Young Master Smeet
Forum Replies Created
-
Posts
-
“It is this “smoke and mirrors”, i.e. debt being an asset, that brought us a global economic crisis from which the world economy has yet to recover.”
That wasn’t the cause of the 2008 crisis, it was just the way it manifested, investment went into financial services largely because there wasn’t a decent return on investment elsewhere (and because lots of governments had inflated their way out of the Asian Tigers crisis).
“But the fact remains that Frederick is now confronted by more effective demand than without Alice having received her loan. ”
This is the key point, in our model, as intermediaries, any loans to Alice have at least frozen, if not withdrawn effective demand from elsewhere in the economy: generalised price rises only become possible, then, through an actual fall in the value of money.
I’ve spent too much time thinking about Alice and Charley, I think we need to be clearer what happened:
Alice gains an asset of £100 from Barclays, and has a liability of £100 to Barclays (her debt – let’s leave interest out of this). Barclays gain and asset of £100 (Alice’s debt) and a liability to cover paying Alice for that debt.
Alice buys the goods from Eve, thus wiping out her asset of £100 at the bank to replace it with capital of £100 in the form of goods. This effectively moves Barclays liability from Alice to Eve, as they now face having to pay Eve (or Eve’s bank).
No net value is created here, until Eve starts to draw upon actual cash, in which case her bank will have to draw on equity to meet it’s liability to her.
The £100 worth of goods were created in the real economy. Existing wealth moved around.
Hi Kimschnitzel,
As far as I’m aware, I’m not saying anything different to ALB: banks are unproductive financial intermediaries who make their cut of the surplus value through economies of scale and sweating their workforce.
The only part of your story that creates purchasing power is the bit where the loans are repaid through new economic activity realising value. The rest is smoke and mirrors.
Banks have no special powers beyond those granted by the state (which are, thus, really state powers). I’ve, in the past, told the story of fractional reserve banking using a shoe shop (that bought and sold on credit).
Just like the IOUs I can issue, and you can issue. When we do so, we do not create spending power, we simply realise spending power that is available elsewhere.
Kimschnitzel,
we are cutting down to some very fine differences here. I accept ‘possibility’ was a loose word. I understood the former meaning, that only state issuance fiat money in excess to the need over the counter is what creates inflation, but they do that in order to prevent banks stalling and to allow them to lend freely.
In your example, no central bank money, or other, is required, because of the coincidence, which would in real life be accidental, of Barclays and Deutsche bank both paying each other exactly £100 – banking clearance, though, like the owl of Minerva, only spreads its wings with the dying of the light, and if Charley had only bought £75 from Freddie, the central bank would come into play.
This is why I shaded with ‘possibility’ because it is not something known in advance and controlled, but contingent arising from multiple actors.
It would be possible for those actors to not need central bank clearance, but accidents can happen: the central bank could restrict the money it is prepared to print to purely over the counter demand and kill off inflation, but there would be knock on effects in the economy elsewhere.
And, just to say “be able to get its hands on” means it is drawing demand from elsewhere in the economy (or at least freezing it) preventing bank loans alone from creating inflation.
Hi Kimschnitzel,
we are in essence agreeing, AFAICS: the central bank only comes into play during the clearing process if a bank needs an overdraft.
As the Cristicuffs doc says: “The key point here is that Barclays does not need to have £100 in its vaults when it grants Eve an entitlement to £100. However, **Barclays must be able to get its hands on £100 when payment in actual money is demanded** i.e. when satisfying payment demands with promises to pay does not suffice. Barclays’ ability to grant credits and collect interest on them is premised on its success in managing its income streams and financial assets.”
And again: “On the other hand, the Bank of England creates credit without any reference to gold or any other commodity money. It simply decides how much money it wants to lend out according to its monetary policy. It creates this money in a similar way as private banks create money of account. They lend it out – HSBC wants a loan for £1000, the Bank of England adds £1000 to HSBC’s central bank account. The difference to private banks is that the “vault” of the Bank of England is never empty, it always has those £1000 lying around, should HSBC wish to withdraw them. **They can print it and thus the BoE is always solvent**.”
