I have money in my wallet. I don't have social relations there.
From the heteconomist post of 18 December:
In response to my argument, JKH drew my attention to an interesting post written by David Andolfatto in March this year, in which he points out that money – irrespective of the particular system in place – is always what I have been referring to as a social relation and what Andolfatto describes more specifically as a ‘promise’.
I have a lot of trouble with this "social relation" concept of which PeterC writes. So I focus on it. Peter equates his "social relation" with Andolfatto's "promise". Perhaps this can help to clarify the meaning of the concept.
In David Andolfatto's post, the main point is that
condemnations of the Fed based on charges of creating money "out of thin air" are off the mark. The discussion should instead center on whether the Fed, as currently construed, is an institution that can be trusted to make good on its promises.
Andolfatto's purpose is to evaluate the phrase "out of this air" and its use as a criticism of the Federal Reserve. Developing the concept, he had this to say about promises:
Societies rely heavily on promising-making and promise-keeping. It is the foundation of all financial markets.
That's true. But the "promise" is "I'll pay you later". And "keeping" the promise means actually making the payment. And when I do actually make that payment, I do it by giving you the money that I promised to give you. Money is not the promise. Money is the fulfillment. Money extinguishes the promise. Money extinguishes debt.
I am looking at transactions here. Transactions are the economy.
Andolfatto continues:I'd like to point out something about the promises you make. They are made "out of thin air." The promises that other people make are also made "out of thin air"...
The fact that promises are made "out of thin air" does not mean they are worthless.
The Fed creates fiat money (yes, out of thin air). But fiat money in itself does not constitute a promise against anything in particular...
The fact that promises are made "out of thin air" does not mean they are worthless.
The Fed creates fiat money (yes, out of thin air). But fiat money in itself does not constitute a promise against anything in particular...
But fiat money in itself does not constitute a promise against anything in particular, Andolfatto says. (Perhaps PeterC missed that part.)
The old textbooks say money is "a promise to pay". But these days, as DA says, money is not a promise to pay anything in particular. You cannot return a paper dollar to the issuer and get gold for it, or silver, or anything except maybe another a paper dollar with a different serial number, just to make you go away. Or maybe they will drag you away. The dollar stands on its own. Stands, or falls on its own.
So if money is not a promise OF anything and not a promise to DO anything, then it really isn't a promise at all. And if it isn't a promise, then it isn't a "social relation".
When you could get gold for your paper, the paper carried a promise. But now money carries no such promise. Money today is "fiat". This is something that "MMT" people like PeterC dwell on all the time. How can Peter miss the fact that money now carries no promise?
When people used money for gold, and exchanged gold receipts, the receipts were promises to pay gold. But the gold was the money, and the gold was not a promise of anything. Today, paper money is not a promise of anything.
The ideas which are here expressed so laboriously are extremely simple and should be obvious. I don't know anyway why everybody has this concern with explaining what money is. Money is what you are paid for doing work. Money is what you pay when you buy groceries. Isn't that enough? Doesn't that accurately identify money?
Used to be, you brought your gold to the goldsmith to keep it safe, and the goldsmith gave you a receipt for it. And you could go back later, bring the receipt, turn it in, and get back your gold.
But as things turned out, you could also exchange the receipt for some fresh eggs from the farmer, or maybe for some time with his daughter. And then the farmer could go to the goldsmith, turn in the receipt, and get gold for it.
The receipt was a promise to pay gold.
We don't do that anymore. We don't need to do it that way. We don't use the gold. We just use the paper. But some people want to keep the phrase "a promise to pay gold" and just drop off the last word. That's not how it is. The change from gold-backed money to fiat money was a huge change (as the MMT people unfailingly point out). It was not just the gold that disappeared. The "promise" disappeared, too. How the MMT people unfailingly miss this fact is beyond me.
Used to be, there was the gold, and there were the promises to pay gold. People accepted that the promises were "as good as gold" and everything went along fine for a while. And then one day somebody would discover there was not enough gold to meet all the paper promises, and then there were problems.
Today, we don't use gold. We use government-issued money, and bank-issued money. People accept that the bank issue is as good as government issue and everything goes along fine for a while. But for every dollar of bank-issued money somebody somewhere is paying interest.
As time goes by, the bank-issue grows faster than the government-issue. So interest costs increase, relative to income. Ever so gradually, this depresses living standards, depresses profits, depresses demand, depresses supply, and increases costs in the productive sector. Meanwhile, it makes the financial sector look healthy.
When we used gold for money, it was excessive bank issue that created problems in the money. Today, we use government issue for money, but it is still excessive bank issue that creates problems in the money.
