# Austrian School: Crap/Not Crap?



## camouflage (Dec 13, 2011)

I've been wondering whether I've been fair on the Austrian School of economic thought, Mises an all that, so I thought I'd ask here.


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## articul8 (Dec 13, 2011)

This is where neo-liberalism really begins - with the fall of Austrian social democracy and the proto-fascist [though not Nazi] arguments of Mises (who worked for Dollfus)


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## camouflage (Dec 13, 2011)

Dollfus aye? I wonder who that is then, will have to wikyit, but alas, tis past my bed-time.


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## ViolentPanda (Dec 14, 2011)

camouflage said:


> Dollfus aye? I wonder who that is then, will have to wikyit, but alas, tis past my bed-time.



Englebert Dollfuss, the between-the-wars Austrian conservative pol who became chancellor a couple of years before eating Nazi bullet. The sort of economics von Mises proposed would have appealed to Dollfuss because they were, well, Austrian and conservative.

As for whether posterity has leant weight to the theorising of the Austrian School, that depends which side of the economic line you're on. _Laissez faire_ does generally, after all, give more to he that already has, but as far as how the working classes have benefitted from the work of the Austrian School, we haven't. In fact one could place part of the blame for the current clusterfuck on the witterings of von Mises and his vomitous ilk.


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## JimW (Dec 14, 2011)

Impression I got from somewhere I can't recall is that the Austrians lost the intellectual argument in Europe way back, slipped to the margins then resurfaced years later in the States but by that time no-one elsewhere took them seriously enough any more to bother with a thorough refutation again (target had moved on to the Chicago School proper) , hence they thrived in the peculiar space of libertarian politics in America, were Mr Logic high school debating and unquestioned capitalist assumptions rule.
Does that sound familiar to anyone else? Might have it all round my neck.


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## ItWillNeverWork (Dec 15, 2011)

There are a few problems I have with the Austrian school. For example their theory of the business cycle.

The Austrians believe that long term investments by firms in new projects, and the ability of households to consume the goods produced by these projects, are coordinated over time via the interest rate. So for example, if lots of households decide to start saving there will more money for the banks to lend out; in order to lend out this newly increased amount of money, the banks will compete with each other for borrowers by lowering the interest they charge.

Firms see that the interest rate on borrowing is lower, and so will think that longer term investments are now affordable when they were not previously. Because investments in new projects (building a new factory, or block of apartments, or whatever) take time to come to fruition, it is not until further on down the line that firms will know that their investments are actually profitable. Fortunately for the firms, in a free market the new projects will find sufficient demand for their goods because households have been saving their money.

The Austrians claim that when a central bank lowers interest rates, firms are encouraged to borrow money for investment when no prior saving has taken place by households. This means that firms will engage in instigating new projects (a boom is set underway). Once these projects are completed, and the firms try to sell their newly increased output, they will find that aggregate demand is just not high enough to absorb that output; the reason being that noone has been saving their money. The inevitable bust arrives. Austrians suggest that central banks should be abolished and that the free market should be allowed to equilibrate saving with investment (and hence aggregate demand with aggregate supply).

The main problem I have with this is that it misunderstands (just like the neoclassicals) the way in which credit is created. They assume that saving is required before the banks are able to lend, but in reality a bank can simply type a few numbers into a computer and credit a borrowers account with however much they want. So the link between saving and lending does not exist and there is nothing to stop the banks creating a boom in investment all on their own. Even without a central bank a boom-bust cycle, such as the Austrians describe, could occur. This does not preclude the possibility of a government induced recession of course, but neither does it preclude the possibility of an endogeonously created one.

There are other issues I have with the Austrians but this is good enough for a start.

BTW I didn't vote in the poll as I think that they are part crap part non-crap. Even turds contain a speck of gold now and again.


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## purves grundy (Dec 15, 2011)

Did they have owt to do with the Vienna circle? Seems a number of points at which their positivism would overlap, but iirc a fair few of the Vienna circle were Marxists so maybe that's not the case...


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## love detective (Dec 15, 2011)

ItWillNeverWork said:


> but in reality a bank can simply type a few numbers into a computer and credit a borrowers account with however much they want.



This is a common misconception that seems to be rife within the left and particularly the occupy movement at the moment

It's absolute rubbish however and stymies any kind of proper understanding, and therefore also any grounded critical analysis, of the banking & credit systems

At both the systemic and individual level the credit system and lending is dependent upon money (and by extension other forms of value) circulating. If it doesn't circulate in the 'right' quantities to the 'right' places at the 'right' times, the conditions for lending do not exist and no amount of typing numbers into a computer can create, replicate or magic into existence this material base that lending is dependent on


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## revol68 (Dec 15, 2011)

I assumed ItWillNeverWork was referring to how loose the banks were with their lending, y'know sub prime mortgages, as well as their novel accounting techniques that allowed them to present future projections as actual assets and how that invalidates the Austrian schools neat little notion of the market regulating credit.


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## love detective (Dec 15, 2011)

Nah, the point was a reference to how credit/money is created, not what is subsequently done with it

As to novel accounting techniques - all financial assets are is a reflection of projected future income streams, so in principle there's nothing outlandish about recognising an asset in the here and now based on cashflows in the future

The problem is that the market is never able to see the absurdity behind a lot of these projections/estimates and instead of moderating them in the way that market champions suggest it does, it ends up facilitating the compounding of the situation and instead of regulating this nonsense it lends it legitimacy and makes bubbles out of it.

But it can never do anything other than that, when capital roams around and looks for more and more autonomous ways of capturing a share of value created elsewhere, the sheer momentum of it means there's no room for the kind of timely 'market logic' and correctional regulating ability that the theorists, in the face of increasingly regular crisis, continue to imbibe it with

obligatory marx quote:-




			
				marx in ch17 of theories of surplus value said:
			
		

> In the crises of the world market, the contradictions and antagonisms of bourgeois production are strikingly revealed. Instead of investigating the nature of the conflicting elements which errupt in the catastrophe, the apologists content themselves with denying the catastrophe itself and insisting, in the face of their regular and periodic recurrence, that if production were carried on according to the textbooks, crises would never occur. Thus the apologetics consist in the falsification of the simplest economic relations, and particularly in clinging to the concept of unity in the face of contradiction


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## ItWillNeverWork (Dec 15, 2011)

love detective said:


> This is a common misconception that seems to be rife within the left and particularly the occupy movement at the moment
> 
> It's absolute rubbish however and stymies any kind of proper understanding, and therefore also any grounded critical analysis, of the banking & credit systems
> 
> At both the systemic and individual level the credit system and lending is dependent upon money (and by extension other forms of value) circulating. If it doesn't circulate in the 'right' quantities to the 'right' places at the 'right' times, the conditions for lending do not exist and no amount of typing numbers into a computer can create, replicate or magic into existence this material base that lending is dependent on



I don't see how this invalidates my point. If my bank increases my overdraft then they can do so with a few taps on the keyboard. The money supply has been increased has it not?


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## ViolentPanda (Dec 15, 2011)

ItWillNeverWork said:


> I don't see how this invalidates my point. If my bank increases my overdraft then they can do so with a few taps on the keyboard. The money supply has been increased has it not?



No, because what they're doing is crediting you is "already-existing money". Your bank can't create money, only the central bank can do that.


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## ItWillNeverWork (Dec 15, 2011)

ViolentPanda said:


> No, because what they're doing is crediting you is "already-existing money". Your bank can't create money, only the central bank can do that.



This is what I disagree with - the multiplier model. I go along with the theory of endogenous money that Steve Keen writes about. I'll try and fish out the study, but in one of Keen's lectures on his website, he mentions some empirical research that was done showing how base money expands after the expansion of other measures of money; implying that central banks do not have as much control over the money supply as they think.


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## ItWillNeverWork (Dec 15, 2011)

From Keen's "The Roving Cavaliers of Credit":

http://www.debtdeflation.com/blogs/2009/01/31/therovingcavaliersofcredit/



> Two hypotheses about the nature of money can be derived from the money multiplier model:
> 
> 1. The creation of credit money should happen after the creation of government money. In the model, the banking system can’t create credit until it receives new deposits from the public (that in turn originate from the government) and therefore finds itself with excess reserves that it can lend out. Since the lending, depositing and relending process takes time, there should be a substantial time lag between an injection of new government-created money and the growth of credit money.
> 
> ...


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## sleaterkinney (Dec 15, 2011)

JimW said:


> Impression I got from somewhere I can't recall is that the Austrians lost the intellectual argument in Europe way back, slipped to the margins then resurfaced years later in the States but by that time no-one elsewhere took them seriously enough any more to bother with a thorough refutation again (target had moved on to the Chicago School proper) , hence they thrived in the peculiar space of libertarian politics in America, were Mr Logic high school debating and unquestioned capitalist assumptions rule.
> Does that sound familiar to anyone else? Might have it all round my neck.


Now over here too via the Lib-dems and the Tories. They might not say it out loud but their policies stem from the same thinking. The argument doesn't stand up which is why they are using the debt crisis as an excuse instead.


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## love detective (Dec 15, 2011)

ItWillNeverWork said:


> I don't see how this invalidates my point. If my bank increases my overdraft then they can do so with a few taps on the keyboard. The money supply has been increased has it not?



Your conflating the final stage of the transmission mechanism of extending credit with the material conditions that need to be in place to allow that extension to happen in the first place

Tapping a few numbers into a computer is clearly one thing that is required in the overall process of lending from a bank to another party - but mistaking this for the only thing that's required, and positing this tapping on the keyboard as both necessary and sufficient stands in the way of a proper understanding of what actually happens, and therefore any chances of a proper critique of it

This is not an exact analogy, but what you're saying is similar to saying that pressing the lever on a petrol pump at a petrol station creates petrol

Also re your point about endogenous and the money multiplier - this is pretty much irrelevant, and a separate thing, to your initial point about how banks create credit money. Whether one argues that central bank money exists first which then seeds credit money or whether credit money is created first and then ultimately backed by central bank money creation - the simple fact remains that tapping a few numbers on a keyboard is not all that is required for a commercial bank to extend credit to another party - and this point holds whether you hold an endogenous, exogenous or erogenous theory of money/credit creation

If a bank wants to lend to someone it must be able to fund that lending, and whether this funding is sourced through customer retail deposits, commercial bank borrowing in the money markets, asset sales, central bank financing or any other method, it doesn't change the simple fact that you can't lend what you haven't funded


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## ItWillNeverWork (Dec 16, 2011)

love detective said:


> Your conflating the final stage of the transmission mechanism of extending credit with the material conditions that need to be in place to allow that extension to happen in the first place
> 
> If a bank wants to lend to someone it must be able to fund that lending, and whether this funding is sourced through customer retail deposits, commercial bank borrowing in the money markets, asset sales, central bank financing or any other method, it doesn't change the simple fact that *you can't lend what you haven't funded*



Why can't you? Isn't this what fractional reserve banking is by definition?



> Also re your point about endogenous and the money multiplier - this is pretty much irrelevant, and a separate thing, to your initial point about how banks create credit money.



Actually, I thought that it _was_ the point I made initially. I assumed that you were making the argument that only central banks could create new money.



> If it doesn't circulate in the 'right' quantities to the 'right' places at the 'right' times, the conditions for lending do not exist and no amount of typing numbers into a computer can create, replicate or magic into existence this material base that lending is dependent on



Could you go into this a little more? Specifically what you mean by circulating to the 'right' places/times. Cheers.



> ...erogenous theory of money


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## Captain Hurrah (Dec 16, 2011)




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## love detective (Dec 16, 2011)

ItWillNeverWork said:


> Why can't you? Isn't this what fractional reserve banking is by definition?



Nope, it's nothing of the sort - it's the complete opposite in fact. Fractional reserve banking can only happen if money circulates - it's not about just creating loans out of thin air through the tapping on a keyboard within a commercial bank. If you are a bank and want to take part in the circulation of money/credit, you can't do it unless you either already hold money or someone deposits it with you (through any of the forms I mentioned in the last post) - then you can lend it on and it turn through circulation it may end up back with you (through further deposits) which you can lend on again. There's nothing magical or conspiratorial about fractional reserve lending, it's just money circulating, and for you as bank to take part in that onward circulation of money/loans/deposits it has to first circulate to you before any of that can happen.

If you look at a balance sheet of any bank in it's financial accounts, unsurprisingly the balance sheet adds up to zero - i.e. total assets equals total liabilities - this shows that every asset a bank has is funded by an equivalent liability - i.e. you can't create an asset out of thin air, it has to be funded by something, if you don't have the funding/liability you can't extend the loan/asset

So just like if someone has a tenner and uses that tenner to buy something from someone else and the person they bought that thing from buys something from someone else and so on, which means a single bit of money can effect the purchase and sale of a much higher amount than it represents off and in itself. Likewise if instead of purchases & sales, that tenner is lent and borrowed lots of times (i.e. effectively fractional reserve lending with zero reserve requirements), all that happens is that same bit of money leaves in its trace a string of deposits and loans within the system. All of these in the widest sense/definition represents the money supply.

However for that string of circulation to happen (and to be mediated by the banks) a whole load of things have to happen external to the banks doing the mediating (i.e. money & value has to be successfully completing the circuit of capital). Banks are not the independent actor in all of this, they are the dependent one (obviously they can also put a hold on circulation, so they are not wholly dependent, but they are not wholly independent either)

You just need to look at what's going on around us at the moment to see this demonstrated - the circulation process is seizing up meaning banks can't fund themselves (and therefore extend loans) through the normal processes and instead have to rely on copious amounts of central bank funding to keep going. If banks were the independent actor in all this as is commonly suggested they wouldn't need any of this support, they would just magic the money into existence through copious amounts of keyboard tapping, but they can't, so they don't.



> Actually, I thought that it _was_ the point I made initially. I assumed that you were making the argument that only central banks could create new money.



Base money can only be created by the central banks, and only commercial banks can circulate this - the total of these two things represents the total money supply. So money supply (in it's widest sense/definition) can be increased by either central banks doing something (creating new base money) or commercial banks doing something (facilitating the circulation of that money). However commercial banks can't magic into existence the situation where they can take part in that circulation process purely through tapping on their keyboards - which was the point you made initially i.e. you said:-

_in reality a bank can simply type a few numbers into a computer and credit a borrowers account with *however much they want*_



> Could you go into this a little more? Specifically what you mean by circulating to the 'right' places/times. Cheers.



Hopefully some of what I wrote above makes more sense of what I meant above, but if not can go into more detail (away from computer all day though today)



>



It is the humour!


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## ViolentPanda (Dec 16, 2011)

ItWillNeverWork said:


> From Keen's "The Roving Cavaliers of Credit":
> 
> http://www.debtdeflation.com/blogs/2009/01/31/therovingcavaliersofcredit/



All of which fractional reserve banking sets on its' arse. The model needs to take that (government-sanctioned credit creation - in effect "government money) into account, I'd have thought.


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## ViolentPanda (Dec 16, 2011)

ItWillNeverWork said:


> Why can't you? Isn't this what fractional reserve banking is by definition?



Not really. FRB isn't a bank creating money, it's a bank exercising the ability to extend government-sanctioned credit that's already been accounted for in the "money supply".


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## JimW (Dec 16, 2011)

love detective said:


> It is the humour!


I thought it was an oblique reference to Marx's regular touching of Engels for a fiver.


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## littlebabyjesus (Dec 16, 2011)

One can 'create' money by revaluing one's assets upwards, can one not? Isn't that Keen's point about the ponzi scheme that was the exploding property market?


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## nino_savatte (Dec 16, 2011)

articul8 said:


> This is where neo-liberalism really begins - with the fall of Austrian social democracy and the proto-fascist [though not Nazi] arguments of Mises (who worked for Dollfus)


Not only Mises but Hayek too iirc.

Both of them, along with Friedman, were members of the Mont Pelerin Society.


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## Blagsta (Dec 16, 2011)

littlebabyjesus said:


> One can 'create' money by revaluing one's assets upwards, can one not? Isn't that Keen's point about the ponzi scheme that was the exploding property market?



fictitious capital, not backed by commodity production, presumably


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## revol68 (Dec 16, 2011)

Blagsta said:


> fictitious capital, not backed by commodity production, presumably



yeah, that's what I assumed ItWillNeverWork was talking about.

I mean the banks did lend way beyond their funds and instead of this being solved by them crashing and burning, instead they got bailed out by public money, as well as central banks actually having to print more money.

In that sense the commercial banks essentially increased the money supply by presenting states and central banks with a fait acompli? no?


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## love detective (Dec 16, 2011)

littlebabyjesus said:


> One can 'create' money by revaluing one's assets upwards, can one not?



No - and again this is making a similar mistake to IWNW

You can revalue your assets upwards to your hearts desire but in and off itself (just like IWNW's banks hammering away on their keyboards) it won't create a bean of money (try it now and see what happens)

If however you have an asset, and then for whatever reason (and due to circumstances, at least in part, external to you) the future income stream from that asset is expected to be more than previously expected, then you may be able to use the increased value of the asset as collateral to obtain credit. But only at that stage is credit money 'created' - and in turn whoever extends that credit to you has to do more than just tap away on their keyboard, they have to first agree with your valuation of the asset pledged as collateral and secondly be able to fund the extension of credit to you (alternatively, instead of borrowing against the value of the asset, you could just sell the asset outright to someone but the same conditions still apply - the other party has to source the funds from somewhere and need to agree with your valuation).

But for any of this to happen, the trigger is not one just revaluing one's assets upwards. Revaluing your assets upwards (just like the tapping away on the keyboard at the bank to transmit credit to a customer) is an activity which requires a 'material' basis for it to happen - it's a reflection of something that has happened elsewhere, it's the dependent not independent variable in the process, it's the consequence of an event not its cause.

So you can't just arbitrarily revalue an asset upwards and this in and off itself 'creates money'. Even if the revaluation of the asset is an accurate reflection of an actual increase in its worth (i.e. an increase in the future discounted cash flows expected from it) - this still doesn't lead to the 'creation of money' - only if that increased asset value can be used to effect a credit transaction with another party who can fund the lending, is credit money then actually 'created'

Also revaluing an asset upwards in and off itself doesn't create ficticious capital in the marxist sense - only when the process described above starts to happen, when the titles to, or claims on, those assets (whether revalued upwards or not) start circulating independently of the asset they relate to, does fictitious capital come into being


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## love detective (Dec 16, 2011)

revol68 said:


> In that sense the commercial banks essentially increased the money supply by presenting states and central banks with a fait acompli? no?



In the build up of and prior to the crash, the credit fuelled property bubble could be seen as a movement by capital to take on an autonomous form and break free from the grounded restrictions of the thing that gives life to it in the first place - i.e. value production & appropriation through the exploitiation of labour.

However this attempt to move away from its material base, can only ever be temporary, crisis intervenes as it always will to irrationally rationalise the irrational system. This involves the destruction of value of all types, physical, real and fictitious - and therefore whole swathes of loans, assets and liabilities that were based on this bubble gets destroyed.

And if your talking about money in its widest sense then crisis has substantially reduced the money supply as a result. So there's no fait acompli in terms of commercial banks (and interdependent activity elsewhere in the real world) bringing the money supply up to a certain high level and forcing states & bank to support it at that level. The crisis destroyed a large part of the 'money supply' that had built up through these activities (remember one bit of 'money', through circulation can leave in its trace huge multiples of loans & deposits, likewise the reverse is true, they can all be unwound and destroyed in a similar manner). The banks needed bailing out because large elements of that increased money supply they had attempted to build (i.e. property backed credit loans) had to be written off. The bailouts weren't to support the artificially increased leveraged/multiplied money supply that the bubble built up, but to enable the banks to survive once it had all been written off


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## revol68 (Dec 16, 2011)

love detective said:


> In the build up of and prior to the crash, the credit fuelled property bubble could be seen as a movement by capital to take on an autonomous form and break free from the grounded restrictions of the thing that gives life to it in the first place - i.e. value production & appropriation through the exploitiation of labour.
> 
> However this attempt to move away from its material base, can only ever be temporary, crisis intervenes as it always will to irrationally rationalise the irrational system. This involves the destruction of value of all types, physical, real and fictitious - and therefore whole swathes of loans, assets and liabilities that were based on this bubble gets destroyed.
> 
> And if your talking about money in its widest sense then crisis has substantially reduced the money supply as a result. So there's no fait acompli in terms of commercial banks (and interdependent activity elsewhere in the real world) bringing the money supply up to a certain high level and forcing states & bank to support it at that level. The crisis destroyed a large part of the 'money supply' that had built up through these activities - the banks needed bailing out because large elements of that increased money supply they had attempted to build (i.e. property backed credit loans) had to be written off. The bailouts weren't to support the artificially increased money supply that the bubble built up, but to enable the banks to survive once it had all been written off



Yeah, the whole thing of finance losing itself in a mastubatory frenzy, imaginging itself as autonomist and self sustaining. I get that, the crisis is the bit where it looked down and realised there was nothing below it, like the coyote in the road runner cartoon.

I thought ItWillNeverWork's point was that the austrian schools notion of the free market self regulating was the fact that they don't and didn't, as shown by the fact they created massive bubbles of fictious capital, of money that had no backing.
I don't think anyone was arguing that this was a process that could go on indefinitely, rather that it can go on for a period before eventually crashing back to reality and that deregulated finance is a dead cert to produce these bubbles.

Also I take your point about the bailouts being used to cover loans being written off and the like, but has it not still led to central banks being pushed into printing money that actually isn't backed up by anything, that is they intervened to stop it contracting all the way back to what it should be? Am actually stabbing in the dark in that one btw.


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## love detective (Dec 16, 2011)

i'm off out to the IWCA xmas social in a minute so will need to return to this tomorrow

briefly though IWNW made a number of points in his initial post - i agreed with most of them (i.e. the ones you repeated above about the fallacy of the market self regulating and I made agreeing comments on that in the last couple of paragraphs of this post above) but not with all of them (i.e. about money creation), so I think some of these points are being conflated and talked about as one thing when they are not

and yeah central banks have printed money, but if that doesn't circulate with appropriate vigour (which at present it's not really) it doesn't do much in terms of the overall money supply. As the key measures of money supply reflect not only how much 'base money' is in the system but how fast it circulates - and the base money part is usually only a small fraction of the total wider money supply, with the rest made up of it moving around everywhere, circulating, velocity and all that stuff. So the central bank creation of money through QE and the like is an attempt to boost up the overall money supply through injecting more base, to compensate for the fact that the crisis has resulted in a massive contraction in the velocity of circulation compared to previously


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## TruXta (Dec 16, 2011)

revol68 said:


> I thought ItWillNeverWork's point was that the austrian schools notion of the free market self regulating was the fact that they don't and didn't, as shown by the fact they created massive bubbles of fictious capital, of money that had no backing.



I'd hazard a guess that most Austrians claim the markets were never free, and that regulation and state intervention is what created the crisis, not "pure" market forces.


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## ViolentPanda (Dec 16, 2011)

TruXta said:


> I'd hazard a guess that most Austrians claim the markets were never free, and that regulation and state intervention is what created the crisis, not "pure" market forces.



That's the usual excuse: If only market forces had free rein, everything would be fine!


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## ItWillNeverWork (Dec 16, 2011)

love detective said:


> If you look at a balance sheet of any bank in it's financial accounts, unsurprisingly the balance sheet adds up to zero - i.e. total assets equals total liabilities - this shows that every asset a bank has is funded by an equivalent liability - i.e. you can't create an asset out of thin air, it has to be funded by something, if you don't have the funding/liability you can't extend the loan/asset



There's a lot in what you've said that I don't quite grasp yet, but on this point above, in this lecture Keen (if I am understaning him correctly - which I'm probably not) claims that the process by which credit is created is as follows:

- Capitalist has an idea and goes to bank for a loan to fund this idea.
- Bank creates _two_ accounts. A credit account which the capitalist can draw from, and a debit account that records the capitalist debt.

So in this scenario, hasn't the credit been created with the books still balancing? He also talks about how neoclassials and some of the circuitists confuse stocks with flows, and that it's the flow of credit (circulation) that enables the expanded production (or something like that anyway). I need to watch the lecture again and do some extra reading I think.

I get the feeling also that I am maybe misunderstanding the subject due to my own fuzzy definitions of all the terms. For example, what measure of money are we talking of? How is 'credit' creation different from 'money' creation? I'm sure everything will be a bit more clear eventually; I am currently doing an open uni module in financial services, so that'll probably help.

Do you have any books you can recommend?

Thank you for being patient with me so far btw. We all have to start somewhere.


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## sptme (Dec 17, 2011)

Re reserve banking, can some one explain:
Say I'm a small bank and the central bank as just deposited $100 in my bank. I want to lend this out with a 10% reserve. Do I:

A) keep $10 in the bank and lend out $90
B) keep $100 in the bank and make up $90 to lend out.

I'd been given the impression that banks did B and that's how the money supply was expanded.

Also, if I charge interest on the loan and the only money available is the original money given out from he central bank. where does the money come from to pay for the interest?


