A Basic Introduction to the emerging Paradigm of Transfinancial Economics

 

The following is a brief paper which also appears in a respected academic book edited by Dr Debesh Bhowmik. It is entitled An Approach Towards Central Bank Digital Currency published by Kunal Books, New Delhi, 2022. In Chapter4 the material below is presented. Also, it should be mentioned that a paper published in 2016 entitled Orthodox Monetary Theory: A Critique From Post-Keynesianism and Transfinancial Economics by Dante A. Urbina appears in a book called International Monetary System. Past, Present, and Future Regal Publishing, India. RS

Ref IMF

 Futuristic Economics for the 21st Century

by Robert Searle

Abstract

The following is in brief concerned with the very basics of an emerging paradigm known as Transfinancial Economics or TFE. It can be seen as a form of Keynesian Economics. Basic to it is the huge relevance of the use of computers and information technology in finance. This would act as a means of notably influencing the economy towards a more ethical, and greener environmentally friendly economy as never before. Many will regard TFE as being similar to Modern Monetary Theory or MMT which has gained a large amount of publicity in recent years. However, the latter is regarded as being a precursor and possible stopgap to TFE which is far more advanced. At the time of writing what follows is still “work in progress”. Of course, it raises many questions which may be answered in the near future such as TFE’s connection with exchange rates and of course the possible emergence of Central Bank Digital Currencies, or CBDCs.

Keywords: Transfinancial Economics, Modern Monetary Theory, Inflation Taxation, Digital Price Controls, Climate Change

JEL Classification Codes: E42,F33,F65,G00,O3,Q54

1. Nationwide Electronic/Digital Price Controls

Essentially, Transfinancial Economics or TFE believes notably that new unearned repayable and non-repayable money can be digitally created ex nihilo and phased into the economy safely without leading to uncontrolled levels of inflation or indeed hyperinflation. This is simply done with the aid of highly flexible electronic digital price controls used for nearly every kind of financial transaction in real time. Thus, if there is a concern about some rise in the prices of certain goods and services these could be digitally capped temporarily. This would be an instantaneous process and could occur automatically in any part of the economy. This could be undertaken with the help of supercomputers or more likely by quantum computers (Clegg, 2021).

Of course, such digital price controls are not the ideal way of doing things but they are better than nothing. Some form of compensation could be created for retailers if desired. However, it must be stressed here that with the right algorithms the market price is allowed to change naturally as much as possible. Whether we like it or not most of the money exists as digital data in a bank. It is used in any number of transaction but “real” money like cash and coin can still be used (unmonitored or possibly monitored in some way) but it would make up only a tiny fraction of the overall economy, and hence, would have near zero significance in our understanding of the whole economy. This is an important but basic point to understand.

Also, in connection notably with vital climate change projects a legally binding agreement should ideally be undertaken to use certain algorithms to track funding. They could detect and instantly ” freeze” in real-time any money that may be involved in fraud.

2. Big Data and Real-Time Economics/The Uncloaking of the“Invisible Hand”.

As one might well realize it would be possible to understand the entire economy in real-time (or near real-time). This colossal accounting data would be created 24/7 with virtually every transaction notably using barcodes, or something similar. The central Inflation Authority would be programmed to instantly check the inflation status of each product or service and if at all necessary instant temporary price capping may occur. Hence, a huge picture of the economy would be possible and could prove invaluable for future economists. Also, such incoming real-time economic indicators would be totally up to date and as such would have no long-time lags unlike conventional economic data.

In spite of this though such information cannot fully rule out uncertainty in the economy. Yet, the data emerging instantaneously should at least give us a far better idea of how it is “working” and this could be important for decision-making. AI or Artificial Intelligence could also play a vital role in all this. Apart from identified transaction data there are what are referred to as Faster Indicators. These use various types of economic activity to be factored in to give us an even wider understanding of the economy in real time (Salina, 2020; Haldane, 2018).

It must be made clear that what we have been saying so far is a capitalist economy. TFE though can also be adapted into a socialist or communist type of economy because it can notably make central planning a lot easier and more likely to succeed unlike conventional economics. Indeed, Economic Cybernetics is an example of this kind of approach, and it is also possible in some future time to have an economy which is “completely” automated and where money is no longer necessary (Cockshott & Cottrell, 1993).

The concepts of TFE are like those proposed by Clifford Douglas and his Social Credit Movement but they have the added dimension of using Big Data and instant digital price capping which did not exist in his time. If he were around today, he would have been impressed by the use of computers, smart phones, plastic cards, et al in developing a futuristic economy. Modern Monetary Theory or MMT is to some extent similar. It should be added too that the term “Social Credit” has nothing to do with the dystopian system of the same name in China (Heydorn, 2014).

Finally in this section of this brief paper it should be said that in time the financial industry will hopefully be powered more and more by sustainable (non-fossil fuel) electricity, and it should be said too that it is possible to have a high degree of commercial confidentiality in connection with the digital transaction data instantaneously going to the Inflation Authority 24/7 for specific businesses of one kind, or another.

3. Maintaining the Value of Money in Real-Time.

TFE would be able to maintain the value of money in real-time at the point of sale (POS). For example, person T buys product A in a shop and its retail price is instantly checked for its inflation status. It is found to be above the inflation rate by 50p and the customer though has already spent this amount but is compensated for it digitally by having it recreated into his or her account. This is called Above Inflation Adjustment. In another instance, person T buys product C which is 30p below the inflation rate and it is the retailer who gets the extra 30p by a digital recreation of it in her or her account. This is called Below Inflation Adjustment. (McDermott,2004).

4. Dynamic Pricing in Real-Time

Fintech is short for Financial Technology. It is a critical part of the TFE paradigm without which it cannot exist. A good example of such financial technology which exists now is Dynamic Pricing. Essentially, it can automatically deal with variable pricing due to changes in supply and demand. It has been successfully utilised in areas such as transportation, hospitality, professional sports, retail, and the like. Even Amazon uses it along with many other companies (Sharda, 2018). All this adds greater credibility to the idea of developing a genuine real-time economy on a national and ultimately international scale. Of course, it has to be realized and remembered that real-time data is used by financial markets around the world in which investors can keep an eye on the value of their shares, or securities. Traders can use such information to make “bets” on the rise and fall of prices of the various companies such as Apple, Google, Unilever, and many other lesser-known ones.

5. TFE and the Climate Change Emergency

At present the greatest challenge facing humanity is the climate change emergency. Tragically, it seems highly likely that it will become irreversible (if it is not already). As such governments, Bigtech companies, and smaller businesses must try if possible to make serious efforts to create credible resilient adaption and mitigation projects on a scale never before known in human history. All this ultimately costs money. Hence, TFE. With this emerging paradigm it would be possible to create new money to fund credible and “feasible” green projects. Of course, investors could be invited to invest venture capital into such investments which could prove lucrative. Such projects may seem in some cases more like “science fiction” but now is the time to think outside the box otherwise we could see the global demise of the human race. It is simple as that. Climate change emergency is not just a physical challenge it is also a spiritual one of the highest order.

