J. D. Alt: 2020

By J. D. Alt, author of The Architect Who Couldn’t Sing, available at Amazon.com or iBooks. Originally posted at New Economic Perspectives.

Lambert here. I find this fable interesting for two reasons: First, it’s a powerful narrative exposition of what MMT would look like in the real world when put to use for public purpose; more like this please! Second, the cellphone-enabled “digital lira” of 2020 is screaming out to be simulated by an app — and a suitable back end — in 2012. Perhaps the UMKC buckaroo needs to go digital?

* * *

It was in the year 2020 that a majority of people first began to “see” what money is. For a few months—after the “realization” started hitting the pages, airwaves, blogs, tweets and twits of mainstream media—it became a silly joke: “2020 perfect vision, at last! How could things have been so blurry for so long?” For thousands of years, in fact.

Most agree the vision-shift began with the final collapse of the Eurozone in 2019, an event which had been forecast for some time. The surprise was that the unraveling had begun with Italy, instead of Greece as everyone had expected. It turned out to be the hot Italian blood that first reached a boiling point over the crippling cruelty of the long imposed austerity: the island of Sicily threatened secession and deadly street riots broke out in Rome, Naples and Milan—and then everywhere else. The government capitulated on September 12, 2018, declaring not only that pensions would be reinstated—with payments made in “the Italian national currency”—but also would be increased by 10%. It further declared a twelve month federal tax holiday: income and value-added taxes were put on hold for what was called the “National Transition.”

The dire predictions of hyper-inflation never materialized. Instead, people went back to work picking up the garbage and debris that had piled up for months, working for Lira, rebuilding burned out buildings and repairing roads and utilities that hadn’t been maintained for over a year. What caught everyone by surprise, however, was a decision by the Italian Ministry of Finance about how to affect the transition from Euro to Lira: Why go to the expense and trouble of printing Liras again? they reasoned. Cell phones for some time had been capable of making credit and debit card transactions. Why not, the Ministry decided, dispense with cash Lira entirely, and issue to every Italian citizen a “Digital Lira Card” (DLC) which could be loaded with Lira at any ATM machine, and then debited by any vendor with a cell phone. Why not indeed?

Within hours of the government’s Declaration of Transition, workers in the “Emergency Reconstruction Brigade” (created to remove the garbage and debris left by the riots) were pulling their “paychecks” by inserting bright red Digital Lira Cards into the slots of ATM machines—the Lira “in” the ATM machines having been “placed” there by computer keystrokes at the Ministry of Finance. Soon, DLCs were buying wine and bread, pasta, olives and biscotti in the markets of Napoli and Rome. The street cafes reopened and even the Teatro dell’Opera, which had cancelled its 2017 season, was back in business, swiping DLCs as patrons entered the theater. Most of all, everyone was happy the long, bitter political argument was over. Italy really wasn’t broke after all. It had only run out of Euros—and good riddance to boot!

What really got everyone’s attention, though, were the DLCs. There was something about using digital money that began to change the way people thought about money itself. It wasn’t as though it was something new—most financial transactions, in fact, had been occurring for decades with digital keystrokes. What made the difference, it seems, was the complete absence of cash money. The new Lira only existed in digital form: numbers on a screen. You could not hold them in your hand and count them out one at a time. You could not fold them into bundles and put them in your pocket or purse, or lock them safely in a strong-box. They could not fall out of your pocket and be lost either. The idea began to lose its grip of money being a physical thing which, like other physical things, was somehow associated with a finite quantity.

Even stranger, everyone began to clearly understand where the digital Lira (dLs) were coming from—how they were created. They were created by computer keystrokes at the Ministry of Finance. It wasn’t as if they were coming out of a pot that had to somehow be replenished. In fact, the Ministry of Finance was producing Lira exactly like an electric generator pumps electrons into the electric grid where they run motors and illuminate lighting fixtures and television screens. ERB workers could “see” this happen when they slid their DLCs into an ATM and watched the numbers tally up on the little screen.

