From the Comments: On Government Spending, Bank Money Creation, Barter

Smart observations on our brief series on dollars

“[A positive interest rate policy is] basic income for those who already have money.”
—Warren Mosler, here.

A song about money from the 1972 film Cabaret

The response to our current series on dollars has elicited good comments, two of which I’d like to quote here.

The series so far:

• Part 1 is about the dollar itself: “Why ‘Entitlement’ Cuts May Succeed”
• Part 2 explains why taxes are levied: “Why Governments Tax: A List”
• Part 3 discusses the ‘deficit’: “What Is This ‘Deficit’ We Hear So Much About?”
• Part 4 uncovers the true nature of the Treasuries market: “What Is the Federal Bond Market Really?”

BrianM on Direct Spending versus Money Creation by Loans

About Part 4, on the Treasuries market, BrianM wrote this:

As Warren Mosler says, government bonds are universal basic income for people with money. Bonds are overwhelmingly held by or on behalf of people with lots of money.

Also, since the US government is a net payer of interest (by a lot), rising interest rates tend to be inflationary rather than deflationary. They add money to the non-government sector (but with real distributional effects that are not great).

It’s also worth noting that while banks can and do create bank deposits (”money”) under government authority, that money comes along with an encumbrance. You have to pay it back. For every dollar created by private banks through lending, a corresponding dollar of private debt is also created. This is not true of government money creation (spending). What’s more, the banks create a private liability (interest) for which they do NOT create the deposits to pay. In order for the economy to actually grow, and for the private debts to be paid, (all else being equal) the government MUST deficit spend to add at least enough money to the system to cover private interest payments over time. Only the government can create unencumbered money.

Lastly, and in regard to the “debt” (that isn’t), the “debt ceiling” is another choice made by Congress that has no Constitutional requirement whatsoever. It could be repealed at any time via the same process used to create it (and the sooner the better).

The actual Mosler quote is this: He called a positive interest rate policy as “basic income for those who already have money.” His main point is that when government raises interest rates, it’s a gift to the rich. (This is the point at which Stephanie Kelton and Paul Krugman were at odds in the article we mentioned in the original piece.)

But Brian’s point is correct: the federal bond market most serves the rich (“those who already have money”). And yes, as he says, “real distributional effects are not great” — meaning that in general, the wealthier one is, the less likely one is to spend more in the broad consumer economy.

For the well-off, much of the excess goes to 401k’s, second homes, college funds and the like. For the excessively overly rich, the 1000 who run the world, distribution to big-money pros, dealers in art, and makers of superyachts is likely as far as their new money will travel. We won’t see a dime.

Aboard the 590-foot superyacht Azzam, an example of where money goes when you have far too much (source)

In addition, Brian’s third paragraph makes an excellent point.

For every dollar created by private banks through lending, a corresponding dollar of private debt is also created. This is not true of government money creation (spending). What’s more, the banks create a private liability (interest) for which they do NOT create the deposits to pay

Accumulated debt has destroyed many societies, as Michael Hudson forever points out. This is another reason the excessively rich prefer putting people in debt — your interest payments are their unneeded income stream.

Randy Allred on Money and Barter

Also commenting on Part 4, Randy Allred in part wrote this:

Money didn’t arise out of any retail barter economy, which has never existed; money was required to create retail markets.

The “money rose out of barter” idea is sourced by most to Adam Smith (that Adam Smith), who either invented it out of whole cloth or “cribbed [the idea] from the works of free-market theorists from medieval Persia,” per David Graeber in Debt, Chapter 1. As Graeber points out and anthropology verifies, money rose from a general and human sense of “obligation,” things owed to another, like kindness, thanks and good treatment. Only in some cases did these need to be quantified, which is what money does.

Graeber’s work is impossibly valuable. I’m glad to come back to it here.