Banks can lend an amount of the money you deposit with them, which is less than the amount you deposited (the rest is held back for liquidity reserves).
The banking system hasn't worked like this for decades. When a bank makes a loan it doesn't lend money other people have deposited, it creates a deposit in the customer's account out of thin air. At the same time they also make a record in their reserve account with the bank of England (think it's called double accounting). When people repay the loans the money is then destroyed.
Anyway this isn't really much to do with MMT. MMT talks mostly about how govt creates and spends money, not the money created through bank loans to consumers and businesses. When the govt spends money, it is much the same as a house buyer getting a mortgage, except the mechanism is different. Govts don't have to apply for a loan to a commercial bank or demonstrate how they're going to repay it, they just instruct the BoE to create the money and then it is 'repayed' when they collect taxes. All the govt money created this way that hasn't been taxed back is essentially the national 'debt', except it's not really debt as the govt can't be in debt to itself. It's only called debt because it's recorded as a liability in the accounts.
PS if anyone wonders how money is created it's all here...
The banking system hasn’t worked like this for decades. When a bank makes a loan it doesn’t lend money other people have deposited, it creates a deposit in the customer’s account out of thin air. At the same time they also make a record in their reserve account with the bank of England (think it’s called double accounting). When people repay the loans the money is then destroyed.
That is not correct in the way most people understand money and this sort of nonsense is why people don't believe in mmt (mmt does not support this lie).
Banks can only lend money they have, either through customer deposits or via other sources of investment (ie selling packaged loans). In fact if banks can't even lend all the money they do have in deposits, they normally have to hold a reaonable amount (~20%) in highly liquid assets (or cash with the central bank). If banks could just invent money it'd be impossible to go bust. They can create a loan and a deposit simultaneously but as soon as the deposit is withdrawn they have to have liquidity to cover the loan, so this is not a bottomless pit
Source : I've worked at a bank for 20 years, and my current role involves liquidity calculations.
Banks can only lend money they have, either through customer deposits or via other sources of investment
Well the Bank of England doc I posted above disagrees with you. You should probably go and tell them they’re wrong.
I think there are some interesting ideas in MMT, but at the same time I suspect there are some key factors missing from the model.
For example, as far as I can tell, if you subscribe to MMT then the Euro as a currency is a bad idea, no question. If you were to take that argument to it's logical conclusion then the US would be better off getting rid of the dollar and having each state have it's own currency.
In fact, it could well be that the divisions should be even smaller. Iceland has a sovereign currency and a population of 400,000. Should we be breaking things down where each grouping of 500,000 people gets it's own currency?
Banks can only lend money they have, either through customer deposits or via other sources of investment (ie selling packaged loans).
I'm sorry this is 100% factually incorrect.
Commercial banks create loans - the loans are basically digital money creation performed under license from the BoE. Nothing more than key strokes.
They never lend out other customers deposits.
Creating a liability and an asset. This cancels itself out when repaid
From the BoE's money creation in the modern world doc (at their website.)
One common misconception is
that banks act simply as intermediaries, lending out the
deposits that savers place with them. In this view deposits
are typically ‘created’ by the saving decisions of households,
and banks then ‘lend out’ those existing deposits to borrowers,
for example to companies looking to finance investment or
individuals wanting to purchase houses.
Sorry there are many many misunderstanding about money that are believed to be fact.
Just think about for one second - there has to be a source of reserves (base money). As an individual you can't create money. That is the task of the BoE and commercial banking system.
For example, as far as I can tell, if you subscribe to MMT then the Euro as a currency is a bad idea, no question. If you were to take that argument to it’s logical conclusion then the US would be better off getting rid of the dollar and having each state have it’s own currency.
This is resolved easily enough.
States are currency users - the federal government is a currency issuer. States aren't countries either.
There is no contradiction really.