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## ItWillNeverWork (Dec 17, 2011)

The answer is A. According to the money multiplier theory, what happens after that point is that the $90 will be placed by the borrower in another account (maybe at another bank, maybe not). Since the $90 shows up as a deposit, 10% of that can be kept in reserve and 90% lent out again as another loan ($81).

If you follow that process above through to its end, you get 100 + 90 + 81 + 72.9 etc. All of these added together can make a $100 initial reserve expand up to a larger amount. The amount it can expand to depends on the reserve requirement. So in short, the money multiplier works across the banking system as a whole and not in an individual bank.


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## ItWillNeverWork (Dec 17, 2011)

sptme said:


> Also, if I charge interest on the loan and the only money available is the original money given out from he central bank. where does the money come from to pay for the interest?



Funnily enough I was just reading into this. The answer is something (I think )to do with the initial loan being a _stock_ (i.e. an amount measured at a given time), and the repayment coming from a _flow_ of funds as the money circulates around the economy. Think about it this way; a single banknote can circulate indefinitely and be involved in settling any amount of transactions, the amount of transactions is not limited by the _size_ of the stock but by the _rate_ at which it circulates over time. One pound can be involved in more than one pounds worth of activity.

Imagine an economy consisting of me, you, and love detective; there is a money stock of one pound which I start with. I give you the pound, you give it to LD, LD gives it to me. In that process (a flow) there has been 3 pounds worth of transactions, but the supply of money (a stock) is still only 1 pound. Interest is able to be repaid out of this process of circulation; if the circulation stops for whatever reason (like it does in a credit crunch) then people cannot service their debts and the economy goes tits up.

Maybe love detective could clarify if I am beginning to get the right idea.


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## sptme (Dec 17, 2011)

So I keep $10 in the bank and lend out $90 but i can claim that my bank is solvent to the tune of $100 because I can count the money I loaned out.

bank B gets the deposit of $90. Loans out $81 and keeps $9 in the bank but can claim its got $90 on its books...and so on.

Is that the right idea?


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## ItWillNeverWork (Dec 17, 2011)

sptme said:


> So I keep $10 in the bank and lend out $90 but i can claim that my bank is solvent to the tune of $100 because I can count the money I loaned out.
> 
> bank B gets the deposit of $90. Loans out $81 and keeps $9 in the bank but can claim its got $90 on its books...and so on.
> 
> Is that the right idea?



Yep, that's it.


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## sptme (Dec 17, 2011)

ItWillNeverWork said:


> Yep, that's it.



So you have multiple banks making overlapping claims on the same money.


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## love detective (Dec 17, 2011)

you have multiple banks (and the respective people they lent to) recording separate assets (claims) and liabilities (obligations) that have been created through the circulation of money

IWNW - i agree with what you say about the flow/movement/circulation being more important than the actual stock of base money - i'd tried to get that point across in previous posts, but probably didn't make it clear

edit: i haven't watched that thing that you linked to by Keen, will have a look later and get back on it


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## love detective (Dec 19, 2011)

ItWillNeverWork said:


> There's a lot in what you've said that I don't quite grasp yet, but on this point above, in this lecture Keen (if I am understaning him correctly - which I'm probably not) claims that the process by which credit is created is as follows:
> 
> - Capitalist has an idea and goes to bank for a loan to fund this idea.
> - Bank creates _two_ accounts. A credit account which the capitalist can draw from, and a debit account that records the capitalist debt.
> ...



Had a quick skim through that lecture, and got to say I think it's horribly/poorly explained in terms of the bit that you refer to above. He seems to be conflating the internal accounting transactions that a bank will make in relation to the loan account being formally set up (but not drawn on) with the actual flow/movement of money that happens in reality when the loan is drawn upon (which is ironic as he's always going on about the importance of the flow over the static). These are two very different things, with only the later actually relating to the flow & movement of money between two parties.

What he is referring to above (and not sure why he puts that much focus on it as it's not really the relevant part) is the 'internal' accounting transaction that happens prior to any loan physically being paid out to the borrower. He's technically right in what he says, but this doesn't actually explain the flows that happen once the loan is actually drawn upon/used.

So what he's saying is that when the loan is approved, the bank creates an internal accounting entry which creates an asset (representing the money owed to the bank by the borrower) and a liability (representing the money of the loan which has not yet been drawn on by the borrower, i.e. it's effectively on deposit at the bank by the borrower). So at this point in time, nothing has happened in terms of flows of money between the two parties, nor has their overall debtor & creditor relationship changed. All we have is an equal and opposite asset and a liability for the same amount between two parties that cancel out to zero. So the borrower's net position with the bank (and the bank's net position with the borrower) hasn't changed one bit. Previously he had a net position of zero with the bank, now he has an asset of 100 representing money the bank 'owes' to him (i.e. his deposit account) and a liability of 100 representing the money he owes to the bank. Overall representing a net zero relationship between the two parties. No money has flowed and the debtor & creditor relationship between the two parties remain exactly the same as they were prior to this accounting entry that Keen focuses on.

Once the borrower actually wants to use this money however (to buy something, pay someone etc..) - the bank has to be able to fund this and if they can't, regardless of the digits of a 100 in the deposit account of the potential borrower, the borrower can't get at the money (in reality though, the bank will have funded the loan position at the point of creating the internal accounting entry to ensure it's covered, however this funding of the loan is a completely different & separate thing to the internal accounting entry being discussed). So only at the point in time when the borrower draws on the loan does the original position of a net zero change, to then reflect a net liability on the part of the borrower to the bank of a 100 and a net asset on the part of the bank from the borrower of a 100. So it's at this stage that actually reflects a flow/movement of money - resulting in the creation of net debtor and creditor relationship between the bank and the borrower.

I've probably confused things even more now - so to strip it down a bit to more meaningful stuff:-

If you asked me to lend you a tenner on the phone and I said yes - this point in time is the equivalent of the internal accounting entry that Keen is talking about. i.e. it creates a (contingent) obligation between two parties but doesn't involve anything actually happening (in terms of flows of money). If the next day you come round my place to physically get the tenner, I need to have a tenner to give you. And regardless of whatever internal accounting entries I may have made the previous night, if I can't get my hands on a tenner to give you, then no amount of focus on the internal accounting entries in my ledger is going to magic the tenner into existence to pass on to you.

I only skipped through the lecture, so I may have missed out on something where he explains this more clearly, but that slide in and off itself is a very confusing thing to focus on. It places the focus on the wrong thing/part of the loan creation process - as it appears to focus on the formal accounting entries at one point in time, rather than the external activities required by the bank in order to honour the accounting entries previously created. It's technically correct in terms of the narrow accounting entries and one particular point in the process, but in terms of explaining the totality and capturing the actual flows that are required - I think it's pretty poor.

Also I can see how anyone taking this at face value could come away with the impression that commercial bank's can 'create money' from a few taps on their keyboard. I don't think Keen means to give this impression however as I doubt this is what he believes, but his method of exposition there is pretty poor and can result in people completely misunderstanding what he is trying to get across


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## ItWillNeverWork (Dec 20, 2011)

love detective said:


> Also I can see how anyone taking this at face value could come away with the impression that commercial bank's can 'create money' from a few taps on their keyboard. I don't think Keen means to give this impression however as I doubt this is what he believes, but his method of exposition there is pretty poor and can result in people completely misunderstanding what he is trying to get across



You are correct that the lecture is maybe not as clear as it could be. I have taken a look at the paper that this model is based on (edited to add: I just found an updated and better written version of the above paper here), and I think I have a better idea of what he is trying to say. A lengthy quote I know, but this is from the first part of the paper to give a feel for what he is trying to achieve:



> *1: Introduction*
> 
> One issue in Heterodox economics on which there is widespread agreement is that the money supply is endogenous—in contrast to the Neoclassical convention of treating the money supply as exogenous (and somehow under the control of the Central Bank). Basil Moore’s pioneering work inaugurated this consensus, with a persuasive verbal and diagrammatic account of the method by which money is created—*via the lines of credit that major corporations have **negotiated with their banks*(Moore 1983: 544, 546; see Rochon 2001 for a longer historical perspective). More recently, the Italian-French Circuit School provided a sound “first principles” perspective on the process of money creation in a pure credit economy (Graziani 1989, 2003).
> 
> ...



Keen then goes on to demonstrate the construction of this model step by step, introducing a new element at each of those steps along the way. The introduction of the step that 'creates new money' does not appear to the very end, and the part of the video that you talk about is prior to this step – at that point he is merely talking about the internal transaction accounting as you rightly point out.

Most of the paper, then, is about showing that it is possible for a a circular flow model of the economy to be self-sustaining without the need for any new injections of money. What strikes me is that the 'creation' of money in this model feels like an arbitrary addendum to make the model have 'growth'. That growth is achieved by simply adding an amount of money to the loan/deposit accounts of the firm sector at a certain rate as the model runs.

This injection of money Keen puts down to a 'line of credit' used to finance entrepreneurial activity, but without following up by reading the references he mentions, I see no argument presented regarding _previous_ conditions required for this money to be 'created' other than 'keyboard tapping'. Maybe this is deliberate though. He mentions in one of the lectures that the model is really just a heuristic to gain a bit of understanding, and that certain assumptions will be dropped at a later stage.

I have attempted to build the model using the steps outlined in the paper (albeit using agent-based modelling software rather than systems dynamics) and I get the same behaviours out of my model that occur in the paper. I will upload the model as an applet at some point so you can have a play (as well as gaze in amazement at my rudimentary programming skills )


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## love detective (Dec 20, 2011)

Sorry but I don't really have the time to wade through all his papers & lectures at the moment

I think though that both proponents of exogenous and endogenous money theories paint an incorrect picture of the theory that they are opposing. i.e. in the summary above Keen states that exogenousists (is that a word?) claim that money supply is under the control of the central bank, which is clearly not what happens in reality and I doubt is what most of them claim in theory

In reality it's a bit of both, the central bank can influence the money supply in various ways and to various levels of success (as we are seeing at the moment) but it does not 'control' it as Keen suggests that exogenouists claim. Just as actors outside of the central bank can also influence the money supply in various ways and to various levels of success through their economic activity (as we are also seeing at the moment), but they also do not exert full control over it. Combined the actions of the state/central bank, commercial banks, and more generally labour & capital determine the money supply - each does in certain degrees and to certain levels of effectiveness at differing times. To stick to a theory which effectively scrubs out the contribution of one of these and over states the contribution of another is not going to tell us anything about what happens in real life. Their artificially controlled assumption based models may appear to suggest that it's possible in theory, but you just need to look around at what's going on around us in the world at the moment to see that their models and reality are not overly familiar with each other

One basic question I would ask though to anyone who continues to claim that commercial banks can create money purely by tapping a keyboard (i.e. the claim that this tapping is both necessary and sufficient) is why are we in a financial crisis?

If Northern Rock, RBS, Lloyds or Alliance & Lester can create money by tapping away at their keyboards why did they nearly go under in 2008 when they were unable to fund themselves in the money markets, why did they go to the state and central banks for emergency liquidity, when they were sitting upon this magical golden goose that allows them to create money at will? The answer is of course that they can't create money at will. They can play a part in the circulation of money if certain conditions external to themselves are met, however they can't magic these material conditions into existence by tapping on their idealist keyboards.

For the people who claim that commercial banks can create money at will, they have to explain why, when money was desperately needed to survive, they didn't just create it at will in the manner in which it has been suggested they can? If any answer to this question is met with a claim that, oh the conditions weren't right, or confidence had been lost or whatever, then it clearly pulls the rug form under the feet of the claim that they can create money at will, as this shows that this money creation process relies upon something else, something that is not achieved by typing on a keyboard, something that the bank can't just magic into existence.

edit: come to think of it, if people do think that commercial banks can just 'create money' at the stroke of a keyboard, why do banks bother lending money at all? Why do they go to the bother of 'creating' £100 from nothing, and lending it to someone for a year at 10% interest to get £110 back once a year has passed? Why don't they just create the £110 straight away at the beginning and skip out that whole lending part?


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## bubmachine (Jan 28, 2012)

Seemed like politics masquerading as science - or like a religion.

Even though the system they wanted as never existed, and will never exist, they were so convinced that they were right that it is just plain annoying to read.

The "Road to Serfdom", although a piece of skilful rhetoric, is complete nonsense and I am not sure why people took it seriously. (The argument was that: if the economic is not a pure free-market, it will be mixed, and that is just a slippery slope to state socialism. Because it is.)


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## nino_savatte (Jan 28, 2012)

bubmachine said:


> Seemed like politics masquerading as science - or like a religion.
> 
> Even though the system they wanted as never existed, and will never exist, they were so convinced that they were right that it is just plain annoying to read.
> 
> The "Road to Serfdom", although a piece of skilful rhetoric, is complete nonsense and I am not sure why people took it seriously. (The argument was that: if the economic is not a pure free-market, it will be mixed, and that is just a slippery slope to state socialism. Because it is.)



Though Keynes found _Road to Serfdom_ interesting, he noted that it was unworkable. I find Hayek's arguments (such as they are) against 'centralisation' to be absolutely barking. I also think his logic is flawed - particularly his notion that Nazism and socialism are the same thing.


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## camouflage (Mar 8, 2012)

littlebabyjesus said:


> One can 'create' money by revaluing one's assets upwards, can one not? Isn't that Keen's point about the ponzi scheme that was the exploding property market?


 
love_detectives incisive posts aside, a plethora of money-like financial instruments are created in an increasing frenzy during the development of a bubble, and more money can be created simply through the valuation of assets (which again, start to sky-rocket as the bubble develops).

For me it basically all comes down to dreams, hopes and promises. Despite the attempts of any government or ruling party to control it, people make promises to eachother and on the back of those promises further promises are made. There's only so much energy and material to go around of course so then the whole expansionary paper-dreamland must collapse back to what's actually available. There's nothing wrong with this in my opinion, normal human behavior, plans exist in the future, inhale exhale, rhythms of life, etcetera.

Libertards in my opinion just don't like people, our tendency to live in societies, or the trust we have to have in total strangers to get by day to day. That's why they're obsessed with cold shinny yellow metal.

*ps thread bumped as I'd forgotten about it and now remembered it


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## camouflage (Mar 8, 2012)

revol68 said:


> yeah, that's what I assumed ItWillNeverWork was talking about.
> 
> I mean the banks did lend way beyond their funds and instead of this being solved by them crashing and burning, instead they got bailed out by public money, as well as central banks actually having to print more money.
> 
> In that sense the commercial banks essentially increased the money supply by presenting states and central banks with a fait acompli? no?


 
No, typing money into the system like that simply causes inflation, nothing is gained. We're seeing in my opinion commodity price inflation now thanks to all the QE.


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## littlebabyjesus (Mar 8, 2012)

camouflage said:


> No, typing money into the system like that simply causes inflation, nothing is gained. We're seeing in my opinion commodity price inflation now thanks to all the QE.


How is that due to qe? If anything, I would have thought that it is more likely to be due to effects such as Peak Oil. Peak Oil is likely to leave commodity prices permanently higher over the coming years until dependency on oil is reduced.


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## camouflage (Mar 8, 2012)

love detective said:


> i'm off out to the IWCA xmas social in a minute so will need to return to this tomorrow
> 
> briefly though IWNW made a number of points in his initial post - i agreed with most of them (i.e. the ones you repeated above about the fallacy of the market self regulating and I made agreeing comments on that in the last couple of paragraphs of this post above) but not with all of them (i.e. about money creation), so I think some of these points are being conflated and talked about as one thing when they are not
> 
> and yeah central banks have printed money, but if that doesn't circulate with appropriate vigour (which at present it's not really) it doesn't do much in terms of the overall money supply. As the key measures of money supply reflect not only how much 'base money' is in the system but how fast it circulates - and the base money part is usually only a small fraction of the total wider money supply, with the rest made up of it moving around everywhere, circulating, velocity and all that stuff. So the central bank creation of money through QE and the like is an attempt to boost up the overall money supply through injecting more base, to compensate for the fact that the crisis has resulted in a massive contraction in the velocity of circulation compared to previously


 
MV=PT, pump up the M as a sub for wanting a bigger V. Or something.


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## littlebabyjesus (Mar 8, 2012)

ld explains well how qe doesn't necessarily cause inflation, though. I used to think that it had to, but ld's arguments have convinced me otherwise. It's what money _does_ that counts - ie how it circulates.

This is one of the places where monetarism is fundamentally wrong. Governments don't control the size of the money supply in the way that monetarists think they do.


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## camouflage (Mar 8, 2012)

littlebabyjesus said:


> How is that due to qe? If anything, I would have thought that it is more likely to be due to effects such as Peak Oil. Peak Oil is likely to leave commodity prices permanently higher over the coming years until dependency on oil is reduced.


 
I wouldn't bring Peak Oil into it just yet, I'd say it's far more likely that the additional trillions are the cause of commodity price inflation... interesting point though, where does one effect end and the other begin.


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## littlebabyjesus (Mar 8, 2012)

camouflage said:


> I wouldn't bring Peak Oil into it just yet, I'd say it's far more likely that the additional trillions are the cause of commodity price inflation... interesting point though, where does one effect end and the other begin.


You need to show how. The last round of qe probably had an effect here in the uk on top-end house prices, providing banks with funds to lend out but in a situation where they will only lend to very low-risk borrowers. And, um, that's probably the extent of the effect. Banks are so risk-averse at the moment that they will not lend to anyone to provide for the basics except at extortionate interest rates - and qe appears to have made little difference to that. The extra money just sits there on deposit at the Bank of England in case there is another run on the banks - or it's used to go straight back out and buy more government debt.

As we have a situation at the moment where more money is being paid back than borrowed, the real risk is deflation - the reduction in the amount of money circulating due to this process. qe is a direct response to that reduction - an attempt to offset it. As such, it is a logical thing to do, although far from the best thing to do, imo - far better to give us the money than the banks, allow us all to pay down our debts in a way that doesn't cause deflation. Or just to print money to be paid directly to workers on, for instance, social housing building projects.

I think my question would be this: If the rise in the price of international commodities is due to qe, why has qe only affected the prices of those things? Why has it not caused a general across-the-board inflation?

My answer would be that the reasons for the increases in international commodity prices are probably elsewhere.


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## camouflage (Mar 8, 2012)

Well alot of it is in the form of dollars, the international currency, so maybe the things that are traded in dollars mostly are inflating. I agree with what you say though, but the banks are using the money they've been given, to play the commodities market... I could be wrong though, talking about what's happening  in the world of finance is far less interesting to me than talking about economic ideas so I was probably only half listening when I picked up this impression of what the banks are doing with all the money they're not lending to us.

Mind you if they aren't.. that's all bubble for the future I reckon.


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## littlebabyjesus (Mar 8, 2012)

I can't see any bubble for the foreseeable future - at least certainly not in housing. The point is that bubbles need both the ability to lend and the desire to borrow. Nobody is going to borrow against a house in anticipation of its price going up at the moment, I wouldn't think.

Something dramatic would have to change to see a bubble situation again. Japan went through rounds of qe, and its house prices are still below where they were in 1989. Its inflation also remains around zero - indeed it still struggles to avoid deflation. The link between qe and inflation is far from straightforward.


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## camouflage (Mar 8, 2012)

I made my last post in the bout-to-leave-work-rush, so it could stand some clarification. I figured a quick google of the words constituting my point (qe2 commodities inflation) should throw up the right sort of thing, and sure enough... this.​​A quick scan of which seems to be along the lines of what I've been saying since last February... and then some. Looks like an interesting article actually.​


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## littlebabyjesus (Mar 8, 2012)

That's interesting. It suggests that it is specifically US qe that is causing the commodity inflation.

I wish they wouldn't misuse the word theorem, though. It is a theor*y*, not *em*.


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## ViolentPanda (Mar 8, 2012)

camouflage said:


> ... interesting point though, where does one effect end and the other begin.


 
I suspect we're going wrong if we think of effects as being mostly independent of one another, with effects ending and another beginning. If we look at the complexity wrought by, for example, derivatives (and I don't mean the products themselves, but their *effects*), then we need to accept that effects, be they from Peak Oil, other scarcity, commodities blips or from banking chickens coming home to roost, interact with each other and sometimes synergise in terms of the number of people they effect.  I think it's impossible to blame Peak Oil, QE or any other single factor.


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## ViolentPanda (Mar 8, 2012)

littlebabyjesus said:


> I can't see any bubble for the foreseeable future - at least certainly not in housing. The point is that bubbles need both the ability to lend and the desire to borrow. Nobody is going to borrow against a house in anticipation of its price going up at the moment, I wouldn't think.
> 
> Something dramatic would have to change to see a bubble situation again. Japan went through rounds of qe, and its house prices are still below where they were in 1989. Its inflation also remains around zero - indeed it still struggles to avoid deflation. The link between qe and inflation is far from straightforward.


 
TBF, UK housing prices are *still* in a bubble, to all intents and purposes.


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## littlebabyjesus (Mar 8, 2012)

ViolentPanda said:


> TBF, UK housing prices are *still* in a bubble, to all intents and purposes.


In some ways, yes. I think the reason they haven't halved as you might have thought that they would is the ongoing housing shortage in this country - that combined with the low interest rates has just about stopped them from plummetting. I anticipate them bobbling around at much the same level for a few years yet. I'd be amazed if they started going up again in a concerted way.


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## deke t lefel (Mar 9, 2012)

come autumn, purple will be considered the new black and flares will be back in fashion


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## camouflage (Mar 9, 2012)

ViolentPanda said:


> I suspect we're going wrong if we think of effects as being mostly independent of one another, with effects ending and another beginning. If we look at the complexity wrought by, for example, derivatives (and I don't mean the products themselves, but their *effects*), then we need to accept that effects, be they from Peak Oil, other scarcity, commodities blips or from banking chickens coming home to roost, interact with each other and sometimes synergise in terms of the number of people they effect. I think it's impossible to blame Peak Oil, QE or any other single factor.


 

Indeed, it's all a glorious tapestry etcetera.


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## camouflage (Mar 9, 2012)

ViolentPanda said:


> TBF, UK housing prices are *still* in a bubble, to all intents and purposes.


 
I agree, it's scary that so far we have the 'great recession' but not even the benefit of being out of the bubbled-up asset prices to be grateful for. It's like having been knocked over by a bus that then stops and parks itself on you. It's ok for the people _on_ the bus I suppose, but still. Isn't a similar situation responsible for Japans "lost decades"?


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## ViolentPanda (Mar 9, 2012)

camouflage said:


> I agree, it's scary that so far we have the 'great recession' but not even the benefit of being out of the bubbled-up asset prices to be grateful for. It's like having been knocked over by a bus that then stops and parks itself on you. It's ok for the people _on_ the bus I suppose, but still. Isn't a similar situation responsible for Japans "lost decades"?


 

The cynic in me says "well, the government and the market have an interest in keeping the bubble inflated, however many people the bus runs over".
I'm not sure that Japan is a good analogy, though. They did/do at least have a productive capacity which could take up some of the slack in their economy, even if it couldn't take them off the plateau. here, we've got nothing similar.


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## littlebabyjesus (Mar 9, 2012)

Japan's economic indicators before their credit crunch in 1990 were remarkably similar to the UK's in 2007 in terms of the debt structure. Both crunches were caused by an excess of private debt - in Japan's case it was more company debt than individual, but as a % of gdp, the figures for private/public debt are near as damn it identical. And the response to both crunches has been the necessary replacement of that private debt by public debt. So far, as in Japan, the private sector remains stubbornly intent, taken as a whole, on paying down its excessive debts, and demand in the economy remains very weak.

This doesn't have to be all doom and gloom. If a way were found to stop the rich from continuing to get richer, zero growth would be perfectly acceptable. After all, the economy today is larger than it was 10 years ago, and 10 years ago, nobody was saying that we were in a crisis. But because of the functioning of capitalism in its current form, zero growth means that capital still takes its returns, and everyone else gets progressively poorer as the size of their slice of the pie is reduced.


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## littlebabyjesus (Mar 9, 2012)

To add a point about the Austrian school, their whole way of thinking is detestable. They are amoral in their outlook, and to look at economics as if it were amoral is itself immoral.

Adam Smith said famously that the baker does not bake his bread out of altruism, but out of self-interest. But he wasn't entirely right about that. There is a real sense among most people that they like to do good. If they can combine doing good with making a living, that is ideal. We are moral beings, after all, and to remove morality from the economy in this way is simply wrong. It leads to a 'Dragon's Den' / The Apprentice style of thinking where the profit is what matters, the means of making that profit largely incidental. To remove the concept of service from work is a horrible thing to do - and we see all around us the faceless chains that are a result of this.


