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'Money is always created by the state and must therefore be regulated by the state'

Uhm, what? The only way the state is a special actor in all of this, is that it takes the liberty to rewrite monetary contracts at its whims.
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Open your eyes. All relevant money systems in the world today exist as creations of the state, under the rules of the state.

I agree with you that it is, in principle, possible for a money system to be created by somebody other than a state. Clearly, there are some examples of this in history, and it is attempted occasionally without too much success in the sense of achieved relevance (see e.g. Bitcoin). And that's the key point here. Those other money system remain too small to be of relevance. So if you want to pretend that money is not created by the state, a productive discussion with you is pretty much impossible. One could say that you have to accept the fact that the Emperor has no clothes.

By the way: MMT is slowly but surely gaining traction among other economists. Here's an interesting paper by someone who basically agrees in all points, but just thinks the message should be toned down. (There is one minor point where he does disagree, which I believe to be a mistake in how he accounts for net financial assets. But I digress.)

By the way: MMT is slowly but surely gaining traction among other economists

Not only economists--check this out: http://www.ourdime.u...-reforming-fed/
Quoting: "Senator Bernie Sanders put together a panel of economists and other public policy experts to come up with a plan to “reform” the Federal Reserve structure....The surprising part was that the panel had a significant number of MMT economists. People like L. Randall Wray, William Black, James Galbraith, and Stephanie Kelton. With all that MMT on the council and the strong showing from the UMKC economics department, I’m optimistic about the reforms they’ll come up with. Wray has been writing about the Fed since being on the panel. I think it gives a little hint of the kind of things he and other MMT economists are recommending."
Also, the Fed itself is putting out stuff like http://www.federalre...1041/index.html correcting the money multiplier myth:
Quoting: "A second issue involves the effect of the large volume of reserves created as we buy assets....The huge quantity of bank reserves that were created has been seen largely as a byproduct of the purchases that would be unlikely to have a significant independent effect on financial markets and the economy. This view is not consistent with the simple models in many textbooks or the monetarist tradition in monetary policy, which emphasizes a line of causation from reserves to the money supply to economic activity and inflation....will need to watch and study this channel carefully."

[quote name='Eelco' timestamp='1324303261' post='4895282'][color="#000000"][font="Arial"]
'Money is always created by the state and must therefore be regulated by the state'

Uhm, what? The only way the state is a special actor in all of this, is that it takes the liberty to rewrite monetary contracts at its whims.
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Open your eyes. All relevant money systems in the world today exist as creations of the state, under the rules of the state.

I agree with you that it is, in principle, possible for a money system to be created by somebody other than a state. Clearly, there are some examples of this in history, and it is attempted occasionally without too much success in the sense of achieved relevance (see e.g. Bitcoin). And that's the key point here. Those other money system remain too small to be of relevance. So if you want to pretend that money is not created by the state, a productive discussion with you is pretty much impossible. One could say that you have to accept the fact that the Emperor has no clothes.
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The 'money systems', yes. The 'money', no.

Money is a loosly coupled set of qualities. In some contexts, it means a store of value. In some, a source of liquidity. And in others, a denominator of a contract.

Especially in the age of fiat currencies, only fools store a significant amount of value in the form of 'money'. Liquidity comes in many forms. Just yesterday, I traded one beer in the one bar versus another beer in the next bar. Contracts can be denominated, at least in principle, in any denomination. Even if a contract in some fiat currency is forced upon you (a tax burden for instance), one can hedge against the exchange rate of dollars and sheep such as to effectively be taxed in terms of sheep. But granted, the latter does not happen that much (whether in sheep or anything else). It is in fact in the denomination of long term contracts such as mortgages that fiat currencies have the most relevance.

Anyway, the point is that 'money' is a much more general thing than coins, bills, account balances, or gold bars for that matter. These are but particular means to some ends. I guess one could say that MMTers are like goldbugs, just with a different fixation. Its a shame that 'fiatbug' does not quite have the same ring to it, but maybe thats just a matter of getting used to it.

