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The Ridiculous Debt and Deficit Scam

parliamentAfter a weekend of intense study reading a plethora of material online from a variety of economists I am at the point where, similar to my University days, I must put what I have learned to paper. In reality it’s even scarier than University because, unlike handing it to a tutor for a confidential and sympathetic grading, posting it online exposes me to any amount of ridicule from anyone, anywhere. But, having come this far, I have to press on and continue what I started with my previous article, “Do Taxes Fund Spending?”

If what I write is true, and naturally I believe it is, we as a nation are being deceived in a way that, I think, is unconscionable. Essentially, this is a dummies version of the previous article and is designed to attract more people like me, who are still going through the difficult process of learning and understanding what is a relatively simple principal So, here goes….
*
To a sovereign nation like ours that operates its own central bank, the notion of a government being in debt and budgeting for surpluses and deficits is a ridiculous scam.

Every sovereign nation has the right and the responsibility of creating its own money. It carries out this responsibility by creating and supplying that money through the agency of its central bank and delivers that money into the market place via the commercial banking system. This is just one source from which commercial banks obtain money, but it is the most important source because it fulfills one of the essential steps a government takes to control the supply of money. Other sources are private investment and export income.

tax and bondThe other essential steps a government takes to control the supply of money are through taxation and the sale of bonds. Taxation and the sale of bonds remove money from the market place. There are two other ways money is removed from the market place, namely through personal savings and import payments. This two pronged process is analogous to a giant water tank with a hose at the top pouring water in and an outlet valve at the bottom allowing water out. Now think money instead of water. The objective is to maintain as close as possible a constant level of money in our economy; enough money in circulation sufficient to avoid inflation which is what happens when there is too much money in circulation and recession when there is too little. It is a finely balanced discipline undertaken and monitored by the central bank. The amount of money in circulation at any time is called the monetary base or high-powered money. It is the national income and consists of all the money the central bank holds in reserves for the commercial banks as well as all the money in the commercial bank vaults, and all the money you and I have in our wallets and purses and what we hide under the carpet. Just how the central bank calculates all that is another story, but they do it constantly. The process never stops.

rbaGovernments rely heavily on the efficiency of the central bank to keep them advised as to the amount of money in circulation, as well as the likely movement of money both in the short term and the long term. The central bank also advises the government on the implications of government fiscal decisions and the impact of those decisions upon that finely balanced position they are required to monitor. It goes without saying that sometimes the central bank miscalculates the current position and/or governments ignore warnings given by the bank which can, and does, lead to imbalances that cause inflationary pressures or recessionary outcomes. Nobody is perfect all the time. So, when things get out of hand and too much money gets into the system, the central bank will generally address this imbalance by raising interest rates to soak up and remove that money. The government may also choose to issue bonds. When too little money is in circulation and people stop buying other than for essential needs, more money needs to be poured into the economy to stimulate demand. In this case the central bank will lower interest rates to release money into circulation thus enabling increased spending power. All this activity is made possible because the government has the ability and responsibility to create money.

This brings us to the question of government budgets and the notion of surplus, deficit and debt. When a government brings down a budget it will do so to with the intention of matching what it spends with what it collects in the form of taxation. It does this to ensure a predictable outflow of money from circulation and to maintain that constant balance; not unlike how we manage our household affairs. But it is wrong to think that it must do this. It doesn’t. Managing a sovereign nation’s economy is not the same as managing a household economy. Households cannot create their own money. We all wish we could but our resources are finite. A government’s resources are not finite despite what politicians tell us. To understand this, let’s go back to the water tank analogy. The government creates money and pours it in, taxation takes money out. Taxation doesn’t fund spending. It is part of the process that removes the money from circulation in a constant predictable way. So, when a government’s budget reveals that it is spending more than it is collecting (i.e. a deficit), that doesn’t mean it has to borrow to make up the difference. It can just create more money, i.e. print it, although these days the process is little more than altering the numbers in a computer. So long as the level in the tank remains constant that extra money is not a debt. It doesn’t have to be paid back. Likewise when a budget shows less money being spent than is being collected in tax (i.e. a surplus), that doesn’t mean the government has a bank account with that surplus saved. That money simply doesn’t exist.

hockey hoIf we apply this principle to our present government’s rhetoric about debt and deficit, about unsustainable spending, about the “mess” the previous government left, one can clearly see that such claims are false and misleading. This government is trying to manage the economy in the same way each of us manages our own households. The figures they present to us are a fiction. Households and businesses manage their affairs differently because they cannot print money. It would be nice if we could but there you are. We must determine our profit and loss and our tax liabilities with resources that are finite. We must live within the confines of our own budgets and meet our obligations as determined by the government. But that is not the way a government should run a country.

This principle also exposes Joe Hockey’s budget as not only cruel and vindictive but also as a ridiculous sham. It smacks of something personal as if the poor are being punished for allowing themselves to be in that situation. It exposes the neo-Liberal economic strategy that treats Australia as if it were a household. They should be challenged for this. This government is not governing for the people but for the big end of town. It is blatantly unfair and unnecessary.

I am not pretending to be an economist. But I am smart enough to see the difference between the government’s management of the economy and the way it should be managed. Either they don’t know how to do it, or they don’t want to, which is the more likely, and that means we, the 90% who feed the economy, are being played for fools by the 10% who feed off us and stay rich, because of us.

Recent articles by John Kelly:

Hockey’s Class Warfare

What a Circus!

Is Abbott a Christian or just a Catholic?

Where have all the Leaders gone?


129 comments

  1. DanDark

    There is a clown in every circus. And Eleventy wins it with this current circus
    Geeee I wonder how long it took them to script the gabble
    They are spewing forth, covering the unsuspecting voter in a haze of fog…
    The fog is lifting and eleventy and co are slowly drowning….

  2. n

    good on you, John.

  3. Lee

    Well written, John.

  4. Bighead1883

    Thank you John Kelly and to date you are the only writer honestly describing our Sovereignty.
    You`ve correctly shown that we can print.digitize our own money for fiscal control but yet we DON`T.
    Why? well it has to be treasonous doesn`t it? why are politicians borrowing when Q/E can apply.
    With the US having a 16 $trillion economy and us having a $1.5-6 trillion economy that means that with the US doing Q/E at $85 billion per mth since the GFC began we could also have done a pro rata Q/E [$8.5 billion per mth] and used this for infrastructure spending etc.
    This would also have lowered our $AUD and primary producers would have gained.
    It`s even likely that the car makers would have stayed.
    Currently we have a 2 Party Preferred Treason on us by the very politicians whom we engage to look after our country with fiduciary resolve.
    Australians need to begin a class action lawsuit against all governments who`ve privatised any of our assets and services.

  5. Brendan Kelly

    I’m not an economist either but I have thought along these lines for a while. The Government controls the flow of money. It can’t owe money to itself. The Balance of payments is an important consideration, though. If we are importing much more than we export, in dollar terms, the Government must use more complex settings to change the situation. Simple increasing of taxation rates to curb expenditure will also have a major impact on local businesses. The policy settings have to address industry development and advancing technologies relevant to our markets, which is now broader than ever.
    The biggest mistake was made by the Howard Government, when Costello was Treasurer. Instead of using the surpluses created by the mining boom for infrastructure development and technological investment, we all got tax cuts and were encouraged to spend like mad. It usually got spent on things made overseas, so the Gerry Harveys and Frank Lowys got richer but not the overall Australian economy.

  6. Pingback: The Ridiculous Debt and Deficit Scam | OzHouse

  7. edward eastwood

    Not a bad summation John, but you might like to give credit where credit’s due.

