Several of you have asked for the skinny on what money actually is. So, here’s the full fat Worstall take on cold, hard cash.
Answer: It’s a way of keeping score. Who has the right to call upon the resources of others in that same society? And that, other than a couple of footnotes which we’ll deal with overleaf, is pretty much it.
It doesn’t matter, at this level of understanding, whether money is a commodity itself, something representing or exchangeable into a commodity like the gold standard, or just those pieces of paper of the current fiat money. It’s simply a way of recording who gets to ask for what.
The average hourly wage in the UK is £13 or so. If you’ve £13 you can get an hour of average labour devoted to you. If you’ve £1.3m then you can get 100,000 hours of that average labour and what it can produce.
Because increasing the number of things you can make claims with doesn’t increase the number of things you can make claims upon.
Assessing your article (rather than the rights or wrongs of the ideas behind it), I would say that most of page 2 should have been on page 1, since your answer –
“It’s a way of keeping score. Who has the right to call upon the resources of others in that same society?”
– is too vague to mean anything in isolation. You might be talking about the divine right of kings, or about a Marxist reading the room to see who has power over whom. The real core to the piece is the “money-is-the-institutionalisation-and-anonymisation-of-debt” (and the preamble explanation thereof), and that should have been on page 1.
The rest was rather rambling, and ultimately disappointing since it wasn’t tied back to the basic point in any meaningful way. Saying that Murphy and Corbyn are correct (!) but just leaving it hanging with a “scary” political incentives label isn’t good enough. To be fair, not much can be expected from such a short essay.
Seems like a great basis for a book, though:
– money represents *this* (how it came about, how it works, what it has enabled)
– but there are consequences and side effects of money that can detach it from its core representative function
– these are some of the horrid things that can happen when it does get detached.
– can we keep it attached? How?
also
$ $ £ £ ♫ . – . – . – . – . – . – ♬ £ £ $ $
I’ve got ninety thousand pounds in my pajamas.
I’ve got forty thousand French francs in my fridge.
I’ve got lots and lots of lira,
Now the deutschmark’s getting dearer,
And my dollar bill could buy the Brooklyn Bridge.
There is nothing quite as wonderful as money!
There is nothing quite as beautiful as cash!
Some people say it’s folly, but I’d rather have the lolly,
With money you can really make a splash!
The initial reason for having money was because bartering is really cumbersome and impractical, for all kinds of reasons. So money allowed us to trade with each other without all the problems inherent in bartering. Isn’t it still fundamentally about that in the end?
Hey! he writing for the Reg again, maybe I should restore it to my bookmarks — then I noticed the date of that article.
Are you ever going to spend all your savings, or do they have value to you purely as claims on real things you don’t want right now?
Are you ever going to spend all your savings, or do they have value to you purely as claims on real things you don’t want right now?
Can you please stop coming here and writing gibberish.
My savings are my deferred spending plus some insurance in case I have an emergency (which is why I never spend all my savings). Now, that’s not hard is it?
What pliz means “skinny”?
What’s wrong with the old ‘medium of exchange’, ‘store of value’ definitions which have the advantage of clarity unlike this:
…something representing or exchangeable into a commodity like the gold standard
How many gentle monks are doing time in purgatory because of their persistent failure to beat?
Hi, MMTer here.
The first error that people make is saying that MMT says we should run deficits. It’s a bit more nuanced than that.
“The budget deficit is endogenously determined—growing when the economy slows and falling when growth picks up.” —L. Randall Wray (STATEMENT: House Budget Committee, “Reexamining the economic costs of debt”, Nov 20, 2019)
Got that? It’s the non-government sector that determines whether we have deficits or not. Here is the sectoral balances equation as derived from Wynne Godley’s model as looked at from the perspective of government:
(G – T) = (S – I) + (M – X)
It’s the stuff on the right hand that determines whether the government runs a deficit or not. If the non-government sector decides to net save, i.e., save in excess of investment, then the government must run a deficit. It has no choice in the matter. This is because the economy will enter into recession, tax revenue will fall, and welfare payments will rise, and the deficit rises that way.