Some things never change.
Afterword --
In a comment below, Greg has kind words for an excerpt from the above text, including this piece of it:
You cannot return a paper dollar to the issuer and get gold for it, or silver, or anything except maybe another a paper dollar with a different serial number, just to make you go away.
I read that somewhere. (I have no idea where.) Especially the part except maybe another a paper dollar with a different serial number. I definitely read that somewhere. And I think my wording may be close enough to what I read, that I want to attribute the thought to somebody. I don't mean to steal or plagiarize, but only to adopt an idea that helps to provide clarity.
25 comments:
Looks like you're arguing for a gold standard here. I don't think you are. i sure hope not.
How can Peter miss the fact that money now carries no promise?
I doubt that the MMT guys miss this. I suspect they think it is irrelevant.
Cheers!
JzB
Art.
There was a time when I carried something in my wallet for "social relations", and it wasn't money. It had value, could be used as a promise, and if not used for its intended purpose could be inflated.
Art,
Kidding aside, I'm still trying to make sense of all this. I'm in agreement with your notion that excessive bank issue is the problem. I'd take it a step further and argue that leverage coupled with excessive risk associated with the lending is the real culprit. Just a thought.
I gotta say Art, you do have a way of asking questions that makes you have to think clearly. I like that.
This;
"The old textbooks say money is "a promise to pay". But these days, as DA says, money is not a promise to pay anything in particular. You cannot return a paper dollar to the issuer and get gold for it, or silver, or anything except maybe another a paper dollar with a different serial number, just to make you go away. Or maybe they will drag you away. The dollar stands on its own. Stands, or falls on its own.
So if money is not a promise OF anything and not a promise to DO anything, then it really isn't a promise at all. And if it isn't a promise, then it isn't a "social relation".
is particularly good.
As Mosler says ( you knew I would quote him eventually) fiat money systems require an "anchor".
There are many choices for anchors and these are the ones that have been used throughout history. No particular order.
1) Gold/Silver/other metal
2) Some foreign currency (a peg)
3) Wheat
4)Unemployment (what we use now)
5)Cost of labor (What the JG that Mosler recommends essentially is)
There are others but all fiat requires an anchor.
Gold standard was just fiat with a gold anchor, not too difficult to understand
So drop promise and use anchor instead. All money must be anchored to something as a support system. And of course support can be looked at as a "promise" to help.
Of course a strong state can just make you use the money with threat of incarceration (what a tax liability is ultimately) Thats a promise they CAN keep!
Thanks, Greg.
"Gold standard was just fiat with a gold anchor"
THAT is clever.
But perhaps there IS no anchor now? Maybe that's the problem? Maybe that's your point.
'Scuse me while I paste this in for Nute:
Nanute,
I'd have got back to you sooner, but we were busy taking down the artificial Christmas tree and putting up the artificial ferns.
My method of making sense of things includes
1. Don't read too much into the evidence. Let facts be facts. One doesn't have to draw conclusions from everything. I like to wait, and let conclusions arise on their own. For me, it makes the conclusions undeniable.
2. Prioritize, and set aside. Determine what is most important, and what is true but less significant. Even when things are not related by cause-and-effect, this can be done.
3. Look at graphs. Graphs reveal the truth. (Note that the graphs themselves become much simpler if we don't have to draw conclusions from them all the time.)
Probably not what you asked. But I can for example simplify and say that "excessive bank issue" is the same thing as "leverage" (excessive lending = excessive borrowing ≈ excessive debt = excessive credit use); perhaps you were saying that as well...
And further, I can say that the "excessive risk associated with the lending" is part of the general problem of excessive bank issue or excessive leverage or excessive reliance on credit. I would agree that the risk is the vehicle by which the problems of excessive bank issue are transferred to the economy as a whole. But the vehicle of transfer is the cart, not the horse. Thus, a lower priority.
Economists speak of technology and shocks and [many more things I cannot remember because I do not know what they are] and all this grandiose phrasing that sounds important. I think it plays a minor role, for the most part.
I think of the economy as transactions or exchanges. Every transaction involves an exchange of value; almost universally, transactions involve an exchange of money and something else. So money is involved in almost every transaction, and transactions ARE the economy.
So, if something is wrong with the economy, I look for something wrong with the money. It will not always be the case that the economic problems arise from problems in the money, but it happens far more often that people generally admit.
I simplify by eliminating the concern with technology and "total factor productivity" and "shocks" and "risk" and "the Arabs" and "the Chinese" and "the Japanese" and "the Canadians" and ... just by looking at the money. Imbalances in the money. Excessive bank issue.
