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Imo, a useful next step from here is to read up o nmodern monetary theory's theory/description of central banking. Imo, we tend to start with a description of

Imo, a useful next step from here is to read up o nmodern monetary theory's theory/description of central banking. Imo, we tend to start with a description of fractional banking for historic reasons, gold backed money and later dollar backed currency. It's enlightening (to me) to discard this for a moment, and start by forgetting about fractional banking. Just start with loans and follow the ledger as loans are created and distributed. Fractional banking can then be understood as a control mechanism imposed on a system that already exists. This isn't historical, but it is logical. Loan-based money makes simpler sense when you think of it as a purely in its own terms. So... Dollar or euro "Money," in a broad sense, is created every time any kind of loan is made. Bank money is when someone is owed money by a bank... like when you have a bank account. Central bank money is when a central bank owes someone money. ^not necessarily an endorsement of mmt's other ideas or goals.

throwaway13337 5y ago
I'm sorry I used the word 'fractional'. It's a bit of a red herring here. The making of loans does not require a reserve of any sort theoretically. It just requires trust in the institution loaning more of these imaginary dollars/points/beanie babies on a spreadsheet or in a database somewhere. It's just a promise. It was traditionally handled through a backing of some fractional reserve and is still guaranteed in a lot of places by a promise of holding so much reserve of the currency. The reserve fraction varies. I believe retail banks are more bound by risk and regulatory requirements than by their reserve in making loans. Modern monetary theory is scares the hell out of me. It seems to give way too much power to too few people. I like instead the idea of encouraging banks to loan to certain industries specifically. This has worked for all these 'miracle' economies like Japan/Korea/China.
- neilwilson 5y ago
  MMT is a description of how money actually works. Ultimately we all create money all the time because it is just a promise by of something in the future. . The difference is that government can force you to obtain a particular promise via the taxing powers we give it at election time. No trust required. Banks then leverage that. For a dollar to be called a dollar there has to be a transitive clearance link to the entity that owns it. Otherwise it is just a liability of the bank in question - like a share or bond
- dalbasal 5y ago
  So... Re:mmt. Modern monetary theory seems to enjoy spooking people. Not sure that's a good thing. However... You can and should separate between "how X works" and "what should we do." Mmt has the best description of how fiat money works. A lot of this is at odds with existing institutional structure in both the US & EU. In any case, there is no contradiction between MMT and being conservative, anti-centralisation or any other value system. It is just a description of how bank money works. The powers still exist, they're just non-explicit currently. EU members can, in effect, print euros. As we saw in the Greek crisis, the ECB's actual role/power is making euros exchangeable for euros, regardless of country. This is very different to how these instructions were conceived, because they didn't understand the money system of their own time. Similarly, the US Fed-treasury complex doesn't represent where power and control actually are. The whole discourse becomes jumbled.
  - TacticalCoder 5y ago
    > EU members can, in effect, print euros. As we saw in the Greek crisis, ... What do you mean? Greece half-jokingly threatened printing shitload of actual physical euros to pay back their public debt and the EU prevented them to do so. Greece defaulted. If EU members really could print, why did Greece default?
    - dalbasal 5y ago
      I mean that when Greece says "I will put €x in your bank account", they can. They don't need to get those euros from somewhere else. They can just make them appear in your bank. That's why they can run deficits without running out of money. This is basically "where euros come from." They're spent into an economy by governments. The ECB keeps track of how much each government spends, less taxes collected. The diff becomes "national debt." Money owed to the ECB. The ECB decides interest rates, but this is basically just accounting. Greece will never have a persistent surplus, where ECB loans are paid down. Neither will other member states. So, interest "payments" just determine how fast the national debt grows. The ECB threatened to stop backing the Greek banking system, which basically would have turned euros in Greek banks into a divergent currency.
