Where does money come from?

[Wossname]

chewybrian » 2 minutes ago


Steve is saying that the 'gift' of the money would effectively be a loan. It would be added to government debt, which ultimately must be paid for by the citizens in one way or another--perhaps by higher future taxes, or reduced services in the future, inflation, etc.

Yes I believed that was what he was saying.
What I am saying is that the need to put up taxes or to reduce services to pay for it is mistaken.
Money is made from "thin air" by keystrokes on a computer. Most people don't know this.
Have a look at the links above and see what you think (if you have time).

[Sculptor1]

Whilst the Corona Virus clampdown is in place the best thing for the economy to do is to declare a jubilee on all rents and mortgages.
Simply declare April and May as not existing for tax purposes, and make it illegal for any rents or mortgages to be collection.
Mortgage payments would simply be deferred to the end of the policy. Rent collectors would just have to suck it up - But since rent seeking behaviour is always a burden on the real economy this policy would do no harm.

I think you are very much on the mark. The only change I would make is that missed rent payments would become due at the end of the rent period, allowing the renter up to one year more to make good without penalty (they did sign a contract, after all).

I see no reason to burden the poorest with that. Rent seeking behaviour is by definition earning without working.
Any rent seeker who needs the rent to keep up mortgage payments would not be harmed.
This is win win.

[Steve3007]

Steve is saying that the 'gift' of the money would effectively be a loan. It would be added to government debt, which ultimately must be paid for by the citizens in one way or another--perhaps by higher future taxes, or reduced services in the future, inflation, etc.

Yes, that's what I was saying.

Money is made from "thin air" by keystrokes on a computer. Most people don't know this.
Have a look at the links above and see what you think (if you have time).

It's only made from "thin air" in the same sense that any other contractual agreement or promise is made from "thin air". Money is an abstraction of the concept of exchanging human labour for other human labour. All abstractions are, arguably, made from "thin air".

But I will have a look at the links, if I have time.

[Wossname]

Steve3007 » 7 minutes ago

But I will have a look at the links, if I have time.

If you do look then I would be interested to know if you still believe that taxes must go up to pay for the proposal, and if so why?

[Wossname]

Sculptor1 » Today, 12:27 pm

Whilst the Corona Virus clampdown is in place the best thing for the economy to do is to declare a jubilee on all rents and mortgages.
Simply declare April and May as not existing for tax purposes, and make it illegal for any rents or mortgages to be collection.
Mortgage payments would simply be deferred to the end of the policy. Rent collectors would just have to suck it up - But since rent seeking behaviour is always a burden on the real economy this policy would do no harm.

FYI the prime minister has today announced he will introduce emergency legislation to prevent private renters from being evicted. We await details.

On rationing, here in the UK some major supermarkets have declared they will limit the number of items people may buy to prevent stockpiling.

For those of you in the USA, here lavatory paper, long-life milk, bread, eggs, pasta and rice have recently been impossible to buy because of panic buying. You have been warned!

[Sculptor1]

Steve is saying that the 'gift' of the money would effectively be a loan. It would be added to government debt, which ultimately must be paid for by the citizens in one way or another--perhaps by higher future taxes, or reduced services in the future, inflation, etc.

Yes, that's what I was saying.

Money is made from "thin air" by keystrokes on a computer. Most people don't know this.
Have a look at the links above and see what you think (if you have time).

It's only made from "thin air" in the same sense that any other contractual agreement or promise is made from "thin air". Money is an abstraction of the concept of exchanging human labour for other human labour. All abstractions are, arguably, made from "thin air".

But I will have a look at the links, if I have time.

One thing that is good may come of this crisis; people are going to realise what money actually is. They might also figure out that the last 10 years of austerity has been a **** con. A con trick which has enabled the number of billionaires to have tripled whilst food banks, homelessness and zero hour contract have rocketed.

Money has no intrinsic value, but is the oil that enables value to move through the economy. Without the oil wealth can accumulate to the benefit of the rich. Too much oil and we all drown.