The point I am taking issue with is this: “For the avoidance of doubt, the claim here is not that central banks cause inflation (type I) when “printing money”, i.e. lending to private banks. Rather, this inflation is a phenomenon produced by the credit operations of private banks when they create credit because they see lucrative business, i.e. in a boom.” In that precisely this is the only cause of inflation, if the central bank did not print money, the private banks would end up contracting their lending to keep within their liquidity, it is *only* the possibility of the state increase in the issue of money that creates actual inflation (a fall in the value of money) when dealing with fiat currency.
And, again, the point that rising prices does not equal inflation itself.
Hi Kimschnitzel,
Status:
– Barclays owes Frederick £100 (bank account) and
– Alice owes Barclays £100+interest (loan contract), double entry bookkeeping is happy.
– Deutsche Bank owes Eve £100 (bank account) and
– Charley owes Deutsche Bank £100 + interest.Yes, Alice and Charley can buy £200 of commodities, and Barclays and deutsche Bank have to have the active potential of handing over £200 in value: and this is what stops this process being inherently inflationary (in the strict sense of a change in the value of money), since demand is drawn from elsewhere in the economy, so there is no net change in global demand.
There might be local increases in prices (for example, if Frederick is selling Corn, then the increased demand for corn might lead to a rent price increase on available corn supplies) in specific sectors. (By this model is is possible to have positive inflation and falling prices at the same time, if say price are falling due to technical changes in production).
In this story, the only way this would be inflationary is if Barclays and Deutsche bank do not in fact have enough to cover the loans, and cannot raise it from other banks, and the central bank steps in to cover the funding gap and in fact creates new money.
I think there’s very little gap between point 4 & 5, , and it is a matter of legality not economics: how far are the bank management prepared to risk being indicted for fraud? As Bernie Madoff, and countless other fraudsters and pyramid salesmen have proven, you can indeed invest without covering the balance of the liability.
Demand over the counter is all that is needed for money proper, but the bank cannot completely ignore the total potential demand. Under double entry book keeping, iirc, the loan is an asset and a liability, the two cancel out. Yes, the bank has an incentive to play as fast and close as possible when issuing loans, but regulators, the management and the shareholders have an interest in making sure that the full value of loans can at least be potentially covered (but they don’t need to have the cash immediately in hand).
Much the same happens with pension schemes which while immediately solvent, the law requires to be operated on a ‘wind-up’ basis.
And, yes, the capacity of the borrower to repay is an important part of the total loan process, they too have to realistically be able to repay. So, the important point is, and this is in part why I Marx dumped a load of text, that the real economy drives the banking process, not the other way around. The wealth has to be there, somewhere, to make the numbers match.
all methods which save on medium of circulation are based upon credit. On the other hand, however, take, for example, a 500-pound note. A gives it to B on a certain day in payment for a bill of exchange; B deposits it on the same day with his banker; the latter discounts a bill of exchange with it on the very same day for C; C pays it to his bank, the bank gives it to the bill-broker as an advance, etc. The velocity with which the note circulates here, to serve for purchases and payments, is effected by the velocity with which it repeatedly returns to someone in the form of a deposit and passes over to someone else again in the form of a loan. The pure economy in medium of circulation appears most highly developed in the clearing house — in the simple exchange of bills of exchange that are due — and in the preponderant function of money as a means of payment for merely settling balances. But the very existence of these bills of exchange depends in turn on credit, which the industrialists and merchants mutually give one another. If this credit declines, so does the number of bills, particularly long-term ones, and consequently also the effectiveness of this method of balancing accounts. And this economy, which consists in eliminating money from transactions and rests entirely upon the function of money as a means of payment, which in turn is based upon credit, can only be of two kinds (aside from the more or less developed technique in the concentration of these payments): mutual claims, represented by bills of exchange or cheques, are balanced out either by the same banker, who merely transcribes the claim from the account of one to that of another, or by the various bankers among themselves.[11] The concentration of 8 to 40 million bills of exchange in the hands of one bill-broker, such as the firm of Overend, Gurney & Co., was one of the principal means of expanding the scale of such balancing locally. The effectiveness of the medium of circulation is increased through this economy in so far as a smaller quantity of it is required simply to balance accounts. On the other hand the velocity of the money flowing as medium of circulation (by which it is also economised) depends entirely upon the flow of purchases and sales, and on the chain of payments, in so far as they occur successively in money. But credit effects and thereby increases the velocity of circulation. A single piece of money, for instance, can effect only five moves, and remains longer in the hands of each individual as mere medium of circulation without credit mediating — when A, its original owner, buys from B, B from C, C from D, D from E, and E from F, that is, when its transition from one hand to another is due only to actual purchases and sales. But when B deposits the money received in payment from A with his banker and the latter uses it in discounting bills of exchange for C, C in turn buys from D, D deposits it with his banker and the latter lends it to E, who buys from F, then even its velocity as mere medium of circulation (means of purchase) is effected by several credit operations: B’s depositing with his banker and the latter’s discounting for C, D’s depositing with his banker, and the latter’s discounting for E; in other words through four credit operations. Without these credit operations, the same piece of money would not have performed five purchases successively in the given period of time. The fact that it changed bands without mediation of actual sales and purchases, through depositing and discounting, has here accelerated its change of hands in the series of actual transactions.