Banks continued to make loans as before, but there was a surprise here as well: The cellphone-app made available for everyone to manage their DLC accounts clearly revealed—in a visual format—that when a bank loan was made, the bank was NOT increasing the nation’s money supply (as had been previously believed for hundreds of years.) When a pasta-maker borrowed 100 dLs to purchase flour, the right hand column of his DLC-app magically increased by 100 “new” dLs; but the left had column simultaneously showed -100 dLs—the amount he had to repay the bank. His net dLs (the bottom line on his DLC-app) remained unchanged: the bank, in fact, had not “created” any money at all! This reinforced the profound perception that the only new digital Lira being created were the ones keystroked by the Ministry of Finance. There was no other way they could get created. And, as this fact became clear, another began to percolate into people’s everyday awareness: The only way the Ministry of Finance could keystroke the digital Liras into existence was by “spending” them on something.

And spend they did. To everyone’s astonishment, during that year of “National Transition,” September 12, 2018 to September 12, 2019, the federal government solicited proposals from private business and contractors for over sixty billion dLs in reconstruction and repair projects. The public education system was expanded, new schools and trade colleges were planned for every community, and teacher training was made a national priority. The “Emergency Reconstruction Brigade” was quickly expanded to entirely replace unemployment benefits, providing useful work for any unemployed Italian citizen over the age of sixteen who wanted to work for a paycheck. After the general clean-up was completed, the ERB undertook whatever services local mayors determined could be usefully provided without competing with local businesses. Proof-of-Concept grant programs—modeled on the Gates Foundation efforts to eradicate tropical diseases—were established to provide seed money for small-scale innovators on any topic, with the grants awarded through an internet-based peer review and voting process. Coastal cities began the long and arduous process of raising their historic, stone-laid sea-walls against the dire predictions of rising oceans. The national unemployment rate, which had been nearing 40% before the riots, dropped to less than 10% in twelve months.

With unemployment plummeting, the biggest debate within the Ministry of Finance during that year of “National Transition” was whether, or for how long, to extend the federal tax holiday, and what kind of tax structure to impose when it ended. What enlivened the debate in an unexpected way was the realization—suddenly clear as day—that the reason they would be reinstating federal taxes was NOT because they needed to collect digital Lira to pay for federal spending. It had become perfectly clear that the Ministry of Finance could spend as many dLs as needed simply by keystroking them into existence. It was not necessary first to collect them as taxes. No, the reason the Ministry would be re-imposing a federal tax would be to drain dLs out of circulation—and the reason they would do that would be to control inflation. While inflationary pressure on the dL had not yet appeared, it seemed inevitable that it would as unemployment dropped closer and closer to a theoretical full employment. This, the Ministry of Finance realized, was what the federal taxes would effectively be doing: taking back out some portion of the dLs they’d previously spent in, to keep the total number of Lira in circulation from ballooning out of control.

Once this realization became a consensus, the debate shifted to what kind of federal tax should be imposed. If it was not being collected to cover federal spending, shouldn’t it then achieve some other purpose? Why not an Income Tax for wealth redistribution? But if you had just agreed that taxes would not be used for federal spending (there being no difference between a tax-collected dL and a keystroked dL) then how would an Income Tax redistribute wealth? Taxing income, it was evident, no longer accomplished anything at all! In the same way, what was accomplished by taxing consumption with a Value Added Tax? You wanted consumers, after all, to consume, so why “penalize” them for it? What was eventually agreed upon was a Carbon Tax. This had the merit, first of all, of achieving the goal (which they all knew would soon become critical) of draining dLs out of the economy to control inflation. But second, it achieved the goal of incentivizing both businesses and consumers to burn less carbon in both manufacturing and consumption. The seawalls being raised by the Emergency Reconstruction Brigade might not have to be built so high as they otherwise would.