Here are a few examples of potential green projects which need to be undertaken (though some of them are in the making or have already been done but not on a scale ultimately necessary for human survival) and they include more solar and wind and solar power facilities; more factory plants and mechanical trees to "suck" carbon emissions out of the atmosphere; more electric cars; more advances in nanotechnology in which atomic structures could create new materials in a world of limited resources; possible underground cities and even underground agriculture may be a required to some extent; natural solutions; sun dimming which may be necessary but a controversial move; more flood defences; more recycling centres and so on. At the same time with all this going on the likes of entrepreneurs such as Bezos and Musk can “wisely” continue with the possible colonisation of the moon and even mars (Gates, 2002; Carney, 2021).

6. The Basic Differences between Transfinancial Economics and Modern Monetary Theory

Modern Monetary Theory is at the time of writing been in the public spotlight for several years and has attracted much public attention. It is similar to Transfinancial Economics or TFE. MMT claims that the government is the sole issuer of the national currency and can fund public expenditure and only raises taxation, if necessary, as a means of controlling inflation at some future date. In this respect, TFE is in agreement. Infact, something like MMT already exists. It is called Deficit Spending. This is when governments need more money and can borrow it and (or) create new amounts of it (Kelton, 2020). This of course works but only to a limited extent. Now, the key differences are:

a) TFE uses digital price controls to monitor and if necessary, cap the market price. These would cover the entire economy and not just tiny sections of it. MMT though would use taxation to control inflation instead but may ultimately use price controls.

b) Unlike MMT TFE has a very advanced understanding of the economy via Big Data in real-time whilst the former would probably largely rely on old outdated understanding of economics.

c) As MMT continues to create new money into the economy a point may be reached that too much money will circulate and could lead to not just gradual rises in inflation but to a sudden mass catastrophic state of hyperinflation. With TFE such problems are dealt with directly by digital controls that would instantaneously control the situation at a touch of a button or indeed happen automatically.

d) Since TFE would have a far more accurate comprehension of the economy in real-time it can assess the potential inflation tax liability (possibly as an online sales tax) months or years ahead. On the other hand, MMT could find itself in a situation in which the overall inflation tax liability would be too heavy, and could even cause social unrest. Incidentally, it should be added that a tax rebate is possible in which the inflation taxation paid could be digitally recreated in full, or in part at a future date.

e) Unlike MMT TFE can adjust the value of money if necessary and instantaneously when products and services are bought in real-time at the point of sale (POS). This of course is when the inflation status is checked by the Inflation Authority. Thus, the purchasing power of money is largely or wholly maintained. This was explained in brief early on using two examples.

f) In MMT the government is seen as the key issuer of currency as something which is non- repayable. However, special private banks could be had in which such grants or (non-governmental) “subsides” could be created digitally.

Key References

[1] Carney, Mark. (2021). Value (s), Building a Better World for All. William Collins.

[2] Clegg, Brian. (2021). Quantum Computing; The Transformative Technology of the Qubit Revolution. Icon

[3] Cockshott, W. Paul., & Cottrell, Allin. (1993). Towards a New Socialism. Spokesman Books.

[4] Gates, William Henry. (2021). How to avoid a Climate Disaster; The Solutions we have and the Breakthroughs. Allen Lane.

[5] Haldane, Andy. (2018, April 30). Mapping the economy in real time is almost within our grasp. Financial Times.

[6] Heydorn, Oliver. M. (2014). Social Credit Economics. Canada: CreateSpace Independent Publishing Platform.

[7] Kansas, Salina. (2021, October23). The Real-Time Revolution; How the pandemic reshaped the dismal science. The Economist

[8] Kelton, Stephanie. (2020). The Deficit Myth: Modern Monetary Theory and how to build a Better Economy. John Murray.

[9] McDermott, John. (2004).Economics in Real Time, a Theoretical Reconstruction. The University of Michigan Press

[10] Sharda, Sahaj. (2018). The Extinction of the Price Tag; How dynamic pricing can save you. New 

Degree Press.

Important. Many people reading the above may realize that the concept of Blockchain would be used in Transfinancial Economics to monitor transactions in real time.

Some key Points to understand in brief

1. One possible problem with TFE is ofcourse shortages due notably in connection with food security. This is not mentioned in the above paper in detail. This could be alleviated to a large extent with forward thinking and credible planning using special monitored non-repayable money. However, as Climate Change worsen governments will probably be forced to introduce manual price controls but such a measure though would largely be resisted by mainstream economics. Ofcourse, conspiracy theorists would come out of the wood work if and when this happens. Another issue is that highly flexible digital price controls unlike their manual counterparts would be far more efficient (though they could be better termed as inflation controls).But the latter could act as a stopgap for the former if absolutely necessary.

2. In the normal state of affairs green goods and services should as time goes by become cheaper and hence more attractive as demand naturally increases from the public. However, this process is already happening somewhat "slowly" but there are marketing stratagies which could artificially alter this situation, and this needs to be developed to create green competition using small or large subsidies. Companies that could loose out at first would be compensated using new capital created ex nihilo. The details of exactly how green artificial "competition" works is still being developed in detail at the time of writing.

3.  The originator of TFE is very much aware that Transfinancial Economics would increase emissions. This is unfortunate but hopefully with further funding the way or ways to deal with this problem would be better funded as never before. There are ofcourse a number of so-called carbon capture programmes in the world, but much more like this needs to be done. Anyway, all this means is that if we have Rapid Green Growth or RGG many people would still die during the Climate Change Crisis. This is tragically unavoidable. But if this were slowly undertaken (as is the case now) it is more probable that the death toll would be much higher in the long run.

4.   It is important to understand that when TFE becomes a reality there is no direct or indirect of taxation. The reason is simple. Since money can retain its value in real time it cannot be inflated to a serious degree, and cause devaluation of money. This means ofcourse that more money can be transmitted into the economy safely. All this has notable implications for charities, and NG0s, or non-governmental organisations as it would mean that raising money from earned sources would no longer be absolutely necessary. This is revolutionary. The only limits ofcourse for this are limited human and natural resources at any point in time.

5. Originally, the above entry included a lengthy piece on TFE but this is not included here, though it may re-appear. It maybe found elsewhere probably on The Economics Realms blogspot.

6. Furthermore, over the years TFE has been circulated around on the internet, and has attracted a number of influential people including Steve Keen (and some of his followers), Ellen Brown, Stephen Zarlenga, Baron Prem Sikka, Richard Murphy, Hazel Henderson (who was especially keen on TFE), and even the present Lord Nathan Rothschild and his family seem to be interested in the new economic paradigm to some extent. There are also some indications that certain commercial entities (ie potential private investors) may be taking some interest in TFE and ofcourse, they could help attract relevant funding for the emergence of TFE into the world.

7. Another aspect of this subject is that notably big oil and gas companies could possibly be legally "bribed" and bought up and phased out to make way for an economy run by clean sustainable energy. Admitedly, this may not be the most ethical way of doing things but humanity must come first rather than powerful vested interests.