And
“The quantity of circulating bills of exchange, therefore, like that of bank-notes, is determined solely by the requirements of commerce; in ordinary times, there circulated in the fifties in the United Kingdom, in addition to 39 million in bank-notes, about 300 million in bills of exchange — of which 100-120 million were made out on London alone. The volume of circulating bills of exchange has no influence on note circulation and is influenced by the latter only in times of money tightness, when the quantity of hills increases and their quality deteriorates. Finally, in a period of crisis, the circulation of bills collapses completely; nobody can make use of a promise to pay since everyone will accept only cash payment; only the bank-note retains, at least thus far in England, its ability to circulate, because the nation with its total wealth backs up the Bank of England.”
Literally anyone can issue an IOU, since that is a creature of contract law, and the acceptance of IOUs is limited only by whether creditors will believe that the issuer is good for the money and that they can enforce it. An IOU can circulate (indeed, in a way, with the gold standard, paper money was literally just an IOU, it still has the ‘I promise to pay the bearer on demand’ statement on it, in England.
You can even use the IOU as a financial instrument, and borrow against the expectation. The IOU could circulate forever, without ever being redeemed, but an honest issuer would have to account for its continued existence, even if the risk of it being called in were low (and they could, in theory, buy a hedge against the IOU being redeemed, creating yet another financial instrument from the same piece of paper and payment stream).
So, when we’re talking about ‘purchasing power’ we need to come back to value, and how a portion of value in the economy is employed as means of circulation, and why this whole debate matters, because banks cannot create value (saving, arguably, through financial services, but that’s a slightly different story).
In some ways his analysis is hopeful, because it would mean that Putin has already kind of got what he wants via breaking Russia from the global system: maybe a frozen conflict might ensue (which would be a return to the status que pre-war, with the battle lines just moved a bit).
Also, the thesis is kind of proven by the seizure of oligarch assets: the lesson is, if you don’t control a territory and its state, your wealth is at risk.
This seems recent:
https://jacobin.com/2022/10/russia-ukraine-war-explanation-class-conflictIt’s also worth thinking about things like the Central African kingdoms:
Such as the Empire of Ghana or the Kanem-Bornu Empire, etc. which were sophisticated polities with iron working. They were not, contrary to the European mythology of the ‘Dark Continent’ a far away mysterious place, the spread of Islam shows the extent to which they were connected with other parts of the world (famously, a Ghanaian Emperor making Haj trashed the then world economy he brought so much gold with him).The Pursuit of the Millenium is a good recounting of radical sects, false messiahs and pseudo-Baldwins throughout the middle ages, which is very instructive.
Speaking of Jones, his ‘Chaucer’s Knight’ is an entertaining (but slightly reaching) reading of the Knight’s tale: but I’d also recommend taking some time struggling with Chaucer for a slice of intellectual life in the middle ages.
Seb Falks the Light ages is a good micro-history about monastic astronomy, including things like debates over when the day starts.
A brief history of commercial capitalism “Rather than a picture centred solely on Europe, we enter a diverse and vibrant world. Banaji reveals the cantons of Muslim merchants trading in Guangzhou since the eighth century, the 3,000 European traders recorded in Alexandria in 1216, the Genoese, Venetians and Spanish Jews battling for commercial dominance of Constantinople and later Istanbul. We are left with a rich and global portrait of a world constantly in motion, tied together and increasingly dominated by a pre-industrial capitalism. The rise of Europe to world domination, in this view, has nothing to do with any unique genius, but rather a distinct fusion of commercial capitalism with state power.” (I need to get round to writing up a review for the standard).
