That reminds me of the old saying: "economists were invented to make weather forecasters look good" - perfectly understandable In April where we have sunshine and showers but nobody can say when we'll have the one and when the other ...
Back in the 80s, I read a book by (who else?) a certain John Galt, in which he noted that fiat currency will always seek the value of its medium, while also noting that paper was then priced at eighty cents a ton. Wonder what an electronic bit costs these days?
No. 1, you’re making a fundamental logical error, just like every American, when you write that the US government owns the Federal Reserve – that’s not true. The Federal Reserve is neither federal, nor government-owned, nor even American – it’s a consortium of private banks, and the US government borrows money from them. This usury is sucking the very lifeblood out of your nation and other nations too, for interest on loans is, after all, humanity’s greatest invention, as the old rabbi said on his deathbed 🤦♂️
Actually, I do know how that system works (but not for us). Thanks for giving this trigger to the readers to dig in further.
That said, whether the Treasury borrows from a government entity or a private consortium, the mechanism I'm describing - running infinite overdrafts to accommodate deficit spending - works the same way. Keen's accounting identity argument holds (or fails) regardless of who sits on the other side of the ledger.
They are the Goldman Sachs, Rockefellers, Lehmans and Kuhn Loebs of New York; the Rothschilds of Paris and London; the Warburgs of Hamburg; the Lazards of Paris; and the Israel Moses Seifs of Rome.
Pretty easy, Assets=liabilities+owner's equity; Total Rev-Total Expenses=profit/loss; profit/loss goes into the owner's equity bucket at the end of the year. Whether you like it or not; every human being on the planet is tied to these equations. The magic is in the mystification of it all:) Yes, I am aware of the missing trillions had to go somewhere (space) or buried (tunnels) :)
If everyone viewed their personal relationships in the same way. For example, are you a liability to your family, friends community or an asset; do you take everything (total expenses drain) or do you give frequent positive deposits to the relationships (positive revenue to the relationship). Make choices everyday, every hour, every decision with that viewpoint and feel the difference!!
As a former auditor long ago using red pencils, I only need to look at a few accounts to know the scoop. #1) Retained Earnings #2) Intangible assets like Goodwill the biggest "predictable" write offs/ rip offs in history happen there #3) Current assets/liabilites #4) Free cash flow.
"The Weimar Republic’s accounting was impeccable. The reichsmark’s purchasing power was gone. "
Kind of ironic that it took an Austrian to correct that situation.
Speaking of which, if you can spare the time I highly recommend the German TV series Babylon Berlin, a semi-historical police drama set in that era. I just checked and it can still be found on bittorrents.
the economist is preparing the ground for tokenization. once private wealth will be tokenized, it will also be considered as nominal GDP, along our personal data, life earning expectation and everything else deemed to be collateral. get ready for more articles like this in the near future, as we approach the great re$et.
This sounds a lot like MMT (Modern Monetary Theory), a la Stephanie Kelton. Essentially, she claims that government can print forever as long as inflation doesn't get "too high." The listeners are left to decide for themselves how high that is.
Replace Mansplaining with Economistsplaing. AWKWARD! I collect bullion, coins and currency (as a hobby). I have some "ZombieBucks" and "ZombieCoins" which may actually be more valuable than most fiat!
Thanks No1, a stunningly simple explanation of a subject steeped in mystery for many. It took me 6 months to get to grips with double entry, and only then, when I did it in practice at my sponser company in the 60s. With pen and paper ledgers. Now it's digital, even qualified professionals don't understand. Thank goodness you do.
Simply put, the current system relies on the issue of debt ex nihilo plus interest (bonds) which always has to be repaid by issuing more debt. Thus, there always has to be economic growth, without it, the system collapses, which is why the bankers fear deflation - it kills their system.
The bankers do not want to give up their privileged position so their answer is digital and a CBDC control grid. I believe this will fail, as indeed have all their other many attempts have failed, including Covid (which was intended to kick off the Great Reset as Schwab's narrow window claimed at the time) - it failed.
Now we have the Iran war, yet another attempt to kick off the Reset - this too will fail as the BRICS and China have a workable model already in place - Public Banking is the essence of a truly sustainable system but it excludes the bankers privilieges. The Bank of North Dakota is the only public bank in the West. https://austrianpeter.substack.com/p/the-financial-jigsaw-part-2-59-brics
Strong piece on the limits of accounting identities. Keen’s double-entry focus misses the Austrian insight that the real damage comes from distorted credit allocation and malinvestment, not whether the books technically balance.
