I have commented several times on people who falsely think that all U.S. dollars are lent into existence as bank loans, and that we therefore owe our souls to the bankers. They totally reject Rodger Mitchell’s teachings, since Rodger tends to focus on the devastation caused by gratuitous austerity, in which politicians reduce government spending in order to starve us. For these people, there is no government spending. There is only government borrowing. Hence they think the Fed and the banks rule the universe. They think that politicians have no say over central government spending, and that politicians do not vote for austerity. They think that Monetary Sovereignty is held by banks, not the U.S. government.
Once people fall into this mental trap, it is very difficult to pry them out of it.
Their entrapment often happens like this…
One day they discover that “fractional reserve banking,” is a myth, and that banks create loan money out of thin air by crediting accounts. This apparently gives supreme power to bankers. After all, whoever controls the money controls society.
(If they are anti-Semites who believe that “all bankers are Jews,” then so much the better, since one delusion feeds the other, allowing them to falsely proclaim that “We all owe the Jews.”) Often they feel that they have stumbled upon the secret of the ages. (“Bankers create loan money out of thin air!”)
Next they find others online who speak of a wonderful place a long time ago in a galaxy far, far away in which noble Jedi knights used something called “the force” (i.e. government-issued money) to defeat the evil Debt Vader.
Their delusion is further cemented by lies told by bankers themselves, such as this lie from the Bank of England…
“The amount of money created in the economy ultimately depends on the monetary policy of the central bank. In normal times, this is carried out by setting interest rates. Monetary policy acts as the ultimate limit on money creation.”
There it is, right from the dragon’s mouth. Except it’s a lie, or at best a half-truth. The Bank of England is only addressing the amount of credit (i.e. loan money) in circulation, while ignoring the trillions in government-created money.
The word “credit” itself confuses people. As a noun, “credit” means a loan. As a verb, “credit” means to change (or “mark-up”) the numbers of a bank account. This “mark-up” is done to annotate money that may or may not exist as loans.
The deluded ones think that even if someone hands you a dollar bill, and you deposit it in your bank account, then that dollar was lent into existence by the Federal Reserve, and we all owe interest on it. Hence (they think) we have a “national debt crisis.” (More on this below.)
Some of them encounter MMT writing, which says that not all money consists of bank loans. MMT reveals that Monetarily Sovereign governments also issue money, and not as loans.
However the deluded ones are reassured by people like Paul Krugman, who says,
“I get the premise that modern governments which are able to issue fiat money can’t go bankrupt, whether or not investors are willing to buy their bonds. And it sounds right if you look at it from a certain angle. But it isn’t right.”
(Krugman goes on to say that if MMT was right, then we would have hyper-inflation. Krugman is wrong about so many things that I could dedicate an entire blog to debunking his nonsense. He still thinks that banks directly lend out their depositors’ money!)
Wikipedia backs up this delusion by (falsely) echoing that banks create all the money — although Wikipedia has a link at the bottom to “alternative theories” such as chartalism, which says that Monetarily Sovereign governments also create money.
Because of this delusion, we see reader comments like this, which I read two minutes ago at the “Institute for New Economic Thinking” (a New York City “think tank” founded by George Soros)…
“The root of the problem is that the central bank controls the issuance of money. This started when sovereign governments surrendered their basic right to issue money to privately owned banks. This has been THE political issue since the days of ancient Greece. Any government that does not issue the money is controlled by those who do issue it. We need a united movement that understands this. The Greens are the only political party that addresses it in their platform.”
The Greens? They call for more austerity just like everyone else. Gratuitous austerity (i.e. federal deficit reduction) has already caused so much poverty that scurvy (the disease) has made a dramatic comeback in the USA. Symptoms include bleeding gums, mysterious swelling, bruises, fatigue, mood swings, rashes, hemorrhaging, joint pain, and others.
(I’m waiting for Trump to say, “Scurvy? That’s a disease of old-time pirates, isn’t it?)
Another source of the delusion (that banks-create-all-the-money) is the close relationship between the U.S. Treasury and its main bank, the Federal Reserve.
