If you're looking for advice about how to make a profit or a capital gain, then my apologies for the clickbait: this post is about how money itself is created.
>a financial operation that creates money must occur on both the Assets and the Liabilities-Equity side of the banking sector's ledger. Conversely, any operation which occurs only on the Assets side of the banking sector's ledger, or on the Liabilities-Equity side, does not create money.
Steve, pretty certain this is mistaken, as it does not consider expenses. Here's a counterexample. Say we provide some entertainment at a bank's holiday party, and the bank has compensated us via a bank check. There's no balance sheet *asset* to show for this, no matter how much the partiers enjoyed the show! Rather, there's a new liability to us -- on something like the "Bank Checks Outstanding" line -- and diminished shareholder equity, also on the right side of the balance sheet.
We're free to deposit our check anywhere, but as we have an account with that same bank, we present that check for deposit. The bank gains no asset in the process; it is obliged to redeem its own IOU. The bank will debit "Bank Checks Outstanding" and credit "Customer Deposits" by the same amount. It has reapportioned its liabilities at our instruction. The bank's debt to us is now liquid, mobile, redeemable in the form and place of our choosing. Money has been created in the process, hasn't it?
That's why I said Assets and Liabilities-Equity. Your example is of a transfer of money from the bank's short-term equity to one of its liabilities. That does not create money, as I said.
Steve, if you'd be kind enough to clarify...our checking balance is money, so surely this new increment is money? Is it then pre-existing money? Was some other recognized component of the community's money supply drawn down to offset it? Thanks
This is why I emphasize that short term bank equity is part of the money supply: it’s not just deposits. Hence a transfer from bank equity to a deposit account does not create money.
Good Day Steve, I am enjoying the eye opening content and am playing with models, how would I account for proceeds form imports and exports into the system.
That's a major issue that I have refrained from tackling myself, mainly for reasons of time, but also because I expect its results would contradict the arguments MMT advocates make about a trade deficit. While I think this is important, it's second-order compared to the fact that MMT's entirely accurate domestic monetary analysis is now part of the mainstream debate. That's an amazing achievement for a non-orthodox approach to economics, and I don't want to scupper it.
That said, what you'd need to do is build two matching structures using Godley Tables--one with (say) _{UK} and the other with _{USA} suffixes on all stocks and flows to indicate the different monetary systems. Then you'd have a flow called "Trade Deficit" which can be positive or negative, and have that involving the importer (say the UK) purchasing US$ using UK£ from its bank, while the exporter receives US$, which increase US$ reserves in the US system.
My expectation is that the model would show the domestic money supply being reduced by importing and increased by exporting. This is something that the MMT like "exports are a cost, imports are a benefit" doesn't tackle.
Incidentally, part of the defence of this position has involved the idea of "opportunity cost", implying that the exporting country is doing without something it could use. That effectively involves a Neoclassical vision of firms: over-full employment of capital stock, so diminishing marginal productivity and rising marginal cost. All of that is bollocks, as empirical research (which Neoclassicals ignore) has established. I was pleased to spot a Reuters news report today which made the point that rising capacity for most firms means falling costs, not rising:
>a financial operation that creates money must occur on both the Assets and the Liabilities-Equity side of the banking sector's ledger. Conversely, any operation which occurs only on the Assets side of the banking sector's ledger, or on the Liabilities-Equity side, does not create money.
Steve, pretty certain this is mistaken, as it does not consider expenses. Here's a counterexample. Say we provide some entertainment at a bank's holiday party, and the bank has compensated us via a bank check. There's no balance sheet *asset* to show for this, no matter how much the partiers enjoyed the show! Rather, there's a new liability to us -- on something like the "Bank Checks Outstanding" line -- and diminished shareholder equity, also on the right side of the balance sheet.
We're free to deposit our check anywhere, but as we have an account with that same bank, we present that check for deposit. The bank gains no asset in the process; it is obliged to redeem its own IOU. The bank will debit "Bank Checks Outstanding" and credit "Customer Deposits" by the same amount. It has reapportioned its liabilities at our instruction. The bank's debt to us is now liquid, mobile, redeemable in the form and place of our choosing. Money has been created in the process, hasn't it?
Cheers -- EconCCX
That's why I said Assets and Liabilities-Equity. Your example is of a transfer of money from the bank's short-term equity to one of its liabilities. That does not create money, as I said.
Steve, if you'd be kind enough to clarify...our checking balance is money, so surely this new increment is money? Is it then pre-existing money? Was some other recognized component of the community's money supply drawn down to offset it? Thanks
This is why I emphasize that short term bank equity is part of the money supply: it’s not just deposits. Hence a transfer from bank equity to a deposit account does not create money.
Good Day Steve, I am enjoying the eye opening content and am playing with models, how would I account for proceeds form imports and exports into the system.
Thanks Tafadzwa!
That's a major issue that I have refrained from tackling myself, mainly for reasons of time, but also because I expect its results would contradict the arguments MMT advocates make about a trade deficit. While I think this is important, it's second-order compared to the fact that MMT's entirely accurate domestic monetary analysis is now part of the mainstream debate. That's an amazing achievement for a non-orthodox approach to economics, and I don't want to scupper it.
That said, what you'd need to do is build two matching structures using Godley Tables--one with (say) _{UK} and the other with _{USA} suffixes on all stocks and flows to indicate the different monetary systems. Then you'd have a flow called "Trade Deficit" which can be positive or negative, and have that involving the importer (say the UK) purchasing US$ using UK£ from its bank, while the exporter receives US$, which increase US$ reserves in the US system.
My expectation is that the model would show the domestic money supply being reduced by importing and increased by exporting. This is something that the MMT like "exports are a cost, imports are a benefit" doesn't tackle.
Incidentally, part of the defence of this position has involved the idea of "opportunity cost", implying that the exporting country is doing without something it could use. That effectively involves a Neoclassical vision of firms: over-full employment of capital stock, so diminishing marginal productivity and rising marginal cost. All of that is bollocks, as empirical research (which Neoclassicals ignore) has established. I was pleased to spot a Reuters news report today which made the point that rising capacity for most firms means falling costs, not rising:
"Tesla told Reuters it was adjusting prices in line with costs. Capacity utilisation at its Shanghai Gigafactory has improved, while the supply chain remains stable despite the impact on the economy of China's stringent zero-COVID restrictions, leading to lower costs, it said." (https://www.reuters.com/business/autos-transportation/tesla-cuts-starting-prices-model-3-model-y-china-2022-10-24/)