Liquidity comes in many forms. Just yesterday, I traded one beer in the one bar versus another beer in the next bar.[/quote]

I like that example. Liquidity indeed

Contracts can be denominated, at least in principle, in any denomination.[/quote]

True. In practice though, that's rarely the case. In the developed world, contracts are basically always denominated in the country's currency. Where contracts cross boundaries, they are usually denominated in one of the participating currencies (or perhaps a basket). In developing countries, larger contracts are often denominated in foreign currencies like USD, Euro or CHF or whatever.

So I don't know. You need some kind of fundamental goodwill towards others to have any kind of useful discussion, and you don't seem to be prepared to have that towards MMT. Of course MMT researchers are aware of the things you write (admittedly, things may be different for some of the "acolytes"). The point is that they consider them to be irrelevant for the claims they're making. So what if they don't always go to the full length of explaining all that, especially in an exposee intended for a normal audience? You can't always put the full disclaimer everywhere.

Anyway, the point is that 'money' is a much more general thing than coins, bills, account balances, or gold bars for that matter. These are but particular means to some ends. I guess one could say that MMTers are like goldbugs, just with a different fixation.[/quote]

It's kind of ironic that you didn't mention reserves or bonds. If there's one thing MMT really brought to the table in terms of "money things", it's the importance of understanding how reserves and the bond market work (this goes back to Mosler's paper in 1994). Other than that, I would say the next thing they repeat over and over again is the sectoral balances, which is not about "money things" at all. I have seen "money as a contract" emphasized by MMTers much more than by the people who write against MMT, so that's a weird criticism on your part.

Aside from all this arguing, why not look into Dubai in the UAE? I've not lived there myself but I would consider moving there if there was a job for me. It has an interesting culture and you'd surely meet lots of other ex-pats there. You can get a job in an English-speaking firm and the locals seem to have at least a grasp of some English also, due to the large number of ex-pats and holiday makers.

Seems to be a more relaxed way of life out in such areas.

Contracts can be denominated, at least in principle, in any denomination.

True. In practice though, that's rarely the case. In the developed world, contracts are basically always denominated in the country's currency. Where contracts cross boundaries, they are usually denominated in one of the participating currencies (or perhaps a basket). In developing countries, larger contracts are often denominated in foreign currencies like USD, Euro or CHF or whatever.

So I don't know. You need some kind of fundamental goodwill towards others to have any kind of useful discussion, and you don't seem to be prepared to have that towards MMT. Of course MMT researchers are aware of the things you write (admittedly, things may be different for some of the "acolytes"). The point is that they consider them to be irrelevant for the claims they're making. So what if they don't always go to the full length of explaining all that, especially in an exposee intended for a normal audience? You can't always put the full disclaimer everywhere.
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As far as I understand, it is certainly true the fiat currencies have a dominating role at least in the denomination of contracts. But given as to how fundamental this proposed direct relationship between money and government fiat is presented in the expositions on MMT I have seen, it is no surprise that it might lead to significant disagreement down the road.

Weve had this discussion before: you (and MMT) claim private savings demand government deficit. I asked you which government supplied the very real private savings in the squirrel economy. I dont remember if I ever got an answer.

As a political voluntaryist, I would certainly like to think an advanced and well functioning monetary system is possible without a state. As for storing wealth and providing liquidity, I think these are problems that used to be reasonably solved by metal standards, but nowadays are non-issues anyway due to technological advancement. The challenge (faced by statists and non-statists alike) is creating a denominator of long term contracts that people can rely on to coordinate economic activity over time. What does paying 1000$ a month over fifty years MEAN? Winning the jackpot or selling yourself into slavery? And does that outcome depend on my success at the ballot box? A good money would minimize these uncertainties, and I contend that a fiat system does a fundamentally poor job of it. An ETF maximally diversified over your sphere of economic activity (global these days, unless you live in NK) seems like a much better suited instrument for such a role.

