Thursday, 5 July 2018

Fractional-reserve banking

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As a model of how money is actually created, it is 'neat, plausible, and wrong.' The fallacies in the model were first identified by practical experience, and then empirical research.
—Steve Keen[1]
Fractional-reserve banking is a relatively simple but wrong way of describing the banking system. As always with bad economics, it is popular partly because older academics have a vested interest in defending the idea, but also because it serves a useful political purpose for plutocrats. Namely, it basically denies that banks control the money supply of the modern economy. This allows the rich to place the onus of controlling the money supply upon governments, specifically by cutting expenditure on the grounds that it creates inflation (it can, but it presently doesn't).
Banks do not, as too many textbooks still suggest, take deposits of existing money from savers and lend it out to borrowers: they create credit and money ex nihilo – extending a loan to the borrower and simultaneously crediting the borrower’s money account
—Lord Adair Turner, formerly the UK's chief financial regulator[2]
When they lend money, banks create money out of nothing. They can do so with no deposits at all, since that money is in electronic form. Obviously, this would be impossible if this was done physically, as in pre-electronic banks. The difference between lending $100,000 and $10,000,000 of physical objects is the difference between handing someone two handfuls (2.4 kilos) of gold and shipping them a truck laden with 240 kilos of it. The difference between lending those sums electronically is a single keystroke. Accidentally creating millions of dollars' worth of objects is rare. Doing so electronically happens all the time, such as when instead of giving this man the $100,000 overdraft he asked for this bank manager gave him $10,000,000.

Neat, Plausible[edit]

Monetarists assume that the Federal Reserve can influence banks' lending by setting the Fractional Reserve Rate. They assume that this is possible because they assume that banks can't lend without deposits. Ergo they believe that increasing the amount of each deposit that a bank must 'keep' and not lend reduces the amount of lending, that decreasing the Fractional Reserve Limit increases lending, and that using a central bank to directly increase or decrease a bank's reserves will cause it to increase or decrease the creation of new loans respectively. More broadly this belief sits well with their assumption that banks and lending don't affect the economy, or that if they do then it is in a way which never changes and can therefore be safely ignored.
This sounds plausible because Neoclassical economists have a holistic ideological vision in which everyone's economic activities - including those of governments and banks - are just like those of the individual person or household. It seems like common sense that if you cannot physically lend $50 to your friend who has forgotten their wallet, then banks must not be able to lend money unless they already have some. Likewise, it seems like common sense that governments can't spend money unless they take the same amount or more in the form of taxes. While some people are aware that it is possible for governments to spend more than they take, Neoclassicists ensure that these people believe that it will create hyperinflation, which is Satan.
At an academic level, the Fractional Reserve theory has only been able to survive through the ongoing process of purging and no-platforming its critics. Even before the concept was created in the 1970s, it was manifestly apparent that the lending did not require deposits. Yet the inconvenient reality was simply assumed away.[3]


If Fractional Reserve Banking really explained how the actual banking sector worked, there would be a credit crunch every few minutes as the banks waited for people to make deposits. Everyone would pay for almost every ordinary expense with cash, and no-one would ever use credit cards unless they were willing to wait minutes, hours, or even days for the payment to go through.
Instead, banks just create the money they need to get by without paying much - or any - attention to the level which they are nominally supposed to 'keep'. This is why the top-down Quantitative Easing implemented by Japan for two decades and Bernanke+Obama et al. in the Great Recession did not increase lending to businesses and consumers.
The quantity of reserve balances itself is not likely to trigger a rapid increase in lending [...] the narrow, textbook money multiplier does not a ppear to be a useful means of assessing the implications of monetary policy for future money growth or bank lending. - Seth Carpenter, Federal Reserve associate director,Money, reserves, and the transmission of monetary policy: does the Money Multiplier exist? p.29
[4] Just as they did in Japan, EU-US banks used the vast majority of the QE funds for the productive (for them) purposes of lending the money one each other with above-inflation rates of interest, where it has sat ever since. In both cases they used a little to buy back their own stocks, buy each other's stocks, buy stocks in other companies, and inflate asset bubbles. Nowhere have they increased lending to businesses or consumers, because the present and predicted future returns on doing so were lower. Of course, Neoclassicists are divided between saying that neither of these examples count because we didn't use allow them to create enough QE money - or that all the things which happened instead of what they predicted must actually be good things because anything which can be done to make money must be good for society, or else it couldn't be done. Classic! [5]

Stopped Clock[edit]

Austrians hate the Franctional Reserve concept not because they understand that it does not apply in reality, but because they have their own equally nutty model of how things 'should be done' instead.
The very thought that a bank may do something other than sit in front of your money and watch it grow mold makes some people foam at the mouth.[6] Many get very quiet if you ask where the interest on their liquid savings accounts would come from then.
The same people often howl that government intervention in the banking system is filthy socialism because it is not their favored economic policy. Safe to say this is often ignoring history, when before there was regulation of fractional reserve banking by the Federal Reserve things were much more exciting for depositors, what with all the constant banking crises and all.

