So I started a mild side quest on Andrew Gelmans blog, where they are discussing Trump and politicians and started discussing deficit spending and such. I wrote several long posts describing how I think deficit spending drove inequality through amplifying the money supply and concentrating it into the hands of wealthy capitalists. I discuss debt and money creation and link to stuff I've found here from some of you #mmt types. https://statmodeling.stat.columbia.edu/2024/05/05/on-lying-politicians-and-bullshitting-scientists/#comment-2371714 and related comments @djl
It appears the various theories about where money comes from were never tested until 10 yrs ago:
"Surprisingly, despite the longstanding controversy, until now no empirical study has tested the theories.... This study establishes for the first time empirically that banks individually create money out of nothing." https://www.sciencedirect.com/science/article/pii/S1057521914001070
I haven't looked into any more recent studies though.
@anoneuoid
Yeah I've seen this paper. I think it should be obvious to everyone that it's correct but it's kinda wild that even people at banks push back against it. @djl
[continued]:
> Because the Eurodollar market dates from 1958-59, when the United States first developed large balance of payments deficits, it is often assumed that its deficits created the market and that a balance of payments surplus will reduce or even destroy it. But since governments and residents of many countries have found the market valuable and make extensive use of it, the size is not determined by the U.S. position alone.
@anoneuoid
Yeah I will take a look at that. I'm not sure what the heck is going on in the Eurodollar market. Are banks more or less creating dollars according to some alternative rules for creation? Or are they just using dollars created by the US govt and transferred elsewhere? @djl
It's just like if I bet you every week on a football game. We text back/forth "ok now you owe me $20", now its $40, now $30. Meanwhile, I am assuming you will pay up whatever it is. Then I make other bets saying that "Dlakelan is good for it". At the root there is the assumption I can get those actual dollars.
@anoneuoid
Yes, as soon as you are taking my IOU and giving it to someone else there is new money created, but I'd argue it's not quite dollars. Different people will accept my IOU at different discounts to a dollar bill or a bank deposit, so it's really a "foreign exchange market" for my sovereign tokens. @djl
The interest rates ended up determined by a centralized entity that was rigging them:
> The London Interbank Offered Rate (LIBOR) came into widespread use in the 1970s as a reference interest rate for transactions in offshore Eurodollar markets. https://en.wikipedia.org/wiki/Libor
My understanding is like yours, that its a derivative of the dollar with extra risk. But the derivative got TBTF.
@anoneuoid
So I'm gonna tag the @economics@a.gup.pe group because some of them may know more about what Eurodollars are and how they come into being and how they work @djl
Ok, my understanding is that if I sell something to a guy in China, then he can take a dollar-denominated loan out from his local bank to pay for it. These "dollars" can then be transferred to my US account.
It'd be more large B2B transactions, not personal, But lets see what they say.
So, the EuroDollar market might work in a way that dollars are created, but it might work in a way more similar to what standard Economists attribute to the banks in the US... Namely maybe Alice takes dollars in her account and buys bank loans denominated in EuroDollars, the bank then uses Alices dollars to lend to Bob who buys your shipment of wheat.
Dollars flow Alice -> Bob -> You without increasing the total, but a bank EuroDollar bond is created that Alice holds, and needs to be paid back later. That happens when Bob sells stuff and pays back his loan with interest, and then the bank pays Alice with lesser interest.
Which situation is which is a really good question. Does the EuroDollar market act as an inter-agent lending intermediate, or does it originate Dollars out of thin air? I find it hard to believe it originates Dollars out of thin air, as the US would likely try to stop that, with force if necessary.
Right, so having read that, it seems like the collateral system is really important to the EuroDollar market. If banks are manufacturing money in dollars in checking accounts mostly in exchange for collateral 1-to-1 in US bonds, then they're really acting as an intermediary. The bond represents deficit spending of the US govt, it's "as good as money" because eventually The Fed will buy it for new dollars.
Only if the banks are taking less than 1-1 collateral is this really manufacturing extra money, as opposed to simply converting latent money (bond) into active money (dollars in checking accounts).