    What you’re discussing here is Modern Monetary Theory and its been around for quite a while.

    It’s also been the central plank for bloggers such as Peter Martin and his site; Modern Monetary Theory; Real Economics

    It has also been frequently referred to by commentators such as John Armour, Mobius and even my humble self and a host of others.

    http://mugwumpost.wordpress.com/of-fairy-tales-and-sea-stories/

    http://mugwumpost.wordpress.com/whenever-i-hear-the-words-we-have-to-get-the-budget-back-in-surplus-i-reach-for-my-bullshit-repellent/

    Not to mention Bill Mitchell whose billyblog has been the source of information for ‘true believers’ including myself.

    While its great to see that the penny has dropped and you’re wearing your steel capped boots, don’t forget to mention that we’re all riding on the back of giants such as Mitchell, Kelton, Wray, Mosler et al.

  8. Graeme Henchel

    In Abbott’s world it’s quite routine
    To say black is white and brown is green
    In this world of deceit and distortion
    Words get twisted in all contortion
    The climate’s not changing
    The earth is flat
    Bronwyn’s not biased
    Joe is not fat
    Cuts are increases
    Co-payments aren’t tax
    Promises aren’t broken
    Who cares about facts
    Concoct a crisis where none exists
    Standard fare for mendacious sophists
    Claim to be the pensioners best friend
    When caught out just condescend
    When the lying impact starts getting weaker
    Morrison can bash an asylum seeker
    In Abbott’s world it’s quite routine
    To lie to the point of being obscene

  9. Lawrence Winder

    You are an evil man John Kelly.

    Things are not supposed to be so simple.

    How can “Rabbutt-the-Hun” and Joe “Cereal/Toyota-Killer” Hockey implement the IPA’s vision of a Market Economy if the economically uneducated likes of you can explain it?

    This is treasonous and will probably be dealt with in the harshest fiscal manner.

  10. Vivienne

    Congratulations to Graeme Henchel – spot on poem and I’m not really into poetry!

  11. June M Bullivant Oam

    Thank you explained this in very simple language, and from memory over time (I am not that young anymore) you are correct, I remember things like that happening. The Government is telling us a whole heap of crap, the worst problem is they are full of it, I don’t know if we will ever get truthful governance ever. I think the whole political scene needs and overhaul and we need to get rid of career politicians and get ones that lead for the common good, I personally have had all that I need, bring on the next election, seen today that the anger had softened, it is because we are so fed up we are having a rest.

  12. Diannaart

    Australians need to begin a class action lawsuit against all governments who`ve privatised any of our assets and services.

    When will the, er, (no pun intended) penny drop?

    I’m no economist either, therefore I look at actual stuff being done (or not).

    If there truly, wuly, was a budget crisis would the PPL still be on?

    Would defence be getting everything it wants?

    …The chief economist at Bank of America Merrill Lynch, Saul Eslake, said the Coalition’s fiscal objectives should be viewed as only an ”aspirational goal” that would only be achievable if the economy began growing rapidly.

    ”[Otherwise] there’s not a lot of scope for them to find these sacks of money that are going to deliver them the savings they need,” he said.

    http://www.smh.com.au/federal-politics/federal-election-2013/huge-cuts-needed-to-fund-abbotts-new-spending-20130826-2sm9w.html#ixzz35REmr6LG

    That’s right folks, even with hitting Australia’s infrastructure; education, health, public transport, renewable R&D and manufacture and more, Abbott needs even more money to realise his dream of far-right dystopia.

    Exciting times, eh?

  13. Dr.wom Bhatt

    Thank you John Kelly on a most informative article. I will challenge one point. You base part of your view on the fact that Australia is a “Sovereign” nation. Is that really the case ? Most ex-colonial nations have an “Independence Day”. When does Australia celebrate its independence from GB ? https://www.youtube.com/watch?v=jY2k_f11lxI

  14. Abbienoiraude

    Thank you John Kelly for ‘dumbing it down’ for the likes of me. I try and try to follow the reasoning of this lot and got lost in the simile of ‘household budgets’. It did not seem right.
    Then this morning it was reported on ABC how there are nations in Europe ‘PRINTING MONEY’ to tip into their economies so they can give it a good kick start. THAT confused me. Just printing more money can be done by Countries without any reference to ‘gold’ or USA or the World Bank? Wow who would have known.

    Lo and behold, coincidentally I opened up your post on AIMN and there you are explaining how countries can ‘print money’ as much as they like to keep the balance.

    I will have to read it again, but the strongest points I take are that this mob are really doing a cruel and vicious thing to us and that we on DSP and carers pensions are being viciously and unnecessarily and ideologically vilified and punished.

    Damn them!

  15. JohnB

    Hello John,
    Like your explanation, logic and analogies.
    If there is one flaw in your analysis it think it is that ‘our’ Reserve Bank is not the sole property of the Australian government.
    Could you please expand on the complications caused to the operation of an economy under a foreign owned reserve bank.

    “There are only five countries worldwide that do not have a reserve bank: North Korea, Sudan, Cuba, Libya & Iran.
    The Australian Reserve Bank, like others worldwide, is a private company, therefore unlike a public corporation does not have to publish accounts
    The Australian Reserve Bank, like others worldwide, has total control over inflation & interest rates
    The Australian Reserve Bank is a foreign ADI. A “foreign ADI” means a body corporate that:
    (a) is a foreign corporation within the meaning of paragraph 51(xx) of the Constitution; and
    (b) is authorised to carry on banking business in a foreign country; and
    (c) has been granted an authority under section 9 to carry on banking business in Australia.”
    http://nesaraaustralia.com/2012/07/15/facts-of-the-reserve-bank-of-australia/

  16. Bacchus

    I think the AIMN deals in facts JohnB, not conspiracy theories…

    http://en.wikipedia.org/wiki/NESARA

    What is the Reserve Bank of Australia and who owns it?

    The Reserve Bank of Australia is Australia’s central bank. Its role is set out in the Reserve Bank Act 1959. The Bank conducts the nation’s monetary policy and issues its currency. It seeks to foster financial system stability and promotes the safety and efficiency of the payments system. It also offers banking services to government. The Bank is a body corporate wholly owned by the Commonwealth of Australia. For more information see about the RBA.

    http://www.rba.gov.au/qa/role.html

  17. JohnB

    Thanks Bacchus,
    I fell into that one – should research my sources more diligently.

    I stand corrected and am greatly relieved that the misinformation I posted has been corrected.

  18. Bighead1883

    Graeme Henchel your poem is excellent,HURRAH

  19. Bacchus

    There’s been a lot of that one floating around lately JohnB – seems to be a concerted push for some reason or other…

  20. n

    if the RBA does all of these things, how do we find ourselves in the position that Hockey speaks of?

  21. RalphG

    “I will have to read it again, but the strongest points I take are that this mob are really doing a cruel and vicious thing to us and that we on DSP and carers pensions are being viciously and unnecessarily and ideologically vilified and punished.”

    It’s called neo-liberalism and unfortunately it’s embraced by all the major political parties. I have never heard a mainstream economist or economic commentator who doesn’t speak as if the gold standard still applies.

  22. charybds

    Well ‘n’ .. we really aren’t in the position Hockey speaks of are we?

  23. edward eastwood

    n; That’s the point of this article. We’re not in the position that Hockey speaks of. It’s purely confected like the ‘budget emergency’ or the ‘welfare emergency’.

    Hockey’s claims spring from ideology and fiscal reality.