Macroeconomic effects[edit]

In the USA, UK, Australia and much of the developed world all economic growth requires the exponential increase of private debt. This is the ultimate product of the banking system created by the Neoliberal-Neoclassical revolution, which has allowed debts to compound and wealth-extraction from the population to increase. Banking is one of the three principal sectors which maximise the unearned income of plutocrats by extracting value from the wage-earning population, the others being Insurance and Real Estate.
Without a biblical-style cancellation or restructuring of debts, this process will continue until de facto plutonomy and debt-slavery of virtually the entire world population result. [7]

Historical existence[edit]

Fractional Reserve Banking did actually exist in the days when banks kept physical objects such as gold and paper currency which could be withdrawn. In those days it was important for regulators to ensure that banks kept more than the bare minimum of valuable objects to-hand, since the banks naturally wanted to keep as little of them in-house as possible in order to maximise their profits - yet those could be withdrawn, possibly causing a bank run. While many imposed limits on how much could be withdrawn at once in order to limit the amount that they had to keep on hand, lowering the withdrawal amount in a crisis could actually cause more panic and therefore more to be withdrawn as a larger number of depositors showed up demanding their money back. Many small banks in the US went bust as a result of depositors losing confidence in them, which is why the Federal Reserve bank was created to establish Fractional Reserve limits and give gold or cash-money to insolvent banks in an emergency. It also limited the risk that the depositor's insurance (FDIC) would kick in every time one too many people came into the bank asking for cash.


While banks can't literally print their own money in a system with a central bank, they can increase the money supply. In a system of fiat currency, banks' monetary base (i.e., what is actually in the "vaults") is made up of money which can be supplied by the central bank in time of need. However, when banks make loans above their reserve (which is pretty much always), it adds to the money supply, specifically what economists call "M2" and "M3" (depending on the type of loan), which are considered less "liquid" than the monetary base. Thus, lending can (but not necessarily will) cause demand-pull inflation.
In the world of electronic banking, banks can now create "money" out of thin air, through create accounts. When someone spends these accounts, they are transferred to another bank, then this is lent on an interbank market (FED funds, LIBOR), to give reserves to banks who need it. [8]
It is always possible to still get a run on the bank if too many people demand money in excess of the reserve. A simple analogy is airline seating. Airlines know a few people will cancel, so they overbook flights by selling more tickets than seats. A run on the bank is like everyone showing up to the flight and no cancellations. (Or the plot of Mel Brooks' The Producers, when the play they'd over-sold shares of unexpectedly became a hit.) Bank runs are prevented in modern banking systems by the creation of a lender of last resortWikipedia's W.svg to avoid short-term liquidity shortfalls.
The fractional reserve system itself takes no account of the risks of the loans banks make. If the reserve requirement was set to 100%, interest accumulated in deposits and the generation of loans would be nearly nonexistent. However, no banks would run out of money, as long as they had absolutely no costs. This has traditionally been policy favored mostly by Scrooge McDuck, and Austrians, but has gained currency in certain circles following the 2008 crash, and has been advocated by economists Laurence Kotlikoff, John Kay and John Cochrane as well as the Financial Times' chief economics commentator Martin Wolf, and Iceland look to be heading towards implementing full reserves.[9]

The Conspiracy Theories[edit]

Fractional reserve banking is the subject of numerous conspiracy theories. They usually revolve around or have their roots in anti-Semitism in the form of Jewish banker conspiracies like the Rothschild family controlling the world. This usually ties in to conspiracies about the Federal Reserve as well as gold buggery or sound money. Sometimes the cry of "fractional reserve banking is fraud!" is a cover for some kind of economic woo or scam — usually of the "don't trust banks, put your money in my Ponzi scheme instead" variety. Sometimes these theories are just the result of people failing to understand abstract concepts.