Richard Werner’s work complements this by showing banks create money endogenously, but the key variable is the destination of that credit: productive SME lending builds genuine growth, while speculative flows fuel bubbles.
His proposal for thousands of small, local banks with guidance toward real investment is a practical bridge — not MMT-style fiscal dominance, but a way to improve credit quality without handing more power to central planners.
It’s imperfect and carries second-order risks, but it’s far more aligned with decentralized principles than pure deficit monetization. Worth considering as a step in the right direction.
I used to somewhat like Keen but kind of got the impression he now has a big chip on his shoulder, especially since his Australian housing market crash didn’t happen. And his fixation with climate ideology
I do not say deficits don't matter , deficits matter in as much as they are the amount of money in circulation that the government promises to pay , you fail to point out that deficits are essential they are essential in that if the government , any government that issues its own currency , if it decided to clear its deficit you me and every other person on this planet who has british money would have NONE because to clear the government deficit the government would have to take back all the money in issue including cash and savings and every other bit that constitutes part of the government deficit.The result of this would be everyone going back to bartering , paying for your groceries with your jewellery or something else you posess of equal value to the groceries you want.
People who decry government debt as a bad element are lying and the only reason they do it is because they do not want to pay tax , oh they may say government spends poorly or they waste money but lets be clear about this , private businesses would all go out of business if there was no government currency and government currency can only exist if government spends it into existence.
One further point , the people i refer to who are tax shirkers rave about bitcoin but lets face it and be truthful bitcoin is just a currency that instead of being owned and issued by government is owned and issued by private individuals and those private individuals are against tax so would have no way whatsoever of controlling inflation.
Your explanation is still trying to trick people.
Just come clean and get to the point , you hate taxes you dont want to pay taxes you dont want to pay for anything you dont use and probably claim you dont use any government services as manytax shirkers do , but they forget the roads , the trains the airports the water supplies the sewerage systems everything around them came originally from the issue and spending of government currency yes it may have eventually made its way to a private business that built something but without government currency so called government debt by people like yourself nothing would have been built unless immediate profit was possible.
That's a hell of a leap. From "criticizes deficit spending" to "hates taxes, doesn't want to pay for anything, probably thinks sewers are a conspiracy". I pay taxes. Quite a lot of them. Criticizing how money gets created is not the same as wanting to freeload on roads.
But the substantive claim is more interesting, so let me engage with that.
You're treating "government deficit" and "money in circulation" as the same thing. They're not. The deficit is an annual flow. The money supply is a stock. And most of that stock isn't government deficit money at all - it's bank credit, created by commercial banks through lending. Strip out every cent of accumulated government debt and you'd still have a banking system creating most of the money in existence.
You're also assuming government fiat is the only possible form of money. Gold existed. Silver existed. Private banknotes circulated for centuries before central banks did. Whether those systems were better or worse is a separate argument worth having. But "clear the deficit and we're all bartering with jewellery" only follows if you've already decided fiat is the only thing that can be money. That's the conclusion doing the work, not the premise.
On Bitcoin - whatever you think of it, "can't control inflation" is literally the one critique that doesn't apply. Its supply schedule is fixed by code. 21 million, capped, done. Dislike it for volatility, energy use, speculation, whatever. That one doesn't land.
Banks do not create money only government creates money by spending it into existence and banks can only issue money that is already authorized for issue by government all currency in circulation began its life being issued by government not by banks , gee , banks are private businesses they can only operate under license from the government and yes currency in circulation is government debt it tells you on it " i promise to pay the bearer on demand " signed governor of the bank of england , the bank of england is just a part of the government treasury.
Paying taxes is done by everyone one way or another be it income tax or vat or road tax etc etc etc but a growing number of people moan about paying tax thinking that their tax is then used by government to pay social security benefits or overseas aid etc etc etc , its not , all tax is destroyed by government immediately they receive it and taxes in uk can only be paid with uk currency , tax receipts change double entry book keeping red entries ( spent ) to black ( received ) deficits have to be maintained and yes if all uk government debt was cleared there would be zero money circulating , your idea that private banks would issue their own currency is nonsense its out of date by at least a hundred years that nonsense was ended because private banks couldnt be trusted with other peoples money , they used to gamble it making investments using their customers savings it caused the great knickerbocker financial crash of 1907 they cannot by law do that any longer thank goodness.
