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Old 10-25-2011, 04:37 PM   #101
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Originally Posted by mgeoffriau View Post
For anyone who is working through this MMT stuff like me, I recommend doing the following.

Read Warren Mosler's Soft Currency Economics.

Then read it again.

Then read a couple critiques from Bob Murphy (because they are critiques, but also because they contain some instructive examples that make MMT clearer).

The Upside-Down World of MMT

Aren't Deficits Another Name for Saving? Nope.
Mark and others - please keep in mind as you explore "MMT" body of work a couple of things:
  • I like to distinguish between the more academic body of work which is essentially entirely descriptive. That's where I talk about the "modern monetary system analysis."
  • Most of the stuff you will find on blogs is necessarily compressed and often combined with prescriptive measures. That's what I call "MMT."
  • Any time you see a critique of "MMT" that starts with something like, "MMTers say that deficits don't matter," understand that the person issuing the critique has not bothered to understand MMT and is tearing down a straw man (at least in that regard).

Good luck with your exploration. It's kind of mind-bending stuff for those of us with backgrounds in neo-classical economics.
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Old 10-25-2011, 11:06 PM   #102
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So in a nutshell, MMT says the debt never needs to be repaid, a constant deficit is OK even though it makes the debt grow, as long as the interest payments stay as a fairly small % of the budget. This system is sustainable for as long as the inflation rate is "manageable" and the deficit growth doesn't require so much money printing that we get high inflation.

Correct?
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Old 10-26-2011, 09:02 AM   #103
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Originally Posted by JasonC SBB View Post
So in a nutshell, MMT says the debt never needs to be repaid, a constant deficit is OK even though it makes the debt grow, as long as the interest payments stay as a fairly small % of the budget. This system is sustainable for as long as the inflation rate is "manageable" and the deficit growth doesn't require so much money printing that we get high inflation.

Correct?
Acknowledging that trying to boil it down to a single paragraph will have obvious shortcomings and adding the caveat that the above is related to a country with a monetary system like the USA, Japan, Canada, Australia, et al...

I suppose that is reasonable, depending on what you mean by "money printing." The only way net new money enters the system is via "money printing" which should be considered synonymous with "government spending."

If you want a couple of soundbite answers, I suppose you could go with "deficits matter more than debt" and "taxes should be used to affect aggregate demand rather than monetary policy."
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Old 10-26-2011, 11:18 AM   #104
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There's a few thoughts that I've been trying to pin down while I'm reading through this stuff, and I'm going to take a stab at it here. Not sure if I'll be able to exactly express what I mean.

2 things strike me about MMT as I read about it.

(1) A lot of the relevant terms change or at least shift in meaning (when compared to classical economics), making direct comparison and non-technical discussion difficult, and,

(2) this difficulty of translation shifts the debate from Should government play such an active role in controlling the size of the economy to something more like Is MMT a sustainable and beneficial construction. This is troublesome to me.

See, ultimately, I'm not terribly concerned whether the MMT formulas work (though my suspicion is that there's some problems with the way a distinction is drawn between "net private savings" and "individual private savings" as Bob Murphy argues), I'm more concerned with the fact that built into the structure of MMT is an active role for government to pick winners and losers.

Why should government be targeting a particular inflation rate at all? Inflation penalizes those who have already saved or who are on a fixed income. Why should our government make them poorer?

Moreover, shifting terms (or constructing the mechanics of the system) in order to draw this sharp divide between vertical money creation or horizontal money creation obfuscates the reality of the situation, which ultimately boils down opportunity cost. To build into the system the idea that government "creates" the money when it spends and "destroys" the money when it taxes neatly sidesteps the actual situation, which is the diversion of resources from the private market and the hijacking of economic decisions for millions of citizens.

Likewise, I am troubled by MMTers' confidence in the very idea of a fiat currency -- I have yet to see an example of a government introducing a fiat currency, spending it, then demanding it back in the form of taxes, with no historical link to a previous commodity-based (whether direct or representative) currency. In other words, fiat currency seems to me always to be borrowing the populations' confidence in the previous iteration (which, generally speaking, is called the same name, has the same appearance, and is denominated in the same amounts).