8. Finally, it should be said in this brief introduction the originator (ie.Robert Searle) of the TFE System hopes to write a few more papers on some aspect(s) of this subject. At the same time he hopes to fully research and complete a book probably to be entitled Towards Economic Revolution, subtitled Global Financial Reform and the Survival of the Human Race. This may take two years or so and would require help from a whole array of experts including those in economics, business, politics, law, computers, et al.

Reference Source P2P Foundation. Click link below in the elongated box

As a "side interest" my facebook site may be of interest Click

 Original source https://wiki.p2pfoundation.net/Transfiancial_Economics  (for paper at top section) 

Category: 

• Economics

Seven Basic Differences between Modern Monetary Theory or MMT and Transfinancial Economics or TFE

                                             Transfinancial Economics

Basic Definitions  

Modern Monetary Theory 

MMT  believes that the government is the issuer of currency and as such can create new money as public expenditure without raising taxation. Tax is only used for reducing inflation if necessary at some point in time. Something like this already exists as deficit spending when governments need more finance and this is done by borrowing and/or creating new money. MMT is essentially a precursor to TFE which is far more advanced. The former could though act as a stopgap for the research and devlopment of the latter.

Transfinancial Economics

TFE is a futuristic economics which can exist within a more ethical and reformed democratic market/capitalist economy where emphasis is on green products and services. Since  most financial transactions are done electronically/digitally it means that they can be tracked,  and controlled in real-time or near real-time. As most goods have ID barcodes, or some other relevant code such data could be collected centrally by an Inflation Authority and create Big Data in real time of what is going on in the economy 24/7 and what should be done if problems arise. More importantly, flexible electronic/digital price controls could be used to control inflation when necessary rather than taxation (used only when it is absolutely necessary) and this means that more and more money could be safely phased into the economy  without fear of  hyperinflation as prices can be instantly capped at a touch of a button on a huge scale. This is revolutionary. 

Essentially TFE is similiar to Clifford Douglas and his economic theory of Social Credit  (not to be confused with the dystopian Chinese system of the same name) which like MMT can be seen as a precursor. Moreover, Douglas did not live in the computer age, and if he were around today he would probably have appreciated TFE.

The Key Differences..... MMT and TFE

POINT ONE

i) MMT uses taxation as a means of controlling inflation. However, price controls may be necessary at a later stage.

ii) TFE uses highly flexible eletronic/digital price controls as the key tool for inflation. Taxation is avoided as far as is possible. Moreover, these controls virtually monitor the entire economy. They are not just simply targeted at some very small groupings of products and services. This is important to understand.  

POINT TWO

Unlike MMT TFE would have a far more advanced understanding of the economy in actual real time, or indeed, near real time. As such it would have a highly accurate understanding of the potential risks involved in creating and electronically transmitting new money into the economy. MMT on the other hand would probably rely on highly questionable conventional economic data (ie. indicators) to reach decisions about creating new money. 

POINT THREE

Unlike MMT TFE as indicated already but worth stressing again is that the former would not have a complete understanding of the economy in real-time, or near real time in its present model. However though the TF economy would be monitored in a highly advanced way uncertainty cannot be totally ruled out. 

POINT FOUR

Unlike MMT TFE has the speed to instantaneously control inflation as indicated above. With MMT though such a approach does not exist and may not be accurately targetted. 

POINT FIVE

Unlike MMT TFE could give us a far more accurate assessment of whether inflation taxation is needed or not. Thus, it could actually predict with a good degree of accuracy as to when such tax could prove to become too heavy for consumers and hence, avoid serious problems on a national scale. 

POINT SIX

 It is important to say that with the right algorithms inflation checks can maintain the value of money in real-time at the point of sale. This is something MMT cannot do.

POINT SEVEN 

Unlike MMT TFE believes that special banks or certain arrangements could be made for private or private/public banks to create new money as something non-repayable if the need arises. Thus, government is not the sole source in being able to do this.

Also, it should be finally added that though transaction data can give us an excellent understanding of the workings of the economy in real time there are other "economic indicators" like those in the so-called   Real Time Economy or RTE, and Faster Indicators using a variety of economic activities which can be tracked and monitored. 

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 itself is only used as a means of controlling inflation.  This is a good idea. One recommends it as a good start in the development towards a more Non-Debt Based Economic System. On a downside note, the degree of inflation taxation within the MMT concept could possibly become increasingly greater over time, and hence, lead a grave social, economic, and political situation... when the tax debt could become "too heavy". However, the big advantage of MMT has over TFE in its Advanced Stage is that it would require time to set up, but the amount of new money it could create, and safely phase in would ultimately be far greater than MMT. The reason for this is that it would be possible to gradually increase the levels of growth and potential inflation in such a way as to retain the value of the currency (This is explained later in the text). Such a process 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, and only used in an emergency situation.''



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.


https://wiki.p2pfoundation.net/Transfinancial_Economics


R.Searle the Blogger, and Originator of TFE

To what extent can Positive Money and Modern Monetary Theory join forces?

Blogger  Ref  https://wiki.p2pfoundation.net/Transfinancial_Economics
 

A recent blog by Clint Ballinger highlights some of the similarities and differences between Positive Money’s proposals and those of Modern Monetary Theory (MMT) and other Post-Keynesian types of analysis. We thought Ballinger makes some good points that are worth highlighting, before suggesting where we think his review could be improved.
Ballinger starts his discussion by complimenting both sides, suggesting that:

“Despite these various approaches having important disagreements…[their] areas of interest all are grounded in reality & therefore their discussions on policy options are coherent and useful, unlike orthodox policy discussions.”

Next, Ballinger distinguishes between the two sides, suggesting that Post-Keynesians and MMTers have conceptualised their approach by deconstructing the fallacies of the current orthodox framework:

“Post-Keynesian economists have been trying to get orthodox economists to understand the way the economy actually works (with endogenous money) in the real world for decades…[Post-Keynesians dismiss] A significant number of monetary reformers [who] focus on a money multiplier [and] are still stuck in a loanable funds world…”

On the Positive Money approach, Ballinger states:

“There is another group of monetary reformers that do understand that we are in an endogenous money – not a loanable funds – world. Their proposals do not focus on a (non-existent) money multiplier. Their proposals are aimed at actually making the current endogenous money system into a true loanable funds system.”

Ballinger then makes an interesting point as to why Post-Keynesians and MMTers take issue with Positive Money style of proposals, as they:

“…have looked on in dismay as orthodox economists have spent whole careers writing about a non-existent loanable funds system and in turn giving terrible, indeed dangerous, policy advice. Thus it is natural to view holders of the loanable funds view as enemies who do real harm to the economy and the public.”

Ballinger however, is quick to state why Positive Money-type (PM) proposals should not be condemned:

“But it is different to be frighteningly delusional about reality (as orthodox economists are about loanable funds) than to understand that the current system is an endogenous money system and want to make it a loanable funds system (as PM-type proposals do. There are other main reasons many Post-Keynesians reject PM-type proposals. At times, though, it seems mere association with the muddled orthodox view of banking does influence how/whether some Post-Keynesians really weigh the details of PM-type proposals).”

