This is huge!
I think it should be a central plank of our policy platform.
This British group explains the concepts in a very accessible way. Thanks to BillM for pointing me here.
Pirates! Read/watch the following materials, then come back and discuss.
http://positivemoney.org/issues/
http://positivemoney.org/how-money-works/
http://positivemoney.org/our-proposals/
Ok here we go.
No.
This is basically a modern dot com and digital currency language version of the bad socialist economic principles.
At its core, my view (and most economists) is that a reliance on a combination of debt and inflation to fund lifestyle is absolutely the worst choice possible for an economy long term despite amazing popularity politically in the short term.
This is very different to Basic Income or Negative tax, and itâs important to not confuse it for them.
The logic above seems to go: People need money to pay bills, so they will be given a credit card. The payments of the credit card will be met by issuing more credit cards. When that grows too big, we will print a lot of money to pay for the credit card interest, and just keep printing every time its due. If you even attended one class in economics at a poorly performing highschool given by a teaching who hated their job and resentfully explained only the absolute basics, you would still know this is really, really, really bad long term.
Now one aspect of it, appears to be âHelicopter Moneyâ - which is the distribution of money to the bulk of citizens. Despite what it says on their pamphlet - this still leads to the top 5% getting most of this money. In Australia when we did this to combat the GFC, Gerry Harvey released a range of large TVs exactly priced to be bought by this handout to workers. Harvey Norman had a great profitable year, when people were going to be tightening their belts and saving instead. Iâm glad my tax dollars helped Gerry out of a tight spot.
So a lot of TVâs were bought, rather than the money going into funds which yes are owned by a lot of wealthy people, but also a lot of working people via their superannuation. These funds invest in: Roads. Bridges. Airports. Buildings - no not little renovations, massive buildings that big companies pay serious rent for. Oh and building all those things requires engineers, construction workers, secretaries, managers, accountants, subcontractors, caterers and creates secondary jobs for food trucks, pubs, clothing, car repairs. But South Korea got to make us TVâs a few inches larger that we didnât really need instead, which Iâm sure equally contributes to our future wealth.
In the end, the solution is not the debt economy. Itâs equity. What I like about Universal income is that it recognises that as a citizen, you have and are entitled to a stake in the political as well as economic future of the nation, and that stake is real and tangible. Equity is smart money. Money that has influence, that can take control if it does not like how things are being run, money thatâs value goes up if the value of the whole thing goes up and similarly falls through the floor if the value of everything goes down. Itâs not fixed by an arbitrary act of parliament and therefore the citizens have no reason to care if things are well run or poorly run for the long term.
My 2c.
How did you leap from the concept of positive money, to the assumption that the only way to use this would be to âfund lifestyleâ ?
What if you used it to build infrastructure, to drive research, to fund the creation of export oriented new business?
How about building up our internet infrastructure (NZ have 1gbit home services)? How about we develop our own renewable energy technology, do it here and export it to the world?
Stuff like that.
Creates jobs and a shit tonne of economic activity.
Its talking about the scenario of helicopter credit rather than quantative easing to combat economic activity stagnation as a result of growing wealth disparity and lack of natural trickle down economics.
My points still stands in the scenarios you have linked.
If your talking about something different (which you seem to now) which is about nationalising investment, thats another thing entirely. We already did examples of that. You may have heard of Telstra.
I was actually thinking a bit about money just before I saw this thread @AndrewDowning.
I had a look at some of the ideas from this group, and thereâs something they completely ignore: inflation. But that might be on purpose to try not to scare people.
It took me a moment to understand where @edeity is going with the credit card analogies, essentially stating the problem as: people currently have too much personal debt, so just giving them money isnât going to help that part of the equation, weâre still in a situation where any shock to the system or rising interest rates is going to crash the world economy again.
These positive money people are quite specific that the money doesnât have to be repaid, itâs not debt money. Currently banks creating loans without borrowing ensures economic activity occurs without a permanent increase in money supply (which would cause inflation), this is actually a good thing about the existing system and why central banks use what ever policies they have to control inflation by setting the cash rate. Money loans created from debt helps to stop periods of rapid economic expansion (jobs and growth) from causing run away inflation while allowing the liquidity for GDP expansion. Thatâs my understanding of basic economics at least 
Thatâs actually what these people seem to be saying, they want to increase equity in parts of the economy they think (which is subjective) will be the most beneficial, Iâm sceptical though of assigning this stuff to any committee, be it banks, politicians, or public groups. You could argue that by making the changes the positive money people advocate youâll increase property affordability from the consequence of inflation it will cause and thus reduce personal debt levels. Theyâre not saying that they intend to use inflation via government printed money that doesnât have to be repaid (effectively quantitative easing) to move towards an economy with more equity in the hands of consumers and small to medium business, but thatâs really what I think theyâre doing. Which is actually I think an idea worth debating:
Maybe we could use a Universal Basic Income policy entirely funded from an increasing money supply (printed money) to start shifting everyone back towards monetary equality, deliberately using inflation to devalue the money held by the 1%-ers. But thereâs obvious problems here to, for instance youâd need it to be a world wide UBI to stop capital flows under such a system out of countries with this policy, youâd risk crashing the economy if a government on itâs own legislated such a thing.