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## camouflage (Mar 9, 2012)

Adam Smith has in my opinion been horribly misunderstood. To my reading what he meant was that there's no 'grand plan', that generally enriching effects can emerge from people just tootling along doing their own thing, talking and walking and transacting and planning in the manner we call the market. For some reason this has been read as some sort of ruthless selfish I'm-alright-so-yooz-can-fuck-right-off type attitude which is not to my mind what he meant at all! It's a bit like what happened to Darwin really ("wow, life seems to evolve and adapt to different environments" becomes transformed in the minds of muppets into "Crush The Weak, The Strong must Dominate!!111!!)

In fact the guy wrote another book too that I'm quite interested in giving a read (if I ever complete my struggle through the one currently on my Kindle where he blathers on a bit too much re bushels of wheat and things called 'shillings') titled
_The Theory of Moral Sentiments_​in which he apparently espouses (as the name suggests) the wider context in terms of human relations and wider society.


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## littlebabyjesus (Mar 9, 2012)

He assumed that everyone shared core values of decency and fair play. However, he did stress this point about self-interest. I agree that he was taken the wrong way by the likes of Thatcher. But imo, his model was still wrong. It did not allow for the complexity of human motivation. As is often the case with models, the process of simplification can introduce lies.


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## camouflage (Mar 9, 2012)

littlebabyjesus said:


> He assumed that everyone shared core values of decency and fair play. However, he did stress this point about self-interest. I agree that he was taken the wrong way by the likes of Thatcher. But imo, his model was still wrong. It did not allow for the complexity of human motivation. As is often the case with models, the process of simplification can introduce lies.


 
I disagree. If I were to say that a network of paths can be formed through woodland without any grand-design, just by people and animals coming and going about their own individual business, I don't think that equates to saying you need a gaggle of psycopaths to make it possible to navigate the wooldand, it's got nothing to do with selfishness, just describing that aspect of emerging patterns that is not designed in accordance with any overall scheme but can lead to making it easier for all to get around. Not even saying that selfishnes has a virtue really. He did use the term 'self-love', I concede. but that was missleading considering what he was actually saying. As misleading as saying people and animals walking through the undergrowth going about their own 'self-loving business' might imply a bunch of wood-dwelling masturbaters wandering around Hamstead Heath.


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## littlebabyjesus (Mar 9, 2012)

I don't disagree particularly with that aspect of what he said, although it's almost a truism - but yes, order can emerge from the interactions of many individuals, none of whom has that order in their heads, and none of whom necessarily understands the order that they are a part of. I agree with that bit, and it's something that occurs in all kinds of contexts.

What I disagree with is the emphasis Smith laid on self-interest as the motivator, as defined by him. He mistakenly characterised people as rational. We're partially rational beings, but we are also emotional beings, and we are motivated by all kinds of things that cannot easily be reduced to self-interest, even 'enlightened' self-interest. We also do good for the sake of doing good, and any economic model that doesn't include this will be wrong. Smith only told half a story. And while I also agree that Smith was no Austrian-school devil, he got lots of things wrong, including not anticipating at all how capitalism would lead to extremes of wealth distribution. I suspect that if Smith were alive today, he himself would be making these same criticisms of what he said.


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## camouflage (Mar 9, 2012)

littlebabyjesus said:


> I don't disagree particularly with that aspect of what he said, although it's almost a truism - but yes, order can emerge from the interactions of many individuals, none of whom has that order in their heads, and none of whom necessarily understands the order that they are a part of. I agree with that bit, and it's something that occurs in all kinds of contexts.
> 
> What I disagree with is the emphasis Smith laid on self-interest as the motivator, as defined by him. He mistakenly characterised people as rational. We're partially rational beings, but we are also emotional beings, and we are motivated by all kinds of things that cannot easily be reduced to self-interest, even 'enlightened' self-interest. We also do good for the sake of doing good, and any economic model that doesn't include this will be wrong. Smith only told half a story. And while I also agree that Smith was no Austrian-school devil, he got lots of things wrong, including not anticipating at all how capitalism would lead to extremes of wealth distribution. I suspect that if Smith were alive today, he himself would be making these same criticisms of what he said.


 
Well I've been putting forward my disagreement with the way he is generally represented, but frankly I don't think anyone can claim a proper understanding of Smiths ideas on human behavious unless they have first read both of the books I've referred to above. "Smith only told half a story" you said, but have you like most people only read half of what he's said?

(I know I have, only read part of half  )


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## littlebabyjesus (Mar 9, 2012)

Alright. Fair point. No I haven't read that book.


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## love detective (Mar 9, 2012)

Have you read wealth of nations? 

Do you think if he was alive today he would criticise the parts of Wealth of Nations that talked about the desirability & requirement for things like progressive taxation, redistribution, safety nets, public good provision and pro worker organisation (and anti-employer collusion) - all such things suggest that, despite the very early stage capitalism was at at the time he was writing, he certainly had some insight into how capitalism could lead to 'extremes of wealth distribution' which you claim he did not anticipate. 

not to mention his theory of alienation of labour through productivity developments, and his (somewhat muddled) labour theory of value - all of which can be found in WN - and that's before we start to look at WN in the context of the theory of moral sentiments 

You seem to be taking your reading of Smith from right wing free market types who also haven't read him


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## littlebabyjesus (Mar 9, 2012)

I've only read some of it, I admit. I'm aware that he spoke a good deal about how employers need to be prevented from exploiting workers/customers. The dangers of the very private monopolies that Thatcher created, for instance. But do you think he anticipated the savage exploitation of the 19th century?

Things like this:



> As soon as government management begins it upsets the natural equilibrium of industrial relations, and each interference only requires further bureaucratic control until the end is the tyranny of the totalitarian state.


 
And many other quotes like it, show the idea that those right wing types picked up on - the idea that there is a 'natural equilibrium' that the invisible hand will bring. That this equilibrium is good is a given to him, is it not?

My criticism of this kind of thinking is that it doesn't account for the fact that essential resources are limited. It also takes as a given the idea that private property is somehow 'natural'. Combine those two, and you have a problem, imo.

And this quote was famously said by Thatcher:



> It is not from the benevolence of the butcher, the brewer, or the baker, that we expect our dinner, but from their regard to their own interest. We address ourselves, not to their humanity but to their self-love, and never talk to them of our necessities but of their advantages.


 
This most definitely only tells half the story for me. There is a certain kind of (imo, mistaken) philosophy that insists that there is no such thing as altruism, that everything we do can be put down to self-interest of some kind or other. But I find this way of thinking barren, since it provides no explanation at all as to why people act as they do. Appealing to the idea of self-love really is only half a story. What about love for others?


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## ItWillNeverWork (Mar 9, 2012)

littlebabyjesus said:


> And many other quotes like it, show the idea that those right wing types picked up on - the idea that there is a 'natural equilibrium' that the invisible hand will bring. That this equilibrium is good is a given to him, is it not?
> 
> My criticism of this kind of thinking is that it doesn't account for the fact that essential resources are limited. It also takes as a given the idea that private property is somehow 'natural'. Combine those two, and you have a problem, imo.


 
Another criticism of equilibrium theory is that it is grounded in an immature understanding of dynamic systems. All systems have circular causation, feedback loops, and variables that interact in other complex ways. Systems can have multiple equilibria, or be completely unstable around a number of equilibrium points that are _never_ reached.

Anyone who has studied even a small bit of engineering or physics can tell you this, but all these advances in science/maths have completely bypassed most economists despite having been around for the best part of a century. It beggars belief that economists are so out of touch, tbf.


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## littlebabyjesus (Mar 9, 2012)

Yes, good point. tbf there are economists who take this seriously. Not the Austrian school, though. You do still hear extraordinary things, such as the 'natural rate of unemployment', which are not just wrong, but bear no resemblance at all to the society they are trying to describe. It's like they've just arrived from Mars.


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## Blagsta (Mar 9, 2012)

ItWillNeverWork said:


> Another criticism of equilibrium theory is that it is grounded in an immature understanding of dynamic systems. All systems have *circular causation*, feedback loops, and variables that interact in other complex ways. Systems can have multiple equilibria, or be completely unstable around a number of equilibrium points that are _never_ reached.
> 
> Anyone who has studied even a small bit of engineering or physics can tell you this, but all these advances in science/maths have completely bypassed most economists despite having been around for the best part of a century. It beggars belief that economists are so out of touch, tbf.


 
This is kinda what Marx was getting at with his dialectics.


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## love detective (Mar 9, 2012)

littlebabyjesus said:


> But do you think he anticipated the savage exploitation of the 19th century?


 
why would someone push for the desirability & requirement for things like progressive taxation, redistribution, safety nets, public good provision, the benefits of worker organisation and the dangers of employer collusion if they didn't recognise that capitalism, left to itself, was capable of such degradation of humanity?

If, as you assert, he didn't anticipate that capitalism would lead to the extremes of wealth distribution, what logical explanation could there be for him focussing on, and being supportive of, the kind of things i mention above?

Smith also got to a couple of things nearly a 100 years before Marx did - namely a labour theory of value and the revolutionary potential for society of the division of labour/automation, while at the same time foreseeing the alienating aspects of it for labour. Given how rudimentary & nascent industrialised capitalism was at the time of Smith's writing, I don't think there is much scope to criticise him for his lack of anticipation of a whole load of problems that the ongoing development of capitalism could and would bring with it. Politically and economically he was effectively a social democrat who believed capitalism could be tamed and made to work for the benefit of all (so if he should be criticised it should be for this) - and just as much cause could be made for him being a pre-marx marxist as could be made for him being a full on market liberal (i.e. a little, but not much either way)



> Things like this:
> 
> And many other quotes like it, show the idea that those right wing types picked up on - the idea that there is a 'natural equilibrium' that the invisible hand will bring. That this equilibrium is good is a given to him, is it not?


 
Smith generally had the view that government intervention could not make things better _unless_ there was a market failure in that particular area - this is the view that led him to believe in the necessity for public good provision etc (as the market would never provide it safely/properly) - so from a wider perspective and reading of him, there is a case for invoking his 'market failure' qualification to negate the specifics of some of the more commonly used market liberal love in type quotes. Clearly he felt the market had a role to play and supported its extension into various aspects of life, but not in the unlimited & unrestrained way that he is used by market liberals.



> My criticism of this kind of thinking....


 
I'm not sure you have the necessary holistic grasp on what his 'kind of thinking' was to be honest (as evidenced by your various comments above) - your criticisms of him are responses to selectively mined quotes by pro market liberals, devoid not only of the wider context of his theory of moral sentiments but also of the context of wealth of nations itself from which they come. This kind of passive 'engagement' with Smith just feeds into and supports the false appropriation of Smith by nakedly pro market liberals - much better to deprive them of their hero by using his work against them



> There is a certain kind of (imo, mistaken) philosophy that insists that there is no such thing as altruism, that everything we do can be put down to self-interest of some kind or other. But I find this way of thinking barren, since it provides no explanation at all as to why people act as they do. Appealing to the idea of self-love really is only half a story. What about love for others?


 
I agree with you about there perhaps being a certain kind of philosophy that insists there is no such thing as altruism, but to lump Adam Smith into the type of thing you talk about above says more about your lack of understanding/knowledge of his writings than it does about anything else. If you'd even been aware of the existence of what Smith probably considered his most important work (The Theory Of Moral Sentiments) then there is no way you would have written the above - for example does the quote below from TMS fit in with your portrayal of Smith as only being concerned with self love and not love for others?




			
				Adam Smith in Theory of Moral Sentiments said:
			
		

> to restrain our selfish, and to indulge our benevolent affections, constitutes the perfection of human nature; and can alone produce among mankind that harmony of sentiments and passions in which consists their whole grace and propriety. As to love our neighbour as we love ourselves is the great law of Christianity, so it is the great precept of nature to love ourselves only as we love our neighbour, or what comes to the same thing, as our neighbour is capable of loving us.


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## camouflage (Mar 17, 2012)

littlebabyjesus said:


> Yes, good point. tbf there are economists who take this seriously. Not the Austrian school, though. You do still hear extraordinary things, such as the 'natural rate of unemployment', which are not just wrong, but bear no resemblance at all to the society they are trying to describe. It's like they've just arrived from Mars.


 
What would you say the 'natural rate of unemployment' means?


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## ymu (Mar 17, 2012)

Adam Smith proposed a land tax, on the grounds that rentiers produce nothing useful and land cannot be hidden or expatriated. Fell over backwards when I read that. There's plenty the right don't like to mention about their intellectual forebears.

Thanks for those posts ld, really useful.


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## ItWillNeverWork (Mar 17, 2012)

This is what nature thinks of equilibrium.





> A chemical clock is a complex mixture of reacting chemical compounds in which the concentration of one or more components exhibits periodic changes.[1] They are a class of reactions that serve as an example of non-equilibrium thermodynamics, resulting in the establishment of a nonlinear oscillator. The reactions are theoretically important in that they show that chemical reactions do not have to be dominated by equilibrium thermodynamic behavior.
> 
> In cases where one of the reagents has a visible color, crossing a concentration threshold can lead to an abrupt color change in a reproducible time lapse. Examples of clock reactions are the Belousov-Zhabotinsky reaction, the Briggs-Rauscher reaction, the Bray-Liebhafsky reaction and the iodine clock reaction. The concentration of products and reactants of oscillatory chemical systems can be approximated in terms of damped oscillations.
> 
> http://en.wikipedia.org/wiki/Chemical_clock


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## camouflage (Mar 17, 2012)

ItWillNeverWork said:


> This is what nature thinks of equilibrium.




A couple of things here... first I don't see what your point is with the video, the solution seemed to switch fairly evenly between blue and clear. I imagine that on a graph it would be a fairly regular sine-wave, a steady heartbeat. Over the long term the liquid will be about fifty percent blue and fifty percent clear. How does this contradict the idea that equilibriums can exist in nature? Secondly, who is asserting that equilibrium is real, economists generally or Adam Smith? Hayek or Mises?
I don't think anyone in the thread has said that including those named. 

I'm interested in reading up on Minsky, he's an economist whos ideas you might find interesting.


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## ItWillNeverWork (Mar 17, 2012)

camouflage said:


> A couple of things here... first I don't see what your point is with the video, the solution seemed to switch fairly evenly between blue and clear. I imagine that on a graph it would be a fairly regular sine-wave, a steady heartbeat. Over the long term the liquid will be about fifty percent blue and fifty percent clear. How does this contradict the idea that equilibriums can exist in nature? .


 
The point is not that equilibrium's don't exist. The point is that systems do not necessarily converge on a single one. The concept of equilibrium as used by economists assumes that these convergences occur in order to clear markets. For example, the Austrian theory of business cycles rests on an assumption that the economy will coordinate present investment with future consumption via an equilibrium interest rate - if this rate is distorted by government, then the economy is thrown out of equilibrium. Their opposition to minimum wage laws and unions are a consequence of believing that there is a unique price that clears labour markets and spontaneously leads to full employment.

My suspicion is that the economy contains internal dynamics that produce cycles spontaneously, and that boom/bust will therefore _not_ be ameliorated by simply getting government out of the way. Cycling might be as natural to economies as it is to certain chemical reactions.



> Secondly, who is asserting that equilibrium is real, economists generally or Adam Smith? Hayek or Mises?
> I don't think anyone in the thread has said that including those named.


 
I don't think Smith talked of equilibriums in the same way as economists do today. He wrote about an invisible hand of course, and this is a verbal description of a similar process, but the idea of a formal mathematical equilibrium came later on. Hayek and Mises (or at least followers of them that I have spoken to) would reject the claim that they utilise equilibrium concepts (and Austrians in general tend to make a big fuss about how their theories are truly dynamic, and unlike the mainstream). However, they just sneak equilibrium in through the back door as an assumption in their business cycle and labour theories.



> I'm interested in reading up on Minsky, he's an economist whos ideas you might find interesting


 
Yeah, I've read a little bit about him just recently. Intuitively there seems to be a lot that makes sense in what he says.


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## littlebabyjesus (Mar 17, 2012)

> Their opposition to minimum wage laws and unions are a consequence of believing that there is a unique price that clears labour markets and spontaneously leads to full employment.


 
Thing is, even if this is true - which I dispute - that doesn't necessarily mean that the condition of full employment in this hypothetical situation of a free market will produce wages at the bottom that are liveable. Amartya Sen has done a lot of work showing how famines are not necessarily caused by bad harvests so much as the collapse in the value of the wages of the poorest workers to the point where they can no longer afford to feed themselves. He specifically looked at the Bengal famine of the 1940s, during which he and his family and loads of other middle class families experienced no shortage or hardship at all, while just down the road people were starving. The harvest wasn't particularly bad - it was the means of distributing it equitably through pricing that had gone wrong.

There is no reason in a world of limited resources for any kind of unregulated market to provide for everyone. I wish I had the skills to do it, but I think it should be possible to model this in, for instance, a housing market. Where there is a limited resource - land, primarily in this case, but also building materials and workers - that is owned privately, the most profitable situation for those who already own is one of permanent shortage. What I'd like to be able to show is how this situation can be produced without any kind of controlling mind, simply through individuals and firms acting to maximise their own wealth.

That's the stupidity in my mind of Austrian school thinking - resources are limited and distributed unequally: in such a situation, there is not, and can never be, a free market. They model something that bears little resemblance to reality.


I've also been reading up on Minsky. He hypothesises that it is stability itself that sows the seeds for instability - there is no equilibrium in other words - as long periods of stability lead to riskier and riskier investments until investments in fact become Ponzi investments. The power of his argument, to my mind, comes from the way that he very precisely predicted the rise in sub-prime mortgages after a long period of stability, and described how these would eventually lead to collapse. This paper sums up briefly his idea. And this table shows how what he predicted would happen happened - the 'sub-prime' are the Ponzi investments in Minsky's way of thinking. The 'Minsky moment', when wile coyote realises that he's run off the cliff, asset values collapse and Ponzi investments show their real (lack of) value, is pretty clear too:



Minsky talks a lot about the way that banks are not merely facilitators of profit, but active profit-seekers themselves - and as such, are constantly looking to innovate. What I'm not clear about is whether or not he thinks that the finance for the Ponzi investments is always properly backed by a liability - a deposit of some kind - or whether he thinks that the complexity of innovative financial instruments is in fact a cover for financing that is not backed by a corresponding deposit. It would explain a lot to my mind if the latter were true.


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## littlebabyjesus (Mar 17, 2012)

Coming back very briefly to Adam Smith, I'm not sure what bearing his moral philosophy has on his political ideas, tbh. His ideas about morality seem to be a fairly conventional expression of Christianity - where 'love thy neighbour' is held to be the most important commandment of all. Thatcher always claimed to be motivated by Christian morality. Cameron's Big Society guff could be taken to be the same thing.


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## camouflage (Mar 17, 2012)

littlebabyjesus said:


> Thing is, even if this is true - which I dispute - that doesn't necessarily mean that the condition of full employment in this hypothetical situation of a free market will produce wages at the bottom that are liveable. Amartya Sen has done a lot of work showing how famines are not necessarily caused by bad harvests so much as the collapse in the value of the wages of the poorest workers to the point where they can no longer afford to feed themselves. He specifically looked at the Bengal famine of the 1940s, during which he and his family and loads of other middle class families experienced no shortage or hardship at all, while just down the road people were starving. The harvest wasn't particularly bad - it was the means of distributing it equitably through pricing that had gone wrong.
> 
> There is no reason in a world of limited resources for any kind of unregulated market to provide for everyone. I wish I had the skills to do it, but I think it should be possible to model this in, for instance, a housing market. Where there is a limited resource - land, primarily in this case, but also building materials and workers - that is owned privately, the most profitable situation for those who already own is one of permanent shortage. What I'd like to be able to show is how this situation can be produced without any kind of controlling mind, simply through individuals and firms acting to maximise their own wealth.
> 
> ...


 
Hedge Finance: can pay interest and principal.
Speculative Finance: can pay interest, but not principal.
Ponzi Finance: can pay niether interest nor principal.

To my understanding this would indicate that Ponzi finance is not backed by anything, thus being named after this guy...


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## JimW (Mar 17, 2012)

littlebabyjesus said:


> Coming back very briefly to Adam Smith, I'm not sure what bearing his moral philosophy has on his political ideas, tbh. His ideas about morality seem to be a fairly conventional expression of Christianity - where 'love thy neighbour' is held to be the most important commandment of all. Thatcher always claimed to be motivated by Christian morality. Cameron's Big Society guff could be taken to be the same thing.


Wasn't one of the main points Polanyi made in The Great Transformation that it was precisely this divorcing of some supposed rational economics from a moral framework for human interactions that was one of capital's ideological achievements?


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## littlebabyjesus (Mar 17, 2012)

Here I'm a little unclear about what Minsky means. He says that loans can only be paid back if there are also future loans, and indeed loans are made in expectation of future loans.

But fractional reserve lending is supposed to work in such a way that less than 100 percent of any deposit is loaned out - so no matter how stupid your investment was, or how unwise the loan, it is not money that's come out of nowhere. You have a problem if the loan isn't paid back, of course, as you can't honour your liabilities, but the money doesn't just come out of nowhere - every loan is backed by a deposit.

Now on the borrower's side, Minsky's terms make sense - the asset/expected income and its relation to their ability to pay: so the finance isn't backed by collateral/earnings on the borrower's side, but should be on the lender's. If it's standard fractional reserve lending, the lender's finance is always backed by a deposit of greater value than the loan.

Minsky elsewhere talks about money being created by loans, then destroyed again when the loan is paid back. This makes a lot of sense - and if you could construct a system so opaque that the origin of the finance is not clear, you could just create the money out of nowhere with no deposit to back it up, and the system would work fine as long as the borrower pays it back: the money is created then destroyed again, and everyone's happy. But that's not allowed under fractional reserve lending. My question is: 1. is an explosion in credit such as was seen in the last 20 years even possible in a fractional reserve lending system where all loans must be backed by deposits, and 2. if not, are the new complex financial instruments in fact hiding the truth - which is that the money for the loans was created out of thin air in a way that isn't supposed to happen - on the back of notional asset prices, in other words, and on the back of the expectation of rising asset prices in the case of Ponzi investments: which would be a true Ponzi scheme.


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## camouflage (Mar 17, 2012)

littlebabyjesus said:


> are the new complex financial instruments in fact hiding the truth - which is that the money for the loans was created out of thin air in a way that isn't supposed to happen - on the back of notional asset prices, in other words, and on the back of the expectation of rising asset prices in the case of Ponzi investments: which would be a true Ponzi scheme.


 
Yes. Except the not supposed to happen bit, it just does happen because Confidence itself can be Credit. Exuberance as well I imagine.


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## littlebabyjesus (Mar 18, 2012)

Steve Keen (a Minskyite economist) talks about this - basically, he says that banks don't first build up deposits then loan - but the reverse: they make loans then look for the deposits. After all, banks don't make money by taking deposits - they make money by making loans, and it is the demand for loans that determines how much money they need, and can afford, to take in deposits.



> The model of money creation that Obama’s economic advisers have sold him was shown to be empirically false over three decades ago.
> The first economist to establish this was the American Post Keynesian economist Basil Moore, but similar results were found by two of the staunchest neoclassical economists, Nobel Prize winners Kydland and Prescott in a 1990 paper Real Facts and a Monetary Myth.
> *Looking at the timing of economic variables, they found that credit money was created about 4 periods before government money.* However, the “money multiplier” model argues that government money is created first to bolster bank reserves, and then credit money is created afterwards by the process of banks lending out their increased reserves.


 
This is the endogenous creation of money idea - that loans create deposits, not vice versa. And it appears that there _is_ empirical evidence for this. Expansion of credit comes first, reserves come later. This also fits well with the way that quantitative easing seems to make such a small impact - it is the creation of money before there is any demand for it, so it doesn't do anything.

There is a good wiki page on this:




> 'Loans create deposits': for the banking system as a whole, drawing down a bank loan by a non-bank borrower creates new deposits (and the repayment of a bank loan destroys deposits). So while the quantity of bank loans may not equal deposits in an economy, a deposit is the logical concomitant of a loan – banks do not need to increase deposits prior to extending a loan.


 
This makes sense to me - person A borrows from the Bank, pays person B to do something, then person B deposits the money in the Bank.


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## ymu (Mar 18, 2012)

Useful posts there, lbj.

I think Minsky's fundamental point is that neoclassical economics has no proper way of dealing with debt. This is a good paper by Keen on this:

Like a Dog Walking on its Hind Legs”: Krugman’s Minsky Model

Krugman's response to this is more or less "you're right, but I'm too old to reskill - young guns go for it. Please."

On relending deposits, the problem was banks counting non-cash assets as the same thing as cash. This meant that instead of lending out, say, 90% of a new deposit, they could lend out more than 100%, creating an inevitable downward spiral. Read a really good article about this recently, but I can't find it now. Will keep looking. It goes summat like this:

Someone deposits £1. Lend out 90% of the £1 deposited, put 10p in the reserves. Get the 90p on deposit from the borrower, lend out 90%, put 9p in the reserves. You eventually end up with the original £1 in the reserves. Count things that shouldn't be counted as cash as a cash deposit, and you can lend out more than 100% of cash deposits and the amount of liability compared to assets spirals out of control.