    Nations that issue their own (fiat) currency are never revenue constrained and in reality can never go broke, in fact they need to spend before they can ‘borrow’ although even the term ‘borrow’ is a misnomer because they are actually borrowing from themselves and the interest paid on bond issue is created ‘ex nihlo’ (out of nothing).

    The below links will help explain why this is so.

    http://petermartin2001.wordpress.com/2014/05/30/why-sometimes-ive-believed-as-many-as-six-impossible-things-before-breakfast-or-whats-so-hard-about-mmt/

    http://bilbo.economicoutlook.net/blog/?p=24850

    http://bilbo.economicoutlook.net/blog/?p=3346

    http://www.snowcow.com/society/we-save-when-the-government-spends/

  24. edward eastwood

    Whoops, sorry. That should read Hockey’s claims spring from ideology and NOT fiscal reality. (sticky fingers)

  25. Trevor

    Mmmmm

    Now will that be enough to cause the hounds of Abbott be loosed at such treachery regarding the economic facts.

    A good article this one and in todays West Australian is an article regarding student debt which make for sober reading and reveals the inadequesy of Joe Balony mr Eleventy and his economic charades on behalf of the lying Abbott.

    Export Abbott not Refugees.

  26. John Kelly

    Edward Eastwood, I’m more than happy to acknowledge all those you mention and the fact that none of this is new. It was a torrid weekend and absorbing MMT over a relatively short period caused some oversight. My anger increased each time I realised that while I understood what Mitchell et al were saying, Hockey didn’t, or didn’t want to. This, to me, was outrageous. I am sending an email copy of this article to several government MP’s in the vain hope of a reply. I want to get their view and if it doesn’t agree with mine, I want to find out why.

  27. Rafe Falkiner

    Nicely put Mr Kelly

  28. jimhaz

    I have never formed a coherent picture of how international economics works, but I know it cannot be as easy as you are suggesting, otherwise more countries would do it. Those that do tend to be ones like Zimbabwe.

    Bonds are still a future debt.

    “In the case of the Fed and all the other major central banks ‘printing money’, it’s a similar situation. Although in this case they are liquidating/monetising previously created government debt. They are simply changing the structure of the debt market from long term to short term. They are making it ‘more liquid’.”

    Printing money would cause inflation as the level of money in the the Oz economy would be higher, people would be more inclined to pay higher prices.

    http://www.economicshelp.org/blog/634/economics/the-problem-with-printing-money/

    Still, I do not doubt that thy could indeed print some money. It is one of those do it in moderation things. They could print enough money to considerably soften the effects of the budget, to take off the cruelty – but they don’t want to do they!

    I’ve been surprised at how little the US money printing over the last 2 or 3 decades has had on their household expenditure, but then one can read stuff like this:

    http://go.bloomberg.com/market-now/2013/12/31/for-us-men-40-years-of-falling-income/

  29. Kaye Makovec

    “It smacks of something personal as if the poor are being punished for allowing themselves to be in that situation.”

    Of course it does because we choose to be poor, choose to be underpaid, choose to go on the DSP, even choose to be old.

  30. DanDark

    And we cannot forget, we choose to get sick,
    Yes smacks of their lack of understanding of humans
    They are subhuman, that sit on the high moral ground
    Called religion, and it’s constraints on ones mind…

  31. John Kelly

    Jimhaz, in one way you have answered your own querie by inadvertently linking bonds with the printing of money. Issuing bonds is not a debt. It is a process by which money is taken out of circulation. Printing money replaces the money the bonds soaked up. The balance therefore is zero. That can’t be inflationary. The QE program in the US over the past five years has not been inflationary. Yes, the bond is repaid with interest but the only deficit is the interest and that is easily balanced out with subsequent bond issues or taxation. Once again, the balance is zero. Zimbabwe is not an example that has any place in this discussion. Zimbabwe was gross mismanagement on a monumental scale. I don’t know why other countries don’t follow the Modern Monetary Theory. I suspect other more qualified people could help you there.

  32. joe3868

    Bacchus; You need to do your research more thoroughly. The ADI,s mentioned by JohnB actually issue our currency to our Reserve Bank. No one denies that the Reserve bank is wholly owned by the Government but there our sovereignty stops. . The AdIs are none other than the Rothchild international banking cartel who issue our currency and to whom we pay interest for the privilege.
    Follow the money trail and it always ends at the Rothchild banks and the Bank of England.Every Western nation that hasn’t thrown
    out the Rothchild banks is indebted to them as loans not only of their currency, but loans to their governments and banks is Rothchild money. The debt to them always increases until the nation concerned goes bankrupt . Iceland and Ireland were bankrupted but had the guts to chuck out the Rothchild bankers. Ireland has put some of them in jail. Those countries then set up a national bank which issues its own currency and pays interest to no-one. Iceland went from bankruptcy to prosperity almost overnight. Russia kicked out the Rothchild banks about 10 years ago, so did Hungrey. The US is staggering towards bankruptcy.
    The day of reckoning is being put off by continually increasing its debt level. What is really mind-boggling is that the debt is
    a fictitious fraud based on fictitious money created out of thin air or as the Governor of our Reserve Bank calls it ‘ex nihlo’.when he referred to money “loaned” to depositors such as mortgages and other personal loans..The moment a person signs a mortgage agreement, the money is created out of thin air for which the poor devil has to not only pay back something that doesn’t exist but a whopping interest bill on top. Most people, even educated people are still under the illusion that the money they borrow from a bank is depositors money loaned to them. Not so, and hasn’t been the case for many years. .Depositors
    money goes instead on a banking merry-go-round creating more and more debt and finds its way into derivatives.
    Please watch this video aptly titled “The Biggest Scam in the History of Mankind..” Its an eye opener.
    https://www.youtube.com/watch?v=iFDe5kUUyT0

    Joe3868.

    ps. The above is not a Conspiracy Theory, but a gigantic Conspiracy.

  33. John Armour

    Congratulations John on getting this nailed down over a week-end. I can tell you it took me a lot longer than that !

    In your understandable haste to get your head around all this however there are a couple of things that you should revisit and have another look at, viz, the purpose of bonds and how the central bank controls the money supply (it can’t).

    First, the purpose of bonds issuance is not to remove money from the market place, but rather to remove excess reserves from the accounts the commercial banks keep at the RBA. I know the text books tell a different story but they’re wrong.

    Excess reserves build up as the government spends over and above the tax take, that is, in times of deficits. Government cheques all finish up in the reserve accounts of commercial banks. Tax is also paid out of those reserve accounts so you can see how the balances would ebb and flow.

    Banks with excess reserves try to unload them to other banks to earn some interest, but if the banking system in aggregate is flush with excess reserves, the bid rate on these reserves could fall to zero. Nobody wants them.

    Banks can’t lend these reserves outside the banking system (the inter-bank market), only amongst themselves.

    Why this is important is because the ‘interbank lending rate’ on reserves is also the ‘cash rate’, the target rate the RBA sets as a benchmark for the financial sector, as the lowest risk loan for the shortest term (overnight).

    So, to drain the excess reserves out of the interbank market, the government issues bonds. This is nothing more than an asset swap, but it’s the origins of the “Big Lie” that the government is “borrowing” to fund “the debt”, the so-called debt our grand-children will have to pay back.

    Next is the issue of the money supply. Contrary to Monetarist belief, the central bank cannot actually control the money supply (‘broad money’). The money supply is effectively controlled by the commercial banking sector. All the central bank does is supply reserves to the commercial banks, when they can’t get them cheaper elsewhere. It does however influence the lending rate of the commercial banks.

    So whilst the RBA can’t control the supply of money, it can control the price (the interest rate) and thereby, in theory, the level of demand in the economy, and inflation.

