3 ms·

A lot of people on the right (libertarians) seem to think that the government is somehow responsible for money creation, and therefore, one needs to go to gold

by js8 6y ago

A lot of people on the right (libertarians) seem to think that the government is somehow responsible for money creation, and therefore, one needs to go to gold standard or limit the government's ability to print money in some other way. These are pretty much exogenous theories of money creation. But I believe in endogenous theories of money creation (e.g. chartalism), which claim that money are created as IOUs, basically bonds that can be further traded. And conversely, any bond that can be further traded behaves, in effect, as money, and there is no "hard" definition of what money is. Which means money are really created by lots of different actors in the economic system, not necessarily just government, and to control money creation, you need to regulate the system in many different places (for example, you would have to limit what kind of deals can citizens make with each other, which goes against the libertarian ideology). In some sense, exogenous theories give their supporters an illusion of control, that the government somehow controls money creation, and so it can and should deal with the problem. But it probably does not, the Central Banks go at lengths to control it, but in lot of cases (like asset price inflation fueling itself) the system can effectively create money on its own and unbalance itself. (I really recommend great post from Steve Keen: https://www.debtdeflation.com/blogs/2009/01/31/therovingcavaliersofcredit/ https://www.debtdeflation.com/blogs/2009/01/31/therovingcava...)

js8 6y ago
Maybe I should add, the way I view the 2008 crisis, is that lot of new money were already created by private sector in the asset (housing) bubble, in the form of private debt, and this eventually starved money out of the parts of the economy which really produced something useful. So the government printing money (QE) was really trying to replace the newly created money with "official" money so that the starved portion of the economy would not end up too victimized. They basically socialized all these private decisions to create more money. Alternatively, what they could have done, selectively tax the gains from the asset bubble, as taxation without spending actually destroys money, but that's kinda hard to do both politically and technically. Although some selective spending might have been beneficial for the victims (all the poor souls who took on debt during the bubble). That's pretty much standard Keynesian economic policy - to reduce the stalemates between debtors and creditors, by reducing privately created money during the boons, and creating extra money during the busts. However, nobody today really likes taxes and government transfers, so we end up with inflation as a resolution mechanism of choice.
- viklove 6y ago
  > Maybe I should add, the way I view the 2008 crisis, is that lot of new money were already created by private sector in the asset (housing) bubble And why did this happen? Because the federal government repealed Glass-Steagal in the 90s and allowed the banks to do so by trading in risky securities. So, even in this case that you brought up, the money was in effect created by the policy of the legislature.
  - js8 6y ago
    By this argument, government is responsible for anything that ever happens in society. Which to me doesn't sound right, unless you're talking about some kind of totalitarian regime. The asset bubbles happen in other economies, too, so they cannot be explained away only by removing Glass-Steagal.
    - AnimalMuppet 6y ago
      The asset bubbles not happening from 193x (whenever it got passed) to 200x (whenever it got repealed) maybe can be explained by Glass-Steagal, though...
jmillikin 6y ago
It's worth distinguishing money, which is created by government regulation, from other forms of wealth and stores of value. The reason that money has value is because the government will demand a certain amount of it as taxes. The amount of money created -- whether by "traditional" mechanisms such as interest on sovereign debt, or more ad-hoc helicopter deposits -- is balanced against money to determine the value of a currency. Bonds are a temporary removal of money from the economy. You give the government $95 today, and they promise to pay you $100 in 10 years[0]. Whether that's a good deal depends on the expected inflation rate. Gold is therefore not a bet on the presence of inflation, but on the (predicted) relative ratio of inflation vs same-currency sovereign bonds. If the dollar is inflating at 3% and a 10-year treasury yields 1% then gold is a great investment, but flip those numbers around and it changes from a currency hedge to a plain commodity. [0] Or, if you're buying a German bund, you pay $101 today and get back $100.
- js8 6y ago
  Your view is exactly the position of exogenous money theorists. My point is, there is the other view. > It's worth distinguishing money, which is created by government regulation, from other forms of wealth and stores of value. Well, depends on how you define money. In exogenous theories, money are defined extensionally, by listing examples of money, i.e. money is what government issues. However, in endogenous theories, money are defined intentionally, by their properties, i.e. money is something that has not value in itself (have no use value), but can be readily exchanged for something that is valuable (have exchange value). (And then in practice, you have different indicators M1, M2, M3, ..) > The reason that money has value is because the government will demand a certain amount of it as taxes. This is different in the endogenous theory, money simply have value because people deem them to have value. It's not necessarily because government says, "this has value". Bitcoin is obvious counterexample, it has exchange value. > Bonds are a temporary removal of money from the economy. Under the intentional definition of money this is not true. If those bonds can be further traded between the creditors, then they will act as money (they will become a thing that can be exchanged for something else valuable). And you can see that amount of money in the economy increased, because now the original money paid for the bond and the bond itself is potentially in circulation, and can be spent on goods and services at the same time. So bond creation creates new money, and its repayment will destroy the new money. The endogenous theories are built on the observation that there is systemic similarity between a banknote and a bond, they are both intrinsically worthless pieces of paper that represent value for which they can be (possibly) exchanged in the future.
orwin 6y ago
Its not "believing" if its true. Most of the world money supply is created through loans. I looked at the numbers last week and my memory is failing me, but is think that less than 6% of circulating euros are issued by the european central bank. I mean you just have to look at the money supply (estimated) and agregate all ECB issued money since 2001 (data freely available online, but you can pay to have the work done for you). Government creating money is a drop in the water. At all time, money is created through loans. Reimbursing the money destroys it.