There was one group who was particularly unhappy about all of this: The Mafioso had begun scrambling to convert their businesses to any currency other than the Italian Lira because they discovered it was suddenly impossible to fill suitcases with laundered cash for their felonious transactions. The godfathers were steaming with fury—but, of course, it was awkward to make their objections known. In a related discovery, the federal government found that a simple computer program virtually eliminated the corruption typically endemic in government contracts. Every dL issued, it turned out, could be tracked endlessly, and accurately, through the economy. The program, known as L-Track, could do searches with variable filters which generated an instant report of where the digital Lira were at any given moment. It was impossible to hide them, and difficult to skim them without being seen.

The world was watching all this of course. With great interest. Mainstream economists were busy explaining the “Italian Spring” and scrambling to explain why it appeared that the federal “deficit” the Italian government was “tallying up” didn’t appear to be “debt” that it was ever, at any point, going to have to be “repay” to anyone at all. This final bit of confusion came to a head—and the “great realization” started to unfold, the blinders torn off, the window shades yanked up, the curtains thrown open to a new understanding of money itself—when those villainous financiers who had held the Eurozone hostage through all the years of the debt-crisis, bidding up the interest rates they demanded to buy the Greek, Italian and Spanish bonds, refusing to take even the smallest “hair-cut” when those nations struggled to make their interest payments—when those self-righteous bond-buyers came to the Italian Ministry of Finance and announced they would now like to buy Italy’s bonds again! And the Ministry of Finance replied: “Bonds? We have no bonds for sale. Why would we want to sell you bonds? We have no need to borrow your money!” And the bond-buyers responded: “But we want to buy your bonds! We need a place to park all this cash that we can’t think of anything good to do with—a place to park it that will earn us interest. We need you to issue bonds so we can buy them!” And the Ministry of Finance replied: “If you want to spend your money in Italy, come and build a factory or start a business, or invent a new way to convert sunlight to electricity using Nano-particles, or commission a new opera or some other great work of art…. But don’t come here wanting to buy our bonds. We’re no longer in the business of parking your money for you—and paying for the privilege.”

That was in the year 2020, and the world sat up and took notice.

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About Lambert Strether

Readers, I have had a correspondent characterize my views as realistic cynical. Let me briefly explain them. I believe in universal programs that provide concrete material benefits, especially to the working class. Medicare for All is the prime example, but tuition-free college and a Post Office Bank also fall under this heading. So do a Jobs Guarantee and a Debt Jubilee. Clearly, neither liberal Democrats nor conservative Republicans can deliver on such programs, because the two are different flavors of neoliberalism (“Because markets”). I don’t much care about the “ism” that delivers the benefits, although whichever one does have to put common humanity first, as opposed to markets. Could be a second FDR saving capitalism, democratic socialism leashing and collaring it, or communism razing it. I don’t much care, as long as the benefits are delivered. To me, the key issue — and this is why Medicare for All is always first with me — is the tens of thousands of excess “deaths from despair,” as described by the Case-Deaton study, and other recent studies. That enormous body count makes Medicare for All, at the very least, a moral and strategic imperative. And that level of suffering and organic damage makes the concerns of identity politics — even the worthy fight to help the refugees Bush, Obama, and Clinton’s wars created — bright shiny objects by comparison. Hence my frustration with the news flow — currently in my view the swirling intersection of two, separate Shock Doctrine campaigns, one by the Administration, and the other by out-of-power liberals and their allies in the State and in the press — a news flow that constantly forces me to focus on matters that I regard as of secondary importance to the excess deaths. What kind of political economy is it that halts or even reverses the increases in life expectancy that civilized societies have achieved? I am also very hopeful that the continuing destruction of both party establishments will open the space for voices supporting programs similar to those I have listed; let’s call such voices “the left.” Volatility creates opportunity, especially if the Democrat establishment, which puts markets first and opposes all such programs, isn’t allowed to get back into the saddle. Eyes on the prize! I love the tactical level, and secretly love even the horse race, since I’ve been blogging about it daily for fourteen years, but everything I write has this perspective at the back of it.


