Credit is Debt

... but there are two distinct forms

There are (at least) two distinct forms of credit=debt for a given state currency numeraire. One is the household who has either credit or debt in the State’s unit of account, but held with a commercial bank. They want the credit, not the debt… ideally. The other form is the same, but held by the Government. What’s the difference? The difference is the Government is self-regulating (mostly, except perhaps if there is a Constitution). In each case the money is the State’s IOU. But in the Government case the debt is irrelevant, it’s just a book entry. You do not have to pay taxes to relieve the government of Its “debt burden”, since it is no burden, since they create the tax credit. The tax is paid to legitimate the tax liability, not to fund the Government coffers (there is no such thing, there is just a spreadsheet).

A household can internally replicate this by emitting IOU’s of parents to the children. Exactly the same monetary system, but without bankers. Why would the kids accept their parent’s IOU? Oh, goodness knows!?🤣 Why on earth would parents wish to restrict the activities of their children? Parkour and wingsuit flying all around 24/7 I say! With free public healthcare who cares about the hospital bill, right? Mr & Mrs Tarzan Cookie Monster: “Brain. damage. good. me no want children too smarter than me.”

There’s a lot of decent MMT writing these days on substack, MMT101, and RealProgressives, more than I can review. But shout-out to Derek McDaniel who also has a fresh angle on things, and some triggering but-in-a-nice-way article titles: All Credit is Renting. Derek is always giving me new ways to think about things, even while I do not at all share some of his views or definitions (I’m not pro-capitalism, rather, I am pro-markets but with wise government regulation, but not heavy ham-fisted regulation).

Why? Because maybe to Derek (?) “capitalism” means markets and such-like, and private enterprise. But to my mind those things have nothing to do with capitalism. And never mind the can of worms that real world capitalism is anti-capitalism qua Smith, since real world capitalism seeks monopoly power. In my corner of society “capitalism” is nothing but exploitation of workers for the gains of the power elites, or even the petite bourgeois bosses (at times). No need to mince words about it, Capitalism is class relation, and is inherently unjust, exactly the same way the Caste system in India is horrifically unjust, so has to be eliminated as a social system one way or another — if we value justice above gross planned hierarchical power inequality.

Right, so “anti-capitalism” is not good enough, since it is compatible with actual existing capitalism! This core incomplete dichotomy is, I am certain, what fuels a lot of the current (fake-)Left vs Right-wing political Kabuki Theatre. (Really both are right-wing conservative.)¹ Soi dissant “leftists” can rail against privatization of what should be public services, but they always fail and morph into right-wingers whenever they threaten to tax the middle class to pay for the services. They’ve got it completely backwards, and have no comprehension of the purpose of the tax system — read: tax-driven currency system.

The tax is not the “pay for”, it is the demand withdrawal, the opposite of “pay for”. Since you have tax liabilities to pay, you now need to earn the State’s tax credit. Capisce?

By the way, our NZ deputy head-fascist, David Seymour, recently was asked official questions in Parliament “How is money created?” or “How does government get the money?” I know for a fact Seymour has talked to MMT’ers (of the capitalist variety, but that’s irrelevant) and so full well knows the NZ government creates the NZ$ by fiat, when it spends. But he lied outright in Parliament, on the record, by saying the complete reverse of what he knows: he claimed government can only get the NZ$ off the taxes. So he was saying the tax-payers all have counterfeit money printing presses, or ways to hack the bank account system.

More nuanced: Slytherin Seymour might wriggle his way out of this by invoking post-Keynesianism, by claiming the banks create the deposits when they make loans. This is the endogenous circuit. He’d still be wrong, since bank credit NETS to zero money. It has to be repaid — to the bank! not to the Prime Minister! — so if any of it goes to government it’s a massive demand leakage and breaks the endogenous circuit.

There is no magic money tree. Someone is always getting paid to create bank deposits. When that’s the politicians, we damn well aught to make sure those deposits are going to workers, not to the rentiers and the predatory finance sector (aka. economic parasites).

