as for the euro zone, it seems that article 123 of the Lisbon treaty ( follower of 104 of Maastricht treaty ) seems , if I remember and understand properly, to forbid the European Central Bank to directly buy bonds from european states. ( although it did end up doing so lately in the case of Greece ? ) Hence the european central bank only sells its currency ( created out of thin air ? ) to commercial banks ? And european states become dependent on "control" by "the global financial market" to buy their Bonds - as approach to borrow money ? Hence european states at the mercy of the financial markets ? ( and potential speculation ) In both US Dollar and Eurozone currency , I feel there are a number of questions regarding who really has influence on the system, to who it is accountable, and if there is any ( democratic ? ) Sovereignty left ? http://en.wikipedia.org/wiki/Sovereignty On Wed, Mar 2, 2011 at 4:47 PM, Dante-Gabryell Monson < [email protected]> wrote:
Hi Roberto,
thanks for your reply. it makes me thinking.
I ask myself, what is *"the interest-free currency issued by governments or their central banks"* that you mention at the end of your message.
What is this government interest free currency in the current ( central bank dollar ) system ? Is it government bonds ? if so, does the government not buy bonds back by paying interest ?
Also, are it "their" central banks, or are central banks ( in europe and the US ) non-governmental institutions ( controlled by / accountable to ... ... ? ) In the states, it seems to be "semi-private" ( which apparently means "not owned" by the US government - answer I find after googling it )
I do have the feeling that it may have been the case in the past, when the Treasury had control on creating / feeding money into the system through public spending ( without interest ? ), and then taking it out through taxes ? "Greenbacks" / "Demand Notes" - for history, see : http://en.wikipedia.org/wiki/United_States_Note
Yet, in the case of the US central bank dollar, it seems to be backed by Treasury Bonds, when the Fed buys bonds with money it creates out of thin air, using tax payers money to guarantee its own monetary creation ? And requiring commercial banks to have a certain percentage of this type of money as guarantee for the credit they issue ?
On Wed, Mar 2, 2011 at 5:36 AM, Roberto Verzola <[email protected]>wrote:
I'm trying to understand what Chris Cook is saying below...
There are at least two meanings of credit in finance: credit as debt, and credit as in debit/credit, left/right columns in accounting.
He seems to mean the former, except that he asserts that a credit instrument is not debt, so apparently not.
If he means the second, accounting people always say that debit/credit don't mean anything except left/right, which doesn't make sense in the context below.
Would he mean some other thing then?
He seems to distinguish between the "interest-free currency" created by the banks (meaning, I suppose, that the banks do not pay any interest for this currency) and the debt created when this currency is loaned out (for which the banks *earn* interest. At one point, he says banks "spend these interest-free currentcy into existence". I could be wrong, but I understand it differently:
Banks *cannot* spend the debt-money they create, as far as I know. The currency they create has no independent existence *except* as a loan to borrowers, and the banks can only spend the interest earnings from these loans. So creation occurs *only* at the instant the interest-bearing debt is created. As soon as the principal is paid, the currency created from it is extinguished. Its interest earnings go to the bank; that's what they can spend.
This makes debt-money different from the interest-free currency issued by governments or their central banks, which have independent existence outside a debt relationship.
At least that's how I understand it. I'd be glad to be clarified about this.
Roberto
Dante-Gabryell Monson wrote:
This message from Chris Cook is interesting to me...
It initially makes me feel there are "different vectors", used as tools, which may have accounting equivalents, and can spark confusion as to what is what ?
excerpt :
/*" The currency is not the debt, but a credit instrument identical to those issued by government. "*/
plus ci dessous...
---------- Forwarded message ---------- From: *Chris* Date: Sat, Feb 26, 2011 at 3:05 PM Subject: [gang8] ....of Public Credit To: [email protected] <mailto:[email protected]>
Dear Gang
I made the following response to someone in a forum on 'Public Banking' who was repeating the fallacy that money is debt.
It covers quite a bit of ground, actually, and I'd be interested to see if the Gang can pick holes in it
Best Regards
Chris Cook
I'm afraid you share a fundamental misconception in relation to the money created by banks, which is in fact a credit instrument, not a debt instrument.
When private banks create credit they create a virtual IOU as an accounting object. This interest-free IOU is a 'look-alike' of the interest-free IOU issued by Central Banks, and is routinely exchanged for such notes and coin in private hands when they are 'deposited' in the banks. It is currency created as an object or thing to which account owners have title.
When a private bank lends this currency into existence it is creating BOTH the currency AND the interest-bearing loan relationship with the borrower under a debt contract. The currency is not the debt, but a credit instrument identical to those issued by government.
The debt is created in exchange for the use over time of the currency. When a private bank spends currency into existence it creates virtual credit instruments, and 'deposits' these into the accounts of suppliers, staff, management or shareholders by crediting them with an entitlement to these virtual assets.
These credit instruments/IOUs are accepted by governments in payment of taxes, and that is what gives them their value. There is functionally no difference between an invoice issued by a private business for private services rendered, and a tax demand issued for government services rendered.
Likewise, the issue by government of an undated IOU redeemable against taxes is functionally equivalent to the issue by a private business of an undated IOU redeemable against goods and services. eg Air Miles, Store Loyalty points, or the well known DeliDollars.
Government IOUs differ from private ones in that they are made universally acceptable against debts by 'legal tender' laws aka by government fiat.
So in a nutshell, governments do not create debt when they 'print money' and spend it. Government IOUs are in fact credit instruments analogous to a form of undated non interest-bearing redeemable preference share.
Of course, these credit instruments must be issued and spent sensibly, and not in relation to existing assets, where they will cause inflation as the private banks demonstrated by creating the property bubble.
In my view public credit need not be inflationary if used to facilitate the circulation of goods and services and the creation of new productive assets, such as affordable housing; renewable energy and energy saving projects; infrastructure such as transport, schools and hospitals, and of course on training and education of the population to enable them to create these assets.
Such public credit creation should be professionally managed by service providers with a stake in the outcome, and accountably overseen by a Monetary Authority (as in Hong Kong, where there is no Central Bank). Once productive assets are created with public credit, they may then be refinanced by private investment in long term credit based upon their productive value (eg rental flows and energy flows).
In this way pension investment will enable the public credit used to create new assets to be retired and recycled. Likewise, the newly productive workforce will pay taxes, which again will retire and recycle the public credit which made the workforce productive.
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