    Remember that commercial banks get the money they lend from the same place as the government, from thin air. They do not lend depositor’s funds as commonly believed, so they are somewhat unrestrained in how much money they can create to lend.

    Do you find the story getting “curiouser and curiouser” ? A lot more to come.

  34. Bighead1883

    @ joe3868June 23, 2014 at 8:56 pm
    We are completely sovereign.
    Unlike the US Federal Reserve and the ECB or the BoE the ARB is Sovereign entire.
    The ARB website will explain it all to you.

  35. Bighead1883

    @ joe3868June 23, 2014 at 8:56 pm
    http://www.rba.gov.au/qa/role.html
    Here are the facts joe which is why I say our politicians are traitors and we really do need a Federal ICAC

  36. John Armour

    I don’t know why other countries don’t follow the Modern Monetary Theory. I suspect other more qualified people could help you there.

    There’s a good chance China employs MMT-type insights in how they manage their economy.

    Frank E Newman, a former Deputy Secretary of the US Treasury wrote a book called “Six Myths that hold back America” wherein he suggested as much. He spent many years in China and has an insider’s knowledge of their banking and monetary system.

    I can imagine Chinese central bankers smiling inscrutably (if that’s possible) as western economists warn about the unsustainability of Chinese deficits. They probably wouldn’t realise that paper currency is a Chinese invention and they probably worked all this out a thousand years ago.

  37. Bighead1883

    People do please understand that the MSM Corporate media propaganda is even dumbing people down as to our own fiscal sovereignty.
    Do not let our Royal Mint/Perth Mint be privatised or the ARB either.

  38. RalphG

    “Those that do tend to be ones like Zimbabwe.”

    I was wondering how long it would take for someone to bring up Zimbabwe or even the Weimar Republic.

    Zimbabwe’s problems were not caused by the government increasing the money supply. Their problems were caused by Mugabe’s foolish idea of handing over the county’s farmland to people who had no idea about farming.

    “Printing money would cause inflation as the level of money in the the Oz economy would be higher, people would be more inclined to pay higher prices.”

    Inflation is a risk when the demand in goods and services exceeds the ability of an economy to respond to that demand. Having more money in the economy does not automatically cause inflation as you claim.

    “I’ve been surprised at how little the US money printing over the last 2 or 3 decades has had on their household expenditure”

    Why would it? Printed money = cash. Do you buy everything with cash? Do you pay all your bills with cash?

  39. Bighead1883

    @ John Armour
    The Chinese own the Americans via bond holdings.
    They are themselves stopping these purchases because of the US Fed Res still too large Q/E and China wanted the Tapering exponentially hastened.
    The Chinese Shadow Banking {non Government supported] is floundering and will not be bailed out and this will catch out the West`s HFT derivatives because who`s going to accept the hedge? ain`t gonna happen and the GFC MK4 is on because GFC MK 2 LIBOR/ GFC MK 3 PIIGS junk bonds is still there as so are all the GFC MK1 junkbonds [sub prime mortgages]

  40. Bacchus

    joe3868,

    Perhaps you would be better served doing your own research on non-conspiracy sites before showing your ignorance in public…

    ADIs are banks and building societies… Approved Deposit taking Institutions 🙄

    http://www.apra.gov.au/adi/Pages/default.aspx

  41. Bacchus

    The ADIs mentioned by JohnB actually issue our currency to our Reserve Bank.

    Seriously, that has to be close to the most nonsensical statement ever made on this site! Simple request – just go away. You have NFI…

  42. RalphG

    “Seriously, that has to be close to the most nonsensical statement ever made on this site! Simple request – just go away. You have NFI…”

    I’ll second that

  43. John Armour

    The Chinese own the Americans via bond holdings

    The Chinese only have 6% of US debt, so there’s a way to go yet.

    Meanwhile the yanks are enjoying all those iPads while the Chinese do laps in a pool full of US Treasury paper.

    I know who’s doing best out of this deal.

  44. John Armour

    China only holds about 8% of U.S. debt.

    Hey Ralph, we better get our story straight or our credibility will be shot !

    🙂

  45. Craig

    John Kelly. People are actually dumber for having read this article by you. No you are not and economist and if you think the ‘solution’ is hey lets print money then god help us

    Why doesn’t every government as you say just print more money. Problem solved? Why did Greece face bankruptcy if all they need was john Kelly as fiscal adviser to say ‘print some more money boys’

    Do a bit more reading john. Educate yourself before sprouting such ridiculous dribble in the future

    Totally appalled by the ludicrous diatribe being touted as anything of any worth

  46. Bacchus

    So Greece is sovereign in it’s own currency ‘Craig’?

    Do you understand the relevance of that question? I would posit that you’re another that really has NFI 🙄

  47. edward eastwood

    John Kelly; I can understand both your rage and your excitement – I speak for myself but I think I can say without too much fear of contradiction, that its a pretty common reaction in most of us who discover MMT.

    Keep your anger, because it’s going to simmer and grow for a couple of reasons the first being that you’re going to start feeling like Galileo trying persuade others of the fact that the Earth moves around the Sun while others are going to do their damnedest to convince you of the current status quo.

    The most frustrating thing is trying to get this into the political arena as you will no doubt discover should you fire a couple of missives off to various politicians.

    Neither the ALP nor the Greens (who are actually best placed to use it to their advantage) have evinced the slightest interest although in some ways they have actually approached the brink several times.

    Even though MMT has been around for quite some time – and one could say its the natural evolution of Keynes theories, it appears to be too radical for those who are convinced that the Sun goes around the Earth.

    This is not to say however that we shouldn’t keep trying and your article has certainly provoked an increased interest, and that’s all which is needed to further a wider understanding.
    Look forward to more.

  48. John Armour

    “I was wondering how long it would take for someone to bring up Zimbabwe or even the Weimar Republic”

    Not long usually Ralph. This is Neil Wilson’s version of Godwin’s Law:

    “As an online economic discussion grows longer, the probability of a comparison involving Zimbabwe or the Weimar Republic approaches one.”

  49. Bighead1883

    So with China owning 1.3+ trillion of US debt via Treasury bonds and with a 2013 trade deficit to China of $315 billion I again reiterate,China owns the US by sheer trade volume and debt interest.
    China cut $800 billion of debt exposure to the US because of it`s shaky status of the global reserve currency.
    Now as I stated the Chinese government will not rescue it`s shadow bankers and the West could not keep it`s fingers out of the honey jar.
    http://qz.com/175590/five-charts-to-explain-chinas-shadow-banking-system-and-how-it-could-make-a-slowdown-even-uglier/
    So John and Ralph I trust you can both put up a decent debate on this but I seem to be dealing with juveniles.

  50. Bighead1883

    OH Ralph and John what are your opinions on Australia doing Q/E?

  51. John Armour

    Looks like there’s a “Greek” version of Godwin’s Law too.

    Why did Greece face bankruptcy if all they need was john Kelly as fiscal adviser to say ‘print some more money boys’

  52. John Armour

    OH Ralph and John what are your opinions on Australia doing Q/E?

    First we’d have to drop the cash rate to near zero. The RBA’s still got plenty of ‘monetary’ headroom.

    Second, why would we want to do that ? The purpose of QE is to lower the yield on long term bonds in the mistaken belief that that might influence interest rates in the corporate market and stimulate lending. Hasn’t worked yet and neither should it. The resultant increase in reserves has no effect on banks lending capacity because banks are not reserve constrained and neither do they lend reserves (except to each other).