I think this one's the other way around on banks. The Bank of England's own 2014 paper "Money creation in the modern economy" (https://www.bankofengland.co.uk/quarterly-bulletin/2014/q1/money-creation-in-the-modern-economy) says commercial banks create most of the money supply through lending. When a bank issues a loan, it creates a matching deposit - that deposit is new money. UK bank deposits outweigh physical Bank of England currency roughly 30-to-1, so most money in circulation wasn't spent into existence by government. It was lent into existence by a commercial bank.
On "tax is destroyed immediately" - that's standard MMT framing and the accounting is defensible, but "destroyed" is doing a lot of rhetorical lifting. It makes taxes sound like cosmic ledger adjustments rather than real resources extracted from real people who can no longer spend that money. The economics happen regardless of how the books book.
I'm not in the "taxation is theft" camp either - courts, contract enforcement, a trusted unit of account don't appear from nowhere. But "tax is a neutral accounting operation" is the same mistake in the opposite direction. Both framings hide what's actually going on.
On 1907 - banks still invest customer deposits, that's fractional reserve banking. Glass-Steagall (1933, US, not UK) separated commercial from investment banking, and was largely repealed in 1999.
Banks creating loans is not the same as banks creating new money they get the money to create the loans from the government then they lend it , the government even give the banks interest on that money .Yes the money issued to the commercial banks by government is new money but its not money introduced in the first instance by the commercial banks.
Yes when the commercial bank makes a loan it creates two account entries one in red that pays out the loan and the other in black of an equal amount that shows the loan and receives the repayments til its fully repaid and yes it is new money that is loaned out but its firstly issued under license by the government to the commercial banks by automated transfer these automated transfers are issued in a lump sum to commercial banks periodically.
Lol, they get the money from Governments by paying for it (at a rate of interest). But this is not a mechanism where some government clerk sits down and assesses each loan, instead it in itself is a market place. And even bank credit ratings are a marketplace.
So, if a client of a bank wants a loan, the bank in effect does create that credit via this market-based system.
Immediate profit was possible, in the cases where it led to beneficial infrastructure at the right marginal price. In these cases debts are repayable.
But government deficits that become fungible via wasteful boondoggles and distortions are a key miss in Keensian economics. They are false profits of the future . :-)
Prof Keen has some serious modelling creds, eg his Ravel, Minsky systems dynamic models and publications are worthy of respect. But I think his models aren't explicit enough about the effects of drag by waste, and the model's smooth and lag-less dynamic feedbacks don't represent the jagged edges of the real economy.
Taxes are inevitable. What we need is better accounting of where they come from and go. Open source blockchain on government spending. Then government can spend its deficits and create money that builds projects which repay the currency that was made to create them. ie. projects that bring positive future benefit. Boondoggles will wave red flags and make the Bond Vigilantes jobs easier.
My Bigger Question...
What do you think about AI-R & UBI ? Is UBI an inevitable outcome of AI and Robotics ? When we are say 40% UBI in 5-10 years time, with reduced (labour) tax pool and higher welfare (UBI), where do tax revenues come from ? Or more importantly for Bond Vigilantes, where will future tax receipts come from... to pay interest on the bonds.. ?
If you look at any reasonable accounting framework, UBI would rely on government deficit aka printing, without which, discretionary spending, both private and govt, will drop off a cliff.
I'm in a completely different camp. The government issues treasuries. These are sold to whomever in the REAL world. That's where the government gets its money from. FED is NOT printing.
Money creation rests with the commercial banks. There is a lot of rules regarding their balance sheets (Basel x) - these rules and the banks‘ risk appetite (within these rules) define, how much money is created. It's all ledger money, has nothing to do with bills. The less loans the banks grant, the less money available.
The reserves at the FED are relevant for clearing the balances between the commercial banks. Otherwise they are of no monetary use. If the FED does QE, they BUY treasuries from the banks, increase the reserves of the respective bank and by doing so, decrease the amount of treasuries in circulation. This is bad, because treasuries are used as collateral in interbank transactions. And not only in the US, but globally. Sending USD from the US to China in order to pay for rare earth involves a lot of intermediaries BETWEEN the FED area of influence (USA) and that of the PBC (China).
The Austrians (and almost all other econonmists) have theories about more or less closed national economies. Today we live in a completely interconnected global economy. That's why all these theories are crap in explaining today's world. Especially regarding the USDollar in the Eurodollar area, ie the area where treasuries are used as collateral. (M Friedman already mentioned it in 1969. Until now no theory or explanation for "global" money was developed.)