[gad-fly]

A very simple primer. When you get to “click here” then I recommend you do.
https://modernmoneybasics.com/

Here is a half hour video giving simple diagrams and very clear narration:
https://www.youtube.com/watch?v=bHQCjFebIf8

I was about to focus on your two links which are highly relevant to the thread, but I felt it might be caught in the present crossfire on COVID 19. Thus there may be some short delay.

Various measures have been proposed to alleviate the impact, including $1000 to every citizen, waive/delay payment, quicker refund, and so on. These measures, which may well be justified, can be viewed as gifts to individuals, to be paid back. Again, 'no free lunch' applies. Government has mandate to increase money supply at its discretion. Hence sending gift is always viable. But that is not the end of the story. One scenario is for it to increase tax later. Another is to do nothing afterwards, when rampant inflation will be allowed to take the economy back to stability. INFLATION is what everyone has to pay for, because it will eat away money in his pocket. Payback time may be uncertain, but it will never fade away. Nor will it be too far away.

[Wossname]

gad-fly » Today, 6:45 pm


I was about to focus on your two links which are highly relevant to the thread, but I felt it might be caught in the present crossfire on COVID 19. Thus there may be some short delay.

Various measures have been proposed to alleviate the impact, including $1000 to every citizen, waive/delay payment, quicker refund, and so on. These measures, which may well be justified, can be viewed as gifts to individuals, to be paid back. Again, 'no free lunch' applies. Government has mandate to increase money supply at its discretion. Hence sending gift is always viable. But that is not the end of the story. One scenario is for it to increase tax later. Another is to do nothing afterwards, when rampant inflation will be allowed to take the economy back to stability. INFLATION is what everyone has to pay for, because it will eat away money in his pocket. Payback time may be uncertain, but it will never fade away. Nor will it be too far away.

I fear if governments don’t pump billions into their economies we will be facing recession.

The impact of this virus is likely to leave people poorer and depress economic activity even so. Excess demand and inflation look to be the least of our worries.

If I am wrong, that can always be addressed down the road.

[gad-fly]

gad-fly » Today, 6:45 pm


I was about to focus on your two links which are highly relevant to the thread, but I felt it might be caught in the present crossfire on COVID 19. Thus there may be some short delay.

Various measures have been proposed to alleviate the impact, including $1000 to every citizen, waive/delay payment, quicker refund, and so on. These measures, which may well be justified, can be viewed as gifts to individuals, to be paid back. Again, 'no free lunch' applies. Government has mandate to increase money supply at its discretion. Hence sending gift is always viable. But that is not the end of the story. One scenario is for it to increase tax later. Another is to do nothing afterwards, when rampant inflation will be allowed to take the economy back to stability. INFLATION is what everyone has to pay for, because it will eat away money in his pocket. Payback time may be uncertain, but it will never fade away. Nor will it be too far away.

I fear if governments don’t pump billions into their economies we will be facing recession.

The impact of this virus is likely to leave people poorer and depress economic activity even so. Excess demand and inflation look to be the least of our worries.

If I am wrong, that can always be addressed down the road.

You may be right. Remember government is not omnipotent. Gazing into the crystal ball, it may not see clearer than you. I believe we shall fall into a recession whatever measure government may take. Having taken a wrong measure, it is seldom given to replay. Shutting down the economy, even partially, is unprecedented. The worse case scenario is a depression.

[Scott Mayers]

chewybrian » 2 minutes ago


Steve is saying that the 'gift' of the money would effectively be a loan. It would be added to government debt, which ultimately must be paid for by the citizens in one way or another--perhaps by higher future taxes, or reduced services in the future, inflation, etc.

Yes I believed that was what he was saying.
What I am saying is that the need to put up taxes or to reduce services to pay for it is mistaken.
Money is made from "thin air" by keystrokes on a computer. Most people don't know this.
Have a look at the links above and see what you think (if you have time).

