My plan is to write a draft what should become a chapter for my banking book. The inflation manuscript is in good shape (but way behind schedule), but there’s nothing I can publish from it (other than reposting the edited version of articles posted earlier). This article is somewhat lightweight — it might turn into the introductory section, which I normally just keep as a summary of the chapter contents. The advantage of putting this summary out is that it sort-of explains why I might cover some digressions in the first articles.
Yes, the payments system is different from the lending (money creation) system and could be better managed by cutting it out of the private banking system by everyone having an account at the central bank. Yes, there are privacy issues - but the current system is already monitored by data firms that know our transactions, can agglomerate other data and sell it on, including to governments. A digital ‘cash’ option could easily be created for modest transactions.
The loan system allows 95% of our money to be created by banks for private profit, which is at the heart of our current environmental and climate crisis. I don’t think anyone has an answer to what fraction of our money should be created for profit so let’s guess 50:50 rather than 95:5. So we have a long way to go and at the heart of the journey is bank regulations. It is the key role of central banks and has been entirely lost sight of.
As for control, leaving behind the misapplied Phillips’ curve and the silly Taylor rule, and that most inflation is supply side including oil, the real question is can a complex system like the economy ever be controlled in the first place. It can’t. When economic levers are pulled, including the interest rate, feedback loops are engaged with different time constants so the lever-puller really has no idea.
Which brings us back to MMT. Warren Mosler’s view is that the natural central bank rate is zero and should be left there. No more wealthfare cheques to the wealthy as we cut welfare cheques to the poor. Because far from higher rates cutting inflation, they increase it. It’s pretty straightforward. If you’re a business person, what inflation rate are you going to build into future prices. The central bank rate, of course.
We’ve seen how this plays out in Argentina - inflation following interest rates UP until there is a revolution at the ballot box. A lot of what has been proposed is yourself-in-the-foot-shooting but getting rid of the Central Bank? Maybe not so much.
Same in Australia, the Australian Office of Financial Management (AOFM). They manage the the daily operating account BUT also decide on the issuance of treasurys 'to meet budget funding requirements' as they put it.
The Govt's role as currency issuer is implemented throught the CB. Any money floating around the CB member banking system is created by CB and is a liability of the CB. Some comments here suggest the CB should butt out of banking. The biggest problem I see here is the CB liability for any member bank deposits is lost when the liability is transferred between individual banks without CB liability protection. Hope this makes sense.
Yes, the payments system is different from the lending (money creation) system and could be better managed by cutting it out of the private banking system by everyone having an account at the central bank. Yes, there are privacy issues - but the current system is already monitored by data firms that know our transactions, can agglomerate other data and sell it on, including to governments. A digital ‘cash’ option could easily be created for modest transactions.
The loan system allows 95% of our money to be created by banks for private profit, which is at the heart of our current environmental and climate crisis. I don’t think anyone has an answer to what fraction of our money should be created for profit so let’s guess 50:50 rather than 95:5. So we have a long way to go and at the heart of the journey is bank regulations. It is the key role of central banks and has been entirely lost sight of.
As for control, leaving behind the misapplied Phillips’ curve and the silly Taylor rule, and that most inflation is supply side including oil, the real question is can a complex system like the economy ever be controlled in the first place. It can’t. When economic levers are pulled, including the interest rate, feedback loops are engaged with different time constants so the lever-puller really has no idea.
Which brings us back to MMT. Warren Mosler’s view is that the natural central bank rate is zero and should be left there. No more wealthfare cheques to the wealthy as we cut welfare cheques to the poor. Because far from higher rates cutting inflation, they increase it. It’s pretty straightforward. If you’re a business person, what inflation rate are you going to build into future prices. The central bank rate, of course.
We’ve seen how this plays out in Argentina - inflation following interest rates UP until there is a revolution at the ballot box. A lot of what has been proposed is yourself-in-the-foot-shooting but getting rid of the Central Bank? Maybe not so much.
Same in Australia, the Australian Office of Financial Management (AOFM). They manage the the daily operating account BUT also decide on the issuance of treasurys 'to meet budget funding requirements' as they put it.
The Govt's role as currency issuer is implemented throught the CB. Any money floating around the CB member banking system is created by CB and is a liability of the CB. Some comments here suggest the CB should butt out of banking. The biggest problem I see here is the CB liability for any member bank deposits is lost when the liability is transferred between individual banks without CB liability protection. Hope this makes sense.
1) Central Banks have to tame the member banks who pressure them into setting higher interest rates.
2) You make the CB role sound quite benign.
CBs play a significant role by indirectly (through the back door), monetising Govt debt.