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The Nature of Money Banking and Credit

 
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Richard Glover



Joined: 29 Sep 2008
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Location: Ealing, London, UK

PostPosted: Fri Oct 01, 2010 8:54 am    Post subject: The Nature of Money Banking and Credit Reply with quote

At the recent Waterperry Care of Nations conference, there were some lively discussions about money, banking and credit. A key sticking point for some were the questions "How money is created?" and the "Can it be destroyed?".

Focus was directed to the work of Prof Steve Keen, one of those that is said to have predicted the financial crisis we are now in. He runs 2 active websites http://www.talkfinance.net/ and http://www.debunkingeconomics.com// both of which delve into finance and money.

Keen claims that money is endogenous, which is to say that it arises naturally as part of the macro-economic system of which banks are a part.

One particular sticking point was his claim that when bank-money, which was created at the point of making a loan, is not destroyed when the loan is repaid. Personnaly I find this difficult to understand. To help specifically on this point, Keen suggests looking at one of his papers which is attached here "The Roving Cavaliers of Credit".

Keen also tackles the claim that interest can never be paid back without the creation of yet more money; we may have seen this in "Money as Debt". This is shown by Keen to be false, a clue being that bankers, capitalists, workers are all part of the wealth creation process, can share in its proceeds and will spend their money receipts.

Have fun reading!



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Steve Keen from http://www.debtdeflation.com

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Richard Glover



Joined: 29 Sep 2008
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PostPosted: Mon Oct 11, 2010 7:51 am    Post subject: Reply with quote

Wikipedia provides several useful helps to those studying Keen's paper.

"Endogenous money" is described in both http://en.wikipedia.org/wiki/Monetary_circuit_theory and http://en.wikipedia.org/wiki/Endogenous_money. The idea is that money supply is determined by the level of aggregate demand, and is not under the control (or restraint) of central banks. This is a direct challenge to the "money multiplier" concept. Augusto Graziani is an economist who champions this view.

Chartalism is worth looking at - http://en.wikipedia.org/wiki/Chartalism. This places emphasis on fiat money and requires it to be the only settlement of taxes; governments can operate at (and have to) a deficit, yet can maintain money vale. Bank/credit money is also permited and is seen as endogenous (as above). There are several interesting ideas in this system.

How many ways of understanding money are there?


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Chris O'Brien



Joined: 17 Jul 2010
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Location: Harpenden, Herts

PostPosted: Mon Oct 11, 2010 8:26 pm    Post subject: Steve Keen's views on money production. Reply with quote

I got as far as page 17 but my head started to hurt! It is a bit dense!

However I think that he has a point: If fiat moey is notes and coins it hardly features at all in most commercial transactions. I checked on my own transactions last year and only 11% of them involved cash. As a pensioner one would expect me to have a much higher MO ratio to M3 as I have no debts.

It seems to me that the real economy only starts to operate when one exchanges one's 'wealth' for real things, food, houses, cars, holidays etc. A 'city boy' with zillions in the bank only enters the economy when he buys a docklands flat or a Ferrari. Investment bankers and pensioners live off 'wealth from obligation' and as long as real wealth producers are prepareed to forego some of the wealth they produce everything is fine. However, if a situation arises, as in Russia or Argentina recently, then the obligation goes out the window and pensioners starve and bankers have to find someone else to rob!

Therefore instead of chasing the mirage of wealth as money we should investigate if wealth can stored and how much 'wealth by obligation' takes from' wealth by production'.

If our world were like the sci-fi film 'Logan's Run' where everyone was put to death at 30 the economy would be so much simpler!
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Richard Glover



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PostPosted: Thu Oct 21, 2010 8:03 am    Post subject: Reply with quote

After reading several of Prof Steve Keen's papers, a few questions and comments were sent to him; they have been posted here in anticipation of some further help in this important area.