What is Ham-fisted Regulation?

It is whatever disadvantages the poorest or if you have no dire poverty, it is whatever disadvantages the workers and props up the rentiers.

A Recent Rant on Credit and “Borrowing”

This is ported from over at Mastodon, where we have some actually sensible anthropologists and anarchists and the like talking about macroeconomics.

There as this Forbes article (pay-wall, but you can read 4 articles free each month) where this dude Coppola corrects a few errors in language framing like a pedant. He was correct, but I had a few words to add on Mastodon.

Coppola is correct: money is not “cost free” in real terms. Naturally bank credit is not free, there is always the promissory note to repay (your credit card agreement if nothing else). But nor is government money “free”, since the government is not should not be in the business of providing basic income², since whenever it does, it re-gauges the currency downwards and hence applies inflation, which eventually (with a lag) removes that added purchasing power. (This is not easily empirically provable when the basic income is only a small fraction of GDP, it’s just a point of logic.)

Moreover, the government cannot spend by fiat without votes in Parliament, and this does not come for free.

The initial commentary post was from GhostOnTheHalfShell:

So this is more MMT ranting. In this case of over the topic of the government borrowing as a fiscal response to an economic downturn.

Since the bank of England and one of the federal reserve banks make the same, but even Forbes, aligns with them.

It’s all a little bit hilarious, because during a crisis commercial money is being destroyed through default.

In my reply on Mastodon:

This Forbes article is interesting! (pun half intended!)

Almost. To make a really decent MMT rant you have to also add that “government borrowing” (a misnomer, since it is just an asset swap: non-interest bearing cheque account numbers goes down while interest-bearing Tsy bond account number goes up) is far worse than “contracting the money supply” in terms of social (in)equality..

It does nothing to the money supply initially, but after the 3 month period for the next interest payment it ADDS to the money supply.

The function is not to finance government at all, it’s the opposite: basic income but only for people who already have money and in proportion to how much money they already have.

It should be a mandatory WARNING that most economists have interest rates backwards, and especially all geopolitics bros and talking heads (Pascal Lottaz not included) . (So much nonsense recently, it’d be hilarious if not so tragic, because all this backwards monetary system thought is literally driving warfare these days, or at least aircraft carrier movements and whatnot, for no good reason except stupid imperialist ambition, blind to the real benefits of trade — let the other guy’s workers make the stuff for you if that’s what they desperately wanna do, no need to send warships or bomb them to stop them from making nice things for you.) — that seemed a long parenthesis.

Raising rates fuels inflation and adds net tax credits to the economy, since the government (in most countries) is a huge NET payer of interest. Basic Income, but only for the rich (and needless pension funds [why ‘needless’? — a topic for another day³]).

The Forbes writer Coppola is correct.

But I object to their implied framing (it’s a bit hidden in subtext methinks).

The government creation of equal credit + debt is an entirely different affair, since in this case the debt never needs to be repaid — it serves a totally different function as the NET exogenous money supply for a growing economy. Unlike commercial bank credit.

However, if we regard commercial banks as agents of the State, then really the commercial bank lending operations are also exogenous, and there’d also be no reason to demand repayment of the credit unless it served an anti-inflation purpose. Of course, customer borrowing would then be a race to the bottom (or is it top?) and so would need some other constraint, say a ration of credit or something, but who in their right mind would not annually just take all their ration, so it’d be basic income.

So in my view bank credit serves a useful purpose for financing future payments from future extrapolated income. It’s a good system. It is not “capitalist” nor “socialist” nor anything, it’s just one way a firm or household can spend in advance of anticipated income.

Note: I’d leave all framing of “money supply” and “creation out of thin air” or such-like aside, since it is a distraction (implicitly invoking the inflation boogeyman), and instead I would urge us to focus on the PURPOSE. The purpose of bank credit is just as stated, to finance expenditure desired in advance of future income. So people can to some extent operate over spans of time, instead of merely with what they’ve got in their bank account at the moment.

