Does Banking Require Debt?

“Government spending occurs simultaneously with a credit to a private bank account—that is to a demand deposit at a bank. The offsetting liability on the government’s books is a credit to the bank’s reserves at the central bank (which is the “private” bank’s asset).” L. Randall Wray

‘Spending’ money into existence entails the entry of a number into a private bank account. A government pays for something by ‘depositing’ ‘money’ in someone’s private account. That money is then a debt as seen by the bank where the account resides; it is money that can be withdrawn. To offset this ‘debt’ an equal amount is entered by the government in that bank’s reserve account at the central bank. This is double entry bookkeeping, in which the active and passive sides (double entry) of the ‘ledger’ must balance, a carry over from the middle ages when all we had was pen and paper.

This means that ‘spending’ in the MMT world view must incur a balancing liability, either at the ‘cost’ of whatever interest rate is set by the central bank and/or generated by market forces (treasuries, bonds etc.), or for free when the offsetting liability is created as indicated above. However, this “for free” ceases to be free at the private banks, since the reserves are used to generate more loans (banks exist to make growing profits), so debt-based costs do arise in the economy from all government spending, since the banking system is the mechanism use to distribute money. The economy is one system, no matter how we notionally separate the components.

If we can accept governments ‘create’ money, why the debt, why this insistence on double entry bookkeeping? Debts are only going to be ‘paid back’ with further ‘borrowing’ anyway, especially if all money is spent/borrowed into existence in the first place – there is only debt, its circulating, its destruction, and further creation. Well, the way I’ve read it, we ‘need’ debt for two main reasons, and both are systemic:

1. As part of how money is removed from the economy – without refined and sensitive techniques for cooling the economy down, it will over-heat.

2. Debt is how banks make profits, and though governments, via central banks, do create money, they do this through the banking system, using its techniques. And, at a more fundamental level still, debt is a reason to ‘need’ banks at all. Debt is what banking is about, fundamentally.

The problem with (or cost of!) debt is usury, which inexorably sucks money to lenders (banks), meaning wealth increasingly concentrates to the financial sector over decades, which becomes a drag on the economy. Money will lose value when growth slows (and growth cannot go on forever), if, when less debts are taken out privately and the money supply contracts, government borrows/spends into the economy so that debts can be repaid and deflation kept at bay. This spending creates new debts (of course) which must not only earn banks money somehow (otherwise they die), but also corresponds to no goods and services at market-demand level, or, put another way, does not reflect genuine ‘market’ activity (see China’s Great Mall and Japan’s oceans of concrete). Government demand is ‘fake’ in the sense that the economy can’t really afford it, by definition. If it could, the government would not have to step up to the plate as borrower/spender of last resort. Interest is the heat that keeps the economy hot, active, dynamic, since it renders the money supply scarce. But it requires growth as a side effect, and growth cannot go on forever.

“People just didn’t want to borrow because the economy was collapsing and they were carrying too much debt. [ … ] Reserves, then, are like a bank’s checking account at the Fed. A bank can lend those reserves only to another institution that is allowed to hold reserves at the Fed. Banks do lend reserves to one another in the fed funds market, but since banks already have more than a trillion dollars in excess reserves, there is no need to give them more in order to encourage them to lend to one another.” Marshall Auerback

Marshall Auerback also mentions that Canada’s banking system has no reserve requirement at all, something I did not know. But so what? When people owe too much money, they stop borrowing. Banks can be as flush as possible, but if everyone else is indebted, the economy slows down.

To my mind there’s this odd disconnect—in MMT as elsewhere in orthodox economics—between awareness of the problem of people’s indebtedness on the one hand, and this cavalier attitude to money creation as debt on the other. In theory, money can be created as and when a bank, central or otherwise, believes such to be profitable/sensible. In the theory we get a picture of endless lending, back and forth, from reserves to credit to debt to credit and back again, and everywhere there is endless demand for goods and services, so there’s no actual problem. Except people, consumers and producers alike, get indebted. And then there’s the planet’s carrying capacity which doesn’t even get a look in. All in all it doesn’t add up. Only, in the steam of this theorizing, money is being stripped of its symbolic power. Though no sovereign need default, that hardly matters. Money, in its current form, has taken a beating and clearly needs reform, or revolution, and this requires revolution everywhere else.

