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  1. At my bank, and I do believe at ANY bank, I can buy shares in a money market mutual fund. No new money is created when I do this. My account is debited and the fund’s account credited. The fund then lends this existing money to a (generally very short term) borrower at interest. This is the lending of “loanable funds” with the bank as an intermediary. It isn’t, as Michael paints it, an issue of one OR the other. Banks do BOTH. Private non-bank lenders, which include bank savers, cannot be ignored when examining the money system and yet economists and bankers universally do just that.

    Banks create money as one principal debt and then it is either saved and replaced with a new loan or lent as existing money by a non-bank, institutional or individual. This can happen over and over to the same mortgage euro during the passage of 30 years creating uncountable MULTIPLE CONCURRENT PRINCIPAL DEBTS of the SAME MONEY. Thus all principal debt is impossible in the aggregate without perpetual growth of the “money supply” i.e. principal debt to banks. New money creation must always match or exceed the current rate of money extinguishment or defaults will be MATHEMATICALLY INEVITABLE. Mathematically inevitable default will occur any time new money creation slows down for ANY reason.

    Michael mentions 3 recent publications by central banks that make it very clear that money is created as principal debt to banks. The first of these was Money Creation in the Modern Economy (2014) by the Bank of England which was published 8 years after I informed the world (in at least 26 languages) of this fundamental truth in Money as Debt (2006).

    I challenged the authors of that report about what they omitted from their otherwise accurate description of the banking system – namely bank savings and the lending of existing money by non-banks, both of which create multiple concurrent principal debts of the same money. My challenge boiled down to three very simple arithmetic questions the bankers refused to answer. Read my report and the challenge itself at this link.

    Digging Deeper into Debt-Money
    The Bank of England’s confessional isn’t the whole story
    “… just consider what might happen if mortgage holders realised the money the bank lent them is part of an invisible trap, a game of musical chairs designed by the bankers in which losers are mathematically predetermined to default whenever the creation of new debt to banks slows down, for any reason. The only way to keep the music playing is for all of us as a whole to go further and further into debt to banks forever.”

    I explain the basics in “Economists and a Pile of Nuts” a cartoon just over 2 minutes long.

    The animated calculus explanation takes longer.

  2. To begin his second presentation, Michael admits that he doesn’t understand distributed ledger technology (DLT), the foundational technology of cryptocurrency. Not many of us do. Nor do we need to. We DO need to distinguish that cryptocurrency, as currently practiced, is only ONE possible use of DLT, commonly known as “blockchain”.  

    Blockchain can be put to many different uses, the common feature being secure transfer of information of one kind or another, without the participation and potential interference of a “trusted third party”. One such use is scientific collaboration. A good explanation of what blockchain can be used for is here:

    “The growing interest in scientific applications of blockchain is motivated by long-standing concerns over the reliability and transparency of contemporary science and the inequities of the academic publishing industry.”

    In the many articles about cryptocurrencies that I have read, and interviews with crypto-gurus I have watched, cutting the banks and government out of the picture entirely is the stated ideological goal for much the same reasons quoted above about scientists’ interests in blockchain. Just replace the words “scientific” and “science” in the quote above with “monetary” and “banking”.

    The banks, previously essential for providing secure information transfer services to commerce can now be bypassed by a competing technology that many view as an heroic freedom movement, completely oblivious to the fact that ownership of the means of production will allow capitalists to accumulate any form of money we care to create. A famous German guy with a big beard published this revelation in 1867.

    The “coin model” of money
    So far, cryptocurrencies have mostly imitated Bitcoin’s “coin model” of a fixed quantity made valuable by its own scarcity, a very old concept of money that was necessitated by the very limited technology of the past. The only way to transfer “value” conveniently over long distances was by means of the physical transfer of precious metal coins.

    “Precious metals”, gold and silver, were difficult to extract from the ground. This guaranteed that these metals would forever remain scarce and therefore “precious”.

    On the other hand, in the Twilight Zone of todays’s financialization fantasies, there is no limit to how many of these “coin model” cryptocurrencies that can be created, making the value due to scarcity concept a macroeconomic absurdity. How do you divide the national output by infinity to get a price level?  I suggest seeing these “coin model” cryptocurrencies as small fires with the potential to burn down the “scarcity model” of money altogether.

    The participation rate that shot Bitcoin up from a fraction of a penny to $20,000 US was due to it being first out of the gate and very successfully promoted as it continues to be.  The name and logo were well chosen. The next stop is a quarter million, according to the current hype.