Well, the FED is buying treasuries from banks. Primary dealers/banks have already bought these treasuries from the government. So, the money is already handed to the government.
Now these treasuries just change their owners. From commercial banks to the FED.
(We already see, that a lot of treasuries are sold globally to get hold of USD to pay the higher oil prices. There is a shortage in treasuries [globally]. The rising USD during the last weeks is a sign for increased USD demand. Which is served by selling treasuries.)
Yes, but with what, if not newly "printed" currency? Or did they sell the long end to finance purchases at the short end?
The whole idea of providing liquidity in the market is effectively money printing. Yes, it's intended to stabilize, but why is the market unstable in the first place if it isn't ultimately a structural imbalance between supply and demand? In the meantime, money thus created gets multiplied via fractional reserve thus creating new (speculative) obligations before being withdrawn, if that actually ever happens. The end result is just as likely to create new imbalances as it is to stabilize.
The FED has its own balance sheet and credits the selling bank reserves.
Those reserves are then on the balance sheet of the selling bank. That’s it. Just an asset swap treasuries vs reserves.
Credit capabilities of the commercial bank‘s balance sheet remains untouched BUT treasuries for collateral is gone.
Banks lend against their balance sheets according to legislative rules/restraints. Not against „collected“ money. Fractional reserve system doesn‘t exist.
Not sure if you're defending the Fed here or not. I personally don't like the idea of private entities having any control of the nation's money. Most everywhere else that is the domain of the central bank. I also object to the idea of using a nation's currency as an international reserve because by definition that means running a trade deficit which ultimately leaves you at the mercy of foreign creditors.
Back around the time the GSEs (Freddy, Fannie etc) blew up I was an avid reader of Doug Noland's Credit Bubble Bulletin. Today my head hurts just thinking about that stuff so you'll have to excuse me if I bow out here.
I‘m an economist by training and it took me a while to understand the reality of money creation (vs theory). Bundesbank changed their explanation in 2009, Bank of England only in 2014 or so. Whether you like it or not - it is commercial banks that create today’s ledger money. And there is no other way, since transfers between currency areas have to be managed. Somehow. It was commercial banks who created a reliable system to transfer money from NY to Berlin/Shanghai/Mumbai/… Central banks can’t do that. By definition. And yes, Triffin‘s dilemma is a problem. But until now we have no better system. Crypto might create one, but definitely not bitcoin.
The problem are banks, who try to get higher ratings for crap - which increases their credit capacities. And if they try to get crap off their balance sheet.
Well, the FED is printing the USD bills. Yes. BUT they‘ll handed over to the banks against their reserves. So, the money was already created by the commercial banks (debt). The FED pockets the difference between printing costs and nominal value of the bills.
That reminds me of the old saying: "economists were invented to make weather forecasters look good" - perfectly understandable In April where we have sunshine and showers but nobody can say when we'll have the one and when the other ...
I live in BC on the west coast where we have a saying:
if you don't like the weather, just wait 5 minutes.
Back in the 80s, I read a book by (who else?) a certain John Galt, in which he noted that fiat currency will always seek the value of its medium, while also noting that paper was then priced at eighty cents a ton. Wonder what an electronic bit costs these days?
No. 1, you’re making a fundamental logical error, just like every American, when you write that the US government owns the Federal Reserve – that’s not true. The Federal Reserve is neither federal, nor government-owned, nor even American – it’s a consortium of private banks, and the US government borrows money from them. This usury is sucking the very lifeblood out of your nation and other nations too, for interest on loans is, after all, humanity’s greatest invention, as the old rabbi said on his deathbed 🤦♂️
Actually, I do know how that system works (but not for us). Thanks for giving this trigger to the readers to dig in further.
That said, whether the Treasury borrows from a government entity or a private consortium, the mechanism I'm describing - running infinite overdrafts to accommodate deficit spending - works the same way. Keen's accounting identity argument holds (or fails) regardless of who sits on the other side of the ledger.
True, and documented:
---
They are the Goldman Sachs, Rockefellers, Lehmans and Kuhn Loebs of New York; the Rothschilds of Paris and London; the Warburgs of Hamburg; the Lazards of Paris; and the Israel Moses Seifs of Rome.
https://hannenabintuherland.com/usa/the-federal-reserve-cartel-the-eight-families-who-own-usa-dean-henderson-herlandreport/
Ay vey 😆
This is true and Iran uses Islamic banking which forbids usury. Hmm, guess this is why they are a target? They don't subscribe to the BIS.