I keep seeing you say "money is made by 'thin air' in ignorance.

I mentioned that money is just a kind of 'energy' in exchange. If there were no DEBT, there would be no money. YET, this would not mean that society could not operate. It would exchange this 'energy' via direct barter.

When the economy is thought 'good' by the standards of market places, this is a measure of the activity of exchanges often related today to the relatively artificial exchange of debts already in existance. But while the market using money this way is thought of as 'good', that virtue itself is "made by thin air" if you understand that the debts are just in the form of promises on paper.

In reality all money originates from REAL properties that some bank OWNS prior to beginning to trade. You can start your own 'bank' by buying a house yourself and making promisory notes that represent some percentage of your real house. The house would have to be yours first and something that you are willing to give up like a 'rental lease' by the promises you split the house as into official parts, like the rooms in it, for instance.

Those 'second' mortgages offerred for old people in those commercials today are an example. The bank offers the person to give up 'ownership' of their home in trade for 'money' that the owner of the house has to pay back. Those particular deals are often made with a 'promise' to give the whole house to the bank should you die or stop by giving back the bank the money created for the value of the house, which cancels OUT THE MONEY.

Governments do not 'make' actual money, they only create the 'supply' of bills that are recognized universally as 'official' debt. When the bank, using the above example, gives a second 'mortgage', they are BUYING a part of the house back from the owners so that they can use part of that ownership as 'debt' in the form of money. While the original owner might have some agreement to accept say, a fixed amount of money each month, the bank is in effect paying them BACK the house for the cancellation of any money created. The excess money that the bank owes to the homeowner is what gets used to represent their liquid debt that they can use to loan to others.

The bank needs to either make the separate notes (physical money) themselves or, as has evolved, to ask the government to make up some "official bills" (dollars). The government making the cash have to get paid to make this paper. To do this, they make the treasury bonds that promise those who buy them to pay back the whole plus a little back in the future without profit! Thus the bank only makes bills in a kind of non-profit way. They just agree to require all banks to have one common central place that can hold a percentage of the ownership of the bank as a type of assurance or insurance should there be a run on the bank. So a percentage of what they buy of that person's house is placed in the 'reserve'. This locks this amount there and then is mapped to the quantity of 'dollar bills' that the government, as a non-profit service, gives to the banks in the amount that is in the reserve. The bank now has a percentage of the house placed asside that they cannot profit off of while the government gives them the paper bills. When the bank pays a monthly fee to the house owner who offered up their house, they pay the owner a percentage of interest for the loaned 'ownership' of which the principle cancels out some portion of the bank's debt BACK. Then, since their percentage of ownership is now less, the central bank sends back to the bank another percentage held on reserve.

The Reserve bank tells the government the amount of value they sent back to the bank and this reduces the total value of the money supply. The actual bills that get cancelled have to eventually be sent back to the government where it gets 'destroyed', another non-profit service.

The only other thing that government is permitted to do is to divide or multiply the actual supply. If, for instance, you had ten dollar bills in total (for simplicity), the government can opt to make ten more bills and add that to the supply. This makes each dollar become worth 50 cents. Those banks who had $1, don't lose because they just get $2 for each one while the worth of each becomes 50 cents. See, no change technically. The supply is all accounted for but the extra bills permits more people to have smaller loans, for instance.

This talk of how banks or government MAKES money from thin air as though they are theives is ********. This would be unproductive as such 'counterfeiting' would only backfire later. This would be like if you had some particular thing you promised two people to have in the future without being able to fulfill in the future. When the future comes where you have to give such an item to those you promised, they WILL learn of the deception and this would certainly expose you to the fraud. This means that government nor banks have a realistic means to counterfeit without getting caught eventually and be held liable. Thus, banks nor government make money literally for 'free'.

A simple DELAYED debt is 'stored' energy that acts as money until the original REAL property (or other energy form) is paid back by the original promise. While fraud by PEOPLE within governments or banks exist, this is NOT legal.