I know this is rambly but I'm trying to just write down thoughts as I read and research so I don't forget stuff.
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Old 10-26-2011, 12:45 PM   #105
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Agreed. QFT

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To build into the system the idea that government "creates" the money when it spends and "destroys" the money when it taxes neatly sidesteps the actual situation, which is the diversion of resources from the private market and the hijacking of economic decisions for millions of citizens.
MMT may end up just like Keynesianism, a BS school that justifies Big Gov and central banking. I wonder if it's getting funding from the FedRes just like Keynesian studies did...


My objective in understanding MMT is to understand if the current trajectory is sustainable - i.e. will the US Gov't go insolvent or alternately, will the interest rates the US Gov pays on its outstanding debt, double or quadruple, diverting a much bigger % of its budget, as Niall Ferguson argues - he says this is the endgame of every empire in history.

That the gov't/central bank *should* be regulating a monopoly currency is a question whose answer to my mind, is a resounding No!

That the gov't should be controlling 40% of GDP today, is also a big No!

That the 2008 crash was caused by the preceding bubble created by the unholy alliance of the central bank and the gov't, is not even a question in my mind anymore.

So using MMT to form a prescription to "fix the economy" is complete bollocks. The assumption, which I quoted from the Roche article, that gov't's are selfless, wise entities, there to "correct" the free market, is a very flawed and naive belief. It is part of the "fatal conceit" myth. I outlined the reasons, with citations, in my post #87:
https://www.miataturbo.net/showpost....3&postcount=87


My interest in MMT is because I believe the pendulum of bigger gov't will only swing the other way when the Fed Gov goes insolvent and it undergoes a real fiscal crisis wherein it will default on big chunks of its promised entitlements. Then finally the people will realize that a welfare gov't is simply unsustainable.

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Old 10-26-2011, 12:57 PM   #106
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As a reply to Scrappy's #103 post...

and this
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I think you (A) mis-state the Keynesian position on government spending and (B) over-state the popularity of the belief in more government spending is better. What did the Congressional vote on the initial fiscal stimulus program look like? Why did the (confused) debt ceiling debate go down to the last minute? Why does a Tea Party exist?
The debt ceiling debate was a farce. They argued over 1% cuts. This demonstrates the political impossibility of shrinking the deficit. So even if forever paying interest on a growing debt is OK, the gov't by its incentive system, tends toward growing deficits, (and thus inflation), and controlling an ever larger % of GDP. All of which are bad.

The "Tea Party" is a farce - they advocate gov't spending cuts, but do not realize that "their" Medicare is the elephant in the room, the real budget breaker. Until they realize this and publicly acknowledge that they need to give up on the idea of Medicare, in the long term, there can be no meaningful "budget cuts".


Quote:
Originally Posted by JasonC SBB
Even if they didn't increase it, just look at the fact I keep repeating:
The Medicare/SS system will have 2 workers for every retiree. Unsustainable. Something's gotta give. We'll get broken promises. Aka default.
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Originally Posted by Scrappy
I am not an expert on the accounting of the Social Security and Medicare programs, but it is my understanding that even minor adjustments for future recipients have a large impact on the projections.
You are talking about interest rates. I'm talking about the bottom line in terms of productivity. Don't think of money, think in terms of economic output. For each retiree, there are only two workers. The retirement age needs to be pushed out. That's broken promise #1. Although IMO this in and of itself is not a bad thing. There's no getting around this.

The increasing deficit will cause more inflation (that's as per the MMT'ers). This will cause the retirement savings of the retirees to dwindle. Inflation is theft. It steals from retirees.