Ballinger then cautions Positive Money, by stating:

“Realize the danger of being thought “not to get” endogenous money…Educate those who still talk about “full/fractional reserves” and a money multiplier that these are just not the issue…The loanable funds system PM and others propose is a “no reserves” system, not a full reserve system.”

Later on Ballinger gives some advice to Post-Keynesians and MMters, suggesting they should:

“Try (even) harder to teach monetary reformers that are erroneously still worried about a money multiplier that there simply is not one in the current system…If they understood endogenous money and that loans create deposits they would see that reforming a “money multiplier” is a waste of time.”

Then Ballinger notes that, there is scope for both sides to join forces:

“Rather than arguing among themselves, Post-Keynesians and PM-type groups should focus on the important overlaps of their bank/finance reform proposals.”

Positive Money should (according to Ballinger):

“…Support MMT proposals that get part of the way to your goals, even if you ultimately want further changes… if PM type proposals want to move from “A” (today’s system) eventually to “D” (a loanable funds system), and Mosler-type proposals move the system to “B” (significant restrictions on the way endogenous money is currently created; the existence of a parallel narrow banking system for those who want it) then PM should be very much on board.”

While Post-Keynesians and MMTers should recognize that Positive Money reformers:

“…Are different from orthodox economists in a crucial way – they get endogenous money – they just don’t believe it serves the public purpose…Recognize that real dialogue is possible with them unlike with the vast majority of orthodox economists. If a loanable funds model would not work or would be worse for the public, clearer statements of why could be made.”

Ballinger also notes that both MMT and Positive Money are often unfairly criticized:

“Many of the concerns with the PM proposal I have seen brought up are actually discussed in some detail in the PM literature…and it often seems that critics of the plan simply do not closely read PM explanations of the details of the plan.”

“There are plenty of critiques of MMT – most of which are completely misguided and due to fundamental misunderstandings of the economy due to orthodox economic blinders.”

Yet for Ballinger, the primary line of contention between Positive Money and many Post-Keynesian groups “…is somewhat complicated, and the key reason involves endogenous money…[and] whether or not endogenous private credit-money creation also serves the public purpose”.

Subsequently, concerns regarding both approaches are laid out. For Positive Money, Ballinger asks:

“Would the new system of exclusively state money be able to create a fair system for large business loans? How would that system differ from the current system?”

And for Post-Keynesians and MMTers, Ballinger asks:

“Does the fact that endogenously created private credit-money dwarfs state money restrict the ability of the government to act in the public purpose in the way MMT believes?

“Does this render MMT ideas on the role of the state in the economy unworkable? Does the inherent instability and pro-cyclical nature of endogenous money have too many social costs? Does the endogenous money system stealthily but inexorably lead to regulatory capture? …Lead to unsustainable levels of private debt? To highly inequitable wealth distributions?”

After citing some useful articles (well worth a read), Ballinger concludes by stating:

“PM-type proposals & MMT are in essential agreement that the state can and should just spend state money for public purpose, with inflation the limiting factor. This is sometimes unclear because of the operational peculiarities of various countries, not least of the US. Whether this is just through continued deficit spending, or a 60 trillion dollar coin or similar, circulating treasury notes (the same thing really), or whatever, ultimately makes little difference. PM-type proposals have long used the US Greenback – circulating (mostly digital) treasury notes, as a key example, and MMT economists have the same view.”

From our perspective, there are some really good points that apply for both MMTers and us. The only thing we would want to point out here is that the main argument for our reform is not about transforming “…the current endogenous money system into a true loanable funds system”. While we seek to ensure that banks function as genuine intermediaries, we are more concerned with returning the power to create new money to an accountable body working in the public interest, and removing the dependency on debt-fuelled growth.
The primary difference is that money could be created endogenously in a Positive Money system, if voters and the incumbent government chose to do so, by allowing banks to have overdrafts at the Bank of England. In contrast to the current monetary system, Positive Money proposals would give the Bank of England more flexibility, allowing it to choose when to slow down the rate of creation of new money directly, rather than trying to restrain the creation of money by the banks.

Stephanie Kelton Has The Biggest Idea In Washington

Once an outsider, her radical economic thinking won over Wall Street. Now she's changing the Democratic Party

 

Illustration: Damon Dahlen/HuffPost Photos: Getty

 

 

Blogger Ref  https://wiki.p2pfoundation.net/Transfinancial_Economics

 

by  Zach Carter 20/05/2018 12:23 BST | Updated 21/05/2018 15:06 BST

For most of her career, Stephanie Kelton was accustomed to being ridiculed. It started in grad school.
At Cambridge University in the late 1990s, she signed up for an economics course taught by Willem Buiter, who later became the chief economist at Citigroup. When she asked a question about money in a particular model, he turned, red-faced with fury, and unloaded on her. “If you are the type of person who thinks money is important,” she recalls him saying, “then you are probably the same type of person who enjoys sitting in your basement and beating yourself with a rubber hose.”
The words obviously left an impression. Kelton ― who is now 48 and has been teaching economics herself for more than 16 years ― repeats them, twice, to make sure they’re transcribed correctly. Buiter didn’t respond to a request for comment.
She’s been receiving (slightly) more polite versions of the same dressing down ever since. Conservatives have accused her of worshipping a “magic money tree,” and Paul Krugman dismissed her ideas in a 2011 New York Times column as a naive blueprint for hyperinflation that carried “a sort of eerie resemblance to John Galt’s speech in Atlas Shrugged” ― a ruthless insult among her left-leaning friends.

- ADVERTISEMENT -

Kelton’s core idea ― that the government can’t run out of money or go bankrupt, no matter how much it spends ― hasn’t really changed since the days when Buiter and Krugman were trashing her thinking. But it seems the world has. Today she is a full-fledged member of the American power elite, juggling television bookings with MSNBC’s Chris Hayes and Bloomberg TV’s Joe Weisenthal, writing op-eds for The New York Times and being quoted in The Wall Street Journal.

Please enter a valid email addressThank you for signing up! You should receive an email to confirm your subscription shortly. There was a problem processing your signup; please try again laterPod Save America and Financial Times want her on their podcasts. She’s got a book deal with Public Affairs, and Bloomberg View has signed her up as its newest columnist ― but she isn’t sure that gig is worth the time, given her packed speaking schedule. In May alone, she’s being flown to Las Vegas to debate a former International Monetary Fund chief economist before heading to Monaco to moderate a panel on artificial intelligence. After that, the House of Lords in London.

