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From the conclusion: > This article has discussed how money is created in the modern economy. Most of the money in circulation is created, not by the printing

by aazaa 5y ago

From the conclusion: > This article has discussed how money is created in the modern economy. Most of the money in circulation is created, not by the printing presses of the Bank of England, but by the commercial banks themselves: banks create money whenever they lend to someone in the economy or buy an asset from consumers. And in contrast to descriptions found in some textbooks, the Bank of England does not directly control the quantity of either base or broad money. The Bank of England is nevertheless still able to influence the amount of money in the economy. It does so in normal times by setting monetary policy — through the interest rate that it pays on reserves held by commercial banks with the Bank of England. More recently, though, with Bank Rate constrained by the effective lower bound, the Bank of England’s asset purchase programme has sought to raise the quantity of broad money in circulation. This in turn affects the prices and quantities of a range of assets in the economy, including money. The discussion seems incomplete without mentioning government deficit spending. This is, after all, the premise of Modern Monetary Theory: that unlike households, currency issuers like the US federal government aren't under the same balanced budget constraints as households. Currency issuers can create money by spending it into being. Budget deficits can be financed through the issuance of bonds, which look a lot like loans. But they can also be financed by just printing the money. The end result is the same, money into the pockets of people, but the implications are very different. The MMT perspective is gaining ground, especially as the world's governments find it increasingly difficult to avoid deficit spending. A leading proponent (Kelton) proposes ditching deficit targets altogether in favor of inflation targets.