If, however, the government runs a deficit of the right size, there is no need to have unemployment, and the net effect will be that the deficit will be smaller. Yes, deficits will be smaller if you follow the MMT prescription. Note that you will have a deficit in any event.
Deficits are the norm, not the exception. This is because the non-government sector typically desires to net save. This is not inflationary because remember that this is saving, not consumption. What MMT says that we should satisfy the non-government sector’s desire to net save.
By way of example:
Say an economy produces $100 of investment, but the non-government sector wants to save $120. Here, the net saving is $20. Absent government intervention, and because saving always equals investment, the $20 investment shows up as excess inventories, workers lose their jobs, and the deficit rises that way. What MMT says is that the government should inject $20 into the economy, which satisfies that net saving desire. Again, this will not be inflationary because people want to hold this extra injection as saving.
To sum up, what MMT says that given you have to run a deficit anyway, run a deficit of the good kind instead of the bad kind.
Further to my comment, a quote from Randall Wray’s article. I provide a link below which has a chart showing the two alternative deficits paths that a government can take.
[quote]
“We can obtain the same deficit ratio—say 4%–with a wide variety of growth rates. We could hypothesize that we can move from a 4% deficit ratio to an 8% deficit ratio in either the good way or the ugly way—as shown in the next graph.
(see the graph in the article)
Start at point A, which shows a deficit ratio of 4% with a growth rate of 4%. Now let’s cut spending or raise taxes in an attempt to cut the deficit. If this slows growth, we could move up to point B—with a deficit ratio of 8% and negative growth. That’s the ugly way to produce a bigger deficit.
That is the Japanese way. Whenever the economy begins to escape stagnation, the government adopts a new consumption tax that kills the recovery and causes the deficit to grow.
Or we can increase the deficit the good way, by embarking on a public infrastructure investment campaign. We move from point A to point C. The increased spending boosts the deficit and economic growth. However, as growth picks up, tax revenue grows and we shift down the arrow to Point D—with a lower deficit and higher growth.
That’s the good path to deficits.”
[end quote]
http://neweconomicperspectives.org/2020/01/statement-house-budget-committee-reexamining-the-economic-costs-of-debt-nov-20-2019.html
[quote]
Having acknowledged that there are real limits to government deficits (it was never denied), MMT nevertheless makes clear that government deficits are the norm, not the exception. This does not mean that government deficits of any size are okay. They must be consistent with private-sector net-saving intentions. It simply means that ongoing government deficits of some size will be the appropriate policy under normal circumstances. The reason for this is that the non-government sector typically desires to net save. This means, as a matter of accounting, that the government must run deficits.
In aggregate:
Government Balance + Non-Government Balance = 0
This is an identity, true by definition. The financial balance of the non-government sector matches the government’s balance dollar for dollar. Non-government can only maintain a surplus (positive balance) if the government runs a deficit (negative balance). The financial wealth of non-government is nothing other than the accumulated deficits of the government sector.
For an open economy, such as an individual trading nation, the non-government sector can be disaggregated into the domestic private sector and foreign sector. As a matter of accounting:
Government Balance + Domestic Private Balance + Foreign Balance = 0
The majority of nations run current account deficits. For these nations, the foreign balance is positive and government deficits are required if non-government is to maintain a financial surplus. Ongoing government surpluses are only sustainable in a few small trade-surplus nations with current account surpluses sufficiently large to offset the net-saving intentions of domestic households and businesses.