    1. PCMcGee

      Agreed Mick, money can’t hold value unless it’s scarce. This is the reason why society cannot solve war, poverty and crime. You really must read Jacque Fresco’s book, The Best That Money Can’t Buy.

        1. Mick

          I’m more interested in the access to resources being more transparently politicised. In this scenario the ability for money to justify rationing seems to collapse, so another way of distributing them might be necessary?

      1. TK421

        Right, something is only valuable if it is scarce. If there was only one telephone in the world, it would be so much more worth having than the phones that exist today.

      2. TK421

        “This is the reason why society cannot solve war, poverty and crime.”

        But the level of crime in settled societies has been dropping for centuries. The “war on poverty” greatly diminished poverty*. And it sure seems like most wars take place precisely because of resource scarcity, from oil and the occupation of Iraq to usable farmland in Rwanda–so we shouldn’t say a resource like money is scarce if it really, truly isn’t. Realistically speaking, there is no limit on the amount of money that can exist. There is probably a limit on the amount of money that *should* exist, of course, but there is literally nothing stopping society from creating more money, unlike oil or farmland.


      3. LeonovaBalletRusse

        Fresco is a designer, and obviously the New World City/Region Planner. He stands to GAIN much in the New World.

  1. Goodness me

    Isn’t this post a very subtle troll of the “banks create money out of thin air” crowd?
    Are you ready for the onslaught of comments from people who never sat through undergraduate economics and worked out how the money multiplier works?

    I’m assuming that you are still counting dL deposits with banks as part of the money stock.

    1. jake chase

      Does anybody know what happened to the people who were too old to work but had accumulated actual money through what used to be called saving and investing? I suppose they were stuck with Euros, and company shares, and bonds, right?

      1. James Cole

        Presumably there is an exchange rate, plus pensions were reinstated at 110%. Compare to the fortunes of the same folks under the current real-life austerity trajectory.

    1. TK421

      Which is the “childish” part? The part about the government creating money, rather than forcing people to barter with an already-existing commodity? That thing about magnetized cards being used to conduct commerce? Those so-called “ATM” devices? You should get out more.

      I will say this: it often seems naive to think the Eurozone will wait until 2019 to break up.

  2. Jack Parsons

    Cell phone as money gateway: a telco in Africa (maybe more) uses cellphone minutes as a savings account. Minutes are convertible back to cash. Everybody has cell phones (really) but there are no bank branches, so using your phone as your bank is practical.

    1. Hypothetical_Taxpayer

      Cell phones for some time had been capable of making credit and debit card transactions.Why not, the Ministry decided, dispense with cash Lira entirely, and issue to every Italian citizen a “Digital Lira Card” (DLC) which could be loaded with Lira at any ATM machine, and then debited by any vendor with a cell phone. Why not indeed?

      Gadzooks! Italy invents the debit card! But better yet, The Marconi Debit Card!

      Why not? Apple only accepts dollars or Canadian Maple Leafs for iPhones?

  3. Max424

    When I hear the words “digital money,” I reach for my revolver.

    How do you think we got here? Why are modern US households so incredibly fucked? How did their balance sheets so quickly realign –the American middle-class moving from a SANE position of carrying almost NO debt in the mid-1970’s, to being stuck in an INSANE 14 trillion dollar hole today?

    The American economy rapidly –and not-so-unintentionally (neo-liberals!)– transitioned from the tangible to the airy (from cash to plastic), that’s how.

    Cash, almost by definition, is self-imposed discipline. Remove that discipline –plastic for all my sheep/serfs!– and the ballgame is over.

    Note: Everybody should study casino operations. Casinos beat you in many ways, but their main edge is not a percentage one, it’s psychological.

