#Economics#AllYouNeedToKnow
— AXEC (@EgmontHandtke) November 30, 2025
“In 1989, the top one percent held 22.8 percent of American wealth. By the second quarter of 2025, that figure reached 31.0 percent. The bottom fifty percent now holds 2.5 percent. The Federal Reserve printed nine trillion dollars between 2008 and…
Showing posts with label Banking. Show all posts
Showing posts with label Banking. Show all posts
November 30, 2025
Occasional X: Clueless economists / Money (LXIV)
October 30, 2024
Occasional X: Criminals and the Monetary Order (II)
#HowItWorks
— E.K-H (@AXECorg) October 30, 2024
“So if fraud is rampant in the banking system, then at this point it's an intentional feature not a bug....” (Adam Taggart)
The U.S. economy runs on #Profit. Macroeconomic profit Qm is given by the axiomatically correct #ProfitLaw / #BalancesEquation…
January 22, 2019
Profit and macrofoundations
Comment on James Galbraith on ‘A global macroeconomics ― yes, macroeconomics, dammit ― of inequality and income distribution’*
Blog-Reference
James Galbraith observes with regard to the JEL classification codes: “Under Macroeconomics there is nothing, unless you count E25 ‘Aggregate Factor Income Distribution,’ which surely means the analysis of factor shares ― Wages, Profits, Rent ― also known as the functional distribution.” and “From a theoretical standpoint distribution is the essence of micro, of market relations and of supply-and-demand. The discipline exists, largely, to explain factor returns. If it doesn’t explain ― I don’t say ‘justify’ ― the pay of the worker and the return to capital, then the rest of what it does would not sustain it.”
What is even more remarkable: the keyword Profit neither appears under Microeconomics nor Macroeconomics. The first problem of Distribution Theory is that economists obviously do not know what profit is.
Fact is: “A satisfactory theory of profits is still elusive” (Desai, Palgrave Dictionary) and this is the most damning verdict about economics. After 200+ years, economists cannot tell the difference between profit and income. This is the present state of economics: the major approaches ― Walrasianism, Keynesianism, Marxianism, Austrianism ― are mutually contradictory, axiomatically false, materially/formally inconsistent, and all got the pivotal concept of the subject matter ― profit ― wrong. #1, #2, #3
Because Profit Theory is false, Distribution Theory is false by logical implication.
James Galbraith identifies the point where things went wrong: “Lucas made the wrong choice. He decreed that micro takes precedence ― that the house is built on microfoundations. Godley did not have patience for this. Surely the house is better built on solid steel-and-concrete pilings, on macrofoundations, with micro-shingles on the roof?”
Indeed, that’s it. Economics needs a Paradigm Shift from false microfoundations to true macrofoundations. At this point, though, James Galbraith stops and turns to the prospects and problems of empirical research. He does not specify what the true macrofoundations are.#4, #5
From the true macrofoundations follows the macroeconomic Profit Law as Qm≡Yd+(I−Sm)+(G−T)+(X−M). Legend: Qm monetary profit, Yd distributed profit, Sm monetary saving, G government expenditures, T taxes, X exports, M imports. This reduces to the core Qm≡−Sm, i.e., the business sector’s profit is equal to the household sector’s dissaving, and vice versa, the business sector’s loss is equal to the household sector’s saving.
Macroeconomic profit has nothing to do with greed/exploitation/productivity but with growing/shrinking debt. Lo and behold, this is one of James Galbraith’s key findings: “1. There are global turning points in the path of pay inequality. They occur around 1971, around 1980, and around 2000. These correspond in each case to major shifts in the worldwide financial regime: to the breakdown of Bretton Woods, to the outbreak of the global debt crisis, and to return to low interest rates and rising commodity prices that followed the NASDAQ slump and the 9/11 attacks, along with the rise of China in world trade.”
Macroeconomic profit is an objectively given and well-defined magnitude. The first thing to notice is that profit is qualitatively different from income.#6 Loss or profit is NOT income. Distributed profit is income. Because of this, it is inadmissible to speak of ‘profit income’ because profit is the difference of flows and not a flow like wage income. Wage income and profit cannot be added together to total income, and profit is not a share of total income. In their utter scientific incompetence, economists get the basics of distribution theory wrong from Adam Smith and David Ricardo onward to this day. #7, #8, #9
James Galbraith is right: “A global macroeconomics ― yes, macroeconomics, dammit” is the key to Profit Theory and Distribution Theory. Microfoundations are proto-scientific garbage since Jevons/Walras/Menger. Economics has to be based on macrofoundations. Get it: If it isn’t macroaxiomatized, it isn’t economics.
Egmont Kakarot-Handtke
* Review of Keynesian Economics
#1 Profit and distribution: a primer
#2 Essentials of Constructive Heterodoxy: Profit
#3 The Profit Theory is False Since Adam Smith. What About the True Distribution Theory?
#4 First Lecture in New Economic Thinking
#5 From false microfoundations to true macrofoundations (II)
#6 Macro for dummies (II)
#7 Profit and distribution: a primer
#8 There is NO such thing as a “labor share of income”
#9 Ricardo, too, got profit theory wrong
Related 'The actual distribution is unacceptable? Do NOT seek economic advice!' and 'Income distribution: No market failure but theory failure' and 'The Levy/Kalecki Profit Equation is false'. For details of the big picture, see cross-references Profit/Distribution.
Blog-Reference
James Galbraith observes with regard to the JEL classification codes: “Under Macroeconomics there is nothing, unless you count E25 ‘Aggregate Factor Income Distribution,’ which surely means the analysis of factor shares ― Wages, Profits, Rent ― also known as the functional distribution.” and “From a theoretical standpoint distribution is the essence of micro, of market relations and of supply-and-demand. The discipline exists, largely, to explain factor returns. If it doesn’t explain ― I don’t say ‘justify’ ― the pay of the worker and the return to capital, then the rest of what it does would not sustain it.”
What is even more remarkable: the keyword Profit neither appears under Microeconomics nor Macroeconomics. The first problem of Distribution Theory is that economists obviously do not know what profit is.
Fact is: “A satisfactory theory of profits is still elusive” (Desai, Palgrave Dictionary) and this is the most damning verdict about economics. After 200+ years, economists cannot tell the difference between profit and income. This is the present state of economics: the major approaches ― Walrasianism, Keynesianism, Marxianism, Austrianism ― are mutually contradictory, axiomatically false, materially/formally inconsistent, and all got the pivotal concept of the subject matter ― profit ― wrong. #1, #2, #3
Because Profit Theory is false, Distribution Theory is false by logical implication.
James Galbraith identifies the point where things went wrong: “Lucas made the wrong choice. He decreed that micro takes precedence ― that the house is built on microfoundations. Godley did not have patience for this. Surely the house is better built on solid steel-and-concrete pilings, on macrofoundations, with micro-shingles on the roof?”
Indeed, that’s it. Economics needs a Paradigm Shift from false microfoundations to true macrofoundations. At this point, though, James Galbraith stops and turns to the prospects and problems of empirical research. He does not specify what the true macrofoundations are.#4, #5
From the true macrofoundations follows the macroeconomic Profit Law as Qm≡Yd+(I−Sm)+(G−T)+(X−M). Legend: Qm monetary profit, Yd distributed profit, Sm monetary saving, G government expenditures, T taxes, X exports, M imports. This reduces to the core Qm≡−Sm, i.e., the business sector’s profit is equal to the household sector’s dissaving, and vice versa, the business sector’s loss is equal to the household sector’s saving.
Macroeconomic profit has nothing to do with greed/exploitation/productivity but with growing/shrinking debt. Lo and behold, this is one of James Galbraith’s key findings: “1. There are global turning points in the path of pay inequality. They occur around 1971, around 1980, and around 2000. These correspond in each case to major shifts in the worldwide financial regime: to the breakdown of Bretton Woods, to the outbreak of the global debt crisis, and to return to low interest rates and rising commodity prices that followed the NASDAQ slump and the 9/11 attacks, along with the rise of China in world trade.”
Macroeconomic profit is an objectively given and well-defined magnitude. The first thing to notice is that profit is qualitatively different from income.#6 Loss or profit is NOT income. Distributed profit is income. Because of this, it is inadmissible to speak of ‘profit income’ because profit is the difference of flows and not a flow like wage income. Wage income and profit cannot be added together to total income, and profit is not a share of total income. In their utter scientific incompetence, economists get the basics of distribution theory wrong from Adam Smith and David Ricardo onward to this day. #7, #8, #9
James Galbraith is right: “A global macroeconomics ― yes, macroeconomics, dammit” is the key to Profit Theory and Distribution Theory. Microfoundations are proto-scientific garbage since Jevons/Walras/Menger. Economics has to be based on macrofoundations. Get it: If it isn’t macroaxiomatized, it isn’t economics.
Egmont Kakarot-Handtke
* Review of Keynesian Economics
#1 Profit and distribution: a primer
#2 Essentials of Constructive Heterodoxy: Profit
#3 The Profit Theory is False Since Adam Smith. What About the True Distribution Theory?
#4 First Lecture in New Economic Thinking
#5 From false microfoundations to true macrofoundations (II)
#6 Macro for dummies (II)
#7 Profit and distribution: a primer
#8 There is NO such thing as a “labor share of income”
#9 Ricardo, too, got profit theory wrong
Related 'The actual distribution is unacceptable? Do NOT seek economic advice!' and 'Income distribution: No market failure but theory failure' and 'The Levy/Kalecki Profit Equation is false'. For details of the big picture, see cross-references Profit/Distribution.