It is thus irresponsible to think that money creation itself is literally artificial. What IS artificial is to the right of individuals to EXPLOIT the value of one thing when trading to make a PROFIT beyond the actual tit-for-tat "energy" that things represent because this breaks the conservation principles of energy in the sam way as happens with nature. This won't happen if we run out of the 'free' resources represented by 'unrenewables' though, something our future progeny will eventually have to learn to deal with.

[Scott Mayers]

chewybrian » 2 minutes ago


Steve is saying that the 'gift' of the money would effectively be a loan. It would be added to government debt, which ultimately must be paid for by the citizens in one way or another--perhaps by higher future taxes, or reduced services in the future, inflation, etc.

Yes I believed that was what he was saying.
What I am saying is that the need to put up taxes or to reduce services to pay for it is mistaken.
Money is made from "thin air" by keystrokes on a computer. Most people don't know this.
Have a look at the links above and see what you think (if you have time).

I keep seeing you say "money is made by 'thin air' in ignorance.

I mentioned that money is just a kind of 'energy' in exchange. If there were no DEBT, there would be no money. YET, this would not mean that society could not operate. It would exchange this 'energy' via direct barter.

When the economy is thought 'good' by the standards of market places, this is a measure of the activity of exchanges often related today to the relatively artificial exchange of debts already in existance. But while the market using money this way is thought of as 'good', that virtue itself is "made by thin air" if you understand that the debts are just in the form of promises on paper.

In reality all money originates from REAL properties that some bank OWNS prior to beginning to trade. You can start your own 'bank' by buying a house yourself and making promisory notes that represent some percentage of your real house. The house would have to be yours first and something that you are willing to give up like a 'rental lease' by the promises you split the house as into official parts, like the rooms in it, for instance.

Those 'second' mortgages offerred for old people in those commercials today are an example. The bank offers the person to give up 'ownership' of their home in trade for 'money' that the owner of the house has to pay back. Those particular deals are often made with a 'promise' to give the whole house to the bank should you die or stop by giving back the bank the money created for the value of the house, which cancels OUT THE MONEY.

Governments do not 'make' actual money, they only create the 'supply' of bills that are recognized universally as 'official' debt. When the bank, using the above example, gives a second 'mortgage', they are BUYING a part of the house back from the owners so that they can use part of that ownership as 'debt' in the form of money. While the original owner might have some agreement to accept say, a fixed amount of money each month, the bank is in effect paying them BACK the house for the cancellation of any money created. The excess money that the bank owes to the homeowner is what gets used to represent their liquid debt that they can use to loan to others.

The bank needs to either make the separate notes (physical money) themselves or, as has evolved, to ask the government to make up some "official bills" (dollars). The government making the cash have to get paid to make this paper. To do this, they make the treasury bonds that promise those who buy them to pay back the whole plus a little back in the future without profit! Thus the bank only makes bills in a kind of non-profit way. They just agree to require all banks to have one common central place that can hold a percentage of the ownership of the bank as a type of assurance or insurance should there be a run on the bank. So a percentage of what they buy of that person's house is placed in the 'reserve'. This locks this amount there and then is mapped to the quantity of 'dollar bills' that the government, as a non-profit service, gives to the banks in the amount that is in the reserve. The bank now has a percentage of the house placed asside that they cannot profit off of while the government gives them the paper bills. When the bank pays a monthly fee to the house owner who offered up their house, they pay the owner a percentage of interest for the loaned 'ownership' of which the principle cancels out some portion of the bank's debt BACK. Then, since their percentage of ownership is now less, the central bank sends back to the bank another percentage held on reserve.

The Reserve bank tells the government the amount of value they sent back to the bank and this reduces the total value of the money supply. The actual bills that get cancelled have to eventually be sent back to the government where it gets 'destroyed', another non-profit service.