It is not that government spending is good or bad per se, nor that market-based money lending is better or worse, but that debt/usury skews the game towards the financial sector, and demands perpetual growth. In that nothing can grow forever, usury has to come to an end some day. That “some day” is happening now, logically at the apex of the banks’ power, making sufficient recognition of the core dynamic difficult to impossible prior to systemic collapse.

Eventually (sooner rather than later) we must dump this forced-growth system, dump debt, dump usury, and invest in steady state growth. This will require a new idea of ‘profit,’ in which societal and environmental health become the primary indicators of how well we are doing, rather than the bank-friendly GDP rate, Number of Billionaires, and Corporate stock prices. Waged-labour will become yet more cumbersome as economic activity becomes a less significant element of societal well being. As Money the Myth dissolves in its own heat, so will monetary wealth fail to be the potent indicator of success it still is.

Happiness, which makes life worth living, can only grow so far. Who would define themselves as ecstatically happy with their lives, and what sort of a system would demand happiness levels grow beyond ecstatic to ever dizzier heights? Change may be the only constant, but from a simple math perspective, increasing GDP has to stop producing increasing happiness, to ignore planetary carrying capacity for a moment. The glow is wearing off. GDP, that is, economic activity, is losing its charisma. Through the centuries the economy has taken us far, now new forms and endeavours must be learned as economic activity becomes less relevant. Will MMT carry on with its current momentum? I believe so, and am happy about that. It is part of the process of demoting money and promoting wealth I feel to be the chief characteristic of what humanity is going through. But I suspect MMTs success will be banking's demise, and technologies like Square (hat tip Steven Malagodi) are going to play a starring role.

The Venus Project decouples from Zeitgeist

That's right folks, you heard it here last! Jacque Fresco and Roxanne Meadows have, somewhat hamfistedly, severed their affiliation with The Zeitgeist Movement.

My interest in both groups is qualified for many reasons, but perhaps the first of them is that in defining a system humanity has never tried, conviction is the last thing I can have. The term "resource-based economics" may have originated with Jacque Fresco, but that means very little, especially when the man's message is deeply rooted in systems theory, which tells us we are not creators or potent actors initiating The New with the power of our being, we react and respond, are shaped and influenced as we shape and influence in response. Resource-based economics is nothing more than the prioritizing of resources over money, an idea which has many ramifications and implications, but, being untried, needs to be openly discussed and tested in whatever are the most effective ways. I do not believe that process can be tightly controlled, especially not by a 95 year old man. Insistence on such control weakens you.

But there we are, it has happened. We are all only human and should not expect perfection from one another, nor be too surprised when we screw up or when plans don't work out as hoped. Shit happens. Interestingly enough though, in his latest radio address, Peter Joseph mentions working with ideas such as time banks and other monies that are necessary to move beyond the current impasse. It is refreshing to hear that. That was a point that always frustrated me. The Venus Project insists on a moneyless solution, talks often of transition, but does not define the money-design that stands a chance of placing humanity on a path that can prioritize resources over money. That was always a glaring failing. Without that defined all you have is an idea of a possible future and nothing more, no matter how many times transition is mentioned. Peter also mentions working with the Buckminster Fuller Institute and other bodies, and this can only be good. To unite as many people as possible behind an idea as contrary to the status quo as resource-based economics, you simply must work with others, which means mess and compromise. That The Venus Project are still alone cannot be a good sign.

I sincerely hope Peter and others in the movement look at MMT, at demurrage, guaranteed income, and anything else that might serve as stepping stones toward steady state growth, human and environmental concern, and away from our religious reliance on Hand, The Invisible. Diversity is the spice of life. Insistence on purity, whatever the hell purity really is, always ends badly. In the end it's not money itself that matters, it is our systemic relationship with money and money's association with wealth that does. It seems likely to me that a system which needs no money is possible, but not inevitable. There are too many variables. The means are the ends, the journey is the destination. If we, globally, as a species, can have some variant of agreement to demote money and promote wealth, over time and going forward, see the vital importance of staying supple so that we can adjust wisely to the changes that come at us unendingly, that would already be the seed of resource-based economics. And that task is mighty enough.

