One point is not stressed enough - the importance of the clearing system! This is what keeps the whole system in check. It's not free for all and there are limits on how much private money can be created. Good analogy is a personal credit card = license to print money- individuals can create money by spending into the economy (like banks giving loans) BUT, at the "end of the day" or 55 days, they have have to have the capacity to settle (if the bank only issues the money and doesn't balance with deposits from other banks they have to provide collateral for the loans they issued once the money is transferred to another bank).
One more thought, probably a more complex issue to address - what does money actually represent? Yes, money as "debt accounting system" can explain how it is created and reconciled but I am missing "a view" on how its "value" is determined. Sticks or rocks did not have intrinsic value but gold did. Both were used as money. And historically there were "systems" where other things were used as common "value" determination for trade. So that "exchange/trade" aspect of money must be a part of its explanation...
And then, why value of current money is inflating over time if it is a pure accounting reference? I guess, there is more to money than a single view can explain...
I don't think the creation of money by private banks is as benign as you make it sound. The main reason that land prices have increased so much more than wages since banking deregulation in the 1980s is excessive bank credit growth funneled into real estate. In a full reserve monetary system, only the central bank can create money, so this kind of asset price inflation, and the associated growth in debt to income ratios, would be restrained. As an added benefit, the public subsidy implicit in deposit guarantees for too-big-to-fail banks would not be needed.
You claim the view that money is a market good is wrong, but you never explain why you think its wrong. You go on to explain the credit system as if that invalidates that money is a market good. Both are correct. How can people trust you if you just blurt out stuff like that without actually justifying your opinion?
There is nothing about bitcoin or other cryptocurrency that precludes a credit system. All the bank machinations you're talking about are 100% compatible with bitcoin. We could argue whether the flexibility of the credit system is good or bad, but it is compatible none the less.
One thing that's bad about our current credit system is that banks are insulated from the consequences of their actions by things like the FDIC, bank bail outs, and special access to the central bank (that no one else gets the privilege of working with). Another thing that's bad is the federal reserve printing base money out of thin air whenever they want to. Base money is not credit, its theft.
If you can't understand why a hard currency like bitcoin has advantages over fiat currency, you have no business telling anyone anything about money. It gives me reason not to respect anything you're saying.
That bet is looking pretty good right now, although I do recall some central American country accepting Bitcoin or other crypto for the payment of taxes and monetising it. But not sure if it was just a conversion based system which doesn't qualify for one of your bet criteria.
Crypto might not make sense as money and in the way that we buy and sell goods day to day but does it still have a place? Could it die as a market place to invest in, yet still perform a financial function? And if it still has a function could it (should it) continue to be a market place? Obviously, people can choose to invest in anything and if we continue to invest in crypto the way people are it could go on for a while but if there is a fundamental flaw then surely it is only a matter of time before the market dies? No doubt there are other examples of markets in history that are no longer.
It's 'investing' in nothing but a bit of code that does nothing and has no value. It simply consumes HUGE amount of electricity, pushing up energy costs and worsening emissions. It's like gambling where the only winners are the big holders (holdings are more concentrated than wealth in the real world), who sell on the upswings and buy back in at the next bottom, turning their useless code into real money at the expense of the millions of people who buy in at the top and sell at the bottom. Most holdings are less than $30!
The interest is a transfer within the monetary the system. After all, bank owners make money from interest and they spend that money in other people's accounts, circulating it once more.
Interest (economic rent) might be justified for lending of assets (which banks never do).
Interest cannot be justified on so-called bank "credit-loans" because "bank-credit" is not a bank-asset - it's a bank-liability (and therefore a customer-asset). No-one can lend a liability.
Credit in a bank-account is always a customer's asset. Bank-credit "lending" claims to lend a customer her own asset, thus involves deliberate deception, topped off with fraudulent accounting.
Banks don't lend money. they create it when they make loans. They provide a valuable service. They ensure that people who borrow this new money pay it back. This takes resources to assess the borrower's capacity to repay, their security, and ensure all the documentation is correct and then they track repayments and follow up people in arrears. They also bear the cost of defaults. For this services, they are entitled to a profit. The trouble is that banks have duped politicians to allow them to merge with investment funds... so the banks create money for themselves. A solution is CBDC : https://medium.com/@michael-haines/central-bank-digital-currency-does-not-have-to-be-evil-00a931b0722f
The government can and should let them fail. In the US the government has no constitutional power to bail out private companies, and so bail outs are not only wrong and harmful to the economy, but they're unconstitutional.
> the deposits would not be on the books of the agent bank, but on the books of the Central Bank
We already have FDIC. So how would that be significantly different?
A stock/flow confusion. Like any other business, banks pay dividends to their shareholders from their profit margins (which come from interest margins). These dividends then end up in shareholder bank accounts, which can be spent back into circulation for the debtors to obtain to repay their interest.
