Thursday, May 7, 2015

Where Does the Buck Stop?

The Example of Nations in relation to Money would be a very uncertain Rule... opposite measures have been us'd in some Countries to what have been used in others, and contrary measures have been used in the same Countries to what was used immediately before, not because of any difference in their Circumstances, but from the Opinion, that since the Method used had not the effect design'd, a contrary would; And there are good Reasons to think that the Nature of Money is not yet rightly understood.
Money and Trade Considered, With a Proposal for Supplying the Nation with Money, John Law, 1705

310 years have passed since John Law wrote the text above. Judging from the current, often heated, discussions on Twitter and in the blogosphere, fueled by the Bank of England among others, I'm tempted to conclude that there are good reasons to think that the nature of money is not yet rightly understood.

Some time ago I read Walter Bagehot's Lombard Street, published in 1873. Afterwards it has crossed my mind that had Bagehot been brought to us, in person, with the help of a time-machine, he would have been able to teach us a lot about the current monetary system. I imagine him being able to focus on the most relevant parts of it and pose the most relevant questions.

As John Law describes above, the monetary system has evolved, and still evolves, through trial and error. Although -- or perhaps exactly because -- his own trial in France ended up in a very famous error, we should be thankful to Law for the work he did to increase our understanding of money.

To us mere mortals, the problem with trial and error is that at any given point in time, the more consecutive trials and errors -- and, necessarily, time -- have passed, the less understandable the system is to us. Think about the human brain and the universe. One thing is that the complexity of the system increases. Another one is that we get accustomed to things being as they are. We start taking things for granted. We might think that it can only be this way, missing the fact that we are in the midst of a trial. We adopt one viewpoint out of many possible ones. We stop asking questions, from ourselves and others.

Einstein has said: "It's not that I'm so smart, it's just that I stay with problems longer.". If you want to find a problem to stay with for the rest of your life, trying to understand the nature of money seems like a good bet.

Today, there are perhaps a million people, old and young, around the world, staying with the "Money Problem". Never has there been as many as there are now (thanks to increased leisure), and never have they had as good an access to information as they have today. Monetary economics, and macroeconomics in general, is on the rise. For this we can thank the Great Financial Crisis. The emergence of Quantitative Easing and negative interest rates, regardless of their effect on the real economy, has had an huge impact on people's understanding of money, or more precisely on the feeling of lack of understanding which has led to willingess to study the subject. This is in no way confined to amateurs: many of the academic economists often seem as puzzled as the laymen when thinking about QE, especially if they haven't been too familiar with monetary economics -- and most of them haven't. There is also a great sense of urgency, even unease, behind all this, much like there was in the 1930s. Something is wrong, and it seems it has a lot to do with money and debt.

To the point of this post. Where does the buck stop?

When discussing money (a term which I have mostly abandoned) with people familiar with monetary economics, sooner or later someone mentions "high-powered money" (HPM). I would be happy if we could shed more light onto this in the comments section later on, but let me try to make the first try here.

I see that most of the lines from (people who turned out to be) MMT advocates in a Twitter discussion I participated in yesterday are to be found in a single blog post by Bill Mitchell ("Money multiplier and other myths"), so I'll quote him below to represent what I assume to be the "MMT case". I want to stress the point that I'm not here to attack MMT. I'm someone who thinks for himself, and I have learned a lot by reading people who seem to consider themselves MMTers. I question many things they say, like I question nearly everything I happen to come by, be it written by New Keynesians, neoclassicals, Austrians or Post-Keynesians. Most importantly, I believe I question my own thinking all the time, too.

Mitchell critizes the "money multiplier" concept and says:

The monetary base does not drive the money supply. In fact, the reverse is true. So the reserves at any point in time will be determined by the loans that the banks make independent of their reserve positions.

I believe he is correct. Later on, discussing HPM, he writes:
Modern monetary theorists consider the credit creation process to be the “leveraging of high powered money”. The only way you can understand why all this non-government “leveraging activity” (borrowing, repaying etc) can take place is to consider the role of the Government initially – that is, as the centrepiece of the macroeconomic theory. Banks clearly do expand the money supply endogenously – that is, without the ability of the central bank to control it. But all this activity is leveraging the high powered money (HPM) created by the interaction between the government and non-government sectors.