If the economy is transaction, the hinderance is cost.
I learned about cost from Adam Smith.
There IS an anchor now and its NAIRU.
Anchors are put in place as a way to control inflation. The thinking is that without an anchor there is no constraint and runaway printing leads to hyperinflation.
The method we've used the last thirty years to discipline inflation is to break unions so labor cant organize and demand higher wages, keep a buffer stock of unemployed semi desperate people who will work for whatever wages are offered and try to condition people that unemployment is natural, necessary and the only way the rest of us can enjoy low inflation. This is why any talk of directly hiring anyone is always answered with..... "No way, why should I pay more for groceries so some unemployed guy can get a "make work" job!?"
We cant see a non zero sum way to make everyone wealthier.
So we have an anchor but its not very effective and ends up bringing the worst out in people and not the best.
Additionally, when the last thirty years have been spent blaming inflation only on govt spending,inflationary private lending gets ignored or credited to *market forces*.
Greg, I was thinking that. Not NAIRU, but DSGE or "neoliberal" or Supply-side policy or whatever. Using unemployment to keep inflation stable. The Phillips trade-off. The Taylor rule. All variants on the same concept.
(Actually, I was gonna ask about that again, but then (the above) occurred to me.) (And actually, you said it the first time. Oops.)
Milton Friedman relied on the "scarcity" argument (like Andolfatto, in the post referenced at Heteconomist).
Friedman claimed to see a relation between the quantity of money and the volume of [real] output.
I struggled to see it, years ago, but then I did see it. So I guess I'm a scarcity guy too. But of course Velocity is not stable, and that is a big monkey wrench in the Quantity-of-Money theory of inflation.
[digression]
The economists' explanation of "velocity" is so dumb I cannot adequately describe it. They base velocity on "final" spending, rather than "all" spending. So velocity is UNDERstated.
But then they often use M2 money for the money in the velocity calculation. And most of M2 is in savings, as opposed to in circulation. So the "money" part of the calculation is often OVERstated. (Note that Wikipedia refers to velocity as velocity of circulation but their first graph uses M2 money, more than three-quarters of which is NOT circulating.)
So if Velocity = (NGDP / M2) then the numerator is understated, and the denominator is overstated. These two wrongs don't make a right; but nor do they seem to bother economists much. I guess economists are used to being wrong. Oooh.
And then, they say things like "Velocity affects the amount of economic activity generated by a given money supply." No it doesn't. Velocity is a number we get by looking at the level of economic activity, and the given money supply. Velocity doesn't CAUSE economic activity. (This is painfully stupid.)
[end digression]
The NAIRU is a very different sort of "anchor" than the gold standard. It almost requires a different definition of the word "anchor".
Getting back to the original discussion... If we stop thinking of money as a "social relation" or a "promise" and start thinking of it as having an "anchor", what does that do for me? PeterC at Heteconomist still insists that money is a "relation"... I still insist it is not.
Are you saying that money "anchored" to something (or, money anchored to value by the NAIRU say) is a "social relation"? is NOT a social relation? I don't see the connection. You say "of course support can be looked at as a 'promise' to help," but I don't get that either.
Art,
Thanks for the worthwhile advice. I guess my biggest problem is I'm a cause and effect guy. This leads to making assumptions and conclusions that run up against the correlation does not equal causation construct. On the surface complicated/multi faceted issues seem intuitively obvious, but then someone with more tools in the head department comes along and shows things ARE more complicated and nuanced than one thinks. I'll try your methods of observation and see if I can make some improvement in my observations. It's hard to teach an old dog new tricks, but I'm still willing to hunt.
I was struck by when you said: "I would agree that the risk is the vehicle by which the problems of excessive bank issue are transferred to the economy as a whole. But the vehicle of transfer is the cart, not the horse. Thus, a lower priority." I wish you'd elaborate on this a bit further. Once again, my simple cause and effect mind is not seeing this as being a lower priority.
Artificial trees, artificial ferns... I think there's a correlation here.
Greg -
I'm glad you bought up NAIRU, because I have s slightly different take.
consider that, in principle, the Fed has a dual mandate, but in practice they don't give a rat's ass about unemployment.
Steve Roth explains:
http://www.asymptosis.com/250-billion-reasons-why-the-fed-hates-inflation-and-doesnt-care-about-employment.html
So, I'll suggest that our anchor is not employment, but rather inflation. Thus the Fed can issue vast quantities of new money (that sit idle in excess reserves) because at the ZIRB, inflation is unaffected.
Nanute:
What is risk? It is the threat of loss of interest or principal, income or wealth. But the threat arises with the loan or the investment. The risk does not exist apart from the financial transaction.