Multiplier effect[edit]

The multiplier effect, or money multiplier, refers to the effects of a bank lending money over its reserve requirements as explained above. By law, banks are required to keep x% (depending on the locale and type of bank) of the total money they lend out in reserve. The resulting amount of money is 1/x multiplied by an original deposited amount, where x is the required reserve ratio in decimal form. For example, a bank is required to have a 20% reserve. Alice deposits her $1000 paycheck into the bank. The bank is able to lend out $800 to Bob, who buys a used car from Charlie, who deposits the $800 into another bank. The bank turns around and lends $640 to Denise, and so on down the line until there is $5000 in the system.
While it may seem a bit like smoke and mirrors to someone unfamiliar with economics, imagine instead of cash it was something with 'obviously' more use such as tools. We all need tools to work, but the vast majority of time we own the tool we aren't using it. So we put the tools in a tool bank, so that others can use it while we are not. If we only need the tools for about 20% of the time, the result is that the bank causes there to be effectively 5 times as many tools in the system. That it's currency instead of tools doesn't change the effect.
The multiplier effect is generally regarded as a simplification in academic and policy making circles. The Bank of England has stated that "while the money multiplier theory can be a useful way of introducing money and banking in economic textbooks, it is not an accurate description of how money is created in reality",[10] and the multiplier model "has not featured at all in the recent academic literature". Charles Goodhart, the UK’s pre-eminent monetary economist and former member of the Bank of England's Monetary Policy Comittee has stated that “as long as the Central Bank sets interest rates, as is the generality, the money stock is a dependent, endogenous variable. This is exactly what the heterodox, Post-Keynesians ... have been correctly claiming for decades, and I have been in their party on this.” [11]
In the Post-Keynesian view, the multiplier is an ex-post facto accounting identity (or, in other words, a legal fiction). The reason for this is that a bank can make any loan it deems worthy and then borrow money from either the interbank loan market (a market in which banks lend excess reserves to each other)[12] or the Fed discount window to meet reserve requirements.

Bank capitalization, charters, and the Glass-Steagall Act[edit]

Banking regulation is much stricter than regulation in other industries and the financial sector. To apply for a bank charter, the owners (usually bank holding companies[13]) of the bank's capitalization are required to be debt free. Banks are supposed to be unencumbered rock solid investments.[14] Once the charter is granted the bank then can receive deposits, i.e., a debt owed to depositors encumbered by the bank's capitalization. The combined value of the banks capitalization, along with its ability to lend other peoples money (depositors money) equals the bank's balance sheet.
If a part owner of a bank holding company were to take on private debt, and sold his stake in the bank to satisfy the debt, that could reduce the bank's capitalization, drive down the value of other shareholders stake, curtail the bank's ability to lend, and affect the economic growth and activity in the surrounding neighborhood. Thus holders of bank charters are strictly regulated and supposed to be responsible with a proven track record in managing their own financial affairs.
The Glass-Steagall Act strictly regulated bank's and bank charter owners ability to use bank assets (i.e., a bank's capitalization, depositor's money, and earnings from its capitalization and depositors money). Under Glass-Steagall banks were limited to collecting interest off of lending depositors money (which a portion was paid back to depositors) or brokering deals -- bringing buyer and seller together and making a fee off the transaction without using the bank's own cash. Repealing Glass-Steagall opened the door to proprietary trading -- removing the heretofore strict requirements of banks to only invest or engage in the most conservative activities, and allowing them to purchase with bank stock and earnings, riskier assets with potentially more lucrative return, such as sub-prime mortgages[15] and insurance companies loaded with potential risk and liabilities.
The Volcker Rule, named after former Federal Reserve Chairman Paul Volcker and part of the Dodd-Frank Fin Reg bill aimed at Wall Street reform, is an effort to allow the Federal Reserve stricter oversight of bank holding companies ownership and activities, which is difficult due to confidentiality agreements and privacy rights.[16]
The United States is the only country in the world to have ever imposed the segregation of consumer banking and investment banking which existed under Glass-Steagall.

