Coffee with Joe 2/18/10: Chartalism and Fractional Reserves

[sidchem1]

Joe

Bank reserves are not necessary for loans and increasing reserves does not increase lending.  So your arguments about increasing bank reserves causing inflation does not hold water. See Bill Mitchell's Blog if you want a complete explanation of this

Cheers

[joebhed]

@sidchem1

The only issue is whether fractional-reserve banking, in which all money is issued privately as a debt, is inflationary or not.

It is.

By needing debt interest payments to have a medium of exchange, every loan takes from future economic potential a hidden tax that increases the price of everything.

Thus, all debt-money in existence commands compounding interest which steals wealth from the economy in the form of price inflation.

See at 6:25 and 8:25 in.

Thanks.

[joebhed]

@sidchem1

While creating excess bank reserves has the potential for causing inflation in a fractional-reserve system, it would only do so if excessive lending, based on the excess reserves, actually takes place.

Excessive lending, that beyond the real potential for national economic growth, does cause inflation.

Our rub with the chartalists is not inflation - its real monetary sovereignty.

It's about WHO creates the nation's money.

It's about BEING the monopoly issuer of currency.

[rodneyorondeaujr]

I wanted to pause and thank everyone for engaging me. It is not often I bump into people who care about these issues let alone have a basic understanding of how it works.

[rodneyorondeaujr]

the fed does own treasury debt. they return most of the interest they collect to the treasury. it never buys directly from the treasury though. the fed buys it from the public when it conducts open market operations. it cannot just buy whatever it wants whenver it wants. this is all just interest rate maintenance.. look, its clear you have no idea what your talking about. anyone interested in the truth look up warren mosler, bill mitchell, mike norman, randall wray and economics. they're profeso

[joebhed]

@rodney

I understand the FED protocol for returning excess income to Treasury.

So?

The government has the Constitutional right to create the money directly.

Why do they allow private bankers to create the money and lend it to the government at interest - which must be collected from the taxpayer - and then pay the excess back to the Treasury?

Sounds stupid.

You really believe the $600B in GUV purchases was about interest rate maintenance?

The Fed had already reduced interest rates to zero.

????

[rodneyorondeaujr]

now the parent could borrow business cards from the child and pay interest. but why would it do this. the currency issuer has no real need to borrow its own cuurency that it issues at will. it all has to do wiht interest rates. It is just a tool to set the price of money and control how much spending power the currency users have. We have passed laws saying we have to borrow everything we spend that isn't collected in taxes. Those are self imposed.

[rodneyorondeaujr]

now, if you spend 10 business cards and tax 10, you have a balanced budget. what if the child wants to accumlate cards so he/she may want to go on vacation or something and still meet the tax. the parent can come up with more chores and spend more cards than he/she collects, say 15. so spending of 15 and a tax of 10 is a deficit of 5. this is not a problem because the parent has an infinite amount of business cards.

[joebhed]

@rodney

Again, sorry Rodney.

This is monetary pablum.

It is not worth a response. 

[rodneyorondeaujr]

you can make your own currency at home. If you have kids and want to get them to do chores, heres how it works. create a tax of say 10 business cards. Then come up with jobs that they can do to earn them paying say 1 per hour. It is important that their is a penalty for not meeting the tax. the tax creates the demand

[joebhed]

@rodney Hey, please. I read the Buckaroo story years ago. It is not relevant to anything I am saying. It never was. It never will be. I invite all readers to google Buckaroo Money and Randy Wray's 2001 paper at UMKC. It's fun reading. Sorry you went through all the trouble to try to make it relevant. I think you know that I do not agree with the Warren-Randy-Bill postulations about modern money. Wray build on Innes. Innes is wrong. Money does not need to be a debt, until it is lent.