Let's keep in mind that monetary base is another name for HPM. Money supply consists mostly of commercial bank deposits, which are held by non-bank businesses and households. Based on this, I don't fully understand how Mitchell can hold these two positions simultaneously:

1. Private credit creation by commercial banks (which affects the money supply) drives the amount of HPM. (first quote above)

2. Private credit creation process is leveraging of HPM. (second quote above)

Have I misunderstood something? To me, "leveraging of HPM" sounds a bit like "money multiplier". I find it hard to believe that Mitchell would hold such opposite positions, so I point this out in order to get this clarified.

Mitchell continues:
HPM or the monetary base is the sum of the currency issued by the State (notes and coins) and bank reserves (which are liabilities of the central bank). HPM is an IOU of the sovereign government – it promises to pay you $A10 for every $A10 you give them! All Government spending involves the same process – the reserve accounts that the commercial banks keep with the central bank are credited in HPM (an IOU is created). This is why the “printing money” claims are so ignorant. The reverse happens when taxes are paid – the reserves are debited in HPM and the assets are drained from the system (an IOU is destroyed). 
So HPM enters the system through government spending and exits via taxation. When the government is running a budget deficit, net financial assets (HPM) are entering the banking system. Fiscal policy therefore directly influences the supply of HPM. The central bank also creates and drains HPM through its dealings with the commercial banks which are designed to ensure the reserve positions are commensurate with the interest rate target the central bank desires. They also create and destroy HPM in other ways including foreign exchange transactions and gold sales.
We can think of the accumulated sum of the vertical transactions as being reflected in an accounting sense in the store of wealth that the non-government sector has. When the government runs a deficit there is a build up of wealth (in $A) in the non-government sector and vice-versa.

He is obviously not saying that only the fiscal position affects the amount of HPM in the system. For instance, the amount of HPM in the US economy today has very little to do with the size of the fiscal deficit (say, five years prior and five years foward). So he must be saying that (a small) part of the HPM is "net financial assets" -- that is, until the deficit is covered by issuing government bonds which then take the role of "net financial assets" (until the central bank does QE...). Some MMT advocates seem to put a lot more importance on the fiscal deficit as a source of HPM, and this can be misleading.

My main problem with MMT described by Mitchell is this: Fiscal deficits do not create assets without corresponding liabilities. ("Only vertical transactions create/destroy assets that do not have corresponding liabilities.") The view is too narrow. Government acts on behalf of its citizens, and spends mainly on behalf of its taxpayers. Therefore the liabilities it acquires are acquired on behalf of the "non-government sector".

No IOU can ever present "net wealth" in the global economy.

Connected to this, we need to acquire a broader view where he writes that "HPM is an IOU of the sovereign government – it promises to pay you $A10 for every $A10 you give them!". It is an IOU which has a nominal value of $A10, denominated in an abstract unit of account (in this case, Australian Dollar; the IOU itself is not "a dollar"). What is owed is not defined -- only the nominal value of it is. It is left to the creditors (holders of this IOU) and the debtors (taxpayers and other debtors) to decide what is owed. It will be decided on the market. I will clarify this in my coming posts.

So where does the buck stop? It doesn't stop at HPM. It doesn't stop at "the money which is a promise to pay money". It stops at the transactions (often of goods and services) between creditors and debtors. Money is an IOU, and that is why money can never be what is ultimately owed.


  1. Let me congratulate you for pursuing this, since you clearly weren't satisfied with the answers you've received. What the planet needs is more critical thinkers, no blind followers. I'm not a drone, and I don't like drones - regardless of their political preferences.
    Now, let's address the issue (hopefully one and for all).
    Before the government can tax or borrow (pay interest on) its own currency, it must spend the money into existence. All the funds that go to paying taxes & buying government debt (gov securities) come from government spending.
    I really don't understand your semantics with this "Money is an IOU, and that is why money can never be what is ultimately owed."
    All money is credit/debt. Not all money is universally accepted in public or private transactions.
    Why bank credit structure is DEPENDENT on government (CB included) vertical transactions? Because you need root income in order to leverage yourself. Government IOUs is legal tender - meaning it can extinguish both public and private debts. Bank debt creates (increased) demand for government currency.
    Now, from wikipedia...