***
AXEC109i
June 19, 2018
The Fisher Effect ― another piece of nincompoop-economics
Comment on David Glasner on ‘Keynes and the Fisher Equation’
Blog-Reference
Roughly speaking, the Fisher Equation is about the relationship between nominal and real interest rates under inflation, and the Fisher Effect is about the effects of changes in expected inflation on the nominal interest rates. #1
In the following, it will be demonstrated that the Fisher Effect is due to a design flaw of the monetary economy. Neither Fisher nor Keynes has realized this because they never understood how the economic system works. #2
As the correct analytical starting point, the elementary production-consumption economy is defined with this set of macroeconomic axioms: (A0) The objectively given and most elementary configuration of the economy consists of the household and the business sector, which in turn consists initially of one giant fully integrated firm. (A1) Yw=WL wage income Yw is equal to wage rate W times working hours. L, (A2) O=RL output O is equal to productivity R times working hours L, (A3) C=PX consumption expenditure C is equal to price P times quantity bought/sold X.
Under the conditions of market-clearing X=O and budget-balancing C=Yw in each period, the price is given by P=W/R (1). This is the most elementary form of the macroeconomic Law of Supply and Demand.
The price P is determined by the wage rate W, which takes the role of the nominal numéraire, and the productivity R. The quantity of money is NOT among the price determinants. This puts the commonplace Quantity Theory forever to rest.
What is needed for a start is two things: (i) a central bank which creates money on its balance sheet in the form of deposits, and (ii) a legal system which declares the central bank’s deposits as legal tender.
Deposit money is needed by the business sector to pay the workers who receive the wage income Yw per period. The need is only temporary because the business sector gets the money back if the workers fully spend their income, i.e., if C=Yw. Overdrafts are needed by the household sector for consumption expenditures if the households want to spend before they get their income.
For the case of a balanced budget C=Yw, the idealized transaction sequence of deposits/overdrafts of the household sector at the central bank over the course of one period is shown under the label of Graphic. #3
The household sector’s deposits/overdrafts are ZERO at the beginning and end of the period. Money is continually created and destroyed during the period under consideration. There is NO such thing as a fixed quantity of money. The central bank plays an accommodative role and simply supports the autonomous market transactions between the household and the business sector.
From this follows the average stock of transaction money as M=kYw, with k determined by the transaction pattern. In other words, the average stock of money M is determined by the autonomous transactions of the household and business sector and created out of nothing by the central bank. The economy NEVER runs out of money.
Monetary profit for the economy as a whole is defined as Qm≡C−Yw, and monetary saving as Sm≡Yw−C. It always holds Qm≡−Sm, in other words, the business sector’s surplus = profit equals the household sector’s deficit = dissaving. Vice versa, the business sector’s deficit = loss equals the household sector’s surplus = saving. This is the most elementary form of the macroeconomic Profit Law.
When the government is added, the Profit Law reads Qm≡(G−T)−Sm. Legend: G government expenditures, T taxes.
In the initial period, G, T, and Sm are all zero. Hence, macroeconomic profit Qm, too, is zero.
In period 1, there is a government sector deficit, but it is exactly equal to the household sector saving. Hence, Qm is again zero. The government’s debt consists of overdrafts at the central bank Ω. The household sector’s savings consist of deposits at the central bank Φ. Both sides of the central bank’s balance sheet are equal.
Now, the interest rate on deposits is zero and the interest rate on government debt is r. The rate r is set such that it covers exactly the central bank’s wage bill, i.e., rΩ=WL* (2). #4, #5
Under these simplified conditions, one has for the price of the consumption good P=W/R and for the rate of interest r=(W/Ω)L* (3).
In period 2, the wage rate W is doubled. All real variables remain unchanged. According to (1), the price P doubles. According to (2), either (a) the nominal rate of interest r doubles and the nominal debt Ω remains constant, or (b) the nominal rate of interest remains constant and the nominal debt doubles.
Needless to emphasize that (2b) is the correct solution. The institutional setting, though, is such that the nominal value of the debt does NOT move in lockstep with inflation.
In the correct institutional setting for the monetary economy, the nominal rate of interest does NOT move with inflation, but nominal debt does. So, there is NO such thing as a Fisher Effect; the nominal rate r remains constant. And because of this, inflation expectations have NO effect on the nominal interest rate.
In well-behaved inflation, the nominal interest rate r remains constant, the real interest rate r'=r/P falls, and the nominal debt increases Ω'=ΩP such that nominal interest payments rΩ' increase and real interest payments r'Ω' remain constant.
Egmont Kakarot-Handtke
#1 Wikipedia Fisher Equation
#2 Macroeconomics ― dead since Keynes
#3 Graphic AXEC98 Idealized transaction pattern
#4 Essentials of Constructive Heterodoxy: Money, Credit, Interest
#5 The Emergence of Profit and Interest in the Monetary Circuit
Blog-Reference
Roughly speaking, the Fisher Equation is about the relationship between nominal and real interest rates under inflation, and the Fisher Effect is about the effects of changes in expected inflation on the nominal interest rates. #1
In the following, it will be demonstrated that the Fisher Effect is due to a design flaw of the monetary economy. Neither Fisher nor Keynes has realized this because they never understood how the economic system works. #2
As the correct analytical starting point, the elementary production-consumption economy is defined with this set of macroeconomic axioms: (A0) The objectively given and most elementary configuration of the economy consists of the household and the business sector, which in turn consists initially of one giant fully integrated firm. (A1) Yw=WL wage income Yw is equal to wage rate W times working hours. L, (A2) O=RL output O is equal to productivity R times working hours L, (A3) C=PX consumption expenditure C is equal to price P times quantity bought/sold X.
Under the conditions of market-clearing X=O and budget-balancing C=Yw in each period, the price is given by P=W/R (1). This is the most elementary form of the macroeconomic Law of Supply and Demand.
The price P is determined by the wage rate W, which takes the role of the nominal numéraire, and the productivity R. The quantity of money is NOT among the price determinants. This puts the commonplace Quantity Theory forever to rest.
What is needed for a start is two things: (i) a central bank which creates money on its balance sheet in the form of deposits, and (ii) a legal system which declares the central bank’s deposits as legal tender.
Deposit money is needed by the business sector to pay the workers who receive the wage income Yw per period. The need is only temporary because the business sector gets the money back if the workers fully spend their income, i.e., if C=Yw. Overdrafts are needed by the household sector for consumption expenditures if the households want to spend before they get their income.
For the case of a balanced budget C=Yw, the idealized transaction sequence of deposits/overdrafts of the household sector at the central bank over the course of one period is shown under the label of Graphic. #3
The household sector’s deposits/overdrafts are ZERO at the beginning and end of the period. Money is continually created and destroyed during the period under consideration. There is NO such thing as a fixed quantity of money. The central bank plays an accommodative role and simply supports the autonomous market transactions between the household and the business sector.
From this follows the average stock of transaction money as M=kYw, with k determined by the transaction pattern. In other words, the average stock of money M is determined by the autonomous transactions of the household and business sector and created out of nothing by the central bank. The economy NEVER runs out of money.
Monetary profit for the economy as a whole is defined as Qm≡C−Yw, and monetary saving as Sm≡Yw−C. It always holds Qm≡−Sm, in other words, the business sector’s surplus = profit equals the household sector’s deficit = dissaving. Vice versa, the business sector’s deficit = loss equals the household sector’s surplus = saving. This is the most elementary form of the macroeconomic Profit Law.
When the government is added, the Profit Law reads Qm≡(G−T)−Sm. Legend: G government expenditures, T taxes.
In the initial period, G, T, and Sm are all zero. Hence, macroeconomic profit Qm, too, is zero.
In period 1, there is a government sector deficit, but it is exactly equal to the household sector saving. Hence, Qm is again zero. The government’s debt consists of overdrafts at the central bank Ω. The household sector’s savings consist of deposits at the central bank Φ. Both sides of the central bank’s balance sheet are equal.
Now, the interest rate on deposits is zero and the interest rate on government debt is r. The rate r is set such that it covers exactly the central bank’s wage bill, i.e., rΩ=WL* (2). #4, #5
Under these simplified conditions, one has for the price of the consumption good P=W/R and for the rate of interest r=(W/Ω)L* (3).
In period 2, the wage rate W is doubled. All real variables remain unchanged. According to (1), the price P doubles. According to (2), either (a) the nominal rate of interest r doubles and the nominal debt Ω remains constant, or (b) the nominal rate of interest remains constant and the nominal debt doubles.
Needless to emphasize that (2b) is the correct solution. The institutional setting, though, is such that the nominal value of the debt does NOT move in lockstep with inflation.
In the correct institutional setting for the monetary economy, the nominal rate of interest does NOT move with inflation, but nominal debt does. So, there is NO such thing as a Fisher Effect; the nominal rate r remains constant. And because of this, inflation expectations have NO effect on the nominal interest rate.
In well-behaved inflation, the nominal interest rate r remains constant, the real interest rate r'=r/P falls, and the nominal debt increases Ω'=ΩP such that nominal interest payments rΩ' increase and real interest payments r'Ω' remain constant.