Randy Wary explains…
While it was obvious two hundred years ago that the national treasury spent by issuing currency, and taxed by receiving its own currency in payment, that is no longer so obvious, because the Fed stands between the Treasury and recipients of government spending, as well as between Treasury and taxpayers making payments to government.
Mr. Wray means that even though money only exists in the accounts of banks and bank-like entities, this does not mean that all money in banks consists of loans from banks. If money in a bank is created by a bank, it is a loan. If money in a bank is created by order of the U.S. government, then it is not a loan (but it may be taxable).
However, as MMT has shown, nothing of substance has changed—even though taxpayers today make payments from their private bank accounts, and banks make the tax payments to Treasury for their depositors using reserves held at the central bank. And when treasury spends, its central bank credits reserve accounts of private banks, which credit deposit accounts of recipients of the government spending.
In other words the Fed has introduced some extra steps to U.S. government spending, but the U.S. government continues to spend without borrowing its spending money.
This is not to say that government and the banks face no constraints to their money-creation. For Monetarily Sovereign governments, the constraint consists of the budget authority provided by Congress and the President, plus the political “debt limit” antics, plus the advent of possible (but unlikely) inflation. For banks, the limits consist of capital constraints, plus restrictions on the types of loans that banks can make (and types of other assets that banks can hold).
Unfortunately politicians have removed most constraints from bank lending. The result has been hyper-leveraging, which causes bubbles, plus criminal banking activity.
Meanwhile the government is starving us via austerity, in order to make us slaves of the bankers.
The people who think that all money consists of bank loans want to go back to using the “greenbacks” that were first issued by the U.S. Treasury during the U.S. Civil War…
“Greenbackers” (i.e. people who think that all money consists of bank loans) see the words “Federal Reserve Note,” on a currency bill, and they think, “Right there is the proof that it was lent to us by the Federal Reserve. The notes carry the signature of the U.S. Treasury secretary, which proves that the secretary borrows all our money from the Fed.”
Actually, less than three percent of the U.S. money supply consists of coins and paper notes. The dollars in your own bank account have no physical existence, and do not say “Federal Reserve Notes.”
More importantly, all true money exists only in the accounts of banks, but this does not mean that all money in bank accounts consists of bank loans. Even if you never took out a loan for your entire life, and you lived strictly with cash, you would still need banks, since our money system is based on banks – but not strictly on bank loans! Banks simply keep the ledgers for money, some of which is loans, and some of which is not. Since the Fed backs up all U.S. banks, the term “Federal Reserve Note” plus “U.S. Treasury” reassures you that the banking system (where all true money exists) is backed up by a central bank, plus a central government.
When the U.S. government issued “greenbacks” during the U.S. Civil War, we had banks, but not a Federal Reserve System to stabilize and help regulate all banks. We still use “greenbacks” today, but they are called Federal Reserve Notes.
Yes we need to downsize and re-regulate the big banks. Yes, too much money in our society exists as bank loans. Yes, we should remove banks from private ownership as far as possible. Yes we need more public banks like the Bank of North Dakota.
However it is not possible to eliminate banks or the Fed altogether. We must have banks in one form or another if we are to have any monetary system at all.
Therefore the solution is to increase deficit spending by the U.S. government. (Oh that’s right. I forgot. There’s no such thing as “government spending.” There is only government borrowing. Right?)
The business cycle is essentially a credit cycle (i.e. a loan cycle). Politicians reduce deficit spending in order to make you grovel to them, and to make you a slave of the bankers who bribe them. This forces you to take out more loans of various types. Eventually the collective debt load builds up to the point that it cannot be paid. Business fold. Bankruptcy abounds. At that point the economy slows down and goes into a recession – unless the U.S. government injects money into the economy via increased spending. But if the U.S. government instead imposes austerity, and reduces its deficit, the recession becomes much worse, and can even be made permanent, such as we now have in the USA.
You can see this in charts that Rodger Mitchell has often provided in his blog. Recessions always follow austerity (i.e. deficit reduction) regardless of the size of the so-called “national debt.” Recessions are triggered by debt loads, but they are cured or worsened by the level of government spending.
Again, the solution is to increase deficit spending by the U.S. government. Either that, or have public state banks (like North Dakota’s) which can create loan money out of thin air, and charge little or no interest.