by js8 6y ago

js8 6y ago

Maybe I should add, the way I view the 2008 crisis, is that lot of new money were already created by private sector in the asset (housing) bubble, in the form of private debt, and this eventually starved money out of the parts of the economy which really produced something useful. So the government printing money (QE) was really trying to replace the newly created money with "official" money so that the starved portion of the economy would not end up too victimized. They basically socialized all these private decisions to create more money. Alternatively, what they could have done, selectively tax the gains from the asset bubble, as taxation without spending actually destroys money, but that's kinda hard to do both politically and technically. Although some selective spending might have been beneficial for the victims (all the poor souls who took on debt during the bubble). That's pretty much standard Keynesian economic policy - to reduce the stalemates between debtors and creditors, by reducing privately created money during the boons, and creating extra money during the busts. However, nobody today really likes taxes and government transfers, so we end up with inflation as a resolution mechanism of choice.

viklove 6y ago
> Maybe I should add, the way I view the 2008 crisis, is that lot of new money were already created by private sector in the asset (housing) bubble And why did this happen? Because the federal government repealed Glass-Steagal in the 90s and allowed the banks to do so by trading in risky securities. So, even in this case that you brought up, the money was in effect created by the policy of the legislature.
- js8 6y ago
  By this argument, government is responsible for anything that ever happens in society. Which to me doesn't sound right, unless you're talking about some kind of totalitarian regime. The asset bubbles happen in other economies, too, so they cannot be explained away only by removing Glass-Steagal.
  - AnimalMuppet 6y ago
    The asset bubbles not happening from 193x (whenever it got passed) to 200x (whenever it got repealed) maybe can be explained by Glass-Steagal, though...

jmillikin 6y ago

It's worth distinguishing money, which is created by government regulation, from other forms of wealth and stores of value. The reason that money has value is because the government will demand a certain amount of it as taxes. The amount of money created -- whether by "traditional" mechanisms such as interest on sovereign debt, or more ad-hoc helicopter deposits -- is balanced against money to determine the value of a currency. Bonds are a temporary removal of money from the economy. You give the government $95 today, and they promise to pay you $100 in 10 years[0]. Whether that's a good deal depends on the expected inflation rate. Gold is therefore not a bet on the presence of inflation, but on the (predicted) relative ratio of inflation vs same-currency sovereign bonds. If the dollar is inflating at 3% and a 10-year treasury yields 1% then gold is a great investment, but flip those numbers around and it changes from a currency hedge to a plain commodity. [0] Or, if you're buying a German bund, you pay $101 today and get back $100.

js8 6y ago
Your view is exactly the position of exogenous money theorists. My point is, there is the other view. > It's worth distinguishing money, which is created by government regulation, from other forms of wealth and stores of value. Well, depends on how you define money. In exogenous theories, money are defined extensionally, by listing examples of money, i.e. money is what government issues. However, in endogenous theories, money are defined intentionally, by their properties, i.e. money is something that has not value in itself (have no use value), but can be readily exchanged for something that is valuable (have exchange value). (And then in practice, you have different indicators M1, M2, M3, ..) > The reason that money has value is because the government will demand a certain amount of it as taxes. This is different in the endogenous theory, money simply have value because people deem them to have value. It's not necessarily because government says, "this has value". Bitcoin is obvious counterexample, it has exchange value. > Bonds are a temporary removal of money from the economy. Under the intentional definition of money this is not true. If those bonds can be further traded between the creditors, then they will act as money (they will become a thing that can be exchanged for something else valuable). And you can see that amount of money in the economy increased, because now the original money paid for the bond and the bond itself is potentially in circulation, and can be spent on goods and services at the same time. So bond creation creates new money, and its repayment will destroy the new money. The endogenous theories are built on the observation that there is systemic similarity between a banknote and a bond, they are both intrinsically worthless pieces of paper that represent value for which they can be (possibly) exchanged in the future.

orwin 6y ago

Its not "believing" if its true. Most of the world money supply is created through loans. I looked at the numbers last week and my memory is failing me, but is think that less than 6% of circulating euros are issued by the european central bank. I mean you just have to look at the money supply (estimated) and agregate all ECB issued money since 2001 (data freely available online, but you can pay to have the work done for you). Government creating money is a drop in the water. At all time, money is created through loans. Reimbursing the money destroys it.