Egmont Kakarot-Handtke
#1 Wikipedia Fisher Equation
#2 Macroeconomics ― dead since Keynes
#3 Graphic AXEC98 Idealized transaction pattern
#4 Essentials of Constructive Heterodoxy: Money, Credit, Interest
#5 The Emergence of Profit and Interest in the Monetary Circuit
April 28, 2018
Poor Wicksell — abused as a testimonial for MMT
Comment on Lars Syll on ‘MMT — the Wicksell connection’
Blog-Reference and Blog-Reference
Lars Syll summarizes, “In modern times legal currencies are totally based on fiat. Currencies no longer have intrinsic value (as gold and silver). What gives them value is basically the simple fact that you have to pay your taxes with them. That also enables governments to run a kind of monopoly business where it never can run out of money. A fortiori, spending becomes the prime mover and taxing and borrowing is degraded to following acts. If we have a depression, the solution, then, is not austerity. It is spending. Budget deficits are not the major problem since fiat money means that governments can always make more of them.”
That much is, of course, true: Wicksell envisaged a pure fiat money system run by the central bank (= giro system). This does not mean, though, that he was in any way a promoter of MMT’s claims or policies. #1
Wicksell certainly did not subscribe to patently false MMT propositions as
Egmont Kakarot-Handtke
#1 Going beyond Wicksell, Keynes, and MMT
#2 The creation and value of money and near-monies
#3 Deficit-spending/money-creation is ALWAYS a bad deal for WeThePeople
#4 Deficits matter for distribution
#5 Reconstructing the Quantity Theory
Related 'How Wicksell and the rest got inflation/deflation wrong' and 'Wicksell’s misplaced critique of mathematics' and 'Stephanie Kelton’s legendary Plain-Sight-Ink-Trick' and 'The clock runs down on economics' and 'The sectoral balances obfuscation: stupidity or corruption?' and 'The Emergence of Profit and Interest in the Monetary Circuit' and 'The Axiomatic Unity of Circuit, Money, Price and Distribution' and 'Criminals and the monetary order' and 'The state of MMT? Stone-dead!'. For the full-spectrum refutation of MMT, see cross-references MMT.
Blog-Reference and Blog-Reference
Lars Syll summarizes, “In modern times legal currencies are totally based on fiat. Currencies no longer have intrinsic value (as gold and silver). What gives them value is basically the simple fact that you have to pay your taxes with them. That also enables governments to run a kind of monopoly business where it never can run out of money. A fortiori, spending becomes the prime mover and taxing and borrowing is degraded to following acts. If we have a depression, the solution, then, is not austerity. It is spending. Budget deficits are not the major problem since fiat money means that governments can always make more of them.”
That much is, of course, true: Wicksell envisaged a pure fiat money system run by the central bank (= giro system). This does not mean, though, that he was in any way a promoter of MMT’s claims or policies. #1
Wicksell certainly did not subscribe to patently false MMT propositions as
- the value of money depends on taxation, #2
- the Central Bank is the State’s department for arbitrary money creation,
- deficit-spending/money-creation is the cure for all economic and social problems, #3
- public debt does not matter. #4
Egmont Kakarot-Handtke
#1 Going beyond Wicksell, Keynes, and MMT
#2 The creation and value of money and near-monies
#3 Deficit-spending/money-creation is ALWAYS a bad deal for WeThePeople
#4 Deficits matter for distribution
#5 Reconstructing the Quantity Theory
Related 'How Wicksell and the rest got inflation/deflation wrong' and 'Wicksell’s misplaced critique of mathematics' and 'Stephanie Kelton’s legendary Plain-Sight-Ink-Trick' and 'The clock runs down on economics' and 'The sectoral balances obfuscation: stupidity or corruption?' and 'The Emergence of Profit and Interest in the Monetary Circuit' and 'The Axiomatic Unity of Circuit, Money, Price and Distribution' and 'Criminals and the monetary order' and 'The state of MMT? Stone-dead!'. For the full-spectrum refutation of MMT, see cross-references MMT.
For more about macrofoundations, see AXECquery.
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Graphic AXEC152
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billmitchell.org Mar 30, 2023, For clarification of the history of the Theory of Money and the correct attribution to the original authors (Knut Wicksell, Axel Leijonhufvud, Basil Moore, Marc Lavoie, Augusto Graziani, Wynn Godley) see William Mitchell - Modern Monetary Theory, When mainstream economists arrive at ideas 50 or so years late and pretend to be contributing to knowledge
December 29, 2017
The creation and value of money and near-monies
Comment on Clint Ballinger on ‘Of Bitcoins and balance sheets: the real lesson from Bitcoin’
Blog-Reference
Clint Ballinger argues: “The national government creates the numeraire for the system (the 'Dollar' in the US, the 'Pound' in the UK, etc.) and, in addition to spending directly into the economy in that numeraire, the government allows a public/private system (publicly regulated private banking system) to operate with the same numeraire. This creates a single system for the public, but in fact, arises from two separate but linked balance sheet expansions.
But why do the tokens from either of these balance sheet expansions have and maintain value?
The government maintains the value of its balance sheet tokens by demanding that some of its tokens, once a year, must be paid back to the government. This guarantees that everyone in that nation will accept and value the tokens from the national balance-sheet expansion.
The tokens that arise from the public/private bank balance-sheet expansion maintain their value analogously ― by the obligation to repay bank loans.
Together, the obligation to pay taxes and the obligation to repay bank loans maintain the value of a currency. Note that both of these rest on the government/legal system of a nation.”
The claim that the value of money depends ultimately on the taxing power of the state is, of course, plain MMT nonsense.
Time to finally settle the theory of money. Because economics is a failed science, it has to be reconstructed from scratch. Walrasian microfoundations and Keynesian macrofoundations have to be scrapped.
As the new analytical starting point, the elementary production-consumption economy is defined with this set of macroeconomic axioms: (A0) The objectively given and most elementary configuration of the economy consists of the household and the business sector, which in turn consists initially of one giant fully integrated firm. (A1) Yw=WL wage income Yw is equal to wage rate W times working hours. L, (A2) O=RL output O is equal to productivity R times working hours L, (A3) C=PX consumption expenditure C is equal to price P times quantity bought/sold X.
Under the conditions of market-clearing X=O and budget-balancing C=Yw in each period, the price is given by P=W/R (1), i.e., the market-clearing price is equal to unit wage costs. This is the most elementary form of the macroeconomic Law of Supply and Demand. For the graphical representation, see Figure 1. #1
The price is determined by the wage rate, which takes the role of the nominal numéraire, and productivity. The quantity of money is NOT among the price determinants. This puts the commonplace Quantity Theory to rest.
The real value of money is ultimately given by productivity. From (1) follows W/P=R, i.e., real wage = productivity. The value of money has NOTHING AT ALL to do with the taxing power of the state. In the production-consumption economy with budget balancing and market clearing, the wage income receivers always get the whole output O=RL.
Monetary profit for the economy as a whole is defined as Qm≡C−Ywand monetary saving as Sm≡Yw−C. It always holds Qm≡−Sm, in other words, the business sector’s surplus = profit (deficit = loss) equals the household sector’s deficit = dissaving (surplus = saving). This is the most elementary form of the macroeconomic Profit Law. Under the condition of budget balancing, total monetary profit is zero.
What is needed for a start is two things: (i) a central bank that creates money on its balance sheet in the form of deposits, and (ii) a legal system that declares the central bank’s deposits as legal tender.
Deposit money is needed by the business sector to pay the workers who receive the wage income Yw per period. The need is only temporary because the business sector gets the money back if the workers fully spend their income, i.e., if C=Yw.
Overdrafts are needed by the household sector for consumption expenditures if the households want to spend before they get their income. This time sequence is no problem for the central bank because the temporary overdrafts vanish with wage payments.
For the case of a balanced budget C=Yw, the idealized transaction sequence of deposits/overdrafts of the household sector at the central bank over the course of one period is shown in Figure 2. #2
The household sector’s deposits/overdrafts are ZERO at the beginning and end of the period. The business sector’s transaction pattern is the exact mirror image. Money, that is, deposits at the central bank, is continually created and destroyed during the period under consideration. There is NO such thing as a fixed quantity of money. The central bank plays an ACCOMMODATIVE role and simply supports the AUTONOMOUS market transactions between the household and the business sector.
From this follows the average stock of transaction money as M=κYw, with κ determined by the transaction pattern. In other words, the average stock of money M is determined by the AUTONOMOUS transactions of the household and business sector and created out of nothing by the central bank. The economy NEVER runs out of money if the central bank does a good job.
The transaction equation reads M=κYw=κPX=κPRL in the case of budget balancing and market clearing, and this yields the commonplace correlation between the average stock of money M and price P for a given employment level L, except for the fact that M is the DEPENDENT variable.
Money comes into existence on the balance sheet of the central bank as soon as the central bank enters an overdraft for the business sector on the asset side and a deposit of an equal amount on the liability side (step 1). This deposit is then transferred to the household sector as wage payment (step 2) and returns in the form of consumption expenditures (step 3). #3
Now, commercial banks are introduced. They can create and destroy ‘money’ technically exactly in the same way as the central bank, except for the fact that it is bank money and not central bank money. The crucial condition for the functioning of the two-monies system is that the business sector and household sector accept bank money as practically identical to central bank money.
To be sure, in the strict sense, bank deposits are NOT money; only central bank deposits are money. This becomes clear as soon as the households/firms try to exchange huge amounts of bank money for central bank money. This is known as a bank run. In this case, the central bank has to step in and help the banks out with the one and only genuine money. The best way to prevent bank runs from ever happening is the unconditional guarantee of the central bank to exchange bank money anytime and in any amount into central bank money.