    Casinos remove bills and coins from the playing field, and replace them with dreams of rainbows and pots of gold.

    Airy chips, in other words, for all my the hopelessly gullible and soon-to-be-broke,* sheep/serfs.

    *Soon-to-be-broke, pshaw. In debt up to their eye balls, and spending every remaining day of their life working to pay off the interest on the interest on the interest on the interest … of their long forgotten initial debt.

    1. They didn't leave me a choice

      That 14 trillion dollar hole? It’s a bad joke by bad people. That’s all it is, might as well not exist at all.

    2. TK421

      “Cash, almost by definition, is self-imposed discipline”

      I hope you don’t think the economy was more disciplined under the gold standard, because that is as far from the truth as could be.

      And why isn’t the growth in household debt related to the stagnancy of wages during the same period?

      1. Max424

        Three decades of exponential “growth” in US household debt is obviously a result of many inputs, including wage stagnation, neo-liberal propaganda slash advertising, bank fraud, privatization, but the number one cause, in my opinion, is the average American consumer now lives in a digital netherworld, where spending money is no longer a difficult and painful experience, but is actually a quite easy and pleasurable thing to do –at the time, and whether they have or not.

        Note: Regarding the gold standard: good for households, bad for governments. In other words, one should balance, one should not.

        Why balance when you don’t have to? That question has been insanely flipped the last thirty years. We tell households, why bother, we tell governments, they must.

        1. TK421

          Maybe this is my own bias, but I sure don’t know many people who can afford to spend, spend, spend and do so mostly because of electronic transactions. They are probably out there, I just don’t think there are enough of them to account for the problem on their own.

    3. dale pues

      damn. I thought it wa just me, hating to spend cash that is. Treating sis and her friend to a steak dinner? amex, no cash. I tell myself it’s for the points (which amex charges me to keep a running tally too!), but really I know not so deep down that I whip out the card because, 1. it’s cool, and 2. no cash disappears in front of my eyes.

  4. d

    “When a pasta-maker borrowed 100 dLs to purchase flour, the right hand column of his DLC-app magically increased by 100 “new” dLs; but the left had column simultaneously showed -100 dLs—the amount he had to repay the bank. His net dLs (the bottom line on his DLC-app) remained unchanged: the bank, in fact, had not “created” any money at all!”

    What about the bank’s side of the transaction? They now have an asset – the loan. What is their offsetting liability?

      1. They didn't leave me a choice

        Continuing on that trajectory, while it’s true that the loan itself is balanced, does not the “money” loaned exist de facto within the transaction system until the point that it is extinquished by paying it back? That is, by saying that the loan does not create money you are effectively analysing the situation in the same way as the neoclassicals do, by assuming that since the money is /eventually/ disappeared into nothing, it never existed in the first place? An equilibrium of sorts that is. I just find that more than a bit wrongheaded since, after all, we all have to live here and now in the field of time derivatives.

        1. TK421

          When you pay back your loan, you don’t extinguish the money involved but rather your liability and the bank’s asset. The money “goes” back to the bank’s account.

          1. EconCCX

            When you pay back your loan, you don’t extinguish the money involved but rather your liability and the bank’s asset. The money “goes” back to the bank’s account. @TK421

            Careful, TK. If you make a payment from your account at another bank to pay off the loan, you’ve conveyed reserves (central bank money) from your checking bank to your lender bank’s “account.” Thus aggregate reserves remain unchanged. Your checking bank has less; your lender bank has more. But your checking bank’s liability to you has been extinguished. M1 has been reduced; money has been destroyed.

            If your checking bank and your lending bank are the same institution, reserves don’t move at all. The bank doesn’t “get” your money because it already has it. But its liability to you is extinguished. Money has again been destroyed.