And again, I see the economies of Asia growing (they are becoming more free market and don't have the albatross of welfare hanging around their necks). As they grow they will be less interested in buying US debt. This is inflationary. This will cause Treasury rates to rise. Servicing the debt will become more expensive, ergo, a bigger % of the budget.
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Old 10-26-2011, 02:31 PM   #107
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Originally Posted by mgeoffriau View Post
(1) A lot of the relevant terms change or at least shift in meaning (when compared to classical economics), making direct comparison and non-technical discussion difficult, and,
Can you give some examples? I know that sometimes "inflation" is one that is used differently. For example, I believe some Austrian-oriented thinkers will consider an increase in money supply to be "inflation" where I believe most MMT-oriented thinkers use "inflation" to mean "price inflation."

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(2) this difficulty of translation shifts the debate from Should government play such an active role in controlling the size of the economy to something more like Is MMT a sustainable and beneficial construction. This is troublesome to me.
This is where I hate the current terminology. At its root, the body of academic "MMT" work is oriented around a description of the current economic system as it incorporates fiat currency and banking operations. This is what I usually refer to as "modern monetary systems" analysis as I feel like there is more and more of a prescriptive element being associated with "MMT."

It is intended to be a description of "what is" and really doesn't say directly "what should be."

If the question is "is the system sustainable and beneficial?" it should be applied to the current fiat system. MMT is not supposed to be a "construction" as much as a "description."

Quote:
Originally Posted by mgeoffriau View Post
Moreover, shifting terms (or constructing the mechanics of the system) in order to draw this sharp divide between vertical money creation or horizontal money creation obfuscates the reality of the situation, which ultimately boils down opportunity cost. To build into the system the idea that government "creates" the money when it spends and "destroys" the money when it taxes neatly sidesteps the actual situation, which is the diversion of resources from the private market and the hijacking of economic decisions for millions of citizens.
My perspective of MMS analysis is that it sidesteps those philisophical questions only in the way that a description of an internal combustion engine sidesteps the question of whether we should be using oil to power our transportation system.

I think you will find several Austrians that agree with the description of vertical vs horizontal money as it relates to new NFAs. That is, "there are two processes of money creation: the first is money creation by the state, and second, is bank creation. The state is the only entity which can create its currency, the bank can only create claims to this money."

When a bank lends, it creates a matching asset and liability which net to zero. When government spends there is no matching liability, thus it is a net add. When they tax, it's a net subtract.

Quote:
Originally Posted by mgeoffriau View Post
Likewise, I am troubled by MMTers' confidence in the very idea of a fiat currency -- I have yet to see an example of a government introducing a fiat currency, spending it, then demanding it back in the form of taxes, with no historical link to a previous commodity-based (whether direct or representative) currency. In other words, fiat currency seems to me always to be borrowing the populations' confidence in the previous iteration (which, generally speaking, is called the same name, has the same appearance, and is denominated in the same amounts).
I think most "MMTers" would argue that they do not dismiss the idea of currency rejection but that they consider it to be a low probability event that, for a system like the USA, would require some extreme shock - like losing a war or having our governing system replaced.

Part of that surely comes from the fact that every example of a nation that has faced currency rejection has not fit in the format of a MMS.


As for the more philisophical questions regarding things like inflation, those are out of my area of primary interest at this point. I'm much more focused on the "what is" part for now.


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Originally Posted by JasonC SBB View Post
And again, I see the economies of Asia growing (they are becoming more free market and don't have the albatross of welfare hanging around their necks). As they grow they will be less interested in buying US debt. This is inflationary. This will cause Treasury rates to rise. Servicing the debt will become more expensive, ergo, a bigger % of the budget.

Jason - Why do you believe that market forces affect US Treasury yields?
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Old 10-26-2011, 03:15 PM   #108
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My perspective of MMS analysis is that it sidesteps those philisophical questions only in the way that a description of an internal combustion engine sidesteps the question of whether we should be using oil to power our transportation system.
No, I understand that, and that's not what I mean. Let me rephrase and explain further.

I'm speaking with particular regard to how the debates are framed. In almost every case I've yet seen, those in favor of the current MMT framework don't bother trying to answer the ought question because they are happy to pick apart the technical errors in the challenges or objections posed to them.