[rodneyorondeaujr]

Look, your making this stuff up. The government does not borrow from the central bank. The government has a bank account at the federal reserve. So does your bank. When it wishes to buy something, the fed turns the numbers up in your banks reserve account and they turn the number up in the sellers account. When someone sells securities to the government or pays their taxes, the fed turns the numbers down in the buyers/taxpayers account and turn the numbers up in the governments account.

[joebhed]

@rodney Another round I guess. Where did I say that the government borrowed from the central bank directly? At what min. of the video? Or quote whatever reply, please. I know how the open market transactions take place. Why do you say this? And what is the significance of the accounting? I won't chase that rabbit unless you make it relevant to something. On the other hand, it is the CB (FRBNY) that handles the transactions between the GUV and the primary dealers. What's your point?

[rodneyorondeaujr]

When it taxes it turns numbers down. It is the creator of money. not the fed.Tell me this. how did the government on the very first day collect a tax in its own currency if it did not spend it into the economy first. it is like the subway. looks like they collect the tokens to pass them out but really they had to issue them before you collect them. there is no bank manager that says you cannot keep borrowing. Its law and that can be changed. but operationally theres no probelm. politics!

[joebhed]

@rodney On the first day, guv did not collect a tax. The banks used their power to issue $US-denominated legal tender. Then guv taxed it back. That’s WHY the bank manager does NOT tell you there is no money to lend. They create the M1 money WITH the loan. Here’s the thing about “operationally”. Tell the Treasury how they operate "operationally". Treasury OPERATES on the basis of an empty till. That’s why we shut down the government. That’s the way it operates: un-operationally.

[rodneyorondeaujr]

This guy completely misses the point of mmt. The problem is not the fiat system. It is being misused by the politicians. Debt is not bad. All of the dollars in your bank account are government debts. Our assets are the accounting image of government debt. Spending occurs first and taxes and debt second. They are not financing operations. The government does not borrow anything from the central bank. When the treasury spends it issues bank reserves by turning numbers up in bank accounts.

[joebhed]

@rodneyorondeaujr Thanks. So, all debts are inconsequential. Only government ignorance and "self-imposed constraints" are the problem. Hadn't heard that before. . When all those debts are not repayable because the amount of debt-service payments exceed the amount of money growth(*), then what happens? (*)WE are HERE. The ONLY saving grace for MMT is in using the debt-free money-creation approach. Using the keyboard. Limited by GBC. We CAN create money without debt. So, why not?

[joebhed]

@rodney I NEVER thought the problem was the fiat system. Why do you say that? I'm not an Austrian. ALL money is fiat - as created by law. Dollars in your bank account are not government debt. They are the debt of the national economy. Payable ONLY by the taxpayers -citizens. Spending occurs first? With what money? Silly chicken and egg stuff. Do a video, Rodney. I keep asking the MMTerrs for this.

[WilhelmDrake]

If the government borrows from a public central bank, and any profits are given to the treasury, or better yet 0 interest rate, and besides the fact that its recorded as a 'debt', I don't see how this would be different from your approach (besides Fractional Reserve Banking). The only advantage with your approach is in terminology. Which I admit is advantagous. As the government debt would be then debt only in name (as Adam Smith said, no government has ever paid of it's debts).

[wilwon33]

This is the type of discussion which American citizens should be focused on. Chartalism does not distinguish the options of using a fractional reserve approach or the fiat approach suggested by the American Monetary Inst. Historically, the Fed Reserve was advocated as being free of influence by the crooked politicians; however, the advocates were the banksters who persuaded Woodrow Wilson to endorse a faulty institutional concept which enabled the (Mafia-like) banksters who now run Wall St.

[UU361]

The current system is breaking, most people will be wiped out and impoverished, there are no reserve requirements in the US other then for checking accounts and even that money is swept out of those accounts at night, and congress does create the money under the current debt based fiat the problem is the money has to be borrowed into creation and intrest paid rather then being spent into existance,

[wvolson]

Worldwide Odious Debt is the Problem I feel! To see the world suffer because of a Money Problem is Really hard to handle. Thanks for sharing your thoughts.