A logical error is an error in computer coding. I think you mean factual error.
Some call it nitpicking. I call it correcting someone who's wrong on the internet:)
Unfortunately, the translator cannot capture the beauty of the language with its seven cases, translating it into this Hebrew for gentiles 😉
Pretty easy, Assets=liabilities+owner's equity; Total Rev-Total Expenses=profit/loss; profit/loss goes into the owner's equity bucket at the end of the year. Whether you like it or not; every human being on the planet is tied to these equations. The magic is in the mystification of it all:) Yes, I am aware of the missing trillions had to go somewhere (space) or buried (tunnels) :)
If everyone viewed their personal relationships in the same way. For example, are you a liability to your family, friends community or an asset; do you take everything (total expenses drain) or do you give frequent positive deposits to the relationships (positive revenue to the relationship). Make choices everyday, every hour, every decision with that viewpoint and feel the difference!!
As a former auditor long ago using red pencils, I only need to look at a few accounts to know the scoop. #1) Retained Earnings #2) Intangible assets like Goodwill the biggest "predictable" write offs/ rip offs in history happen there #3) Current assets/liabilites #4) Free cash flow.
And off-balance sheet debt? It was always a fraud favouring the insiders. I gave up on the markets in 2000 when the balance sheets didn't balance.
"The Weimar Republic’s accounting was impeccable. The reichsmark’s purchasing power was gone. "
Kind of ironic that it took an Austrian to correct that situation.
Speaking of which, if you can spare the time I highly recommend the German TV series Babylon Berlin, a semi-historical police drama set in that era. I just checked and it can still be found on bittorrents.
https://en.wikipedia.org/wiki/Babylon_Berlin
the economist is preparing the ground for tokenization. once private wealth will be tokenized, it will also be considered as nominal GDP, along our personal data, life earning expectation and everything else deemed to be collateral. get ready for more articles like this in the near future, as we approach the great re$et.
This sounds a lot like MMT (Modern Monetary Theory), a la Stephanie Kelton. Essentially, she claims that government can print forever as long as inflation doesn't get "too high." The listeners are left to decide for themselves how high that is.
They can. And the books WILL balance...
Weimar? Zimbabwe? "Powell: hold my beer" 🤪
MMT = Magic Money Tree
Replace Mansplaining with Economistsplaing. AWKWARD! I collect bullion, coins and currency (as a hobby). I have some "ZombieBucks" and "ZombieCoins" which may actually be more valuable than most fiat!
Thanks No1, a stunningly simple explanation of a subject steeped in mystery for many. It took me 6 months to get to grips with double entry, and only then, when I did it in practice at my sponser company in the 60s. With pen and paper ledgers. Now it's digital, even qualified professionals don't understand. Thank goodness you do.
Simply put, the current system relies on the issue of debt ex nihilo plus interest (bonds) which always has to be repaid by issuing more debt. Thus, there always has to be economic growth, without it, the system collapses, which is why the bankers fear deflation - it kills their system.
All went well as the industrial revolution progressed, but growth effectively ceased around 2000 and has flatlined going into reverse recently. The bankers knew all about this in 1971 ( https://wtfhappenedin1971.com/ ) and the book: The End of Growth in 1972. It is the subject of my book: https://www.researchgate.net/publication/358117070_THE_FINANCIAL_JIGSAW_-_PART_1_-_4th_Edition_2020
The bankers do not want to give up their privileged position so their answer is digital and a CBDC control grid. I believe this will fail, as indeed have all their other many attempts have failed, including Covid (which was intended to kick off the Great Reset as Schwab's narrow window claimed at the time) - it failed.
Now we have the Iran war, yet another attempt to kick off the Reset - this too will fail as the BRICS and China have a workable model already in place - Public Banking is the essence of a truly sustainable system but it excludes the bankers privilieges. The Bank of North Dakota is the only public bank in the West. https://austrianpeter.substack.com/p/the-financial-jigsaw-part-2-59-brics
Bottom line: More units of account chasing the same real assets in the economy, adjusted for any real growth in output.
Strong piece on the limits of accounting identities. Keen’s double-entry focus misses the Austrian insight that the real damage comes from distorted credit allocation and malinvestment, not whether the books technically balance.