  53. Bighead1883

    How ignorant are you John Armour,Greece has not been Sovereign fiscally since it joined the EU.
    I thought so,that`s one ignorant one out of the way.
    Godwin`s law espoused by RWNJ`s haha ,what an anathema.
    Your turn Ralph.

  54. RalphG

    “Remember that commercial banks get the money they lend from the same place as the government, from thin air. They do not lend depositor’s funds as commonly believed, so they are somewhat unrestrained in how much money they can create to lend.”

    John, to the best of my knowledge, that is not true. Commercial banks cannot create money “out of thin air”. Only the federal government can do that.

    I think that what creates the illusion of the banks creating money is that they leverage deposits. For example, Person A deposits $1000 with the bank. Person B borrows $1000 from the bank and pays it to Person C. Person C deposits the $1000 with the bank. Person D comes along and borrows the $1000 from the bank and so on. All of these transactions net to zero and no money has been created.

    The banks certainly do lend depositors’ money but they are not constrained to only lending depositors’ money. They also have the ability to borrow from other banks or on the money markets.

  55. Bighead1883

    Now on your Q/E and the International banksters all began Q/E in early 2009 except for Japan as they`ve been doing it for 20 years prior.
    So the globes Central Bankers have thin aired all this capital and what have they done with it?
    Some to the PIIGS and most stayed in the banks,especially on Wall Street where it`s been waging a global currency war [but of course a fiscally aware person of your calibre would know this]
    Now we could have done pro rata Q/E from OCT 2008 at $8.5 billion per month.
    WOW that would have seen NO borrowing and a lower dollar.
    OK so now do your Zimbabwe thing {as if Australia could ever be compared to Zimbabwe]

  56. John Armour

    Do a bit more reading john. Educate yourself before sprouting such ridiculous dribble in the future

    It’s not the quantity of the reading Craig. You sound like you’ve done a fair bit. It’s the quality that’s important.

    You won’t learn macroeconomics by reading newspapers or listening to Alan Kohler on the telly.

    Have you bothered to read any of the numerous links to Modern Monetary Theory that have been posted recently ?

  57. sam

    Just though i’d add. Yes MMT is an example that shows the stupidity of ‘bedget defecit == bad’. MMT is the best mechanics we have for economics as it is a proper ‘top down’ approach (like engineering systems in general). Is robust and observes how modern fiat currencies actually work. Note: the word ‘observes’ not ‘theorises’.

    But i thought it would be appropriate to add the ‘shades of grey’ to this conversation. Specifically economic schools of thought:

    It not just MMT but even conventional economists who will argue that there is not ‘rush back to surplus’ that an advanced currency issuing economy can be run with moderate debt for decades. (so it becomes an issue of ‘relative’ beliefs). Eg: Australia’s sectorial balances history 😉

    Eg: conversation with friend whom works in RBA duing the ‘stimulus’ package during Rudd government years basically agrees that its only ideological that the ‘budget’ is a ‘budget’ at all and they can issue currency when needed no strings attatched as long as its aimed at boosting the economy in some measurable way.

    Which is not all that contraversial its well within the paradigm of Keynesian economics which even when done badly has worked by past precedent.
    http://en.wikipedia.org/wiki/Keynesian_economics

    I guess this only highlights the ideological extremists in charge though doesnt it! For a mathematically unsound concept they will try and place Austerity on old people, unemployed, small business, familes disproportionately. (Whom all can go bankrupt/governments cant)

    And to ‘pre-empt’ the usual rubbish that this is inflationary sorry where is that evidence:
    http://www.tradingeconomics.com/australia/consumer-price-index-cpi
    *remeber the rubbish that the rudd governments stimulus would create accelerated inflation… Myth.

    And to really prove this point look at japan in the late 90’s should have hyper inflated ;)…
    http://www.inflation.eu/inflation-rates/japan/historic-inflation/cpi-inflation-japan.aspx

  58. Bighead1883

    Ralph G the big banks that make up the US Federal Reserve,the ECB and the BoE all thin air their money and swap this with countries for Treasury Bonds
    They charge interest and cash them at maturity [ and they thin aired the funds,digitized]
    We are Sovereign here in Australia and the Conservatives want us enslaved like the US/Japan/EU/UK
    Say no to privatisation and say no to the TPP

  59. craig

    Ok fair point, in my haste and frustration at such a silly over simplisation of economic function, that the solution thats been staring the globel world is simply “print more money” (seriously for one second stop and actually think about how silly that sounds – hey guys why worry all we have to do is print more money problem solved)

    Why didnt the EEC just print more money and bail out Greece – the EEC is by the defnition put forward really in the same position as Australia and by the logic posted can fix its problems by simply printing money? right?

    Here is another question for you

    If this is TRULY the answer and its SO obvious why did Labour run and report the budget as a deficit and why didnt it just print more money and make us all happy?? are they in on the conspiracy too? Why did they borrow money from foreign countries and want to pay interest on that (leaking money as you say) and not just print some more??

    And one more just for good measure

    If the answer is just “print money” why wouldnt the Liberal governent just do that? seriosuly why risk political ruin with an unpopular budget when they could just as easily print more money make everyone happy and keep getting elected

  60. jimhaz

    “Those that do tend to be ones like Zimbabwe.”

    That statement did not contain in inference that printing money was the *sole* cause of Zimbawes woes. Nonetheless it was a factor.

    Wiki: “However, the Mugabe government was printing money to finance involvement in the Democratic Republic of the Congo and, in 2000, in the Second Congo War, including higher salaries for army and government officials. Zimbabwe was under-reporting its war spending to the International Monetary Fund by perhaps $22 million a month.[11]

    Another motive for excessive money creation has been self-dealing. Transparency International ranks Zimbabwe’s government 134th of 176 in terms of institutionalised corruption.[12]”

    [“I’ve been surprised at how little the US money printing over the last 2 or 3 decades has had on their household expenditure”

    Why would it? Printed money = cash. Do you buy everything with cash? Do you pay all your bills with cash?]

    OK, what’s the proper term Monetary expansion, M1 or M2 cant recall.

  61. Bighead1883

    Excellent questions Craig.
    The whole ideology of these 12 banks that own the world,virtually is to rule unelected.
    They have through their Transnational corporation bought up most country`s assets and services globally.
    These bankers own 50.01% of shares in these Transnationals.
    They want global austerity so as to have even more control.

  62. Bighead1883

    @jimhaz yes Wiki is partially correct and Mugabe could not pull off what Gaddafi was going to do.
    Gaddafi had created the gold dinar and this was being used intra Africa/Russia.
    Gaddafi wanted Libya`s oil paid for in gold and not USD.
    This is what got him killed.
    Lockerbie,another 9/11
    Wanna go there?

  63. John Armour

    John, to the best of my knowledge, that is not true. Commercial banks cannot create money “out of thin air”. Only the federal government can do that.

    I think you’ve got some kind of “Money Multiplier” in mind Ralph, as described in all the text books, and in some US Fed publications. But it’s quite wrong.

    Banks do in fact create money out of thin air (once called ‘fountain pen money’) and their only restraints are those imposed by the Basel Accord, now up to number 3.

    They actually leverage multiples of their capital, essentially the value of their common stock. Different kinds of loans have different risk weightings. It gets pretty complicated.

    Whilst the literature of MMT has been describing the conventional Money Multiplier model of lending as wrong for years, the Bank of England has only recently come out and agreed with MMT. Google “Money creation in the modern economy” + “Bank of England Quarterly Bulletin” to save me downloading again…I’m on a 3G modem.

  64. John Armour

    Goodbye John as you are extremely out of your depth

    I’ll take that as a compliment.

