December 22, 2015

Money, cranks, and morons

Comment on Norbert Häring on ‘Randall Wray attacks “debt-free-money cranks” based on sloppy arguments’

Blog-Reference and pointer to this post at Naked Capitalism

Sloppy thinking has always been the hallmark of economists, and their natural mental state since Adam Smith is utter confusion.#1 This thread shows that it is not clear what money is and what the relationship between money and debt is and, most important of all, how the monetary economy works.

Norbert Häring maintains that “the MMT-people are among the ones who understand money best.” That is not the case, the formal foundations of MMT are defective.#2

It is decisive to start with an elementary production-consumption economy without government and taxes in order to make it absolutely transparent how the quite different functions of the transaction unit and the credit unit of the Central Bank fit together. The specific historical form of money (token, coin, note, deposit, etc.) is irrelevant to the general theory of money.

Money and debt are produced like any other good by the banking industry which can be at first reduced to the Central Bank alone. If in the simplest case, interest on the debt is equal to the total wage bill of the Central Bank then profit is zero. In this case, the rate of interest depends on the productivity of the Central Bank. To charge interest for creating money ‘out of nothing’ is therefore in principle not different from charging a price for any other produced good/service. The credit rate of interest is in the grand scheme of things just another price. If this rate is set to zero the central bank makes a loss. Things are obviously different if the debit rate is set to zero.

The case is a bit different for the creation of pure transaction money (= financing the total wage bill of the monetary economy). For the special case of interest-free helicopter money see (2015, Sec. 7).

What neither the orthodox nor the heterodox would-be economists realize is the relationship between the change of debt and profit/loss, which is of existential importance for the functioning of the monetary economy, and how all is related to the quantity of money (2011a; 2011b).

Not before the elementary relationship between household sector debt and money is crystal clear the case of government sector debt can be tackled. It is moronic to throw all forms of money (token, coin, note, deposit, etc.) and debt (household-, government-, business sector) together.

Debt-free money is ultimately a debt that the Central Bank owes to itself.

Egmont Kakarot-Handtke

Kakarot-Handtke, E. (2011a). Reconstructing the Quantity Theory (I). SSRN Working Paper Series, 1895268: 1–28. URL
Kakarot-Handtke, E. (2011b). Reconstructing the Quantity Theory (II). SSRN Working Paper Series, 1903663: 1–20. URL
Kakarot-Handtke, E. (2015). Major Defects of the Market Economy. SSRN Working Paper Series, 2624350: 1–40. URL

#1 How the intelligent non-economist can refute every economist hands down
#2 Modern Moronomic Theory

Related 'Crisis, cranks, and scientists' and 'Political economics and intellectual corruption' and 'The irrelevance of economics' and 'Money and debt in six elementary steps'.