"Bank Money"
Banks are another part of the machinery we call "Canada". Although they are subject to a lot of criticism, they perform an essential function. One of them is to "create money".
When you borrow money from a bank, the money doesn't come from a big pile of cash in the vault. It is created "out of thin air" by increasing a number in your account (money the bank owes you). There is also an equal but opposite number created in the bank's books, reflecting a debt you owe to the bank (an asset to the bank). The banking "system" is machinery that maintains the illusion that "bank money" is interchangeable with the "real money" the Government prints. But these two kinds of money are really not the same thing. In particular, when bank money, backed by debt, is threatened by the inability to collect the debt that backs it, the entire system is threatened. This is what happened in 2008 and explains (more or less) why the government needed to step in and "print" billions of "real money" to stabilize the system. To use our plant metaphor, the economy depends on the flow of money (real and bank) but bank money depends on the collectability of debt. Bank money can vanish from the system if the holder of debt ceases to trust the debtor's ability to repay. Due to the "magic" of central banking, which maintains the "par" relationship between "currency" and bank debt, the disappearance of bank money sucks money out of the whole economy and what money is left ceases to "flow". There is a whole library of books written on this subject, so I won't wade into the weeds much further on this subject.
There is one aspect of this that has been left hanging in my mind and that's what we call the government debt and deficit. We usually think of this as money "borrowed" from the private sector to make up the difference between what the government "prints" and what it wants to "borrow" to meet budget targets. Why would the government "borrow" money it can print?
The usual answer to this is that the deficit provides the government a means to control borrowing in the economy ("bank money") by setting interest rates on the money it "borrows", initially from the banks. According to conventional theory, this provides the government with a lever to control the overall economy and especially to keep inflation within desired targets. Our experience is that this "lever" doesn't actually work, especially in times of slow growth and deflation (such as now). Greenspan himself, who had his hand on this lever for decades, came to doubt that it was connected to anything.
Banks can sell off this debt in the form of bonds or T-bills but the net effect is the same: a certain amount of currency is removed from circulation (acting like taxes) in exchange for a government commitment to "service" the debt by paying interest. One insight of MMT is that the deficit is mathematically equal to saving in the private sector - at least this type of saving, namely money "invested" in government bonds.
Such savings get "leveraged up" in the banking system and play a role in backing "bank money". The effect of all this money being created is an equal but opposite buildup of debt, which worries many authors. What worries me is that the owners of this debt wind up being (by definition) "people who save", which are increasingly a rare breed of citizen. The monetary machine seems to have a byproduct of pumping real money into the pockets of savers, including large corporations who can choose to pile up cash in preference to investing it. A glut of cash in these pockets can produce serious disruptions in the economy as a whole, encouraging buildups of monopolies, the "wealth gap" and the strangulation of small enterprises. This theory sees the "wealth gap" as a systemic consequence of the financial system - the way that money is created, rather than some moral failure of society at large. much less the "savers" among us.
I am concerned about deficits but not for the reason that politicians claim. It has nothing to do with "balanced budgets". Deficits create an increasing claim on the resources of the country by a tiny group of people (the rich) who also tend to hold the levers of political power to ensure that the system continues to work this way.
My understanding of deficits, leveraged from my new understanding of MMT is definitely a "work in progress". There are many great books that give an introduction to the banking system. I have written a lot about debt. Graeber's "Debt - The First 5000 years" is a great book to start with if you are new to the subject.
When you borrow money from a bank, the money doesn't come from a big pile of cash in the vault. It is created "out of thin air" by increasing a number in your account (money the bank owes you). There is also an equal but opposite number created in the bank's books, reflecting a debt you owe to the bank (an asset to the bank). The banking "system" is machinery that maintains the illusion that "bank money" is interchangeable with the "real money" the Government prints. But these two kinds of money are really not the same thing. In particular, when bank money, backed by debt, is threatened by the inability to collect the debt that backs it, the entire system is threatened. This is what happened in 2008 and explains (more or less) why the government needed to step in and "print" billions of "real money" to stabilize the system. To use our plant metaphor, the economy depends on the flow of money (real and bank) but bank money depends on the collectability of debt. Bank money can vanish from the system if the holder of debt ceases to trust the debtor's ability to repay. Due to the "magic" of central banking, which maintains the "par" relationship between "currency" and bank debt, the disappearance of bank money sucks money out of the whole economy and what money is left ceases to "flow". There is a whole library of books written on this subject, so I won't wade into the weeds much further on this subject.
There is one aspect of this that has been left hanging in my mind and that's what we call the government debt and deficit. We usually think of this as money "borrowed" from the private sector to make up the difference between what the government "prints" and what it wants to "borrow" to meet budget targets. Why would the government "borrow" money it can print?
The usual answer to this is that the deficit provides the government a means to control borrowing in the economy ("bank money") by setting interest rates on the money it "borrows", initially from the banks. According to conventional theory, this provides the government with a lever to control the overall economy and especially to keep inflation within desired targets. Our experience is that this "lever" doesn't actually work, especially in times of slow growth and deflation (such as now). Greenspan himself, who had his hand on this lever for decades, came to doubt that it was connected to anything.
Banks can sell off this debt in the form of bonds or T-bills but the net effect is the same: a certain amount of currency is removed from circulation (acting like taxes) in exchange for a government commitment to "service" the debt by paying interest. One insight of MMT is that the deficit is mathematically equal to saving in the private sector - at least this type of saving, namely money "invested" in government bonds.
Such savings get "leveraged up" in the banking system and play a role in backing "bank money". The effect of all this money being created is an equal but opposite buildup of debt, which worries many authors. What worries me is that the owners of this debt wind up being (by definition) "people who save", which are increasingly a rare breed of citizen. The monetary machine seems to have a byproduct of pumping real money into the pockets of savers, including large corporations who can choose to pile up cash in preference to investing it. A glut of cash in these pockets can produce serious disruptions in the economy as a whole, encouraging buildups of monopolies, the "wealth gap" and the strangulation of small enterprises. This theory sees the "wealth gap" as a systemic consequence of the financial system - the way that money is created, rather than some moral failure of society at large. much less the "savers" among us.
I am concerned about deficits but not for the reason that politicians claim. It has nothing to do with "balanced budgets". Deficits create an increasing claim on the resources of the country by a tiny group of people (the rich) who also tend to hold the levers of political power to ensure that the system continues to work this way.
My understanding of deficits, leveraged from my new understanding of MMT is definitely a "work in progress". There are many great books that give an introduction to the banking system. I have written a lot about debt. Graeber's "Debt - The First 5000 years" is a great book to start with if you are new to the subject.
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