  65. Bighead1883

    Your welcome John

  66. Bacchus

    Thanks for those links Bighead1883. You’ve placed your ‘tin-foil-hat’ credentials firmly on the table. Your inane ramblings can now safely be ignored 😉

  67. John Kelly

    John Armour, “Do you find the story getting “curiouser and curiouser” ? A lot more to come.”

    Jeez, I feel like I’ve scraped the top centimetre of ice off the biggest iceberg the world has seen.

  68. Bighead1883

    Why Bacchus,I never knew you cared.
    You`ll be able to join in with the adults next year.
    Meantime tell us about how WTC #7 was destroyed.

  69. John Kelly

    Edward Eastwood, I’m taking all of your advice on board.

  70. DanDark

    Keep “scraping” John Kelly you are doing a fabulous job so far
    Maybe upgrade to a pick, might need it for protection 😉

  71. RalphG

    John, it wasn’t the money multiplier I had in mind. I understand that the money multiplier is just a myth.

    Have a look at this blog by Bill Mitchell. The relevant section is towards the end and begins with “Private banks still need to “fund” their loan book.”

  72. John Armour

    Jeez, I feel like I’ve scraped the top centimetre of ice off the biggest iceberg the world has seen.

    Or starting out on the ascent of Mt Improbable. The view from the summit makes it all worthwhile but.

  73. Lee

    “Why did Greece face bankruptcy if all they need was john Kelly as fiscal adviser to say ‘print some more money boys’

    Do a bit more reading john. Educate yourself before sprouting such ridiculous dribble in the future”

    Craig, if you take your own advice and read John’s previous article on this topic, you will understand why Greece couldn’t print more money and why Australia cannot follow in Greek footsteps.

    John, you’re doing a great job. Don’t worry about the Craigs and Bigheads of this world. It would appear they don’t read carefully, so it is probably a waste of time repeating the information already shared in the last few days.

  74. Bighead1883

    @Lee
    I thoroughly find your implication to me as to John Kelly offensive
    If you care to look at the third or fourth comment you`ll see mine to John Kelly.
    Methinks you are the one not reading what`s laid before thine eyes.
    Poppycock to you.

  75. Lee

    “I thoroughly find your implication to me as to John Kelly offensive”

    @Bighead

    Good. Does that mean you will take your toys and go home now?

  76. Bighead1883

    Haha,I`m just getting ready to play with you sandpit kiddies.
    @Lee

  77. Lee

    “Haha,I`m just getting ready to play with you sandpit kiddies.”

    The corn is popped and I’ve settled in to watch. Knock yourself out.

  78. Bacchus

    The corn is popped and I’ve settled in to watch. Knock yourself out.

    Given what we’ve seen so far Lee, it’s going to be a pretty boring show 😉

    I’m off to bed…

  79. Bighead1883

    Nighty night kiddies,sleep tight now and I`ll see you again when I next visit AIMN.
    PS brush the popcorn out of your teeth before you nod off,ta.

  80. John Armour

    John, it wasn’t the money multiplier I had in mind. I understand that the money multiplier is just a myth.

    Well you certainly have your head around MMT, so I’m glad my assumption there was wrong.

    I’m still pretty sure however that commercial banks still do in fact create the money they lend out of thin air.

    At the end of that article you quoted Bill said this:

    “Deposits do not fund loans. But they are one source of funds that the bank has available to ensure that its role in the settlement process is not compromised which would require borrowing from the central bank.”

    The settlement process refers here to the role of reserves in the payments system of course.

    And this from that BoE Quarterly Bulletin:

    “Money creation in practice differs from some popular misconceptions — banks do not act simply as intermediaries, lending out deposits that savers place with them, and nor do they ‘multiply up’central bank money to create new loans and deposits.”

    The problem is that banking types keep using the word “funding”. We assume it’s the loans they’re funding, when in fact it’s just the reserves, which they don’t lend. And yes, the do sometimes talk of “funding the loans” just to add to the confusion.

    What convinced me that it was reserves they were “funding” was the profits: there’s no way banks can make that sort of money on the spread between the interest they pay on term deposits and what they charge on, say, mortgages without leverage, and lots of it.

    They also need our currency to fund their trading desk. They can’t use their ‘funny’ money for that.

    I reckon they’re also happy to pay interest on term deposits to keep it out of the corporate bonds market where it could be unwelcome competition for bank lending.

    But I’m happy to be convinced otherwise Ralph if you can come up with something that sets out an alternative explanation in unequivocal terms. At this point I’m just making the best out what I’ve got. I did ask the questions some years ago on billyblog but nobody responded and I can guess why: it’s all too hard !

  81. Mike Stasse

    Good clear explanation, thank you John……. a couple of points though..:

    “When too little money is in circulation and people stop buying other than for essential needs, more money needs to be poured into the economy to stimulate demand. In this case the central bank will lower interest rates to release money into circulation thus enabling increased spending power”

    That money is not ‘released’. It’s lent. ALL money is loaned into existence. http://www.peakprosperity.com/crashcourse/chapter-7-money-creation Because all debts bear interest, ever more money is needed to repay the capital plus interest. The Australian government may owe far less than other OECD nations, but Australians are among the most indebted in the world. As a ratio of debt to GDP, we the people owe 15 times as much as the government (gov det to GDP is 10%, ours is 150% http://www.businessspectator.com.au/article/2013/8/5/economy/whos-responsible-australias-debt-crisis)

    I also liked the analogy…..:

    “This two pronged process is analogous to a giant water tank with a hose at the top pouring water in and an outlet valve at the bottom allowing water out. Now think money instead of water. The objective is to maintain as close as possible a constant level of money in our economy; enough money in circulation sufficient to avoid inflation which is what happens when there is too much money in circulation and recession when there is too little.”

    In fact, ‘the tank’ has to grow. Yes, they try to keep ‘the level in the tank’ steady, but the tank MUST get bigger, and the inlet and outlet must flow faster and faster…… they call it economic growth. Which is where the REAL scam lies….. because both this inlet and outlet are growing exponentially. http://www.peakprosperity.com/video/217/playlist/153/chapter-4-compounding-problem

    Unlike the government, we the suckers on the outlet of the tank cannot create our own money out of thin air to repay the loans, we have to work (often like slaves doing things we don’t like or even don’t agree with..)

    WORSE…… the growth is on the cusp of collapse, because to exponentially grow the tank, we have to consume more and more ‘stuff’ to feed the growth monster. I posted this yesterday on another thread…. we have about three years before we hit global Peak Mining, and once that happens, economic growth will slow at first, and then simply end. Forever. http://damnthematrix.wordpress.com/2013/08/09/conventional-thinking-is-over/

    Capitalism is the biggest scam of all times. We’re consuming the planet just so we can keep a few people at the top supremely and obscenely wealthy. And the dickheads in Canberra are aiding and abetting them….. filth.

  82. Mike Stasse

    “there’s no way banks can make that sort of money on the spread between the interest they pay on term deposits and what they charge on, say, mortgages without leverage, and lots of it.”

    Don’t forget fees John…… when I started life, interest rates were around the 11% mark, you couldn’t buy a house unless you’d saved up a 20% deposit, and there were NO FEES (and no ATMs and no credit card either!)

  83. edward eastwood

    John Kelly; Thanks, and welcome to the fight. Keep that ice-pick handy, as you can see, there are plenty of ‘tin-foil’ hat wearing ‘flat earther’s’ out there.

  84. PeterF

    The ‘Debt and Deficit Disaster’ is one of the LITANY OF LIBERAL LIES.

  85. robert lawson

    Have no doubt L.N.P .Planned this with their cohourts to take over and dominate this Country years ago .This is real Fascist Takeover stuff .They are tightening their grip daily . Our Country is in trouble ,REAL TROUBLE.