Richard Werner’s work complements this by showing banks create money endogenously, but the key variable is the destination of that credit: productive SME lending builds genuine growth, while speculative flows fuel bubbles.
His proposal for thousands of small, local banks with guidance toward real investment is a practical bridge — not MMT-style fiscal dominance, but a way to improve credit quality without handing more power to central planners.
It’s imperfect and carries second-order risks, but it’s far more aligned with decentralized principles than pure deficit monetization. Worth considering as a step in the right direction.
A public banking model works by directing surplus to the community rather than to the greed of speculative financiers. The N. Dakota Bank is a living example but is ignored for obvious reasons: https://austrianpeter.substack.com/p/the-financial-jigsaw-part-2-59-brics
💯 well said and true. Thanks for providing this clear and concise explanation for those of us we are less economically and financially literate.
I used to somewhat like Keen but kind of got the impression he now has a big chip on his shoulder, especially since his Australian housing market crash didn’t happen. And his fixation with climate ideology
I do not say deficits don't matter , deficits matter in as much as they are the amount of money in circulation that the government promises to pay , you fail to point out that deficits are essential they are essential in that if the government , any government that issues its own currency , if it decided to clear its deficit you me and every other person on this planet who has british money would have NONE because to clear the government deficit the government would have to take back all the money in issue including cash and savings and every other bit that constitutes part of the government deficit.The result of this would be everyone going back to bartering , paying for your groceries with your jewellery or something else you posess of equal value to the groceries you want.
People who decry government debt as a bad element are lying and the only reason they do it is because they do not want to pay tax , oh they may say government spends poorly or they waste money but lets be clear about this , private businesses would all go out of business if there was no government currency and government currency can only exist if government spends it into existence.
One further point , the people i refer to who are tax shirkers rave about bitcoin but lets face it and be truthful bitcoin is just a currency that instead of being owned and issued by government is owned and issued by private individuals and those private individuals are against tax so would have no way whatsoever of controlling inflation.
Your explanation is still trying to trick people.
Just come clean and get to the point , you hate taxes you dont want to pay taxes you dont want to pay for anything you dont use and probably claim you dont use any government services as manytax shirkers do , but they forget the roads , the trains the airports the water supplies the sewerage systems everything around them came originally from the issue and spending of government currency yes it may have eventually made its way to a private business that built something but without government currency so called government debt by people like yourself nothing would have been built unless immediate profit was possible.
That's a hell of a leap. From "criticizes deficit spending" to "hates taxes, doesn't want to pay for anything, probably thinks sewers are a conspiracy". I pay taxes. Quite a lot of them. Criticizing how money gets created is not the same as wanting to freeload on roads.
But the substantive claim is more interesting, so let me engage with that.
You're treating "government deficit" and "money in circulation" as the same thing. They're not. The deficit is an annual flow. The money supply is a stock. And most of that stock isn't government deficit money at all - it's bank credit, created by commercial banks through lending. Strip out every cent of accumulated government debt and you'd still have a banking system creating most of the money in existence.
You're also assuming government fiat is the only possible form of money. Gold existed. Silver existed. Private banknotes circulated for centuries before central banks did. Whether those systems were better or worse is a separate argument worth having. But "clear the deficit and we're all bartering with jewellery" only follows if you've already decided fiat is the only thing that can be money. That's the conclusion doing the work, not the premise.
On Bitcoin - whatever you think of it, "can't control inflation" is literally the one critique that doesn't apply. Its supply schedule is fixed by code. 21 million, capped, done. Dislike it for volatility, energy use, speculation, whatever. That one doesn't land.
Banks do not create money only government creates money by spending it into existence and banks can only issue money that is already authorized for issue by government all currency in circulation began its life being issued by government not by banks , gee , banks are private businesses they can only operate under license from the government and yes currency in circulation is government debt it tells you on it " i promise to pay the bearer on demand " signed governor of the bank of england , the bank of england is just a part of the government treasury.
Paying taxes is done by everyone one way or another be it income tax or vat or road tax etc etc etc but a growing number of people moan about paying tax thinking that their tax is then used by government to pay social security benefits or overseas aid etc etc etc , its not , all tax is destroyed by government immediately they receive it and taxes in uk can only be paid with uk currency , tax receipts change double entry book keeping red entries ( spent ) to black ( received ) deficits have to be maintained and yes if all uk government debt was cleared there would be zero money circulating , your idea that private banks would issue their own currency is nonsense its out of date by at least a hundred years that nonsense was ended because private banks couldnt be trusted with other peoples money , they used to gamble it making investments using their customers savings it caused the great knickerbocker financial crash of 1907 they cannot by law do that any longer thank goodness.