The creation of risk does not exist apart from the creation of debt. Even if risk grows with the square of debt accumulation, risk is the dependent variable. Anyway, nobody gets into these financial transactions for the risk. People get into them (on the creditor side) because they want the income. The promise of income is the driving force; the risk is a moderating force. So, you tell me: Which must be assigned the higher priority, and which the lower?
Two afterthoughts, Nanute.
1. The economy is a system that operates by its own rules. The objective is always to figure out what those rules are. The objective must never be to bend the rules to suit one's personal or social objectives. Getting the economy to do what you want is like getting to the moon: it can be done, and there's probably more than one way to do it, but you can't do it by breaking the laws of nature.
2. On risk: One could argue that risk-based arguments carry no weight at all because risk is forseen. And as the Efficient Market Hypothesis says, investors are "informationally efficient".
Art,
Form your time stamp, you're either up early or late. I have no way of knowing without more information.
Generally speaking without lending risk is minimal. (You could lose "value" to inflation if you just parked the money in a savings account.) You say, risk is the moderating force. I agree. But, haven't we just seen what happens when the moderating force is ignored? I used to be indecisive, now I'm not so sure.
Nute,
From my time stamp, you know that I was up. Fact noted. If and when more information is forthcoming, it may be possible to combine this fact with others.
But don't forget to prioritize. Not all facts are of equal weight.
"But, haven't we just seen what happens when the moderating force is ignored?"
Well yeah, I guess we have. But it is still the moderating force.
Jazz
You are right that all they care about is inflation but the tool they use to control it is unemployment. They think that it is necessary/natural to keep a percentage of people unemployed to control inflation. I'm not arguing that unemployment is the explicit anchor for our currency its just that when you feel like the only way to tame inflation is via the creation of some level of unemployment, unemployment becomes your defacto anchor/standard.
Mosler and others believe they have shown that full employment AND price stability can be coexistent, which is contrary to virtually every other macro model out there. You can decide for your self whether their models are robust but THAT, in fact, is the basic, most elementary argument that MMT is making.
Art
I really dont ever think in M1 or M2 terms at all. For me that is just ceding too much ground to the monetarists , who have, in my view failed miserably to explain our monetary economy adequately
I like what the MMTists (yes Im going to start using MMT- ists) use............. NFAs (net financial assets).
I think its cleaner, more accurate and really what we all think about regarding our own wealth.
It also does a nice job of separating out bank loans form govt spending. Bank loans are always a net zero, I get 100,000 deposit but OWE 100,000 too so Im no *richer*. Govt spending(without a tax increase) is always a net increase in NFAs. The private sector on its own cannot increase NFAs in the economy only vertical transactions form the govt can do that.
Regarding velocity I agree with you. Its a very difficult variable to measure and I m not sure it means much as it is currently conceptualized.
I do have a thought on this ;
"But then they often use M2 money for the money in the velocity calculation. And most of M2 is in savings, as opposed to in circulation. So the "money" part of the calculation is often OVERstated. (Note that Wikipedia refers to velocity as velocity of circulation but their first graph uses M2 money, more than three-quarters of which is NOT circulating.)"
Im not sure it matters where M2 is really. Savings is just money not spent yet. And the aggregate of M2 can be completely unchanged and there be millions of transactions occuring generating enormous GDP.
Consider this; I write you a check for your service money gets transferred form my checking/savings to your checking/savings adding to GDP. This happens all over the economy at once but the level of money in checking/savings in aggregate doesnt change
"
Sorry
I thought I edited out everything in my last post after;
"I do have a thought on this"
I wanted to think about/amend it before posting.
Hows this Art regarding social relation and money;
Money originally emerged through social relations, it was the "record" of promises made between individuals.
The value of each bit of money turned on the level of confidence the receiver of the promise had in the promisers willingness/ability to make good on the promise.
Today it has become something different but the roots of it havent changed. Now in most places its a state issued/controlled entity and the value of each currency is determined in large part by the legitimacy of each state. The legitimacy of each state is in turn judged by how well it enforces certain social contracts (promises)
As money evolved to more and more people,mostly unknown to each other, using the same money, the social relation thing got lost and it simply became something else. As social relationships get lost society becomes less cohesive and more selfish.
I think this describes things today pretty well
Greg wrote:
Govt spending(without a tax increase) is always a net increase in NFAs. The private sector on its own cannot increase NFAs in the economy
__________________________
I'm not sure precisely how MMT defines NFA, but if you are talking about the supply of money I don't believe the statement is correct
If you borrow $10,000 from a bank you have just increased the total deposits in the banking system by $10,000.