Everybody wants a piece of Kelton these days because a simple, radical idea she has been workshopping her entire career is the next big thing in Democratic Party politics. She calls it the job guarantee ― a federal program offering a decent job to every American who wants to work, in every county in the country, at any phase of the business cycle.
It’s a practical expression of her monetary thinking. To her, governments aren’t directly constrained by how much programs cost. The serious concern is inflation, and a job guarantee would revolutionize the way the United States manages the value of the dollar, forcing the Federal Reserve to stop creating unemployment when it wants to keep prices down.  
Politicians like the job guarantee for a simpler reason: Everybody gets a decent job. The idea is getting traction in the Senate. Bernie Sanders’ office is writing a bill that would create  such a program, with help from Elizabeth Warren’s office and support from Kirsten Gillibrand. Even supercentrist Cory Booker has signed off on a pilot version. The Center for American Progress, a leading Democratic think tank, is subtly trying to take credit for the concept (while watering it down).
The sudden respect for Kelton’s big idea isn’t the result of a public clamor for cutting-edge economic theory or an impromptu burst of self-reflection among Washington policymakers. It is instead a story about power and political legitimacy, about the way public officials use economists to block or advance social change and about how economists build credibility by circulating through the cocktail parties, expense-account dinners and conference rooms of high finance.
A onetime college dropout at California State University in Sacramento, Kelton has managed to earn the esteem of both Sanders and an oddball clique of multimillionaire Wall Street traders. Even in hindsight, her journey through this heady milieu seems improbable, almost impossible.

Five years ago, Kelton had a teaching position at the University of Missouri at Kansas City that was partly financed by Warren Mosler, a Wall Street veteran who lives in the Virgin Islands to keep his tax bill down. His politics were flexible. He calls himself a progressive today, but he started pitching his economic ideas to Donald Rumsfeld in the steam room of a racquetball club in the early 1990s.

Mosler’s true passion is for proving smart people wrong, and his work at Bankers Trust in the 1970s instilled in him some unorthodox ideas about money. When people didn’t take those ideas seriously, he had an ax to grind.
So he started putting up funding for academic research at the Center for Full Employment and Price Stability in Kansas City and Bard College’s Levy Institute, hoping to flesh out his observations into a more formalized school of thought. The economists he helped support ― Kelton, L. Randall Wray, Pavlina Tcherneva, Scott Fullwiler, Mathew Forstater ― eventually called their ideas modern monetary theory, or MMT.
Modern monetary theorists believe that confusion around money has distracted economists from the real things that affect the economic health of society ― natural resources, technology, available labor. Money is a tool governments use to manage these variables and solve social problems. It is not a scarce resource that governments have to track down in order to pay for projects.
Mosler figured this out by making enormous amounts of money placing big bets on deeply indebted governments. “Insolvency is never an issue with nonconvertible currency and floating exchange rates,” he argued in a HuffPost blog.
Kelton’s version is simpler: “Money doesn’t grow on rich people.”
But influence does. And Mosler knew a lot of rich people from his days in high finance, including Maurice Samuels, who made millions for himself and Harvard University when he helped manage its endowment during the George W. Bush years. Samuels was MMT-friendly. He made a killing betting on the Italian lira in a Mosler-inspired trade in the 1990s, and in 2013, he talked another Wall Street alum, Andres Drobny, into hosting a dinner on MMT and suggested he invite Kelton to explain the doctrine.
Kelton didn’t come to MMT through glitzy banking connections. Her father served in the military, and she spent her childhood roaming between Illinois, California and North Carolina. She left Cal State in 1991 when the pay at a local furniture store seemed enough to fulfill her modest ambitions. When she went back to school a couple of years later, she became fascinated by ideas that mainstream economists had long since abandoned. After graduation, she traveled to Cambridge, England, to get her master’s at the temple of John Maynard Keynes.
Studying Keynesian economics was not a fast track to power and wealth in the 1990s. At the time, even top Democrats in Washington considered Keynes little more than a curiosity from the Great Depression. The hot topics in the field were innovation, creative destruction and a future in which information technology rendered the political problems of the 20th century obsolete.
Over the years, Kelton grew accustomed to working among professional outsiders ― liberal bloggers, obscure economists and nerdy political activists. Even today, with the book deal and a house in New York on Long Island’s North Shore with a private kayak dock, there’s still more than a little wide-eyed Midwesterner to her personality. Her favorite spot in Stony Brook ― she teaches at the Center for the Study of Inequalities, Social Justice and Policy at the State University of New York campus there ― is a kitschy diner called Crazy Beans with red-glitter vinyl upholstery.
When Drobny reached out to her, Kelton agreed to stop by the 21 Club in Manhattan to talk about MMT, expecting a small event with a few friends.
“Instead, I show up and there are dozens of people, and they wanted me to talk for two hours,” said Kelton. “I had no speaking notes, nothing.”
The 21 Club is not Crazy Beans. Frequented by presidents, CEOs and celebrities from Ernest Hemingway to Jay-Z, its private dining menu features $180 sea bass and four-figure wine bottles. Drobny’s firm bills itself as a macroeconomic research outfit, but it’s more like an expensive, exclusive club for very rich, very eccentric intellectuals, including Peter Thiel — people who own private islands and financial gurus who leave jobs at Goldman Sachs because the money isn’t good enough.
After a few deep breaths, Kelton started her talk. It was a hit. “One guy wanted to take her to Congress,” Drobny recalled. Another wrote a note to all of Drobny’s clients saying Kelton could revolutionize the way the Fed managed the economy and wanted to start popularizing a new economic metric called the Kelton curve. Her inbox was flooded with follow-up questions, including a note from BNP Paribas chief economist Julia Coronado requesting a private briefing.
If you listen to Kelton long enough, you notice that she never refers to “bankers” or “Wall Street” with the derisive tone common among her political allies. She talks instead about “the financial community.” She’s perfectly aware of how far to the right the politics of Big Finance skew, but she views it more like a peculiar subculture than a dark underworld. After all, Wall Street took her under its wing before Democrats took her seriously.
“The financial community ― if you can be persuasive with an unconventional argument, they don’t care about it being unconventional,” she said. “They want to be right.” There’s real money on the line, and fresh ideas can provide a competitive advantage.
In Washington, by contrast, being right rarely matters. Politicians don’t generally turn to economists for new insight into how the world works. Economists instead serve as a kind of credibility shield ― experts who can be trotted out to assure the public that there are very complex and sophisticated reasons political leaders should be doing the things they do. A big part of any Washington economics job is providing a sense of scientific certainty to political judgments that are, by their very nature, uncertain. This is true for big policy changes as well as straightforward tasks like projecting growth rates and government revenue.
The job, in other words, is to back up your team. Getting a policy decision wrong isn’t such a big deal, as long as everyone else on the team blows the same call. The Democratic Party today, for instance, generally regards the bank deregulation it pursued during Bill Clinton’s presidency as a mistake ― but plenty of economists who advocated it ended up with important jobs in Barack Obama’s administration.
As a result, politically relevant economists fetishize orthodoxy. Nobody with political experience really welcomes a new idea that explains why previous economic policies were wrong. And if Kelton’s MMT doctrine is right, then the way nearly every politician talks about government debt, deficits and even money itself is mostly wrong.
“The basic idea is that the government can’t run out of money,” Kelton said. “It creates money just by spending.”
When people talk about government profligacy bankrupting their grandchildren or triggering a cataclysmic debt crisis, Kelton argues, they’re conflating the experience of a typical family, which has to get money from somewhere outside the household to meet expenses, with that of a sovereign government, which creates money as part of its basic operation.
In one of her most important academic papers, published in 2000, Kelton maintains that government doesn’t actually finance its activity by levying taxes or issuing bonds. Instead, it creates money by spending it into existence. If a government wants to build a road, it calls some contractors and puts money in their bank accounts to pay for it. Where does this money come from? The same place all money comes from: thin air.
This means, among other things, that the government can always pay for whatever it wants ― housing, health care, tanks, whatever. But it doesn’t mean governments can just spend infinite amounts without any consequences, she emphasized. Eventually inflation becomes an issue when the amount of money in circulation gets ahead of the productive capacity of the workforce.
But even inflation doesn’t impose a hard limit on policy options. The Federal Reserve can raise interest rates to deal with it, Congress can raise taxes to pull money out of circulation or even impose price controls. All those have their drawbacks, but depending on circumstances, any of them might be preferable to reducing government spending. It all depends on what a society needs. Those needs, Kelton thinks, should be the primary focus of study ― not the immediate impact on the federal budget deficit, a metric that dominates policy discourse in Washington.
The left-wing appeal of these ideas is obvious. With inflation stubbornly low over the past 35 years, Kelton’s work suggests Democrats have plenty of fiscal room to not only protect Social Security and Medicare but also expand them and propose ambitious new programs. But MMT is also attractive to certain elements of the superrich. Because if we don’t have to worry so much about how much these programs cost, then there is no pressing need to raise taxes in order to pay for them.
After the 21 Club dinner, Drobny invited Kelton to a small, select conference he was hosting in Santa Monica, California, where she met Larry Summers, a Clinton treasury secretary and Obama economic adviser, who asked her to send him the best 40 pages of material on MMT available. By October 2013, Kelton was on stage explaining MMT at Columbia University alongside Nobel laureate and former Clinton adviser Joseph Stiglitz. Charles Schwab wanted her to present at its Impact conference the next month. The month after that, she spoke at Harvard.
Her career had changed tracks. She wasn’t just a clever economist with some quirky ideas anymore. Her credibility with Wall Street began to register as academic clout.