Whenever the non-government sector net saves (maintains a surplus), it is spending less of the monetary unit than it earns. The result is unsold output and a signal to firms to cut back production unless the government fills the demand gap through deficit expenditure. By doing so, the government is in a position to ensure all output is sold at current prices and that the non-government sector satisfies its net saving desires. If, instead, the government allows the demand shortfall to persist by not injecting sufficient expenditure of its own, firms will respond by cutting back production. There will be a contraction in output and income, thwarting non-government net saving intentions. If the non-government sector responds by redoubling its efforts to net save, the result is a further shortfall in demand, further contraction of income (as well as tax revenue), more frustration of non-government saving plans, etc. There is no end to the process until either the non-government sector accepts a smaller net-saving position or the government accepts a bigger deficit.
[end quote]
—Dr. Peter Cooper (heteconomist.com)
source: http://heteconomist.com/krugman-and-galbraith-on-deficits/
Chester Draws
How do you know your insurance provider is not simply creating claims on things that don’t exist?
TMB
the real skinny
means the real truth, the inside info, etc.
archaic, of course 🙂
MMT suffers from the same problem as Marxism. When a lengthy explanation of why it MUST work conflicts with reality, it must be reality that’s wrong.
《increasing the number of things you can make claims with doesn’t increase the number of things you can make claims upon.》
rsm/ Do game scores buy real things? / Is zero sum thinking the real nonsense?/ What’s the limit on stocks?
Do us all a favour mate. Post something that adds to the discussion or experience on these threads or fuck off.
Whenever I see algebra in anything written on economics I get an urge to reach for a gun. Because there’s your problem right there. Not a single value in the equation will be known to any degree of accuracy. We’ve had years of people fucking around with this nonsense. It’s what’s got us to where we are today. Can we not make macroeconomics a hanging offence?
Addolff
So are you saying if I challenge your emotional assertions you get cognitive dissonance?
You want an explanation of money? The real stuff? It is very simply an IOU given in exchange for goods or services. Which by common consent can be used in exchange for other goods or services. All it requires is confidence in that common consent. It does not require banks or governments or fucking economists. Any token of exchange has common consent & confidence will serve.
So a government creating money is just forging IOU’s. It was not created by the provision of goods or services.
Or we can increase the deficit the good way, by embarking on a public infrastructure investment campaign.
Investment is deploying money in the expectation of an income or capital appreciation. Importantly, for it to be investment, the capital should be retrievable on closing the investment. Anything else is simply spending money. If spending money with expectation of future benefits, that’s called gambling.
Investment may indeed have some of the attributes of gambling. But gambling never has any of the attributes of investment.
“So are you saying if I challenge your emotional assertions you get cognitive dissonance?”
Ah, channeling Cathy Newman.
No, i’m pointing out that a wise man speaks when he something to say, a fool speaks when he has to say something.
Is it half term or something?
Bis: “Whenever I see algebra in anything written on economics I get an urge to reach for a gun. Because there’s your problem right there.”
Yep. I sometimes wonder how the Ancient Egyptians felt, hearing their high priests bloviating about how Pharaoh was going to ensure a good harvest next year. I imagine it was a bit like reading all those acres of extruded text-like material there.
But what do collectables bring to The equation.
If there are more customers on the market then that can raise the value or reduce the value of some items.
For istance the more customera the more valuable an item could be worth. Such as more people going for A finite item.
OT but related to money printing – I see that 30 year gilt yields are rapidly approaching the 5% mark that precipitated the last spurt of MMT/QE/Money printing/’market operations’ by the BoE, and they have stated that Friday is when they pack up their money printer and leave Truss and Kwarteng to it.
Who wants to bet that by next Monday a new round of QE (or some other word salad scheme that incorporates the concept of printing money and the BoE buying government debt with it) will have been announced in a hurry to ‘calm the markets’ again?
I would put forward the idea that “gilts at 5%” and “Ths gilts market in a paroxysm of spasm” are different things. So, I sorta expect, asbsent spasm, the BoE to be happy enough with 5%. But, obviously, we’ll see.
Good to see the MMT devotees once again avoid answering the fundamental problem in favourvof screeds of macro junk. Money is a claim on somebody’s production. Increasing the amount of money doesn’t mean there’s more production to claim. Just answer that and I’ll believe in MMT.