So, the private sector = banks can create near-money that works under the appropriate institutional conditions just as central bank money. The real value of near money is the same as central bank money. Acceptance and the real value of money and near-money do NOT depend on the state’s taxing power.
Problems arise if money is not brought into circulation in the right way. Roughly speaking, as long as the central bank or the private banks or whoever else finances the wage bill Yw, and the wage rate W moves exactly with the productivity, the price P remains according to (1) absolutely constant. The real value of money/near money rises and falls ultimately with productivity.
However, if the money is brought into circulation at the demand side, such that the household sector takes up credit and spends it on consumption goods, things are radically different. The market-clearing price rises, and this reduces the real value of wage income. The output is now redistributed between income spenders and credit spenders, i.e. P1=(C+Ccr)/O > P=C/O with C=Yw and O=X. #4
Secondly, the business sector now makes a profit, i.e., Qm=Ccr. It holds that the household sector’s deficit (dissaving) is equal to the business sector’s surplus (profit). If the money is brought into circulation by the government’s deficit spending it holds Public Deficit = Private Profit. Hence, MMTers as champions of state money creation and deficit-spending are ultimately ― knowingly or unknowingly does not matter ― agenda-pushers for the one-percenters. #5
With regard to Bitcoin, it follows that it is not even remote money, like a traveler’s check, for example, because the issuer does not guarantee to exchange it back at any time one-to-one into bank money or central bank money. The value of Bitcoin depends solely on the expectation that another private person will eventually exchange it for money or near-money or a financial or real asset. #6
Egmont Kakarot-Handtke
#1 Graphic AXEC31 Elementary production-consumption economy
#2 Graphic AXEC98 Idealized transaction pattern, household sector, balanced budget
#3 Basics of monetary theory: the two monies
#4 MMT, money creation, stealth taxation, and redistribution
#5 MMT is ALWAYS a bad deal for the 99-percenters
#6 Primary and Secondary Markets
Related 'The ultimate ― analytical ― origin of money'.
Blog-Reference
Clint Ballinger argues: “The national government creates the numeraire for the system (the 'Dollar' in the US, the 'Pound' in the UK, etc.) and, in addition to spending directly into the economy in that numeraire, the government allows a public/private system (publicly regulated private banking system) to operate with the same numeraire. This creates a single system for the public, but in fact, arises from two separate but linked balance sheet expansions.
But why do the tokens from either of these balance sheet expansions have and maintain value?
The government maintains the value of its balance sheet tokens by demanding that some of its tokens, once a year, must be paid back to the government. This guarantees that everyone in that nation will accept and value the tokens from the national balance-sheet expansion.
The tokens that arise from the public/private bank balance-sheet expansion maintain their value analogously ― by the obligation to repay bank loans.
Together, the obligation to pay taxes and the obligation to repay bank loans maintain the value of a currency. Note that both of these rest on the government/legal system of a nation.”
The claim that the value of money depends ultimately on the taxing power of the state is, of course, plain MMT nonsense.
Time to finally settle the theory of money. Because economics is a failed science, it has to be reconstructed from scratch. Walrasian microfoundations and Keynesian macrofoundations have to be scrapped.
As the new analytical starting point, the elementary production-consumption economy is defined with this set of macroeconomic axioms: (A0) The objectively given and most elementary configuration of the economy consists of the household and the business sector, which in turn consists initially of one giant fully integrated firm. (A1) Yw=WL wage income Yw is equal to wage rate W times working hours. L, (A2) O=RL output O is equal to productivity R times working hours L, (A3) C=PX consumption expenditure C is equal to price P times quantity bought/sold X.
Under the conditions of market-clearing X=O and budget-balancing C=Yw in each period, the price is given by P=W/R (1), i.e., the market-clearing price is equal to unit wage costs. This is the most elementary form of the macroeconomic Law of Supply and Demand. For the graphical representation, see Figure 1. #1
The price is determined by the wage rate, which takes the role of the nominal numéraire, and productivity. The quantity of money is NOT among the price determinants. This puts the commonplace Quantity Theory to rest.
The real value of money is ultimately given by productivity. From (1) follows W/P=R, i.e., real wage = productivity. The value of money has NOTHING AT ALL to do with the taxing power of the state. In the production-consumption economy with budget balancing and market clearing, the wage income receivers always get the whole output O=RL.
Monetary profit for the economy as a whole is defined as Qm≡C−Ywand monetary saving as Sm≡Yw−C. It always holds Qm≡−Sm, in other words, the business sector’s surplus = profit (deficit = loss) equals the household sector’s deficit = dissaving (surplus = saving). This is the most elementary form of the macroeconomic Profit Law. Under the condition of budget balancing, total monetary profit is zero.
What is needed for a start is two things: (i) a central bank that creates money on its balance sheet in the form of deposits, and (ii) a legal system that declares the central bank’s deposits as legal tender.
Deposit money is needed by the business sector to pay the workers who receive the wage income Yw per period. The need is only temporary because the business sector gets the money back if the workers fully spend their income, i.e., if C=Yw.
Overdrafts are needed by the household sector for consumption expenditures if the households want to spend before they get their income. This time sequence is no problem for the central bank because the temporary overdrafts vanish with wage payments.
For the case of a balanced budget C=Yw, the idealized transaction sequence of deposits/overdrafts of the household sector at the central bank over the course of one period is shown in Figure 2. #2
The household sector’s deposits/overdrafts are ZERO at the beginning and end of the period. The business sector’s transaction pattern is the exact mirror image. Money, that is, deposits at the central bank, is continually created and destroyed during the period under consideration. There is NO such thing as a fixed quantity of money. The central bank plays an ACCOMMODATIVE role and simply supports the AUTONOMOUS market transactions between the household and the business sector.
From this follows the average stock of transaction money as M=κYw, with κ determined by the transaction pattern. In other words, the average stock of money M is determined by the AUTONOMOUS transactions of the household and business sector and created out of nothing by the central bank. The economy NEVER runs out of money if the central bank does a good job.
The transaction equation reads M=κYw=κPX=κPRL in the case of budget balancing and market clearing, and this yields the commonplace correlation between the average stock of money M and price P for a given employment level L, except for the fact that M is the DEPENDENT variable.
Money comes into existence on the balance sheet of the central bank as soon as the central bank enters an overdraft for the business sector on the asset side and a deposit of an equal amount on the liability side (step 1). This deposit is then transferred to the household sector as wage payment (step 2) and returns in the form of consumption expenditures (step 3). #3
Now, commercial banks are introduced. They can create and destroy ‘money’ technically exactly in the same way as the central bank, except for the fact that it is bank money and not central bank money. The crucial condition for the functioning of the two-monies system is that the business sector and household sector accept bank money as practically identical to central bank money.
To be sure, in the strict sense, bank deposits are NOT money; only central bank deposits are money. This becomes clear as soon as the households/firms try to exchange huge amounts of bank money for central bank money. This is known as a bank run. In this case, the central bank has to step in and help the banks out with the one and only genuine money. The best way to prevent bank runs from ever happening is the unconditional guarantee of the central bank to exchange bank money anytime and in any amount into central bank money.
So, the private sector = banks can create near-money that works under the appropriate institutional conditions just as central bank money. The real value of near money is the same as central bank money. Acceptance and the real value of money and near-money do NOT depend on the state’s taxing power.
Problems arise if money is not brought into circulation in the right way. Roughly speaking, as long as the central bank or the private banks or whoever else finances the wage bill Yw, and the wage rate W moves exactly with the productivity, the price P remains according to (1) absolutely constant. The real value of money/near money rises and falls ultimately with productivity.
However, if the money is brought into circulation at the demand side, such that the household sector takes up credit and spends it on consumption goods, things are radically different. The market-clearing price rises, and this reduces the real value of wage income. The output is now redistributed between income spenders and credit spenders, i.e. P1=(C+Ccr)/O > P=C/O with C=Yw and O=X. #4
Secondly, the business sector now makes a profit, i.e., Qm=Ccr. It holds that the household sector’s deficit (dissaving) is equal to the business sector’s surplus (profit). If the money is brought into circulation by the government’s deficit spending it holds Public Deficit = Private Profit. Hence, MMTers as champions of state money creation and deficit-spending are ultimately ― knowingly or unknowingly does not matter ― agenda-pushers for the one-percenters. #5
With regard to Bitcoin, it follows that it is not even remote money, like a traveler’s check, for example, because the issuer does not guarantee to exchange it back at any time one-to-one into bank money or central bank money. The value of Bitcoin depends solely on the expectation that another private person will eventually exchange it for money or near-money or a financial or real asset. #6
Egmont Kakarot-Handtke
#1 Graphic AXEC31 Elementary production-consumption economy
#2 Graphic AXEC98 Idealized transaction pattern, household sector, balanced budget
#3 Basics of monetary theory: the two monies
#4 MMT, money creation, stealth taxation, and redistribution
#5 MMT is ALWAYS a bad deal for the 99-percenters
#6 Primary and Secondary Markets
Related 'The ultimate ― analytical ― origin of money'.
For more details about money, see AXECquery.
In the political realm, there is rhetoric, storytelling, and obfuscation. In the scientific realm, there is axiomatization, consistency/proof, and clarity.