praxulus 5y ago
The central bank is the part of the government that can issue money, and it's included in the explanation. With regard to its effect on the money supply, the rest of the government is no different than any other borrower since it can't (or at least doesn't) directly issue currency.
bko 5y ago
> Budget deficits can be financed through the issuance of bonds, which look a lot like loans. But they can also be financed by just printing the money. The end result is the same, money into the pockets of people, but the implications are very different. Actually, its worse than that. The treasuries are created, sold to bank and the bank immediately sells it to the Fed for cash for a nice little profit (at least in the US) From the Fed: > The Federal Reserve purchases Treasury securities held by the public through a competitive bidding process. The Federal Reserve does not purchase new Treasury securities directly from the U.S. Treasury, and Federal Reserve purchases of Treasury securities from the public are not a means of financing the federal deficit. https://www.federalreserve.gov/faqs/how-does-the-federal-reserve-buying-and-selling-of-securities-relate-to-the-borrowing-decisions-of-the-federal-government.htm https://www.federalreserve.gov/faqs/how-does-the-federal-res...
- jonny_eh 5y ago
  Kelton has a whole chapter on this in her book The Deficit Myth. https://www.amazon.com/Deficit-Myth-Monetary-Peoples-Economy/dp/1541736184 https://www.amazon.com/Deficit-Myth-Monetary-Peoples-Economy...
- jollybean 5y ago
  This is true but misleading because it represents a narrow aspect of what is going on. The Fed owns a small share of public debt. Social Securities, other Funds, and foreign actors own the bulk of it. There's some very worthy reality in what you're speaking of, but it needs to be contextualized.
gigatexal 5y ago
Cogent take. Waiting for the crypto crowd to come in screaming about inflation or the like.
- IncRnd 5y ago
  In today's environment it seems more apt to say stagflation. I'm sure there is a coin for that.
pphysch 5y ago
Key subquote: > More recently, though, with Bank Rate constrained by the effective lower bound, the Bank of England’s asset purchase programme has sought to raise the quantity of broad money in circulation. In other words: "The interest rates are already at the bottom, but we need them to be lower, so we are going to make them effectively negative through QE". The end result: the financial sector will eventually pop and flood the rest of the economy with endless amounts of worthless money, i.e. massive inflation.
- n8cpdx 5y ago
  I was predicting hyperinflation from 2008 and for years after, but the evidence just isn't there. Maybe things will eventually pop. The actual happenings of the economy (people buying and selling) are insulated from financial markets enough that a huge rally can happen without affecting lived reality for people. Maybe a pop in the financial sector can happen without actually affecting the economy? I don't see why the fed can't just make that money go away if it really needs to.
  - vkou 5y ago
    I would like to point out that in order to put the economy into hyperinflation (50% month to month inflation), it would require the Fed to print and parachute somewhere between 50 and 200 trillion dollars in one year. It's not very likely to happen.
    - nO0b 5y ago
      [citation needed]
      - vkou 5y ago
        There's 6 trillion M0 USD in circulation, and 20 trillion in M2. Hyperinflation is defined as ~50% monthly inflation. This means that the value of money drops ~100 fold in a year. You tell me - how much money will the fed have to print, in order to hit that target, and where would it need to parachute it?
deleted 5y ago
[deleted]
kodah 5y ago
I'm curious how we'll clear the hurdle of instrumenting the economy enough to meaningfully measure inflation. This seems to be the big hold up with proponents of MMT, nobody wants to guess anymore.
pessimizer 5y ago
> This is, after all, the premise of Modern Monetary Theory: that unlike households, currency issuers like the US federal government aren't under the same balanced budget constraints as households. Currency issuers can create money by spending it into being. It's central to MMT, but it's really just a factual observation, and the theory about it is orthodox Keynesian economics. It's the Chicago School types that have to constantly come up with magical tripwires that deficits supposedly cause.
jollybean 5y ago
1) The other 'missing giant' is credit. Credit is a couple of orders bigger than currency in circulation and it's really what makes the world go around. We probably should start talking about credit when we talk about currency. 2) " especially as the world's governments find it increasingly difficult to avoid deficit spending" - this has always been the case. a) Raise taxes, b) Raise debt c) Print money. Option 'c' is generally not on the table. And so 'Governments' are 'constrained' by the realities of economics, which is kind of what we want them to be constrained by. It's worth noting the pretty scary nature of MMT proposals, which 'from a different perspective' amount to 'very loose monetary policy bordering on printing money to pay for stuff' and irrespective of the underlying theoretical ideals of MMT, the practical reality is that the money printing press is the 'Absolute Power' that can hardly not corrupt anyone with the power to use it, even under the cover of some intellectually grounded idea. All government fights are, at the end of the day, really about money, the rest is mostly a distraction. It's a giant war over budgets and spending, it always is. To give one party the magical power to do as they please without severe constraints is scary. It's even scary what we have today with the Fed (I think QE and artificially low rates to bail out home owners is really bad). I have much less faith in politicians. I believe for MMT to work, it has to have a framework around it even more rigid than the rules we apply to Central Banks because if there's a gap that can be exploited, it will be.

by aazaa 5y ago

praxulus 5y ago

The central bank is the part of the government that can issue money, and it's included in the explanation. With regard to its effect on the money supply, the rest of the government is no different than any other borrower since it can't (or at least doesn't) directly issue currency.

bko 5y ago

> Budget deficits can be financed through the issuance of bonds, which look a lot like loans. But they can also be financed by just printing the money. The end result is the same, money into the pockets of people, but the implications are very different. Actually, its worse than that. The treasuries are created, sold to bank and the bank immediately sells it to the Fed for cash for a nice little profit (at least in the US) From the Fed: > The Federal Reserve purchases Treasury securities held by the public through a competitive bidding process. The Federal Reserve does not purchase new Treasury securities directly from the U.S. Treasury, and Federal Reserve purchases of Treasury securities from the public are not a means of financing the federal deficit. https://www.federalreserve.gov/faqs/how-does-the-federal-reserve-buying-and-selling-of-securities-relate-to-the-borrowing-decisions-of-the-federal-government.htm https://www.federalreserve.gov/faqs/how-does-the-federal-res...

jonny_eh 5y ago
Kelton has a whole chapter on this in her book The Deficit Myth. https://www.amazon.com/Deficit-Myth-Monetary-Peoples-Economy/dp/1541736184 https://www.amazon.com/Deficit-Myth-Monetary-Peoples-Economy...
jollybean 5y ago
This is true but misleading because it represents a narrow aspect of what is going on. The Fed owns a small share of public debt. Social Securities, other Funds, and foreign actors own the bulk of it. There's some very worthy reality in what you're speaking of, but it needs to be contextualized.

gigatexal 5y ago

Cogent take. Waiting for the crypto crowd to come in screaming about inflation or the like.