Anyway, the point is that 'money' is a much more general thing than coins, bills, account balances, or gold bars for that matter. These are but particular means to some ends. I guess one could say that MMTers are like goldbugs, just with a different fixation.[/quote]

It's kind of ironic that you didn't mention reserves or bonds. If there's one thing MMT really brought to the table in terms of "money things", it's the importance of understanding how reserves and the bond market work (this goes back to Mosler's paper in 1994). Other than that, I would say the next thing they repeat over and over again is the sectoral balances, which is not about "money things" at all. I have seen "money as a contract" emphasized by MMTers much more than by the people who write against MMT, so that's a weird criticism on your part.
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My position is that I dont think ive ever seen anyone whom I believe fully understands the monetary system; I certainly dont. In that sense I welcome MMT as an addition to the debate, and I certainly think some of its emphasis is more illuminating than that of the typical exposition.

As far as I understand, it is certainly true the fiat currencies have a dominating role at least in the denomination of contracts. But given as to how fundamental this proposed direct relationship between money and government fiat is presented in the expositions on MMT I have seen, it is no surprise that it might lead to significant disagreement down the road.

Okay.

Weve had this discussion before: you (and MMT) claim private savings demand government deficit. I asked you which government supplied the very real private savings in the squirrel economy. I dont remember if I ever got an answer.
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I don't remember either. The point is that squirrels don't save in net financial assets. They only save in real assets, so the comparison is meaningless. The distinction between financial and real assets is an important one, and it's possible that I haven't made it as clearly back when we had this discussion the last time. I'm still learning new things from time to time

I suppose that the kind of "sound vs. functional finance" conflicts are essentially pre-programmed. As long as there are no stable currencies, people avoid having too much savings in financial assets. If they have anything to save, they do so in real assets, from real estates to fine arts to precious metals. But as currencies become more stable, and it becomes more convenient, practical, and often more successful to save in financial assets [1], the effects described by MMT become more pronounced. So as the behaviour of the private sector changes, the government behaviour and institutional instincts that have been important in arriving at the stable currency start becoming detrimental to the well-being of society.

The key, then, is to change this behaviour and instincts in a reasonable way, while still having safeguards to prevent the currency from becoming too unstable. Basically, the gut reflex of "living within your financial means" must be replaced by or transformed into a gut reflex of "living within your real means". Part of the problem is that we have great ways to vividly summarize the "financial means". [3] The "real means" are much more difficult to assess, much less summarize, so in a way we have to become more sophisticated in our understanding of the world to achieve this transformation. I think the unemployment rate, as well as data about factory etc. utilization can at least provide a good start, but that's clearly far from a complete solution.

I would also mention that not all countries are equal in this respect, look e.g at countries in South America. Many people there have a significant part of their private savings in US$-denominated assets. So while MMT certainly applies in a very literal meaning to their respective fiat currencies and governments, the private savings in that currency are lower and therefore their impact on how the government should behave are lower. One can take the view that as far as the country's fiat currency is concerned, the US$ savings behave like real assets would behave.

As a political voluntaryist, I would certainly like to think an advanced and well functioning monetary system is possible without a state. As for storing wealth and providing liquidity, I think these are problems that used to be reasonably solved by metal standards, but nowadays are non-issues anyway due to technological advancement. The challenge (faced by statists and non-statists alike) is creating a denominator of long term contracts that people can rely on to coordinate economic activity over time. What does paying 1000$ a month over fifty years MEAN? Winning the jackpot or selling yourself into slavery? And does that outcome depend on my success at the ballot box? A good money would minimize these uncertainties, and I contend that a fiat system does a fundamentally poor job of it.[/quote]

I sympathize with you, really, I just think that your vision is fundamentally impossible because of the savings and debt dynamics that would be involved. As soon as your denominator is sufficiently successful, people will want to start saving in it. [2] But where do those savings ultimately come from? I can only see two possibilities, and both have problems.

A) Either you create, out of nothing, assets that are not anybody else's liability (or you call them the system's liabilities). This is the route that BitCoin has taken, for example: BitCoins are simply created out of nothing, they are not anybody's liability. But this route poses obvious fairness and governance problems. Who gets to decide how many of these assets are created, and to whom are they given? As far as such things go, BitCoin is actually fairly clever: you get assets for maintaining the system. But many people object to the distorted early-adopter advantage of people who mined on an essentially empty network, getting huge payoffs for very little investment.