External links[edit]

See also[edit]

Icon fun.svg For those of you in the mood, RationalWiki has a fun article about Fractional-reserve banking.
Economics Tautology


  1. Jump up Steve Keen, Debunking Economics - The Naked Emperor Dethroned? p.308
  2. Jump up Martinez, Raoul, Creating Freedom: Power, Control and the Fight for Our Future (Edinburgh, 2016), accessed at,+as+too+many+textbooks+still+suggest,+take+deposits+of+existing+money+from+savers%22&source=bl&ots=PCrJyDmPc4&sig=6JFaITQbHpXBZK5cOh2ifMTI1us&hl=en&sa=X&ved=0ahUKEwi18tG5-PHWAhVCmpQKHbz8CgIQ6AEILjAB#v=onepage&q=%22Banks%20do%20not%2C%20as%20too%20many%20textbooks%20still%20suggest%2C%20take%20deposits%20of%20existing%20money%20from%20savers%22&f=false
  3. Jump up Keen, Steve, Debunking Economics – The Naked Emperor Dethroned?, second edition, (New York, 2011) p.307-312
  4. Jump up printed in Keen, Steve, Debunking Economics – The Naked Emperor Dethroned?, second edition, (New York, 2011) p.313
  5. Jump up Hudson, Michael, Killing the Host: How Financial Parasites and Debt Destroy the Global Economy (Baskerville, 2015) pp.82-84
  6. Jump up Those guys are really against fractional reserve banking? I really didn't expect that these guys want to destroy capitalism.
  7. Jump up Hudson, Michael, Killing the Host: How Financial Parasites and Debt Destroy the Global Economy (Baskerville, 2015) p.158
  8. Jump up Commercial banks by far create more new money daily by interbank lendingWikipedia's W.svg than the Federal Reserve does. Depositing loan proceeds drawn on one bank with another bank creates new money (the same money appears as an asset on both bank's ledgers). The daily reconcilation of accounts between banks - cashing checks drawn on each other's accounts, and banks with surplus deposits helping a bank with a lot of loan activity in one day causing it to fall below reserve requirements, also affects interbank lending, See here Note 7.
  9. Jump up
  10. Jump up
  11. Jump up
  12. Jump up In Great Britain interbank borrowing is done at the LIBOR rate. In the United States, commercial interbank borrowing to meet reserve requirements is done at the Federal Funds rate, also known as bankers cost of funds.
  13. Jump up Defintion: bank holding company
  14. Jump up Bank Holding Company Act. Capital Adequacy Guidelines:Risk-Based Measure.
  15. Jump up Regulation Y Revised, Federal Reserve Bank of San Fransisco.
  16. Jump up The "Volcker Rule": Proposals to Limit "Speculative" Proprietary Trading by Banks, Congressional Research Service, June 22, 2010.

Monday, 25 June 2018

The Key Difference between Transfinancial Economics, and Modern Monetary Theory, or MMT.

The following is a statement, or extract from a certain site which hosts a "paper," or presentation on Transfinancial Economics

It should be said too that MMT seems to be gaining some traction notably among the American progressives. It can be summed up in one sentence. Essentially, it believes that government should create new money to fund public expenditure, and taxation is only used as a means of controlling inflation. This is a good "workable" idea which would be fairly easy, and quick to set up. One recommends it as an excellent start in the development towards a more Non-Debt Based Economic System. However, TFE in its Advanced Stage would require time to set up, but the amount of new money it could create, and phase in would ultimately be far greater than MMT probably. The reason for this is that it would be possible to gradually increase the levels of inflation, but at the same time retain the value of the currency. This can only be successfully achievable if the economy can be monitored, and controlled in Real-Time, or near Real-Time........ Furthermore, taxation itself could be phased out altogether as a means of controlling inflation.

For further explanation please go to the link below. TFE can also be seen as the most advanced, and most "scientific" system in Economics yet to be fully developed.

R.Searle the Blogger, and Originator of TFE

Thursday, 14 June 2018

Steve Keen — Some Preliminary Questions for MMT

I had an impromptu debate with Warren Mosler, the founder and still one of the leading figures of "Modern Monetary Theory" recently. We disagreed on the role of trade deficits, and this has led another MMT luminary, Bill Mitchell, to write two commentaries critiquing my position (see "Trade and external finance mysteries – Part 1" and "Trade and finance mysteries – Part 2".
This is my partial reply to Mitchell—there are more issues that I want to take up when I have time to do so....
Some Preliminary Questions for MMT
Steve Keen | Professor and Head Of School Of Economics, History & Politics, Kingston University, London
Blogger Ref


Kristjan said...
Now they are running around with this exports are cost and imports are benefit argument. Mosler has always said that exports are paying for imports. What he meant by saying that imports are benefit is that if everyone wants to hold your currency then let them do that because it benefits the domestic economy and that is correct.