IncRnd 5y ago
In today's environment it seems more apt to say stagflation. I'm sure there is a coin for that.

pphysch 5y ago

Key subquote: > More recently, though, with Bank Rate constrained by the effective lower bound, the Bank of England’s asset purchase programme has sought to raise the quantity of broad money in circulation. In other words: "The interest rates are already at the bottom, but we need them to be lower, so we are going to make them effectively negative through QE". The end result: the financial sector will eventually pop and flood the rest of the economy with endless amounts of worthless money, i.e. massive inflation.

n8cpdx 5y ago
I was predicting hyperinflation from 2008 and for years after, but the evidence just isn't there. Maybe things will eventually pop. The actual happenings of the economy (people buying and selling) are insulated from financial markets enough that a huge rally can happen without affecting lived reality for people. Maybe a pop in the financial sector can happen without actually affecting the economy? I don't see why the fed can't just make that money go away if it really needs to.
- vkou 5y ago
  I would like to point out that in order to put the economy into hyperinflation (50% month to month inflation), it would require the Fed to print and parachute somewhere between 50 and 200 trillion dollars in one year. It's not very likely to happen.
  - nO0b 5y ago
    [citation needed]
    - vkou 5y ago
      There's 6 trillion M0 USD in circulation, and 20 trillion in M2. Hyperinflation is defined as ~50% monthly inflation. This means that the value of money drops ~100 fold in a year. You tell me - how much money will the fed have to print, in order to hit that target, and where would it need to parachute it?

deleted 5y ago

[deleted]

kodah 5y ago

I'm curious how we'll clear the hurdle of instrumenting the economy enough to meaningfully measure inflation. This seems to be the big hold up with proponents of MMT, nobody wants to guess anymore.

pessimizer 5y ago

> This is, after all, the premise of Modern Monetary Theory: that unlike households, currency issuers like the US federal government aren't under the same balanced budget constraints as households. Currency issuers can create money by spending it into being. It's central to MMT, but it's really just a factual observation, and the theory about it is orthodox Keynesian economics. It's the Chicago School types that have to constantly come up with magical tripwires that deficits supposedly cause.

jollybean 5y ago

1) The other 'missing giant' is credit. Credit is a couple of orders bigger than currency in circulation and it's really what makes the world go around. We probably should start talking about credit when we talk about currency. 2) " especially as the world's governments find it increasingly difficult to avoid deficit spending" - this has always been the case. a) Raise taxes, b) Raise debt c) Print money. Option 'c' is generally not on the table. And so 'Governments' are 'constrained' by the realities of economics, which is kind of what we want them to be constrained by. It's worth noting the pretty scary nature of MMT proposals, which 'from a different perspective' amount to 'very loose monetary policy bordering on printing money to pay for stuff' and irrespective of the underlying theoretical ideals of MMT, the practical reality is that the money printing press is the 'Absolute Power' that can hardly not corrupt anyone with the power to use it, even under the cover of some intellectually grounded idea. All government fights are, at the end of the day, really about money, the rest is mostly a distraction. It's a giant war over budgets and spending, it always is. To give one party the magical power to do as they please without severe constraints is scary. It's even scary what we have today with the Fed (I think QE and artificially low rates to bail out home owners is really bad). I have much less faith in politicians. I believe for MMT to work, it has to have a framework around it even more rigid than the rules we apply to Central Banks because if there's a gap that can be exploited, it will be.