        2. LeonovaBalletRusse

          Imagine this, more realistically, since we know the Mind of the Master Class:

          The 100L debit shows on the mark’s phone. The bank “collects” an arbitrary amount each month/day, plus “fee”/”interest”/GAIN by subtracting this overnight from the mark’s “equity” as displayed on the phone.

          Hard to imagine? It’s happening right now.

    1. William

      This was clearly explained. The Italian government created more cash . . . no, I mean money. Uh, no, I mean currency, No wait, I mean “digital Lira. . .when needed–presumably whenever a bank made a loan! So what has happened is the government has “nationalized” the federal reserve system (or whatever they call it over there).

      The story presents the worst dystopia. Think about your EVERY transaction being tracable to you, a time, and a place. With zero privacy (hey, while we’re at it, why not ban window shades? What do we have to hide?), the opportunities for control and manipulation by authorities are endless. This story is simply an apologetic for the surveilance state.

      1. tim8alete

        Every transaction can currently be trace to person, time and place. Probable cause and court order gives the authority to look. Does that invade your privacy?

        Absolutely! That is a good thing.

        All internet transactions as well.

        Fourth Ammendment


    2. EconCCX

      His net dLs (the bottom line on his DLC-app) remained unchanged: the bank, in fact, had not “created” any money at all! @J. D. Alt

      The bank had created a government-guaranteed medium of exchange that would electronically circle the globe: money! M1 rising in the amount of the new loan. But diminishing with each payment to the bank.

      On the other side of the equation: a private debt! Nonmoney! More debt created than money, with the difference, via interest and fees, compounding over time, requiring new borrowing to repay. Unto insolvency, foreclosure, depression, repudiation. Welcome to Soddy’s dystopia. The world we’re in.

  5. joebhed

    I have an idea.
    Let’s pretend that the government (Treasury, Finance Ministry, Monetary Authority) has both the Constitutional power and enabling legislation RIGHT NOW to create all of the nation’s money supply, and the only thing that is preventing national peace, justice and prosperity is, well, a ‘realization’.
    Maybe if we pretend that the private bankers are not creating all of the nation’s money supply as a debt by making loans, there will be a magic transformational enlightment that somehow transfers that debt-saturating, wealth-concentrating power back to the people and we can all live happily ever after.
    Maybe we can just declare that which can be, IS.

    Or, maybe, we can act like adults and identify the reforms that NEED to be made, propose and fight for those reforms and make this thing happen.
    The Money System Common.

    1. Ben Wolf

      We don’t need to pretend. Consolidated government has all money issuance power and banks do not issue all our money supply.

      1. joebhed

        Consolidated government is a term that has meaning to me for state and local governments, but I am not familiar with the term in relation to the money-issuance power.
        Our sovereign government gained the money creation, issuance and regulation power after taking it back from Great Britain in our War for Independence, and placed that power squarely with the Congress. I don’t believe they ever mentioned the consolidated government. That might be an accounting term.
        Being sovereign, our government has the money issuance power.
        However, our government has allowed for private money creation and issuance throughout our history.
        The last actual government issuance of any significant part of the money supply was during the Civil War when the Congress authorized the public issuance of some $450 million in Greenbacks. Without debt.
        Other brief, smaller public involvement has also been interspersed with the private bank issuance of the money.
        It’s not that the government doesn’t have the power and legal capacity to be the monopoly issuer of the money supply, it’s that it has transferred that power of issuance to the private bankers.
        By any conventional measure of the money supply that is used by real people in the real economy – the kind that pays wages and is used to buy stuff, – the private bankers issue all of that money, except coins(c.e.).
        And they issue all of that money as a debt.
        The same government that HAS the sovereign power to issue the money then goes to those private bankers and borrows the money it needs to pay its Bills, and pays interest to the private bankers who issued that money.
        The only part of the money supply that is not issued by the private bankers is coinage. Coinage is permanent real money issued without debt whose seigniorage is earned by the government.
        A branch of government prints the FR notes that circulate as money, but they are issued into existence as part of the money supply by the private banks. The government gains no seigniorage by the issuance of FR notes.
        So, to be clear. It is not that government needs any more money creation powers than the sovereign nation presently enjoys. We are not the monopoly-issuer because of decisions made long ago by those in Washington.
        But we should be.

