the nominal value of that bond – say 100€, thereby reducing the circulating money supply by 100€ through taxation and giving that money to the Central Bank which now takes a loss of 60€ because it paid 160€ for the bonds in the first place. After all this, 60€ of new money have been created by the Central Bank without any value being created with that money, because Germany only received 100€ for its bond when it was emitted.
            So now Deutsche Bank has 160€ sitting in its reserve account (which is real Central Bank money, as reals as cash). It won’t lend it out because that’s risky because the economy is in the shitter. So it use that money to gamble on the asset markets, inflating asset bubbles and setting up the next crisis.

            I’m sorry RJ, but you got this wrong. There is no corresponding bank credit for the QE money the Central Bank is creating. The banks are therefore not profiting off the base interest rate alone (which nowadays is close to zero and in some countries like Switzerland negative), they’re directly profiting off the Central Bank gifting them the difference between the price they paid for the bonds and the price they sell them for to the Central Bank. This is by all means new money since nobody else got into debt for it (unless you count the accounting “debt” the Central Bank owes to itself, which it has to put on the liability side of its balance sheet to account for the increase on the asset side that comes from purchasing the bonds).

          • RJ

            There are two possibilities

            1 The bank swaps the bond for reserves. So the bank holds a bank asset and swaps it for reserves. In this situation no new bank credit is created

            2 A non bank like a pension fund swaps the bonds for cash. In this situation the bank get new reserves as an asset to support the new bank credit. This bank credit is the banks liability but the pension funds asset.

            So this statement
            “There is no corresponding bank credit for the QE money the Central Bank is creating.”

            is correct for 1. But incorrect for 2.

          • Crash

            True. So if it is correct for situation 1 (banks selling off bonds to the Central Bank directly) how are these new reserves not newly created money without a corresponding debt again?

          • RJ

            Govt bonds are ONLY issued to drain (destroy) reserves previously created from Govt spending. This Govt spending creates both new reserves and new money. The banks JE from this spending is
            DEBIT Reserves (bank asset / BoE liability = Govt debt)
            CREDIT Bank credit (banks liability / our money)

            Situation 2. Bonds drain the reserves AND BANK CREDIT when a non bank buys the bonds

            Situation 1. Bonds drain the reserves ONLY when a bank buys the bonds. So in this situation govt spending creates new money that is not eliminated (drained) by the bond issue

            Buying back bonds simple reverses the above.

          • Crash

            You are basically confirming what I wrote. When the government issues bonds, it increases the total money supply by its nominal amount, say 100€. However, it has the obligation to pay back this money in the future, causing that money to be destroyed again. In this sense it’s not much more different than a business taking out a loan, increasing the money supply and destroying it via repayment. So far so good. This is debt based money, created out of a loan.

            Having the Central Bank buy back the bonds with QE not for a nominal price, but for a market price of 160€ creates and additional 60€ of unbacked new money – there is no corresponding previously issued debt to account for those 60€ – government or private. When having to come up with the money to use for QE the BoE simply creates it out of nothing, no debt no nada. You have been right about the technical journal entries so far from the private sector and the treasury so far, but everyone here knew that part already. It’s the money as debt part.

            Try to give an explanation of the Bank of England’s journal entries as well. What’s the corresponding debt for notes and coins? What about the newly created reserves it uses to fund the buyback? This is the crucial distinction between money (such as cash) and debt.

          • RJ

            “When the government issues bonds, it increases the total money supply by its nominal amount, say 100€. ”

            decreases

          • Crash

            I’m speaking from a Eurozone perspective, and I’m sure the Bank of England is slightly different here, but what you are essentially doing is conflating the Bank of England and the treasury as basically one entity (the government is paying the interest to itself in this case).

            Nevertheless, if those 60GBP end up being added to the deficit in the end then QE is essentially just a fiscal stimulus directed towards bond holders and added on to the government debt, not a monetary stimulus. In fact, if what you’re saying was true there isn’t even such a thing as quantitative monetary policy.