  86. sam

    https://www.youtube.com/watch?v=CvRAqR2pAgw

    A short video about money creation. Might be more digestable for some.

    Imagine if the RBA did a video like this Abbott would ‘defund’ them 😉 Clearly communist 😉

  87. RalphG

    John, have a read of this when you get a chance: http://bilbo.economicoutlook.net/blog/?p=1623

    The relevant section begins at “Endogenous money or Wicksellian myths”.

    In particular:

    “When a bank makes a $A-denominated loan it simultaneously creates an equal $A-denominated deposit. So it buys an asset (the borrower’s IOU) and creates a deposit (bank liability). For the borrower, the IOU is a liability and the deposit is an asset (money). The bank does this in the expectation that the borrower will demand HPM (withdraw the deposit) and spend it. The act of spending then shifts reserves between banks. These bank liabilities (deposits) become “money” within the non-government sector. But you can see that nothing net has been created.

    Only vertical transactions create/destroy assets that do not have corresponding liabilities.”

  88. John Armour

    Imagine if the RBA did a video like this Abbott would ‘defund’ them 😉 Clearly communist

    Their working class accents give them away Sam. Definitely commos.

    I’d never bothered to watch that, having read the Bank of England’s PDF, but you can’t beat a video for quickly getting the message across.

    I think MMT economists would quibble over the QE explanation, but overall it was pretty good.

  89. RalphG

    “OH Ralph and John what are your opinions on Australia doing Q/E?”

    I suppose it would depend on the objective. If you wanted to build up bank reserves it would be effective. If you wanted to stimulate the economy then it would probably have little effect.

    Have a read of this: http://bilbo.economicoutlook.net/blog/?p=661

  90. John Kelly

    Sam, thank you for the video. I can watch that several times and it will resonate quicker than reading it.

  91. Warren Ross

    Terrific article and one that demands a wider audience. One point that might be made though is that the commercial banks’ main source of funding is through lending. In the UK and US 97% of all money enter the economy as loans backed by debt. When you go to your bank and take out a loan for say $500k that money is created on the spot out of thin air and is simply backed by your willingness to repay the debt. Pretty fair privilege we afford them. Just to support your point, the first five minutes of this talk by Randall Wray explains the situation pretty well. What is described for the US works here too: https://www.youtube.com/watch?v=0zEbo8PIPSc&t=5m9s

  92. John Armour

    “That money is not ‘released’. It’s lent. ALL money is loaned into existence.”

    Agree Ralph. That’s clearly incorrect. I’d probably cut Galbraith a bit of slack though as he was almost certainly describing money creation in the era of the gold standard, pre 1971, when things were different.

    I didn’t bother watching after the first mention of Fractional Reserve Banking, so I don’t really know what Galbraith went on to say.

    It’s sad in a way that sort of stuff is still out there. I wonder how long it will take before somebody calls ‘bullshit’ and takes it down. In the meantime of course it’s just another brick in the neo-liberal wall we’ll eventually have to knock down.

    The ‘Fractional Reserve Banking myth’ depends on the ‘Money Multiplier myth’ that drives the ‘bonds controls the money supply myth’, which fuels the ‘govt has to borrow or tax to spend myth’, finishing up at the ‘we’ll all be roon’ed unless the government cuts spending myth’.

    It’s a house of cards that we should be able to blow down like the candles on a five year old’s birthday cake, but it’s not proving to be easy.

  93. RalphG

    “I didn’t bother watching after the first mention of Fractional Reserve Banking, so I don’t really know what Galbraith went on to say.”

    Your comment made me smile. I read the text rather than watch the video but I stopped at much the same point.

  94. darrel nay

    I am new to this website and I would like to say that I love the disagreements. Thanks to John Kelly for more fine work. I can’t say that I am a fan of MMT yet but it is fascinating to read the variety of opinions. Mr Kelly is clearly a gentleman and I would encourage all respondents to honour themselves and each other by keeping the discussion civil – the nasty comments are not productive.

  95. John Armour

    Ralph I’ve only now just caught up with your comment from 9am this morning.

    I guess your comment is in the context of our earlier discussion about banks creating money out of thin air.

    I don’t think Bill’s article refutes that. All he’s saying (I think) is that all credit/bank money nets to zero, and that only vertical money (base money) is money with no matching liability.

    From what I’ve always understood, the fact that all bank money nets to zero is a given, so only in that narrow accounting sense could one say banks don’t really create anything. Borrowers however don’t see things that way !

    It was good to read that article again (and thanks for linking it) because I’d never given much thought to Bill’s important point about how loans, in the end, leverage base money.

    So now it’s clear in my mind that banks leverage their capital to create the loans, those loans create the deposits, and those deposits leverage base money whenever reserves are exchanged between banks to meet the final needs of borrowers.

  96. John Kelly

    John, when you say banks leverage their capital to create the loans, do you mean they leverage their reserves?

  97. John Armour

    No. They are quite different. A bank’s capital is mainly what the shareholders have put in, plus retained profits, and a few other bits and pieces. It’s what’s actually at risk if the bank goes broke, except these days the government seems to bail them out.

    The ratio of loans to capital is different for different kinds of loans and the rules are laid down in the Basel Accords. The rules are in the process of being tightened but I’ve read that the maximum permitted leverage is still around 25:1, probably for home mortgages.

    Reserves can be almost anything ! The word has all sorts of meanings that are apparent only from the context, which is how bankers likes things, ie, confusing to outsiders.

    In the context of this discussion, reserves are the balances the commercial banks have on deposit with the central bank. They are made up from deposits, whether created from savers’ deposits or the deposits created by the banks for their borrowers. Banks have to ensure they have enough reserves on hand to meet the enormous outflows that arise daily out the nation’s financial activities, including paying their customer’s tax bills.

    These reserves can’t be loaned, because, as one source I read said, a bank can’t lend its liabilities. Regardless, it against ‘the rules’. They can lend to each other however like when one bank is short reserves and another flush. The central bank also has an obligation to supply extra reserves if the banks need them, for a price.

    A bit long winded John, but I hope this clarifies things a bit for you.

  98. John Kelly

    Möbius Ecko: good Video. Thank you.

  99. Fab

    I thought the main reason housing became unaffordable was do to those stupid Government grants for first home buyers? Raised the cost of housing to stupid levels. Most benifits of negative gearing is returned via capital gains. Give with one hand and take with the other.

  100. Möbius Ecko

    On the way to work this morning I heard about Vulture Funds in relation to what they’re doing to destroy mostly poorer nations and one in particular, Paul Singer’s NML and what it’s doing to Argentina, especially after it has won a New York court case to more or less bankrupt a whole country if it chooses, and bugger the consequences of starvation and death that follows because of that.

    Argentina’s government hits back at vulture funds after US ruling

    This is greed taken to the ultimate extreme, where the profits of one entity and one very wealthy person override the social well being and fabric of a sovereign nation, even overriding the laws of both domestic and international banks.

    No surprise then that Paul Singer is the single biggest donor to the Republicans and someone our current government would embrace with open arms.

  101. John Armour

    Gosh Lee, Bill will wondering who’s generating all these hits on his website !

  102. Lee

    Whilst reading Bill’s blog yesterday and a few other places, it occurred to me that all around the world people are electing politicians, who have no freaking idea, to run their nations. The situation is only going to get worse in Australia with all these career politicians that are becoming quite common now. We cannot afford to elect people to such important positions where no qualifications are necessary, apart from being an Australian citizen.