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## love detective (Mar 18, 2012)

sorry but there's a lot of misleading & confused information being put forward in the last three posts - the first two pages of this thread have been some fairly detailed discussions around these very things where i tried to go back to the basics to argue against , i.e.

i) the incorrect assertion that banks create money 'from thin air' (and that Keen somehow proves this),
ii) the equally incorrect assertion that money can be created simply by revaluing assets,
iii) the necessity of circulation and it's relationship to fractional reserve lending ,
iv) endogenous money theory etc. - there was also some fairly length responses addressing ItWillNeverWork's points about Keen

there's not much point me responding in any detail to what i disagree with in the three posts above as I already done so in the first two pages of this thread when the same points were made earlier (and on numerous other money/value threads over the last year or so), so i'll scrap the usual lengthy responses as they are already here on the thread - in short though all these things come down to the necessity of circulation/flow/movement and in this case a misunderstanding of it

(poor response re Smith as well LBJ - and i think conflating the usage of christian morality as political cover by politicians with the same thing happening to serious total philosophers like Adam Smith is pretty poor - to put forward the notion that someone like Adam Smith could write two completely contradictory tracts at the same time is absurd and shows little understanding of his work - also Smith, like Hume, was most probably an atheist so he had no need for parroting christain morality for the sake of it like dead dogma - can't be arsed getting dragged into a discussion about it though)


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## butchersapron (Mar 18, 2012)

Minsky is interesting but flawed. He takes the basic 'model' model of capital as his start point which immediately puts him in the _economists_ camp. His emphasis is almost totally on a small part of the overall cycle and gives it the key determining influence - and all this is done through looking from above and through the acts of institutions - which is how he could argue for the dismantling of the classic welfare state, he could never see it as coming from the accumulated victories of the labour movement, but just as an act of capital. He's a much cited name today but i think people might be rather surprised at what he actually argues in his work.


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## littlebabyjesus (Mar 18, 2012)

> to put forward the notion that someone like Adam Smith could write two completely contradictory tracts at the same time is absurd and shows little understanding of his work


I don't think they're contradictory. I also did not suggest he was 'parrotting christian morality for the sake of it'! There is a very great deal in christian morality that is very laudable - and that is the tradition I see Smith following, very solidly. That he was probably an atheist is irrelevant. I don't really want to discuss it either, but that is a caricature of what I said.

As for the 'misleading and confused information', I'm pretty sure I've represented Minsky and Keen's positions fairly accurately. It makes sense to me. A lot of sense.


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## love detective (Mar 18, 2012)

for a start, you're still talking about money being created out of thin air by commercial banks (and positing that other things apparently prove this, when they do no such thing and are not even related to the point you are trying to 'prove') - you haven't taken on aboard a thing that has been said on this thread against this notion or the other stuff

as i've said before, it's pointless discussing this stuff with you as you never engage with any of the detail of the points which are put forward which negate the validity of your assertions - you just leave it for a few months and come back with the same garbled & confused assertions - you project a level of knowledge & understanding of these things that simply isn't there


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## littlebabyjesus (Mar 18, 2012)

You patronising arse. How about _you_ address points. If I've misunderstood Minsky and Keen it should be pretty easy to show me how.


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## love detective (Mar 18, 2012)

why don't you argue against/address the points i've made in the first two pages of this thread (all of which relate to, and argue against, the stuff you've put forward in the last few posts) - instead of just asserting after i've made them, something that goes against them but refusing to engage with any of the detail of it

while i think my points are correct, i don't expect anyone else to - i do however expect them to engage with them if they are going to argue things which contradict them - not like what you do, ignore them and re-assert what you think and then demand everyone addresses what genuis you've come out with

I'll leave you to it


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## littlebabyjesus (Mar 18, 2012)

This from Steve Keen shows that I am not misunderstanding him. It actually goes further than what I said in that it considers the money multiplier model not to be at all the system we have - Keen doesn't think that money is created by governments at all - governments merely react to the creation of credit by banks in order to avoid recession.



> If the entire banking system is at its reserve requirement limit, then the Federal Reserve has three choices:
> 
> refuse to issue new reserves and cause a credit crunch;
> create new reserves; or
> ...


 
You don't have to address my points if you don't want to. Calling them 'garbled and confused assertions' suggests to me that you haven't understood them, though.


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## ItWillNeverWork (Mar 18, 2012)

love detective said:


> why don't you argue against/address the points i've made in the first two pages of this thread


 

In this post you said:


> ...the central bank can influence the money supply in various ways and to various levels of success (as we are seeing at the moment) but it does not 'control' it as Keen suggests that exogenouists claim. Just as actors outside of the central bank can also influence the money supply in various ways and to various levels of success through their economic activity (as we are also seeing at the moment), but they also do not exert full control over it.


Could you go into a bit more detail about how you see economic actors influencing the money supply?


You also wrote:


> For the people who claim that commercial banks can create money at will, they have to explain why, when money was desperately needed to survive, they didn't just create it at will in the manner in which it has been suggested they can? If any answer to this question is met with a claim that, oh the conditions weren't right, or confidence had been lost or whatever, then it clearly pulls the rug form under the feet of the claim that they can create money at will, as this shows that this money creation process relies upon something else, something that is not achieved by typing on a keyboard, something that the bank can't just magic into existence.


 
But I'm not sure Keen is claiming that banks have total control over the money supply at _all_ times. In fact, key to his description of crises seems to be that any limited control that banks may have under certain conditions, cease to prevail in crisis times. In other words, circulation is key, and it is the inevitable interruption of this circulation that signifies the onset of the crisis, and the impotence of banks to continue to extend credit as they did previously


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## camouflage (Mar 18, 2012)

ymu said:


> Someone deposits £1. Lend out 90% of the £1 deposited, put 10p in the reserves. Get the 90p on deposit from the borrower, lend out 90%, put 9p in the reserves. You eventually end up with the original £1 in the reserves. Count things that shouldn't be counted as cash as a cash deposit, and you can lend out more than 100% of cash deposits and the amount of liability compared to assets spirals out of control.


 
I agree with this... plus the asset prices themselves spiral out of control when a sort of 'institutional exhuberance' says every paper-sausage thought up by some vampire-squid somewhere is indeed worth it's weight in bricks.

To my mind attempts to control money are like an attempt to control human-ingenuity itself. I wonder how much of an effect Ratings Agencies have on this process, if they say something is AAA, they have effectively given it Credit right?


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## littlebabyjesus (Mar 18, 2012)

ItWillNeverWork said:


> But I'm not sure Keen is claiming that banks have total control over the money supply at _all_ times.


 
In the article I linked to above, Keen addresses the idea that the Federal Reserve was responsible for the Great Depression, when the money supply contracted massively. He says that they weren't - the contraction was simply the response of people paying down their debts and not wanting to take out new loans, because the confidence to do so had gone. In that sense, banks don't have control of the money supply - the money supply is limited by the willingness of people to borrow.


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## love detective (Mar 18, 2012)

as i said, i'll leave you to it LBJ, you can read what i've written or not (and you can take it onboard or not)

you're probably right, i probably don't understand it, i mean why would I

although i've noticed some of the things you've said in the last post or two seems to recognise the importance of what i'd been talking about earlier (circulation being key, banks being the dependent variable, not the independent variable) so you at least seem to have taken some of these things on board (even if you do present them as though they are arguing against what i say

but i have not the time/energy to continually repeat my points for your own convienience - you're not that special


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## littlebabyjesus (Mar 18, 2012)

I could throw everything you say back at you, you know. You accuse me of not understanding yet take offence when I suggest the same to you. I'd like you to show me a 'garbled and confused assertion' I've made in the last couple of pages.

And yes, I have taken on board a lot of what you've said, which is reflected in what I've been saying on this thread. There is a fundamental disagreement here, though, about how money is created. If you read the Keen article, he talks about the predictions about how a 'deposit-first' system would work and compares them to reality - in particular, he shows how the total debt exceeds total money by quite a distance, something that can't happen in a 'deposit-first' system.

Keen/Minsky provide a lot of detail here. They explain the system and the mechanisms by which it works, and their explanation of the system explains the credit crunch, the failure of monetarism, the comparative levels of debt and how it can expand, the contraction in the money supply during the Depression, the failure of quantitative easing to have much of an impact on the economy. I find this a very compelling case.


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## ItWillNeverWork (Mar 18, 2012)

love detective said:


> but i have not the time/energy to continually repeat my points for your own convienience - you're not that special


 
Am _I_ special enough to get your attention?


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## laptop (Mar 18, 2012)

love detective said:


> i) the incorrect assertion that banks create money 'from thin air' (and that Keen somehow proves this),


 
Is it relevant here that the restriction on banks "creating money" is _regulatory_?

I know it's not strictly a response to the argument, which is about misunderstandings of what happens when the system is operating according to "the rules".

But what _stops_ a bank "tapping a few keys" is a web of _rules_ - Basel rules on reserves down to audit and disqualification of directors. Isn't it?


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## littlebabyjesus (Mar 18, 2012)

That was my question earlier, effectively - do complex financial instruments disguise the fact that credit is being created before deposits?

The thing is that Keen provides empirical evidence that this does in fact take place - whether or not it is supposed to. He also provides suggestions as to how - for instance, the 'lines of credit' that are extended to businesses, which allow them to borrow as and when needed. The fact that central banks - _as a matter of course_ - expand the base money supply pretty much constantly anyway could well disguise the real picture, and again, the empirical evidence suggests that it does: credit comes before reserves.


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## ItWillNeverWork (Mar 18, 2012)

Would it be fair to say that money is endogenously created via the extension of lines of credit, but that this process of creation is contingent on there being circulation of money in the correct proportions and in the right places?


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## love detective (Mar 18, 2012)

laptop said:


> Is it relevant here that the restriction on banks "creating money" is _regulatory_?


 
no - it's not regulatory restrictions that are important here on (this is one of the things I try to argue against when people refer to fractional reserve lending as though it's just some legal restriction that stops certain things happening) - what restricts banks creating money out of 'thin air' is the necessity for things independent of that bank's control to happen prior to them being able to extend credit, i.e. things have to circulate



> But what _stops_ a bank "tapping a few keys" is a web of _rules_ - Basel rules on reserves down to audit and disqualification of directors. Isn't it?


 
again no - what stops banks tapping a few keys and creating money is the fact that the material conditions that are required to be present for a bank to extend credit are outwith the control of the bank itself - they can take part in the circulation of credit (including the step of tapping a few keys) if all the other things that need to be in place are in place - if they're not they can't


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## littlebabyjesus (Mar 18, 2012)

If I understand correctly, the process of interbank lending allows the system as a whole to operate like this, allowing you to look at the system as a whole. If, for instance, banks are supposed to keep 10 percent in reserve, then from a starting point with that 10 percent, credit-led money creation would steadily erode that reserve. The central bank response is to create more base money. But effectively, the extension of credit is what drives the circulation - as creating credit is also creating a deposit. As I understand it, this is how the 'endogenous money' theory operates.

Keen actually models a system of pure credit with no central bank money creation at all. Such a system can exist - so long as the lines of credit are constantly expanded.


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## ItWillNeverWork (Mar 18, 2012)

littlebabyjesus said:


> If I understand correctly, the process of interbank lending allows the system as a whole to operate like this, allowing you to look at the system as a whole. If, for instance, banks are supposed to keep 10 percent in reserve, then from a starting point with that 10 percent, credit-led money creation would steadily erode that reserve. The central bank response is to create more base money. But effectively, the extension of credit is what drives the circulation - as creating credit is also creating a deposit. As I understand it, this is how the 'endogenous money' theory operates.
> 
> Keen actually models a system of pure credit with no central bank money creation at all. Such a system can exist - so long as the lines of credit are constantly expanded.


 

That is pretty much how I understand Keen's argument. I do not seewhy this is in conflict with ld's assertion that circulation is important. Surely the ideas compliment each other, or at least are not mutually exclusive. Like I say,  money is endogenously created via the extension of lines of credit, but that this process of creation is contingent on there being circulation of money in the correct proportions and in the right places.

Maybe ld can respond to this point?


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## love detective (Mar 18, 2012)

littlebabyjesus said:


> I'd like you to show me a 'garbled and confused assertion' I've made in the last couple of pages.


 
Here's two for starters




			
				LBJ said:
			
		

> are the new complex financial instruments in fact hiding the truth - which is that the money for the loans was created out of thin air


 



			
				LBJ said:
			
		

> on the back of notional asset prices


 
For the first one, the first couple of pages of this thread was spent talking about this - you ignored all of it to come back and just repeat the assertion that money is created by commercial banks out of thin air

The second one, i'd like to point out as a classi example of your approach to 'debate' on things like this:-

On 16th December you stated the following




			
				LBJ 16th December said:
			
		

> One can 'create' money by revaluing one's assets upwards, can one not?


 
I replied on the same day



> No - and again this is making a similar mistake to IWNW
> 
> You can revalue your assets upwards to your hearts desire but in and off itself (just like IWNW's banks hammering away on their keyboards) it won't create a bean of money (try it now and see what happens)
> 
> ...


 
Now as is your usual approach - you didn't respond to any of the above - however a few months later you then come back, ignoring the points that were made to you, and make the same assertion, that money can be created by simply revaluing assets



> Keen/Minsky provide a lot of detail here. They explain the system and the mechanisms by which it works


 
And earlier on this thread, ITWN put forward a paper by Keen which was used to back up the case that money could be created out of thin air by commercial banks - I read it, engaged with it, and argued against it and showed (in my mind anyway) that he had done no such thing

You also accuse me of attempting to shut down debate - all I can say that it's a pretty flawed attempt on my part to shut down debate by pointing you towards posts on a thread that are relevant to points you are making and asking you to engage with the points that had been made prior to your contributions - it's an odd way to shut down debate by asking you to engage with and debate stuff is it not?

I admit I may have been rude and vigorous in some of my posts - and that's not due to frustration of you not accepting my points, but of frustration of you continually ignoring the time & effort that people put into responding to your points, and time and time again just coming back and repeating the same baseless assertions, avoiding the addressal of any points that have been put forward in respond to your assertions

Now, seriously that's the last on this from me - i apologise if I was rude or disrespectful - but i do have better things to be doing than this, so i'll leave you to it


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## ItWillNeverWork (Mar 18, 2012)

I guess I'm just not that special.


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## littlebabyjesus (Mar 18, 2012)

love detective said:


> I admit I may have been rude and vigorous in some of my posts - and that's not due to frustration of you not accepting my points, but of frustration of you continually ignoring the time & effort that people put into responding to your points, and time and time again just coming back and repeating the same baseless assertions, avoiding the addressal of any points that have been put forward in respond to your assertions


I don't see them as baseless assertions. The post by you that you quote in this post appears to me to be a direct contradiction of what Keen says, to be exactly what Keen is arguing against. He provides empirical evidence to back this up, and makes what is to my mind a compelling case.

You disagree with this, it appears. But you haven't convinced me with your argument. You accuse me of not reading your arguments, but I have - carefully. And what I've been trying to do in the last couple of pages is to provide some base for the suggested mechanism (*not* assertions - you repeatedly misinterpret questions from me as assertions).


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## love detective (Mar 18, 2012)

again i have no will power



littlebabyjesus said:


> The thing is that Keen provides empirical evidence that this does in fact take place


 
Keen shows that money within the monetary system circulates - he doesn't show that money is created out of thin air as part of that process

money can circulate, creating the loans/obligations/'new money' that it leaves in its trace, without increases in central bank money. this is a very basic fact of the monetary system (something that has also been discussed in detail in the earlier pages of this thread). So to show that empirically the money supply races ahead of (proportionally) existing base central bank money, doesn't prove anything near the assertion that money is created out of thin air by a few taps on the keyboard (as you suggest) - all it proves is the a priori fact that at times of increased circulation/activity the supply of money increases, and that supply is not dependent on central bank money to do so. The regulatory aspect of what or how much reserve needs to be held back is not the important thing here in terms of getting to the fundamentals of how things work - the regulatory aspect can hamper/intervene the fundamentals of how it works but it doesn't create those fundamentals

If there was no requirement to keep any reserves (i.e. the 10% referred to above) this wouldn't magically allow banks to create money out of thin air - all it would mean is that they could lend out £100 for every £100 they got in - if they wanted to lend out £110 for every £100 they got in, then there's no amount of tweaking with regulatory/legal things that could make this happen - no more than you or I could magically lend £10 to someone that we don't have


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## love detective (Mar 18, 2012)

littlebabyjesus said:


> Keen actually models a system of pure credit with no central bank money creation at all. Such a system can exist - so long as the lines of credit are constantly expanded.


 
Austrian economists and general equilibrium theoryists model all kinds of systems that suggest in theory their preferred systems can exist - hell even communists do - i'm not sure what this is meant to prove though. (edit: maybe the european banks who had to borrow just over a trillion euros from the ECB in Dec 11/Feb 12 should also have paid more attention to the theories of Keen)

which leads to the commonly used phrase that if only the world behaved like it does in their textbooks then everything would be ok


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## love detective (Mar 18, 2012)

ItWillNeverWork said:


> I guess I'm just not that special.


 
sorry mate - you are special, very special in fact - but i'm really trying not to get dragged into this as I always end up spending too much time on it


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## ItWillNeverWork (Mar 18, 2012)

love detective said:


> sorry mate - you are special, very special in fact - but i'm really trying not to get dragged into this as I always end up spending too much time on it


 
Maybe just a small response to post #106?

Yours, the special fella.


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## love detective (Mar 18, 2012)

littlebabyjesus said:


> I don't see them as baseless assertions. The post by you that you quote in this post appears to me to be a direct contradiction of what Keen says, to be exactly what Keen is arguing against. He provides empirical evidence to back this up, and makes what is to my mind a compelling case.
> 
> You disagree with this, it appears. But you haven't convinced me with your argument. You accuse me of not reading your arguments, but I have - carefully. And what I've been trying to do in the last couple of pages is to provide some base for the suggested mechanism (*not* assertions - you repeatedly misinterpret questions from me as assertions).


 
can you put forward a simple explanation for me then, showing how money can be created by simply revaluing one's assets then?

i've set out why, and in my own words, I don't consider that to be the case - can you explain to me in your words why you think it is the case? There's a lot of 'Keen says' cropping up lately, but a lot of it doesn't seem to be to closely connected to what you are arguing - so put Keen aside for the time being (or put him into your own words) and tell me what is incorrect about my post to you arguing against your assertion that money can be created simply by revaluing one's assets?


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## love detective (Mar 18, 2012)

ItWillNeverWork said:


> Would it be fair to say that money is endogenously created via the extension of lines of credit, but that this process of creation is contingent on there being circulation of money in the correct proportions and in the right places?


 
yes - i would say though that the extension of credit is part of the process (a series of steps say) that is required for the money supply to be increased - but you pretty much cover this in your references to the contingencies of the process

As i mentioned further back on this thread though - that this happens is in no way in contradiction with fractional reserve lending or exogenous money theory (the creation of money endogenously is a fundamental part of even exogenous money theory) - it just shows that money circulates within and around the system and leaves in its trace a trail of loans/obligations


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## ItWillNeverWork (Mar 18, 2012)

love detective said:


> yes - i would say though that the extension of credit is part of the process (a series of steps say) that is required for the money supply to be increased - but you pretty much cover this in your references to the contingencies of the process
> 
> As i mentioned further back on this thread though - that this happens is in no way in contradiction with fractional reserve lending or exogenous money theory (the creation of money endogenously is a fundamental part of even exogenous money theory) - it just shows that money circulates within and around the system and leaves in its trace a trail of loans/obligations


 
Ok, thank you for your reply. All of that makes complete sense. Linking this back to the topic of Austrianism, it seems to me that the Austrians believe the endogenous element of this process to be self-equilibrating, with the central-bank aspect distorting that process. Neoclassicals on the other hand, think that the endogenous aspect is prone to disequilibrium, with central bank action required to correct the problems of coordinating flows.


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## love detective (Mar 18, 2012)

yep and Keen is pretty much to all intents & purposes in the Austrian camp in relation to this (i.e. his assertions that his models prove that the central bank isn't really needed)

Endogenous/circuitism theory & models eschew the need for state/central bank activity in the economy and instead posit that that commercial banks can lend (without the need for any central bank money to exist) purely because of their social role (i.e. people put trust in it because of what it is). However commercial banks don't just appear from heaven, supernaturally endowed with a social role, they only have it because the state/central banks stand squarely & solidly behind it. So the basic premise of endogenous/circuitism implicitly relies upon something that it explicitly rejects (yet very obviously & tangibly exists).

I have knee jerk ideological reaction to the core/thrust of the endogenous/circuitism theory as I see it as providing ideological succour to the idea of a purified neo-liberal view of the world where the state & central bank are not required - i.e. the view that markets, money, capitalism can function naturely, without the state crutch, and are effectively a natural thing. 

(the last two paragraphs are just a copy & paste from when this discussion was had last time - funnily enough they both come from a reply to littlebabyjesus....)


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## ItWillNeverWork (Mar 18, 2012)

love detective said:


> yep and Keen is pretty much to all intents & purposes in the Austrian camp in relation to this (i.e. his assertions that his models prove that the central bank isn't really needed)
> 
> Endogenous/circuitism theory & models eschew the need for state/central bank activity in the economy and instead posit that that commercial banks can lend (without the need for any central bank money to exist) purely because of their social role (i.e. people put trust in it because of what it is). However commercial banks don't just appear from heaven, supernaturally endowed with a social role, they only have it because the state/central banks stand squarely & solidly behind it. So the basic premise of endogenous/circuitism implicitly relies upon something that it explicitly rejects (yet very obviously & tangibly exists).


 
This is where I disagree with you. Keen says exactly the opposite in regards to the need for a central bank. Drastically so in fact. His proposal for the current crisis is a 'debt jubilee' funded from central bank created money - effectively creating money and giving it direct to debters instead of using QE. His opposition to neoclassical notions of exogenous money is that it leads to the belief that QE can solve the problem of liquidity, when his own models show this strategy to be inferior to direct giving of money to firms that are in debt.


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## ymu (Mar 18, 2012)

love detective said:


> If there was no requirement to keep any reserves (i.e. the 10% referred to above) this wouldn't magically allow banks to create money out of thin air - all it would mean is that they could lend out £100 for every £100 they got in - if they wanted to lend out £110 for every £100 they got in, then there's no amount of tweaking with regulatory/legal things that could make this happen - no more than you or I could magically lend £10 to someone that we don't have


Sorry, but you are simply wrong on this. Here's the written evidence to parliament on how the  banks did it:



> The deposit creation process is at the heart of the banking system servicing the public and stimulating economic growth. The modern banking instruments of securitisation, hedging, leveraging, derivatives and so on turned this process on its head. They enabled banks to lend more out than they took in deposits. *According to Morgan Stanley Research, in 2007 UK banks loan-deposit ratio was 137%. In other words the banks were lending out on average £137.00 for every £100 paid in as a deposit. Another conservative estimate shows that this indicator for major UK banks was at least 174%. For others like Northern Rock it was a massive 322%.* [For more details, refer to Table A.] Banks were "borrowing on the international markets" and lending money they did not have but assuming to have in the future. Likewise, "international markets" were doing exactly the same. At first sight it might not seem so much different than deposit creation. Deposit creation is lending money by the banks they do not have on the assumption that they will get enough back in sufficient time in the future from borrowers.
> 
> On closer examination there is a remarkable difference. With every cycle of the 86.5% loan-deposit ratio every £1 deposited is reduced becoming less than £0.50 after five cycles and less than 1 penny after 32. With a loan-deposit ratio of 137%—lending £137 for every £100—not to mention 174% or indeed 322%, the story is drastically the opposite. Imagine a banker gets the first £1 deposit in the first week of a new year and lends it out. Imagine that twice every week in that year the amount lent out comes back to him as a deposit and he sustains such deposit creation process with a ratio of 137% twice every week for the year. This is a perfectly plausible scenario on the current electronic financial markets. By the following New Year's Eve, the final amount he finally lends out from the original £1 is over £165 trillion (165 with 12 zeros, or over 16 times the amount governments have so far injected into economy). The total amount lent out in a year by a banker is over £447 trillion. Significantly with a loan-deposit ratio 100% or above no reserve is created.
> 
> http://www.publications.parliament.uk/pa/cm200809/cmselect/cmtreasy/144/144w254.htm


In theory it should have been impossible. Deregulation meant that, in practice, they did it.


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## ViolentPanda (Mar 18, 2012)

camouflage said:


> To my mind attempts to control money are like an attempt to control human-ingenuity itself.


 
In what way(s) are they similar?


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## ViolentPanda (Mar 18, 2012)

laptop said:


> Is it relevant here that the restriction on banks "creating money" is _regulatory_?
> 
> I know it's not strictly a response to the argument, which is about misunderstandings of what happens when the system is operating according to "the rules".
> 
> But what _stops_ a bank "tapping a few keys" is a web of _rules_ - Basel rules on reserves down to audit and disqualification of directors. Isn't it?