B) You embrace the concept of debt and money as a contract. This means you do not create assets out of nothing, but instead every asset is somebody's liability. This is most likely how money began historically, with temples playing a book (or clay tablet) keeping role in the fertile crescent. The question is then: if people want to save a huge amount - and in a relatively wealthy democratic society, this happens if only for retirement purposes - then who holds the liabilities that should correspond to all those assets? Do banks do it? If so, how do you prevent the bank runs that were so common before the establishment of central banks? Do other private actors do it? How can you prevent them from getting into similar problems of illiquidity and insolvency?

I would think of our modern government-controlled fiat systems as a mixture of B and (outside of the Eurozone) A. Most monetary assets are of the B-nature, such as deposits at a bank, which correspond to liabilities of the bank. However, the overall balance of net financial assets within the non-government sector is positive, because the government "creates" assets out of nothing - that is the A part. [4] The governance problem of part A is solved by having a democratically legitimized authority over the system (this is actually the main reason I am against central bank "independence" - it reduces democratic oversight, or gives an easy excuse not to exercise it). The instability problems of B are mitigated by a central bank that acts as lender of last resort and a regulatory authority, and of course by the simple fact that the private sector can have a positive net financial assets balance.

Yes, those governance and oversight systems failed pretty hard in the last decade or so, there's no doubt about that. Regulatory capture is a real problem. But it worked remarkably well before (just compare the 19th century with its frequent crises to the second half of the 20th century), and at least there exists a democratic process by which improvement is possible. Alternative systems lack such a process, at least the proposals I have heard or thought about. So the system may suck, but it's still the best system possible (probably ).

An ETF maximally diversified over your sphere of economic activity (global these days, unless you live in NK) seems like a much better suited instrument for such a role.
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An interesting idea, but the truth of that statement is extremely difficult to evaluate. What if those apparently well-suited ETFs are only able to exist in an environment where there is a reasonably stable fiat currency to begin with? After all, those things have only existed for a short period of time. Another thought: if you actually implement this practically, it seems like you would end up with basically a gold standard system, just with gold replaced by whichever index you choose. As far as such alternatives go, I have to say that it does seem significantly more enlightened than most.

[1] Commodities are surprisingly bad as an inflation hedge. Over the last two generations or so, putting your savings into gold has been a losing proposition! Of course, it depends a bit on where you draw the line: if you invested in gold just after the last gold price bubble burst, you've probably offset inflation, but compared to holding long term bonds it's definitely not great. If you invested at the height of the bubble, I believe you still haven't made your real value back. The picture is similarly bleak for other commodities.

[2] If you haven't seen it yet, I think Paul Krugman's 1998 documentation of a baby-sitting coop provides a salient example.

[3] Of course, MMT says that the "financial means" are an incorrect concept for a fiat currency issuer, because its financial means are infinite. We just invented this shared illusion that happens to correlate reasonably with the "real means" most of the time. The problems begin when this correlation starts to become worse or break down completely.

[4] Yes, reserves and bonds are treated as liabilities of the (consolidated) government (in the US on the balance sheets of Fed and Treasury, respectively). However, since it can never become incapable of servicing these liabilities, the reserves and bonds might as well be created out of thin air when the government spends.

Damnit, I just realized that this is derailing the whole thread. We should probably shut up. It's just too tempting

Au contraire, keep going. The original topic has been fully excavated already, and this one has higher educational value.

[quote name='Eelco' timestamp='1324377531' post='4895659']
As far as I understand, it is certainly true the fiat currencies have a dominating role at least in the denomination of contracts. But given as to how fundamental this proposed direct relationship between money and government fiat is presented in the expositions on MMT I have seen, it is no surprise that it might lead to significant disagreement down the road.

Okay.

Weve had this discussion before: you (and MMT) claim private savings demand government deficit. I asked you which government supplied the very real private savings in the squirrel economy. I dont remember if I ever got an answer.
[/quote]
I don't remember either. The point is that squirrels don't save in net financial assets. They only save in real assets, so the comparison is meaningless. The distinction between financial and real assets is an important one, and it's possible that I haven't made it as clearly back when we had this discussion the last time. I'm still learning new things from time to time
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My point in turn is that 'financial asset' is an ill-defined term. Surely to the squirrels, nuts are everything a money ever could be; a fine store of value and totally liquid. I suppose squirrels dont do a lot of contracting, but I bet theyd use nuts to denominate them, if they would.