Usually It is not that simple case and those countries borrow in foreign currencies. Developing countries have constraints even if they spend in their own currency but those constraints are not financial. Fadhel Kaboub is talking about those issues in this radio show

Those are structural deficiencies by him
1. Food production
2. Energy production
3. High value imports(computers smart phones) versus low value exports.
Calgacus said...
Thinking that "exports are cost and imports are benefit " is wrong is simply insane. It doesn't have to do with any special case, anybody wanting to hold your currency.
To disagree is to simply not understand what is being said, to misunderstand the words involved. But I think I finally got to the heart of the failure of communication here down at billy blog, as Some Guy. People are reading something into it which is not being said.

You can export things without being paid for them, that is the basic meaning of "export".
So what is being said is "Unpaid exports are a cost, unpaid imports are a benefit." How on earth can anyone disagree with this?

Keen:So exports are a cost, imports are a benefit, and for its own good, a country should attempt to run a trade deficit.

This doesn't follow. Because what should go along with the other phrase is: "Payments for exports are a benefit, payment for imports are a cost." You have to look at both of them to begin to judge what you should do. What Bill is trying to do is to carefully look at what is happening, piece together the whole picture from that. People often try to grasp it all at once - and start talking nonsense.

Kristjan:Usually It is not that simple case and those countries borrow in foreign currencies.

That is almost always a very bad idea. In any case, always and everywhere, it should be drastically minimized. Much better to do without for a few years, than to do without forever. Borrowing in foreign currencies is not necessary and is self-defeating. You don't need foreign desires to save in your currency in order to export and import and avoid the nightmare of foreign denominated borrowing.

That is the primary means by which the rich countries keep the poor countries poor. Advice that it is necessary or innocuous is nonsense, and has led to many countries being less food self-sufficient than they were a generation ago - something that really is troubling.
Tom Hickey said...
Keen:So exports are a cost, imports are a benefit, and for its own good, a country should attempt to run a trade deficit.


What MMT actually says is that exports are a (real) cost and imports a (real) benefit in real terms of trade. This is a truism that all economists are with. It's not up for debate. From this truism it follows, that if one understands monetary operations, the balance of payments doesn't change that.

It's true in any case, even in the case of balanced trade, where each country is receiving an equal monetary amount of real goods, or where real goods are being gained by one country in exchange for real assets. This has nothing to do with the amount or sign of the trade balance.

But SK thinks it is not the case.

Moreover, a currency sovereign as the ability to offset effects of this using fiscal policy iaw functional finance. For example, it can offset the effect of importing embedded labor by fiscal policy that creates domestic jobs.

MMT economists don't claim that trade deficits are "good" as such, but rather irrelevant as such. Just like fiscal deficits. It's situational. All countries are not the same, and they should run fiscal policy, monetary policy, domestic economic policy, and trade policy that suits their interests, trading off short term and long term interests.

What MMT economists have actually said it that since imports (of real goods) are a real benefit, a currency sovereign should not be concerned that a net exporter desires to save it its currency. In all monetary transactions involving real goods or real assets, the counterparty must be willing to save in the currency, however briefly, by accepting it in exchange.

As soon as a net exporter doesn't wish to net save in that currency, it's trade surplus will begin to decline. Moreover, those savings (stock) can either be saved indefinitely (stock), sold to others (flow that changes stock), or exchanged for goods or assets (flow that changes stock) in the currency zone.

In other words, it is a pseudo-problem.

MMT economists never recommended that all countries run deficits (surpluses) at once, as SK asserts, since as SK notes, that is logical impossible owing to the accounting identity that external accounts must sum to zero. Does he really think that MMT economists don't know that?

I am willing to git people the benefit of the doubt but SK's response looks bonkers to me.
Kristjan said...
That is not exactly what they argue against Tom. They are saying that MMT-ers say that once you have your own currency, you don't have to worry about trade deficits because your country issues its own currency and MMT-ers say that imports are benefit and exports are cost in real terms. There is nothing wrong in this saying, rather countries that are dependent on foreign sector should consider how they spend. All is not available to them but not because of monetary reasons.

"As soon as a net exporter doesn't wish to net save in that currency, it's trade surplus will begin to decline."

Imagine government deficit spending and people buying foreign goods, you don't have to have a trade deficit for your currency to go down and have inflation.