To extend your analogy, it would as if I said to a pro-internal combustion engine person, "Listen, we need to pursue renewable resources instead of digging for dead dinosaur juice," and the response I get was a detailed correction about drilling techniques and the composition of fossil fuels and the percentage of dinosaur-matter in a given gallon of 87 octane gasoline.

It's hard to find someone who's willing to defend the philosophical foundation for MMT because they are too eager to pick apart technical errors (or perceived technical errors, or apparent misuse of terms, etc.) in the objections presented.
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Old 10-28-2011, 03:49 PM   #109
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Originally Posted by mgeoffriau View Post
It's hard to find someone who's willing to defend the philosophical foundation for MMT because they are too eager to pick apart technical errors (or perceived technical errors, or apparent misuse of terms, etc.) in the objections presented.
I see. I am probably not much help because I probably fit that mold to some extent. I am less concerned with whether the MMT ought to or ought not to exist and much more concerned with does it or does it not accurately describe our reality.

However, on the prescriptive side, there are plenty of people writing about that. By prescriptive, I mean, "assuming MMT is an accurate depiction of the framework, here are things we can do to improve the current situation and the future."

I do feel about some of those proposals the way I feel about some "hard-core free-marketers." That is, the proposals sound great if you take out the human element.

Last edited by Scrappy Jack; 10-28-2011 at 04:04 PM.
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Old 11-07-2011, 08:09 PM   #110
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Old 12-27-2011, 04:26 PM   #111
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Monetary Theory, Crony Capitalism and the Tea Party

Modern Monetary Theory and Austrian Economics

I wonder if the internet will allow for a significantly faster adoption of a new, heterodox description? Probably not any time soon as all of the current policy makers and current educators come from the same orthodox schools of thought. But, seeing a thoughtful discussion of "MMT" on a CNBC blog is interesting.
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Old 12-27-2011, 05:43 PM   #112
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Interesting articles, those last two. Thanks for those. Put words to some of my thoughts as I was educating myself on MMT but didn't have a sufficient grasp to communicate as clearly.
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Old 01-05-2012, 12:46 PM   #113
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I came across the following website from the Chicago school of economics and thought it was pretty interesting. Granted, most of these people are academics and all (as far as I know) operate using the neo-classic paradigms rooted in Keynesian or monetarist theory, buuuuut...

I found it interesting to see them polled on topics like tax reform related to mortgage interest deductions.
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Old 01-27-2012, 10:32 AM   #114
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Post MMT critique of Federal Reserve actions

Quote:
Originally Posted by Warren Mosler
And further detail on this interest income channel shows that while income for savers dropped by nearly the full amount of the rate cuts, costs for borrowers haven't fallen that much, with the difference going to net interest margins of lenders. And with lenders having a near zero propensity to consume from interest income, versus savers who have a much higher propensity to consume, this particular aspect of the institutional structure has caused rate reductions to be a contractionary and deflationary bias.

The Fed should know this. There is a very high quality research paper by DC Fed officer Seth Carpenter spelling outmuch of this in detail for the FOMC, as well as research papers from the NY Fed on the same subject.
What I think he is saying here is that actions like quantitative easing (which basically swaps income-generating bonds for non-income generating reserves) has really only helped the banks, while hurting savers and not really meaningfully helping borrowers.

Quote:
Originally Posted by Warren Mosler
In other words, the Fed knows the U.S. can't be the next Greece, as politicians from all sides continuously warn and fear monger. They know that Greece and the other eurozone member nations are in the position of US states, currency users, not the federal government, the issuer of its currency. And they know that the ECB is the currency issuer for the euro, and, like the U.S. government, its expenditures are not revenue constrained.

And yet the Fed remains silent when Congress allows this misinformation to determine public policy.

And, worse, FOMC members have tended to encourage the use of this misinformation, with their talk about the merits of long term deficit reduction and all that goes with it.

Here I think he is saying that the Fed has failed to educate Congress and the public on the operational realities of modern money and that is harmful for public discourse and fiscal policy setting.

As I often say, people may ultimately disagree on the correct prescription - but most are trying to treat the wrong disease due to a misdiagnosis.
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Old 01-30-2012, 11:58 AM   #115
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It's Idiot Season!