Musings on Hierarchy

Energy is cycled upwards by hierarchy, by definition. A hierarchical form has the systemic function of concentrating wealth to focused purposes, though all will share the quality that they enable the further functioning of that hierarchy. Anything else would self-defeating. No system can be coherent for long if its very nature is self-destructive. So the hierarchical form concentrates wealth to its top in its own interest. The bottom bears the weight, again, by definition. The benefits of the process must accrue more to the top than to the bottom, otherwise the form would not be hierarchical. This much is uncontroversial. Also uncontroversial is that states are hierarchical. As such they can only be about concentration of wealth to the top using the bottom as engines driving the conversion of environmental resources into wealth, using the bottom to carry the load too, as said. That's a tough sell.

There is no myth in the above, brief analysis. However, the state must generate a story of some kind to justify exploiting people to power its continuing existence. Divine right, nationalism, socialism, capitalism, are all stories of varied flavours justifying a system which can only be hierarchical. That there are such things in some states as welfare, national health systems, child benefit, and so on, is despite the structure of the state, not because of it. The state needs to keep the lower orders 'happy,' else breakdown happens. The minimum amount of resources will be devoted to this, again by definition, but what that minimum is changes with the justifying story and the people's ability to bargain for a greater share of the state's product.

To me the most fascinating justifying myth of all is the Myth of Free Markets. In this myth markets are Not-State; they are egalitarian; open; tolerate no elitism, no class, no snobbery; they are for Every Man. The myth, woven by elites of the state, says, 'Work hard, and ye too can be as rich as the richest.' This is the same as, 'Be good on Earth, and ye shall have your reward in Heaven.' I doubt there is a story anywhere told by any elite to any subjugated people that has a different dynamic; sacrifice now and later … who knows? The trick this time around is notionally to hive off part of the hierarchy and call it egalitarian, whereas it is in fact a resource-exploiting system as hierarchical as can be.

The Free Market Fairytale is, in my opinion, sheer genius. It steals egalitarianism from the collective unconscious, from the cultural ancestry of all peoples really, and repackages it, sells it back to us wrapped up in MTV and Ferrari and Apple Inc., and asserts, with no evidence whatsoever, that self-interest, competition, I'm alright Jack, left alone (i.e. unquestioned), will produce the maximum possible good for us all. It takes the 'war of each against all' and calls it Good. And it cries, very deliberately, 'Down With The State!' as often and as loudly as it can. It means no such thing, of course. It means down with egalitarianism, though this may not be said in public. If it really meant 'Down With The State!' it would not use usury as its economy's primary driver, since usury is a ponzi scheme, a pyramid scheme, and can only be hierarchical in its functioning and effect.

Ponzi schemes must grow or they collapse. Must all hierarchies perpetually grow for the same systemic reason? Is egalitarianism the only sustainable system, seen over the long term? Does this mean anarchy is the only safe bet? These are some of the most important questions humanity currently faces, but only a few people are asking them.

Franz Hoermann – “The death of money – electronic money”

(This is a long, unbroken excerpt from “The End of Money”, about as long as I dare go in one unbroken stretch, out of politeness, and despite the author's generous permission, but this is a passage I personally found very helpful. It covers a lot of important ground quickly and clearly, and links with many other aspects of our money predicament. I hope you get as much out of it as I have.

Now over to the Professor...)

“In 1993, Joel Kurtzman, former editor of The Harvard Business Review, authored “The Death of Money: How the Electronic Economy Has Destabilized the World's Markets and Created Financial Chaos”. In this work he points out how investment bank business practices themselves have changed in the electronic age. Purchase of shares is no longer decided on the quality of the company's products, nor on the competence of its management, rather exclusively via the mathematical properties of these shares' historical performance in the market – should price level, dividend, and volatility fit to a mathematical formula, the share will be bought, otherwise not. The actual economical foundations of the company have become totally irrelevant. Today mostly anonymous transactions are effected through use of electronic trading systems, and many of the involved see an advantage therein.