I think this one's the other way around on banks. The Bank of England's own 2014 paper "Money creation in the modern economy" (https://www.bankofengland.co.uk/quarterly-bulletin/2014/q1/money-creation-in-the-modern-economy) says commercial banks create most of the money supply through lending. When a bank issues a loan, it creates a matching deposit - that deposit is new money. UK bank deposits outweigh physical Bank of England currency roughly 30-to-1, so most money in circulation wasn't spent into existence by government. It was lent into existence by a commercial bank.
On "tax is destroyed immediately" - that's standard MMT framing and the accounting is defensible, but "destroyed" is doing a lot of rhetorical lifting. It makes taxes sound like cosmic ledger adjustments rather than real resources extracted from real people who can no longer spend that money. The economics happen regardless of how the books book.
I'm not in the "taxation is theft" camp either - courts, contract enforcement, a trusted unit of account don't appear from nowhere. But "tax is a neutral accounting operation" is the same mistake in the opposite direction. Both framings hide what's actually going on.
On 1907 - banks still invest customer deposits, that's fractional reserve banking. Glass-Steagall (1933, US, not UK) separated commercial from investment banking, and was largely repealed in 1999.
Banks creating loans is not the same as banks creating new money they get the money to create the loans from the government then they lend it , the government even give the banks interest on that money .Yes the money issued to the commercial banks by government is new money but its not money introduced in the first instance by the commercial banks.
Yes when the commercial bank makes a loan it creates two account entries one in red that pays out the loan and the other in black of an equal amount that shows the loan and receives the repayments til its fully repaid and yes it is new money that is loaned out but its firstly issued under license by the government to the commercial banks by automated transfer these automated transfers are issued in a lump sum to commercial banks periodically.
We do not agree
Lol, they get the money from Governments by paying for it (at a rate of interest). But this is not a mechanism where some government clerk sits down and assesses each loan, instead it in itself is a market place. And even bank credit ratings are a marketplace.
So, if a client of a bank wants a loan, the bank in effect does create that credit via this market-based system.
Immediate profit was possible, in the cases where it led to beneficial infrastructure at the right marginal price. In these cases debts are repayable.
But government deficits that become fungible via wasteful boondoggles and distortions are a key miss in Keensian economics. They are false profits of the future . :-)
Prof Keen has some serious modelling creds, eg his Ravel, Minsky systems dynamic models and publications are worthy of respect. But I think his models aren't explicit enough about the effects of drag by waste, and the model's smooth and lag-less dynamic feedbacks don't represent the jagged edges of the real economy.
Taxes are inevitable. What we need is better accounting of where they come from and go. Open source blockchain on government spending. Then government can spend its deficits and create money that builds projects which repay the currency that was made to create them. ie. projects that bring positive future benefit. Boondoggles will wave red flags and make the Bond Vigilantes jobs easier.
My Bigger Question...
What do you think about AI-R & UBI ? Is UBI an inevitable outcome of AI and Robotics ? When we are say 40% UBI in 5-10 years time, with reduced (labour) tax pool and higher welfare (UBI), where do tax revenues come from ? Or more importantly for Bond Vigilantes, where will future tax receipts come from... to pay interest on the bonds.. ?
If you look at any reasonable accounting framework, UBI would rely on government deficit aka printing, without which, discretionary spending, both private and govt, will drop off a cliff.
The root of the problem is usury. Banned in Islam. Iran does not subscribe to the BIS. The banksters must remove it. Public banking solves it: https://austrianpeter.substack.com/p/the-financial-jigsaw-part-2-59-brics
I'm in a completely different camp. The government issues treasuries. These are sold to whomever in the REAL world. That's where the government gets its money from. FED is NOT printing.
Money creation rests with the commercial banks. There is a lot of rules regarding their balance sheets (Basel x) - these rules and the banks‘ risk appetite (within these rules) define, how much money is created. It's all ledger money, has nothing to do with bills. The less loans the banks grant, the less money available.
The reserves at the FED are relevant for clearing the balances between the commercial banks. Otherwise they are of no monetary use. If the FED does QE, they BUY treasuries from the banks, increase the reserves of the respective bank and by doing so, decrease the amount of treasuries in circulation. This is bad, because treasuries are used as collateral in interbank transactions. And not only in the US, but globally. Sending USD from the US to China in order to pay for rare earth involves a lot of intermediaries BETWEEN the FED area of influence (USA) and that of the PBC (China).