The comparison would be meaningless if you could argue that the squirrel-like (real) part of our economy is neglegible. But I contend that this is not the case. The squirrel-like part of the economy is what it is all about.

I suppose that the kind of "sound vs. functional finance" conflicts are essentially pre-programmed. As long as there are no stable currencies, people avoid having too much savings in financial assets. If they have anything to save, they do so in real assets, from real estates to fine arts to precious metals. But as currencies become more stable, and it becomes more convenient, practical, and often more successful to save in financial assets [1], the effects described by MMT become more pronounced. So as the behaviour of the private sector changes, the government behaviour and institutional instincts that have been important in arriving at the stable currency start becoming detrimental to the well-being of society.

The key, then, is to change this behaviour and instincts in a reasonable way, while still having safeguards to prevent the currency from becoming too unstable. Basically, the gut reflex of "living within your financial means" must be replaced by or transformed into a gut reflex of "living within your real means". Part of the problem is that we have great ways to vividly summarize the "financial means". [3] The "real means" are much more difficult to assess, much less summarize, so in a way we have to become more sophisticated in our understanding of the world to achieve this transformation. I think the unemployment rate, as well as data about factory etc. utilization can at least provide a good start, but that's clearly far from a complete solution.
[/quote]
I agree with the sentiment that its real means that count, and that money in its narrow sense is but a nominal thing. (nonetheless, a nominal thing that has been used to denominate a lot of real contracts, so fiddling with it is sure to have real effects).

What I dont buy is the macroeconomic assumption that you can look at empty factories and easily translate that into satisfying demand in a meaningful way. The problem is not just that the factories' gears are not turning; thats a symptom. The underlying problem is probably quite more subtle, and of a real nature. Like a lack of skilled management in the area, for instance. If you want to get these factories back to work to satisfy alleged demand, you are going to have to compete with the rest of the economy for the real factors that decided that factory shouldnt be operating at the moment.

The bottom line: the idea that one can control the economy guided by one-dimensional metrics such as unemployment and factory-utilization is fundamental folly. Its like navigating a racecar through the streets of new york by looking only at RPM; as long as RPM is high, we are going forward! Lets keep priming the RPM pump! (never mind if we are in forward gear, or any at all. Or how many pedestrians we run over)

As a political voluntaryist, I would certainly like to think an advanced and well functioning monetary system is possible without a state. As for storing wealth and providing liquidity, I think these are problems that used to be reasonably solved by metal standards, but nowadays are non-issues anyway due to technological advancement. The challenge (faced by statists and non-statists alike) is creating a denominator of long term contracts that people can rely on to coordinate economic activity over time. What does paying 1000$ a month over fifty years MEAN? Winning the jackpot or selling yourself into slavery? And does that outcome depend on my success at the ballot box? A good money would minimize these uncertainties, and I contend that a fiat system does a fundamentally poor job of it.[/quote]

I sympathize with you, really, I just think that your vision is fundamentally impossible because of the savings and debt dynamics that would be involved. As soon as your denominator is sufficiently successful, people will want to start saving in it. [2] But where do those savings ultimately come from? I can only see two possibilities, and both have problems.
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The coop story is interesting, but mostly from the perspective of price-controls. If it is mandated that one hour of baby-sitting equals one token, then certainly the absolute number of tokens in circulation has real meaning. But without this price control, the problems mentioned can not arise. The absolute amount of paper in circulation would not matter. As such, I dont think the analogy with a real country like Japan is very meaningful.

The fact that a nobel-prize winning economist (chooses not to) see that distinction, I rather saddening. But then again, I never ranked either his intellect nor honesty above that of Al Gore, so I guess at least consistency doesnt suffer.

A) Either you create, out of nothing, assets that are not anybody else's liability (or you call them the system's liabilities). This is the route that BitCoin has taken, for example: BitCoins are simply created out of nothing, they are not anybody's liability. But this route poses obvious fairness and governance problems. Who gets to decide how many of these assets are created, and to whom are they given? As far as such things go, BitCoin is actually fairly clever: you get assets for maintaining the system. But many people object to the distorted early-adopter advantage of people who mined on an essentially empty network, getting huge payoffs for very little investment.