"Roving Cavaliers of Credit" is on the first post of this topic, and is probably the most readable to non-mathematicians.
"Keynes's Revolving Fund of Finance and Transactions in the Circuit" http://www.debtdeflation.com/blogs/wp-content/uploads/2007/03/KeenKeynesCircuit.pdf deals with how Keynes saw money as basically "endogenous", arising from aggregate demand, rather than the money multiplier model based on central bank money.
Keen's presentation at the recent AMI conference in Chicago (Michael Hudson also presented) can be found at http://www.debtdeflation.com/blogs/2010/10/08/ami-talks-in-flv-format/

This is what was sent to Steve Keen:

Steve,

Many thanks for the clarity of your argument and analysis; I have found "Roving Cavaliers of Credit", "Keynes's Revolving Fund of Finance and Transactions in the Circuit" and your recent AMI presentation all very interesting and helpful. All this though does prompt some questions and comment.

Control of Money supply:
The line of causation being loan - deposit - reserve would seem to describe the present day situation. Loans are constrained, certainly by the willingness to get further into debt, but also to some extent by regulation. Once it did seem reserve ratio was effective (FRB in 1950s to 1970s leading to growth in Eurodollar market). Now the Basel Accords have some effect. Rules are bent with "off-balance-sheet" innovations, and FRB etc may alter the rules at times, but there is still some (albeit imperfect) regulatory restraint.
If this is true, then any one of the constraints will be operative, and it could be a different one at another time. Thus at times relaxing the rules could seem to be causative, but at other times not. This suggests that money has both endogenous and exogenous aspects, the former being dominant at present.

Importance of Base Money:
I understand that notes and coin are available on demand (surely not just the UK?). The public wanting more notes and coin compromises banks ability to lend, as they diminish their central bank deposits. This (if true) again suggests that Basel etc is having some effect on restraining bank lending. The public seems to be encouraged to use as little cash as possible for this reason.
This on-demand convertibility to cash seems to be a vital aspect for there to be confidence in electronic money. Our recent crisis has seen banks turning to the central bank and government for help. Again this suggests the lender of last resort has a vital part to play. It is as though we have more confidence in the nation than the banks in times of financial crisis.

Is cash a liability?
"Money is an asset to the holder but a debt to no-one" sounds good but I have doubts on exactly what you mean. I sit here with a £20 note, which is certainly an asset to me, but only because I can go anywhere I wish in the UK and obtain goods and services for it. The flipside is that the UK is duty-bound to accept it in exchange. Thus the £20 is an asset to the holder and a liability to the nation.
For the £20 to have the greatest value to the nation as a whole, its value has to be stable. This becomes a vital responsibility of government. For the electronic-to-cash conversion that helps support confidence in bank money, this necessitates some government responsibility for bank money. This would especially include regulation (prevention?) of loans extended to asset speculation, especially in land.

Tempering Speculation:
This does seem to be such an important issue; time and time again we have been through these boom-bust cycles fuelled by speculative activity. This is substantially based on land speculation, the most variable component of property price over the cycle.
Have you posted your view of the potential for some form of land value taxation as a moderator of such destructive activity? I wonder if this also has potential in leveling some of the debt mountains that surround us.

Again, many thanks for your postings and I hope they continue to help change the world's understanding of money and finance.



End of post to Keen.
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Richard Glover



Joined: 29 Sep 2008
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Location: Ealing, London, UK

PostPosted: Wed Oct 27, 2010 1:14 pm    Post subject: The Austrian View on Fractional Reserve Banking Reply with quote

In his book "The Legal Nature of the Monetary Irregular-Deposit Contract" (http://www.cobdencentre.org/literature/download/?dl_page=2), Jesus Huerta de Soto argues that fractional reserve banking (FRB) is morally wrong and basically theft. Before signing wholeheartedly to the Money Reform Party, I would like to examine the proposition by starting with the fairy-tale origins of FRB, the goldsmith with his promissory notes in place of gold.

