Steve Keen's model of a credit economy. In his theory the fiat money system is relatively small and subservient

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Steve Keen's model of a credit economy. In his theory the fiat money system is relatively small and subservient

 

Worth a read

 Steve Keen’s DebtWatch No 31 February 2009: “The Roving Cavaliers of Credit”

 

Quote:

The point made by endogenous money theorists is that we don’t live
in a fiat-money system, but in a credit-money system which has had a
relatively small and subservient fiat money system tacked onto it.

We are therefore not in a “fractional reserve
banking system”, but in a credit-money one, where the dynamics of money
and debt are vastly different to those assumed by Bernanke and
neoclassical economics in general.[10]

Calling our current financial system a “fiat
money” or “fractional reserve banking system” is akin to the blind man
who classified an elephant as a snake, because he felt its trunk. We
live in a credit money system with a fiat money subsystem that has some
independence, but certainly doesn’t rule the monetary roost—far from it.

 

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Re: Steve Keen's model of a credit economy. In his theory ...

Thanks Gibber for the post. Just a
comment: The distinction between credit-based currency and fiat
currency is artificial. Normally people talk about fiat currencies
with the understanding that a “fiat” currency has purchasing
power “by definition” (or more accurately, by coercion), not
because of any intrinsic value (hence the “fiat” name). One can
further qualify a fiat currency as “debt-based” when one means
the particularly destructive variety of fiat money that uses a
promise to repay as an “underlying value”. However, this is still
obviously fiat, since a promise to repay does not endow the currency
with intrinsic value if the repayment is made with even more fiat
money, that is, with even more promises to repay. Only payment with
something of intrinsic value could possibly liquidate a debt. To
monetize “the promise to repay with something of value” was a
practice applied successfully for centuries under the name of a bill
of exchange. The bill of exchange was one of the assets that was
allowed to exist in the Fed's balance sheet according to the original
Federal Reserve Act of 1913.

The other objection I have to this
article is related with the claim that the money created by the Fed
(called “seed money” there) is not debt-based; but it clearly is.
Who is the debtor? The Federal Government, who promises to repay,
with interest, the amount of money created by the Fed out of thin
air. The government's promise to repay is called a “Treasury Bill”
or a “Treasury Bond”, as everyone knows. So, modern money is fiat
and also debt-based (the worst kind). To add insult to injury, the
government itself must repay in the type of money that the Fed (a
private cartel) has the monopoly to issue. As it is said: “The hand
that lends is above the hand that borrows.”

I thought that the other points made in
the article are very valid. It was interesting how the author pointed
out that modern macro-economists can't even get the order of the
events right. It is astonishing how bankrupt in every sense this
dismal discipline is, and yet how people continue to lend credibility
to the same intelligentsia that has provided intellectual cover to
the scam embodied in the banking system. Even “graduates” of the
Crash Course continue to use frequently the same jargon and concepts
of the absurd 2-parameter “Quantity Theory of Money”, the
obfuscated definition of inflation and other terms. Some even
question whether commercial banks create money when they make a loan
or even if perpetual growth is a requirement of the system... we need
a lot more work in this area if we want people to be sufficiently
aware of what is going on to really react. Everything follows from the structure of the monetary system: the balance of power in a society, the existence or not of economic freedom, and as a result, even the existence of political freedom.

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Re: Steve Keen's model of a credit economy. In his theory ...

Thanks for posting this. Very interesting. The idea that M3 creation preceeds M0 creation is a crucial one, and one that seems obvious in hindsight.

This should be further evidence against a sudden inflationary shock since M3 will not expand until economic conditions are condusive , which due to many factors including consumer debt shock, peak oil, aging demographics etc is not going to happen in the forseeable future. The cavaliers of credit are dying off and fleeing the field with what loot they can carry - and they will not be back since the underlying economic activity to support them is undergoing a phase change towards lower levels of consumption and productionas steve ballmer notes.

The ultimate outcome of this is that the credit money supply is being replaced slowly by debt free fiat money. Even if treasuries are created as debt, when the lender and the borrower are the same entity (the government, and a nationalised/propped up bank) then no debt exists.

Even if the government/bank lends their new reserves into existence, the interest paid on it by borrowers goes to the government not private individuals and can thus return to the public via tax cuts of public spending. Alternatively they can just give it away as a welfare payment for example.

Why can the government not simply replace the credit money supply on a 1 for 1 basis with debt free money, over a period of time?

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Re: Steve Keen's model of a credit economy. In his theory ...

 

I cannot get to the article just now. But if you google

+"Steve Keen" +cavalier

You can bring up a cached google copy

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Re: Steve Keen's model of a credit economy. In his theory ...
scepticus wrote:

The ultimate outcome of this is that the credit money supply is being replaced slowly by debt free fiat money. Even if treasuries are created as debt, when the lender and the borrower are the same entity (the government, and a nationalised/propped up bank) then no debt exists.