    But what is the basis of its “value”?  Widely-shared hopes of getting something for nothing on the one hand and acceptance for real value on the other. These “crypto-revolutionaries” often speak of banks creating “money from nothing” so why can’t we?  I hate that phrase. The truth is that bank credit is “money from our lifeblood”. Coin model cryptocurrencies are fraud and theft for much the same reason as counterfeiting is fraud and theft.  

    Bank Credit
    Bank credit money represents the borrower’s commitment to produce something in demand by fellow humans in order to repay the “loan”.  Very often that is 30 years worth of productivity. The current banking system is problematic in its design, as I am not hesitant to point out, but the basis of bank credit money is something that could not be any more real – the lifeblood of borrowers – mostly homebuyers and business owners.

    Something for Nothing
    This is most definitely not the case with the “coin model” cryptocurrencies. Having produced nothing, the early Bitcoin gamblers have acquired enormous real world purchasing power.  New gamblers are salivating over predictions like the one above.  Twenty-one million Bitcoins multiplied by $250,000 each is $5.25 trillion. 
    This is taking without giving on an unprecedented scale!  These people are picking our pockets now and intent on picking them at higher orders of magnitude.  Coin model cryptocurrencies like Bitcoin are outright frauds – not productive investments. That should be obvious, but apparently, most people are dazzled or confused by the technology and too many can’t wait to jump on the magic money greed-wagon themselves.

    The truth is that such cryptocurrencies lay their claims on limited real world production in with the claims in conventional money of those who actually produced it. This is dividing the same pie into more pieces. If four people all contributed equally to making a pie, would they welcome a fifth claim on the pie from an outsider who contributed nothing? No. Why should they?   But when it comes to cryptocurrency it seems that the public is fooled by this counterfeiting in a new disguise. So are most economists, bankers and politicians.

    But not all are fooled.  Bill Harris, former CEO of Intuit and founding CEO of PayPal and Personal Capital had this to say at:

    “In what rational universe could someone simply issue electronic scrip — or just announce that they intend to — and create, out of the blue, billions of dollars of value? It makes no sense.

    All of this would be a comic sideshow if innocent people weren’t at risk. But ordinary people are investing some of their life savings in cryptocurrency. One stock brokerage is encouraging its customers to purchase bitcoin for their retirement accounts!

    It’s the job of the SEC and other regulators to protect ordinary investors from misleading and fraudulent schemes. It’s time we gave them the legislative authority to do their job.”

    I say it’s time they got a kick in the pants and woke up! Economists, bankers and politicians have a duty to know better and alert the public.

    Cryptocurrency’s worthless claims, once accepted for value in the real world, would logically devalue the national currency and thus the conventional money holdings of everyone else in the country, a form of hidden theft identical to undetected counterfeiting. Fortunately for the rest of us, most cryptocurrencies have gone bust and the successful ones are usually held like money under the mattress, waiting for the next big run-up.  Thus neither has resulted in many claims on real production … so far.

    Legal Tender
    In contrast to counterfeit, a “respectable” and neutral-effect central bank cryptocurrency should be called “Legal Tender Coin”, or “Crypto-cash”. It should enable “legal tender” to be stored independent of any bank account, exactly the way paper cash always has, and should be simply one of three forms a legal tender money unit can take: accounting entry at the central bank, physical cash, or crypto-cash.  None of these should pay interest. It sounds innocent enough.

    As Michael puts it, this is a “new feature” of the established system, “not a new world” he is proposing.  The current system remains in place. Physical cash is replaced or added to with crypto-cash that bypasses the commercial banking system by giving the populace direct access accounts at the central bank – picture a central bank ATM. 
    Michael describes CBDC as not being “debt-based”. He states that CBDC would only be issued in exchange for “eligible securities”, a specific list of which is not given.  Logically, we might assume they would be the same “safe” government bonds as well as, since QE, mortgage-backed securities that central banks buy now in order to create new reserves and cash. 

    How is this not “debt-based”?  Both of these are debts – one of the national taxpayers, the other of members of the private sector. If these “eligible securities” are equities, their value is up to the market. In a financial crisis, debts could go unpaid and equity prices could plummet.  

    This proposed direct access to the central bank was never done with physical cash and coin. Perhaps there is a reason.

    What if …?
    Presumably, the public should be able to exchange physical cash and coin for CBDC. The banks pay measly interest rates on savings. Savers run the risk of a bail-in confiscation or total bank failure. If the central bank launched a sales pitch that CBDC is “safe” money, why would there not be a run on the retail banks as savers move massive amounts of retail bank savings to central bank “safety” or crypto storage?