If the total flow of savings accumulated by the private sector is less than the total flow of lending, then the private sector is net saving (accumulating money), this then becomes a sectoral balance issue, where the government sector must net spend (spend more than its revenue) to accommodate this net saving.
The government creates new additional "interest bearing" money into existence, which we call government bonds (a fancy savings account). It then auctions these bonds off to investors (usually banks) on primary markets so additional savings are parked in bonds. It does this by convention as a hangover from the gold standard, and due to some fictitious notion held by neo-classical economists that this imposes "market discipline" on government spending. In reality the government is technically unconstrained in creating more bonds (or more money), because the banks who choose to buy them can always on sell them to the RBA which guarantees it will buy and accept them in order to maintain the cash rate.
COVID showed that if the Federal government needs to spend more, the RBA will just roll-over anyway and create more money to buy the bonds off the government (via the banks as parasitical middlemen). And the supposed profits the RBA makes from creating money to buy government bonds goes back to... the government, as dividend payments. It's really just a big smoke screen to hide that the government can create as much money as it wants and spend as much as it wants (not that it should or does).
Banks don't lend money. They create it when they make loans. They also provide a valuable service. They ensure that people who borrow this new money pay it back. This takes resources to assess the borrower's capacity to repay, their security, and to ensure all the documentation is correct, and then they track repayments and follow up people in arrears. They also bear the cost of defaults. For this services, they are entitled to a profit. The trouble is that banks have duped politicians to allow them to merge with investment funds... so the banks create money for themselves. The banks profits come after exorbitant charges for high salaries and fancy buildings. Also the regulatory costs are huge. A solution is CBDC : https://medium.com/@michael-haines/central-bank-digital-currency-does-not-have-to-be-evil-00a931b0722f
Good article Cameron!
One point is not stressed enough - the importance of the clearing system! This is what keeps the whole system in check. It's not free for all and there are limits on how much private money can be created. Good analogy is a personal credit card = license to print money- individuals can create money by spending into the economy (like banks giving loans) BUT, at the "end of the day" or 55 days, they have have to have the capacity to settle (if the bank only issues the money and doesn't balance with deposits from other banks they have to provide collateral for the loans they issued once the money is transferred to another bank).
One more thought, probably a more complex issue to address - what does money actually represent? Yes, money as "debt accounting system" can explain how it is created and reconciled but I am missing "a view" on how its "value" is determined. Sticks or rocks did not have intrinsic value but gold did. Both were used as money. And historically there were "systems" where other things were used as common "value" determination for trade. So that "exchange/trade" aspect of money must be a part of its explanation...
And then, why value of current money is inflating over time if it is a pure accounting reference? I guess, there is more to money than a single view can explain...
Very good points about the clearing system function
Hi Cameron.
Just catching up. Thank you for this. Some feedback.
1. I think both token and credit view are correct. We acquire money to exchange later on, no?
2. Table Bank A (before) - the total is 55, not 50, no?
https://substackcdn.com/image/fetch/w_1456,c_limit,f_webp,q_auto:good,fl_progressive:steep/https%3A%2F%2Fbucketeer-e05bbc84-baa3-437e-9518-adb32be77984.s3.amazonaws.com%2Fpublic%2Fimages%2F41b25347-47bc-4d76-91ca-ac172b8c2b87_1718x1560.png
3. What do you think of the proposes USA ecash act?
https://ecashact.us/
I don't think the creation of money by private banks is as benign as you make it sound. The main reason that land prices have increased so much more than wages since banking deregulation in the 1980s is excessive bank credit growth funneled into real estate. In a full reserve monetary system, only the central bank can create money, so this kind of asset price inflation, and the associated growth in debt to income ratios, would be restrained. As an added benefit, the public subsidy implicit in deposit guarantees for too-big-to-fail banks would not be needed.
I agree
https://medium.com/@michael-haines/central-bank-digital-currency-does-not-have-to-be-evil-00a931b0722f
You claim the view that money is a market good is wrong, but you never explain why you think its wrong. You go on to explain the credit system as if that invalidates that money is a market good. Both are correct. How can people trust you if you just blurt out stuff like that without actually justifying your opinion?
There is nothing about bitcoin or other cryptocurrency that precludes a credit system. All the bank machinations you're talking about are 100% compatible with bitcoin. We could argue whether the flexibility of the credit system is good or bad, but it is compatible none the less.
One thing that's bad about our current credit system is that banks are insulated from the consequences of their actions by things like the FDIC, bank bail outs, and special access to the central bank (that no one else gets the privilege of working with). Another thing that's bad is the federal reserve printing base money out of thin air whenever they want to. Base money is not credit, its theft.
If you can't understand why a hard currency like bitcoin has advantages over fiat currency, you have no business telling anyone anything about money. It gives me reason not to respect anything you're saying.
That bet is looking pretty good right now, although I do recall some central American country accepting Bitcoin or other crypto for the payment of taxes and monetising it. But not sure if it was just a conversion based system which doesn't qualify for one of your bet criteria.