But do moral considerations impinge on us when we trade anonymously? If the person at whose loss we are making a profit is totally unknown to us, can there then be any moral restraint in pursuit of profit? And, through the comprehensive deployment of networked, electronic information systems multiple business institutions become redundant: Who needs the stock market, when trade can take place on some central computer in some server room?

To what end do we still need banks when our accounts could also be managed from the server room of the post office or a Telecom company? And what exactly is the role of an insurance, when the banks' contracts and computational formula could also be produced and administered in the self-same computer? The implication of this development was that elementary economic ground rules – like, for example, every good is only valuable when it is scarce – could suddenly no longer be applied to money and the value derived from it. Physical gold, which might have been used as backing, was already insufficiently available at the time of the introduction of the fractional reserve system to give money an acceptable value. Values existing as mere bits and bytes on computer disks, couldn't be effectively treated as scarce, since new business models continually arose whose sole purpose was to produce these values, and then, via an assortment of pyramid schemes, to direct them largely to the creators of the schemes, and perhaps also to those positioned closest to the creators. Because the creators of such “mathematical puzzles” are most often graduates of business finance academia, the models created were, generally, mathematically challenging, and their meaning and historical genesis were assiduously withheld from end users – customers – that is, these devices were abused to appropriate other people's money.

A generic example of this form of misuse are so-called derivatives, values supposedly generated from other values. Hundreds of thousands have been created and deployed, very effectively too, as money redistribution mechanisms. The redistributed monies could have been used far more sensibly in the real economy.

If we look a little more closely at electronic money we quickly discern another problem for the continuing use of double entry bookkeeping at banks: the problem of money identity.

No doubt you have already come across the manner in which bank robbers can be caught by tracing the serial numbers of the stolen notes when they later spend them. This “passport of the exchange medium”, the serial number on the bank note, is sadly only sporadically, never comprehensively used as a way of tracking actual money flows. While obvious bank robbers can be apprehended with this system, then presented to the public as the “real crooks”, one avails oneself of this mechanism quite happily. When, on the other hand, such questions as, say, how it is that banks, which apparently had to be rescued by the state, can now suddenly earn “profits”, no one wants even to consider using a water-tight system for tracking money.

And here the following connection becomes clear: as long as physical money, more exactly bank notes – coins have no serial numbers – are used for business transactions, a precise tracking of money flow via serial numbers would be possible.

But, when values are booked to accounts, no physical money is used. In that case it is about nothing more than a representation of money, money as an accounting number. In double entry bookkeeping serial numbers are not recorded, only the amount is noted down. Because bookkeeping is indeed but references to money-sums, is not really about a legal exchange medium, it is in fact not possible to use this instrument to follow money flow in any meaningful way. If bank money-creation were to include a money-identity, that is, were the extension of credit to be in the form of notes with serial numbers and not as mere accounting entries, then it would be immediately obvious that money creation on the part of the banks is not backed by anything at all.

The bank would create notes with serial numbers but these notes would represent what value? They would represent precisely no value at all.

The only value involved here is the debtor's promise to pay back the loan. Why this person is at all obliged to insure (for example with a mortgage) money created as an accounting entry without a backing like gold, on which it would then represent a rightful claim, is, economically speaking, not clear at all. Through the “magic” of double entry bookkeeping and its systemically inherent offsetting entry, the pure accountancy illusion arises that this money possesses a real consideration, or counter-value.”

USArah Palin

Another photo; you at a podium
arms measured statesman-wide, neat hair,
good cheekbones, healthy, respectable

suit. The whole works better with a beer.
(I like European.) You I never met. I met

your image, saw some words emerge
from your mighty jaw. I could understand them.
They were about America and families.

Right behind you, junk. Armies of junk
stiffen your stainless steel spine, work you
to a dream. The lasting smile

that burns forever, bright as a commercial break,
worked to a dream of something anyone could want.
And sometimes I do want you.

But the bitter fuel, the kerosene glisten
of those whitest teeth, the relentless drill-tone,
on message, on target, pitched
like a dog whistle to the viscera

“We, the People” slip up on to get ours,
our piece of your action, the Barbie,
the Burger King, that bile slicks our pit

as the light of your smile radiates. Emit,
sweet beacon, emit. We are still responsive.


Changed the title today (April 4, 2011).

Can You Handle the Truth?

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?