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Grrrr....

Quote:
Thereís a myth in the USA that just wonít go away. Itís this idea that a household balance sheet is somehow comparable to that of the federal governmentís. Few myths are more destructive and lead to greater confusion and/or misguided government policy. In recent months this has become a particularly public subject as the debt ceiling debates have raged and the European debt crisis continues. The problem is, the analogy between a sovereign governmentís balance sheet and a householdís balance sheet is never accurate. The reason this analogy always fails is due to the difference between being a currency issuer and a currency user.

In the following video I explain briefly why this is such a destructive myth and why this country desperately needs to learn that the burden we leave our children is not a debt burden, but a certain living standard. Itís true that spending money at the government level could reduce this living standard and we could certainly leave our children with a standard of living that is below our own, but what we wonít leave them with is a bill that they need to pay off in the form of some debt burden.
Destructive "myth"?

This is the MMT idiocy and someone ought to feed the people running that crap through a wood chipper feet first.

Notice the "disclaimer", like it's no big deal.

Now let's deconstruct that disclaimer.

Let us presume a 3% (of GDP) budget deficit (note that ours is much higher) over a working man's life, from 20-65 (45 years.) Let us further assume that the government "prints" this money (either by bond sales or raw) and by doing so adheres to the "MMT" thesis.

When we begin we have a price level that is defined by GDP / (Money + Credit) We'll define arbitrary units for both -- let's say we have GDP of 10 and (Money + Credit) of 10 as well. The purchasing power of a unit of "money" (either currency or credit) is thus 1.0.

Now we'll inflate (to "pay" our government deficit) by 3% a year for 45 years. That is, 1.03 ^ 44

That's 3.6715, which we then multiply the (Money + Credit) line by.

We now have 10 / 36.715 = 0.2724 for the value of a unit of credit or currency.

That is, each unit of currency or credit now buys about one quarter of what it did originally.

THIS is what "reduced standard of living" is, and it applies to you and your children, along with everyone to follow -- forever.

Now certainly, the economy will "expand" in nominal terms when you indulge in this debt binge and as such you'll get "paid more" in nominal terms. But how much do those earnings expand? That's the problem you see, and we have 30 years of history to tell us how it expands in relationship to debt:



At no point did we manage to expand GDP by as much or more than we expanded debt through the system. As such this is always a losing game for the poor bastard in the economy as a whole and in fact is exactly identical to raising taxes or reducing spending (e.g. "austerity") in terms of its impact upon the common person.

The point, folks, is that the premise these MMT schemers are running is to attempt to hide via their "arm-waving" what amounts to an indirect tax that is put upon the entire nation via their outrageous schemes.


If you don't think this is a "debt we're leaving to our next generation" I suppose you can look at it that way, but only if you're honest about what is being done -- which is even worse that a debt to be paid off. That is, the costs of this policy are immediately and permanently on a forward basis, forever into the future, taxed to both current and all future citizens by destroying their purchasing power!

A cost of living that results in the purchasing power of a unit of currency being debased to the point that nearly FOUR dollars are needed to buy what used to cost one over a mere working man's lifetime is simple and unbridled theft.

In fact, The Coinage Act of 1792 specified that this sort of debasement game was to be punished by death.

Our nation desperately needs to bring back this penalty so that people who promote and execute such schemes get their just "reward."

Disclaimer: Long stout timbers, sharpened steel plates and finished guillotines.
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Old 01-30-2012, 12:03 PM   #116
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Scrappy -- I know Karl Denninger isn't highly regarded in among neo-chartalists, but I'm curious what you think about his argument here. He seems to be arguing similarly to what I've been trying to say -- that the economic costs of excessive government spending may be hidden in the MMT accounting, but the costs remain nevertheless.
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Old 01-30-2012, 02:03 PM   #117
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Originally Posted by mgeoffriau View Post
Scrappy -- I know Karl Denninger isn't highly regarded in among neo-chartalists, but I'm curious what you think about his argument here. He seems to be arguing similarly to what I've been trying to say -- that the economic costs of excessive government spending may be hidden in the MMT accounting, but the costs remain nevertheless.
I'll try to digest his post sometime in the next couple of weeks. I am always leary of people making up simple hypothetical relationships/variables to describe something. While the result may fit their model, their model may not fit reality.