The only other thing that government is permitted to do is to divide or multiply the actual supply. If, for instance, you had ten dollar bills in total (for simplicity), the government can opt to make ten more bills and add that to the supply. This makes each dollar become worth 50 cents. Those banks who had $1, don't lose because they just get $2 for each one while the worth of each becomes 50 cents. See, no change technically. The supply is all accounted for but the extra bills permits more people to have smaller loans, for instance.

This talk of how banks or government MAKES money from thin air as though they are theives is ********. This would be unproductive as such 'counterfeiting' would only backfire later. This would be like if you had some particular thing you promised two people to have in the future without being able to fulfill in the future. When the future comes where you have to give such an item to those you promised, they WILL learn of the deception and this would certainly expose you to the fraud. This means that government nor banks have a realistic means to counterfeit without getting caught eventually and be held liable. Thus, banks nor government make money literally for 'free'.

A simple DELAYED debt is 'stored' energy that acts as money until the original REAL property (or other energy form) is paid back by the original promise. While fraud by PEOPLE within governments or banks exist, this is NOT legal.

It is thus irresponsible to think that money creation itself is literally artificial. What IS artificial is to the right of individuals to EXPLOIT the value of one thing when trading to make a PROFIT beyond the actual tit-for-tat "energy" that things represent because this breaks the conservation principles of energy in the sam way as happens with nature. This won't happen if we run out of the 'free' resources represented by 'unrenewables' though, something our future progeny will eventually have to learn to deal with.

[Wossname]

Scott Mayers » Today, 12:59 am

I repeat, money symbolises a credit-debit relationship. No debt, no money, we seem to be in agreement.

In this sense people can always enter into more such relationships if they both agree.

I agree, commercial banks must have assets before they can start trading. They operate under government licence and should not just create money to make themselves richer (in theory). But perhaps a difficulty is that there is no great incentive for banks to lend money to businesses (risky, requires consideration of business plans), if you can create the money for a mortgage, by keystrokes, and if the house owner defaults you can then take the house off them. This sub-prime lending contributed to the crash. The loan sits as an asset in the accounts, and if you package up and sell on these bad loans to other banks for a nice bonus, and they repackage and sell them on in turn, you have the makings of a problem.

The government makes money by spending. This, if you like, is a debt placed on society which we are obliged to pay for by taxes.
But the government does not need to reclaim all this spending. The deficit is not money owed to someone else. The government is not limited in the sense that it has a fixed amount of money to spend. It can always make more money. The real restraints are the resources in the economy.

In the UK we have suffered years of austerity while the government has claimed it must reduce the deficit and balance the books. We are told we must not live beyond our means. Yet, we both agree, no debt, no money. Why try and balance the books if we are left penniless? We can’t make money, and the government (via its central bank) is the monopoly supplier of banking reserves (fiat currency).

There are two main sources of money in the economy: credit supplied by commercial banks, and government spending. Governments are (rightly) currently spending hundreds of billions to help cope with the Corona virus. This money is made electronically, by keystrokes on a computer.

[gad-fly]

Scott Mayers » Today, 12:59 am

I repeat, money symbolises a credit-debit relationship. No debt, no money, we seem to be in agreement.

In this sense people can always enter into more such relationships if they both agree.

The government makes money by spending. This, if you like, is a debt placed on society which we are obliged to pay for by taxes.
But the government does not need to reclaim all this spending. The deficit is not money owed to someone else. The government is not limited in the sense that it has a fixed amount of money to spend. It can always make more money. The real restraints are the resources in the economy.

Money, issued as a promissory note, is credit to the holder. The seller of a good in exchange for $X holds that credit to acquire that good or one with equivalent value, by transferring $X to another holder. It defies common sense to claim that the promissory note can be created from thin air. Perhaps the misunderstanding arises from nothing can stop anyone (including the government) making as many promissory notes as he likes, but that is not the end of the story. Promise with little prospect of being kept will collapse or devalue, like some junk bonds.