- User23 5y ago
  The major fiat currencies use a proof of violence system to establish value. Specifically, engaging in economic activity incurs fiat denominated tax liabilities, even if that activity doesn’t use the fiat. The currency issuing and taxing authority has offered proof that it will use whatever violence is necessary to enforce those tax liabilities. This creates a more or less inelastic demand for fiat and thus gives it value.
mi_lk 5y ago
> read up on modern monetary theory's theory/description of central banking. any recommendations?
- scrollaway 5y ago
  Economics Explained has an excellent video on it https://www.youtube.com/watch?v=aIQY44LCIjc https://www.youtube.com/watch?v=aIQY44LCIjc
  - dalbasal 5y ago
    I would recommend going direct instead. Mmt is very simple, but needs to be explained with a bank ledger. Metaphors aren't helpful, imo.
- lifeisstillgood 5y ago
  Here is my poor attempt : Imagine I pluck a leaf off a tree and hand it to you and promise that I will do an hours farm labouring if you or anyone else comes back and give me that leaf. I now have a debt, and money is invented to tokenise that debt. However there are only 24 hours in the day so my productive capacity is limited to (at best) 24 leaves per day. (And yes this leads into time issues - that 24 leaves could buy an hour next week - but should there be 24 leaves for every day I am able to work? or just recycle the same 24 ? This leads us into money velocity which impacts the overall productivity calculation at the end) Now MMT says that as there is only one farm labourer and there is only 24 hours in the day you can only have 24 leaves in the monetary system - but if you have say, 18 leaves in the system it's fine to pluck another six off the trees - that will allow the plucker to purchase another six hours of my labour with no inflationary cost. Of course I need to sleep, and it's hard to judge how productive I am etc etc. But the idea is an economy is a whole system and a fiat government is able to purchase up to the productive capacity of the system - which seems quite sensible ... if we know what the productive capacity is. I may of course be wildly wrong and interested in other peoples views
- barry-cotter 5y ago
  Note that no one can link to an academic description by an economist which is precise enough to be right or wrong.
deleted 5y ago
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- deleted 5y ago
  [deleted]
tenuousemphasis 5y ago
I see it differently. Before the Federal Reserve, any bank engaging in fractional reserve banking was committing fraud. Rather than crack down on this fraudulent behavior, the Fed institutionalized it, which seems like an unquestionably negative thing. Thanks to the Cantillion effect, those closest to the source of money are enriched, I would argue unjustly and at the expense of all others using that money. I believe this to be one of the major sources of wealth inequality in the world today.
- jrochkind1 5y ago
  Fractional reserve banking existed in Europe a century or more before the the United States even existed, let along the Federal Reserve. And was not seen as fraudulent -- in that it was a common (not rare) practice, that people knew was going on and were happy to accept the notes. Central banks came into existence to regulate fractional reserve banking before the United States, let alone the Federal Reserve, existed either. the US Federal Reserve did not invent being a central bank. Your way of seeing it differently is ahistorical, and strangely US-centric for a historical view of banking or currency.
  - piethesailorman 5y ago
    Couldn't it be said that all the wealth inequality created by this system in europe created a massive collection of poor europeans who then decided to sell themselves to indentured sertitude in the America? This situation is the basis for why creating a fundamentally different kind of banking system was so important to the first few generations of Americans, thus the previous comment not being ahistorical at all.
    - jrochkind1 5y ago
      Anything can be said, but I would like to see some citation for "This situation is the basis for why creating a fundamentally different kind of banking system was so important to the first few generations of Americans" -- I have never seen any history suggesting that the American colonists were focused on intentionally creating a novel kind of banking system different from Europes because of thinking Europe's led to inequality; if that's actually a non-imaginary thing colonial leaders were doing I'm interested in reading good history on it. The internet sometimes seems to think that making up plausible stories is a valid way of understanding what happened historically.