Ultimately, I think he is getting back to inflation and the "debasement of the dollar." However, I think standard of living if much more complex than that.

For example, some people like to use a statistic that says something along the lines of "the US dollar has lost 98% of its original value since 1913." However, that alone is a terrible measure of standard of living. I will take a 98% debased dollar and 2012 living standards over the standard of living in 1913 any day of the week.


For me, I am less interested in the prescriptive elements of modern money and more interested in the descriptive. The reality is that the USA and other nations sovereign in their own currency are not revenue constrained like a household or other currency user and the US bond market does not operate in the same manner as the Greek or Italian.
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Old 01-30-2012, 02:04 PM   #118
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The central bankers are all "Post-Keynesians" now:

Quote:
Alan R. Holmes, Federal Reserve Bank of New York (1969):

‘In the real world, banks extend credit, creating deposits in the process , and look for the reserves later.’

Nobel Prize Winners Finn Kydland en Ed Prescott , Federal Reserve bank of Minneapolis (1990):

‘There is no evidence that either the monetary base or M1 leads the [credit cycle], although some economists still believe this monetary myth. Both the monetary base and M1 series are generally procyclical and, if anything, the monetary base lags the [credit cycle] slightly.’

Charles Goodhart, member of the Monetary Policy Committee of the Bank of England (2007):

‘The money stock is a dependent, endogenous variable. This is exactly what the heterodox, Post-Keynesians, from Kaldor, through Vicky Chick, and on through Basil Moore and Randy Wray, have been correctly claiming for decades, and I have been in their party on this.’

Piti Distayat en Claudio Bori, Bank for International Settlements (2009):

‘This paper contends that the emphasis on policy-induced changes in deposits is misplaced. If anything, the process actually works in reverse, with loans driving deposits. In particular, it is argued that the concept of the money multiplier is flawed and uninformative in terms of analyzing the dynamics of bank lending. Under a fiat money standard and liberalized financial system, there is no exogenous constraint on the supply of credit except through regulatory capital requirements. An adequately capitalized banking system can always fulfill the demand for loans if it wishes to.’

Seth B. Carpenter, Federal Reserve (2010):

‘Changes in reserves are unrelated to changes in lending, and open market operations do not have a direct impact on lending. We conclude that the textbook treatment of money in the transmission mechanism can be rejected. Specifically, our results indicate that bank loan supply does not respond to changes in monetary policy through a bank lending channel.’

Vitor Constancio, vice president of the ECB (2011):

‘It is argued by some that financial institutions would be free to instantly transform their loans from the central bank into credit to the non-financial sector. This fits into the old theoretical view about the credit multiplier according to which the sequence of money creation goes from the primary liquidity created by central banks to total money supply created by banks via their credit decisions. In reality the sequence works more in the opposite direction with banks taking first their credit decisions and then looking for the necessary funding and reserves of central bank money.’
Link with primary sources
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Old 01-31-2012, 12:27 PM   #119
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http://www.bbc.co.uk/news/technology-16810312

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Before his trip, Leigh Van Bryan wrote that he was going to "destroy America".

He insisted he was referring to simply having a good time - but was sent home.

Trade association Abta told the BBC that the case highlighted that holidaymakers should never do anything to raise "concern or suspicion in any way".

The US Department for Homeland Security picked up Mr Bryan's messages ahead of his holiday in Los Angeles.

The 26-year-old bar manager wrote a message to a friend on the micro-blogging service, saying: "Free this week, for quick gossip/prep before I go and destroy America."
Are you kidding me? Are we so dumb we can't distinguished between real threats and ones that are clearly not.
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Old 02-26-2012, 11:41 PM   #120
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Because you are a terrorist.
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