So yes, the trade deficit argument is mostly wrong.
Footsoldier said...
Steve should stop digging he has just created a bigger hole for himself.

First of all this was not his arguements in the debate with Warren they were completely different. Now they've been answered comprehensively by both Warren and Bill he has decided to ignore his original mistakes and veer off in different direction.

What he is saying now is beyond belief.

This is what happens when you are backed into a corner because of previous mistakes you start making things up. MMT claims none of these things and have answered the crux of Steve's complaint a million times over 20 years.
Footsoldier said...
In the debate with Warren he argued it was all about the money and stated clearly that when exporters brought their money back home this was a new form of money printing.

Both Warren and Bill proved to him that this was nonsense

His second argument was about countries using their currencies held at foreign central banks to buy companies in those countries.

Both Warren and Bill explained why this was nonsense and that Steve clearly didn't know the difference between FPI and FDI.

By getting these 2 wrong his circuit model will end up looking like one big joke when it is finished.

He actually spent 10 mins explaining in the debate that he was furious that other countries ran trade surpluses against Australia. Now has turned 180 and supports Germany running trade surpluses by selling cars to the world !

Steve hasn't even taking the time to admit he was wrong about these 2 arguements. Instead he has now marched head on into a blind alley.

Originally, he had over 30 things he thought dispproved MMT and now after reading the economic papers by MMT'rs he now has one.

This one which is complete nonsense and does not represent the views of MMT.

Why is it so difficult for an economist to understand it has been Germany's choice to use their skills and resources to build cars for other countries to consume?

When all MMT'rs say is they could actually choose to use their skills and resources in a completely different way. In a way that promotes public purpose than benefits everybody and not just car makers and those that work in the industry.

Trade is always balanced and how you use your skills and resources can make or break a country. See venezula for details. That's what's important.

Footsoldier said...
Bill as we speak is covering these very issues with his current Timor-Leste series.

Steve should read them.
jrbarch said...
When things get complicated, go back to basics.

I can never understand why the argument does not start with a few simple facts and the logical threads develop from there?

All I know is that there is the skin of the earth and its resources (that belong to everyone); and human ingenuity and duty. The $monetary system simply a recording system of arbitrary magnitude in theory, constrained by common sense (price stability and resource availability) operationally. The essence of trade is sharing and helping out. The material support system meant to sub stand Life; not metastasise as the be-all.

The real problem is greed; ignorance. Greed is the absence of generosity; ignorance the absence of Knowledge. It’s a human problem.

Surely people have to start with the basics .... ? The arguments seem to take place in cloud nine?

We are human beings. The goal of a material support system is to be in a place where we can enjoy life, learn, grow, and expand as human beings. Politics and economics are useless without that goal in mind. Why evolve a human being at all, just to get lost in mind?
jrbarch said...
That is to say fulfillment is not in the material support system; fufillment is in the human being. [Being Alive 101]
Schofield said...
Interesting mantra from Steve Keen "Workers of the world don't unite under Bill Mitchell!"
Ryan Harris said...
Economist: There are two components a and b to what you are doing and a is maximized when we pretend b isn't a constraint for you.

Idiot:. B is a constraint for me.

Economist: But A is what matters.

Idiot: I know A matters but I have no B. Even though someone has B, I have none.

Economist: B is just a number in a spreadsheet, government can create B endlessly without cost.

Idiot: I don't have B.

Economist:. You are an idiot, you don't understand, we divide it into two components, a and b. B is not important.

Idiot: Right then.
Matt Franko said...
Art majors....
Matt Franko said...
"Bill as we speak is covering these very issues with his current Timor-Leste series.

Steve should read them."

LOL never going to happen but Foot also dont assume Keen can abstract like you are here...

"Abstraction, the cognitive process of isolating, or “abstracting,” a common feature or relationship observed in a number of things, or the product of such a process. "

This cognitive ability varies in people..

Maybe Keen is simply not well trained in abstracting....
Tom Hickey said...
Maybe Keen is simply not well trained in abstracting....

I suspect it may be his lack of accounting background. Math and programming chops don't substitute for accounting savvy.

But SK says he is not providing his rationale in this post and we'll probably have to wait until 2019 to have it! (eyes roll)
Matt Franko said...
Accounting is ideally a Science degree too...
SDB said...
Yes, when the economy is running at full employment, then imports are a real net benefit because we get to consume everything that we produce + everything the foreigners produce.