            It seems to me that you’re saying a government issuing bonds reduces the money supply and the subsequent government spending increases it. But it can only do so up to the amount borrowed. As is the case with peer-to-peer lending. No new money is created in such a case. Unless the government has an overdraft account with a private bank (which would be essentially the same as a private person increasing the money supply via taking out a loan), how can the government effectively grow the money supply?

          • RJ

            “I’m speaking from a Eurozone perspective, and I’m sure the Bank of England is slightly different here,”

            The UK Govt is in a completely different position to all Euro governments. Different rules apply. Euro countries have given away their most valuable asset (monetary sovereignty) and are now no different to a household. The markets now rule these countries. And if they don’t do as they are told (sell off the country etc) the market / EU will smash them. As Greece found out.

            So like a household Euro Govt bond sales makes no difference at all to the amount of bank credit. It simple moves from the purchaser of the bonds to the Govt.

            When the UK Govt spends new reserves and bank credit is automatically created. Bonds drain one or both as explained above.

          • Crash

            Please explain then how QE in the Eurozone is not exactly doing what I described above, aka increasing the money supply without there existing a corresponding government debt (the Euro governments cannot be the debt holders of this QE money as the ECB is forbidden by law to directly finance states by buying newly issued bonds).

            If what you are saying is true, then government debt would have no impact on aggregate demand as this would be nothing else than a redistribution of purchasing power from bond holders to the government which is the same loanable funds nonesense neoclassicals keep promoting. This does not make sense and has no empirical basis.

            In order for the government debt to have stimulating macroeconomic effects, new money has to be created, and considering non banks will use existing money to buy new bonds (as in peer-to-peer lending), and banks, as you say eat through their reserves to buy newly issued government bonds (if I understood you correctly you are not proposing that banks use a new journal entry to buy newly issued govt bonds), how does new money even enter the system via state spending if every Euro had to be previously collected from the private sector? Are you seriously suggesting only the private sector can effectively create money in the Eurozone?

          • RJ

            “Are you seriously suggesting only the private sector can effectively create money in the Eurozone?”

            The ECB can via the banks. When they buy bonds the banks

            DEBIT ECB reserves
            CREDIT Bank credit = new money

            But Govt do not when they spend. Unlike the UK (or any monetary sovereign) Govt. Like NZ, Aust, US etc. Euro countries are finished. They will be sold off one by one. That’s the main reason for the Euro.

          • Crash

            To be honest, I’m having a hard time figuring out what the point is you’re trying to make. In my opinion you haven’t really put forth any credible argument aginst PM. However, I’m, never opposed to an intellectual debate, so I’m not going to reject your ideas outright before I haven’t given you the chance to deliver a more coherent explanation first.

            What exactly are the issues you are having with PM’s understanding of the monetary system and their sovereign money proposal?

          • RJ

            I have explained my position very fully in many posts. If I was starting from scratch and had a team of honest, decent, informed people to implement a new system I would very likely implement close to the PM system. This situation does not apply at present. The confusion about money is unbelievably. And any change would as a result be very risky. It would take many years to approve, explain and implement (10yrs minimum) and would likely result in a much worse situation as Euro countries now find themselves in.

            An example of confusion is your comments on Euro countries being like the UK. No Euro countries are finished now for the very reason of the Euro. They can not survive in it unless the ECB helps them out. Understanding the reasons for this means people must fully understand how the treasury system ties in with the banking system. Very few do. This is a very real danger to the UK. And any reform could make the situation much worse with a Euro type outcome.

            The main issue is ongoing brainwashing about money and banking by those who benefit from this confusion has created many confused reformers. So anyone trying to find a solution has to work through layers and layers of misinformation. I try to do my small bit to provide clarity.

          • Crash

            RJ, I’m not going to accuse you of trolling as at least on the surface you seem to have a grasp of many of the concepts talked about here; and informed criticism is what PM needs the most to strenghten their arguments and possibly refine their agenda.

            However, you are conflating your arguments with cloudy and meaningless alarmist messages like “the Eurozone is done” (which we all know it might very well be the case) and “too much confusion and brainwashing about money” (which we are working on to undo for the public).

