State money, ‘collateral’ and getting things done

I have just watched a lecture by Ann Pettifor which she gave last year at the Institute of International Economic Affairs in Dublin.

I regret that, in spite of my best endeavours, I cannot refind the actual link but I’m not sure it matters as I wrote down much of what she said, and that indicates, in my view that, in spite of having written books on the subject, she does not properly understand money.

“Money is guaranteed by collateral.”

Where she suggests that this collateral is made up of a proper legal system and a reasonably honest and functioning tax collection system, then that could certainly be considered proper ‘collateral’ for money issuance. The rule of law certainly makes money function properly. I don’t personally agree with the terminology of ‘collateral’ but I get the concept.

I agree too, with her when she talks about various states she has visited in Africa, where, because taxation and law do not properly function in a credible way then that means that often they have, in effect, no money of their own – and end up using somebody else’s…

“Money is credit and a promise to pay.”

Fine – but whose credit and whose promise to pay, exactly?

She doesn’t seem to take on board what is so obvious – that the credit is the £10 note we have in our pockets and the promise to pay is actually written on the note issued by our government owned bank.

So when she says that “money consists of claims and obligations”, this is also fine in its way and certainly nicely gets away from the ‘debt’ word but if you have a claim on me I have an obligation to you it offers no information on exactly why you have a claim on me and I an obligation to you.

It advances us no further – it states the situation as it might exist without in any way elucidating how we actually got into the situation.

She states that central banks create credit – and I’m sure she means, though does not make clear, for the government, which is no more than the truth – so consequently the government is in debt to the central bank.

But as the government owns the central bank it is not clear why this debt should be of special consequence – other than to accountants.

When she says, “Money is credit and savings” perhaps I begin to understand where she goes wrong.

Money for the government can never be savings – how can you, as a currency issuer, ever save something which you create at will? It makes no conceivable sense.

She is, I suggest, looking at money, at least partially, from the users’, not the issuers’ perspective – fine if she says so, but not when she is discussing government.

And when she says “the bond market makes clear what government is doing”, and conflates it with the financial crisis being caused by a collapse in confidence of collateral, perhaps I begin to understand her wrong turn…

The collapse in confidence of collateral was something that private banking did. Now I do see the parallel with ill-governed countries, when you refer to the rule of law as similar collateral, but it has nothing to do with private banking or the bond market

Even when the UK bond market is dominated overwhelmingly by the Bank of England’s Asset Purchase Facility yet is still clouded in confusion and certainly doesn’t make anything clear except perhaps to those very closely interested.

Ann Pettifor would probably not agree, but in spite of her interesting but ultimately, I suggest, decidedly confused terminology, we should be confident in a basic and straightforward definition of money.

I suggest simplicity is key and so my definition is:

Issuing money is the way the state gets stuff done.

Comments

  1. Schofield -

    Ann Pettifor doesn’t start from the premise that both Government Money (its central bank money or rather reserves) and Bank Money (licenced commercial bank money) are all created from thin air. In other words no prior liability exists in which money is owed to others forcing a balance sheet into existence. What effectively Pettifor is ludicrously doing is forcing balance sheets into existence which have “thin air” marked down on one side of the balance sheet!

    Of course monetary illiterates try to blow smoke around this very simple initial money creation process by creating a mythical unicorn called “taxpayers’ money” which confuses the influx process with the reflux process.

    1. Peter May -

      I agree – I love the idea of thin air being on one side of the balance sheet!

  2. Schofield -

    The British obsession with sticking a balance sheet on anything with a pulse is killing the country. This results in the unexamined notion of believing the government having to balance its balance sheet through taxation and treasury bonds issue despite it failing to do this balancing for centuries and the country’s economy not collapsing!

    The other country killer is not realising Adam Smith’s Invisible Hand is half-baked ideology since it limits itself to the correct but simplistic notion that free market competition is always fully beneficial. This is of course if the markets, particularly global markets (the era we’re now in), behave fairly, no currency rigging, tax and standards manipulation and especially also if profits are distributed equitably!

    “They [the rich] are led by an invisible hand to make nearly the same distribution of the necessaries of life, which would have been made, had the earth been divided into equal portions among all its inhabitants, and thus without intending it, without knowing it, advance the interest of the society …”

    The Theory of Moral Sentiments, Part IV, Chapter I, pp.184-5, para. 10.

    How would Adam Smith if he was alive today explain the ever-increasing waiting times for treatment on the NHS currently being experienced in the UK, for example? Because the UK government has no money creation powers of its own and must therefore balance the books whilst keeping taxation on the rich minimal? How would he wriggle out of saying the many (as opposed to the rich few) maintaining their health isn’t a necessity of life or would he do a mea culpa and admit his two famous books need re-writing?

    This comment on Adam Smith’s “Invisible Hand” ideology is inspired by reading the Harvard economic professor, Benjamin Friedman’s new book “Religion and the Rise of Capitalism.”

  3. Schofield -

    I’ll re-phrase this part to:-

    “The other country killer is not realising Adam Smith’s Invisible Hand is half-baked ideology since it limits itself to the simplistic notion that free market competition is always fully beneficial.”

    1. Peter May -

      I agree – a proper balance sheet is not actually financial…

      1. Schofield -

        Yes that’s a good way of putting it. There’s a moral balance sheet and a financial profits one. Essentially this is the revised “Invisible Hand” Smith would now be heavily promulgating.

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