Oh dear, oh dear

So, I’ve been asked to have a look at a little paper:

In fact and practice, seigniorage is distributed unfairly and opaquely because most
money is created by commercial banks. Money in circulation (money stock) consists of
notes issued by central banks and deposits created by commercial banks. The quantity of
the latter far exceeds the former in all major countries. Therefore, a portion of seigniorage
is given to commercial banks as a hidden subsidy (Huber and Robertson, 2000).

Well, no.

The idea here is that we want to finance a universal income, and obviously, seigniorage, the profit from creating money, is a good place to get the finance. Sure, why not?

It’s just that the banks aren’t getting seigniorage by creating credit, only the central bank is from creating money. They’re not the same thing at all.

This is easy to test. Where is that seigniorage that the banks are receiving? If it’s anything like proportional to central bank profits from money making then it’s hundred of billions a year in an economy like the UK. As the Positive Money guys say in fact. But the banks don’t get hundreds of billions – that’s an order of magnitude larger than their profits for example.

So, the banks aren’t getting such seigniorage, so we cannot appropriate it by changing the system.

7 thoughts on “Oh dear, oh dear”

  1. Banks provide bank accounts. Bank account balances are money-like that’s why they’re included in money aggregates.

    People have bank accounts because they provide banking services. They provide branches, website, transfers, cards, etc. Those services are funded by interest from borrowers. They’re also funded in a much smaller part by seigniorage.

    Let’s say that the Central Bank is expanding the supply of reserves. The supply of money can be expanded by more. That’s the nub of truth of the money multiplier, though it may not apply in present times. To actually perform that multiplication each bank must attract deposits, that means providing banking services. As a result each bank must offer services so it can use the reserves that it has. So, the returns from this type of seigniorage from commercial banks go to their customers through competition. Only the seigniorage returns from central banking go to the state.

  2. “t’s just that the banks aren’t getting seigniorage by creating credit, only the central bank is from creating money.”

    The banks aren’t getting the seigniorage because they’re not creating the money – their borrowing customers are.

    You go into a bank and ask to take out a loan. The nice lady behind the counter prints out a loan agreement (a promise to repay on an agreed schedule) on a piece of paper costing about 5p. You sign it, and it is now worth £200k to the bank. The bank gives you £200k, £199,999.95 of which is your seigniorage.

    The basic failing of all these schemes to manipulate the money supply is that they all treat money as being imbued with value by some sort of constraint-free magic. Either by legislative fiat, or by some sort of government licence issued to banks.

    ‘Money’ is a credible, enforceable, transferable promise to repay something of genuine value (i.e. goods and services derived from human labour) at a later date. It has value only because of that promised delivery. So in schemes to manipulate the economy by creating money, you can’t just say “print some money and deliver it here”, you have to think about how you’re going to make good on the promises you’re making. Where are you going to get the promised value from, and what other consequences will that have?

    The government can create loads more money by promising to deliver a massive amount of goods and services to the people at a later date. OK. But where all are those goods and services going to come from? It’s going to be coming from the people themselves, isn’t it?

  3. I managed to make it five pages. When one fundamental assumption is wrong, what follows tends to be useless. I didn’t find anything useful.

    I hope that this is a working paper and it was the authors that asked Timmy to look at it.

  4. ” When one fundamental assumption is wrong, what follows tends to be useless. I didn’t find anything useful.”

    Errors are often useful because they lead to good questions. The paper looked plausible enough to at least get to review, so it probably reflects particularly commonly misunderstood subtleties. Can we isolate the flaws and make them obvious? Can we explain the right answer clearly enough that nobody could be in any doubt?

    So Tim picked up on the seigniorage point, and demonstrated it must be false by pointing out that the banks were not getting the amount of money that would be predicted if this was true. It’s a concise and clear demonstration.

    The other interesting question, I thought, is what is causing the long deflationary recession in Japan they’re complaining about? OK, their explanation/solution may be wrong, but what’s the right answer? I didn’t find that one so clear.

  5. @ NiV
    The long deflatioonary recession in Japan might just be caused by the shrinking demand as the working population shrinks and theols people do not need to buy so much as the have all the durable and semi-durable goods that they want so onlyu need to buy food ans ephemerals.
    My wife keeps wanting to buy new clothes and shoes OTOH I look at my clothes and think “I’ve got too many clothes can I find something that i can wear out?” I need a new pair of shoes/sandals about once in two years. Lots of Japanese guys are in the same situation as myself.

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