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Yes, learning how banks create money for me was a huge turning point in realising most of what people think they know (and what I thought) about money, debt and

Yes, learning how banks create money for me was a huge turning point in realising most of what people think they know (and what I thought) about money, debt and economics is actually wrong. That the money supply grows when banks lend and contracts when people pay the debt down is a big point to get your head around. The other big one is the national accounts and sectoral balances - see [1] for a much more detailed run-down. To summarise, take the definition of GDP: (1) GDP ≡ C + I + G + (X – M) where C is household final consumption, I is private investment including inventory, G is Government spending, and (X-M) are net exports. Add net external income flows (FNI) to (1) and you get GNP: (2) GNP = C + I + G + (X – M) + FNI Subtract total transfers and taxes from each side: (3) GNP – T = C + I + G + (X – M) + FNI – T Collect terms by sector (private, Government and External) (4) (GNP – C – T) – I = (G – T) + (X – M + FNI) Then we can simplify - (GNP - consumption - taxes) is equilivalent to private saving (we’ll call that S), and (X - M - FNI) is called the Current Account Balance (CAD): (5) (S – I) – (G – T) – CAD = 0 or (6) (S – I) = (G – T) + CAD What this means is that by definition, if your external sector is balanced, a Government budget surplus must reduce the net assets of the private sector by exactly the same amount as it is in surplus. With a trade deficit and a Government surplus, the private sector’s net assets are reduced by the sum of those. This is quite clear graphically too [2]. So the end result is that you can only have economic growth when the Government is running a surplus and the private sector is in balance or deficit through money creation from banks. Is relies on people borrowing more and more money - but because equal amounts of debt are also created (no higher net wealth), eventually the sector in aggregate can’t borrow any more, and the system falls apart (the second derivative of credit growth dropped a little while before the GFC, which is how some non-mainstream economists predicted that it was coming). But at the end of the day, this means a balanced or surplus Government budget is actually bad for the economy by definition unless you have a big trade surplus (like Germany for instance), because it’s sapping the private sector of wealth. Do you have to start taking a more nuanced view of Government debt, when Government debt actually represents the net actual savings of the private sector! 1. http://bilbo.economicoutlook.net/blog/?p=32396 http://bilbo.economicoutlook.net/blog/?p=32396 2. https://skeltonphd.files.wordpress.com/2013/06/slide1.jpg https://skeltonphd.files.wordpress.com/2013/06/slide1.jpg

nopriorarrests 9y ago
>Government debt actually represents the net actual savings of the private sector! Excuse me, but when Federal Reserve conducts QE and buys 1 trillion of freshly issued government debt, what does it have in common with actual savings of the private sector? Who saved that paltry trillion? :)
- stephen_g 9y ago
  Yes, QE is interesting. Definitey goes against the “Government must tax before it can spend” idea. Remember the Fed is part of the US Government sector, so spending as a result of QE should go into the private sector, minus what is taxed back later. Government securities generally represent savings because the Governments are generally legally required to match deficit spending with bonds, etc. QE was a bit of a departure from the norm (perhaps only temporarily though) and shows what modern monetary theory says - that it isn’t really necessary, not is it necessarily inflationary (this is because all spending carries inflationary risk, and inflation has to do more with aggregate demand than money supply etc. - and the most generally anti-inflationary force is actually taxation)
  - arca_vorago 9y ago
    You do know the Federal Reserve is not actually federal and is owned by private banks right? Perhaps there is some definition of US government sector I'm not aware of.
    - stephen_g 9y ago
      That's a common misconception. It's technically a soft of public-private hybrid, but the "ownership" by private banks is purely symbolic. The system is considered "independent within the Government", not independent of the Government. The Federal Reserve's governors are appointed by the President and confirmed by the US Senate, and it derives all its authority only from the Federal Reserve Act. The organisation is accountable to the Government Accountability Office as well. Most central banks though are just directly owned by the Government of the country, even if they are meant to operate independently. The "independence" of central banks is generally a bad thing though - the point is supposedly to "depoliticise" them but really it's just an attempt to remove any democratic control of them.

nopriorarrests 9y ago

>Government debt actually represents the net actual savings of the private sector! Excuse me, but when Federal Reserve conducts QE and buys 1 trillion of freshly issued government debt, what does it have in common with actual savings of the private sector? Who saved that paltry trillion? :)

stephen_g 9y ago
Yes, QE is interesting. Definitey goes against the “Government must tax before it can spend” idea. Remember the Fed is part of the US Government sector, so spending as a result of QE should go into the private sector, minus what is taxed back later. Government securities generally represent savings because the Governments are generally legally required to match deficit spending with bonds, etc. QE was a bit of a departure from the norm (perhaps only temporarily though) and shows what modern monetary theory says - that it isn’t really necessary, not is it necessarily inflationary (this is because all spending carries inflationary risk, and inflation has to do more with aggregate demand than money supply etc. - and the most generally anti-inflationary force is actually taxation)
- arca_vorago 9y ago
  You do know the Federal Reserve is not actually federal and is owned by private banks right? Perhaps there is some definition of US government sector I'm not aware of.
  - stephen_g 9y ago
    That's a common misconception. It's technically a soft of public-private hybrid, but the "ownership" by private banks is purely symbolic. The system is considered "independent within the Government", not independent of the Government. The Federal Reserve's governors are appointed by the President and confirmed by the US Senate, and it derives all its authority only from the Federal Reserve Act. The organisation is accountable to the Government Accountability Office as well. Most central banks though are just directly owned by the Government of the country, even if they are meant to operate independently. The "independence" of central banks is generally a bad thing though - the point is supposedly to "depoliticise" them but really it's just an attempt to remove any democratic control of them.