In the political realm, Humpty Dumpty rules: “‘When I use a word,’ Humpty Dumpty said in rather a scornful tone, ‘it means just what I choose it to mean — neither more nor less.’ ‘The question is,’ said Alice, ‘whether you can make words mean so many different things.’ ‘The question is,’ said Humpty Dumpty, ‘which is to be master — that’s all’.” #1
In the scientific realm, Aristotle rules: “When the premises are certain, true, and primary, and the conclusion formally follows from them, this is demonstration, and produces scientific knowledge of a thing.”
Economists never got above the level of proto-scientific storytelling and political agenda pushing. #2
Money is clearly defined and measurable with the precision of two decimal places. Money (liability side of the central bank’s balance sheet) is different from bank money, near-money, remote-money, pseudo-money, quasi-money, counterfeit money, crypto money, clay tablets, bullion, IOU, etcetera.
Needless to emphasize that the representative economist in general, and the MMTer in particular, have until this very day NO clear idea of the basic concepts of his subject matter, e.g. profit, income, money, and so on. But he has a lot to blather about democracy, the mob, and liberalism.
#1 Humpty Dumpty is back again
#2 Confused Confusers: How to Stop Thinking Like an Economist and Start Thinking Like a Scientist
***
REPLY to Matt Franko, Tom Hickey Dec 30In the political realm, there is rhetoric, storytelling, and obfuscation. In the scientific realm, there is axiomatization, consistency/proof, and clarity.
In the political realm, Humpty Dumpty rules: “‘When I use a word,’ Humpty Dumpty said in rather a scornful tone, ‘it means just what I choose it to mean — neither more nor less.’ ‘The question is,’ said Alice, ‘whether you can make words mean so many different things.’ ‘The question is,’ said Humpty Dumpty, ‘which is to be master — that’s all’.” #1
In the scientific realm, Aristotle rules: “When the premises are certain, true, and primary, and the conclusion formally follows from them, this is demonstration, and produces scientific knowledge of a thing.”
Economists never got above the level of proto-scientific storytelling and political agenda pushing. #2
Money is clearly defined and measurable with the precision of two decimal places. Money (liability side of the central bank’s balance sheet) is different from bank money, near-money, remote-money, pseudo-money, quasi-money, counterfeit money, crypto money, clay tablets, bullion, IOU, etcetera.
Needless to emphasize that the representative economist in general, and the MMTer in particular, have until this very day NO clear idea of the basic concepts of his subject matter, e.g. profit, income, money, and so on. But he has a lot to blather about democracy, the mob, and liberalism.
#1 Humpty Dumpty is back again
#2 Confused Confusers: How to Stop Thinking Like an Economist and Start Thinking Like a Scientist
Twitter Jan 28, 2022 #CryptoIsCrime
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Twitter Nov 19, 2022 Media promotion of crypto and FTX
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December 27, 2015
Deficit spending, helicopter money, and profit
Comment on ‘Randall Wray attacks “debt-free-money cranks” based on sloppy arguments’
Blog-Reference
There are two fundamentally different types of profit/loss: monetary and nonmonetary. The latter stems from the change in the value of assets. The former emerges in the sphere of production. It is common knowledge that the familiar profit theories are defective. As the Palgrave Dictionary sums up, “A satisfactory theory of profits is still elusive.” (Desai, 2008, p. 10)
To this day, neither the Walrasian, nor the Keynesian, nor the Marxian, nor the Austrian sect can tell the difference between income and profit. This is not exactly a noteworthy scientific achievement of the economics profession.
Keynes had no correct profit theory, and Post Keynesianism never realized that deficit spending is the source of monetary profits (2011). So, by fighting unemployment, Keynesians in actuality became the benefactors of business.
How does the Invisible Hand perform this feat? To answer this question, the methodologically correct approach is to take the simplest economic configuration as an analytical point of departure.
The elementary production-consumption economy is defined for one period by three rather straightforward equations. (A1) Yw=WL wage income Yw is equal to wage rate W times working hours L, (A2) O=RL output O is equal to productivity R times working hours L, (A3) C=PX consumption expenditure C is equal to price P times quantity bought/sold X. For the graphical representation, see Graphic AXEC31
At any given level of employment L, the wage income Yw that is generated in the consolidated business sector follows by multiplication with the wage rate W. On the real side, output O follows by multiplication with the productivity R. Finally, the price P follows as the dependent variable under the conditions of budget balancing, i.e., C=Yw, and market clearing, i.e., X=O. Note that the ray in the southeastern quadrant is not a linear production function; the ray tracks any underlying production function. Note also that the wage rate W is an average if the individual wage rates are different among the employees, which is normally the case. These details are of no consequence for the question on hand.
Under the conditions of market-clearing and budget-balancing in each period, the price is given by P=W/R, i.e., the market-clearing price is always equal to unit wage costs. All changes in the system are reflected by the market-clearing price. Things are different, of course, if the price is not the dependent variable.
In the next period, the households save. The result is shown with Graphic AXEC33
Blog-Reference
There are two fundamentally different types of profit/loss: monetary and nonmonetary. The latter stems from the change in the value of assets. The former emerges in the sphere of production. It is common knowledge that the familiar profit theories are defective. As the Palgrave Dictionary sums up, “A satisfactory theory of profits is still elusive.” (Desai, 2008, p. 10)
To this day, neither the Walrasian, nor the Keynesian, nor the Marxian, nor the Austrian sect can tell the difference between income and profit. This is not exactly a noteworthy scientific achievement of the economics profession.
Keynes had no correct profit theory, and Post Keynesianism never realized that deficit spending is the source of monetary profits (2011). So, by fighting unemployment, Keynesians in actuality became the benefactors of business.
How does the Invisible Hand perform this feat? To answer this question, the methodologically correct approach is to take the simplest economic configuration as an analytical point of departure.
The elementary production-consumption economy is defined for one period by three rather straightforward equations. (A1) Yw=WL wage income Yw is equal to wage rate W times working hours L, (A2) O=RL output O is equal to productivity R times working hours L, (A3) C=PX consumption expenditure C is equal to price P times quantity bought/sold X. For the graphical representation, see Graphic AXEC31
At any given level of employment L, the wage income Yw that is generated in the consolidated business sector follows by multiplication with the wage rate W. On the real side, output O follows by multiplication with the productivity R. Finally, the price P follows as the dependent variable under the conditions of budget balancing, i.e., C=Yw, and market clearing, i.e., X=O. Note that the ray in the southeastern quadrant is not a linear production function; the ray tracks any underlying production function. Note also that the wage rate W is an average if the individual wage rates are different among the employees, which is normally the case. These details are of no consequence for the question on hand.
Under the conditions of market-clearing and budget-balancing in each period, the price is given by P=W/R, i.e., the market-clearing price is always equal to unit wage costs. All changes in the system are reflected by the market-clearing price. Things are different, of course, if the price is not the dependent variable.
In the next period, the households save. The result is shown with Graphic AXEC33
Consumption expenditure C falls below Yw and with it the market-clearing price P. With perfect price flexibility, there are no unsold quantities and no change of inventory. The product market is always cleared, and there is no such thing as an inventory investment. Monetary saving of the household sector is given by Sm≡Yw−C.
The business sector makes a monetary loss that is equal to the household sector’s saving, i.e., Qm≡−Sm. Therefore, loss is the exact counterpart of saving; by consequence, profit is the exact counterpart of dissaving, that is, of the growth of the household sector’s debt. This is the most elementary form of the Profit Law. It follows directly from the profit definition Qm≡C−Ym and the definition of household sector saving Sm≡Yw−C. The sectoral balances always add up to zero, i.e., Qm+Sm=0.
With dissaving/deficit-spending, the debt of the household sector increases in each period. For simplicity, debt takes here the form of current overdrafts at the central bank, which stands for the banking industry. As a mirror image, monetary profit increases the current deposits of the business sector. The stocks of overdrafts and deposits are equal at any point in time.
Helicopter money is deficit spending without a simultaneous increase in household sector debt. To balance the accounts, the central bank enters a debt claim against itself in the books. This ‘drop of money from the sky’ in no way alters the fact that the additional household sector spending increases the profit of the business sector as a whole by exactly the same amount. Ultimately, the business sector is the beneficiary of all forms of deficit spending of the private or public households. Whether the household sector’s debt increases or is taken over by the central bank is a matter of indifference for the business sector.
The Profit Law for the more complex investment economy reads Qm≡Yd+I−Sm (2014, p. 8, eq. (18)). Legend: Qm monetary profit, Yd distributed profit, Sm monetary saving, I investment expenditure. Deficit spending of the household sector means that Sm has a negative sign, hence the effect on profit is positive −(−Sm).
With the correct profit theory, we arrive at the result that ‘QE for the people’ directly leads to an increase in the volume of financial wealth of the business sector. If employment L and productivity R remain unchanged, output remains unchanged, and the real situation of the household sector as a whole does not change at all through the issuance of helicopter money. If employment increases, the situation of the household sector improves, but the total profit of the business sector remains unchanged because it is always equal to the amount of deficit spending and independent of employment, productivity, or the wage rate.
Independent of the original intention to benefit the ‘workers’, both Keynesian deficit spending and helicopter money ultimately benefit the ‘capitalists’. In the course of time, this leads to an extremely unequal distribution of financial wealth. This is what everybody can observe.