Yes, per Derek, the bank is indeed “renting the money”. The banks have a monopoly on credit creation granted to them by the State. The loans are assets of the bank. Hence,

The proper discipline on banks is always on the asset side, not the liabilities side

This partly prevents these bankers from being nasty rentiers with their rentings.

Mainstream economists and central crankers have this backwards, they always seek to discipline the liabilities side, by making deposit holders carry risk of the bank defaulting. This is nuts. It is driven by the presumption customers know the risks, and so will “shop around” for the safest bank! Ludicrous. As if the customers have any grasp of systemic economic risk, or the (in)solvency position of their bankers! Laughable.

Instead, the government can always 100% insure bank deposits, and why not? (That’s purely rhetorical!) Provided they are denominated in the State’s unit of account, not a foreign currency. The proper (MMT) way to discipline banks is to regulate their credit prudential requirements: no credits shall be given if the customer cannot reasonably repay out of anticipated future income. If the customer defaults, too bad, the bank made a mistake (or the customer was a fraud) — a clear case for the regulator nerd to inspect a bit, a good use of public service, not a boring accountant job by any means, it’s nerdy cool detective work for public purpose, without knives & guns.

This makes it explicitly clear what the purpose of bank credit is for! It is not for merely being able to live and breathe. It is for advancing enterprise, or luxury items, like housing or car, or whatever. Which implies, as well as the customer’s credit-worthiness, the bank should be required to consider sustainability. Hence: no credit awarded for super-luxury items.

Bro. Apart from the fact billionaires aught to share some government scorepoints around to boost their cherished “capitalism” (driven by sales, not savings), the very bottom of the barrel of which might be donations to yours truly for writing MMT 𖥐𖥕𖢑𖠢𖦧ꚲ, I really think some of them are just very insecure people, not knowing when their second-to-last million $ will disappear to (down a crypto hole) and so these very insecure folks need savings accounts, with lots of digits in them. You know why… you don’t want your friendly neighbourhood billionaire to make up for his shortcumings with bodily member elongations at the street clinic in Phuket, you’d rather them go up-market to the public hospital in Bangkock.⁴

Seriously now. Let the luxury yacht wannabe owners save up for that, since there is no good reason on earth for needing to own a luxury yacht ahead of the income to pay for it. (I’d make a reasonable exception for limited sports usages.⁵)

A suitable note to end on with the beginning of the NPC rugby season. Our oval ball gladiatorial combat is an opiate of the masses, and like genuine religion (if it can be found) it is a Good thing, if not drunk to excess.

1. On that note, potential ꕷꖾꔇꖡꗍs… I really do not want to read the economics platform of Corbyn’s new movement party in the UK. I am sure it’ll be good on worker cooperatives and public service provisioning, but is likely to threaten to tax the middle class to “pay for” things. Which is a double whammy on the majority of the working class — they’d be paying once in real terms with their labour, then AGAIN by getting their wages taxed. Completely right-wing regressive policy. Someone warn Jeremy, please, for the love of God.

2. Except to those who need the income, like the young, the elderly, the infirm — all of whom should have basic income, and to a decent living income standard. This is called “civilization.” Their spending will help fund all the other tax payers.

3. In brief: there should be no need for retirement savings. Pensions can (and should) be paid by the State when the payments come due. This is also called “civilization”. No savings account is needed, not State nor private. The “pay for” for pensions is in real terms, it is the output of TODAY’s workers.

4. Sure. Sports are a distraction from political activism. But like mind-altering drugs, you cannot blame the workers for taking the opium. We really should not need so much political activism, but such times are what we do not live within.

5. Tourism, especially medical tourism, is an export, so a loss for the Thai people. They have excellent public health systems. But they should serve the Thai, not the farang. The people of Phuket are so lovely, they should be working towards a paradise for the Thai workers, get the seedy tourism out.