B) You embrace the concept of debt and money as a contract. This means you do not create assets out of nothing, but instead every asset is somebody's liability. This is most likely how money began historically, with temples playing a book (or clay tablet) keeping role in the fertile crescent. The question is then: if people want to save a huge amount - and in a relatively wealthy democratic society, this happens if only for retirement purposes - then who holds the liabilities that should correspond to all those assets? Do banks do it? If so, how do you prevent the bank runs that were so common before the establishment of central banks? Do other private actors do it? How can you prevent them from getting into similar problems of illiquidity and insolvency?
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Or C: you collect nuts.

Or mine gold, build houses, invent technologies, and so on.

Obviously, people can never have more net savings, in real terms, then there actually is stuff in the world, in real terms.

Bank runs are a seperate topic I feel.

I would think of our modern government-controlled fiat systems as a mixture of B and (outside of the Eurozone) A. Most monetary assets are of the B-nature, such as deposits at a bank, which correspond to liabilities of the bank. However, the overall balance of net financial assets within the non-government sector is positive, because the government "creates" assets out of nothing - that is the A part. [4] The governance problem of part A is solved by having a democratically legitimized authority over the system (this is actually the main reason I am against central bank "independence" - it reduces democratic oversight, or gives an easy excuse not to exercise it). The instability problems of B are mitigated by a central bank that acts as lender of last resort and a regulatory authority, and of course by the simple fact that the private sector can have a positive net financial assets balance.

Yes, those governance and oversight systems failed pretty hard in the last decade or so, there's no doubt about that. Regulatory capture is a real problem. But it worked remarkably well before (just compare the 19th century with its frequent crises to the second half of the 20th century), and at least there exists a democratic process by which improvement is possible. Alternative systems lack such a process, at least the proposals I have heard or thought about. So the system may suck, but it's still the best system possible (probably ).
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I think the case that the world is a more financially stable one, post financial centralization, is a hard one to make. Perhaps crises were more frequent then, but it seems their magnitude has only increased. Either way, the 19th century was a different one. More wars, more technological and societal disruption, more primitive financial technology, and so on.

An ETF maximally diversified over your sphere of economic activity (global these days, unless you live in NK) seems like a much better suited instrument for such a role.
[/quote]
An interesting idea, but the truth of that statement is extremely difficult to evaluate.
[/quote]
True. Thats economics for you, I suppose.

What if those apparently well-suited ETFs are only able to exist in an environment where there is a reasonably stable fiat currency to begin with? After all, those things have only existed for a short period of time. Another thought: if you actually implement this practically, it seems like you would end up with basically a gold standard system, just with gold replaced by whichever index you choose. As far as such alternatives go, I have to say that it does seem significantly more enlightened than most.
[/quote]
A maximally diversified ETF shares the nice property of a commodity that it is free from political machinations (you seem to think thats a feature, and not a bug, but I disagree), but in a nutshell, its far more stable than gold. Precious metals are volatile in the short and medium term since they have a self-reinforcing dynamic; gold is worth more, the more people are desiring it. This creates an multi-stable equilibrium with alternative such commodities, like silver. And this same principle applies to any instrument that is monetized; the demand for it as a money is self-reinforcing, which creates a potentially unstable dynamic. But a maximally diversified ETF is not just quantitatively different in the sense that it is more diversified; its also logically impossible, or at least pointless, to shift resources out of the world economy and... into the world economy. You cant even try 'cornering' the world economy. Unless you own it in the first place.

If you denominate your mortgage as a fraction of the world (or local/relevant) economy, you know what that means in terms of the number of hours you have to work for it right now, and you know that, barring changes to you relative to the world economy, this is going to stay the same. Of course if your productive capacity gets unexpectedly decimated you are still screwed, but at least both parties to the contract are automagically hedged against changed from the outside, to the maximum degree possible. The meaning of your contract will not fluctuate because someone found a way of turning lead into gold, or because of mismanagement of the fiat currency it is denominated in.