Egmont Kakarot-Handtke
References
Desai, M. (2008). Profit and Profit Theory. In S. N. Durlauf, and L. E. Blume (Eds.), The New Palgrave Dictionary of Economics Online, 1–11. Palgrave Macmillan, 2nd edition. URL
Kakarot-Handtke, E. (2011). Why Post Keynesianism is Not Yet a Science. SSRN Working Paper Series, 1966438: 1–20. URL
Kakarot-Handtke, E. (2014). The Three Fatal Mistakes of Yesterday Economics: Profit, I=S, Employment. SSRN Working Paper Series, 2489792: 1–13. URL
Related 'Keynesianism as ultimate profit machine' and 'Profit and the collective failure of economists' and 'Money and debt in six elementary steps'.
The business sector makes a monetary loss that is equal to the household sector’s saving, i.e., Qm≡−Sm. Therefore, loss is the exact counterpart of saving; by consequence, profit is the exact counterpart of dissaving, that is, of the growth of the household sector’s debt. This is the most elementary form of the Profit Law. It follows directly from the profit definition Qm≡C−Ym and the definition of household sector saving Sm≡Yw−C. The sectoral balances always add up to zero, i.e., Qm+Sm=0.
With dissaving/deficit-spending, the debt of the household sector increases in each period. For simplicity, debt takes here the form of current overdrafts at the central bank, which stands for the banking industry. As a mirror image, monetary profit increases the current deposits of the business sector. The stocks of overdrafts and deposits are equal at any point in time.
Helicopter money is deficit spending without a simultaneous increase in household sector debt. To balance the accounts, the central bank enters a debt claim against itself in the books. This ‘drop of money from the sky’ in no way alters the fact that the additional household sector spending increases the profit of the business sector as a whole by exactly the same amount. Ultimately, the business sector is the beneficiary of all forms of deficit spending of the private or public households. Whether the household sector’s debt increases or is taken over by the central bank is a matter of indifference for the business sector.
The Profit Law for the more complex investment economy reads Qm≡Yd+I−Sm (2014, p. 8, eq. (18)). Legend: Qm monetary profit, Yd distributed profit, Sm monetary saving, I investment expenditure. Deficit spending of the household sector means that Sm has a negative sign, hence the effect on profit is positive −(−Sm).
With the correct profit theory, we arrive at the result that ‘QE for the people’ directly leads to an increase in the volume of financial wealth of the business sector. If employment L and productivity R remain unchanged, output remains unchanged, and the real situation of the household sector as a whole does not change at all through the issuance of helicopter money. If employment increases, the situation of the household sector improves, but the total profit of the business sector remains unchanged because it is always equal to the amount of deficit spending and independent of employment, productivity, or the wage rate.
Independent of the original intention to benefit the ‘workers’, both Keynesian deficit spending and helicopter money ultimately benefit the ‘capitalists’. In the course of time, this leads to an extremely unequal distribution of financial wealth. This is what everybody can observe.
Egmont Kakarot-Handtke
References
Desai, M. (2008). Profit and Profit Theory. In S. N. Durlauf, and L. E. Blume (Eds.), The New Palgrave Dictionary of Economics Online, 1–11. Palgrave Macmillan, 2nd edition. URL
Kakarot-Handtke, E. (2011). Why Post Keynesianism is Not Yet a Science. SSRN Working Paper Series, 1966438: 1–20. URL
Kakarot-Handtke, E. (2014). The Three Fatal Mistakes of Yesterday Economics: Profit, I=S, Employment. SSRN Working Paper Series, 2489792: 1–13. URL
Related 'Keynesianism as ultimate profit machine' and 'Profit and the collective failure of economists' and 'Money and debt in six elementary steps'.
December 23, 2015
Money and debt in six elementary steps
Comment on Norbert Häring on ‘Randall Wray attacks “debt-free-money cranks” based on sloppy arguments’
Blog-Reference and Blog-Reference
Money has taken various historical forms (token, coin, note, deposit, etc.), and the banking system in each country is the outcome of a murky historical process. Therefore, the first thing to do is to abstract from historical detail and define a clear-cut analytical frame of reference. This frame has been called by Keynes the ‘monetary theory of production’ and it is as close as possible to the economy we happen to live in. The frame of reference consists of the elementary structure of the monetary economy.
(i) The elementary production-consumption economy consists of the business and the household sector. The household sector provides the labor input to the business sector, which consists initially of one fully integrated firm. The output of the firm is sold to the household sector. Example: the wage income per period (e.g., year) is 100 [thousand/million/billion, euro/dollar/yen]. So, in a period of defined length, the households put in their work, and the firm owes a total of 100 monetary units to the household sector. For an overview of how it all fits together, see Graphic AXEC31.
(ii) The firm issues IOUs, and these are used in turn by the households to buy the output. For simplicity, the wage income of 100 monetary units is fully spent on the consumption good. Starting from zero at the beginning of each period, IOUs are created by the firm and vanish completely until the end of the period. Clearly, IOUs are debt, and they are used exclusively for the elementary transactions between the business sector and the household sector.
(iii) IOUs work fine with one firm but not with many firms. If the business sector consists of many firms, the need for a general IOU arises. This general IOU is produced by the Central Bank and is called money. The Central Bank gives the firms money in the form of current deposits, and the firms owe current overdrafts to the Central Bank. The firms pay the workers by transferring the deposits instead of IOUs. The workers spend their income, and the deposits return to the business sector, which reduces the overdrafts. At the end of the period, all deposits and overdrafts are again zero. So money is created out of nothing and vanishes into nothing until the end of each period. This process can continue in principle for all eternity, no matter how big or small the economy is. There is no such thing as a fixed quantity of money.
(iv) Only deposits are money; clearly, deposits are always exactly equal to overdrafts. Hence, money is the Central Bank’s half of what is essentially a credit relationship. By logical necessity, both sides of the Central Bank’s balance sheet are equal at any point in time. So Randall Wray is fundamentally right: initially, there is no such thing as debt-free money. But note that deposit/overdraft money as a transaction medium is entirely different from credit for houses and cars or for financing real investment in the business sector, or for financing public deficits. Not keeping these things properly apart is a recipe for a guaranteed mental collapse.
(v) The production/transfer of deposits and overdrafts is, in principle, not different from the production of bread or haircuts. The Central Bank pays wage income to its employees and recovers its costs by charging a transaction price. The transaction price is economically different from interest on credit. The sum of wage incomes of the consumption goods producing firm and the Central Bank is fully spent by the household sector. There is neither saving nor dissaving of the household sector, and the profit of the firm and the Central Bank is zero throughout. This process can continue in principle for all eternity. What we have now is the most elementary version of a properly functioning monetary production-consumption economy (2014).
(vi) Things are different if the Central Bank does not charge a transaction price but interest on overdrafts, which in sum must again be equal to its wage bill. This is how things have developed historically. And this is how the creation of money as a means of transaction became linked to interest. As a matter of principle, these things should be kept institutionally apart. In a well-designed monetary economy, the Central Bank finances the wage bill of the business sector, whatever it is, and charges a transaction price that covers exactly its costs. Problems of the monetary order do not arise because money is created out of nothing, or because money is the one-half of a debt relationship. Problems arise because the transaction function and the credit function are not properly kept apart.
Conclusion: Wray is right in insisting that debt-free money is a nonsensical concept. His banana and cloakroom examples, however, are idiotic. The advocates of ‘debt-free money’, on the other hand, have a valid point: the production of transaction money should be institutionally separated from the production/revolving of credit and not be paid for by interest but by a cost-covering transaction price. For the inclusion of the store-of-value function and household, business, and government sector debt, see (2015a; 2015b).
Egmont Kakarot-Handtke
References
Kakarot-Handtke, E. (2014). Economics for Economists. SSRN Working Paper Series, 2517242: 1–29. URL
Kakarot-Handtke, E. (2015a). Essentials of Constructive Heterodoxy: Financial Markets. SSRN Working Paper Series, 2607032: 1–33. URL
Kakarot-Handtke, E. (2015b). Essentials of Constructive Heterodoxy: Money, Credit, Interest. SSRN Working Paper Series, 2569663: 1–19. URL
Related 'Money, cranks, and morons' and 'Deficit spending, helicopter money, and profit' and 'The ultimate ― analytical ― origin of money' and 'The Dark-Matter Theory of Fiat Money {78a}'
Blog-Reference and Blog-Reference
Money has taken various historical forms (token, coin, note, deposit, etc.), and the banking system in each country is the outcome of a murky historical process. Therefore, the first thing to do is to abstract from historical detail and define a clear-cut analytical frame of reference. This frame has been called by Keynes the ‘monetary theory of production’ and it is as close as possible to the economy we happen to live in. The frame of reference consists of the elementary structure of the monetary economy.
(i) The elementary production-consumption economy consists of the business and the household sector. The household sector provides the labor input to the business sector, which consists initially of one fully integrated firm. The output of the firm is sold to the household sector. Example: the wage income per period (e.g., year) is 100 [thousand/million/billion, euro/dollar/yen]. So, in a period of defined length, the households put in their work, and the firm owes a total of 100 monetary units to the household sector. For an overview of how it all fits together, see Graphic AXEC31.
(ii) The firm issues IOUs, and these are used in turn by the households to buy the output. For simplicity, the wage income of 100 monetary units is fully spent on the consumption good. Starting from zero at the beginning of each period, IOUs are created by the firm and vanish completely until the end of the period. Clearly, IOUs are debt, and they are used exclusively for the elementary transactions between the business sector and the household sector.