Loans created from debt - still requires investors.
If youâve seen the movie The Big Short - it does a reasonable job of explaining creating an investment product out of debt, and also the effects if that runs too long without actually being able to be paid.
You canât have the government making magic money - you have to have someone paying for things. Otherwise its what Zimbabwe does for its economic management - print more money. As @rundll mentioned⌠thats called inflation. It means everyone except the government is poorer (and that everyone will rapidly stop doing business with you, making you poorer again).
Equity in the hands of everyone is a noble idea - actually there is book I read many years ago that was ahead of its time on this - Capital Market Revolution - strongly recommend. But the flip side with equity is - you really are a stakeholder. Your shares are worth only what someone is willing to pay for them. And things you have equity in fail, markets shift, directors steal, visionary founders have heart attacks and some companies are really dumb yet really popular for investors (Dick SmithâŚ). People will demand guarantees because they will think its like a debt, and as soon as you have guarantees its no longer equity, it is a debt because the person providing the guarantees has to hold your control to protect the risk they took on and your back to a debt spiral.
That sentence doesnât parse well.
The point the Positive Money people are making, is that when a bank makes a loan today, they are actually creating new money that did not previously exist, and paying it off destroys that money. They donât even fractional reserve any more. This is certainly not how it used to work, but it is now.
No investor required, though the bank will be in a spot of bother if too many of them are defaulted upon, but they are amortising the risk across all loans, and then insure risk on top of that.
They are pointing out that nearly ALL of the money in circulation is created this way, and that as a consequence, bankers are the defacto controllers of money supply. Further, they point out that there are non-equilibrium forces at play in this setup because in boom times, the banks want to lend more and as a consequence expand money supply, so busy economy gets busier, but in recession times, the banks want to lend less and as a consequence decrease money supply so slow economy gets slower.
In short, the primacy of money creation as debt creation in this system pushes toward extremes, creating the economic cycles we see instead of stability.
That was greedy banks selling badly secured debt as investments.
I feel so much better about banks creating all of our money now /s.
We already have means to pull money back out of circulation that are not loan repayments. They are called taxes. In fact, taxes such as the GST take it out in proportion to the rate of spending. So there is already a built-in mechanism to prevent permanent increases in money supply from non-debt based currency creation.
There are other causes of inflation.
If you spent non-debt government money to try to push past full employment, youâd get wage inflation.
If you spent non-debt government money such that it caused imports, youâd increase foreign debt.
If you spent non-debt government money such that it caused exports, youâd decrease foreign debt.
If you spent non-debt government money on purely local economic activity, you are just creating jobs.
These would be good guidelines, but it should also be clear that just creating/spending money as a sovereign issuer of your own currency does not inherently create inflation. It depends what you spend it on.
Most of the typical economic discussions seem to miss the key point of economics, that economics is really about people doing things. Lets call that real-economics. If it canât smoothly drive real-economics then itâs not working right.
Do you want the decisions about where we drive real-economic activity to fall to bankers by default, or should the government of the day be making decisions with strategic intent?
Itâs also interesting to watch Economics Professor Randall Wray explain Modern Monetary Theory.
L. Randall Wray - Modern Money Theory: Intellectual Origins and Policy Implications
https://www.youtube.com/watch?v=-KRi9nF8BiA
Some key understandings from this are:
I think the biggest issue is that cryptocurrencies arenât going away, and eventually theyâll really screw up fiat currency, by virtue of cutting out the banks; the governments essentially rely on a central-ish banking system to make fiat currency work.
I dont understand. That makes grammatical, logical and structured finance product description sense. In case itâs the logic. How a loan works is the money is supplied by the loaning party OR an investor, in which case the loaning party is closer to a broker, but dependant upon the legal relationships of investor to loaner. Where loans are too big or too frequent for a single entity to supply enough money for loans, you need investors. Neither banks nor Governments create money for loans.