 
Rules and the fact that their having done so will be fairly obvious to other parties rather quickly, so as well as being imposed external regulation, it's internalised self-regulation too.


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## love detective (Mar 18, 2012)

ymu said:


> Sorry, but you are simply wrong on this. Here's the written evidence to parliament on how the banks did it:
> 
> In theory it should have been impossible. Deregulation meant that, in practice, they did it.


 
i'm not wrong on this at all i'm afraid

this research only compares one part of a bank's funding streams (_customer_ deposits) to its total extension of credit (loans)

it doesn't take into account, wholesale funding (which makes up a substantial part of a lot of bank's funding - and is really just commercial deposits but is not included in that analysis), central bank funding, equity capital, subordinated debt and all manner of other types of ways that banks fund their balance sheet. For the purposes of this discussion (to simplify terminology) i've lumped all of these into one category and called them deposits because in the wider sense they are all 'deposits' of money with the bank, they are just different in their nature - but what they all have in common is that they all form part of a bank's overall funding which allows it to lend money out. the research which you quote (which is based on an article that the bbc and times wrote) - purely looks at the relationship between bank lending and customer deposits, it excludes these other important components of bank funding)

The 322% figure quoted for Northern Rock shows exactly why it failed - because the bulk of it's lending was funded from wholesale markets and not from straightfoward more stable customer deposits - so when the wholesale market freezed up it was caught totally exposed. This research does not show that Northern Rock created money equivalent to 222% of the money it had lent out - it merely shows what proportion of it's customer lending was funded through wholesale borrowing (which is effectively the same as a deposit as it's a commercial bank 'depositing' money with another bank for a given time at a given rate)

(i'll quite happily walk through a bank's balance sheet with you and talk through the various categories/components and point out which parts are included in that analysis and which aren't - it will be dull as fuck mind, but it will prove the point)

my central point still remains, if a bank wants to lend out £110 but has only got £100 'deposited' with it (deposit in the wider sense, not the sense used in that report - i.e. if it only has funded itself to the tune of £100 through the variety of ways possible i.e., customer deposits, wholesale funding, equity capital, subordinated debt, etc..), the extra £10 can't be magiced into existence or created just because some regulations have changed - it has to be funded from somewhere before it can be circulated onwards - this is what i've been saying from post one on this thread

edit: and in fact looking back at my post you quoted, I didn't even talk about deposits in it, i referred to things like banks only being able to lend out what they got in - the parliament report doesn't contradict this in any way, as it only focuses on one part of what banks 'get in' to enable them to lend


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## love detective (Mar 18, 2012)

ItWillNeverWork said:


> This is where I disagree with you. Keen says exactly the opposite in regards to the need for a central bank. Drastically so in fact. His proposal for the current crisis is a 'debt jubilee' funded from central bank created money - effectively creating money and giving it direct to debters instead of using QE. His opposition to neoclassical notions of exogenous money is that it leads to the belief that QE can solve the problem of liquidity, when his own models show this strategy to be inferior to direct giving of money to firms that are in debt.


 
I was referring to his models his models that LBJ points to which claim that there is no need for the central bank 

his solutions that you refer to in relation to the current crisis do somewhat contradict his 'models' which show that the central bank is not required though i'll give you that - speak to keen on that one though, not me


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## ItWillNeverWork (Mar 18, 2012)

love detective said:


> I was referring to his models his models that LBJ points to which claim that there is no need for the central bank
> 
> his solutions that you refer to in relation to the current crisis do somewhat contradict his 'models' which show that the central bank is not required though i'll give you that - speak to keen on that one though, not me


 
The models are simplified models to demonstrate flows of money, but when keen modifies the model to replicate a credit crunch, he introduces a central bank injection of money to compare the effects of injecting that money into different parts of the system. In other words, the model containing no central bank is the one that generates crises, and a central bank is introduced to solve that crisis.


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## love detective (Mar 18, 2012)

ItWillNeverWork said:


> In other words, the model containing no central bank is the one that generates crises, and a central bank is introduced to solve that crisis.


 
so is LBJ incorrect in his assertion that Keen:-



> actually models a system of pure credit with no central bank money creation at all. Such a system can exist - so long as the lines of credit are constantly expanded.


 
I'd be surprised if LBJ was wrong in relation to Keen on this as this is exactly the type of thing I would expect from someone coming from the perspective he comes from


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## love detective (Mar 18, 2012)

YMU - here's a snapshot of Northern Rock's balance sheet prior to it's crash (this is a very summarised/condensed down version of it)



If you look at the 2006 year - you will see that loans to customers (the 87) is 322% of customer deposits (27) - this is what the parliament report refers to

All this shows is that the differences between customer lending and customer deposits, is funded by means other than customer deposits - i.e. other kind of funding that the bank has obtained, in this case mortgage securities which represented money that they had borrowed from the wholesale markets which was secured/collaterised on future income streams from their mortgage book and other borrowings plus a little bit of equity capital. It's nothing to do with the bank creating money out of thin air or lending out more than it has got in

While on the topic of this, balance sheets always balance, i.e. total assets equals total liabilities (something that was also discussed earlier on this thread) - anyone who claims that banks can create money out of the thin air would see a situation where the banks assets increase but not their liabilities. This is just absurd really - every asset on that balance sheet above, is funded by a liability for the exact same amount. So in 2006 northern rock had assets of 101bn which in turn were funded by liabiliites of 101bn - the component part of that 101bn that is made up of customer deposits is important from a point of view about how the bank funds it's operations (i.e. it's over reliance on a particular stream/type of funding), but just because customer deposits in this case doesn't equal 101bn, it doesn't mean the bank has created money out of nothing, or lent out more than it has 'got in'.

edit: also if you look at the end of year 2007 position - the reduction in customer deposits represents the run on the bank, meaning it's overall assets were even less funded from customer deposits and things like the state funding from the bank of england begin to take it's place - again this is just funding from different sources, it's not them creating money out of thin air or magicing it into existence


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## ymu (Mar 18, 2012)

EDIT: didn't see your post before this one. Will come back to it.



love detective said:


> i'm not wrong on this at all i'm afraid
> 
> this research only compares one part of a bank's funding streams (_customer_ deposits) to its total extension of credit (loans)
> 
> ...


You can walk us through the bank balance if you like, but I think the place to start is with the Morgan-Stanley research they cite. AFAIK the problem was that some of the things that they counted as equivalent to cash deposits for the purposes of lending were nothing like cash deposits in practice.

Am looking for more detail on that report now.


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## littlebabyjesus (Mar 18, 2012)

love detective said:


> I was referring to his models his models that LBJ points to which claim that there is no need for the central bank
> 
> his solutions that you refer to in relation to the current crisis do somewhat contradict his 'models' which show that the central bank is not required though i'll give you that - speak to keen on that one though, not me


He actually made that model to show how disastrous it would be in practice.


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## ItWillNeverWork (Mar 18, 2012)

love detective said:


> so is LBJ incorrect in his assertion that Keen:-
> 
> I'd be surprised if LBJ was wrong in relation to Keen on this as this is exactly the type of thing I would expect from someone coming from the perspective he comes from


 
The model that LBJ talks of is of a pure credit economy without central bank. Keen tries to show that this model, under very _stringent _conditions can be stable and self perpetuating, but that these conditions would not hold in the real world. This model is explicitly stated to be a heuristic device to simply demonstrate the circular flows. Keen does not use this simplified model to show that the economy is inherently stable, he uses it  as a basic framework that when extended can produce instabilities and disequilibrium behaviour.


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## love detective (Mar 18, 2012)

ymu said:


> AFAIK the problem was that some of the things that they counted as equivalent to cash deposits for the purposes of lending were nothing like cash deposits in practice.


 
nope that's not what it was about i'm afraid - the problem was what i referred to above - that northern rock depended upon the wholesale funding markets far too much in relation to its customer lending - this got it into trouble then those markets froze up and as such a big component of its lending was funded in this way, along with the run on the bank which removed another slice of its funding in the shape of reduced customer deposits , leading first to emergency state funding and then it going down the pan


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## love detective (Mar 18, 2012)

littlebabyjesus said:


> He actually made that model to show how disastrous it would be in practice.


 
I got the impression in your previous post on his model that you were using that to back up your point that money could be created out of thin air (as long as it kept on happening) - at least that was the context you referred to it in


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## littlebabyjesus (Mar 18, 2012)

love detective said:


> I got the impression in your previous post on his model that you were using that to back up your point that money could be created out of thin air (as long as it kept on happening) - at least that was the context you referred to it in


Yes - that it is a theoretically possible system. Keen makes the point that his simplified model in fact produces a better fit to reality than other models. But he doesn't think this is a good thing. The whole thrust of all his arguments is that the situation as it is now must be changed.


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## love detective (Mar 18, 2012)

anything's possible in theory though if you artificially manipulate the conditions in which you model it to make it so!

what use do these things give us though?

we just need to look at what's going on around us in reality to realise the inherent instability of the current mode of production/social relations, and that they should be obliterated - we can see this by simply looking at and analysing reality and what actually happens


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## ymu (Mar 18, 2012)

love detective said:


> nope that's not what it was about i'm afraid - the problem was what i referred to above - that northern rock depended upon the wholesale funding markets far too much in relation to its customer lending - this got it into trouble then those markets froze up and as such a big component of its lending was funded in this way, along with the run on the bank which removed another slice of its funding in the shape of reduced customer deposits , leading first to emergency state funding and then it going down the pan


Not having much luck finding the Morgan Stanley report, but this bit from the Guardian's banking blog has some bearing, I think.



> Former treasurer at a collapsed bank: 'Right and wrong became blurry'
> 
> "I was in treasury. Outsiders have this idea that banks take on deposits and then they go and look for a way to lend them out again, making a margin in the process. In reality it's the other way around. Banks embark on projects for which they need money, and they find it with banks that take on deposits. The process is what we call 'asset-driven'.
> 
> ...


If there is a different risk associated with different ways of funding loans, then funding secured in this way cannot be regarded as equivalent to a cash deposit. How is it treated on the balance sheets?


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## ItWillNeverWork (Mar 18, 2012)

love detective said:


> anything's possible in theory though if you artificially manipulate the conditions in which you model it to make it so!
> 
> what use do these things give us though?
> 
> we just need to look at what's going on around us in reality to realise the inherent instability of the current mode of production/social relations


 
The usefulness comes when this 'core' model is extended by coupling it with a model of the production economy. The model then is able to produce results that resemble some of the events of the past two decades.



> Given suitable initial conditions and parameter values, this highly nonlinear monetary model can generate the stylized facts of the last 20 years of macroeconomic data: an apparent “Great Moderation” in employment and inflation—which was actually driven by an exponential growth in private debt—followed by a “Great Recession” in which unemployment explodes, inflation turns to deflation, and the debt level—absent of bankruptcy and government intervention—goes purely exponential as unpaid interest is compounded. - http://www.debtdeflation.com/blogs/2011/05/16/a-dynamic-monetary-multi-sectoral-model-of-production/


 
Make of it what you will, I don't yet know if I accept what Keen says. But there it is. Here are the results of his model (on the right) compared to the actual numbers.


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## love detective (Mar 18, 2012)

ymu said:


> If there is a different risk associated with different ways of funding loans, then funding secured in this way cannot be regarded as equivalent to a cash deposit. How is it treated on the balance sheets?


 
I don't really understand what you're getting at in your sentence above to be honest

all ways of funding loans have different risks, both within the same categories of funding (i.e. customer deposits) and between them (i.e. say between custoemr deposits and wholesale funding)

the question of the relative riskiness doesn't changes the fundamental fact (which you said this study proves I am wrong on) that if banks want to lend a £100, they have to get it first from somewhere (either by some combination of the different funding routes available or by just one of them)

I don't really understand what you're getting at in your sentence above to be honest - the different types of funding that funds a bank is shown separately on its balance sheet - one element of this funding is customer deposits, this isn't the only form of funding however, it merely forms part of the overall funding that a bank has in place - this funding is used to fund the bank's activities/lending

this is probably not a perfect analogy, but it's like if you say you have £1000 of outgoings in a month, and £800 of this is funded through your wage - with the other £200 being funded from say, the profit on renting out a flat. Just because you spend 125% of your wage income each month, doesn't mean that you spend 25% more than what you get in in total each month, or that it's impossible to spend 125% of your wage income each month. It just shows that you have income from other sources which when added together means that your incomings and outgoings match exactly. Clearly in this case there is risk to both income streams, the £800 could go if you lose your job and the £200 could go if your tenants move out - so there is risk inherent in both of them, however this in no way means that you are somehow able to spend more than you get in each month (if we exclude borrowing for the time being, ironic i know as this is what the topic is about..). So again i'm not quite sure why your sentence above about risk comes into what is a more fundamental issue about how something funds itself (whether it's a bank or you)


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## littlebabyjesus (Mar 18, 2012)

I think I can see what ymu's getting at. If you make a loan which will be repaid in 10 years' time, say, and fund that loan with a 'deposit' that you have to repay in 1 year's time, these are not equivalent. You have not funded your 10-year loan at the start of the process, merely a small part of it: ie the idea that the size of a loan is money _plus time_.


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## love detective (Mar 18, 2012)

yes, but that's completely different from saying you can create money out of thin air or you can lend out more than you have already borrowed

you can only lend out that original loan for ten years, if you have the money in the first place to pass on to the borrower - so it has to be funded initially, and then over the course of the loan, refinanced if the borrowing to fund it didn't exactly match the maturity profile of the loan itself. This is exactly what got Northern Rock into trouble, it borrowed short term on the wholesale markets and lent long term in the mortgage markets - so when the wholesale markets froze up it was left with a huge financing gap when it's shorter term borrowing came up for payment and it wasn't able to renew it and it also wasn't able to liquidise its assets as they were tied up in long term mortgage deals

this is liquidity risk (and was the cause of a lot of the bank's failures), and it's important to bank's survivial - but it doesn't change the simple fact that if you want to lend something, you have to first fund it - this was the central point being contested earlier - and one which both of you suggested I was wrong about - i'm 100% right on this i'm afraid


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## littlebabyjesus (Mar 18, 2012)

Except that lending money you've only got for a year for ten years could be functionally equivalent to lending more than you have borrowed. After that first year, you have to repay your initial borrowing and borrow again - in other words, you are borrowing to finance a loan that's already been made after it has been made.


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## love detective (Mar 18, 2012)

no it's not lending more than you have borrowed - as at the outset you have to have funding in place to fund the proposed loan - yes you have to then refinance that borrowing during the term of the loan, but this is different from what you were proposing earlier that money is created out of thin air to lend out - it's nothing like that

and if you are unable to refinance the borrowing after the first year - you go under and tits up, just like northern rock, you are no longer in that game and instead are funded through central bank funding and wound down/liquidated - whereas again you were asserting that this model of creating money out of thin air was not only possible but sustainable

edit: at the point of the original loan being made out to the customer for ten years, this is the point when the money supply is expanded , and to do this, you have to be in a position to fund that loan - i.e. you can't expand the money supply through circulation if you can't fund your lending - your earlier assertions suggest that the money supply can be increased through the creation of money from thin air - this is simply not possible

and the subsequent refinancing of a loan/deposit that a bank may have taken out to fund a ten year loan has absolutely no impact on the money supply, it's just a straight replacement of funding, leaving the original expansion of the money supply (the ten year loan) completely unchanged


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## ymu (Mar 18, 2012)

love detective said:


> I don't really understand what you're getting at in your sentence above to be honest
> 
> all ways of funding loans have different risks, both within the same categories of funding (i.e. customer deposits) and between them (i.e. say between custoemr deposits and wholesale funding)
> 
> ...


I'm saying that if you use a risky asset to fund loans, it is not the same as a cash deposit and cannot be treated in the same way on the balance sheet. Especially if some of those assets are fake AAA financial instruments which are worth a fraction of their stated value.

Still need that Morgan Stanley report - I want to know exactly what they said about these ratios, and about the other assets used to fund loans. You're saying it has been widely misreported. I don't disbelieve you, I just want to know exactly what they said.


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## ItWillNeverWork (Mar 18, 2012)

Here are a few quotes from a paper by Basil Moore that Keen references in support of his endogenous money theory. What flaws do you see in this, ld? (Sorry if I seem like I'm pestering you with questions, but you seem pretty clued up so I'd be silly not to)



> Banks, after all, are essentially in the business of selling credit. Agreed? Bank assets and liabilities both expand whenever there is an increase in the total quantity of bank earning assets. Agreed? Bank assets are predominantly bank loans. Agreed? As a result it is no surprise that changes in monetary aggregates are closely explained empirically by (or at least closely associated empirically with) changes in total bank loans. Loans make deposits. Finally and most importantly increases in bank loans are made at the initiative of bank borrowers, not the banks themselves. Banks may unilaterally increase their advertising budgets, shade their lending rates, or ease their collateral requirements. But as with any other business, the amount of good or service they can sell depends ultimately on the demand for their product.
> 
> [...]
> 
> ...


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## littlebabyjesus (Mar 18, 2012)

How is that not functionally equivalent to creating money out of thin air, though?

If you borrow for a year and lend for ten years, that is not funding your loan, is it: it is not matching promises, in other words, as you've promised your borrower money for ten years, but your creditor has only promised you money for a year.

It is taking a gamble at the start of the process that you will be able to fund it for the nine unfunded years by relying on there being future investments - a point Minsky makes. If short-term borrowing by banks is cheaper than long-term borrowing, and long-term lending is more profitable than short-term lending, then it's easy to see where their margin comes from - but it relies at the start of the process on there being nine years' worth of funding in the future that does not yet exist.


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## ymu (Mar 18, 2012)

love detective said:


> no it's not lending more than you have borrowed - as at the outset you have to have funding in place to fund the proposed loan - yes you have to then refinance that borrowing during the term of the loan, but this is different from what you were proposing earlier that money is created out of thin air to lend out - it's nothing like that
> 
> and if you are unable to refinance the borrowing after the first year - you go under and tits up, just like northern rock, you are no longer in that game and instead are funded through central bank funding and wound down/liquidated - *whereas again you were asserting that this model of creating money out of thin air was not only possible but sustainable*
> 
> ...


Pretty sure no one is claiming it was sustainable?


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## littlebabyjesus (Mar 18, 2012)

Keen uses his model to show how, in the long term, it produces exponentially spiralling debt, unemployment and deflation. It isn't sustainable! But the point of his model is to show how well it matches up to our current unsustainable system, which, according to Keen, operates in a very similar way to his model.


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## love detective (Mar 18, 2012)

ymu said:


> I'm saying that if you use a risky asset to fund loans, it is not the same as a cash deposit and cannot be treated in the same way on the balance sheet. Especially if some of those assets are fake AAA financial instruments which are worth a fraction of their stated value.


 
first of all it's not a risky asset used to fund loans, it's a risky liability (liabilities on a bank's balance sheet relate to its funding)

a cash deposit could be as risky as any other type of funding for a bank so i'm not sure why you're so wedded to this idea of cash deposits - for example when Northern Rock got into trouble, loads of people withdrew their cash deposits - this compounded the situation for Northern Rock as it gave them an even bigger funding gap at a time when all routes to funding for it (other than state help) was closing up

the point about AAA financial instruments in this case is pretty irrelevant to the point being made also - if Northern Rock issued a AAA rated instrument then at the time of it selling it, it would get say the £100 on day 1, the buyer would then own an instrument that in theory was worth £100 and would give it an income stream. Norther Rock gets the £100 on day 1 (i.e it secures the money at that point) and can then do what it wants with this money (lend it on as a mortgage for example) - the risk in this case is not with Northern Rock the issuer of the security, but the buyer who has already given Norther Rock £100 for it. If it goes tits up it's the buyer who loses out not the issuer. 



> Still need that Morgan Stanley report - I want to know exactly what they said about these ratios, and about the other assets used to fund loans. You're saying it has been widely misreported. I don't disbelieve you, I just want to know exactly what they said.


 
I'm saying you are using the information in it in a way that is not correct for the purposes of your argument/discussion with me - you are conflating narrow categories that are used within it with the wider categories which I have been talking about

I've already went though one of the examples in that report, i.e. Norther Rock and showed you where the figure of 322% derives from, what it's constituent parts relate to and most importantly what is not included in that ratio (and again it's not about assets that are used to fund loans, it's liabilities that are used to fund loans/assets)

By all means look into it more yourself, I don't expect anyone to take my word on it without doing their own investigations - but I am 100% confident of being correct about this, and the only reason I can say this is because it's a straightforward technical matter, there's no ambiguity involved (although the interpretation of these kind of studies does provide a lot of money cranks with erection material for conspiracy theory type analysis of the system)

I need to go and get my tea now


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## laptop (Mar 18, 2012)

littlebabyjesus said:


> How is that not functionally equivalent to creating money out of thin air, though?


 
Because they're not. They're gambling that money - actual money - will be available in the future, at a price they can afford.


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## love detective (Mar 18, 2012)

ymu said:


> Pretty sure no one is claiming it was sustainable?


 
LBJ was putting forward the case that this is how the current system actually works (which is what this discussion has been about) - trust me if it was like this it would have broke properly a long time ago


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## love detective (Mar 18, 2012)

littlebabyjesus said:


> How is that not functionally equivalent to creating money out of thin air, though?
> 
> If you borrow for a year and lend for ten years, that is not funding your loan, is it: it is not matching promises, in other words, as you've promised your borrower money for ten years, but your creditor has only promised you money for a year.
> 
> It is taking a gamble at the start of the process that you will be able to fund it for the nine unfunded years by relying on there being future investments - a point Minsky makes. If short-term borrowing by banks is cheaper than long-term borrowing, and long-term lending is more profitable than short-term lending, then it's easy to see where their margin comes from - but it relies at the start of the process on there being nine years' worth of funding in the future that does not yet exist.


 
if you lend me a tenner for 2 years based on ymu lending you a tenner for one year - have you created a tenner out of thin air, no.


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## littlebabyjesus (Mar 18, 2012)

laptop said:


> Because they're not. They're gambling that money - actual money - will be available in the future, at a price they can afford.


Depends how you look at it. If you make a loan of £100 that is repayable in 10 years, someone somewhere is promising to defer £100-worth of consumption for 10 years, but if you've made that loan on the back of someone promising to defer consumption for just one year, then at the end of that first year, when you have to repay that person, you are left with an unfunded 9-year loan of £100 - which you then have to go out and get another loan for.

To my mind, that fits with the endogenous theory of money creation: you've created £100 for ten years, basically, but you've done it on the back of just one year's worth of £100. That loan you've made comes back into the system as a deposit, which is destroyed when the loan is repaid - in 10 years' time.

Seeing money as a promise, you're not matching promises - you're making a bigger promise than you're being given.


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## littlebabyjesus (Mar 18, 2012)

love detective said:


> if you lend me a tenner for 2 years based on ymu lending you a tenner for one year - have you created a tenner out of thin air, no.


What happens at the end of the year, though? You have to go out and find yourself a tenner from somewhere to pay ymu. At the end of that first year, you are effectively left with an unfunded loan - where you have to go out and find someone to finance the one-year loan of a tenner that you did not fund at the start, and that you have already made.


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## ItWillNeverWork (Mar 18, 2012)

Right, final post. Here I think is the solution to everyone's problems. From Wikipedia http://en.wikipedia.org/wiki/Monetary_circuit_theory



> The key distinction from mainstream economic theories of money creation is that circuitism hold that money is created endogenously by the banking sector, rather than exogenously by the government through central bank lending: that is, the economy creates money itself (endogenously), rather than money being provided by some outside agent (exogenously).
> 
> ...circuitism rejects, among other things, reserve requirement as a cause of the money multiplier, arguing that money is created by banks lending, which only then *pulls in reserves from the central bank*, rather than by re-lending money pushed in by the central bank.
> 
> In practice, commercial banks extend lines of credit to companies – a promise to make a loan. This promise is not considered money for regulatory purposes, and banks need not hold reserves against it, but *when the line is tapped (and a loan extended), then bona fide credit money is created*, and reserves *must be found* to match it. In this case, credit money precedes reserves. In other words making loans pulls reserves in (assuming that the regulatory need for bank reserves exists), instead of reserves being pushed out as loans which is assumed by the mainstream model.


Now to me this seems to combine both the idea of endogenous money with LD's insistence that reserves _must_ be found somewhere. The only disagreement is then on the order of the process, with circuitists claiming that  loans precede deposits and not the other way around.