How is that not an increase in the supply of money?
When you sign a promissory note for $10,000 the banking system expands their balance sheets by $10,000. The banks' assets and liabilities increase by $10,000. And there is $10,000 more money in the system which can be spent.
How is that any different than when the US govt borrows?
The bank can sell your promissory note in the same way that it can sell the Govt's tsy secs. Heck it may even get S&P to give your note a better rating.
The money that the private sector cannot create (legally) is the green stuff with pictures of dead presidents.
JIm
I have a 10,000$ deposit AND a 10,000$ + interest of liability so I am NET poorer.
Borrowing money from a bank does not make you NET better off today. You must always subtract laibilities form your assets to get NET assets.
Greg said
I have a 10,000$ deposit AND a 10,000$ + interest of liability so I am NET poorer.
________________________
If you end up "net poorer" it is because you chose to enter into an unproductive borrowing arrangement.
If you borrow money to buy a house that costs less per month to own than you would have otherwise paid in monthly rent you will have more income to spend. You will be net richer and GDP (income) will increase by more than debt.
An unproductive loan is where the motive for borrowing is not an increase in available income but a speculation there will be increase in the value of the house. That means the result of the loan arrangement is your income decreases and total debt grows faster than income (GDP).
It is also easy to see that if many are doing this as time passes this creates an unsustainable feedback loop that causes rapidly rising housing prices lower incomes and interest that becomes oppressive and all-consuming. Eventually you get to the point where there are loans given with no money down and monthly payment arrangements that don't even cover the interest.
But none of that has anything to with your claim that govt surplus spending is different than private surplus spending. In both cases it is set up so there is an asset and liability that nets to zero.
Jim
I agree with all you said about making productive use of a bank loan. However you are still netting to zero (nominally)when you take a bank loan and when the govt spends (and then issues debt) there is a net increase in *financial assets*.
The govts debt is the private sectors asset.
Where I think banking is all screwed up is that when they loan me the money they put the loan on their books AS AN ASSET.I think only the interest part should be an asset because the principal part is a net to zero for them too. But no, they get to treat the whole P&I as an asset, as I understand it.
...probably off the discussion topic, so forgive me, but
Greg: You must always subtract liabilities from your assets to get NET assets.
Agreed. Just like net weight and gross weight.
But if you subtract out the liabilities -- the private debt that stands behind private sector assets -- then NFA does not consider private sector debt!
NFA IGNORES PRIVATE DEBT.
Right?
I wonder what Debt-per-NFA would look like.
"But if you subtract out the liabilities -- the private debt that stands behind private sector assets -- then NFA does not consider private sector debt!
NFA IGNORES PRIVATE DEBT."
As I understand it ........ WRONG! In fact I think its dead wrong.
Its the non MMT accounting/models that ignore private debt in their calculation of net monetary wealth. I say monetary wealth because I dont count a house worth 250,000$ the same as a 250,00$ bill (like I think the monetarists essentially do or would like to do) I ( and AFAICT the MMT economists/thinkers too) only count 100,000$ in a checking account as money (actually NFA), not 100,000$ of GE stock. Thats why MMT uses the term Net FINANCIAL assets, to distinguish them form real assets like land, stock, commodities and private corporate debt issues (although private corporate debt issues are pretty close to govt bonds in many cases)
Additional thought
in the midst of this whole NGDP targeting discussion, that Sumner and Nick Rowe seem to be leading the charge on, I get this feeling, (though neither one has ever stated this explicitly to my knowledge) that they think a million dollar house and a million dollar bill are the same thing. One is just more liquid than the other. I sense that they think the problem is just that these people with million dollar houses thought they had million dollar bills and if the fed just simply treated them as million dollar bills we could get back to where we were. Thats why Nick is so nebulous in what he calls money. He seems to think that everything is money in a sense.
It has occurred to me, when pondering this, that maybe we should allow every asset to get turned into money at the fed. Every owner of an asset has one opportunity to sell something to the fed for its market price. Once that is done it can never be done, for that asset, again. So all these folks that thought they had million dollar houses? You can get a million dollars..... once. You now pay rent on the house (or the fed finds another renter) and that house is no longer sellable again (by a private party)
Maybe that would stimulate the economy again. I know it is completely unmanageable in the real world but so are more than half the suggestions coming from most of the pundits.
Rainy day, nothin' to do thoughts.
Greg and Art,
I suggest you take a look at this: http://www.3spoken.co.uk/2011/12/double-entry-view-on-keen-circuit-model.html
This speaks directly to the question of how things are accounted for in an MMT model that "balances."
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