The problem though, is that full employment is a special and rare and fleeting circumstance. Our governments are not running full employment economic policy. And so there is a very real cost to exports, and it is the lost demand that would otherwise generate closer to full employment domestically.

Therefore is it not disingenuous to say exports are a benefit and imports are a cost without the "at full employment" qualifier?

(As an aside - for a developing country, wouldn't it be fair to say that exports are a real benefit because of foreign direct investment and the accompanying technology (capital) transfer from developed countries to developing countries?)

Any thoughts?
Calgacus said...
No, it isn't disingenuous, because people who disagree misinterpret what is being said.

Exports are always a cost, imports are always a benefit, in real terms, looking at them apart from finance, from payment. Nothing to do with full employment or whatever. True individually and in aggregate.

To be sure, this is about exporting goods, which is most exporting. Exporting bads (e. g. toxic waste) is a benefit, importing bads is a cost. Maybe thinking about bads clarifies the intended meaning and the logic.

The other things may have some validity, but first things first. One can only talk sensibly about them, combine them into a correct complete understanding after getting clear on the basics.
Tom Hickey said...
Therefore is it not disingenuous to say exports are a benefit and imports are a cost without the "at full employment" qualifier?

The full answer is yes and no, or it's nuanced and needs some explanation. But the principle that imports (of real goods) are a benefit and exports (of real goods) are a cost in real terms of trade is necessarily true by definition. It's a truism (tautology). It's true just by understand the meaning of the terms involved.

What it says is that iImports (meaning receiving real goods) are always and everywhere a benefit in real terms of trade, and exports (losing real goods) are always a cost in real terms of trade. The qualifier "in real terms of trade" alerts that there may be more to it, and there is.

In balanced trade, each party receives real goods in exchange for real goods. The goods imported are a real benefit and the goods exported are real cost. Even though the exchange is mediated through money in a monetary exchange, it's a barter or real goods for real goods in aggregate.

Each side is being not only goods but embedded labor and losing real good and embedded labor in the exchange.

Each situation has to be evaluated situationally. For example, developed economies transacting with undeveloped are often receiving extracted materials in exchange for finished goods. Persistence in this leads to Dutch disease for the extractor. However, if the emerging country gets technology in exchange, then it can become more developed. These are quite different in their economic effects, as well as social, political and historical effects.

In a monetary transaction balanced trade is not necessarily the outcome and if this is the case, then the situation also has to be evaluated situationally. Is the net exporter using the surplus to acquire real assets in the issuing country (foreign direct investment aka FDI) or saving by increasing its foreign portfolio investment aka FPI. Note that "investment" is being used in different senses here — real investment as "bricks and mortar" in the case of the former and financial investment as savings in the case of latter. There are many other questions that arise.

When trade is not balance, the importer is gaining real goods and embedded labor, which may affect employment unless replacement jobs are created by some other means, at minimum a JG, but ideally through investment in higher quality employment than is being leaked away.

Nuance implies, "It's complicated."

This may be along the lines of what SK is driving at. I guess we'll see when he gets around to giving his full response.
SDB said...
Calgacus: "Exports are always a cost, imports are always a benefit, in real terms, looking at them apart from finance, from payment. Nothing to do with full employment or whatever. True individually and in aggregate."

This is hand waving. If you are going to consider nothing else, then me getting something is better than me giving something. Ironically that's assuming we are homo economicus, an assumption heterodox economists in other contexts tend to reject.

Ultimately imports are only a net benefit to a society at full employment. At less than full employment, the people with jobs get to buy cheaper shit at the cost of a portion of the population being without jobs. I know MMT economists understand this, which is one of several reasons a JG makes macroeconomic sense as a policy. Cause with a JG, we're continually operating at full employment and "exports are a cost and imports are a benefit" actually makes sense without the qualification "at full employment."

Tom, I mostly agree with your elaboration.
Tom Hickey said...
Tom, I mostly agree with your elaboration.

Let me summarize it for clarity and ease of understanding.

The statement that imports are a real benefit and exports a real cost is a truism, that is, tautology similar to an accounting identity.

The truism doesn't become interesting until it is interpreted causally, which then introduces nuance based on contingencies that are situational.

For example, saying that imports are a real benefit at full employment includes the concept of embedded labor as a real resources. The importer is gaining real goods that include material, labor and use of capital goods lost in the exchange by the exporting nation.

