For those that are too young to remember, the legendary English comedy show Monty Python had a famous sketch about a disgruntled customer of a pet shop, who realised he had been sold a dead Parrot. The shopkeeper steadfastly refused to admit that the Parrot was dead:
One of the disappointing things about Values by Mark Carney who was the governor of two central banks including the Bank of England -- maybe he didn’t read the paper! -- is his adherence to the idea of fractional reserve banking. I will search out the reference when I get home and share it with you.
There were some other admirable parts to the book including the notion that money is a measure of value and thus a unit of account which is accepted by most economists in their texts. His attack on gold was worth a read.
But I remain dubious about there being usefulness in the concept of a money supply that holds value given how much money is created and destroyed daily by loan and credit repayments and federal taxes. It seems foundational to loanable funds notions that leads to other problems in the economics models of the economy.
Getting a handle on the money supply in a dynamic system seems akin to finding the volume of water flowing through all the river and creek systems in the world.
I’m spending $15k/year to do a Master of Political Economy at Sydney. Makes Steve’s course look like good value!
As part of that I rearranged Australia’s national accounts from 1959 - 2022 in line with MMT sectoral balances (there’s a fun spreadsheet). Of course this is just an accounting identity and proves nothing in itself (except that it works). But most fun was overlaying this identity, as stacked bars, with overlaid plot lines for gross fixed capital formation and household savings*. Behold, savings DO NOT equal investment! And not just a little bit different - there is no time lag that can make those two line up. Even the mainstream sleight of hand that “government savings” are savings does not help this relationship.
Different relationships are far more apparent - between investment and GDP, and between savings and govt deficit. Costello surplus = negative savings, and the relationship is an exact mirror. Every recession, savings and deficit shoot up, investment plummets. The mainstream blames the deficit for “crowding out” the investment, but then what is all that saving doing? Then, the RBA bangs on about “incentivising” savings as they jack up interest rates, but the best incentive for saving is a recession! RBA still seems to have no idea what is going on, even though all this is right there in their own data. It’s like they’re in a parallel universe, the same bullshit universe where Trump represents the working man, capitalism is freedom, climate change is fake, and smoking is good for you.
*There is one time series I could not find: data on credit creation. I searched for this because, no matter what I did, I could not make the accounting identity work from the national accounts without calculating either savings or investment from the identity rather than using the collated data. Still not sure if it is me or the national accounts that have our stocks and flows confused! Overlaying these data separately as plot lines, I saw they *did* line up sometimes, but a long steady divergence through the 80’s, 90’s and 00’s threw it all out of whack. The boom in credit seemed the obvious place to look for this gap, and I expect that would also explain the wild swings in investment that typically precede recessions, but in the RBA’s parallel universe, that’s not how banks work so they don’t bother collating it.
Reminds me of something I learned riding my motorbike in a fluoro vest: it doesn’t help if they’re not looking.
Steve, the other maddening part of banking is the total perversion of financial terminology.
What passes for a debt these days is straight-up Orwellian double-speak. I call it 'nomenclature whack-a-mole'.
When it comes to calculating bank ratios, next to nothing is a debt any more. And, if some academic -- no one has ever heard of (for pay) -- says it's not a debt, it's game on, ladies.
Financial administrators, under severe political and economic interference, are hopeless.
Let's agree: If the scheme has a forward date and is redeemable for money, it's a debt and must be included in bank ratios and leverage calculations. Deriviatives are Exhibit 1.
The president, who is the top financial administrator on the planet, can make it so tomorrow.
It all starts with the cockamamie idea that saving "flows into" deposits, creating more deposits (M2, or "money" in a narrow sense).
Saving is just spending less than income. When people save, they leave their deposits sitting in their accounts.
When they don't save but spend instead, they transfer their deposits to someone else's account. (At the same or a different bank. Whadevuh.)
Neither of those choices creates new deposits.
Nor are are spent deposits "consumed." They're just transferred. No change in the quantity of deposits. Full stop.
One of the disappointing things about Values by Mark Carney who was the governor of two central banks including the Bank of England -- maybe he didn’t read the paper! -- is his adherence to the idea of fractional reserve banking. I will search out the reference when I get home and share it with you.
There were some other admirable parts to the book including the notion that money is a measure of value and thus a unit of account which is accepted by most economists in their texts. His attack on gold was worth a read.
But I remain dubious about there being usefulness in the concept of a money supply that holds value given how much money is created and destroyed daily by loan and credit repayments and federal taxes. It seems foundational to loanable funds notions that leads to other problems in the economics models of the economy.
Getting a handle on the money supply in a dynamic system seems akin to finding the volume of water flowing through all the river and creek systems in the world.
I’m spending $15k/year to do a Master of Political Economy at Sydney. Makes Steve’s course look like good value!
As part of that I rearranged Australia’s national accounts from 1959 - 2022 in line with MMT sectoral balances (there’s a fun spreadsheet). Of course this is just an accounting identity and proves nothing in itself (except that it works). But most fun was overlaying this identity, as stacked bars, with overlaid plot lines for gross fixed capital formation and household savings*. Behold, savings DO NOT equal investment! And not just a little bit different - there is no time lag that can make those two line up. Even the mainstream sleight of hand that “government savings” are savings does not help this relationship.
Different relationships are far more apparent - between investment and GDP, and between savings and govt deficit. Costello surplus = negative savings, and the relationship is an exact mirror. Every recession, savings and deficit shoot up, investment plummets. The mainstream blames the deficit for “crowding out” the investment, but then what is all that saving doing? Then, the RBA bangs on about “incentivising” savings as they jack up interest rates, but the best incentive for saving is a recession! RBA still seems to have no idea what is going on, even though all this is right there in their own data. It’s like they’re in a parallel universe, the same bullshit universe where Trump represents the working man, capitalism is freedom, climate change is fake, and smoking is good for you.
*There is one time series I could not find: data on credit creation. I searched for this because, no matter what I did, I could not make the accounting identity work from the national accounts without calculating either savings or investment from the identity rather than using the collated data. Still not sure if it is me or the national accounts that have our stocks and flows confused! Overlaying these data separately as plot lines, I saw they *did* line up sometimes, but a long steady divergence through the 80’s, 90’s and 00’s threw it all out of whack. The boom in credit seemed the obvious place to look for this gap, and I expect that would also explain the wild swings in investment that typically precede recessions, but in the RBA’s parallel universe, that’s not how banks work so they don’t bother collating it.
Reminds me of something I learned riding my motorbike in a fluoro vest: it doesn’t help if they’re not looking.
There's also the Bank of Canada, the ECB and others explaining money creation. Handy list here https://www.economania.co.uk/various-authors/where-money-comes-from.htm
Steve, the other maddening part of banking is the total perversion of financial terminology.
What passes for a debt these days is straight-up Orwellian double-speak. I call it 'nomenclature whack-a-mole'.
When it comes to calculating bank ratios, next to nothing is a debt any more. And, if some academic -- no one has ever heard of (for pay) -- says it's not a debt, it's game on, ladies.
Financial administrators, under severe political and economic interference, are hopeless.
Let's agree: If the scheme has a forward date and is redeemable for money, it's a debt and must be included in bank ratios and leverage calculations. Deriviatives are Exhibit 1.
The president, who is the top financial administrator on the planet, can make it so tomorrow.
Don't hold your breath