Kelton never refers to ‘bankers’ or ‘Wall Street’ with the derisive tone common among her political allies.

The great irony of Kelton’s career is that her breakthrough with the financial elite created her breakthrough with the American left. In the fall of 2014, she got a call from Sanders. He was taking over as the ranking minority member of the Senate budget committee and needed a chief economist.
“We wanted somebody who could walk into a room with establishment economists and tell them that they were wrong,” said Warren Gunnels, Sanders’ policy director.
That was essentially what Kelton did every time she addressed Wall Streeters about MMT. “I never speak to audiences that are already on board,” she said. “It always feels like going into the lion’s den. But then they love it.”
There are thousands of left-wing economists. But it’s hard for the economically inexpert to distinguish brilliant creativity from quackery. Kelton’s social credentials with Wall Street helped her stand out.
And Sanders liked the ambition of her policy vision. Perhaps more important, he liked the way she talked about Franklin D. Roosevelt. When Sanders asked her what he should do on the budget committee, she said he should pick up FDR’s unfinished agenda from 1944 ― an economic bill of rights. The top item on that agenda was a good job for everyone, guaranteed.
Sanders hired her as the minority’s chief economist on the budget committee, and when he started his presidential run, she agreed to serve as an adviser to the campaign.
Like most politicians, Sanders doesn’t get his economic ideas from studying economic theory. They’re an extension of his moral intuitions, according to several former staffers. He’s much more interested in Pope Francis than in Thomas Piketty. Sanders likes FDR because he spoke clearly and forcefully about economic justice as a moral and political right, and Sanders likes Kelton because she can communicate not just about inflation but also about rights and justice.
When she teaches at Stony Brook, she supplements the chart-and-graph drudgery of economic analysis with current events and a strong dose of history. This year she’s going over the Freedom Budget proposed by A. Philip Randolph, a civil rights leader who organized the 1963 March on Washington. The Freedom Budget ― first presented in 1966 ― is an “almost perfect document,” Kelton says after class. She particularly likes that its author doesn’t force the government to choose between providing a job as a civil right, and providing other priorities, like funding the military.
“The jobs pay for themselves,” she says, by creating new socially productive stuff that makes its way into the economy. What matters isn’t the deficit but whether these new work hours can generate something useful.
Kelton thinks it’s obvious that there’s plenty of room for more work today. Poverty and unemployment are tricks played on the economy by money ― there are no material or productive barriers to eliminating either one.
But it’s hard for many to believe that achieving such ambitious goals wouldn’t come with some other searing social price. While she got Sanders’ attention talking about economic rights and social justice, he balked at the implications of her broader theory. He had been pounding Republicans on the deficit for years and didn’t want to give it up. He had voted against the expensive Iraq War, the George W. Bush administration’s Big Pharma–friendly Medicare prescription drug benefit and the Bush tax cuts, arguing they were too expensive and diverted resources from programs that would genuinely help the middle class. While Kelton the radical theorist wanted Sanders to shrug off deficits, Sanders the politician wanted to pay for his plan by taxing the rich.
Gunnels said Sanders “does believe that the wealthy and large corporations need to pay their fair share in taxes and we can use that to rebuild our crumbling infrastructure and Medicare and tuition for all Americans.” And Kelton and Sanders discussed their theoretical differences before she was hired. “He wanted to make sure that Stephanie understood that ― that when she came on she was working to advance the agenda of Sen. Sanders,” said Gunnels.
For all its ambition, Sanders’ agenda wasn’t very creative. It just expanded the scope of existing programs that liberals already liked. The minimum wage would be higher. Tuition at public universities would be not just reduced, but free. Medicare would be available to everyone, with better coverage. Kelton didn’t have a problem with any of it, but almost nothing distinctive about her economic thinking ended up in the platform.
She thought her boss was walking into a trap by insisting that higher taxes on the rich and economic growth could pay for everything he wanted to do. She was right. When the campaign enlisted University of Massachusetts at Amherst economist Gerald Friedman to calculate the cost of Sanders’ platform, Friedman relied on overly optimistic assumptions in his modeling. Economists aligned with rival Democratic candidate Hillary Clinton pounced, accusing the Sanders operation of fiscal irresponsibility and economic illiteracy. Sanders staffers still wince at the memory. The numbers shouldn’t have mattered, but they didn’t add up.
To project some intellectual legitimacy for the campaign, Kelton corralled economists into signing letters in support of individual Sanders policies. She got over 200 signatures from people backing a $15 minimum wage and 170 endorsing his plan to break up the banks. This was not an easy task, since nearly every economist with political experience expected Sanders to lose and most saw little reason to get themselves on Clinton’s bad side a few months before she secured the Democratic nomination. Even Friedman endorsed Clinton.
But by 2016, Kelton had some impressive connections. When she noticed Columbia University economist Jeffrey Sachs criticizing Clinton’s foreign policy on cable news, she reached out to see if he could find other common ground with Sanders. It should not have been a natural fit. During the 1990s, Sachs was a proponent of shock-therapy neoliberal economics ― a swift transition from state-dominated economies to market-based pricing and delivery. It proved a disaster in Russia, where he was a top adviser to the government. He has since drifted leftward, but remains a card-carrying member of the D.C. establishment, a mainstay of MSNBC’s “Morning Joe” and superelite conferences like the Aspen Ideas Festival and the World Economic Forum in Davos, Switzerland.
Sachs endorsed Sanders and invited him to a conference at the Vatican, where the senator got to meet one of his heroes, Pope Francis. In one of the oddest political unions of the past 30 years, Sanders returned the favor by writing the introduction to Sachs’ latest book. The Sachs connection boosted Sanders’ credibility in Washington, and the campaign relished getting him in front of the camera. Economics is as much about prestige as it is about math.
Kelton refuses to criticize Sanders or her time in his employ. She likes him, and she’s proud of her work for the campaign. But other staffers say she was obviously underutilized by the three white men at the top of the organization. The Sanders camp’s struggles with race and gender aren’t exactly breaking news, but in Kelton’s case, it’s hard to distinguish the campaign’s gender trouble from general incompetence or the sexism that pervades the economics profession.
Male economists dominate senior positions internationally and hold 86 percent of tenured jobs in academic doctoral programs, while the number of women entering graduate programs has flatlined at about 33 percent for nearly two decades. The pattern overflows into journalism: The people who cover economic policy for major news outlets tend to look like this. (Hi!) Power and expertise are heavily gendered ideas in America, and so economics, the most powerful form of modern expertise, is a heavily gendered discipline.
Economists don’t like to acknowledge this because it undermines the status of male economists ― who tend to hold more conservative views than their female colleagues ― and the intellectual primacy of the field. It’s a reminder that politics are ultimately governed by social relations, not financial abstractions. In 2005, Summers, the most prominent Democratic Party economist of this generation, gave a lecture downplaying sexism in academic sciences while positing that “issues of intrinsic aptitude” might account for the dearth of female science professors.
He quickly apologized amid a tremendous outcry. But econ is still a bro’s world. A study published last year analyzed the words that were most closely associated with women economists on the popular message board Economics Job Market Rumors. The results are gross: “hotter,” “lesbian,” “bb,” “sexism,” “tits,” “anal,” “marrying,” “feminazi,” “slut.”  
Kelton hasn’t been immune to this. She knows men don’t get lectured about rubber hoses, but she doesn’t volunteer complaints about the discipline in casual conversation. Her passion is for economic theory ― probably the most male-dominated sector of the field ― and she’d rather explain to Summers why he’s wrong about Keynes than why he’s wrong about women.
When pressed, she acknowledges the profession can be a minefield. Kelton teaches plenty of feminist economics in her courses, but early in her career, she avoided publishing research on policies that are obviously gendered, like child care and the pay gap.
“It’s easy to get pigeonholed as a women’s economist,” she said. “I’m an economist.”