(iii) IOUs work fine with one firm but not with many firms. If the business sector consists of many firms, the need for a general IOU arises. This general IOU is produced by the Central Bank and is called money. The Central Bank gives the firms money in the form of current deposits, and the firms owe current overdrafts to the Central Bank. The firms pay the workers by transferring the deposits instead of IOUs. The workers spend their income, and the deposits return to the business sector, which reduces the overdrafts. At the end of the period, all deposits and overdrafts are again zero. So money is created out of nothing and vanishes into nothing until the end of each period. This process can continue in principle for all eternity, no matter how big or small the economy is. There is no such thing as a fixed quantity of money.
(iv) Only deposits are money; clearly, deposits are always exactly equal to overdrafts. Hence, money is the Central Bank’s half of what is essentially a credit relationship. By logical necessity, both sides of the Central Bank’s balance sheet are equal at any point in time. So Randall Wray is fundamentally right: initially, there is no such thing as debt-free money. But note that deposit/overdraft money as a transaction medium is entirely different from credit for houses and cars or for financing real investment in the business sector, or for financing public deficits. Not keeping these things properly apart is a recipe for a guaranteed mental collapse.
(v) The production/transfer of deposits and overdrafts is, in principle, not different from the production of bread or haircuts. The Central Bank pays wage income to its employees and recovers its costs by charging a transaction price. The transaction price is economically different from interest on credit. The sum of wage incomes of the consumption goods producing firm and the Central Bank is fully spent by the household sector. There is neither saving nor dissaving of the household sector, and the profit of the firm and the Central Bank is zero throughout. This process can continue in principle for all eternity. What we have now is the most elementary version of a properly functioning monetary production-consumption economy (2014).
(vi) Things are different if the Central Bank does not charge a transaction price but interest on overdrafts, which in sum must again be equal to its wage bill. This is how things have developed historically. And this is how the creation of money as a means of transaction became linked to interest. As a matter of principle, these things should be kept institutionally apart. In a well-designed monetary economy, the Central Bank finances the wage bill of the business sector, whatever it is, and charges a transaction price that covers exactly its costs. Problems of the monetary order do not arise because money is created out of nothing, or because money is the one-half of a debt relationship. Problems arise because the transaction function and the credit function are not properly kept apart.
Conclusion: Wray is right in insisting that debt-free money is a nonsensical concept. His banana and cloakroom examples, however, are idiotic. The advocates of ‘debt-free money’, on the other hand, have a valid point: the production of transaction money should be institutionally separated from the production/revolving of credit and not be paid for by interest but by a cost-covering transaction price. For the inclusion of the store-of-value function and household, business, and government sector debt, see (2015a; 2015b).
Egmont Kakarot-Handtke
References
Kakarot-Handtke, E. (2014). Economics for Economists. SSRN Working Paper Series, 2517242: 1–29. URL
Kakarot-Handtke, E. (2015a). Essentials of Constructive Heterodoxy: Financial Markets. SSRN Working Paper Series, 2607032: 1–33. URL
Kakarot-Handtke, E. (2015b). Essentials of Constructive Heterodoxy: Money, Credit, Interest. SSRN Working Paper Series, 2569663: 1–19. URL
Related 'Money, cranks, and morons' and 'Deficit spending, helicopter money, and profit' and 'The ultimate ― analytical ― origin of money' and 'The Dark-Matter Theory of Fiat Money {78a}'
***
Graphic AXEC207
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
References
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'.
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
References
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'.
September 28, 2015
Nowhere land
Comment on Merijn Knibbe on ‘The return of ‘land’ in macroeconomic discourse. Wonkish’
Blog-Reference
(i) The misrepresentation of land in economic theory started already with Ricardo's concept of rent (2011b). The deeper problem is that economists never understood what profit is. Therefore, because profit theory has been false from the very beginning, the concept of rent has been misleading, and distribution theory had no foundation whatsoever since the classics (2014). Neoclassics only worsened the situation.
(ii) In order to integrate land into the theory of market interaction, the distinction between primary and secondary markets is essential (2011a). Both types run on entirely different principles. The standard supply-demand-equilibrium analysis is not applicable, to begin with.
(iii) With the distinction between primary and secondary markets comes the distinction between monetary profit and nonmonetary profit. What is also needed is the distinction between monetary and nonmonetary saving. The latter applies in the case of changes in asset values which affect the household sector's net worth directly.
(iv) For the definition of property and the possible use of land for ‘painless’ taxation see (2015).
(v) For the relationship between financing, asset valuation, rate of interest, and profit see (2012).
Note in addition:
— The familiar well-behaved production function is a nonentity. Therefore, all models that contain one are worthless. From this follows that neoclassical production and distribution theory has always been unacceptable.
— As far as land/real estate is used as collateral it does not appear on a bank’s balance sheet. Price changes indirectly influence the riskiness of a loan which, however, becomes effective only in the case of default.
In sum: the treatment of land in the history of economic thought is indeed unassailable proof for the scientific incompetence of economists.
Egmont Kakarot-Handtke
References
Kakarot-Handtke, E. (2011a). Primary and Secondary Markets. SSRN Working Paper Series, 1917012: 1–26. URL
Kakarot-Handtke, E. (2011b). When Ricardo Saw Profit, He Called it Rent: On the Vice of Parochial Realism. SSRN Working Paper Series, 1932119: 1–19. URL
Kakarot-Handtke, E. (2012). Make a Bubble, Take a Free Lunch, Break a Bank. SSRN Working Paper Series, 2167234: 1–35. URL
Kakarot-Handtke, E. (2014). The Profit Theory is False Since Adam Smith. What About the True Distribution Theory? SSRN Working Paper Series, 2511741: 1–23. URL
Kakarot-Handtke, E. (2015). Essentials of Constructive Heterodoxy: Institutions. SSRN Working Paper Series, 2598721: 1–18. URL
Blog-Reference
(i) The misrepresentation of land in economic theory started already with Ricardo's concept of rent (2011b). The deeper problem is that economists never understood what profit is. Therefore, because profit theory has been false from the very beginning, the concept of rent has been misleading, and distribution theory had no foundation whatsoever since the classics (2014). Neoclassics only worsened the situation.
(ii) In order to integrate land into the theory of market interaction, the distinction between primary and secondary markets is essential (2011a). Both types run on entirely different principles. The standard supply-demand-equilibrium analysis is not applicable, to begin with.
(iii) With the distinction between primary and secondary markets comes the distinction between monetary profit and nonmonetary profit. What is also needed is the distinction between monetary and nonmonetary saving. The latter applies in the case of changes in asset values which affect the household sector's net worth directly.
(iv) For the definition of property and the possible use of land for ‘painless’ taxation see (2015).
(v) For the relationship between financing, asset valuation, rate of interest, and profit see (2012).
Note in addition:
— The familiar well-behaved production function is a nonentity. Therefore, all models that contain one are worthless. From this follows that neoclassical production and distribution theory has always been unacceptable.
— As far as land/real estate is used as collateral it does not appear on a bank’s balance sheet. Price changes indirectly influence the riskiness of a loan which, however, becomes effective only in the case of default.
In sum: the treatment of land in the history of economic thought is indeed unassailable proof for the scientific incompetence of economists.
Egmont Kakarot-Handtke
References
Kakarot-Handtke, E. (2011a). Primary and Secondary Markets. SSRN Working Paper Series, 1917012: 1–26. URL
Kakarot-Handtke, E. (2011b). When Ricardo Saw Profit, He Called it Rent: On the Vice of Parochial Realism. SSRN Working Paper Series, 1932119: 1–19. URL
Kakarot-Handtke, E. (2012). Make a Bubble, Take a Free Lunch, Break a Bank. SSRN Working Paper Series, 2167234: 1–35. URL
Kakarot-Handtke, E. (2014). The Profit Theory is False Since Adam Smith. What About the True Distribution Theory? SSRN Working Paper Series, 2511741: 1–23. URL
Kakarot-Handtke, E. (2015). Essentials of Constructive Heterodoxy: Institutions. SSRN Working Paper Series, 2598721: 1–18. URL
July 11, 2015
Extremely long roots
Comment Lars Syll on ‘Schäuble goes Matrix’
Blog-Reference
You quote Mark Blyth’s article ‘A Pain in the Athens. Why Greece Isn't to Blame for the Crisis’ approvingly. Blyth explains: “The roots of the crisis lie far away from Greece; they lie in the architecture of European banking.”
This is accurate only insofar as the European banking system has adopted the negative institutional features of the US banking system.
Remember that the investment banks literally invented sub-prime lending. Not one competent mortgage banker, neither in Germany nor in France, would have taken up this type of business.#1 Investment banking has nothing to do with classical European banking which consists essentially of lend-and-hold, long-term customer relationship, and risk-absorbing equity.
Investment banking depends basically on extreme leveraging, minimizing risk-bearing equity, maximizing quarterly return on equity, shifting credit risk to non-banks via securitization, and shifting the risks from derivatives betting ultimately to the public via too-big-to-fail. It was not so long ago when first Deutsche Bank and then the rest of the rather conservative German banking industry turned to investment banking.
This casino banking failed in 2008 in the US and now in Greece.