    Stephanie Kelton argues that bank money is generally accepted in settlement of debt and taxes because of state guarantees, but that state-issued high-powered money sits atop a "hierarchy of money".
    MMT economists regard the concept of the money multiplier, where a bank is completely constrained in lending through the deposits it holds and its capital requirement, as misleading. Rather than being a practical limitation on lending, the cost of borrowing funds from the interbank market (or the central bank) represents a profitability consideration when the private bank lends in excess of its reserve and/or capital requirements (see interaction between government and the banking sector).
    According to MMT, bank credit should be regarded as a "leverage" of the monetary base and should not be regarded as increasing the net financial assets held by an economy, with only the government or central bank able to issue high powered money with no corresponding liability.

    Notice the distinction, HPM with no corresponding liability. Without the CB buying government debt or buying private sector debt, HPMs endogenously created will always have a matching liability within the nongovernment sector.
    The former we know, it's called deficit spending. The latter is when firms or households issue their own IOUs and the CB buys them with reserves. The important observation being that firms & households can issue all the IOUs they want. In this (albeit unlikely) scenario, the CB would own the private sector IOU as an asset, and the private sector would own the CB reserves as assets. A promise made & unfulfilled, we call a debt. Everything has to balance to zero, else there's an error in the math. That's the sectoral balance. Steve Keen defines aggregate demand as income + the change in private debt. Mainstream economists regard aggregate demand only as income; that's why Krugman got his ass handed to him by Keen during their online debate on banking.

  2. Thanks, Serban!

    Let's see if we can both increase our understanding here.

    "HPM with no corresponding liability."

    Let's consider two instances of HPM issuance:

    1. The Fed buys MBSs. It acquires a private IOU in exchange for "newly-created" HPM.

    2. Treasury spends HPM into existence (there is a transfer from Treasury's general account at the Fed to a reserve account of a commercial bank).

    Could you help me to locate the "HPM with no corresponding liability" here?

    My interpretation: In case 1 there is a corresponding liability. In case 2, it depends. If the budget is balanced, then also this HPM comes with a corresponding (tax) liability.

    Correct? I have understood that only HPM-financed fiscal deficit is said to come with no corresponding liability, and thus it represent "net financial wealth" to the non-gov sector.

    1. HPM with no corresponding liability in the nongovernment sector. QE takes away say 50 bil dollars worth of financial assets, and it swaps it with a different type of financial asset worth 50 bil dollars. The net remains zero. In order for that to not be the case. The CB would have to give say 50 bil dollars worth of reserves without taking away anything from the banks in return. That would be equal to fiscal policy.
      QE (aka monetary policy) is simply a massage for a wooden leg. It keeps the financial (the credit structure) system afloat by inflating bank asset prices (MBSs). This way, the bubble does not burst and defaults do not occur. Besides, MBSs expire after a period of time. When the MBS matures, the corresponding reserves will vanish as well.
      Just like the treasuries will vanish in time. The difference here being that the government owns the liability of the treasury, and the private sector owns the asset side of the treasury. In our scenario, the CB simply swaps private sector assets with other private sector assets (MBS and bank reserves are private sector assets. MBS is asset for the CB, bank reserves are liabilities for the CB). In fiscal policy scenario, the CB is simply crediting more numbers than it debits within the private sector. Those excess reserves (fiscal deficit funds) are drained via debt issuance (monetary policy). Banks are given treasuries in return, which have better yields. So you could think of QE as neutral or balanced budget policy between the CB and the banks. QE is hoping for spending multiplier effect to occur - which it doesn't during the downturn.
      So yeah, your conclusion is clear and correct.

    2. So far, so good, then :-)

      If we pick any year, the share of government spending covered by taxation is seen to come with a matching non-government liability, because tax obligation is a taxpayer liability, and it is connected to this government spending.

      The share of government spending which is not covered by taxation -- the fiscal deficit -- is usually covered by government debt issuance. In your words: "Banks are given treasuries in return, which have better yields."

      Is this government debt seen as a non-government sector (taxpayer) liability or not? I find two reasons to think it is:

      1. Taxpayer pays the interest on the debt.

      2. If the debt is not rolled over, it is the taxpayer who will repay the debt.

    3. Government debt either in reserve form, securities form, or cash represents private sector assets. Like Abba Lerner said, issuance of debt is just a preference of the government for the public to hold interest bearing bonds rather than leaving reserves for the banks in order to earn interest on them.
      Taxpayers don't pay the interest on the debt. The interest on the debt is paid from government spending. Government debt is 'paid off' (private sector savings are destroyed) when the CB debits the private sector's reserve account more than it credits it. CB credits government's reserve account, it debits private sector's reserve account. You can't make a reserve drain without a reserve add. Government interest bearing securities represent private sector saving accounts at the CB. Undrained reserves (not swapped for treasuries) represent private sector checking accounts at the CB. All the CB is doing for the private sector when the government deficit spends is to first credit the private sector's reserve (checking) account and then to move that money into the private sector's securities (savings) account. The latter account pays (better, if the CB is paying IOR; it can also not pay IOR if that's the law or policy) interest. All the CB is doing is changing money from one pocket to another for the very same pair of pants.
      Again, all the money that goes to paying taxes & buying government debt (implicitly servicing government debt interest payments) comes from government spending.
      Government debt payments (interest payments) are not made from taxpayer's pockets. A budget surplus means the CB is net crediting government sector's reserve account at the expense of the private sector - depleting the stock of private sector savings accrued over time. But those accrued savings were created by the government via fiscal policy (deficits) in the course of time.
      Government debt (interest bearing securities) can be paid off (payments made until maturity) without budget surpluses via fiscal deficit spending if the government agrees to stop issuing new debt while it runs fiscal deficits.
      In conclusion, I think you can understand why I don't prefer the expression 'the taxpayer repays the debt' - b/c it doesn't make sense. It means that I'm paying off my own assets.

    4. I think we need to be careful with the different perspectives available to us here. I could be called a Chartalist and I view money much in the same way as A. Mitchell-Innes in his "Credit Theory of Money" (the small difference being that if money is an IOU, credit, then why not forget the whole notion of "money" and free ourselves to think clearly about these IOUs and understand better who owes who and what). Despite being a Chartalist and an "Innesian" -- perhaps in my own way, like Minsky was a Keynesian -- , I cannot agree with all the conclusions MMTers draw, arguably, from very much the same premises. So we are not far apart when it comes to the perspective. My intuition right now is that MMT doesn't stay true to the chosen perspective; doesn't follow it to its logical conclusion. But obviously many MMTers are smart, clear thinkers, so I could be wrong. That's why I really appreciate it that I get to discuss these matters with open-minded MMTers.

      You wrote: "I think you can understand why I don't prefer the expression 'the taxpayer repays the debt' - b/c it doesn't make sense. It means that I'm paying off my own assets."

      I assume you prefer this expression: "Government debt is 'paid off' (private sector savings are destroyed) when the CB debits the private sector's reserve account more than it credits it. CB credits government's reserve account, it debits private sector's reserve account."

      In any case, whatever expression you choose, this implies a fiscal surplus. Taxpayers have fulfilled a liability which was above the liability connected to government spending during the same year, and so the accumulated fiscal deficit (represented by government debt) from earlier years should be that much smaller now.

      And I don't see a problem with "paying off my own assets". Non-government sector is paying off its own assets all the time, as, to quote MMTers, "those net to zero". This is also true for that part of HPM spent into existence by the government which is covered by taxation. So I don't see any other problem here than that which might arise if we take those assets to be "net assets" for the public -- for the taxpayers.

      I could try to offer a very simple sketch of "my Chartalism" so you might better understand where I come from:

      When the government spends, it issues IOUs on behalf of the taxpayers. Those IOUs end up in the hands of those who *sell* something to the government (a much smaller group than taxpayers, although these are usually taxpayers too; a part of the whole). As these IOUs are a liability of the taxpayers, the taxpayers will need to *sell* something to the holders of these IOUs in order to redeem the IOUs. (In the spirit of Mitchell-Innes, selling is "paying" while buying is "getting paid".) When the taxpayer finally submits the IOUs to the government as a "tax payment" -- no real payment takes place at this point, and I assume you agree with me here -- it is to show that he has redeemed the IOUs the government had earlier issued on his behalf. At this point the IOUs are "destroyed" -- alternatively, the chips have been returned to the casino, and chips in the hands of the casino do not represent IOUs --, which is of course a sign that a liability has been fulfilled. But in reality, these IOUs had been redeemed already when the taxpayer sold something to the holder of these IOUs.

      How does this sound?

    5. Dude, sorry, I'm getting tired of this back and forth. It seems we're getting very parallel to each other. And you asking questions like "has anyone proved that nongov sector likes to net save?" feels like plain trolling. I explained that that obsolete logic & language does not apply and does not accurately describe what's happening.
      The government debt represents private sector savings. I (the private sector) cannot pay off my own savings. It's illogical. The government, on the other hand, (the higher entity), can destroy my stock of savings via perma surpluses. And no, you comparing private sector transactions which net to zero to the government eroding private sector assets is comparing two very distinct things. Private sector does not create or destroy net money. Taxpayers don't/can't 'pay off' the national debt. The government destroys the national debt.