Exports are are real cost in that labor as real resource is being exported but it is not a factor at full employment, since it is a resource in excess of what the country needs at time to perform at optimal capacity.

But that, too, depends on how "fun employment" is defined, as well as changing conditions.

It's nuanced.
Tom Hickey said...
"fun employment" should obviously be "full employment."
Ryan Harris said...
This comment has been removed by the author.
Calgacus said...
SDB:This is hand waving.

No, it is the opposite of hand waving. Hand waving is a phrase from mathematics. It is the sort of thing that one does at the end of a course, when everybody understands what is going on and can fill in the details themselves. These are "beginning of the course", fundamental, chapter zero things. I am trying to go slowwwly because that is where people are getting confused and end up saying strange things, and denying tautologies and accounting identities, because they are misinterpreting what is being said.

MMT and accounting and business rigorously use the normal, dictionary definitions of words, but people start unconsciously changing them in these arguments. They don't slow down and listen to what the MMTers are saying, even when the MMT economists agree. And you have to do things the careful way MMT does it, say all these things, use words rigorously, to see all the nuances. There is a very similar conversation going on down at Billy blog, where I post as "Some Guy"; I gave some relevant personal experience there.

Ultimately imports are only a net benefit to a society at full employment. At less than full employment, the people with jobs get to buy cheaper shit at the cost of a portion of the population being without jobs.

Sure, "ultimately" in many or most senses- but that means here "skipping to the end of the course", that is "handwaving" while I am saying get the beginning, the skeleton of the arguments and definitions straight. If people misuse language, they usually end up blaming the wrong things, and getting policy wrong.

The ultimate point is that there is nothing whatsoever in MMT that needs to be changed for trade, for an open economy.
SDB said...
Alright: ~In real terms, exports are a cost and imports are a benefit~

Translation: When we talk about exchange of good and services, doing work and not getting to consume the fruit of that work is bad, offering an IOU and getting to consume the other person's work is good, and this is from the perspective of the narrow self-interested consumerism of homo economicus.

I understand the meaning. I get that this is a truism in generic economic terms.

All I'm really saying is what Tom said right here: "The truism doesn't become interesting until it is interpreted causally, which then introduces nuance based on contingencies that are situational." That is, there are actual downsides and upsides to trade deficits and trade surpluses that are not captured in those definitions. For example, one of the downsides to deficits is less demand domestically, and one of the major upsides is technology transfer to the developing country that is running a current account surplus / export-oriented growth strategy (China for example). In other words there are often huge "benefits" (upsides) to running a trade surplus. And there are often huge "costs" (downsides) to running a budget trade deficit.

"The ultimate point is that there is nothing whatsoever in MMT that needs to be changed for trade, for an open economy."

I agree the MMT framework theoretically accounts for everything I've said. But in the actual world we live in, without an effective full employment policy, then balanced trade or a trade surplus is probably preferable to running a trade deficit, for the reasons I've been emphasizing, especially for a developing country but really for all countries.
Calgacus said...
Alright: ~In real terms, exports are a cost and imports are a benefit~

I wrote more, but erased it as we really don't disagree. My point is that you must write it the way MMT & Lerner et al did it to be logically consistent and bulletproof and convince skeptics.

I have a three part course on MMT & Foreign Trade, which you can get by sending a SASE & $10,000 .... Just kidding.

Part One is FDR's message to the 1933 London Conference, a one page message that is very obscure now, but which he was prouder of doing than the WPA, Social Security, etc - with good reason.

Part Two is Keynes's article National Self-Sufficiency, which makes many of the sort of points you do above, so is superficially inconsistent, but deeply consistent with MMT & fucntional finance.

Part Three is the chapters on Foreign Trade and Investment in Abba Lerner's Economics of Employment which is imho the best systematic exposition ever written. They're at the end of the book, but imho can be and maybe should be read first, because in important ways the foreign trade theory is more basic.

I can send anybody interested links or a pdf of Lerner's book. Of course the $10,000 would be welcome for this onerous labor.
BTO said...
Please send the book , let the incremental growth in the edonomic enlightment (mine) be your reward 🙂
Calgacus said...
BTO: Sent it from my wife's gmail, starts with xues.... subject line: Abba Lerner Book
AXEC / E.K-H said...
Tom Hickey

For the full resolution of the MMT-foreign trade issue see

Additional proof of MMT’s inconsistency

or Bill Mitchell — A surplus of trade discussions
here at MNE

Egmont Kakarot-Handtke