A very good piece of advice for the Greek people would be to look at the German cooperative banking group. In effect, people can own their local bank, the lender-creditor relationship is face-to-face, risks are strictly limited, and if it actually happens that one bank fails it is bailed out by a fund, that is, by all cooperative banks together. Seen as an institution, this self-organizing group of diverse firms provides all banking/insurance services at zero risks for society at large. No taxpayer ever paid a cent for a failed cooperative bank. This is exactly the opposite of too-big-to-fail which is the de facto life insurance of the free-riding US banking system.
This system, not the German three-column institutional setup, has been exported around the world under the flag of deregulation.
In 2008 the US banking system had been rescued by the Fed. Only if the toxic assets were valued to market today, one could see whether the big American banks are actually bankrupt or not. Note that the suspension of the mark-to-market accounting principle FAS157 was one of the first rescue actions in March 2009.
The Greek crisis is ultimately due to a switchover from originally safe and sound European banking institutions to US-style Ponzi banking. The self-destructive feature of this system is extreme leveraging, as Minsky already pointed out.
It is true, indeed, that it was not alone Greece which had the whole thing messed up, but Blyth’s analysis remains on the surface. Yes, the roots of the crisis lie far away from Greece — approximately the width of the Atlantic.
Egmont Kakarot-Handtke
#1 See also on the RWER blog It's about institution-building, stupid.
Blog-Reference
You quote Mark Blyth’s article ‘A Pain in the Athens. Why Greece Isn't to Blame for the Crisis’ approvingly. Blyth explains: “The roots of the crisis lie far away from Greece; they lie in the architecture of European banking.”
This is accurate only insofar as the European banking system has adopted the negative institutional features of the US banking system.
Remember that the investment banks literally invented sub-prime lending. Not one competent mortgage banker, neither in Germany nor in France, would have taken up this type of business.#1 Investment banking has nothing to do with classical European banking which consists essentially of lend-and-hold, long-term customer relationship, and risk-absorbing equity.
Investment banking depends basically on extreme leveraging, minimizing risk-bearing equity, maximizing quarterly return on equity, shifting credit risk to non-banks via securitization, and shifting the risks from derivatives betting ultimately to the public via too-big-to-fail. It was not so long ago when first Deutsche Bank and then the rest of the rather conservative German banking industry turned to investment banking.
This casino banking failed in 2008 in the US and now in Greece.
A very good piece of advice for the Greek people would be to look at the German cooperative banking group. In effect, people can own their local bank, the lender-creditor relationship is face-to-face, risks are strictly limited, and if it actually happens that one bank fails it is bailed out by a fund, that is, by all cooperative banks together. Seen as an institution, this self-organizing group of diverse firms provides all banking/insurance services at zero risks for society at large. No taxpayer ever paid a cent for a failed cooperative bank. This is exactly the opposite of too-big-to-fail which is the de facto life insurance of the free-riding US banking system.
This system, not the German three-column institutional setup, has been exported around the world under the flag of deregulation.
In 2008 the US banking system had been rescued by the Fed. Only if the toxic assets were valued to market today, one could see whether the big American banks are actually bankrupt or not. Note that the suspension of the mark-to-market accounting principle FAS157 was one of the first rescue actions in March 2009.
The Greek crisis is ultimately due to a switchover from originally safe and sound European banking institutions to US-style Ponzi banking. The self-destructive feature of this system is extreme leveraging, as Minsky already pointed out.
It is true, indeed, that it was not alone Greece which had the whole thing messed up, but Blyth’s analysis remains on the surface. Yes, the roots of the crisis lie far away from Greece — approximately the width of the Atlantic.
Egmont Kakarot-Handtke
#1 See also on the RWER blog It's about institution-building, stupid.
July 3, 2015
It's about institution-building, stupid
Comment on Michael Hudson on ‘Finance as Warfare’
Blog-Reference
Finance has not necessarily much to do with warfare — but it can if things are messed up.
Mortgage financing, for example, is an ancient and rather simple business. In Germany, it was institutionalized in 1900 with the Mortgage Banking Act. This law was so well-crafted that it worked with minor modifications until 2005 when it was abolished in an act of institutional suicide. The new law was sold under the slogan ‘Strengthening Germany as a Financial Centre.’ This was when deregulation was the hype of the day, which lasted until Wall Street's meltdown. This financial mega-crash, first of all, showed one thing: what happens when you do mortgage banking the American way.
Note, that a mortgage debtor saw and heard nothing for 10, 20, or 30 years of his creditor if he paid his fixed annuity monthly. If a loan became non-performing, mostly due to private misfortune like unemployment or divorce, the mortgage bank tried to help the debtor back on his feet because the last thing a mortgage bank wanted was the real estate that had been pledged as collateral. All it ever wanted was the money back plus interest as agreed upon in the mortgage contract. Then it could, in turn, fulfill its obligations vis-à-vis the Pfandbrief owners, mostly pension funds, and other long-term buy-and-hold investors.
This changed when it became possible to sell non-performing loans to firms that were specialized in making money from talking to the debtors in the bonebreaker jargon that people had hitherto only encountered in Hollywood movies.
Note further, that the margins of mortgage banks were usually seen as razor-thin and not something an investment banker would get out of bed for in the morning.
Most importantly, note that Germany has never had a real estate boom-bust cycle. That is quite remarkable when you consider that Japan, the US, Britain, Spain, and many other economies have been badly damaged by a real estate bust.
Likewise, the margins of commercial banks like Deutsche Bank were unspectacular. Yes, until Mr. Ackermann came and announced that he aimed at something about 20 or so percent — like the American investment banks. This made the stock market happy.
Now, whoever has been long enough in the banking business knows that margins way above the average can only be made by magic or fraud. People preferred to believe in magic while the latter happened as a trivial reality throughout the banking industry.
After everything had duly crashed against the wall in 2008/09 the actual resume is this. There is no use to lament too long over banksters. It has been convincingly demonstrated that, for example, mortgage lending can be institutionalized in such a way that it works smoothly to the benefit of lenders, borrowers, and the economy at large. It can be done for other financing businesses, too.
The point is whether a country is good at institution-building or not. There is a lot at stake. If you mess up your political institutions you end up in a banana republic, if you mess up your banking institutions, first and foremost the central bank, you end up in large-scale bankruptcy and QE.
I think it would be acceptable to get out of this war rhetoric, not because there is nothing to it, but because it keeps us from building proper functioning political and economic institutions.
There is a way to get rid of financial war, banksters, and — not to forget — the small-scale corruption of people who do not belong to the one-percenters. Economics is, in the first place, not about good guys vs. bad guys, it is about effective vs. ineffective institutions (including laws, judges, and prisons for financial warmongers).
Egmont Kakarot-Handtke
Blog-Reference
Finance has not necessarily much to do with warfare — but it can if things are messed up.
Mortgage financing, for example, is an ancient and rather simple business. In Germany, it was institutionalized in 1900 with the Mortgage Banking Act. This law was so well-crafted that it worked with minor modifications until 2005 when it was abolished in an act of institutional suicide. The new law was sold under the slogan ‘Strengthening Germany as a Financial Centre.’ This was when deregulation was the hype of the day, which lasted until Wall Street's meltdown. This financial mega-crash, first of all, showed one thing: what happens when you do mortgage banking the American way.
Note, that a mortgage debtor saw and heard nothing for 10, 20, or 30 years of his creditor if he paid his fixed annuity monthly. If a loan became non-performing, mostly due to private misfortune like unemployment or divorce, the mortgage bank tried to help the debtor back on his feet because the last thing a mortgage bank wanted was the real estate that had been pledged as collateral. All it ever wanted was the money back plus interest as agreed upon in the mortgage contract. Then it could, in turn, fulfill its obligations vis-à-vis the Pfandbrief owners, mostly pension funds, and other long-term buy-and-hold investors.
This changed when it became possible to sell non-performing loans to firms that were specialized in making money from talking to the debtors in the bonebreaker jargon that people had hitherto only encountered in Hollywood movies.
Note further, that the margins of mortgage banks were usually seen as razor-thin and not something an investment banker would get out of bed for in the morning.
Most importantly, note that Germany has never had a real estate boom-bust cycle. That is quite remarkable when you consider that Japan, the US, Britain, Spain, and many other economies have been badly damaged by a real estate bust.
Likewise, the margins of commercial banks like Deutsche Bank were unspectacular. Yes, until Mr. Ackermann came and announced that he aimed at something about 20 or so percent — like the American investment banks. This made the stock market happy.
Now, whoever has been long enough in the banking business knows that margins way above the average can only be made by magic or fraud. People preferred to believe in magic while the latter happened as a trivial reality throughout the banking industry.
After everything had duly crashed against the wall in 2008/09 the actual resume is this. There is no use to lament too long over banksters. It has been convincingly demonstrated that, for example, mortgage lending can be institutionalized in such a way that it works smoothly to the benefit of lenders, borrowers, and the economy at large. It can be done for other financing businesses, too.
The point is whether a country is good at institution-building or not. There is a lot at stake. If you mess up your political institutions you end up in a banana republic, if you mess up your banking institutions, first and foremost the central bank, you end up in large-scale bankruptcy and QE.
I think it would be acceptable to get out of this war rhetoric, not because there is nothing to it, but because it keeps us from building proper functioning political and economic institutions.
There is a way to get rid of financial war, banksters, and — not to forget — the small-scale corruption of people who do not belong to the one-percenters. Economics is, in the first place, not about good guys vs. bad guys, it is about effective vs. ineffective institutions (including laws, judges, and prisons for financial warmongers).
Egmont Kakarot-Handtke
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