  6. p78

    Lovely story, thank you for clarifying many points. So it was never “Tax and Spend” as they had us believe, but indeed “Spend and Tax”.
    Why is this not going viral?

      1. Mick

        Does expanding the money supply work the same way for every economy? I can’t see how Zimbabwean inflation was due to an overheated economy that needed taxation as a balancing mechanism.

        1. Ben Wolf

          Zimbabwe suffered a collapse in national productivity (over 80%) and the loss of its ability to tax as a driver of its currency. In response to its inability to acquire resources needed for governance, they turned their printing presses to full and money supply vastly outstripped the resources available for purchase, precipitating a hyperinflationary event.

  7. JEHR

    If we do away with cash, then those who swindle and cheat with and launder cash will not be able to continue doing so.

    Imagining a country where interest is never paid is a lovely fantasy. Then what need would there be for banks?

      1. joebhed

        Very interesting.
        That there could be debt- and interest-free money issued for any economic activity that involves real goods and services is agreed.
        But when the product being sold is access to money itself, then the natural rate of interest should flow to those providing the capital.
        Only seems fair.

      1. Yves Smith

        He got mad when I chewed him out offline for saying too many bad things about Mormons. A toad hopping out of someone’s mouth occasionally might be OK, but he was making a steady diet of it.

      1. EconCCX

        New Economic Perspectives is an echo chamber. @Hypothetical_Taxpayer

        Not by accident. I put up a comment once that was quickly purged by deficit_ostrich, who did not reply to my emailed request for her rationale. Below is the email, which contains the original comment:

        Greetings UMKC Economists

        My appreciation for UMKC’s brand of heterodox economics is boundless. I came to conclusions similar to MMT’s with Abba Lerner’s “Flation” more than thirty years ago, but have learned more about banking in recent years, and come to align with circuitists such as Steve Keen and Herman Daly.

        This morning I put a reply up on the MMT primer which I thought was factual and respectful. It was removed, and I’m wondering what was objectionable, and what you’d have me change in it to make it acceptable.

        Thanks for any insights

        “Raising the ratio to 10% means they only have 90% of their assets potentially earning higher returns. And so on. Will that affect lending rates earned (what they charge borrowers) and deposit rates paid (what they pay depositors)?”

        Wait, are you maintaining that banks lend out the money of their savings depositors? Banks create new money as “deposits” (liabilities) that balance against the mortgages and other loans they’ve persuaded the public to sign for. It’s the debt, private and public, that creates the circulating medium; but since interest accrues on the books, that interest can be paid only by the assumption of new debt. It’s a thieving system of money that is putting entire civilizations in debt bondage.

        Anna Schwartz describes money creation accurately here, using a 10% reserve ratio. She has the banking system lending up to $9000 against a $900 excess reserve:


        So at a 1% ratio, that same $900 powers almost 100K of free ride money creation. It just requires banks to have rough balance between customers making payments and customers receiving them, else loans from other banks at the Fed Funds Rate are required.

        Schwartz very clearly has private banks, rather than government, creating today’s money. Government merely maintains confidence through deposit insurance, and by its willingness to convert “any” amount of deposit money, i.e. bank IOUs, into inconvenient, cumbersome constitutional money, i.e. Treasury-issued coins.

        MMT’s depiction of the money creation process should be documented with reference to banking law, not merely asserted. Drs. Hudson and Black have studied the mechanics, and are not, to my knowledge, MMTers.

        Of course some of this would not be accurate today. But even if it wasn’t accurate at the time, to delete a substantive argument rather than address it is to enforce an orthodoxy that no commenter should abide.