The "latent money" aspect of bonds is something that Keen needs to address in his calculations.
I'd guess that it is much less due to "rehypothecation" (or similar if that is not the technically correct term). But here is another source:
Recently, I heard a high official of an international financial organization discuss the Euro-dollar market before a collection of high-powered international bankers. He estimated that Euro-dollar deposits totaled some $30 billion. He was then asked: “What is the source of these deposits?”
His answer was: partly, U.S. balance-of-payments deficits; partly, dollar reserves of non-U.S. central banks; partly, the proceeds from the sale of Euro-dollar bonds. This answer is almost complete nonsense.
The correct answer for both Euro-dollars and liabilities of U.S. banks is that their major source is a bookkeeper’s pen.1
So the M3 measure used to be published and it included a number of items including an estimate of the Eurodollar market. Here's the ratio of M3/M2 for the available period.. You can see a clear trend upwards after 1995. The money supply in general has a clear regime change in 1995... you can see in M2 as well.
Not sure how useful those charts are. Theres a bit of history here:
> In 1989, M2 (less currency) accounted for almost 27% of consumers’ financial assets, yet by 1995 the share of M2 had declined by more than one-third to account for only 17% of consumers’ financial assets. During the same period, the share of mutual fund holdings grew about 2.5 times to represent 13.2% of financial assets in 1995. https://www.frbsf.org/research-and-insights/publications/economic-letter/1998/03/is-it-time-to-look-at-m2-again/
@anoneuoid
Well, there's a difference between financial assets and money. If you own mutual funds you're subject to the volatility of market prices and you need to sell to convert to money to make purchases. Also the govt doesn't create more mutual funds shares by deficit spending, at least not directly. Money is the measuring stick for fund value etc. @economics@a.gup.pe @djl
Today someone can have a robinhood account with some stock and go out to eat with a friend. They can then sell, withdraw to their bank, and immediately send money over zelle (or whatever) to their friend.
Theres still a couple days for the ACH withdrawal to process, but can see it is processing immediately and be pretty confident it shows up. In the future prob even that will go away.
Thus, stocks are much more "money-like" than 50 years ago.
@anoneuoid
I agree and actually one of the points I was eventually driving at but got sidetracked a bit on Gelmans blog thread is that the ability of banks to convert marketable assets to cash (eg. by taking stocks as collateral) is at the heart of some of the worst banking issues, such as ultra wealthy avoiding capital gains taxes and volatility in the market mechanically pumping cash into the finance industry through cycles of "panics" @economics@a.gup.pe @djl
57 trillion is a highly problematic estimate. M2 is only 20 Trillion, so saying that "only about a third of dollars are in the US banking system" will require a major explanation. I'm very interested though so I'll take a look.
Yes, this theory is very problematic for monetary policy. If you accept it, it looks like the US lost control of the dollar ~1960. And no one knows the right way to measure it.
For example, it means when the Fed/BoJ/etc do QE, this is removing collateral from the market, which acts to reduce the total number of dollars. Ie, it is deflationary.
Holy crap that's a great podcast transcript (and thanks for linking to a transcript, I never like listening to recorded audio).
yes, very much it feels like you're right, overseas eurodollars are a major source of dollars, and when something like the Chinese credit crisis and real estate debacle goes belly up it can affect the actual supply of dollars globally through disrupting the various contracts that underly eurodollars
Thanks. I'd like if someone worked out some kind of predictive model from this theory.
But seems that is currently impossible since the inputs are so poorly known. Basically we are a "pre-scientific" stage of figuring out how to accurately observe the behavior of the stars/planets, a prerequisite to modelling how it all works.
At the very least, I think any kind of analysis that ignores this issue of eurodollars is likely to be very wrong.