Mortgage back securities, a now major backbone of our debt markets are investors supplying money to spread across multiple loans. A model in a bath sipping champaign explains this in the movie The Big Short, but since youâd rather hear it from me instead, there you go.
Your point about their saying they are creating new money - IS CALLED INFLATION. If they are not creating new money but using tax dollars to create a new investment class that attracts money - that is NOT NEW MONEY that is the government interfering in a free market economy. Oh, but what harm does a little government playing the stock market do, when itâs for such a good cause?
Government is political. Politicians are motivated by things other than money. As a result they fuck up when it comes to investment because they are more worried about the politics. And no it doesnt matter how much technical expertise they have, the person in charge is political. It will fuck up.
People who pay taxes and operate in the particular market the government is entering will lose jobs âstealing from Peter to pay Paulâ. And then stop paying taxes. A less efficient, less innovative but disproportionately influential new player has entered the market. Less jobs, reduced tax base, reduced competitiveness, foreign competitors are very very happy at our investment in effectiveness.
We will think its a good idea. This is the worst of all. We will be happy with Australian owned mediocrity. This continuously erodes our ability in the future to actually be relevant. Itâs why government investment in propping up failing industries like manufacturing is a terrible idea.
And because some things are just important:
The conversation is actually not really influenced by cryptocurrencies. It does not effect the problem or solution. They are great for other problems though.
Man, this website and itâs infographics are cluttered confusing mess.
How did they manage that? Itâs not even that hard of a concept to grasp, the Iceland reform proposal explained it well.
The Bank of England apparently disagrees with you:
From the Bank of Englandâs 2014 Q1 Quarterly Bulletin:
âIn the modern economy, most money takes the form of bank deposits. But how those bank deposits are created is often misunderstood: the principal way is through commercial banks making loans. Whenever a bank makes a loan, it simultaneously creates a matching deposit in the borrowerâs bank account, thereby creating new money.â âCommercial [i.e. high-street] banks create money, in the form of bank deposits, by making new loans. When a bank makes a loan, for example to someone taking out a mortgage to buy a house, it does not typically do so by giving them thousands of pounds worth of banknotes. Instead, it credits their bank account with a bank deposit of the size of the mortgage. At that moment, new money is created. For this reason, some economists have referred to bank deposits as âfountain pen moneyâ, created at the stroke of bankersâ pens when they approve loans.(1)â ÂŹ[our addition in brackets] (McLeay, Thomas, & Radia, Money creation in the modern economy, page 1 & 3)
or, here is Standard and Poor explaining the same thing with a lot more detail:
On page 7: âBanks lend by simultaneously creating a loan asset and a deposit liability on their balance sheet. That is why it is called credit âcreationââcredit is created literally out of thin air (or with the stroke of a keyboard). The loan is not created out of reserves. And the loan is not created out of deposits: Loans create deposits, not the other way around. Then the deposits need a certain amount of reserves to be held against them, and the central bank supplies them (more on that below).â
Actually, I thought Margot told her story more elegantly, but her story doesnât seem to be the same as your story.
The banks, despite poofing the money into existence via the loan creation process (Asset as Mortgage contract, balanced by Liability as deposit in lenders account) are still facing the risk that the asset doesnât pay back, as in people default on their loans and the property canât be sold for enough; and this is where Margotâs story comes in.
The banks, under pressure to make more loans for more profit, took too much risk on board, and so they cheated to get those assets off their books by selling them to investors as investments with some anticipated though not-guaranteed return. They lied to those investors about the risks associated with the âinvestmentsâ.
However, there was never an actual need for them to sell those assets to create the loans. It was all about risk mitigation but trying to pass the consequences of their own stupid risk judgement off onto third parties.
The fraudulent misrepresentation of those risks are why some bankers should really have gone to prison, but phrases like âmarket confidenceâ and âtoo big to failâ kept coming up instead.
Good one. I actually did know that they had a policy on this, but somehow as I got into this topic, it never twigged to look there.
This is an excellent resource. Thanks Ryan.
Now I think this part of your argument requires a more nuanced discussion.
Nowhere have I (or the positive money folks) suggested that the government should be playing in the stock market. In fact âplaying in the stock marketâ sounds a lot more like what central banks achieved via âQuantitative easingâ which mostly resulted in inflation of stock prices. I am not proposing that we invest in any private organisation.
I think we need to explore the concept of âinfrastructureâ.
When it comes to left/socialist ideas, I do not believe that the state should own/run everything. As you point out, governments are grossly inefficient at actually doing things. Too much arse covering and not enough doing typically.