MMT theorists suggest that money can be made by government at will, which is correct as government has that mandate given by us, but they have not yet finished telling the story. Let us move on, to focus on your several MMT links which are sitting cold. Let us hear and debate what they say. Welcome to anyone taking the lead, or I can do it after a day or two.

[Steve3007]

The following is a copy of this post, which is more at home here.
viewtopic.php?p=356396#p356396

Wossname wrote:

Wealth is created by labour, by adding value to the environment. Wealth involves having the goods and services that you want or need. Money is an invention that promotes wealth creation. It is portable, divisible, has common value, frees us from a coincidence of wants in a barter system etc. and in fact is so much better than a barter system that most modern governments want a money based economy. Many older societies used money too. Money is like the oil that runs the engine of the economy. Money is how you pay for stuff.

Where does it come from? (Title of thread hint hint).

Banks create it under government licence when making loans. Governments create it when spending. This can seem surprising. I repeat, government spending creates money (you can’t). So sovereign governments can’t run out. But too much is inflationary and so taxes remove money to reduce inflation (amongst other things). Taxes aren’t required to pay for anything. You can only pay tax with money the government has already created (again, you can’t make it).

I do not wish to hijack this thread (even though this is a response to you on your own thread). But you know where to head if you really want to learn more. There are many links on that thread apart from my doubtless unintelligible ramblings. Any questions post them there and I’ll happily respond.

[Steve3007]

These are my comments, from the point of view of not having any specialist knowledge on the subject but just relying on my everyday experience of money and economics.

Wealth is created by labour, by adding value to the environment.

Yes, I see that. As I understand it, economic theories (rightly or wrongly) generally don't count the "raw" environment as part of that value. They treat the labour expended on processing that environment into something useful to people as containing the value. I've noticed that people have debated the rights and wrongs of this. But that's another issue.

Wealth involves having the goods and services that you want or need. Money is an invention that promotes wealth creation. It is portable, divisible, has common value, frees us from a coincidence of wants in a barter system etc. and in fact is so much better than a barter system that most modern governments want a money based economy. Many older societies used money too. Money is like the oil that runs the engine of the economy. Money is how you pay for stuff.

Yes, I get that too. In being an efficient means of exchanging labour (more efficient than, for example, a barter system) money promotes wealth creation in a way that is analogous to the way in which oil reduces friction in an engine. The oil isn't burned like fuel. i.e. it doesn't add energy to the system. But it does maximize the amount of energy that is used to do work and minimize the amount that is wasted as heat. Does that analogy still hold?

Where does it come from? (Title of thread hint hint).

Banks create it under government licence when making loans.

Yes. I see that.

Governments create it when spending. This can seem surprising. I repeat, government spending creates money (you can’t).

Here I'm confused. I don't see how government spending in itself creates money. I see how governments creating money and then spending it or loaning it does. But I don't see how spending money levied as taxes creates money. Surely that just spends money that was already created (by the government) earlier?

So sovereign governments can’t run out.

Yes, I see that. They can just "print" more. That's why investing in government bonds is the safest possible kind of investment, right? Because the government can always guarantee to pay you back. Safer even than keeping the money in a commercial bank. (Although in the UK now the government guarantees the first £85,000 of that.)

But too much is inflationary and so taxes remove money to reduce inflation (among other things).

I see why creating money is inflationary. But I don't see how taxes remove money from the system if those taxes are then spent in the system.

Taxes aren’t required to pay for anything. You can only pay tax with money the government has already created (again, you can’t make it).

Yes, obviously the government, at some point in the past, created all the money in circulation. Every note has the words "I promise to pay the bearer..." on it and is signed by the chief cashier of the BofE (in the UK). But paying for such things as public services (i.e. the labour of public sector workers) using taxation means paying them using the labour of current taxpayers, right?

So if the government/central bank creates money to pay those public sector workers, whose labour is ultimately used for that payment? Was I right in saying that it is the labour of future taxpayers?