100% the details are unknown. I've been specifically working on trying to figure out how to rebalance my investments. The first thing I'm doing is trying to figure out what I'm invested in... I hold various different ETFs but what they hold is largely unclear to me. So I'm building some code to download the holdings and analyze portfolios in terms of industry components at least... This kind of stuff is very relevant to my interests.
one of the things I think it can help with though is trying to understand profitability of various sectors. Like, if you look at the US Financial sector: It's clear to me that it's been doing crazy amounts of growth because of essentially money supply
In every case, it's clear... stocks go up crazy amounts starting in 2009 or so, like a lightswitch was turned on. And I don't think that was real economic growth experienced by individuals. To me much of that growth is asset price inflation... Like the market indexes went up 2.5x since 2009 but GDP went up 1.5x
I feel like I just don't know how to understand investment anymore. Maybe it's because the finance system is so unhinged.
QE did that, and with it the investment culture. It’s not unlike the 1920s though. The commodity is expectation and jumping on market moves.
I think this is what Soros was calling reflexivity. Business fundamentals are replaced by expectations in the market. It’s playing off its own dynamics.
There is another side effect from consolidation. Whale moves dictate prices. They have an ability to shape prices.
There’s also a lot to say from applied mmt. That Doug guy whose streams I link to, uses MMT ML to forecast markets informed by MMT concepts. I’ve been following him for some time to see how well he holds up.
@GhostOnTheHalfShell
Right, I mean that's what I was saying already to my Facebook friends in 2013 or something, but I'm not even clear on how QE accomplished it. I mean M2 growth turned on like a light switch around 1995, and QE just seemed to continue that. On a log scale money supply grew linearly from 1995-2019 despite all the financial baloney, dot com, mortgage, wars, and weird Fed policy. @anoneuoid@economics@a.gup.pe @djl
If you nose around in Keen’s stuff, in one of his earlier papers, he demonstrates that lending + a pricing mechanism is a chief mechanic of inequality, because in a down turn, business income preferentially services their debt obligations. Labor pays the price in reduced wages.
Because governments create fiat money, their deficit is the source of bank deposits.
In essence lending and especially charging interest is wealth transfer from labor to creditors.
@GhostOnTheHalfShell
In a world where lots of overhead is involved with banking, ie. Bankers with little visors doing math by hand and checking physical books etc... interest can be justified as simply the wages of that labor, so making interest go to zero isn't good, even running our computers and things costs some resources... Interest should be nonzero. But it shouldn't be more than the normal wages for running computers and such... There's no gold diverted from other uses or etc @djl
@GhostOnTheHalfShell
If Interest rates are high in the private lending market while prices in general are not changing it represents a scarcity of money, so government should simply transfer money by UBI to each individual. If prices are skyrocketing it means there's too much money for the available goods at current prices. Govt should raise taxes. All this fiddling w the interest rate at the Fed is completely counterproductive. @djl
a) Inflation is not necessarily or even largely due to 'too much money', see profiteering.
b) Inflation also must generally follow interest rates in some way because interest is in essence a cost increase to production or living standards funded by loans.
Interest rates can also reflect perceived risk of default. See also credit cards.
In all this, I agree, interest is a stupid way of influencing inflation or economic activity made worse by faulty theory.
Agreed about profiteering, though that usually occurs specifically when oligopoly or monopoly conditions occur, and is often worst when recent increases in money supply lead to greater willingness to accept the power imbalance.
Interest rates we can think of as derived specifically from competition with the inter-agent loan market... If banks charge too much interest, firms will sell bonds to agents holding extra cash. No money created.
The thing is banks can create money out of nothing, so they should usually be under-cutting the inter-agent bond market, unless there's a real excess of money floating around in the economy.
This leads me to a point I was going to make about Keen's analysis on his blog today.
His double-entry bookkeeping has a problem with lack of time-passage.
Right, I get that, it's just that he leaves out the situation where individuals DO loan money to the govt... during the period between when the US sells a bond, and when the buyer eventually get it back to a bank who sells it to The Fed who creates new money in Reserves...
Banks are obligated to buy US bonds. It may well be that these purchases far outstrip bond sales in the private sector. Banks buying bonds is the secret money creation sauce, where the Fed conjures 'cash' ex-nihil.
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