            Most people here have deep understanding of the monetary system, so you are welcome to argue about the technicalities of PM’s analysis and proposals you seem to be having an issue with. Despite your numerous posts and (probably) your best intentions at heart, unfortunately you haven’t made a consistently coherent and clear argument about what misinformation exactly you are accusing the other blog members to be adhering to. Nobody here understands what exactly it is you are trying to say and it’s not because we’re stupid. I suggest instead of commenting on each blog post individually about bits and pieces, how about you create a longer, structured, completely thought out argument in a separate blog post and let us know exactly what you like about sovereign money, where you think it is wrong, what has to be done differently on a technical level and what consequences those different systems or transitions would lead to. Unfortunately you don’t have a team, so you have to do the work yourself convincing others logically, but if you succeed you might have a team of people agreeing with you.

            The reason why you are having a hard time having getting your points accepted here is that you mix detailed technical issues such as journal entries (which we all appreciate) with very unspecific and meaningless warnings. Not that they might not be true, but if there’s no substance (aka explanation) behind them, they’re flat out boring. I’ll give you two examples from your last post:

            “No Euro countries are finished now for the very reason of the Euro. They can not survive in it unless the ECB helps them out.”
            Of course we know the problems in the Euro area, but your arguments are not precise. How exactly would the ECB help out and what goes on in their balance sheet and that of the banks? Who would own the debt, would it add to the government’s debt or not? Who would benefit and how and how would that affect the total money supply (split into reserves, bank credit and cash)? Try to use your knowledge of accounting to create a stock-flow-consistent argument and share it with us!

            Another thing you have said repeatedly is:
            “Understanding the reasons for this means people must fully understand how the treasury system ties in with the banking system. Very few do. This is a very real danger to the UK. And any reform could make the situation much worse with a Euro type outcome.”
            You don’t specify how the treasury ties in with the banking system now, how it should it be in your opinion in the future, and how that vision is different from PM and why. You also don’t clarify how a monetary reform (and which one) would make the situation much worse with a Euro type outcome and why. You might think you know, but unless you can coherently convince everyone else with an airtight logical framework (or reference academics or other intellectuals who share your views) you will not succeed in convincing anyone. From what I can tell your arguments sound mostly like coming from the MMT camp but you never tell which school of thought you identify with.

            It looks like you’re trying to help, but by frequently commenting on singular posts on bits and pieces without conveying a complete picture of your understanding you are not helping PM’s cause at all, which is first and foremost educating people about the nature of the monetary system.

          • RJ

            “It looks like you’re trying to help, but by frequently commenting on
            singular posts on bits and pieces without conveying a complete picture
            of your understanding you are not helping PM’s cause at all,”

            Maybe not for you. But people are getting the point now. Slowly one by one. I have even seen a massive change in the quality of the blog posts on PM. Franks post are high standard whereas in the past most were OK at best.

            Realistically the system will not be changed unless the ruling elite decide on a change beneficial to them. For example the Euro. This is a complete disaster where the power was taken off democratically elected Govt’s and given to a small unaccountable ruling elite that will smash an elected govt if they step out of line. Greece is just the first example as times will get tough. The Euro and EU enforced peoples austerity guarantees it.

            So for me the key is educating the public how much power the UK Govt has today. And correcting misinformation. A good example of misinformation is that the UK Govt must borrow (sell bonds) to spend (as Euro countries must). No they sell bonds to drain reserves resulting from deficit spending. This understanding turns everything on its head. It mean austerity and selling off asset on the cheap is not only unnecessary but bad for the UK economy right now.

            “and it’s not because we’re stupid”
            I never said readers are. But we have all been brain-washed. Accepting this was part of my reawakening.

          • Crash

            Most of us here understand the problems of the Eurozone but let me insist on asking you about what issues you have with PM’s analysis and where do you diverge?