If you look at it from our point of view moving to the Euro would take away the sovereignty of the pound - which means we can mechanically control how we finance things. During COVID the ECB did grant special spending powers to individual countries to perform their own finance operations. So they moved closer to fiat sovereignty for that period as I understood it.
States are currency users – the federal government is a currency issuer.
But according to MMT the individual states would be better off as currency issuers, wouldn't they?
But according to MMT the individual states would be better off as currency issuers, wouldn’t they?
This is where things go a bit off topic from what MMT says.
MMT says nothing about policy choice - MMT describes the current fiat systems in economies with central banks.
That's it.
People, like they do then add their prescriptions to it.
MMT doesn't say anything about States or what is best in that regard.
MMT is a framework for analysis.
Brass tacks. The originator of MMT (Warren Mosler) says this in his original white paper.
MMT alone recognizes that the US Government and its agents, including its regulated commercial banks, are the sole supplier of that which it demands for payment of taxes
That is, the currency itself is a simple public monopoly.
The US government levies taxes payable in US dollars.
The US dollars to pay those taxes or purchase US Treasury securities can only originate from US Government and its agents.
This is in direct contrast with mainstream economic models and the rhetoric that states the US government must tax to get US dollars to spend, and what it doesn't tax it must borrow from the likes of China and leave the debt to our grandchildren.
MMT therefore recognizes that it's not the US government that needs to get dollars to spend, but instead, the driving force is that taxpayers need the US government’s dollars to be able to pay taxes and purchase US Treasury securities.
Stephan Kelton unintentionally discovered the MMT process when she looked into government financing and discovered what she expected to happen (tax and spend) was in fact the other way around (spend and tax) and she produced a peer reviewed paper about this process.
Is that not effectively monetary exchange (a domestic version of foreign exchange) rather than monetary policy that is being described?
(The bold bit that was)
MMT says nothing about policy choice – MMT describes the current fiat systems in economies with central banks.
That’s it.
OK, but surely there must be an economy that is too small for MMT? And likewise an economy that is too large for MMT?
I'm wondering because the Eurozone has a lot of countries that don't have their own central bank. Many MMT proponents say that this shows that the Euro is not a good thing because those countries can't use MMT.
However, I don't see many of those same proponents saying the individual states in the US should create their own central banks and currencies.
If banks could just invent money it’d be impossible to go bust. They can create a loan and a deposit simultaneously but as soon as the deposit is withdrawn they have to have liquidity to cover the loan, so this is not a bottomless pit
You have it back to front - if they lent out customers money they would go broke because of lack of liquidity. This is very reason they don't do what you believe they do.
Commercial banks such as yours have accounts at the BoE where there is complex interplay of accounts that keep liquidity flowing through the system.
The loan liquidity that the commercial bank creates out of thin air is propped up by the central bank.
(Apologies to Daz he's probably posted the same BoE article. But I cut this out.)
Commercial banks create money, in the form of bank deposits,
by making new loans. When a bank makes a loan, for example
to someone taking out a mortgage to buy a house, it does not
typically do so by giving them thousands of pounds worth of
banknotes. Instead, it credits their bank account with a bank
deposit of the size of the mortgage. At that moment, new
money is created
None of this remotely controversial - it's just the system is technically ahead of most folk's understanding. Many still think we're on the gold standard.
Many MMT proponents say that this shows that the Euro is not a good thing because those countries can’t use MMT.
Yes of course - MMT doesn't describe their system because the the bond issuance is different. And the ECB has the power but they do have individual banking demands.
But I'm guessing it would be fundamentally impractical to carve up every system, and not forgetting the USD is a reserve system holding together the entire globe.
I think it's more a case of the Euro is a step too far for us - and you genuinely lose control rather than let everyone have their own currency.
It's the currency control that's important.
Sates in the USA operate their own taxation for funding purposes just like our district councils do.
The system we have has many flaws but the simple point of logic is the government can buy whatever is available rather than can't afford it.
That's all we really need in this debate especially during a general election where MPs go on and on about lack of money.