    6. I can see how all I say must sound illogical (or even like trolling) to someone who has taken as an undisputable fact that, in a closed economy, the private sector can hold IOUs (fin. assets) behind which there lies no corresponding liability, directly or *indirectly*, on the private sector. Ultimately, I think I'm questioning the division between private and government as independent entities. If you know of previous discussion around this, you might save some time by linking to it?

      Who is the government? Who is going to fulfill its financial liabilities if not we, the people? We do that through taxation all the time, as we both agree.

      If you say that government IOUs are "net savings" (even "net wealth" has been used by MMTers) for the private sector, then you must be able to show how these government IOUs are eventually redeemed, or even paid interest on, without imposing a corresponding burden on the private sector. In my world, IOUs which are never redeemed, nor are paid interest on, are worthless pieces of paper.

      I don't have a problem with accepting that a currency-issuing government can roll over its debt indefinitely or pay interest on it by just issuing more IOUs. I'm also aware that usually governments don't run surpluses.

      I do have a problem with accepting that HPM itself is "wealth". If pieces of HPM, IOUs, are to have a positive value (anywhere close to their nominal value) for the private sector holder of such an IOU, there must be a liability connected to them. Now, I have understood that we agree that behind part of the HPM in existence is clearly a private liability. In the US, this private liability can be a tax obligation, a commercial bank obligation (direct loans from the Fed), a bunch of mortgages (Fed-owned MBSs) or various kinds of private credit (through repos). As far as I know, MMT views all these liabilities to be indirect liabilities, because it views HPM to be a government liability. Nevertheless, MMT is ready to admit that the part of HPM covered by this kind of indirect liabilities is *not* "net savings" for the private sector.

      Am I correct if I interpret the "pure government liability", which is said to be behind these "net savings", to be nothing but the promise to "pay you $A10 for every $A10 you give them" (in Bill Mitchell's words)? If so, to appoint any real value to this liability is, in my opinion, strictly against the main message of Chartalism which is that these IOUs derive their value from the tax liability connected to their issuance. To me it's easy to see how this is a case of "substance over form" where substance is the tax liability and form is the irrelevant liability to "pay" HPM in HPM.

      And like this wasn't enough, behind all this looms the question of how we view the government. If what government owns and owes is really owned and owed by citizens, then this discussion doesn't make any sense?

    7. It is by far more easier than you think. The paper of a 100 note is not what counts but the imprinted information on it, which states, that the owner of this information is able to settle a debt of 100. This is the only thing you can do with a bank note. If you own a 100 note you do not have a liability nor you have a claim, because a 100 note do not give you any right, not even the right to buy at a supermarket. Before you can use a 100 note you MUST FIRST have a debt of 100 (this is the contract at the debt level) an THEN you have the right to use the 100 note for settling your debt. In short: without obligation no payment, or: first applies the law of obligations, later applies the law of property. The concept to see the medium of payment (HPM) as IOU (that is as a debt) means to ignore the crucial distinction between these two strictly separated juridical spheres.

      BTW: to see a note as a carrier of information is in accord with the paperless informations at the CB who has how much units of debt settlement options. If this information is called wealth or not does not matter. It gives you the right to settle a debt but only IF you made a contract which results in a (monetary) obligation. In a nutshell: this is also the solution to the inside-outside money debate, because the discussants are not aware of the fact, that they are fighting each other to convince the other side that only the own theory can be correct, when in fact they discuss two separate things, which belong together. Why? The reason is, that (any) claim MUST have a thing, item or information (HPM) which handed over nullifies this claim. Its´s that simple.

    8. "The reason is, that (any) claim MUST have a thing, item or information (HPM) which handed over nullifies this claim."

      I agree. And in case of HPM, I can see at least three different situations:

      1. Handing HPM over (by a private party, to a private party) does nullify private claims. Nevertheless, it leaves the original creditor holding an IOU (HPM). This means that the creditor remains a creditor, but now to another party.

      2. A tax claim is nullified by handing over HPM to the government. This doesn't leave the other party a creditor like in the private-private case above.

      3. When the government hands over HPM to a private party as part of government spending, no claim is nullified.

      To me, handing over HPM can nullify claims. But in private hands, HPM always remains an IOU, representing a claim that has to be ultimately nullified by other means than by handing over HPM.