            I understand what you are trying to say, that the UK Govt could just spend new money into existence and remove the reserves through issuing bonds. But two questions remain unanswered for me:

            1) When a government issues a bond on the open market (as the EU countries must do) does a bank have the ability to create the money necessary to buy those government bonds or does it have to use up existing reserves to do so?
            This matters in the aggregate, because if a bank has to reduce its existing cash to buy those bonds (variant 1), then what happens is that the aggregate money supply stays the same (bank’s cash goes down, the government’s cash goes up by the same amount, it’s a neutral redistribution of purchasing power as all the bank does is an asset swap cash for bonds).

            On the other hand, if a bank creates the money via double entry bookkeeping to buy up the bonds (variant 2), it increases the money supply by creating a simultaneous liability towards the government the same way it creates money lending out to households.

            2) If variant 1 is correct, then how exactly does a government effectively grow the money supply? As stated above, issuing bonds would be akin to peer to peer lending (the loanable funds model), redistributing existing money from bondholders to the government. So any additional money necessary to grow aggregate demand would have to come from somewhere. Please describe those journal entries, where the government gets this additional money from. Does it have a direct line of credit with the Central Bank (at least in the UK, we know it does not in the Eurozone)?

          • RJ

            “bought the bonds at 100 and having sold them off to Coca Cola for 160.”

            This will not happen unless there is a big movement in interest rates. If it goes the wrong way the £100 might be sold for £90.

          • http://www.jamesmurraylaw.com/about/who-is-jim-murray/ James Murray

            Crash

            I admire your trying to get sense out of RJ.

            Impossible.

            He gives all the outward signs of a twerp but in fact he is a dangerous troll.

            He wastes the time of genuine/ sincere responders by making contradictory assertions that masquerade as proper debate points.

            And he has certainly done this over the last year or more.

            Others in these columns have suggested he be barred.

            I have given my contact details to him, challenging him to prove he is genuine – no response of course.

            Please do not waste your time.

            He delights in protracted threads that have no possibility of s resolution.

            Regretfully, in the future, we can expect P Money will have RJ, and many such others from the private banking sector (or paid by it) seeking to confuse genuine readers of this blog.

            They are terrified of their magical money tree being taken from them.

            RJ does nor support the PM movement but, crucially, he claims to have read the Jackson/Dyson ‘Modrnising Money’ while refusing properly to give where in the book he disagrees and why.

            Proper visitors to the blog are being confused by his dangerous nonsense – and that is his objective.

            I suggest that PM’s permanent staff recognise RJ’s pedigree and bar him.

            He will pop up again of course but hey ho!

            Jim Murray

          • RJ

            Another rant. You would be much off better reading a few books on this subject again. Because your understanding at present based on your posts on these threads is not good. Or it is good and you are just trying to confuse.

          • http://www.jamesmurraylaw.com/about/who-is-jim-murray/ James Murray

            You say texting are not gaining more than the average Joe from the latest situation?

            What planet are you on?

            As to the rest of your buff, it is just assertions, nothing more.

            No argument, no evidence.

            You do not support PM.

      • http://www.jamesmurraylaw.com/about/who-is-jim-murray/ James Murray

        The quote:
        £375 billion of QE is created in the B of E accounts.
        It is used to buy treasury bonds from the banks.
        The banks therefore have cash instead of assets.
        The banks have to ‘use’ this cash or it just sits there earning no interest.
        Most of this is lent on loans secured on property – domestic or commercial – which does not help the country finances at all.
        Ideally the banks should loan to investors who wish to grow the economy by purchasing plant etc ie create wealth.
        However, less than 10% in actual fact is lent out in this way into the ‘real economy’
        Capice?

        • RJ

          Your above post is so wrong Frank it is almost unbelievable.

          For example
          “The commercial banks therefore have cash instead of assets”
          No no no no no. They banks hold reserves not cash. And they also hold a bank liability if the bonds are sold by a non banks.

          “The banks have to ‘use’ this cash or it just sits there earning no interest.”
          No no no no etc etc. They earn interest on excess reserves.

          etc etc.

  • Marco Saba

    To understand the accounting issue about money creation, please read here: Cash Flow Accounting in Banks— A study of practice, Ásgeir B. Torfason, 2014 https://www.scribd.com/doc/294880212/Cash-Flow-Accounting-in-Banks-A-study-of-practice

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