  8. craazyman

    We’re not doing away with cash or coins.

    forget it.

    Numismaticism is a pastime worth preserving. And money can be a physical object of art and design. The physicality of the world is dissolving and with it, its beauty. I say stuff the digital coins up the iPhone’s ass.

    I say bring back the subway token, I’ve had it up to here (hand over head) with the Metrocard. You never know how much is left on it and you’re continually in a state of anxiety, worrying whether they’ll let you on the bus without shaking their head in resignation “another freeloader who pretends he couldn’t keep track of his card balance”. They just sullenly wave you on, it’s an indignity to all.

    1. Aquifer

      i tend to agree – methinks our medium of exchange should be as “solid” as the things we exchange it for ….

      This inexorable movement toward exchanging virtual for physical reality – both the idea that we should, let alone the idea that we can with impunity – is a BIG boo-boo, IMO …

  9. Chauncey Gardiner

    Enjoying the juxtaposition of the author’s name (nom d’plume?) with that of Ayn Rand’s John Galt.

    Gasp!… Would this mean no more “Austerity” measures?… No more massive engineered financial frauds?… No more incomprehensibly enormous “Bailouts”?… No more theft of publicly owned assets (aka “Privatization”)?… No more Kondratiev harvest cycles?… etc.

    But what are the implications with respect to trade, oil and those who benefit from the “Global Reserve Currency”?… (“Realpolitik”, as they are wont to say)

    Thank you, Mr. Alt. Also appreciated your earlier post back in May and your website: http://www.houseeds.com

  10. Heretic

    I like the story. I believe that this would be narratively true, but there is an important issue that is unaddressed… The availability of real resources in the economy. In the case of Italy, Spain and Greece, these three nations (I believe) are energy importers, they have no useful reserves of oil or coal. How would they get the Arab nations (or the Russians or the central Asian nations) to supply them with the energy they need to mobilize their economy? I believe that is the major issue facing those three nations; I believe they are food and water sufficient, and and their are plenty of minerals worldwide available for purchase.

    Ironically, this story of MMT would work very well in North America… This continent has all the real resources, people, technology, expertise and ingenuity it needs to be able to be self sufficient and self-mobilize (mind you, energy consumption for transportation would have to be reduced an optimized).

  11. Chauncey Gardiner

    To think the smart, wealthy and powerful beneficiaries of the current system would willingly implement such an alternative system without a fight is naive. And let’s face it, they control this government at this time.

    Further, there is the not insignificant issue detailed beginning in the seventh paragraph of this linked article by a blogger and political strategist:

    Insurmountable?… No. But to some extent the continuing march of events and further pain will be required to set the stage for systemic change IMO. And yes, I do believe in Black Swans.

  12. Aquifer

    Well, one problem i have is that this rosy picture is obviously assuming that the gov’t putting all these dls into circulation is a benign one, and wants to improve the lot of it’s citizens, but just instituting this monetary system in no way guarantees such an outcome …

    Sorry folks but no matter what money “system” you use – if you aren’t diligent about whom you put in charge of creating and distributing those lira, whether digital or physical (read: PAY ATTENTION to politics), you can still be as screwed as you are now … There is no way to get around that ….

  13. J.D. ALT

    Hey Naked Capitalists, why all the angst about this little essay? All it is doing is trying to illustrate three basic facts:
    1. Modern sovereign governments issue their national currency by fiat.
    2. The only limit to the amount of fiat currency sovereign governments issue (and spend) is inflation.
    3. Modern sovereign governments don’t have to either collect taxes or borrow in order to issue and spend their national currency.
    These three facts mean it is POSSIBLE for an enlightened nation to provide itself—through the structure of its sovereign government—with the optimal infrastructure and services the people need to fully employ themselves in their quest for life, liberty, and the pursuit of happiness.
    What we should be taking about is, if it’s POSSIBLE, why isn’t it being done?

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