    Or … the process might instead be a gradual erosion of the reserve base owned by banks which, unless remedied, would cause a significant shrinkage in bank credit creation.  Any time money creation by banks slows down for any reason, the result is mathematically inevitable defaults. See my comments on Steve Keen’s presentation:

    To make up for the banking system’s loss of reserves to the public, the central bank would have to buy the equivalent amount of new debt. This is currently done by buying debt (government preferred) from retail banks.  If the transfer of reserves into public hands were sufficiently large, the amount of debt needing to be bought by the central bank to restore a functional reserve level for retail banking could dwarf past efforts at quantitative easing.

    This would be in addition to the “eligible securities” the central bank would need to buy in order to create the CBDC. And if CBDC became really popular, the central bank’s balance sheet would need to expand manyfold. That could require far more “eligible securities” than are available. 

    What if borrowers prefer to borrow “safe” CBDC as “loanable funds” from private non-bank lenders instead of creating new money as retail bank credit?  The result would be a slowdown in bank credit money creation. According to my analysis, any time the creation of new bank credit slows down, for any reason, the result is a wave of mathematically inevitable defaults, a financial crisis.

    Blaming the Borrowers not the System
    What causes these periodic financial crises that economists routinely fail to see coming? The usual answer is “too much debt”.  However, observing that a default collapse was caused by “too much debt” is just a truism, not an analysis.  The roof fell in because of “too much snow” is an observation. An analysis would be:  the roof fell in because it wasn’t designed properly for the conditions that would inevitably occur and the point of failure has been identified.

    “Too much debt” is generally thought of as debt exceeding the capacity of the borrowers to repay, an earning problem. Picture reckless borrowers getting in over their heads or blame the moral hazard that allowed reckless bankers to count on a bailout if all went wrong, pushing loans on unqualified borrowers who then defaulted. Both were contributing factors, but not the whole picture.  

    According to my analysis, anything that tightens the money tap of new bank credit, for any reason, banker panic or borrower exhaustion alike, has to precipitate mathematically inevitable defaults – by design.

    Musical Chairs
    Properly understood, the math of the bank credit system is a variation on the game of musical chairs. Money created as principal debt gets lent multiple times as existing money creating impossible principal debt. Picture the number of players, initially one per chair, the original borrowers, increasing severalfold as each dollar is saved at and replaced by a bank or lent as existing money by a non-bank. The number of chairs stays the same. The number of people in need of a chair increases.  

    Losers are mathematically inevitable whenever the music stops. To keep the music playing, more chairs need to be constantly added.  Total principal debt to banks, what we use as money, must forever increase.  When it doesn’t, that is to say, when the creation of new bank credit fails to stay ahead of the current rate at which bank credit is being repaid and extinguished, the shortage of chairs becomes evident.

    Of course the weakest borrowers and the most over-leveraged lenders are the first round of losers. Viewed from my analysis, the trigger that starts a default crisis could be any number of causes; but the full extent of the resulting defaults is determined by how much impossible principal debt needs to be eliminated from the system as a whole to get back to a level that normal velocity can sustain.  Bank savings are impossible principal debt. So is any lending of existing bank credit by anyone: mutual fund, Uncle Bob, the mafia …

    Picture a juggler attempting to juggle too many balls.  Some have to be dropped so the juggling can continue. If not done in time, the dropping won’t be done in a controlled fashion. Unfortunately, banks are like jugglers who get paid for every ball they can keep in the air, which is a motivation to keep their balance sheets looking healthy by keeping too many non-performing loans on their books for too long.

    To sum up: impossible principal debt is the number of balls that have to be kept in the air by borrowing from Peter to pay Paul and vice versa. Dropped balls are defaults that reduce the impossible debt. Impossible principal debt is a direct result of a high savings to chequing ratio, a lot of non-bank lending and any reduction in velocity, the rate at which money changes hands. Please read my comments on Steve Keen’s presentation at:

    Think Outside of the Box
    It is my position that real progress will only be made when money is solidly anchored in the real world by being legal claims on specific real things in proven demand – both existing and to be produced in the short term. 

    I call them Producer Credits. Demand creates credit creates money.

    The solution to the problem is to expand the concept of money to include 
    “promises of something specific from someone specific.”

    Therefore, by irreducible logic, ONLY the Producers in an economy can provide this stable form of money. Banks however, could play a vital role as brokers performing “due diligence” in their own best interest, thus eliminating credit ratings agencies.

    The Producer Credit system is compatible with conventional money and actually depends on the continued existence of conventional money to be able to offer a stable global value unit.

    I have a page devoted exclusively to the business case for banks

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