I'm not good at titles, so collapse from time to time to the needlessly sensational. Please forgive me my foibles and weaknesses. This will be a very short post since I have much to do and am dog-tired to boot.
Maybe there's an innocent explanation, but a response I posted on an MMT thread (here) did not get published. My original comment is there—questioning the 'nets to zero' part of MMT theory—but my answer to DanF's criticism has (so far) failed to get through quality control. It's been two days.
Here's the nub of it. In MMT theory, which interests me greatly, it is asserted that private bank credit-money has no effect on money supply over the long run since it nets to zero. The reasoning behind this assertion is that debts are expunged upon repayment, and the interest comes from the existing money supply to the bank. So no gain, no loss, just movement of 'real' money around the economy. I wrestled with this in previous posts at Econosophy (here, here and here), and have consequently come to the conclusion that 'nets to zero' is too gentle or forgiving a position to hold on bank credit. At risk of sounding aggressive, banks are the scum of the earth.
I see a number of problems with the MMT position.
1. People do get indebted and that acts as a drag on economic activity. Banks don't forgive loans with a shrug, because, hey, it wasn't real money anyway.
2. Credit-money is used and accepted as payment, becoming 'real' money from the payee's point of view—from the system's point of view too—upon moving from one account to another. When it lands in the payee's account, the hosting bank can use it as reserves for further lending, even if it's the same bank that issued the credit.
3. Repayment of debt is 'asymmetrical,' not neat and tidy. Defaults mean not all credit-money returns to the source to meet its doom. See my article on this concept here.
4. Only notes have serial numbers, and even they are not traced through the economy. The banking system makes no effort whatsoever to 'two-track' the monies, 'real' and credit, flowing through it as cash. When I pay bills online, I have absolutely no idea if the bits and bytes I'm transferring originated as credit-money or 'real' money, and neither does the system. (And anyway, bank notes are promises to pay the bearer the amount written on the note. You can exchange your $5 for $5 anytime you want.) I can use 'real' money to repay credit-money. Does 'real' money then get destroyed? Is that allowed?
5. 'Real' money, notes and coins, represent a tiny fraction of the money supply (3-5%). If the interest owed on all loans everywhere were 3-5%, the banks would in effect 'own' all the economy's real money. But interest owed is far higher than that; think mortgages and credit card debts. Banks own everything and then some. For there to be more than enough money in the system the govt would have to print notes and mint coins far more than they do now. Then and only then would there be enough money in the economy to pay off debts. However, money does not distribute itself equally, so the results of such govt action are hard to impossible to predict. One thing is certain though, while we see money as wealth, as a 'store of value,' there will be entrenched rich and poor divides.
I'm pretty sure my reasoning is sound, but like to check it with the experts. That they will not engage me makes me suspicious. Dear readership, have I missed something obvious? Does private credit-money creation net to zero?
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