The basic idea is that the government can’t run out of money. It creates money just by spending. Stephanie Kelton

Usually, being on the losing end of a lefty Democratic Party presidential run is a career blow. But Clinton’s loss to Donald Trump exploded the existing hierarchy of party experts. Her team of economists, which had expected to be running various government agencies, is instead plugging away at think tanks and universities just like the Sanders crew.
As a result, a new class of intellectuals is getting a shot at crafting the next slate of Democratic priorities, and Kelton is one of the most important economists in their ranks.
When she isn’t busy teaching or working out the economic effects of eliminating student debt, she gets invited to strategy sessions with Senate Minority Leader Chuck Schumer (D-N.Y.), and maintains a strong relationship with the Sanders team. She’s no longer working for his Senate office, but she’s a fellow at the new Sanders Institute, a think tank devoted to progressive policy ideas. In February she connected Sanders with Darrick Hamilton and Sandy Darity, two economists who specialize in the economics of racial inequality. Darity, who teaches at Duke in North Carolina, and Hamilton, who works at the New School in New York, had been putting together a proposal for one of Kelton’s favorite ideas: the job guarantee.
Kelton was already developing a similar proposal with MMT economists. But Hamilton and Darity’s work, which had a stronger focus on infrastructure than Kelton’s, intrigued Sanders, as did their more straightforward focus on economic and racial inequality. Both proposals envision the government’s hiring more than 10 million people who are currently sitting on the economic sidelines, though they differ in the way the program is administered and what kinds of jobs are offered.
After the call, Sanders announced that the job guarantee will be his next major policy initiative. Though the legislative details haven’t been announced, anybody in the job guarantee program would receive at least a $15-an-hour wage and health insurance. Just about everyone in Washington expects it to be the centerpiece of a 2020 Sanders presidential run.
Plenty of liberal economists are skeptical. Even if Kelton doesn’t like focusing on the cost of the plan, the price tag is big: Hamilton and Darrity’s version would run $543 billion a year, or about 3 percent of the U.S. economy, and Kelton’s would come in at about $378 billion a year for the first five years before rising modestly. It would reshuffle labor markets, automatically raising the minimum wage to $15 an hour, requiring significant corporate reorganizations and unpredictable price increases.
The logistics are also formidable: The federal government would need to coordinate with states, municipalities and nonprofits all over the country to get millions of people into new jobs and establish an effective bureaucracy to manage the enterprise through the ups and downs of the business cycle.
Kelton isn’t too worried. People are debating the idea seriously. Some lawmakers are thinking beyond the deficit and asking how much it would grow the economy (hundreds of billions of dollars a year), or improve productivity by developing and maintaining new skills. In April, freshman Rep. Ro Khanna (D-Calif.) called Kelton “one of the most thoughtful and creative economists of our generation,” saying her ideas had “moved the entire debate in Congress.”
It’s too early to know if she can move the country, as well. But nobody is screaming about rubber hoses. 
“I believe employment should be a right,” she insists. “Values come first, technical details are next.”

A Response to Richard Murphy’s Concerns

 

 

June 5, 2015 by Ben Dyson (formerly Positive Money) Blogger Ref https://wiki.p2pfoundation.net/Transfinancial_Economics

 

Tax campaigner and writer Richard Murphy outlines his concerns with Positive Money’s proposals to prevent banks from creating money here. This is our response.

When is a bank not a bank?

Richard first point is a semantic argument about the definition of a bank. When is a bank not a bank? In Richard’s view, when it doesn’t create money:

I cannot accept the argument that if you remove the key identifying quality that defines a bank, which is its ability to create and so lend money, that it remains a bank.  It does instead become a deposits and loan institution, which is something quite different, whilst its lending function is no longer about the creation and destruction of money but is, instead, more akin  to being an outsourced credit committee of the Bank of England.