What I do think makes sense, is that there are some things that makes sense to socialise and some things that really do not.
For example, it makes a whole lot of sense to socialise the creation of roads, but not to socialise the creation of things we drive on the roads. One of these is a common good and the other is a private good. In fact, this distinction is sooo bleeding obvious that it just doesnât occur to even the USA die-hard capitalist population to even think that their roads might be ⌠god forbid ⌠âSocialistâ.
Now, this doesnât mean that the government should build the roads themselves. We can quite happily pay whatever private industry corporations provide the best deals, to do the job. The difference is that instead of allowing banks to create ALL of the money, we tighten up on that a bit and create some of it to pay directly for this infrastructure creation.
This injects money for industrial effort directly into economic activity and job creation to build value in the community and increasing private sector industrial capacity, instead of driving the inflation of house prices.
Consider what else looks like public common infrastructure?
There is a lot to unpack here, and some dodgy arguments being thrown about. Whenever I come across a new theory, I read until I think I understand the basic premise and then go looking for criticisms. Two blog posts have caught my attention that seem to have pretty solid criticisms, that have been alluded to by @edeity.
The Problem with Positive Money
and
WHATâS WRONG WITH POSITIVE MONEY?
The biggest problem to me seems to be the sovereign risk. When banks make bad loan decisions and they go under as a result, it sucks, people lose their jobs, some lose investments and the stock market takes a hit. If the central government makes the same mistakes it is a disaster for the whole economy.
In the current political climate, would you trust politicians to manage currency trades effectively? I donât. The risk is much greater when everything relies on one fail point, the central bank.
The other really big risk, which is related, is adopting a central economic planning policy means that the countriesâ finances are determined based on what has passed, not what the economy is doing now. Setting the cash access rate may put brakes on future plans because there isnât enough money in the system to provide the loans, if the project appears sensible, a bank can make the loan and take the risk.
There are also issues around inflation, which the Icelandic proposal seems to try to address, but there is so much reading to do I havenât studied this aspect of the proposal fully yet. The positive money website doesnât seem to really talk about it.
Now I will poke holes in wrong arguments because they are wrong.
The Australian banking system is quite well regulated, and whilst the government decided to underwrite the the big four banks during the GFC, it wasnât needed due to said regulation. You can set the required financial reserves of the banks to be higher or lower as the government thereby making the system more or less secure.
The Australian Prudential Regulation Authority (APRA, the other APRA) have legislated requirements that the banks must comply to, including amount of cash that banks can loan based upon money reserves.
This is a bit of a false dichotomy, but if I buy into the dichotomy, I trust the banks more? Sorta. Could you imagine the Libs pouring money into coal, to cut down the competitiveness of renewables? Totally. Banks diversify the risks, want a return or they go under/ lose Board votes etc.
There are other ways to use government controlled banks for the public good, without radically altering the current financial system. The North Dakota State bank seems to work quite well, in cooperation with other banks and can lend money at a low interest to the government, entrepreneurs and even students without creating a single point of failure for the entire financial system.
Here is an interview with the banks President:
How the Nationâs Only State-Owned Bank Became the Envy of Wall Street
This could be done under the North Dakota state bank system without touching the commercial banks.
House prices, whilst exacerbated by bank lending, are mainly driven by negative gearing tax breaks.
@AndrewDowning is correct in the terming of âBanks Make Moneyâ⌠they dont but it is correct as it is the common description, because they do effectively make moneyâŚ
Money used to actually ONLY be made by banks⌠Governments had gold and who would want that paper rubbish⌠but then of course when the innovation took off it became mandated that only governments could create money etc. and then it went full circle⌠sort of.
Fractional reserve is a big thing for banks, when I worked in helping strategy for an institutional bank the ratio of reserve to loans was the single biggest item for potentially increasing profitability⌠after slashing staff. All the banks actually want to get rid of fractional reserve.
Replacing it with centralised control is however not a good idea. Governments are bad at financial management and utterly horrendous when it comes to innovation. People who invent things and create jobs and change the way the world works⌠these are not the people who are successful in government.
It would be risky for the party to get drawn into abstract debates about competing economic theories. Our candidates are mostly IT people, artists, civil libertarians - who would be far outside their comfort zone in these sorts of discussions.
Maybe if we can narrow it from theory to a specific and easily digested policy proposal, there might be something. But donât fall into the trap of using trendy theories as cover for old-school authoritarian impulses. Massive state spending and domineering central planning have never worked well regardless of the rationale that gets attached to them.