Crypto might not make sense as money and in the way that we buy and sell goods day to day but does it still have a place? Could it die as a market place to invest in, yet still perform a financial function? And if it still has a function could it (should it) continue to be a market place? Obviously, people can choose to invest in anything and if we continue to invest in crypto the way people are it could go on for a while but if there is a fundamental flaw then surely it is only a matter of time before the market dies? No doubt there are other examples of markets in history that are no longer.
It's 'investing' in nothing but a bit of code that does nothing and has no value. It simply consumes HUGE amount of electricity, pushing up energy costs and worsening emissions. It's like gambling where the only winners are the big holders (holdings are more concentrated than wealth in the real world), who sell on the upswings and buy back in at the next bottom, turning their useless code into real money at the expense of the millions of people who buy in at the top and sell at the bottom. Most holdings are less than $30!
So what are your thoughts about usury?
If all money is created as DEBT, how is the interest paid? - More DEBT!
The interest is a transfer within the monetary the system. After all, bank owners make money from interest and they spend that money in other people's accounts, circulating it once more.
Interest (economic rent) might be justified for lending of assets (which banks never do).
Interest cannot be justified on so-called bank "credit-loans" because "bank-credit" is not a bank-asset - it's a bank-liability (and therefore a customer-asset). No-one can lend a liability.
Credit in a bank-account is always a customer's asset. Bank-credit "lending" claims to lend a customer her own asset, thus involves deliberate deception, topped off with fraudulent accounting.
Banks don't lend money. they create it when they make loans. They provide a valuable service. They ensure that people who borrow this new money pay it back. This takes resources to assess the borrower's capacity to repay, their security, and ensure all the documentation is correct and then they track repayments and follow up people in arrears. They also bear the cost of defaults. For this services, they are entitled to a profit. The trouble is that banks have duped politicians to allow them to merge with investment funds... so the banks create money for themselves. A solution is CBDC : https://medium.com/@michael-haines/central-bank-digital-currency-does-not-have-to-be-evil-00a931b0722f
> They also bear the cost of defaults.
Do they? https://www.ft.com/content/a2150ee7-75df-4b33-9ec2-43b41a6f5712
I should have said, they bear the cost of defaults... up to a point. If the defaults put the bank at risk, then the government is forced to step in.
Under a CBDC model where the commercial banks act as agents for the Central Bank (dealing with retail customers), we could let any bank fail, with the cost of failure being born by the bank's shareholders, as the deposits would not be on the books of the agent bank, but on the books of the Central Bank: https://medium.com/@michael-haines/central-bank-digital-currency-does-not-have-to-be-evil-00a931b0722f
> the government is forced to step in
The government can and should let them fail. In the US the government has no constitutional power to bail out private companies, and so bail outs are not only wrong and harmful to the economy, but they're unconstitutional.
> the deposits would not be on the books of the agent bank, but on the books of the Central Bank
We already have FDIC. So how would that be significantly different?
A stock/flow confusion. Like any other business, banks pay dividends to their shareholders from their profit margins (which come from interest margins). These dividends then end up in shareholder bank accounts, which can be spent back into circulation for the debtors to obtain to repay their interest.
If the total flow of savings accumulated by the private sector is less than the total flow of lending, then the private sector is net saving (accumulating money), this then becomes a sectoral balance issue, where the government sector must net spend (spend more than its revenue) to accommodate this net saving.
The government creates new additional "interest bearing" money into existence, which we call government bonds (a fancy savings account). It then auctions these bonds off to investors (usually banks) on primary markets so additional savings are parked in bonds. It does this by convention as a hangover from the gold standard, and due to some fictitious notion held by neo-classical economists that this imposes "market discipline" on government spending. In reality the government is technically unconstrained in creating more bonds (or more money), because the banks who choose to buy them can always on sell them to the RBA which guarantees it will buy and accept them in order to maintain the cash rate.
COVID showed that if the Federal government needs to spend more, the RBA will just roll-over anyway and create more money to buy the bonds off the government (via the banks as parasitical middlemen). And the supposed profits the RBA makes from creating money to buy government bonds goes back to... the government, as dividend payments. It's really just a big smoke screen to hide that the government can create as much money as it wants and spend as much as it wants (not that it should or does).
Interesting - I would like to hear your view on usury.
All money is created as DEBT with interest?
Where does this interest come from? - More DEBT money?
Banks don't lend money. They create it when they make loans. They also provide a valuable service. They ensure that people who borrow this new money pay it back. This takes resources to assess the borrower's capacity to repay, their security, and to ensure all the documentation is correct, and then they track repayments and follow up people in arrears. They also bear the cost of defaults. For this services, they are entitled to a profit. The trouble is that banks have duped politicians to allow them to merge with investment funds... so the banks create money for themselves. The banks profits come after exorbitant charges for high salaries and fancy buildings. Also the regulatory costs are huge. A solution is CBDC : https://medium.com/@michael-haines/central-bank-digital-currency-does-not-have-to-be-evil-00a931b0722f