But I’m guessing it would be fundamentally impractical to carve up every system, and not forgetting the USD is a reserve system holding together the entire globe.
I think that's the key issue. MMT primarily concerns the US dollar. If another currency became the world's reserve currency then it would probably do a good job of describing that currency as well.
How it describes countries other than the US is still questionable.
So far only Sri Lanka has openly cited MMT as a justification for it's economic policy and that doesn't seem to be working very well so far.
Is that not effectively monetary exchange (a domestic version of foreign exchange) rather than monetary policy that is being described?
(The bold bit that was)
I'm not sure I follow.
But it's the analysis of both fiscal and monetary operations.
That is only the 1st paragraph of the doc.
This really isn’t true
Still waiting for the other accurate model.
Please don't say fractional reserve. Even the BoE article we keep putting up makes a nonsense of that. There is no liquidity ratio any more.
How it describes countries other than the US is still questionable.
Not really it describes economies with a central bank and fiat systems.
The Sri Lanka job was nothing to do with MMT. It was someone saying they tried MMT and it failed. Simply made up stuff
Like all damaged economies they had lots of foreign debt and many issues.
It's pretty clear you dont 'print' or issue money just to get yourself out of trouble if there are structural problems with your economy.
https://gimms.org.uk/2022/05/15/reblog-no-mmt-didnt-wreck-sri-lanka/
The UK has a system described by MMT but if you buy the wrong things and make poor decisions - don't blame MMT blame the policy makers!
MMT is not a fix - it is a way of understanding things to make better decisions. Those better decisions are down to your policy makers.
I've said before all you have to take away is the government does not have to functionally borrow to spend
That's it.
The Sri Lanka job was nothing to do with MMT. It was someone saying they tried MMT and it failed. Simply made up stuff
Like all damaged economies they had lots of foreign debt and many issues.
But isn't this just the 'no true Scotsman' fallacy.
All countries have issues to a greater or lesser extent. But it seems clear that if you just print money then no matter how solid the economy eventually your currency is going to transition from being a 'proper' currency where MMT applies to a 'dodgy' currency where MMT no longer applies.
The question is where exactly is this transition point? At what point can you just print money as and when it's needed and at what point can't you do so?
The point is when that printing of money starts to produce undesirable effects , typically excessive inflation levels.
That of course is a totally subjective, indefinite answer but that's the reality.
I've said this before but I still think it comes down to this. MMT is a much better, more real model of how these things work than the one we normally work with. However, that doesn't necessarily matter at all . The status quo has real power despite how wildly flawed and divorced from reality it is, and the people with the most power and money and influence- whether investors, institutions, governments, etc- have a huge vested interest in making it continue to work.
Frankly the accuracy and validity and reality of the economic model is almost certainly far less important than the size of the thumb of the scales, if the richest and most influential people and organisations and governments all benefitted from building an economy based on Pogs it'd probably do better than a perfect economic model that made them feel less powerful. And there would still be billions of people fighting and dying of starvation in the hope that one day they'll have a big enough pile of Pogs to stop.
In the meantime people can keep getting rich trading in things that don't exist, real costs like entire nations being drowned by the sea can be ignored because they're not in the spreadsheet (and because we didn't put them in the spreadsheet in 1611), and all the other obviously batshit insane nonsense that we have to pretend is sensible because the entire world economy and everything about it is dependant on enough people believing fairies are real.
In a lot of ways it's just a confidence trick, in other ways it's an abuser's threat of making things worse if you try and fix anything. But most of all it's just the thing that sort of works (or at least, that doesn't work but which we have the capacity to fake it so that it seems to), which benefits the people who have the most influence and destroys the people with least.
We'll keep pretending it works while we burn the world in order to keep faking it and the fairy-wing trading empires will continue to thrive as long as nobody ever asks to see a fairy.
Remember that money is both a proxy and a social construct and will therefore conform to any widely held theory about it.