  103. Lee

    “Gosh Lee, Bill will wondering who’s generating all these hits on his website !”

    @John

    It’s all your fault. lol

  104. John Kelly

    Yes John, it’s all your fault. I just read Bill Mitchell’s explanation of the Argentine, NML decision and my headache has come back.

  105. Mike Stasse

    Great video Mobius…… Fractional Reserve Banking and all!

    One thing that always seems to escape those who make these videos is that while they say the money supply has been growing exponentially, they omit to say that interest has been making is growing faster than the GDP. Which is why we’re all going to hell in a handbasket, especially as the coming energy crisis will end all growth.

  106. Steve

    Hi John,
    I agree with you , but what if the reserve bank is a private bank , run and owned by criminals printing our money out of thin air , and then lends the money to our government , at interest , ripping us off , and stealing the wealth of our country and turning us into slaves by the debt they created out of the interest on their paper notes , which is backed by nothing and when we default on our housing loans , bank loans and the rest , they reposes our assets , land , houses , farms , our country , and our people are slaves all by this scam called the private banking system . The system you talk about is the system in our Australian constitution 1900 – 1 which is still the law of our land , but is ignored because of our , People of Australia’s , ignorance of our rights .
    This is a scam by which the private banks are raping our people and our country and stealing our wealth and making slaves of us and our children through unending debt .
    I include links so you can check for yourself , It is time we all woke up and do as Iceland did .
    https://www.youtube.com/watch?v=DDexDNn6vSM

    The Biggest Scam In The History Of Mankind – Hidden Secrets o
    https://www.youtube.com/watch?v=iFDe5kUUyT0

    And a link to who owns the Reserve Bank Of Australia
    http://larryhannigan.com/who_really_owns_the_reserve_bank_of_australia.htm
    https://www.youtube.com/watch?v=Ii0TtXcjYPE
    I hope this information can help all our people to be free !!

  107. RalphG

    “I agree with you , but what if the reserve bank is a private bank”

    Okay, I’ll ‘fess up. I own the Reserve Bank.

    run and owned by criminals

    A few speeding fines, that’s it. Honest.

    “printing our money out of thin air”

    No, the printing process requires, ink, substrate, plates, a printing press and various other items.

    “…out of the interest on their paper notes”

    You mean polymer notes. We stopped using paper notes 20 years ago.

    Sorry, couldn’t resist.

  108. John Armour

    Ralph…:) 🙂 🙂

  109. John Armour

    I hope this information can help all our people to be free !!

    You’re the one who’s been enslaved if that’s what you believe, Steve.

    Read back through the links Bacchus has posted. We’ve been down this road quite a few times lately.

    At the end of the day you can still believe what you want to believe and it’s your choice but make that decision after you’re in possession of all the facts.

  110. darrel nay

    Has anyone read David Rockefellers memoirs where he admits to conspiring against his own nation – and he’s proud of it (p.405). It is an entirely reliable source, given it’s HIS memoir. Treason trumps corruption.

  111. Bacchus

    So you’ve read the entire memoirs darrel nay, and can fill us in on the context of that quote? Or have you taken the thousands of conspiracy theory sites that cite this ONE page from the memoirs as the whole truth?

    No, I haven’t read the memoirs, but I’m not making conspiracy allegations either. Your evidence is VERY thin…

  112. darrel nay

    reply for Bacchus

    I mistakenly posted this on the “Do Taxes Fund Spending” thread. All this monetary theory must be doing my head in.

    The abovementioned quote is famous and is in Rockefellers own memoirs – it is not a conspiracy. Readers can view the exact page at http://forum.prisonplanet.com/index.php?topic=184634.0. To give some more context, how about his quote to the New York Times on August 10, 1973 – “Whatever the price of the Chinese Revolution…The social experiment in China under Chairman Mao’s leadership is one of the most important and successful in history.” Tens of millions of people were murdered in this ‘successful experiment’.

    Mainstream media loves to use the tactic of criticising people for being conspiracy theorists in order to try to sideline views which don’t conform to their propagandist view. I could offer countless examples but, just to illustrate the point, I remember when any suggestion that the west were arming Muslim extremists was met with that classic retort of “it’s just a conspiracy theory”. Now the west openly admits it funded and trained the Mujahideen in Afghanistan as a part of its Cold War operation against the Soviets.

    just a thought

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  115. Lee

    Thank you, John.

  116. darrel nay

    I just watched the RT youtube video provided above. It was interesting but didn’t seem to provide much beyond what has been repeated by MMT proponents throughout the recent threads involving MMT on AIMN. Even Stephanie Kelton recommended a reduction in regulation, in the form of ‘a holiday on payroll tax’, as a prescription for tough economic times.

    The questions put to S. Kelton were fairly tame and failed to explore the reality that any monetary theory for a fiat currency economy will only be productive/successful if it has the confidence of the local and trade markets. Stephanie did however recognise that ultimately the political spending choices in Washington were just as important in moving towards ‘full employment’ (somewhat of a misnomer). This is to say that the pollies can easily hijack any monetary policy to suit their agendas.

    Respect

  117. Tom Hickey

    Darrell, MMT economists are quite aware of the role of politics in shaping economic policy. MMT shows the policy space and operational realities and constraints associated with a particular type of monetary system, such the existing “fiat” system or the previous gold standard. Understanding this enables one to know what is possible for a government to do wrt economic policy.

    However, what a government does is a matter of political choice. Choice may be well informed about the potential policy space and operations, or not. Policy can also be directed to favor some interest groups over others. Much policy is either ill-informed or targeted politically.

    Generally, governments provide explanations for the choices that are made. Those who understand MMT are able to discern how closely these explanations match available policy space and operational reality — or are simply ideological or influenced by special interests.

    For example, lack of affordability is not a valid excuse in a fiat system where the government is a currency sovereign in the MMT sense that doesn’t borrow in a foreign currency. This excludes the nations of the EZ that gave up monetary sovereignty and countries that peg their currencies like China or use another country’s currency like Ecuador. It also doesn’t apply to provincial and local governments in a federal system in which the federal government is the currency issuer and provinces and localities are currency users along with firms and households.

    The operational description of MMT applies to monetary systems rather than to policy formulation. MMT also includes a macroeconomic theory based on the monetary description that allows for explanation and prediction. This, too, is policy neutral.It simple reveals policy options.

    When one understands how the monetary system works in terms of available policy space and operations and also the macro implications of different alternatives, then it is possible to formulate policy based on specific criteria.

    The generally received criteria for economic policy are maximizing growth consistent with full employment and price stability.

    Most economists believe that this is a trifecta in which a maximum of two factors can be achieved simultaneously. Generally speaking, prevailing economic policy uses a buffer stock of unemployed as a tool to target growth and price stability.

    MMT shows how to develop policy that will overcome this constraint and deliver growth along with full employment and price stability using, for example, the sectoral balance approach developed by Wynne Godley, functional finance developed by Abba Lerner, and the MMT job guarantee developed by MMT economists based on the work of Hyman Minsky.

  118. petermartin2001

    Darrel,

    I don’t believe Stephanie Kelton, or any other proponents of MMT, ever shy away from answering difficult questions.

    MMT is primarily a theory of what is rather than what should be. Of course once we do better understand how the economy does function we can appreciate that ‘we can’t afford it’ is generally not a valid reason for government not doing things.

    This isn’t a new insight from MMT. As Keynes said ‘if something can be done it can be afforded’. Whether it should be afforded is a political question.

    Regards

    PM

  119. John Armour

    Darrel,

    Your might care to google “Tom Hickey and MMT”.

    Then print out the comment he addressed to you, and frame it.

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