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## love detective (Mar 18, 2012)

littlebabyjesus said:


> What happens at the end of the year, though? You have to go out and find yourself a tenner from somewhere to pay ymu. At the end of that first year, you are effectively left with an unfunded loan - where you have to go out and find someone to finance the one-year loan of a tenner that you did not fund at the start, and that you have already made.


 
at which point was the money supply expanded?

is that (particular) expansion of the money supply (the original loan) impacted in any way by the refinancing of the loan to finance it?

your orignal assertion was that the money supply could be expanded through the creation of money/credit from banks out of thin air - you have not done anything to back this up yet

at no point in time is the original loan actually unfunded - one form of funding replaces another at various points in time yes, but that's different from saying you have an unfunded loan, you don't - you have liquidity risk and maturity mis-match risk, but at any point in time your loans are funded. You can't say lending in the future is unfunded because the future isn't here yet and when the future arrives, the loan is funded, just like any other point in time. You original assertion was that this creating money out of thin air was the norm as to how things worked - this seizing on the process of how longer term loans are funded through a series of rolled over short term loans while throwing up some important points as to risk at the individual bank level, but it doesn't equate to the creation of money/credit from thin air as you have been suggesting up until now

and in the extreme case where the funding cannot be rolled over, as we have seen the state steps in and bails them out with emergency funding (like what happened to all UK, European and American banks over the last few years - you can see it in the example of Norther Rock's balance sheet above with the 28bn in the 2007 year) to support the lending that is already in place and starts to cut down the expansion of future lending and eventually unwinds the current lending. This point also shows the ludicrious nature of some views that says the monetary system can survive on its own without the state crutch to stand behind it, not only in times of trouble, but even just in normal times

I've mentioned this many times, but what is important here is flows/movement - i.e. when does the money flow, how is funded at the point in time when it flows, when does the money supply expand etc - your looking at a point in the future which is not a flow and using this to try and retain some credibility for your original assertion that money is created by commercial banks out of thin air (and that this magical process is shielded by complicated financial instruments that you don't even understand), it isn't.


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## ItWillNeverWork (Mar 18, 2012)

I think also that there is a breakdown in communication on this thread due to the way in which the process is being described. Remember that we are talking of a circular flow, or in the language of Marx, a dialectical process. When we say that "the banking sector creates money as loans, and _then_ finds deposits", this is no different from saying "the banking sector finds deposits and then loans them out". The reason is that, ultimately, the loans end up back in the banking sector as deposits. So as long as that money keeps on circulating, the 'creation' of credit can continue, and this credit is backed by reserves.


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## littlebabyjesus (Mar 18, 2012)

It was not an assertion. Why do you keep posting in this confrontational manner about things that I have suggested? I was suggesting that you're not matching promises - so you are not facilitating the exchange of like for like, which fits with what Minsky said about current loans being financed by the expectation of future loans. TBH I'm not clear myself what implications this lack of a match of promises has - but that there is a mismatch is undeniable: the bank is giving bigger promises than it is receiving. Yes, the point at which it can no longer fund its promise is the point at which it goes under, but that's missing the point - the creation of the loan has created a corresponding deposit in the system: the loan creates the means to fund itself, except that reserves are required, meaning that at some point the base supply of money needs to be expanded, a service that central banks unfailingly provide.

As for possible ways that complicated financial instruments could hide a process of endogenous money creation, well, again, I was asking, not telling. And certainly not asserting. You seem very confident that this doesn't happen. I don't quite get where your confidence comes from, given that there appears to be empirical evidence that this process happens - so it must happen through some mechanism or another. You haven't refuted the empirical evidence, such as that there is far more debt than existing money, and that the creation of base money can be shown to come after the creation of credit money (at a time lag of about a year, which is something that could perhaps reflect the time mismatch of promises - I'm not sure myself whether this could be the case, but don't discount it). Is Keen wrong that lines of credit provide such a mechanism?


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## ymu (Mar 18, 2012)

love detective said:


> the point about AAA financial instruments in this case is pretty irrelevant to the point being made also - if Northern Rock issued a AAA rated instrument then at the time of it selling it, it would get say the £100 on day 1, the buyer would then own an instrument that in theory was worth £100 and would give it an income stream. Norther Rock gets the £100 on day 1 (i.e it secures the money at that point) and can then do what it wants with this money (lend it on as a mortgage for example) - the risk in this case is not with Northern Rock the issuer of the security, but the buyer who has already given Norther Rock £100 for it. If it goes tits up it's the buyer who loses out not the issuer.


But they didn't sell them all - they kept a load on the books, for apparently nefarious reasons.



> While this wholesome-sounding story undoubtedly captures some of what drives
> the securitization market, it is also incomplete. It has become apparent in recent years
> that another important driver of securitization activity is regulatory arbitrage—a
> purposeful attempt by banks to avoid the rules which dictate how much capital they are
> ...


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## love detective (Mar 18, 2012)

littlebabyjesus said:


> It was not an assertion. Why do you keep posting in this confrontational manner about things that I have suggested?


 
you said



> are the new complex financial instruments in fact hiding the truth - which is that the money for the loans was created out of thin air


 
within the question that you were asking you stated what the 'truth' was - that money for the loans was created out of thin air - i.e. you made an assertion as to what the truth was and the possibility as to how this truth was being hidden. This was the point i intervened to comment on the various bits of misinformation that had been peddled in the previous three posts.



> I was suggesting that you're not matching promises - so you are not facilitating the exchange of like for like


 
you are matching promises, someone has promised to borrow from you for ten years and you've promised to lend to them for ten years - what you then need to do is to work to make sure that you make good your promise - just like if you promise to be faithful to your wife/partner you can't encapsulate and deliver 100% of the requirements of that promise in the immediate here and now, it's something that you do over a period of time



> Yes, the point at which it can no longer fund its promise is the point at which it goes under, but that's missing the point - the creation of the loan has created a corresponding deposit in the system: the loan creates the means to fund itself, except that reserves are required, meaning that at some point the base supply of money needs to be expanded, a service that central banks unfailingly provide.


 
don't quite understand where you're going with the above to be honest



> As for possible ways that complicated financial instruments could hide a process of endogenous money creation, well, again, I was asking, not telling. And certainly not asserting. You seem very confident that this doesn't happen. I don't quite get where your confidence comes from, given that there appears to be empirical evidence that this process happens - so it must happen through some mechanism or another. You haven't refuted the empirical evidence, such as that there is far more debt than existing money, and that the creation of base money can be shown to come after the creation of credit money (at a time lag of about a year, which is something that could perhaps reflect the time mismatch of promises - I'm not sure myself whether this could be the case, but don't discount it). Is Keen wrong that lines of credit provide such a mechanism?


 
i didn't refute the empirical evidence presented, because I do not believe that that evidence is evidence for the point being claimed - the point being claimed was that money can be created out of thin air by banks and what they lend doesn't need to be funded by the entity doing the lending, it somehow just happens. The evidence presented to back this up was not evidence that actually backed it up - it was merely evidence that in boom times things circulate like hell and that circulation of already existing money/obligations moves out of all proportion to central bank base money. This 'empirical evidence' doesn't show that money can be created out of thin air, it just shows that things circulate very fastly and frantically during such periods - it says nothing as to how that circulation takes place in relation to banks lending money that they don't have to lend

Probably not making myself that clear at this stage as it just seems to be going round in circles


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## love detective (Mar 18, 2012)

ymu said:


> But they didn't sell them all - they kept a load on the books, for apparently nefarious reasons.


 
erm, northern rock created mortgage backed securities and sold them to investors

those securities obligated northern rock to pay back the principal (and interest) at a point in the future (like decades), this obligation is recorded on their books and appears on their balance sheet as a liability (if you look back at that screen shot of northern rocks' balance sheet in 2006/2007 you can see them there on it)

when investors bought the securities from them (for cash) the entry in northern rock's accounts would be to debit the cash account and credit their mortgage security liablilty account - this records the fact that they have an increase in cash from the investors and an increase in liabilities representing their future obligation to pay back the principal

selling mortgage backed securities in this way inherently keeps the liability on their books - this is part and parcel of the transaction

anyway - you've picked up on the smaller/minor point I made in relation to the bigger post - have you had any luck looking into the main topic which you brought up as evidence of me being wrong about the ways bank fund themselves?


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## ymu (Mar 18, 2012)

That is my main point (but I may be confusing concepts in expressing it). They were cooking the books so that they could lend out far more than they were allowed to by the regulatory system, using the shadow-banking system. If you read that extract (second paragraph), the point he is making is that they did not sell them on - they created them for the purposes of regulatory arbitrage, to circumvent capital controls.


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## laptop (Mar 18, 2012)

love detective said:


> I've mentioned this many times, but what is important here is flows/movement...


 
It seems the underlying rhetoric about "fiat money" is grounded on a failure to understand this - the fruitloop end of the argument is founded on "I can't imagine how money could be based on anything I can't drop on my foot."

To which, as so often, the answer is "_imagine harder_".


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## love detective (Mar 18, 2012)

ymu said:


> That is my main point (but I may be confusing concepts in expressing it). They were cooking the books so that they could lend out far more than they were allowed to by the regulatory system, using the shadow-banking system. If you read that extract (second paragraph), the point he is making is that they did not sell them on - they created them for the purposes of regulatory arbitrage, to circumvent capital controls.


 
i was talking about your post/study which you used to accompany your comment that I was completely wrong on what i had said - this study that you put forward was nothing to do with the off balnce sheeting of risk ask assets to reduce the regulatory capital that they had to hold - it's all part of the wider problems of course, but had nothing to do with the parliamentary thing you quoted originally, to show that i was completely wrong

i.e. the point about northern rock having loans that represented 322% of customer deposits (or 139% industry wide or something like that) - and that you put it forward to prove that banks could lend out more than they 'got in' - i have tried to explain how this shows nothing of the sort - i was just wondering whether you still thought that was the case or not. I thought that was your main point as that was the point you came into the thread at.

No offence, but your jumping around quite a bit with the things that you are quoting from elsehwere (i get the impression of frantic googling for everything and anything), and they are all not directly related to each other (except in the most widest of widest contexts) - you started off quoting studies related to on balance sheet stuff which supposedly proved i'm wrong about something, but now are talking about stuff that was moved off balance sheet as though they are one and the same things, they are not - there is quite a lot of stuff being conflated here, i was trying to stick to the things you quoted in your original post when you entered this discussion, and focus on explaining why it didn't prove what you thought it proved - ideally we could nut that one out before moving on to other things, no?


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## ymu (Mar 18, 2012)

I am quite happy to accept that I misunderstood that point. It relates to liquidity, not to the amount of money that a bank can create. I think I'm getting confused between reserves and capital requirements.

Ignoring capital requirements allows them to lend more on the same assets - but they still have to cover it with risky loans from other banks, right? The effect is to increase the amount of money being lent out, but it's not creating money out of thin air so much as creating money out of something that might very easily collapse into thin air.


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## love detective (Mar 18, 2012)

it doesn't so much relate to liquidity as such - it relates to the structural funding of a bank's activities which in turn may or may not create liquidity risk depending on the terms of the various funding that is in place - i.e. even if all customer loans were funded by customer deposits, there is still liquidity risk in that the maturity profile of deposits may not match exactly that of customer loans (i.e. the type of thing being discussed by LBJ and myself above)

edit - just noticed that you edited some more stuff into that last paragraph after i had replied to it, so briefly



> Ignoring capital requirements allows them to lend more on the same assets


 
ignoring capital requirements (or finding ways round them through regulatory arbitrage etc..) allows them to lend more on the same capital base



> but they still have to cover it with risky loans from other banks, right?


 
well yes, but more correctly this and any lending has to be funded by something from some source - whether it is funded by customer deposits (the focus of that parliament report you quoted), funding in the wholesale markets, share capital, subordinated debt or whatever, all of these methods of funding have varying degrees of differing risks & benefits attached to them - not just between those categories but within them as well



> The effect is to increase the amount of money being lent out, but it's not creating money out of thin air


 
yes, it can make it easier for banks to lend out more if they offload lending from their own balance sheets into off-balance vehicles as this removes the lending from their balance sheet and therefore removes that lending from the capital requirements that it would otherwise have to comply with (but again bank's can't take partake in lending unless the conditions are right, i.e. they need people who want to borrow and they have to fund that lending from somewhere - so the regulatory aspect is one of the necessary variables but it's not sufficient in and off itself - this is what i was trying to get at earlier by saying it's not the legal/regulatory aspect that is really the fundamental thing here



> so much as creating money out of something that might very easily collapse into thin air.


 
yeah - the whole flurry of circulation that leaves a trail of obligations in its path can just as quickly unwind itself when the music stops - but i still dont' like to talk about thin air for some reason


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## romeo2001 (Mar 19, 2012)

love detective you deserve a medal - explained it really well and _very patiently_. 

One of the problems I have with the whole marxist thing is that most people have the same knowledge of marx as they do smith ie random quotes and other peoples interpretations following their own agendas.  Its hardly the best foundations to revolutionise the populace


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## littlebabyjesus (Mar 19, 2012)

A point about this 'creating money out of thin air idea. If I understand it correctly, the circuitists say that both the loan and the deposit are created. In other words the sum total is zero. It's a little like a vacuum generating a particle and its antiparticle. This would explain why there is no value at all to a bank creating money on its own to make itself solvent - the creation of credit is only of value if that credit is used to do something, to circulate in some way as it makes its way back into the banking system as a deposit. The individual banks in the system will then rely among other things on interbank lending to balance their books, but in a smoothly functioning system where the banks have confidence in each other, there's no reason to suppose that this balancing process cannot take place very quickly.

Also, with a money supply that is constantly growing, I could imagine that the process might be disguised, with the system as a whole gradually sliding away from its reserve obligations (and hiding this fact through various ruses) only to be periodically righted by injection of more base money.


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## love detective (Mar 20, 2012)

so boiled down (and avoiding a drawn out discussion on the mechanics of circuit theory which was touched upon much earlier in the thread), what you are saying is that:-

'money' created out of thin air isn't really money at all

i.e. the money supply can only be increased if things happen outside of (and outside the control of) the bank tapping away on the keyboard - i.e. the bank is not the independent factor in all this but a dependent one

which is what i've been saying since the very first post on this thread

monetary circuit theory and endogenous monetary theory are pretty much one and the same thing - the key thing about them being that money supply is increased (or decreased) through the combined 'natural' activity of actors within the monetary system - this same thing is also a large part of what exogenous monetary theory says as well though (i.e. activity within the monetary circuit hugely increase the small amount of central bank base money that is injected into the system from outside)

pure endogenous theory is useful at looking at the material conditions required for expansion of money supply, but it doesn't capture the political dimension that results in exogenous factors like the state having to always be on hand to pick up and dust the thing down when it falls over or becomes dysfunctional.

Also the specifics of circuit theory are much clearer when applied to the moving around of money within the system in relation to purchases & sales i.e. person A buys something from person B and the bank as the third party (ultimately) decreases the balance on person A's account and increased the balance person B's account - i.e. effectively just shifting things around.

But when it comes to credit (where the same basic principle as above still applies), they do seem to gloss over the requirement that banks have to fund their lending to others by finding that funding from somewhere, i.e. in an example of a loan, if Person B's account is increased (reflecting the money given to them by the loan) there needs to be an equal & opposite decrease elsewhere in the system, and this decrease is a reflection of the sourcing of the funding to fund the proposed loan to Person B - i.e. there has to be a person/entity A somewhere that has or will ensure the flows are in place to enable the bank to complete the loan - i.e. money has to circulate).

In short endogenous/circuit theory merely reasserts (in a somewhat muddled way) the fact that in order for a bank to make a loan (and create money) two things external to that bank needs to be in place,

i) an entity wanting to borrow, and
ii) a source of funds that is available to the bank to lend

If both these things are not in place then no amount of thin air can help - and the lack of activity that results in (ii) above not happening is the reason that european banks borrowed over a trillion euros, exogenously, from the ECB in the last couple of months


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## ItWillNeverWork (Mar 20, 2012)

littlebabyjesus said:


> You haven't refuted the empirical evidence ... that the creation of base money can be shown to come after the creation of credit money (at a time lag of about a year, which is something that could perhaps reflect the time mismatch of promises - I'm not sure myself whether this could be the case, but don't discount it). Is Keen wrong that lines of credit provide such a mechanism?


 
Is 'base money' the same as 'money held by banks as a funding source for their loan activity'? If not, then just because credit money expands prior to base money, it does not necessarily follow that banks grant loans prior to having enough deposits, does it?

I mean, Imagine Bank A has a reserve of £5000 and lends this to a firm. The firm then transfers this to Bank B. Bank B then has enough reserves to lend out £5000 to someone else, no? In this scenario, there is £10000 worth of money lent out, all of which is fully backed by reserves in banks, but only £5000 of original 'base' money (not sure I'm using the terminology correctly here).

At the point which the debtors wish to withdraw their money as cash, the banks will just call on the central bank to print up the necessary coins etc. Credit has expanded prior to base money, but even so, all the banks have found funding for their loan activity prior to lending anything out.

Am I getting anything wrong here? It feels as if I might be.


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## love detective (Mar 20, 2012)

ItWillNeverWork said:


> Is 'base money' the same as 'money held by banks as a funding source for their loan activity'? If not, then just because credit money expands prior to base money, it does not necessarily follow that banks grant loans prior to having enough deposits, does it?



This was the point I made a few posts up to LBJ that the 'empirical evidence' presented to back up his claim had nothing actually to do with said claim


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## ItWillNeverWork (Mar 20, 2012)

love detective said:


> This was the point I made a few posts up to LBJ that the 'empirical evidence' presented to back up his claim had nothing actually to do with said claim


 
So is it true to say that expanded production cannot take place without the money supply expanding also?

I mean, if a trillion pounds is created as base money, and that trillion is lent to firms who use it to create 2 trillion worth of value, where does the new money come from to represent that newly created value? Who decides to expand the supply of money?


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## love detective (Mar 20, 2012)

ItWillNeverWork said:


> So is it true to say that expanded production cannot take place without the money supply expanding also?


 
Theoretically and conceptually not necessarily no - the creation of money is not the same thing as the creation of value

In practice though, as new value is created the money supply will expand to keep up with it (or expand in anticipation of yet to be created value, i.e. claims on future value production)

If you're familiar with the basic marxian circuit of capital as below:-







The M in that represents money and the above shows the M' at the end has expanded due to the production (during the P...C' stage) and realisation of surplus value (during the C' - M' stage) - so that M' > M and this increased M' is then thrown back into the circuit bringing about expanded reproduction

however (and theoretically) there's nothing to stop the money part being taken out of it and the resultant commodities that are produced in the production process (C') being exchanged directly for the commodites (MP) & (LP) that are required to begin the production process again (either at the same, i.e. simple production or enlarged, i.e. expanded reproduction). So on that basis expanded reproduction is not theoretically/conceptually wedded to an increase in the money supply

The existence of Money and the increasing supply of it helps the process (of both simple production & expanded reproduction) along though as it mediates the step between turning the outputs of the production process into new inputs to the production process. However, the creation of value is not necessarily dependent on the existence of money. I mean the whole point (and means) of the valorisation of capital is not just to end up with more money, but to continually complete at an increasingly faster speed the circuit of capital, this is what brings about the ongoing valorisation of capital (and not just clinging on to your increased money, but throwing it back into the circuit)- which means the quicker value progresses from one of its forms (Money Capital, Productive Capital or Commodity Capital) to an other (Productive Capital, Commodity Capital or Money Capital) the more value can be produced & realised.

Somewhere in volume 2 of Capital Marx actually mentions (or hints) that conceptually the most efficient form of capitalism would be where money didn't play a part in the above circuit and instead the outputs of the production process were exchanged directly for the inputs to the next production process - this skips out the step to transform commodity capital into money capital and then money capital into productive capital - and turns commodity capital straight back into productive capital. While this is conceptually true, and results in an increased traversing of the circuit of capital by value (allowing for a more efficient valorisation process), the reality is that barter on that scale would never reach the levels of efficiency required so money steps in to mediate those necessary transformations from one type of capital to another

edit: also in the reproduction schema in volume 2 of capital - Marx goes through the social reproduction process of both simple and expanded reproduction without actually bringing money into the picture, this is done to remove the peripheral noise that money brings and allows a focus to be made on the core/fundamentals of the underlying process


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## camouflage (Mar 22, 2012)

ViolentPanda said:


> In what way(s) are they similar?


 
In what ways are money and human ingenuity similar? In no ways... my point is that the one is the product of the other. Consider the humble prison-fag.... Actually I hear these days, in Mexican prisons they trade cans of sardines now. Fungible.

Paper is no different, the central banks slap down a reserve requirement so as to try an control the economy, and the private banks cook-up a plethora of complicated new confetti to lend out and make profits on anyway. People exchange these liquidly and use them to avoid all sorts of government rules, regulations and taxes. This is called 'financial innovation'. The more positive everyone feels about the future, the more vigorously they splash the new liquids around.

Gold-fetishist libertards are basically control freaks, they want the government to 'back gold' (by fiat one presumes) so effectively all they're really saying is that they want money to be controlled, strictly, and in favor of the creditors. Regulation by gold makes some things harder, but it's no magic bullet by far, it's juts another form of regulation and control. I suspect the simple truth is that humanity is by nature, inflationary and likes to spend its time confounding restrictions. Likewise our language and likewise our money (language and money serve similar functions actually).

Note that this is coming from a self-confessed bitcoin obsessive (recovering).


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## binka (Mar 24, 2012)

romeo2001 said:


> love detective you deserve a medal - explained it really well and _very patiently_.
> 
> One of the problems I have with the whole marxist thing is that most people have the same knowledge of marx as they do smith ie random quotes and other peoples interpretations following their own agendas. Its hardly the best foundations to revolutionise the populace


this definitely. just finished reading this topic and love detective has made certain things a lot clearer and clearly shown some things i thought to be true to be wrong.


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## articul8 (Mar 25, 2012)

romeo2001 said:


> love detective you deserve a medal - explained it really well and _very patiently_.


Aha - with your ability to patiently explain you'll go far


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## littlebabyjesus (Mar 25, 2012)

love detective said:


> In short endogenous/circuit theory merely reasserts (in a somewhat muddled way) the fact that in order for a bank to make a loan (and create money) two things external to that bank needs to be in place,
> 
> i) an entity wanting to borrow, and
> ii) a source of funds that is available to the bank to lend
> ...


I think they are saying a little more than that. Your subsequent post touches on this - that money needs to circulate in order for real value to be attached to it. Otherwise it has no value. So, a bank 'creates' a £100 credit and a £100 deposit on its books. All fine - adds up to zero on its balance sheet - but worth nothing. It's a closed circuit that can't do anything. That needs to be lent out to a real person to do a real thing in the economy to buy something of real value. It will then be deposited back into the system by the person who accepted the money for the good, expanding the money supply until such a time as the borrower pays back the loan, with that value attached to it: £100 buys 10 pigs, or whatever. Not until the deposit has been made has any value been attached to the money.

But I think the endogenous theory's position is this: I go to the bank and ask to borrow £10k to buy myself a car. The bank decides that yes, that seems reasonable, making a judgement in advance of whether or not someone will accept £10k for that car, whether or not £10k is worth that car's amount of value. They may even have the car owner's prior agreement that yes, they will accept the £10k. Where car dealers themselves offer finance, that is clearly the case. So the transaction can go ahead on the promise that £10k will immediately enter the system as a deposit with the value 'that car' attached to it. This doesn't require a prior deposit. Indeed, if both sides in the agreement use the same bank, the bank can carry out the whole process itself - it has found a real person to take on the debt and a real person to take on the deposit, in a loop that includes 'that car' as its value. In a smoothly running banking system where banks trust each other to do good business, the deposit enters the system as a whole and the bank creating the credit can go to the system and instantly take on an interbank loan to cover it.

The endogenous theory's position, as I understand it, is that this is what happens in reality. Of course, that doesn't create reserves, and reduces the percentage of existing reserves to total loans. But the likes of Keen argue that this is exactly what happens, and that it requires central banks to periodically make up that shortfall, otherwise the system seizes up.

It's a position that says that fractional reserve lending is essentially a fiction. Deposits do not precede loans, and if they did, then central banks would be in control of the size of the money supply in a way that reality shows us that they are not. In reality, according to Keen, the size of the money supply is purely limited by the willingness of people to borrow and the willingness of banks to lend.

As I understand it, monetarism was based on the idea that money is lent out via fractional reserve lending, so via the money multiplier effect, the reserve requirement creates a strict upper limit to the amount of money that can be created from a particular amount of central bank seed money. That their model failed in reality when it was tried shows that the system cannot have been operating to those rules. Either banks were breaking the rules and lending out more than they were supposed to or the system simply doesn't work like that at all. The latter is the position of the endogenous theory.


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## laptop (Mar 25, 2012)

littlebabyjesus said:


> That [the monetarist] model failed in reality when it was tried shows that the system cannot have been operating to those rules. Either banks were breaking the rules and lending out more than they were supposed to or the system simply doesn't work like that at all.


 
From epistemology, rather than economics: _not necessarily_.

We always have to bear in mind that there is an uncountably large set of theories capable of fitting any set of empirical data 

Failed in _what sense_?

If in the narrow sense that central bank decisions did not have the predicted effect on money in circulation, then that's a moderately tight constraint on the applicability of the the theory.

If, as I suspect, it was failure by some other measure (inflation?) then it says rather little about the theory.