So if you prefer, call them deposit and loan institutions. From the point of view of the customer they’ll still be institutions that provide payment services, offer savings and investment products, and make loans, so perform all the functions of banks except for creating money. The argument that this is an outsourced credit committee of the Bank of England makes no more sense than arguing that a private equity firm, peer to peer lender or pension fund is an outsourced investment committee of the Bank of England.

The Role of Government Spending and Taxation

Richard points to a fact highlighted by Modern Monetary Theory (MMT) writers: that taxation withdraws money from the economy and in effect ‘destroys’ bank deposits. The government effectively creates new money (in the form of bank deposits) when it spends into the economy, and destroys bank deposits when it taxes money out of the economy. MMT often extends this into a statement that the government can spend whatever it wants, subject to the inflation constraint. It can deal with that inflation constraint by taxing more money out of the economy, in effect making way for its own spending.

“If it is the process of spending  government created money into the economy that provides the substance of this money creation process, then the corollary of tax paid must, of course, negate it.  I do not recall this issue being addressed in PM’s work.”

But the point that taxes withdraw the money from the economy does not affect the arguments for money creation by the state in place of banks. Firstly, whatever MMT says about how the system could work, the practical reality is that government and HM Treasury aims to limit its spending to what it can collect in taxes, and borrows the difference. It doesn’t finance any of its spending by net creation of bank deposits; it simply uses taxes and borrowing to ‘destroy’ deposits held by tax payers or investors, and then ‘re-creates’ them when it spends. So this is a zero sum exercise.

So MMT’s description of governments creating money when they spend, and destroying money through tax (in order to manage inflation) is a description of how the system could work. But in the current arrangement, it would be more realistic to see taxes/borrowing and spending as redistributing bank deposits from certain bank accounts to others (i.e. from the accounts of taxpayers and investors to the accounts of public sector employees, contractors etc.)

In this environment, governments are not using their power to create additional new money in any sense. Our argument has been that they should be using this power. Even if they don’t immediately prevent banks from creating money, some sovereign money creation would reduce our current dependence on bank-financed debt-fuelled growth. We’ve written about how the state could use money creation in parallel to money creation by banks in this paper from November 2013.

If the state does start to use its power to create additional new money, it would be competing with the money created by the banks. By stopping banks creating money, you ensure that the proceeds of any new money creation go to the state rather than the banks.

Concerns about the shortage of credit

The first of these is that money will, of course, be needed for mortgages and financial speculation.  The second is that, as Ann Pettifor has argued,  there is no way that a central committee can anticipate the needs of finance system for money in the following month.  There will, inevitably, be credit rationing as a result for productive activities. PM’s  responses on this issue, including the argument that not all credit is money, are simply not credible:  it is not reasonable to argue  the businesses should wait to make settlement of commercial obligations because of a shortage of cash created during the course of a month by the MCC,  which is what they imply.  Like it a lot that will inevitably constrain economic activity.

We’ve just completed a paper, which will be released next week, looking at the supply of credit in a sovereign money system. This paper suggests that the common assertions that there will be ‘inevitably be credit rationing’ don’t stand up when looked at in more detail. Rather than repeating the arguments of that paper here, we’ll comment in more detail next week.

The Democratic Aspect

Richard writes that:

“…there is  a suggestion that money creators should not be influenced by those demanding money. That is seriously worrying at two levels. First, this effectively says that this MCC [Money Creation Commitee] will determine the level of government spending without any reference to the need that it might meet. That is monetary policy gone mad, and profoundly undemocratic and surely not what PM mean, in which case they need to make revision.”

This is incorrect. The government is still capable of borrowing or setting its own tax policy, so the government, not the MMC, determines what its spending will be. The money created by the MCC is an addition to its existing tax revenue, and would reduce how much it would need to borrow for any given level of spending. But the purpose of the MCC is not to find a way to finance the government’s operations, but to look at the needs of the wider economy. Instead of trying to influence the economy through the use of interest rates – a very indirect and ineffective tool – they would be able to create money directly. Government is one of the obvious distribution channels for this new money to get into the real economy, although other options, such as a “citizen’s bonus” to every citizen could work well too.

It makes no sense to claim that this is “profoundly undemocratic”. Monetary policy today is not about financing government spending; it’s about setting a rate of interest rate that should filter through the economy and influence wider economic activity. That system is broken now, without doubt, and needs significant reform (obviously we have quite clear ideas of how that reform would work).

More fundamentally, it seems odd to argue that giving a government-appointed committee the responsibility for creating money, and ensuring that all money created benefits the state (and by extension, the public) is ‘profoundly undemocratic’ when it is contrasted against the current system, in which money creation is done on the basis of whether it will be profitable for a bank, with no public interest motive even considered.

“And it is also deeply troubling  that the real economic consequences of money creation as indicated by the merit of various spending programme should have no influence upon the decision as to whether to create that money or not. In my opinion the exact reverse should be true, including in the private sector where the precise problem is that money has not been used for appropriate purposes.”

 This is a valid point, that we’ll update in a future edition of the book. The Money Creation Committee would need to have an idea of how the government would intend to spend any newly created money before it could assess how much would need to be created, because different uses have different effects on the economy. We’ve written about this issue on page 36-37 of our paper Sovereign Money Creation: Paving the Way to a Sustainable Recovery.

Final Points

Richard writes:

“I could expand all these arguments, of course. But what they suggest are real issues of concern and not petty sniping (in which I have no interest at all). I want banking and monetary reform. I want that to be used as the basis for a better economy. But I am deeply worried about making money creation so much a priority that government and economic activity is subjugated to it, and despite what PM says that seems inevitable to me.

So government has to be in control of its demand for money and the central bank has to meet that need.”

As we’ve explained above, government would still be in control of how much it spends: it still retains full control over how much it taxes or borrows. There are debates about whether the power to create money should be in the hands of independent central banks or under immediate control of the Treasury. I suspect Richard’s faith in politicians not to overuse this capacity to create money, even in the years running up to an election, is stronger than that of most people. Like it or not, the economic convention at this point in time is that central bank independence is necessary to prevent politicians using monetary policy for short-term ends. We can have a wider debate about whether that’s correct or not, but in terms of putting forward ideas that won’t immediately be rejected by the mainstream, we have to accept some of the constraints that already exist. Any campaign to give Gordon Brown or George Osborne the power to decide how much money to create is dead in the water.

Richard concludes:

So let me assure PM: I want the understanding and reform you do but please address the real concerns that many who have sympathy have with what you’re saying. We’re spending our time on this to make the process work. We’e worried you’re not delivering a workable or democratic or accountable solution, and that’s worrying.”

We’ve spent the last 5 years taking on feedback and concerns from a wide range of people, and adapting the proposals to deal with any valid concerns. We’ve undertaken significant research on issues like the risk of shortage of credit, and are undertaking further research on other potential issues that might arise. But there’s is a real limit on what we can do to address assertions that a proposal that puts money creation in the hands of the state is less democratic than one that leaves it in the hands of profit-seeking companies.