I wish that were the case, but it isn't. There is no debt-free fiat money being created. Remember, the government does not create the money, it collects it by selling its debt. Suppose that indeed there was the nationalization of some bank in the most favorable terms for the government (this has not happened, as the government is simply paying top-dollar for trash or positions in insolvent, totally unprofitable entities). Any money injected to such bank in the form of high-powered money ("seed money") would still have been created by the Fed as monetized debt. The debt is not owed by the government to itself, but by the government to the Fed, or whatever bond holder. Let me emphasize: the absurd reality continues unabated: The government "borrows" money created out of thin air by the Fed, which is not a federal agency. Remember, the government only creates debt instruments that are then monetized by the so called Federal Reserve. All of this is business as usual. Nothing has changed.

This situation will continue until the following happens: a) the abolition of the Federal Reserve, b) the writing-off of any "debt" still owed to it by the government and c) the repossession of any assets transferred to the Fed as collateral for any debts owed (that is, the repossession of the American gold, or whatever is left after the Fed's illegal sales.)

Quote:

Even if the government/bank lends their new reserves into existence, the interest paid on it by borrowers goes to the government not private individuals and can thus return to the public via tax cuts of public spending. Alternatively they can just give it away as a welfare payment for example.

In the operations of this hypothetical public commercial bank, the money borrowed by the public or corporations would be created in the usual way: as debt and out of thin air. So there is no debt-free money by this avenue either. That any profits could go back into the government coffers is irrelevant with respect to the nature of money.

Quote:

Why can the government not simply replace the credit money supply on a 1 for 1 basis with debt free money, over a period of time?

That is the 260 billion dollar question. It is unsafe to assume that the government acts in the best interests of the population. By now it ought to be obvious to anyone that isn't asleep that the government acts in the best interests of the bankers and of a bunch of corporate insiders. It is not surprising then that the control of the monetary system, virtually the ultimate source of power in a society, is kept in private hands. The debt-based fiat system is designed to benefit the bankers and to accrue more power to them irrespective of the consequences. As for the consequences, we are just starting to experience them...

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Re: Steve Keen's model of a credit economy. In his theory ...

 

Yes, EVERY dollar is DEBT, incl. base money.

Wright Patman (1893-1976) was a Democratic representative from Texas, who served in the U.S. Congress from 1929 to his death on March 7, 1976. He was chairman of the House of Representatives Committee on Banking and Currency for 40 years. For 20 of those years, he introduced legislation to repeal the Federal Reserve Banking Act of 1913.

Here are excerpts from what he said on September 29, 1941, as reported in the Congressional Record of the House of Representatives (pages 7582-7583):

“When our Federal Government, that has the exclusive power to create money, creates that money and then goes into the open market and borrows it and pays interest for the use of its own money, it occurs to me that that is going too far. I have never yet had anyone who could, through the use of logic and reason, justify the Federal Government borrowing the use of its own money... I am saying to you in all sincerity, and with all the earnestness that I possess, it is absolutely wrong for the Government to issue interest-bearing obligations. It is not only wrong: it is extravagant. It is not only extravagant, it is wasteful. It is absolutely unnecessary.”

 

 

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Re: Steve Keen's model of a credit economy. In his theory ...

When the ECB (European Central Bank) earns a profit on securities, it pays it out as dividend to its shareholders... which happen to be the states inside the eurozone. So most of the money payed in interest to the ECB, is payed back as a dividend to the lenders, creating effectively an almost interest free loan. They keep a lot of money to cover their costs, but these costs will have to be payed by the government anyway, just to keep the system running. Most of the interest, however, is demanded just to keep inflation low. So by buying securities, the ECB spares the governments some costs.

Now I'm not sure about the FED, but I expect they work the same way. So when the FED buys securities directly from the government, the government get's a very cheap loan.

 

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Re: Steve Keen's model of a credit economy. In his theory ...

I think the situation with the fed is similar to that of the ECB. I'll admit that I don't fully understand the intracacies of the fed reserve system. However it might be more helpful to consider a less complex situation such as the BoE or BoJ.Lets step away from the US centric view for a moment.

Then whatever conclusions we draw with regard to debt money in these currencies, then we can see how it extends to the federal reserve dollar, or not.

Note that government debt is not the same as private household or corporate debt. Why? Because the government can monetise it's debt, yet I cannot monetise mine. The fact the government sells debt is a red herring - because they can monetise it, it is not debt, at least not in the sense you and I understand it.

My position is that soveriegn governments are essentially in the business of creating debt-free money - they simply pretend that what they are doing is playing by the rules, when all along the intention is to monetise the interest payments. The crime here is not the deception of the market (in reality, people understand the rules of the game and choose to particpate anyway, e.g. china, the middle east), but the fact that the seignorage revenue that the government might receive from creating new debt-free money is given to the bankers, and that our democratically elected leaders choose to leave the control of the money supply in private hands such that profits from its exploitation are privatised rather then shared. The fact that M3 money creation preceeds M0 money creation shows this to be true.