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## love detective (Mar 25, 2012)

littlebabyjesus said:


> I think they are saying a little more than that. Your subsequent post touches on this


 
No, they are not - the concept/necessity of circulation is inherent in both of the two points I made that endogenous theory reasserts (i.e. a requirement of someone wanting to borrow entails the circulation of that money once borrowed, and the requirement of the bank having to fund that lending from somewhere entails the circulation of funds through the bank to fund it)



> that money needs to circulate in order for real value to be attached to it. Otherwise it has no value.


 
this is way off the mark i'm afraid. Just because circulation needs to happen for the money supply to be expanded (i.e. the point i've been making since post 1 of this thread) - it does not follow that an increase in the money supply/circulation produces value. Circulation does not produce value. The circulation/increase in money supply (using the example of the car below) merely facilitates the change in ownership of a commodity and leaves a trail of obligations in its wake. The purchase and sale of an item using credit adds nothing of value, it just changes ownership. This myth/idea that circulation can be produced within the sphere of circulation was something that was dominant in 16th/17th century mercantilism theory, but from the physiocrats and adam smith onwards this notion was shown to be untrue, and that value at the social level can only be produced within the sphere of production. Part of the reason we are in such a mess at the moment, is this idea that value could be produced by bypassing production, and that it could be achieved purely within the sphere of circulation. this led to huge amounts of capital being sucked into the financial system looking to capture value, but no actual increase in value being produced at the social level, so eventually crisis intervenes and destroys/devalues that excess capital



> So, a bank 'creates' a £100 credit and a £100 deposit on its books. All fine - adds up to zero on its balance sheet - but worth nothing. It's a closed circuit that can't do anything. That needs to be lent out...


Sorry but you can't lend out an accounting entry


> Not until the deposit has been made has any value been attached to the money.


again, this is just bonkers - you're mixing up all kinds of concepts here



> But I think the endogenous theory's position is this: I go to the bank and ask to borrow £10k to buy myself a car. The bank decides that yes, that seems reasonable, making a judgement in advance of whether or not someone will accept £10k for that car, whether or not £10k is worth that car's amount of value........So the transaction can go ahead on the promise that £10k will immediately enter the system as a deposit with the value 'that car' attached to it. This doesn't require a prior deposit.


 
First off, the bank does not approve an application for a car loan of £10k on the basis of whether it thinks 'someone will accept 10k for the car'. they approve the loan if the borrower has sufficient income to pay the loan back and/or collateral to act as security should the borrowers income stream stop - if you have these things the bank doesn't care whether you burn the money given as they are reasonably assured of a repayment stream giving a profit on the deal and their original loan repaid. it's pretty daft to say that the bank approves the loan based on whether they think 'someone will accept' £10k for the car - if the car is only worth £7k i'm sure the seller would accept £10k for it, so this is a fairly bizarre thing to state as the thing that determines whether a loan is given or not.

But putting that aside, your claim (which i don't really agree with, but if we follow the logic through) still depends upon the 'promise' of a deposit coming back into the system to make that loan possible - which is odd as this is supposedly you making an argument that loans create deposits, where in this case it's the 'promise' of a deposit that enables, and in your own words, 'the transaction [to] go ahead. So even in the version that you put forward (again which i don't go along with) you're pretty much using an example of the necessity of a promise of a deposit to enable the loan to be made - so even in this the deposit (and the necessity of it) comes first, i.e. before the loan.



> Indeed, if both sides in the agreement use the same bank, the bank can carry out the whole process itself - it has found a real person to take on the debt and a real person to take on the deposit, in a loop that includes 'that car' as its value. In a smoothly running banking system where banks trust each other to do good business, the deposit enters the system as a whole and the bank creating the credit can go to the system and instantly take on an interbank loan to cover it.


 
If both sides use the same bank, then the banks loan to the person buying the car has effectively been funded by the seller of the car depositing the proceeds at the bank (and in reality these two things would probably happen at the same time) - if they don't use the same bank, then the bank making the loan, as you say, has to be able to fund that loan from somewhere, either the interbank loan market or in times of stress the lender of last resort, the central bank. So what you've argued here (in a roundabout way) is what i've said multiple posts above - that a bank can't make a loan unless it funds that loan from somewhere (i.e. a deposit of some sort, either form a customer, another bank, or a central bank). This argument I was making was against those who either argued that money was created by banks out of thin air (yourself included) or that banks could somehow lend out more than they got in (what ymu originally put forward). In reality each day a bank will forecast their transactions for a day, if it looks like they are planning to lent out more than they had scheduled to get in, they borrow in the interbank market to fund it (or central bank in times of stress). So taking it back to the part of my post that you quoted, this is exactly what i said - it reasserts that for a bank to make a loan they need someone wanting to borrow and a way of funding that loan.



> The endogenous theory's position, as I understand it, is that this is what happens in reality. Of course, that doesn't create reserves, and reduces the percentage of existing reserves to total loans. But the likes of Keen argue that this is exactly what happens, and that it requires central banks to periodically make up that shortfall, otherwise the system seizes up.


 
you've got this part wrong/mixed up - why would the smooth circulating of loans and deposits in the system cause the system to seize up? the reserve requirement is a regulatory requirement to try and make sure that lending does not get out of control, the existence of those reserves or not would not cause the system to seize up. the system seizes up when this kind of circulation doesn't happen.


> It's a position that says that fractional reserve lending is essentially a fiction. Deposits do not precede loans....


You've argued above in your own post that loans are only created as long as the 'promise' of a deposit exists, so even taking your version of events (which i don't agree with) you've shown the necessity of deposits in order for loans to be made - i.e. the promise of a deposit is required in order for a loan to be made - ergo deposits do precede loans. Just to clarify though, I don't agree with the way you set it out, but was just following your logic through. Will continue on this point in the bit below.


> Deposits do not precede loans...and if they did, then central banks would be in control of the size of the money supply in a way that reality shows us that they are not.


again your mixing lots of things up here - both myself and IWNW have picked up on this false conflation you've made a few posts back. There is no connection between:-

i) 'deposits creating loans' AND the central bank being in control of the size of the money supply, or
ii) 'loans creating deposits' AND banks being in control of the money supply

i.e. you seem to think that if you can prove that loans create deposits then that means you've proved that central banks are not in control of the size of the money supply. there's no necessary connection between these things though - for example i argue that deposits create loans and that central banks alone are not in control of the money supply. You're conflating two things that you seem to think are associated/dependent when they are not. In reality the money supply and what happens to it is controlled by a mixture of things, banks, people, the activity of capital and central banks - each part can have differing influences at different points in time and in different situations and to differing degrees of success



> In reality, according to Keen, the size of the money supply is purely limited by the willingness of people to borrow and the willingness of banks to lend.


I partly agree with this, adding though that it's not just a willingness of banks to lend, but their ability to do so (and that the impact of regulatory/capital adequacy restrictions do in reality place an upper limit restriction on what banks can lend, which they can only exceed if they raise more core capital or find ways of regulatory arbitrage to get round it).

In short though, this is what i've been saying since my first post on this thread, and arguing against those who claim that banks can create money out of thin air or can lend out more than they get in.


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## littlebabyjesus (Mar 25, 2012)

I can't address all your points at the moment. But I would like to address just one for now. I did not say that circulation produces value. I said that circulation attaches value to money. There is an important difference there.


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## phildwyer (Mar 26, 2012)

love detective said:


> LBJ was putting forward the case that this is how the current system actually works (which is what this discussion has been about) - trust me if it was like this it would have broke properly a long time ago


 
LBJ is perfectly right, and you are once again wrong.

Not only is fiat money, interest and so on created out of thin air, _all _money is created out of thin air. It could be no otherwise. Why not? Because money _is _thin air, that is why.  Money--or at least the financial value it purportedly contains--does not, that is to say, exist,

If anyone, such as the one who currently chooses to call himself "Love Detective," ever tries to deny this, or to assert the empirical reality of money, simply ask them to show you a bit of this fabled "money" of theirs.

They will be unable to do so. Instead they will tell you that your question is naive, that you have clearly never studied economics, that you lack a basic understanding of the necessary concepts--which they are getting downright _fed up _of having to explain over and over again.

Just smile politely, and request again that they show you a bit of "money."


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## phildwyer (Mar 26, 2012)

love detective said:


> your orignal assertion was that the money supply could be expanded through the creation of money/credit from banks out of thin air - you have not done anything to back this up yet


 
Common sense and everyday experience back him up.

To grasp the absurdity of Love Detective's "realist" position with regard to money, all one has to do is open a savings account.  What happens?  Little bits of money begin to magically appear in you bank account, without you or anyone else doing anything material to cause this.  Value has been created out of thin air.

Love Detective will claim that this is not what really happens.  In reality, he will claim, this money refers to human labor-power, and without that labor-power it could not exist.  And logically speaking he is of course quite right.

Pragmatically speaking however, he is entirely wrong.  Ours is a society accustomed to taken empirical appearances for reality.  Because of this custom, our society is organized around the principle that money reproduces itself out of thin air.  Love Detective may protest that money is only a representation of an ulterior reality, but ours is a society in which representation is more important than reality.  Indeed ours is a society that recognizes no distinction between representation and reality, one in which that distinction has therefore failed to hold.

Which rules the world: symbolic exchange-value or the labor-power it represents?

In such a society, to insist on the "realist" or referential model of money is simply to deny reality.  Denying reality is no way to change it.


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## phildwyer (Mar 26, 2012)

love detective said:


> I got the impression in your previous post on his model that you were using that to back up your point that money could be created out of thin air (as long as it kept on happening) - at least that was the context you referred to it in


 
To be honest, I'm getting a little bit tired of having to address this matter over and over again.  Simply changing your username does not make your arguments any better.  But still...

Look, money really is created out of thin air you know.  What about interest on a loan?  Or interest on that interest?  Or the interest on the confidence that this interest will reach a rate lower than that at which it was originally sold within a six-month period?  The connection to anything real or material is pretty distant in such calculations, is it not?  Nor does anything material or real have much to do with the manner in which such calculations progress, does it?

All money is symbolic, and in that sense unreal.  And yet this unreal symbol has become far more important and influential than the reality it represents.  This importance and influence enables it to disregard the insignificant matter of its own non-existence, and to carry on behaving as if it existed.  I don't see, in that case, why you bother to insist on its non-existence.

For example: which determines when a factory should close down: symbolic money or real labor-power?  Obviously the former.  Labor-power can jump up and down crying "you can't do that, I'm realer than you," and symbolic money will simply retort: "Realer than me are you?  Fine, now fuck off and be real on the dole."


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## love detective (Mar 26, 2012)

Phil, I need to insist that if you want to contribute to this thread you first take some time to understand what is being talked about before you jump in and make yourself look silly

money,like value, is immaterial (but objective) - this doesn't mean the conditions that are required for it to exist and be expanded can be created out of thin air. the activities that lead to the expansion of the money supply cannot be created by an individual bank out of thin air. this is the discussion that is being had on this thread - you pointing out omgzzz money is immaterial so that means nothing exists so that means everything is just magic and created out of thin air, is just schoolboy contrarian nonsense, that shows little attempt to connect with the subject matter

you've regressed back to what was being discussed on page 1 of this thread - where you conflate the few taps on a keyboard that form one step in a chain of steps/activities that are required to 'create' money with that overall process itself - you can't magic the material conditions that are required for this process into existence from thin air, therefore you can't create money from thin air, and no amount of sophistry is going to make that possible

so now please, stop embarrassing yourself - you continually fall into the trap of fetishising money, and indeed Marx points out that the relations of capital assume their most externalised and fetish like form in 'interest bearing capital'. So it's no surprise that someone of your idealist posturing nature and demented bishop berkleyism would fall into that trap easier than others - your surface level analysis of money is third rate vulgar political economy, which simply repeats surface form appearances for the explanation of why things happen (stones fall to the ground not through gravity but because stones have a tendency to fall to the ground, cows in the distance really are small, money is magic ) - this may be suitable for trolling on a message board, but not i'm afraid for serious discussion, so please take it elsewhere


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## camouflage (Mar 26, 2012)

phildwyer said:


> Common sense and everyday experience back him up.
> 
> To grasp the absurdity of Love Detective's "realist" position with regard to money, all one has to do is open a savings account. What happens? Little bits of money begin to magically appear in you bank account, without you or anyone else doing anything material to cause this. Value has been created out of thin air.
> 
> ...


 
I think there's been a fundamental confusion between the terms 'Money' and 'Credit/Debt' on this thread. Credit/Debt's the important bit, two people can make up Credit/Debt all day long and pass it round between themselves and even interested third-parties with no problem. In fact one could say that 'thin air' is way under-valued by people who don't understand exactly where ideas, value-systems and plans for the future are hosted.

I think what ld meant was that you can't create Debt without the other side of the coin also being created... Credit. Or "_what comes to the same thing_"... you can't create Credit without creating Debt.

Reserve requirements etc specify how much Debt has to be 'backed' when creating Credit, but that's about all.


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## littlebabyjesus (Mar 26, 2012)

I agree that credit/debt is what is important here. This rather begs a question, though, wrt reserves. How can there ever be more deposits than there are loans? Where would the 'extra' bit of the deposit come from?


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## butchersapron (Mar 26, 2012)

*weeps into rum*


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## phildwyer (Mar 26, 2012)

love detective said:


> money,like value, is immaterial (but objective) - this doesn't mean the conditions that are required for it to exist and be expanded can be created out of thin air.


 
Except that in practice, in real life, it is money (or rather financial value) that determines the nature of these "conditions that are required for it to exist."

What determines who will perform which material acts of labor, under what conditions and for whom?  Money (or rather financial value) determines this, does it not? 

And yet as you admit here financial value has no material existence at all, but is a mere symbol or to put it colloquially "thin air."

So it seems that the conditions that are required for financial value to exist are indeed created out of thin air, and that you are once again proved wrong.


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## littlebabyjesus (Mar 26, 2012)

butchersapron said:


> *weeps into rum*


It's just so easy, this stuff, isn't it? How could anybody get it wrong?


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## Hocus Eye. (Mar 26, 2012)

I have been following this thread from the beginning and was just dreading phildwyer coming on to it with his oft repeated idea that money is spiritual and proof of the existence of god or some similar twaddle which is completely out of context with the arguments here.


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## phildwyer (Mar 26, 2012)

Hocus Eye. said:


> I have been following this thread from the beginning and was just dreading phildwyer coming on to it with his oft repeated idea that money is spiritual and proof of the existence of god or some similar twaddle which is completely out of context with the arguments here.


 
I understand: you assume that economics can be separated from philosophy, and perhaps also that philosophy can be separated from theology.

I think you are wrong on both counts.


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## love detective (Mar 26, 2012)

I'll leave you to it Phil, you clearly know what you are talking about, you've really got to the crux of the issue here i feel and I think we can all learn a lot from what you have to say (well LBJ & Jazz won't because you all seem to be on the same page anyway, but the rest of us, boy, there's a lot to pick up there)


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## littlebabyjesus (Mar 26, 2012)

tbh, ld, your recent posts show me that you don't really get what I've been saying.


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## phildwyer (Mar 26, 2012)

littlebabyjesus said:


> tbh, ld, your recent posts show me that you don't really get what I've been saying.


 
You're speaking a language he doesn't understand: philosophy.

Thing is, economics is _premised _on bullshit, philosophically speaking. Philosophy undermines the most basic assumptions of economics, making it impossible for those who accept those assumptions to continue the conversation on their own terms.

A classic example is your insistence that money can be created out of thin air. Philosophically speaking, of course, you are right--all money is thin air. But the terms of the discipline of economics are premised on the assumption that money is somehow real, or at least that it refers to something real, and within that discipline there are ways to sustain that assumption, as we have just seen.

From any extra-economic perspective however, that assumption like so many others is manifestly and patently absurd.


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## love detective (Mar 26, 2012)

littlebabyjesus said:


> tbh, ld, your recent posts show me that you don't really get what I've been saying.


 
I'll leave you, Jazz and Phil Dwyer to revel in your collective correctness then (and i'm sure no one will judge the quality of your analysis by the company they keep)


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## littlebabyjesus (Mar 26, 2012)

love detective said:


> I'll leave you, Jazz and Phil Dwyer to revel in your collective correctness then (and i'm sure no one will judge the quality of your analysis by the company they keep)


What kind of nonsense is this? You have misunderstood a few of my points. I highlighted one - I merely said that the act of circulation attaches value to money, not that it creates value. There is another - that the system would seize up without central bank intervention because the reserve requirement is being violated - not because the system cannot work like that, but because by working like that, the system breaks the rules of reserves. The central bank's own rules would cause a seizure - so it basically breaks its own rules to keep the system going.

And yes, we are going round in rather large circles because any 'deposit-first' theory of money creation begs the question: where did that deposit come from? Keen and others say that this isn't a problem as it isn't the way money is created, and that there is good hard evidence for this in the timing of central bank base money expansion. I've been saying for a while now that your system assumes that money is already present in the system, and does not account for the creation of money. To my mind, the endogenous theory, as I outlined it, does.


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## camouflage (Mar 26, 2012)

littlebabyjesus said:


> I agree that credit/debt is what is important here. This rather begs a question, though, wrt reserves. How can there ever be more deposits than there are loans? Where would the 'extra' bit of the deposit come from?


 
Do you mean to ask how can there be more loans than there are deposits?

If so, I reckon that the 'extra bit' be the wealth creation, or the anticipation of future value, the "if" in "build it and they will come", or at least the 'objective truth' in the market research that says people will pay good money (or even crap money if stack em high sell em cheap's your game) for what you've taken the loan to build/invest in in the first place. It's the Confidence in future growth.

Out of 'thin air' is precisely where we get all our stuff from, why the outrage and shock that it's where we get money, credit and debt from too.


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## ItWillNeverWork (Mar 26, 2012)

Just wondering, but do banks report their balances on a periodic basis or continually? If it is the former, then there is a way in which banks might be able to expand the money supply whilst maintaining a situation in which all loans are backed by deposits.

An individual bank will have a projection of how much money it expects will be coming into its coffers each period, and using this projection it will plan to lend out a certain amount. Imagine this projection is 100 million, and so the bank authorises it's branches to lend out that amount over the coming period. The money gets lent out to firms that pay for goods and services from people who deposit that money back in the same bank.So here we are at the end of the period, with both sides of the balance sheet summing to zero.

Now imagine the bank projects it will have 105 million deposited next period, and so lends out 105 million. Once again the money gets lent out to firms that pay for goods and services from people who, again, deposit that money back in the same bank. In this situation, loans have created deposits just like Keen argues, and there is no problem with all loans being fully backed by deposits so long as the balances are reported at the _end_ of the period. So long as that flow keeps circulating, of course.


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## love detective (Mar 26, 2012)

littlebabyjesus said:


> What kind of nonsense is this?


 
It's merely pointing out that in your travails to expertly explain to us how you think things work, the only people who you've ended up agreeing with (or agreeing with you) have been Jazz, Phil Dwyer and Milton Friedman - as i said, if you judge people's analysis on the company they keep you don't come out of this looking to well with those as bed fellows

(and it rich you calling nonsense, with some of the nonsical shite you've come out with on this topic over the last year or so - and i notice once again when i take the time to respond line by line to your ramblings, you can never actually come back and respond to them, you just do this vague, 'oh you don't understand' shite without actually doing what i do and taking the time to respond as to why - as to why that is the case i'll leave it to others to make up their minds on)


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## littlebabyjesus (Mar 26, 2012)

Well you misrepresented what I said. Add to that a dig and an attempt to belittle, which you do a lot of. You're the only one here claiming expertise. You and perhaps dwyer. How you think what I'm saying is in agreement with Friedman I simply don't understand.


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## love detective (Mar 26, 2012)

http://www.urban75.net/forums/threads/money-and-value.276954/page-5#post-10490295

and by the way, if people go about pompously projecting an air of authority about a subject they know very little about, then I think it is important to belittle them - otherwise others may accept what you are saying just because 'who' is saying it (rather than basing it on whether what is being said is actually correct) - that is dangerous as it allows people who know very little about an important topic to spread misinformation about it - the example in the post linked to above is a case in point, something that you argued until you were blue in the face for, while i patiently and calmly countered your points until you conceeded that you were in fact talking a load of crap (a load of crap that Friedman also spouted)


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## littlebabyjesus (Mar 26, 2012)

You attack me in this thread for something I said in the past? Why not address the endogenous theory as I laid it out? You might like to read one or two of the links I've provided because you  indicate to me that you don't really get it. I might have got the theory wrong, but I don't think I have and others who are reading the same stuff as me seem to think it means the same as I think it means.

But you prefer to make out that I'm spouting random crap. You are the pompous one here, belittling anybody who questions you.


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## ItWillNeverWork (Mar 26, 2012)

I don't think Friedman thinks that the money supply is endogenous, does he? I mean, a central assumption of Monetarism is that the money supply _can  _and _should_ be controlled by the central bank. That hardly fits in with what lbj has been saying here. The opposite in fact.


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## redsquirrel (Mar 27, 2012)

love detective said:


> So it's no surprise that someone of your idealist posturing nature and demented bishop berkleyism


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## phildwyer (Mar 27, 2012)

littlebabyjesus said:


> Well you misrepresented what I said. Add to that a dig and an attempt to belittle, which you do a lot of. You're the only one here claiming expertise. You and perhaps dwyer.


 
Erm.. excuse me, but where have I claimed any "expertise?"

I think you'll find that I've been very reticent about any credentials any of us might or might not have. I have allowed my arguments to do their work on their own merit.


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## phildwyer (Mar 27, 2012)

love detective said:


> It's merely pointing out that in your travails to expertly explain to us how you think things work, the only people who you've ended up agreeing with (or agreeing with you) have been Jazz, Phil Dwyer and Milton Friedman - as i said, if you judge people's analysis on the company they keep you don't come out of this looking to well with those as bed fellows


 
What a pathetic, pompous twat you truly are.

Your technique of argumentation is pathetic.  You've been exposed as a fraud and a fake, and your only recourse is to personal abuse.  Useless.


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## JimW (Mar 27, 2012)

phildwyer said:


> What a pathetic, pompous twat you truly are.


Oh, phil's resorted to personal abuse.


phildwyer said:


> ...exposed as a fraud and a fake, and your only recourse is to personal abuse. Useless.


Hmm.


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## ymu (Mar 27, 2012)

Don't fall for it Jim, he knows perfectly well how ridiculous those posts are - he only uses that sort of overblown rhetoric when he's trying to get someone to bite. This is a decent thread - don't let him ruin it.


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## JimW (Mar 27, 2012)

ymu said:


> Don't fall for it Jim, he knows perfectly well how ridiculous those posts are - he only uses that sort of overblown rhetoric when he's trying to get someone to bite. This is a decent thread - don't let him ruin it.


I guessed as much, as it seemed a fairly obvious direct self-contradiction. Shame phil won't try and make a contribution instead, he's not stupid.


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## love detective (Mar 27, 2012)

littlebabyjesus said:


> You attack me in this thread for something I said in the past?


 
I summed up in my post that in your travails to expertly explain to us how money & value work (in general, not this particular thread) you have collected an odd bunch of bedfellows who agree with your 'work' - Jazz, Phil Dwyer and Friedman for example

And it's a good example to point out I think - it shows how mixed up and muddled your own pompous shite actually is in this area, one minute you are confidently telling us all how something works which is straight out of a friedmanite monetarist perspective, then the next you've swung the other way and arguing the opposite - all while maintaining that at all times you of course are right and people who don't agree with you just don't understand you.



> Why not address the endogenous theory as I laid it out? You might like to read one or two of the links I've provided because you indicate to me that you don't really get it. I might have got the theory wrong, but I don't think I have and others who are reading the same stuff as me seem to think it means the same as I think it means.


 
can't believe you are accusing me of not addressing your posts on this - i've made plenty long and detailed posts responding to your points on this matter - here and here for example, and as usual you do your usual, when faced with a comprehensive response to your posts, you either go silent for a few weeks or claim you don't have time to respond to it (and give a one line response) and then moan at others for not responding to you. Why not address my replies to your posts instead of disingenuously suggesting that I haven't addressed your points?



> But you prefer to make out that I'm spouting random crap.


 
If one minute you are arguing crude friedmanesque monetarist theory (the post i linked to on the other thread) and the next you are arguing pretty much the complete opposite of it, then yes, i think that is spouting random crap - it shows that you have no fundamental framework/grasp of the topic you are trying to project knowledge on. At least if i'm wrong, i'll be consistently wrong on it as everything I am saying is coming from a framework that i've established from over twenty years of both theoretical and practical research into this area (i know this counts for nothing against you looking up a couple of pages on wikipedia though)



> You are the pompous one here, belittling anybody who questions you.


 
as i said above, i belittle pompous fakes like you (and Phil), who have little knowledge of the topic but project an air of confidence about it that is unmerited by their understanding of the topic. which as i've said before i think is dangerous as people can end up just taking what you say as correct because of 'who' says it (well obviously they don't with Phil, but you know what i mean) - if you don't like it, then take a bit of time to understand something properly before you confidently spourt your shite, or failing that, once just once, actually admit you're not as clever as you like to think you are - it won't hurt.