100% Reserve:
Whilst there is a 1-to-1 correspondence between the amount signified by gold-backed notes and the amount of gold, there is no problem and a lot of mutual convenience. The goldsmith charges a fee for the service, and whilst trust remains, everyone is happy.

Fractional Reserve:
As generally a significant fraction of trading gold just sits in the vault, it would appear to be justifiable to issue more gold-backed notes than are covered by gold. However, De Soto argues (see chapter 1) that a depositor expects to be able to draw out the gold on demand. As FRB implies that not all depositors are able to draw out gold to the value of their notes, the depositor is to some extent being defrauded. Thus only 100% reserve banking is justifiable. This argument seems to have some merit! [Perhaps someone could expand on this rather-to-brief summary of the argument].

Considerings:
    If there is trust in the notes, they are much more convenient than the gold, suggesting notes have some merit. If there was 100% trust, they would be MORE valuable than gold as a means of exchange.

    Where the medium of exchange is government-issued notes and coin which, although not gold-backed, had a steady and trusted value, this would also be more convenient than carrying gold.

    I sense that it does not matter who issues the notes or how they are backed, as long as there is trust in them. Does anyone disagree with this?

    If agreed, this would also seem to apply to electronic money, as long as there is the trust.

    If that is true, then FRB in itself is not a problem as long as there is a trust-maintaining mechanism in the money supply system.

Is there such a thing?
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Robin Smith



Joined: 29 Oct 2010
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Location: Wokingham, Berkshire, UK

PostPosted: Sat Oct 30, 2010 10:22 pm    Post subject: Reply with quote

Richard

I've read the first doc and watched the AMI video. The foc is really good in explaining the error in the source of credit money.

The video is also very good ... until... it reaches the slide titled "The Euphoric Economy" and the bullet: "Rising debt levels and interest lead to crisis", which I can believe

And then shows how non ponzi investors can no longer afford their assets. So the collapse starts. But its not at all clear who he means non ponzi investors? Nor does he say why they cannot afford them any more.

It feels like he is confusing debt with rent. But is impossible to tell because he has not said a word about rent.

Best regards
Robin.
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Richard Glover



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PostPosted: Mon Nov 01, 2010 7:59 am    Post subject: Reply with quote

Here is the PowerPoint presentation of Keen's presentation at AMI. It is well worth going through carefully.
http://www.debtdeflation.com/blogs/wp-content/uploads/2010/10/KeenAMI2010WhyCreditMoneyCrashes.ppt

Robin, The invester distinction appears to be between speculative investments in assets (Ponzi) and all other investments (viz productive enterprise). Your question on why they have to sell their assets is a good one.


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Richard Glover



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PostPosted: Mon Nov 01, 2010 10:29 pm    Post subject: Usury Reply with quote

Anyone interested in the topic of usury? This link (http://www.monetary.org/usurytalk.htm) is of a talk given in London 2004 by Stephen Zarlenga, a director of American Monetary Institute (AMI). It includes many historical references.
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Richard Glover



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PostPosted: Thu Nov 04, 2010 8:43 am    Post subject: The worst way to organise banking? Reply with quote

Mervyn King (Governor of the Bank of England) gave a speech "Banking: From Bagehot to Basel, and back again" at the Buttonwood Gathering in New York on 25th Oct. The phrase that caused most ripples was: "Of all the many ways of organising banking, the worst is the one we have today."

The BofE does seem to be taking the financial crisis very seriously, and are giving a lot of attention to how the financial sector can be freed from such catastrophic events. The speech reflects this and includes historical perspective, analysis of present weaknesses, approaches to overcome them, the weakness of Basel 3, and so on.

He uses some interesting phrases such as "financial alchemy" to describe one of the supposed functions of financial intermediaries viz. maturity transformation (converting short term liabilities to long-term assets).

The text can be downloaded from this forum. Further speeches by BofE staff are available at http://www.bankofengland.co.uk/publications/speeches/2010/index.htm.



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