So governments win the game by monetising, bankers win by acting as an unnecessary intermediary between new money created by the government and the end users. The rest of us lose out via inflation, un-naturally wide income distributions and by being forced to compete in the interest-rate driven rat race.

However now the money supply has ceased functioning in this way, there is going to have to be change before there can be a recovery. Change is in the hands of the government, and despite obvious corruption we do still have the power to elect them. If we accept that the government will atempt to preserve itself, then it seems to me the obvious casualties are the bankers. I think politcians see this - look at the recent behaviour of gordon brown and obama - anti-banking rhetoric is spilling forth. They know what they need to do to keep people onside, and will do it.

This means that within the next few years, I think we will see debt-free money creation, gotten into circulations through other means than the banks. There is simply no other way the politicans can keep their shirts.

That's not to say we won't have an elite.It will just be a different one, one that controls important resources like the energy supply, commodity supply and information supply. Money as we have known it is finished, and so are the banksters. 

 

 

 

 

 

 

 

 

 

 

 

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Re: Steve Keen's model of a credit economy. In his theory ...
woupiestek wrote:

When the ECB (European Central Bank) earns a profit on securities, it pays it out as dividend to its shareholders... which happen to be the states inside the eurozone. So most of the money payed in interest to the ECB, is payed back as a dividend to the lenders, creating effectively an almost interest free loan.

In fact ECB's shareholders are National Central Banks (CB), not the states. See Art 28 of ECB Statute

Some CB are 100% nationalized (eg in France) and then all their profits indeed come back to the Govt.

But other CB are not, eg in my country, Belgium, the CB is 50% owned by state, 50% owned by private shareholders. Anyone can even buy stock of National Bank of Belgium. See Art 4 of NBB statute. That beeing said, the profits are distributed according to the law. The maximum dividend per share has even been lowered recently, so most of the profits comes back to the Govt.

I don't know how it works in other states.

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Re: Steve Keen's model of a credit economy. In his theory ...

Steve Keen is following the discussion on his article.

 

He points off to another interesting link

http://www.debtdeflation.com/blogs/wp-content/uploads/papers/NotKeenOnBa...

 

A draft article...

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Re: Steve Keen's model of a credit economy. In his theory ...

Another good article. Steve might be interested to know if he doesn't already that his writings are also being appreciated by the readers of Mish's blog. 

My question on this article is: 

Steve wrote: "an effective way to cause inflation would be to increase money wages, with the direct objective of causing firms to increase their prices to compensate."

How is this to be accomplished in practice? This the crucial question, and one that I have been thinknig about a lot recently. Clearly the solution to this cannot involve the banks.

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Re: Steve Keen's model of a credit economy. In his theory ...

OK, I'm not that smart, and admit freely to sufering MEGO trying to understand.  Makes basic sense, that maybe the banks create money out of thin air, before the FED gets involved.  What is the net result to us the population, as the FED prints dollars to ward off deflation, anticipating inflation later, if that's NOT going to be the case?  Depression and continued deflation?  Why would gold be an asset then?  Isn't cash better?

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Re: Steve Keen's model of a credit economy. In his theory ...

In the great depression gold prices were stable... which is no suprise, since the dollar was on a gold standard. But gold prices can still rice during a depression. Of course, I have no idea what will happen...

Steve's models seem to imply that the problem with our monetary system is not interest or inflation, but that the explosive growth of debt is a consequence of speculation. To stop the growth of debt, we need to stop speculation.

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Re: Steve Keen's model of a credit economy. In his theory ...

Alright, but I just learned (through this website) that debt is money; so if that is the case, how does the explosive growth of money not result in inflation but deflation?  Ok, so there is real money (cash), and bad money (debt, securitized debt), and that the bad money can be destroyed (deflation).  Again, that doesn't sound like gold is superior to cash, unless the debt gets monetized.  Of course monetization seems inevitable, because the some of that debt is owned by the banker-oligarchy, and they want that debt monetized, to clean or launder their pocket books. 

???? 

 

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Re: Steve Keen's model of a credit economy. In his theory ...

The exponential growth in the money supply is not as bad as Chris portrays it to be: it means that prices always rice, and the money doesn't work well as `a store of wealth', but it actually helps to stabilize the economy. The problem is the growth of debt relative to the money supply, and that has been growing exponentially too. This mean that almost everybody has to use more of his money just to pay for debts and interest charges. Here is a natural limit: a maximal sustainable level of debt, that has been exceeded, because of the bubble.

Now banks find out that laying more debts on the people often leads to bankrupcies, and them loosing money. So what do they do: they keep it in their reserves. The money in circulation decreases. Then the banks decide to pay of their debts to the central bank. And if a central bank debt is repayed, the money is destroyed. So the total money supply decreases too. And this is how a crisis causes a depression.

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