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## love detective (Mar 27, 2012)

phildwyer said:


> What a pathetic, pompous twat you truly are.
> 
> Your technique of argumentation is pathetic. You've been exposed as a fraud and a fake, and your only recourse is to personal abuse. Useless.


 
If you don't like the fact that you also have collected some oddballs as bedfellows on this I don't mind if you take it out on me and abuse me Philip


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## love detective (Mar 27, 2012)

ItWillNeverWork said:


> I don't think Friedman thinks that the money supply is endogenous, does he? I mean, a central assumption of Monetarism is that the money supply _can _and _should_ be controlled by the central bank. That hardly fits in with what lbj has been saying here. The opposite in fact.


 
I never said he did - I was pointing out how all over the shop LBJ is on this (in general), one minute he's arguing for stuff that Friedman would agree with, the next he is, as you say, arguing for the complete opposite

edit: and while he was arguing the friedman line, he was doing exactly the same to me as he is now, i.e. saying i didn't understand what he was saying, maintaining that he was absolutely correct in what he was saying, calling me pompous for pointing out where he was wrong on it, accusing me of not responding to his posts when in fact it was him not responding to mine - exactly the same MO


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## Captain Hurrah (Mar 27, 2012)

love detective said:


> If you don't like the fact that you also have collected some oddballs as bedfellows on this I don't mind if you take it out on me and abuse me Philip


 
Phil was saying the opposite about you when it suited.  That is, when you confronted ViolentPanda.


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## littlebabyjesus (Mar 27, 2012)

love detective said:


> I never said he did - I was pointing out how all over the shop LBJ is on this (in general), one minute he's arguing for stuff that Friedman would agree with, the next he is, as you say, arguing for the complete opposite
> 
> edit: and while he was arguing the friedman line, he was doing exactly the same to me as he is now, i.e. saying i didn't understand what he was saying, maintaining that he was absolutely correct in what he was saying, calling me pompous for pointing out where he was wrong on it, accusing me of not responding to his posts when in fact it was him not responding to mine - exactly the same MO


 
On this thread, I have been trying to understand and present the ideas of Minsky, and providing links to show where what I am saying is coming from. You do not acknowledge this, but prefer these constant personal attacks.


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## love detective (Mar 27, 2012)

and on this thread me responding to things that you write that I see as wrong and pointing out why I think they are wrong are now 'constant personal attacks' are they

You are obviously entitled to your own opinion, but I would be surprised if anyone would see my contributions on this thread as 'constant personal attacks'

when you were arguing for the (completely incorrect) pro-friedmanite line about money in previous threads, you were doing exactly the same as you have done on this thread, confidently asserting you knew exactly how things worked while patting yourself on the back for coming up with this great new theory of money (and value) and complaining that anyone who didn't agree with you just didn't understand your arguments and were being pompous and belittling you and attacking you


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## ymu (Mar 27, 2012)

Try re-reading the thread lbj. Carefully, and with an open mind. I think ld is getting impatient with you, but I don't think it's fair to say it's more attack than content. Not by a long chalk. Positively charming compared to me when someone persistently misinterprets a medical paper.


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## phildwyer (Mar 28, 2012)

JimW said:


> I guessed as much, as it seemed a fairly obvious direct self-contradiction. Shame phil won't try and make a contribution instead, he's not stupid.


 
It was retaliation, not contradiction. And I've made many substantive contributions to this and other threads.

The problem as I see it is that Love Detective has failed to see the implications of the fact that money is a purely psychological phenomenon, a sign. In this he follows the discipline of "economics" as a whole, though not critics of that discipline such as Marx--whose advances on political economy were made possible precisely by applying philosophical concepts to the spurious ideology of "economics."

Because it is a purely psychological phenomenon, there is no reason why money should have any essential qualities at all. It can have any qualities we choose to attribute to it--including non-referentiality (it need not refer to anything material or objective).

For most of human history, for example, money was believed to be incapable of autonomous reproduction, as in interest. Now we see it very differently.

The other thing to bear in mind in this discussion is that money, or the economy, should not be treated in isolation, as if they were real empirical phenomena. They are rather part of general human culture. Thus the rise to power of money, and the revelation of its nature as a sign, must be seen as part of a more general rise of signs and representation to cultural prominence and determining power.


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## phildwyer (Mar 28, 2012)

Captain Hurrah said:


> Phil was saying the opposite about you when it suited. That is, when you confronted ViolentPanda.


 
What are you on about now?  I never agreed with Love Detective about anything.


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## love detective (Mar 28, 2012)

phildwyer said:


> It was retaliation, not contradiction.


 
what was it retaliation for?



> The problem as I see it is that Love Detective has failed to see the implications of the fact that money is a purely psychological phenomenon, a sign. In this he follows the discipline of "economics" as a whole, though not critics of that discipline such as Marx--whose advances on political economy were made possible precisely by applying philosophical concepts to the spurious ideology of "economics."....
> 
> ......The other thing to bear in mind in this discussion is that money, or the economy, should not be treated in isolation, as if they were real empirical phenomena. They are rather part of general human culture. Thus the rise to power of money, and the revelation of its nature as a sign, must be seen as part of a more general rise of signs and representation to cultural prominence and determining power.


 
Probably the biggest strawman i've seen from you to date - how you can write the above, when I have been writing things like the below in relation to this stuff ever since I started talking about it here is beyond me




			
				love detective a few days ago said:
			
		

> the usage of money & finance in the present day are expressions of the underlying system of social relations - they are produced by it - you can't just skim them of the top of the system and by doing so produce a new system. you have to obliterate the essence that produces and reproduces them. it's not a question of economics or economic policy, it's a profoundly social issue and one about relations between people and things, it's about the social form of human working activity


 
Once again you have been caught out posting in bad faith, being disingenuous and frankly a rather poor lier

(obviously i don't agree with you that money is purely a sign though, i.e. an expression without an essence - I have a more insightful and meaningful analysis of that than you do which is touched upon in the post of mine I quoted. i am happy to take you through that slowly and from the basics so you may improve your own rather muddled and mystifying perspective on this)


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## phildwyer (Mar 28, 2012)

love detective said:


> what was it retaliation for?


 
Well you make a veritable principle of belittling your opponents:



love detective said:


> and by the way, if people go about pompously projecting an air of authority about a subject they know very little about, then I think it is important to belittle them


 
A principle that you have applied consistently throughout this thread. Mine wasn't the most witty or appropriate response, admittedly.



love detective said:


> Probably the biggest strawman i've seen from you to date - how you can write the above, when I have been writing things like the below in relation to this stuff ever since I started talking about it here is beyond me


 
You've also been talking of the "economy" as if it were an autonomous sphere, and your entire analysis is marred by your failure to take into account the implications for "economics" of extra--"economic" discourses such as philosophy.

I'll respond to your substantive disagreement with my case in a separate post.


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## phildwyer (Mar 28, 2012)

love detective said:


> obviously i don't agree with you that money is purely a sign though, i.e. an expression without an essence


 
I wouldn't say that it doesn't have an essence--although I probably just have. What I meant is that money (or rather financial value etc) has no _material _essence, no physical being at all. It only exists in the human mind.

So if it does have an autonomous essence--one that human beings cannot just change whenever they feel like it--then it is completely unique in the realm of things that have no physical existence. Everything else that exists only in the human mind, human beings can change at (collective) will.

And it is true that money does show a unique combination of objective and subjective characteristics. In fact I'd argue that these include the power to reproduce, and therefore to function as a completely independent agent.

So money is an immaterial essence that exists only in the human mind, and yet is not controlled by that mind, but rather controls it, or attempts to do so. It also has the power to reproduce and to effect changes in the external world independently of any human intervention, or at the very least to get human beings to follow its interests rather than their own.

So what then is money?


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## love detective (Mar 28, 2012)

phildwyer said:


> You've also been talking of the "economy" as if it were an autonomous sphere, and your entire analysis is marred by your failure to take into account the implications for "economics" of extra--"economic" discourses such as philosophy.


 
you see, what you wrote in the last post and this one gets to the crux of your failings in approach to these kind of topics

If you'd actually read all of capital (which i presume you haven't) you would see that the method employed by Marx is one that partakes in different levels of analysis at different layers of perspective - vol 1 of capital is arguably the deep essence of the argument, and moving through the volumes we approach something reaching, but not quite there, the more surface forms phenomenal forms.

Such that when dealing with the more surface like/phenomenal forms, a different form of both analysis and language is employed - this is driven primarily by the topic and not the philosophical underpinnings of the person doing the analysis.

So when you barge onto a thread like this that is involved with the discussion of some detail on a topic, you instantly think that because people are involved in the discussion of detail and 'concrete' aspects of it (a thing you are incapable of partaking in as you are analytically & intellectually ill-equipped to do so) that somehow that analysis is not bedded into any deeper framework/substance which shapes the approach to the whole thing.

Unlike you phil, I am entirely capable of switching the level of analysis so it is appropriate to the topic, the combination of a deeper framework/structure guiding the analysis of the more detailed/phenomenal forms makes for a much more rounded analysis.

You however are only capable of operating (and i use that phrase in the loosest sense) at the most abstract and detached levels, which means that when it comes to any situations where that deeper essence needs to be applied to more concrete topics, you are unable to do so, and your frustruation of that inability on your part, leads to the kind of defence mechanism that we see being put into operation above. That is what makes you unsuitable and ill-equipped, not only to take part in discussions like this, but to even understand them

You are the type of abstract philosopher that Marx detested


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## love detective (Mar 28, 2012)

phildwyer said:


> I wouldn't say that it doesn't have an essence--although I probably just have.


 
you did indeed say it was 'purely' a sign (and indeed further on in this very post you posit money as the essence, so it does seem like you are a bit all over the place as to what you actually think it is)



> What I meant is that money (or rather financial value etc) has no _material _essence, no physical being at all. It only exists in the human mind.


 
I agree that value is nothing but a social relation - can you please point me to where I have said otherwise?

the fact however that it is immaterial, does not mean it is not objective - and my characterisation of it as a social relation provides something that your characterisation of it as just existing in the mind doesn't - which is to emphasise that it is a relation between people and things - i.e. robinson crueso and value would be complete strangers. This means that it can't be magiced into existence from thin air purely by an individual thinking about it as you cringingly imply in relation to abstract labour (or as others do in relation to creating money by purely tapping away on their keyboards). It's embedded in and stems from the social relations between people and things in this society as they go about the necessary reproduction of that society and the social relations of it (backed up by extra-economic forces when those 'natural' ones are at risk)



> So if it does have an autonomous essence--one that human beings cannot just change whenever they feel like it--then it is completely unique in the realm of things that have no physical existence. Everything else that exists only in the human mind, human beings can change at (collective) will.


 
verging into strawman territory again here - my explanation of value (and the money that is an, imperfect, expression of it) does not for one minute grant it any essence except from the human beings whose working social relations is its lifeblood



> And it is true that money does show a unique combination of objective and subjective characteristics. In fact I'd argue that these include the power to reproduce, and therefore to function as a completely independent agent.


 
and here is where you slip back into the fetishing of money (not to mention completely contradicting what you just said in the last post) - the function and flows and activities of money, masks the real underlying human activities which leads to the 'illusion' that money in and off itself has the power to reproduce or is capable of functioning as a completely independent agent. You have completely contradicted your previous point here, don't you see that - you are all over the place with this one i'm afraid. Your previous 'proof' that money has the indpendent agency to reproduce itself in and off itself, was pointing to putting money in a bank account and then seeing interest be added to it - ergo money has reproduced itself. this is the ultimate fetishisation - that you accept at face value that what happened just happened and did not involve a whole series of underlying human led activities that produced the surplus value which eventually was distributed in the form of interest to the owner of that bank account. Complete fetishisation of the object by the subject there phil



> So money is an immaterial essence that exists only in the human mind, and yet is not controlled by that mind, but rather controls it, or attempts to do so.


 
well putting aside the fact that money is the expresion and not the essence - then yes bog standard,feuerbach/alienation/fetishism concepts here phil - religion/value comes from within us as human beings, but is seen to stand over us, we externalise our own human powers and attribute them to something external to us, which gives it the power over us, the more we give it the less we have etc..but it is is still our power



> It also has the power to reproduce and to effect changes in the external world independently of any human intervention


 
no it doesn't, if humans didn't exist or went extinct tomorrow, money would not be doing any of the things that you assert it has/does - i.e. possess the capacity to function as a completely independent agent, to self produce in and off itself - this simple observation pulls the rug out from underneath your whole philosophical approach to it



> or at the very least to get human beings to follow its interests rather than their own.


 
as discussed above, money does not have its own interest separate from those human beings whose sum total of social relations give rise to it



> So what then is money?


 
and expression of social human relations and their social working activities in reproducing themselves and their society - not an independent agent as you assert, not something that would continue to exist if the human relations that give it its lifeblood did not exist, and not something that has the power to independently reproduce itself in and off itself


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## JimW (Mar 28, 2012)

love detective said:


> the fact however that it is immaterial, does not mean it is not objective - and my characterisation of it as a social relation provides something that your characterisation of it as just existing in the mind doesn't - which is to emphasise that it is a relation between people and things - i.e. robinson crueso and value would be complete strangers. This means that it can't be magiced into existence from thin air purely by an individual thinking about it (or tapping away on their keyboards). It's embedded in and stems from the social relations between people and things in this society (backed up by extra-economic forces when those 'natural' ones are at risk)


This is the aspect that seems entirely clear to me, even if I can struglle to get my head round some of the nitty gritty.


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## littlebabyjesus (Mar 28, 2012)

ymu said:


> Try re-reading the thread lbj. Carefully, and with an open mind. I think ld is getting impatient with you, but I don't think it's fair to say it's more attack than content. Not by a long chalk. Positively charming compared to me when someone persistently misinterprets a medical paper.



There is an assumption there that I am misinterpreting minsky/keen.


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## love detective (Mar 28, 2012)

i'm responding to your words on a screen, if these are articulations of your own ideas or someone elses, it makes no difference - you make a point, and i respond to it - if you are unable to rebut those points/rebuttals then it says something about your original point

As i've pointed out, you consistently fail or unable to come back on any of the specific rebuttals or detailed responses I make to your posts (other than vague generalised 'oh i still think i'm right type stuff but i don't have time to explain why at the moment')

And you mix up, conflate and confuse so many of the categories and concepts that you use, which I think shows that you don't understand what you are talking about. Both myself and ItWillNeverWork picked up on an example of this a page or so back when you were confidently putting forward empirical evidence of one thing as conclusive proof of something else - this is like saying that because someone has observed that 10,000 cars pass through a stretch of a road in an hour it's prove that Phil Dwyer likes cheese, and unless I can disprove the evidence of those ten thousand cars passing through that stretch of road then I am unable to disprove that Phil Dwyer likes cheese


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## love detective (Mar 28, 2012)

JimW said:


> This is the aspect that seems entirely clear to me, even if I can struglle to get my head round some of the nitty gritty.


 
getting your head round the nitty gritty means you're not a proper philosopher though


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## phildwyer (Mar 28, 2012)

So now you're trying to overwhelm us with sheer volume, is that it?

I have to do some work today, so I'll have to respond at greater length later. For now though:



love detective said:


> you did indeed say it was 'purely' a sign (and indeed further on in this very post you posit money as the essence, so it does seem like you are a bit all over the place as to what you actually think it is)


 
You seem to be positing an opposition between sign and essence. But this is a false opposition: signs have essences just like anything else. There's no contradiction in money being both sign and essence.

In fact I've no idea how you can deny this. If money didn't have an essence it wouldn't have an objective existence. If it wasn't a sign, we couldn't use it to buy things. So it seems that the confusion is all yours.

I think the source of our difference, on this matter anyway, is the dual nature of money. I don't think you can seriously deny that money is a sign. What you mean is that it is a _referential_ sign, it refers to labor-power. And logically speaking this is true.

However the merest glance at the world should suffice to convince us that it is not _empirically_ true. What actually happens in the real world is that we behave as though money were a _non_-referential sign--a "performative" sign that carried its value within itself and achieved objective effects autonomously.

And we do this even though we know this assumption to be false. When has a lack of logic been a bar to empirical existence?


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## love detective (Mar 28, 2012)

i've always said money is an expression of an underlying thing - you're way off again with this portrayal (it's you who has clumsily categorised it in various places as 'purely a sign' , 'the essence' and now a sign and an essence - and now you have to try and tie together all these clumsy characterisations into something solid, producing absurdity upon absurdity) - and for you to state, in general, that there is no contradiction/oppostiion between sign and essence is absurd (although this stance from you explains your demented bishop berkleyism) - look out the window today and you see the sun moving from one side to the other, there's no contradiction here is there between that sign/phenomenal thing and the underlying essence is there? just as there is no contradiction between the phenmonal observation of interest being credited to a bank account and the essence of the human activities that have to take place for the whole series of events that this distribution of surplus value is dependent on - oh no, what you see is what happens and what happens is what you see - no need for science as things are just explained by describing back what those things are

good to see you employing the LBJ approach of picking up on a small point and avoiding the general substance of responses to you, usually employed when unable to counter the detail

get on with your work philipa


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## phildwyer (Mar 28, 2012)

phildwyer said:


> I think the source of our difference, on this matter anyway, is the dual nature of money. I don't think you can seriously deny that money is a sign. What you mean is that it is a _referential_ sign, it refers to labor-power. And logically speaking this is true.
> 
> However the merest glance at the world should suffice to convince us that it is not _empirically_ true. What actually happens in the real world is that we behave as though money were a _non_-referential sign--a "performative" sign that carried its value within itself and achieved objective effects autonomously.
> 
> And we do this even though we know this assumption to be false. When has a lack of logic been a bar to empirical existence?


 
Replying to oneself on a messageboard is probably a sign of madness, but it seems worth emphasizing the above. 

The difference between LD and myself seems to rest on the nature of reality.  We can presumably agree that money is alienated labor-power (i.e. a referential sign), and also that it _appears _to be soemthing entirely different--a sign with inherent meaning/value. 

But is what _appears _to happen what _really _happens?  I think that, after a certain stage, we have to acknowledge that (in a sense) it is.  If money really does, in practice, rule the world as an independent power, then it does little good to point out that it is not, logically speaking, an independent power.


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## phildwyer (Mar 28, 2012)

DP


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## love detective (Mar 28, 2012)

phildwyer said:


> Replying to oneself on a messageboard is probably a sign of madness, but it seems worth emphasizing the above.
> 
> The difference between LD and myself seems to rest on the nature of reality. We can presumably agree that money is alienated labor-power (i.e. a referential sign), and also that it _appears _to be soemthing entirely different--a sign with inherent meaning/value.
> 
> But is what _appears _to happen what _really _happens? I think that, after a certain stage, we have to acknowledge that (in a sense) it is. If money really does, in practice, rule the world as an independent power, then it does little good to point out that it is not, logically speaking, an independent power.


yeah you can reply/respond to your own posts but not others - easier that way eh

those cows over there in the distance look really small, so it does little good to point out that they are not, logically speaking, really small

the sun looks like it revolves around the earth, so it does little good to point out that it does not, logically speaking, revolve around the earth - i mean what benefit could that possibly bring us about understanding the world/universe we live in

if you come across as a dick, it does little good to point out that you are not, logically speaking, really a dick


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## phildwyer (Mar 28, 2012)

love detective said:


> i've always said money is an expression of an underlying thing - you're way off again with this portrayal (it's you who has clumsily categorised it in various places as 'purely a sign' , 'the essence' and now a sign and an essence - and now you have to try and tie together all these clumsy characterisations into something solid, producing absurdity upon absurdity) - and for you to state, in general, that there is no contradiction/oppostiion between sign and essence is absurd (although this stance from you explains your demented bishop berkleyism) - look out the window today and you see the sun moving from one side to the other, there's no contradiction here is there between that sign/phenomenal thing and the underlying essence is there?


 
This is madness.

"Sign/phenomenal thing" wtf?

You are equating a sign with a phenomenal thing, are you? You think that when I see the sun I am seeing a sign? Am I talking to a looney?

Seems like you're just posting without thinking now, in your excitement.



love detective said:


> get on with your work philipa


 
Just as an aside: why do you of all people think that feminization is an insult?


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## phildwyer (Mar 28, 2012)

love detective said:


> the sun looks like it revolves around the earth, so it does little good to point out that it does not, logically speaking, revolve around the earth - i mean what benefit could that possibly bring us about understanding the world/universe we live in


 
Stop.  Wait. Think.

The sun is not a sign.  Is it?  IS IT?  _Is _it?

No of course it is not a fucking sign.  So why do you treat it like a sign?

_[When your posts start channeling Pulp Fiction you know it's time for a break...]_


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## love detective (Mar 28, 2012)

phildwyer said:


> This is madness.
> 
> "Sign/phenomenal thing" wtf?
> 
> You are equating a sign with a phenomenal thing, are you? You think that when I see the sun I am seeing a sign?


 
your empirical observation of the 'sun moving around the earth' is in contradiction with the essence of the real underlying movements of the celestial bodies

you can try and avoid the topic by reducing it, as usual, to personal abuse - but it just shows further, as if any further proof was needed of course, that you have been caught out once more in your pseudo intellectual ramblings



> Seems like you're just posting without thinking now


 
you're obviously rubbing off on my philipa



> Just as an aside: why do you of all people think that feminization is an insult?


 
are you uncomfortable with terms of affection between males dear?


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## phildwyer (Mar 28, 2012)

love detective said:


> your empirical observation of the 'sun moving around the earth' is in contradiction with the essence of the real underlying movements of the celestial bodies


 
Where to _start_?

OK, to start with: you seem to be under the impression that, empirically speaking, it looks as though the sun moves around the earth. 

But you are wrong even in this initial assumption. What would it look like empirically if the earth moved around the sun?


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## love detective (Mar 28, 2012)

phildwyer said:


> Stop. Wait. Think.
> 
> The sun is not a sign. Is it? IS IT? _Is _it?


 
reduced to gross misrepresentation, your beat, admit it philip


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## love detective (Mar 28, 2012)

phildwyer said:


> Where to _start_?
> 
> OK, to start with: you seem to be under the impression that, empirically speaking, it looks as though the sun moves around the earth.
> 
> But you are wrong even in this initial assumption. What would it look like empirically if the earth moved around the sun?


 
notice how your excuse for being unable to respond to the substantive points of my posts (here and here) was because you didn't have time and were far too busy, yet have spent the last half an hour wittering on like a demented loon trying to find a loophole to extract yourself out of your mess and indeed to create as much noise as you can to take away attention from the points you are unable to deal with

beat


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## phildwyer (Mar 28, 2012)

love detective said:


> notice how your excuse for being unable to respond to the substantive points of my posts (here and here) was because you didn't have time and were far too busy, yet have spent the last half an hour wittering on


 
Up to this point you are absolutely correct.  Nature of the beast innit.

I'll go to work now, but rest assured that I will deal with the posts to which you refer in due course.


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## love detective (Mar 28, 2012)

of course you will philipa dear, of course you will

now run away child


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## camouflage (Mar 28, 2012)




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## love detective (Mar 28, 2012)

rigorous, intellectual and debate are not three words that spring to mind when looking at Philipa's contribution to this thread


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## camouflage (Mar 28, 2012)




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## ItWillNeverWork (Mar 28, 2012)

camouflage said:


>


 
That kids knows not how to throw a punch.


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## phildwyer (Mar 28, 2012)

love detective said:


> rigorous, intellectual and debate are not three words that spring to mind when looking at Philipa's contribution to this thread


 
On and on and on, bitching and sniping far into the night like a gin-sodden old dowager...


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## stuff_it (Mar 28, 2012)

Ah, I see this went well.


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## love detective (Mar 29, 2012)

phildwyer said:


> On and on and on, bitching and sniping far into the night like a gin-sodden old dowager...


 
anything to avoid having to address the points in the posts, here and here eh phil

try and make as much noise and throw as much personal abuse about as you can and hope that this does enough to cause a distraction from your inability to actually address the points (and i don't know about you, but for me 5pm is not far into the night)

face it, you're simply not fit for purpose


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## love detective (Mar 29, 2012)

still dodging the issues philip

would have thought had you had such a solid grasp of the topic you are trying to talk about then dealing with the issues raised in those posts would have been simple and taken up less time than it has taken you to generate the bluster that you do here (which is in no way in order to distract from your inability to do so, oh no)


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## phildwyer (Mar 29, 2012)

love detective said:


> still dodging the issues philip


 
No you nutter, I'm talking to you on the other thread--or I was when you posted this.  How many conversations can you have at once?


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## love detective (Mar 29, 2012)

you've had ample time to come up with a response and yet you are unable to - instead trying to create as much noise and distraction as you can to create cover for your own inabilities 

not fit for purpose philip, far from it indeed


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