The Austrians (and almost all other econonmists) have theories about more or less closed national economies. Today we live in a completely interconnected global economy. That's why all these theories are crap in explaining today's world. Especially regarding the USDollar in the Eurodollar area, ie the area where treasuries are used as collateral. (M Friedman already mentioned it in 1969. Until now no theory or explanation for "global" money was developed.)
"That's where the government gets its money from. FED is NOT printing."
How would you explain this then?
https://www.reuters.com/business/finance/fed-says-will-start-reserve-management-treasury-bill-buying-2025-12-10/
Well, the FED is buying treasuries from banks. Primary dealers/banks have already bought these treasuries from the government. So, the money is already handed to the government.
Now these treasuries just change their owners. From commercial banks to the FED.
(We already see, that a lot of treasuries are sold globally to get hold of USD to pay the higher oil prices. There is a shortage in treasuries [globally]. The rising USD during the last weeks is a sign for increased USD demand. Which is served by selling treasuries.)
"Well, the FED is buying treasuries from banks."
Yes, but with what, if not newly "printed" currency? Or did they sell the long end to finance purchases at the short end?
The whole idea of providing liquidity in the market is effectively money printing. Yes, it's intended to stabilize, but why is the market unstable in the first place if it isn't ultimately a structural imbalance between supply and demand? In the meantime, money thus created gets multiplied via fractional reserve thus creating new (speculative) obligations before being withdrawn, if that actually ever happens. The end result is just as likely to create new imbalances as it is to stabilize.
https://www.ft.com/content/6a04be70-6d05-4f03-b4c7-39ceae52bb64?syn-25a6b1a6=1
The FED has its own balance sheet and credits the selling bank reserves.
Those reserves are then on the balance sheet of the selling bank. That’s it. Just an asset swap treasuries vs reserves.
Credit capabilities of the commercial bank‘s balance sheet remains untouched BUT treasuries for collateral is gone.
Banks lend against their balance sheets according to legislative rules/restraints. Not against „collected“ money. Fractional reserve system doesn‘t exist.
"Fractional reserve system doesn‘t exist."
True enough, but the multiplier effect still pertains.
https://www.dyingeconomy.com/credit-creation.html
Not sure if you're defending the Fed here or not. I personally don't like the idea of private entities having any control of the nation's money. Most everywhere else that is the domain of the central bank. I also object to the idea of using a nation's currency as an international reserve because by definition that means running a trade deficit which ultimately leaves you at the mercy of foreign creditors.
https://en.wikipedia.org/wiki/Triffin_dilemma
Back around the time the GSEs (Freddy, Fannie etc) blew up I was an avid reader of Doug Noland's Credit Bubble Bulletin. Today my head hurts just thinking about that stuff so you'll have to excuse me if I bow out here.
I’m not defending anyone. I just want to understand the system. Regarding fractional reserve (factors), see p12, Misconception 2.
https://www.bankofengland.co.uk/-/media/boe/files/ccbs/resources/understanding-the-central-bank-balance-sheet.pdf
I‘m an economist by training and it took me a while to understand the reality of money creation (vs theory). Bundesbank changed their explanation in 2009, Bank of England only in 2014 or so. Whether you like it or not - it is commercial banks that create today’s ledger money. And there is no other way, since transfers between currency areas have to be managed. Somehow. It was commercial banks who created a reliable system to transfer money from NY to Berlin/Shanghai/Mumbai/… Central banks can’t do that. By definition. And yes, Triffin‘s dilemma is a problem. But until now we have no better system. Crypto might create one, but definitely not bitcoin.
The problem are banks, who try to get higher ratings for crap - which increases their credit capacities. And if they try to get crap off their balance sheet.
Approx 97% of money supply is issued as debt at interest (usury). Only 3% issued as sovereign money (cash) free of interest by the Treasury. The balance needs to be more toward 50/50. https://austrianpeter.substack.com/p/cash-essential-for-freedom-and-democracy?
Well, the FED is printing the USD bills. Yes. BUT they‘ll handed over to the banks against their reserves. So, the money was already created by the commercial banks (debt). The FED pockets the difference between printing costs and nominal value of the bills.
Its one of those "It Is Difficult to Get a Man to Understand Something When His Salary Depends Upon His Not Understanding It"
many such cases, very sad