Re: Money and Inflation

From: Bill Ryan (william_b_ryan_at_hotmail.com)
Date: 07/03/04 

Date: 3 Jul 2004 14:08:55 -0700

In a modern fiat money system, the _net_ monetary
wealth of the private sector is due to government
spending.
-----------------------------------
No, it's not.
->

Currency issued by the government has replaced gold
as the monetary base.
-----------------------------------
Mo modern government issues currency. Currency notes
are tokens of central bank credit in every modern
country, with the possible exception of Zimbabwe.
->

Base money derives its value from the fact that it is
required in the payment of taxes.
-----------------------------------
The term "base money" is not found in any generally
available textbook. It may not be found in any
textbook. Money derives its value to its holder
through its acceptability in trade. So it is true
that money does derive some of its value from the
fact that government will accept it in payment for
taxes. General Motors will accept it in payment for
cars. Microsoft will accept it in payment for
Windows. I can use it to purchase food at the corner
grocer's, etc.
->

Bank deposits retain value because the government
requires them to be converted into currency on
demand.
-----------------------------------
There is no requirement from government that banks do
so. If there is, please cite it. Convertibility is
a function of the private contract between banker and
depositor, which differs from contractual arrangement
to contractual arrangement.
->

A bank loan creates both an asset and a liability,
and therefore does not result in net monetary wealth.
-----------------------------------
The first clause in this sentence is true; the second
is patently false. It reflects the "net to zero"
fallacy that comes from Hummel's poor understanding
of the theory of accounting. He has no comprehension
what net worth means. He fails to recognize that
while accounting figures are denominated in the
dollar sign ($), they are not money. He has no
comprehension of the capital account.

This is the theorem that is relevant to a fractional
reserve system with a central bank that also makes
loans: Loans create Deposits; the Repayment of Loans
cancel Deposits. Loans in this case include loans by
the central bank as well as the commercial banks.
The purchase of securities by the central bank (or
any bank) is the functional equivalent to loans.

In the relevant three-sector model, the central bank
is logically aggregated with the financial sector -
regardless of whether or not government putatively
owns it; the government is aggregated with the firms
sector - inasmuch as it is a special type of firm.
In the more extended model government is dis-
aggregated from firms and considered separately as a
fourth sector. The consuming sector interacts with
the other two (or three) sectors depending on the
level of sophistication in the analysis.

As a matter of accounting, the net wealth of the
consuming sector (reflected in the aggregate of their
capital accounts) increases with the increase in
loans because (in a well balanced system) the
entrepreneur is financially enabled to bring forth
increasing productive capacity, made possible from
innovation, invention and discovery - that he
organizes into their most productive combination, as
ultimately judged by his customers the consumers in
free markets. In principle but also as matter of
accounting, the consuming sector is the beneficial if
not titular "owner" of productive capacity, as
reflected through accumulation to their net worth
according to the rules of accounting.

The discussion-groupie William Hummel is paying too
much attention to his crank mentor, Warren Mosler.
He really should learn something about accounting and
the meanings of its terminology.
->

The growth of credit money depends on the demand for
bank credit and the willingness of banks to lend.
-----------------------------------
Which includes the central bank. Central bank credit
and commercial bank credit are completely fungible,
one with the other, and therefore indistinguishable
to seller or purchaser.
->

TO BE CONTINUED.

Relevant Pages

  • Re: The New York Times at War With America
    ... When I made the claim that what the government was doing was legal, ... money laundering have been under way for a decade, ... "Monitoring international bank transfers, especially with the ... authorization that a newspaper knows to print, ...
    (soc.retirement)
  • Re: The Credit Theory of Money
    ... >prevented by government from issuing too much of it, ... >community to the borrower when they lend money. ... [REJOINDER] ... founding charter of the Bank of England. ...
    (sci.econ)
  • Re: I Bet W.Buffet & B.Gates would (if asked) concur
    ... Why don't they just spend the money they made under ... If the bank gives me ... how the Swedish government did it and it worked. ... We'll be able to have a longer life, ...
    (alt.gathering.rainbow)
  • Re: Do you feel sorry?
    ... which goes to the bank, which re-invests in other investments, makes ... every month from the government. ... That doesn't mean that I am a "welfare recipient". ... And the mortgages are not getting any money from the ...
    (alt.vacation.las-vegas)
  • Re: Bailout reality check
    ... When you have a sector that should be accounting for no more than 10% generating a bit less than half, ... And people are always going to make money from that sector, and there's nothing wrong with that. ... Rita, why should she be any different from anyone else? ... I worked for Manufacturers Hanover Bank for two years and even got ...
    (soc.retirement)