      Btw, I just today read from The Economist how in Germany law and economics are much more closely related than elsewhere -- how lawyers are more involved in issues elsewhere dealt mostly by economists :-) Is this true?

    9. First: it is not clear, what you mean by 'original creditor'. The issuing instance is the CB, is it that, what you mean?

      Second: a payment to the government is also a payment to get rid of a debt. Remember: FIRST debt, THEN payment!

      Third: here is the crucial question with regard to MMT. The MMT´lers think, that HPM is a child of the government, because they believe, that all HPM comes into existence by government spending. This is due to their belief, that only debts against the government is the central cause of HPM demand. But this is a consequence of their belief, that money is rooted exclusivly in chartalism. That is bullshit, because through the CB the enterprises also get HPM to finance their obligations. This is the first channel why HPM is created.

      Maybe the misconception is due to the imagination, that only government has the power to issue HPM. Complete nonsense, because HPM is mainly used to finance the payment needs of private companies. MMT relies on a secondary (chartalist) source to interpret the monetary system and think, they got the entire wisdom. But neglecting everything what is as well going on in the economy is no reliable way of thinking.

      Take it like this: MMT relies on a holy superpower, which can manage anything with respect to monetary matters. A small look into the history of money tells otherwise. To state the economic argument: they do not have any idea, why private agents should oblige to this arrangement but their claim that is is so. To tell you the truth: money is accepted because the privates and the enterprises have a debt service to pay. And it doesn´t matter if this debt is to pay to a bank because of former investments or for government, who like to impose taxes. Realize: tax payments are some 30 to 40 percent of all liabilities and one more - the tax evasions of the big companies who have a very negligible tax burden is a very characterizing story.

      This is the root of MMT? Stop kidding... (I hope you are not a MMt´ler.)

    10. Sorry, "original creditor" was bad language. I referred to the creditor in the private-private debt relationship. Debtor hands over HPM to this creditor, this nullifies the creditor's claim on the debtor, but the HPM itself is a claim on some other party so the creditor remains a creditor in the big picture (macro level). I somehow feel you don't agree?

      In my world, any HPM issued is an IOU issued, and it is therefore, from the start, a claim on some party. But it is important to notice that it is not the direct claim (claim on CB to pay HPM if presented with HPM) that is relevant here, but the indirect claim. These indirect claims arise from what I could call "credit-debt chains". It can be an indirect claim on the taxpayer, who actually nullifies this claim by selling something to the holder of this claim (claimant). (Later, the taxpayer nullifies the government's tax claim on him by handing over the HPM to the government -- the circle closes.) Another example of this kind of chain: The Fed buys MBS and hands over HPM to the seller of this MBS. This HPM is an indirect claim on the mortgagor (the chain might be long, with many middlemen, of course). In this situation, I see the Fed acting like a bank, not that different from other banks. It goes between a debtor and a creditor and adds a link (itself) to a credit-debt chain.

      You might have adopted a totally different view on all this, and if so, I hope you could try to consider if my view is "internally consistent".

      I agree with you on most of your critique of MMT, at least as it is presented by many of its proponents. They talk about HPM but seem to mean only the amount of HPM that is somehow trackable to "money-financed deficit". And in some mysterious way, "The economy CANNOT GROW IN NET MONEY TERMS without fiscal deficits - aka net financial assets" (see comment from Enache below). First, this whole thing has very little to do with economic growth. Second, coming from people who seem to accept that money is credit, it is weird that MMT sees a logical need to have "money" without a corresponding liability on the private sector, in other words something that, from private viewpoint, looks like "commodity money".

    11. Btw, how much have you read Schumpeter on money? I'm just making myself familiar with his "Treatise on Money", and this caught my attention (from the Orientation by Fritz Karl Mann):

      "... the theory of money is not to discover "the surface of the matter" but "the essence of money"

      I might be wrong, but I take the "surface of the matter" to represent "form" and the "essence of money" to represent the "substance" -- what I referred to earlier. In Chapter IX, "The Essence of Money", he returns to "our basic idea of social central bookkeeping".

      I haven't read further, but I thought you might be familiar with him and thus it might be helpful to make this reference.