throwaway13337 5y ago

I'm sorry I used the word 'fractional'. It's a bit of a red herring here. The making of loans does not require a reserve of any sort theoretically. It just requires trust in the institution loaning more of these imaginary dollars/points/beanie babies on a spreadsheet or in a database somewhere. It's just a promise. It was traditionally handled through a backing of some fractional reserve and is still guaranteed in a lot of places by a promise of holding so much reserve of the currency. The reserve fraction varies. I believe retail banks are more bound by risk and regulatory requirements than by their reserve in making loans. Modern monetary theory is scares the hell out of me. It seems to give way too much power to too few people. I like instead the idea of encouraging banks to loan to certain industries specifically. This has worked for all these 'miracle' economies like Japan/Korea/China.

neilwilson 5y ago
MMT is a description of how money actually works. Ultimately we all create money all the time because it is just a promise by of something in the future. . The difference is that government can force you to obtain a particular promise via the taxing powers we give it at election time. No trust required. Banks then leverage that. For a dollar to be called a dollar there has to be a transitive clearance link to the entity that owns it. Otherwise it is just a liability of the bank in question - like a share or bond
dalbasal 5y ago
So... Re:mmt. Modern monetary theory seems to enjoy spooking people. Not sure that's a good thing. However... You can and should separate between "how X works" and "what should we do." Mmt has the best description of how fiat money works. A lot of this is at odds with existing institutional structure in both the US & EU. In any case, there is no contradiction between MMT and being conservative, anti-centralisation or any other value system. It is just a description of how bank money works. The powers still exist, they're just non-explicit currently. EU members can, in effect, print euros. As we saw in the Greek crisis, the ECB's actual role/power is making euros exchangeable for euros, regardless of country. This is very different to how these instructions were conceived, because they didn't understand the money system of their own time. Similarly, the US Fed-treasury complex doesn't represent where power and control actually are. The whole discourse becomes jumbled.
- TacticalCoder 5y ago
  > EU members can, in effect, print euros. As we saw in the Greek crisis, ... What do you mean? Greece half-jokingly threatened printing shitload of actual physical euros to pay back their public debt and the EU prevented them to do so. Greece defaulted. If EU members really could print, why did Greece default?
  - dalbasal 5y ago
    I mean that when Greece says "I will put €x in your bank account", they can. They don't need to get those euros from somewhere else. They can just make them appear in your bank. That's why they can run deficits without running out of money. This is basically "where euros come from." They're spent into an economy by governments. The ECB keeps track of how much each government spends, less taxes collected. The diff becomes "national debt." Money owed to the ECB. The ECB decides interest rates, but this is basically just accounting. Greece will never have a persistent surplus, where ECB loans are paid down. Neither will other member states. So, interest "payments" just determine how fast the national debt grows. The ECB threatened to stop backing the Greek banking system, which basically would have turned euros in Greek banks into a divergent currency.
User23 5y ago
The major fiat currencies use a proof of violence system to establish value. Specifically, engaging in economic activity incurs fiat denominated tax liabilities, even if that activity doesn’t use the fiat. The currency issuing and taxing authority has offered proof that it will use whatever violence is necessary to enforce those tax liabilities. This creates a more or less inelastic demand for fiat and thus gives it value.

mi_lk 5y ago

> read up on modern monetary theory's theory/description of central banking. any recommendations?

scrollaway 5y ago
Economics Explained has an excellent video on it https://www.youtube.com/watch?v=aIQY44LCIjc https://www.youtube.com/watch?v=aIQY44LCIjc
- dalbasal 5y ago
  I would recommend going direct instead. Mmt is very simple, but needs to be explained with a bank ledger. Metaphors aren't helpful, imo.
lifeisstillgood 5y ago
Here is my poor attempt : Imagine I pluck a leaf off a tree and hand it to you and promise that I will do an hours farm labouring if you or anyone else comes back and give me that leaf. I now have a debt, and money is invented to tokenise that debt. However there are only 24 hours in the day so my productive capacity is limited to (at best) 24 leaves per day. (And yes this leads into time issues - that 24 leaves could buy an hour next week - but should there be 24 leaves for every day I am able to work? or just recycle the same 24 ? This leads us into money velocity which impacts the overall productivity calculation at the end) Now MMT says that as there is only one farm labourer and there is only 24 hours in the day you can only have 24 leaves in the monetary system - but if you have say, 18 leaves in the system it's fine to pluck another six off the trees - that will allow the plucker to purchase another six hours of my labour with no inflationary cost. Of course I need to sleep, and it's hard to judge how productive I am etc etc. But the idea is an economy is a whole system and a fiat government is able to purchase up to the productive capacity of the system - which seems quite sensible ... if we know what the productive capacity is. I may of course be wildly wrong and interested in other peoples views
barry-cotter 5y ago
Note that no one can link to an academic description by an economist which is precise enough to be right or wrong.

deleted 5y ago

[deleted]

deleted 5y ago
[deleted]

tenuousemphasis 5y ago

I see it differently. Before the Federal Reserve, any bank engaging in fractional reserve banking was committing fraud. Rather than crack down on this fraudulent behavior, the Fed institutionalized it, which seems like an unquestionably negative thing. Thanks to the Cantillion effect, those closest to the source of money are enriched, I would argue unjustly and at the expense of all others using that money. I believe this to be one of the major sources of wealth inequality in the world today.

jrochkind1 5y ago
Fractional reserve banking existed in Europe a century or more before the the United States even existed, let along the Federal Reserve. And was not seen as fraudulent -- in that it was a common (not rare) practice, that people knew was going on and were happy to accept the notes. Central banks came into existence to regulate fractional reserve banking before the United States, let alone the Federal Reserve, existed either. the US Federal Reserve did not invent being a central bank. Your way of seeing it differently is ahistorical, and strangely US-centric for a historical view of banking or currency.
- piethesailorman 5y ago
  Couldn't it be said that all the wealth inequality created by this system in europe created a massive collection of poor europeans who then decided to sell themselves to indentured sertitude in the America? This situation is the basis for why creating a fundamentally different kind of banking system was so important to the first few generations of Americans, thus the previous comment not being ahistorical at all.
  - jrochkind1 5y ago
    Anything can be said, but I would like to see some citation for "This situation is the basis for why creating a fundamentally different kind of banking system was so important to the first few generations of Americans" -- I have never seen any history suggesting that the American colonists were focused on intentionally creating a novel kind of banking system different from Europes because of thinking Europe's led to inequality; if that's actually a non-imaginary thing colonial leaders were doing I'm interested in reading good history on it. The internet sometimes seems to think that making up plausible stories is a valid way of understanding what happened historically.