  3. Here I tried to express some of my thoughts about HPM in english:

  4. Thanks for clarifying your position, Renee.

    I feel that you stay very true to the "form" and, in my opinion, might miss the "substance", which to me is that HPM itself is an IOU. Thus, handing over HPM as a repayment of debt, although it does cancel the particular debt, leaves the creditor nevertheless a creditor. Perhaps you agree?

    About deposits. Let's say we have the following situation:

    I take on a consumer loan from my bank -- which has a 30 % market share in my country -- and promise to pay it back in 6 months. Then I buy a used car from my local car dealer (using the loan for 70 % of the purchase price) and transfer the deposit to the dealer, who happens to have an account in the same, market-leader bank as I have. I drive around in the car for almost 6 months and then sell it back to the same dealer, naturally for a slightly lower price than I bought it for (say, with a 20 % discount). The dealer transfers a deposit to me and I pay back my loan to the bank, with interest.

    I don't see any HPM transfers in this case. What I see is deposits used as IOUs in the real economy, with real effects -- with substance. I don't say it goes like this typically, but it is nevertheless a plausible scenario which might help us understand also the big picture.

  5. This is my last post to you.
    You've proven with these tweets that you do not understand basic Post-Keynesian observations, and confuse a lot of things. Statements in quote marks are yours.
    "We can all save a share of our income without the need for net financial assets."
    False. The nongovernment sector (in aggregate) cannot net save without the government sector running a correspondent fiscal deficit. If the government sector's position is neutral, the net (in aggregate) within the nongovernment is zero.
    "Income/Saving are flow variables. Assets & Savings are stock variables."
    Creative way of confusing flows with stocks here. Income = Spending. Assets minus Liabilities = Equity. The national debt, which represents the nongovernment sector's stock of savings, is created by accrued net government debits (fiscal deficits) over time.
    "So what? You can save by stashing $100 notes in your mattress thanks to QE. No net financial assets."
    More confusing stuff from you. Regardless of QE, and regardless of government's fiscal position, someone (within the nongovernment sector) can save X sum or owe X sum. We were talking about macroeconomics, macro deals with the aggregate - not with the micro. We're not talking about individual balance sheets of households or firms.
    "I'm trying to find out where is the need to hold those "net financial assets". Who asks for them?"
    Again, (for someone claiming to have done his homework and knowing Chartalism) more trollish attitude from you. The economy CANNOT GROW IN NET MONEY TERMS without fiscal deficits - aka net financial assets. The economy, on its own, can only leverage itself up to a point, and later on deflate to where it started. Nobody 'asks' for net financial assets. Government appropriates budgets for its spending - for its interests. Spending and Taxation are not rigid, the behavior of government and of the nongovernment impact them. Aggregate demand is income + the change in private debt. The reason why the fiscal deficit shrinks in the expansion is because of the private sector leveraging itself through bank debt - as such, more economic activity occurs - more jobs are created - which leads to more tax-revenue and less welfare payments from the government. When burden of debt servicing begins to affect private spending desire (and thus increasing desire of household to save), that's when the recession is triggered - and the automatic fiscal stabilizers react counter-cyclically to the fall in private sector spending.
    "Money has value because government taxation destroys it, so scarcity gives it value."
    False! Government imposes obligations on you in the form of fines, fees, and taxes and demands you extinguish those obligations ONLY in the government's currency. If you cant' do that, you face the penalty the law prescribes.
    "Has anyone proven that the economy actually wants to save financial assets?"
    You imply here that the public would prefer to hold physical wealth rather than money. Again, a trollish question. Have you ever heard of retirement plans? Of pension funds? Have you ever seen drug dealers and gangsters put chunks of cash inside their walls? That's called DESIRE to HOLD/KEEP/SAVE (in) financial assets! Big corporations require a good portion of their capital be in cash!
    You asking such things and refusing to actually stay perpendicular on the subject - instead of deflecting and jumping to something else and venting out your frustrations via veiled ad hominems (saying this like "b/c it doesn't fit your picture") is proof that you need to do more reading before theorizing.

    1. Amazing.

      Instead of answering my fair critique and questions above, you pick some lines from a longer Twitter conversation and -- trying to guess what I meant -- proceed to show that I'm wrong.

      And not only that, but you end the diatribe by grossly misquoting me:

      "Btw, has anyone tried to show that non-gov really wants to "net save" (in financial assets)?" --> "Has anyone proven that the economy actually wants to save financial assets?"

      I can't help but suspect it was intentional.

      I hope you understand that you make MMT sound like a religion -- and yourself one of its most fanatic proponents.